    [Senate Hearing 114-133]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-133

            THE STATE OF RURAL BANKING: CHALLENGES AND CONSEQUENCES

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

                                    HEARING

                                   before the

                                SUBCOMMITTEE ON
                 FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

                                     of the

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

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

                EXAMINING THE REGULATORY BURDENS ON RURAL BANKS

                                   __________

                                OCTOBER 28, 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
                           Dawn Ratliff, Chief Clerk
                          Troy Cornell, Hearing Clerk
                          Shelvin Simmons, IT Director
                              Jim Crowell, Editor

                                     ______

         Subcommittee on Financial Institutions and Consumer Protection

                   PATRICK J. TOOMEY, Pennsylvania, Chairman

                JEFF MERKLEY, Oregon, Ranking Democratic Member

    MIKE CRAPO, Idaho                    JACK REED, Rhode Island
    DEAN HELLER, Nevada                  CHARLES E. SCHUMER, New York
    MIKE ROUNDS, South Dakota            ROBERT MENENDEZ, New Jersey
    BOB CORKER, Tennessee                MARK R. WARNER, Virginia
    DAVID VITTER, Louisiana              ELIZABETH WARREN, Massachusetts
    MARK KIRK, Illinois                  JOE DONNELLY, Indiana
    TIM SCOTT, South Carolina

                 Geoffrey Okamoto, Subcommittee Staff Director

           Lauren Oppenheimer, Democratic Subcommittee Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                          WEDNESDAY, OCTOBER 28, 2015

                                                                       Page

    Opening statement of Chairman Toomey.............................     1

    Opening statements, comments, or prepared statements of:
        Senator Merkley..............................................     3

                                   WITNESSES

    Terry Foster, Executive Vice President and Chief Executive
      Officer, Mifflin County Savings Bank, Lewistown, Pennsylvania,
      on behalf of the Pennsylvania Association of Community Bankers.     5
        Prepared statement...........................................    24
        Responses to written questions of:
            Senator Warren...........................................    42
    Roger A. Porch, Vice President, First National Bank, Philip,
      South Dakota...................................................     8
        Prepared statement...........................................    28
        Responses to written questions of:
            Senator Warren...........................................    42
    Carrie Wood, President and Chief Executive Officer, Timberland
      Federal Credit Union, DuBois, Pennsylvania.....................    10
        Prepared statement...........................................    32
    Sarah Edelman, Director, Housing Policy, Center for American
      Progress.......................................................    12
        Prepared statement...........................................    34

                  Additional Material Supplied for the Record

    Charts submitted by Chairman Toomey..............................    43
    Summary of the Democratic alternative to the ``Financial
      Regulatory Improvement Act of 2015'' submitted by Senator
      Merkley........................................................    44
    Letter submitted by Jim Nussle, President and CEO, Credit Union
      National Association...........................................    46

                                     (iii)

            THE STATE OF RURAL BANKING: CHALLENGES AND CONSEQUENCES

                                  ----------

                          WEDNESDAY, OCTOBER 28, 2015

    U.S. Senate, Subcommittee on Financial Institutions
                               and Consumer Protection,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Subcommittee met at 10:04 a.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Patrick J. Toomey, Chairman of the
    Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN PATRICK J. TOOMEY

        Chairman Toomey. The hearing will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the Committee at any time necessary. The Chair now--
    turns on his mic. The Chair now recognizes himself for the
    purpose of an opening statement.
        First, I want to thank the witnesses for joining us. We
    will go through the introductions in a moment, but I appreciate
    your taking the time to share your unique insights into the
    topic that we are examining this morning. And the topic, of
    course, is the regulatory burdens on rural banks, and these
    burdens are not a new matter, but the fact is our rural banks
    and financial institutions are among the smallest financial
    institutions in the country, and they are struggling in the
    current regulatory environment.
        I helped to start a small bank in the Lehigh Valley of
    Pennsylvania and the western part of New Jersey with the goal
    of lending to small businesses and local residents. And that
    was back in 2005, so I have some firsthand personal experience
    with the regulatory environment as it existed then. It has
    clearly gotten much worse in the meantime.
        What I think sometimes folks from urban and suburban areas
    may not appreciate is the extent to which in rural areas a
    town's local bank is often a citizen's first, sometimes only
    exposure to the financial system. And these banks survive by
    offering exceptional service to these customers, personalized
    products, and fostering an ongoing, long-term relationship.
        The fact is in small town across Pennsylvania and the
    United States, George at Bailey Building and Loan on Main
    Street still exists. Unfortunately, new regulations are
    straining the business of continuing to bank rural customers.
        Congress and the President attempted to deal with threats
    to our financial system, threats that were posed by a handful
    of the largest institutions in the world in 2010 through Dodd-
    Frank. But, unfortunately, even the smallest institutions have
    been caught up in regulation that has resulted in more red
    tape.
        In fact, in some ways this burden has been
    disproportionately felt by banks that are small and rural. Even
    though some of them have some of the healthiest balance sheets,
    business models, and relationships in the entire financial
    sector, the fact is compliance costs, at least a portion of
    them, are often fixed costs, and small institutions have a
    smaller revenue source with which to absorb those costs.
        There's a striking example of the harm that has been
    happening in the very small bank and the new bank sector, and
    that is, the absence of new bank charters that have been issued
    recently. We have a chart here that depicts what has been
    happening across America. Between 2000 and 2009, the vertical
    gray bars on the graph reflect the new bank charters each year.
    And what you can see is that that number completely collapses
    and goes to zero after Dodd-Frank is passed. In fact, since
    2010, only two de novo banks have been formed.
        The red line is a measure of the amount of new regulations
    that have been imposed on financial institutions, and you can
    see the dramatic upward spike corresponds roughly but pretty
    well with the complete collapse of the formation of new banks.
    This I think is devastating. The fact that America no longer
    launches new community banks is devastating for Americans
    across the country.
        But I understand why it is happening. It is hard for me to
    imagine taking the risk of starting a new bank today, having
    had that experience in the past, given the combination of this
    avalanche of new regulations that one faces and the artificial
    interest rate environment where interest rates are basically at
    zero and margins are so compressed.
        Well, apparently I am not the only one that cannot imagine
    starting a new bank. Nobody is doing it anywhere in America. So
    we have destroyed de novo bank formations. That no longer
    happens in America. And we are forcing a stunning wave of
    consolidation among small banks. It started a long time ago,
    but it has been accelerating recently. And as we have this
    consolidation, we are not replacing these institutions with new
    startups.
        A Harvard Kennedy School paper in 2015 said, and I quote,
    ``Community banks' vitality has been challenged more in the
    years after Dodd-Frank than in the years during the crisis.''
    And again I quote, ``The rapid rate of consolidation away from
    community banks that has occurred since Dodd-Frank's passage is
    striking given that this regulatory overhaul was billed as an
    effort to end `too-big-to-fail' .''
        The fact is in the absence of new community banks and the
    absence of a thriving small bank sector, we have less
    competition, less dynamism, and fewer financial services for
    men and women and small businesses who need these services.
        So this Subcommittee, we have been working for some time
    now to try to provide some regulatory relief for the smallest
    financial institutions. We have had five hearings focused on
    community banks and credit unions, two others on credit access
    for small businesses. We had the Financial Regulatory
    Improvement Act of 2015 with dozens of measures designed to
    provide relief. I am proud to have authored several of these
    provisions in separate bills that got rolled into one, and I am
    very disappointed that we have not been able to get bipartisan
    support so that we can move this on the Senate floor.
        I do want to also point out one particular industry that
    depends so much on the smallest of banks, and that is
    agriculture. It is very often the case in rural agricultural
    areas that there is only one financial institution--and it is
    often a very small community bank or credit union--that
    provides credit to the ag community to the ag community in that
    market. But these small institutions in the aggregate provide a
    huge percentage of all agricultural lending. This chart depicts
    that.
        The light-green area on the top represents the percentage
    of all loans, agricultural loans, that are made by banks that
    are less than $1 billion in total assets, and you can see that
    is about half of all the loans. The dark-green area are loans
    that are made by banks of $1 to $10 billion, still quite small.
    Combined, you can see this is over 70 percent of all the loans
    that are made to agricultural America are made by small and
    very small banks. This is an absolutely essential part of the
    financial services industry for rural and agricultural America.
        So the fact is while we have been unable to provide this
    regulatory relief, in my view, the burden is carried not just
    by financial institutions but the folks on Main Street and the
    folks in the rural communities who would otherwise be served by
    a more robust small banking market.
        Our witnesses today represent institutions that have been
    unduly burdened by Dodd-Frank and other regulatory creep. I
    hope their views and suggestions will be taken into account as
    we continue to pursue ways in which we can relief that burden.
        And, with that, I will recognize the Ranking Member,
    Senator Merkley, for his opening statement.

