[Senate Hearing 114-3]
[From the U.S. Government Publishing Office]


                                                          S. Hrg. 114-3


        REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT UNIONS

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE REGULATORY BURDEN ON COMMUNITY BANKS AND CREDIT UNIONS, 
      INCLUDING RECOMMENDATIONS TO ALLEVIATE THE REGULATORY BURDEN

                               __________

                           FEBRUARY 10, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MICHAEL CRAPO, Idaho                 SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                    Jelena McWilliams, Chief Counsel

                       Beth Zorc, Senior Counsel

                Jack Dunn III, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

               Jeanette Quick, Democratic Senior Counsel

         Erin Barry Fuher, Democratic Professional Staff Member

              Phil Rudd, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       TUESDAY, FEBRUARY 10, 2015

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
    Senator Tester...............................................     4
    Senator Toomey
        Prepared statement.......................................    42

                               WITNESSES

Doreen R. Eberley, Director of the Division of Risk Management 
  Supervision, Federal Deposit Insurance Corporation.............     4
    Prepared statement...........................................    42
    Responses to written questions of:
        Senator Shelby...........................................    86
        Senator Brown............................................    89
        Senator Crapo............................................    91
        Senator Corker...........................................    93
        Senator Heller...........................................    95
        Senator Sasse............................................   109
        Senator Moran............................................   109
        Senator Tester...........................................   115
Maryann F. Hunter, Deputy Director of the Division of Banking 
  Supervision and Regulation, Board of Governors of the Federal 
  Reserve System.................................................     6
    Prepared statement...........................................    49
    Responses to written questions of:
        Senator Shelby...........................................   119
        Senator Crapo............................................   121
        Senator Corker...........................................   122
        Senator Heller...........................................   125
        Senator Sasse............................................   142
        Senator Cotton...........................................   143
        Senator Moran............................................   144
        Senator Tester...........................................   147
Toney Bland, Senior Deputy Comptroller for Midsize and Community 
  Bank Supervision, Office of the Comptroller of the Currency....     8
    Prepared statement...........................................    54
    Responses to written questions of:
        Senator Shelby...........................................   154
        Senator Brown............................................   157
        Senator Crapo............................................   158
        Senator Corker...........................................   159
        Senator Heller...........................................   161
        Senator Sasse............................................   174
        Senator Moran............................................   176
        Senator Tester...........................................   178

                                 (iii)

Larry Fazio, Director, Office of Examination and Insurance, 
  National Credit Union Administration...........................     9
    Prepared statement...........................................    59
Candace A. Franks, Commissioner, Arkansas State Bank Department, 
  on behalf of the Conference of State Bank Supervisors..........    11
    Prepared statement...........................................    74

              Additional Material Supplied for the Record

Legislative proposals recommended by the Office of the 
  Comptroller of the Currency submitted by Senator Toomey........   184
Response from Toney Bland submitted by Chairman Shelby...........   193


 
        REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT UNIONS

                              ----------                              


                       TUESDAY, FEBRUARY 10, 2015

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard C. Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This week, the Committee on Banking begins an examination 
of potential changes to the current regulatory structure. Today 
we will focus on regulatory relief for smaller financial 
institutions. In the near future, we will continue this 
examination by focusing on unnecessary statutory and regulatory 
impediments across the financial services spectrum.
    While there are some who continue to argue that current law 
is beyond reproach, there are many on both sides of the aisle 
that believe improvements can and should be made. Today we will 
hear from regulators on some of the lessons they have learned 
and how best to overcome some of the challenges that they have 
encountered. And although we may not agree on many things, I 
believe that we can all agree that community banks and credit 
unions play a vital role in our local economies.
    Six hundred and twenty-nine counties in the United States 
are served only by one single community bank. Six million U.S. 
residents depend on small financial institutions for their 
daily banking needs. These financial institutions use their 
knowledge of local communities to lend to small businesses, 
which are the engine of job creation in America.
    A recent survey found that community banks provide 48 
percent of small business loans issued by U.S. banks--48 
percent. That number is even higher in rural areas where small 
financial institutions account for 52 percent--yes, 52 
percent--of small business and farm loans. These financial 
institutions are able to forge relationships with local 
consumers that enable them to develop products tailored to the 
specific needs of their communities.
    Unfortunately, we have heard that innovation tailored for 
Main Street is being smothered by unnecessary regulations 
originally designed for Wall Street. Some of the regulators 
before us today have testified in the past that small financial 
institutions did not--yes, did not--cause the financial crisis. 
Nevertheless, added regulations have caused hundreds of banks 
and credit unions to simply stop offering certain products. 
They are instead forced to spend valuable resources on 
compliance staff.
    A survey by the Federal Reserve and the Conference of State 
Bank Supervisors found that compliance costs have increased for 
94 percent of community banks. I believe it is time to reverse 
this trend. Today we expect to hear recommendations from 
regulators on ways to provide regulatory relief for smaller 
financial institutions. Past Committee hearings on this issue 
have demonstrated bipartisan understanding that something must 
be done here. Discussion here will build upon these efforts by 
providing specific recommendations for both regulators and 
Congress to implement.
    I believe that we are long overdue for regulatory relief 
for small financial institutions, and I look forward to the 
hearing today.
    I will now recognize Senator Brown, our Ranking Member.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, very much. I 
appreciate that you have invited both Federal and State 
regulators to continue the conversation that we had last fall 
about regulatory relief for small banks and for credit unions.
    This hearing is timely as Federal agencies have made 
important changes recently that benefit the smallest depository 
institutions, and I thank you for those changes.
    To highlight a few, in January, the NCUA reproposed its 
risk-based capital rule to be responsive to concerns, 
legitimate concerns, raised by small credit unions. A few weeks 
ago, CFPB announced changes to its mortgage rule, a win for 
small lenders, particularly those in underserved rural areas. 
The Fed proposed to eliminate quarterly consolidated financial 
reporting requirements for certain bank holding companies and 
savings and loan holding companies under $1 billion.
    Since our last hearing last fall, Congress has also acted. 
We passed and the President signed into law several regulatory 
relief bills that were discussed at the September hearing and 
supported by those who will be before this
    Committee on Thursday. These bills included a bill 
introduced by Senators King, Warner, and Tester that doubled 
the threshold for the Small Bank Holding Company Policy 
Statement; a bill supported by Senators King, Jack Reed on this 
Committee, and Senator Warner to allow insurance for credit 
unions members' IOLTA accounts; and a bipartisan bill authored 
by Senator Moran and me to permit financial institutions to 
offer prize-linked savings accounts. All of those are now law.
    Also as a result of congressional action, led by Senator 
Vitter, a Member of this Committee, the President has nominated 
a community banker to serve on the Federal Reserve Board. There 
are also regulatory relief proposals that I supported that did 
not cross the finish line last year. I am pleased that Senator 
Moran, and joined now by Senator Heitkamp, will reintroduce the 
Privacy Notice Modernization Act. That bill last year had 75 
Senate sponsors. Mr. Chairman, this bill is ready for action, 
and we should move on it as soon as we can.
    There is no question that regulators and Congress have been 
responsive to the concerns of small institutions. We have acted 
where legitimate problems have been identified, and members and 
stakeholders have come together to find compromise.
    I thank the witnesses today for helping in that process. I 
do not believe, though, that every bill intended to provide 
regulatory relief to small institutions is a good idea. Some 
proposals could threaten the safety and soundness of individual 
institutions; others could remove important consumer 
protections that all customers deserve, no matter the size of 
the lending institution, the bank. We must not forget that more 
than 400 banks with less than $1 billion in assets failed as a 
result of the crisis. The cost to the Deposit Insurance Fund 
exceeded $26 billion.
    Lending, of course, is an inherently risky business. We 
must make sure we do not encourage unsafe practices in our 
efforts to tailor regulations to small lenders. We need to 
establish a process to evaluate the merits of the proposals 
being suggested today and those we will hear about on Thursday.
    We will not be successful this Congress in providing 
regulatory relief if our proposals do not have broad bipartisan 
agreement and are attached to unrelated must-pass legislation. 
Our prospects are even less likely if we try to pair regulatory 
relief with attempts to roll back Wall Street reform.
    I am open to solving real problems affecting community 
institutions, as evidenced by our actions over the last couple 
of years. We can find common ground if our goal is to provide 
meaningful relief to the Nation's smallest institutions while 
not compromising safety and soundness or consumer protections.
    Today's witnesses can help us evaluate programs. They have 
done significant research to better understand the 
characteristics of community banks and small credit unions. 
They also understand, our panelists also understand why and how 
small institutions fail. This can help us target regulatory 
relief to the smallest institutions.
    For example, in Ohio, 80 percent of the community banks in 
my State are under $500 million in total assets. These are the 
types of institutions that feel the impact of burdensome 
regulations the most, whether it is providing another report to 
their regulatory or needing to hire another employee for 
compliance.
    Last, Mr. Chairman, I look forward to hearing more about 
the EGRPRA review currently underway. The Fed, the OCC, and the 
FDIC are required by law to review regulations and identify 
those which are duplicative, outdated, or unnecessary. The 
NCUA, State regulatory agencies, and the CFPB participate in 
this exercise voluntarily, in addition to the three that are 
required. This review supplements a significant analysis of 
impacts that the agencies also do while writing a rule.
    I appreciate that you have already held meetings in Los 
Angeles and Dallas and plan to hold meetings in Boston, 
Chicago, Washington, and rural areas later in the year. I would 
encourage you to consider a meeting in Ohio as well. This 
review will be completed next year. Any actions we take in 
Congress should complement, not complicate, the process 
currently underway by the agencies.
    Mr. Chairman, I thank you.
    Chairman Shelby. All Members' opening statements will be 
made part of the record. I understand that Senator Tester has 
another Committee hearing. He wanted to say----

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. I do, and I want to thank the Chairman and 
Ranking Member for their statements and for holding this 
hearing. In a rural State like Montana, community banks and 
credit unions are the lifeblood for capital for businesses and 
personal families. And I would just like to say this is a State 
where personal relationships still matter, and Wall Street did 
behave--some on Wall Street behaved badly a few years back. And 
I think community banks and credit unions have felt the pain of 
their behavior when they did nothing wrong.
    I would just ask that this Committee and the regulators 
match the risks with the regulation. That is really where it 
needs to be. And I think that if we do that, we will have 
succeeded in making capital accessible for folks that live in 
rural America and across this country.
    Chairman Shelby. Thank you.
    Our witnesses today are Doreen Eberley, the Director of the 
Division of Risk Management Supervision for the Federal Deposit 
Insurance Corporation.
    Maryann Hunter is the Deputy Director of the Division of 
Banking Supervision and Regulation for the Board of Governors 
of the Federal Reserve System.
    Mr. Toney Bland is the Senior Deputy Comptroller for 
Midsize and Community Bank Supervision for the Office of the 
Comptroller of the Currency.
    Larry Fazio is the Director of the Office of Examination 
and Insurance at the National Credit Union Administration.
    And Candace Franks is the Commissioner of the Arkansas 
State Bank Department. She also serves as chairman of the 
Conference of State Bank Supervisors.
    I would like to ask all the witnesses--all the witnesses' 
written testimony will be made part of the hearing record, and 
if you could sum up your oral testimony in about 5 minutes, it 
will give us a chance to have a dialog with you.
    We will start with Ms. Eberley.

  STATEMENT OF DOREEN R. EBERLEY, DIRECTOR OF THE DIVISION OF 
    RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE 
                          CORPORATION

    Ms. Eberley. Thank you. Chairman Shelby, Ranking Member 
Brown, and Members of the Committee, I appreciate the 
opportunity to testify on behalf of the FDIC on regulatory 
relief for community banks. As the primary Federal regulator 
for the majority of community banks, the FDIC has a particular 
interest in understanding the challenges and opportunities they 
face.
    Community banks provide traditional, relationship-based 
banking services to their communities. Although they hold just 
14 percent of all banking assets, community banks account for 
about 45 percent of all of the small loans to businesses and 
farms made by insured institutions.
    While more than 400 community banks failed during the 
recent financial crisis, the vast majority did not. 
Institutions that stuck to their core expertise weathered the 
crisis and are now performing well. The highest rates of 
failure were observed among noncommunity banks and among 
community banks that departed from the traditional model and 
tried to grow rapidly with risky assets often funded by 
volatile brokered deposits.
    The FDIC is keenly aware of the impact that its regulatory 
requirements can have on smaller institutions, which operate 
with fewer staff and other resources than their larger 
counterparts. Therefore, the FDIC pays particular attention to 
the impact its regulations may have on smaller and rural 
institutions that serve areas that otherwise would not have 
access to banking services.
    The FDIC and the other regulators are actively seeking 
input from the industry and the public on ways to reduce 
regulatory burden through the Economic Growth and Regulatory 
Paperwork Reduction Act process, which requires the Federal 
financial regulators to review their regulations at least once 
every 10 years, to identify any regulations that are outdated, 
unnecessary, or unduly burdensome. As part of this process, the 
agencies are jointly requesting public comment on our 
regulations. We are also conducting regional outreach meetings 
involving the public, the industry, and other interested 
parties.
    In response to what we have heard in the first round of 
comments, the FDIC has already acted on regulatory relief 
suggestions where we could achieve rapid change. In November, 
we issued two Financial Institution Letters responding to 
suggestions we received from bankers.
    The first Financial Institution Letter, or FIL, released 
questions and answers about the deposit insurance application 
process. Commenters had told us that a clarification of the 
FDIC's existing policies would be helpful.
    The second FIL addressed new procedures that eliminate or 
reduce the need to file applications by institutions wishing to 
conduct permissible activities through certain bank 
subsidiaries organized as limited liability companies, subject 
to some limited documentation standards. This will 
significantly reduce application filings in the years ahead.
    The FDIC takes a risk-based approach to supervision which 
recognizes that community banks are different than large banks 
and should not be treated the same. Every FDIC examiner is 
initially trained as a community bank examiner through a 
rigorous 4-year program. As a result, each examiner gains a 
thorough understanding of community banks before becoming a 
commissioned examiners. These examiners live and work in the 
same communities served by the banks they examine, ensuring 
that they are knowledgeable and experienced in local issues 
important to those banks.
    Institutions with lower risk profiles, such as most 
community banks, are subject to less supervisory attention than 
those with elevated risk profiles. For example, well-managed 
banks engaged in traditional, noncomplex activities receive 
periodic, point-in-time safety and soundness and consumer 
protection examinations that are carried out over a few weeks. 
In contrast, the very largest FDIC-supervised institutions 
receive continuous safety and soundness supervision and ongoing 
examination carried out through targeted reviews during the 
course of an examination cycle.
    The FDIC also considers the size, complexity, and risk 
profile of institutions during rulemaking and supervisory 
guidance development processes and on an ongoing basis through 
the feedback we receive from community bankers and other 
stakeholders. Where possible, we scale our regulations and 
policies according to these factors.
    As we strive to minimize the regulatory burden on community 
banks, we look for changes that can be made without affecting 
safety and soundness. For example, we believe that the current 
$500 million threshold for the expanded 18-month examination 
period could be raised. In addition, we would support Congress' 
efforts to reduce the privacy notice reporting burden.
    We also think it would be worthwhile to review various 
longstanding statutory and regulatory thresholds to see if they 
should be changed.
    In conclusion, the FDIC will continue to pursue regulatory 
burden reduction which achieves the fundamental goals of safety 
and soundness and consumer protection in ways that are 
appropriately tailored for community banks. We look forward to 
working with the Committee in pursuing these efforts.
    Chairman Shelby. Ms. Hunter.

STATEMENT OF MARYANN F. HUNTER, DEPUTY DIRECTOR OF THE DIVISION 
 OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Ms. Hunter. Thank you. Chairman Shelby, Ranking Member 
Brown, and other Members of the Committee, I appreciate the 
opportunity to testify on the important topic of community 
banks and our efforts to reduce regulatory burden on these 
institutions.
    Having begun my career more than 30 years ago as a 
community bank examiner at the Federal Reserve Bank of Kansas 
City and eventually becoming the officer in charge of 
supervision at the Reserve Bank, I have seen firsthand how 
critical it is that we balance effective regulation and 
supervision to ensure the safety and soundness of community 
banks while also ensuring that undue burden does not constrain 
the capacity of these institutions to lend to the communities 
they serve.
    I last testified before this Committee in September of 
2014, and at that time I testified that, in the wake of the 
financial crisis, the Federal Reserve has spent the past 
several years revising our community bank supervisory programs 
to make them more efficient and less burdensome for well-run 
institutions.
    For example, we have continued to build upon our 
longstanding risk-focused approach to supervision, reviewing 
field procedures, refining training programs, and developing 
automated tools for examiners to focus their attention on areas 
of higher risk, reducing some of the work at low-risk, well-
managed community banks.
    Furthermore, we developed programs to conduct more 
examination work off-site, such as the loan review, to reduce 
the time the examiners spend physically in the bank.
    We also have an initiative underway to use forward-looking 
risk analytics to better identify high-risk areas within 
community and regional banks which would allow examiners to 
focus their examination time on the areas of highest risk and 
reduce burden on the low-risk institutions.
    In January of this year, the Federal Reserve responded to 
legislation passed by Congress in December of 2014 related to 
the scope of the Federal Reserve's Small Bank Holding Company 
Policy Statement. Specifically, the Federal Reserve Board 
issued an interim final rule and a proposed rule to implement 
Public Law 113-250. Effective immediately, the interim rule 
adopted by the Board excludes small savings and loan holding 
companies with less than $500 million in consolidated assets, 
which also meet certain qualitative requirements, from the 
Board's consolidated regulatory capital requirements, thus 
putting them on par with similarly situated bank holding 
companies.
    The Federal Reserve Board also issued a Notice of Proposed 
Rulemaking that would raise the asset threshold from $500 
million to $1 billion for determining applicability of the 
Small Holding Company Policy Statement and expanded its scope 
to also include savings and loan holding companies.
    The policy statement facilitates the transfer of ownership 
for community banks by allowing their holding companies to 
operate with higher levels of debt and, thus, lower levels of 
consolidated capital than would otherwise be allowed.
    Additionally, the Federal Reserve Board took immediate 
steps beyond what was required in the legislation to relieve 
regulatory reporting burden for bank holding companies and 
savings and loan holding companies that have less than $1 
billion in total consolidated assets and also meet the 
qualitative requirements of the policy statement.
    The Board has proposed to eliminate quarterly consolidated 
financial requirements in the FR Y-9C report for those 
institutions and instead require semiannual parent-only 
financial statements. The Federal Reserve immediately notified 
the affected institutions so they would not continue to invest 
in system changes to report regulatory capital data for only a 
short period of time.
    The changes in the threshold for the Small Holding Company 
Policy Statement and the related reductions in reporting have 
significantly reduced consolidated capital requirements and 
reporting burden for more than 700 small institutions. More 
than 40 percent of the institutions that were required to file 
the 60-page consolidated financial statements every quarter now 
will file only an 8-page report twice a year, resulting in a 
significant reduction in burden.
    A second key development since September is the beginning 
of the interagency review of regulations in accordance with the 
Economic Growth and Regulatory Paperwork Reduction Act, or as 
it is also known, the EGRPRA process. We are working closely 
with our counterparts at the OCC, FDIC, and State supervisors 
to seek public comment and hold outreach meetings to get 
feedback directly from bankers and from community groups about 
ways to reduce burden related to our rules and examination 
practices. To date, the meetings held in Los Angeles and Dallas 
have yielded some useful and specific suggestions for 
consideration and review.
    Let me conclude by emphasizing that we are committed to 
listening and considering ideas for reducing burden through the 
EGRPRA process. We want to ensure that our regulations and 
examination activities are appropriately tailored to the level 
of risk inherent in community banks. We strive to balance our 
safety and soundness objectives with the need to reduce 
unnecessary burden to ensure that small institutions can 
continue to meet credit needs in their local communities.
    Thank you for inviting me to share our views on these 
matters, and I look forward to answering any questions you may 
have.
    Chairman Shelby. Mr. Bland.

STATEMENT OF TONEY BLAND, SENIOR DEPUTY COMPTROLLER FOR MIDSIZE 
 AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF 
                          THE CURRENCY

    Mr. Bland. Chairman Shelby, Ranking Member Brown, and 
Members of the Committee, thank you for the opportunity to 
appear before you today to discuss the challenges facing 
community banks and Federal savings associations and the 
actions the OCC is taking to help these institutions address 
regulatory burdens.
    I have been a bank examiner for more than 30 years, and I 
have seen firsthand the vital role community banks play in 
meeting the credit needs of consumers and small businesses 
across the Nation.
    At the OCC we are committed to supervisory practices that 
are fair and reasonable and to fostering a climate that allows 
well-managed community banks to grow and thrive. We tailor our 
supervision to each bank's individual situation. We take into 
account the products and services it offers as well as its risk 
profile and management team.
    Given the wide array of institutions we oversee, the OCC 
understands that a one-size-fits-all approach to regulation 
does not work. Therefore, to the extent that the law allows, we 
factor these differences into the rules we write and the 
guidance we issue.
    My written statement provides several examples of the 
commonsense adjustments we have made to recent regulations to 
accommodate community bank concerns. Guiding our consideration 
of every proposal to reduce burden on community banks is the 
need to ensure that fundamental safety and soundness and 
consumer protection safeguards are not compromised.
    Within this framework, to date we have developed three 
regulatory relief proposals that we hope Congress will consider 
favorably. We are also undertaking several efforts to identify 
and mitigate other regulatory burdens through a regulatory 
review process.
    The first proposal we submitted to Congress would exempt 
some 6,000 community banks from the Volcker rule. As the vast 
majority of banks under $10 billion in assets do not engage in 
the proprietary trading or covered funds activities that the 
statute sought to prohibit, we do not believe that they should 
have to commit resources to determine if any compliance 
obligations of the rules would apply. We do not believe this 
burden is justified by the nominal risk that these institutions 
could pose to the financial system.
    We also support changing current law to allow more well-
managed community banks to qualify for a longer--18 months--
examination cycle. Raising the threshold from $500 million to 
$750 million for banks that would qualify for this treatment 
would cover an additional 300 community banks.
    We also support providing flexibility for Federal thrifts 
so that those thrifts that wish to expand their business model 
and offer a broader range of services in their communities may 
do so without the burden and expense of a charter conversion. 
Under our proposal, Federal thrifts could retain their current 
governance structure without unnecessarily limiting the 
evolution of their business plan. As the supervisor of both 
national banks and Federal thrifts, we are well positioned to 
administer this new framework without requiring a costly and 
time-consuming administrative process.
    I am also hopeful that the ongoing efforts to review 
current regulations to reduce or eliminate burden will bear 
fruit. I just returned from the second public EGRPRA meeting in 
Dallas where regulators heard ideas to reduce burden from a 
number of interested stakeholders. The agencies are currently 
evaluating the comments received from these meetings and from 
the public comment process. While this process will unfold over 
a period of time, the OCC will not wait until it has completed 
the implemented changes where a good case is made for relief or 
to submit legislative ideas identified through this process to 
Congress.
    Separately, the OCC is in the midst of a comprehensive, 
multiphase review of our own regulations and those of the 
former OTS to reduce duplication, promote fairness in 
supervision, and create efficiencies for national banks and 
Federal savings associations. We are currently reviewing 
comments received on the first phase of our review focusing on 
corporate activities and applications.
    Finally, we are continually looking for innovation ways to 
reduce burden. Last month, the OCC published a paper that 
focused on possibilities for community banks to collaborate to 
manage regulatory requirements, trim costs, and better serve 
their customers. We believe there are opportunities for 
community banks to work together to address the challenges of 
limited resources and acquiring the necessary expertise.
    In closing, the OCC will continue to carefully assess the 
potential effect that current and future policies and 
regulations may have on community banks, and we will be happy 
to work with the industry and the Committee on additional ideas 
or proposed legislative initiatives.
    Again, thank you for the opportunity to appear today. I 
would be happy to respond to questions.
    Chairman Shelby. Thank you.
    Mr. Fazio.

 STATEMENT OF LARRY FAZIO, DIRECTOR, OFFICE OF EXAMINATION AND 
        INSURANCE, NATIONAL CREDIT UNION ADMINISTRATION

    Mr. Fazio. Good morning, Chairman Shelby, Ranking Member 
Brown, and Members of the Committee. Thank you for the 
invitation to discuss regulatory relief for credit unions.
    While NCUA regulates 6,350 credit unions with $1.1 trillion 
in assets, over three-quarters of these federally insured 
credit unions have less than $100 million in assets. Because 
these credit unions have fewer resources available to respond 
to marketplace, technological, legislative, and regulatory 
changes, NCUA is acutely aware of the need to calibrate our 
rules and our examinations to remove any unnecessary burden on 
these smaller credit unions.
    As a result, NCUA scales our regulatory and supervisory 
expectations when it is sensible and within the agency's 
authority to do so.
    Where regulation is needed to protect the safety and 
soundness of credit unions, the savings of members, and the 
Share Insurance Fund, NCUA uses a variety of targeting 
strategies. These strategies include fully exempting small 
credit unions from rules, using graduated requirements as size 
and complexity increase for other rules, and incorporating 
practical compliance approaches into agency guidance. Thus, we 
work to balance maintaining prudential standards with 
minimizing regulatory burden.
    Since 1987, NCUA has undertaken a rolling 3-year review of 
all of our rules and regulations, and although not required by 
law, NCUA is again voluntarily participating in the current 
EGRPRA review. These reviews conduct retrospective analysis 
with an eye toward streamlining, modernizing, or even repealing 
regulations that are not necessary.
    Over the past 3 years, NCUA has also taken 15 actions 
through the agency's Regulatory Modernization Initiative to cut 
red tape and provide lasting benefits to credit unions. These 
actions include: easing eight regulations, including 
modernizing the definition of a small credit union, to 
prudently exempt thousands of credit unions from several 
complex rules; streamlining three processes, facilitating more 
than 1,000 low-income designations, and increasing blanket 
waivers; and issuing four legal opinions, allowing more 
flexibility in credit union operations.
    Next week, the NCUA Board will consider a proposal to 
increase the asset threshold for defining ``small entity'' 
under the Regulatory Flexibility Act. If approved, this change 
would provide transparent consideration of regulatory relief 
for a greater number of credit unions in future rulemakings.
    Going forward, NCUA Board Chairman Debbie Matz has 
announced plans to consider streamlining the member business 
lending rule, finalize regulatory relief on holding fixed 
assets, and simplify the process for adding some types of 
associational groups to credit unions' fields of membership.
    NCUA is also revising our examination process to provide 
relief. Through our small credit union examination program, 
NCUA spends less time on average now in small, well-managed 
credit unions. NCUA is further working to reduce the time spent 
on-site conducting exams and to improve their consistency in 
this process.
    Concerning legislation, NCUA appreciates the Committee's 
recent efforts to enact laws to provide share insurance 
coverage for lawyers' trust accounts and enable federally 
insured financial institutions to offer prize-linked savings 
accounts.
    NCUA would advise Congress to provide regulators with 
flexibility in writing rules to implement new laws. Such 
flexibility would allow us to scale rules based on size and 
complexity to effectively limit additional regulatory burdens 
on smaller institutions.
    NCUA also supports several targeted regulatory relief bills 
for credit unions. These bills include: legislation to allow 
healthy and well-managed credit unions to issue supplemental 
capital that will count as net worth; permit all Federal credit 
unions to grow by adding underserved areas; raise the cap on 
member business lending to support small businesses; and exempt 
one- to four-unit non-owner-occupied residential loans from the 
member business lending cap.
    Finally, parallel to the powers of the FDIC, OCC, and 
Federal Reserve, NCUA asks for the authority to examine and 
enforce corrective actions where needed at third-party vendors. 
NCUA's draft legislation would provide regulatory relief for 
credit unions and close a growing gap in NCUA's authority to 
work directly with key infrastructure vendors, like those with 
a cybersecurity aspect. This would allow us to obtain necessary 
information to assess risks and deal with any problems at the 
source.
    In closing, NCUA remains committed to providing regulatory 
relief and streamlining examinations. We also stand ready to 
work with Congress on related legislative proposals. I look 
forward to your questions.
    Chairman Shelby. Ms. Franks.

 STATEMENT OF CANDACE A. FRANKS, COMMISSIONER, ARKANSAS STATE 
  BANK DEPARTMENT, ON BEHALF OF THE CONFERENCE OF STATE BANK 
                          SUPERVISORS

