[Senate Hearing 114-8]
[From the U.S. Government Publishing Office]
S. Hrg. 114-8
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 POTENTIAL CHANGES TO THE CURRENT REGULATORY REGIME AND THE
IMPACT ON COMMUNITY BANKS AND CREDIT UNIONS
__________
FEBRUARY 12, 2015
__________
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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
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THURSDAY, FEBRUARY 12, 2015
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 1
WITNESSES
R. Daniel Blanton, Chief Executive Officer, Georgia Bank and
Trust, and Chairman-Elect, American Bankers Association........ 3
Prepared statement........................................... 37
Wally Murray, President and Chief Executive Officer, Greater
Nevada Credit Union, on behalf of the Credit Union National
Association.................................................... 5
Prepared statement........................................... 43
Responses to written questions of:
Senator Brown............................................ 153
Senator Cotton........................................... 154
John H. Buhrmaster, President and CEO, First National Bank of
Scotia, and Chairman, Independent Community Bankers of America. 6
Prepared statement........................................... 93
Responses to written questions of:
Senator Brown............................................ 155
Senator Vitter........................................... 155
Senator Cotton........................................... 157
Ed Templeton, President and CEO, SRP Federal Credit Union, on
behalf of the National Association of Federal Credit Unions.... 8
Prepared statement........................................... 130
Responses to written questions of:
Senator Brown............................................ 157
Senator Cotton........................................... 158
Michael D. Calhoun, President, Center for Responsible Lending.... 10
Prepared statement........................................... 148
Responses to written questions of:
Senator Brown............................................ 159
Senator Vitter........................................... 160
Senator Menendez......................................... 160
Senator Cotton........................................... 161
Additional Material Supplied for the Record
Prepared statement of the Appraisal Institute.................... 163
(iii)
REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT UNIONS
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THURSDAY, FEBRUARY 12, 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 Shelby, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The Committee will come to order.
This week, the Banking Committee began an examination of
potential changes to the current regulatory regime. On Tuesday,
we heard from the regulators on some ways to mitigate the
regulatory burden on community banks and credit unions. Today,
we will hear from those who are subjected to that burden.
We have asked our witnesses today to share their
recommendations to us on ways to provide regulatory relief for
smaller financial institutions and how the regulators can
improve their review of outdated, unnecessary, or unduly
burdensome regulations to make it more comprehensive and
meaningful to everybody.
As the hearing on Tuesday demonstrated, I believe there is
some bipartisan support here between the Democrats and
Republicans, understanding that something, something
substantive must be done to relieve the regulatory burden on
institutions that provide essential banking functions to
communities all across this country.
I look forward to hearing from our witnesses and I also
will continue to work with my Ranking Member, Senator Brown.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and thank you to
the five witnesses that are joining us today. I appreciate that
very much. I look forward to hearing from you.
At last September's meeting, a group of witnesses similar
to today's discussed a variety of regulatory relief proposals.
Before the end of last year, Congress passed, pretty much
everybody on this Committee supported, and the President signed
into law several of those proposals where there was bipartisan
consensus. I spelled them out at Tuesday's hearing. I will not
repeat that list today. I thank a number of the Members of the
Committee--Senator Vitter, Senator Warner, others--that were
very helpful as sponsors of some of that legislation that
showed we can, indeed, work together to improve the regulatory
climate for financial institutions.
If we hope to find consensus on more regulatory relief
proposals, especially for community banks and credit unions, we
will need to engage in a process similar to the one that
allowed these bills to make it across the finish line,
consensus among agencies and industry and consumer groups, all
of our witnesses earlier in the week and our witnesses today,
and we were able to do that.
In my first hearing in 2011 as Chair of the Financial
Institutions and Consumer Protection Subcommittee, Senator
Corker and I heard from some of the same organizations that are
testifying today before this Committee about the opportunities
and challenges facing community banks. It is notable how far
the regulators have come since then, in no small part because
Members of this Committee have asked them to do more for small
institutions. The regulators understand the concerns raised by
community banks and credit unions. They made it clear in their
testimony 2 days ago and in their actions over the past several
months. They have responded by making or considering changes to
the supervision and regulation of these institutions in a way
that lessens regulatory burden while at the same time
safeguarding safety and soundness and the consumer protections
that are in place.
As this Committee begins a process to determine if there
are actions Congress should take to provide additional
regulatory relief to the smallest financial institutions, I
believe we need to do several things. We need to better
understand the impact of the regulators' efforts. We need to
determine if there is more the regulators should do through the
EGRPRA review or other means to reach a relieved regulatory
burden. We need to vet the proposals being recommended at this
week's hearings, and we need to build stakeholder consensus on
these proposals.
The privacy notice bill which I mentioned on Tuesday has
gone through this type of process. We know the CFPB has done
all it can within its authority to address this concern of
community banks and credit unions. The current proposal,
reintroduced by Senators Moran and Heitkamp earlier this week,
has broad bipartisan consensus, 75 cosponsors last year, and
has been vetted. I believe the Committee, as I mentioned to the
Chair earlier in the week, should take action on this.
Another bill, to allow privately insured credit unions to
become members of the Federal Home Loan Bank System, which I
introduced last Congress, has begun this process, as well.
Senator Donnelly is working on that legislation this year.
We know that there are no additional actions FHFA can take,
and I believe that stakeholders are open to changes to the bill
to reflect concerns raised at the end of last year. This is a
successful model for our consideration of other regulatory
relief proposals. It does not mean we will agree with every
idea that deserves action. I want to reiterate that I am not
interested in moving proposals that will weaken or roll back
Wall Street reform, or undermine safety and soundness, or roll
back consumer protections.
But, I think we should act on the proposals upon which we
all agree, after fair consideration, those proposals that will
make a difference for the smallest institutions. That is how
this Committee has worked in the past under Chairs of both
parties and we are hopeful that is how the Committee--and have
every reason to expect Senator Shelby and me to be able to work
together and do the same thing.
Chairman Shelby. Thank you, Senator.
I would like to remind my colleagues here that the record
here will be open for the next 7 days for any additional
statements and any other materials that you might want to
submit to our witnesses, and I thank the witnesses for being
here today.
Dan Blanton is the Chief Executive Officer for the Georgia
Bank and Trust and the Chairman-Elect of the American Bankers
Association.
Mr. Wally Murray is the President and Chief Executive
Officer for the Greater Nevada Credit Union and is testifying
on behalf of the Credit Union National Association.
John Buhrmaster is the President of the First National Bank
of Scotia and the Chairman of the Independent Community Bankers
of America.
Mr. Ed Templeton is the President and CEO of SRP Federal
Credit Union and is appearing on behalf of the National
Association of Federal Credit Unions.
And, Mr. Michael D. Calhoun is the President of the Center
for Responsible Lending.
I welcome all of you to the Committee. Your written
statements will be included in the record and I wish you would
sum up your basic statements as quickly--within 5 minutes where
we can have a question and answer period with you.
We will start with you, Mr. Blanton.
STATEMENT OF R. DANIEL BLANTON, CHIEF EXECUTIVE OFFICER,
GEORGIA BANK AND TRUST, AND CHAIRMAN-ELECT, AMERICAN BANKERS
ASSOCIATION
Mr. Blanton. Thank you, Chairman Shelby and Ranking Member
Brown. My name is Dan Blanton. I am the Chief Executive Officer
of the Southeastern Bank Financial Corporation and Georgia Bank
and Trust in Augusta, Georgia, and I am also the Vice Chairman
of the American Bankers Association. I appreciate the
opportunity to be here today to discuss ABA's agenda for
America's hometown banks and to convey how the growing volume
of bank regulation, particularly for community banks, is
hurting the ability of banks to meet the needs of consumers and
communities.
Community banks are resilient. We have found ways to meet
our customers' needs despite the ups and downs of the economy.
This job has been made much more difficult by the avalanche of
new rules, guidance, and seemingly ever-changing expectations
of our regulators. It is this regulatory burden that often
pushes small banks to sell to banks many times their size. In
fact, today, there are 1,200 fewer community banks today than
there were 5 years ago. This trend will continue unless some
rational changes are made to provide relief to community banks.
Every bank in this country helps fuel job creation,
economic growth, and prosperity. The credit cycle that banks
facilitate is simple. Customers' deposits provide funds to make
taxes--I mean, to make loans that allow customers to invest in
their hometowns. The profits generated by these investments
flow bank into the banks as deposits, and the credit cycle
repeats, creating jobs, tax revenue, wealthy individuals, and
capital to expand businesses.
Regulation shapes the way banks do business and can help or
hinder the smooth function of the credit cycle. Every bank
regulator changes--every bank regulation change directly
affects the cost of providing bank products and services to
customers. Every small change can reduce credit availability,
raise costs, or drive consolidation. Everyone who uses bank
products and services is impacted by changes in bank
regulation.
Congress must take steps to ensure that the banking
industry has ability to facilitate jobs creation and economic
growth through their credit cycle. When a bank disappears,
everyone is affected.
We urge Congress to work together, Senate and House, to
pass bipartisan legislation that will enhance the ability of
community banks to serve our communities. In particular,
Congress can take action to ensure credit flows to communities
across the country by improving the access to home loans. The
mortgage market touches the lives of nearly every American
household. Banks help individual consumers achieve lifelong
goals of ownership by giving them access to funds that they
need.
It is painfully clear that new regulations requirements
have constrained the mortgage lending and have made it
particularly difficult for first-time home buyers to obtain a
home loan. Over-regulation of the mortgage market has reduced
credit availability to bank customers, raising the cost of
services and limiting bank products. The result has been a
housing market that still struggles to gain momentum.
Congress should ensure that loans held in portfolio are
treated as qualified mortgages. The Dodd-Frank Act is very
restrictive on its definition of ability to repay and this is
having a detrimental impact on the market and consumers with
their credit. We support legislation that would deem any loan
made by a bank and held in that lender's portfolio as showing
ability to repay and, therefore, compliant with the Qualified
Mortgage Act. Loans held in portfolio by their very nature
demonstrate the ability to repay. Simply put, banks would not
be staying in business very long if they made and held loans on
their books that cannot be repaid. This is a common sense
approach that does not impose additional challenges on
borrowers and lenders in the lending process.
In addition, Congress can help community institutions by
expanding the number of banks eligible for the 18-month exam
cycle for highly rated community banks; providing an
independent appeals process for bank examination decisions; by
providing flexibility in the definition of rural for qualified
mortgage designation purposes; and establishing a review and
reconciliation process that will prevent the duplication of
rules and eliminate redundant rules; and requiring targeted
rulemaking for regulations that focus on the purpose of the
rule; removing arbitrary regulatory thresholds not
corresponding to the bank's risk and business model; approving
Senator Moran and Senator Heitkamp's legislation, S. 423, that
eliminates redundant annual privacy notices; and eliminating
unnecessary currency transaction report filings; providing
greater accountability for law enforcement's use of the Bank
Secrecy Act data.
ABA stands ready to help Congress address these important
issues, and thank you, and I would be happy to answer any
questions that you may have.
Chairman Shelby. Thank you, Mr. Blanton.
Mr. Murray.
STATEMENT OF WALLY MURRAY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GREATER NEVADA CREDIT UNION, ON BEHALF OF THE CREDIT
UNION NATIONAL ASSOCIATION
Mr. Murray. Chairman Shelby, Ranking Member Brown, thank
you for the invitation to testify today for the Credit Union
National Association. I am Wally Murray, President and CEO of
Greater Nevada Credit Union and Chairman of the Nevada Credit
Union League.
As the economy recovers, America's credit union members
continue to rely on their credit unions for safe and affordable
financial services delivered by institutions that they own, and
we continue to provide tremendous benefits in terms of lower
interest rate loans and lower fee or no fee products and
services. Because credit unions are actively fulfilling their
mission, consumers benefit to the tune of $10 billion annually.
Yet, there are multiple statutory and regulatory barriers that
keep us from more fully serving our members and we want to work
with the Committee to reduce them. Doing so will significantly
improve the impact credit unions have on consumers and the
communities we serve.
Since the beginning of the financial crisis, credit unions
have been subjected to more than 190 regulatory changes from
nearly three dozen Federal agencies totaling nearly 6,000
pages. These new rules, usually aimed at curtailing practices
that we do not engage in, impact us because we have to analyze
the rule and determine how to comply, change internal policies
and controls, design and print new forms, retrain staff, update
computer systems, and help our members understand the changes.
This costs money and time, both of which would be far better
spent serving our members.
Recently, a number of Senators asked about the cost of
complying with these rules. Sharing this concern, I am pleased
to announce that CUNA is embarking on a major study on the
impact of the regulatory burden on credit unions, including its
costs. We are engaging in this effort because we know it is
important to Congress to understand the cost impact associated
with compliance, and, frankly, we have been disappointed with
the regulators' efforts to quantify the expense their rules
impose on credit unions and our members. We hope to have that
data to share with the Committee later this year.
In addition, Congress should strongly consider why small
institutions are being required to comply with rules more
appropriately suited for too-big-to-fail banks and abusers of
consumers. Policy makers universally say credit unions and
community banks did not solve the problem, but you would not
know that based on the hundreds of rules to which we have been
subjected since the crisis. If you truly believe we are not the
problem, please work with us to remove the barriers that keep
us from serving our members, your constituents, even better.
My written testimony includes more than two dozen
recommendations for statutory changes. A few examples are: The
Federal Credit Union Act has not kept up with the rapidly
developing financial services industry over the last 20 years.
The time has come to modernize that Act. We urge Congress to
look at credit union capital requirements, restore full
business lending authority, streamline field of membership, and
grant new powers. In addition, we ask that Congress promote a
fair examination system by creating an independent ombudsman
and appeals process.
We also encourage Congress to ensure the CFPB uses its
exemption authority to a much greater extent than it has to
date. Members of this Committee have acknowledged that the
Bureau has such authority, but we believe it is not being used
sufficiently. We ask Congress to clarify and strengthen these
exemption instructions as they pertain to smaller depository
institutions, like credit unions. If a new rule results in a
credit union doing less to serve its members, that rule has
failed. A perfect example for credit unions is the remittances
rule.
We also look forward to the enactment of legislation
modernizing privacy notification requirements so that consumers
receive meaningful information about how their personal
financial data is being handled.
My written testimony also includes two recommendations
related to the Federal Home Loan Bank System. One would permit
more credit unions to join the system. The other would extend
the Community Financial Institution exemption to include credit
unions.
Finally, we urge the Committee to actively engage in the
debate over data security. Credit unions and their members are
greatly impacted by the weak merchant data security practices
that have allowed several large-scale breaches, including those
at Target and Home Depot, which have adversely affected my
credit union and our members. The negligence of those that do
not protect their payment information costs us a lot of money
and shakes the confidence of our members. These breaches would
be significantly reduced if those that accept payments were
subject to the same standards as those that provide cards. We
implore the Committee to hold hearings and consider legislation
that ensures all participants in the payment system follow the
same securities standards.
Congress does a lot to remove barriers for credit unions
and community banks. It has not gone unnoticed to us that this
hearing is one of the first that this Committee has held this
year. We are grateful for this and we are hopeful that it
indicates the priority of these concerns for the Committee. We
look forward to working with you and thank you for the
opportunity to testify today.
Chairman Shelby. Thank you.
Mr. Buhrmaster.
STATEMENT OF JOHN H. BUHRMASTER, PRESIDENT AND CEO, FIRST
NATIONAL BANK OF SCOTIA, AND CHAIRMAN, INDEPENDENT COMMUNITY
BANKERS OF AMERICA
Mr. Buhrmaster. Chairman Shelby, Ranking Member Brown, and
Members of the Committee, my name is John Buhrmaster and I am
President and CEO of First National Bank of Scotia, a $425
million asset bank in Scotia, New York. I am also Chairman of
the Independent Community Bankers of America and testify today
on behalf of more than 6,500 community banks nationwide. Thank
you for convening today's hearing.
We are here today to discuss a fundamental question: What
is at stake for the future of the American banking industry? Do
we want a system with fewer but much larger banks, more
systemic risk, less consumer choice, and commodified product
offerings? Will we allow large expanses of rural and small town
America to be deprived of access to essential banking services?
This Congress provides a unique opportunity to reflect on this
troublesome but very real scenario and to enact legislation
that will help reverse a dangerous trend.
Meaningful regulatory relief is needed to preserve the
economic value community banks bring to our Nation. America is
built on community bank credit, yet the rich tradition of
community banking is at risk today because of regulatory
overkill grossly out of proportion to any systemic or consumer
risk posed by community banks.
A community bank is not a mega-bank on a small scale. The
key characteristics of a community bank are a simple capital
structure and business model, traditional products and
services, and most importantly, a community-oriented character.
It is a time-tested business model that built this country and
has worked for generations.
The fundamental policy error of recent years has been
applying monolithic regulatory mandates to community banks.
Community banks deserve tiered regulation proportionate with
their size and risk profile. Such relief is needed in the near
term, not medium term or the long term. I urge this Committee
not to let this opportunity slip.
ICBA's Plan for Prosperity is a robust regulatory relief
agenda with nearly 40 legislative recommendations that will
allow Main Street to prosper. Each provision of the plan was
crafted to preserve and strengthen consumer protection and
safety and soundness. A copy is attached to my written
statement.
But, before describing it, I would like to thank the
Members of this Committee for their leadership in the adoption
of H.R. 3329 at the end of last Congress, which doubled the
qualifying asset threshold under the Small Bank Holding Company
Policy Statement. This Congress, you have already passed
legislation to ensure community bank representation on the
Federal Reserve Board of Governors. Both of these provisions
are now law. On behalf of my bank and all community banks,
thank you. These are steps in the right direction, but much
more can and much more must be done.
ICBA's Plan for Prosperity is organized around three broad
pillars. The first pillar is mortgage lending. Every aspect of
mortgage lending is subject to new, complex, and expensive
regulations that are upending the economics of this line of
business. Our recommendations include qualified mortgage status
for community bank mortgage loans held in portfolio and other
critical provisions.
The second pillar of the plan is improved access to capital
to sustain community bank independence. Our recommendations
include an exemption from Basel III, which was intended to
apply only to large internationally active banks; relief from
the costly mandates of S-Ox 404(b); and reform of Regulation D
to ease investment in privately owned community banks.
The third pillar of the plan is reform of bank oversight
and examination to better target the true sources of risk. Our
recommendations include streamlining the quarterly call report
and an extended exam cycle for highly rated banks, and reform
of the bank exam appeals process to improve accountability.
The Senate bill from last Congress that best represented
the scope of the Plan for Prosperity was the CLEAR Relief Act
sponsored by Senators Moran, Tester, and Kirk. With more than
40 bipartisan cosponsors, the bill was a set of consensus
solutions to ensure continued access to credit and other
banking services. We are grateful to the Members of this
Committee who supported the CLEAR Act. This Congress, we look
forward to a new CLEAR Act with even more robust, yet sensible,
community bank relief.
Last Congress, over 20 bills were introduced in the House
and the Senate embodying Plan for Prosperity provisions.
Chairman Shelby introduced a bill to require cost-benefit
analysis of proposed rules. Senators Moran and Heitkamp have
reintroduced a bill to provide relief from privacy notices. Six
bills passed the House and many others passed the Financial
Services Committee. These bills, most of which enjoyed strong
bipartisan support, have set the stage for action in this
Congress.
We strongly encourage this Committee to complete the work
that was begun in the last Congress and enact meaningful
regulatory relief for community banks. We look forward to
working with this Committee to craft urgently needed
legislative solutions.
Thank you again for the opportunity to testify today and I
look forward to your questions.
Chairman Shelby. Mr. Templeton.
STATEMENT OF ED TEMPLETON, PRESIDENT AND CEO, SRP FEDERAL
CREDIT UNION, AND CHAIRMAN, NATIONAL ASSOCIATION OF FEDERAL
CREDIT UNIONS
Mr. Templeton. Good morning, Chairman Shelby, Ranking
Member Brown, Members of the Committee. My name is Ed
Templeton. I am testifying today on behalf of NAFCU, where I
serve as the Chairman of the Board. I currently am President
and CEO of SRP Federal Credit Union headquartered in North
Augusta, South Carolina. The entire credit union community
appreciates the opportunity to come before you today.
Credit unions have always focused on their members.
However, the increasing complexity of regulation is taking a
toll on the industry. The impact of the growing compliance
burden is evident as the number of credit unions continues to
decline. Since the second quarter of 2010, we have lost nearly
1,100 credit unions, 96 percent of which were below $100
million in assets. Many institutions simply cannot keep up with
the new regulatory tide and have had to merge out of business
or be taken over. Credit unions need regulatory relief, both
from Congress and from the regulators, including the NCUA and
the CFPB.
At SRP, our compliance costs have more than doubled since
2009, and we are actually adding another compliance officer in
2015 just to keep up. That is not getting ahead, that is just
to keep up. Many credit unions find themselves in similar
situations. A recent NAFCU survey found that 70 percent of
respondents have noncompliance staff working on compliance
issues, which takes time away from the mission of serving the
members. Focusing on complying with unnecessary regulations
keeps credit unions from fulfilling our core mission of
providing our members with provident credit and other financial
services.
My written testimony outlines NAFCU's updated five-point
plan for credit union regulatory relief as well as our new top
ten list of regulations that need to be amended or eliminated.
One of the greatest challenges the credit unions face today
is the disconnect between the regulatory agency in Washington
and the real world that credit unions and community banks
operate in. While regulators have taken some small steps toward
relief, too often, arbitrary thresholds do not actually
consider the risk or complexities of institutions. Regulation
of the system should match the risk to the system.
One example of a burdensome regulation where costs will
outweigh the benefits is the NCUA's new risk-based capital
proposal. The new proposal is a significant improvement over
the initial proposal, but the problem with the regulation
remains. The proposed rule is extremely costly and NCUA has not
demonstrated why it needs a broad-brush regulation. Despite
NCUA's estimate that a relatively small number of credit unions
will be downgraded with its risk-based capital proposal, the
rule would force most credit unions to hold millions of dollars
of additional reserves just to achieve the same capital levels
we currently maintain. These funds could otherwise be used to
make loans to consumers, to small businesses, or aid in our
Nation's economic recovery.
We also believe there are serious legal questions
concerning the ability of NCUA to finalize the proposal as
written. Ultimately, we believe legislative changes are
required to bring about a comprehensive capital reform action
allowing credit unions access to supplemental capital.
Next, NAFCU believes the field of membership rules for
credit unions should be modernized on both the legislative and
the regulatory fronts. NAFCU believes that reasonable
improvements to current field of membership restrictions
include streamlining the charter changing process, revising the
population limits in NCUA's field of membership rules, and
making statutory changes to allow all credit unions to add
underserved communities to their working groups.
Cost and time burden estimates issued by regulators are
often grossly understated. We believe Congress should require
periodic reviews of actual regulatory burdens of finalized
rules and ensure agencies remove or amend those rules that
vastly underestimated the compliance burden. At SRP, we spend
approximately 116 man hours to fill out one NCUA call report.
NCUA's 2014 submission to the OMB estimated the time to do that
at 6.6 hours. Something does not add up, 116 versus 6.6. There
is a disconnect someplace.
All regulations must meet the test of whether the benefits
outweigh the costs. We always need to have the end game in mind
and make sure the regulation matches the true risk. There are a
number of additional steps outlined in my written statement,
both for Congress and the regulators, to provide relief.
In conclusion, the growing regulatory burden on credit
unions is the top challenge facing our industry today. It must
be addressed in order for credit unions to survive and meet the
mission of serving their members' needs. We urge Congress to
enact regulatory relief and hold regulators accountable to do
the same.
We thank you for the opportunity to share our thoughts
today with you and I welcome any questions you may have.
Chairman Shelby. Thank you, Mr. Templeton.
Mr. Calhoun.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
RESPONSIBLE LENDING
Mr. Calhoun. Chairman Shelby, Ranking Member Brown, and
Members of the Committee, today's hearing addresses the
question of how we protect and promote critical community
financial institutions while preserving consumer financial
protections that are essential for the growth and integrity of
our economy.
The Center for Responsible Lending is the policy affiliate
of Self-Help, a community financial institution with over 30
years' experience providing banking services that help small
businesses and families succeed. We have provided over $6
billion of financing for small businesses, home loans, and
today have tens of thousands of families that depend upon us
for deposit accounts, credit cards, home loans, and other basic
financial products.
Before joining CRL, I spent a large part of my career
working in those lending programs, and I also served as General
Counsel dealing day to day with compliance issues. So, we know
well the different business model and activities of traditional
community financial institutions. The key is how to advance
that effort.
Four principles apply. First, we must protect the integrity
and fairness of our financial markets. Not only were community
banks not the cause of the financial crisis, they were among
the most severely impacted victims. While they did not offer
the risky home loans that drove the crisis, the resulting
recession stressed those banks and we lost nearly 500 of them
in the ensuing years, and that occurred before Dodd-Frank rules
went into effect. One of the most important advances in
consumer regulation is, for the first time, nonbanks are now
required to follow basic rules that banks have followed for so
long. In providing relief to community institutions, we must
continue those protections.
Second, relief must be directed to traditional community
financial institutions. Many of the proposals that have been
made would primarily or solely benefit larger institutions. Of
course, there should never be unnecessary regulations for
institutions of any size. But, where exceptions to otherwise
effective provisions are being made to accommodate special
business model community banks, they should be carefully
targeted.
Overly broad provisions undercut basic protections, and
also, they dilute the benefit of the provision to community
banks. At their worst, they create exemptions for nondepository
entities, including the very players that pushed reckless
lending in the past. For example, several of the mortgage
proposals would apply to lightly supervised nonbanks and open
the door again to reckless lending.
Focusing on traditional community banks also means focusing
on the community lending model. Some of the proposals include
exemptions up to $50 billion. Institutions in this category
have very different business models from traditional community
banks. They include American Express Bank, E*Trade Bank, GE
Bank, and Morgan Stanley Bank. While those institutions provide
important financial services, their markets and activities have
little in common with traditional community financial
institutions.
Third, overly broad exceptions undercut basic protections.