                   STATEMENT OF SENATOR JEFF MERKLEY

        Senator Merkley. Thank you very much, Mr. Chairman, and
    thank you to all of you for bringing your frontline experience
    to this conversation.
        Seven years ago, our economy plunged into a free fall that
    took us deeper than any crisis since the Great Depression,
    impacting both consumers and financial institutions across the
    country. And Congress responded with the Wall Street Reform and
    Consumer Protection Act to protect consumers and our economy,
    to prevent or decrease the odds of a similar plunge off an
    economic cliff.
        Our economy has slowly bounced back, and the memory of the
    crisis is still fresh in the minds of many Americans, millions
    of whom lost their homes, they lost their jobs, they lost their
    retirement savings. And for this reason, there remains strong
    bipartisan support for reforming the activities of Wall Street,
    with nine in ten likely voters saying it is important to
    regulate financial services and products to ensure that they
    are safe for consumers.
        That said, we all know that community banks and small
    credit unions did not cause the financial crisis. As
    legislators, then, we need to strike a balance, provide
    appropriate consumer protection from predatory products, while
    ensuring that community banks and credit unions can do their
    job providing credit in rural America.
        The Democrats on the Banking Committee recognized that some
    regulatory relief was needed and joined together to propose
    just such a bill. We offered a path forward to ensure that
    rural areas can continue to depend on community banks for
    mortgages and agricultural loans and small business loans. A
    Wall Street Journal article paints a positive picture saying
    that in some ways community banks are the picture of health
    with loans balances, profitability, and increased number of
    loans held on portfolio. But we have all heard from our
    community banks about the challenges that they have with, as
    the Chairman described, regulatory creep, and that needs to be
    addressed, and thus the Democratic initiative.
        Banks and credit unions in Oregon almost exclusively fall
    into the community and small financial institution categories,
    especially true of financial institutions that serve our rural
    communities, many of which have deep roots in small
    communities, from the Bank of Eastern Oregon--headquartered in
    Heppner with a population of 1,300; it has 13 branches and $325
    million in assets--to Rogue Credit Union in southern Oregon--
    which has grown to have about $1 billion in assets, 15
    branches, and is serving rural areas like Klamath County--and
    Mid Oregon Credit Union, which is headquartered in Bend,
    serving rural central Oregon, as well as Warm Springs Tribe.
    Mid Oregon has six branches and $213 million in assets. I think
    that these are representative of the types of institutions we
    would find all across America. And while I am familiar with the
    feedback from our Oregon community banks, I look forward to
    hearing feedback from all of you on the front line in South
    Dakota and Pennsylvania.
        I am not going to go through the details of the Democratic
    bill that was designed to address many of the issues that we
    have been hearing from rural banks. I can submit those for the
    record.
        Chairman Toomey. Without objection.
        Senator Merkley. I want to turn to your experience. The
    caution I would have is against trying to use the challenges of
    banks in rural America as a wedge to restore the New York Wall
    Street casino operations that brought down America. That has
    been a choice strategy that we have been witnessing here on
    Capitol Hill, and that would be a mistake. Enabling essentially
    taxpayer-subsidized hedge funds to operate with our deposits
    and put the entire banking system at great risk would be
    absolutely no service to Americans in urban or rural America.
    Meanwhile, we stand united in wanting to address the types of
    issues that you will be identifying. Thank you.
        Chairman Toomey. Thank you very much, Senator Merkley.
        I am now going to recognize the gentleman from South
    Dakota, Senator Rounds, for the purpose of introducing one of
    the witnesses who is a constituent of Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman.
        Roger Porch grew up on a farm and ranch in West River,
    South Dakota, where both banks and towns are few and far
    between. For those who have never been there, West River is
    shortgrass country where cow-calf operations are the norm. It
    still takes a cowboy and a cow to raise a calf, and a banker
    needs to understand the land in order to serve the needs of his
    or her customers. Roger understands the geography of West
    River. He knows the land, and he knows the people.
        I served with Roger in the South Dakota State Senate, and I
    found him not only reasonable but knowledgeable and a very
    concerned person with his constituents' needs always firsthand.
        Roger graduated from Kadoka High School in 1969 and the
    University of South Dakota in 1974, and for those of us who
    graduated from South Dakota State, we put up with him anyway.
        He returned to his family's ranch after college and
    operated it until 1995, when he started working at the First
    National Bank in Philip. He was elected to the South Dakota
    House of Representatives in 1984, served until 1990, and was
    Vice Chairman of the Ag Committee. He was elected to the South
    Dakota State Senate in 1990, where I first met him, where he
    served for 6 years chairing the Committee on Education, and he
    later served on the State Board of Education for 5 years.
        Roger is currently the vice president and head of the loan
    department for the First National Bank in Philip. He sits on
    the Board of Directors of the Philip Health Services, which
    operates a clinic, a hospital, a nursing home, and is the
    secretary of the Philip Charities, which is the local economic
    development organization. He and his wife, Lois, have been
    married for 44 years, have three children and five
    grandchildren, last count. They still own and operate the
    family ranch which consists of about 3,500 acres of pasture and
    farmland. I know that our Committee can benefit from Roger's
    long experience and use his testimony to help make it easier
    for rural bankers to effectively serve their customers.
        Thank you, Mr. Chairman.
        Chairman Toomey. Thank you, Senator Rounds.
        At this time I would like to extend a warm welcome to all
    of our witnesses, and let me proceed with a brief introduction
    for our other witnesses.
        We have with us Mr. Terry L. Foster, the executive vice
    president and chief executive officer of MCS Bank in Lewistown,
    Pennsylvania. And Senator Rounds just introduced Mr. Porch.
    Welcome to both of you.
        Ms. Carrie Wood is the president and chief executive
    officer of Timberland Federal Credit Union in DuBois,
    Pennsylvania.
        And Ms. Sarah Edelman is director of housing policy at the
    Center for American Progress.
        Thank you all for joining us today. I will recognize each
    of you for a 5-minute oral summary of the testimony that you
    have submitted. Your full testimony will appear in the record,
    and then we will proceed to questioning. So thank you again,
    and, Mr. Foster, please proceed.