    Ms. Franks. Good morning, Chairman Shelby, Ranking Member 
Brown, and distinguished Members of the Committee. My name is 
Candace Franks, and I serve as bank commissioner of the 
Arkansas State Bank Department. I am also chairman of the 
Conference of State Bank Supervisors. It is my pleasure to 
testify today on behalf of CSBS.
    I would like to thank Congress and this Committee for your 
focus on community banks. In my 35 years as a State regulator, 
I have seen firsthand the positive local impact of community 
banks. These banks are critical to providing access to credit 
in urban as well as rural areas, and they are important to 
building and maintaining consumer confidence in our financial 
system.
    One out of every five U.S. counties has no physical banking 
offices except those operated by community banks. In my home 
State of Arkansas, a very rural State, there are 96 towns that 
have only one physical banking location. For these small rural 
towns, the community banking system is the banking system.
    Community banks excel at relationship lending, making them 
a vital source of credit for small businesses. In fact, 
community banks play an outsized role in lending to small 
businesses, holding 46 percent of loans to small businesses and 
farms.
    Regulators must constantly improve the way we conduct 
supervision to ensure a balanced approach. This allows banks to 
contribute to the stability and resiliency of the economy and 
strengthens the diversity that exists in the banking system. As 
State regulators have examined various approaches to right-
sizing community bank regulation, we have found that community 
banks cannot be defined by simple line drawing based on asset 
thresholds. While asset size is relevant, there are other 
factors. Factors like market areas, funding sources, and 
relationship lending are characteristics I as a bank regulator 
understand and witness on a daily basis. We need a process that 
identifies the relevant factors and provides flexibility in how 
those factors are weighed and considered.
    This new definitional approach sets a foundation for other 
measures to tailor regulation and supervision to the community 
bank business model, for example, providing that application 
decisions affecting community institutions do not set precedent 
for other types of institutions or conferring QM status onto 
all mortgages held in portfolio by community banks.
    While much needs to be done to right-size community bank 
regulation, I want to recognize some significant steps already 
taken. The CFPB's proposed changes to its mortgage rules would 
give more banks flexibility to make loans to their customers. 
CSBS commends Congress for passing a bipartisan provision 
requiring that at least one member of the Federal Reserve Board 
have experience either as a supervisor of community banks or a 
community banker. This new requirement reaffirms that community 
banks are an integral part of the financial system.
    Similarly, we ask Congress to reaffirm the existing legal 
requirement that the FDIC Board includes an individual with 
State regulatory experience. A seat at the table will not 
automatically result in a right-sized regulatory framework. 
Additionally, we must truly understand the state of community 
banking and the issues they face. This is why CSBS has 
partnered with the Federal Reserve to attract new research on 
community banking. This research will help us develop a system 
of supervision that provides for a strong, enduring future for 
the dual banking system.
    Work from the Community Bank Research Conferences held by 
CSBS and the Federal Reserve has demonstrated there is real 
value in the relationship lending model used by community 
banks. One study presented at the 2013 conference found that 
proximity to a community bank enhances the chance for survival 
of startup companies. Our hope is this research will inform 
legislative and regulatory proposals and appropriate 
supervisory practices and will move us closer to a right-sized 
regulatory framework.
    There are significant operational and strategic differences 
among our Nation's banks. These differences reflect the 
admirable diversity of our financial system. Our regulatory 
approach must also reflect this diversity.
    Thank you for the opportunity to testify today, and I look 
forward to your questions.
    Chairman Shelby. Thank you.
    I will direct my first question to Ms. Eberley. According 
to the FDIC, only two de novo Federal banking charters--two--
have been approved since 2009. Since 1990, we have lost more 
than 3,000 banks, including 85 percent of banks with assets 
under $100 million. Equally concerning to a lot of us is that 
no new banks are being created because of barriers of entry.
    Is the FDIC concerned about the lack of new banks? And what 
specific step is your agency taking to address the issue, if 
you are? And what legislative solutions might resolve some 
barriers to entry but keep the safety and soundness of the 
system intact, which we all want to do? Ms. Eberley.
    Ms. Eberley. Thank you. I think the issue is one of where 
we are in the economic cycle versus one of legislative barriers 
or even regulatory barriers.
    As I mentioned, in the EGRPRA process we were asked to 
clarify the application process for deposit insurance, and we 
have done that. Our policy has not changed. It remains the 
same. We had one application in 2014. That application remains 
in process. It came toward the end of the year.
    But I think the numbers of de novo's do not reflect the 
interest actually in community banking. If you instead look at 
the dollar amount of capital that has flowed into the community 
bank industry since 2008, it is $43 billion. That indicates 
that there is investor interest in supporting community banks 
and belief in the viability of the community bank model. And I 
believe that capital at some point will shift into de novo 
institutions as the economy continues to improve and as the 
inventory of small troubled banks continues to decline.
    Chairman Shelby. Do you see any legislative proposals, or 
do you have any of your own?
    Ms. Eberley. No.
    Chairman Shelby. Do you like what the regulations call for 
now?
    Ms. Eberley. The regulations that govern applications for 
deposit insurance--and there are two pieces to it, so there is 
the charter as well, which we do not grant. The charter would 
either come from the State authority or the Office of the 
Comptroller of the Currency in the case of a national bank. But 
the guiding principles for us are the statutory factors for 
deposit insurance in the FDI Act, and we think they are 
relevant today.
    Chairman Shelby. I understand that the FDIC, the Federal 
Reserve, and the OCC are currently undertaking a regulatory 
review under the Economic Growth and Regulatory Paperwork 
Reduction Act. This act requires, among other things, a review 
of all regulations prescribed by your agencies. But buried in a 
footnote in the related Federal Register notice, you have 
indicated that you will not review certain rules.
    Who decided to exclude regulations from this review and 
based on what authority? You do not need to tell us why they 
did it. We just want to know who made the decision. Was it made 
at the very top? We will start again with you, Ms. Eberley, and 
then go to the OCC and the Fed.
    Ms. Eberley. We work on this through the Federal Financial 
Institution Examination Council with the benefit of our Legal 
Advisory Group. The regulations that were excluded are 
regulations that are new, so recently enacted, and that is the 
basis, as I understand it, for excluding them.
    Chairman Shelby. OK. Ms. Hunter, do you have any comment?
    Ms. Hunter. Yes, that is my understanding as well. It is 
just the newer regulations require more time to get experience 
with exactly how they are operating and where the burden might 
be. So that was really the basis for that.
    Chairman Shelby. Mr. Bland, do you have any----
    Mr. Bland. Chairman Shelby, I would just add that while the 
footnote says that, I have attended both the Los Angeles and 
the Dallas one, and in the spirit of just hearing from the 
bankers and other stakeholders, we have been open to any and 
all proposals or thoughts they have had. And so part of the 
process is to just be as open and hear as candid from them on 
regs that are of interest to them.
    Chairman Shelby. Who made that decision? Was it the 
Chairman of the Federal Reserve?
    Mr. Bland. I am not aware of that.
    Chairman Shelby. Was it the Comptroller of the Currency? 
Was it the Chairman of the FDIC? Somebody made the decision. We 
just want to know who.
    Mr. Bland. We can find out for you, Chairman.
    Chairman Shelby. Will you furnish that for the record?
    Mr. Bland. We will find out who made that decision.
    Chairman Shelby. OK.
    This leads me to the cost-benefit analysis for regulatory 
review. I am a believer in empirical analysis when it comes to 
regulations. If a regulation's costs outweigh its benefits, I 
believe it should be thrown out. Does anyone disagree? And if 
so, why? In other words, if a regulation's cost, you weigh 
that, outweigh its benefits, should we keep it? Mr. Bland, if a 
regulation's costs outweigh its benefits, should it be thrown 
out?
    Mr. Bland. Chairman Shelby, the issue of cost-benefit, if 
it should be thrown out, you know, also when you enact 
legislation, it needs time to see what the effectiveness is. 
And so----
    Chairman Shelby. But ultimately if you had time to analyze 
it and if its costs to the banking system outweigh its benefits 
to the public, should we have it? In other words, it would be 
weighed in the balance, and should it be gone?
    Mr. Bland. Chairman Shelby, in the strictest sense, I 
understand your point. But one of the things that is 
important----
    Chairman Shelby. Do you disagree with me?
    Mr. Bland. No. I was going to make this point.
    Chairman Shelby. OK.
    Mr. Bland. There are safety and soundness and consumer 
protections safeguards----
    Chairman Shelby. Oh, absolutely.
    Mr. Bland. And so that has to be weighed in addition to 
that----
    Chairman Shelby. Absolutely. That would be one of the 
costs--or benefit to the public, benefit versus cost.
    What about you, Ms. Hunter? What is your thought?
    Ms. Hunter. Well, I would add to Mr. Bland's comment that 
the challenge is that it is easy to measure the costs because 
they fall to specific institutions. It is much harder to 
measure the benefits because they really accrue to a very broad 
population, things like safety and soundness of the banking 
system or confidence in the payment system. So that is really 
the challenge in assessing costs and benefits. I do think that 
it is worth doing that analysis, and I know when we propose 
rules, we look first at what was the benefit that the statute 
was intending to try to achieve. You know, what was that goal? 
And then try to fashion rules that minimize the cost of 
achieving that goal as best we can. And, obviously it takes 
time to understand exactly how it gets implemented in the 
industry.
    Chairman Shelby. But that is part of the process, is it 
not, to weigh the costs versus the benefits. That is part of 
your job as a regulator, is it not?
    Ms. Hunter. It is, and it is part of the process we go 
through when we develop rules responding to statutory 
mandates----
    Chairman Shelby. What about the FDIC?
    Ms. Eberley. I would add to what Ms. Hunter said, the 
challenge is quantifying the benefits of a safe and sound 
banking environment and the lack of failures, the lack of 
economic loss, that is the challenge.
    Chairman Shelby. It is.
    Ms. Eberley. And it is a difficult thing to quantify when 
you are going with a cost-benefit analysis.
    Chairman Shelby. I do not disagree with you, but you would 
weigh the costs versus the benefits. If the benefits outweigh 
the costs, keep the regulation. If it does not, it ought to 
fall. But that is a big debate we have going, because we are 
talking about overregulating smaller banks and so forth, the 
costs to them versus the benefit to the public, I guess.
    OK. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman. Thank you all for 
joining us, the four of you that were at our September 16th 
hearing, the four Federal regulators. Thank you for being here, 
Ms. Franks. Thank you for joining us on this one.
    Ms. Hunter, a question for you. Over the weekend, the major 
story broke in U.S. and European media outlets, including ``60 
Minutes'', about a trove of HSBC account holder data that 
reveals the HSBC Swiss banking arm collaborated in efforts by 
some of its account holders to engage in tax evasion. I 
understand European tax officials recovered huge amounts of 
back taxes from and imposed large penalties on some of these 
account holders. I understand that the IRS received this 
information in 2010, 5 years ago. Would they normally share 
that information immediately with the Fed?
    Ms. Hunter. Well, in response to your question, I will 
first say I did not personally see the piece that was on ``60 
Minutes'', but I can say that--we really cannot comment on 
specific investigations.
    Senator Brown. That is why I asked would you normally get 
that kind of information.
    Ms. Hunter. In a general sense, when there is an 
investigation, yes, we do share information when requested by 
the law enforcement authorities.
    Senator Brown. ``Share'' meaning you give to them. Do they 
normally give this kind of information to you?
    Ms. Hunter. It would depend on the case. There would be a 
dialog about--certainly if they are limited in their ability to 
share with us, they would not do that. But we provide 
information upon request. We generally may be aware that there 
is an investigation going on.
    Senator Brown. OK. I want to ask you something. I take that 
to mean there is a good chance that you have had this, that the 
Fed has had this information for quite some time. I gather 
investigations of some individual U.S. account holders 
identified by these leaks have been undertaken by IRS.
    My question is this: HSBC has a recent history of major 
U.S. sanctions and money-laundering violations. They now face 
these new charges of facilitating tax evasion. Summarize, if 
you will, for the Committee what the Fed has done with respect 
to HSBC to pursue these tax evasion allegations, what 
conclusions you may have reached regarding HSBC's 
responsibility for these activities, and what steps you are 
taking with other Federal officials to pursue these matters.
    Ms. Hunter. OK. Well, first of all, again, I cannot really 
speak to the specific matter that is under investigation, but I 
can tell you that, with respect to HSBC--we have entered into 
three formal enforcement actions, consent, cease, and desist 
orders, and those relate to Bank Secrecy Act and AML 
compliance. There is one related to mortgage servicing 
activities and one related to compliance risk management in 
general. So we have been obviously working on issues with the 
firm related to compliance generally.
    I will say that in any situation where there is an 
investigation, if we have evidence or we are provided with 
evidence that there is a violation of law or breach of safety 
and soundness based on activities, and especially those that 
might involve tax evasion, we take that very seriously. We 
would favor certainly moving forward, and I am firmly committed 
to taking any appropriate sanctions or penalties that would 
accrue from the outcome of that work.
    Senator Brown. These are, as you know, very serious 
accusations and in some cases more than accusations, as we 
found. And this Committee, a lot of us, will be watching the 
Fed's actions on this, so we will be in touch about that.
    Ms. Hunter. We agree they are very serious accusations.
    Senator Brown. A question for the four Federal regulators, 
one question. Each of your agencies must comply with a slew of 
requirements when writing rules. This is a bit of a follow-on 
to Chairman Shelby's question. The Administrative Procedures 
Act, the Regulatory Flexibility Act, the Paperwork Reduction 
Act--these require you to publish rules for public comment, 
review rules for impacts on small businesses, consider less 
burdensome alternatives, reduce the paperwork burden. You are 
also currently undertaking the EGRPRA review process to 
identify burdensome and outdated regulations.
    The question is this--a couple of questions, and if you 
would just start with Ms. Eberley and work your way down. Do 
you think your agency adequately takes into account the costs 
and benefits of the rules you write? What impact would 
additional analysis requirements have on your ability to 
implement new rules? Might some of these proposals actually 
stop rulemaking in its tracks or slow it down so the burden is 
too great to move forward? Ms. Eberley, we will begin with you, 
please.
    Ms. Eberley. OK. Well, we certainly do try to carry out the 
cost-benefit analysis. Under our policy on rulemakings, we 
consider the costs, the benefits, and alternatives based on 
available data. We ask a lot of questions during the rulemaking 
process to garner the impact on institutions, and we are 
particularly interested in the feedback we get from community 
banks about the costs of the regulation or the ways that it 
would impact the institution. And we make changes based on the 
information that we hear.
    As to your second question, which was about whether 
additional requirements would impact that process, I think it 
would. Anytime you add additional requirements, it makes the 
process of conducting the analysis more difficult and also 
would open it up to additional legal challenges.
    And your final question was what kind of impact could that 
have on the process. I think it could certainly slow the 
process and certainly would make it more cumbersome and limit 
our flexibility.
    Senator Brown. Thank you.
    Ms. Hunter.
    Ms. Hunter. I am not sure I have much more to add to that 
very complete response. I do agree that it would add complexity 
to the process, certainly adding extra steps, and those would 
tend to slow down development of rules. And that can be 
problematic in the sense that on some occasions the lack of 
clarity between the time a law is passed and the rule is 
developed can impose burdens on banks as well, because they are 
not sure exactly how various requirements might be implemented.
    Senator Brown. Mr. Bland.
    Mr. Bland. The OCC has a very robust economic analysis 
impact that looks at the quantitative and qualitative factors 
and to appropriateness of a rule. We also have this process 
consistent with the OMB guidance, which has been assessed.
    And to your last point, the only thing to add is the 
proposed rules could halt or slow down implementation of rules.
    Senator Brown. And, Mr. Fazio, last.
    Mr. Fazio. I would just echo the comments of my colleagues 
and indicate that NCUA does take account of all the costs and 
benefits that we can reasonably catalogue and quantify in our 
rulemaking process and try to speak to that in the preambles to 
our rules.
    We also take very seriously and find very useful the 
comments we receive during the rulemaking process. The agency 
responds to those comments in our preambles to our final rules. 
We find stakeholder comments very helpful in fine-tuning and 
calibrating the rules so that we target the rule and keep it as 
efficient as possible while also providing alternatives, 
practical alternatives, for credit unions to comply.
    Senator Brown. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman. I have just a few 
questions.
    First, if I could--and I would like to address this to Ms. 
Hunter--one issue that represents a particular regulatory 
burden on small banks involves new rules for appraisals. Kansas 
Fed President Esther George observed at a 2014 conference that 
market values in smaller rural communities may not have an 
objective comparison. However, new appraisal rules do not 
provide requisite flexibility for small businesses and 
individuals in rural and other small community markets.
    Now, while the Fed did not promulgate the appraisal rules, 
it has to examine them. How are you addressing the small banks' 
concerns about appraisals in rural communities? And what 
recommendations would you have to rectify the problem?
    Ms. Hunter. Well, Senator, you raise an excellent point and 
one that we have certainly heard in our outreach and 
discussions with community banks, and particularly those in 
rural areas. The difficulty in getting appraisers who know the 
community and are able to do the work that is required has been 
a real challenge, and so this is actually one area where, 
through the EGRPRA meetings that we have had in Dallas and in 
Los Angeles, we have actually heard comments about some 
suggestions that might help alleviate some of the issues in 
rural areas but also burden more broadly for community banks. 
And one of the suggestions was to take a look at the threshold 
for when these appraisals are actually required and for what 
kinds of deals.
    The threshold was last set in 1994, I believe. It is an 
interagency rule. But it was set in 1994, and it is at 
$250,000, and there is a higher threshold for some business 
loans.
    In hearing that in the meetings, came back--and speaking 
for the Federal Reserve, we certainly think it merits a good 
look at just what that threshold should be, how many deals was 
it capturing in 1994 versus what the right level might be 
today; and if we were to raise that threshold, it could achieve 
the burden reduction and particularly alleviate the problem in 
rural areas.
    Senator Rounds. Does anyone else care to comment on that as 
well? If not, I do have another question, and that would be 
for, in this case, Ms. Eberley. Kansas Fed President Esther 
George, once again, said at the same 2014 conference that 
community banks were considered well capitalized and that their 
risks understood before Basel III. Yet in spite of that, now 
community banks must adopt the more complicated capital rules 
with finer degrees of risk weights and capital buffers. The 
risk-weighted asset schedule of the Call Report has 57 rows and 
89 pages of instructions, even though no additional capital was 
required for the majority of the community banks. Are 57 rows 
and 89 pages of instructions simply too much for most community 
banks? Are they necessary?
    Ms. Eberley. You know, one of the lessons coming out of the 
crisis was that the industry as a whole needed higher levels of 
capital and higher-quality capital, and that is what our 
interagency capital rules were designed to do. I think it is 
fair to ask if we can make it more simple for community banks, 
and then I think that that is something we are open to 
continuing to look at.
    Senator Rounds. OK. One more question, and this is for Ms. 
Franks. There are several legislative proposals to consider as 
a qualified mortgage all residential mortgage loans made, as 
long as the loan is included in the lender's portfolio. Can you 
explain how this would benefit or impact consumers?
    Ms. Franks. The State bank supervisors believe that that 
would certainly benefit consumers to have QM loans held in 
portfolio qualify. We feel like that would be beneficial to a 
consumer because the local bank knows their customer and they 
have an inherent interest in ensuring that those banks can 
repay those loans when they make those loans in the first 
place. So we think that that would be a great benefit to our 
consumers.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    I think we all share common beliefs here that community 
banks are critically important. They play an outsized role both 
in relationship lending and particularly lending for small 
business.
    One of the things the Chairman mentioned in his opening 
comments--and I have heard similar numbers--is that compliance 
costs have gone up north of 90 percent. I find, though, that 
when I press my community bankers to specifically enumerate 
where those costs come from and document them, I get not a lot 
of specificity.
    For all of you, very briefly--because I have got one 
another follow-up--would you estimate--could you give an 
estimate of how much compliance costs have gone up since Dodd-
Frank for community banks? And is there kind of an enumeration 
of top three things that you are hearing as you do these 
sessions around the country? Just go on down the line.
    Ms. Eberley. We attempted an empirical study in 2012, and 
the difficulty with doing that is that institutions are not--as 
you noted, they are not maintaining the kind of information 
that you could actually just do the math. They do not keep 
their books in a way that would allow you to gather the data 
that is necessary. And, in fact, they told us that gathering 
that data would in and of itself be burdensome. So there is 
that issue.
    But on the EGRPRA front, the comments that we are 
receiving, the general themes have been mentioned previously, 
looking at the various thresholds and rules and regulations, 
some of which have been outstanding for decades, and whether or 
not those thresholds are still reasonable based on changes in 
the industry. That is the number one theme through the EGRPRA 
process.
    Senator Warner. Ms. Hunter.
    Ms. Hunter. Yes, and I would add to that as well, the 
things we hear most are the lack of specificity is an issue. It 
is really the time, and it is accumulation of small changes. So 
at least what I hear from the banks--and we have been hearing 
in the EGRPRA process sometimes it is a one-time change; it is 
getting used to a new way of doing things. It might even 
introduce system changes that they might not have wanted to do 
at exactly that point in time. So there is an accumulation of 
burden or an up-front investment of time, and then going 
forward it is this 5 minutes to review a policy, 10 minutes 
with the board.
    So it is hard to quantify, but that is the kind of thing we 
are looking for in the EGRPRA process to try to see how we 
might streamline that.
    Senator Warner. But do you think it is--the 90 percent 
number that is thrown around, do you think that is an accurate 
reflection?
    Ms. Hunter. 90 percent increase----
    Senator Warner. In terms of increased compliance cost.
    Ms. Hunter. I do not have the information to be able to 
evaluate that.
    Senator Warner. Could we finish down the----
    Mr. Bland. Senator Warner, it is a very complex issue, but 
I have heard in my visits with bankers, it manifests itself in 
additional resources you have to hire, particularly as it gets 
more complex, they have to hire folks with a certain specialty, 
but also diverting their attention away from lending and 
interacting with their customer base. The impact on staff, 
though, varies with the size of the institution and the 
activities they are involved in, but it is real based on what 
we hear from bankers.
    But similar to what was said before, some of the changes 
are looking at different threshold, but also our collaborative 
paper that we put out is in recognition of the challenges that 
institutions have, and by sharing and working together, they 
can help them manage their costs, but also acquire the 
experience they need, because the banking business is going 
through a substantial change. When you overlay technology but 
also nonbank competition, different products and services, and 
so that realization of the change, and to be able to offset 
that with sharing of resources, building expertise, is 
critical.
    Senator Warner. Very briefly, because I have got one other 
question.
    Mr. Fazio. I would just echo that. I think it is a case of 
there is just a lot of change going on now. Part is regulatory; 
part is marketplace and technological. And it is a lot for the 
institutions, especially smaller ones, to deal with. It remains 
to be seen if we will reach a state of equilibrium that, you 
know, allows them to feel like that is something that they can 
manage going forward.
    We try to help where we can. A lot of the rules that credit 
unions complain about are not within NCUA's direct authority, 
and so there is not much we can do, but we do try where we can 
to help them in complying, have practical approaches, guidance, 
our Office of Small Credit Union Initiatives, to help them with 
their planning and with consulting. And so we do what we can.
    Ms. Franks. Yes, Senator, my institutions generally tell me 
that the costs are incurred through hiring additional staff and 
also in implementing and spending the manual time and effort in 
trying to understand the new regulations and to implement them, 
and particularly this is difficult in more rural areas and more 
rural banks where you do not have a large group to choose new--
--
    Senator Warner. Let me just add, I mean, I think there are 
certain things, like Senator Rounds mentioned, in terms of 
forms, I think the thresholds issue. I do think the more we can 
get some specificity around the kind of pressing our community 
banks for what the changes are.
    I guess the comment I would like to make, Mr. Chairman, is 
that--and I do not know how you grapple with this. Clearly, 
with 400 banks failing, we still have to deal with safety and 
soundness. But my belief is that enhanced prudential standards 
for the larger institutions, even though we try to bifurcate 
them toward smaller, have kind of seeped down into the 
examiners at the smaller banks. And I do not know how you 
grapple with that best practices standard, but I would love to 
come back and revisit that.
    Chairman Shelby. Thank you.
    Senator Heller.
    Senator Heller. Mr. Chairman, thank you. And it is my wish 
to follow up on some of your questions, Senator Warner's 
questions, and Senator Brown's questions as I use up my 5 
minutes. But I want to thank everybody for being here. Thanks 
for taking the time and spending time with us. It is very, very 
helpful. I am bouncing back between a couple of committees 
here, and I know a couple of us here are doing the exact same 
thing. So I just want to make sure I ask the right committees 
the right questions.
    Having said that, and I think the theme here is that the 
number of financial institutions in this country has shrunk to 
its lowest level since the Great Depression. I know some of 
these statistics have already been discussed, but we once in 
this country had 18,000 banks, and today we have less than 
7,000.
    In my home State of Nevada, there are about a dozen 
community banks left, and that is less than half of what there 
were 5 years ago. The last bank closure occurred June of 2013. 
There are only 19 credit unions left in the State, serving 
nearly 340,000 members. Thirty-one percent of Nevadans are 
unbanked or underbanked, which is the highest in the country. 
So I guess for the FDIC, is this a concern or a statistic?
    Ms. Eberley. It is a concern, and it is one of the reasons 
we conducted a study on consolidation in the banking industry 
to really look at what are the underlying reasons for 
consolidation and see what we could learn from that.
    What we saw over the period that you talked about, with the 
decline of institutions from 18,000 down to less than 7,000, is 
that about 20 percent of the consolidation that occurred over 
that period was from failures that were really isolated into 
two significant crises primarily. And so to the extent that we 
can avoid financial crises in the future through strong 
supervision and good regulation, that will go a long way toward 
protecting institutions.
    The other 80 percent of consolidation we considered 
voluntary, and it was a mix of institutions that were merging 
with unrelated companies and institutions that were 
consolidating with related companies. The biggest single wave 
of that activity that really accounted for a substantial part 
of the voluntary consolidation occurred after the relaxations 
on interstate branching through Riegle-Neal and other State 
initiatives in the mid- to late 1990s. So that was the single 
biggest period. That can only happen once. So, you know, we do 
not expect to see large waves like that again.
    What is missing from the equation is de novo's. We do 
expect that, as the economy continues to improve, we will see 
some de novo activity again, and we are looking at it that way.
    The other point I might make----
    Senator Heller. Ms. Eberley, I do not have a lot of time, 
so----
    Ms. Eberley. I am sorry.
    Senator Heller. And I hate to cut you off, but I do have to 
get to my questions. This was brought up, and, again, I want to 
follow up on the Chairman's comments about this application 
process. I do not know if the Community Bank of Pennsylvania 
has been brought up in this hearing. It is the first new 
federally approved bank since 2010. In the process of applying, 
the Pennsylvania bank raised $17 million from investors but had 
to spend nearly $1 million just in application fees, and the 
attorneys said that it was 8 to 16 inches of application pages 
in order to get it chartered.
    I guess the question is, quickly: If you have to spend $1 
million to open up a bank in America today, how many more banks 
do you anticipate are going to pay that price?
    Ms. Eberley. We do not charge any application fees for 
applications for deposit insurance. There is no fee associated 
with that. Institutions do have startup costs as they go 
through the process----
    Senator Heller. But you understand what I am saying. We are 
talking about the cost of putting together 16 inches of 
paperwork, lawyers and accountants and everybody else that you 
have to put together. It cost them $1 million. Is this what we 
can expect in the future from the FDIC as costs? The question 
is: Are you going to open a bank today if you have those kind 
of costs?
    Ms. Eberley. That sounds like a large figure based on my 
experience.
    Senator Heller. Let me just go to Senator Warner's comments 
about costs and how they are not getting answers from small 
community banks in his State. I tell you, I am getting answers 
from the small community banks, and, Mr. Bland, I think you 
touched on it, and that is, personnel costs. We have small 
banks in Nevada that are being audited by the Feds. There are 
no exceptions, clean books, but then being required--required--
to hire another compliance officer. And they are saying, 
``Where are we going to come up with $120,000 to $150,000 to 
pay for another compliance officer, even though we have no 
exceptions?'' That is part of the problem of what is going on.
    So I want to ask--do I have a minute, Chairman? On EGRPRA, 
I just want to ask one quick question on EGRPRA.
    Senator Toomey. [Presiding.] OK.
    Senator Heller. Will you consider Dodd-Frank's regulations 
during the EGRPRA process?
    Mr. Bland. I will take a stab.
    Senator Heller. OK.
    Mr. Bland. Given that the EGRPRA process is looking at 
rules, established rules that are outdated, overly burdensome, 
and unnecessary, most of the Dodd-Frank rules that the OCC is 
responsible for have not been implemented yet or have taken 
effect. And so it is not, we feel, appropriate to look at those 
rules at this time.
    Senator Heller. But isn't it true, though, we will not have 
another EGRPRA study for another 10 years?
    Mr. Bland. That is true.
    Senator Heller. And so if we do not include Dodd-Frank----
    Mr. Bland. But I would say that the OCC, as part of our 
normal practice, looks at whether rules are appropriate in 
terms of relevance, and we will make changes without waiting 
for the next EGRPRA process.
    Senator Heller. OK. To all of you, thank you very much for 
being here.
    Mr. Chairman, thank you.
    Senator Toomey. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman.
    I think you are getting a theme here that this is not a 
partisan issue, this is not something that there is a lot of 
disagreement on this Committee about. We are deeply concerned 
about the status of community banks in this country, deeply 
concerned about what we hear back home in terms of 
overregulation, compliance burden, extra paperwork, what needs 
to happen. And I look at this in kind of two different ways.
    First, you have got the obligation to make sure that your 
rules make sense, to make sure that you are doing the lookback; 
when you are enacting these rules, you are actually sensitive 
to some of the issues like appraisals, some of the issues like 
extra compliance and burden. These banks did not create the 
problem, but yet they feel like they have the lion's share of 
the burden because they do not have the economies of scale. And 
so what was too small--you know, too big to succeed--or too big 
to fail has now become to small to succeed. So it has then 
allowed new entrants into the market that are competing without 
the burden of regulation, but also has really made--not just 
look at shutting down banks or closing down banks but removing 
lines of credit, especially in the mortgage area.
    And so I want to kind of get to two points. It would be 
very informative to know what reactions you have had to what 
you have already heard in the Dodd-Frank arena, what reactions 
you have had to what you have already heard about the need for 
accommodation and retreat on some of the regulation.
    On the other hand, Mr. Bland, you said to the extent the 
law allows, and I think that is the other challenge we have 
here, is trying to figure out where we are going to put the 
burden on you to solve this problem and where we need to be a 
partner. And so I am curious, as you have been going through 
the EGRPRA process, as you have met with the community bankers 
in your meetings, what are you hearing about Dodd-Frank that 
would be impossible for you to fix without legislative action?
    Mr. Bland. Our primary focus has not been on Dodd-Frank in 
the EGRPRA process, but, what we----
    Senator Heitkamp. I would imagine they do not hesitate to 
tell you about it, though.
    Mr. Bland. In a kinda-sorta way, they get at it.
    [Laughter.]
    Mr. Bland. But I think those themes that you touched on are 
the important ones in terms of the impact relative to the 
institution. And I think part of the discussion we had earlier 
about what is a community bank I think is an important one 
because where it used to be traditional services in a defined 
market, it is really being stretched in terms of definition 
when you overlay the competition. But banks are really 
challenged by what is the right business model and making sure 
that the rules and regs and our policies and practices mirror 
what those institutions are----
    Senator Heitkamp. But I think our point is, as they are 
trying to meet those challenges, whether it is technology and 
competing with online banking, competing with folks who do not 
have these regulations as their challenge, we do not want to 
add additional unnecessary burden on that challenge. And so I 
think one of the things that would be extraordinarily helpful 
for me, as you kind of go back and look, is to take a look at 
what you have already done in response to concerns that have 
been raised, and not looking at EGRPRA but looking at Dodd-
Frank, and then taking a look at where you are sympathetic to 
the concerns that community banks or smaller institutions have 
and what we need to do to fix those concerns, because the 
viability of financial institutions going forward is dependent 
on its diversity. And I could tell you stories about community 
bankers who did not use QM, but yet were able to do 200 
mortgages on an Indian reservation that they would not have 
gotten otherwise. That is relationship banking, and none of us 
here want to preside over a Federal policy that eliminates the 
need for relationship banking.
    And so I just would appreciate any information that you 
could get to me about what accommodations you have already made 
and then what needs to happen, in your judgment, beyond that to 
accommodate the concerns that you are hearing. And, you know, 
we all have a role to play. I think that you guys have heard 
and are starting to react, but this idea--and I think the 
Chairman talked about cost-benefit and so did Mark. How do you 
evaluate costs? It is not good enough to say, ``I do not 
know.'' We have got to get to the point where we do know so 
that we can evaluate the risk-benefits of what we are doing in 
this arena, especially as it relates to small institutions.
    Senator Toomey. Senator Vitter.
    Senator Vitter. Thank you. I want to start by thanking the 
Chair for calling this hearing and certainly echoing his 
introductory comments. I think there is great opportunity on a 
bipartisan basis to move forward with some regulatory relief 
for smaller institutions. And as one piece of evidence of that, 
Senator Brown and I have a bill. The discussion of it has 
dominated on the section which requires higher capital 
standards or megabanks, but it also have a very important 
separate section offering some significant regulatory relief 
for community banks. And I think that is one example of 
bipartisan work in that direction. I hope this Committee will 
produce that sort of movement.
    Let me ask all of our guests, in general, what do you think 
or what have you measured as the increase in compliance costs 
burden in the last few years on community banks specifically?
    Ms. Eberley. As I mentioned, we did try to do an empirical 
study in 2012, and the data is just not there to complete the 
study. I can share some anecdotal information that would 
suggest that some of Dodd-Frank's provisions that were designed 
to eliminate too big to fail may, in fact, be leveling the 
playing field.
    One of the things that we have seen is loan growth in 
community banks compared to the industry. Last year we started 
putting out our quarterly banking profile with a separate 
section dedicated to community banks and just their financial 
information. That shows that community bank loans grew year 
over year and quarter over quarter at a greater pace than the 
industry, and it was about 2:1.
    Senator Vitter. OK. What about my question, which was 
compliance costs?
    Ms. Eberley. I mentioned we had attempted to do an 
empirical study, and we cannot----
    Senator Vitter. OK. So you do not know. Does anyone else 
have any general perceptions or studies regarding compliance 
costs of community banks in the last few years?
    Ms. Hunter. I would only add that the Federal Reserve 
cosponsors a research conference with the Conference of State 
Bank Supervisors. We have had two of those conferences. There 
have been some papers presented at those conferences, getting 
at this very issue. Not having the details in front of me on 
exactly what each study said or did, I would not want to quote 
them directly, but I do recall, for example, one paper looked 
at the very smallest institutions and found that having to hire 
one more compliance staff member made the difference between 
profitability and nonprofitability.
    So those kinds of studies are really helpful in that we 
take that information and when we think about the impact of new 
requirements and as we are implementing them, try to take the 
least burdensome path to achieving the result that was intended 
in the law.
    Mr. Bland. Senator Vitter, we do not have any assessments 
like that.
    Senator Vitter. OK. Anybody else have any?
    Ms. Franks. I would just echo what Ms. Hunter said as far 
as the Community Bank Research Conference, because we have had 
some papers presented that do address some of those issues, 
particularly on small banks, and we will be glad to get that 
information to you, Senator.
    Senator Vitter. OK. Well, I would really commend this issue 
to all of you. It is pretty darn important. Compliance costs 
have mushroomed. That impacts every financial institution, but 
it disproportionately impacts smaller ones for the reasons Ms. 
Hunter suggested. You know, if you increase compliance costs 
100 percent, Citi is in a much better position to deal with 
that than a small community bank for whom it can literally put 
them under or cause them to have to sell out--a trend which is 
clearly accelerating. So I really commend that to you. It is 
awfully important, and certainly my perception, talking to 
community banks every week, is that the burden is enormous. For 
the most part, they are dealing with things, solutions for 
things they had--problems they had nothing to do with, and yet 
the burden on them is far bigger proportionally than it is on 
larger institutions.
    Another theme I hear all the time from smaller banks is 
real concern that Dodd-Frank and other recent regulation is 
pushing toward a one-size-fits-all, very standardized model for 
products. And they really think that is taking away their whole 
reason for existence in essence, their whole niche in the 
market. And in that context, the qualified mortgage issue comes 
up a lot.
    Do you hear that from community banks? And what is your 
reaction?
    Ms. Eberley. We have heard a lot from community banks about 
the concerns with the ability to repay and QM rules, primarily 
relating to the definitions of rural and small bank. We have 
shared those concerns with CFPB as we have heard them, and CFPB 
has recently put forth a Notice of Proposed Rulemaking to 
respond to the concerns that they have heard from community 
banks and offering some expanded designations.
    Senator Toomey. Thank you.
    Senator Vitter. OK.
    Senator Toomey. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair.
    The feedback that I get from my community banks around 
costs, around the general topic we are discussing, are 
overlapping audits, visits from different regulatory bodies, 
uncoordinated--too many staff coming in, overwhelming the local 
institution, the costs of preparing for that.
    You mentioned, Ms. Eberley, the 2012 study. In that study, 
the community banking study, was there an effort to step into 
the mind-set of a community bank and look at it from their 
point of view in terms of how many regulators are coming, how 
often, in what kinds of numbers, and whether there is a way to 
coordinate that whole set of activities in order to diminish 
the burden on community banks while achieving the core purposes 
of the regulatory visits?
    Ms. Eberley. At the same time that we completed the data 
study, we embarked on an outreach initiative that started with 
a symposium of community banks that we held in Washington, 
followed by outreach sessions around the country in each of our 
regional offices, hosted by our Chairmen, and we specifically 
asked institutions, you know, what were the things that created 
burden for them. They talked about new regulations, they talked 
about communication, and they talked about the examination 
process and ways that we could make it better. We took actions 
back in 2012 and 2013 on the feedback that we received from 
institutions and the feedback that we continue to receive. In 
particular, we streamlined our pre-exam planning process, the 
information that we ask institutions for before we go in, to 
make the examination process smoother once we get there. So we 
try to do as much work off-site as possible before we even show 
up, so that we go in with informed examiners ready to hit the 
ground running and limit the examination process.
    We did not get specific feedback during that process that I 
recall about coordination with other regulators, but we do work 
on that at a local level with our State counterparts through 
our field supervisors as they go through examination planning. 
We have cooperative examination agreements that define who will 
examine the institution when.
    Senator Merkley. Thank you. I am going to cut you off 
there. I think you have gotten to the core of the type of 
feedback loop that is so important. I am not sure, based on the 
feedback from my community banks, that it cannot be further 
improved on, but I gather you are continuing to hold the 
regional roundtables to try to get to the heart of this. And I 
appreciate that.
    Another piece of the commentary is that rules that were 
designed really for big banks engaged in market making, banks 
that are engaged in wealth management and investments in wealth 
management funds, banks that have trading going on in the 
derivative markets, these rules become part of an examination 
process that just is a burden and misappropriately applied.
    Is that a problem? And is it getting addressed? Yes, as the 
primary regulator of small community banks.
    Ms. Eberley. Absolutely. I would say first that all of our 
examiners are trained as community bank examiners, so they are 
aware of the rules that apply to community banks. We have a 
number of controls in place to prevent any kind of trickle-
down, if the concern is that the rules that are meant for the 
largest banks are being applied to smaller banks.
    First is just the good education of our staff. We have a 
very professional and experienced examination staff.
    Second, every report of examination goes through at least 
one level of review by a case manager in our regional office, 
who, again, is trained in all of our rules and regulations and 
what applies to which institutions.
    Third, we audit our regional office adherence to policy on 
a regular basis to ensure that we are being consistent across 
the country. And we stress communication at all levels that if 
institutions have any concerns, that they bring them up early 
in the examination process so that we can resolve them.
    Senator Merkley. Thank you. In short, you are saying that 
that really is not an issue for the things you are doing, and I 
am sure that will lead to further discussion of that.
    Then, finally, the feedback is--and this was referred to, I 
believe, by Senator Warner--that even when formal requirements 
do not exist, the regulators in the examinations are often 
saying, ``Well, you must do X.'' And it is, like, ``Well, why 
is that?'' ``Well, it is a best practice, and so you really do 
not legally have to do it, but we expect you to do it.'' And 
that trickle of best practices from large institutions down is 
creating challenges and problems that may be, again, 
inappropriately suited to small community banks. Is that an 
area you feel like you have adequately addressed?
    Mr. Bland. Senator, I can jump in here. Absolutely, this 
whole notion of best practices is something that we have to 
guard against, because some of the intentions are good, but the 
net effect, as you say, could be bad in terms of the 
institutions. And so one of the things we do is make sure we 
emphasize a matter requiring attention, which is an identified 
issue that the banks need to address, versus a best practice or 
a recommendation. Most recently, we updated our guidance to be 
very clear about what our examiners communicate, the things 
that have to be done because they are impacting the bank versus 
those things that are nice-to-do's. And so that is one of the 
things that we really have to focus on.
    But one of the keys that is really at this is explaining 
the why to bankers. Why are we asking them to do this? And then 
what will be the tangible benefit of acting on whatever our 
recommendation is?
    Senator Merkley. Thank you. My time is up, but I appreciate 
the feedback. Thanks.
    Senator Toomey. Thank you, and I will claim my time at this 
point.
    I would like to submit for the record a letter that I 
received from Comptroller Curry that contained a number of 
suggested reforms that I appreciate very much. Hearing no 
objection, I will submit that to the record.
    Second, I want to make a brief editorial comment, if I 
could. I just want to underscore how frequently we had 
sometimes several hundred new bank charters issued in a given 
year across this country, not at all unusual to have 100, 200 
new charters in a year. To go for 6 years with only two new 
charters, I have to say I find it wildly implausible to think 
that that is a reflection of a business cycle. In my view, it 
is very clearly a combination of a zero interest rate 
environment that has been engineered by the Fed and massive 
regulation that makes it impossible for people to see how they 
can have a surviving community bank. I say this as a person who 
helped launch a community bank in 2005. I was shocked by the 
amount of regulation that that bank was subject to then, and 
that was before Dodd-Frank. It has clearly gotten much, much 
worse, and it is impossible to believe that this is not related 
to the just virtually complete halt in a very, very important 
source of capital for small businesses and consumers.
    Having said that, what I think is very good news today is 
what I really want to talk about, and that is that the OCC has, 
in my mind, quite constructively, suggested several significant 
reforms, and I would like to pursue a discussion about that, 
especially with Mr. Bland, because this is exactly the 
conversation I think we should have. What are the specific 
things we can do that will help the existing community banks 
and more community banks serve the credit needs of their 
community?
    So, Mr. Bland, as you know and you mentioned in your 
testimony, one of the proposals you have suggested is to exempt 
community banks with assets of less than $10 billion from the 
Volcker rule, and I want to discuss that a little bit. But let 
me first start by--is it your sense, is it generally true that 
banks of $10 billion and less engage in virtually none or a de 
minimis amount of the activities meant to be precluded by the 
Volcker rule?
    Mr. Bland. Senator Toomey, that is correct. Our assessment 
around this area has shown that a lot of the activities that 
most community banks engage in is not under the purpose of the 
proposed rule. And, therefore, to require the compliance effort 
to make that determination seems costly compared to the actual 
activities that they have. And so that is where our view is on 
that.
    And then even if institutions were involved in activities 
that would follow the rule, the extent of those activities are 
not significant relative to larger institutions. And so the 
realization of looking at institutions around the $10 billion 
and under mark did not seem to be the intent of the 
legislation. So that is pretty much the bedrock of our 
proposal.
    Senator Toomey. And the reality is that these small banks 
have to spend a fair amount of time and energy and resources 
simply proving that they do not do what they have never done. 
Is that fair?
    Mr. Bland. That is correct. And, Senator Toomey, our 
thought is we can use the supervisory process to make 
assessments of whether or not those types of activities pose 
risks that we need to address.
    Senator Toomey. So I would like to ask Ms. Eberley and Ms. 
Hunter just briefly, are you open to pursuing a reform such as 
what has been proposed by the OCC?
    Ms. Hunter. Well, speaking for the Federal Reserve, I know 
Governor Tarullo, in testimony and in speeches, has voiced 
support for the proposal for exactly the reasons that Mr. Bland 
identified. Community banks do have some activities that are 
covered by the Volcker rule, but the risks are not nearly as 
great as for the largest institutions and it can be managed in 
the supervisory process.
    Senator Toomey. Thank you.
    Ms. Eberley.
    Ms. Eberley. We would estimate that very few of the banks, 
if any, that we supervise are engaged in activities covered by 
Volcker, but we have not taken an agency position.
    Senator Toomey. Well, I would encourage you to consider 
this seriously. I think it is a very constructive proposal.
    The last point I would make is, Mr. Bland, would you agree 
that there is nothing magical about the $10 billion figure? In 
other words, there is nothing intrinsic about one incremental 
dollar above that that suddenly gives rise to the activities?
    Mr. Bland. I would agree with that.
    Senator Toomey. OK. The second thing I want to touch on was 
you have also suggested that banks with up to $750 million in 
assets be examined every 18 months rather than every 12 months. 
Now, isn't it true that the size of the banks is not the only 
criteria that would determine whether they get that little bit 
of relief from the frequency of these reviews?
    Mr. Bland. Yes, the primary driver is well managed, and the 
ability of these banks in terms of the risks, but their proven 
performance. And really one of the major emphases here is for 
us to divert our attention to less well managed institutions, 
so it is a matter of devoting our resources, but also to lessen 
the burden on those banks that are performing well and that are 
managing themselves properly.
    Senator Toomey. I think that is a very constructive 
approach.
    Again, Ms. Eberley and Ms. Hunter, just briefly, because I 
am out of time, have you considered this? And are you open to 
this type of reform as well?
    Ms. Eberley. We indicated our support in our opening 
statement.
    Senator Toomey. OK.
    Ms. Hunter. Yes, and I think this is also a suggestion that 
OCC are looking at. One point I would make is we also hear 
proposals about cutting back on Call Report reporting, and that 
combined with extending of frequency or somehow reducing-- on-
site presence, there is a tradeoff there. We could use the 
reported information to monitor risks, which would allow us to 
feel comfortable extending exam frequency for certain 
institutions.
    Senator Toomey. Thank you. My time has expired.
    Senator Warren.
    Senator Warren. Thank you, Mr. Chairman
    Our community banks and credit unions play a unique and 
critical role in the market for financial services, and we must 
ensure that they can continue to do that in the years ahead. 
These small institutions clearly do not pose the same kinds of 
risks as the biggest banks, and our regulation and supervision 
of these institutions should reflect that.
    The good news is that Dodd-Frank does reflect that basic 
principle. It exempts community banks and credit unions from 
many of its rules, and for the others it almost always gives 
regulators the discretion to tailor their approach based on the 
size and business model of the institution.
    So when Members of Congress start talking about rolling 
back regulations in the name of community banks, I want to be 
sure that it is really about helping community banks and not 
about helping their much larger competitors.
    I want to start with this: Ms. Hunter, in your testimony 
you note that the Fed defines ``community banking 
organizations'' as those with under $10 billion in assets. Is 
that right?
    Ms. Hunter. Yes, that is true.
    Senator Warren. Good. And, Mr. Bland, I us that the OCC's 
definition of community banks looks at a few factors in 
addition to asset size, but under the OCC's definition, what 
percentage of community banks have under $10 billion in assets?
    Mr. Bland. Senator Warren, we have about 85 percent of our 
banks are less than $10 billion.
    Senator Warren. OK. And about what percent are under $1 
billion in assets?
    Mr. Bland. Boy, that is a good test for me. We have 1,400 
banks under $1 billion. We supervise a total of 1,600, so that 
is really in the higher 80s.
    Senator Warren. So it is going to be in the higher 80s. So 
nearly all of the banks that you are supervising, community 
banks are going to be under $1 billion, much less under $10 
billion.
    Mr. Bland. That is correct.
    Senator Warren. And, finally, Ms. Eberley, I know that the 
FDIC also defines community banks by examining a few different 
factors in addition to size, but I have the same question for 
you. Under FDIC definition, what percentage of community banks 
are under about $10 billion?
    Ms. Eberley. Using our definition, 94 percent of the banks 
under $10 billion meet our definition. A couple over $10 
billion meet it.
    Senator Warren. OK. So the banks--you have got a few that 
are under $10 billion that do not meet the definition of 
community banks.
    Ms. Eberley. That is correct.
    Senator Warren. But your community banks, the ones that do 
meet the definition, are nearly all concentrated under $100 
billion. You said all but a few, I think.
    Ms. Eberley. Yes, yes.
    Senator Warren. And how many under $1 billion, that is, way 
under $10 billion?
    Ms. Eberley. That is 90 percent of institutions.
    Senator Warren. OK. Thank you. So it sounds to me like the 
consensus from our Federal regulators is that, out of the 
several thousand community banks out there, nearly every single 
one has under $10 billion in assets and most are under $1 
billion in assets. There are a lot of bills out there that are 
being promoted as helping community banks, but I want to look 
just a little bit closer at who they will actually help, and 
here is an example.
    Under current law, banks with less than $10 billion in 
assets are completely exempted from the examination and 
reporting requirements of the Consumer Financial Protection 
Bureau. A bill introduced in the last Congress would have 
raised that exemption threshold from $10 billion to $50 
billion. By raising that exemption threshold, would that bill 
benefit any of the 99 percent of community banks that are under 
$10 billion in assets? Anyone?
    [Witnesses shaking heads.]
    Senator Warren. No? OK. I will take that as a no.
    In fact, given that the banks between $10 billion and $50 
billion in assets directly compete with the community banks in 
many communities, would not a bill that raises the Consumer 
Financial Protection Bureau threshold to $50 billion actually 
hurt community banks by helping their competitors? Anyone? In 
other words, it just adds more competition against what we 
define as community banks.
    So I just think that 6 years ago--we need to focus on the 
fact that 6 years ago we suffered through the worst financial 
crisis in generations, one that caused millions of families to 
lose their homes, their jobs, their retirement savings, and 
that forced taxpayers to bail out the biggest banks. We put in 
new rules to try to rein in the biggest financial institutions. 
It is important that our community banks and credit unions 
thrive, but rolling back important protections to help the 
biggest banks just puts community banks at a greater 
disadvantage.
    The big banks are going to keep using the small banks as 
cover for their special rollbacks. That is what they did before 
the crisis, and that is what they have been doing after the 
crisis. We should not fall for that trick.
    Thank you, Mr. Chairman.
    Chairman Shelby. [Presiding.] Senator Moran.
    Senator Moran. Mr. Chairman, good morning. Thank you all--
way over here. I have a profile view of you this year. Thank 
you all for being back. I was speculating with my staff about 
the number of times we have had hearings in this room. Many of 
you have participated before. We are guessing three or four 
times a year we have examined the issue of the regulation of 
community banks.
    My question initially is: What has changed? I have been a 
Member of this Committee, now I am beginning my fifth year. My 
position at the end of the table does not demonstrate that, but 
I have been here for 5 years.
    [Laughter.]
    Senator Moran. What have we eliminated, what have we 
improved in the issue of community banks? And somewhat in 
response to the Senator from Massachusetts, I am not 
particularly interested in the banks. I am interested in the 
people they lend money to. And while we talk about $1 billion 
deposit banks, what I am thinking about is banks that are less 
than $100 million. That dominates our State. I have made the 
case, and perhaps this sounds a bit back home, but economic 
development can be whether or not there is a grocery store in 
many of the communities I represent, and that translates in 
today's hearing in my world is if there is not a community bank 
that cares about the community, that is willing to take a risk 
because it matters to that community that there is a grocery 
store, and taking that risk they believe they are going to get 
a return on their investment, if they are wrong, it does not 
create a systemic problem for the country's financial 
circumstances.
    What are we doing to take care of those folks who are 
willing to have relationship banking because they are so 
connected to their community? My question about the hearings 
is: Has anything changed in the 5 years that we have had 20 
hearings on this topic? Have we made any progress? Or are my 
bankers just folks who like to complain and come to my town 
hall meetings and tell me stories that really they should not 
worry about?
    I asked this question in a previous hearing. What have you 
ever heard in one of these hearings that you have taken back 
and there has been a consequence to what you heard at a hearing 
and said, ``Let us solve this problem''?
    Ms. Hunter. Well, I will go ahead and start off.
    Senator Moran. Thank you.
    Ms. Hunter. Especially since I spent a considerable amount 
of time in your State earlier in my career.
    So some things have changed and some have not. I would 
think that one thing that has changed, certainly we have been 
through a very significant economic cycle. That always changes 
the environment with which examiners in particular are looking 
at banks and assessing the risks that they have. So that will 
change from year to year, the intensity of examination activity 
or discussions.
    I think to some of the earlier discussion, some of the more 
recent regulatory changes, there have been some new 
requirements for community banks, but by far the vast majority, 
the most significant changes are falling on the larger 
institutions. That is hard to absorb, though, when they are 
struggling to absorb additional compliance activities or adapt 
to new rules.
    One thing I would say is that when we come to these 
hearings, we do take it very seriously. I know at the Federal 
Reserve--and I am confident my counterparts would say the same 
thing--we look very carefully at our procedures, at our 
examinations, and the messages that we give to our examiners, 
we review across districts, across examination offices to see 
are we being consistent, are we responding to concerns that we 
hear from bankers. And sometimes we will find, yes, we are 
asking for things that are beyond what we had initially 
envisioned might be necessary and we will invest more in 
training to deal with that through changing our supervisory 
process.
    Senator Moran. How much of the problems that a banker or a 
bank faces in the regulatory environment comes from decisions 
made by the local office, the local examiner? Is that an issue 
in which the applications are applied in a different manner in 
a particular region or community versus what decisions you make 
and what guidelines you put in place for those exams?
    Ms. Hunter. Well, I will start again. The way our process 
works is we delegate supervision and responsibility to the 
Reserve Banks, which means if there is an examination or 
supervision of a well-managed institution, the decisions are 
made locally. Where we have more involvement from Washington is 
when I would think the industry would want us to have greater 
consistency, decisions around issues about if we are 
restricting capital distributions or some other kind of 
important factor that might come up through the supervisory 
process. Here being consistent across districts is quite 
important, and that is when we will try to bring those issues 
to Washington.
    Senator Moran. I remember the last time we had this 
conversation, you played the Kansas card with me. It always 
works.
    [Laughter.]
    Senator Moran. It is difficult to chastise anybody who 
spent time in our State.
    Just a couple of other observations, and I will conclude. I 
do not know that there is a question here, but my point in this 
part of the conversation is I want these hearings to make a 
difference, and in part we need to know what it is 
legislatively by law needs to be changed. But I hope that this 
is not just something that has become a routine in hearing us 
espouse the challenge we face.
    One of those challenges--and it is going to change again, I 
do not know whether for the good or the bad, on August 1st in 
regard to real estate mortgages. I have had at least a dozen 
community bankers tell me they no longer make real estate loans 
to people who want to buy a home in a town of 2,000 people. 
What an amazing development. And the only reason they say they 
do not do it is the nature of the regulations, the uncertainty 
of whether they are complying, and the consequences if they are 
not. And to live in a community of 2,000 or 3,000 people and 
have your hometown bank say, ``I am sorry, I cannot make you a 
loan because I am fearful that I might not cross the `t' and 
dot the `I,' '' that is a pretty damning thing, in my view, for 
the future of rural America.
    I just was going to point out that Senator Tester and I 
will once again package--we are drafting a small lending credit 
union/bank piece of legislation, and I am hoping that in this 
new Congress it has the opportunity to be heard in this 
Committee and action taken and be considered on the Senate 
floor, and I look forward to working with you to see that we 
get the right framework in place.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Brown.
    Senator Brown. Thank you for one more question, Mr. 
Chairman, on the second round.
    I want to first say I agree with Senator Warren and Senator 
Moran on the whole idea of what we should do to help the 
smallest banks. As I said earlier, in my State, in Ohio, a 
State of almost 12 million people, 80 percent of the community 
banks are very small, under $500 million in total assets. So we 
know who we are aiming at here.
    This is a question for the four of you. Sorry again to 
leave you out, Ms. Franks. At the hearing last fall, I asked 
you to describe and define community banks and small credit 
unions. Your answers were helpful as we thought about 
regulatory relief and generally identified the smallest 
institutions serving local areas with a very simple business 
model. One banker told me that banking should be boring, and he 
has been very successful at growing a very small bank into a 
several-billion-dollar community bank.
    As we consider proposals to provide regulatory relief to 
these smaller institutions, I am reminded of an exchange I had 
within then-Chairman Bernanke a couple years ago. He indicated 
that regulators should do whatever we need to do to make sure 
the financial system--``that our financial system is safe.'' I 
agree with that sentiment. I want to ensure that any steps 
taken by you all or by us to provide regulatory relief first 
and foremost keep the system safe. I know your comments play 
into that. I know you believe that it is very important.
    So this question is for the entire panel. I will start this 
time with you, Mr. Fazio, and work to your right, to my left. 
Is there a particular size of institution that you believe 
would benefit the most from regulatory relief? What should we 
know about the causes and failures of small institutions as we 
consider these regulatory relief proposals? What analysis are 
you doing on Congress' regulatory relief proposals to ensure 
that the relief is targeted to those institutions that need it 
most and that those proposals do not threaten safety and 
soundness or do not strip away consumer protections, regardless 
of the size of the banks.
    So, Mr. Fazio, if you would take that sort of mix of four 
questions and just give us thoughts as specific as you can, 
each of you.
    Mr. Fazio. Well, I would start with the fact that under the 
Regulatory Flexibility Act analysis, we have historically 
defined small as $50 million or less. We had increased that 
several-fold in January of 2013 when the NCUA Board raised that 
definition to $50 million. The board next week is going to take 
up that new definition and potentially raise it to as high as 
$100 million. Eighty percent of all credit unions are $100 
million or less in assets, so that would exempt--or that would 
provide special analysis that we would do in considering 
exempting or scaling expectations for safety and soundness and 
other regulatory provisions in the rules we make. So I think 
that is mainly how we think about a smaller entity in our 
context.
    What we try to do, as I had indicated, is scale and target 
our regulations at the institutions that have the most risk and 
that have the size and complexity to deal with it. We do take 
every opportunity to tailor our processes and to understand the 
costs and the benefits as it relates to credit unions when we 
need to do safety and soundness-based regulations to support 
that. And so we have done a lot of things to try to help along 
those areas. A big part of it--and we have heard about it today 
a lot at the hearing--is the exam process itself and the 
supervision process, and we have made significant strides in 
recent years to tailor our exam process to help small entities, 
to reduce the burden on them, to support them. We have an 
office that is dedicated to supporting small credit unions. It 
is called the Office of Small Credit Union Initiatives. We 
provide a lot of training and consulting, partnership 
opportunities. So we are doing a lot of that.
    We would be mindful of any legislation going forward that 
would preserve the ability for us to continue to flexibly 
approach cost-benefit analyses in the way we approach targeting 
and scaling our regulations, so that would be our thought 
process, at least in terms of potential future legislation.
    Senator Brown. Thank you.
    Mr. Bland.
    Mr. Bland. Senator Brown, when you look at the community 
banks the OCC supervises, 1,400 of our 1,600 are less than $1 
billion. So that is what our primary focus is around.
    But I would also caution all of us, though, when you look 
at what is happening in the industry today, with technology in 
particular, it is changing the size. But also we have to be 
careful of prescribing certain limits that also then prescribes 
what a bank can do under those limits, because we run the risk 
of threatening innovation in the industry. And so at the OCC we 
do use asset size as a pointer, but then we try to delve deeper 
into what activities and complexity that those institutions are 
involved in. Coming out of the last crisis, we had institutions 
that were very small doing very complicated things that 
required them to have the requisite systems.
    For the most part, the institutions that we supervise are 
less than $1 billion. But we are also trying to challenge 
ourselves as we contemplate rules around what they do, not so 
much what their size is.
    Senator Brown. Thank you.
    Ms. Hunter.
    Ms. Hunter. Your question is who would benefit most and 
kind of linking it back to causes of failure. For small banks 
the cause of failure is generally bad loans and not enough 
capital to absorb the losses, and that is something we have 
seen over decades. So when you think about small banks, making 
sure the safety and soundness elements, the capital, is 
sufficient, that is obviously important.
    In terms of who would benefit, I am very interested to hear 
what the bankers have to tell us when we do the EGRPRA outreach 
session focused on rural institutions. I think those banks are 
different from even the suburban community banks that might be 
just under $10 billion, and so I am hoping that we will hear 
something that might be useful and how we can address their 
particular needs.
    Senator Brown. Thank you.
    Ms. Eberley.
    Ms. Eberley. The definition we use is also not asset based. 
We look at the activities of the institution, relationship-
based lending funded by core deposits in a relatively tight 
geographic market. So they have local knowledge and local 
experience and face-to-face work with their customers.
    In terms of the lessons learned from the crisis that we 
should keep in mind as we think about regulatory relief, I will 
draw back a little bit from the last crisis as well. You know, 
there is no substitute for an on-site examination of an 
institution--the time that we spend face-to-face with 
management and understanding the bank's activities and risks 
and what they are doing. To Toney's point about understanding 
the risk profile of the institution, you can be a very small 
institution engaged in very risky activities. Quality and 
quantity of capital are important; as is recognizing loss 
timely. A lot of institutions at the beginning of the crisis 
did not, and that prevented them from being able to raise 
capital.
    Concentrations have to be managed. Early supervisory 
intervention makes a difference. Institutions where there was 
early supervisory intervention and they heeded the 
recommendations fared better than those who did not. And rapid 
growth funded by noncore deposits creates a situation where 
there is really no franchise value and institutions struggle to 
find investors when they need capital down the road because 
they have not created a franchise.
    So those are some of the key lessons that we would look at 
when we are looking at regulatory relief proposals and also 
just looking back to what was the original reason for the rule 
and do any of these things still play today.
    Senator Brown. Thank you. Thank you all.
    Chairman Shelby. Thank you, Senator Brown.
    A 2012 study found that of 192 Dodd-Frank rulemakings done 
through 2012, 74 percent contain no cost-benefit analysis or no 
quantitative analysis. This means that as of 2012 we had no 
idea how much three-fourths of Dodd-Frank rules would cost to 
comply with.
    Assuming this is true--and I think the study showed it--
does this concern you, Ms. Eberley?
    Ms. Eberley. It would not be in conformance with the way 
that we approach rulemaking, which is we certainly do work to 
do cost-benefit analysis and consider the costs, benefits, and 
alternatives.
    Chairman Shelby. Sure. Does that concern you, does it 
concern the Federal Reserve?
    Ms. Hunter. I would add to Ms. Eberley's comment, in making 
rules we do consider costs and benefits and do quantitative 
impact studies on a number of issues related to rulemaking. So 
I know that that analysis underlies the development of the 
rule.
    Chairman Shelby. Mr. Bland.
    Mr. Bland. Chairman Shelby----
    Chairman Shelby. Is that important? Is cost-benefit 
analysis important?
    Mr. Bland. It is important.
    Chairman Shelby. OK.
    Mr. Bland. And, you know, with the regulations under Dodd-
Frank that the OCC is responsible for, as I mentioned earlier, 
we do an economic impact analysis, and that is part of our 
process, and it is really embedded in our rulemaking process.
    Chairman Shelby. Mr. Fazio, is cost-benefit analysis 
important to the viability of the credit unions, too many 
regulations not thought out?
    Mr. Fazio. Yes, sir, that is important, and we, again, try 
to articulate those costs and analyze those costs where we can.
    Chairman Shelby. Sure. Ms. Franks.
    Ms. Franks. We believe a cost-benefit analysis is 
beneficial. We do that in Arkansas, so that is something that 
we certainly take in mind.
    Chairman Shelby. Ms. Hunter, you said earlier that it is 
easy to calculate the cost of regulations but not the benefits. 
That might be true. I do not know. But maybe more work needs to 
be done.
    In 2011, the General Accounting Office found that Federal 
financial regulators' economic analysis for Dodd-Frank ``falls 
short'' of what could be done. How do you respond to that? Do 
you think that you need to do more? A lot of us think you need 
to do more----
    Ms. Hunter. Well, if I said it was easy, I would try to 
qualify that by saying it is easier when it is focused in on 
specific institutions.
    Chairman Shelby. ``Easy'' or ``easier''?
    Ms. Hunter. Easier to identify costs that affect particular 
institutions. And so along those lines, I would add that, yes, 
we very much value information about costs. When we put rules 
out for comment, the most valuable ones are when institutions 
tell us, ``Here is a real impact. Here is a cost I am going to 
have to have. Here is the impact on perhaps my need to change 
computer systems in order to implement what you propose.'' We 
respond to those and incorporate those into the final rules, 
and I think our capital rules are a good example where we took 
the feedback from the banks about the cost of implementation 
and made adjustments.
    So we do recognize that more information on cost is 
valuable. I hope that as we go through the EGRPRA process we 
will hear more about it, but certainly in any comment period, 
the more specific information we get from the institutions, the 
better.
    Chairman Shelby. A lot of us that advocate cost-benefit 
analysis for all regulations, not just for banks, but I have 
been pushing that for years, it defies logic not to do it. But 
we are not saying to you as bank regulators loosen the 
regulations and do not worry about safety and soundness. We do 
worry about that. You have got to do that. But do the whole 
thing and do it right, because I know from being up here on 
this Committee 29 years, I can tell you that a lot of those 
regulations make no sense and they ought to be weighed in the 
balance.
    Senator Cotton.
    Senator Cotton. Thank you.
    Chairman Shelby. We have one of your Arkansans here.
    Senator Cotton. I know that. Very proud and excited. I 
apologize for being a little late. I was presiding over the 
Senate, which I think is the Senate's version of paying your 
dues, right?
    Thank you all very much for your time. I want to touch on 
the mortgage servicing business, a specific concern I have 
about the mortgage servicing business being driven into a 
largely unregulated shadow nonbank system. Some reports I have 
seen suggest that you have seen at least a doubling if not a 
tripling of nonbank companies moving into the mortgage 
servicing business. A lot of banks are divesting of this 
business. And I wanted to ask, first, why you think this is, 
and maybe we can start with Ms. Eberley.
    Ms. Eberley. Not a lot of the banks that we supervise have 
significant amounts of mortgage servicing businesses. By and 
large, community banks do very small amounts, and they are 
keeping it.
    Senator Cotton. Ms. Hunter.
    Ms. Hunter. The mortgage servicing industry certainly has 
undergone significant changes in recent years, so we are noting 
that there is some shift away from the larger banking 
organizations, but at this point I do not know that I could add 
any more insight on that.
    Mr. Bland. Senator Cotton, I would share what has been said 
also, but I also would say that continuing innovation and speed 
of delivery and technology is making a big difference in who 
can provide the services at a more effective cost, and that has 
been a big driver as well.
    Mr. Fazio. Most credit unions portfolio their mortgages, 
and they service them. Not many credit unions hold mortgage 
servicing assets on their books. A few do. It is a very small 
percentage, and we have not seen any real trends to move those 
outside of the credit union portfolio.
    Ms. Franks. We feel the capital requirements that are 
causing these mortgage servicing rights to be taken to other 
sources will cause relationship lending to be dampened, and we 
would like to see our banks be able to continue to service 
those mortgages that they produce. State regulators, many State 
regulators--I do not, but many State regulators do regulate 
those mortgage service companies, and I know that they are 
looking at prudential standards for those companies.
    Senator Cotton. And, Ms. Franks, you are talking about the 
regulations implementing the Basel III capital requirements?
    Ms. Franks. Right.
    Senator Cotton. I have to say that I tend to agree with 
your assessment, Ms. Franks, and that is not just chauvinism 
for Arkansas. But this is, you know, what I have heard and what 
I have seen in other studies. So, you know, one question that I 
would like to ask is: Was there any study in particular on the 
assets that the regulations implementing the capital 
requirements have on the mortgage servicing business, not the 
general study on capital requirements but specifically the 
impact it could have on the mortgage servicing business, 
especially of small and midsize banks?
    Ms. Eberley. We absolutely looked at it for community 
institutions in response to the comments we received as part of 
the capital rulemaking. And as I noted, there are very few 
community institutions that are engaged in mortgage servicing 
to a level that would have been impacted by the new capital 
rules.
    Senator Cotton. Ms. Hunter.
    Ms. Hunter. Yes, I would only add the goal of the capital 
rules was to make the capital regime more resilient, and as I 
understand it, in going through the comment process, we looked 
at various classes of assets. Those assets that proved to be 
less liquid in the financial crisis and when institutions 
needed more liquidity in those assets, those tended not to get 
the more relaxed treatment than some of the other assets 
perhaps received in the final rule.
    Senator Cotton. Well, I mean, I appreciate the goal. I just 
feel that this may be another instance in Dodd-Frank and its 
implementation and the overall regulatory environment we have 
seen over the last few years where we have actually been aiming 
at one goal and maybe having the opposite result, driving 
activity out of the regulated banking and credit union sphere 
and into nonbank businesses. To me it seems like this is a 
problem for at least two reasons. One, for community banks in 
particular, especially in a State like Arkansas--and I know 
States like Alabama and Tennessee and other States represented 
here--that is a good business, provides a good margin, has 
relatively safe assets; but, two, it is also very bad for the 
people we serve, the consumers of those banks. You know, rather 
than dealing with a small bank in a place like Yell County, 
Arkansas, or, for that matter, in Pulaski County, Arkansas, 
which is small by Washington standards, you know, they may end 
up now dealing with esoteric and obscure nonbank entities that 
are far away, where they have less recourse and less 
protections than they would if they were dealing with their 
community banks and their credit unions.
    My time has expired. I want to thank you all for your time, 
and, Ms. Franks, thank you in particular for increasing the 
number of Arkansans we have in Washington today.
    Chairman Shelby. Senator Corker.
    Senator Corker. Well, thank you, Mr. Chairman. I apologize 
for being in a closed session for the last 2\1/2\ hours 
regarding Iran, and I know that the key questions that I had 
hoped to ask have been asked by others. I just came to say to 
you I appreciate you having this hearing and for these 
distinguished witnesses being here.
    I think it is really evident that while Dodd-Frank was put 
in place to attempt to deal with financial stability and some 
of the risks that especially the larger institutions in America 
posed and to try to cause them to not be such a threat, if you 
will, to our Nation's economy, there is no question that what 
has happened in the process is that our community banks have 
been tremendously affected. We are losing community banks left 
and right. The asset base that they have to deal with relative 
to compliance is causing them to be noncompetitive. And I look 
forward to working with you to alleviate some of the 
restrictions that have been put in place, unintentionally I 
think, on them that are causing them to not be able to serve 
the purpose that they serve in the communities that we know 
thrive from having active community bankers doing what they are 
doing.
    So I thank you. I look forward to working with you. I do 
have some detailed questions that I will send through QFRs, and 
I look forward to additional hearings covering this same topic.
    Chairman Shelby. Thank you. Thank you, Senator Corker.
    I want to follow up on Senator Moran, and others here 
alluded to this today, but Senator Moran was specific. A small 
bank, you know, we have millions--as all of you know, millions 
and millions of people living in small communities in this 
country. And he was talking about a small bank's inability to 
make a ``plain vanilla'' blue-chip loan on a piece of real 
estate because of regulations. Do you all understand that? 
Nobody wants a failing institution or, you know, a troubled 
institution. But should not banks have clarity on what they can 
do to make it work? Because, you know, we have a banking system 
because we have a free market economy. We want to keep it that 
way. We want to have access to capital. We want those debts 
paid back. We understand all that. But isn't there some way for 
regulators to solve some of those problems, at least try to? Is 
it a question of capital? Is it a question of management? Or is 
it a problem of overregulation? I do not know.
    Ms. Eberley. We have shared the concerns that we have heard 
from community bankers, especially those that are in what they 
think are rural communities but maybe did not meet the 
definition of rural under the CFPB's rules. I think the CFPB 
has tried to be responsive to that. They have put out a Notice 
of Proposed Rulemaking expanding the definition of rural and 
small bank. The expanded rural definition picks up about 1,700 
more institutions, bringing the total to a little over 4,000, I 
believe. And the small bank exemption expansion will pick up 
about 700 additional institutions.
    We do think that with those proposals it will make it 
easier for banks in rural communities to comply with the 
ability-to-repay rules and make mortgages.
    Chairman Shelby. The Federal Reserve, do you have----
    Ms. Hunter. Yes, I would add to that I think some of the 
issues we are hearing around the appraisal threshold and some 
of the appraisal issues, that may also be helpful for the kind 
of situation that you are describing. So we will continue to 
work on that as we move through the EGRPRA process.
    Mr. Bland. Chairman Shelby, I was going to say the areas 
you listed, I would say all of the above, and for different 
reasons. I think the new and the amount of regulations have had 
impact on institutions, and so to the extent there is relief, 
we need to give them that relief. And one of the things we are 
doing at the OCC is doing that assessment of laws and rules 
that are not necessary or should be modified.
    For example, when the OTS was combined in the OCC, we are 
undertaking and still undertaking a review of all the 
regulations to make sure they are fair and balanced and 
consistent.
    The other part about management, though, that you mentioned 
is very critical. With the complexity of the industry, you 
know, making sure you have the right skill sets, not only at 
the board level but at the management level, is key. But if 
they cannot acquire that, particularly rural banks, that is why 
our collaboration paper was emphasizing sharing of resources, 
which is for some institutions hard to do when they have been 
solely focused on going their own way. But it is important to 
look for opportunities to manage those costs, offload those 
costs, but also get the expertise you need so rural, urban--we 
are really stressing that as a good opportunity for 
institutions.
    Chairman Shelby. The credit unions?
    Mr. Fazio. In addition to what my colleagues have 
mentioned, I would say that one of the challenges, we have been 
in, again, a tremendous period of change, and one of the 
additional challenges is the uncertainty there, the market 
uncertainty. How will, for example, QM and non-QM loans price? 
How liquid will they be? What is the legal uncertainty? Do we 
have any court precedents yet, for example, on how that will be 
interpreted? So I think that lack of certainty creates 
challenges for our financial institutions in terms of the 
lending process, and we understand that. What we can do about 
it as regulators and what we try to do at NCUA is to provide, 
when it is within our authority to do so, clarity about how we 
will view it in the exam process and the supervision process. 
And we have published a lot of guidance on that to try to help 
credit unions understand the rules, the new rules, and how we 
will examine for them.
    We also do a lot of training and outreach within 
institutions, especially the smaller ones who are serving in 
these rural communities, to help them understand those areas 
and to get training and to share best practices.
    Chairman Shelby. Ms. Franks, do you want to comment on 
behalf of the small banks?
    Ms. Franks. I do, Senator. While we do recognize that the 
CFPB has made some improvements in these areas, we would like 
to see, as far as the State supervisors are concerned, that 
qualified mortgage--any mortgage loan that is held in portfolio 
would qualify under the QM rules, because when you have made a 
loan that you are holding in portfolio, you have already done 
the ability-to-repay analysis. So we would really like that to 
be something that is initiated. We feel like that would be an 
improvement in those areas.
    Chairman Shelby. Thank you.
    On behalf of the Committee, I want to thank all of the 
witnesses today. We will be following up with each of your 
agencies as we begin consideration of regulatory relief here, 
and we want your input.
    The record will remain open for the next 7 days for 
additional questions, statements, and other materials that any 
Member may wish to submit.
    So thank you very much for your appearance today. The 
Committee is adjourned.
    [Whereupon, at 12:07 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Mr. Chairman, I not only want to thank you for holding this hearing 
but I also want to take the opportunity to thank the panel of 
regulators for agreeing to appear before the Committee. The topic of 
regulatory relief for our community financial institutions is not new 
to the Members of this Committee. Our offices are frequented by small 
banks and credit unions who are struggling under a regulatory regime 
that hasn't been ``right-sized'' for them.
    Opening an account or obtaining a loan at your local community bank 
is often the first exposure people have to the financial system. That 
experience used to be marked by exceptional service, personalized 
products, and an ongoing relationship that proved beneficial to both 
the customer and the banker. It really was like going to see George at 
Bailey Building and Loan for your first mortgage or a loan for your 
local business.
    But over the years, as Washington attempted to deal with problems 
that were much bigger and which emanated from different parts of the 
financial system, our community financial institutions found themselves 
trying to navigate longer and longer regulations and a seemingly 
endless amount of red tape. While their larger brethren, for whom the 
regulations were targeted, at least had the advantage of scale 
economies to shoulder the cost, small banks not only had to comply with 
requirements that didn't suit them, but they also had little ability to 
pay for additional compliance.
    While I am very frustrated with the current regulatory framework 
for our community financial institutions, I am encouraged by our 
regulators' willingness to appear today and address some of these 
issues head-on. I also want to commend Comptroller Tom Curry, and the 
staff at the Office of the Comptroller of the Currency, for attempting 
to be proactive in giving the right regulatory touch to our community 
banks. On December 5, 2014, Comptroller Curry sent me a letter and 
attached three legislative proposals that he recommend Congress act on 
to provide some relief to the institutions regulated by the OCC. Mr. 
Chairman, I'd like to submit that letter and those proposals for the 
record.
    In short the OCC has proposed exempting banks with less than $10 
billion in assets from the Volcker Rule, allowing banks with less than 
$750 million in assets be examined every 18 months as opposed to 
annually, and providing thrifts some additional flexibility in their 
charter in order to remain competitive in the marketplace. I look 
forward to exploring these proposals with the witnesses later in the 
hearing.
    Our regulators have a tough job to do in promoting a safe and sound 
financial system. As Congress looks to better align the regulatory 
touch community financial institutions receive with the risks they pose 
to the greater financial system, I ask our regulators to be 
constructive partners in helping us identify those regulations that 
need to be revised and for them to implement the statutory changes 
Congress makes in a manner that is consistent with our intent.
    I look forward to the panel's testimony and a robust discussion.
                                 ______
                                 