We saw this with the bipartisan Military Lending Act, which
protects service members from predatory loans. The original
rules had several exemptions, and payday lenders and others
learned quickly how to restructure their business to exploit
them. As a result, the rules failed and our military bases
today are still encircled with lenders targeting 400 percent
loans at our troops. Congress has directed DOD to go back and
rewrite those rules, which they are doing in this time.
Fortunately, many of the agencies, as we heard earlier this
week, are addressing how to preserve the community bank model
and providing relief there. Most recently, the CFPB provided
substantial revisions to the mortgage rules addressed to
community banks.
Fourth, we must distinguish between community financial
institution regulatory relief and proposed structural changes,
such as to the CFPB. Those changes pose the greatest threat to
basic financial protections. They also undercut efforts to
deliver relief to the community banks. For example, we saw in
the buildup to the housing crisis the budget process was used
to hamstring oversight that would have countered the
uncontrolled lending. When HUD tried to put restrictions on
risky mortgages and when there were efforts to rein in the
GSEs' excessive portfolios, both of those efforts were blocked
with budget provisions. Similarly, structural changes such as
commission undercut effective oversight. That is why the Senate
in 2008 by a broad bipartisan vote explicitly required
independent funding and a single director for the new regulator
of the GSEs.
In conclusion, thank you for the opportunity to testify
today. We look forward to working with the Committee, the other
community financial institutions, and regulators in advancing
the role and growth of community banking.
Chairman Shelby. Thank you, Mr. Calhoun.
Mr. Blanton, arbitrary thresholds--in your testimony, you
recommend removing arbitrary asset thresholds for certain
regulations. If you were to remove arbitrary asset thresholds,
what would you use instead?
Mr. Blanton. Yes, I would propose a risk-based model that
looks at the banks' risk profile that they are taking and set
guidance based on that. In my State, Georgia, which has had a
pretty tough economy, we have lost 87 banks. All of these
banks, when you looked at their risk profile, were very highly
leveraged in certain areas, but all of them would have been
under a threshold. So, the threshold, to me, does not really
properly identify the type of business model these banks are
in.
Chairman Shelby. I think people know I am a strong believer
in empirical analysis when it comes to regulations. If a
regulation's cost outweighs its benefits, I believe it should
be thrown out, or never brought forth. On Tuesday, we heard
here from the Federal Reserve that it is easy to measure
regulatory cost basis. Mr. Templeton, have the regulators done
a good job analyzing costs and benefits?
Mr. Templeton. Sir, the example I gave, I think, in my
verbal testimony speaks somewhat to that. In our shop, it takes
north of 100 hours just to do the call report. NCUA estimated
that it is 6.6. If they use that type of data to do the whole
industry, you can see the magnitude of the misrepresentation of
the cost. That is a good example, sir.
Chairman Shelby. In the area of de novo bank charters, Mr.
Buhrmaster, it is my understanding that only two de novo
Federal banking charters have been approved since 1909. On
Tuesday, we heard from the FDIC that this is due to, quote,
``the economic cycle,'' not, quote, ``legislative barriers or
even regulatory barriers.'' Are regulatory barriers, Mr.
Buhrmaster, standing in the way of new banks being formed?
Mr. Buhrmaster. Well, we have seen some economic recovery
in parts of the country----
Chairman Shelby. Uh-huh.
Mr. Buhrmaster.----much of the country. So, clearly, I do
not believe it is part of the economics of it. What I do
believe--or, the national economics. What I do believe is I
have got a stack here--I asked my compliance officer to show me
all the regulations she has had to look at, that is guidances,
changes, and so forth. I had to print it in small print so I
could actually not over-exceed the weight limit on the plane.
But, this is 7 years' of changes these folks have had to do.
Now, a de novo for the first 7 years is going to be subject to
all of this. It is a crushing burden on a new business, and,
frankly, they are small businesses. Would you open a small
business if you had to deal with this amount of regulatory
burden?
Chairman Shelby. It would not happen, would it?
Mr. Buhrmaster. It would not happen.
Chairman Shelby. I will direct this question to the credit
union. A lot of us are concerned when regulations limit
choices, increase costs for consumers, or perhaps cause
institutions to stop offering products altogether. Mr. Murray,
have any regulations increased the cost of products or services
that you offer your members or caused you to stop offering them
altogether?
Mr. Murray. A great example of that in our shop is the
remittances rule that was put forth by CFPB. That forced us to
raise the prices of that service for our members after we first
had to make a choice about whether or not to continue with that
service at all. That is a choice that many credit unions, they
opted out of that service simply because of the cost of that
regulation and found it too burdensome to continue to offer.
Again, the cost-benefit just was not--it did not stack up. So,
that is a great example of one where we have had to raise our
price by 10 percent or more just to stay up with that----
Chairman Shelby. That is where you need some relief, is it
not?
Mr. Murray. We would love some relief in that area.
Chairman Shelby. Risk-based capital proposal--last month,
the National Credit Union Administration issued a revised
proposal regarding the capital standards for credit unions. Mr.
Templeton and Mr. Murray, what are your views on the revised
proposal, and has the National Credit Union Administration
conducted a sufficient cost-benefit analysis?
Mr. Templeton. First, I would say that the current proposal
is a significant improvement from the first proposal, so I
would applaud NCUA for moving in the right direction. But, I
think the real question still remains, is this a regulation
that has a purpose for being in existence?
When we take the regulation as proposed and roll it back
over the last 9 years--and the calculations are not crystal
clear, you have to make a few assumptions, so let me just be
clear on that--but, when we take the regulation, apply it
retrospectively, 95 percent of the credit unions that would
have been problematic under the regulation came through the
last 9 years and are healthy and alive today. Very few credit
unions would not have made it through. What the proposal would
have done is it would have made it extremely hard or
intensified the pressure on all credit unions to raise
additional capital that would have been called for under the
regulation.
Now, does that mean it is not necessary? I think it is a
good indication it is not necessary and it has not been
thoroughly analyzed, and particularly with the benefit of
looking back. We can look back right now and really see if, in
a hard time, this rule would make a difference. So, that is
where I think we are on that, sir.
Chairman Shelby. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
I want to dig a little more deeply on the issue of costs
and benefits of these regulations. That seems to be the primary
purpose of this hearing, to discuss that. Mr. Calhoun, I would
like to ask you, we heard in today's--I am sorry, in Tuesday's
hearing that the regulators already conduct significant impact
analysis of their rules, both during the rulemaking stage as
well as retrospectively, in addition to the EGRPRA rule.
Several agencies noted on Tuesday that they conduct ongoing
reviews of their rules more frequently and voluntarily. The
regulator of credit unions, the Consumer Bureau, they do those
without being required to by Federal law. Witnesses pointed to
the inherent difficulty in assessing the benefits of a rule,
especially sort of the societal-wide benefits, since preventing
another financial crisis or ensuring that consumers have
protections before subject to predatory lending may not be
easily quantifiable beforehand.
Several recent bills offered by some Members of this
Committee and others have proposed that we should require
agencies to undertake more cost-benefit analysis as they
proceed. Tell us your opinion of these bills, many of which
have broad applications across more than just financial
services through the Government, but particularly impact
financial regulators. Give us your thoughts about some of these
requirements.
Mr. Calhoun. Well, certainly, agencies must consider the
burden of their regulations, both when they are considering
them in the first place, and they need to go back and look at
them again. I mean, for example, the CFPB has a requirement
that they have to go back and reevaluate every regulation after
a 5-year period in addition to their evaluation at the outset.
But, many of these cost-benefit analyses are very
challenging, and let me just give one example. A proposal which
most of the members here strongly supported was the reform of
our credit card market, but at the time that that was
proposed--it initially was proposed by the Federal Reserve
using their rulemaking authority--there were predictions from
industry that it would not only destroy the credit card market,
but pose systemic risks to the whole banking system because of
the stress on the credit card banks. And, if the agency had to
cost that out, I mean, those are very difficult projections,
and understandably, and we have seen this ourselves, when you
have to comply with the regulations, you look at them from a
different viewpoint, often, than when you are writing them.
But, if you impose a burden like that, particularly with
the ability to block all regulations by legal challenges, I
think we throw the baby out with the bath water there and we
end up with just gumming up the whole system. Again, clearly,
the burden has to be assessed on initial and ongoing basis, but
these proposals, I think, again, would throw the baby out with
the bath water.
Senator Brown. Thank you.
Give me a brief answer on this. Are costs easier to--costs
to the banks and the credit unions, and then Wall Street, too--
are costs easier to quantify than benefits?
Mr. Calhoun. They are, but they are often exaggerated. If
you look in the consumer product world, another example was
when it was proposed that lawnmowers have a cutoff device, it
was projected by industry that that would add $500 or so to the
cost of every lawnmower. Well, now you can still go buy a
lawnmower with a cutoff device for under $200 at Walmart. I
mean, it is very hard to know--there is as much art as science
in projecting both the costs and even more so the benefits.
Senator Brown. Let me pursue one more question----
Mr. Calhoun. Yes.
Senator Brown.----Mr. Chairman--Mr. Calhoun, on costs.
Today and in Tuesday's hearing, several questions were asked
about the increasing costs of compliance to community banks and
credit unions after the passage of Dodd-Frank. What has been
your experience with compliance costs?
Mr. Calhoun. I think our experience, and we are a--we have
Federal and State credit union charters and go through the call
reports and everything that everybody else gets to have the fun
with--a lot of that came as a natural reaction to the financial
crisis, that you did have lots of institutions failing, again,
mainly due to the macro effects, but that led regulators to
more carefully scrutinize all financial institutions. And, so,
that has been, from our view, the biggest driver of it.
We do think there needs to be review and concern about
overlapping regulations. We applauded the regulators, for
example, for uniting the QM and QRM rule. That would have been
a whole another layer of mortgage regulation, that I think the
regulators heard the call to say, simplify that and make them
the same. So, we think that we are getting some response from
the regulators. Clearly, efforts like today help highlight
these issues in a very beneficial way.
Senator Brown. Thank you, Mr. Chairman.
Chairman Shelby. Senator Corker.
Senator Corker. Thank you, Mr. Chairman, and thank you for
having this hearing, you and the Ranking Member, and I want to
thank all of you for your testimony.
I am going to ask all of my questions to Mr. Blanton, but I
just want to say this. I have seen nothing like Dodd-Frank to
alleviate the tensions between the credit unions and the
banks----
[Laughter.]
Senator Corker.----and, I will say, it is a welcome
reprieve for all of us who have had to have to deal with that
tension.
But, to Mr. Blanton, as we look at encouraging private
capital back into the mortgage market, it seems one of the
easiest things we can do is deem loans held in a lender's
portfolio as compliant with the QM standard for the purpose of
a borrower's ability to pay. I understand that the CFPB
partially addressed this issue through its Notice of Proposed
Rulemaking. Last Congress, legislation was introduced in the
House, H.R. 2673, that would provide broader and more permanent
relief for any depository institutions that make loans and hold
them on portfolio.
Why is this relief provided--why is the relief provided by
the CFPB insufficient, and why would the legislation introduced
last Congress be such an improvement, and what do you say to
those who suggest relief like this would lead to the
proliferation of some of the predatory products we saw leading
up to the crisis?
Mr. Blanton. Thank you. Survival is a real driver for
cooperation, so----
[Laughter.]
Mr. Blanton. With the QM rule--you know, my whole career, I
have been making a loan to where the father would call me and
say, ``My son is getting married. He and his wife really do not
qualify, but we have got to get them in a house.'' I would say,
``Fine. We will take care of it.'' I have made hundreds of
those loans. Now, under the definition now, I know from day one
they do not qualify. I cannot put my bank in the position of
making that loan where I have put more people in fresh and new
homes, new couples for that scenario--and that is what
community banks do, is we have this relationship with these
borrowers, and we have the father call us and say, ``Please
help my son or my daughter.'' With this definition now, if I
cannot deem that QM from day one and put it on my books, I have
now put my institution at risk. And, so, these are the things
that we need to see legislation passed to allow us to continue
to make this relationship loan that we have always made and
help this young couple into a house.
Senator Corker. And, I was not actually going to do this,
but Mr. Calhoun, if you could briefly respond. It seems to me
that that is a legitimate thing, that the three Cs--character,
character, and knowing the people you are dealing with--has
been a fundamental part of our banking industry for years.
Would you have any opposition to that type of thing?
Mr. Calhoun. So, we have very strongly supported the
expansion of QM status for community bank loans on portfolio,
but it is a different business model. I would note, even in the
crisis, WaMu and Wachovia, for example, two institutions that
both went under largely due to unsustainable loans on their
portfolio, and when you are looking at a refinancing, it is the
borrower's equity in the house--and the majority of loans still
today are refinances--it is the equity in the house that is
providing the cover.
But, we are strong supporters, again, for community
financial institutions. His lending model is very different
from a large bank where it is much more routinized and
impersonal, so----
Senator Corker. So I have a consensus on this point?
Mr. Calhoun. I think there is a large amount of consensus
on this point.
Senator Corker. My second question. If you think back to
the terms of the underlying reasons behind the Volcker Rule, I
think you would be hard pressed to find anyone that thought it
was needed because of the activities of community banks. Yet,
according to the letter of the law, banks must be in
compliance. On Tuesday, Mr. Bland of the OCC said that the
compliance effort to make that determination seems costly
compared to the actual activities that smaller banks have. What
does it mean for smaller banks that never engaged in
proprietary lending but still need to be in compliance for the
Volcker Rule?
Mr. Blanton. Well, we first saw we do have to do an
analysis to even determine where that qualifies, and most
community banks, the only part that they are involved in is
maybe the deposit accounts of local municipalities and all.
And, so, for us, it is just a very expensive process to make
that determination and then have to deal with that.
Senator Corker. And, Mr. Calhoun, briefly, do you have any
issue with that type of proposal?
Mr. Calhoun. So, the Volcker Rule requires community banks
to still document that they are not covered. There seems to be
room there for relief to make that certainly easier and less
burdensome than it is now, again, for community banks.
Senator Corker. Yes. Well, it seems like we are making a
lot of progress here.
[Laughter.]
Senator Corker. I would say that--my last point, and I know
there will not be time to answer unless the Chairman gives me a
second, but the Bipartisan Policy Center suggested creating a
pilot program for a consolidated examination force for
institutions subject to supervision by all three of the Federal
prudential regulators. Such a program would force coordination
between agencies and minimize the costs associated in
examination for banks. It appears that the Federal Financial
Institutions Examinations Council would provide the vehicle to
run the pilot program. Just briefly, Mr. Blanton, do you think
this is something that would be a good idea?
Mr. Blanton. I think it is something that needs to be
explored. I do not--I think more information needs to be looked
at, but I think it certainly ought to be explored and might
very well have good credibility to it.
Senator Corker. Thank you all for being here and for what
you do in your communities around the country. I do not know
why we have two institutions separated by the Savannah River
here at one place, but we are glad to have you.
[Laughter.]
Senator Corker. Thank you very much.
Chairman Shelby. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman, and thank all
the witnesses for their testimony.
You know, banking is a regulated industry, and with good
reason. One need to look no further than the financial crisis,
when millions of Americans lost their homes, jobs, and
retirement savings, and businesses across the country had to
close their doors and let their employees go, and taxpayers had
to bail out some of the worst offenders just to prevent an even
bigger meltdown. But, I also believe that regulation is not a
one-size-fits-all exercise. A community bank or credit union
that makes loans to small businesses and home buyers poses
different risks and should be treated differently from an
integrated mega-bank with multinational scope and sophisticated
trading operations.
So, I am eager to work with my colleagues on both sides of
the aisle on targeted consensus measures that help small
institutions better serve their communities and compete in the
marketplace and to reduce unnecessary burdens for institutions
of any size. However, in the desire to do that--and I have
often said that community banks were not the cause of our
financial crisis in the preceding years--I would, however,
caution that those who would seek to use regulatory relief for
small institutions as a pretext for other goals, such as
gutting important consumer protections or financial reforms,
will face a challenge by many of us.
I believe that regulatory relief is compatible with
protecting consumers, investors, and taxpayers, but I would
have serious concerns about attempts to hijack the process and
undermine these goals, for example, by creating overly broad
carve-outs or imposing a rigged version of cost-benefit
analysis that would block almost any regulatory action and
invite frivolous legal challenges at taxpayers' expense.
So, I think that regulatory relief, at least as I envision
it, to make and help community banks and credit unions and
others be able to function effectively in the marketplace and
help consumers is a shared bipartisan interest, but I hope it
is not the opportunity in which some will look to slay the very
provisions that ultimately have brought us further and further
back away from the systemic risk that created not a systemic
risk just for those institutions, but for the entire Nation. I
do not want to relive that again. But, I do want to work with
all of you to create greater abilities to be able to function
and function effectively and, of course, with the appropriate
oversight.
So, let me ask all of you, I have heard from some community
banks in my State that when a dispute comes up in the context
of an examination, they do not always feel that there is a
sufficient process available for fairly resolving the dispute.
And, I would add that these are not cases where the bank is
looking for an opportunity to challenge or appeal every
decision that goes against them. They just want to know that
the mechanism exists where their concerns can be fairly heard
and appropriately responded to in a timely manner.
For any of the witnesses, to the extent that this has been
an issue for you or your institution or members of your
association, can you discuss what type of improvements you
think can be made in that regard. For example, are there
changes that you would make to the ombudsman's office of your
respective regulators? Mr. Buhrmaster.
Mr. Buhrmaster. Well, first, let me just respond to your
first comments that if a proposal that we have before you to
reduce regulatory burden affects safety and soundness or
consumer protection, it goes against everything that the
community bank is for, and that is not something we could
support. So, please be assured that what we are asking for is
to allow us to deliver better service to our consumers and to
help promote entrepreneurship among small businesses.
So, that said, an examination process--I had an exam a
couple of years ago where we had one examiner who really did
not look at the entire packet of information he was given, and
we received a warning on that information. We did not feel that
was right. We felt the examiner did not do his job properly. We
moved up the channel. Fortunately, we have--in our area, we had
an examiner in charge of the regional office that listened and
worked with us and worked through that issue.
But, as I travel the country talking to different community
bankers across the Nation, it depends on what agency and it
depends on your regional administrator or the food chain up on
whether or not those type of things can get removed. I remember
earlier in my career we had a similar issue. It ended up going
to D.C. and we did not prevail. We did not go to the ombudsman,
because, frankly, it is scary to report an individual examiner
to an ombudsman. You just do not know. That guy is going to
come back into your bank sometime.
So, I think there needs to be more transparency. In our
Plan for Prosperity, we do have a proposal there that deals
with this, and I would hope that this Committee would take a
look at that proposal and enact some changes.
Mr. Blanton. You know, I completely agree with John's
comments. Our whole mission is to take care of our communities
and protect them. We would never support any legislation that
would in any way try and harm our borrowers or harm our
businesses. I mean, that is what we do. We look after our
communities.
As far as the proposal for an independent ombudsman or
regulatory review process, as I cross the country, I have the
same stories of people, one, that are scared to use the
ombudsman within the existing agency. I understand that. They
are paid by that agency. They work for that agency. And, there
is a tendency to kind of shy away from using that. An
independent agency would have the ability to review, and you
have a proper place to present your challenges to the exam.
Exams do vary all over, depending on the scope and the
experience of the examiner. Our exam teams have been very well,
and Georgia has had a lot of activity with our exams and, by
and large, have been handled very well. But, there are--as any
large agency throughout the country, there are different levels
of expertise down through the ranks. And, so, I can see some
real value in being able to have an independent place to be
able to come and discuss the findings of an exam. So, we do
support that.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Shelby. Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman. I
appreciate your holding these hearings. This is not the first
time that you and I and this Committee have worked together to
put together a package for reform of our regulatory system for
financial institutions and I appreciate the focus on community
banks and credit unions in this hearing.
The first thing I would like to do with the witnesses is--
and I am not going to ask you to answer this question right
now. I am going to ask you if you will please send me a written
response to this question. But, the question is, can you
identify some of your top priorities for the kinds of reforms
that we need, the kinds of regulatory reform that this
Committee should look at as we prepare for legislative or
regulatory oversight. Do you think all of you could come up
with a list of two or three or four or five, or I do not want
to limit it, five or ten top reforms?
[Witnesses nodding.]
Senator Crapo. I see everybody shaking their head in the
affirmative. So, please, if you would, send those to the
Committee.
Now, with some--and you can refine this list before you
send it to the Committee. But, do you all have some ideas in
your mind right now that came to your mind as I asked whether
you had some top priorities? I would like to ask you, and you
can probably answer these questions just by raising your hand,
if it fits. Do some of those top priority reforms that you
think the Committee should consider fall under CFPB
jurisdiction?
[Witnesses raising hands.]
Senator Crapo. Four of the five hands went up, Mr.
Chairman.
Do some of them fall under Dodd-Frank rules and
regulations?
[Witnesses raising hands.]
Senator Crapo. I think all the hands went up on that.
Do some of them fall under money laundering legislation or
regulation?
[Witnesses raising hands.]
Senator Crapo. Five of the five hands went up.
The reason I am asking this question is because each of
those categories that I just listed to you, I understand to be
exempted by the EGRPRA process from our regulators from review.
In the testimony before this Committee yesterday, the
regulators told us that they were not looking at Dodd-Frank
regulations in their EGRPRA review process. In the footnotes to
the EGRPRA process that has now been started, it says, as the
law says, that CFPB regulations are not--or, the CFPB is not
required to participate in EGRPRA, and money laundering
provisions are not going to be considered, again, because the
law does not require it.
So, my question to you is, if we are having the Federal
agencies review the burden of regulations on the financial
institutions and our effort there is to try to identify
outdated, unnecessary, and unduly burdensome regulations, and
each of you say that some of your top priorities fall in the
very area that our regulators tell us is not going to be
reviewed, do we need to reform the EGRPRA process? And, again,
I would just like to see by raise of hand if you would agree
with that.
[Witnesses raising hands.]
Senator Crapo. I see three or four or five--in fact, maybe,
I think, five hands went up.
I do believe that this Committee will not be limited by the
restrictions that the regulators have claimed they are
following with regard to the EGRPRA process. I have previously
in hearings with the regulators encouraged them not to self-
limit themselves in this review, and I, frankly, would
encourage you in your comments and participation in that
process to continue to bring up these kinds of issues, even
though the agencies may tell you they will not listen to you,
because I believe that this Committee is going to do its part
through oversight to try to get those agencies, whether it is
in the EGRPRA process or otherwise, to look at these issues.
Just from the testimony that we have had here today--the QM
example has been brought up--I do not think that the agencies
would have looked at QM under EGRPRA. The Volcker Rule has been
brought up. I do not think the agencies will look at the
Volcker Rule under EGRPRA, under their current approach to it.
And, so, my point is, I think that we have got to expand
the focus of our Federal agencies who are looking at this
issue. I appreciate again, Mr. Chairman, your willingness to
have this broader review, and I hope that through the input
received from those like our witnesses today, as well as from
the oversight that this Committee provides, that we can help
our Federal agencies to also--our regulatory agencies to also
expand their view about how we should approach helping the
community banks and the credit unions and other financial
institutions in this country. Thank you.
Chairman Shelby. Thank you, Senator Crapo.
Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman, and I want to
thank all of you for being here.
I had the privilege of serving on the Financial Services
Committee during some of the most difficult times over in the
House of Representatives, and one of the things that was most
heartbreaking was so many of our small businesses in Indiana
having their credit lines ended because it was such a challenge
for the banks, as well, at that time, and to see them not being
able to get inventory lending, floor plan lending, all of those
things that affected our small businesses. I wanted to make
sure that we never had to do that again, and that is why we
worked to ensure the safety and soundness of our financial
system, and so that is, like, the cornerstone of everything we
do.
But, then I sit with my community bankers and credit unions
and they go, you know, number one, we were not the folks who
did it, and we all understand that. But, number two is, those
are our goals, to make sure those businesses continue to be
able to get those loans and the credit lines, but here are some
things that we are now dealing with that have made it tougher
for us to maybe not sell at the end of the year or to make it
more challenging.
So, if you each had one or two things that when you look
at, you go, hey, the safety and the soundness of the system
will be protected, but this does not do anything but make our
lives more difficult, if you could just give me one each----
Mr. Blanton. Well, I mean, I go back to the mortgage
process now. My bank does originate a quite good number of
mortgages. In the process, where just a few years ago you would
sit down with an originator and make an inquiry, you would just
simply, you know, what is the mortgage market, what are the
rates and all now, that is now an application, so, now I go
through a very rigorous process of logging in this application,
all this tracking, that just a few years ago was nothing but a
polite conversation between an originator and a borrower. And,
so, now I have got all this log I have got to do, all this
tracking, and I have to do it in a zero-tolerance environment
with humans involved. I am sorry. That is very difficult. We
have the best intentions, but it just does not always translate
when you get it onto paper.
And, the amount of work now that my mortgage department is
doing tracking this, it has quadrupled, quote, our
``applications.'' It has quadrupled not only that, you now have
to send them a decline letter. Just because it is now
considered an application, you have to send them a decline
letter. They get a letter and go, they did not even apply as
far as they were concerned. They were just doing an inquiry,
just kind of what is going on, and seeing now you have declined
me? And, so, they are insulted. I have sat here and given them
a decline letter.
So, that is just one example with my bank of the amount of
expense I have to do in a zero-tolerance environment, and there
again, I say, that is really hard with humans.
Senator Donnelly. Mr. Murray.
Mr. Murray. I would agree that the mortgage side is a big,
big challenge. You know, when the QM rules came out and we
started having to have the conversations internally about, OK,
what kind of borrowers will not qualify for this, I mean, that
is just kind of going back to the period that you were
referring to, about when we were making decisions to save the
institution at the detriment of consumers. We are having those
same kind of conversations when it comes to QM.
So, we have taken a conservative approach. We have said we
are not going to do any non-QM loans right now. We are going to
take a wait and see and see how it all plays out. That is not
the way to serve our communities effectively, and so I beseech
you to look at that and understand the true impacts of that on
the communities that it is affecting.
Senator Donnelly. Sir.
