[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

                               __________

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

                  RICHARD C. SHELBY, Alabama, Chairman

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

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                    Jelena McWilliams, Chief Counsel

                       Beth Zorc, Senior Counsel

                Jack Dunn III, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

               Jeanette Quick, Democratic Senior Counsel

         Erin Barry Fuher, Democratic Professional Staff Member

              Phil Rudd, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                      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

                              ----------                              


                      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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \14\ Community Lending Enhancement and Regulatory Relief Act of 
2013, H.R. 1750, 113th Cong. (2014).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \17\ Federal Deposit Insurance Corporation, Statistics on 
Depository Institutions.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \18\ Public Law 104-208 (1996), codified at 12 USC  3311.
---------------------------------------------------------------------------
    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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