                PREPARED STATEMENT OF DOREEN R. EBERLEY
   Director of the Division of Risk Management Supervision, Federal 
                     Deposit Insurance Corporation
                           February 10, 2015
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, I appreciate the opportunity to testify on behalf of the 
Federal Deposit Insurance Corporation (FDIC) on regulatory relief for 
community banks. As the primary Federal regulator for the majority of 
community banks, the FDIC has a particular interest in understanding 
the challenges and opportunities they face.
    My testimony will highlight the profile and key performance 
information for community banks. I then will discuss the current 
interagency review to identify outdated, unnecessary, or unduly 
burdensome regulations. Next, I will describe how the FDIC strives on 
an ongoing basis to implement regulations and our supervision program 
in a way that reflects differences in risk profile among the industry 
participants, while achieving our supervisory goals of a safe-and-sound 
banking system. Finally, I will touch on our continued work under our 
Community Bank Initiative to respond to requests we have received from 
community banks for technical assistance.
Community Bank Profile
    Community banks provide traditional, relationship-based banking 
services to their communities, including many small towns and rural 
areas that would otherwise not have access to any physical banking 
services. Community banks (as defined in FDIC research \1\) make up 93 
percent of all banks in the U.S.--a higher percentage than at any time 
going back to at least 1984. While they hold just 14 percent of all 
banking assets, community banks account for about 45 percent of all of 
the small loans to businesses and farms made by insured institutions. 
Although 448 community banks failed during the recent financial crisis, 
the vast majority did not. Institutions that stuck to their core 
expertise weathered the crisis and are now performing well. The highest 
rates of failure were observed among noncommunity banks and among 
community banks that departed from the traditional model and tried to 
grow rapidly with risky assets often funded by volatile noncore and 
often nonlocal brokered deposits.
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     \1\ Our research is based on a definition of community banks that 
goes beyond asset size alone to account for each institution's lending 
and deposit gathering activities, as well as the limited geographic 
scope of operations that is characteristic of community banks.
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    The latest available community bank data, \2\ as of September 30, 
2014, showed continued improvement in the overall financial condition 
of community banks and the industry as a whole. Further, the 
profitability gap between community banks and larger, noncommunity 
banks has narrowed in recent quarters. In the third quarter of 2014, 
community bank return on assets (ROA) rose to 0.97 percent--the highest 
in more than 7 years, and just 6 basis points less than the ROA of 
noncommunity banks.
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     \2\ Community bank is defined as FDIC-insured commercial banks and 
savings institutions meeting the criteria for community banks that were 
developed for the FDIC's Community Banking Study, published in 
December, 2012: http://fdic.gov/regulations/resources/cbi/report/cbi-
full.pdf.
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    Community banks earned $4.9 billion during the quarter, an increase 
of 11 percent from a year ago. Higher net interest income, increased 
noninterest income, and lower provision expenses were the primary 
drivers of stronger earnings at community banks. A steepening of the 
Treasury yield curve in the year ending in September helped to lift the 
average community bank net interest margin (NIM) by 2 basis points from 
a year ago, even as the industry NIM was falling by 12 basis points. 
Close to 33 percent of the industry's annual growth in net interest 
income (up $3.2 billion) came from community banks. Meanwhile, 
community bank loan balances rose by 8 percent over the past year 
compared to 4.6 percent for the industry. Community banks reported 
growth in all major loan categories, including residential mortgages 
and loans to small businesses, and asset quality showed continued 
improvement with noncurrent loans down 20.3 percent from the third 
quarter of 2013.
EGRPRA Review and Progress to Date
    The FDIC and other regulators are actively seeking input from the 
industry and the public on ways to reduce regulatory burden. The 
Economic Growth and Regulatory Paperwork Reduction Act of 1996 \3\ 
(EGRPRA) requires the Federal Financial Institutions Examination 
Council (FFIEC) \4\ , the FDIC, the Federal Reserve Board (FRB), and 
the Office of the Comptroller of the Currency (OCC) to review their 
regulations at least once every 10 years to identify any regulations 
that are outdated, unnecessary, or unduly burdensome. EGRPRA also 
requires the agencies to eliminate unnecessary regulations to the 
extent such action is appropriate. The second decennial EGRPRA review 
is in process with a required report due to Congress in 2016. The FDIC 
has developed a comprehensive plan for conducting its EGRPRA review 
that includes coordination with the other Federal banking agencies. \5\
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     \3\ Public Law 104-208 (1996), codified at 12 U.S.C. 3311.
     \4\ The FFIEC is comprised of the Board of Governors of the 
Federal Reserve System (FRB), the Office of the Comptroller of the 
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the 
National Credit Union Administration (NCUA), the Consumer Financial 
Protection Bureau (CFPB) and the State Liaison Committee (SLC), which 
is comprised of representatives from the Conference of State Bank 
Supervisors (CSBS), the American Council of State Savings Supervisors 
(ACSSS), and the National Association of State Credit Union Supervisors 
(NASCUS).
     \5\ http://www.fdic.gov/EGRPRA/
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    As the primary Federal regulator for the majority of community 
banks, the FDIC is keenly aware of the impact that its regulatory 
requirements can have on smaller institutions, which operate with fewer 
staff and other resources than their larger counterparts. Therefore, 
the FDICs pays particular attention to the impact its regulations may 
have on smaller and rural institutions that serve areas that otherwise 
would not have access to banking services, and the input community 
bankers provide regarding those impacts.
    On June 4, 2014, the Federal banking agencies jointly published in 
the Federal Register the first of a series of requests for public 
comment on regulations. The first request for comment covered 
applications and reporting, powers and activities, and international 
operations. The comment period for this request closed on September 2, 
2014, and 40 comments were received and are being reviewed. The 
Agencies also are in the process of adopting for comment a second 
Federal Register notice, which was approved by the FDIC Board 3 weeks 
ago, addressing the banking operations, capital, and Community 
Reinvestment Act categories of regulations.
    To date, the agencies also have held two regional outreach meetings 
in Los Angeles and in Dallas to get direct input as part of the EGRPRA 
review process. Presenters included bankers, community groups, and 
consumer groups, and the events have been attended by agency principals 
and senior agency staff. Additional meetings are currently scheduled 
for Boston on May 4, 2015; Chicago on October 19, 2015; and Washington, 
DC, on December 2, 2015. The agencies also plan to hold an outreach 
meeting focused on rural banks.
    In response to what we heard in the first round of comments, the 
FDIC already has acted on regulatory relief suggestions where we could 
achieve rapid change. In November, we issued two Financial Institution 
Letters (FILs), our primary communication tool for policy and guidance 
to bankers.
    The first FIL released questions and answers (Q&As) about the 
deposit insurance application process to aid applicants in developing 
proposals for Federal deposit insurance and to enhance the transparency 
of the application process. Some EGRPRA commenters--and others--
indicated that there was some confusion about the FDIC's existing 
policies and suggested that a clarification of existing policies would 
be helpful. The Q&As address four distinct topics: the purpose and 
benefits of prefiling meetings, processing timelines, initial 
capitalization requirements, and business plan requirements.
    The second FIL addressed new procedures that eliminate or reduce 
the need to file applications by institutions wishing to conduct 
permissible activities through certain bank subsidiaries organized as 
limited liability companies, or LLCs, subject to some limited 
documentation standards. The prior procedures dated back to the time 
when the LLC structure was first permitted for bank subsidiaries. In 
the past 10 years, the FDIC processed over 2,200 applications relating 
to bank activities; the vast majority of these applications involved 
subsidiaries organized as LLCs. Commenters remarked, and we agreed, 
that an LLC is no longer a novel structure and does not create 
particular safety-and-soundness concerns. We are confident that the new 
procedures will result in a more streamlined process for the 
institutions we supervise--especially our community institutions--
without compromising the FDIC's safety and soundness standards.
    Several themes are emerging through the EGRPRA process that could 
affect community bankers, such as looking at whether laws and 
regulations based on long-standing thresholds should be changed--for 
example, dollar thresholds requiring an appraisal or a currency 
transaction report. Along these same lines, commenters have expressed 
an interest in decreasing the frequency of examinations set forth in 
statute, increasing the size of the institutions eligible for longer 
examination intervals, or both. Commenters also have asked that we 
ensure that supervisory expectations intended for large banks are not 
applied to community banks and that we have open and regular lines of 
communication with community bankers. We look forward to continuing to 
receive comments during the EGRPRA process and through the outreach 
sessions and we intend to carefully consider comments received. It is 
our intention to continue looking for ways to reduce or eliminate 
outdated or unnecessary requirements as we move forward with this 
review, rather than wait until the end of the EGRPRA process.
Tailored Supervisory Approach for Community Banks
    The FDIC's supervision program promotes the safety-and-soundness of 
FDIC-supervised institutions, protects consumers' rights, and promotes 
community investment initiatives by FDIC-supervised institutions. The 
FDIC has long tailored its supervisory approach to the size, 
complexity, and risk profile of each institution. This approach is 
embedded throughout our supervisory program, which includes issuing 
rulemakings and guidance, and maintaining a highly trained and 
professional examiner cadre to conduct periodic, on-site examinations 
and ongoing monitoring.
Rulemakings and Guidance
    The FDIC considers the size, complexity, and risk profile of 
institutions during the rulemaking and supervisory guidance development 
processes and on an ongoing basis through feedback we receive from 
community bankers and other stakeholders. Where possible, we scale our 
regulations and policies according to these factors. The FDIC's policy 
statement on the development and review of regulations includes a goal 
of minimizing regulatory burdens on the public and the banking 
industry. Additionally, all of our FILs have a prominent community bank 
applicability statement so community bankers can immediately determine 
whether the FIL is relevant to them.
    A number of recent FDIC rulemakings implemented provisions of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) that were designed to benefit community institutions. For example, 
the assessment base for deposit insurance was changed from domestic 
deposits to average total assets minus average tangible equity, which 
shifted more of the deposit insurance assessment burden from smaller to 
larger institutions. As a result, aggregate premiums paid by 
institutions with less than $10 billion in assets declined by 
approximately one-third in the second quarter of 2011, primarily due to 
the assessment base change. Under the Dodd-Frank Act, the deposit 
insurance coverage limit was permanently increased to $250,000, which 
particularly benefits small businesses and other depositors of 
community institutions. The Dodd-Frank Act also increased the minimum 
reserve ratio for the Deposit Insurance Fund (DIF) from 1.15 percent to 
1.35 percent, with the increase in the minimum target to be funded 
entirely by larger banks.
    In addition to issuing rules to implement the Dodd-Frank Act 
provisions that benefit community banks, the FDIC also has taken into 
account the unique characteristics of community banks in its rulemaking 
to implement other important reforms to the financial system. For 
example, in adopting the implementing regulations for the Volcker Rule, 
the agencies recognized that, while the requirements of the 
implementing statute apply to all banking entities regardless of size, 
the activities covered are generally conducted by larger, more complex 
banks. Accordingly, the agencies designed the Volcker Rule to reduce 
the burden placed on banks that do not engage in proprietary trading 
activities or have only limited exposure to fund investments.
    Under the Volcker Rule, a bank is exempt from all of the compliance 
program requirements, and all of the associated costs, if it limits its 
covered activities to those that are excluded from the definition of 
proprietary trading. This exemption applies to the vast majority of 
community banks. For community banks that are less than $10 billion in 
assets but do engage in activities covered by the Volcker Rule, 
compliance program requirements can be met by simply including 
references to the relevant portions of the rule within the banks' 
existing policies and procedures. This should significantly reduce the 
compliance burden on smaller banks that may engage in a limited amount 
of covered activities.
    The FDIC and other bank regulators also considered the burden on 
community banks in adopting regulatory capital rules. The FDIC 
recognizes that a number of the more complex requirements of our 
capital rules are not necessary or suitable for community banks. As 
such, many aspects of the revised capital rules do not apply to 
community banks. For example, the new capital rules introduce a number 
of provisions aimed only at the large, internationally active banks. 
These provisions include the supplementary leverage ratio, the 
countercyclical capital buffer, and capital requirements for credit 
valuation adjustments and operational risk, to name a few. In addition, 
the revised capital rules contain large sections that do not apply to 
community banks. Most notably, the advanced approaches framework only 
applies to internationally active banks and the market risk rule only 
applies to banks with material trading operations.
    Several areas of the proposed rule attracted significant comment 
and concerns from community bankers, namely, proposed changes to risk 
weightings for 1-to-4 family mortgages; the treatment of accumulated 
other comprehensive income (AOCI), trust preferred securities (TruPS) 
and mortgage servicing assets; and the applicability of the 
conservation buffer to banking organizations organized under Subchapter 
S of the Internal Revenue Service Tax Code. After considering those 
comments and taking into account other safety and soundness factors, 
the banking agencies did not adopt certain of the proposed changes that 
caused concerns for community banks in the final rule, namely mortgage 
risk weightings and the treatment of AOCI and TruPS.
    Notwithstanding our belief that the applicability of the 
conservation buffer to all financial institutions was important to 
achieving the safety-and-soundness goal of higher capital, last July we 
issued a FIL to FDIC-supervised institutions describing how we would 
treat certain requests from S corporation institutions under the new 
capital rules. Many community banks are S corporation banks, and we 
issued this guidance because of feedback we heard from concerned S 
corporation banks and their shareholders. The FIL describes how the 
FDIC will consider requests from FDIC-supervised S corporation banks to 
pay dividends to their shareholders to cover taxes on their pass-
through share of bank earnings when those dividends are otherwise not 
permitted under the new capital rules. We informed FDIC-supervised 
banks that we would generally approve those requests for well-rated 
banks, barring any significant safety and soundness issues.
    To assist bankers in complying with the revised capital rules, the 
FDIC conducted outreach and technical assistance designed specifically 
for community banks. In addition to the publication of a community bank 
guide and an informational video on the revised capital rules, FDIC 
staff conducted face-to-face informational sessions with bankers in 
each of the FDIC's six supervisory regions to discuss the revised 
capital rules most applicable to community banks.
Examination Program
    The foundation of the FDIC's examination program is a highly 
trained and professional examiner cadre. Every FDIC examiner is 
initially trained as a community bank examiner through a rigorous 4-
year program that teaches examination concepts, policies, and 
procedures. As a result, on the way to becoming commissioned examiners, 
they gain a thorough understanding of community banks. The vast 
majority of our field examiners in our 83 field offices nationwide are 
community bank examiners. These examiners live and work in the same 
communities served by the community banks they examine, ensuring that 
they are knowledgeable and experienced in local issues of importance to 
community bankers and can serve as a first line resource to bankers 
regarding supervisory expectations.
    Our examiners conduct bank examinations using a risk-focused 
examination program, which tailors the supervisory approach to the 
size, complexity, and risk profile of each institution. Risk-focused 
examinations are based on core principles of safety and soundness, 
including risk identification and mitigation. Institutions with lower 
risk profiles, such as most community banks, are subject to less 
supervisory attention than those with elevated risk profiles. For 
example, well-managed banks engaged in traditional, noncomplex 
activities receive periodic, point-in-time safety and soundness and 
consumer protection examinations that are carried out over a few weeks, 
while the very largest FDIC-supervised institutions are subject to 
continuous safety-and-soundness supervision and ongoing examination 
carried out through targeted reviews during the course of an 
examination cycle.
    Our examination cycle is also tailored to the size and risk posed 
by a bank. The Federal Deposit Insurance Act requires regular safety-
and-soundness examinations of State nonmember banks at least once 
during each 12-month period. However, examination intervals can be 
extended to 18 months for well-run and well-rated institutions with 
total assets of less than $500 million. Most FDIC institutions have 
total assets less than $500 million. This longer cycle permits the FDIC 
to focus its resources on those segments of the industry that present 
the most immediate supervisory concern, while concomitantly reducing 
the regulatory burden on smaller, well-run institutions that do not 
pose an equivalent level of supervisory concern.
    FDIC policy guides consumer compliance examination schedules, which 
also vary based on the institution's size, prior examination rating and 
risk profile. Community Reinvestment Act (CRA) examination schedules 
conform to the requirements of the Gramm-Leach-Bliley Act, which 
established the CRA examination cycle for most small institutions. The 
FDIC also uses different CRA examination procedures based upon the 
asset size of institutions. Those meeting the small and intermediate 
small asset-size threshold are not subject to the reporting 
requirements applicable to large banks and savings associations.
    The FDIC utilizes off-site monitoring programs to supplement and 
guide the on-site examination process. Off-site monitoring programs can 
provide an early indication that an institution's risk profile may be 
changing. The FDIC has developed a number of off-site monitoring tools 
using key data from banks' quarterly Reports of Condition and Income, 
or Call Reports, to identify institutions that are experiencing rapid 
loan growth or reporting unusual levels or trends in problem loans, 
investment activities, funding strategies, earnings structure or 
capital levels that merit further review. Off-site monitoring also 
allows the FDIC to expand the examination cycle for certain lower-risk 
institutions, as described above.
Community Banking Initiative and Technical Assistance
FDIC Community Banking Study
    Since late 2011, the FDIC has been engaged in a data-driven effort 
to identify and explore issues and questions about community banks. 
Initial findings were presented in a comprehensive FDIC Community 
Banking Study, published in December 2012. Our subsequent research has 
studied community bank consolidation, long-term developments in branch 
banking, the effects of rural depopulation on community banks, and the 
efforts of minority-owned and operated depository institutions to serve 
their communities. The FDIC's community bank research agenda remains 
active, and in 2015, we will be studying the challenges that face 
small, closely held banks, such as raising external capital and 
ensuring management succession.
New Community Bank Quarterly Banking Profile
    Last year, the FDIC introduced a community bank section in the 
FDIC's Quarterly Banking Profile. The QBP, as it is commonly known, is 
a long-standing tool that the industry, regulators, policymakers, 
investors, analysts, consumers, and other stakeholders use as a report 
card on the banking industry. We launched the Community Bank QBP to 
ensure that community bank performance was not obscured in the overall 
industry picture because of their small size. The most recent analysis 
of that data was presented earlier in this testimony.
Community Bank Outreach and Technical Assistance
    In 2009, the FDIC established its Advisory Committee on Community 
Banking to provide advice and guidance on a broad range of policy 
issues impacting small community banks and the local communities they 
serve. In February 2012, the FDIC sponsored a national conference to 
examine the unique role of community banks in our Nation's economy. 
Later in 2012, roundtable discussions were conducted in each of the 
FDIC's regions that focused on the financial and operational challenges 
and opportunities facing community banks, and the regulatory 
interaction process. Additional roundtable discussions were held in 
each region in 2013 and 2014.
    In discussions with community bankers in these venues and through 
our routine outreach efforts, it became clear that community banks were 
concerned about keeping up with changing regulations and policy issues 
and were interested in assistance from us to stay informed. As a 
result, in 2013, the FDIC created a regulatory calendar that alerts 
stakeholders to critical information as well as comment and compliance 
deadlines relating to new or amended Federal banking laws, regulations 
and supervisory guidance. The calendar includes notices of proposed, 
interim and final rulemakings, and provides information about banker 
teleconferences and other important events related to changes in laws, 
regulations, and supervisory guidance.
    In addition, in 2013, and based on community banker feedback, the 
FDIC restructured our preexamination process to better tailor 
examination activities to the unique risk profile of the individual 
institution. As part of this process, we developed and implemented an 
electronic preexamination planning tool to ensure consistency 
nationwide and to ensure that only those items that are necessary for 
the examination process are requested from each institution to minimize 
burden.
    We also instituted a number of outreach and technical assistance 
efforts, including more than 20 training videos on complex topics of 
interest to community bankers. For example, in spring 2013, we issued 
six videos designed to provide new bank directors with information to 
prepare them for their fiduciary role in overseeing the bank. This was 
followed by the release of a virtual version of the FDIC's Directors' 
College Program that regional offices deliver throughout the year. We 
also have issued a series of videos, primarily targeted to bank 
officers and employees, providing more in-depth coverage of important 
supervisory topics with a focus on bank management's responsibilities. 
\6\ We issued the latest technical assistance video (on the Consumer 
Finance Protection Bureau's loan originator compensation rule) just 
last month.
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     \6\ Technical Assistance Video Program: https://www.fdic.gov/
regulations/resources/director/video.html.
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    We also hosted banker call-ins on topics such as proposed new 
accounting rules, new mortgage rules, and Call Report changes. The FDIC 
offers a series of Deposit Insurance Coverage seminars for banking 
officers and employees. \7\ These free seminars, which are offered 
nationwide, particularly benefit smaller institutions, which have 
limited training resources.
---------------------------------------------------------------------------
     \7\ Deposit Insurance Coverage: Free Nationwide Seminars for Bank 
Officers and Employees (FIL-17-2014), dated April 18, 2014.
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    In June 2014, the FDIC mailed an Information Packet \8\ to the 
chief executive officers (CEOs) of FDIC-supervised community banks 
containing resources and products developed as part of the FDIC's 
Community Banking Initiative, as well as documents describing our 
examination processes. In addition to an introductory letter to CEOs, 
the packet contained brochures highlighting the content of key 
resources and programs and a copy of the FDIC's Cyber Challenge 
simulation exercise. Cyber Challenge was designed to encourage 
community banks to discuss operational risk issues and the potential 
impact of information technology disruptions. The exercise contained 
four videos that depict various operational disruptions and materials 
to facilitate discussion about how the bank would respond. Lists of 
reference materials where banks could obtain additional information 
were also included. All of these resources can be found on the 
Directors' Resource Center, available through the FDIC's Web site. \9\
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     \8\ See http://www.fdic.gov/regulations/resources/cbi/
infopackage.html.
     \9\ See https://www.fdic.gov/regulations/resources/director/.
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    At the local level, we have enhanced communication efforts by 
having our community bank examiners contact supervised institutions 
between examinations to discuss and clarify supervisory and regulatory 
changes and the overall risk profile of the institutions.
    Going forward the FDIC intends to continue to be a resource for 
community banks regarding developing industry issues. One recent 
example involves Call Reports. We have received comments from 
institutions and others about the cost and burden of preparing Call 
Reports, and we have also heard comments about the benefits of Call 
Reports, including their aforementioned use in extending examination 
cycles and the transparency they bring to the industry for investors, 
bankers, consumers, analysts, and other stakeholders. Working through 
the Federal Financial Institutions Examination Council or FFIEC, we 
have engaged the industry in a dialogue about ways to improve Call 
Reports and the reporting process, and we will pursue several actions 
in the near term. For example, we have already conducted banker 
training calls regarding certain Call Report changes and plan to 
conduct additional calls going forward as needed. Additionally, we plan 
to propose certain burden-reducing changes in 2015 and implement a more 
robust process for bank agency users to justify retaining or adding 
items to the Call Report.
    Another example is actions taken by the FDIC to raise awareness of 
cyber risks and to work with community banks to encourage practices to 
protect against cyberthreats. During 2014, the FDIC issued a list of 
free resources from which community banks could obtain cyberthreat 
information and assisted financial institutions in identifying and 
shutting down ``phishing'' Web sites that attempt to fraudulently 
obtain and use an individual's confidential personal or financial 
institution, This year, the FDIC will add additional videos to the 
Cyber Challenge simulation exercise and work as a member of the FFIEC 
to implement actions to enhance the effectiveness of cybersecurity-
related supervisory programs, guidance, and examiner training. The FDIC 
will continue to work with community banks to address this and other 
emerging threats.
Conclusion
    The FDIC will continue to pursue regulatory burden reduction for 
community banks, while preserving safety and soundness goals. Strong 
risk management practices and a strong capital base are fundamental to 
the long-term health of community banks and their ability to serve 
their local communities. Most community banks know how to manage the 
risks in their loan portfolios and have strong capital positions. And 
of course, community banks have a strong interest in retaining 
customers by treating them fairly. Serving the credit needs of their 
local communities, while managing the attendant credit risks, truly is 
the core expertise of many community banks.
    Reports by the General Accounting Office and the FDIC's Office of 
Inspector General (OIG), \10\ and our own Community Banking Study have 
shown that banks--even those with concentrated asset portfolios--with 
sound risk management practices and strong capital have been able to 
weather crises and remain strong. Institutions that did not survive, 
according to these reports, were those with weaker or more aggressive 
risk management approaches, including imprudent loan underwriting and 
rapid growth often financed by wholesale funds or brokered deposits. 
One of our IG reports also found that banks that heeded supervisory 
directives regarding risk management practices were more likely to 
survive.
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     \10\ Causes and Consequences of Recent Bank Failures (January 
2013), GAO-13-71 and Comprehensive Study on the Impact of the Failure 
of Insured Depository Institutions (January 2013), EVAL-13-002.
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    We believe the evidence strongly supports the idea that the best 
way to preserve the long term health and vibrancy of community banks, 
and their ability to serve their local communities, is to ensure their 
core strength is preserved: strong capital, strong risk management and 
fair and appropriate dealings with their customers. We also believe our 
own supervision plays an important role in obtaining corrective action 
to address problems where this is needed, and that this also promotes 
the long-term health of community banks. This being said, we remain 
alert to the importance of achieving the fundamental objectives of 
safety-and-soundness and consumer protection in ways that do not 
involve needless complexity or expense. Going forward, we continue to 
look for ways to improve our supervisory processes and reduce 
regulatory burden on the industry. We also stand ready to provide 
technical assistance regarding proposals that seek to achieve the 
fundamental goals of safety-and-soundness and consumer protection in 
ways that are appropriately tailored for community banks.
                                 ______
                                 
                PREPARED STATEMENT OF MARYANN F. HUNTER
Deputy Director of the Division of Banking Supervision and Regulation, 
            Board of Governors of the Federal Reserve System
                           February 10, 2015
Introduction
    Chairman Shelby, Ranking Member Brown, and other Members of the 
Committee, I appreciate the opportunity to testify on the important 
topic of community banks and the effects of regulatory burden on these 
institutions. Community banks are a critical component of our financial 
system and economy. Their deep ties to their local communities give 
them firsthand perspectives on the local economic landscape; they focus 
on customer relationships and often look beyond traditional credit 
factors to consider unique borrower characteristics when making credit 
decisions. Having begun my career more than 30 years ago as a community 
bank examiner at the Federal Reserve Bank of Kansas City and eventually 
becoming the officer in charge of bank supervision at the Reserve Bank, 
I have seen first hand how critical it is that we balance effective 
regulation and supervision to ensure safety and soundness of community 
banks, while also ensuring that undue burden does not constrain the 
capacity of these institutions to lend to the communities they serve. 
In my testimony, I will discuss measures taken by the Federal Reserve 
to ensure that regulations, policies, and supervisory activities do not 
place an undue burden on community banks.
    The Federal Reserve supervises approximately 850 State-chartered 
community banks, the majority of which are small community banks with 
total assets of $1 billion or less, and which are members of the 
Federal Reserve System (referred to as State member banks). \1\ In 
addition, the Federal Reserve supervises more than 4,400 bank holding 
companies and more than 300 savings and loan holding companies, most of 
which operate small community banks and thrifts.
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     \1\ For supervisory purposes, the Federal Reserve uses the term 
``community banking organization'' to describe a State member bank and/
or holding company with $10 billion or less in total consolidated 
assets.
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    The overall condition of community banks has improved significantly 
in the wake of the financial crisis. The number of banks on the Federal 
Deposit Insurance Corporation's ``Problem List'' fell from a peak of 
888 at the end of first quarter 2011, to 329 at the end of third 
quarter 2014. \2\ Despite that significant decline, the number of 
problem banks compares unfavorably with historical numbers of less than 
100, on average, in the years prior to the crisis. Moreover, small 
community banks continue to experience considerable earnings pressure 
based on historically low net interest margins, and many report 
concerns about their prospects for continued growth and profitability.
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     \2\ See Federal Deposit Insurance Corporation, Quarterly Banking 
Profile, Third Quarter 2014, www2.fdic.gov/qbp/2014sep/qbp.pdf.
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Soliciting Views From Community Banks on Regulatory Burden
    The Federal Reserve uses multiple channels to solicit the views of 
community banks on banking and economic topics, including regulatory 
burden. For instance, when a proposed rule or policy is issued to the 
public for comment, we gather information from banking organizations 
that assists us in assessing implementation complexity or cost, 
especially for the smallest institutions. The feedback received has 
been instrumental in helping us scale rules and policies to 
appropriately reflect the risks at these institutions without 
subjecting them to unnecessary burden. This was evident in the final 
capital guidelines that were issued in July 2013. \3\ The Federal 
banking agencies' final rules reflected several changes to respond to 
comments and reduce the regulatory burden on community banks. As a 
result, many of the requirements that apply to larger banking 
organizations do not apply to community banks.
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     \3\ http://federalreserve.gov/newsevents/press/bcreg/20130702a.htm
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    Also, in 2010, the Federal Reserve Board (the Board) formed the 
Community Depository Institutions Advisory Council (CDIAC) to provide 
input to the Board of Governors on the economy, lending conditions, and 
other issues of interest to community depository institutions. \4\ 
CDIAC members are selected from representatives of banks, thrift 
institutions, and credit unions serving on local advisory councils at 
the 12 Federal Reserve Banks. One member of each of the Reserve Bank 
councils is selected to serve on the national CDIAC, which meets twice 
a year with the Board of Governors in Washington, DC, to discuss topics 
of interest to community depository institutions.
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     \4\ http://federalreserve.gov/aboutthefed/cdiac.htm
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    Additionally, in accordance with the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996 (EGRPRA), the Federal banking agencies 
have launched a review to identify banking regulations that are 
outdated, unnecessary, or unduly burdensome. \5\ The comment period for 
the EGRPRA review for the first set of regulations ended early in 
September 2014, and the agencies plan to publish three additional 
Federal Register notices seeking comment over the next year and a half. 
The Federal Reserve and the other agencies have begun a series of 
outreach meetings with bankers, consumer groups, and other interested 
parties as part of the EGRPRA review. \6\ The Federal Reserve and the 
other agencies conducted two outreach meetings, the second of which 
took place in Dallas last week. Additional outreach meetings are 
scheduled for the coming months, including one scheduled for this 
August focused on issues affecting rural institutions. The comments 
from the industry, consumer groups, and others have been very 
informative and will help the agencies in assessing regulatory burden.
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     \5\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation (FDIC), and Office of the Comptroller of 
the Currency (OCC), ``Federal Bank Regulatory Agencies Seek Comment on 
Interagency Effort To Reduce Regulatory Burden'', press release, June 
4, 2014, www.federalreserve.gov/newsevents/press/bcreg/20140604a.htm.
     \6\ See the Federal Financial Institutions Examination Council's 
(FFIEC) EGRPRA Web site at http://egrpra.ffiec.gov/ for more 
information.
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    A recurring theme from the EGRPRA outreach meetings thus far has 
been the question of whether the agencies could reevaluate the various 
thresholds and limits imposed in regulations that may constrain 
community banks and their lending activities. For example, bankers have 
asked the agencies to consider increasing the dollar threshold in the 
appraisal regulations for transactions below which an appraisal would 
not be required. Community bankers in rural areas have noted that it 
can be difficult to find an appraiser with knowledge about the local 
market at a reasonable fee, and raising the threshold would allow 
bankers to use a less-formal valuation of collateral for more loans. 
Some bankers at the EGRPRA meetings have suggested reviewing the 
statutorily mandated examination frequency for banks of various sizes 
and condition as a way to ease burden from frequent examinations. Other 
banks have commented on the requirements of some longstanding 
interagency guidance and suggested that some may now be outdated and 
warrant a fresh look and revision.
    In order to better understand and respond to concerns raised by 
these institutions through the various channels, the Board has 
established a community and regional bank subcommittee of its Committee 
on Bank Supervision. \7\ The governors on this subcommittee help the 
Board as a whole to weigh the costs associated with regulation against 
the safety-and-soundness benefits of new supervisory policies for 
smaller institutions. The subcommittee also meets with Federal Reserve 
staff to hear about key supervisory initiatives at community banks and 
ongoing research in the community banking area.
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     \7\ http://federalreserve.gov/aboutthefed/bios/board/default.htm
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Tailoring Regulations and Policies for Community Banks
    At the Federal Reserve, we weigh the burden on banks to implement 
new regulatory requirements against the need for requirements to 
safeguard the safety and soundness of the financial system. We 
recognize that the cost of compliance can be disproportionally greater 
on smaller banks versus larger institutions, as they have fewer staff 
available to help comply with additional regulations. To address this, 
we work within the constraints of the relevant statutory mandate to 
draft rules so as not to subject community banks to requirements that 
would be unnecessary or unduly burdensome to implement.
    Many recently established rules have been applied only to the 
largest, most complex banking organizations. For example, the Federal 
Reserve and the other Federal banking agencies have not applied large-
bank stress testing requirements to community banks. To clarify stress 
testing expectations for community banks, the Federal banking agencies 
issued a policy statement in May 2012. \8\ While the stress testing 
policy statement reiterated the Federal Reserve's view that all banking 
organizations, regardless of size, should have the capacity to analyze 
the potential impact of adverse outcomes on financial conditions, the 
agencies also made clear that community banks were exempt from the more 
stringent requirements for the largest banks, such as Dodd-Frank Wall 
Street Reform and Consumer Protection Act stress testing and the 
Federal Reserve's Comprehensive Capital Analysis and Review. The 
Federal Reserve has reminded examiners that while community banks 
should anticipate how future events and adverse trends might affect the 
institution's financial condition and viability, examiners should not 
apply complex large-bank stress testing expectations to community 
banks.
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     \8\ Board of Governors of the Federal Reserve System, FDIC, and 
OCC, ``Agencies Clarify Supervisory Expectations for Stress Testing by 
Community Banks'', press release, May 14, 2012, www.federalreserve.gov/
newsevents/press/bcreg/20120514b.htm.
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    Most recently, the Board issued an interim final rule and proposed 
rule to implement Public Law 113-250, which was signed into law by the 
President in December 2014. \9\ Effective immediately, the interim rule 
adopted by the Board excludes small savings and loan holding companies 
with less than $500 million in total consolidated assets that meet 
certain qualitative requirements from the Board's regulatory capital 
requirements (Regulation Q). This effectively places these savings and 
loan holding companies on equal footing with similarly sized bank 
holding companies that are subject to the Board's Small Bank Holding 
Company Policy Statement (policy statement).
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     \9\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board Invites Public Comment on Proposed Rule To Expand the 
Applicability of Board's Small Bank Holding Company Policy Statement'', 
press release, January 29, 2015, www.federalreserve.gov/newsevents/
press/bcreg/20150129b.htm.
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    The Board also issued a notice of proposed rulemaking that would 
raise the asset size threshold from $500 million to $1 billion for 
determining applicability of the policy statement, and expand its scope 
to include savings and loan holding companies. The policy statement 
facilitates the transfer of ownership of small community banks by 
allowing their holding companies to operate with higher levels of debt 
than would otherwise be permitted. Institutions subject to the policy 
statement are not subject to the Board's regulatory capital 
requirements.
    While consolidated capital requirements do not apply to firms 
covered by the policy statement, regulatory capital requirements will 
continue to apply at the depository institution level.
    The Federal Reserve has made a concerted effort to communicate 
clearly to both community bankers and examiners about new requirements 
that are applicable to which community banks. We provide a statement at 
the top of each Supervision and Regulation letter and each Consumer 
Affairs letter that clearly indicates which banking entity types are 
subject to the guidance. These letters are the primary means by which 
the Federal Reserve issues supervisory and consumer compliance guidance 
to bankers and examiners, and this additional clarity allows community 
bankers to focus efforts only on the supervisory policies that are 
applicable to their banks. Also, to assist community banks in 
understanding how new complex rules could possibly affect their 
business operations, the Federal banking agencies have issued 
supplemental guides that focus on which rule requirements are most 
applicable to community banks. For example, the Federal banking 
agencies issued supplemental guides for the capital requirements issued 
in July 2013, as well as the Volcker rule issued in December 2013. \10\ 
Moreover, it is important to note that we work closely with our 
colleagues at the State banking agencies and the other Federal 
regulatory agencies to ensure that our supervisory approaches and 
methodologies are applied as consistently as possible to all community 
banks.
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     \10\ Board of Governors of the Federal Reserve System, FDIC, and 
OCC, ``New Capital Rule: Community Bank Guide'', July, 9, 2013, 
www.federalreserve.gov/bankinforeg/basel/files/
capital_rule_community_bank_guide_20130709.pdf; and Board of Governors 
of the Federal Reserve System, FDIC, and OCC, ``The Volcker Rule: 
Community Bank Applicability'', December 10, 2013, 
www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf.
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    We also have developed several platforms to improve our 
communication with community bankers and to enhance our industry 
training efforts. For example, we have developed two programs--``Ask 
the Fed'' and ``Outlook Live'' \11\--as well as periodic newsletters 
and other communication tools such as FedLinks. \12\ These platforms 
highlight information about new requirements and examiner expectations 
to address issues that community banks currently face and provide 
resources on key supervisory policies.
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     \11\ Consumer Compliance Outlook is available at 
www.philadelphiafed.org/bank-resources/publications/consumercompliance-
outlook/, and Outlook Live is available at www.philadelphiafed.org/
bankresources/publications/consumer-compliance-outlook/outlook-live/.
     \12\ FedLinks is available at www.cbcfrs.org/fedlinks. Also see 
another Federal Reserve publication, Community Banking Connections, 
which is available at www.cbcfrs.org/.
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Changes in Regulatory Reporting Requirements
    In an action related to changes in the policy statement, the Board 
took immediate steps beyond what was required in the legislation to 
relieve regulatory reporting burden for bank holding companies and 
savings and loan holding companies that have less than $1 billion in 
total consolidated assets and meet the qualitative requirements of the 
policy statement. Specifically, the Board eliminated quarterly and more 
complex consolidated financial reporting requirements (FR Y-9C) for 
these institutions, and instead required parent-only financial 
statements (FR Y-9SP) semiannually. The Board also eliminated 
regulatory capital reporting for savings and loan holding companies 
with less than $500 million in total consolidated assets from the FR Y-
9SP. The Board filed an emergency request with the Office of Management 
and Budget and received approval to make these changes effective on 
March 31, 2015, while it completes the notice and comment process on 
the related rulemakings. The Board took this action and immediately 
notified the affected institutions so they would not continue to invest 
in system changes to report revised regulatory capital data for only a 
short period of time. Also, the Board took this action in response to 
feedback from members of the banking community who indicated that 
reducing the reporting frequency of financial data could save 
institutions time, especially time spent on internal audit and review 
processes associated with senior officials' attestations.
    A number of community banks have suggested reducing burden from 
required quarterly reporting of the Consolidated Reports of Condition 
and of Income (the Call Report). Working through the Federal Financial 
Institutions Examination Council, the Federal Reserve is considering a 
number of ways to be responsive to industry concerns about Call Report 
filing requirements and assess the potential impact of collecting less 
data from banks. Later this month, the Federal banking agencies will 
host a teleconference with bankers to provide additional guidance on 
the reporting of revised regulatory capital information on the Call 
Report.
Risk-Focused Supervision Examination Process
    Consistent with the Federal Reserve's approach to development of 
supervisory policy, our longstanding risk-focused approach to 
consolidated supervision provides that examination and inspection 
procedures should be tailored to each organization's size, complexity, 
risk, profile, and condition. There are distinct differences between 
the supervision program of a large, complex bank and a small, 
noncomplex bank. For one, large banks generally have a dedicated 
supervisory team that may be resident at the bank, unlike small banks, 
which may only meet with an examination team every 12 to 18 months. 
Furthermore, if a bank is engaging in nontraditional or higher-risk 
activities, our supervision program typically requires greater scrutiny 
and a higher level of review of specific transactions. Conversely, if a 
well-managed bank's activities are lower risk, we adjust our 
expectations for examiners to a lower level of review. In this way, we 
alleviate examination burden on community banks with histories of sound 
performance and modest risk profiles.
    We are continually working to calibrate examination expectations so 
that they are commensurate with the level of risk at banking 
organizations. For example, the Federal Reserve has an initiative 
currently underway to use forward-looking risk analytics to identify 
high-risk community and regional banks, which would allow us to focus 
our supervisory response on the areas of highest risk and reduce the 
regulatory burden on low-risk community and regional banks.
    The Federal Reserve also adopted a new consumer compliance 
examination framework for community banks in January 2014. \13\ While 
we have traditionally applied a risk-focused approach to consumer 
compliance examinations, the new program more explicitly bases 
examination intensity on the individual community bank's risk profile, 
weighed against the effectiveness of the bank's compliance controls. As 
a result, we expect that examiners will spend less time on low-risk 
compliance issues at community banks, increasing the efficiency of our 
supervision and reducing regulatory burden on many community banks. In 
addition, we revised our consumer compliance examination frequency 
policy to lengthen the time frame between on-site consumer compliance 
and Community Reinvestment Act examinations for many community banks 
with less than $1 billion in total consolidated assets.
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     \13\ See the Board's Consumer Affairs Letter CA 13-19 (November 
18, 2013), ``Community Bank Risk-Focused Consumer Compliance 
Supervision Program'' at www.federalreserve.gov/bankinforeg/caletters/
caltr1319.htm and Consumer Affairs Letter CA 13-20 (November 18, 2013), 
``Consumer Compliance and Community Reinvestment Act (CRA) Examination 
Frequency Policy'' at www.federalreserve.gov/bankinforeg/caletters/
caltr1320.htm.
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    In addition to our efforts to refine our risk-focused approach to 
supervision, we have been investigating ways that would allow for more 
supervisory activities to be conducted off-site, which can improve 
efficiency and reduce burden on community banks. For example, we can 
conduct some aspects of the loan review process off-site for banks that 
maintain electronic loan records and have invested in technologies that 
would allow us to do so. While off-site loan review has benefits for 
both bankers and examiners, some bankers have expressed concerns that 
increasing off-site supervisory activities could potentially reduce the 
ability of banks to have face-to-face discussions with examiners 
regarding asset quality or risk-management issues. In that regard, we 
will continue to work with community banks that may prefer their loan 
reviews to be conducted on-site. In short, the Federal Reserve is 
trying to strike an appropriate balance of off-site and on-site 
supervisory activities to ensure that resources are used more 
efficiently while maintaining high-quality supervision of community 
banking organizations.
    The Federal Reserve has invested significant resources in 
developing various technological tools for examiners to improve the 
efficiency of both off-site and on-site supervisory activities, while 
ensuring the quality of supervision is not compromised. For instance, 
the Federal Reserve has automated various parts of the community bank 
examination process, including a set of tools used among all Reserve 
Banks to assist in the preexamination planning and scoping. This 
automation can save examiners and bank management time, as a bank can 
submit requested preexamination information electronically rather than 
mailing paper copies to the Federal Reserve Bank. These tools also 
assist examiners in the continuous, off-site monitoring of community 
banks, enabling examiners to determine whether a particular community 
bank's financial condition has deteriorated and warrants supervisory 
attention between on-site examinations.
    As we develop supervisory policies and examination practices, we 
are mindful of community bankers' concerns that new requirements for 
large banks could become viewed as ``best practices'' that trickle down 
to community banks in a way that is inappropriate. To address this 
concern, the Federal Reserve is enhancing communications with and 
training for examinations staff about expectations for community banks 
versus large banks to ensure that expectations are calibrated 
appropriately. Specifically, we are modernizing our longstanding 
examiner commissioning training program for community bank examiners, 
and a key part of this effort is reviewing the curriculum to ensure 
that supervisory expectations for larger banks do not make their way 
into the community bank examination curriculum. In addition, when new 
supervisory policies are issued, we typically arrange a teleconference 
to explain the new policy to examiners, including whether and to what 
extent the policy is applicable to community banks. By effectively 
training our examination staff and providing channels to keep them 
informed of newly issued policies in a timely manner, examiners are 
better equipped to understand the supervisory goals of regulations and 
guidance for community banks and to provide appropriate guidance to 
community banks.
Additional Opportunities To Reduce Burden
    In addition to the steps taken to reduce regulatory burden that 
were already discussed, the Federal Reserve recently issued the first 
semiannual public report on applications activity. \14\ The report aims 
to increase transparency about applications filings, while providing 
useful information to bankers to help them gain efficiency. In 
addition, Federal Reserve System staff are working to identify 
opportunities to change examination practices and rules to increase 
efficiency of the examination process and thereby reduce the time 
community bankers spend to prepare and work with examiners. We are in 
the process of conducting a review of community bank examination 
scoping procedures to make sure they are aligned with current banking 
practices and risks, and reflect key lessons from the crisis. Overall, 
these adjustments should enhance our supervisory efficiency by 
targeting more intensive examination work at bank activities that 
proved to be higher risk and reducing some examination testing at 
community banks that performed well throughout the crisis.
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     \14\ The report can be found at www.federalreserve.gov/
bankinforeg/semiannual-report-on-banking-applications-20141124.pdf.
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    Although none of the actions that we are currently taking require 
legislative changes, some of the relief that bankers have asked for and 
suggestions developed through the EGRPRA process may require 
legislative action. We will work with the other Federal banking 
agencies as appropriate to consider and assess the impact of potential 
changes identified through the EGRPRA review process.
Conclusion
    We understand that one size does not fit all in supervision and 
regulation and that supervisory expectations for the largest, most 
complex firms are often inappropriate for community banks. We are 
committed to making sure that regulations, policies, and activities are 
appropriately tailored to the level of risk inherent in these 
institutions and that we respond to ideas for reducing burden that come 
through the EGRPRA process. The Federal Reserve is committed to taking 
a balanced approach that fosters safe and sound community banks and 
fair treatment of consumers, and encourages the flow of credit to 
consumers and businesses.
    Thank you for inviting me to share the Federal Reserve's views on 
the effect of regulatory burden on community banks. I would be pleased 
to answer any questions you may have.
                                 ______
                                 