Mr. Buhrmaster. Yes. First of all, we never did a better
business in small credit lines as we did when all those large
banks were canceling our customers and they were coming in to
us saying, ``How do I get my inventory?'' That year, we did a
bang-up business on small lines of credit, and we have kept
those customers.
Things in the regulations that are harming small
businesses, especially--that was the focus of your question, I
believe--the equity in someone's home is the greatest source of
capital for a startup business, and granting home equity loans
or first lien mortgages on a house that someone wants to
mortgage to put the money into their business has become so
difficult because of the high-cost mortgage and the ability to
repay part of the QM. If loans held in portfolio by community
banks, by these institutions, were exempt from that rule, we
would be able to provide more capital to businesses because we
would not have to be restricted.
The hardest loan to make right now is to a small business,
a self-employed individual. I had an individual, he wanted
$30,000 on a first mortgage, and I only got the call after he
had given up and gone and found money somewhere else. The guy
had been with us for 20 years. He has done this a couple times
before. We had to make him jump through hoops to provide us
with all this documentation to prove he had the ability to
repay, because our recognition of his character was not enough.
That is what is harming businesses, QM.
And, then, the fact that on Basel III, we are losing the
ability to--we are losing capital when we write a development
loan. I want to help develop commercial properties, yet it
costs me more in capital to do those loans now.
Senator Donnelly. My time is up, but----
Mr. Templeton. To carry that tide on down the table, QM is
just really changing the whole atmosphere for the small lender
in our marketplace. When QM first rolled out, we automatically
got to the conclusion we were not going to do nonqualified
because the risks were just too great. As we dug and dug and
dug, we determined that we could not back away from that
market, because if we did, it was going to be a substantial
portion of our business.
But, what we did have to do is we had to lop off, for lack
of a better phrase, the outliers, the people that were on the
fringe that, up until then, we would take the risk on them, and
up until then, our track record had been near perfect over 25
years. I think in 25 years, we lost maybe two times on a loan
like that. The track record indicated those people are going to
work with us because we work with them.
But now, all of a sudden, they have got a brand on the
mortgage that says ``nonqualified.'' It is a target in the
event of any type of catastrophic event in that person's life,
and the outlier presents just too much of a risk today, where
10 years ago, that was bread and butter to us. They loved us
because we were able to do something for them that a person on
the street called a loan shark or a finance company was willing
to do for 35 or 40 or 50 percent and we would do it for 8 or 9
percent.
Senator Donnelly. OK.
Mr. Templeton. And, those days are gone now.
Senator Donnelly. Thank you, Mr. Chairman.
Chairman Shelby. Senator Scott.
Senator Scott. Thank you, Mr. Chairman, and thank you for
providing the opportunity to have this conversation today. I
think it is a very important conversation and one I will
continue along the lines of Senator Donnelly.
I will just tell you a very quick story. As a kid growing
up in the insurance business, I had an opportunity to start a
business, a small Allstate Insurance franchise with a 1990 240-
SX with 253,000 miles. I went to a big bank and said, ``This is
my asset.'' They all--looking at your faces, they all laughed,
too.
[Laughter.]
Senator Scott. I got used to that, very comfortable four or
five banks into it. But, I went back to the bank where I had
the longest relationship and shared my business plan and had a
conversation and the banker said, ``I can do something called a
relationship loan, a character loan.'' I cannot imagine in the
current environment--though you had nothing to do with the
failure of our economy--that you would be in the position to
take that risk, because if I understand the rules and the
regulations fairly, that any unacceptable risk on your books
brings attention in waves that would be disconcerting and
challenging for you to overcome that threshold.
Is that an accurate statement, that today's environment
would not allow you to provide a kid like me--a kid like me
several years ago--an opportunity to move forward and starting
my own business? Is that accurate, Mr. Buhrmaster?
Mr. Buhrmaster. I believe that is accurate. I think that
for someone starting--we have done State Farm loans. We have--
--
Senator Scott. Allstate.
Mr. Buhrmaster. I am sorry, Allstate----
Senator Scott. Please. Please.
[Laughter.]
Mr. Buhrmaster. OK.
Senator Scott. There are some things that cannot be allowed
on the Banking Committee.
[Laughter.]
Mr. Buhrmaster. I actually have an Allstate loan.
[Laughter.]
Mr. Buhrmaster. I do believe in good hands. Let us just get
this right. So, we have done Allstate, as well----
Senator Scott. Good.
Mr. Buhrmaster. We have done those, too. You are passing
generational businesses or you are picking up a new business--
--
Senator Scott. Absolutely.
Mr. Buhrmaster.----and those are character loans. That is
what our economy is based on. And, yes, we can do some of
those. They are harder to do right now, much harder. But,
again, it is that source of equity. What really puts the brakes
on it right now is if you are using a home for any part of that
financing of that project, it kills it. It is very difficult.
Senator Scott. Let me take that question--because you just
created a segue into Mr. Blanton's earlier conversation about
the QMs and the ability to create access to capital and/or to a
home to folks that you have had a long-term relationship with
not only the borrower, but their family. And, so, if you could
put into context for us that actual process and how challenging
it is today compared to speaking to how challenging it was.
And, in the context of safety and soundness, could you and
would you be able to create a narrative that makes sense to
your board of directors and to your institution but not to the
regulators?
Mr. Blanton. It is really hard to document to your
regulators, but as far as safety and soundness, those loans
that we can make and we keep on our books are some of the
safest loans we make because we have that relationship with
that family and have had it for generations.
I know a lot of my rural colleagues in Georgia, some of
their prime loans may be five acres and a double-wide----
Senator Scott. Yes.
Mr. Blanton.----and they have done it year after year after
year. What the regulators do not seem to understand in that
environment is if you force to where I cannot make that loan
anymore and I cannot put it on my books, that family does not
have the luxury of saying, ``Well, we will just do without the
money.'' They are going to get the money. They have no choice.
So, now, where are they? Down the street at a much higher
interest rate environment that is not constrained by all the
constraints that we have because they had no choice. They had
to generate $5,000 or $10,000 or whatever the amount was. Well,
these people in a lot of cases are self-employed. Trying to fit
them into an ability to repay definition is virtually
impossible.
Senator Scott. Yes, very difficult. And, I will tell you,
according to a Harvard Kennedy School working paper authored by
Marshall Lux, one of the unintended consequences of Dodd-Frank
is that community bank small business lending has declined by
about 11 percent, and small business banks, a billion dollars
or less in assets, their share of banking assets have also
declined by 19 percent, as if too-big-to-fail is more likely
today than it has been before the regulatory environment was
created.
Let me just ask my final question, with my time running
out, to Mr. Templeton. As you know, sir, I served for about 7
years on a credit union board, back when I had an afro. Let me
just ask you a question, though. Looking at the current
environment, what is the impact on your ability to loan? How
many folks are you employing today who are involved in the
regulatory responsibilities of the credit union versus the
lending part of the credit union? And, what does that look like
for the future of credit unions if what we have seen so far
gets worse?
Mr. Templeton. Today, we have two people employed full-
time. We are in the process of adding a third person full-time.
But, that is only the beginning of the compliance costs. Those
are people who are dedicated 8 hours a day to doing nothing but
compliance. Every time we have a new product, every time we
have a feature change, we have to reach down into the
functional departments and involve those people in the
compliance aspects of how are we going to be compliant on this
new modification. So, those numbers exponentially go up.
To maybe answer your question another way, the loan that
you talked about that used to could be done in many local banks
and credit unions was a 5-minute loan in many cases back then.
Yeah. I know you. I have known you forever. I trust you. Let us
get the paperwork done. Today, that loan may turn into 15 or 20
or 30 hours. That is a regulatory compliance burden. That is an
overhead cost that is not measured in all the assessments of
the risk and reward.
If you talked to me today about that loan, I would say,
well, let me get back to you. So, I go and I talk to the
financial analyst and I say, what do you think? I go and talk
to this person. I go and talk to that person. And, the process
goes on and on and on.
Senator Scott. Thank you.
Mr. Calhoun. And, if I may add, Senator, just to make sure
it is clear for the record, the CFPB proposal, which I think
most people here have supported and I know ICBA has praised,
would allow unlimited portfolio loans for community banks to
qualify for QM status. Another area where we can have
clarification, we do a lot of small business lending. We can
have more clarification that the QM standards should only apply
to consumer loans and business loans are generally taken
outside of that, but we can get more clarity on that, I think
that would be a specific thing that could help.
Senator Scott. Thank you, sir. Thank you, Mr. Chairman.
Chairman Shelby. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
I grew up in a town of 90 people. You can imagine, my
family had a relationship with a community bank. Whether it was
financing a home that you could never get an appraisal on,
right, because where are you going to find a comparable sale,
right? Whether it was helping my father finance his business
and cash-flow his business, or looking at a farm that needed a
quick operating loan because of some tragedy.
I think the great irony of this is, in spite of all that
relationship banking and that character banking that you do,
you were not the institutions that failed because you were
banking every day on the American people and your relationship
with the American people. And, we want to get back there. And,
I think what you see here is a real bipartisan interest in
getting this done.
I know you probably hear, here we go again, right? We are
going to testify and we are going to tell our story and nothing
happens. You have 75 cosponsors on the privacy bill last year
and we did not get it done.
I am here to tell you that I think with the leadership here
of Senator Shelby and Senator Brown and the commitment of this
Committee, we are going to get this done for you. So, it is
critically important that we know what your priorities are, and
I applaud--I think Senator Corker took you through a couple
that he sees and hears about, we all hear about, and I think
Senator Crapo said, OK, here it is, and I hope that you share
that document with all of us because we want to get this right.
So, with that--that was kind of my first line of
questioning. What two or three things are the highest priority,
will take the most amount of burden, give you the biggest bang
for the buck, that we know we can do without creating an
environment of systemic failure or without unraveling necessary
controls to make sure that we do not have a repeat of 2008.
So, I am going to ask you a little different question. We
hear all the time about trickle-down of best practices, right.
So, all of a sudden, someone comes in and says, well, we just
examined Wells and Wells is doing it this way, so we want you
to do it this way. So, that examiner piece, that fear of the
heart attack letter, or as you explained, what happens when you
do not have someone who can be a monitor or adjust what a maybe
overzealous examiner would do, that is also something, and that
is a little tougher for us to get at. And, so, I would like to
examine that a little bit more, on what you think would be--you
obviously did not like the ombudsman suggestion, so I am
looking for alternatives to deal with the examination issues
that you have, and we can start with you, Mr. Blanton.
Mr. Blanton. You know, you are right. That is a very, very
difficult question to ask because there are so many--with so
many examiners at this, so many different approaches on each
exam. But, we do come into areas such as, in my bank, are you
stress testing your loan portfolio? Well, I am not required to
do that, but, they say, well, yeah, but you really need to.
And, I understand where they are coming from, but there are
just some things--my bank does not represent a risk to
anything. I mean, I am sorry. If I go away, there is nothing in
this economy that has changed. And, I think, therefore, I need
to be regulated and examined in that same way.
Senator Heitkamp. But, your community will change.
Mr. Blanton. My community will change, yes, ma'am. It most
certainly will. But, I think I need to be regulated that way
and I need to be examined that way, to where it meets my risk
profile.
Senator Heitkamp. Some kind of change that we can make here
is what I am after, where you would feel comfortable that you
had a legitimate second look from an examiner.
Mr. Murray. Yes. We believe that an independent process is
highly needed for the examination process. We do not really
feel like in the credit union world we have an effective
appeals process right now. We do not have an ombudsman that we
feel we can go to. Our appeals process is up the food chain of
the examiner that oversees us. So, it does not work, it is not
effective, and, therefore, it is not utilized.
And, you are absolutely right about the best practices
trickle-down effect. It is very real and it is very
influential, and it happens from all levels. You know, one of
the things we are dealing with in the credit union world right
now is some perceived notion that interest rates are going to
explode in the very near future, and so we are being asked to
shock test our balance sheets for incredibly high interest rate
shocks, well beyond what is called for in any regulation. That
request is coming from examiners who are getting it from higher
up in the agency. That is unreasonable, it is illogical, and it
costs a lot of time and money. And, we can receive a nice ding
on our examination if we either do not do it or if those
results do not come out favorably.
Mr. Buhrmaster. Best practices is real. It happens. We get
asked to do reports, not because they are required by
regulatory reasons, but they are required by one examiner, and
then that report stays with you and that--it is like
snowflakes. I mean, you are from North Dakota. You understand
this. You walked out this morning and it was beautiful. It was
snowing. There was light. But, then you go out to Buffalo, New
York----
Chairman Shelby. Go to North Dakota.
Mr. Buhrmaster. For me. But, you go out to Buffalo where
they have six feet of snow, and that is not, and that is what
we have got here, is the cumulative effect.
Now, it is the cumulative effect at these examinations
where they are constantly--they are in your house. It is not
every 12 months or 18 months. They are there all the time. I
get a quarterly call from my examiner. I am submitting
paperwork every quarter to them. They are with us. If you move
that exam cycle--this is something that you can do--move that
exam cycle to 24 months for one and two banks, one and two
CAMELS-rated banks, that is going to provide us some relief.
That is going to give us greater time to work with the
regulators, work through this process. We will not have to jump
to the ombudsman so fast because we have got another exam
coming up.
Mr. Templeton. I concur with Mr. Buhrmaster's suggestion to
increase the exam schedule timeframe. That gives us more time
to do things, more time to move the ship.
In terms of the ombudsman, I think the ombudsman could be a
good thing just because it is somebody independent watching,
OK, and sometimes knowing there is somebody watching makes you
do things slightly different. And, it is always a relief valve.
In my institution, in 40-plus years, I have only had one or two
examiners that I have had difficulty communicating with, and
even though, I would not have needed to go to an ombudsman,
because it was not that severe.
So, I think one of the first things in the examination
process needs to be to try to establish a meaningful dialogue
between the examiner and the institution. Sit down and talk
about, what are we trying to accomplish here? What are you
looking for? What do you want? Let me know when you have
headaches. Let me know when you have problems. And, a lot of
that can go a long way for easing pains.
Now, there is always a rogue financial institution who does
not want to talk to an examiner, sees them as their enemy. You
have got a rogue examiner on the other side. So, it is not a
perfect world, but communication starts it toward the right
place. An ombudsman is just that little safety net hanging
there, just in case.
Mr. Calhoun. I think the real key is where we started here,
and it is targeting this relief to community financial
institutions. They do have a different model, and that can call
for different approaches. But, once these things get blurred
and say, you know, we are going to change the system for
everybody, even if they are $100 billion, $500 billion, that is
a different banking model. It is not the relationship lending.
It is not the community focus. And, so, these need to be
targeted. I mean, 90 percent of community financial
institutions are a billion dollars or less. That is very
different from whence people were talking $50 billion or $100
billion, as sometimes gets tossed around.
Chairman Shelby. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Folks in Massachusetts are really sensitive about snow
analogies right now.
[Laughter.]
Senator Warren. Where it is 77 inches and it is supposed to
start snowing again this afternoon, so----
We have heard a lot today about how smaller banks are being
smothered by unnecessary regulation, supposedly because of
Dodd-Frank rules like the new mortgage rules that went into
effect in the first quarter of 2014. Now, I have been looking
for some hard data to support that claim. According to the
latest report from the FDIC, the banking industry as a whole
posted earnings of nearly $40 billion in the third quarter of
2014. That was a 7.3 percent increase relative to the third
quarter of 2013. In other words, the banking industry did
substantially better after the mortgage rules took effect in
January of 2014.
And, here is the kicker. Community banks did even better
than the industry as a whole. According to the FDIC, year over
year community bank earnings up were nearly 11 percent compared
with 7 percent for the industry as a whole.
So, Mr. Blanton, if, as you claim, community banks were
particularly hard hit by Dodd-Frank's new rules, why are they
making more money since the rules went into effect and doing
better than the big banks?
Mr. Blanton. Well, I do not really think there is
necessarily a direct correlation between the mortgage rule
passing and the profits of a bank.
Senator Warren. Well, I thought that was exactly what your
testimony was, as I read it, and that is that the rules were
tangling up the community banks so that the community banks
could not do business, and yet their profitability seems to
suggest they are doing better than ever after the regulations
went into effect.
Mr. Blanton. Well, there again, I do not think that it is
because of the regulation that the banks are doing better. I
mean, it is tangling up our process to do mortgages. It is
making it much more difficult. It is costing us quite a lot.
Your statistics on the profits of our industry are right. We
have done very well. But, if you go back and average over the
last 10 years, it has been a very difficult process, and just
now, we are beginning to get some efficiencies and come back
into the market and be successful and we see these as
constraints for us to where we are having a hard time
continuing to have that momentum.
Senator Warren. Well, you know, I appreciate that, but like
I said, the numbers show you are really doing pretty well after
these regulations. We know that all of the big bank lobbyists
love to come into our offices and talk about how community
banks are being crushed and they need our help, but a lot of
the times, the legal changes that they are asking for are not
really about helping community banks, and here is an example.
Mr. Blanton, in your testimony, the ABA's very first
request in the name of community bank regulatory relief is a
bill that would allow an insured depository institution of any
size to satisfy the QM rule as long as they held the loan in
portfolio. As you know, under the current rule, banks with
under $2 billion in assets that issue fewer than 500 mortgages
a year can already satisfy the QM rule for any loan that they
hold on portfolio. The CFPB just proposed raising that
threshold to 2,000 loans a year. That is going to cover the
vast majority of community bank mortgages.
So, just give me a sense here, Mr. Blanton, if Congress
passed this bill that the American Bankers Association wants,
how many community bank mortgages would become eligible for QM
that are not currently eligible, or under the CFPB rules would
be eligible, and how does that stack up against the number of
mortgages held by Wells Fargo, Citibank, JPMorgan, and the
other giants that would become eligible under this change in
the rules?
Mr. Blanton. Well, I think, in the change in the rule that
we are currently supporting, I would go back to the argument
that if I am holding that loan or they are holding that loan on
their books, they are taking all the risks.
Senator Warren. I am not asking you the question about
whether or not you think it is a good rule. I am asking you the
question about the impact. I am asking you how many mortgages
currently are held or are being issued by community banks that
are not--do not have an exemption right now and that would be
affected by this rule versus the number of mortgages that are
held by Wells Fargo, JPMorgan, and other large financial
institutions.
Mr. Blanton. Well, for a community bank, we would
certainly--if they raise that threshold, it will certainly
exempt a whole lot of our mortgages that we are holding.
Senator Warren. You have a whole lot of mortgages outside
the CFPB's proposed 2,000 mortgage threshold?
Mr. Blanton. No, ma'am, but we would add--we would be able
to make those loans, then, if they are----
Senator Warren. And how many for the banking giants?
Mr. Blanton. Umm----
Senator Warren. They are part of your organization. Maybe
you could just get back to me----
Mr. Blanton. Yes, ma'am.
Senator Warren.----on that one. That would be helpful.
You know, the financial performance of the community banks
shows that Congress and the regulators, I think, have done a
pretty good job of tailoring the rules to protect community
banks. We should be very skeptical of regulatory relief bills
that are promoted as helping small banks but that are pushed by
ABA lobbyists for the big banks.
If we really want to help the community banks, let us start
by getting rid of the $85 billion a year too-big-to-fail
subsidy that we give to the biggest banks year after year.
Small banks are not getting that. Or, let us start by holding
big bank executives accountable for committing fraud, like we
do with small bank executives for committing fraud. Those are
the kinds of changes that would help level the playing field
for our community banks.
Thank you, Mr. Chairman.
Chairman Shelby. Mr. Calhoun, I believe you stated earlier
that the CFPB has to review, quote, ``every single regulation
every 5 years.'' I do not believe that is correct. What the
statute actually says is that the CFPB has to review each
significant rule every 5 years, not every rule.
Mr. Calhoun. I stand corrected.
Chairman Shelby. OK.
Mr. Calhoun. I think they broadly interpret the word
``significant,'' though, and it would apply to the vast bulk of
their rulemaking.
Chairman Shelby. Just for the record.
Along these same lines, it is my understanding that the
Federal Reserve, and I am reading this, the Federal Reserve
System and the Conference of State Bank Supervisors, CSBS,
reported earlier in 2014 that many--many--community banks found
qualified mortgage and ability to repay rules to be
particularly burdensome. In fact, according to the CSBS survey
in this study, 15 percent of active mortgage lenders noted 80
percent or more of their one- to four-family mortgage loans
would not meet qualified mortgage, QM, requirements.
If a loan is performing and you know the customer--and you
know the customers--you would not exist as banks, and you know
them--you should be able to make that loan. Otherwise, you are
driving that people, as has been pointed out, into areas where
they are going to be extorted and everything else. We need to
give you some relief. I really believe this.
Mr. Calhoun. Mr. Chairman, if I could clarify for the
record, also----
Chairman Shelby. Yes.
Mr. Calhoun.----on the QM proposal that CFPB has currently
put out, it actually is to allow an unlimited number of
portfolio loans by community banks to qualify for QM status.
The 2,000 threshold is they can make 2,000 nonportfolio loans.
But, that does not apply to the limitation of how many
portfolio loans would qualify for QM status. So, that rule
really goes very, very far in providing flexibility to
community banks----
Chairman Shelby. Mr. Buhrmaster, you are in the banking
business. You know every day what comes and goes.
Mr. Buhrmaster. Yes.
Chairman Shelby. Go ahead and comment.
Mr. Buhrmaster. Mr. Chairman, if the QM rules were revised
to allow portfolio loans to be counted as QM, that is consumer
protection from what you said. We have got people that are not
meeting those QM standards, the ability to repay, that are
being forced to go to other places that do not follow the
proper rules----
Chairman Shelby. And never will.
Mr. Buhrmaster.----and never will. And, to the point of the
2,000 limit, you know, I have visited two banks that are over
that--I am sorry, the $2 billion limit. I visited a bank in
Montana, a bank in Nebraska that have rural offices that
sometimes are the only offices in those towns, and they write
these nonconforming loans. And, it has become more difficult
for those banks to hold those on their books if they are not
QM. So, we believe that exemption should be higher.
Again, it is consumer protection. You want people coming
with the community banks who have their own money on the table
when a loan fails.
Chairman Shelby. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. A very good
hearing. I appreciate, again, your calling it, and all five of
the witnesses have contributed a great deal today, all five of
you. Thank you.
I mention Mr. Blanton's comments about the son or daughter
of a longtime customer friend, community leader, whatever, and
that those loans, you just are not likely to make those loans
anymore. I think the discussion that a number of you have had
about the QM rule providing legal liability protection shifts
the burden to the borrower to show that a lender knew they
could not pay back the loan.
One of the things you said was the son or daughter does not
really qualify for the loan, which is a pretty telling
statement for a banker to make, understanding, though, that you
can go ahead and make that loan. You just do not have the legal
liability protection afforded to you by the QM. So, nobody is
saying--putting aside even the expansion of the rule from 500
to 2,000, nobody is stopping you from doing that loan. You just
do not do--you know, the hand of big Government is not telling
you you cannot do it. It is just saying you do not get the
legal protection afforded by QM.
I think it is important to note that, and I think your
comments, other comments that several of you have made point to
the issue of the Consumer Bureau raising the number from 500 to
2,000. And, I think we all like that. I mean, I like the idea
that even--your bank, I understand, Mr. Blanton, is one billion
and--what size?
Mr. Blanton. One-point-eight billion.
Senator Brown. One-point-eight billion, and you make--you
make, typically, how many loans a year?
Mr. Blanton. Total loans or mortgage loans?
Senator Brown. Mortgage loans. I am sorry.
Mr. Blanton. Mortgage loans, about 300.
Senator Brown. OK. So you are already really under the
consumer level. So, understanding--I mean, I know a lot of
community bankers in my State, dozens and dozens, and pretty
much all of them would fall under the QM portfolio standards of
2,000, and most of them already under the 500.
But if, Mr. Calhoun, you would briefly describe, what are
the dangers of overall QM--understanding the ABA, when Mr.
Blanton is here speaking for the small banks and sort of
echoing the words of Mr. Buhrmaster, that is one thing, but if
he is here representing the largest, particularly Wells Fargo
and those that are doing huge numbers of mortgage loans, it is
a different story. What is the danger of the largest six or
eight banks in the country, or even some of the more mid-size
but larger on that edge, on that end, banks doing sort of
unlimited QM protection if they keep it in portfolio?
Mr. Calhoun. As we saw in the crisis, a number of the very
large banks had business models where they made very risky
loans, the loans with no doc, no income, no assets, and also
loans with big teaser payments that jumped up dramatically and
the only way you would stay in the loan is refinancing if house
prices went up. Two examples of those were Washington Mutual
and Wachovia, and their portfolio lending was the major factor
in taking down both those companies, presenting systemic risk,
and also lots of borrowers lost their homes there. And, so,
there is a real----
Senator Brown. So, you like the number 2,000? Is that a
good number that we all can agree on?
Mr. Calhoun. So, again, to be clear, the CFPB rule is even
much larger than that. It says you can make 2,000 loans that
you sell to the market plus unlimited number, no cap at all on
the number that you put on your portfolio.
I would, if I could, just raise one point that is very
concerning, is a number of the legislative proposals and even
the CFPB rule and their expanded proposal apply to
nondepositories equally. Treat them exactly the same, the folks
down the street that we are worried about people going to
instead of the community banks, get the same relief under some
of these proposals, and that is a key change that needs to be
made as this goes forward, because it is a very different world
for these loans to be made by supervised depository
institutions versus made by many of the people who did the
reckless lending that started the whole financial crisis.
Senator Brown. OK. Mr. Buhrmaster, I am going to ask you a
question. Another story broke this week of alleged misconduct
with one of the world's largest banks. The Governor of the Bank
of England in a recent speech said the scale of misconduct at
some financial institutions has risen to a level--again, not
talking at all about any of you--has risen to a level that has
the potential to create systemic risks, unquote. Pretty
troubling statement. He went on to say--Mark Carney is his
name--it threatens to undermine trust in financial institutions
and markets, eliminating some of the hard-won benefits of the
initial reforms.
Mr. Buhrmaster, does the continued misconduct by some of
the largest banks in this country on Wall Street and some of
the largest banks in the world, do they have a negative impact
on community banks and your customers?