     STATEMENT OF TERRY FOSTER, EXECUTIVE VICE PRESIDENT AND CHIEF
      EXECUTIVE OFFICER, MIFFLIN COUNTY SAVINGS BANK, LEWISTOWN,
      PENNSYLVANIA, ON BEHALF OF THE PENNSYLVANIA ASSOCIATION OF
                           COMMUNITY BANKERS

        Mr. Foster. Thank you, Chairman Toomey, Ranking Member
    Merkley, and Members of the Committee. My name is Terry Foster.
    I serve as executive vice president and CEO of MCS Bank. We are
    a $137 million asset bank headquartered in Lewistown,
    Pennsylvania. We are a State-chartered mutual savings bank, and
    we were originally chartered in 1923. Our bank serves
    exclusively rural populations in the central part of the State.
    I have served in my current role at MCS Bank since 2009, but I
    have served the bank in other capacities for the past 20 years.
        I would like to add that I have also been a customer of
    this very bank since I was a young boy.
        I also serve as the current chairman of the Pennsylvania
    Association of Community Bankers and as a member of the Mutual
    Bank Council of the Independent Community Bankers of America. I
    wish to thank you for convening today's hearing and providing
    me with the opportunity to testify.
        I want to state that my testimony is based upon my own
    experiences and observations as a rural community banker, as
    well as from the perspective of my fellow bank employees'
    dealings with our customers and stakeholders. I also speak from
    the perspective of a $137 million institution trying to
    preserve our ability to survive and maintain a presence in
    communities where local banking and service is so very
    important. I refer you to my written testimony for greater
    details on our bank, its history, staff, and markets, but I do
    think it is important to mention that and stress the fact that
    within two of the communities in which we have branches, we are
    the only bank in town.
        By their nature, rural markets create unique efficiency
    challenges in terms of serving dispersed populations as
    compared to the more densely populated suburban and urban
    areas. The fact that MCS Bank, at just $137 million in assets,
    operates five full-service branches to reach our customer base
    illustrates this point. Every dollar of cost rural institutions
    must incur to maintain compliance with new or heightened
    regulatory requirements disproportionately impact institutions
    like mine.
        Unique population dynamics in the rural markets call for
    specialty servicing knowledge and are a critically important
    reason that community banks in rural markets do survive. In our
    market, we serve a unique population in the ``plain sect'' or
    the Amish community.
        Amish, for those of you who are not familiar, live simple
    agrarian existences, avoid the use of modern technologies,
    including electricity and automobiles. In place of automobiles,
    they travel by horse-drawn buggy. Because of their social and
    religious conventions and aversion to technology, serving this
    demographic takes a keen, local understanding of this community
    to meet its members' needs, a community that will never be
    understood by banks headquartered in suburban or urban centers
    and whose needs are not a part of the equation when branch
    consolidation or closure decisions are being contemplated.
        I like to tell the story of how in the wake of a large
    regional bank abandoning a rural community with a high
    concentration of Amish residents we were able to figure out a
    way to restore local banking. The loss of this branch was
    devastating to the community's residents and businesses,
    particularly to the Amish residents whose transportation
    limitations created an unusual hardship by forcing them to
    travel long distances to another community to do their banking
    at a branch to which their account servicing was transferred.
        MCS Bank worked with community leaders and business owners,
    and eventually we partnered with a local businessman to build
    and open a 530-square-foot branch within his family's building
    supply and hardware store. Today this branch is thriving,
    albeit much smaller, and supporting the community, and we have
    provided financing to the Amish community for such projects as
    the purchase of land for farm expansion and for the
    construction of a new retail store.
        The potential loss by this particular community is just one
    example of situations that are playing out in communities
    across the Nation. I believe very strongly that the community
    banking industry is experiencing consolidation, particularly in
    rural markets, at an accelerating rate, for a host of reasons,
    but one being escalating compliance-related cost and
    complexities.
        I argue that a great deal of time and resources we are
    devoting toward our efforts to comply with the letter of the
    laws and regulations, their complexities, and many
    inconsistencies have had a detrimental impact on our ability to
    serve our customers with both products and service delivery.
        Has Dodd-Frank, for instance, impacted the products our
    bank offers? Absolutely. Since the introduction of QM and
    Ability-To-Repay, MCS Bank has discontinued offering balloon-
    type loans. With the volume of rules to interpret and
    implement, we had to focus our efforts on the most utilized of
    our mortgage products.
        The required escalation of our compliance focus negatively
    impacts bank stakeholders such as community organizations,
    charities, et cetera, which have historically been the
    beneficiaries of our philanthropic efforts. The more time our
    people must devote to compliance is less time available for
    them to spend on volunteer and charitable endeavors. Increased
    regulatory costs also negatively impact the community by way of
    diverting financial resources away from community investment.
    As increased costs and other pressures work collectively to
    incentivize further consolidation, larger organizations with
    distant headquarters locations lack the appreciation and
    commitment to local needs in rural areas.
        Are the theories behind consumer-focused regulations well
    intended? Absolutely. The notion of ``ability-to-repay,'' as
    generally defined, has long been an underwriting practice of
    prudent community bankers and lenders, but the codification of
    such concepts into regulation is fraught with complexity,
    inconsistencies, and in some cases lacks logic. The unintended
    consequence is confusion, which ultimately leads to human
    error, additional costs, and potential examiner criticism. I
    refer the Committee Members to the detailed example in my
    written testimony for examples of human error situations that
    we have experienced.
        Because the timing of today's hearing which coincides with
    the ongoing work to fully implement the rules of the new TRID
    requirements, I have also included some TRID examples in my
    written testimony.
        The complexity involved in implementing TRID is taxing all
    parties involved. In our case, our third-party loan origination
    software provider's applications were not ready to go on
    October 3rd. As a result, our testing protocols were delayed.
    At this point, we are still determining if the new rules will
    allow us to continue to offer certain types of single-closing
    construction loans that have ARM features, which have benefits
    to consumers from the standpoint of cost reductions as well as
    reduced time and efficiency. It also impacts our ability to
    reduce our interest rate risk.
        A final issue I wanted to share with the Committee is what
    I term ``the flood map creep.'' Flood zone expansion has
    exposed our bank to reputation damage and instances of a formal
    consumer complaint being lodged with the Pennsylvania
    Department of Banking and Securities and ultimately a lost
    customer. Again, in my written testimony, I have provided a
    detailed example of this very instance.
        In terms of recommendations, there are a number of bills
    that are in front of the Senate that we believe will provide
    some significant relief from many of the concerns that I
    raised, and I am sure other witnesses will also raise, and I
    cite a sampling of these specific bills and their favorable
    provisions within my written testimony.
        Last, I would just again like to thank you for the
    opportunity to testify today, and I do hope that my comments
    will be beneficial to the work of the Subcommittee.
        Thank you.
        Chairman Toomey. Thank you, Mr. Foster.
        Mr. Porch.