                   PREPARED STATEMENT OF TONEY BLAND
 Senior Deputy Comptroller for Midsize and Community Bank Supervision, 
               Office of the Comptroller of the Currency
                           February 10, 2015
Introduction
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, thank you for the opportunity to appear before you today. 
Consistent with the Committee's invitation letter, my testimony focuses 
on the challenges facing small national banks and Federal savings 
associations (hereafter referred to as community banks) and the work of 
the Office of the Comptroller of the Currency (OCC) to help these 
institutions remain a vibrant part of our Nation's financial system. I 
also discuss specific steps we are taking to address regulatory burden 
on community banks, OCC recommendations for congressional action in 
furtherance of this goal, and our progress on the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996 (EGRPRA) regulatory review.
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    Statement Required by 12 U.S.C. 250: The views expressed herein 
are those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
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    Before describing these initiatives, I would like to share the 
OCC's perspective on community banks. The OCC supervises approximately 
1,400 institutions with assets under $1 billion. These community banks 
provide many of the essential financial services and much of the credit 
necessary for our Nation's economic growth. Throughout the country, 
these banks help small businesses thrive by offering personalized 
service and credit products tailored to their customers' needs. In 
addition, these banks and their employees strengthen our cities and 
towns by helping to meet municipal finance needs and actively 
participating in civic life.
    Overseeing the safety and soundness of community banks is central 
to the mission of the OCC. Approximately two-thirds of our examination 
staff is dedicated to the supervision of these institutions. In my role 
as Senior Deputy Comptroller for Midsize and Community Banks, I 
regularly meet with community bankers to hear first-hand about their 
successes, their challenges, and their frustrations. I have seen how 
well-managed community banks weathered the financial crisis and 
provided a steady source of credit to their communities. But I've also 
heard their concerns about the long-term viability of their business 
models. And I've heard their frustration with the time and resources 
they spend trying to track and comply with regulatory requirements--
time and resources they contend could be better spent responding to the 
needs of their customers and communities.
    We take these concerns seriously. My testimony describes steps that 
we are taking to help community bankers meet these challenges, navigate 
the changing regulatory landscape, and ensure that the OCC's 
supervisory policies and regulations are appropriately tailored to 
community banks. I also provide the OCC's perspective on legislative 
proposals and regulatory opportunities for reducing regulatory burden 
on these important institutions.
The OCC's Approach to Community Bank Supervision
    The OCC is committed to fostering a regulatory climate that allows 
well-managed community banks to grow and thrive. We have built our 
supervision of community banks around local field offices where the 
local Assistant Deputy Comptroller (ADC) has responsibility for the 
supervision of a portfolio of community banks. Each ADC reports to a 
District Deputy Comptroller who, in turn, reports to me. We have based 
our community bank examiners in over 60 locations throughout the United 
States, close to the banks they supervise.
    Through this supervisory structure, community banks receive the 
benefits of highly trained bank examiners with local knowledge and 
experience, supplemented by the resources and specialized expertise 
that a nationwide organization can provide. Our bank supervision 
policies and procedures establish a common framework and set of 
expectations. Each bank's portfolio manager tailors the supervision of 
each community bank to its individual risk profile, business model, and 
management strategies. We give our ADCs considerable decision-making 
authority, reflecting their experience, expertise, and first-hand 
knowledge of the institutions they supervise.
    We also seek to ensure that we apply our supervisory policies, 
procedures, and expectations in a consistent and balanced manner. For 
example, a key element of the OCC's supervisory philosophy is open and 
frequent communication with the banks we supervise. In this regard, my 
management team and I encourage any banker who has concerns about a 
particular examination finding to raise these concerns with his or her 
examination team and with the district management team that oversees 
the bank. Our ADCs and Deputy Comptrollers expect and encourage such 
inquiries.
    If a banker does not want to pursue these avenues of communication, 
our Ombudsman provides a venue for bankers to discuss their concerns, 
either informally or formally by requesting an appeal of examination 
findings. The OCC's Ombudsman is fully independent of the supervisory 
process, and he reports directly to the Comptroller. In addition to 
hearing formal appeals, his office provides bankers with an impartial 
ear to hear complaints and a mechanism to facilitate the resolution of 
disputes with our examination staff.
Tailored Supervision
    The OCC understands that a one-size-fits-all approach to 
supervision is not always appropriate, especially for community banks. 
We recognize that community banks have different business models and 
more limited resources than larger banks. Therefore, where we have the 
flexibility under the law, we seek to tailor our supervision to a 
bank's size and complexity, and we factor these differences into the 
rules we write and the guidance we issue.
    The OCC seeks to minimize burden on community banks through various 
means. Examples of ways in which we tailor our regulations to 
accommodate community banks, while remaining faithful to statutory 
requirements and legislative intent, include explaining and organizing 
our rulemakings so these institutions can better understand their scope 
and application, providing alternative ways to satisfy regulatory 
requirements, and using regulatory exemptions or transition periods.
    For example, the OCC, Federal Deposit Insurance Corporation (FDIC), 
and Board of Governors of the Federal Reserve System (Board) jointly 
drafted the final risk-based regulatory capital rule to reflect the 
nature and complexity of the different institutions we regulate. 
Although some provisions in the rule apply broadly, many requirements, 
including the supplementary leverage ratio and the countercyclical 
capital buffer, apply only to the largest banking organizations that 
engage in complex or risky activities. We also adjusted the final rule 
to address significant concerns raised by community bankers by 
retaining the current capital treatment for residential mortgage 
exposures and allowing community banks to elect to treat certain 
accumulated other comprehensive income (AOCI) components in a manner 
consistent with the general risk-based capital rules. This treatment of 
AOCI helps community banks avoid introducing substantial volatility 
into their regulatory capital calculations. And we continue to explore 
additional ways to tailor the capital rules to respond to community 
bank concerns and proposals, consistent with our objective of ensuring 
appropriate levels and quality of capital.
    The OCC also responded to community bank concerns when we finalized 
our revised lending limits rule, issued in accordance with section 610 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), to include counterparty credit exposure arising from 
derivatives and securities financing transactions. Specifically, the 
rule exempts from the lending limit calculations certain securities 
financing transactions most commonly used by community banks. It also 
permits small institutions to adopt compliance alternatives 
commensurate with their size and risk profile by providing flexible 
options for measuring covered counterparty credit exposures, including 
an easy-to-use lookup table.
    Our final rule implementing the Volcker Rule provisions of the 
Dodd-Frank Act is another example of how we seek to adapt statutory 
requirements to activities at different sized institutions, where 
possible. The statute applies to all banking entities, regardless of 
size; however, not all banking entities engage in activities covered by 
the prohibitions in the statute. One of the OCC's priorities in the 
interagency Volcker rulemaking was to make sure that the final 
regulations imposed compliance obligations on banking entities in 
proportion to their involvement in covered activities and investments. 
The rule, however, does not exempt community banks from the burden of 
needing to assess and determine whether their activities may be covered 
by the rule. As noted later in my testimony, we have submitted a 
legislative proposal that would exempt small banks from this rule.
    The OCC is constantly seeking to improve how we communicate 
information to community banks and to provide them with tools and 
resources to assist them in identifying and managing their risks. We 
have designed the bulletins announcing the issuance of each new 
regulation or supervisory guidance so that these banks can quickly 
assess whether the issuance applies to them, and we include a 
``highlights'' section that identifies the key components of the rule 
or guidance. We also provide plain language descriptions of complex 
requirements to assist community bankers in understanding newly issued 
rules. For example, we provided community banks with a quick reference 
guide to the mortgage rules issued by the Consumer Financial Protection 
Bureau last year. We also produced a streamlined, 2-page summary of the 
final domestic capital rule, highlighting aspects of the rule and key 
transition dates applicable to community banks. We supplemented this 
summary with an online regulatory capital estimator tool for banks, 
which we developed with the other Federal banking agencies. The 
agencies plan to augment the estimator tool with a supplemental tool 
that banks may use to help calculate regulatory capital requirements 
for securitization exposures.
    In addition, the OCC is interested in providing community banks 
with tools to assist them in determining whether they are adequately 
prepared to address cyberthreats. This has been a particular focus of 
the Federal Financial Institutions Examination Council (FFIEC), which 
the Comptroller currently chairs. During the summer of 2014, members of 
the FFIEC, including the OCC, piloted a cybersecurity assessment at 
more than 500 community institutions to evaluate their preparedness to 
mitigate cybersecurity risks. The assessment supplemented regularly 
scheduled exams and built upon key supervisory expectations contained 
within existing FFIEC information technology handbooks and other 
regulatory guidance. The agencies subsequently published FFIEC 
Cybersecurity Assessment General Observations, \1\ which includes 
questions for bank management to consider when assessing their 
institutions' cybersecurity preparedness. We understand that community 
banks have found this information helpful in assessing their own 
strengths and weaknesses in this important area. In addition, the FFIEC 
is in the process of updating and expanding its cybersecurity guidance 
and expects to make an announcement on this soon.
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     \1\ http://www.ffiec.gov/press/PDF/
FFIEC_Cybersecurity_Assessment_Observations.pdf
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    Through our secure BankNet Web site, the OCC provides other tools 
targeted to community banks. These include a portfolio-level stress 
test tool designed to provide bankers with a simple method to perform 
portfolio stress testing on income producing commercial real estate 
loans. OCC examiners developed this optional tool in response to 
requests from community bankers seeking additional guidance on how to 
stress test their loan portfolios. Another popular tool allows bankers 
to develop customized peer reports that they can use to compare their 
bank's balance sheet and financial performance ratios to those of other 
banks.
    The OCC's Semiannual Risk Perspective reports provide bankers with 
an analysis of current market and risk trends that may affect their 
institutions. Because we recognize that community banks may face 
different challenges than larger banks, the report discusses risks from 
both a large and small bank perspective. We supplement this semiannual 
report with periodic webinars, generally targeted to community banks, 
on emerging risk topics. For example, last year, the FFIEC conducted a 
webinar for community banks on ``Executive Leadership of 
Cybersecurity''. More than 5,000 Chief Executive Officers of community 
institutions registered for this event. The goal of this and similar 
webinars is to provide community bankers with practical information to 
help them mitigate emerging risks and to understand and comply with 
supervisory expectations.
Other Burden Reduction Opportunities
    When considering proposals to reduce burden on community banks, the 
OCC seeks to ensure that the proposals do not compromise fundamental 
safety and soundness or consumer protection safeguards. Within this 
framework, the OCC is committed to exploring additional ways to reduce 
unnecessary regulatory burden on community banks. To this end, we are 
undertaking several regulatory review projects designed to reduce 
burden, particularly on community banks, and are considering other 
innovative approaches to address this issue. Late last year, we drafted 
and submitted three legislative proposals that, if enacted, would 
provide a statutory basis to revise our regulations and reduce burden 
on covered institutions. These proposals, which I describe below, are 
the product of both our on-going dialogue with smaller institutions and 
our supervisory expertise with both large and small banks and savings 
associations. We recently resubmitted these proposals to this committee 
for consideration. In addition, the OCC would be pleased to share our 
experience and expertise with the Committee as it considers other 
legislative options to address regulatory burden.
Legislative Proposals
    Amendments to the Scope of the Volcker Rule. The risks to the 
financial system of proprietary trading and owning or sponsoring 
private equity and hedge funds are far more significant when larger 
institutions engage in these activities than when community banks do 
so, to the extent they even engage in such activities. Yet, the Volcker 
Rule contains no exemption for community banks. Accordingly, community 
banks need to ascertain whether their activities are covered by the 
Volcker Rule in order to understand whether they have any compliance 
obligations. Making this determination may require them to expend money 
and resources--for example, by hiring attorneys and consultants. This 
regulatory burden is not justified by the risk these institutions 
present.
    In response to concerns raised by community institutions, and 
issues that have arisen during our ongoing Volcker Rule implementation 
efforts, the OCC drafted a legislative proposal to exempt from the 
Volcker Rule banks with total consolidated assets of $10 billion or 
less. This proposal would eliminate unnecessary burden for small banks 
while ensuring that we address the risks the Volcker Rule sought to 
eliminate. Where a community bank engages in activities covered by the 
current Volcker Rule, the OCC could address any concerns as part of its 
normal safety and soundness supervisory process. Based on our analysis, 
we estimate that this amendment could exempt more than 6,000 small 
banks, including small banks regulated by the OCC, from the requirement 
to comply with the regulations implementing the Volcker Rule.
    Revisions to the Examination Schedule. The OCC generally examines 
national banks and Federal savings associations with total assets 
greater than $500 million on a 12-month cycle. We believe, however, 
that there are additional healthy, well-managed community banks that 
should qualify for the 18-month examination cycle. Accordingly, the OCC 
drafted a legislative proposal to increase from $500 million to $750 
million the asset-size threshold that determines whether a community 
bank can qualify for an examination every 18 months, rather than every 
12 months. The OCC would continue to use off-site monitoring tools to 
identify potential problems in these low risk institutions and, if 
warranted, could examine the institution more frequently.
    This is consistent with the incremental approach that Congress has 
taken when increasing the threshold amount of assets that permit small 
institutions to qualify for the 18-month examination cycle. 
Furthermore, it would allow the OCC to more appropriately align our 
supervisory resources with risk, while simultaneously reducing the 
regulatory burden on small, well-capitalized, and well-managed 
institutions. We estimate that this amendment would affect more than 
300 banks, including banks regulated by the OCC.
    Changes to Permissible Activities for Federal Savings Associations. 
Currently, the powers of Federal savings associations are set out in 
the Home Owners' Loan Act (HOLA), which establishes lending and 
investment limits for these institutions. Federal savings associations 
have told us that they would like to engage in additional activities to 
serve their communities but are unable to do so because of the HOLA 
limits. Under existing law, their only option is to convert to a bank 
charter, a process that can impose costs and burden that we believe can 
be alleviated.
    To address these concerns, the OCC drafted legislation that would 
give a Federal savings association a choice: continue to operate as a 
traditional thrift or file a notice to be treated as a ``covered 
savings association.'' Generally, a covered savings association would 
have the powers of and be subject to the same restrictions as a 
national bank. In practice, this means that a Federal savings 
association that becomes a covered savings association would gain 
national bank powers but would have to discontinue activities not 
permissible for a national bank, subject to rules governing 
nonconforming assets and subsidiaries. This option would provide a 
Federal savings association with the flexibility to retain its current 
corporate form and governance structure without unnecessarily limiting 
the evolution of its business plan. If a Federal savings association's 
business plan changed after it became a covered savings association, it 
generally would be permitted to reverse its election and regain its 
traditional thrift status after an appropriate period. This proposal 
would allow these institutions to adapt to changing economic and 
business environments and to better meet the needs of their 
communities. As the supervisor of both national banks and Federal 
savings associations, we are well-positioned to administer this type of 
framework given our familiarity with the individual institutions and 
their governing statutes.
Current Initiatives
    While the OCC calibrates individual regulations to account for 
differences in the size and complexity of institutions as they are 
developed, we recognize the need to periodically assess how existing 
rules can be modified to ease regulatory burden on banks. The OCC has 
several projects underway, and it is considering other approaches to 
achieve this goal.
    Integration of National Bank and Savings Association Rules. The 
Dodd-Frank Act transferred to the OCC all functions of the Office of 
Thrift Supervision (OTS) relating to the examination, supervision, and 
regulation of Federal savings associations. Following the transfer of 
OTS rulemaking functions to the OCC, we began a comprehensive, 
multiphase review of our regulations and those of the former OTS to 
reduce burden and duplication, promote fairness in supervision, and 
create efficiencies for national banks and Federal savings 
associations. Last spring, we issued a proposal to integrate our bank 
and saving association rules relating to corporate activities and 
transactions into a single set of rules, where possible. Many of the 
changes included in the proposal would reduce burden for all 
institutions, including community banks. We are working on a final rule 
to implement these changes and hope to issue it in the near future.
    EGRPRA. The OCC, FDIC, Board, and FFIEC are currently engaged in a 
review of their regulations imposed on insured depository institutions, 
as required by EGRPRA. Specifically, the statute requires that, at 
least once every 10 years, the agencies seek public comment on rules 
that are outdated or otherwise unnecessary. This provides both the 
agencies and the public with an opportunity to consider how to reduce 
burden. The OCC, as chair of the FFIEC, is currently coordinating this 
joint regulatory review.
    To conduct the EGRPRA review, the agencies published a Federal 
Register notice this past June asking for comment on three categories 
of rules. We plan to issue a second Federal Register notice this month 
seeking comment on three additional categories, followed by two 
additional notices on the remaining rules during the next year. In each 
notice, we specifically ask the public to identify ways to reduce 
unnecessary burden associated with our regulations, with a particular 
focus on community banks.
    The agencies received over 40 comments on the first Federal 
Register notice, many of which suggested specific rule changes. We are 
carefully reviewing all of the comments to identify where changes would 
be appropriate. In addition, we are undertaking our own review of these 
rules, and the statutes they implement. This project is very important 
to the Comptroller, and we are hopeful that it will yield positive 
results, particularly for community banks.
    In addition, the agencies are holding a series of EGRPRA outreach 
meetings to give members of the public an opportunity to present their 
views in person. The outreach meetings feature panel presentations by 
industry participants and consumer and community groups. To date, we 
have held outreach meetings in Los Angeles and Dallas, and I have 
participated in each of these meetings to hear first-hand the views and 
recommendations offered by the many participants. We have additional 
meetings scheduled in Boston, Chicago, and Washington, DC. We have also 
scheduled an outreach meeting in Kansas City that will focus 
specifically on rural banking issues. Recognizing that travel costs may 
restrict the ability of interested parties to attend in person, we 
live-stream each outreach meeting, where possible, and provide a video 
archive of the proceedings to increase the public's opportunity to view 
the meetings. These resources are easily accessible on the agencies' 
EGRPRA Web site, along with the Federal Register notices, all comments 
we have received, and additional EGRPRA information. \2\
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     \2\ The EGRPRA Web site can be accessed at http://
egrpra.ffiec.gov.
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    While the EGRPRA process will unfold over a period of time, the OCC 
will not wait until it is over to implement changes where a good case 
is made for regulatory relief. Where it is clear that a regulation is 
outdated, unnecessary, or unduly burdensome, we will act where we have 
the authority to do so. For example, we are actively reviewing 
suggestions to eliminate board of director approvals in certain 
circumstances and to broaden the use of electronic submissions for 
filing forms. In addition, many of the changes that we included in the 
integration rulemaking discussed above are consistent with comments we 
received in the EGRPRA review. Finally, the EGRPRA review may help us 
identify burdensome regulatory requirements that derive from statutory 
provisions. When we identify these provisions, we look forward to 
sharing our insights and experience with Congress.
    Call Report Simplification. The OCC and other Federal banking 
agencies, under the auspices of the FFIEC, are considering ways that we 
can further tailor reporting requirements for community banks. 
Recently, we have received proposals to reduce the burden associated 
with the preparation of the Consolidated Reports of Condition and 
Income (Call Reports), including the feasibility of allowing certain 
banks to file a short-form Call Report for two quarters of a year. The 
OCC has discussed the Call Report issue in numerous meetings with 
bankers, and we are committed to carefully considering their concerns.
    As part of this effort, the OCC and other Federal banking agencies 
have agreed to undertake a comprehensive review of all Call Report 
items and schedules and to review every line item of every schedule in 
the Call Report to try to determine what truly needs to be collected 
and if there is any other way to get such information. The OCC's 
standard is that Call Report data should directly support long-term 
supervisory needs to ensure the safety and soundness of banks and that 
a strong business case that discusses the relative benefits, costs, and 
alternatives must support any additions. At the request of members of 
the FFIEC, its Task Force on Reports is developing a set of guiding 
principles as the basis for evaluating potential additions or deletions 
of data items to and from the Call Report.
    Collaboration. While we expect that the above-referenced projects 
will reduce burden for many community banks, the OCC is also studying 
other, less conventional approaches to help community banks thrive in 
the modern financial world. One especially promising approach involves 
collaboration between community banks and is the subject of an 
important paper the OCC published last month. \3\ The principle behind 
this approach, which grew out of productive and ongoing discussions 
between the OCC and our community banks, is that by pooling resources, 
community banks can manage regulatory requirements, trim costs and 
serve customers who might otherwise lie beyond their reach. We have 
already seen examples of successful collaboration, such as community 
banks forming an alliance to bid on larger loan projects and banks 
pooling resources to finance community development activities.
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     \3\ ``An Opportunity for Community Banks: Working Together 
Collaboratively'', Jan. 13, 2015.
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    There are many other opportunities of this nature, which can 
increase efficiencies and save money. As noted in our paper, these 
include collaboration on accounting, clerical support, data processing, 
employee benefit planning, and health insurance--to name just a few. 
Our innovative community banks can undoubtedly find other ways to share 
resources in a safe and sound manner.
Conclusion
    Community banks are essential to our Nation's communities and small 
businesses. The OCC is committed to minimizing unnecessary regulatory 
burden for these institutions. We will continue to carefully consider 
the potential effect that current and future policies and regulations 
may have on community banks and will be happy to work with the 
Committee on any proposed legislative initiatives.
                                 ______
                                 
                   PREPARED STATEMENT OF LARRY FAZIO
 Director, Office of Examination and Insurance, National Credit Union 
                             Administration
                           February 10, 2015
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, the National Credit Union Administration appreciates the 
invitation to testify about regulatory relief. \1\ I am Larry Fazio, 
Director of NCUA's Office of Examination and Insurance.
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     \1\ NCUA's primary mission is to provide, through regulation and 
supervision, a safe and sound credit union system. NCUA performs this 
important public function by:
      Examining all Federal credit unions;
      Participating in the supervision of federally insured, State-
chartered credit unions in coordination with State regulators; and
      Insuring accounts up to $250,000 at federally insured credit 
unions.
    As required by the Federal Credit Union Act, NCUA also serves as 
the administrator of the $12 billion National Credit Union Share 
Insurance Fund. In this role, NCUA provides oversight and supervision 
to 6,350 federally insured credit unions. Of these credit unions, NCUA 
directly supervises 3,981 Federal credit unions chartered by the 
agency.
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    Today, three-quarters of credit unions have less than $100 million 
in assets and the median asset size of a credit union is $24 million. 
\2\ Smaller credit unions in particular have fewer resources available 
to respond to marketplace, technological, legislative, and regulatory 
changes. NCUA, therefore, is acutely aware of the need to calibrate our 
rules and examinations to remove any unnecessary burden on these 
smaller credit unions.
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     \2\ The term ``credit union'' is used throughout this testimony to 
refer to federally insured credit unions. NCUA does not oversee 
approximately 132 State-chartered, privately insured credit unions. As 
of September 30, 2014, federally insured credit unions represent 98 
percent of all credit unions in the United States and serve 98.7 
million credit union members.
    As a policy matter, in 2007 NCUA issued a report to Congress 
concluding that the Federal Government should be the sole provider of 
primary deposit insurance. Federal deposit insurance has played an 
important role in maintaining confidence in the financial system and 
the stability of our economy, and the lessons learned from failures of 
private deposit insurance schemes should not be forgotten. See http://
www.ncua.gov/Legal/Documents/DepositInsuranceStudyReporttoCongress-
Ver6-4.pdf for more details.
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    NCUA scales our regulatory and supervisory expectations for smaller 
credit unions. NCUA also seeks to provide broader regulatory relief 
when it is sensible and within the agency's authority to do so. Over 
the past 3 years, we have taken many actions to cut red tape and 
provide lasting benefits to credit unions. This includes relaxing eight 
regulations and streamlining three processes.
    Where regulation is necessary to protect the safety and soundness 
of credit unions and the National Credit Union Share Insurance Fund, 
NCUA employs a variety of strategies to ensure our regulations are 
effectively targeted. \3\ These strategies include fully exempting 
small credit unions from certain rules, using graduated requirements as 
size and complexity increase for others, and incorporating practical 
compliance approaches in agency guidance. In short, we work to balance 
maintaining prudential standards with minimizing regulatory burden.
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     \3\ Congress established the National Credit Union Share Insurance 
Fund in 1970 as part of the Federal Credit Union Act (P.L. 91-468) and 
amended the Share Insurance Fund's operations in 1984 (P.L. 98-369). 
The fund operates as a revolving fund in the U.S. Treasury under the 
administration of the NCUA Board for the purpose of insuring member 
share deposits in all Federal credit unions and in qualifying State-
chartered credit unions that request Federal insurance. Funded by 
federally insured credit unions, the Share Insurance Fund is backed by 
the full faith and credit of the United States.
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    My testimony will discuss elements of NCUA's current rulemaking 
process, including recent and prospective efforts to tailor regulation 
and supervision based on credit unions' size and complexity. I will 
also comment on NCUA's efforts to reduce examination burdens. Finally, 
I will offer legislative recommendations related to regulatory relief.
Regulatory Flexibility Act
    Under the Regulatory Flexibility Act, NCUA must publish an analysis 
in the Federal Register and give special consideration to the 
regulatory burden and alternatives for small credit unions whenever a 
proposed or final rule would impose a significant economic burden on a 
substantial number of small credit unions. \4\
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     \4\ The Regulatory Flexibility Act provides NCUA with the 
opportunity to define which credit unions fall under the law's 
coverage. 5 U.S.C. 601(4).
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    In recognition of the operational and financial challenges faced by 
smaller credit unions, the NCUA Board in January 2013 reviewed the 
threshold used to identify which credit unions qualify as small 
entities under the Regulatory Flexibility Act. Based on credit union 
system percentages carried forward from the last update in 2003 and 
corresponding risks to the Share Insurance Fund, the Board determined 
credit unions with less than $50 million in assets, up from the prior 
$10 million threshold, were small entities for purposes of the 
Regulatory Flexibility Act.
    At the time of the 2013 adjustment, the number of credit unions 
classified as small for purposes of the Regulatory Flexibility Act 
nearly doubled. Today, 4,124 institutions representing 65 percent of 
all credit unions are covered by the small credit union definition.
    At the same time it revised the small credit union definition, the 
NCUA Board provided immediate regulatory relief by exempting credit 
unions under $50 million from several regulatory requirements. First, 
the Board increased from $10 million to $50 million the threshold that 
defines which credit unions are complex, narrowing the category of 
credit unions that could be subject to risk-based net worth 
requirements and the associated prompt corrective action mandates. 
Second, the Board increased from $10 million to $50 million the 
threshold used to exempt credit unions from our interest rate risk 
rule.
    In a coordinated policy change, the Board nearly doubled the number 
of credit unions eligible to apply for NCUA's Office of Small Credit 
Union Initiatives' individualized consulting services by increasing the 
eligibility threshold to $50 million. \5\ Subsequently, the NCUA Board 
extended relief at the same level in new rules requiring certain 
liquidity contingencies and creditor notices in voluntary liquidations.
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     \5\ Created in 2004, NCUA's Office of Small Credit Union 
Initiatives fosters credit union development and the effective delivery 
of financial services for small, new, and low-income credit unions, as 
well as minority depository institutions. The office provides 
individualized consulting, loan and grant opportunities, targeted 
training, and valuable partnership and outreach services to help viable 
small credit unions thrive.
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    In January 2013, the NCUA Board also committed the agency to 
revisit the Regulatory Flexibility Act threshold in 2015 and every 3 
years thereafter. \6\ The Board took this action to ensure the 
definition of a small credit union would keep pace with changes in the 
marketplace.
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     \6\ This triennial review of the small credit union definition 
under the Regulatory Flexibility Act is in addition to NCUA's rolling 
3-year review of all regulations.
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    As a result, next week the Board will consider a proposed rule to 
include hundreds of additional credit unions under the definition of a 
small entity. Increasing the threshold from $50 million to $100 million 
would provide special consideration for regulatory relief for an 
additional 745 credit unions in future rulemakings.
    Should the Board adopt a $100 million threshold, 77 percent of all 
credit unions would be covered in future considerations of regulatory 
relief. \7\ Taking this action also would recognize the challenges 
encountered by credit unions below $100 million in assets, which have 
slower deposit growth rates, slower membership growth rates, and higher 
operating costs than peer credit unions above the threshold.
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     \7\ Credit unions with less than $100 million in assets hold 11 
percent of the system's assets.
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Regulatory Review Efforts
    NCUA is ever mindful of the impact of regulations on credit unions, 
especially smaller ones. We are proactive in our efforts to identify 
outdated, ineffective, or excessively burdensome regulations. We also 
continually review and take appropriate steps to eliminate or ease 
burdens, whenever possible, without compromising safety and soundness.
Rolling Regulatory Review
    Since 1987, NCUA has followed a well-delineated and deliberate 
process to continually review its regulations and seek comment from 
stakeholders, such as credit unions and trade associations. Through 
this agency-initiated process, NCUA conducts a rolling review of one-
third of its regulations each year, meaning that we review all of our 
regulations at least once every 3 years.
    This long-standing regulatory review policy helps to ensure NCUA's 
regulations:

   Impose only the minimum required burdens on credit unions, 
        their members, and the public.

   Are appropriate for the size of the credit unions regulated 
        by NCUA.

   Are issued only after full public participation in the 
        rulemaking process.

   Are clear and understandable.

    This rolling review is fully transparent. NCUA publishes on our Web 
site a list of the applicable regulations up for review each year and 
invites public comment on any or all of the regulations. \8\
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     \8\ See http://www.ncua.gov/Legal/Regs/Pages/Regulations.aspx.
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Economic Growth and Regulatory Paperwork Reduction Act
    Further, NCUA is voluntarily participating in the interagency 
review process created by the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996. \9\ EGRPRA requires the Federal Financial 
Institutions Examination Council and its member Federal banking 
agencies to review their regulations at least once every 10 years to 
identify any rules that might be outdated, ineffective, unnecessary, 
insufficient, or excessively burdensome. NCUA is not required to 
participate in this process, but the agency has elected once again to 
do so.
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     \9\ 12 U.S.C. 3311.
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    Under the EGRPRA review, each agency is issuing several categories 
of rules for public comment at regular intervals over 2 years--with an 
eye towards streamlining, modernizing, or even repealing regulations 
when appropriate. The categories are:

   Agency Programs,

   Applications and Reporting,

   Capital,

   Consumer Protection,

   Corporate Credit Unions,

   Directors,

   Officers and Employees,

   Money Laundering,

   Powers and Activities,

   Rules of Procedure, and

   Safety and Soundness.

    In May 2014, 33 NCUA regulations in the Applications and Reporting 
and Powers and Activities categories were released for review. In a 
second notice in December 2014, NCUA opened 17 rules for comment in 
three additional categories: Agency Programs, Capital, and Consumer 
Protection.
    As part of NCUA's voluntary participation in the latest EGRPRA 
review, NCUA will evaluate the burden on credit unions for those 
regulations within NCUA's control. NCUA, however, has no authority to 
provide relief from requirements imposed by other regulators.
Regulatory Modernization Initiative
    In 2011, NCUA Board Chairman Debbie Matz launched the agency's 
Regulatory Modernization Initiative. The initiative balances two 
principles:

   Safety and soundness--strengthening regulations necessary to 
        protect credit union members and the Share Insurance Fund.

   Regulatory relief--revising and removing regulations that 
        limit flexibility and growth, without jeopardizing safety and 
        soundness.

    In implementing this initiative, NCUA also has held regular in-
person and online town hall meetings to solicit feedback from 
stakeholders. These events have identified regulatory relief issues on 
which the agency has since acted.
    Ultimately, NCUA under the initiative has taken 15 actions to cut 
red tape and provide lasting benefits to credit unions. \10\ 
Specifically, NCUA during the last 3 years has worked to ease eight 
regulations, providing regulatory relief to thousands of credit unions. 
NCUA has also streamlined three processes--facilitating more than a 
thousand new low-income credit union designations, increasing blanket 
waivers for member business loans, and establishing an expedited 
process for examinations at smaller credit unions. \11\ NCUA has 
additionally issued four legal opinions, allowing more flexibility in 
credit union operations.
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     \10\ See Appendix I for a complete list of these actions.
     \11\ A low-income credit union is one in which a majority of its 
membership (50.01 percent) qualifies as low-income members. Low-income 
members are those members who earn 80 percent or less than the median 
family income for the metropolitan area where they live, or the 
national metropolitan area, whichever is greater. In nonmetropolitan 
areas, the qualification threshold is a median family income at or 
below 80 percent of the State median family income for nonmetropolitan 
areas, or, if greater, the national median family income for 
nonmetropolitan areas. Under the Federal Credit Union Act, the low-
income designation offers certain benefits and regulatory relief, such 
as an exemption from the cap on member business lending, eligibility 
for Community Development Revolving Loan Fund grants and low-interest 
loans, ability to accept deposits from nonmembers, and authorization to 
obtain supplemental capital.
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Rulemaking Process
    In developing any regulation, NCUA strives to ensure the agency's 
rulemakings are reasonable and cost-effective. NCUA additionally 
conducts an analysis to inform the agency's decisions in advance of 
regulatory actions. The analysis also ensures that regulatory choices 
are made after appropriate consideration of the likely consequences.
    NCUA's safety and soundness regulations protect credit unions and 
the members who own them, as well as strengthen the credit union system 
the agency supervises and insures. \12\ The benefit of these 
regulations is that they reduce the likelihood of credit union failures 
and, in doing so, promote stability and protect the Share Insurance 
Fund.
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     \12\ NCUA has a number of regulations that address issues other 
than safety and soundness, such as those rules related to field of 
membership, the Community Development Revolving Loan Fund, payday 
alternative loans, the organization of Federal credit unions, agency 
procedures, and examiner postemployment restrictions, among others.
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    Any loss to the Share Insurance Fund is ultimately borne by 
surviving credit unions, which may be required to pay increased 
premiums. As member-owned cooperatives, this means the members, who are 
the owners and consumers of the credit unions, may ultimately have to 
repay these costs. As the developments of the last decade have 
demonstrated, the cost of regulatory inaction can result in failures 
that impose a greater cost to credit unions and society than the cost 
of action. \13\
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     \13\ The collapse of five corporate credit unions during the 2007-
2009 financial crisis best illustrates this point. To date, credit 
unions have paid $4.8 billion in assessments and experienced $5.6 
billion in losses in the form of contributed capital. These costs 
incurred during the financial crisis reduced credit union earnings and 
assets and, as a result, during that time may have decreased interest 
paid on share deposits, increased loan rates, and constrained credit 
union services for their members.
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    Through the public comment process, the NCUA Board gains insights 
on potential costs, unintended consequences, and alternative strategies 
directly from the credit unions the agency supervises and insures, as 
well as other interested stakeholders. The Board then uses this 
information to make adjustments before issuing a final rule. A good 
example of this process in action is NCUA's October 2013 final rule on 
emergency liquidity and contingency funding.
    The proposed liquidity rule applied to all federally insured credit 
unions with more than $50 million in assets, but the public comment 
period yielded a number of important observations about the compliance 
requirements associated with establishing emergency lines of credit. 
Based on this information, the NCUA Board reconsidered the balance 
between costs and benefits specifically for credit unions between $50 
million and $250 million in assets. The final rule exempted credit 
unions with assets up to $250 million from establishing emergency lines 
of credit with the Federal Reserve's Discount Window, or NCUA's Central 
Liquidity Facility, or both. Instead, the Board only required credit 
unions of this size to develop contingency funding plans that clearly 
set out strategies for meeting emergency liquidity needs.
Examples of Scaled Regulation
    In addition to calibrating the liquidity and contingency funding 
rule, NCUA has recently scaled other regulations based on the asset 
size of the credit union. Examples of such tailored regulations include 
the agency's 2012 interest rate risk rule and the revised proposed 
risk-based capital rule issued last month. \14\
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     \14\ See Appendix II for a more complete listing of efforts to 
scale regulations, calibrate examinations, and provide assistance 
designed to address the unique circumstances of smaller credit unions.
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Interest Rate Risk Rule
    NCUA's focus on interest rate risk management has been constant and 
pronounced for more than 15 years, as evidenced by a steady issuance of 
guidance to examiners and credit unions on asset-liability management. 
Since 2010, interest rate risk management has been a heightened focus 
for NCUA, and it is a primary supervisory focus for the agency again in 
2015.
    NCUA's focus on interest rate risk exposure has increased due to 
the extraordinary low level of interest rates and the overall 
lengthening of asset durations in the credit union system. NCUA is 
mindful that a period of rapidly rising rates could be a particularly 
challenging scenario for some credit unions. To stay ahead of the curve 
and maintain stable earnings, credit unions need to have policies in 
place to survive adverse rate environments.
    These concerns led the NCUA Board to issue a final rule 3 years ago 
aimed at managing interest rate risk. Generally, the rule categorizes 
credit unions based on size, which is correlated to risk exposure, to 
determine the need to adopt a written policy on interest rate risk. 
Consistent with the Board's policy to exempt small credit unions from 
regulations when prudent, the size and exposure criteria in the 
interest rate risk rule exempt credit unions with less than $50 million 
in assets, while protecting the Share Insurance Fund by covering most 
of the system's assets.
    The NCUA Board exempted smaller credit unions because they 
customarily have very low interest rate risk profiles as they are not 
as active in residential mortgage lending or long-term investing. \15\ 
Also, smaller credit unions typically have much higher capital levels 
and hold relatively more cash and short-term investments on their 
balance sheets. \16\
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     \15\ As of September 30, 2014, real estate loans at credit unions 
with more than $50 million in assets accounted for 33.2 percent of 
total assets, compared to 15.8 percent at credit unions below this 
threshold.
     \16\ As of September 30, 2014, credit unions with $50 million or 
less in assets maintained cash and short-term investment balances at 
22.9 percent of total assets, compared to 12.5 percent for credit 
unions above this threshold.
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Revised Proposed Risk-Based Capital Rule
    After reviewing 2,056 comments on the original risk-based capital 
proposal, last month the NCUA Board issued a revised proposed rule. 
NCUA's primary goals for the revised proposed risk-based capital rule 
remain the same:

   To prevent or mitigate losses to the Share Insurance Fund by 
        having a better calibrated, meaningful, and more forward-
        looking capital requirement to ensure credit unions can 
        continue to serve members during economic downturns without 
        relying on Government intervention or assistance, and

   To modernize the risk-based capital calculations and 
        framework, in accordance with the Federal Credit Union Act's 
        directives.