Mr. Buhrmaster. It certainly does. When--I mean, I am from
New York and I get compared to the Wall Street banks. I mean,
people get confused, upstate, downstate. So, naturally, it rubs
off on us.
Senator Brown. Nobody confuses upstate New York----
[Laughter.]
Mr. Buhrmaster. Thank you.
Senator Brown. Nobody where I come from. Maybe they do if
you live in Rochester, I do not know.
[Laughter.]
Mr. Buhrmaster. But, the misconduct of some of the largest
banks, when you look at that business model, defines that they
have to pay where they purposely choose to break the law or
violate regulations. It is a budget item for them and it does
affect us because it results in these type of regulations we
are here trying to get overturned. And, if they continue to
have this kind of misconduct, and if they continue not to be
held personally responsible--I mean, when a crime is committed,
it is not an institution. It is somebody there that is making a
decision. But, yet, none of the largest banks have been held
accountable.
When the FDIC is suing small banks' directors for certain
things but they will not sue the largest six banks for the same
type of things, it says there is a different set of rules for
different players and it is affecting us. We need the
regulatory relief that has come from that misbehavior. It has
fallen on us. That is why it affects us. And, every time there
is a headline, it makes it harder to get this regulatory reform
through.
Senator Brown. I could not agree more.
Last question, and thank you for your indulgence, Mr.
Chairman. Mr. Murray, you state in your testimony that changing
the structure of the Consumer Bureau, the CFPB, by stripping
its independence, changing its leadership from a director to a
board, would reduce burden for small institutions. I would like
to ask each of the five of you--start with Mr. Murray, then Mr.
Blanton, and then work across, and then finally Mr. Calhoun--
how does changing the structure--I am confused. I do not quite
see that. How does changing the structure reduce the burden
that, in your case credit unions, in the others, if you agree
with that, at the banks.
Mr. Murray. Sure. We just believe that it creates an
environment for more sensible rulemaking, for collaboration,
much like among this Committee, from different minds, whereas
when you have one person in charge of the entire Bureau, who
sets that agenda? One person, essentially. And, so, we just
feel like it is a more common sense approach to coming up with
common sense regulation, and so----
Senator Brown. Do you have any specifics? Any of you, do
you have any specifics on why that would be, I mean, what you
would get--what you would get different coming out of there?
Mr. Murray. CFPB was originally set up, obviously, by Dodd-
Frank, and given a very specific set of marching orders in
Dodd-Frank. But, then, after that, after that all goes away,
what does CFPB do after that and who sets that agenda? Where
does that come from? And, that is our concern, and so we feel
like a board----
Senator Brown. Do you suggest changes in the Department of
Labor, instead of having one Cabinet Secretary, or the
Department of Health and Human Services, or, for that matter,
the President of the United States? I mean, should we have--I
mean, does that structure make more sense to run our country?
Mr. Murray. Well, you know, our Government is set up on a
series of checks and balances and that is what----
Senator Brown. Well, I would say the Consumer Bureau has
been hauled in front of the House Financial Institutions
Committee about every month or two for oversight, and there are
many in this--that we got that--a lot of you working together
got some rule changes out of them.
OK. Mr. Blanton, your thoughts, and then Mr. Buhrmaster,
Mr. Templeton, and Mr. Calhoun.
Mr. Blanton. OK. First, I wanted to make one correction.
When I said the number of loans I originated, I was thinking of
the dollar value. We originated about 1,200 to 1,400 loans a
year, so----
Senator Brown. OK. So, you will still be under the 2,000--
--
Mr. Blanton. Still be under it, but I did want to make that
clarification.
Senator Brown. And you are larger than most community
banks----
Mr. Blanton. Yes, I am.
Senator Brown.----by a lot.
Mr. Blanton. Yes, I am.
We support a system such as the FDIC Board of Governors. It
has worked very well for the FDIC as far as the--we think that
that would be a much better system to govern such an important
agency as the CFPB, and with that set of different Governors,
you get different views and opinions and you get to see a
consensus work as opposed to one particular person's direction
or whim as to how they want something done. So, we operate well
under the FDIC and we think that system works very well as----
Senator Brown. Do you like the independent funding of FDIC?
Mr. Blanton. Pardon?
Senator Brown. Do you like it that FDIC has independent
funding, not coming through Congress?
Mr. Blanton. Umm, no, I do not. I think the way the current
system works with the FDIC is correct.
Senator Brown. Oh, OK. So----
Mr. Blanton. But, I like the way the Board of Governors
works and the way that it oversees that----
Senator Brown. So, independent funding is OK for the
Consumer Bureau. You just want a board with the Consumer
Bureau.
Mr. Blanton. Well, no, I do not agree. I am sorry. I do not
agree with the funding of----
Senator Brown. The funding is OK with FDIC that way, but
you want to change the Consumer Bureau to a different funding.
Mr. Blanton. Yes.
Senator Brown. OK.
Mr. Blanton. A more accountable funding.
Senator Brown. But, why not change the FDIC to more
accountable funding, then?
Mr. Blanton. I guess because the system is working. We are
pleased with that system.
Senator Brown. OK. Mr. Buhrmaster.
Mr. Buhrmaster. When you are setting a system up, you are
not setting it for an individual, an individual personality.
You are setting it up for the long term. And, we have had a
wonderful relationship with Director Cordray. He has been very
receptive to community banks' needs. But, a good example is an
interview he just gave in the American Banker recently--in
fact, I believe it was this week--where he talked about the
difficulty of the process he had in dealing with the exemptions
that were just granted on QM. It was his influence that helped
bring a different point of view to the table. We may have a
different director some day, and having different views at the
table when you are dealing with consumer protection items, it
keeps the pendulum from swinging too far.
You know, that five-member panel on the FDIC, a lot of what
FDIC did in the past was types of consumer protection, whether
it is regulating the banks in order to keep the consumers safe
or going directly for those regs. Having that--having those
different views helps keep things centered and keeps things
reasonable.
Senator Brown. Mr. Templeton.
Mr. Templeton. To echo what Mr. Buhrmaster said, from the
conceptual stage, and again, you have to divorce concept and
reality. But, conceptually, three or five people coming
together to achieve a goal are going to bring different
perspectives, different ideas. There is going to be compromise.
There is going to be discussion. There is going to be all sorts
of dialogue as you move toward an end result. If you have one
person, it just is an agenda. That person may seek input from
outside, but it still becomes one person's agenda. So, multiple
heads bring greater wisdom.
Another thing that it possibly would bring, and not that
you could not do it with a single individual, but it would
cause a formal agenda to be released so that, ahead of time,
people would know what is going on. Now, that could conceivably
be done, but with the board structure, you would need an
agenda, and I think the light of day begins shining in. People
get time to be prepared and develop concepts and ideas.
Senator Brown. Fair enough.
Mr. Calhoun, before you respond--and keep it as brief as
you can, I apologize--because you made a statement earlier that
I just wanted to give you a chance--I have heard you testify a
lot, and I have never heard you say something that was kind of
not correct, and I want to make sure you get a chance to kind
of clarify. You said the CFPB every 5 years is required to
review its major regulation. It is--what I think you meant to
say, and give you a chance to correct, is 5 years after a new
regulation. It is not every 5 years. It is that one time, just
to clear the record. Is that your understanding?
Mr. Calhoun. Yes.
Senator Brown. OK. OK. That is my--now, answer that other
question, and then I will turn it back. Again, thank you for
the Chair's indulgence.
Chairman Shelby. Thank you, Senator Brown.
Senator Brown. Well, I am sorry, and give him the----
Chairman Shelby. Yes.
Mr. Calhoun. So, very quickly, we strongly support the
single director. It was the failure, in fact, of the Federal
Home Loan Bank Board that led to having a single director being
one of the primary reforms for FHFA. And, we believe strongly
that the single director will be far more responsive to
community financial institution concerns. As we have seen with
almost every commission, they become very quickly big bank-
centric. If there are five nominees for a commission, the CFPB,
there are not going to be four of them that are going to be
representing consumer financial institutions, maybe one. We
just had to fight to get one on the Fed out of seven spots.
And, there has just been a natural tendency, as we have
heard from testimony today, that the commissions focus on the
biggest institutions and have less receptivity to community
financial institutions. So, that is one of the reasons that we
strongly support the current structure. We also note it has the
FSOC oversight and the required consultation with other
prudential regulators.
Senator Brown. Thank you, and again, Mr. Chairman, thank
you for allowing me to go over my time.
Chairman Shelby. Thank you. I thank all of you. I think we
have had a very good hearing and I appreciate your willingness
to be here, to be forthright with us, because that is what we
need.
I am going to invite you to supply in writing for this
Committee any additional thoughts or information that you may
have for our record that will help us to formulate the right
thing here.
I also invite the members of your respective organizations
to contact us directly here at the Committee with any concerns
or ideas that they may have for reform. You are out there in
the marketplace. The Members of this Committee, I think, would
welcome input from individual financial institutions from all
over this country as we consider comprehensive regulatory
relief. If you have a concern, we want to hear it.
Thank you again for your appearance here. We are going to
try to be responsible here.
The Committee is adjourned.
[Whereupon, at 11:46 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF R. DANIEL BLANTON
Chief Executive Officer, Georgia Bank and Trust
on behalf of the American Bankers Association
February 12, 2015
Chairman Shelby, Ranking Member Brown, my name is Daniel Blanton,
Chief Executive Officer of Southeastern Bank Financial Corporation and
Georgia Bank & Trust, in Augusta Georgia. I am also the Vice Chairman
of the American Bankers Association (ABA). I appreciate the opportunity
to be here to present the views of the ABA regarding regulatory relief
for small financial institutions. The ABA is the voice of the Nation's
$14 trillion banking industry, which is composed of small, mid-size,
regional and large banks that together employ more than 2 million
people, safeguard $11 trillion in deposits and extend more than $8
trillion in loans.
Georgia Bank and Trust is a $1.8 billion community bank established
in 1989. We have 12 branches serving the Augusta area and extend $975
million in loans to our local communities.
ABA appreciates the opportunity to be here today to talk about how
the growing volume of bank regulation--particularly for community
banks--is negatively impacting the ability of banks throughout the
Nation to meet our customers' and communities' needs. This is not a new
subject, yet the imperative to do something grows every day. Community
banks are resilient. We have found ways to meet our customers' needs in
spite of the ups and downs of the economy. But that job has become much
more difficult by the avalanche of new rules, guidances and seemingly
ever-changing expectations of the regulators. This--not the local
economic conditions--is often the tipping point that drives small banks
to merge with banks typically many times larger. The fact remains that
there are 1,200 fewer community banks today than there were 5 years
ago--a trend that will continue until some rational changes are made
that will provide some relief to America's hometown banks.
Each and every bank in this country helps fuel our economic system.
Each has a direct impact on job creation, economic growth and
prosperity. The credit cycle that banks facilitate is simple: customer
deposits provide funding to make loans. These loans allow customers of
all kinds--businesses, individuals, governments and nonprofits--to
invest in their hometown and across the globe. The profits generated by
this investment flow back into banks as deposits and the cycle
repeats--creating jobs, wealth for individuals and capital to expand
businesses. As those businesses grow, they, their employees and their
customers come to banks for a variety of other key financial services
such as cash management, liquidity, wealth management, trust and
custodial services. For individuals, bank loans and services can
significantly increase their purchasing power and improve their quality
of life, helping them attain their goals and realize their dreams.
This credit cycle does not exist in a vacuum. Regulation shapes the
way banks do business and can help or hinder the smooth functioning of
the credit cycle. Bank regulatory changes--through each and every law
and regulation, court case and legal settlement--directly affect the
cost of providing banking products and services to customers. Even
small changes can have a big impact on bank customers by reducing
credit availability, raising costs and driving consolidation in the
industry. Everyone who uses banking products or services is touched by
changes in bank regulation.
The onslaught of regulatory changes has already had an impact. For
example, 58 percent of banks have held off or canceled the launch of
new products--designed to meet customer demand--due to expected
increases in regulatory costs or regulatory risks. Additionally, 44
percent of banks have been forced to reduce existing consumer products
or services due to compliance or regulatory burden.
It is imperative that Congress take steps to ensure and enhance the
banking industry's ability to facilitate job creation and economic
growth through the credit cycle. The time to address these issues is
now before it becomes impossible to reverse the negative impacts. When
a bank disappears everyone is affected. We urge Congress to work
together--Senate and House--to pass bipartisan legislation that will
enhance the ability of community banks to serve our customers.
In particular, Congress can take action to ensure credit flows to
communities across the country by (1) improving access to home loans,
(2) removing impediments to serving customers, and (3) by eliminating
distortions by Government in the marketplace. In the remainder of my
testimony, I will highlight some specific actions under each of these
that would help begin the process of providing meaningful relief to
help community banks and help bank customers.
I. Improve Access to Home Loans
The mortgage market touches the lives of nearly every American
household. Banks help individual consumers achieve lifelong goals of
homeownership by giving them access to the funding they need. Without
home loans most Americans would not be able to purchase a home.
Banks are a major source of mortgage loans--holding more than $2
trillion in one-to-four family home loans on their books and
originating others under Government guarantees. In addition, banks
support the housing industry with construction and development loans,
and homeowners with home equity lines of credit. Housing construction
and development, as well as the transactional activities of buying,
selling and furnishing homes, generate both direct and indirect
benefits for the economy. These critical services of banks results in
more income and jobs in communities, along with a larger tax base for
local governments. According to the National Association of Home
Builders, the construction of 100 single-family homes will result in
$21.1 million in income, $2.2 million in taxes and other revenue to
local governments, and 324 local jobs.
It is painfully clear that new regulatory requirements have
restrained mortgage lending and have made it particularly difficult for
first-time home buyers to obtain a home loan. The complex and
liability-laden maze of compliance has made home loan origination more
difficult, especially for borrowers with little or weak credit history.
Over-regulation of the mortgage market has reduced credit available to
bank customers, raised the cost of services, and limited bank products.
The result has been a housing market still struggling to gain momentum.
Congress can help reduce needless impediments to mortgage lending
that have constrained the banking industry's ability to help first-time
home buyers and dampened the growth of prosperity across the Nation's
communities. For example, Congress should:
Treat Loans Held in Portfolio as Qualified Mortgages:
The Dodd Frank Act (DFA) is very restrictive in its definition
of ``ability to repay'' and this is having a detrimental impact
on the market and consumer access to credit. In fact, the
Consumer Financial Protection Bureau (CFPB) has been forced to
delay implementation of some aspects of the rule which would
eliminate balloon loans. These loans, which are in virtually
all cases held in portfolio, are a useful and in-demand product
for many customers, particularly those in rural areas seeking
smaller dollar loans and those that do not meet secondary
market eligibility requirements. It helps bank manage interest
rate risk and without tools like this some borrowers would not
have access to mortgage loans at all. While the bureau has
recently proposed expanded exemptions for smaller lenders
serving rural and underserved areas, more relief is needed for
lenders and borrowers in all areas of the country.
ABA supports legislation (similar to H.R. 2673 in the 113th
Congress) that would deem any loan made by an insured
depository and held in that lender's portfolio as compliant
with the Qualified Mortgage rule under the DFA (so long as the
loan is not sold). The Qualified Mortgage or QM label is given
to loans which can be shown to meet the qualifications of the
Ability to Repay provisions of DFA. Loans held in portfolio
are, by their very nature, loans which can be repaid; otherwise
they would present safety and soundness concerns and would not
be allowed by a lender's prudential regulators.
Simply put, banks would not stay in business very long if they
made and held loans on their books that cannot be repaid; they
hold all the risk that a loan might default. This is a common
sense approach to showing that a loan has been properly
underwritten and meets the QM and ability to repay requirements
of the DFA without imposing additional challenges to borrowers
and lenders in the lending process.
Eliminate the Excessively High Life-of-Loan Liability:
Not only are the rules complex and liability-laden, the level
of liability is both high and often extends for the life of the
loan. A liability with such a long life will give any lender
pause when considering any but the lowest-risk borrowers. Why
should ability to repay liabilities hang over a lender's
business for 20 years or more into the life of a 30-year loan?
Common sense suggests that any mortgage loan that has remained
current for a number of years has certainly demonstrated the
borrower's ability to repay. Congress should replace the ATR
life of loan liability with a more reasonable term so that
liability ends after a loan has performed for a reasonable
number of years.
Establish an Effective Appeals Process to the Definition of a
Rural Area:
The definition of rural and underserved is critical and can
dramatically affect banks and the communities they serve. The
CFPB has already recognized this and has used its DFA
discretionary authority to exempt certain loans from the
qualified mortgage rule. This has been very important to
accommodate community banks that make short-term balloon loans
as a means of hedging against interest rate risk. However, the
exemption applies only if, during the preceding calendar year,
the creditor extended more than 50 percent of its total covered
transactions that provide for balloon payments in one or more
counties designated by the Bureau as ``rural'' or
``underserved.'' Thus, the definitions used can be limiting and
hurt mortgage customers that are inevitably in counties that
may have been inappropriate excluded.
ABA supports legislation (like S. 1916 introduced last Congress
by Majority Leader McConnell) that would direct the CFPB to
establish an application process to have an area designated as
a rural area if it has not already been designated as such by
the Bureau. An appropriate exemption process is critical to a
bank's ability to meet their community's needs since it would
help to assure that whatever definition of rural is ultimately
used by the CFPB, there would be an avenue to apply to the
Bureau to extend the definition of rural in those inevitable
cases where a county may have been inappropriately excluded.
Mandate a Study of the Basel III Capital Requirements Impact on
Mortgage Servicing Assets:
Implementation of Basel III is disrupting the market for
mortgage servicing rights by imposing punitive capital
requirements that are causing many banks to sell these assets,
usually to nonbank mortgage servicing firms that have little
connection with the original borrowers. ABA supports
legislation which requires the banking regulators to study the
overall impact of these requirements on the safety and
soundness of the banking system, including the impact on the
value of such assets as sales are required; the financial
stability of nonbank purchasers of mortgage servicing assets;
and the risks posed by shifting servicing duties from the
banking industry to nonbank entities. The regulators should be
required to report to the committees of jurisdiction within 1
year on recommendations for legislative and/or regulatory
changes to address concerns identified by the study, and steps
to implement the provisions should be halted until Congress has
the opportunity to review the study and act.
Encourage the Federal Housing Finance Agency to Reconsider its
FHLB Membership Rule:
For more than 80 years Congress has maintained eligibility
requirements for lenders to join the Federal Home Loan Banking
system. On several occasions, including in recent years,
Congress has even taken actions to expand eligibility for
members in certain ways. Currently, the FHFA has proposed
restrictions which might limit the ability of banks of all
sizes, including community banks, from retaining this critical
source of liquidity. The ABA does not object to a consideration
of the best way to regulate new business structures among Home
Loan Bank system members that might otherwise impose risks on
the system. However, the system should retain what is
essentially a self-enforcing discipline that Congress created
when it first established the system. The simple matter is
members cannot borrow from the Federal Home Loan Bank system
unless they have eligible collateral that is contemplated by
the statue. ABA will continue to work with Members of Congress
to ensure that the Federal Housing Finance Agency follows
congressional intent and does not unnecessarily restrict access
to vital liquidity provided by the Federal Home Loan Banks.
II. Remove Impediments to Serving Customers
Rules and requirements surround every bank activity. When it works
well, bank regulation helps ensure the safety and soundness of the
overall banking system. When it does not, it constricts the natural
cycle of facilitating credit, job growth and economic expansion.
Finding the right balance is key to encouraging growth and prosperity
as unnecessary regulatory requirements lead to inefficiencies and
higher expenses which reduce resources devoted to lending and
investment.
The key to changing this consolidation trend is to stop treating
all banks as if they were the largest and most complex institutions.
Financial regulation and examination should not be one-size-fits-all.
All too often, regulation intended for the largest institutions become
the standard that is applied to every bank-Basel III being the most
egregious. Such an approach only layers on unnecessary requirements
that add little to improve safety and soundness, but add much to the
cost of providing services--a cost which customers ultimately bear.
Instead, ABA has urged for years that a better approach to regulation
is to tailor bank supervision to take into account the charter,
business model, and scope of each bank's operations. This would ensure
that regulations and the exam process add value for banks of all sizes
and types.
By eliminating unnecessary impediments to the natural credit cycle,
Congress can help stem the tide of community bank consolidation driven
by these unnecessary impediments which negatively impacts every
community across the United States. For example, Congress can:
Reduce unnecessary and redundant paperwork:
Congress should require a review and reconciliation of existing
regulations that may be in conflict with or duplicative of new
rules being promulgated by the banking agencies, or which in
their application badly fit the variety of institutions that
make up the banking industry. This would help to eliminate
conflicts among different regulations, thereby eliminating
additional and unnecessary compliance burdens. It would also
result in more effective policies. Congress should also (among
other things):
Eliminate unnecessary currency transaction report
filings;
Provide greater accountability for law enforcement's use
of the Bank Secrecy Act data; and
Eliminate redundant annual privacy policy notices by
passing S. 423
Create a more balanced, transparent approach to bank
examination and regulation:
Congress should expand the number of banks eligible for an 18-
month exam cycle for highly rated community banks. This would
reduce significantly the resources required to deal with yearly
examinations by the regulators. The Comptroller of the
Currency, Thomas Curry, publicly stated such a change would
reduce burden on well-managed community institutions and would
also allow the agencies to focus their efforts on institutions
that may present supervisory concerns.
Congress should also:
Provide an independent appeals process for bank
examination decisions resulting in better accountability;
Require the Securities and Exchange Commission and the
Bank Regulators to perform cost-benefit analyses before issuing
new rules; and
Revise the cost-benefit test for rules proposed by the
Commodity Futures Trading Commission.
Limit burdensome trickle-down of complex bank regulations:
Congress should support legislation that prevents the
``trickle-down'' of complex bank regulation onto smaller and
mid-sized banks. For example, Congress should:
Require targeted rulemaking by regulators that focus on
the purpose of the rule, appropriately adjusted to the risk
footprints of banks;
Remove arbitrary regulatory thresholds not corresponding
to a bank's risk and business model;
Exempt small banks from Commodity Futures Trading
Commission clearing requirements which would improve their
ability to manage risk within the firm;
Eliminate unnecessary public stress test disclosures for
mid-sized banks; and
Ensure capital rules designed for systemically important
financial institutions are applied only to banks that are truly
SIFIs, based on multifactor assessments of systemic risk, not
merely asset size.
III. Eliminate Distortions by Government in the Marketplace
The banking industry's ability to serve customers is affected by
many forces, including regulatory or tax-advantaged nonbank competition
and unreasonable legal risks. These forces restrain the credit cycle,
add risk and distortions, and impede the banking industry's ability to
encourage growth and prosperity within communities.
Nonbank financial institutions offer identical products and
services but do so without the same regulatory oversight, consumer
compliance or tax treatment. As bank regulations become increasingly
restrictive, products migrate from the safety and soundness of the
banking system to the under-regulated or unregulated market. This
magnifies risk for all who use financial services.
Furthermore, some nonbanks benefit from special tax privileges
which have created economic distortions that shift resources and
banking activity from taxpaying banks to the tax-privileged sectors.
Credit unions and the Farm Credit System are prime examples. Such
marketplace tax distortions are neither good public policy nor fiscally
responsible.
In addition, unreasonable legal risks faced by banks have
restrained the credit cycle. For example, uncertainties surrounding the
interpretation of fair lending rules have raised the risks of costly
litigation and forced financial institutions to limit mortgage lending
operations. Similarly, unjustified and abusive patent litigation and
licensing fee demands have drained funds available for lending. These
legal risks create no benefit for local communities. Congress should
eliminate unreasonable legal risks so that the banking industry can
return to the business of banking.
Another potential and serious distortion involves innovations
within the payment system by nonbanks. Banks have always protected the
integrity of the payments system. As new innovations come forward it is
critical that they are within a secure regulatory system that promotes
consumer protection and system integrity. Equal access and equivalent
regulation are key principles to ensure this.
Congress should:
Support legislation that eliminates Government distortions in
the private market by:
Eliminating the Credit Union industry's special tax
treatment
Ending the Farm Credit System's unjustified tax
privileges
Ensuring agencies do not impose price controls, directly
or indirectly
Support legislation to eliminate unreasonable legal risks and
impediments by:
Enacting patent troll reform to reduce the threat of
patent abuse
Removing uncertainties in fair lending rules, such as
penalties where there is no intent to engage in unlawful
discrimination
Support Taxpaying Bank Charters by:
Conforming savings and loan holding company thresholds
and registration rules with those of banks
Supporting charter flexibility for mutual banks and
Federal savings associations
Encouraging regulators to charter new banks
Protect the Payments System by:
Ensuring that all participants--banks and nonbanks--are
subject to consistent rules and oversight for consumer
protection, safety and soundness and systemic risk
Avoiding technology mandates
Expanding information-sharing between public and private
entities to fight threats
Ensuring all parties have consistent accountability to
customers before and after breaches
Holding breached parties responsible for costs of
breaches
Conclusion
Community banks have been the backbone of hometowns across America.
Our presence in small towns and large cities everywhere means we have a
personal stake in the economic growth, health, and vitality of nearly
every community. A bank's presence is a symbol of hope, a vote of
confidence in a town's future. When a bank sets down roots, communities
thrive. We urge Congress to act now to help turn the tide of community
bank consolidation and protect communities from losing a key partner
supporting economic growth.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF ED TEMPLETON
President and CEO, SRP Federal Credit Union
on behalf of the National Association of Federal Credit Unions
February 12, 2015
Introduction
Good Morning, Chairman Shelby, Ranking Member Brown and Members of
the Committee. My name is Ed Templeton and I am testifying today on
behalf of the National Association of Federal Credit Unions (NAFCU). I
serve as the President and CEO of SRP Federal Credit Union,
headquartered in North Augusta, South Carolina. I have over 42 years of
financial industry experience, including the last 27 years as President
and CEO of SRP FCU. SRP FCU is a community credit union serving over
104,000 members in several counties in South Carolina along the Georgia
border with nearly $700 million in assets.