      STATEMENT OF ROGER A. PORCH, VICE PRESIDENT, FIRST NATIONAL
                       BANK, PHILIP, SOUTH DAKOTA

        Mr. Porch. Senator Rounds, thank you for that kind
    introduction. Chairman Toomey, Ranking Member Merkley, and
    Members of the Committee, my name is Roger Porch, and I am a
    vice president at First National Bank in Philip, South Dakota.
    I would like to thank you for affording me the opportunity to
    appear before you this morning to share some information about
    regulatory challenges faced by rural banks. My hope is that we
    can find some regulatory relief that will help community banks
    across the country. More importantly, however, we hope that we
    can, by making credit more readily available to those who live
    in rural areas, sustain our lifestyles and expand local
    economies.
        The area in which I live--western South Dakota--is highly
    reliant upon agriculture and tourism, and we are doing well.
    But we take nothing for granted and are pleased to be here this
    morning.
        My bank is headquartered in Philip, South Dakota, and we
    have one branch in Faith, South Dakota, located 85 miles to the
    north. We are a $250 million bank and serve a large area of
    western South Dakota. We have customers as far west as Wyoming
    and south to Nebraska. First National Bank is privately owned
    and has successfully served the needs of our trade area for
    over 100 years.
        We live by the motto, ``Partners in Banking.'' Our
    principal scope of business is the financing of farmers and
    ranchers with lines of credit and real estate and machinery
    loans. However, excessive, unfocused regulations are changing
    the way we do business.
        The ability to meet local needs has not been easy with the
    increased regulatory costs and second-guessing by bank
    examiners. During the last decade, the regulatory burden for
    community banks has multiplied greatly.
        In my testimony today, I would like to make the following
    three points: unnecessary regulatory burden limits banks'
    ability to serve their customers; these challenges have real
    costs for our banks and the communities they serve; and then
    some commonsense solutions which would help alleviate this
    burden.
        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 growth,
    facilitating credit, and economic expansion. It has been noted
    by others that regulatory cost as a percentage of overhead has
    increased. Specifically for First National Bank, we spent
    $220,000 on regulatory expense, which is 19 percent of
    overhead. Looked at differently, it is approximately 7.5
    percent of our bottom line, including salaries.
        Today First National Bank does not make home loans. The
    avalanche of new mortgage regulations is too complex and costly
    to comply with. The added cost and risk of making these loans
    is not something our bank can justify. The economic life of
    rural America depends upon financial products and services that
    only community banks provide. By forcing many banks out of
    mortgage lending, significant harm is done to the rural
    communities that bankers are trying to serve.
        In rural areas, an appraiser is difficult and sometimes
    impossible. For ag property up to $1 million, we can get by
    with an in-house evaluation, which works quite well. For larger
    appraisals, we might find ourselves waiting several months for
    a certified appraiser to complete the appraisal. In certain
    cases involving homeownership, an appraisal might not be
    available.
        Our main scope of business is lending operating money to
    ranchers and farmers. Although we do use projected cash-flows
    in our annual credit analyses, we consider ourselves equity
    lenders. We measure equity for each customer once a year. If we
    are required to rely on cash-flow analysis, we could possibly
    find ourselves in the situation of not being able to loan
    operating money to ranchers and farmer with equity in the
    millions.
        The Consumer Financial Protection Bureau is inquiring into
    overdraft procedures to determine how those practices are
    impacting consumers. First National Bank considers itself an
    ``ad hoc'' bank, meaning we generally cover overdrafts rather
    than return checks. We know our customers and feel that they
    can best meet their needs.
        As an example of burdensome regulation, 25 years ago the
    call report that we submitted was less than 10 pages long.
    Today for our bank it is 86 pages.
        Competition from nonbank lenders is an ongoing problem.
    Farm Credit System and credit unions enjoy special tax
    treatments giving these institutions a competitive advantage.
        I believe my time in front of this Subcommittee would be
    wasted if some possible solutions were not offered, and so in
    that light then, I believe that HMDA rules could be relaxed to
    allow rural community banks some flexibility before the rules
    apply.
        With respect to appraisers, there might be some relaxation
    of requirements in becoming certified. We would request that
    there be some directive given to bank examiners in the area of
    cash-flow lending versus equity and collateral-based lending.
        For rural community banks, we hope that account overdrafts
    can be managed internally. We know our customers. And we would
    ask that call reports be simplified to reflect a bank's
    business model and size. And I understand that this is not the
    time nor place to take up the issue of Farm Credit and credit
    unions, but the issue does need to be noted.
        We ask for regulation and oversight that is truly
    beneficial to rural consumers who rely on local banks for
    credit. The focus should be on enforcing existing laws rather
    than creating new rules and regulations that threaten banks'
    future existence. Rural banks can compete, but they cannot
    compete while burdened with red tape and unnecessary, unfocused
    regulations. It is not fair to local banks and the communities
    they rely on.