    The new proposal significantly narrowed the proposed rule's scope 
by redefining ``complex'' credit unions. Under this rulemaking, the 
NCUA Board has proposed to limit the risk-based capital requirement to 
credit unions with more than $100 million in assets, rather than the 
$50 million threshold contained in the current rule and the earlier 
proposal.
    By increasing the asset threshold, the revised proposed rule 
exempts over three-quarters of credit unions. Through this targeted 
improvement, the revised proposed rule covers 1,455 credit unions that 
hold 89 percent of the system's assets. \17\ In comparison, the 
original proposal covered 2,237 credit unions representing 94 percent 
of the system's assets. \18\ The revised proposal also would result in 
the downgrade of fewer credit unions. \19\
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     \17\ Data as of December 31, 2013.
     \18\ Same as above.
     \19\ The reformulated risk-based capital proposal would downgrade 
the capital status of just 19 of 1,455 covered credit unions, based on 
data as of December 31, 2013. For more information about the revised 
risk-based based capital proposed rule, see http://www.ncua.gov/
Resources/Pages/risk-based-capital-resources.aspx.
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    As requested by stakeholders, including several members of the 
Senate Banking Committee, the revised proposed rule includes 
significant changes to the risk weights for investments, real estate 
loans, member business loans, corporate credit unions, and credit union 
service organizations. The risk weights contained in the new proposal 
are generally comparable to or more favorable than the risk weights 
applied to banks by Federal banking agencies.
    Finally, the revised proposed rule extends the implementation date 
to January 1, 2019. This date aligns with the risk-based capital rule 
implementation deadline for banks. It also allows credit unions covered 
under the rule ample time to prepare for the change.
Other Regulatory Relief Proposals Under Consideration
    Going forward, NCUA is already working to provide additional 
regulatory relief for credit unions. For example, NCUA is drafting a 
proposal to modernize our member business lending rule. The primary 
changes being considered involve removing prescriptive underwriting 
criteria and other outdated restrictions, thereby eliminating the need 
for credit unions to request waivers from NCUA to conduct business.
    In April 2014, the NCUA Board also issued a proposed rule to define 
more clearly which associational groups do and do not qualify for 
membership in a Federal credit union. The proposed rule would provide 
automatic approval for seven types of associations. To facilitate 
greater access to credit union membership, commenters suggested several 
more categories of well-established associational groups that should 
also be considered for automatic approval. The Board is now carefully 
reviewing these suggested regulatory improvements.
    NCUA is additionally working to fine-tune a proposed rule on asset 
securitization. Approved in June 2014, this proposal would allow 
qualified Federal credit unions to securitize loans they have 
originated under certain conditions. Once finalized, this rule would 
provide these Federal credit unions with greater flexibility to manage 
interest rate and liquidity risks.
    Finally, the NCUA Board in July 2014 proposed to streamline the 
agency's fixed-assets rule. This proposal would eliminate the current 
requirement to obtain a waiver from NCUA for a Federal credit union 
with assets of $1 million or more that wants to make investments in 
fixed assets exceeding 5 percent of shares and retained earnings. The 
proposed rule also would make it easier for Federal credit unions to 
acquire property to accommodate plans for future expansions.
    The NCUA Board is expected to consider a final fixed-assets rule by 
the end of the second quarter. This rule would allow Federal credit 
unions to make business decisions on upgrading technology, updating 
facilities, or making other purchases without filing waivers.
Improvements in the Examination Program
    Beyond providing targeted relief by issuing regulatory exemptions 
and adopting tailored rules, NCUA is providing regulatory relief 
through revisions to our examination process.
Small Credit Union Examination Program
    Since 2002, NCUA has followed a risk-focused exam program. This 
approach is designed to efficiently allocate agency resources to credit 
unions and areas of operations that exhibit the greatest potential risk 
exposure to the Share Insurance Fund. The program relies on examiner 
judgment to determine the areas that need review. Over time, NCUA has 
adjusted this approach by adding minimum scope requirements and 
establishing the National Supervision Policy Manual to ensure 
consistency of supervisory actions across all regions of the country.
    While the risk-based examination program has generally worked well, 
in 2011 we determined that the resources used to complete examinations 
were not in balance with the credit union system's risks. NCUA was 
spending more exam hours on the smallest credit unions rather than the 
largest credit unions that have the greatest concentration of the 
system's assets and the greatest potential risk exposure to the Share 
Insurance Fund.
    NCUA has since moved to concentrate supervision on credit union 
activities that pose the most risk. In recognition that larger, more 
complex credit unions require more attention, NCUA began streamlining 
exams for the smallest credit unions and deploying examiners where 
their work will be most effective in protecting the Share Insurance 
Fund.
    NCUA now has in place a streamlined examination program for 
financially and operationally sound credit unions with less than $30 
million in assets. Through the Small Credit Union Examination Program, 
NCUA spends less time on average in small, well-managed credit unions. 
This decreased examination burden reflects a reduced overall scope but 
is more precisely focused on the most pertinent areas of risk in small 
credit unions--lending, record keeping, and internal control functions.
    NCUA is now expanding the Small Credit Union Examination Program to 
include Federal credit unions with up to $50 million in total assets 
that received a composite CAMEL rating of 1, 2, or 3 at their last 
examination. \20\ After completing training, NCUA anticipates fully 
implementing the new procedures by the end of the first quarter of 
2015. \21\
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     \20\ The CAMEL rating system is based upon an evaluation of five 
critical elements of a credit union's operations: Capital adequacy, 
Asset quality, Management, Earnings and Liquidity. The CAMEL rating 
system is designed to take into account and reflect all significant 
financial, operational and management factors that examiners assess in 
their evaluation of a credit union's performance and risk profile. 
CAMEL ratings range from 1 to 5, with 1 being the highest rating.
     \21\ For larger, more complex credit unions, NCUA will continue to 
perform risk-focused exams.
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Broader Examination Reforms
    NCUA is further working to streamline the examination process for 
all credit unions by harnessing technology. Improvements in computers, 
software, and security are allowing NCUA to design a new Automated 
Integrated Regulatory Examination System and revise our Call Report 
system to improve off-site monitoring capabilities and thereby 
potentially reduce the overall time NCUA spends on-site inside credit 
unions conducting examinations.
    To improve consistency in the way field staff develop and use 
documents of resolution, NCUA also revised our policy and procedures in 
2013. \22\ NCUA clarified how and when documents of resolutions should 
be used. The new policy states that documents of resolution should be 
used to address issues significant enough that a credit union's failure 
to correct the problem would necessitate the examiner recommending an 
informal or formal enforcement action. In addition, examiners must cite 
the appropriate law, regulation, or authoritative NCUA policy when 
including an issue as a finding or document of resolution in the 
examination report.
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     \22\ Examiners use documents of resolution to outline plans and 
agreements reached with credit union officials to reduce areas of 
unacceptable risk. An area of unacceptable risk is one for which 
management does not have the proper structure for identifying, 
measuring, monitoring, controlling, and reporting risk.
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    The result has been clearer expectations for credit unions and NCUA 
field staff, and greater consistency in the examination process. Credit 
unions generally have supported the change. As a result of these 
changes and an improved economy, the agency has additionally 
experienced a decline in the number of documents of resolution issued.
Regulatory Relief Legislation
    Finally, the Committee has asked NCUA to identify ways to ease 
credit union regulatory burdens through legislation.
    NCUA is very appreciative of the Senate's efforts last December to 
enact into law the Credit Union Share Insurance Fund Parity Act and the 
American Savings Promotion Act. \23\ The first law allows federally 
insured credit unions to offer the same level of insurance on deposits 
as banks and thrifts for lawyers' trust accounts. The second law 
permits federally insured financial institutions to offer prize-linked 
accounts to promote saving.
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     \23\ P.L. 113-252 and P.L. 113-251, respectively.
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    Looking ahead, NCUA has several proposals to share with the 
Committee related to regulatory flexibility, field of membership 
requirements, member business lending, supplemental capital, and vendor 
authority.
Regulatory Flexibility
    Today, there is considerable diversity in scale and business models 
among financial institutions. As noted earlier, many credit unions are 
very small and operate on extremely thin margins. \24\ They are 
challenged by unregulated or less-regulated competitors, as well as 
limited economies of scale. They often provide services to their 
members out of a commitment to offer a specific product or service, 
rather than a focus on any incremental financial gain.
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     \24\ See Appendix III for a breakdown of credit union performance 
by asset class over time.
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    The Federal Credit Union Act contains a number of hard-coded 
provisions that limit NCUA's ability to revise regulations and provide 
relief to such credit unions. Examples include limitations on the 
eligibility for credit unions to obtain supplemental capital, field of 
membership restrictions, curbs on investments in asset-backed 
securities, and the 15-year loan maturity limit, among others. \25\
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     \25\ 12 U.S.C. 1751 and what follows.
---------------------------------------------------------------------------
    To that end, NCUA would encourage Congress to consider providing 
regulators like NCUA with flexibility to write rules to address such 
situations, rather than imposing rigid requirements. Such flexibility 
would allow the agency to effectively limit additional regulatory 
burdens, consistent with safety and soundness. As previously noted, 
NCUA continues to modernize existing regulations with an eye toward 
balancing requirements appropriately with the relatively lower levels 
of risk smaller credit unions pose to the credit union system. By 
allowing NCUA discretion on scale and timing to implement new laws, we 
could more flexibly mitigate the cost and administrative burdens of 
these smaller institutions while balancing consumer and prudential 
priorities.
Field of Membership Requirements
    The Federal Credit Union Act currently only permits Federal credit 
unions with multiple common-bond charters to add underserved areas to 
their fields of membership. We recommend that Congress act to modify 
the Federal Credit Union Act to give NCUA the authority to streamline 
field of membership changes and permit all Federal credit unions to 
grow their membership by adding underserved areas.
    Allowing Federal credit unions that have a community or single 
common-bond charter the opportunity to add underserved areas would open 
up access for many more unbanked and underbanked households to credit 
union membership. This legislative change could also eventually enable 
more credit unions to participate in the programs offered through the 
congressionally established Community Development Financial 
Institutions Fund, thus increasing the availability of credit and 
savings options in distressed areas. \26\
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     \26\ Located within the U.S. Department of the Treasury, the 
Community Development Financial Institutions Fund's mission is to 
expand the capacity of financial institutions to provide credit, 
capital, and financial services to underserved populations and 
communities in the United States.
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    Congress also may want to consider other field of membership 
statutory reforms. For example, Congress could allow Federal credit 
unions to serve underserved areas without also requiring those areas to 
be local communities. Congress may also want to simplify the 
``facilities'' test for determining if an area is underserved. \27\ 
NCUA stands ready to work with the Committee on these ideas, as well as 
other options for adjusting field of membership requirements.
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     \27\ The Federal Credit Union Act presently requires an area to be 
underserved by other depository institutions, based on data collected 
by NCUA or Federal banking agencies. NCUA has implemented this 
provision by requiring a facilities test to determine the relative 
availability of insured depository institutions within a certain area. 
Congress could instead allow NCUA to use alternative methods to 
evaluate whether an area is underserved to show although a financial 
institution may have a presence in a community, it is not qualitatively 
meeting the needs of an economically distressed population.
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    Outside of the legislative process, Chairman Matz recently 
established a working group to discuss existing regulatory field of 
membership constraints and options for ensuring the Federal credit 
union charter remains relevant in today's marketplace. This group is 
requesting candid feedback from stakeholders to help the agency 
identify potential regulatory or procedural changes to enable Federal 
credit unions to more readily promote access to populations with 
limited alternatives for financial services.
Member Business Lending
    NCUA reiterates the agency's support for legislation to adjust the 
member business lending cap, such as the Small Business Lending 
Enhancement Act from the 113th Congress. This bill contains appropriate 
safeguards to ensure NCUA can protect safety and soundness as qualified 
credit unions gradually increase member business lending.
    For federally insured credit unions, the Federal Credit Union Act 
limits member business loans to the lesser of 12.25 percent of assets 
or 1.75 times net worth, unless the credit union qualifies for a 
statutory exemption. \28\ For smaller credit unions with the membership 
demand and the desire to serve the business segments of their fields of 
membership, the restriction makes it very difficult or impossible to 
successfully build a sound member business lending program. As a 
result, many credit unions are unable to deliver commercial lending 
services cost effectively, which denies small businesses in their 
communities access to an affordable source of credit and working 
capital.
---------------------------------------------------------------------------
     \28\ 12 U.S.C. 1757a.
---------------------------------------------------------------------------
    These credit unions miss an opportunity to support the small 
business community and to provide a service alternative to the small 
business borrower. Small businesses are an important contributor to the 
local economy as providers of employment and as users and producers of 
goods and services. NCUA believes members that are small business 
owners should have full access to financial resources in the community, 
including credit unions, but this is often inhibited by the statutory 
cap on member business loans.
    NCUA additionally supports the Credit Union Residential Loan Parity 
Act introduced in the House during the 113th Congress. This legislation 
addresses a statutory disparity in the treatment of certain residential 
loans made by banks and credit unions.
    When a bank makes a loan to purchase a 1- to 4-unit, non-owner-
occupied residential dwelling, the loan is classified as a residential 
real estate loan. If a credit union were to make the same loan, it is 
classified as a member business loan and therefore subject to the 
member business lending cap. To provide policy parity between banks and 
credit unions for this product, this bill would exclude such loans from 
the cap. The legislation also contains appropriate safeguards to ensure 
NCUA will apply strict underwriting and servicing standards for these 
loans.
Supplemental Capital
    NCUA supports legislation to allow healthy and well-managed credit 
unions to issue supplemental capital that will count as net worth. This 
legislation would help protect the Share Insurance Fund by adding a new 
layer of capital, in addition to retained earnings, to absorb losses at 
credit unions.
    Most Federal credit unions only have one way to raise capital--
through retained earnings. Without access to other ways to raise 
capital, credit unions are exposed to risk when the economy falters. 
Financially strong and well-capitalized credit unions also may be 
discouraged from allowing healthy growth out of concern it will dilute 
their net worth ratios and trigger prompt corrective action-related 
supervisory actions.
    A credit union's inability to raise capital outside of retained 
earnings limits its ability to expand into fields of membership more 
effectively and to offer greater options to eligible consumers. 
Consequently, NCUA has previously encouraged Congress to authorize 
healthy and well-managed credit unions, as determined by the NCUA 
Board, to issue supplemental capital that will count as net worth. If 
reintroduced in the 114th Congress, NCUA would again be supportive of 
the Capital Access for Small Businesses and Jobs Act.
Vendor Authority
    Finally, and most critically, NCUA requests that the Senate Banking 
Committee consider legislation to provide the agency with examination 
and enforcement authority over third-party vendors--including credit 
union service organizations, or CUSOs for short. Obtaining this 
authority is the agency's top legislative priority. \29\
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     \29\ NCUA has two other legislative priorities. The first priority 
would enhance access to emergency liquidity for the credit union system 
by making targeted changes to the Central Liquidity Facility and 
expanding the agency's access to the U.S. Treasury. The second priority 
would permit NCUA to charge risk-based premiums for the Share Insurance 
Fund much like the Federal Deposit Insurance Corporation charges for 
the Deposit Insurance Fund. Risk-based premiums would lessen the 
funding burden on small credit unions, which generally pose less risk 
to the Share Insurance Fund.
---------------------------------------------------------------------------
    While providing important services and helping smaller credit 
unions achieve economies of scale, there are inherent risks in some 
CUSOs. Since 2008, NCUA estimates that nine CUSOs have caused more than 
$300 million in direct losses to the Share Insurance Fund and led to 
the failures of credit unions with more than $2 billion in aggregate 
assets. In one such example, one CUSO caused losses in 24 credit 
unions, some of which failed.
    CUSOs provide products and services that can significantly affect 
financial well-being, and, in the case of technology service providers, 
the security of credit unions and the members they serve. During the 
third quarter of 2014, credit unions using the services of a CUSO 
accounted for $974 billion in assets or 88 percent of system assets. 
This figure is up from 79 percent of assets at year-end 2009.
    The Government Accountability Office has noted that NCUA has a 
limited ability to assess the risks third-party vendors, including 
CUSOs, pose for credit unions and, ultimately the Share Insurance Fund, 
and to respond to any problems. NCUA may only examine vendors with 
their permission and cannot enforce any corrective actions. NCUA can 
merely make recommendations and present findings to each vendor's 
credit union clients. This lack of authority stands in contrast to 
Federal banking agencies and most State regulators.
    NCUA's inability to oversee third-party vendors also poses a 
regulatory burden for credit unions, as the agency must rely on credit 
unions to report certain information on the vendors with which they do 
business. Additionally, NCUA must work through each credit union that 
uses third-party vendors or CUSOs to obtain material about the vendor 
or CUSO. This duplication of efforts creates a burden on all credit 
unions, particularly smaller credit unions that rely more heavily on 
vendors for many products and services.
    A legislative fix would close a growing gap in NCUA's authority and 
provide some regulatory relief for credit unions. Specifically, NCUA 
would be able to work directly with key infrastructure vendors, 
including those with a cybersecurity dimension, to obtain necessary 
information to assess risks and deal with any problems at the source.
    The need for NCUA to have vendor authority is best illustrated by 
the growth of cybersecurity threats, which are a major concern for the 
agency. The complexity of online communications is growing, as is the 
number and sophistication of hackers, thieves, and terrorists seeking 
to exploit vulnerabilities in the system. Moreover, credit unions are 
increasingly using third-party vendors to provide technological 
services, including security, and there is a greater interconnectedness 
among vendors.
    Today, the top five technology service providers serve more than 
half of all federally insured credit unions representing 75 percent of 
the credit union system's assets. Thus, a failure of even one vendor 
represents potential risk to the Share Insurance Fund.
    These vendors also provide an array of products and services to 
credit unions, and credit unions, like other small and community 
institutions, rely heavily on third parties to deliver services and 
manage technology in providing services. Credit unions often use common 
third-party services designed specifically for small cooperative 
institutions. Vendors perform functions that include online banking, 
transaction processing, fund transfers, and loan underwriting. Member 
data are being stored on these vendors' servers.
    NCUA therefore needs the same authority as the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the Currency, 
and the Board of Governors of the Federal Reserve System to examine 
third-party vendors. To achieve this objective, NCUA has developed a 
legislative proposal which we believe would afford the agency the 
appropriate statutory authority. NCUA stands ready to work with the 
Committee on legislation to effectuate the necessary changes so that 
all credit unions can responsibly and effectively utilize the services 
of CUSOs and technology service providers.
    Thank you again for the invitation to testify. I am happy to answer 
any questions.








                PREPARED STATEMENT OF CANDACE A. FRANKS
    Commissioner, Arkansas State Bank Department, on behalf of the 
                  Conference of State Bank Supervisors
                           February 10, 2015
Introduction
    Good morning, Chairman Shelby, Ranking Member Brown, and 
distinguished Members of the Committee. My name is Candace Franks. I 
serve as the Bank Commissioner for the State of Arkansas and I am the 
current Chairman of the Conference of State Bank Supervisors (CSBS). It 
is my pleasure to testify before you today on behalf of CSBS.
    CSBS is the nationwide organization of banking regulators from all 
50 States, the District of Columbia, Guam, Puerto Rico, and the U.S. 
Virgin Islands. State banking regulators charter and supervise more 
than 5,000 insured depository institutions. Additionally, most State 
banking departments also regulate a variety of nonbank financial 
service providers, including mortgage lenders, mortgage servicers, and 
money services businesses. For more than a century, CSBS has given 
State supervisors a national forum to coordinate supervision of their 
regulated entities and to develop regulatory policy. CSBS also provides 
training to State banking and financial regulators and represents its 
members before Congress and the Federal financial regulatory agencies.
    In my 35 years with the Arkansas State Bank Department, it has 
become abundantly clear that community banks are vital to economic 
development, job creation, and financial stability. I know this 
Committee shares my convictions, and I appreciate your efforts to 
examine the State of our country's community banks and regulatory 
approaches to smaller institutions.
    State regulators have a long history of innovating to improve our 
regulatory and supervisory processes to better meet the needs of 
community banks, their customers, and our States. Because of our roles 
and where we fit in the broader regulatory framework, State banking 
departments are able to pilot programs at the local level based on our 
particular needs, especially in the area of bank supervision. This 
often leads to innovative practices bubbling up from individual States 
and expanding into other States. At the same time, each State has the 
authority to choose what works best in their local context.
    This regulatory flexibility is a strength of the State banking 
system. After all, community banks in Arkansas might face local issues 
that my department should address in one manner, while another State's 
banking regulator might have a different set of supervisory challenges 
to address. The Appendix to my testimony highlights a few cases in 
which State regulators have proven to be particularly adept at 
developing and implementing flexible practices to better serve our 
smaller institutions. \1\
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     \1\ Also see: Vice, C. ``Examining the State of Small Depository 
Institutions''. Committee on Banking, Housing, and Urban Affairs. 
United States Senate. September 16, 2014. Available at: http://
www.banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=6e89b188-c24a-40d5-99e9-
754868914674.
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    My testimony today will highlight the importance of community banks 
and their relationship-based business model, the shortcomings of our 
current community bank regulatory approach, and State regulators' 
vision for a new framework for community bank regulation. I will also 
discuss specific ways in which Congress and the Federal banking 
agencies can adopt right-sized policy solutions for community banks and 
highlight State regulators' current outreach initiatives with community 
banks. Finally, my testimony will discuss the States' efforts to 
produce new and enhanced research to promote a better understanding 
among policymakers about the role of community banks and the impact 
they have upon our local, State, and national economies and 
communities.
Community Banks and Relationship Lending Are Essential
    The U.S. banking system is incredibly diverse, ranging from small 
community banks to global financial conglomerates. This diversity is 
not a mistake, but rather a product of our unique dual banking system. 
The dual banking system, consisting of State and national banks 
chartered by State and Federal regulators, has encouraged financial 
innovation and institutional diversity for more than 150 years.
    Community banks are essential to the U.S. financial system and 
economy. The Federal Deposit Insurance Corporation (FDIC) classifies 
nearly 93 percent of all U.S. banks as community banks, meaning there 
are 6,107 community banks embedded in local communities throughout the 
country. \2\ The defining characteristic of a community bank is its 
relationship-based business model--a business model that relies on the 
bank's knowledge of its local market, citizens, and economic 
conditions. Community banks are able to leverage this personal, soft 
data in a way that large, model-driven banks cannot. This is why 
community banks have an outsized role in lending to America's small 
businesses, holding 46 percent of the banking industry's small loans to 
farms and businesses while only making up 14 percent of the banking 
industry's assets. \3\ A community banker knows the entrepreneur 
opening a new business around the corner. A community banker also knows 
the local real estate market and the homebuyer seeking a mortgage loan. 
These relationships allow community bankers to offer personalized 
solutions designed to meet the specific financial needs of the 
borrower.
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     \2\ ``Quarterly Banking Profile: Third Quarter 2014''. FDIC. 
Available at: https://www2.fdic.gov/qbp/2014sep/qbp.pdf.
     \3\ ``FDIC Community Banking Study''. FDIC, pp. 3-4 (December 
2012). Available at: http://www.fdic.gov/regulations/resources/cbi/
study.html.
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    Community banks engage in relationship lending in the largest U.S. 
cities and the smallest rural markets. Their role in providing credit 
and banking services is just as vital as the largest financial 
institutions. In fact, many consumers, businesses, and farms are not 
served particularly well by standardized, model-driven lending. This is 
especially the case in rural areas, where the FDIC has found that 
community banks are three times more likely to operate a banking office 
outside of a metro area than their large bank counterparts. \4\
---------------------------------------------------------------------------
     \4\ Ibid.
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    There are more than 600 counties--or one out of every five U.S. 
counties--that have no physical banking offices except those operated 
by community banks. \5\ In my home State of Arkansas, there are 96 
towns served by only one physical banking location, be it a bank's main 
office or branch. In fact, 66 of these communities have populations 
with less than 1,000 people. Community banks are the financial 
lifeblood of these small Arkansas communities. To these parts of the 
country, citizens do not differentiate between community banks, 
regional banks, or the largest banks in the world. For these small or 
rural towns, the community banking system is the banking system.
---------------------------------------------------------------------------
     \5\ Ibid.
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    Simply put, community banks are a vital part of a very diverse 
financial services marketplace and help ensure credit flows throughout 
the Nation's diverse markets. They provide credit and banking services 
in a flexible, innovative, and problem-solving manner, characteristics 
that are inherent in the community bank relationship-based business 
model.
The Shortcomings of Our Community Bank Regulatory Framework
    State regulators believe that policymakers in Congress, the Federal 
banking agencies, and State banking agencies must rethink how we all 
approach regulating and supervising community banks. The statistics are 
clear--most banks are community banks that operate in local markets:

   Ninety percent of today's 6,589 banks have less than $1 
        billion in total assets.

   The 5,908 banks with less than $1 billion in assets hold 
        less than 9 percent of the banking industry's total assets.

   The average community bank has $225 million in total assets, 
        and employs 54 people on average.

    On the other end of the industry spectrum, we find a very different 
type of bank:

   There are four U.S. banks that exceed $1 trillion in total 
        assets, and two of these have more than $2 trillion in total 
        assets.

   Four banks hold around 41 percent of the banking industry's 
        total assets.

   These four institutions each average 188,100 employees.

    The community bank and megabank business model are also radically 
different. Community banks serve local economies by tailoring their 
loans and financial services around the customers within their 
geographically limited markets. Conversely, the largest banks leverage 
economies of scale in order to offer standardized mortgage and consumer 
products across a diversity of U.S. and global markets, provide 
financial services to multinational corporations, and engage in 
extensive capital markets activity.
    These are vastly different businesses, and policymakers must 
regulate and supervise these financial institutions differently based 
on their size, complexity, overall risk profile, and risk to the 
financial system.
    Recent regulatory reform efforts have rightfully centered on 
addressing the problems posed by the largest, most systemically 
important banks. However, there is also widespread concern among 
policymakers and the banking industry that many of these new rules, in 
addition to existing regulatory requirements, pose an undue burden for 
community banks. To be sure, Congress and Federal regulators have 
undertaken measures to provide community institutions with relief. 
While these regulatory relief efforts are positive, there remains a 
need for a more comprehensive approach based on a common and consistent 
definition of community banks. A quick sampling of various asset 
thresholds for community bank regulatory relief purposes illustrates 
this point:

   Federal Reserve Small Bank Holding Company (BHC) Policy 
        Statement--Exempts BHCs with assets less than $1 billion from 
        the consolidated BHC capital guidelines and grants them 
        simplified reporting requirements.

   Consumer Financial Protection Bureau (CFPB) Jurisdiction--
        The CFPB does not have direct supervisory authority over 
        institutions that fall below $10 billion in assets.

   CFPB Small Creditor Definition--Residential mortgage loans 
        are granted Qualified Mortgage status if the bank has less than 
        $2 billion in total assets.

   CFPB Balloon Loan Qualified Mortgages--Residential mortgage 
        loans are granted Qualified Mortgage status if the bank has 
        less than $2 billion in total assets and the institution 
        originates 50 percent or less of its mortgages in rural or 
        underserved areas.

   CFPB Escrow Exemptions--Banks are exempt from escrow 
        requirements if the bank has less than $2 billion in total 
        assets and the institution originates 50 percent or less of its 
        mortgages in rural or underserved areas.

   Treatment of Trust Preferred Securities (TruPS) Under the 
        Collins Amendment--Grandfathers TruPS issued before May 19, 
        2010, into regulatory capital for BHCs with less than $15 
        billion in assets.

   Home Mortgage Disclosure Act (HMDA) Reporting Criteria--
        Banks with less than $44 million in assets are exempt from 
        reporting HMDA data as required under Regulation C.

    State regulators are concerned that an approach to regulatory 
relief that relies solely or primarily on asset thresholds falls short 
in granting small community banks real relief from regulations designed 
for their larger competitors. True regulatory right-sizing for 
community banks will require a holistic approach.
    These are vastly different businesses, and policymakers
State Regulators Support a Definitional Approach for Right-Sizing 
        Community Bank Regulation and Supervision
    Regulatory right-sizing requires a process for determining how 
safety and soundness and consumer protection requirements can better 
reflect the community banking business model. To start this process, 
policymakers and regulators need to know which institutions should be 
the focus of our regulatory right-sizing efforts. To date, a consensus 
definition has eluded policymakers. CSBS is confident that regulators 
and policymakers can more accurately define the universe of community 
banks and tailor laws, regulations, and supervision for these 
institutions.
    A definitional approach would provide the necessary foundation for 
a more appropriate regulatory framework for community banks. The 
definitional approach could be used as a basis for a broad range of 
regulatory right-sizing initiatives. Instead of crafting specific 
exemptions in law or leaning on boilerplate statements like 
``appropriate for the size and complexity of the institution,'' there 
would be a clear process for defining a community bank. With a new 
process in place to identify community banks, Congress and regulators 
could then move forward in a holistic manner to provide regulatory and 
supervisory right-sizing for these institutions.
    After all, the more than 6,100 institutions identified as community 
banks are not simply a number, but rather institutions that State 
regulators know, license, supervise, and work with on a regular and 
extensive basis. My banking department staff spends innumerable hours 
with community bankers in Arkansas, supervising them and helping them 
address today's banking challenges. This is the case for every 
regulatory agency at this table--we all know which institutions are in 
fact community banks, and we must begin to provide these institutions 
with real regulatory relief in a comprehensive, holistic manner.
    Community banks are best identified by a set of principles that can 
be applied on a case-by-case basis, not by simple line drawing. CSBS is 
committed to getting this right, and my colleagues and I would be glad 
to work with Congress to create a process for community bank 
identification that is not solely based on asset thresholds, but takes 
qualitative criteria into account. For example, State regulators 
believe characteristics such as the following can help identify 
community banks:

   Operating primarily in local markets;

   Deriving funding primarily from a local market, specifically 
        through deposits of members of the community in which it 
        operates;

   Its primary business is lending out the deposits it collects 
        to the community in which it predominately operates;

   The lending model is based on relationships and detailed 
        knowledge of the community and its members, not volume-driven 
        or automated;

   Focusing on providing high-quality and comprehensive banking 
        services; and

   Locally based corporate governance.

    Based on criteria such as these, I am confident we can identify the 
universe of community banks. This will provide the necessary framework 
for policymakers to move forward in a purposeful manner, designing 
statutes and regulations that are consistent with and foster a diverse 
economy and financial system.
Specific Areas for Community Bank Regulatory Relief
    As the effort to address regulatory burden has evolved over the 
last several years, State regulators have worked to identify specific 
recommendations that we believe would be meaningful for community 
banks. While these areas help to illustrate the inappropriate 
application of regulation and negative effect on community banks, the 
definitional approach presented earlier in this testimony would provide 
a foundation to address many of these issues. For State regulators, the 
objective is not necessarily less regulation, it is regulation and 
supervision that reflects and appreciates the community banking 
business model. The following represent specific actions that Congress 
and the Federal banking agencies can undertake to promote right-sized 
regulations for community banks.
Study Risk-Based Capital for Smaller Institutions
    The Basel Committee on Banking Supervision designed risk-based 
capital standards for internationally active banks. These standards are 
overly complex and inappropriate for community banks and their business 
model. Indeed, research presented at the Community Bank Research 
Conference has shown that a simple leverage requirement would be 
equally, if not more, effective than risk-based capital requirements 
for community banks, and would be much less burdensome. \6\
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     \6\ Moore, R., and M. Seamans. ``Capital Regulation at Community 
Banks: Lessons From 400 Failures''. Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/
Capital_Regulation_at_Community_Banks.pdf.
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    Congress should mandate the U.S. Government Accountability Office 
(GAO) investigate the value and utility of risk-based capital for 
smaller institutions. The resulting GAO study should seek to understand 
how risk weights drive behavior in the volume and type of credit a bank 
originates, as well as the burden of providing the necessary data for 
calculating capital ratios.
Mortgage Rules Should Better Reflect the Realities of Community Bank 
        Portfolio Lending
    Community banks that hold the full risk of default of a loan are 
fully incented to determine the borrower's repayment ability. Laws and 
regulations regarding mortgage lending should reflect this reality.
            Qualified Mortgage Status for Mortgages Held in Portfolio
    When a community bank makes a mortgage and holds that loan in 
portfolio, the interests of the bank and the borrower are inherently 
aligned, furthering the objective of safe and sound business practices 
that protect consumers. Yet, a national community bank survey and 
community bank town hall meetings conducted in conjunction with the 
2014 Community Banking in the 21st Century research conference point to 
a problem: while many community banks' existing mortgage businesses are 
consistent with the Ability-to-Repay (ATR) and Qualified Mortgage (QM) 
requirements, complying with the regulations is not only creating an 
outsized regulatory burden but also curtailing lending. One solution 
that would tailor the requirement to the nature of community bank 
mortgage lending is to grant the QM liability safe harbor to all 
mortgage loans held in portfolio by a community bank. Congress explored 
this issue through hearings and CSBS-supported legislation during the 
113th Congress. We encourage this Congress to pursue similar 
legislation to promote portfolio lending by community banks.
            Improving the CFPB's Rural Designation Process
    The Dodd-Frank Act's ATR requirement's restrictions on balloon 
loans and the CFPB's efforts to provide limited relief for balloon 
loans made by smaller institutions in rural areas illustrate the need 
for regulatory right-sizing and for a conscious effort to understand 
and adapt regulation to the community bank business model. When used 
responsibly, balloon loans are a useful source of credit for borrowers 
in all areas. Properly underwritten balloon loans are tailored to the 
needs and circumstances of the borrower, including situations where the 
borrower or property is otherwise ineligible for standard mortgage 
products. Because banks can restructure the terms of a balloon loan 
more easily than an adjustable rate mortgage, they are able to offer 
the borrower more options for affordable monthly payments, especially 
in a rising interest rate environment.
    As a regulator, I prefer that lenders and borrowers in my State 
have flexibility and options when selecting consumer products and 
mortgages. Since the mortgage is held in portfolio, community banks 
must work to ensure that the product is tailored to take into 
consideration all risks associated with the credit in order to avoid 
default.
    Community banks retain balloon mortgages in portfolio as a means of 
offering credit to individuals that do not fit a standard product but 
nonetheless can meet the monthly mortgage obligation. That is the logic 
behind the Dodd-Frank Act provision providing balloon loans with QM 
status if those loans are originated in rural or underserved areas by a 
small creditor. However, the CFPB's original approach to identifying 
such areas relied solely on the Department of Agriculture's Urban 
Influence Codes, producing many illogical and problematic outcomes for 
community banks.
    CSBS raised this concern shortly after the original rule was 
proposed, and we worked with Congress to develop a petition process for 
interested parties to seek rural designation. We applaud Congress for 
its focus on this issue, and we appreciate the CFPB's recent efforts to 
improve its rural and underserved designation framework by adding rural 
census blocks as defined by the U.S. Census Bureau.
    More fundamentally, portfolio lending is not a ``rural'' issue or 
an ``underserved'' issue; it is a relationship-based lending issue for 
all community banks. Eliminating the rural or underserved balloon loan 
limitations for qualified mortgages would go a long way in expanding 
the CFPB's Small Creditor QM framework to include all loans held in 
portfolio by community banks. Similarly, removing the rural or 
underserved requirements from the exception to mandatory escrow 
requirements for higher-priced loans would make right-sized regulations 
business model focused, not geographically focused.
            Tailor Appraiser Qualifications for 1-4 Family Loans Held 
                    in Portfolio
    Current appraisal regulations can curtail mortgage lending in 
markets that lack qualified appraisers or comparable sales. Congress 
should require regulations to accommodate portfolio loans for owner-
occupied 1-4 family loans, recognizing the lender's proximity to the 
market and the inherent challenge in securing an accurate appraisal by 
a qualified appraiser.
Community Bank Fair Lending Supervision Must Acknowledge the Business 
        Model and Be Applied Consistently
    State regulators take the difficulties that many underserved 
borrowers have had in obtaining access to fair credit very seriously, 
especially in regards to mortgage lending and home ownership. State 
regulators are committed to enforcing institutions' compliance with the 
letter and spirit of our fair lending laws, but we are concerned about 
regulators' overreliance on opaque statistical models that use small 
samples to judge fair lending performance and inconsistencies in 
Federal regulators' approach to fair lending supervision. Many times it 
is not the statute that creates the problem, but the interpretation, 
guidance, and the examination techniques utilized. Federal agency 
leadership must commit to a more pragmatic and transparent approach to 
fair lending supervision.
    Federal regulators should not use one-size-fits-all techniques and 
tools on community banks in fair lending examinations. A smaller 
institution makes case-by-case lending decisions based on local 
knowledge and local relationships. While statistical analysis plays a 
role in fair lending supervision, it is not the beginning and end of 
the analysis. Supervisors must utilize their flexibility to look beyond 
statistical models to take a more holistic view of the lending 
decision.
    Despite assurances of consistent approaches from ``headquarters'' 
to ``the field'' and of continued collaboration to ensure consistency, 
State regulators have observed meaningful differences in how the three 
Federal banking agencies treat community banks on fair lending issues 
and as well as a disconnect within the individual agencies. Federal 
agency leadership has the responsibility to make sure this is not the 
case, and they must be accountable for ensuring transparency and 
consistency.
    The current approach to fair lending for community banks is having 
a chilling effect on credit availability, as banks, frustrated by the 
examination process, are curtailing or exiting consumer credit 
products. From a public policy perspective, we should want community 
banks doing this business. If there were only 66 banks that had 
compliance or Community Reinvestment Act problems in 2013, \7\ and 
referrals to the Department of Justice are minimal, why are banks 
experiencing such in-depth and extensive reviews?
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     \7\ ``FDIC Annual Report 2013''. FDIC. Available at: https://
www.fdic.gov/about/strategic/report/2013annualreport/AR13section1.pdf.
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The Application Process for Community Banks Must Reflect the Business 
        Model
    Community bank applications submitted to Federal banking agencies 
for transactions such as mergers and capital investments can take an 
extended time to process because the agencies have to ensure the 
decision will not establish a precedent that could be exploited by 
larger institutions. The approval of a merger, acquisition, or 
expansion of activities should be related to the overall size and 
complexity of the transaction, and community banks should not be 
unnecessarily penalized for the potential action of larger financial 
institutions. Federal law, an agency rule, or a clause in an approval 
letter could provide the necessary protection by stating that 
application decisions for community banks do not establish a precedent 
for systemically important financial institutions.
    To further address the length of time the agencies take to review 
community bank applications, the application review and approval 
process for a defined subset of community institutions should be 
decentralized with more final decision-making authority given to FDIC 
Regional Offices and the regional Federal Reserve Banks.
Federal Regulatory Agency Leadership and State Supervisory 
        Representation
    A key to the success of the dual banking system is robust 
coordination among regulators. Meaningful coordination in regulation 
and supervision means diversity at the highest governance levels at the 
Federal regulatory agencies. The current FDIC Board does not include an 
individual with State regulatory experience as required by law. \8\ The 
Federal Deposit Insurance (FDI) Act and congressional intent clearly 
require that the FDIC Board must include an individual who has worked 
as a State official responsible for bank supervision. As the chartering 
authority for more than 76 percent of all banks in the United States, 
State regulators bring an important regulatory perspective that 
reflects the realities of local economies and credit markets. State 
regulators were pleased to see bipartisan legislation introduced last 
Congress in the Senate and the House that refined the language of the 
FDI Act to ensure that Congress' intent is met and that the FDIC Board 
includes an individual who has worked in State government as a banking 
regulator. We hope to see this proposal reintroduced this Congress.
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     \8\ 12 U.S.C. 1812(a)(1)(C).
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    We thank Congress for its efforts to require community bank or 
community bank supervisory representation on the Federal Reserve Board 
of Governors (the Board) through the Terrorism Risk Insurance Program 
Reauthorization Act of 2014. In 2013, CSBS released a white paper \9\ 
on the composition of the Board of Governors and an infographic \10\ 
that illustrates the background and experience of the members of the 
Board of Governors throughout the Board's history. The white paper 
highlights two key trends: Congress' continuing efforts to ensure the 
Board's composition is representative of the country's economic 
diversity, and the Board's expanding supervisory role. The infographic 
illustrates the growing trend of naming academics to the Board. Passage 
of Senator Vitter's provision reinforces Congress' consistent intent to 
bring together a range of perspectives on the Board, and reaffirms the 
important role of community banks in the financial marketplace.
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     \9\ ``The Composition of the Federal Reserve Board of Governors''. 
CSBS. Available at: http://www.csbs.org/news/csbswhitepapers/Documents/
Final CSBS White Paper on Federal Reserve Board Composition (Oct 23 
2013).pdf.
     \10\ Available at: http://goo.gl/eCKVrS.
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Practical Privacy Policy Notice Requirements
    State regulators firmly believe that financial institutions have an 
affirmative and continuing obligation to respect customer privacy. 
However, there are commonsense practices for communicating privacy 
policies. If a bank's privacy policy does not change, the bank should 
not be required to repeatedly inform customers of the policy. Redundant 
notifications are costly and limit the effectiveness of important 
privacy communications with customers. Accordingly, CSBS supports any 
commonsense fix to the Gramm-Leach-Bliley Act that exempts financial 
institutions from mandatory annual privacy policy mailings if the 
institution's privacy policy does not change.
State Regulators Are Engaging Community Banks
    State regulators regularly and actively engage with community banks 
to try to reduce regulatory burden and to help meet the pressing needs 
these institutions face. State regulators are currently working to 
facilitate the Economic Growth and Regulatory Paperwork Reduction Act 
process. We are providing guidance to and conducting outreach with 
community banks to help them navigate cybersecurity threats.
Economic Growth and Regulatory Paperwork Reduction Act
    The Federal Financial Institutions Examination Council (FFIEC) 
allows State regulators and our Federal counterparts to better 
coordinate bank supervision, which helps reduce the supervisory burden 
for community institutions. State regulators are involved in the FFIEC 
through the State Liaison Committee, which is currently chaired by 
Massachusetts Banking Commissioner David Cotney.
    One of the FFIEC's current major projects is the review of banking 
regulations mandated by the Economic Growth and Regulatory Paperwork 
Reduction Act (EGRPRA). \11\ State regulators, through our presence on 
the FFIEC, are committed to using this review as an opportunity to 
pinpoint regulations that may not be properly suited to the business 
model of community banks. We are excited to participate in this process 
through the FFIEC with our Federal colleagues at the FDIC, Federal 
Reserve Board, and the Office of the Comptroller of the Currency.
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     \11\ 12 U.S.C. 3311.
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    State regulators are attending and participating in the regional 
outreach events. I am particularly pleased that there will be an event 
later this year focused on rural banks. Additionally, the feedback 
received during the outreach events and through the ongoing comment 
process will provide important input to the State Liaison Committee and 
State regulators as a whole as we continue to seek ways to minimize 
duplicative regulation and to make supervision of State-chartered banks 
more efficient.
    The FFIEC and Federal regulatory agencies are contributing 
significant time and resources to ensure the EGRPRA process is a 
fruitful endeavor. The Federal regulators' commitment to this effort is 
evidenced by the attendance of Comptroller Curry, Federal Reserve 
Governor Powell, and FDIC Chairman Gruenberg at EGRPRA outreach 
meetings throughout the country. Their commitment shows that this will 
not merely be a check-the-box exercise, but a meaningful process of 
reducing regulatory burden.
    While the comment process and outreach events have just begun, they 
are already yielding meaningful areas for us to consider changes, 
including burdens associated with the quarterly call report, other 
regulatory filings, and Bank Secrecy Act compliance. The industry is 
also building a reasonable case for extending the examination cycle for 
certain institutions. We also greatly appreciate Comptroller Curry's 
comments that there are changes we can start making now before we 
complete the EGRPRA process.
Executive Leadership of Cybersecurity
    We appreciate Congress' ongoing efforts to address cybersecurity 
challenges. Cybersecurity is a national priority, and State regulators 
are fully engaging community banks on this vital issue. The persistent 
threat of cyber attacks is a widespread problem facing all industries, 
especially the financial services industry. Through regular dialogue 
with our State-chartered financial institutions, State regulators have 
learned that the issue of cybersecurity can be daunting for small bank 
executives who often have limited resources and assets to dedicate to 
cybersecurity.
    State regulators have heard from small bank executives that while 
they understand the harm cyber attacks can cause to their financial 
institutions, the abundance of information available on cybersecurity 
is overwhelming and largely technical, making many bankers uncertain as 
to what information applies to their particular institution. This 
feedback from State-chartered banks prompted State regulators, through 
CSBS, to launch the Executive Leadership of Cybersecurity (ELOC) 
initiative in 2014. \12\ The ELOC program seeks to raise awareness 
among bank CEOs that managing an institution's cybersecurity risks is 
not just a ``back office'' issue, but also an executive and board level 
issue. ELOC is part of a larger State and Federal effort to help combat 
the threat of cyber attacks in the financial services sector.
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     \12\ ``Executive Leadership of Cybersecurity''. CSBS. Available 
at: http://www.csbs.org/cybersecurity.
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    With the launch of the ELOC initiative, CSBS established a 
cybersecurity resources Web page that, for over a period of 9 weeks, 
served as a key resource for bank executives to receive comprehensive, 
nontechnical, and easy-to-read information on cybersecurity tailored to 
community bank CEOs. By the conclusion of the Web campaign, more than 
500 community bankers had signed up to receive CSBS's exclusive ``Cyber 
101: A Resource Guide for Bank Executives'', a resource guide that 
compiles recognized industry standards for cybersecurity and financial 
services industry best practices into one document. The ELOC Web 
campaign and resource guide provided community bank executives with the 
knowledge and necessary tools to better understand cyberthreats at 
their institutions, better prepare for and protect against 
cyberthreats, and to better understand their role as bank executives in 
managing cybersecurity risks at their banks.
    The high level of community banker interest in the ELOC initiative 
sent a strong message to State regulators that community banks are 
looking for more leadership and clear guidance on how to address 
cybersecurity risks at their institutions. To that end, CSBS has made 
cybersecurity one of its highest priorities. In addition to the ELOC 
Web site and the cyber resource guide, CSBS will be working with State 
banking departments to host a series of cybersecurity industry outreach 
events throughout 2015. My department will take part in hosting one of 
these events in Arkansas this year.
    These examples demonstrate the willingness of State regulators to 
seek innovative solutions and methods to provide comprehensive and 
effective supervision, while tailoring our efforts to the business 
models of banks. Banks should be in the business of supporting their 
communities. We are working to enact supervision that ensures safety 
and soundness and consumer protection, while allowing State-chartered 
banks to serve their customers most effectively and contribute to the 
success of our local communities, our States, and our Nation.
The Need for Robust Community Bank Research
    State regulators recognize that designing a right-sized regulatory 
framework requires us to truly understand the state of community 
banking, the issues community banks face, and the nuances within the 
community banking industry. Data-driven and independently developed 
research on community banks is sorely lacking when compared to the 
breadth of research dedicated to the largest financial institutions. To 
address the need for research focused on community banks, State 
regulators, through CSBS, have partnered with the Federal Reserve to 
conduct the annual Community Banking in the 21st Century research 
conference. \13\ Bringing together State and Federal regulators, 
industry experts, community bankers, and academics, the research 
conference provides valuable data, statistics, and analysis about 
community banking. Our hope is that community bank research will inform 
legislative and regulatory proposals and appropriate supervisory 
practices, and will add a new dimension to the dialogue between the 
industry and regulators.
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     \13\ ``Community Banking in the 21st Century''. Federal Reserve 
System/CSBS. Available at: https://www.stlouisfed.org/banking/
community-banking-conference-2014/.
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    The research conference represents an innovative approach to 
research. The industry informs many of the themes studied, providing 
their perspective on issues through a national survey and local town 
hall meetings. At the same time, academics explore issues raised by the 
industry in a neutral, empirical manner, while also contributing their 
own independent research topics. This approach ensures that three 
research elements--quantitative survey data, qualitative town hall 
findings, and independent academic research--all enhance and refine one 
another, year after year. The research conference's early success 
underscores the interest and need for community bank research: in 2014, 
more than 1,000 community bankers participated in the national survey, 
more than 1,300 bankers attended local town hall meetings, and more 
than 37 research papers were submitted by academics for consideration, 
a considerable increase from the number of papers submitted for the 
inaugural 2013 conference.
    I would like to share some of the findings we have gathered through 
our community bank research conferences from academic research, the 
national survey of community banks, and our town hall meetings with 
community banks. I would also like to illustrate how our holistic 
approach to research can lead to better policy outcomes for community 
banks.
Academic Research on Community Banks
    While there have only been two community bank research conferences 
thus far, we have already benefited from valuable data and research 
findings that show the importance of community banks and the centrality 
of their relationship-based lending model. For example, we now know 
that community bank failures lead to measurable economic 
underperformance in local markets. \14\ Research also shows that the 
closer a business customer is to a community bank, the more likely the 
start-up borrower is to receive a loan. \15\ Community banks also have 
a key advantage through ``social capital,'' which supports well-
informed financial transactions. This so called ``social capital'' is 
the basis for relationship lending and exists because community bankers 
live and work in the same communities that their banks do business. The 
success of the community bank is tied directly to the success of 
consumers and businesses in those communities. This is especially true 
in rural areas, where the community bank relationship-based lending 
model results in lower default rates on U.S. Small Business 
Administration loans than their urban counterparts. \16\
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     \14\ Kandrac, J. ``Bank Failure, Relationship Lending, and Local 
Economic Performance''. Available at: https://www.stlouisfed.org//
media/Files/PDFs/Banking/CBRC-2013/Kandrac_BankFailure_CBRC2013.pdf.
     \15\ Lee, Y., and S. Williams. ``Do Community Banks Play a Role in 
New Firms' Access to Credit?'' Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/
Lee_Williams.pdf.
     \16\ DeYoung, R., et al. ``Small Business Lending and Social 
Capital: Are Rural Relationship Different?'' Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/
DGNS_2012_SBA_lending.pdf.
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    We are also discovering the extent to which governmental policies 
can impact community banks. For example, research shows that more than 
80 percent of community banks have reported a greater than 5 percent 
increase in compliance costs since the passage of the Dodd-Frank Act. 
\17\ Research has also informed us that the Federal banking agencies' 
appeals processes are seldom used, inconsistent across agencies, and at 
times dysfunctional. \18\ We can also see that macroprudential 
regulation can have a meaningful impact on bank behavior, but that it 
may also cause unintended consequences. \19\ We hope that findings like 
these will inform policymakers' work designing a right-sized policy 
framework for community banks.
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     \17\ Peirce, H., I. Robinson, and T. Stratmann. ``How Are Small 
Banks Faring Under Dodd-Frank?'' Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/
SESSION3_Peirce_Robinson_Stratmann.pdf.
     \18\ Hill, J. ``When Bank Examiners Get It Wrong: Financial 
Institution Appeals of Material Supervisory Determinations''. Available 
at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/
SESSION2_AndersonHill.pdf.
     \19\ Bassett, W., and W. Marsh. ``Assessing Targeted 
Macroprudential Financial Regulation: The Case of the 2006 Commercial 
Real Estate Guidance for Banks''. Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/
SESSION2_Bassett_Marsh.pdf.
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National Survey of Community Banks
    The community banker survey we conducted as part of the research 
conference provides us with crucial information straight from the 
industry. \20\ For example, bankers have been very vocal about the 
compliance burdens associated with the new Ability-to-Repay and 
Qualified Mortgage rules. Our research finds that community banks 
continue to see residential mortgage lending as a meaningful business 
opportunity, but have a mixed view of making non-QM loans, with 26 
percent of respondents indicating that they would not originate non-QM 
loans and an additional 33 percent only originating non-QM on an 
exception basis. Assessing the new ATR and QM mortgage standards 
against existing loans, 67 percent of bankers identified a low level of 
nonconformance, suggesting the two rules generally align with existing 
bank practices.
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     \20\ The survey data is available at: https://www.stlouisfed.org/
bank-supervision/2014-community-banking-conference/2014-survey-data.
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    Community banks have long voiced concerns about increasing 
regulatory compliance costs, but these costs have been difficult to 
quantify historically. To encourage additional data and research in 
this area, the national survey sought to identify how increased 
compliance costs are realized in community banks' operations. Survey 
data show that rising compliance costs primarily take the shape of 
spending additional time on compliance, hiring additional compliance 
personnel, and increasing reliance on third-party vendors.
    The survey also showed us that less than a quarter of respondents 
plan to add new products and services in the next 3 years. We must take 
this as an important red flag. Any industry that is not in a position 
to innovate while the world around it is innovating has questionable 
long-term viability.
Community Banker Town Hall Meetings
    Community bankers in the town hall meetings were quite clear: the 
ATR and QM mortgage rules have required banks to make significant 
operational changes in order to comply. These changes have increased 
the cost of origination, the cost to the consumer, and have reduced the 
number of loans a bank can make.
    Bankers also indicated that compliance burdens and security 
concerns are significant headwinds to launching new products and 
innovation. Similarly, bankers expressed that new regulations have 
changed how they approach serving their customers, shifting their 
mentality away from creating flexible products for customers and 
towards what regulations allow them to do.
Holistic Research Can Lead to Better Policy Outcomes
    Looking at these research conference findings together should cause 
policymakers to ask serious questions about our approach to regulating 
community banks. In the context of the ATR and QM mortgage rules, if 
new requirements are generally consistent with most community banks' 
practices, should implementation of these rules result in increased 
costs and a reduction in credit availability? When we think about 
community banking products, should regulatory compliance burdens 
inhibit community banks from offering innovative products to their 
customers? These are not outcomes any policymaker should want, and we 
must be responsive to what the industry and empirical research are both 
telling us.
    More importantly, this information can lead policymakers to better 
policy outcomes, if we let it. We are seeing more clearly the role and 
value that community banks play in our economies. This should inform 
and inspire us to not establish broad asset thresholds out of political 
pressure, but to craft a meaningful regulatory framework for a 
community banking business model that provides real value and presents 
limited risk to the financial system.
    The 2015 Community Banking in the 21st Century research conference 
will be held this fall at the Federal Reserve Bank of St. Louis. We are 
pleased that Chair Yellen is planning on attending and addressing the 
conference. We have already issued a call for research papers and are 
planning our national survey and town hall events. State regulators 
have been encouraged by the overwhelming demand for this conference. We 
have been pleased at the growing response to the call for papers over 
the past 2 years and expect the response and interest in the conference 
to continue to grow.
Moving Forward
    Congress, Federal regulators, and State regulators must focus on 
establishing a new policymaking approach for community banks. We must 
do so by moving away from an inconsistent, piecemeal regulatory relief 
strategy that uses hard asset thresholds. We will need a new 
definitional framework based upon the easily identifiable attributes of 
a community bank. Only then will we be able to provide community banks 
with a regulatory framework that effectively complements and supervises 
their unique relationship-based lending model.
    Policymakers are capable of right-sizing regulations for these 
indispensable institutions, but we must act now to ensure their long-
term viability. CSBS remains prepared to work with members of Congress 
and our Federal counterparts to build a new right-sized framework for 
community banks that promotes our common goals of safety and soundness 
and consumer protection.
    Thank you again for the opportunity to testify today, and I look 
forward to answering any questions you have.
Appendix
    This Appendix highlights just a few cases in which State regulators 
have proven to be particularly adept at developing and implementing 
flexible practices to better serve our smaller institutions. Some of 
these examples are broad, historic initiatives that have significantly 
shaped the trajectory of U.S. banking regulation and supervision, such 
as the joint and coordinated bank examination framework. Other examples 
provide local snapshots highlighting the flexibility that individual 
States exercise on a regular basis. The significance that these are 
State-based solutions cannot be understated. States have the dexterity 
to experiment with supervisory processes in ways that the Federal 
Government cannot without applying sweeping changes to the entire 
industry. This is by design and a trademark of our dual banking system. 
As States develop these practices, CSBS has developed several vehicles 
for States to share techniques and best practices with one another, 
allowing for the speedy deployment of successful models nationwide and 
maximizing regulatory efficiency.
Joint Examinations of Multicharter Holding Companies
    Joint bank examinations trace their roots back more than two 
decades, when due to interstate branching restrictions, bank holding 
companies would often own independently chartered banks in different 
States. To improve regulatory efficiency, State banking agencies began 
conducting joint examinations of multicharter holding companies with 
other State regulators.
    Before the Riegle-Neal Interstate Banking and Branching Efficiency 
Act of 1994 (Riegle-Neal), States like Iowa and Indiana were already 
coordinating with other State banking regulators to conduct joint State 
examinations for multicharter holding companies. This approach 
eliminated regulatory duplication, reduced the regulatory burden on the 
individual banks and the holding company, and helped the regulators 
develop a holistic view of the entire holding company. Once Riegle-Neal 
was passed, States built upon their existing practices in order to 
coordinate with Federal supervisors, crafting examination plans across 
State and agency lines. In 1996, the States formalized cooperative and 
coordination agreements, the Nationwide Cooperative Agreement \21\ and 
Nationwide State-Federal Supervisory Agreement, \22\ to facilitate the 
supervision of multistate banks and to define the nature of State-
Federal supervision. These agreements set up a model centered on the 
examination team of the holding company or lead institution and, while 
close to 20 years old, still form the basis for State-Federal 
supervisory interaction. These agreements foster effective coordination 
and communication among regulators and have led to a supervisory model 
that reduces burden and enhances responsiveness to local needs and 
interests in an interstate banking and branching environment.
---------------------------------------------------------------------------
     \21\ Nationwide Cooperative Agreement (Revised 1997). Available 
at: http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/
nationwide_coop_agrmnt.pdf.
     \22\ Nationwide State/Federal Supervisory Agreement (1996). 
Available at: http://www.csbs.org/regulatory/Cooperative-Agreements/
Documents/nationwide_state_fed_supervisory_agrmnt.pdf.
---------------------------------------------------------------------------
    This process ultimately leads to a more consistent examination 
experience for these community institutions. Rather than the holding 
company having to handle numerous examinations throughout the year, 
regulators conduct coordinated examinations of all the holding 
company's institutions at the same time, satisfying State and Federal 
supervisory requirements in a streamlined manner.
    This is just one of many illustrations of how State regulatory 
agencies have shown great flexibility and willingness to reduce burden 
for their State-chartered institutions, all while maintaining the same 
level of effective oversight.
Arkansas Self-Examination Program
    A State-specific example of regulatory innovation can be found in 
my own department. The Arkansas Self-Examination Program serves both as 
an off-site monitoring program and an effective loan review report for 
bank management. Since its introduction in 1986, the program has 
created significant regulatory efficiencies and benefits to 
participating community banks.
    When an Arkansas bank volunteers to participate in the Self-
Examination Program, it provides the Arkansas State Bank Department 
with roughly three pages of financial information each month. We use 
this information to spot problem areas and trends that may threaten the 
bank's safety and soundness. In exchange for this data, we provide 
participating institutions with reports that reflect the bank's month-
by-month performance, a performance comparison with peer institutions, 
and early warnings that flag issues of concern. Both the information 
provided by the banks and reports generated by my staff remain 
confidential. While the program is not a replacement for examinations, 
it is an excellent supplement that benefits our agency and the bank.
    Although the program is optional, the participation rate of 
Arkansas banks typically exceeds 90 percent. By creating a simple, 
direct, and valuable tool for community banks, we can better protect 
consumers and the marketplace and ensure the continuing success of our 
State's financial institutions.
Central Point of Contact
    Many State banking departments follow the practice of assigning a 
single individual as a central point of contact to specific 
institutions to conduct ongoing off-site surveillance and monitoring. 
The off-site portion of this process promotes efficient and effective 
State supervision, allowing examiners to carry out their work away from 
the bank, freeing up bankers' time and office space. At the same time, 
central points of contact also provide banks with a single person to 
turn to when they have supervisory questions and issues, ensuring a 
more direct, faster response to their needs.
CSBS Loan Scoping Job Aid
    In addition to coordination with the industry to make supervision 
more efficient, State regulators are increasingly turning to technology 
to enhance and streamline supervision. In 2012, CSBS published a Loan 
Scoping Job Aid (job aid) for examiners that encourages State 
regulators to consider institution-specific criteria that may lead to a 
smaller, yet more effective, loan review methodology. \23\ Loan review 
is the cornerstone of safety and soundness examinations, providing 
examiners the best avenue for determining a bank's health. The CSBS job 
aid provides methods for examiners to improve their loan scope by 
reviewing a different sample of loans than would otherwise be the case. 
This more thoughtful, risk-focused, yet surgical approach will help 
regulators identify new risks and provide community banks with more 
meaningful and useful examination results.
---------------------------------------------------------------------------
     \23\ Available at: http://www.csbs.org/regulatory/resources/Pages/
JobAids.aspx.
       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                     FROM DOREEN R. EBERLEY

Q.1. According to the OCC, the Federal banking agencies have 
agreed to undertake a comprehensive review of all Call Report 
items and schedules. When will this review be completed? Who 
from your agency is in charge of this review? Will this review 
result in a formal, publicly available report?