I currently serve as a Director-at-large and Chairman of NAFCU's
Board of Directors. I have served in a number of roles with the
Association while on the Board, including as Vice-Chairman and a member
of the Legislative Committee. I received my BBA from Augusta College,
graduated from the Georgia School of Banking and the BAI School of Bank
Administration at the University of Wisconsin.
As you are aware, NAFCU is the only national organization
exclusively representing the interests of the Nation's federally
chartered credit unions. NAFCU-member credit unions collectively
account for approximately 69 percent of the assets of all federally
chartered credit unions. NAFCU and the entire credit union community
appreciate the opportunity to participate in today's hearing regarding
regulatory relief for credit unions.
Historically, credit unions have served a unique function in the
delivery of essential financial services to American consumers.
Established by an Act of Congress in 1934, the Federal credit union
system was created, and has been recognized, as a way to promote thrift
and to make financial services available to all Americans, many of whom
may otherwise have limited access to financial services. Congress
established credit unions as an alternative to banks and to meet a
precise public need--a niche that credit unions still fill today.
Every credit union, regardless of size, is a cooperative
institution organized ``for the purpose of promoting thrift among its
members and creating a source of credit for provident or productive
purposes.'' (12 USC 1752(1)). While over 80 years have passed since the
Federal Credit Union Act (FCUA) was signed into law, two fundamental
principles regarding the operation of credit unions remain every bit as
important today as in 1934:
credit unions remain wholly committed to providing their
members with efficient, low-cost, personal financial service;
and,
credit unions continue to emphasize traditional cooperative
values such as democracy and volunteerism.
These principles apply for all credit unions, regardless of their
size. When compared with the Nation's ``Too Big To Fail'' financial
institutions, all credit unions are ``small'' institutions. It is with
this fact in mind that NAFCU believes that there should not be
artificial or arbitrary asset thresholds established for which size
credit unions should receive regulatory relief. The challenges facing
the industry impact, or stand to impact, all credit unions and all
ultimately need relief.
Today's hearing is an important one and the entire credit union
community appreciates the opportunity to expand on the topic of
regulatory relief. In my testimony I will cover several main points,
including:
Increased regulatory burden and how it is impacting credit
unions;
The importance of legitimate cost-benefit analysis at the
regulatory agencies from the onset;
Understanding risk in the financial system and the
potential of regulating credit unions out of existence with
one-size fits all regulatory solutions;
How Congress can provide regulatory relief; and
How the regulatory agencies can provide regulatory relief.
I. Increased Regulatory Burden has Impacted Credit Unions
Credit unions have a long track record of helping the economy grow
and making loans when other lenders have left various markets. This was
evidenced during the recent financial crisis when credit unions kept
making auto loans, home loans, and small business loans when other
lenders cut back. Still, credit unions have always been some of the
most highly regulated of all financial institutions, facing
restrictions on who they can serve and their ability to raise capital.
Credit union lending continues to grow at a solid pace today, up
about 18 percent as of June 2014, as compared to 2009. Although credit
unions continue to focus on their members, the increasing complexity of
the regulatory environment is taking a toll on the credit union
industry. While NAFCU and its member credit unions take safety and
soundness extremely seriously, the regulatory pendulum post-crisis has
swung too far toward an environment of over regulation that threatens
to stifle economic growth. As the National Credit Union Administration
(NCUA) and the Consumer Financial Protection Bureau (CFPB) work to
prevent the next financial crisis, even the most well intended
regulations have the potential to regulate our industry out of
business.
During the consideration of financial reform, NAFCU was concerned
about the possibility of over regulation of good actors such as credit
unions, and this is why NAFCU was the only credit union trade
association to oppose the CFPB having rulemaking authority over credit
unions. Unfortunately, many of our concerns about the increased
regulatory burdens that credit unions would face under the CFPB have
proven true. While there may be credible arguments to be made for the
existence of a CFPB, its primary focus should be on regulating the
unregulated bad actors, not adding new regulatory burdens to good
actors like credit unions that already fall under a prudential
regulator. As expected, the breadth and pace of CFPB rulemaking is
troublesome, and the unprecedented new compliance burden placed on
credit unions has been immense. While it is true that credit unions
under $10 billion are exempt from the examination and enforcement from
the CFPB, all credit unions are subject to the rulemakings of the
agency and they are feeling this burden. While the CFPB has the
authority to exempt certain institutions, such as credit unions, from
agency rules, they have been lax to use this authority to provide
relief.
The impact of this growing compliance burden is evident as the
number of credit unions continues to decline, dropping by 22 percent
(more than 1,700) institutions since 2007. A main reason for the
decline is the increasing cost and complexity of complying with the
ever-increasing onslaught of regulations. Since the 2nd quarter of
2010, we have lost 1,100 federally insured credit unions, 96 percent of
which were smaller institutions below $100 million in assets. Many
smaller institutions simply cannot keep up with the new regulatory tide
and have had to merge out of business or be taken over. Credit unions
need regulatory relief, both from Congress and their regulators.
This growing demand on credit unions is demonstrated by a 2011
NAFCU survey of our membership that found that nearly 97 percent of
respondents were spending more time on regulatory compliance issues
than they did in 2009. A 2012 NAFCU survey of our membership found that
94 percent of respondents had seen their compliance burdens increase
since the passage of the Dodd-Frank Act in 2010. At SRP FCU our
compliance costs have more than doubled since 2009 and we are adding
another compliance officer in 2015 just to keep up. Many credit unions
find themselves in the same situation, as a March, 2013, survey of
NAFCU members found that nearly 27 percent had increased their full-
time equivalents (FTEs) for compliance personnel in 2013, as compared
to 2012. That same survey found that over 70 percent of respondents
have had noncompliance staff members take on compliance-related duties
due to the increasing regulatory burden. This highlights the fact that
many noncompliance staff are being forced to take time away from
serving members to spend time on compliance issues.
At SRP FCU we have felt the pain of these burdens as well. There
are costs incurred each time a rule is changed and most costs of
compliance do not vary by size, therefore it is a greater burden on
credit unions like mine. We are required to update our forms and
disclosures, reprogram our data processing systems and retrain our
staff each time there is a change, just as large institutions are.
Unfortunately, lending regulation revisions never seem to occur all at
once. If all of the changes were coordinated and were implemented at
one time, these costs would have been significantly reduced and a
considerable amount of our resources that were utilized to comply could
have been used to benefit our members instead.
If Congress and the regulators will not act to provide regulatory
relief to credit unions, the industry may look vastly different a
decade from now.
II. Credit Unions Need Regulatory Relief
Regulatory burden is the top challenge facing all credit unions.
While smaller credit unions continue to disappear from the growing
burden, all credit unions are finding the current environment
challenging. Finding ways to cut-down on burdensome and unnecessary
regulatory compliance costs is the only way for credit unions to thrive
and continue to provide their member-owners with basic financial
services and the exemplary service they need and deserve. It is also a
top goal of NAFCU.
Ongoing discussions with NAFCU member credit unions led to the
unveiling of NAFCU's initial ``Five Point Plan for Regulatory Relief''
in February, 2013, and a call for Congress to enact meaningful
legislative reforms that would provide much needed assistance to our
Nation's credit unions. The need for regulatory relief is even stronger
in 2015, which is why we are releasing an updated version of the plan
for the 114th Congress.
The 2015 plan calls for relief in five key areas: (1) Capital
Reforms for Credit Unions, (2) Field of Membership Improvements for
Credit Unions, (3) Reducing CFPB Burdens on Credit Unions, (4)
Operational Improvements for Credit Unions, and (5) 21st Century Data
Security Standards.
Recognizing that there are a number of outdated regulations and
requirements that no longer make sense and need to be modernized or
eliminated, NAFCU also compiled and released a document entitled
``NAFCU'S Dirty Dozen'' list of regulations to remove or amend in
December of 2013 that outlined 12 key regulatory issues credit unions
face that should be eliminated or amended. While some slight progress
was made on several of these recommendations, we have updated that list
for 2015 to outline the ``Top Ten'' regulations that regulators can and
should act on now to provide relief. This list includes:
1. Improving the process for credit unions seeking changes to their
field of membership;
2. Providing More Meaningful Exemptions for Small Institutions;
3. Expanding credit union investment authority;
4. Increasing the number of Reg D transfers allowed;
5. Additional regulatory flexibility for credit unions that offer
member business loans;
6. Updating the requirement to disclose account numbers to protect
the privacy of members;
7. Updating advertising requirements for loan products and share
accounts;
8. Improvements to the Central Liquidity Facility (CLF);
9. Granting of waivers by NCUA to a Federal credit union to follow
a state law; and
10. Updating, simplifying and making improvements to regulations
governing check processing and fund availability.
In my statement today, we will highlight a number of key issues
where these regulatory burdens and proposals are posing immediate
threats to the ability of credit unions to serve their members and give
them the financial products that they want and need. Perhaps one of the
greatest challenges credit unions face is the often times grossly
distorted time and cost estimates provided to them by the regulatory
agencies in the proposal stages of rulemaking. As will be further
discussed in my testimony below, regardless of whether or not the
estimates are put forward in good faith, there continues to be a major
disconnect between the regulatory agencies in Washington, D.C., and
credit unions across the country in terms of how time consuming,
costly, and problematic it can be to implement various proposals.
Additionally, there isn't always a great amount of thought given to the
actual operational aspects of many proposals including how they will
interact with existing regulations and how they would address risk in
the system without layering needless regulation upon needless
regulation.
III. Recent Actions to Provide Relief
NAFCU and the entire credit union community would like to thank the
Members of this Committee and your staffs for all of your work on the
passage of H.R. 3468, the Credit Union Share Insurance Fund Parity Act
in the 113th Congress. As you are aware, this legislation allows NCUA
to provide pass-through share insurance coverage on Interest on Lawyers
Trust Accounts (IOLTAs) and other similar accounts, similar to what the
Federal Deposit Insurance Corporation (FDIC) provides. We also
appreciate the passage of the American Savings Promotion Act.
NAFCU also recognizes that there has been effort by regulators,
such as NCUA and CFPB to provide relief via the regulatory process.
While there have been some small steps taken, too often regulators set
arbitrary asset thresholds for relief and don't actually consider the
risk or complexities of institutions. Regulation of the system should
match the risk to the system. As previously noted, when compared with
the Nation's ``Too Big To Fail'' financial institutions, all credit
unions are ``small'' institutions and not very complex. There should
not be artificial or arbitrary asset thresholds established for which
size credit unions should receive regulatory relief. The challenges
facing the industry impact, or stand to impact, all credit unions and
all ultimately need relief.
More needs to be done. In particular, NAFCU is also concerned that
regulators sometimes try to frame new costly and burdensome proposals
as ``regulatory relief'' when the end result for credit unions is
higher costs for little relief. One example is NCUA's request for
additional third-party vendor examination authority for credit unions
which they have called ``regulatory relief.''
NAFCU does not support spending credit union resources to expand
NCUA's examination authority into noncredit union third parties. While
NCUA contends that examination and enforcement authority over third-
party vendors will provide regulatory relief for the industry, NAFCU
and our members firmly believe that such authority is unnecessary and
will require considerable expenditure of the agency's resources and
time. NAFCU disagrees with the assertion that third-party vendor
examination and enforcement authority will provide any significant
improvement to credit union safety and soundness. The key to success
with appropriate management of vendors is due diligence on behalf of
the credit union. NAFCU supports credit unions being able to do this
due diligence and NCUA already offers due diligence guidance to credit
unions. Giving NCUA additional authority will require an additional
outlay of agency resources, which will in turn necessitate higher costs
to credit unions.
Another prime example of a proposal NCUA has called relief, but is
in fact a new heavy burden on the industry, is the agency's current
proposal for a risk-based capital system for credit unions.
IV. NCUA's 2nd Risk-Based Capital Proposal: Still a Solution in Search
of a Problem
On January 15, 2015, the National Credit Union Administration
(NCUA) Board, in a 2-1 vote, issued a revised risk-based capital
proposed rule for credit unions. NAFCU has just begun to analyze the
proposal and will be providing NCUA with detailed comments and concerns
from our membership as part of the agency's request for comment before
the April 27, 2015, deadline. We are encouraged to see that the revised
version of this proposal addresses some changes sought by our
membership. However, NAFCU maintains that this costly proposal is
unnecessary and will ultimately unduly burden credit unions and the
communities they serve.
A Costly Experiment for Credit Unions
NAFCU and its member credit unions remain deeply concerned about
the cost of this proposal. NAFCU's analysis estimates that credit
unions' capital cushions (a practice encouraged by NCUA's own
examiners) will suffer over a $470 million hit if NCUA promulgates
separate risk-based capital threshold for well capitalized and
adequately capitalized credit unions (a ``two-tier'' approach).
Specifically, in order to satisfy the proposal's ``well-capitalized''
thresholds, today's credit unions would need to hold at least an
additional $729 million. On the other hand, to satisfy the proposal's
``adequately capitalized'' thresholds, today's credit unions would need
to hold at least an additional $260 million. Despite NCUA's assertion
that only a limited number of credit unions will be impacted, this
proposal would force credit unions to hold hundreds of millions of
dollars in additional reserves to achieve the same capital cushion
levels that they currently maintain. These are funds that could
otherwise be used to make loans to consumers or small businesses and
aid in our Nation's economic recovery.
In addition, NCUA's own direct cost estimate approximates that is
will cost $3.75 million for the agency to adjust the Call Report,
update its examination systems and train internal staff to implement
the proposed requirements. NCUA also estimates credit unions would
incur an ongoing $1.1 million expense to complete the adjusted Call
Report fields. NCUA's conservative estimate states that it will only
take a meager 40 hours to completely review the 450-page proposal
against a credit union's current policies at a cost of over $5.1
million. We expect that the true costs will be much higher when credit
unions have to comply.
Impact Analysis
NCUA estimates that 19 credit unions would be downgraded if the new
risk-based proposal were in place today. NAFCU believes the real impact
is best illustrated with a look at its implications during a financial
downturn. Under the new proposal, the number of credit unions
downgraded more than doubles during a downturn in the business cycle.
Because the nature of the proposal is such that, in many cases, assets
that would receive varying risk weights under the proposal are grouped
into the same category on NCUA call reports, numerous assumptions must
be made to estimate impact.
Under our most recent analysis, NAFCU believes 45 credit unions
would have been downgraded during the financial crisis under this
proposal. Of those 45, 41 of credit unions would be well-capitalized
today. To have avoided downgrade, the institutions would have had to
increase capital by $145 million, or an average $3.2 million per
institution. As the chart on the next page demonstrates, almost all of
the credit unions that would have been downgraded--95 percent--are well
capitalized or adequately capitalized today without NCUA's risk-based
capital proposal being needed.
Legal Authority
NAFCU strongly believes that NCUA lacks the statutory authority to
prescribe a separate risk-based capital threshold for well capitalized
and adequately capitalized credit unions. NCUA Board Member J. Mark
McWatters, the dissenting vote on the proposal, called NCUA's lack of
legal authority the most ``fundamental issue presented before the
Board.'' The Federal Credit Union (FCU) Act expressly provides that
NCUA shall implement a risk-based net worth requirement that ``take[s]
account of any material risk against which the net worth ratio required
for an insured credit union to be adequately capitalized may not
provide adequate protection.'' 12 U.S.C. 1790d(d). The FCU Act does
not provide NCUA the express authority to implement a separate risk-
based net worth threshold for the ``well capitalized'' net worth
category. Simply put, Congress has not expressly authorized the Board
to adopt a two-tier risk-based net worth standard.
Further, it has been disclosed that NCUA authorized the expenditure
of $150,000 to seek an outside legal opinion over the legality of the
risk-based proposal. It is worth noting that NCUA continued forward
with this proposal despite the neutrality of the outside opinion which
recognized the questionable legal standing of the proposal by noting
only that a court ``could'' conclude that NCUA had the statutory
authority to offer a two-tier system.
Legislative Change
Ultimately, NAFCU believes legislative changes are necessary to
bring about comprehensive capital reform for credit unions such as
allowing credit unions to have access to supplemental capital sources,
and making the statutory changes necessary to design a true risk-based
capital system for credit unions that gives greater statutory
flexibility in determining corresponding leverage ratio standards.
V. Credit Unions Need Field of Membership Help
In addition to the legislative changes needed on the capital front
for credit unions, field of membership (FOM) rules for credit unions
need to be modernized, both on the legislative front and by NCUA.
NAFCU believes reasonable improvements to current field-of-
membership restrictions include: (1) streamlining the process for
converting from one charter type to another; (2) updating and revising
population limits in NCUA's field of membership rules; and, (3) making
statutory changes to make it easier for all credit unions to add
``underserved'' areas within their field of membership or continuing
serving their current select employee groups (SEGs) when they change
charters. Additionally, NAFCU believes that NCUA should have a
``reverse wild card'' authority where Federal credit unions can request
a waiver from the agency that allows them to follow a State rule for
credit unions if it allows them to serve their members better.
Charter Conversions
NAFCU continues to hear from our members that NCUA's Rules and
Regulations governing charter conversions for credit unions that seek
to convert from one type of Federal charter to another are
unnecessarily cumbersome. We ask that NCUA review its rules on
conversions and initiate a rulemaking for changes, with particular
focus on conversions to a community charter.
NAFCU and our members strongly oppose the agency's chartering rule
that prevents a single- or multi-associational chartered Federal credit
union (FCU) from continuing to serve its existing field of membership
when it converts to a community charter, unless the field of membership
is entirely within the new community. The effect of this limitation has
been that FCUs are dissuaded from offering their services to more
people, a result that we do not believe is desirable.
Definition of ``Rural District''
Under NCUA's Rules and Regulations, a ``rural district'' is defined
as (1) a district that has well-defined, contiguous geographic
boundaries; (2) more than 50 percent of the district's population
resides in census blocks or other geographic areas that are designated
as rural by the United States Census Bureau; and (3) does not exceed
certain other population thresholds. The district's population cannot
exceed either (a) the greater of 250,000 or 3 percent of the population
of the State in which the majority of the district is located, or (b)
if the district has well-defined contiguous geographic boundaries, it
does not have a population density in excess of 100 people per square
mile, and the total population of the district does not exceed the
greater of 250,000 or 3 percent of the population of the State in which
the majority of the district is located.
The current definition of ``rural district'' was revised in
February, 2013. As NAFCU has expressed many times to NCUA, it is
important that the definition not be overly restrictive and
consequently deprive many Americans the opportunity to receive high
quality financial services from a credit union.
While NAFCU welcomed NCUA's efforts to enable more credit unions to
obtain a community charter under the ``rural district'' designation, we
continue to hear from our members that the final rule has had only a
limited effect. We urge the agency to reconsider the definition of
``rural district'' so as to provide greater flexibility for credit
unions that would like to serve rural areas of our Nation. A more
flexible definition of ``rural district'' would increase credit
availability to those who might otherwise not have ready access to
financial services.
NAFCU notes that under the ``three percent option'' only those
credit unions that seek to serve in rural areas in the 13 most
populated States in the country have been affected by the final rule.
Those credit unions that would like to serve persons who live in rural
areas in the remaining 37 States and U.S. Territories remain subject to
an arbitrary 250,000 population limit.
NAFCU is also concerned with the final rule's 250,000 population
limit. In prior communications with the agency, we urged NCUA to, at
the very least increase this limit to the pre-2010 level of 500,000,
which was reduced without explanation. With the 2010 changes, the
agency effectively decided that a ``rural district'' is actually 60
percent smaller in population than it previously thought. This fact, in
and of itself, is troubling. NAFCU believes the 250,000 limit is
arbitrary and does not pass even a cursory review of our Nation's
makeup. We urge the agency to reconsider this threshold.
Further, NAFCU believes NCUA should either remove or greatly
increase the 100 person per square mile limit, as this population
density threshold is far too low. NAFCU does not believe a person-per-
square mile limitation should be part of the analysis for determining
whether a credit union should be granted a community charter with
``rural district'' designation.
Statutory Changes are Needed
Congress can provide FOM relief by removing outdated restrictions
that credit unions face such as expanding the criteria for defining
``urban'' and ``rural'' and allowing voluntary mergers involving
multiple common bond credit unions and allowing credit unions that
convert to community charters to retain their current select employee
groups (SEGs).
Furthermore, Congress should clarify that all credit unions,
regardless of charter type, should be allowed to add underserved areas
to their field of membership. This is an important issue for SRP FCU,
as our membership includes Allendale and Barnwell counties which are
some of the most rural in South Carolina. They are also some of the
poorest, with large percentages living below the poverty level. SRP FCU
has a strong presence in these counties, with a significant amount of
the adult populations in those counties being members. We would like to
take our success in these counties and help other underserved
communities. However, as a community charter, we cannot add underserved
areas to our field of membership.
VI. Regulators Must Be Held Accountable for Cost and Compliance Burden
Estimates
Cost and time burden estimates issued by regulators such as NCUA
and CFPB are often grossly understated. Unfortunately, there often is
never any effort to go back and review these estimates for accuracy
once a proposal is final. We believe Congress should require periodic
reviews of ``actual'' regulatory burdens of finalized rules and ensure
agencies remove or amend those rules that vastly underestimated the
compliance burden. A March, 2013, survey of NAFCU's membership found
that over 55 percent of credit unions believe compliance cost estimates
from NCUA and the CFPB are lower than they are when the credit union
actual has to implement the proposal.
We believe Congress should use their oversight authority to require
regulators to provide specific details on how they determined their
assumptions in their cost estimates when submitting those estimates to
OMB and publishing them in proposed rules. It is important that
regulators be held to a standard that recognizes burden at a financial
institution goes well beyond additional recordkeeping. At SRP FCU, we
spend approximately 116 employee hours to fill out one NCUA Call
Report. NCUA's 2014 submission to OMB estimates the time to complete
the Call Report to be 6.6 hours per reporting cycle. Something is
amiss. That's 109 hours of regulatory burden that are not being
recognized on just one form. With the requirements of the new proposed
risk-based capital proposal, this burden is likely to get worse. More
needs to be done to force regulators to justify that the benefits of a
proposal outweigh its costs.
VII. Revisiting Legislation from the 113th Congress to Provide Relief
There were a number of measures introduced in either the House or
Senate in the 113th Congress to provide credit unions with regulatory
relief. Unfortunately, many of these measures stalled at various points
in the legislative process. Still, we hope that these measures gain
traction in the 114th Congress:
Regulatory Relief for Credit Unions Act of 2013
The Regulatory Relief for Credit Unions Act of 2013 (H.R. 2572)
reflected several provisions important to NAFCU. The legislation would:
establish a risk-based capital system for credit unions;
allow NCUA to grant Federal credit unions a waiver to
follow a State rule instead of a Federal one in certain
situations;
authorize NCUA to step in where appropriate to modify a
CFPB rule affecting credit unions;
require that NCUA and CFPB revisit cost/benefit analyses of
rules after 3 years so they have a true sense of the compliance
costs for credit unions;
require NCUA to conduct a study of the Central Liquidity
Facility and make legislative recommendations for its
modernization;
give credit unions better control over their investment
decisions and portfolio risk.
Member Business Lending Improvements
Senators Mark Udall and Rand Paul introduced S. 968, the Small
Business Lending Enhancement Act of 2013, and Representatives Royce and
McCarthy introduced H.R. 688, the Credit Union Small Business Jobs
Creation Act. Both bills would raise the arbitrary cap on credit union
member business loans from 12.25 percent to 27.5 percent of total
assets for credit unions meeting strict eligibility requirements.
Additionally, NAFCU supported legislation (H.R. 4226) to exclude
loans made to non-owner occupied 1- to 4-family dwelling from the
definition of a member business loan and legislation (H.R. 5061) to
exempt loans made to our Nation's veterans from the definition of a
member business loan.
Furthermore, NAFCU also supports exempting from the member business
lending cap loans made to nonprofit religious organizations, businesses
with fewer than 20 employees, and businesses in ``underserved areas.''
Supplemental Capital for Credit Unions
Allowing eligible credit unions access to supplemental capital, in
addition to retained earning sources, will help ensure healthy credit
unions can achieve manageable asset growth and continue to serve their
member-owners efficiently as the country recovers from the financial
crisis.
During the last Congress Representatives King and Sherman
introduced H.R. 719, the Capital Access for Small Businesses and Jobs
Act, a bill that would authorize NCUA to allow Federal credit unions to
receive payments on uninsured, nonshare capital accounts, provided the
accounts do not alter the cooperative nature of the credit union. The
need for supplemental capital is even greater today as the NCUA pushes
ahead with their stringent risk-based capital proposal.
Reforms to the definition of ``Points and Fees''
Senators Manchin, Johanns, Toomey, Kirk, Stabenow and Levin
introduced S. 1577, The Mortgage Choice Act, a bipartisan bill that
would exclude affiliated title charges from the ``points and fees''
definition, and clarify that escrow charges should be excluded from any
calculation of ``points and fees.'' These important changes would
greatly improve the definition of ``points and fees'' used to determine
whether a loan meets the QM test, and would ensure that those with low
and moderate means would continue to be able to obtain their mortgages
from their credit union at a reasonable price. We appreciate the
leadership of the sponsors of this legislation and urge the Senate to
advance this issue as soon as possible. Similar legislation (H.R. 685)
was just reintroduced in the House last week.
Privacy Notices
Earlier this week Senators Moran and Heitkamp reintroduced
bipartisan legislation (S. 423) that would remove the requirement that
financial institutions send redundant paper annual privacy notices if
they do not share information and their policies have not changed,
provided that they remain accessible elsewhere. These duplicative
notices are costly for the financial institution and often confusing
for the consumer as well. In the 113th Congress, this legislation had
over 70 cosponsors in the Senate. We appreciate the continued
leadership on this important issue. Similar legislation has been
introduced in the House this Congress as H.R. 601.
Examination Fairness
Credit unions face more examiner scrutiny than ever, as the
examination cycles for credit unions have gone from 18 months to 12
months since the onset of the financial crisis even though credit union
financial conditions continue to improve. Additional exams mean
additional staff time and resources to prepare and respond to examiner
needs. NAFCU has concerns about the continued use of Documents of
Resolution (DOR) when they are not necessary or are used in place of
open and honest conversations about examiner concerns. A survey of
NAFCU members last year found that nearly 40 percent of credit unions
that received DORs during their last exam felt it was unjustified and
nearly 15 percent of credit unions said their examiners appeared less
competent than in the past. NAFCU supports effective exams that are
focused on safety and soundness and flow out of clear regulatory
directives and later in my testimony we will outline areas where we
think NCUA can do more.