        At the end of the day, this is not about banks. It is not
    about First National Bank in Philip. It is about people. It is
    about the communities and lifestyles of those who populate
    rural America. We have a unique opportunity this morning to
    begin the process of effecting change which will truly help the
    residents of rural America.
        I look forward to your questions. Thank you.
        Chairman Toomey. Thank you, Mr. Porch.
        Ms. Wood, please proceed.

        STATEMENT OF CARRIE WOOD, PRESIDENT AND CHIEF EXECUTIVE
     OFFICER, TIMBERLAND FEDERAL CREDIT UNION, DUBOIS, PENNSYLVANIA

        Ms. Wood. Chairman Toomey, Ranking Member Merkley, and
    Committee, thank you for the opportunity to testify at today's
    hearing.
        I am Carrie Wood, president and CEO of Timberland Federal
    Credit Union, a $60 million credit union located in DuBois,
    Pennsylvania. We serve 9,800 members, over three-quarters of
    which are low-income. My 15 full-time staff and I work hard
    every day to help meet their financial needs.
        As a small credit union in a rural area, we have to comply
    with many of the same regulations as the too-big-to-fail banks
    who caused the financial crisis. While my title is CEO, I am
    also the security administrator, the H.R. department, the
    compliance officer, the marketing department, the backup IT
    person, and the NMLS administrator. To keep up with the changes
    coming out of Washington, I have assigned a team of five staff,
    a full third of my total, from various departments across the
    credit union.
        When this team is working on compliance issues, they are
    not serving our members. They are not helping them get loans.
    They are not providing financial counseling. They are not
    helping to improve our services. Every time a rule is changed,
    my credit union and members incur costs. We must make the time
    to understand the new requirement, determine if it applies to
    us, modify our computer systems, update our internal processes,
    properly train our staff, design and print new forms, and
    produce materials to help our members understand the new
    requirement.
        Rules are often changed in the name of consumer protection,
    but when regulators make it harder for me or more expensive to
    serve my members, that is not consumer protection.
        This constant churn of new regulatory requirements takes a
    hit on our bottom line, which for a not-for-profit like us
    directly affects our members and our service. It has also kept
    us from entering new markets.
        Our members want us to offer small business loans, but we
    are hesitant because of the regulatory and statutory
    restrictions in place today. We have also delayed our entry
    into indirect auto lending for similar reasons.
        On top of all that, the CFPB has added an entire new level
    of regulatory anxiety for my credit union and others like us. A
    recent example is the TILA-RESPA Integrated Disclosure forms.
        We have known TRID is coming down the pipe for some time,
    and we worked to prepare for it. TRID is a complicated rule,
    and the CFPB provided absolutely no transition time. One day we
    did things in one way; the next day, it was completely
    different. No transition period. No enforcement delay. No legal
    protections. As a small institution, when we ran into an
    unanticipated problem after we flipped the switch on the TRID
    forms, we were forced to manually input information, slowing
    down our process for our members and potentially exposing us to
    errors.
        NCUA has said that their examiners are going to exercise
    tolerance for a reasonable amount of time. But I do not
    understand why Congress will not protect us from legal
    liability as we work the kinks out in our system.
        Despite the ever-growing regulatory burden, we continue to
    help our members. And, in closing, let me tell you how.
        When our members open an account, we offer a free credit
    review, and three members of our staff are trained to become
    Certified Financial Counselors to provide free credit
    counseling for our members.
        We participate in a program called ``Better Choice'', which
    is an alternative to payday lending. To participate in this
    program, we require our members to receive financial
    counseling, and we partner with our local Community Action to
    provide it. Timberland makes absolutely no money on this
    program. It is a member service.
        Small loans are pretty common for us. Members request them
    to buy fuel, settle payday loans, buy an Amish mattress, among
    other things. I once did a loan for a man whose five
    granddaughters moved back in with him because his daughter lost
    her job. He needed $200 in a loan because the girls had
    contracted lice at school. He could not afford the treatments
    until his next Social Security check, and the girls could not
    go back to school until he took care of the problem. I have
    written car loans for members who have totaled their cars due
    to deer damage and once for a member who hit a horse. Public
    transportation is a struggle in central Pennsylvania, so my
    members need a car, which makes these loans very vital for us.
    Like all credit unions, the work we do at Timberland helps
    families stay in their homes, members to hold jobs, and
    children to stay in school. We are a lifeline for our members.
        My members need our credit union to be in a position to
    help them in these situations. Unfortunately, every rule makes
    it much more difficult for us to be there when they need it.
        There is a reason that we are losing a credit union a day,
    and it is coming out of Washington in the form of ever-changing
    and ever-increasing regulatory burden. Again, your focus on the
    crisis facing small community financial institutions is
    critical, and I applaud your efforts.
        Thank you for the opportunity to testify.
        Chairman Toomey. Thank you, Ms. Wood.
        Ms. Edelman, please proceed.