A.1. At the December 2014 meeting of the Federal Financial 
Institutions Examination Council, Council members directed the 
Council's Task Force on Reports to undertake certain actions to 
address concerns raised by bankers about the burden of 
preparing the Consolidated Reports of Condition and Income 
(Call Report). This formal initiative is intended to identify 
potential opportunities to reduce burden associated with the 
Call Report requirements for community banks. The comprehensive 
review of all Call Report items and schedules is one of the 
actions under this initiative.
    Section 604 of the Financial Services Regulatory Relief Act 
of 2006 requires the Federal banking agencies to ``review the 
information and schedules that are required to be filed by an 
insured depository institution'' in the Call Report. The 
deadline for the next statutorily mandated review is the fourth 
quarter of 2017. The Task Force on Reports and the agencies 
have accelerated the start of this review of the existing Call 
Report items and schedules to 2015. This review is planned for 
completion by the fourth quarter 2017 statutory deadline.
    In conducting the comprehensive review, the Task Force on 
Reports and the agencies will require Call Report users at the 
Council's member entities to provide more robust justifications 
for Call Report items than in previous reviews. Users would 
need to explain how they use each data item, the frequency with 
which it is needed, and the population of institutions from 
which it is needed. Data items or schedules for which users 
provide insufficient justification for continued collection 
from some or all institutions in all four quarters would be 
candidates for elimination, less frequent collection, or the 
creation of a new or an upward revision of an existing 
reporting threshold, which can be size and/or activity-based. 
Call Report schedules would be prioritized for review over the 
next 2 years based on their perceived burden.
    Mr. Robert Storch, Chief Accountant, Division of Risk 
Management Supervision, is in charge of the review for the 
FDIC. A formal, publicly available report on the results of the 
comprehensive review of the Call Report is not currently 
planned. However, the Federal banking agencies will publicly 
propose to implement burden-reducing Call Report changes 
identified as a result of this review in joint Federal Register 
notices that will be issued for comment in accordance with the 
Paperwork Reduction Act. Burden-reducing Call Report changes 
identified as a result of this review would be proposed on a 
flow basis annually as they are identified rather than waiting 
until the completion of the entire comprehensive review.

Q.2. Kansas Fed President, Esther George, said at a 2014 
conference that the community bank ``business model is one in 
which the incentives of banks are aligned with outcomes that 
benefit their customers and the economy. When incentives are 
aligned in this way, the need for an `ability to repay rule,' 
for example, seems unnecessary.''
    Do you agree that banks that hold mortgages on portfolio 
have a vested interest to perform an analysis of a customer's 
ability to repay irrespective of whether such mortgage meets 
the requirements of a ``Qualified Mortgage''?

A.2. Analyzing a borrower's ability to repay a loan is a 
longstanding, fundamental tenet of safe and sound underwriting 
that also is in the best interest of the borrower. This is true 
in residential, commercial, consumer, and other lending. The 
Ability-to-Repay/Qualified Mortgage rule (ATR/QM) is consistent 
with this important principle. When originating mortgages, 
FDIC-supervised institutions have traditionally established 
borrowers' ability to repay loans, and we are finding that they 
are continuing to meet this standard in the normal course of 
their business.
    Meeting the requirements of the current regulation is 
consistent with how community banks do business. Indeed, we are 
hearing anecdotally that most of our institutions are meeting 
the QM standard as well. As you may know, the CFPB recently 
proposed to expand the definition of small and rural creditors. 
This will make it easier for a larger number of lenders to meet 
the more flexible standards that apply to these creditors and 
loans. Indeed, if finalized as proposed, the new rule would 
allow most FDIC-supervised institutions to originate mortgages 
consistent with QM standards nearly without limit, as long as 
those mortgages are held in portfolio.

Q.3. Do you agree that mortgages held on portfolio should be 
afforded a ``Qualified Mortgage'' status? If not, why not?

A.3. QM status involves important safeguards for lenders, 
borrowers, and the financial system, including product 
requirements that encompass basic underwriting standards and 
protections against products that proved to be particularly 
risky in the crisis, such as option ARMs, negatively amortizing 
loans, and certain balloon loans. Extending safe harbor status 
to such risky products that performed so poorly in recent 
years, even if they were held in a bank's portfolio, would 
raise significant policy concerns.
    Most community banks meet the current definition of ``small 
creditor,'' so they can take advantage of an exception that 
allows them to make balloon loans, as long as they meet the 
other product requirements and hold the loan in their 
portfolios. This exception is particularly important to small 
and rural banks that are more likely than larger banks to 
originate balloon loans, and the recent proposal to expand the 
universe of small and rural creditors could result in even more 
lenders taking advantage of the balloon loan exception.

Q.4. The OCC acknowledged in its testimony that the Volcker 
Rule contains no exemption for community bank, and that the 
regulatory burden is not justified by the risk these 
institutions present. The OCC has drafted a legislative 
proposal to exempt from the Volcker Rule banks with total 
consolidated assets of $10 billion or less.
    Do you support exempting from the Volcker Rule banks with 
total consolidated assets of $10 billion or less? Do you 
support OCC's proposal? If not, why not?
    If you believe that the $10 billion threshold for an 
exemption from the Volcker rule is not appropriate, what 
threshold or other criteria would be more appropriate to use as 
the basis for the exemption?

A.4. The idea underlying the Volcker Rule is that the Federal 
banking safety net should not, as a general rule, be used to 
support proprietary trading activities and investments in hedge 
funds and private equity. As a practical matter, community 
banks generally do not engage in proprietary trading, although 
a few community banks hold exposures to covered funds that 
would be prohibited by the Volcker Rule. Safety and soundness 
considerations would support the idea that community banks 
should remain disengaged from the practice of proprietary 
trading and that the few that do hold covered funds dispose of 
these high-risk exposures by the end of the Volcker Rule 
conformance period, including any extensions of the conformance 
period that may be granted by the Federal Reserve Board under 
their authority provided by the Volcker Rule.
    In adopting the implementing regulations for the Volcker 
Rule, the FDIC along with the other agencies recognized that 
while the requirements of the implementing statute apply to all 
banking entities regardless of size, larger banks generally 
conduct the covered activities. Accordingly, the agencies 
designed the Volcker Rule to reduce the burden placed on banks 
that do not engage in proprietary trading activities or only 
have limited exposure to fund investments.
    Under the Volcker Rule, a bank is exempt from all of the 
compliance program requirements and all of the associated 
costs, if it limits its covered activities to those that are 
excluded from the definition of proprietary trading. This 
exemption applies to the vast majority of community banks. For 
community banks that have less than $10 billion in assets but 
do engage in activities covered by the Volcker Rule, compliance 
program requirements can be met by simply including references 
to the relevant portions of the rule within the banks' existing 
policies and procedures. This should significantly reduce the 
compliance burden on smaller banks that may engage in a limited 
amount of covered activities.
    If the agencies' experience in implementing the Volcker 
Rule shows that there is undue burden placed on community banks 
by even the minimal compliance requirements under the 
implementing regulations, we believe there is authority under 
the current statute to modify the regulation as appropriate.

Q.5. The OCC also recommended increasing the asset-size 
threshold from $500 million to $750 million to determine 
whether a community bank can qualify for an examination every 
18 months.
    Do you support increasing the asset-size threshold from 
$500 million to $750 million to determine whether a community 
bank can qualify for an examination every 18 months? Do you 
support OCC's proposal? If not, why not?

A.5. In general, it is our experience that most banks within 
the $500 million to $750 million fit the community bank model--
conducting noncomplex, traditional activities within their 
community. The FDIC is open to considering an increase in the 
asset size threshold for institutions to be subject to an 18-
month examination interval.
    Currently, about 80 percent of banks (5,150) have total 
assets of $500 million or less, and most of these are well-
capitalized and well-managed and would qualify for the extended 
examination interval. Another approximately 380 banks would 
qualify if the asset-size threshold was raised to $750 million.
    However, it is important to continue a program of regular 
on-site examinations because unfortunately, community banks do 
fail. Of the 500 plus banks that failed since 2008, the median 
size was just $242 million. There is no substitute for regular, 
on-site examinations to address specific problems at individual 
institutions. Call Reports and other financial reporting can 
give a snapshot of the bank's financial position, but the only 
way to truly assess the quality of capital and assets is to 
examine them on-site. Moreover, there is no effective way for 
examiners to evaluate the quality of management and 
management's risk management practices without a regular 
program of on-site examination. No amount of capital will be 
able to save poorly managed banks with significant and 
increasing levels of risky and problem assets.

Q.6. If you believe that the $750-million threshold is not 
appropriate, what threshold or other criteria would be more 
appropriate to use as the basis for this change?

A.6. The FDIC is open to considering an increase in the 
institution asset size threshold to $750 million for an 18-
month examination interval.

Q.7. Would you support allowing any institution to petition to 
qualify for an exam every 18 months?

A.7. Section 10 of the Federal Deposit Insurance Act and Part 
337 of the FDIC Rules and Regulations specify institutions that 
are well-managed and well-capitalized and with total assets of 
less than $500 million may qualify for an examination interval 
of 18 months. While we are open to raising the thresholds, the 
FDIC prefers to maintain a threshold to ensure a consistent 
examination schedule for institutions rather than conducting 
case-by-case analyses of petitions, which could result in 
inconsistent regulatory treatment.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM DOREEN R. EBERLEY

Q.1. Your agency put out an interagency statement on your 
approach to QM loans just over a year ago. In the statement, 
you stated that financial institutions should continue to 
originate QM and non-QM loans and that you would not criticize 
loans based solely on their QM status.
    How have you made sure this message is heard by all of your 
examiners at all financial institutions, particularly small 
ones?

A.1. On December 13, 2013, the FDIC, FRB, NCUA, and the OCC 
jointly issued an interagency statement on the supervisory 
approach for residential mortgage loans. The FDIC recognizes 
that many institutions are assessing how to implement the 
Ability-to-Repay (ATR) and Qualified Mortgage (QM) Standards 
Rule issued by the CFPB and will not subject a residential 
mortgage loan to regulatory criticism based solely on the 
loan's status as QM or a non-QM.
    As the FDIC supervises many small community banks, we have 
made it a top priority to develop a deeper understanding and 
sensitivity to the challenges and opportunities facing 
community banks. In order to ensure that all FDIC examiners are 
aware of the new rules, the FDIC has (1) provided comprehensive 
training to all examiners prior to the effective date of the 
mortgage rules; (2) incorporated training on new rules into the 
curricula used in connection with our schools for new 
examiners; (3) provided regular alerts on up-to-date changes to 
all examiners through our internal distribution channels; and 
(4) held quarterly meetings with field examination supervisors 
in the regional offices.
    The FDIC provides a substantial amount of technical 
assistance to help our supervised banks and their staff keep 
current on the latest consumer compliance issues and changes, 
including those associated with the new mortgage rules, through 
a variety of channels. Examples include a Technical Assistance 
Video Program that covers a wide variety of topics (e.g., CRA, 
Flood Insurance, Fair Lending, Mortgage Rules, etc.) and 
nationwide banker teleconferences, designed to maintain open 
lines of communication with financial institution staff on 
important regulatory and emerging issues.

Q.2. What impact has the rule had on small banks making non-QM 
loans?

A.2. Preliminary observations by FDIC examiners suggest that 
the extent to which FDIC-supervised banks are originating non-
QMs varies from institution to institution; a number of FDIC-
supervised banks are originating non-QM loans while others are 
focusing their lending on QM loans. While it is still early in 
the implementation process, and we do not have concrete data 
about loan originations outside of the QM safe harbor, we have 
heard feedback from some community bankers that they have long 
been documenting borrowers' ability to repay and, as a result, 
their underwriting and lending has been relatively unchanged 
since the new ATR/QM rule became effective.
    We note recent data showing that the growth in residential 
lending among community banks since the rule became effective 
has actually outpaced the industrywide rate of growth. While 
the data does not tell us why that happened, of course, it may 
be that this reflects the sound lending practices of community 
banks such that the mortgage rules did not require significant 
changes to their business practices.

Q.3. Is the QM standard the only standard that a lender can use 
to establish a borrower's ability-to-repay their mortgage at 
the time of origination?

A.3. No, it is not. The ATR can be established outside of the 
QM framework. The ATR Rule sets forth eight basic requirements 
as to what must be considered and verified in determining 
ability to repay for non-QM loans. They include assessing 
current or reasonably expected income or assets, among other 
things. It is important to note that while these common sense 
underwriting standards must be considered generally, the rule 
does not mandate any specific target ratios or other metrics 
around these underwriting standards. Lenders are free to 
develop their own specific underwriting metrics and processes 
as long as they are consistent with the ATR/QM Rule.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM DOREEN R. EBERLEY

Q.1. The first Economic Growth and Regulatory Paperwork Act 
(EGRPRA) review submitted to Congress in 2007 states: ``Besides 
reviewing all of our existing regulations in an effort to 
eliminate unnecessary burdens, the Federal banking agencies 
worked together to minimize burdens resulting from new 
regulations and current policy statements as they were being 
adopted.'' The report submitted to Congress specifically 
discussed consumer financial regulations, anti-money laundering 
regulations, and recently adopted rules. However, included in 
the Federal Register for this 10-year review are two footnotes 
that suggest that CFPB rules, anti-money laundering rules, and 
new regulations that have recently gone into effect will not be 
included in the review.
    Rather than predetermine which rules should or should not 
be reviewed, shouldn't the agencies review all existing 
regulations and eliminate or recommend statutory changes that 
are needed to eliminate any regulatory requirements that are 
outdated, unnecessary, or unduly burdensome?

A.1. In carrying out the statutory mandate to conduct a 
comprehensive regulatory review pursuant to section 2222 of 
EGRPRA, the FDIC, OCC, and FRB (collectively, the Federal 
banking agencies or FBAs) are required to categorize their 
regulations by type and publish, at regular intervals, one or 
more categories of regulations for public comment, asking 
commenters to identify any outdated, unnecessary, or unduly 
burdensome regulatory requirements.
    However, commenters are free to comment on any regulations 
and, to the extent the FBAs receive comments on regulations 
outside of their respective jurisdictions (such as the CFPB's 
consumer protection rules or the anti-money laundering rules 
promulgated by the Department of the Treasury's Financial 
Crimes Enforcement Network), the FBAs will share those comments 
with the appropriate agencies. Generally, comments that pertain 
to regulations promulgated by agencies other than the FBAs are 
most effectively addressed by the agencies that have authority 
to amend or eliminate those rules, as appropriate.
    In accordance with EGRPRA, the FBAs initially decided to 
exclude new FBA regulations that had only recently gone into 
effect or rules that have yet to be fully implemented. \1\ In a 
March 6, 2015, letter to Chairman Shelby, however, the FBAs 
committed to expand the scope of the EGRPRA review to include 
newly issued FBA regulations. Specifically, the FBAs indicated 
their intention to solicit comment on regulations that have 
been finalized before we complete the EGRPRA review. To that 
end, the FBAs indicated that future Federal Register notices 
soliciting public comment under the EGRPRA review, including 
the next notice expected to be issued in May 2015, will no 
longer exclude new regulations.
---------------------------------------------------------------------------
     \1\ For similar reasons, during our first EGRPRA review that was 
completed in 2006, the FBAs excluded recently issued regulations 
implementing the Community Reinvestment Act (CRA) and several capital 
rulemaking initiatives. See 71 Fed. Reg. 287, 289 (Jan. 4, 2006).

Q.2. Does Congress need to update the EGRPRA statute to include 
the CFPB to ensure the review is comparable in scope to what 
---------------------------------------------------------------------------
was reviewed last time?

A.2. Section 2222 of EGRPRA requires the FFIEC and each 
appropriate FBA to conduct a review of their regulations. \2\
---------------------------------------------------------------------------
     \2\ The FFIEC currently is comprised of the Office of Comptroller 
of the Currency (OCC), the Board of Governors of the Federal Reserve 
System (FRB), the Federal Deposit Insurance Corporation (FDIC), the 
National Credit Union Administration (NCUA), the Consumer Financial 
Protection Bureau (CFPB), and the State Liaison Committee.
---------------------------------------------------------------------------
    The FDIC notes that, in a regulatory review process 
separate from the EGRPRA process, the Consumer Financial 
Protection Bureau (CFPB) is required to review its significant 
rules and to publish a report of its review no later than 5 
years after the rules take effect. See 12 U.S.C. 5512(d). The 
agencies participating in the EGRPRA review process have 
publicly committed to share any comments with the CFPB (or 
other appropriate agency) if the reviewing agencies receive a 
comment about a regulation that is within the other appropriate 
agency's jurisdiction.
    Should Congress determine that it would be beneficial to 
include the CFPB as a participating agency in future EGRPRA 
reviews, we will collaborate with the CFPB as we have with the 
other banking agencies participating in the current EGRPRA 
process.

Q.3. If not, what specific steps will be taken to ensure that 
the review will include all existing regulations, including 
consumer financial regulations, anti-money laundering rules, 
and new regulations?

A.3. As noted above, the FBAs have committed to solicit comment 
on our regulations that have been finalized before we complete 
the EGRPRA review. To that end, future Federal Register notices 
soliciting public comment under the EGRPRA review, including 
the next notice expected to be issued in May 2015, will no 
longer exclude new regulations. In addition, the FBAs will 
accept comments on our regulations at the remaining public 
outreach meetings. The agencies participating in the EGRPRA 
review process also have publicly committed to share any 
comments with the CFPB (or other appropriate agency) if the 
reviewing agencies receive a comment about a regulation that is 
within the other appropriate agency's jurisdiction.

Q.4. A main criticism of the last review was that the banking 
regulators subsequently repealed or eliminated only a few 
substantive regulations. To ensure that the current review has 
a more successful outcome, will your agencies set up a 
Government Web site that posts the feedback and list the 10 
most burdensome regulations identified?

A.4. The FBAs have established a publicly accessible, 
interagency EGRPRA Web site at http://egrpra.ffiec.gov/ similar 
to the EGRPRA Web site that was set up during the last EGRPRA 
process. On that Web site, the FBAs post all of the Federal 
Register notices seeking public comment on the regulations 
subject to EGRPRA review and, in an effort to promote 
transparency, also post every comment letter received in 
response to our requests for public comment. The EGRPRA Web 
site also includes an archive of Web casts and transcripts from 
every outreach meeting. In addition, the FDIC has its own 
publicly accessible EGRPRA Web page that provides related 
information and a link to the interagency EGRPRA Web site.
    Although the FBAs consider each comment received during the 
EGRPRA process regardless of when it is received, the FBAs have 
divided their regulations into groups and are seeking comments 
on the various groups of regulations through a series of 
Federal Register notices. Because the comment process is still 
ongoing, it would be premature to identify the most burdensome 
regulations identified by the commenters. To the extent there 
are significant issues raised by commenters, however, the FFIEC 
will identify those in the Report to Congress that is required 
to be submitted pursuant to section 2222 of EGRPRA.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                     FROM DOREEN R. EBERLEY

Q.1. Last Congress, legislation was introduced in the House 
(H.R. 2673, 113th Congress) that would provide financial 
institutions protection from the liability associated with 
Section 1411 of the Dodd-Frank Act, so long as the loan appears 
on the institution's balance sheet. I understand that the CFPB 
partially addressed this issue for some institutions through 
its Notice of Proposed Rulemaking. Please answer the following 
questions related to the proposed legislation:
    Do you believe the proposed legislation would have a 
material impact on the safety and soundness of covered 
financial institutions?

A.1. QM status involves important safeguards for lenders, 
borrowers, and the financial system, including product 
requirements that encompass basic underwriting standards and 
protections against products and features that proved to be 
particularly risky in the crisis, such as option ARMs, 
negatively amortizing loans, not underwriting to the fully 
indexed rate, and certain balloon loans. Extending safe harbor 
status to such risky products and features that performed so 
poorly in recent years, even if they were held in a bank's 
portfolio would raise significant policy concerns.
    Additionally, it is important to note that most community 
banks meet the current definition of ``small creditor,'' so 
they can take advantage of an exception that allows them to 
make balloon loans, so long as they meet the other product 
requirements and hold the loans in their portfolios. This 
exception is particularly important to small and rural banks, 
which are more likely than larger banks to originate balloon 
loans; and the recent proposal to expand the universe of small 
and rural creditors could result in even more lenders taking 
advantage of the balloon loan exception.

Q.2. If so, do you believe the current supervisory process and 
capital requirements are sufficient to address any perceived 
risks that may come from this change?

A.2. The recent crisis reflects that the financial industry is 
vulnerable to significant losses if large numbers of borrowers 
receive loans they cannot afford to repay. While the 
supervisory process and capital requirements mitigate against 
potential losses, there is no substitute for the prudent 
underwriting of loans.

Q.3. Do you have additional comments, concerns, or proposed 
changes to the legislation?

A.3. The evidence so far is that the existing balance of 
regulation and flexibility with respect to QM is working. 
Recent data showing that the growth in residential lending 
among community banks since the rule became effective has 
actually outpaced the industrywide rate of growth. While the 
data do not tell why that happened, it may be that this 
reflects the preexisting sound lending practices of community 
banks such that the mortgage rules did not require significant 
changes to their business practices. Until and unless there is 
sound data to the contrary, we believe that it would be 
premature to make any portfolio loan--regardless of actual 
underwriting or product design--presumptively one that meets an 
ability-to-repay standard.

Q.4. The Bipartisan Policy Center recently suggested creating a 
pilot program for a ``consolidated examination force'' for the 
institutions subject to supervision by all three of the Federal 
prudential regulators. Such a program would force coordination 
between the agencies and minimize the costs associated with 
examinations for banks. It appears that the Federal Financial 
Institutions Examination Council (FFIEC) could provide the 
vehicle to run the pilot program. Do you believe your agencies 
currently have the statutory authority to undertake such a 
joint pilot program through FFIEC? If so, why haven't the 
agencies taken steps to initiate such a pilot program?

A.4. Coordinated Examinations. The agencies already coordinate 
their examination programs when their supervisory oversight 
overlaps.
    Examination Activities. For FDIC-supervised institutions, 
we coordinate primarily with the relevant State authority. 
Since 1992, we have had working agreements with the Conference 
of State Bank Supervisors (CSBS) that cover such topics as the 
frequency of examinations, the types of examinations on banks 
of supervisory concern, preexamination procedures, the 
responsibilities of each agency for processing reports of 
examination and for conducting specialty examinations, the 
coordination of enforcement actions, the processing of joint 
applications, and the sharing of supervisory information.
    The FDIC has entered into agreements for conducting 
alternate examinations with the State banking regulators to 
avoid duplication of efforts. The FDIC is constantly looking 
for ways to reduce burden and streamline supervisory processes 
and has received some constructive comments on how to do this 
in the EGRPRA outreach, including raising thresholds for 
extended exam cycles and continuing to improve communication 
between bankers and examiners.
    The FDIC also coordinates with the Federal Reserve when 
there is a holding company, with the depth of coordination 
being driven by the extent of nonbank entities under the 
holding company and the size of the institution. In 1995, the 
FDIC, the Federal Reserve, and the CSBS formed a State-Federal 
working group to streamline and improve the coordination of the 
examination and supervision of State-chartered institutions 
operating in an interstate environment.
    The Shared National Credit (SNC) Program is an interagency 
initiative administered jointly by the Federal Deposit 
Insurance Corporation, the Federal Reserve Board, and the 
Office of the Comptroller of the Currency. The program was 
founded in 1977 for the purpose of ensuring consistency among 
the three Federal banking regulators in the classification of 
large syndicated credits.
    Technology service provider (TSP) examinations are 
examinations authorized by the Bank Service Company Act (12 
U.S.C. 1867(c)). Because many TSPs provide services to more 
than one class of banking charter, the Federal banking 
regulators typically conduct examinations of TSPs on a joint 
basis, with rotating responsibility for serving as agency-in-
charge. For the largest TSPs, the Federal banking regulators 
coordinate the examinations at the national level through the 
Federal Financial Institution Examination Council (FFIEC) IT 
Subcommittee. Regional TSPs are coordinated by each agency's 
regional office.
    Backup Authority. The FDIC's statutory authority gives it a 
degree of supervisory responsibility, in its role as insurer, 
for insured depository institutions (IDIs) for which it is not 
the primary Federal supervisor. The FDIC's examiners have the 
authority to make recommendations and take enforcement action 
against such IDIs. The FDIC also has staff in each of its 
regional offices that regularly review examination reports and 
other available information from the primary Federal regulators 
for those institutions. The FDIC also performs off-site 
monitoring of those institutions on an ongoing basis, 
particularly for institutions with more than $10 billion in 
assets.
    Under a 2010 agreement with the OCC and the Federal 
Reserve, the FDIC has the other regulators' ongoing consent to 
participate in examinations of large, complex IDIs, as defined 
in the document. Pursuant to this agreement, the FDIC has 
dedicated examiners participating with the OCC and the Federal 
Reserve in continuous examination activities at every IDI that 
has more than $100 billion in total assets. The FDIC 
collaborates with the OCC and the Federal Reserve in their 
development of supervisory strategies. The FDIC also 
participates in a variety of other periodic supervisory 
activities at these institutions, including capital and 
liquidity stress tests.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                     FROM DOREEN R. EBERLEY

Q.1. During the hearing, Mr. Toney Bland stated, ``But I would 
say that the OCC, as part of our normal practice, we look at on 
an ongoing basis whether rules are appropriate in terms of 
still relevant, and we will make changes, if they need to, 
without waiting for the next EGRPRA process.'' Within your 
respective agency's jurisdiction, please provide the number and 
a list of regulations you're your agency eliminated or changed 
due to irrelevance or undue burden since 2006 along with a 
brief description of each.

A.1. See Appendix A attached.

Q.2. Within your respective agency's jurisdiction, please 
provide the total number and a list of new rules and 
regulations that have been adopted since the last EGRPRA review 
along with a brief description of each.

A.2. See Appendix B attached.

Q.3. During the last EGRPRA review, Federal banking agencies 
hosted a total of 16 outreach sessions around the country. To 
date only six outreach sessions have been announced. During 
this current EGRPRA review, how many total outreach meetings 
will be held and will there be at least 16 meetings as before?

A.3. The Federal banking agencies have scheduled a total of six 
outreach meetings in centrally located cities around the Nation 
and may consider additional forms of outreach. During the last 
EGRPRA review, the Federal banking agencies conducted a total 
of 16 outreach sessions that hosted approximately 500 people in 
total. As part of the current EGRPRA review, the Federal 
banking agencies have conducted two outreach meetings to date 
that have already hosted over 200 people in total. In addition, 
the current EGRPRA outreach sessions will provide a live-stream 
and transcript of every outreach meeting via the EGRPRA Web 
site, which was not available during the previous EGRPRA 
review.

Q.4. To date only one EGRPRA outreach meeting, focusing on 
rural banking issues, has been scheduled in Kansas City. How 
many more rural banking outreach meetings do you plan on 
scheduling? Given the diversity of rural banking needs around 
the country, in what other geographic regions would those 
meetings take place?

A.4. We believe that rural banking plays a critical role in 
providing consumers and businesses across the Nation with 
essential financial services and access to credit. To ensure 
that rural bankers have an opportunity to address their 
concerns directly to regulators, the Federal banking agencies 
have scheduled an outreach meeting in Kansas City, which will 
focus specifically on rural banking issues. The FFIEC's EGRPRA 
Web site will provide a live-stream Web cast and a transcript 
of the entire meeting to ensure all interested parties from 
other geographic regions have access to the meeting. In order 
to make the live-stream more interactive, the Federal banking 
agencies are looking to make phone participation available, if 
possible, to people who may wish to participate in the rural 
outreach session via Web cast.
























        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                     FROM DOREEN R. EBERLEY

Q.1. Some are very concerned that implementing certain Basel 
III capital requirements relating to mortgage servicing could 
substantially alter business models adopted by banks in 
Nebraska and elsewhere designed to complete certain mortgage 
services on their own behalf and for other banks.
    Have you completed or otherwise reviewed analyses that show 
whether the adoption of these requirements would affect 
mortgage servicing operations?
    If so, have these analyses shown that smaller institutions 
would limit mortgage servicing operations as a result?
    What entities are likely to perform the mortgage servicing 
operations instead?

A.1. In adopting the revised Basel III regulatory capital rule, 
the FDIC took careful action to ensure the rule appropriately 
reflects the risks inherent in banking organizations' business 
models. The FDIC believes the rule's treatment of mortgage 
servicing assets (MSA) contributes to the safety and soundness 
of banking organizations by mitigating against MSA market value 
fluctuations that may adversely affect banking organizations' 
regulatory capital base. The FDIC, together with the other 
Federal banking agencies, have long limited the inclusion of MS 
As and other intangible assets in regulatory capital due to the 
high level of uncertainty regarding the ability of banking 
organizations to realize value from these assets, especially 
under adverse financial conditions. Moreover, the financial 
crisis demonstrated that the liquidity--in the form of sales, 
exchanges, or transfers--of MSAs may become unreliable at a 
time when banking organizations are especially in need of 
reliable liquidity. Furthermore, the FDIC, as receiver of 
failed insured depository institutions, has generally found 
MSAs to be unmarketable during periods of adverse economic and 
financial conditions.
    Prior to issuing the revised rule, the agencies conducted a 
pro forma impact analysis that suggested the vast majority of 
banking organizations would meet the revised risk-based capital 
requirements after incorporating the treatment for MSAs, 
without having to make any changes to their business models. 
The rule also provides a lengthy transition period to allow 
banking organizations sufficient time to modify their capital 
structure or adjust business models, as appropriate. Based on 
these considerations, the FDIC believes the rule's treatment of 
MSAs is appropriate and strengthens the quality and required 
level of capital.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
                     FROM DOREEN R. EBERLEY

Q.1. One of the most consistent things I hear from Kansas banks 
and credit unions is that they are continually being required 
to comply with new regulations that were never intended to 
affect them. I am in the process of drafting a small lending 
regulatory relief package along with Sen. Tester that seeks to 
address some of these problems by clarifying that small lenders 
are very different than the regulations' intended targets. Do 
you believe that some of the rules intended for our most 
complex financial institutions have trickled down to community 
banks? If so, what specific portions of the law under your 
individual area of jurisdiction have you identified as 
problematic for small lenders?

A.1. As a general rule, FDIC examinations adhere to statutory 
and regulatory thresholds and do not encompass a review of 
guidance or regulations that are not applicable to an 
organization. Our communications to examiners and bankers on 
supervisory matters clearly identify to whom the guidance or 
regulations applies. Additionally, we continually encourage 
bankers to contact our regional offices to discuss any 
questions they may have regarding our regulations and guidance, 
including issues of applicability.

Q.2. The burden of regulation does not necessarily come from a 
single regulation, but the aggregate burden of regulations, 
guidance, and size-inappropriate best practices. The burden 
grows when small lenders are required to comply with several 
new rules concurrently. In isolation, the impact of one 
regulation may appear small, but when added to the growing list 
of compliance requirements, the cost is skyrocketing. What is 
your agency doing to identify and reduce aggregate burden?

A.2. As the primary Federal regulator for the majority of 
smaller, community institutions, the FDIC is keenly aware of 
the challenges facing community banks and already tailors its 
supervisory approach to consider the size, complexity, and risk 
profile of the institutions it oversees. The FDIC has taken a 
number of actions to identify and reduce aggregate burden.

Examination Process

    Since 2011, FDIC letters to the industry (Financial 
        Institution Letters or FILs) include a Statement of 
        Applicability to institutions with less than $1 billion 
        in total assets. If an industry letter is targeted to 
        larger, more complex institutions, we let community 
        institutions know that upon issuance.

    The FDIC tailors certain examination and reporting 
        requirements to consider institution size. For example, 
        our programs for periodic on-site examinations of risk 
        management and compliance with the Community 
        Reinvestment Act (CRA) follow extended frequency cycles 
        for smaller, well-managed institutions. Similarly, 
        certain annual audit reporting requirements either 
        exempt smaller institutions or reduce their reporting 
        scope. For certain well-managed, well-capitalized 
        institutions with less than $500 million in total 
        assets, the FDIC is able to extend the cycle (reduce 
        the frequency) of statutorily mandated risk management 
        examinations from 12 months to 18 months.

    In 2013, in response to concerns about pre- and 
        post-examination processes, the FDIC developed a Web-
        based tool (e-Prep) that generates a preexamination 
        document and information request list tailored to a 
        specific institution's operations and business lines.

    Examination and enforcement procedures related to 
        the Home Mortgage Disclosure Act (HMDA) have been the 
        subject of significant attention by the FDIC over the 
        past several years as we have sought to refine our 
        processes to best achieve our key supervisory objective 
        of the accurate reporting of loan-level mortgage data 
        by the 60 percent of FDIC-supervised institutions 
        subject to HMDA reporting thresholds. Key changes 
        include: (1) revising sampling techniques for small 
        reporters (less than 100 reportable transactions) to 
        avoid triggering additional file review for minor 
        errors; and (2) limiting imposition of civil money 
        penalties to situations where an institution's level of 
        errors is significantly above the threshold for 
        resubmission and the violations are deemed egregious.

Application/Deposit Assessment Process

    In response to what we heard in the first round of 
        comments from the EGRPRA review, the FDIC has already 
        acted on regulatory relief suggestions where we could 
        achieve rapid change. In November, we issued two 
        Financial Institution Letters (FILs) responding to 
        suggestions we received from bankers.

      The first FIL released questions and answers 
        about the deposit insurance application process at 
        https://www.fdic.gov/news/news/financial/2014/
        fill4056.html after commenters told us a clarification 
        of the FDIC's existing policies would be helpful.

      The second FIL addressed new procedures that 
        eliminate or reduce the need to file applications by 
        institutions wishing to conduct permissible activities 
        through certain bank subsidiaries organized as limited 
        liability companies, subject to some limited 
        documentation standards. This will significantly reduce 
        application filings in the years ahead. See at https://
        www.fdic.gov/news/news/financial/2014/fil14054.html.

    In 2011, the deposit insurance assessment base was 
        changed from using adjusted domestic deposits to 
        average consolidated total assets minus average 
        tangible equity. This change resulted in larger, more 
        complex institutions paying a higher proportion of 
        total assessments. In addition, the assessment system 
        for larger institutions also results in higher 
        assessment rates for banks with high-risk asset 
        concentrations, less stable balance sheet liquidity, or 
        potentially higher loss severity in the event of 
        failure.

Technical Assistance

    The Directors' Resource Center, available through 
        the FDIC's Web site, is dedicated to providing useful 
        information and resources for directors and officers of 
        FDIC-insured institutions.

    The FDIC has issued a series of educational videos: 
        New Director Education Series, Virtual Directors' 
        College Program, Virtual Technical Assistance Program, 
        and Proposed Rulemaking Videos. These efforts are 
        ongoing, and most recently, the FDIC has issued several 
        technical assistance videos on the new mortgage rules 
        issued by the Consumer Finance Protection Bureau (CFPB) 
        pursuant to the Dodd-Frank Act. The video series is 
        designed to assist bankers in familiarizing themselves 
        with the new rules and meeting the regulatory 
        requirements. The first video, released in November 
        2014, covered the Ability to Repay and Qualified 
        Mortgage Standards Rule. The second video, released in 
        January 2015, covered the Loan Originator Compensation 
        Rule, and the third video, released in February 2015, 
        covers the Servicing Rule.

    The Regulatory Calendar, which is updated on an 
        ongoing basis, alerts stakeholders to critical 
        information, as well as comment and compliance 
        deadlines relating to changes in Federal banking laws 
        and regulations. It includes notices of proposed 
        interim and final rulemakings, guidance affecting 
        insured financial institutions, and notices for 
        training opportunities such as banker conference calls.

Other Activities

    In February 2012, the FDIC sponsored a national 
        conference to examine the unique role of community 
        banks in our Nation's economy and the challenges and 
        opportunities they face. Later in 2012, roundtable 
        discussions were conducted in each of the FDIC's six 
        supervisory regions that focused on the financial and 
        operational challenges and opportunities facing 
        community banks and the regulatory interaction process. 
        The FDIC has held subsequent roundtables each year 
        since 2012.

    In December 2012, the FDIC released its Community 
        Banking Study, a data-driven review that explored 
        issues and questions about community banks. Subsequent 
        studies in this series have addressed banking industry 
        consolidation, the effect of rural depopulation on 
        community banks, the performance and social impact of 
        minority depository institutions, and the evolution of 
        branch office structures. In 2014, the FDIC added a 
        permanent section in its flagship Quarterly Banking 
        Profile report dedicated to tracking trends in the 
        community banking sector.

    In 2009, the FDIC established its Advisory 
        Committee on Community Banking to provide advice and 
        guidance on a broad range of policy issues impacting 
        small community banks--and the local communities they 
        serve--with a focus on rural areas. The Advisory 
        Committee has provided valuable input on examination 
        policies and procedures, lending practices, deposit 
        insurance assessments, insurance coverage issues, 
        regulatory compliance matters, and obstacles to the 
        continued growth and ability to extend financial 
        services in their local markets.

Tailored Rules

    The Dodd-Frank Act reforms were designed to improve 
        the competitive balance between small and large banks 
        by restoring market discipline and oversight of large 
        systemically important institutions. For example, 
        enhanced prudential standards, resolution planning, and 
        stress testing provisions apply only to banks over $10 
        billion, and incentive compensation provisions exempt 
        institutions with less than $1 billion in total assets.

    The Volcker Rule provides that a bank with 
        consolidated assets of $10 billion or less may satisfy 
        the compliance program requirements of the Volcker Rule 
        by including in its existing compliance policies and 
        procedures appropriate references to the requirements 
        of section 13 of the BHC Act and adjustments as 
        appropriate given the activities, size, scope, and 
        complexity of the banking entity, rather than a full 
        Volcker Rule compliance program.

    The full Liquidity Coverage Ratio applies only to 
        large internationally active banking organizations at 
        the consolidated level and their IDI subsidiaries with 
        assets of at least $10 billion. Banking organizations 
        that are at least $50 billion, but which are not 
        considered internationally active, are subject to a 
        less stringent Modified Liquidity Coverage Ratio only 
        at the holding company level.

    In connection with the promulgation of the new 
        capital rules in 2013, the FDIC issued a 14-page 
        Community Bank Guide, designed to assist community 
        bankers in their understanding of the new capital 
        rules. In the final capital rule, the Federal banking 
        agencies retained the existing treatment of residential 
        mortgage exposures and Accumulated Other Comprehensive 
        Income, and also grandfathered certain Trust Preferred 
        Stock for small bank holding companies, all in response 
        to the concerns of community banks.

    Additionally, in July 2014 we issued a FIL to FDIC-
        supervised institutions describing how the FDIC will 
        consider requests from FDIC-supervised S corporation 
        banks to pay dividends to their shareholders to cover 
        taxes on their pass-through share of bank earnings when 
        those dividends are otherwise not permitted under the 
        new capital rules. We informed FDICsupervised banks 
        that we would generally approve those requests for 
        well-rated banks, barring any significant safety and 
        soundness issues. Many community banks are S 
        corporation banks, and we issued this guidance because 
        of feedback from concerned S corporation banks and 
        their shareholders.

Q.3. The EGRPRA process was brought about to identify redundant 
or excessively burdensome regulation. I think the EGRPRA 
process has the potential to be an important tool to begin 
rebuilding some semblance of trust between Federal regulators 
and the financial institutions they oversee. However, the first 
iteration revealed little agency will to utilize the process. 
Resulting reductions in regulatory burden were, in a word, 
insignificant. Various EGRPRA listening sessions have been 
conducted across the country. What is the most consistent 
message you are hearing from participants? What are you doing 
differently in the current EGRPRA review, and what actual, 
tangible relief can our smallest lenders expect?

A.3. The EGRPRA review is still ongoing, and the Federal 
banking agencies (FBAs) continue to solicit input from the 
public via Federal Register notices and outreach meetings on 
various categories of regulations. Several commenters have 
indicated it is not so much a single regulation, but the total 
impact of all financial institution regulations that concerns 
regulated entities. This message is most frequently received 
from community banks. The FBAs are keenly aware of the role 
that community banks play in providing consumers and businesses 
across the Nation with essential financial services and access 
to credit, and will carefully consider comments that provide 
insight on ways to provide regulatory relief to such 
institutions. To address these comments, the FDIC has 
implemented some burden-reduction measures during the EGRPRA 
review process, rather than at the conclusion of the process. 
For example, on November 19, 2014, the FDIC announced in 
Financial Institution Letter 54-2014 the elimination of certain 
filing requirements for State bank subsidiaries engaged in 
activities that are permissible for a national bank subsidiary 
when the State bank subsidiary is organized as a limited 
liability company.

Q.4. Major changes to mortgage disclosures and timing 
requirements are set to go into effect on August 1st of this 
year. These regulatory changes will impact every participant in 
the mortgage lending process and every consumer mortgage 
transaction. The financial institutions that are still engaged 
in residential mortgage lending are making every effort to be 
ready by the August deadline. I am concerned that, if poorly 
crafted or hastily implemented, these additional rules will 
result in fewer borrowing options in communities I represent as 
small lenders exit the business altogether. Are your respective 
examiners already being trained on how to assess these changes 
over the course of their reviews?

A.4. As you know, the need for greater harmony between the two 
major mortgage disclosure laws--RESPA and Truth in Lending--has 
long been recognized and sought. The new disclosures were 
developed through testing that involved both consumers and 
industry representatives. It does, of course, represent a 
substantial change to make the initial switch, which is why 
there was substantial lead time and industry outreach built 
into the implementation process.
    We are sensitive to the implementation challenges for 
community banks. We are in the process of preparing extensive 
training for our examiners and intend to have them trained 
before the new requirements take effect. We also are working on 
an interagency basis to develop examination procedures for 
examiners to use as they examine institutions for compliance 
with the regulation. In addition, the CFPB is doing outreach to 
the industry, and also has a number of resources available to 
help community banks with the new rule [http://
www.consumerfinance.gov/regulatory-implementation/tila-respa/]. 
The FDIC will monitor the impact of this rule on community 
banks.