NAFCU strongly supported legislation introduced (S. 727) by
Senators Manchin and Moran last Congress that would have helped to
ensure timeliness, clear guidance and an independent appeal process
free of examiner retaliation. Identical legislation (H.R. 1553) was
introduced in the House and NAFCU is hopeful that both chambers take
this issue up during the 114th Congress.
Relief From the Consumer Financial Protection Bureau
NAFCU has consistently supported measures in both chambers to bring
greater accountability and transparency to the Consumer Financial
Protection Bureau (CFPB) including replacing the director with a board
akin to other Federal financial regulators, bringing the CFPB under the
congressional appropriations process, and giving the Financial
Stability Oversight Council additional tools to challenge CFPB
rulemaking. NAFCU appreciates the leadership of Senators Fischer,
Scott, Barrasso, Chambliss, Collins, Inhofe, Johnson and Roberts for
spearheading these efforts.
Additionally, we appreciate the work of Senators Toomey and
Donnelly for introducing S. 2732, the CFPB Examination and Reporting
Threshold Act, to address the arbitrary $10 billion threshold for
examination of depository institutions by the CFPB. NAFCU believes that
all credit unions, as good actors during the financial crisis, should
be exempt from being subject to the CFPB and would support adding
language to the legislation exempting all credit unions in place of the
proposed $50 billion threshold.
Relief From Operation Choke Point
The Operation Choke Point initiative was launched in an effort to
fight consumer fraud by denying fraudulent businesses access to banking
services and holding financial institutions and third-party processors
accountable if they continue to serve a client operating in a
fraudulent manner. NAFCU, with many others in the financial services
industry, has noted concerns that this program ``could seriously deter
the natural growth and development of e-commerce and stifle future
economic growth.''
In the House, Representative Leutkemeyer introduced H.R. 4986, the
End Operation Choke Point Act, a bill that would create a legal safe
harbor for financial institutions, including credit unions that meet
qualifying criteria. Luetkemeyer also introduced H.R. 5758, the
Financial Institution Customer Protection Act, a bill that would rein
in the Justice Department's ``Operation Choke Point'' initiative by
restricting its ability to order the termination of accounts in
financial institutions by requiring Federal banking regulators, to
provide material reason beyond reputational risk for ordering a
financial institutions to terminate a banking relationship. It would
also require regulators to put any order to terminate a customer's
account into writing. The latter bill was reintroduced last week in
substantially similar form and under the same title as H.R. 766.
Helping Expand Lending Practices in Rural Communities Act
Introduced by Leader McConnell (S. 1916), this bill would be
helpful to small creditors, including credit unions, as they deal with
the CFPB's definition ``rural area'' particularly as it relates to the
ability-to-repay rule. Representative Andy Barr (H.R. 2672) had a
similar bill in the House and NAFCU hopes these bicameral efforts
continue this Congress. As I outline in my testimony below, NAFCU also
has concerns with how NCUA defines ``rural.''
Community Bank Mortgage Servicing Asset Capital Requirements Study Act
Introduced by Representatives Luetkemeyer and Perlmutter as H.R.
4042 in the last Congress, this bill would delay the implementation of
Basel III regulations on mortgage servicing assets until an impact
study is conducted and alternatives are explored. Given the
circumstances credit unions find themselves in with the risk-based
capital proposal, NAFCU believes this is an appropriate vehicle to
include a similar analysis be done by the NCUA pertaining to their
risk-based capital proposal.
SAFE Act Confidentiality and Privilege Enhancement Act
Introduced by Chairman Capito as H.R. 4626 in the House last
Congress, the bill would clarify the confidentiality of information
shared between State and Federal financial service regulators under the
S.A.F.E. Mortgage Licensing Act. This commonsense technical fix is
welcomed by credit unions as it applies to the Nationwide Mortgage
Licensing System & Registry established as an oversight mechanism to
collect information from Mortgage Loan Originators. Senator Capito just
reintroduced this last week and we applaud her efforts.
VIII. Areas Where Regulators Can Provide Relief to Credit Unions
While my testimony has outlined important issues impacting credit
unions and highlighted steps that Congress can take to help, there are
additional steps that the NCUA, CFPB, FHFA, the Federal Reserve and
others can currently take to provide relief without congressional
action and we would encourage them to do so.
NCUA
We are pleased that the National Credit Union Administration has
been willing to take some small steps recently to provide credit unions
relief. A prime example of this is the agency's proposed fixed-asset
rule. This is a topic that was previously on NAFCU's ``Dirty Dozen''
and we are hopeful that the agency will continue moving forward and
finalize this proposal.
We are also glad to see NCUA's voluntary participation in review of
its regulations pursuant to the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (EGRPRA). This review provides an
important opportunity for credit unions to voice their concerns about
outdated, unnecessary or unduly burdensome requirements of NCUA's Rules
and Regulations.
While these small steps by NCUA are positive, NAFCU believes that a
big part of the problem is the cumulative impact of numerous
regulations. While NCUA is not required to follow the President's
Executive Order 13563--Improving Regulation and Regulatory Review, we
believe that the agency should adhere to the spirit of it during the
rulemaking process, such as taking into account the costs of cumulative
costs of its regulations on the credit union industry. As noted
earlier, NAFCU believes all credit unions need relief and regulators
such as NCUA should not solely rely on an arbitrary asset-size
threshold when providing relief.
While my testimony has already outlined key areas such as field of
membership, risk-based capital and compliance burden estimates, there
are a number of areas where we would like to see NCUA action to provide
relief.
Member Business Lending
A major area where we think NCUA can use its authority to provide
relief is with member business lending. The Member Business Lending
(MBL) regulation, as NAFCU and our members have consistently
maintained, is far too restrictive and cumbersome.
As NAFCU outlined in both its March 5, 2014, letter to NCUA Board
and our ``Top Ten'' list of regulations to eliminate or amend, there
are several aspects of the MBL requirements which should be improved,
including: changes to the waiver requirements and waiver process to
make it more efficient and easier to obtain individual and blanket
waivers; expanding opportunities to obtain waivers; and removing the 5
year relationship requirement to obtain a personal guarantee waiver.
Additionally, NCUA should use its authority granted in the FCU Act to
provide an exception to the limitations on member business loans (the
MBL cap) for those credit unions that have a history of making MBLs to
their members for a period of time.
Section 1757a of the FCU Act contains the limitations on MBLs.
Under Part 723 of NCUA's Rules and Regulations, the aggregate MBL limit
for a credit union is limited to the lesser of 1.75 times the credit
union's net worth or 12.25 percent of the credit union's total assets.
However, the FCU Act also contains exceptions to the MBL cap. In
particular, it provides exception authority from the MBL cap for ``an
insured credit union chartered for the purpose of making, or that has a
history of primarily making, member business loans to its members, as
determined by the Board.'' See, 12 U.S.C. 1757a(b)(1).
Traditionally, this provision in 1757a has been construed
narrowly by NCUA. Section 723.17(c) of NCUA's Rules and Regulations
currently defines credit unions that have a history of primarily making
member business loans as credit unions that have either 25 percent of
their outstanding loans in member business loans or member business
loans comprise the largest portion of their loan portfolios, as
evidenced by any Call Report or other document filed between 1995 and
1998. NAFCU continues to hear from our members that this definition is
overly restrictive and often prevents them from extending sound loans
to their small business members, many of whom have been abandoned by
other financial institutions due to their smaller size.
NAFCU has urged NCUA to take a broader interpretation of the
history of primarily making MBLs provision of the FCU Act. This can be
done by NCUA utilizing its statutory authority to create an exception
from the MBL cap for all credit unions that have a history of making
MBLs for an extended period of time. NAFCU and our members believe that
a credit union that has had a successful MBL program in place for a
period of 5 years or greater would be a reasonable basis to satisfy
this statutory authority.
NCUA has explained that the current definition ``focuses on a
credit union's historical behavior during the years leading up to the
enactment of the Credit Union Membership Access Act (CUMAA).'' NAFCU
and our members believe this focus is unnecessarily restrictive, and we
have urged the agency to expand the scope of the definition. NAFCU
contends that it would be more appropriate for NCUA to consider a
credit union's history of making MBLs in general, rather than
restricting its focus solely to a credit union's behavior from 1995
through 1998. In particular, we believe the agency should define credit
unions that have had a successful MBL program in place for at least 5
years as having a ``history of primarily making MBLs.'' NAFCU has
encouraged the NCUA Board to set this standard and make the exception
available to all credit unions.
NCUA expanding the opportunities for credit unions to obtain
waivers is another area where they could help. In February 2013, NCUA
issued supervisory letter 13-01 to credit unions attempting to shed
light on the criteria and processes for obtaining MBL waivers. While
this guidance was useful to credit unions, NAFCU continues to hear from
its members that the waiver process is complicated, slow moving, and
inefficient. As a result, many credit unions have been unable to extend
sound loans to their small business members, loans which may have been
lost to competitors, or worse, never extended at all.
While waivers should not be used so frequently that they are the
norm, the process to obtain one should not be so excessively difficult
as to prevent credit unions from serving their membership effectively.
Healthy, well-run credit unions with risk-focused MBL programs that
maintain appropriate policies and procedures and that perform adequate
due diligence on their member borrowers should be able to apply for and
obtain blanket waivers which would help their membership.
Furthermore, the MBL regulations should be amended to expand a
credit union's ability to obtain an individual or blanket waiver.
Credit unions, because of their fundamental nature, are in a great
position to extend credit to small businesses which will help fuel our
Nation's economic recovery. Expansion of the waiver capabilities would
enable well run credit unions to extend loans to their small business
members.
As noted above, the FCU Act contains the limitations on and
exceptions to MBLs. However, the FCU Act does not prescribe limitations
on the waivers that NCUA can put in place with regard to the
regulations it imposes for MBLs that are not statutory requirements.
Section 723.10 of NCUA's Rules and Regulations contains an
enumerated list of MBL-related requirements for which a credit union
can apply for a waiver. NAFCU believes that this enumerated list of
available waivers should be replaced with a more flexible waiver
provision that would allow a credit union to apply for, and obtain, a
waiver from a nonstatutorily required MBL regulatory requirement. The
use of an enumerated list necessarily restricts a credit union from
obtaining a waiver of a requirement which is not listed, even where
such a waiver would not pose a safety and soundness concern to the
credit union. NAFCU encourages NCUA to amend Section 723.10 to provide
a more flexible waiver provision.
NCUA could issue appropriate guidance for the types of waivers that
a credit union could obtain using a more flexible standard, which could
include enumerated lists and appropriate examples. Section 723.11 of
NCUA's Rules and Regulations contains the procedural requirements for a
credit union to obtain a waiver, and it requires a credit union to
submit a waiver request accompanied by a great deal of information
related to the credit union's member business loan program. Under a
more flexible provision, and taking into account safety and soundness
considerations, NCUA should be able to determine from the information
required to be provided pursuant to Section 723.11 whether a waiver is
appropriate for a credit union. This approach would enhance a credit
union's ability to provide MBLs to its members without compromising the
safety and soundness of the credit union.
Budget Transparency
NCUA is funded by the credit unions it supervises. Each year,
credit unions are assessed a different operating fee based on asset
size. NCUA then pools the monies it receives from credit unions and
uses those funds to create and manage an examination program. The
monies that NCUA collects, however, have significantly increased over
the past 6 years to cover a $109.7 million increase in the agency's
budget during that period.
NAFCU supports the agency's efforts to accurately calculate the
appropriate overhead transfer rate and urges NCUA to maintain a rate
that is equitable to FCUs given they are funding the remaining agency
expenses through operating fees. NAFCU encourages NCUA to continue to
look for ways to decrease costs in order to reduce fees FCUs pay to the
agency. In connection with this, NAFCU believes that credit unions
deserve clearer disclosures of how the fees they pay the agency are
managed.
As NAFCU has stated in previous communications to the agency, NCUA
is charged by Congress to oversee and manage the National Credit Union
Share Insurance Fund (NCUSIF), the Temporary Corporate Credit Union
Stabilization Fund, the Central Liquidity Fund, and its annual
operating budget. These funds are comprised of monies paid by credit
unions. NCUA is charged with protecting these funds and using its
operating budget to advance the safety and soundness of credit unions.
Because these funds are fully supported by credit union assets,
NAFCU and our members strongly believe that credit unions are entitled
to know how each fund is being managed. Currently, NCUA publicly
releases general financial statements and aggregated balance sheets for
each fund. However, the agency does not provide non-aggregated
breakdowns of the components that go into the expenditures from the
funds, such as the overhead transfer rate. Although NCUA releases a
plethora of public information on the general financial condition of
the funds, NAFCU urges the agency to fully disclose the amounts
disbursed and allocated for each fund. For example, NAFCU and our
members believe that NCUA should be transparent about how the monies
transferred from the NCUSIF through the overhead transfer rate are
allocated to the NCUA Operating Budget.
NCUA Board Member McWatters has urged greater transparency in
NCUA's budget process, including an industry hearing on the budget. He
has also outlined a series of recommendations for the agency to take to
provide great budget transparency:
1. Additional detail regarding each of the following expenditures:
Employee Pay and Benefits, Travel, Rent/Communications/
Utilities, Administrative, and Contracted Services;
2. A detailed analysis of how NCUA may reduce the expenditures noted
in item 1 above;
3. The submission of the methodology employed by NCUA in calculating
the OTR for public comment, and a detailed description of the
methodology adopted by NCUA following a thoughtful analysis of
the comments received;
4. A detailed analysis of expenditures among NCUA, the National
Credit Union Share Insurance Fund, the Temporary Corporate
Credit Union Stabilization Fund, and the Central Liquidity
Facility;
5. A detailed analysis of why NCUA's budget has increased by over
50-percent in the past 5 years, as well as a year-by-year
analysis of all such increases;
6. A detailed analysis of all cost savings programs implemented by
NCUA over the past 5 years;
7. A detailed analysis of all expenditures incurred by NCUA to
support the Financial Stability Oversight Council (FSOC);
8. A detailed analysis of all expenditures incurred by NCUA in
implementing the Sensitive Compartmented Information Facility
(SCIF);
9. A detailed analysis of all expenditures that NCUA anticipates to
incur with respect to the proposed risk based net worth rule,
as well as all other proposed rules;
10. A formal cost-benefit analysis with respect to each rule or
regulation proposed by NCUA, as well as a detailed description
of the methodology employed by NCUA in conducting such
analysis; and
11. A detailed reconciliation of how NCUA plans to allocate budget
expenditures to achieve its strategic goals.
Many of these recommendations align with NAFCU's concerns and we would
urge the Committee to call on the agency to implement these
recommendations.
Advertising
Another area where NCUA could provide relief would be to amend its
Rules and Regulations to accommodate for the rise of social media and
mobile banking. Regulations governing advertising, such as 12 CFR
740.5, for example, contain requirements that are impossible to apply
to social media and mobile banking, especially mediums that are
interactive. A survey earlier this year of NAFCU members found that
nearly one-in-four have a hard time advertising online or on mobile
devices because of these rules. We believe these rules should be
amended with the use of social media and mobile banking in mind to
include more flexibility as opposed to the rigidity of the current
rules. Credit unions have fared very well in safely adopting the use of
such technology, and they take actions necessary to ensure their
policies and procedures provide oversight and controls with regard to
the risk associated by social media activities. A modernization of
these rules by NCUA would clear up ambiguity and help credit unions use
new technologies to better meet the needs of their members.
Examination Issues
While I have already outlined our support for the Financial
Institutions Examination Fairness and Reform Act that was introduced in
the last Congress, NAFCU believes that NCUA could take action now to
vastly improve the examination process for credit unions.
NAFCU supports effective exams that are focused on safety and
soundness and flow out of clear regulatory directives. However, the
examination process, by its very nature, can be inconsistent.
Regulatory agencies in Washington try to interpret the will of
Congress, examiners in the field try to interpret the will of their
agency, and financial institutions often become caught in the middle as
they try to interpret all three as they run their institution.
Unfortunately, the messages are not always consistent.
Exam Modernization
As part of its Regulatory Modernization Initiative, NCUA recently
issued its Letter to Credit Unions (Letter No. 13-CU-09). It
streamlined the examination report and clarifies for credit unions the
difference between a Document of Resolution (DOR) and an Examiner's
Findings Report. Full implementation of these new documents began with
exams that started on or after January 1, 2014.
NAFCU has concerns about the continued use of Documents of
Resolution (DOR) when they are not necessary or are used in place of
open and honest conversations about examiner concerns. Examiner
Findings Reports should be used in place of DORs for less urgent
issues. That would allow management may use its own discretion to
determine the timeframe and approach for correcting those less urgent
problems.
Finally, NAFCU believes NCUA should update its exam manual and
provide credit unions with the updates so that they may better
understand the examination process.
Consistency
One of the most troublesome complaints we hear is that NCUA
examinations continue to apply regulations inconsistently. While we
fully recognize that examiners must have a certain degree of
discretion, as we have previously communicated to the agency,
inconsistent examinations and application of regulations create
unnecessary confusion and are costly.
Additionally, regulators should ensure that their regulations are
consistently applied from one examiner to another. Inconsistent
application of laws and regulations among examiners increases
uncertainty. This increased uncertainty adds another unnecessary layer
of difficulty for credit unions to maintain the highest levels of
compliance.
More importantly, it is also unclear how an examiner will evaluate
compliance. In addition to actual regulations, NCUA also routinely
provides ``guidance'' in any one of a number of different forms. Some
examiners treat the guidance as just that; a tool to be used for credit
unions to comply with regulations or implement best practices. Some
examiners, however, treat the ``guidance'' as if it were part of the
regulation itself, and consider failure to comply with the guidance as
something roughly equal to failing to comply with the regulation. More
should be done to ensure that all examiners treat both regulations and
guidance consistently and for the purpose each was issued.
Unfortunately, if examinations are not conducted consistently,
compliance with the ever-growing number of regulations will be ever
more difficult. As a significant percent of examiners are new and with
a large number retiring, NCUA will no doubt be continuing to hire new
examiners. Thus, we believe that this is a critical juncture, as well
as a great opportunity, for the agency to appropriately train and
educate examiners so that examinations are conducted consistently. With
this goal in mind, NCUA should take any and all measures it deems
appropriate to achieve this goal.
Examination Appeal Process
NAFCU understands that some of our concerns cannot be addressed by
regulators. Generally, NCUA and its examiners do a satisfactory job,
but every inconsistency that forces credit unions to divert more
resources to compliance reduces their ability to better serve their
members. This ultimately translates to lower interest rates on savings,
higher interest rates on loans, and in some cases, the inability to
extend credit to a member that would receive credit otherwise.
NAFCU urges reforms to establish an appeals process that should
provide an opportunity to identify inconsistencies and serve as a
quality assurance check. The existing appeal process does not promote
either. Under the existing process, if an examiner makes a
determination to take action against the credit union, the credit union
must first address the issues with the examiner. The second step is to
contact the supervisory examiner, who evaluates the facts and reviews
the analysis. If the issue is still not resolved, the credit union may
send a letter to the regional director. After the previous steps have
been taken, a credit union may then appeal to the NCUA Board for review
of the decisions below.
The appeal process has a number of inherent flaws, not the least of
which is the exclusion (in most instances) of a review by an
independent third-party at any level of the process. Under these
circumstances it is almost impossible to avoid conflicts of interest
and approach each situation objectively.
CFPB
We would also like to acknowledge efforts by the CFPB to provide
relief, such as seeking to act on the privacy notice issue in the
absence of any final congressional action and efforts to revisit some
of the concerns raised about points and fees under the new QM rule.
While we believe that legislative action is still necessary in both
regards, the Bureau deserves credit for taking steps in the absence of
Congressional action. Still, NAFCU has consistently maintained that the
tidal wave of the Bureau's new regulations, taken individually, and
more so in their cumulative effect, have significantly altered the
lending market in unintended ways. In particular, the ability-to-repay,
qualified mortgage, and mortgage servicing rules have required credit
unions of various sizes and complexities to make major investments, and
incur significant expenses. Taken all together, these regulations have
made credit unions rework nearly every aspect of their mortgage
origination and servicing operations.
Exemption Authority
One area where the CFPB could be the most helpful to credit unions
would be to use its legal authority to exempt credit unions from
various rulemakings. Given the unique member-owner nature of credit
unions and the fact that credit unions did not participate in many of
the questionable practices that led to the financial crisis and the
creation of the CFPB, subjecting credit unions to rules aimed at large
bad actors only hampers their ability to serve their members. While the
rules of the CFPB may be well-intentioned, many credit unions do not
have the economies of scale that large for-profit institutions have and
may opt to end a product line or service rather than face the hurdles
of complying with new regulation. While the CFPB has taken steps, such
as their small creditor exemption, more needs to be done to exempt all
credit unions.
Credit unions are also further hampered by the fact that the CFPB
does not have one consistent definition of ``small entities'' from rule
to rule. We are pleased that the CFPB makes an effort to meet its
obligations under the Small Business Regulatory Enforcement Fairness
Act (SBREFA). However, we believe that the Bureau must do more to
address the concerns of smaller financial institutions in its final
rulemaking, so that new rules do not unduly burden credit unions.
Under SBREFA, the CFPB is required to consider three specific
factors during the rulemaking process. First, the agency is to consider
``any projected increase in the cost of credit for small entities.''
Second, the CFPB is required to examine ``significant alternatives to
the proposed rule which accomplish the stated objective of applicable
statutes and which minimize any increase in the cost of credit for
small entities.'' Third, the CFPB is to consider the ``advice and
recommendations'' from small entities. 5 U.S.C. 603(d). This
directive serves an important function. When Congress passed the Dodd-
Frank Act, it expected the newly established CFPB to be a proactive
regulatory body. NAFCU believes the decision to subject the CFPB to
SBREFA was a conscious decision to help ensure that regulations,
promulgated with large entities in mind, do not disproportionately
impact small financial institutions that were not responsible for the
financial crisis.
Regulation E
As NAFCU outlined in our ``Top Ten'' list of regulations to
eliminate or amend in order to better serve credit union customers, the
requirement to disclose account numbers on periodic statements should
be amended in order to protect the privacy and security of consumers.
Under Regulation E, credit unions are currently required to list a
member's full account number on every periodic statement sent to the
member for their share accounts. Placing both the consumer's full name
and full account number on the same document puts a consumer at great
risk for possible fraud or identity theft.
NAFCU has encouraged the CFPB to amend Regulation E 205.9(b)(2)
to allow financial institutions to truncate account numbers on periodic
statements. This modification is consistent with 12 C.F.R.
205.9(a)(4), which allows for truncated account numbers to be used on a
receipt for an electronic fund transfer at an electronic terminal. This
change is also consistent with 605(g) of the Fair Credit Reporting
Act that states, ``no person that accepts credit cards or debit cards
for the transaction of business shall print more than the last 5 digits
of the card number or the expiration date upon any receipt.'' NAFCU
believes that by adopting this change, the CFPB will allow financial
institutions to better protect the security and confidentiality of
consumer information.
Compromised accounts are not only dangerous for consumers, but can
be extremely costly for credit unions. In the past year alone data
breaches have cost the credit union industry millions of dollars.
According to feedback from our member credit unions, in 2013 each
credit union on average experienced $152,000 in loses related to data
breaches. The majority of these costs were related to fraud losses,
investigations, reissuing cards, and monitoring member accounts. As the
recent high-profile data breaches at some of our Nation's largest
retailers have highlighted, criminals are willing to go to great
extremes to obtain consumer's sensitive financial information. Credit
unions understand the importance of steadfastly protecting their
member's confidential account information, which is why we strongly
suggest this regulatory update.
Until Congress passes new legislation to ensure other third
parties, such as merchants, who have access to consumer's financial
information, have effective safeguards in place to protect consumer
information, the CFPB should consider this minor modification to
Regulation E. This change would go a long way in keeping sensitive
financial information out of the hands of criminals and reduce the
increasing fraud costs borne by credit unions and other financial
institutions.
Remittances
The Dodd-Frank Act added new requirements involving remittance
transfers under the Electronic Fund Transfer Act (EFTA) and directed
the CFPB to issue final rules amending Regulation E to reflect these
additions. Under this mandate, the Bureau, released a series of final
rules concerning remittances, all of which became effective on October
28, 2013.
In February 2012, the CFPB issued its first set of final rules on
remittances. These rules required, among other things, remittance
service providers, including credit unions, to provide a pre-payment
disclosure to a sender containing detailed information about the
transfer requested by the sender, and a written receipt on completion
of the payment. Following the release of the February 2012, final rule,
the CFPB issued on August 20, 2012, a supplemental final that provided
a safe harbor for determining whether a credit union is subject to the
remittance transfer regulations. Specifically, a credit union that
conducts 100 or fewer remittances in the previous and current calendar
years would not be subject to the rules.
In May 2013, the Bureau modified the final rules previously issued
in 2012, to address substantive issues on international remittance
transfers. This final rule eliminated the requirement to disclose
certain third-party fees and taxes not imposed by the remittance
transfer provider and established new disclaimers related to the fees
and taxes for which the servicer was no longer required to disclose.
Under the rule, providers may choose, however, to provide an estimate
of the fees and taxes they no longer must disclose. In addition, the
rule created two new exceptions to the definition of error: situations
in which the amount disclosed differs from the amount received due to
imposition of certain taxes and fees, and situations in which the
sender provided the provider with incorrect or incomplete information.
NAFCU opposed the transaction size-based threshold for the final
rule's safe harbor. The CFPB relied on an institution size-based
threshold, rather than a transaction size-based threshold, in its
recently released mortgage rules, and NAFCU urged the Bureau to adopt a
similar approach for differentiating between remittance transfer
providers. Additionally, NAFCU raised concerns with the final rule's
requirement of immediate compliance if an entity exceeds the safe
harbor's 100 transaction threshold. It encouraged the CFPB to allow
entities who exceed the safe harbor threshold a realistic period in
which to meet the standards of the final rule.