     STATEMENT OF SARAH EDELMAN, DIRECTOR, HOUSING POLICY, CENTER
                         FOR AMERICAN PROGRESS

        Ms. Edelman. Thank you, Chairman Toomey, Ranking Member
    Merkley, and Members of the Subcommittee for the invitation to
    appear before you today. My name is Sarah Edelman, and I direct
    the housing program at the Center for American Progress.
        Consumers living in rural areas rely on community banks to
    meet their credit needs. These banks provide vital support to
    the small businesses, farmers, and homeowners that make rural
    economies run. However, for decades, the number of community
    banks serving these areas has been in decline. The number of
    community banks peaked in 1984 and has declined ever since at a
    rate of about 300 banks per year.
        There are many reasons for this trend, including changes in
    interstate banking rules that made it easier for banks to merge
    and consolidate, slower population growth in rural areas, and
    changes in the financial market. However, consolidation within
    the community banking sector has not been all bad news for
    banks or consumers.
        First, the majority of consolidation has been voluntary and
    has taken place between community banks as opposed to large
    non-community banks buying smaller ones.
        Second, even though the number of locally owned community
    banks has declined, the number of bank branches in rural areas
    has remained relatively stable over the years. There are only 5
    percent fewer branches operating in rural areas today than
    there were before the financial crisis, mirroring overall
    national trends.
        What is most important is that consumers and small
    businesses in rural areas have access to the credit they need
    in order to revitalize their economies.
        In the wake of the Great Recession, recovery in the
    unemployment rate, job growth, and wage growth in rural areas
    have all lagged behind urban centers. And even as many housing
    markets are recovering, some rural markets are seeing further
    deterioration. The percentage of mortgaged homes with negative
    equity in rural counties increased from an average of 11
    percent in the second quarter of 2011 to 20 percent in the
    first quarter of 2015.
        Community banks, which represent more than 70 percent of
    bank branches in rural areas, are vital partners to businesses
    and farmers that can revitalize rural economies.
        Unfortunately, much of the conversation in Washington about
    supporting community banks has focused on gutting the important
    financial reform laws put into place after the financial
    crisis. This approach is wrong-headed and overlooks the
    important fact that the challenges facing community banks have
    far more to do with shifting market dynamics rather than new
    regulation.
        The overwhelming majority of community banks are already
    provided a host of exemptions to the Dodd-Frank Act, providing
    them with a competitive advantage over large banks and the
    flexibility to continue the relationship lending that is at the
    core of their business model.
        Additionally, regulators have taken a number steps to make
    compliance easier for community banks and have worked closely
    with the industry throughout the rulemaking process. In fact,
    over the past 3 years, agencies have made changes to over 30
    final rules based on feedback from community banks and credit
    unions. Regulators have done a good job of balancing the
    responsibility to protect consumers and the safety and
    soundness of the banking system while protecting access to
    credit.
        The truth is that strong financial regulation supports a
    stable financial market. Banks of all sizes are more likely to
    fail or consolidate during periods of financial and economic
    crisis.
        Right now, community banks appear to be getting stronger
    and healthier. Both smaller and larger community banks
    originated a larger share and number of home purchase mortgages
    today than they did in 2010. Last year, community banks
    increased their lending volume at almost twice the rate of
    larger banks. Data from the FDIC also show that the performance
    and financial health of community banks has experienced
    consistent improvement over the past 5 years.
        While we encourage regulators to continue working with
    small banks and credit unions to help them adjust to new
    regulation, neither regulators nor Congress should weaken
    standards at the expense of consumers or the economy. Rolling
    back important regulatory measures, as proposed by the
    Financial Regulatory Improvement Act of 2015, makes the
    financial system more vulnerable to another crisis and makes it
    more likely that community banks will suffer even if they are
    doing everything right.
        Thank you for your time, and I look forward to questions.
        Chairman Toomey. Thank you, Ms. Edelman.
        We have run over a little bit on the time with our witness
    presentations, so I am going to make sure to stick to my 5-
    minute limit and ask my colleagues to try to do likewise, if we
    could.
        Thank you for that testimony. Gosh, where to begin.
        For those who are actually involved in running financial
    institutions here, Mr. Foster, Mr. Porch, and Ms. Wood, you
    have talked about this new wave of regulation, this new burden,
    the new regulations that you have been hit with. In the absence
    of those new regulations, would you guys be risky institutions?
    Would you be in danger of failure? Are you much safer
    institutions now by virtue of these regulations? If each of you
    would briefly comment on that.
        Mr. Porch. No. We have been a strong, well-capitalized bank
    for nearly 100 years, and we would remain that. So it is not so
    much as our future survival as it is to be able to serve our
    consumers. We need to keep loan rates as best we can, deposit
    rates in the best light, and then we do not have much for fees.
    So that is more of it than financial strength, sir.
        Chairman Toomey. Mr. Foster.
        Mr. Foster. As a mutual bank, we have had historically very
    strong capital. You know, our concern--as they say, capital is
    king, and we have always been capitalized well above the
    minimums.
        In terms of creating risk, our risk at this point is more
    to risk of earnings over time. As we are increasing our cost
    structure, our overhead costs have increased. Therefore,
    current earnings, that is the only way that we can build
    capital, is through retained earnings. So that is where the
    pressure lies--or our greatest pressure is.
        Chairman Toomey. And compliance cost has been an increasing
    cost for you?
        Mr. Foster. Absolutely. Yes, we have seen--again,
    compliance cost is not the only cost pressure, but just from a
    broad statistic, we have seen a 25-percent increase year over
    year from 2010 forward in our overhead costs.
        Chairman Toomey. OK. Ms. Wood.
        Ms. Wood. I cannot say that we are any more sound today