Q.5. Is your agency prepared to be flexible in implementing 
these new rules while small institutions struggle to implement 
these changes effectively?

A.5. The FDIC, like other bank regulatory agencies, appreciates 
the magnitude of this initial change in disclosures. As with 
the rules that became effective in 2014, our initial 
examination will look at whether the institution has developed 
a plan and timeline for implementation, including training to 
assure that the appropriate personnel are familiar with the 
rule's requirements. FDIC examiners will consider the overall 
compliance efforts of an institution and take into account 
progress the institution has made in implementing its plan.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                     FROM DOREEN R. EBERLEY

Q.1. I remain concerned about consolidation in the industry. In 
a State like Montana we had 65 community banks before the 
crisis, and as of yesterday we had 54. That means a sixth of 
our institutions have either gone out of businesses or 
consolidated with some of the larger institutions. I'm 
concerned that if consolidation continues the whole nature of 
small institutions being able to serve, particularly rural 
communities, is going to disappear.
    Can you tell me what trends you've seen with respect to 
community bank consolidation since the crisis and how this rate 
compares to before the crisis?

A.1. Consolidation is a long-term banking industry trend that 
dates back to the mid-1980s. Two waves of bank failures have 
removed more than 2,700 banking charters from the industry 
since 1985. But community banks were a little less likely than 
non-community banks to fail during the recent crisis. Just 5 
percent of community banks operating at the end of 2004 failed 
through 2014, compared to 6 percent of non-community banks.
    Voluntary mergers and consolidations have been responsible 
for the disappearance of more than 13,000 banking charters 
since 1985. As documented in FDIC research published last year, 
the most rapid period of voluntary consolidation was between 
1993 and 2001, immediately following the relaxation of 
geographic restrictions on banking.
    In all, community banks have seen much lower rates of 
charter consolidation than non-community banks in recent years. 
Our 2014 research shows that the total rate of charter 
attrition for community banks between 2003 and 2013 (29 
percent) was less than half the rate for non-community banks 
(61 percent). Moreover, when community banks were acquired as a 
result of failure or merger, in 65 percent of the cases the 
acquirer was another community bank.
    So while consolidation appears likely to continue as a 
long-term trend for the banking industry, it does not appear to 
pose a threat to the viability of the community banking model. 
At year-end 2014, some 93 percent of FDIC-insured institutions 
met the FDIC's community bank definition, an increase from 87 
percent back in 1984.

Q.2. Why do you think we are seeing this in the industry?

A.2. The long-term trend of consolidation in banking has 
particularly affected the smallest institutions. At the end of 
1984, there were over 6,000 federally insured banks and thrifts 
with assets less than $25 million. But by the end of 2014, 
there were just 180 institutions with assets less than $25 
million. This trend speaks to the presence of economies of 
scale that operate among the smallest institutions.
    The 2012 FDIC Community Banking Study identified declining 
average cost with greater asset size for some community bank 
lending specialties, but found that most of these economies of 
scale were realized by the time an institution reached a size 
of around $100 million. This is consistent with trends that 
have been observed in the size distribution of community banks 
over time. While the median community bank held $36 million in 
assets in 1984, by 2014 the median community bank held total 
assets of $167 million.
    In all, the long-term trend of banking industry 
consolidation has resulted in fewer independent charters and 
increases over time in the median and average size of community 
banks and, especially, non-community banks. But this trend has 
not resulted in any decline over time in the percent of 
institutions that operate as community banks according to the 
FDIC's research definition.

Q.3. Are you seeing a difference in consolidation in urban 
areas vs. rural areas?

A.3. The FDIC has not specifically compared the rate of 
consolidation between institutions headquartered in urban vs. 
rural areas. However, results published in the 2012 FDIC 
Community Banking Study show that community banks are more 
likely to be headquartered in a non-metro county than non-
community banks (47 percent to 17 percent in 2011). Moreover, 
the share of community banks headquartered in metro counties 
actually increased slightly from 46 percent in 1987 to 47 
percent in 2011, while the share of total community bank 
offices located in non-metro counties increased from 34 percent 
to 38 percent. These figures do not point to a disproportionate 
decline in the community bank presence in non-metro counties 
during the long-term trend of banking industry consolidation.

Q.4. And specifically, what impact does this consolidation have 
on rural parts of the country?

A.4. As indicated above, community banks are an integral part 
of local economies in non-metro U.S. counties. In 2014, the 
FDIC published a study of the long-term trend of rural 
depopulation and the effect that it has had on the community 
banking sector. Over one half of U.S. rural counties lost 
population between 1980 and 2010, and the overall trend toward 
depopulation appears to be accelerating. Notwithstanding this 
long-term demographic trend, community banks operating in rural 
areas have performed relatively well in recent years, owing to 
a strong farm economy and relative stability in rural housing 
markets compared to those in some major metropolitan areas. 
Still, depopulation does create certain challenges for rural 
community banks, as it tends to limit their opportunities for 
growth and also can make it difficult to attract and maintain 
managerial talent.

Q.5. Community Institution Viability--What do you consider to 
be the biggest threat to small institutions livelihood and what 
are you all doing to address those risks?

A.5. Currently, the prolonged low interest rate environment and 
slow economic recovery are pressuring margins, have contributed 
to increased interest rate risk, and can limit a community 
bank's options for revenue growth. Additionally, emerging 
trends and risks will continue to challenge community banks' 
ability to plan for the future, such as the increasing volume 
and sophistication of cyberthreats and attacks.
    The FDIC has responded to the low interest rate environment 
by enhancing its review of institutions' sensitivity to 
interest rate risk and has provided a technical assistance 
video for community bankers regarding interest rate risk. 
Moreover, we have dedicated an entire issue of our Supervisory 
Insights journal to interest rate risk issues.
    Regarding cybersecurity, the FDIC issued a list of free 
resources from which community banks can obtain cyberthreat 
information and has assisted financial institutions in 
identifying and shutting down ``phishing'' Web sites that 
attempt to fraudulently obtain and use an individual's 
confidential personal or financial information. This year, the 
FDIC will add additional videos to our existing Cyber Challenge 
simulation exercise and work as a member of the FFIEC to 
implement actions to enhance the effectiveness of 
cybersecurity-related supervisory programs, guidance, and 
examiner training. The FDIC will continue to work with 
community banks to address these and other emerging threats.

Q.6. Review of Existing Regulation--Can you elaborate on how 
your review is going and share with us the major areas of 
consensus the agencies and the industry have found so far?

A.6. The EGRPRA review is still ongoing, and the Federal 
banking agencies (FBAs) continue to solicit input from the 
public via Federal Register notices and outreach meetings on 
various categories of regulations. Both the FDIC and the FFIEC 
have posted copies of relevant Federal Register notices on 
their respective Web sites. In addition, the FFIEC has posted 
video recordings and transcripts of outreach meetings, as well 
as copies of public comments received by the FBAs on their 
respective Web sites. The FDIC and the other Federal banking 
agencies participating in the EGRPRA review process have begun 
a thorough review of all comments received, whether they were 
provided by participants in EGRPRA outreach sessions or through 
the more traditional public comment process. Although the 
EGRPRA review process has not concluded, we have heard from 
commenters, especially community banks, that it is the 
cumulative effect of all regulations that concerns regulated 
entities, and not just a single regulation.

Q.7. Can you share anything about your future plans as this 
review moves forward?

A.7. The Federal banking agencies will continue to solicit 
public input to identify outdated or otherwise unnecessary 
regulations that impact insured depository institutions. To 
accomplish that, the FBAs will publish additional Federal 
Register notices seeking comment on various categories of 
rules. In addition, the FBAs plan to hold four more outreach 
meetings this year, with one meeting focusing on rural banks. 
Comments related to the EGRPRA review process will be posted 
electronically on the FFIEC's and FDIC's Web sites. Once the 
EGRPRA review is complete, the FFIEC will provide Congress with 
a joint report that summarizes any significant issues raised in 
the public comments received by the FFIEC and the participating 
EGRPRA agencies along with the relative merits of such issues. 
The report will include an analysis of whether the FBAs will be 
able to address the regulatory burdens associated with such 
issues or whether these burdens must be addressed by 
legislative action. In the meantime, the FDIC has implemented 
some burden-reduction measures during the EGRPRA review 
process, rather than at the conclusion of the process. For 
example, on November 19, 2014, the FDIC announced in Financial 
Institution Letter 54-2014 the elimination of certain filing 
requirements for State bank subsidiaries engaged in activities 
that are permissible for a national bank subsidiary when the 
State bank subsidiary is organized as a limited liability 
company.

Q.8. Appraisal--In Montana, I continue to hear concerns from 
our community banks about appraisals. On several occasions I've 
heard stories about appraisers having to travel across the 
State or come from neighboring States. And when you live in a 
State like mine, you often find multimillion ranches next to 
your average middle-class family farm. If you aren't from the 
area, things like comparables become very tricky if you aren't 
from the area. Can you share any thoughts you have about ways 
to make the appraisal process more effective and less time 
consuming? Especially for institutions that keep mortgages in 
portfolio, considering they keep the risk on their books.

A.8. The Federal financial institution regulatory agencies' 
appraisal regulations require an appraisal for a federally 
related transaction unless an exemption applies. The primary 
exemption permits using an evaluation for transactions of 
$250,000 or less with the exception of certain higher-priced 
mortgage loans. Industry data reflects the median home price 
was $199,600 as of January 2015, indicating an evaluation was 
permitted for the vast majority of residential mortgage loans. 
We recognize that individuals performing evaluations and 
appraisals in rural areas may face challenges in identifying 
and locating comparable sales. However, exempting all real 
estate loans in rural areas from valuation requirements 
(appraisal or evaluation) could raise both safety and soundness 
and consumer protection concerns.
    The Interagency Appraisal and Evaluation Guidelines provide 
a caveat for small or rural institutions or branches of large 
institutions that recognizes that it is not always practical to 
separate the collateral valuation program from the loan 
production process, as follows:

        For a small or rural institution or branch it may not 
        always be possible or practical to separate the 
        collateral valuation program from the loan production 
        process. If absolute lines of independence cannot be 
        achieved, an institution should be able to demonstrate 
        clearly that it has prudent safeguards to isolate its 
        collateral valuation program from influence or 
        interference from the loan production process. In such 
        cases, another loan officer, other officer, or director 
        of the institution may be the only person qualified to 
        analyze the real estate collateral. To ensure their 
        independence, such lending officials, officers, or 
        directors must abstain from any vote or approval 
        involving loans on which they ordered, performed, or 
        reviewed the appraisal or evaluation.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                     FROM MARYANN F. HUNTER

Q.1. According to the OCC, the Federal banking agencies have 
agreed to undertake a comprehensive review of all Call Report 
items and schedules. When will this review be completed? Who 
from your agency is in charge of this review? Will this review 
result in a formal, publicly available report?

A.1. In December of 2014, the Federal Financial Institutions 
Examination Council (FFIEC) agreed to undertake a comprehensive 
review of the Consolidated Reports of Condition and Income 
(Call Report) to identify potential opportunities to reduce 
burden associated with the Call Report requirements for 
community banks. This review is planned for completion by the 
fourth quarter of 2017. The review is being conducted under the 
direction of the Board's Chief Accountant Supervision in the 
Division of Banking Supervision and Regulation. A formal, 
comprehensive report on the results of the review is not 
currently planned for release to the public. However, the 
Federal Reserve and the other Federal banking agencies will 
publicly propose changes to the Call Report that we agree upon 
as a result of this review in joint Federal Register notices 
which will be issued for public comment in accordance with the 
Paperwork Reduction Act.

Q.2. Kansas Fed President, Esther George, said at a 2014 
conference that the community bank ``business model is one in 
which the incentives of banks are aligned with outcomes that 
benefit their customers and the economy. When incentives are 
aligned in this way, the need for an `ability to repay rule,' 
for example, seems unnecessary.''
    Do you agree that banks that hold mortgages on portfolio 
have a vested interest to perform an analysis of a customer's 
ability to repay irrespective of whether such mortgage meets 
the requirements of a ``Qualified Mortgage''?
    Do you agree that mortgages held on portfolio should be 
afforded a ``Qualified Mortgage'' status? If not, why not?

A.2. As provided in a December 2013 interagency statement, the 
Federal Reserve expects institutions to underwrite residential 
mortgage loans in a prudent fashion and address key risk areas 
in their residential mortgage lending, including loan terms, 
borrower qualification standards, loan-to-value limits, and 
documentation requirements, regardless of whether loan is a 
qualified mortgage or nonqualified mortgage.
    The Federal Reserve continues to expect institutions to 
underwrite all residential mortgage loans in a prudent fashion. 
It is not sufficient that mortgages only be held in portfolio 
in order to be designated as qualified mortgages (QM). However, 
if mortgages that are held in portfolio meet the specific QM 
requirements, as defined in Consumer Financial Protection 
Bureau regulations, including preclusion of certain features, 
such as negative amortization, interest-only payments, or 
certain balloon structures, and must meet limits on points and 
fees and other underwriting requirements, then the QM 
designation may be appropriate.

Q.3. The OCC acknowledged in its testimony that the Volcker 
Rule contains no exemption for community banks, and that the 
regulatory burden is not justified by the risk these 
institutions present. The OCC has drafted a legislative 
proposal to exempt from the Volcker Rule banks with total 
consolidated assets of $10 billion or less.
    Do you support exempting from the Volcker Rule banks with 
total consolidated assets of $10 billion or less? Do you 
support OCC's proposal? If not, why not?
    If you believe that the $10 billion threshold for an 
exemption from the Volcker rule is not appropriate, what 
threshold or other criteria would be more appropriate to use as 
the basis for the exemption?

A.3. Section 619 of the Dodd-Frank Act, which added a new 
section 13 to the Bank Holding Company Act of 1956 (BHC Act), 
also known as the Volcker Rule, generally prohibits any banking 
entity, regardless of size, from engaging in proprietary 
trading, and from acquiring or retaining an ownership interest 
in, sponsoring, or having certain relationships with a covered 
fund, subject to certain exemptions. Under the terms of the 
statute, section 13 applies to any banking entity regardless of 
its size. As a result, section 13 and the final rules apply to 
community banks.
    With respect to the Volcker Rule, the Federal Reserve, the 
Federal Deposit Insurance Corporation (FDIC), and the Office of 
the Comptroller of the Currency (OCC) (the Agencies) are 
charged with implementing that statutory provision endeavored 
to minimize the compliance burden on banking entities. As part 
of the implementing rules, the Agencies reduced the compliance 
program and reporting requirements applicable to banking 
entities with $10 billion or less in total consolidated assets. 
This was based in part on information that indicated that 
banking entities of this size generally have little or no 
involvement in prohibited proprietary trading or investment 
activities in covered funds. \1\ Exempting community banks from 
section 13 would provide relief for thousands of community 
banks that face ongoing compliance costs incurred simply to 
confirm that their activities and investments are indeed exempt 
from the statute. At the same time, an exemption at this level 
would not be likely to increase risk to the financial system. 
The vast majority of activity and investment that section 13 of 
the BHC Act is intended to address takes place at the largest 
and most complex financial firms whose failure would have a 
significant effect on the stability of the financial system. 
Moreover, even with an exemption, the Federal banking agencies 
could continue to use existing prudential authority to address 
unsafe and unsound practices at a community bank that engaged 
in imprudent investment activities.
---------------------------------------------------------------------------
     \1\ See ``The Volcker Rule: Community Bank Applicability'' (Dec. 
10, 2013), available at: http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20131210a4.pdf.

Q.4. The OCC also recommended increasing the asset-size 
threshold from $500 million to $750 million to determine 
whether a community bank can qualify for an examination every 
18 months.
    Do you support increasing the asset-size threshold from 
$500 million to $750 million to determine whether a community 
bank can qualify for an examination every 18 months? Do you 
support OCC's proposal? If not, why not?
    If you believe that the $750 million threshold is not 
appropriate, what threshold or other criteria would be more 
appropriate to use as the basis for this change?
    Would you support allowing any institution to petition to 
qualify for an exam every 18 months?

A.4. We are open to discussing with our colleagues at the other 
agencies the potential impact of revising the current asset 
threshold for the 18-month examination cycle. Any revisions to 
the threshold need to consider the trade-offs of a less 
frequent onsite examination cycle against the availability of 
data to monitor a bank's condition between onsite examinations. 
Therefore, an increase in the asset-size threshold for the 
examination cycle would have to be weighed against any 
proposals to lessen the regulatory reporting requirements for 
community banking organizations, including the reporting 
frequency and data collected, that could limit examiners' 
ability to monitor a bank offsite. Further, Federal bank 
supervisors still need the ability to conduct more frequent 
onsite examination for safety and soundness purposes.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM MARYANN F. HUNTER

Q.1. The first Economic Growth and Regulatory Paperwork Act 
(EGRPRA) review submitted to Congress in 2007 states: ``Besides 
reviewing all of our existing regulations in an effort to 
eliminate unnecessary burdens, the Federal banking agencies 
worked together to minimize burdens resulting from new 
regulations and current policy statements as they were being 
adopted.'' The report submitted to Congress specifically 
discussed consumer financial regulations, anti-money laundering 
regulations, and recently adopted rules. However, included in 
the Federal Register for this 10-year review are two footnotes 
that suggests that CFPB rules, anti-money laundering rules, and 
new regulations that have recently gone into effect will not be 
included in the review.
    Rather than predetermine which rules should or should not 
be reviewed, shouldn't the agencies review all existing 
regulations and eliminate or recommend statutory changes that 
are needed to eliminate any regulatory requirements that are 
outdated, unnecessary, or unduly burdensome?

A.1. The Federal Reserve, Office of the Comptroller of the 
Currency, and the Federal Deposit Insurance Corporation (the 
Agencies) have included in the Economic Growth and Regulatory 
Paperwork Act (EGRPRA) review all regulations over which we 
have rulemaking authority. Since the publication of the first 
request for comment, the Agencies have decided to expand the 
scope of the EGRPRA review to cover all regulations, including 
those that were enacted relatively recently. Future Federal 
Register notices and public outreach meetings will make it 
clear that the Agencies are accepting comment on all 
regulations adopted by the Agencies. The final request for 
comment, expected to be published by year end, will ask for 
comment on all regulations that have been adopted in final form 
by the time of the issuance of that request, even if the 
regulation was adopted only shortly before such request. As was 
stated in the Federal Register notice, comments that the 
Agencies receive during this EGRPRA review on rules that are 
administered by other agencies, such as the Consumer Financial 
Protection Bureau (CFPB) and the Financial Crimes Enforcement 
Network, will be provided to those agencies for their 
consideration.

Q.2. Does Congress need to update the EGRPRA statute to include 
the CFPB to ensure the review is comparable in scope to what 
was reviewed last time?

A.2. Under 12 U.S.C. 5512(d)(2), the CFPB is required to 
conduct a review of its significant rules every 5 years after 
their effective dates. Accordingly, the Federal Reserve 
believes that any consumer protection regulations transferred 
from the banking agencies to the CFPB under the Dodd-Frank Wall 
Street Reform and Consumer Protection Act will be reviewed in 
accordance with that requirement. In addition, the Agencies 
will send to the CFPB any comments received on regulations 
administered by the CFPB.

Q.3. If not, what specific steps will be taken to ensure that 
the review will include all existing regulations, including 
consumer financial regulations, anti-money laundering rules, 
and new regulations?

A.3. As noted above, we will provide other appropriate agencies 
with copies of comments received on regulations under their 
purview. The CFPB itself has its own statutorily mandated 
review process of its regulations. In addition to providing the 
appropriate regulator with any comments the Agencies receive 
during the EGRPRA review for which they are the functional 
regulator, the Agencies have expanded the scope of this EGRPRA 
review to include all new regulations that will be issued in 
final by the Agencies prior to the publication of the last 
Federal Register notice for the EGRPRA review. We believe this 
will enable the Agencies to conduct a thorough review of 
relevant regulations.

Q.4. A main criticism of the last review was that the banking 
regulators subsequently repealed or eliminated only a few 
substantive regulations. To ensure that the current review has 
a more successful outcome, will your agencies set up a 
Government Web site that posts the feedback and list the 10 
most burdensome regulations identified?

A.4. The Agencies intend to publish a report to Congress at the 
end of this EGRPRA review. As was done in the report on the 
last EGRPRA review, the Agencies will summarize the comments 
provided and our responses to them. The report will summarize 
the significant issues arising from the review and the 
Agencies' responses thereto, in order to identify the feedback 
we received and the most burdensome regulations identified.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                     FROM MARYANN F. HUNTER

Q.1. Last Congress, legislation was introduced in the House 
(H.R. 2673, 113th Congress) that would provide financial 
institutions protection from the liability associated with 
Section 1411 of the Dodd-Frank Act, so long as the loan appears 
on the institution's balance sheet. I understand that the CFPB 
partially addressed this issue for some institutions through 
its Notice of Proposed Rulemaking. Please answer the following 
questions related to the proposed legislation:
    Do you believe the proposed legislation would have a 
material impact on the safety and soundness of covered 
financial institutions?

A.1. It is not readily apparent how the draft legislation would 
work with the existing qualified mortgage requirements provided 
in the Consumer Financial Protection Bureau's (CFPB) Ability-
to-Repay rule. If the loans held on balance sheet do not meet 
the qualified mortgage criteria as set forth in the CFPB's 
rule, the legislation could create an incentive for banking 
organizations to originate mortgage loans that include features 
that were problematic during the crisis, such as negative 
amortization. Regardless of whether a mortgage loan is a 
qualified mortgage or nonqualified mortgage, the Federal 
Reserve continues to expect banking organizations to underwrite 
residential mortgage loans in a prudent fashion and address key 
risk areas in their residential mortgage lending, including 
loan terms, borrower qualification standards, loan-to-value 
limits, and documentation requirements. \1\
---------------------------------------------------------------------------
     \1\ Interagency Statement on Supervisory Approach for Qualified 
and Nonqualified Mortgage Loans (December 13, 2013).
---------------------------------------------------------------------------
    Finally, the qualified mortgage definition would not affect 
the regulatory capital treatment for residential mortgage 
exposures. Under the revised regulatory capital rules, mortgage 
exposures secured by a first-lien on an owner-occupied or 
rented one-to-four family residential property that meet 
prudential underwriting standards, are not 90 days or more past 
due or carried on nonaccrual status, and are not restructured 
or modified, receive a 50 percent risk weight. A banking 
organization must assign a 100 percent risk weight to all other 
residential mortgage exposures even if designated as a 
qualified mortgage.

Q.2. If so, do you believe the current supervisory process and 
capital requirements are sufficient to address any perceived 
risks that may come from this change?

A.2. See response to Question 1.

Q.3. Do you have additional comments, concerns, or proposed 
changes to the legislation?

A.3. We do not have any at this time.

Q.4. Mr. Bland and the OCC have suggested that banks under $10 
billion could be exempt from the Volcker rule. With respect to 
Volcker compliance, Governor Tarullo stated that he believes 
``both community banks and supervisors would benefit from not 
having to focus on formal compliance with regulation of matters 
that are unlikely to pose problems at smaller banks.'' Do you 
believe the $10 billion threshold proposed by the OCC is 
appropriate?

A.4. Section 619 of the Dodd-Frank Act, which added a new 
section 13 to the Bank Holding Company Act of 1956 (BHC Act), 
also known as the Volcker Rule, generally prohibits any banking 
entity, regardless of size, from engaging in proprietary 
trading, and from acquiring or retaining an ownership interest 
in, sponsoring, or having certain relationships with a covered 
fund, subject to certain exemptions. Under the terms of the 
statute, section 13 applies to any banking entity regardless of 
its size. As a result, section 13 and the final rules apply to 
community banks.
    With respect to the Volcker Rule, the Federal Reserve, the 
Federal Deposit Insurance Corporation (FDIC), and the Office of 
the Comptroller of the Currency (OCC) (the Agencies) are 
charged with implementing that statutory provision endeavored 
to minimize the compliance burden on banking entities. As part 
of the implementing rules, the Agencies reduced the compliance 
program and reporting requirements applicable to banking 
entities with $10 billion or less in total consolidated assets. 
This was based in part on information that indicated that 
banking entities of this size generally have little or no 
involvement in prohibited proprietary trading or investment 
activities in covered funds. \2\ Exempting community banks from 
section 13 would provide relief for thousands of community 
banks that face ongoing compliance costs incurred simply to 
confirm that their activities and investments are indeed exempt 
from the statute. At the same time, an exemption at this level 
would not be likely to increase risk to the financial system. 
The vast majority of activity and investment that section 13 of 
the BHC Act is intended to address takes place at the largest 
and most complex financial firms whose failure would have a 
significant effect on the stability of the financial system. 
Moreover, even with an exemption, the Federal banking agencies 
could continue to use existing prudential authority to address 
unsafe and unsound practices at a community bank that engaged 
in imprudent investment activities.
---------------------------------------------------------------------------
     \2\ See The Volcker Rule: Community Bank Applicability (Dec. 10, 
2013), available at: http://www.federalreserve.gov/newsevents/press/
bcreg/bcreg20131210a4.pdf.

Q.5. The Bipartisan Policy Center recently suggested creating a 
pilot program for a ``consolidated examination force'' for the 
institutions subject to supervision by all three of the Federal 
prudential regulators. Such a program would force coordination 
between the agencies and minimize the costs associated with 
examinations for banks. It appears that the Federal Financial 
Institutions Examination Council (FFIEC) could provide the 
vehicle to run the pilot program. Do you believe your agencies 
currently have the statutory authority to undertake such a 
joint pilot program through FFIEC? If so, why haven't the 
---------------------------------------------------------------------------
agencies taken steps to initiate such a pilot program?

A.5. The three Federal banking agencies regularly coordinate 
joint examination work in an effort to minimize the burden on 
an institution. Further, to avoid duplication of efforts and to 
share expertise, the staffs of the agencies regularly meet to 
discuss supervisory activities and findings and rely on long 
standing interagency agreements to conduct joint examinations 
and to share supervisory information. The decision to conduct a 
joint examination considers each agency's supervisory authority 
over a particular institution and the need to share information 
to support our various supervisory mandates. For instance, on 
the resolution of a problem bank or thrift, the FDIC, as the 
insurer of depository institutions, has backup examination 
authority and coordinates with the primary Federal bank 
regulator (either the Federal Reserve for state member banks 
and the OCC for national banks and Federal thrifts) and as 
applicable, the state banking department, on participation on 
an examination. As the supervisor for holding companies, the 
Federal Reserve coordinates its examination activities with OCC 
and FDIC when the holding company and the bank or thrift 
subsidiary share risk functions.
    Since 1977, the Agencies have coordinated the Shared 
National Credits (SNC) review program that is designed to 
provide a uniform review and credit quality assessment of many 
of the largest and most complex credits in the banking system. 
The SNC review program provides an efficient and consistent 
review of any loan or formal loan commitment extended to 
borrowers by a federally supervised institution, its 
subsidiaries, and affiliates that aggregates $20 million or 
more and is shared by three or more unaffiliated supervised 
institutions. In 2014, the agencies reviewed $975 billion of 
the $3.39 trillion credit commitments in the SNC portfolio. \3\
---------------------------------------------------------------------------
     \3\ Refer to the interagency press release announcing the 2014 SNC 
review results on the Federal Reserve's public Web site at: 
www.federalreserve.gov/newsevents/press/bcreg/20141107a.htm.
---------------------------------------------------------------------------
    The Federal Reserve and the FDIC also coordinate the 
examination of State banks with the responsible State banking 
department. To foster consistency in the examination of State 
community banks, the Federal Reserve, the FDIC, and the FFIEC 
State Liaison Committee have adopted common examination 
procedures (referred to as the Examination Documentation (ED) 
Modules) and have an ongoing, interagency process for the 
review and updating of the ED modules to reflect current 
regulatory and policy mandates.
    In addition, the agencies use the FFIEC to foster common 
examination approaches among the agencies. Through the work of 
the various FFIEC task forces and subcommittees, staffs of the 
agencies come together to discuss the implementation of 
supervisory guidance and to develop common reports and 
examination tools. For example, the FFIEC member agencies are 
coordinating various work streams on cybersecurity to improve 
collaboration with law enforcement and intelligence agencies 
and to communicate the importance of cybersecurity awareness 
and best practices among the financial industry and regulators.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                     FROM MARYANN F. HUNTER

Q.1. During the hearing, Mr. Toney Bland, ``But I would say 
that the OCC, as part of our normal practice, we look at on an 
ongoing basis whether rules are appropriate in terms of still 
relevant, and we will make changes, if they need to, without 
waiting for the next EGRPRA process.'' Within your respective 
agency's jurisdiction, please provide the number and a list of 
regulations your agency eliminated or changed due to 
irrelevance or undue burden since 2006 along with a brief 
description of each.

A.1. Per your request, attached please find a list of 
regulations the Federal Reserve has eliminated or changed since 
the last Economic Growth and Regulatory Paperwork Reduction Act 
review (due to irrelevance or undue burden) along with a brief 
description of each (Appendix to Question 1).




Q.2. Within your respective agency's jurisdiction, please 
provide the total number and a list of new rules and 
regulations that have been adopted since the last EGRPRA review 
along with a brief description of each.

A.2. Per your request, attached please find a list of new 
regulations the Federal Reserve has promulgated since January 
1, 2007, along with a brief description of each (Appendix to 
Question 2).


























Q.3. During the last EGRPRA review, Federal banking agencies 
hosted a total of 16 outreach sessions around the country. To 
date only six outreach sessions have been announced. During 
this current EGRPRA review, how many total outreach meetings 
will be held and will there be at least 16 meetings as before?

A.3. At this time, the Federal Reserve, the Office of the 
Comptroller of the Currency, and the Federal Deposit Insurance 
Corporation (the Agencies) have held or scheduled six outreach 
meetings. All meetings have been and will continue to be 
streamed live for public viewing over the Internet. The 
reaction from the public to being able to watch the meetings in 
real time has been very positive. It has also allowed the 
outreach meetings to reach a larger audience than was available 
during the last Economic Growth and Regulatory Paperwork 
Reduction Act review. In addition, the Agencies have scheduled 
one meeting that will focus specifically on the interests and 
concerns of rural depository institutions. This meeting, to be 
held at the Federal Reserve Bank of Kansas City, on Tuesday, 
August 4, will again be streamed live to allow viewing by 
anyone who does not participate in person. Online participants 
may provide oral comments during the meeting, subject to time 
constraints. In addition, online participants may elect to use 
the text chat feature to provide comments that will be saved as 
part of the record of the meeting. A toll free telephone number 
will also be provided for interested persons that wish to 
listen to the meeting but do not have computer access. The 
Agencies will monitor the need for additional meetings in 
response to industry interest.

Q.4. To date only one EGRPRA outreach meeting, focusing on 
rural banking issues, has been scheduled in Kansas City. How 
many more rural banking outreach meetings do you plan on 
scheduling? Given the diversity of rural banking needs around 
the country, in what other geographic regions would those 
meetings take place?

A.4. At this time, the Agencies are awaiting feedback from the 
industry and the results of the participation at the Kansas 
City outreach meeting in order to gauge the need for additional 
rural outreach meetings. Given the livestreaming of the meeting 
and the ability for persons from around the country to 
participate, we anticipate that there will be opportunities for 
all issues of interest to be aired or made part of the record. 
We remain open to additional meetings should industry response 
indicate there is a need for additional outreach meetings 
focusing on rural issues.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                     FROM MARYANN F. HUNTER

Q.1. Some are very concerned that implementing certain Basel 
III capital requirements relating to mortgage servicing could 
substantially alter business models adopted by banks in 
Nebraska and elsewhere designed to complete certain mortgage 
services on their own behalf and for other banks.
    Have you completed or otherwise reviewed analyses that show 
whether the adoption of these requirements would affect 
mortgage servicing operations?

A.1. The Federal Reserve Board, the Office ofthe Comptroller of 
the Currency, and the Federal Deposit Insurance Corporation 
(Agencies) took careful action to ensure the revised regulatory 
capital rule appropriately reflects the risks inherent in 
banking organizations' business models. Prior to issuing the 
rule, the Agencies conducted a pro forma impact analysis that 
showed that the vast majority of community and midsized banking 
organizations (those with less than $10 billion in total 
assets) would meet the rule's minimum common equity tier 1 
capital requirement of 4.5 percent plus the 2.5 percent capital 
conservation buffer on a fully phased-in basis (including the 
treatment of Mortgage Servicing Assets (MSAs)). The Agencies 
have long limited the inclusion of MSAs and other intangible 
assets in regulatory capital and believe the rule's treatment 
of MSAs contributes to the safety and soundness of banking 
organizations by mitigating against MSA market value 
fluctuations that may adversely affect banking organizations' 
regulatory capital base during periods of economic stress.

Q.2. If so, have these analyses shown that smaller institutions 
would limit mortgage servicing operations as a result?

A.2. Please see response for Question 1.

Q.3. What entities are likely to perform the mortgage servicing 
operations instead?

A.3. It is important to note that the revised regulatory 
capital rule does not prohibit mortgage servicing activity. The 
decision to engage in such activity is, in part, a function of 
a firm's preferred business model.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                     FROM MARYANN F. HUNTER

Q.1. Has the Federal Reserve ever studied, or does it intend to 
study, the appropriate capital requirements for mortgage 
servicing assets held by nonsystemic banking institutions, 
separate from a generalized study of the impacts of the Basel 
III capital regime?

A.1. The Federal Reserve, the Office of the Comptroller of the 
Currency, and the Federal Deposit Insurance Corporation (the 
Agencies) took careful action to ensure the revised regulatory 
capital rule appropriately reflects the risks inherent in 
banking organizations' business models. Prior to issuing the 
rule, the Agencies conducted a pro forma impact analysis that 
showed that the vast majority of community and midsized banking 
organizations (those with less than $10 billion in total 
assets) would meet the rule's minimum common equity tier 1 
capital requirement of 4\1/2\ percent plus the 2\1/2\ percent 
capital conservation buffer on a fully phased-in basis 
(including the treatment of mortgage service assets). The 
Agencies have long limited the inclusion of mortgage service 
assets (MSAs) and other intangible assets in regulatory capital 
and believe the rule's treatment of MSAs contributes to the 
safety and soundness of banking organizations by mitigating 
against MSA market value fluctuations that may adversely affect 
banking organizations' regulatory capital base during periods 
of economic stress.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
                     FROM MARYANN F. HUNTER

Q.1. One of the most consistent things I hear from Kansas banks 
and credit unions is that they are continually being required 
to comply with new regulations that were never intended to 
affect them. I am in the process of drafting a small lending 
regulatory relief package along with Sen. Tester that seeks to 
address some of these problems by clarifying that small lenders 
are very different than the regulations' intended targets. Do 
you believe that some of the rules intended for our most 
complex financial institutions have trickled down to community 
banks? If so, what specific portions of the law under your 
individual area of jurisdiction have you identified as 
problematic for small lenders?

A.1. As we develop supervisory regulations and policies and 
examination practices, we are mindful of community bankers' 
concerns that new rules intended for complex financial 
institutions could be applied to community banks in a way that 
is inappropriate. For that reason, our supervision examination 
process continues to be tailored to each organization's size, 
complexity, risk, profile, and condition. Further, to promote 
appropriate implementation of new regulations and supervisory 
policies, the Federal Reserve continues to devote significant 
resources and time to training our examiners and communicating 
with examiners about the goals of a new regulation or guidance 
for community banking organizations.
    In developing a new regulation or policy, the Federal 
Reserve weighs the burden on banks to implement new 
requirements against the need to safeguard the safety and 
soundness of the financial system in context of the statutory 
requirements. We recognize that the cost of compliance can be 
disproportionally greater on smaller banks versus larger 
institutions, as they have fewer staff available to help comply 
with additional regulations. Therefore, working within the 
requirements of the law, we attempt to develop regulations that 
impose requirements that are appropriate for community banks 
and that do not impose unnecessary or unduly burdensome 
requirements to implement. This is evident in many of the 
Federal Reserve regulations implementing the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, where the most 
stringent requirements only apply to the largest and most 
complex banking organizations and not to community banks.
    To assist community banks in understanding how a new rule 
could possibly affect their business operations, the Federal 
banking agencies have issued supplemental guides that focus on 
which rule requirements are most applicable to community banks. 
For example, the Federal banking agencies issued supplemental 
guides for the capital requirements issued in July 2013, as 
well as the Volcker rule issued in December 2013. \1\
---------------------------------------------------------------------------
     \1\ The Federal Reserve, Federal Deposit Insurance Corporation 
(FDIC), and Office of the Comptroller of the Currency (OCC), ``New 
Capital Rule: Community Bank Guide'', July, 9, 2013, 
www.federalreserve.gov/bankinforeg/basel/files/
capital_rule_community_bank_guide_20130709.pdf; and the Federal 
Reserve, FDIC, and OCC, ``The Volcker Rule: Community Bank 
Applicability'', December 10, 2013, www.federalreserve.gov/newsevents/
press/bcreg/bcreg20131210a4.pdf.

Q.2. The burden of regulation does not necessarily come from a 
single regulation, but the aggregate burden of regulations, 
guidance, and size-inappropriate best practices. The burden 
grows when small lenders are required to comply with several 
new rules concurrently. In isolation, the impact of one 
regulation may appear small, but when added to the growing list 
of compliance requirements, the cost is skyrocketing. What are 
---------------------------------------------------------------------------
you doing to identify and reduce aggregate burden?

A.2. Besides the regulatory review mandated by Economic Growth 
and Regulatory Paperwork Reduction Act (EGRPRA), the Federal 
Reserve periodically reviews existing supervisory guidance to 
assess whether the guidance is still relevant and effective. 
For instance, the Federal Reserve conducted a policy review of 
the supervision programs for community and regional banking 
organizations to make sure the programs and related supervisory 
guidance are appropriately aligned with current banking 
practices and risks. The project entailed an assessment of all 
existing supervisory guidance that apply to community and 
regional banking organizations to determine whether the 
guidance is still appropriate. As a result of this review, we 
are likely to eliminate some guidance that is no longer 
relevant and update other guidance for appropriateness to 
current supervisory and banking industry practices and 
relevance to the risks to these institutions.

Q.3. The EGRPRA process was brought about to identify redundant 
or excessively burdensome regulation. I think the EGRPRA 
process has the potential to be an important tool to begin 
rebuilding some semblance of trust between Federal regulators 
and the financial institutions they oversee. However, the first 
iteration revealed little agency will to utilize the process. 
Resulting reductions in regulatory burden were, in a word, 
insignificant. Various EGRPRA listening sessions have been 
conducted across the country. What is the most consistent 
message you are hearing from participants? What are you doing 
differently in the current EGRPRA review, and what actual, 
tangible relief can our smallest lenders expect?

A.3. The most consistent message provided by commenters in this 
EGRPRA review is that the Federal Reserve, OCC, and the FDIC 
(the Agencies) must consider the impact our regulations have on 
our institutions, especially on community banks; that the 
Agencies should coordinate as much as possible to minimize the 
effect of overlapping regulations; and that the agencies should 
reduce regulatory burden as much as is possible.
    The Agencies are conducting the current EGRPRA review with 
a focus on the effect of regulatory burden on insured community 
depository institutions. In each of the outreach meetings held 
to date, the Agencies invited representatives of smaller 
banking organizations to present their views directly to 
participating agency principals and staff. The institutions 
represented a variety of charters, geographic locations, and 
size. In addition, the Agencies have scheduled a public meeting 
at the Federal Reserve Bank of Kansas City that is specifically 
targeted to the concerns of banks in rural markets. This 
meeting will provide conferencing capability and two-way live 
stream capability from some of the other offices of the Kansas 
City Reserve Bank to enable management of depository 
institutions that are not located near the Reserve Bank to have 
the opportunity to participate in the meeting. The Agencies 
also continue to invite the public to provide written comments 
through the EGRPRA Web site, http://egrpra.ffiec.gov/, on any 
regulations that they believe are outdated, unnecessary or 
unduly burdensome.
    The Federal Reserve is reviewing regulations as a result of 
the comments received and, where possible, taking measures to 
alleviate burden on insured community depository institutions. 
For example, the Federal Reserve recently issued a final rule 
on April 9, 2015, to expand the applicability of its Small Bank 
Holding Company Policy Statement and also apply it to certain 
savings and loan holding companies. The policy statement 
facilitates the transfer of ownership of small community banks 
and savings associations by allowing their holding companies to 
operate with higher levels of debt than would normally be 
permitted. Although holding companies that qualify for the 
policy statement are excluded from consolidated capital 
requirements, their depository institution subsidiaries would 
continue to be subject to minimum capital requirements. The 
final rule raises the asset threshold of the policy statement 
from $500 million to $1 billion in total consolidated assets 
and also expands the application of the policy statement to 
savings and loan holding companies. The final rule implements a 
law passed by the Congress in December 2014, and became 
effective on May 15, 2015.

Q.4. Major changes to mortgage disclosures and timing 
requirements are set to go into effect on August 1st of this 
year. These regulatory changes will impact every participant in 
the mortgage lending process and every consumer mortgage 
transaction. The financial institutions that are still engaged 
in residential mortgage lending are making every effort to be 
ready by the August deadline. I am concerned that, if poorly 
crafted or hastily implemented, these additional rules will 
result in fewer borrowing options in communities I represent as 
small lenders exit the business altogether. Are your respective 
examiners already being trained on how to assess these changes 
over the course of their reviews. Are your agencies prepared to 
be flexible in implementing these new rules while small 
institutions struggle to implement these changes effectively?

A.4. While the mandatory compliance date for the new Truth in 
Lending--Real Estate Settlement Procedures Act integrated 
disclosure rules was set by the Consumer Financial Protection 
Bureau (CFPB), we understand that the new rules are significant 
and complex. For that reason, we have conducted outreach to 
ensure the institutions we supervise are aware of and 
understand the new rules. Among other things, we have partnered 
with the CFPB on a series of instructive webinars through our 
Outlook Live platform. Outlook Live is an ongoing webinar 
series on consumer compliance issues, available to the public 
and our examiners. We also finalized and released interagency 
examination procedures on April 15, 2015, that our examiners 
will use and that are publicly available, and we are developing 
additional examiner training.
    We expect our examiners to take into account the size and 
complexity of an institution and its products when deciding on 
the scope of and performing an examination. If mortgages are 
within scope, examiners will initially evaluate how an 
institution manages regulatory changes and overall efforts to 
come into compliance with the new mortgage rules. Among other 
things, examiners will consider the institution's 
implementation plan and actions taken to update the 
institution's policies, procedures, and processes. Reviews of 
individual loans covered by the new rules will not begin 
immediately after the effective date, as examiners generally 
review files that predate the examination. As with any new 
regulation, our goal is to work with the institutions we 
supervise to ensure they are on the right path.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                     FROM MARYANN F. HUNTER

Q.1. I remain concerned about consolidation in the industry. In 
a State like Montana we had 65 community banks before the 
crisis, and as of yesterday we had 54. That means a sixth of 
our institutions have either gone out of businesses or 
consolidated with some of the larger institutions. I'm 
concerned that if consolidation continues the whole nature of 
small institutions being able to serve, particularly rural 
communities, is going to disappear.
    Can you tell me what trends you've seen with respect to 
community bank consolidation since the crisis and how this rate 
compares to before the crisis?

A.1. As stated in my testimony, community banks have deep ties 
to their local communities, which give them firsthand 
perspectives on the local economic landscape; they focus on 
customer relationships and often look beyond traditional credit 
factors to consider unique borrower characteristics when making 
credit decisions. To that end, community banks are a critical 
component of our financial system and economy. The Federal 
Reserve recognizes the important role of community banks and 
seeks to supervise them in a way that fosters their safe and 
sound operation without constraining their capacity to support 
the financial needs of their communities. \1\
---------------------------------------------------------------------------
     \1\ Maryann F. Hunter, Deputy Director, Division of Banking 
Supervision and Regulation. Before the Committee on Banking, Housing, 
and Urban Affairs, U.S. Senate, Washington, DC.
---------------------------------------------------------------------------
    According to data, the number of community banks declined 
37 percent from 12/31/1999 to 12/31/2014. \2\ Further, the 
annual rate of decline appears to have increased since the 
financial crisis. Figure 1 displays the annual percent decline 
in the number of community banks year over year. \3\ As the 
chart illustrates, the percent decline by year has increased 
since the crisis, and does not show a clear sign of returning 
to pre-crisis levels. Prior to the crisis, the number of 
community banks declined an average of 2.3 percent per year; 
while since the crisis, the number of community banks has 
declined an average of 3.9 percent per year. \4\
---------------------------------------------------------------------------
     \2\ A community bank is defined as an insured commercial bank with 
less than $10 billion in assets.
     \3\ The decline includes both failed banks and acquired banks.
     \4\ The pre-crisis years comprise 12/31/1999-12/31/2007, while the 
post-crisis years comprise 12/31/2008-12/31/2014.


    This increase in post-crisis community bank consolidation 
may be driven, in part, by banks acquiring less profitable 
community banks. The return on average assets (ROAA) is a 
standard measure of bank profitability. ROAA is a bank's net 
income divided by its average assets. As shown in Figure 2 
below, community banks that were acquired in the years 
following the crisis tended to have lower ROAA than banks that 
were not acquired during the same years. This has not always 
been the case. As Figure 2 also illustrates, in the 4 years 
immediately preceding the crisis, the average ROAA of community 
banks that were acquired actually exceeded that for banks that 
were not acquired. \5\ This may suggest that, post-crisis, 
profitable banks continue to find opportunities to expand, but 
are currently focused on acquiring less profitable banks.
---------------------------------------------------------------------------
     \5\ Analysis excludes failed banks.
    
    
    This trend, however, does not extend to rural banks. 
Rather, the pre- and post-crisis differences in community bank 
consolidation appear to be driven by banks outside rural areas. 
For purposes of this response, rural is defined using the 
USDA's Rural-Urban Continuum codes, also known as Beale codes.
    According to the Beale codes, a rural area is defined as 
either:

  1.  Non-metro--Completely rural or less than 2,500 urban 
        population, adjacent to a metro area

  2.  Non-metro-Completely rural or less than 2,500 urban 
        population, not adjacent to a metro area

    As shown in Figure 3, pre- and post-crisis consolidation 
since 12/31/1999 is very similar for rural banks, while the 
average annual rate of consolidation for urban community banks 
was much higher post-crisis than pre-crisis. In fact, at rural 
community banks, the average annual rate of post-crisis 
consolidation was lower than the pre-crisis rate.


    The Beale definition of rural counties is fairly 
restrictive, only 11 percent of community banks were located in 
rural counties. However, if we expand that definition to also 
include counties with small urban populations (2,500-19,999) 
that are not adjacent to a metropolitan area, which then 
encompasses 23 percent of community banks as of 12/31/2014, we 
find a similar pattern (see Figure 4).


    To summarize, community bank consolidation has increased 
somewhat since the financial crisis and banks appear to be 
acquiring less profitable banks. This post-crisis increase in 
consolidation does not appear to have impacted rural banks, 
however. The average annual rate of consolidation for rural 
community banks remains just over 2.5 percent, well below the 
post-crisis rate of non-rural community bank consolidation.

Q.2. Why do you think we are seeing this in the industry?

A.2. Please see the response to Question 1.

Q.3. Are you seeing a difference in consolidation in urban 
areas vs. rural areas? And specifically, what impact does this 
consolidation have on rural parts of the country?

A.3. Please see the response to Question 1.

Q.4. What do you consider to be the biggest threat to small 
institutions livelihood and what are you all doing to address 
those risks?

A.4. The Federal Reserve understands that the cost of 
compliance can be disproportionately greater on smaller banks 
when compared to larger institutions, as they have fewer staff 
available to help comply with additional regulations. As such, 
the Federal Reserve continues to make clear distinctions 
between requirements applicable to community banks and those 
applicable to larger institutions, especially those resulting 
from the passage of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act). Efforts to 
communicate these distinctions and clarify supervisory 
expectations for community banks include adding a statement of 
applicability to community banks on newly issued guidance and 
issuance of supplemental guidance for to clarify expectations 
related to stress testing and implementation of the Volcker 
Rule and Basel III. Most important, new guidance aimed at 
community banks is issued only when necessary to support 
significant safety and soundness objectives. The Federal 
Reserve also continues to refine its supervisory program for 
community banks by enhancing its ability to risk focus 
community bank examinations. By placing community banks into 
one of three risk categories--low, medium, or high--based on 
risk information gleaned from financial reports, a greater 
proportion of resources and activities can be redirected from 
the smaller, lower risk institutions to those engaging in 
higher risk activities. Additionally, staff throughout the 
Federal Reserve System are conducting more examination work 
offsite, which can relieve some of the burden associated with 
the onsite examination process.
    Through interaction with the Community Depository 
Institutions Advisory Council, comprised of representatives 
from various segments of the national banking industry, Board 
members receive regular firsthand input on matters of 
importance to community banks. These matters will continue to 
be explored and addressed under the direction of a special 
subcommittee of the Board, which focuses on reviewing the 
effects of regulatory actions on community and regional banks 
because community banks continue to be an important part of our 
financial system.