NAFCU continues to raise concerns that the regulatory burden
imposed by the final rule leads to a significant reduction in
consumers' access to remittance transfer services. NAFCU has heard from
a number of its members that, because of the final rule's enormous
compliance burden, they have been forced to discontinue, or will be
forced to discontinue, their remittance programs. A 2013, NAFCU survey
of our members found that over one-quarter of those that offered
remittance services before the rule have now stopped offering that
service to members and even more are considering dropping. Those that
continue to offer remittances have been forced to significantly
increase their members' fees. NAFCU encourages the CFPB to expand the
threshold for the safe harbor from the definition of ``remittance
transfer provider'' in order to ensure that a meaningful safe harbor is
established.
HMDA Changes Going Beyond the Dodd-Frank Act
The Dodd-Frank Act transferred Home Mortgage Disclosure Act (HMDA)
rulemaking authority to the CFPB and directed the Bureau to expand the
HMDA dataset to include additional loan information that would help in
spotting troublesome trends. Specifically, Dodd-Frank requires the
Bureau to update HMDA regulations by having lenders report the length
of the loan, total points and fees, the length of any teaser or
introductory interest rates, and the applicant or borrower's age and
credit score. However, in its proposal, the Bureau is also
contemplating adding additional items of information to the HMDA
dataset. NAFCU has urged the CFPB to limit the changes to the HMDA
dataset to those mandated by Dodd-Frank.
HMDA was originally intended to ensure mortgage originators did not
``redline'' to avoid lending in certain geographical areas. The HMDA
dataset should be used to collect and provide reasonable data for a
specific reason. The Bureau contends that it is going beyond Dodd-
Frank's mandated changes to get ``new information that could alert
regulators to potential problems in the marketplace'' and ``give
regulators a better view of developments in all segments of the housing
market.'' These open-ended statements could be applied to virtually any
type of data collection, and do not further the original intent of
HMDA. NAFCU urged the CFPB to amend the dataset to advance the original
purpose of HMDA, rather than using it as a vehicle to ``police'' its
recent Qualified Mortgage rules.
The various mortgage-related regulations promulgated by the CFPB
have exponentially increased credit unions' regulatory burden and
compliance costs. Any additions to the HMDA dataset will create even
more operational expenses for credit unions. Credit unions that collect
and report HMDA data through an automated system will have to work with
their staffs and vendors to update their processes and software. Those
without automated systems will experience particularly significant
implementation costs. The CFPB should eliminate unnecessary regulatory
burden and compliance costs by limiting the changes to the HMDA dataset
to those mandated by Dodd-Frank.
TILA/RESPA
Dodd-Frank directed the CFPB to combine the mortgage disclosures
under the Truth in Lending Act and Real Estate Settlement Procedures
Act. Under this mandate, the Bureau, in November 2013, released the
integrated disclosures rule. This 1900-page rule requires a complete
overhaul of the systems, disclosures, and processes currently in place
for a consumer to obtain a mortgage. For example, the rule mandates the
use of two disclosures: the three-page Loan Estimate (which replaces
the Good Faith Estimate and initial Truth in Lending Disclosure); and
the five-page Closing Disclosure (which replaces the HUD-1 and final
Truth in Lending disclosure). There are also a number of stringent
timing requirements and other substantive changes lenders must follow.
The rule is effective August 2015, but lenders are still feeling
pressure to be compliant on time. The sheer magnitude of this rule,
read in conjunction with the totality of the other mortgage rules, has
created a very burdensome regulatory environment and many credit unions
are finding it difficult to continue lending. Credit unions must comply
with the current disclosure requirements, which are extensive, and they
must prepare their compliance solutions for the upcoming ones effective
in August 2015, further exacerbating costs.
Qualified Mortgages
NAFCU continues to have serious concerns about the ``Qualified
Mortgage'' (QM) standard. In short, given the unique member-
relationship credit unions have, many make good loans that work for
their members that don't fit into all of the parameters of the QM box
and fall into the ``nonqualified mortgage'' category. NAFCU would
support the changes below to the QM standard to make it more consistent
with the quality loans credit unions are already making. Further,
credit unions should have the freedom to decide whether to make loans
within or outside of the standard without pressure from regulators.
Points and Fees
NAFCU strongly supports bipartisan legislation to alter the
definition of ``points and fees'' under the ``ability-to-repay'' rule.
NAFCU has taken advantage of every opportunity available to educate and
discuss with the CFPB on aspects of the ability-to-repay rule that are
likely to be problematic for credit unions and their members. While
credit unions understand the intention of the rule and importance of
hindering unscrupulous mortgage lenders from entering the marketplace,
it is time for Congress to address unfair and unnecessarily restrictive
aspects of this CFPB rule.
NAFCU supports exempting from the QM cap on points and fees: (1)
affiliated title charges, (2) double counting of loan officer
compensation, (3) escrow charges for taxes and insurance, (4) lender-
paid compensation to a correspondent bank, credit union or mortgage
brokerage firm, and (5) loan level price adjustments which is an
upfront fee that the Enterprises charge to offset loan-specific risk
factors such as a borrower's credit score and the loan-to-value ratio.
Making important exclusions from the cap on points and fees will go
a long way toward ensuring many affiliated loans, particularly those
made to low- and moderate-income borrowers, attain QM status and
therefore are still made in the future.
Loans Held in Portfolio
NAFCU supports exempting mortgage loans held in portfolio from the
QM definition as the lender, via its balance sheet, already assumes
risk associated with the borrower's ability-to-repay.
40-year Loan Product
Credit unions offer the 40-year product their members often demand.
To ensure that consumers can access a variety of mortgage products,
NAFCU supports mortgages of duration of 40 years or less being
considered a QM.
Debt-to-Income Ratio
NAFCU supports Congress directing the CFPB to revise aspects of the
`ability-to-repay' rule that dictates a consumer have a total debt-to-
income (DTI) ratio that is less than or equal to 43 percent in order
for that loan to be considered a QM. This arbitrary threshold will
prevent otherwise healthy borrowers from obtaining mortgage loans and
will have a particularly serious impact in rural and underserved areas
where consumers have a limited number of options. The CFPB should
either remove or increase the DTI requirement on QMs.
Legal Opinion Letters
In attempting to understand ambiguous sections of CFPB rules, NAFCU
and many of its members have reached out to the CFPB to obtain legal
opinion letters as to the agencies interpretation if it's regulations.
While legal opinion letters don't carry the weight of law, they do
provide guidance on ambiguous section of regulations. Many other
financial agencies such as NCUA, FTC, FDIC and others issue legal
opinion letters so as to help institutions and other agencies
understand otherwise ambiguously written rules. The CFPB has declined
to do so. What they have done is set up a help line where financial
institutions can call for guidance from the agency. While this is
helpful, there are reports of conflicting guidance being given
depending on who answers the phone. This is not just unhelpful, but
confusing when NCUA examines credit unions for compliance with CFPB
regulations.
Federal Reserve Board
NAFCU has long encouraged the Federal Reserve to update Regulation
D. This issue is also on NAFCU's ``Dirty Dozen'' and ``Top Ten'' list.
Regulation D generally imposes reserve requirements on depository
institutions with transaction accounts or nonpersonal time deposits,
and requires reporting to the Federal Reserve. The regulation aims to
facilitate monetary policy and ensure sufficient liquidity in the
financial system. It requires credit unions to reserve against
transaction accounts, but not against savings accounts and time
deposits.
NAFCU believes the Federal Reserve Board should revisit the
transaction limitation requirements for savings deposits. The six-
transaction limit imposes a significant burden on both credit union
members in attempting to access and manage their deposits and credit
unions in monitoring such activity. Member use of electronic methods to
remotely access, review and manage their accounts, as well as the
contemporary transfer needs of members and consumers at all types of
financial institutions, make a monthly transaction limit an obsolete
and archaic measure. Should the Board decide not to outright remove the
transaction limitation requirement for savings deposits, NAFCU has
urged the Board to raise the current limitation from six to 12
transactions. If the Board fails to act in this area, we believe
Congress should be ready to address this issue. We were pleased to see
House Financial Services Committee Chairman Jeb Hensarling and
Representative Robert Pittenger request a GAO study on this issue.
FHFA
In September 2014, FHFA released a proposed rule that would
establish new asset threshold for both FHLB applications and ongoing
membership. Specifically, FHLB members and applicants would be required
to keep 1 percent of assets in home mortgage loans. Also, current FHLB
members would be required to hold at least 10 percent of assets in
residential mortgage loans on an ongoing basis--a marked change from
the current rule, which only requires this 10 percent threshold at the
application stage. The proposal would also require FHLBs to evaluate
member compliance annually and to terminate membership after two
consecutive years of noncompliance. This proposed rule threatens to
severely hamper credit unions' access to the valuable services the
FHLBs provide and must be carefully considered for its full impact
before moving forward. In 2007, 11.4 percent of credit unions were
members of an FHLB, representing 61.7 percent of total credit union
assets. Today, however, 19 percent of all credit unions are members of
an FHLB, and these credit unions represent 75.8 percent of the total
credit union assets and this number continues to grow. This growth of
credit union membership in FHLBs only underscores the need to ensure
that the eligibility requirements for membership in FHLBs are set
appropriately. Unfortunately, this proposal would disenfranchise over 1
million credit union member-owners from receiving the benefits of FHLB
resources as their institution's membership would be terminated under
the newly proposed requirements.
While NAFCU appreciates FHFA's intention of fostering FHLB's
housing finance missions, we believe the current regulatory
requirements effectively ensure that FHLB members demonstrate ongoing
commitments to mortgage lending in their communities. For example, when
an FHLB member borrows an advance, it must provide eligible collateral
to secure the advance. Nearly all eligible types of collateral, which
are determined by Congress, are related to housing. In addition,
current members must certify their active support of housing for first-
time home buyers to the FHFA every 2 years through the Community
Support Statement. Further, FHFA has failed to provide any data or
empirical evidence to support its claims that the FHLB system is at
risk because some members may not meet the proposed asset percentage
requirements on an ongoing basis. Given the sufficient existing
requirements, and the lack of statistical support for the proposed
changes, NAFCU does not believe FHFA needs to move forward with the
newly proposed ``ongoing'' membership requirements for depository
institutions in this rulemaking.
Further exacerbating this issue for credit unions is the statutory
exemption for FDIC-insured banks with under $1.1 billion in assets from
the 10 percent requirement as outlined in the Federal Home Loan Bank
Act. In addition to seeking changes to the underlying FHFA proposal,
NAFCU believes this discrepancy also needs to be addressed to ensure an
even playing field between all financial institutions including credit
unions on this matter. We would urge the committee to act on this
matter and create parity for credit unions.
IX. Department of Defense (Military Lending Act Proposed Rule)
NAFCU is in full support of protecting servicemembers from
predatory and unscrupulous lenders. It is clear this is the intent of
the proposed rule DoD has issued. Unfortunately, and unlike the
original regulation promulgated by DoD in 2007, this rule does not take
into account the unintended consequences to the financial industry.
While well-intentioned, the rule creates a significant and unnecessary
regulatory burden on financial institutions particularly for small
community institutions like credit unions.
The burden is significant because it will force all lenders to add
an extra time consuming and costly step to essentially every extension
of consumer credit. Under the DoD proposed rule, all lenders would be
forced to determine if any individual receiving consumer credit is a
servicemember or a dependent of a servicemember. While the rule
provides flexibility in the manner in which a lender could determine
the status of a borrower, it only grants a safe harbor from civil and
potentially criminal penalties if the lender uses the Defense Manpower
Data Center (DMDC) database. Additionally, even this safe harbor can
become invalid if it is found that financial institution had actual
knowledge of a borrower's status.
This presents a number of issues for credit unions particularly
small credit unions. First, every lender would be forced to review all
information and documentation on every existing member or customer to
determine if they have actual knowledge of the status of that
particular individual. This would produce a significant cost to a
lender to not only review all records but also to implement a system of
checks to ensure that any information given to them in the future that
could serve as actual knowledge is documented.
Second, lenders would have to institute a set of procedures to
check the DMDC database for every extension of consumer credit. Credit
unions would either have to manually check the database in every
situation or pay what could amount to an enormous cost to integrate an
automated system into their current systems. This burden would be
created for virtually every extension of credit to identify individuals
that may makeup less than 1 percent of a credit union's membership.
As noted, NAFCU supports providing servicemembers with protections,
and if incurring the unintended consequences of this rule was the only
way to protect service members, this would certainly be a different
discussion. What is most perplexing about the DoD rule is the fact that
there is a very simple solution to this problem that would
significantly reduce the burden on credit unions and lenders while
still providing servicemembers with the same protections. This solution
is self-identification. If service members self-identify themselves,
virtually all the unnecessary burden of the rule would be mitigated and
service members would still receive the protections intended by the
rule. This method has worked extremely well with the interest rate
reduction required under the Servicemembers Civil Relief Act (SCRA).
Another major concern regarding the rulemaking has been the
process. While this rule will effectively cover almost every lender in
the Nation, the Department of Defense has refused to meet with industry
to discuss how this rule could be implemented in the most effective
manner. Given the opportunity, we believe that industry could make a
valuable contribution to ensuring this rule works both effectively and
efficiently.
X. Regulatory Coordination is also Needed
With numerous new rulemakings coming from regulators, coordination
between the agencies is more important than ever. Congress should use
its oversight authority to make sure that regulators are coordinating
their efforts and not duplicating burdens on credit unions by working
independently on changes to regulations that impact the same areas of
service. There are a number of areas where opportunities for
coordination exist and can be beneficial. We outline two of them below.
Financial Stability Oversight Council (FSOC)
NAFCU has been on the forefront encouraging the FSOC regulators to
fulfill their Dodd-Frank mandated duty to facilitate rule coordination.
This duty includes facilitating information sharing and coordination
among the member agencies of domestic financial services policy
development, rulemaking, examinations, reporting requirements and
enforcement actions. Through this role, the FSOC is effectively charged
with ameliorating weaknesses within the regulatory structure and
promoting a safer and more stable system. It is extremely important to
credit unions for our industry's copious regulators to coordinate with
each other to help mitigate regulatory burden. We urge Congress to
exercise oversight in this regard and consider putting into statute
parameters that would encourage the FSOC to fulfill this duty in a
thorough and timely manner.
Data Security
Outside of advocating for Federal legislation with regard to the
safekeeping of information and breach notification requirements for our
Nation's retailers, NAFCU has also urged regulatory coordination for
credit unions already in compliance with the stringent standards in the
Gramm-Leach-Bliley Act. In the wake of the massive Target data breach
in December 2013 the Federal Trade Commission began exploring a range
of regulatory options to assist consumers, businesses, and financial
institutions. Moving forward, it is imperative that NCUA ensure that
credit unions are protected from any unnecessary regulatory burden and
continue to allow them to provide quality services to their members.
Congress must also act to establish a national data security
standard for retailers who hold personal financial data. The financial
services industry has been subject to such a standard since the passage
of Gramm-Leach-Bliley in 1999, it's time for others who hold financial
data are held to a similar standard. While it is not the subject of
this hearing, we hope that the Committee will make addressing data
security concerns one of its priorities in the 114th Congress.
XI. Conclusion: All Credit Unions Need Regulatory Relief
The growing regulatory burden on credit unions is the top challenge
facing the industry today and credit unions are saying ``enough is
enough'' when it comes to the over regulation of the industry. All
credit unions are being impacted regardless of asset size. This burden
has been especially damaging to smaller institutions that are
disappearing at an alarming rate. The number of credit unions continues
to decline, as the compliance requirements in a post Dodd-Frank
environment have grown to a tipping point where it is hard for many
smaller institutions to survive. Those that do are forced to cut back
their service to members due to increased compliance costs.
Credit unions want to continue to aid in the economic recovery, but
are being stymied by this over regulation. NAFCU appreciates the
Committee holding this hearing today. Moving forward, we would urge the
Committee to act on credit union relief measures pending before the
Senate and the additional issues outlined in NAFCU's Five Point Plan
for Credit Union Regulatory Relief and NAFCU's ``Top Ten'' list of
regulations to review and amend. Additionally, Congress needs to
provide vigorous oversight to the NCUA's proposed risk-based capital
rule and be ready to step in and stop the process so that the impacts
can be studied further. Finally, the Committee should also encourage
regulators to act to provide relief where they can without additional
congressional action.
We thank you for the opportunity to share our thoughts with you
today. I welcome any questions you might have.
______
PREPARED STATEMENT OF MICHAEL D. CALHOUN
President, Center for Responsible Lending
February 12, 2015
Good morning Chairman Shelby, Ranking Member Brown, and Members of
the Senate Committee on Banking, Housing, and Urban Affairs. Thank you
for allowing me the opportunity to testify on regulatory relief for
community banks and credit unions and the need to ensure that all
financial institutions, regardless of their size, are subjected to
responsible regulatory oversight that maintains consumer financial
protections.
I am the President of the Center for Responsible Lending (CRL), a
nonprofit, nonpartisan research and policy organization dedicated to
protecting homeownership and family wealth by working to eliminate
abusive financial practices. CRL is an affiliate of Self-Help, a
nonprofit community development financial institution. For 30 years,
Self-Help has focused on creating asset building opportunities for low-
income, rural, women-headed, and minority families. In total, Self-Help
has provided $6 billion in financing to 70,000 home buyers, small
businesses, and nonprofits and currently serves more than 80,000 mostly
low-income families through 30 retail credit union branches in North
Carolina, California, and Illinois. As the General Counsel of Self-Help
for 20 years, I can personally attest to the fact that responsible
regulations and regulatory oversight are critical to the success of a
small lender.
I. Differences Exist for Community Banks and Credit Unions.
Community lenders and credit unions, and the financial services
they provide, are both important and distinctive. We appreciate that
small lenders and credit unions frequently use a different business
model to provide financial services to consumers, one that usually
involves smaller transactions and is based on the institution having
much closer ties to both the borrowers and communities that they serve.
The result is a tailored lending and underwriting process that can
produce more successful lending. Also, unlike their larger bank
counterparts, smaller financial institutions are less likely to
participate in capital market transactions. Previous testimony from
industry organizations, like the American Bankers Association and the
Independent Community Bankers of America, has shown that community
banks oversee a much smaller percentage of the Nation's financial
assets--on average less than $1 billion at each institution--and
operate with far fewer employees, with industry estimates ranging from
staff averages of 40 to 54.\1\
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\1\ Jeff Plagge, American Bankers Association, Hearing before the
Senate Committee on Banking, Housing, and Urban Affairs, Examining the
State of Small Depository Institutions, 113th Cong. 2d sess, 2014; John
Buhrmaster, Independent Community Bankers of America, Hearing before
the Senate Committee on Banking, Housing, and Urban Affairs, Examining
the State of Small Depository Institutions, 113th Cong. 2d sess, 2014.
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Given the differences in business practices, business scale, and
company resources, CRL supports a regulatory framework and oversight
structure that appropriately recognizes and accommodates the unique
nature of community banks and credit unions. It is important that
regulators understand how small lending institutions work and take
those factors into account when regulating. One-size regulation does
not always fit all. Community banks and credit unions must be able to
continue successfully conducting business in America's communities.
II. Financial Regulations are Important.
Yet, it is important to remember why regulations, especially
financial regulations, are essential to preserving the financial health
of American consumers and the health of this Nation's economy.
Responsible financial regulations protect consumers from abusive and
harmful financial products, ensure the safety and soundness of
financial institutions, and prevent systemic risk from threatening to
undermine the Nation's financial market as a whole.
Recent history has already shown us the consequences of under-
regulation in the financial market. In the wake of the financial
crisis, 5.5 million American consumers have lost their homes through
foreclosure.\2\ And, according to the Federal Deposit Insurance
Corporation, more than 500 banks shuttered their doors; most of those
institutions were community banks.\3\ The failure to have a responsible
regulatory environment also resulted in taxpayers paying $7 trillion to
bail out financial institutions through loans and, according to some
reports, an additional $22 trillion through the Federal Government's
purchase of assets.\4\ In addition, the national economy was undermined
and plunged into a severe recession. People lost their jobs, small
businesses went under, and many Americans--from small entrepreneurs to
families-struggled to make ends meet while being unable to obtain the
credit and capital they needed from financial institutions in order to
sustain their position or expand their asset base.
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\2\ Corelogic, ``CoreLogic Reports 41,000 Completed Foreclosures in
November 2014,'' (January 14, 2015) accessed at http://
investor.corelogic.com/mobile.view?c=118425&v=203&d=1&id
=2007499.
\3\ Federal Deposit Insurance Corporation, Failed Bank List,
accessed at https://www.fdic.gov/bank/individual/failed/banklist.html.
\4\ John Carney, ``The Size of the Bank Bailout: $29 Trillion,''
CNBC, December 14, 2011, accessed at http://www.cnbc.com/id/45674390#.
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The negative nature of these consequences make it clear to CRL that
proactive, responsible financial regulations--like those being enacted
under the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank)\5\--are needed to protect consumers, small businesses,
taxpayers, and the Nation's economy. And it is equally clear that
oversight is necessary for every actor in the financial market, whether
they are as large as J.P. Morgan Chase, a mid-size institution like
Synovus, community bank lenders like Georgia Bank & Trust and First
National Bank of Scotia, or credit unions like SRP Federal Credit Union
and CRL's affiliate, Self-Help. All financial institutions, including
community banks and credit unions, benefit from the underlying purposes
of financial regulation: protecting consumers, ensuring the safety and
soundness of institutions, protecting community financial institutions
from unfair competition, and defending the Nation's financial market
from systemic risk. The question is whether there are different, more
efficient ways to effectively ensure that these objectives are being
met when regulating community banks and credit unions.
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\5\ Public Law 111-203 (2010).
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III. Relief for Community Financial Institutions Should Be Targeted to
Those Institutions.
During the 113th Congress, a number of bills and other industry
proposals were introduced under the banner of providing regulatory
relief to community banks that, in reality, would have primarily or
solely benefited regional, mid-size institutions. These bills and
proposals included provisions to:
Amend the Consumer Financial Protection Act, a component of
Dodd-Frank, to raise the examination threshold that brings an
insured depository institution or insured credit union within
CFPB's supervisory purview from assets of $10 billion or more
to assets of $50 billion or more;\6\
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\6\ Consumer Financial Protection Bureau Examination and Reporting
Threshold Act of 2014, S. 2732, 113th Cong. (2014).
Increase the threshold size of an insured depository
institution or insured credit union that is subject to the
Consumer Financial Protection Act's reporting requirements from
assets of $10 billion or more to $50 billion or more;\7\
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\7\ Consumer Financial Protection Bureau Examination and Reporting
Threshold Act of 2014, S. 2732, 113th Cong. (2014).
Exempt creditors with under $50 billion in assets from the
escrow account requirement for first lien, higher-priced
mortgages held in portfolio as required by the Dodd-Frank Act;
and \8\
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\8\ Community Lending Enhancement and Regulatory Relief Act of
2013, H.R. 1750, 113th Cong. (2014).
Exempt institutions with less than $50 billion in assets
from the Volcker Rule's compliance requirements if they are not
involved in any activities under the law and even remove their
obligation to analyze their trading and investments to ensure
that their activity is exempt.\9\
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\9\ Independent Community Bankers of America, ICBA Policy
Resolutions for 2014.
The reality is that, in terms of asset size, geographic base, and
company resources, institutions with assets between $10 to $50 billion
look very different than a traditional community bank. CRL's analysis
shows that while community banks have on average less than 54
employees, the institutions that stand to benefit from these proposals
have an average of more than 2,500 employees. Compliance costs related
to staffing resources can hardly be viewed as parallel.
Moreover, while the business model of community banking is
predicated on strong community relationships in a concentrated
geographic market, many of the institutions that stand to benefit from
these provisions have nationwide markets. These institutions are large
players with familiar names, like Morgan Stanley Private Bank, American
Express Bank, GE Capital Bank, and E*Trade Bank. Many people would be
surprised to hear these institutions called community banks. They would
also be surprised to learn that American Express Bank is considered as
somehow having the same business model and compliance cost challenges
as First National Bank of Scotia, an institution with 10 banking
branches located in a single State and operating with fewer than 200
employees.
Asset size alone may not accurately define a community bank. Yet,
organizations as diverse as the FDIC,\10\ American Enterprise
Institute,\11\ and CRL agree that a business model focused on
relationship-based lending, geographically concentrated business
market, and limited business resources are important supplementing
factors that complete the definition. The FDIC's recently updated
analysis of its 2012 Community Banking Study notes that, using these
factors, 94 percent of all community banks have assets under $10
billion and 90 percent of those institutions have assets under $1
billion.\12\ Moreover, 80 percent of credit unions have less than $100
million in assets.\13\ Therefore, so-called community bank provisions
that provide exemptions for the 72 institutions holding between $10 to
$50 billion in assets do little to help the more than 6,000 community
banks that provide credit and capital across this country.
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\10\ Federal Deposit Insurance Corporation, Community Banking
Study.
\11\ American Enterprise Institute, The Impact of Dodd-Frank on
Community Banks.
\12\ Federal Deposit Insurance Corporation, FDIC Quarterly 2014,
Volume 8, Number 2.
\13\ Larry Fazio, National Credit Union Administration, Hearing
before the Senate Committee on Banking, Housing, and Urban Affairs,
Examining the State of Small Depository Institutions, 113th Cong. 2d
sess, 2014.
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IV. Substantive Rollbacks of Dodd-Frank are not Community Bank
Regulatory Relief.
A number of community bank regulatory relief proposals focus on
making substantive changes to the mortgage protections put in place by
Dodd-Frank. For example, proposals like those to remove the escrow
requirement for institutions with less than $50 billion in assets
threaten to erase important consumer protections for millions.\14\
Under the CFPB's implemented regulations for Dodd-Frank, escrows are
required only on higher priced mortgages-and even this requirement only
applies for the first years of the loan to ensure that the loan is
sustainable. Escrow accounts protect consumers by ensuring that they
have funds for reoccurring homeownership-related expenses, such as
property taxes and insurance premiums, thereby reducing the likelihood
of default.