    than we were 20 years ago. We have been doing mortgage lending,
    for example, for about 20 years. We have only lost five
    mortgages over the entire life of the program, and we have over
    300 mortgages on our books. So it just has created more
    paperwork for us.
        Chairman Toomey. Right. So prior to these regulations, it
    occurred to you to run a prudent institution that would be
    operating safely, it seems to me.
        Let me go to an issue that has been raised by--Ms. Edelman
    in her testimony observes, correctly, that there are a number
    of regulations, including in the mortgage space, from which
    small banks are exempted. And so if I am correct, Mr. Foster,
    your institution actually is legally permitted to do balloon
    loans, but you have chosen not to do them. First of all, am I
    correct in that understanding? And if so, could you share with
    us why you have chosen to exit and to discontinue products for
    which you have demand, for which your bank is capable of
    providing, and which you are legally allowed to do but you have
    chosen not to? Could you shed some light on that?
        Mr. Foster. Sure. In my testimony I mentioned that we did
    discontinue balloon loans. It was more so a factor--again, I
    rely on my compliance folks to guide me. But we opted--we
    looked at our product offerings and said, you know, we have
    this very complex rule and rules to implement. We needed to
    really dedicate resources to where--to the product lines that
    we had the most demand, and we just, frankly, said, ``You know
    what? We are going to discontinue balloon loans.'' And there
    are very--there are circumstances where that is the right
    choice for a consumer. We never pushed a balloon loan. We would
    offer them in situations where there was a unique need, maybe a
    borrower who was going to be in a transitory--in a home for a
    transitory period, they were going--you know, professors and so
    forth.
        Chairman Toomey. All right. And, Mr. Porch, did you say in
    your testimony that you exited certain residential mortgage
    lending for regulatory reasons?
        Mr. Porch. My bank actually exited mortgage lending a
    number of years ago, and believe it or not, the management of
    the bank at that time believed that regulations were excessive,
    and so they got out of the business. We have now, though, found
    that with TRID, we find it very difficult to even use bare ag
    land as security to finance the purchase and building of a
    home. So that has been an additional one for us.
        Chairman Toomey. Thank you very much.
        Senator Merkley.
        Senator Merkley. Thank you very much, Mr. Chairman.
        One of the things that I found very interesting was the
    rebound that has occurred on assets for banks of various sizes.
    For those of less than $100 million in assets, they went from
    basically zero percent return on assets in 2011 first quarter
    to 0.95 percent of assets in 2015. A similar thing happened
    with the $100 million to $1 billion banks. Whereas, the big
    banks were doing quite well in 2011, and their increase was
    very small. So the small banks have essentially caught up with
    the big banks in terms of return on assets.
        The other thing that I found interesting was that the loan
    rates, the expansion in loans has been increasing at twice the
    rate for small banks as for big banks. And this general success
    of the small banks has occurred in a situation where there is a
    major problem--at least we keep hearing about it from people
    evaluating it--which is the very low interest spread that
    exists.
        And so I just thought I would try to get all of your
    perspectives on this rebound from 2010-11 to 2015, if you have
    seen it in terms of your own bank's success or in general in
    your respective States, and especially how that has been
    managed to happen when the interest spread, which is so
    important for small banks, has been so compressed during this
    period. Anyone like to share your frontline experience?
        Mr. Porch. Well, I will make my remarks brief, because we
    are perhaps the unique animal sitting here at the table this
    morning. Our main scope of business is lines of credit to
    farmers and ranchers, and they have been quite successful over
    the last 5 to 6 years. Inflation, though, has caused operating
    costs to balloon. Livestock costs have ballooned. When we
    finance those operations, our loan volume certainly does go up.
    And it is not a function of mortgage lending or anything such
    as that. It is simply the scope of business that we are in.
        Senator Merkley. Thank you.
        Mr. Foster. In our experience in our market, we have seen
    since 2007 a continual decline in our outstanding mortgage
    loans. At this point in 2015, we are about flat in terms of
    mortgage growth for the year. So if we were to take today and
    go back to 2007-08, our portfolio is smaller.
        Senator Merkley. In terms of return on assets, have you
    seen that change in general in the community banking community
    from 2010-11 until now?
        Mr. Foster. If I reference the FDIC's quarterly reports, I
    would agree--or I do see that. In my own experience, our return
    on assets is going the other direction.
        Senator Merkley. Thank you.
        Anything you want to add on that, Ms. Wood?
        Ms. Wood. We are in the same position where our way has
    gone down. Our loan volume has gone down. We are seeing a lot
    of indirect in the market and a lot more squeezed margins.
        Senator Merkley. OK. And, in fact, it has been just
    absolutely historic lows in terms of the interest rate spread
    over an extended period, which it has been fascinating to see
    banks do as well as they have during that period. But we have
    heard a lot of interest in the Fed that maybe it would be very
    helpful to small banks if the Fed was to, in fact, raise
    interest rates. Is that a viewpoint that you all might share?
    Ms. Wood.
        Ms. Wood. Yes.
        Senator Merkley. Yes. OK.
        Ms. Wood. Absolutely. We have a lot of variable rate home
    equity loans, and they are market-driven.
        Senator Merkley. OK. I wanted to turn to the point that was
    made about the challenge of getting good appraisals under the
    rules. Certainly we went through a period where we did lose a
    lot of small banks. When you look back at the number of small
    banks we lost, a lot of them were ones that you look at the
    practices and you go, Well, that was not the wisest practice.
    They had a lot of concentration in a particular segment of the
    market that was hit hard during the 2008-09 recession; or they
    were deeply engage in loans that had no underwriting, if you
    will, no-document loans. And I do not think anyone wants to
    return to that era.
        But appraisals were part of the conversation about how we
    create this balance. How do we get good data, especially for
    loans that are going to be resold to the public? How can the
    public count on buying securities and make sure that the