Q.5. Can you elaborate on how your review is going and share 
with us the major areas of consensus the agencies and the 
industry have found so far?

A.5. In accordance with the Economic Growth and Regulatory 
Paperwork Reduction Act (EGRPRA), the Federal Reserve, the 
other Federal banking agencies, and the Federal Financial 
Institutions Examination Council are conducting a review of 
regulations to identify outdated or otherwise unnecessary 
regulatory requirements imposed on insured depository 
institutions. The major categories of regulations covered in 
the review include: applications and reporting; powers and 
activities; international operations; banking operations; 
capital; the Community Reinvestment Act; consumer protection; 
directors, officers, and employees; money laundering; rules of 
procedure; safety and soundness; and securities. The agencies 
are soliciting comments on their regulations through notices in 
the Federal Register. \6\ As explained in the March 6, 2015, 
interagency letter to Senator Shelby, the agencies have decided 
to expand the scope of the EGRPRA review in order to be as 
inclusive as possible. Accordingly, the agencies will solicit 
comment on all of our regulations issued in final form up to 
the date that we publish our last EGRPRA notice for public 
comment.
---------------------------------------------------------------------------
     \6\ To date, the Board of Governors of the Federal Reserve System, 
FDIC, and OCC have issued two notices as announced in joint press 
releases on June 4, 2014, (www.federalreserve.gov/newsevents/press/
bcreg/20140604a.htm) and February 20, 2015, (www.federalreserve.gov/
newsevents/press/bcreg/20150220a.htm).
---------------------------------------------------------------------------
    As part of the EGRPRA review process, the agencies are 
holding several outreach meetings with bankers, consumer 
groups, and other interested parties to engage individuals in a 
public discussion about the agencies' regulations.
    The agencies have conducted two outreach meetings to date 
in Los Angeles and Dallas. Additional outreach meetings are 
scheduled for the coming months, including: Boston on May 4, 
2015; Kansas City on August 4, 2015; Chicago on October 19, 
2015; and Washington, DC, on December 2, 2015. The Kansas City 
outreach meeting will focus more specifically on issues 
affecting rural institutions.
    Several themes have arisen so far from discussions at the 
outreach meetings. A recurring theme has been the question of 
whether the agencies could reevaluate the various thresholds 
and limits imposed in regulations that may constrain community 
banks and their lending activities. For example, community 
bankers in rural areas have noted that it can be difficult to 
find an appraiser with knowledge about the local market at a 
reasonable fee. Bankers have asked the agencies to consider 
increasing the dollar threshold in the appraisal regulations 
for transactions below which an appraisal would not be 
required, which could allow them to use a less-formal valuation 
of collateral for a larger number of loans.
    A number of community banks have also suggested reducing 
burden from the required quarterly filing of the Consolidated 
Reports of Condition and of Income, commonly called the Call 
Report. Working through the Federal Financial Institutions 
Examination Council, the Federal Reserve is considering ways 
the agencies could respond to industry concerns about Call 
Report filing requirements and assess the potential impact of 
collecting less data from banks.
    Bankers have also asked whether the agencies could review 
the statutorily mandated examination frequency for banks, which 
varies based on a bank's asset size and condition, as a way to 
ease burden from frequent onsite examinations. Other bankers 
have commented that some longstanding interagency guidance may 
now be outdated and warrant a fresh look and revision. The 
agencies are still weighing these comments and will consider 
all the feedback received in the assessment of their 
regulations.

Q.6. Can you share anything about your future plans as this 
review moves forward?

A.6. We are considering the comments received through the 
EGRPRA process, as well as information obtained from the 
supervisory process, to undertake certain initiatives. In this 
regard, we are taking steps to tailor and improve our 
examination processes to be more efficient and effective and 
less burdensome on lower-risk community banks. For instance, we 
are equipping our Federal Reserve examiners with technological 
tools that enable them to conduct more work offsite and to 
focus their attention on the areas of highest risk. With these 
new tools, examiners are able to conduct some aspects of the 
loan review process offsite for banks that maintain electronic 
loan records and have the technical capability. We are also 
seeking ways to utilize the financial information collected 
from banks to tailor the examination process for institutions 
with lower risk profiles.
    In addition to the EGRPRA review, the Federal Reserve 
periodically reviews its existing supervisory guidance to 
assess whether the guidance is still relevant and effective. 
For instance, the Federal Reserve recently completed a policy 
review of the supervision programs for community and regional 
banking organizations to make sure the programs and related 
supervisory guidance are appropriately aligned with current 
banking practices and risks. The project entailed an assessment 
of all existing supervisory guidance that apply to community 
and regional banking organizations to determine whether the 
guidance is still appropriate. As a result of this review, we 
are likely to eliminate some guidance that is no longer 
relevant and to update other guidance for appropriateness to 
current supervisory and banking industry practices and 
relevance to the risks to these institutions.
    Recently, the Board issued an interim final rule and 
proposed rule to implement Public Law 113-250, which was 
enacted by the Congress and signed into law by the President in 
December 2014. Effective immediately, the interim final rule 
adopted by the Board excludes small savings and loan holding 
companies with less than $500 million in total consolidated 
assets that meet certain qualitative requirements from the 
Board's regulatory capital requirements. This effectively 
places these savings and loan holding companies on equal 
footing with comparably sized bank holding companies that are 
subject to the Board's Small Bank Holding Company Policy 
Statement (policy statement), which fosters local ownership of 
small community banks by allowing their holding companies to 
operate with higher levels of debt than would otherwise be 
permitted.
    On April 9, the Board issued a final rule to raise the 
asset size threshold from $500 million to $1 billion for 
determining applicability of the policy statement, and expand 
its scope to include savings and loan holding companies. 
Holding companies subject to the policy statement are not 
subject to the Board's regulatory capital requirements, 
although regulatory capital requirements will continue to apply 
at the depository institution level.
    In an action related to the expansion of the policy 
statement's scope, the Board took steps to relieve regulatory 
reporting burden for bank holding companies and savings and 
loan holding companies that have less than $1 billion in total 
consolidated assets and meet the qualitative requirements of 
the policy statement. Specifically, the Board eliminated 
quarterly and more complex consolidated financial reporting 
requirements (FR Y-9C) for these institutions, and instead 
required parent-only financial statements (FR Y-9SP) 
semiannually. The Board also eliminated all regulatory capital 
data items that were to be reported on the FR Y-9SP for savings 
and loan holding companies with less than $500 million in total 
consolidated assets. The Board made these changes effective on 
March 31, 2015, and immediately notified the affected 
institutions, so they would not continue to invest in system 
changes to report revised regulatory capital data for only a 
short period of time.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                        FROM TONEY BLAND

Q.1. According to the OCC, the Federal banking agencies have 
agreed to undertake a comprehensive review of all Call Report 
items and schedules. When will this review be completed? Who 
from your agency is in charge of this review? Will this review 
result in a formal, publicly available report?

A.1. At the December 2014 meeting of the Federal Financial 
Institutions Examination Council (FFIEC), Council members 
directed the Council's Task Force on Reports (Task Force) to 
undertake the Task Force's recommendations to address concerns 
raised by bankers about the burden of preparing the 
Consolidated Reports of Condition and Income (Call Report). 
This formal initiative is intended to identify potential 
opportunities to reduce burden associated with the Call Report 
requirements for community banks.
    The comprehensive review of all Call Report items and 
schedules is one of the actions under this initiative. Section 
604 of the Financial Services Regulatory Relief Act of 2006 
requires the Federal banking agencies to ``review the 
information and schedules that are required to be filed by an 
insured depository institution'' in the Call Report. The 
deadline for the next statutorily mandated review is the fourth 
quarter of 2017. The Task Force and the agencies have 
accelerated the start of this review of the existing Call 
Report items and schedules to 2015. This review is planned for 
completion by the fourth quarter 2017 statutory deadline.
    In conducting the comprehensive review, the Task Force and 
the agencies will require Call Report users at the agencies to 
provide more robust justifications than in previous reviews. 
Users would need to explain how they use each data item, the 
frequency with which it is needed, and the population of 
institutions from which it is needed. Data items or schedules 
for which users provide insufficient justification for 
continued collection from some or all institutions in all four 
quarters would be candidates for elimination, less frequent 
collection, or the creation of a new, or an upward revision of 
an existing, reporting threshold, which can be size-and/or 
activity-based. Call Report schedules would be prioritized for 
review over the next 2 years based on their perceived burden. 
Burden-reducing Call Report changes identified as a result of 
this review would be proposed on a flow basis annually as they 
are identified rather than waiting until the completion of the 
entire comprehensive review.
    Another action under this initiative, at the request of the 
Council, is that the Task Force will develop a set of guiding 
principles as the basis for evaluating potential additions or 
deletions of data items to and from the Call Report.
    The Office of the Chief Accountant is in charge of the 
review for the OCC. The agencies will publicly propose to 
implement burden-reducing Call Report changes identified as a 
result of this review in joint Federal Register notices that 
will be issued for comment in accordance with the Paperwork 
Reduction Act.

Q.2. Kansas Fed President, Esther George, said at a 2014 
conference that the community bank ``business model is one in 
which the incentives of banks are aligned with outcomes that 
benefit their customers and the economy. When incentives are 
aligned in this way, the need for an `ability to repay rule.' 
for example, seems unnecessary.''
    Do you agree that banks that hold mortgages on portfolio 
have a vested interest to perform an analysis of a customer's 
ability to repay irrespective of whether such mortgage meets 
the requirements of a ``Qualified Mortgage''?
    Do you agree that mortgages held on portfolio should be 
afforded a ``Qualified Mortgage'' status? If not, why not?

A.2. Regardless of whether a residential mortgage loan is a 
Qualified Mortgage (QM) or non-QM, and whether or not it is 
held in a bank's portfolio, the OCC expects institutions to 
underwrite residential mortgage loans in a prudent fashion and 
address key risk areas in their residential mortgage lending, 
including loan terms, borrower qualification standards, loan-
to-value limits, and documentation requirements. Institutions 
also should apply appropriate portfolio and risk management 
practices. Our expectations are outlined in the OCC's 
Comptroller's Handbook booklet, ``Mortgage Banking''.

Q.3. In your testimony you acknowledged that the Volcker Rule 
contains no exemption for community banks, and that the 
regulatory burden is not justified by the risk these 
institutions present. The OCC has drafted a legislative 
proposal to exempt from the Volcker Rule banks with total 
consolidated assets of $10 billion or less. What is the basis 
for the $10-billion threshold? Would a different threshold or 
criteria be more appropriate?

A.3. The risks to the financial system of proprietary trading 
and owning or sponsoring private equity and hedge funds 
addressed by the Volcker Rule are far more significant when 
larger institutions engage in these activities than they are if 
community banks with assets of $10 billion or less do so. 
However, the Volcker Rule contains no exemption for community 
banks. Accordingly, community banks need to ascertain whether 
their activities are covered by the Volcker Rule in order to 
understand whether they have any compliance obligations. Making 
this determination may require them to expend money and 
resources--for example, by hiring attorneys and consultants.
    The OCC's proposed exemption applies to community banks 
with $10 billion or less in assets that do not have a holding 
company, as well as community banks that are part of a small 
holding company of $10 billion or less in assets. Small banks 
that are part of a larger holding company are not eligible for 
the exemption to ensure that large banking organizations are 
not able to take advantage of this exclusion by moving 
activities covered by the Volcker Rule to a small bank 
controlled by the organization. Exempting community banks from 
the Volcker Rule would relieve them of this regulatory burden 
and would allow the Federal bank regulatory agencies to more 
appropriately focus examination resources where the supervisory 
concern is greatest. The $10 billion threshold in the OCC's 
proposed exemption is consistent with the thresholds for small-
size banks in the Dodd-Frank Act. Applying this method, we 
estimate that the amendment would exempt more than 6,000 small 
banks from the requirement to comply with the regulations 
implementing the Volcker Rule.

Q.4. The OCC also recommended increasing the asset-size 
threshold from $500 million to $750 million to determine 
whether a community bank can qualify for an examination every 
18 months. What is the basis for the $750-million threshold? 
Would a different threshold or criteria be more appropriate? 
Would you support allowing any institution to petition to 
qualify for an exam every 18 months?

A.4. The $750 million asset-size threshold will allow the 
Federal banking agencies to focus their supervisory resources 
on those small depository institutions that may present 
capital, managerial, or other issues of supervisory concern, 
while simultaneously reducing the regulatory burden on small, 
well-capitalized and well-managed institutions. Under current 
law, asset size is not the only criterion for an institution to 
qualify for an 18-month examination cycle. The Federal banking 
agencies must also consider whether the institution is well-
capitalized and well-managed, the composite rating of the 
institution, whether the institution is subject to an 
enforcement proceeding or order, and whether the institution 
has recently undergone a change in control. Setting the 
threshold at $750 million would allow more than 400 additional 
institutions to qualify for an 18-month on-site examination 
cycle if they meet these additional statutory criteria. The 
OCC's proposal is consistent with the incremental approach that 
Congress has taken over the years when increasing the threshold 
amount of assets that would permit a small depository 
institution to qualify for the 18-month examination cycle.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                        FROM TONEY BLAND

Q.1. The NCUA's testimony recommended a legislative change to 
provide the agency with examination and enforcement authority 
of third party vendors. In April 2013, the OCC testified that 
it would recommend a legislative change that would facilitate 
the OCC's ability to examine an independent contractor that 
does significant work for a bank and to take enforcement 
actions directly against independent contractors that engage in 
wrongdoing. Does OCC still support this type of legislative 
change?

A.1. Yes, the OCC continues to support the legislative changes 
that we recommended in April 2013, and that we subsequently 
shared with the Senate Banking Committee and the House 
Financial Services Committee in July 2013.
    The language we drafted allows a Federal banking agency 
(FBA) to take enforcement action against an independent 
contractor that participates in the conduct of the affairs of, 
or conducts the business of, an insured depository institution, 
if the FBA can establish grounds to take such action under 
section 8 of the Federal Deposit Insurance Act (FDIA), 12 
U.S.C. 1818. It also clarifies that an independent contractor 
participates in the conduct of the affairs of, or conducts the 
business of, an insured depository institution by performing 
services for the institution. Finally, the amendment clarifies 
that ``unsafe or unsound practice'' means ``any action, or lack 
of action, which is contrary to generally accepted standards of 
prudent operation, the possible consequences of which, if 
continued, would be abnormal risk or loss or damage to an 
institution, its shareholders, or the Deposit Insurance Fund.''
    The amendment would be useful in cases where an insured 
depository institution has outsourced significant activities to 
an independent contractor that engages in unsafe or unsound 
practices in providing services to the institution.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                        FROM TONEY BLAND

Q.1. The first Economic Growth and Regulatory Paperwork Act 
(EGRPRA) review submitted to Congress in 2007 States: ``Besides 
reviewing all of our existing regulations in an effort to 
eliminate unnecessary burdens. the Federal banking agencies 
worked together to minimize burdens resulting from new 
regulations and current policy statements as they were being 
adopted.'' The report submitted to Congress specifically 
discussed consumer financial regulations, anti-money laundering 
regulations, and recently adopted rules. However, included in 
the Federal Register for this 10-year review are two footnotes 
that suggest that CFPB rules, anti-money laundering rules, and 
new regulations that have recently gone into effect will not be 
included in the review.
    Rather than predetermine which rules should or should not 
be reviewed, shouldn't the agencies review all existing 
regulations and eliminate or recommend statutory changes that 
are needed to eliminate any regulatory requirements that are 
outdated. unnecessary, or unduly burdensome?

A.1. The EGRPRA statute (12 U.S.C. 3311) requires the agencies 
to divide their regulations into categories and issue notices 
soliciting comment on those categories at regular intervals. 
Consistent with the purposes of the EGRPRA review, the agencies 
initially excluded newly issued regulations, those that had not 
yet taken effect, and those that had yet to be fully 
implemented. However, in order to be as inclusive as possible, 
the agencies intend to solicit comment on any of their 
regulations that have been finalized up to the date that we 
publish our last notice for public comment and to report back 
to Congress on all regulations.

Q.2. Does Congress need to update the EGRPRA statute to include 
the CFPB to ensure the review is comparable in scope to what 
was reviewed last time?

A.2. When Congress established the CFPB and transferred 
authority to issue rules under the enumerated consumer laws, it 
required the CFPB to undertake a review of its regulations at 
least once every 5 years. Currently, the agencies participating 
in the EGRPRA review will continue to forward any comments on 
CFPB rules received during the EGRPRA review to the CFPB for 
its consideration.

Q.3. If not, what specific steps will be taken to ensure that 
the review will include all existing regulations, including 
consumer financial regulations, anti-money laundering rules, 
and new regulations?

A.3. Congress transferred the authority to issue many consumer 
financial regulations to the CFPB, which is not required to 
undertake the EGRPRA review. Anti-money laundering rules are 
issued by the Financial Crimes Enforcement Network, which is 
also not required to undertake the EGRPRA review. During this 
decennial EGRPRA review, the Federal banking agencies will 
continue to forward comments on rules not issued by the Federal 
banking agencies to the appropriate agencies for their 
consideration.

Q.4. A main criticism of the last review was that the banking 
regulators subsequently repealed or eliminated only a few 
substantive regulations. To ensure that the current review has 
a more successful outcome, will your agencies set up a 
Government Web site that posts the feedback and list the 10 
most burdensome regulations identified?

A.4. At the beginning of the EGRPRA review process, the Federal 
banking agencies established a dedicated Web site for the 
EGRPRA review, http://egrpra.ffiec.gov, which allows members of 
the public to submit comments and view all comments received 
during the EGRPRA process. In addition to the Web site, the 
agencies are Iive-streaming the EGRPRA outreach meetings to 
allow members of the public to hear and view comments made at 
those meetings. The agencies also intend to make public the 
report to Congress required by the EGRPRA statute that will 
identify unduly burdensome regulations.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                        FROM TONEY BLAND

Q.1. Last Congress, legislation was introduced in the House 
(H.R. 2673, 113th Congress) that would provide financial 
institutions protection from the liability associated with 
Section 1411 of the Dodd-Frank Act, so long as the loan appears 
on the institution's balance sheet. I understand that the CFPB 
partially addressed this issue for some institutions through 
its Notice of Proposed Rulemaking. Please answer the following 
questions related to the proposed legislation:
    Do you believe the proposed legislation would have a 
material impact on the safety and soundness of covered 
financial institutions?
    If so, do you believe the current supervisory process and 
capital requirements are sufficient to address any perceived 
risks that may come from this change?
    Do you have additional comments, concerns, or proposed 
changes to the legislation?

A.1. Sections 1411 and 1412 of the Dodd-Frank Act created new 
section 129C of the Truth in Lending Act (TILA), which requires 
lenders to assess consumers' ability to repay home loans before 
extending credit. Borrowers may be able to recover actual and 
special statutory damages for violations of section 129C and in 
foreclosure actions, may assert such violations as a matter of 
defense by recoupment or setoff. However, Section 129C also 
provides creditors a safe harbor and a presumption of 
compliance with the ability-to-repay requirement for a 
``qualified mortgage'' (QM). The CFPB has implemented section 
129C through amendments to Regulation Z, codified at 12 CFR 
Part 1026.43.
    H.R. 2673, the Portfolio Lending and Mortgage Access Act, 
from the 113th Congress would amend TILA to provide that a QM 
includes all covered mortgage loans that a creditor holds in 
portfolio.
    Regardless of whether a residential mortgage loan is a QM 
or non-QM, the OCC expects institutions to underwrite 
residential mortgage loans in a prudent fashion and address key 
risk areas in their residential mortgage lending, including 
loan terms, borrower qualification standards, loan-to-value 
limits, and documentation requirements. Institutions also 
should apply appropriate portfolio and risk management 
practices. Our expectations are outlined in the OCC's 
Comptroller's Handbook booklet, ``Mortgage Banking''.

Q.4. The Bipartisan Policy Center recently suggested creating a 
pilot program for a ``consolidated examination force'' for the 
institutions subject to supervision by all three of the Federal 
prudential regulators. Such a program would force coordination 
between the agencies and minimize the costs associated with 
examinations for banks. It appears that the Federal Financial 
Institutions Examination Council (FFIEC) could provide the 
vehicle to run the pilot program. Do you believe your agencies 
currently have the statutory authority to undertake such a 
joint pilot program through FFIEC? If so, why haven't the 
agencies taken steps to initiate such a pilot program?

A.4. The OCC is committed to fostering strong collaborative 
relationships with not only the other two Federal prudential 
regulators, the Federal Deposit Insurance Corporation (FDIC) 
and the Federal Reserve System (FRB), but also with the 
Consumer Financial Protection Bureau (CFPB) and international 
supervisors. This commitment to collaboration and coordination 
is reflected in the strategic initiatives that Comptroller 
Curry set forth for the agency and has been incorporated into 
the OCC's strategic plan and the business plans and performance 
goals for our supervisory lines of business and their managers. 
Our goal in such collaborative efforts is not only to minimize 
costs and burden on supervised institutions but also to enhance 
the effectiveness and efficiency of our supervision programs, 
ensure clear and consistent communication to banks' boards of 
directors and senior management, and avoid any supervisory 
gaps.
    The Federal banking agencies have a long history of 
collaboration on key rulemakings and policy guidance. Indeed, 
most significant regulatory rules are promulgated on a joint, 
interagency basis. There is also strong collaboration at the 
local field level among our agencies' examiners and district 
offices. To further interagency coordination where we have 
shared jurisdiction, we have developed and implemented 
processes to share our supervisory strategies with the FDIC and 
FRB and collaborate with these agencies on safety and soundness 
examination programs for banks in our large and midsize bank 
programs.
    These steps include sharing supervisory strategies and 
discussing key supervisory priorities with the FDIC and FRB for 
their input and feedback, meeting with local FRB and FDIC teams 
to discuss our supervisory plans to identify opportunities to 
leverage each other's planned work. As part of these efforts, 
we encourage and support efforts to collaborate on specific 
exams. Such collaboration can run the gamut from providing 
input to the scope of an examination to jointly conducting 
examinations. One prominent example of where we have 
coordinated specific examination work is the collective work 
programs we have developed to assess large banking 
organizations' compliance with the advanced approaches 
standards for the new capital rules. We likewise share relevant 
supervisory work products, such as Reports of Examination and 
Supervisory Letters, and access to our electronic record 
retention systems. We also consult on Matters Requiring 
Attention and other enforcement actions that affect 
organization structure, strategic direction, executive 
personnel, or have a material impact on the entity under the 
supervision of the other agency. Similar coordination efforts 
take place with the CFPB on consumer compliance related 
examination work.
    We believe the processes we have implemented and that we 
continue to refine allow us to achieve the benefits of 
coordination and collaboration envisioned by the Bipartisan 
Policy Center, without the costs that a more structured, 
centralized process administered through the FFIEC would 
entail.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                        FROM TONEY BLAND

Q.1. During the hearing, you stated, ``But I would say that the 
OCC, as part of our normal practice, we look at on an ongoing 
basis whether rules are appropriate in terms of still relevant, 
and we will make changes, if they need to, without waiting for 
the next EGRPRA process.'' Within your respective agency's 
jurisdiction, please provide the number and a list of 
regulations your agency eliminated or changed due to 
irrelevance or undue burden since 2006 along with a brief 
description of each.

A.1. The following is a listing of regulations that the OCC has 
eliminated or modified to mitigate burden.


Q.2. Within your respective agency's jurisdiction, please 
provide the total number and a list of new rules and 
regulations that have been adopted since the last EGRPRA review 
along with a brief description of each.

A.2. A listing of the rules finalized by the OCC from Jan. 1, 
2007, is attached (see Attachment 1). Some of these regulations 
implemented changes as a result of the last EGRPRA review 
process. Some were strictly ministerial such as the annual 
inflation adjustment for CRA determinations.




















Q.3. During the last EGRPRA review, Federal banking agencies 
hosted a total of 16 outreach sessions around the country. To 
date only 6 outreach sessions have been announced. During this 
current EGRPRA review, how many total outreach meetings will be 
held and will there be at least 16 meetings as before?

A.3. To date, we have planned a total of six outreach meetings. 
Three have already taken place in Los Angeles on December 2, 
2014, Dallas on February 4, 2015, and Boston on May 4. Our next 
outreach meetings are scheduled for Kansas City on August 4, 
Chicago on October 19, and Washington, DC, on December 2. These 
outreach meetings have, and will include a larger number of 
participants then during the last EGRPRA review. The previous 
outreach meetings were planned as smaller gatherings and 
included 50 or so bankers or consumer and community groups. The 
current outreach meetings are open to as many as 200 
participants. In addition, the agencies are leveraging 
technology to broaden their reach to interested parties. For 
example, the current outreach meetings are all live-streamed on 
the EGRPRA.gov Web site, so that individuals throughout the 
country may watch and listen to the proceedings at no cost. 
Additionally, at our rural outreach meeting in Kansas City, 
bankers and consumer and community groups will have the 
opportunity to participate and provide comments via a two-way 
audio link. This technology was not available during the last 
EGRPRA process.

Q.4. To date only one EGRPRA outreach meeting, focusing on 
rural banking issues, has been scheduled in Kansas City. How 
many more rural banking outreach meetings do you plan on 
scheduling? Given the diversity of rural banking needs around 
the country, in what other geographic regions would those 
meetings take place?

A.4. We have scheduled one outreach meeting focused on rural 
banking issues in Kansas City on August 4, 2015. However, in 
addition to the in-person program and the live-stream on 
EGRPRA.gov, this meeting will support bankers' and consumer and 
community groups' participation and comments via a two-way 
audio link. The agencies believe that this will allow rural 
bankers and other interested parties from around the country to 
provide their input in the most cost-effective manner.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                        FROM TONEY BLAND

Q.1. Some are very concerned that implementing certain Basel 
III capital requirements relating to mortgage servicing could 
substantially alter business models adopted by banks in 
Nebraska and elsewhere designed to complete certain mortgage 
services on their own behalf and for other banks.
    Have you completed or otherwise reviewed analyses that show 
whether the adoption of these requirements would affect 
mortgage servicing operations?
    If so, have these analyses shown that smaller institutions 
would limit mortgage servicing operations as a result?
    What entities are likely to perform the mortgage servicing 
operations instead?

A.1. The OCC, the FRB, and the FDIC (together, the agencies) 
took careful action to ensure the new capital rules 
appropriately reflects the risks inherent in banking 
organizations' business models. Consistent with the treatment 
of intangible assets generally, the inclusion of Mortgage 
Servicing Assets (MSAs) in regulatory capital has long been 
subject to strict limitations in the United States because of 
the high level of uncertainty regarding the ability of banking 
organizations to realize value from these assets, especially 
under adverse financial conditions. The agencies believe that 
the rules' treatment of MSAs contributes to the safety and 
soundness of banking organizations by mitigating against MSA 
market value fluctuations that may adversely affect banking 
organizations' regulatory capital bases.
    As part of the rulemaking process, the agencies considered 
the potential impact of the regulatory capital rules on banking 
organizations subject to the requirements. The impact analysis 
was performed using regulatory reporting data, supplemented by 
certain assumptions and estimates if data needed for certain 
calculations were not available.
    While the agencies conducted analyses that incorporated a 
range of assumptions, the general conclusion of each agency was 
that the vast majority of banking organizations, including 
community banking organizations, already have capital 
sufficient to meet the minimum requirements of the regulatory 
capital rules on a fully phased-in basis. They also have 
capital sufficient to exceed the fully phased-in capital 
conservation buffer, such that they would not face restrictions 
on distributions and certain discretionary bonus payments under 
the rule. With respect to the small number of banking 
organizations that currently have concentrations in MSAs that 
exceed the limits in the capital rules, we note the capital 
rules provide lengthy transition periods that should allow 
these firms sufficient time to modify their capital structure 
or adjust their business models to conform to the capital 
rules. The capital rules also maintain the risk-weighting from 
the prior risk-based capital rule for MSAs that are not 
deducted from regulatory capital during the transition period. 
Additionally, in response to comments, the agencies removed the 
proposed 90 percent fair value limitation on MSAs that were 
included in regulatory capital. Previously, the general risk-
based capital rules included that treatment in conformance with 
section 475 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA). However, FDICIA permits the 
agencies to remove that limitation if the agencies make a joint 
determination that its removal would not have an adverse effect 
on the deposit insurance fund or the safety and soundness of 
insured depository institutions.
    Finally, to the extent some banking organizations pare back 
their mortgage servicing operations, such business would likely 
shift to other mortgage servicing firms that have the capacity 
to absorb the additional processes.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
                        FROM TONEY BLAND

Q.1. One of the most consistent things I hear from Kansas banks 
and credit unions is that they are continually being required 
to comply with new regulations that were never intended to 
affect them. I am in the process of drafting a small lending 
regulatory relief package along with Sen. Tester that seeks to 
address some of these problems by clarifying that small lenders 
are very different than the regulations' intended targets. Do 
you believe that some of the rules intended for our most 
complex financial institutions have trickled down to community 
banks? If so, what specific portions of the law under your 
individual area of jurisdiction have you identified as 
problematic for small lenders?
    The burden of regulation does not necessarily come from a 
single regulation, but the aggregate burden of regulations, 
guidance, and size-inappropriate best practices. The burden 
grows when small lenders are required to comply with several 
new rules concurrently. In isolation, the impact of one 
regulation may appear small, but when added to the growing list 
of compliance requirements, the cost is skyrocketing. What are 
you doing to identify and reduce aggregate burden?

A.1. As I noted in my written testimony, the OCC recognizes 
that community banks have different business models and more 
limited resources than larger banks. Therefore, where we have 
the legal flexibility, we factor these differences into the 
rules and guidance we issue, and we tailor our supervision to 
each bank's size and complexity. This allows us to avoid having 
the rules and provisions intended for the most complex banks 
trickle down to community banks.
    The OCC has sought to minimize burden for community banks 
when developing regulations. For example, in revising the 
regulatory minimum capital rules we limited the application of 
many new provisions, including the supplementary leverage ratio 
and the countercyclical capital buffer, to the largest banking 
organizations that engage in complex or risky activities. In 
addition, to address the significant concerns expressed by 
community bankers, the agencies' final rules retained the 
previously existing capital treatment for residential mortgage 
exposures. Similarly, while all banks need to maintain adequate 
liquidity, community banks do not need the structured, explicit 
standards for liquid assets required for the largest banks. 
Therefore, we excluded community banks from our liquidity 
coverage rule. More recently, the agencies' risk retention rule 
allows all qualifying mortgages (QM) under the CFPB's mortgage 
rules to qualify as qualified residential mortgages (QRM), 
which should minimize the rule's impact on community banks that 
engage in securitization activities.
    We also take steps to help community banks transition to 
new regulatory requirements. For example, the new capital 
standards are phased-in to give community banks more time to 
come into full compliance with the new rules. We also offer 
webinars and easy-to-understand, quick reference guides on new 
rules that may affect a significant number of community banks. 
Our recent guides have covered the banking agencies' new 
capital rules and the CFPB's new residential mortgage rules.

Q.2. The EGRPRA process was brought about to identify redundant 
or excessively burdensome regulation. I think the EGRPRA 
process has the potential to be an important tool to begin 
rebuilding some semblance of trust between Federal regulators 
and the financial institutions they oversee. However, the first 
iteration revealed little agency will to utilize the process. 
Resulting reductions in regulatory burden were, in a word, 
insignificant. Various EGRPRA listening sessions have been 
conducted across the country. What is the most consistent 
message you are hearing from participants? What are you doing 
differently in the current EGRPRA review, and what actual, 
tangible relief can our smallest lenders expect?

A.2. We take the EGRPRA mandate very seriously, as demonstrated 
by the attendance of the principals and senior staff from all 
three Federal banking agencies at the EGRPRA outreach meetings. 
We are committed to providing regulatory relief where possible, 
consistent with the safe and sound operation of the 
institutions we regulate.
    The most consistent message we have heard so far in both 
written comment letters and at the outreach meetings is that 
community banks are finding it difficult to compete in this 
regulatory and economic environment. With respect to specific 
issues, community banks have noted, for example, that Call 
Reports should be simplified and revised to reduce duplicative 
reporting requirements; asset-size thresholds in our rules 
should be raised to account for inflation; and the asset-size 
threshold for the small bank examination cycle should be 
raised. Unlike the last EGRPRA review, we will not wait until 
the EGRPRA process is complete to implement changes at the OCC 
where a good case is made for regulatory relief. We will review 
all of the recommendations we receive, and where it is clear 
that a regulation is outdated, unnecessary, or unduly 
burdensome, we will act where we have the authority to do so.

Q.3. Major changes to mortgage disclosures and timing 
requirements are set to go into effect on August 1st of this 
year. These regulatory changes will impact every participant in 
the mortgage lending process and every consumer mortgage 
transaction. The financial institutions that are still engaged 
in residential mortgage lending are making every effort to be 
ready by the August deadline. I am concerned that, if poorly 
crafted or hastily implemented, these additional rules will 
result in fewer borrowing options in communities I represent as 
small lenders exit the business altogether. Are your respective 
examiners already being trained on how to assess these changes 
over the course of their reviews. Is your agency prepared to be 
flexible in implementing these new rules while small 
institutions struggle to implement these changes effectively?

A.3. The OCC works with other members of the FFIEC toward the 
development of uniform principles, standards, and guidance to 
achieve consistency in the supervision of financial 
institutions. To that end, the FFIEC's Task Force on Consumer 
Compliance has approved interagency examination procedures to 
reflect the Dodd-Frank Act amendments to the TILA and Real 
Estate Settlement Procedures Act (RESPA). In addition, the task 
force members collaborate on examination tools and training. 
The OCC is responsible for supervising the compliance of 
national banks and Federal savings associations with total 
assets of $10 billion or less with the TILA and RESPA. When the 
CFPB's mortgage rules became effective, OCC examiners focused 
their efforts on discussing the changes with bank management 
teams and reviewing the new policies and procedures 
institutions implemented to comply with these new regulatory 
requirements. When the OCC assesses compliance with the new 
rules, we will take a reasonable approach with respect to our 
supervisory response and take into consideration a bank's 
progress in implementing the rules. The OCC continues to update 
and enhance our training for examiners on the interagency 
examination procedures developed by the Task Force on Consumer 
Compliance of the FFIEC, as well as the other regulations that 
implement the Dodd-Frank Act amendments to the TILA and RESPA. 
The OCC also intends to work collaboratively with the other 
prudential regulators and the CFPB to devise and share training 
resources.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                        FROM TONEY BLAND

Q.1. I remain concerned about consolidation in the industry. In 
a State like Montana we had 65 community banks before the 
crisis, and as of yesterday we had 54. That means a sixth of 
our institutions have either gone out of businesses or 
consolidated with some of the larger institutions. I'm 
concerned that if consolidation continues the whole nature of 
small institutions being able to serve, particularly rural 
communities, is going to disappear.
    Can you tell me what trends you've seen with respect to 
community bank consolidation since the crisis and how this rate 
compares to before the crisis?

A.1. Before describing recent consolidation activity, we note 
that consolidation in the banking industry has been steadily 
occurring since the mid-1980s, thus reflecting a long-term 
trend. That is, the number of banks and banking organizations, 
including smaller ones, has been steadily declining for the 
last 30 years.
    Three different types of events account for most of the net 
change in the number of banks over time. One is mergers. The 
second is failures. The third is de novo entry or the opening 
of newly chartered institutions. The change in the number of 
community banks over time will also be affected by the 
migration of surviving institutions into the larger non-
community bank group.
    For purposes of the analysis below, the OCC looked at 
trends at the bank (rather than the holding company level) and 
used a $1 billion size threshold (in 2009 dollars) to define 
community banks. We also chose year-end 2007 to demarcate two 
time intervals, since recession-related bank failures did not 
start to increase until 2008. The 7 years ending on year-end 
2007 (2001-2007) constitute the pre-crisis period. The 
following 7 years (2008-2014) are the post-crisis period.

Consolidation During the Pre-Crisis Period

    Examining the three most important types of structural 
change individually is useful because they have differing 
causes and their contribution to the overall pace of 
consolidation can vary over time. At the start of the pre-
crisis period, a total of 9,904 banks and thrifts existed in 
the United States. Of this total, 9,282 or 93.7 percent of all 
banks met the community bank definition used in this analysis. 
The asset share of community banks was 16.2 percent of total 
bank assets at that time.
    As has been the case in the years prior to 2001, mergers 
accounted for much of the consolidation immediately prior to 
the crisis. For the 7-year period ending in 2007, 2,312 banks 
merged out of existence and 2012 (87.0 percent) were community 
banks. Relatively good economic conditions kept failures 
relatively low during the pre-crisis interval. A total of 21 
banks failed and 18 of these were community institutions. 
Community bank numbers were supplemented by the 1,034 new banks 
that began operations in the pre-crisis period. Of the 
surviving 7,186 banks meeting the community bank definition at 
the start of the pre-crisis period, 302 exceeded the size 
threshold in 2007 and so were no longer counted as part of the 
community bank group.
    By the end of the pre-crisis period, the number of banks 
fell to 8,534 (a 7-year change of -1,370). The number of 
community banks declined to 7,856 (a 7-year change of -1,426). 
Community banks still accounted for 92.1 percent of all banks 
at year-end 2007. The asset share of community banks also 
declined by about 5 percentage points over the pre-crisis 
period, from 16.2 to 11.4 percent.

Consolidation in the Post-Crisis Period

    During the post-crisis period the number of all banks and 
community banks continued to fall. The number of all banks 
declined by 2,025 (-23.7 percent) from 2007-2014 while the 
number of community banks fell by 1,987 (-25.3 percent). Still 
in 2014, community institutions represented 90.2 percent of all 
banks at that time. The asset share of community banks 
decreased from 11.4 percent to 9.5 percent over the post-crisis 
period. But this decline of 1.8 percentage points is roughly 
half the asset share decline over the pre-crisis period (-4.8 
percentage points).
    Mergers continued to be the most prominent driver of 
consolidation. A total of 1,577 institutions merged during the 
post-crisis period and 1,417 of these were community banks. Not 
surprisingly, failures were considerably higher after 2007 than 
they were in the pre-crisis period. There were 506 bank 
failures from 2008-2014 and 442 were community banks. 
Approximately 145 new banks were chartered in the post-crisis 
period so there was much less of an offset to the decline in 
community banks stemming from mergers and failures. An 
additional 207 banks that met the community bank definition 
used for this analysis in 2007 survived until 2014 but had 
assets above the $1 billion threshold at the end of the post-
crisis period and so contribute to the measured decrease in 
community banks.

Q.2. Why do you think we are seeing this in the industry?

A.2. A number of different factors have contributed to the 
banking consolidation and community bank decline evident since 
2000. The elimination of geographic barriers to bank expansion, 
especially interstate expansion, in the mid-90s fueled merger 
activity. Banks merged to diversify geographically and reduce 
risk, to become larger and so lower costs through the 
realization of size-related economies, and to enter attractive 
new markets through the purchase of an existing franchise 
instead of the more expensive route of starting from scratch. 
Multibank holding companies also merged subsidiary banks that 
they already owned to lower costs. The removal of these 
geographic barriers also exposed banks to increased competition 
from more efficient organizations pressuring relatively 
inefficient ones to sell out. Changes in information processing 
and telecommunications technology also allowed out-of-market 
banks and nonbank firms to compete in local markets without 
having a significant brick-and-mortar presence. Attractive 
merger offers also induced some bankers to sell out to realize 
value for their shareholders. Bankers in rural markets also 
might be motivated to sell out due to slower rates of 
population and economic growth in nonurban areas.
    The surge in failures during the post-crisis period 
contributed to consolidation after 2007. The severe recession, 
commercial real estate exposures and the large number of 
relatively vulnerable immature banks opened in the pre-crisis 
period contributed to the failure wave. The marked decline in 
new bank charters in the post-crisis period also promoted 
consolidation over the 2008-2014 period. Profit expectations of 
potential new bank organizers were undoubtedly adversely 
affected by the deep lengthy recession.

Q.3. Are you seeing a difference in consolidation in urban 
areas vs. rural areas?
    And specifically, what impact does this consolidation have 
on rural parts of the country?

A.3. Consolidation is also evident in rural markets over both 
the pre- and post-crisis periods but the data show that 
community banks continue to play an important role in these 
markets in 2014.
    In the analysis below a rural market is defined as a county 
that is not part of either a metropolitan or micropolitan 
statistical area. There are more than 1,300 such markets in the 
United States. On their financial reports, banks report 
consolidated data only for their headquarters location and so a 
bank is considered rural if its headquarters is located in a 
rural county.

Consolidation in Rural Markets During the Pre-Crisis Period

    Virtually all of the banks in rural markets meet the 
community bank definition used here and so all of the 
discussion will focus exclusively on community bank 
consolidation. At the end of 2000, 2,541 community banks, 
accounting for $192.4 billion in total assets, were 
headquartered in 1,057 different rural markets. These community 
banks represented 27.4 percent of all community banks existing 
at this time and held 15.9 percent of total community bank 
assets.
    During the pre-crisis period, 401 rural community banks 
disappeared through mergers and just five failed. Only five new 
banks were chartered in rural markets from 2001-2007 out of the 
industry total of 1,034. Thirteen of the 2,000 cohort of 
community banks survived in 2007 but exceeded the $1 billion 
asset threshold and so drop out of the community bank group. At 
the end of 2007, 2,097 community banks were headquartered in 
rural markets and accounted for roughly the same percentages of 
the total number and total assets of community banks that they 
did in 2000.

Consolidation in Rural Markets During the Post-Crisis Period

    During the post-crisis period, 274 rural community banks 
merged. A total of 45 rural community banks failed in the 7 
years after 2007. Given that 2,097 rural community banks 
existed in 2007, this implies a failure rate of 2.1 percent. 
The comparable failure rate for all community banks over this 
period is 5.6 percent (442 failures divided by 7,856 community 
banks existing in 2007) which indicates that urban community 
bank failure rates were higher than they were for rural 
community banks. As in the pre-crisis periods only a handful 
(six) of new banks were chartered in rural markets accounting 
for 4 percent of all new banks opened after 2007. A total of 17 
of the 2007 cohort of community banks survived until 2014 but 
grew out of the community bank group.
    At the end of 2014, 1,725 rural community banks continued 
to exist with total assets of $273 billion. These numbers 
represented 29.4 percent of all community banks and 18.4 
percent of all community bank assets in 2014, which were both 
slightly higher than the comparable figures in 2007. Community 
banks are headquartered in 880 different rural markets in 2014. 
The number of community banks in rural markets fell by 372 
during the post-crisis period.
    One disadvantage in using data from bank financial reports 
to analyze changes in consolidation at the local level is that 
the information does not reveal the extent of bank operations 
in all of the geographic markets where they operate. This lack 
of detail is important because most banks operate in more than 
a single geographic area and it is not unusual that significant 
percentages of assets and income come from offices outside the 
locality they are headquartered. There is another data source 
called the Summary of Deposits (SOD) produced annually by the 
FDIC which can provide additional insight on consolidation in 
local markets. This data shows the geographic location of each 
bank and thrift office in the United States on June 30 of each 
year along with the deposits in that office. In particular, SOD 
data can show the percentage of deposits in local markets 
controlled by institutions that are not local community banks. 
One reason observers are concerned about the impact of 
consolidation on community banks is the possibility that such 
institutions will be acquired or replaced in local markets by 
larger banks that are headquartered elsewhere. The presumption 
is that these larger institutions will be unwilling or unable 
to serve customers in rural markets.
    With SOD data it is possible to measure the extent to which 
bank affiliates of holding companies headquartered out-of-State 
control deposits in rural (or non-rural) markets in each year 
and track how this indicator changes over time. SOD data for 
the year 2000, shows at least one out-of-State holding company 
had an office in 685 of the 1,339 rural markets at that time. 
The average aggregate deposit market share of these companies 
was 18.1 percent and the median market share was just 2.5 
percent. In 2007, this type of institution had at least one 
office in 734 of the 1,334 rural markets. The average deposit 
share was slightly higher at 18.7 percent and the median share 
had risen to 6.9 percent. Using the most recent 2014 report, 
out of State holding companies had offices in 715 rural markets 
(out of 1,313 total), and both their average (17.7 percent) and 
median (5.4 percent) deposit share were lower in 2014 than they 
were in 2007. This finding is consistent with recent trends in 
office closures and sales by larger banking organizations 
outside the urban markets where most of their offices are 
concentrated. So this evidence supports the conclusion that 
community banks are still able to compete effectively against 
larger, nonlocal competitors in rural markets.

Q.4. Community Institution Viability--What do you consider to 
be the biggest threat to small institutions livelihood and what 
are you doing to address those risks?

A.4. Strategic risk remains the top risk for midsize and 
community banks. Banks continue to face difficult choices to 
meet earnings targets and keep pace with competition. We have 
communicated to OCC examiners the need to assess banks' 
strategic decision making and execution processes to determine 
if plans are well researched, realistic, and supported by 
appropriate expertise and risk management infrastructures. We 
have also discussed this strategic risk in our semi-annual risk 
perspective report that is publicly available to banks. We 
communicated that banks' boards of directors and senior 
managers should ensure that strategic planning and product 
approval processes appropriately consider expertise, management 
information systems, and risk controls for the banks' business 
lines and activities. Banks also should incorporate management 
succession and retention of key personnel into their strategic 
planning process. Compliance programs should keep pace with the 
volume and complexity of regulatory changes, as well as the 
changing nature of bank customers and transactions.

Q.5. Growth and Regulatory Paperwork Reduction Act Review--Can 
you elaborate on how your review is going and share with us the 
major areas of consensus the agencies and the industry have 
found so far?

A.5. We believe the EGRPRA review process is providing us with 
helpful information about our regulations. The outreach 
meetings have offered the agencies an opportunity to hear 
directly about how our regulations affect community banks. As 
part of these efforts, community banks have told us that they 
are finding it difficult to compete in this regulatory 
environment and that regulations should be tailored to fit the 
size and complexity of the institution. To the extent that we 
have significant flexibility to amend existing regulations, and 
draft new ones, in ways to reduce the regulatory burdens on 
community institutions without compromising the safety and 
soundness of these institutions, we will do so.
    With respect to specific issues, many community banks have 
told us that our Call Reports should be simplified and revised 
to reduce duplicative reporting requirements. The OCC 
understands these concerns and, along with the other Federal 
banking agencies and under the auspices of the FFIEC, is 
undertaking a comprehensive review of all Call Report items and 
schedules. This project includes a review of every line item of 
every schedule in the Call Report to identify information that 
is essential for the agencies and must be collected.

Q.6. Can you share anything about your future plans as this 
review moves forward?

A.6. Through 2015, we plan to issue additional Federal Register 
notices requesting public comments on our remaining 
regulations. We also will hold three additional outreach 
meetings where financial institutions and consumer and 
community groups can provide their comments directly to agency 
principals and senior agency staff. Our next outreach meetings 
are scheduled for Kansas City on August 4, Chicago on October 
19, and Washington, DC, on December 2. We note that the 
agencies recently have expanded the scope of the EGRPRA review 
to include all of our regulations issued in final form up to 
the date that we publish our last EGRPRA notice for public 
comment. We will include these additional regulations in a 
future Federal Register notice requesting EGRPRA-related 
comments, and accept comments on these rules at our remaining 
outreach meetings.
    As this EGRPRA process continues, we will review comments 
received to date to determine whether there are changes to our 
rules that we can propose prior to the end of the EGRPRA review 
process. We also will review these comments for additional 
legislative changes that we can provide to Congress prior to 
the statutorily mandated EGRPRA report, so that Congress can 
incorporate these proposals sooner rather than later. (We note 
that we already have indicated support for legislative 
proposals authorizing a small bank exception to the Volcker 
rule, raising the asset-size threshold for institutions to 
qualify for the 18-month small bank examination cycle, and 
simplifying the legal requirements for Federal savings 
associations to alter their business models.) Lastly, we 
continue to seek ways to calibrate our rulemakings (outside of 
the EGRPRA process) to account for differences in the size and 
complexity of institutions in order to minimize unnecessary 
regulatory burden on community banks.
              Additional Material Supplied for the Record
 LEGISLATIVE PROPOSALS RECOMMENDED BY THE OFFICE OF THE COMPTROLLER OF 
                THE CURRENCY SUBMITTED BY SENATOR TOOMEY
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         RESPONSE FROM TONEY BLAND SUBMITTED BY CHAIRMAN SHELBY
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