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\14\ Community Lending Enhancement and Regulatory Relief Act of
2013, H.R. 1750, 113th Cong. (2014).
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Another proposal, to exclude appraisal requirements for loans under
$250,000 is so broad in scope that it would allow nondepository lenders
to benefit along with all banks and credit unions.\15\ These very
nonbank lenders were key players in the financial crisis and are
already subject to less oversight because of their nondepository
status. The appraisal exemption for $250,000 loans is also overly broad
because it would apply to nearly half of all homes in the United
States. In 2014, the median sales price for existing homes in the
United States was only $209,500. It is important for everyone to
remember that mortgage appraisal fraud was a key driver of the housing
bubble and subsequent bust.\16\
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\15\ Community Lending Enhancement and Regulatory Relief Act of
2013, H.R. 1750, 113th Cong. (2014).
\16\ Federal Bureau of Investigation, 2010 Mortgage Fraud Report.
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Nearly 9 out of 10 mortgages in the United States are made by
noncommunity bank lenders.\17\ Substantive rollbacks of Dodd-Frank's
mortgage provisions with broad applicability undermine Dodd-Frank's
goal of protecting consumers as a whole and preventing the recurrence
of another foreclosure crisis. Rollbacks should not be included in
community bank regulatory relief legislation.
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\17\ Federal Deposit Insurance Corporation, Statistics on
Depository Institutions.
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V. Regulators are moving in the right direction by making efforts to
reduce regulatory burdens for small lenders.
The focus should be on what will help traditional community banks
and credit unions, while protecting consumers, the institutions, and
the Nation's economy as a whole. Thankfully, the Consumer Financial
Protection Bureau, Office of the Comptroller of the Currency, Federal
Deposit Insurance Corporation, and National Credit Union Administration
have been mindful of the differences between larger institutions and
smaller lenders and are working to tailor rules implementing Dodd-Frank
accordingly.
The CFPB, in particular, has developed a successful track record in
taking the lead to adopt and consider regulations that are balanced for
financial institutions and accommodate smaller lenders. For example,
the CFPB recently requested comment on whether to increase the 500
first-lien mortgage cap under QM's small-creditor definition. CRL
expressed support for a reasonable increase of the 500 loan cap,
limiting any potential increase to rural banks or for loans held in
portfolio. The CFPB's proposal quadruples the limit, expanding the loan
origination cap for small lenders from 500 first-lien mortgages to
2,000. This 2,000 limit is exclusive of loans held in portfolio by both
the creditor and its affiliates.
The CFPB has also proposed to only include first-lien mortgage
originations of small lender affiliate assets toward the current $2
billion small lender asset cap. And, to accommodate concerns that the
definition of a ``rural and underserved'' area is too narrow, the CFPB
has proposed expanding the definition of rural areas by including
census blocks as defined by the Census Bureau. Finally, the CFPB is
also proposing to allow grace and qualifying periods for small
creditors to adjust to current and proposed standards. While we may not
always agree on all specifications, we have and continue to support the
CFPB's ongoing efforts to reasonably explore how mortgage rules can
further accommodate small lenders and lending in designated rural and
underserved areas.
In addition to the CFPB's activity with mortgage rules, financial
regulators are working with industry, consumer groups, and other
stakeholders to review their regulatory framework, as required by the
Economic Growth and Regulatory Paperwork Reduction Act of 1996.\18\
Under the existing law, the agencies must eliminate any unnecessary
regulations and are required to report their actions to Congress next
year.
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\18\ Public Law 104-208 (1996), codified at 12 USC 3311.
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Finally, regulators have reported that technical assistance and
ombudsman programs have been extremely effective vehicles for providing
regulatory assistance to community banks and credit unions. The
effectiveness of these programs, however, depends upon adequate
funding. CRL recommends that any regulatory relief legislation include
increased funding for regulators' technical assistance and ombudsman
activities.
VI. Conclusion
Community banks and credit unions play an important and essential
role in this Nation's financial market. Therefore, CRL understands the
need for appropriate regulatory flexibility for small depositories. We
oppose, however, any effort to use regulatory relief for community
banks and credit unions as a vehicle for nondeposit-taking lenders,
mid-size and large financial institutions to avoid having the
regulatory scrutiny and oversight that proved lacking in the buildup to
the financial crisis. The need for regulatory flexibility must be
balanced against the importance of consumer safeguards, an
institution's safety and soundness, and the security of America's
financial system as a whole. Federal financial regulators, like the
CFPB, must be allowed to both protect the American people and ensure
access to a broad, sustainable financial market.
I look forward to continuing to work with this Committee, community
banks and credit unions, their associations, and regulators, to ensure
that all of these objectives are satisfied through laws and responsible
regulations. Thank you for the opportunity to testify today, and I look
forward to answering your questions.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM WALLY
MURRAY
Q.1. At Tuesday's hearing, NCUA stated that its top priority
was to obtain authority from Congress to examine third-party
vendors. In addition to its arguments that it would reduce
burdens for credit unions, it made the case that this authority
is vitally important to protect the smallest credit unions from
cyber-attacks. What are your views on this proposal?
A.1. We disagree with the assertion that providing NCUA with
authority to examine third-party vendors would reduce
regulatory burden. Moreover, we disagree with the premise that
adding an additional layer of regulation could reduce
regulatory burden. NCUA has several tools at its disposal to
ensure that credit unions conduct due diligence in establishing
and maintaining relationships with credit union service
organizations and other third-party vendors. It seems unlikely
that NCUA would reduce its expectation on credit unions with
respect to due diligence if it had authority to examine third-
party vendors and more likely that these vendors would spread
the cost of examinations to their credit union customers.
Further, NCUA already has the authority to require credit
unions to provide information on the credit union service
organizations that they own--and, indeed, already requires this
through a 2014 regulation. Providing NCUA with additional
authority in this area will increase regulatory burden and
costs for all credit unions without meaningfully improving the
safety and soundness of the credit union system or providing
benefit to credit union members.
Likewise, we question NCUA's assertion that increased
authority is necessary to protect the smallest credit unions
from cyber-attacks. Protecting critical infrastructures from
cyber-attacks is a significant national security issue, one on
which the Department of Homeland Security and other agencies
have the expertise and have taken the lead. Given the
coordinated nature of these efforts, we are concerned that
providing NCUA with additional authority could be
counterproductive given the comparatively light expertise the
agency has on these matters.
Q.2. As the Committee considers proposals to provide regulatory
relief to community banks and small credit unions, I am
reminded of an exchange that I had with then Fed Chairman,
Bernanke, in July 2013. At that hearing he indicated that
regulators should ``do whatever we need to do to make sure the
U.S. financial system is safe.'' Do you agree that this is the
regulators' primary objective?
A.2. There is no doubt that safety and soundness has paramount
importance--after all, if there is no confidence in the safety
of the financial system, it will collapse. Regulators play an
important role in this regard, but they are not the only ones
capable of managing safety and soundness. Credit unions have
demonstrated a strong historical track record of managing our
institutions prudently, through even the most challenging
economic times, because we inherently understand that do so is
in the best interest of our members.
It is important for the financial system to be regulated in
a manner that allows providers to offer products and services
to the users at rates and terms that are agreeable. NCUA's
mission statement acknowledges this dual responsibility to
promote safety and soundness and encourage the availability of
credit union services to members: ``The mission of the NCUA is
to facilitate the availability of credit union services to all
eligible consumers, especially those of modest means, through a
safe and sound credit union system.'' (www.ncua.gov).
This is why regulatory relief for credit unions is so
important. When the regulator errs on the side of too much
caution in terms of safety and soundness, the ability of credit
unions to serve their members is restricted. We believe there
are several areas of regulation and statute that are
unnecessary from a safety and soundness perspective and should
be altered or removed altogether.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM WALLY
MURRAY
Q.1. As far as you are aware, to what extent (or lack thereof)
has CFPB exercised its exemption authority under Section 1022
of Dodd-Frank? Is this concerning given the broad scope and
lengthy detail of some of its rulemakings, which, while not
aimed at small financial institutions, can substantially and
negatively impact those businesses?
A.1. Although we recognize that the CFPB has exercised its
exemption authority in important ways, and has taken positive
steps to revisit small institution exemptions in some areas
recently, the Bureau can and should do much more.
In many cases, the exemption levels the Bureau has provided
are much too low to be useful in the real world. For example,
the exemption level for the international remittances rule
works out to be approximately two transactions per week. For a
product that depends on transaction volume in order to make
offering the service economically viable, this is far too low.
As a result, many credit unions have stopped providing this
important service to their members. There are many other
examples of exemption levels set too low, such the small
servicer exemption to the mortgage servicing rules.
Regrettably there are several rules for which the Bureau
could have provided small institution exemptions but did not,
including the HOEPA rules, appraisal rules under Regulation B
and Regulation Z, and importantly, the TILA-RESPA rule that
becomes effective in August.
Credit unions were not engaging in the risky products and
services that caused the financial crisis. They should not be
regulated in the same way as those that did. Regulating credit
unions in the same way as the largest banks has the net effect
of reducing lending, harming credit union members and
communities from coast to coast. When a rule intended to reign
in large banks or nonbank financial service providers results
in fewer credit unions providing the service, consumer
protection suffers, the large banks just get larger, and the
rule has failed.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JOHN H.
BUHRMASTER
Q.1. At the Banking Committee's February 10, 2015 hearing on
regulatory relief, the OCC and FDIC proposed an 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. What
do you think about this proposal?
A.1. ICBA strongly supports the proposal. However, we would
like to see the proposal expanded to include banks with assets
up to $2 billion and we would like to extend the exam cycle
from 18 months to 2 years. Since this provision would only
apply to well rated banks, we believe extending the cycle is
justifiable and would not impair the ability of regulators to
supervise these banks. Even banks on an 18-month cycle, have
contact and oversight by their regulators at least quarterly if
not more frequently. An extension of the exam cycle would not
result in any increase in safety and soundness risk. Quite to
the contrary, it would allow us to devote more resources to our
operational and lending risk review, and less to exam and
compliance risk responses.
Q.2. As the Committee considers proposals to provide regulatory
relief to community banks and small credit unions, I am
reminded of an exchange that I had with then Fed Chairman,
Bernanke, in July 2013. At that hearing he indicated that
regulators should ``do whatever we need to do to make sure the
U.S. financial system is safe.'' Do you agree that this is the
regulators' primary objective?
A.2. Yes, the primary objective of bank regulation should be
safety and soundness. However, we believe regulatory burden is
threatening the safety and soundness of community banks. Many
community banks cannot survive under the current burden and are
being forced to merge or consolidate with other banks. For
these reasons, ICBA is strongly advocating for its Plan for
Prosperity--a set of proposals designed to reduce the onerous
burden on community banks and the communities they serve. A
good example is at my own bank. We have rated compliance and
exam risk to be higher than lending risk, and therefore several
years ago reassigned our most skilled commercial lending
analyst to compliance. We have a strong and conservative
lending history, very similar to most community banks, and yet
the regulatory burden has caused us to take our most talented
individuals and assign them to compliance, and not to our 91-
year-old focus, helping make peoples' lives better.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM JOHN H.
BUHRMASTER
Q.1. Mr. Buhrmaster, as I am sure you are aware the Federal
Deposit Insurance Corporation (FDIC) recently released a
statement encouraging, ``institutions to take a risk-based
approach in assessing individual customer relationships rather
than declining to provide banking services to entire categories
of customers.'' This was in response to requests from Congress
over concerns of the financial task force known as ``Operation
Choke Point.''
As President of your bank did you ever feel any pressure
from any apparatus of the Federal Government not to bank any
category of business? Do you believe that this statement by the
FDIC will stop Operation Choke Point?
A.1. My bank is nationally chartered and regulated by the OCC
and my bank did not feel regulatory pressure aimed at specific
business lines. However, as I've talked with bankers
nationally, I heard many instances of regulatory overreach
targeted at banks providing payment services to payday lenders
and money service businesses. The statement by the FDIC
represents a step in the right direction, but community banks
will not know the impact of the FDIC's recent statement until
their next safety and soundness examination. Our examiners have
required us to provide risk analysis to our minute ACH
origination program that far exceeds our risk with our low
volume, and the minimal fees we get for the service. We
reexamine the rational for maintaining this business line each
year due to these burdensome regulatory requirements.
Q.2. Mr. Buhrmaster, the Nation's largest Wall Street banks
enjoy an implicit guarantee--funded by taxpayers and awarded by
virtue of their size--as the market knows that these
institutions have been deemed ``too-big-to-fail. This allows
the Nation's largest megabanks to borrow at a lower rate than
regional banks, community banks, and credit unions. This
funding advantage, which has been confirmed by three
independent studies, is estimated to be as high as $83 billion
per year.
As Chairman of the Independent Community Bankers of America
do you agree that the Nation's largest banks have an unfair
advantage over community banks? What steps do you believe need
to be taken to fix this inequity?
A.2. We agree that there is an unlevel playing field in banking
and that the large, TBTF banks enjoy an unfair funding
advantage over community banks. The continued growth and
dominance of these banks has created an overly concentrated
financial system, created unacceptable moral hazard and
systemic risk, thwarted the operation of the free market, and
harmed consumers and business borrowers. Although we support
some of the enhanced prudential standards that the regulators
have been imposed on the large banks such as additional capital
and liquidity standards, OLA and contingent resolution plans,
we do not believe these steps by themselves will eliminate the
TBTF advantage. We believe the only way to truly eliminate the
advantage and level the playing field is by restructuring the
banking system. ICBA supports FDIC Vice Chairman Tom Hoenig's
proposal to restructure banking organizations to prevent
extension of the Federal safety net and reduce systemic risk.
Under the Hoenig proposal, banks would be restricted to core
banking activities and would be prohibited from engaging in
risky nonbanking activities.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM JOHN H.
BUHRMASTER
Q.1. As far as you are aware, to what extent (or lack thereof)
has CFPB exercised its exemption authority under Section 1022
of Dodd-Frank? Is this concerning given the broad scope and
lengthy detail of some of its rulemakings, which, while not
aimed at small financial institutions, can substantially and
negatively impact those businesses?
A.1. CFPB has exercised its exemption authority on a number of
occasions to provide tiered regulation for small institutions
or institutions with a small volume of activity. Examples
include: the small creditor portfolio loan exception under the
Ability to Repay/Qualified Mortgage rules (banks under $2
billion in assets that originate fewer than 500 first lien
mortgages per year; pending proposed would increase the limit
to 2,000 loans per year excluding portfolio loans); the small
servicer exception under the Mortgage Servicing rule (for those
servicing 5,000 loans or fewer); the Escrow rule exception (for
small rural creditors); and the Remittances rule exemption
(institutions sending fewer than 100 remittances a year).
While these exceptions and exemptions are appreciated,
community banks are still overburdened with regulatory
requirements that are not necessary to ensure they make high
quality, safe loans, or provide fair and transparent services
to their customers. In many cases, the exceptions and
exemptions should be broader to encompass more community banks.
For example, we bump up against the remittance rule of 100 each
year, and each year we consider dropping the service. If we go
over, we will drop the program, as the risk of the additional
compliance will outweigh any potential gain. In any case, the
portions of the rules that do apply to community banks comprise
hundreds and hundreds of pages of complex and detailed
requirements that consume large quantities of time and
resources to implement and maintain. In many cases, the
requirements make it increasingly difficult for community banks
to provide competitive products and services to their
customers, thereby reducing access to credit in some
communities and eliminating options and choices for consumers
who need it most.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM ED
TEMPLETON
Q.1. At Tuesday's hearing, NCUA stated that its top priority
was to obtain authority from Congress to examine third-party
vendors. In addition to its arguments that it would reduce
burdens for credit unions, it made the case that this authority
is vitally important to protect the smallest credit unions from
cyber-attacks. What are your views on this proposal?
A.1. NAFCU does not support this proposal. We do not believe
spending credit union resources to expand NCUA's examination
authority into noncredit union third parties is a wise use of
resources. While NCUA contends that examination and enforcement
authority over third-party vendors will provide regulatory
relief for the industry, NAFCU and our members firmly believe
that such authority is unnecessary and will require
considerable expenditure of the agency's resources and time.
NAFCU disagrees with the assertion that third-party vendor
examination and enforcement authority will provide any
significant improvement to credit union safety and soundness.
While cybersecurity is an extremely important issue, NAFCU does
not believe that cybersecurity and third-party vendor authority
go hand in hand.
The key to success with appropriate management of vendors
is due diligence on behalf of the credit union. NAFCU supports
credit unions being able to do this due diligence and NCUA
already offers due diligence guidance to credit unions. Given
this fact, we believe NCUA already has tools to address any
issues through the credit union examination process. NAFCU
believes that giving NCUA additional authority is unlikely to
provide additional protection to credit unions. This new
authority would require an additional outlay of agency
resources, which will, in turn, necessitate higher costs to
credit unions.
Q.2. As the Committee considers proposals to provide regulatory
relief to community banks and small credit unions, I am
reminded of an exchange that I had with then Fed Chairman,
Bernanke, in July 2013. At that hearing he indicated that
regulators should ``do whatever we need to do to make sure the
U.S. financial system is safe.'' Do you agree that this is the
regulators' primary objective?
A.2. Safety and soundness is a critical responsibility for
regulators, but there can be different interpretations on what
steps should be taken to achieve it. Ensuring that financial
institutions can continue to provide financial services to the
American public in the most efficient manner, without
compromising safety and soundness, is also critical. The
primary objective of a regulator should be to keep an industry
safe, while at the same time facilitating robust activity
within the industry to serve consumers. If a regulator ensures
an industry is safe, but the industry can no longer meet the
needs of or serve consumers, the regulator has likely not
achieved its primary objective.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM ED
TEMPLETON
Q.1. As far as you are aware, to what extent (or lack thereof)
has CFPB exercised its exemption authority under Section 1022
of Dodd-Frank? Is this concerning given the broad scope and
lengthy detail of some of its rulemakings, which, while not
aimed at small financial institutions, can substantially and
negatively impact those businesses?
A.1. The CFPB has used this authority sparingly, and many times
when it has been used it has not been implemented in a way that
provides a meaningful exemption. An area where the CFPB could
be the most helpful to credit unions would be to use its legal
authority to exempt all credit unions from various rulemakings.
Given the unique member-owner nature of credit unions and the
fact that credit unions did not participate in many of the
questionable practices that led to the financial crisis and the
creation of the CFPB, subjecting credit unions to rules aimed
at large bad actors only hampers their ability to serve their
members. While the rules of the CFPB may be well-intentioned,
many credit unions do not have the economies of scale that
large for-profit institutions have and may opt to end a product
line or service rather than face the hurdles of complying with
new regulation. This is concerning, as the CFPB has the ability
to address this through the exemption authority, but has not
gone far enough in doing so. While the CFPB has taken steps,
such as their small creditor exemption, we believe they should
do more, such as using this authority to exempt all credit
unions on certain rules.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MICHAEL D.
CALHOUN
Q.1. At the Banking Committee's February 10, 2015 hearing on
regulatory relief, the OCC and FDIC proposed an 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. What
do you think about this proposal?
A.1. The Center for Responsible Lending supports allowing well-
managed banking institutions with up to $750 million in assets
the opportunity to qualify for an 18-month examination
schedule. The result should relieve compliance costs for 300
community banks, while giving financial regulators more
resources to address those institutions that present consumer
protection, capital, or other issues of concern.
Q.2. At Tuesday's hearing, NCUA stated that its top priority
was to obtain authority from Congress to examine third-party
vendors. In addition to its arguments that it would reduce
burdens for credit unions, it made the case that this authority
is vitally important to protect the smallest credit unions from
cyber-attacks. What are your views on this proposal?
A.2. We support NCUA's proposal to obtain authority to examine
and regulate third-party vendors, including CUSOs and
subsidiaries of credit unions. As noted by NCUA, this authority
is given to other financial regulators, and it is an important
component of supervision for both safety and soundness and
consumer protection.
Q.3. As the Committee considers proposals to provide regulatory
relief to community banks and small credit unions, I am
reminded of an exchange that I had with then Fed Chairman,
Bernanke, in July 2013. At that hearing he indicated that
regulators should ``do whatever we need to do to make sure the
U.S. financial system is safe.'' Do you agree that this is the
regulators' primary objective?
A.3. Given the consequences of an unstable financial system, it
is clear that consumers, financial institutions, our economy,
and taxpayers benefit when financial regulators prioritize the
safety and soundness of the system. Yet, that priority still
must be balanced with an understanding that the purpose of the
financial system is to responsibly provide access to credit and
capital. Each of these priorities should be equally key
considerations that guide regulatory actions.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER FROM MICHAEL D.
CALHOUN
Q.1. Mr. Calhoun, in a statement on June 24, 2014, on your
organization's Web site you were quoted as saying, ``Despite
what critics claim, Operation Chokepoint is a critical program
that protects American businesses and consumers.''
Please explain how attempting to cutoff lawful businesses'
ability to bank in anyway protects American businesses and
consumers? Do you agree with the FDIC's recent directive
stating, ``institutions to take a risk-based approach in
assessing individual customer relationships rather than
declining to provide banking services to entire categories of
customers?''
A.1. The Operation Choke Point program is designed to target
sources of illegal financial activity. By doing so, it ensures
that our Nation's biggest banks are not complicit in activities
like fraudulent debt collection, drug trafficking, and funding
terrorism.
Several settlements under the program demonstrate its
importance in ensuring that our bank and payment systems are
not used to further illegal activities. Many of these cases
addressed illegal transaction and consumer scams, such as the
systematic charging of fraudulent withdrawals from consumers'
accounts.
Regulators have asked financial institutions to exercise
due diligence and implement appropriate controls to ensure that
they are not aiding the commission of crimes. That approach is
reasonable, necessary, and consistent with the FDIC's most
recent directive related to the program.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM MICHAEL
D. CALHOUN
Q.1. Mr. Blanton's testimony calls for deeming any mortgage
made by a depository institution and held in the lender's
portfolio--regardless of the institution's size--to be a
``Qualified Mortgage'' under the Dodd-Frank Act. Meaning, a
lender would be exempt from requirements to make a good faith
attempt to verify a borrower's ability to repay the loan, even
if the loan includes risky or exotic features or charges very
high fees that might make the loan profitable to the lender
even if the borrower is not able to repay it.
It's one thing to consider, as the CFPB does, whether a
loan is held in portfolio as one factor among many for certain
specific, targeted exemptions for small institutions. But it's
another to call for making this the only factor to create an
exemption for institutions of any size and loans of any type.
Mr. Calhoun, can you explain some of the problems with this
approach? Didn't Washington Mutual and Countrywide, two large
institutions that failed spectacularly during the financial
crisis, hold mortgage loans in their portfolio of a type that
would be problematic to exempt from the ability-to-repay rules?
A.1. We have serious concerns regarding this proposal. It is
important to remember that, during the crisis, institutions
like WaMu and Wachovia originated many unsustainable loans that
they retained in their portfolios.
The reality is that lenders who maintain loans in portfolio
may still pay insufficient attention to a borrower's ability to
repay. This is especially true in cases where the loan creditor
can earn sufficiently high up-front compensation, where
borrowers have substantial equity that would cover any default
risk, and where the incentives of the individual loan
originators and the creditor differ.
The Center for Responsible Lending supports a narrowly
tailored exemption that allows the portfolio loans of community
banks, with certain characteristics that ensure ability to
repay, to be treated as qualified mortgages. For example, there
are important protections in the CFPB rule for small mortgage
lenders and the recent proposed revisions to this rule. It
maintains protections against negative amortization loans,
retains limits on points and fees and ties safe harbor status
to the loan having a reasonable interest rate.
In addition, it is extremely important to limit this rule
to small depository institutions. Permitting lightly supervised
nondepository lenders to be covered by the same rule would
encourage and insulate risky lending by the very same entities
that drove irresponsible lending during the housing crisis. The
rule should also be limited to traditional, small banks because
the community-bank-lending model is much more personalized and
differs significantly from the mortgage-lending model adopted
by larger financial institutions.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM MICHAEL D.
CALHOUN
Q.1. As far as you are aware, to what extent (or lack thereof)
has CFPB exercised its exemption authority under Section 1022
of Dodd-Frank? Is this concerning given the broad scope and
lengthy detail of some of its rulemakings, which, while not
aimed at small financial institutions, can substantially and
negatively impact those businesses?
A.1. The Consumer Financial Protection Bureau has used a number
of provisions of Dodd-Frank to tailor rules that accommodate
the business differences of community banks, while also
protecting consumers.
More recently, the CFPB requested comment on whether to
increase the 500 first-lien mortgage cap under QM's small-
creditor definition. CRL expressed support for a reasonable
increase of the 500 loan cap, limiting any potential increase
to rural banks or for loans held in portfolio. The CFPB's
proposal quadruples the limit, expanding the loan origination
cap for small lenders from 500 first-lien mortgages to 2,000.
This 2,000 limit is exclusive of loans held in portfolio by
both the creditor and its affiliates. The CFPB has also
proposed to only include first-lien mortgage originations of
small lender affiliate assets toward the current $2 billion
asset cap. And, to accommodate concerns that the definition of
a ``rural and underserved'' area is too narrow, the CFPB has
proposed expanding the definition of rural areas by including
census blocks as defined by the Census Bureau. Finally, the
CFPB is also proposing to allow grace and qualifying periods
for small creditors to adjust to current and proposed
standards.
In addition to the CFPB's rulemaking exceptions, Dodd-Frank
contains a number of provisions designed to ensure that CFPB
regulations and activities do not negatively impact the
business model of smaller financial institutions. As an
example, Dodd-Frank exempts community banks from examination
and enforcement actions by the CFPB; the law also requires the
CFPB to go through the SBREFA rulemaking process. As a result,
small businesses have the ability to comment on the Bureau's
rules at an early stage and have advance notice of a rules
direction. By comparison, only two other Federal agencies have
to go through the SBREFA process. Finally, the CFPB voluntarily
created a community bank advisory board to give institutions
the opportunity to have an ongoing dialogue with the Bureau to
discuss its activities.
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