    appraisals that went into establishing the collateral were
    accurate? And I am not sure--I think it was you, Mr. Porch, who
    mentioned the challenge you are having with getting appraisals
    on a timely basis. Do you want to expand on that a little bit
    or any specific suggestions on how do we address this in terms
    of timely appraisals but also for loans that might be being
    resold into the marketplace, accurate estimation of collateral?
        Mr. Porch. First of all, I certainly agree with you that
    there were situations where appraisers probably positively
    influenced values and certainly did impact the subsequent
    collapse of the banking system. So that is indisputable, in my
    mind.
        For us, we have difficulty finding an appraiser. One of the
    gentlemen that does a lot of work for us is 80 years old, and
    he still works, but he is not going to last much longer.
    Another one that we have hired chooses really not to be very
    active in the field, so we are down to one and probably two.
    Keep in mind that typically these are ag land appraisers that
    we use. But the point that I would make with respect to the
    Committee today is that if we need to have an appraisal in the
    Philips of the world, finding comparables is virtually
    impossible. And then when that appraiser appraises a house in
    Philip and he cannot find comparables and tries to sell it in
    the secondary market, the whole deal falls apart. And that is
    where the problem really lies.
        In South Dakota, we have, it seems to me at least,
    increased requirements to becoming an appraiser. It just
    becomes more and more difficult every year to become an
    appraiser. And whether those requirements need to be relaxed,
    whether some of the institutions need to offer appraisal
    classes or some such a thing as that, but it certainly seems to
    me that there would be a solution.
        Senator Merkley. OK. My time is up, but I will just note
    that that is one of the things that we have heard, is a real
    dilemma that we do not have a solution to, comparables in rural
    banking. Thank you.
        Chairman Toomey. Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman.
        I would like to go back just a little bit where Mr. Porch
    has identified the fact that while TRID was being implemented,
    it was causing some challenges. The new TILA-RESPA Integrated
    Disclosure Rule, or TRID, was an attempt by CFPB to simplify
    mortgage disclosures. While it was a long overdue step to make
    disclosures easier for consumers, I am concerned that the new
    rules are making it harder for banks to make loans to
    consumers.
        Mr. Porch, could you just share with us a little bit about
    what you were talking about in terms of what TRID has done in
    terms of you capability to even use bare ag land in some cases
    to make a loan? Could you share a little bit about how that is
    working?
        Mr. Porch. Previously, we could use bare ag land without
    any buildings, and as far as the purpose, we did not really
    care, and if that purpose was for the construction of a home,
    that was totally fine. We had to meet all the disclosures in
    terms of truth in lending, et cetera, but now with TRID, we
    have to meet all the HMDA reporting requirements and
    everything, and, frankly, we do not do enough of that line of
    business that--we are terribly fearful of making a mistake. And
    you have heard some of the other witnesses this morning talk
    about mistakes, and that has us very uneasy about that kind of
    a thing.
        And so we have seven loan officers in our bank, including
    the president. The other day we had a conversation about
    whether we even wanted to venture into that arena, and we said
    two of the guys maybe will undertake that issue, but for the
    majority of us, it is very difficult to be trained, it is very
    difficult to understand the program. And so we just virtually
    are almost out of that market.
        Senator Rounds. Thank you. Just as a follow-up, in terms of
    the need to look at the appraisal situation, Senator Thune and
    I had been working trying to figure out why we were having such
    a tough time getting appraisers, and through our questions from
    the Appraisal Foundation--and this is the industry's
    regulator--it appears that they are making it harder for
    prospective appraisers to actually enter the profession, and
    that there had been a 19-percent decline in the total number of
    appraisers from 2007 to 2014. And when we started talking about
    on a day-to-day basis with one of the other banks in western
    South Dakota--and there are not that many of them, but one of
    them--and I will submit this for the record, Mr. Chairman. The
    note coming back in just yesterday was from one of the loan
    officers saying--this is to her boss: ``I just wanted to let
    you know an interesting situation I just had ordering an
    appraisal the other day. I received one order for an FHA home
    purchase in Eagle Butte, South Dakota. The appraiser I could
    get to go there was charging $1,500, and it was going to take a
    month before she could get us the report. On that same date, I
    received another order for a home purchase with Flagstar in The
    Villages, Florida. The appraiser I engaged in that appraisal
    was going to charge $350 and would have it done in 10 days.
    Isn't the difference amazing?''
        Eagle Butte is on the reservation in western South Dakota.
    We have got challenges in rural areas in terms of getting
    appraisers set up, and I think we ought to be making it a
    little bit easier for these guys to get in and be involved with
    it. And most certainly I think your testimony here has
    identified the need in the Philip area as well.
        If I could, I would like to ask one question of the group,
    if you could. One of the biggest challenges we think that we
    have is trying to cut some of the red tape that is out there.
    The Federal Government is issuing an average of 3,500 more
    rules every single year. We have got over a million Federal
    regulations on the books today. The total cost of the
    regulatory burden to the American public is about $1.9 trillion
    per year compared to about $1.4 trillion in person income
    taxes, so it is a big deal.
        If there was one single regulation out there that we could
    look at eliminating that would help you provide service to your
    customers, can you tell us what it would be today? Is there a
    single regulation which stands out, maybe two that stand out,
    that you would like to see us try to address?
        Mr. Porch. Well, I certainly do not mean to dominate the
    conversation this morning. Finding one would be terribly
    difficult. In my written testimony, we talk about the inability
    or the lack of knowledge for our examiners to understand the
    difference between commercial business and farm and ranch
    lending. And if there is one message that I could leave with
    the Committee today, it would be to understand that, perhaps
    give some directives to examiners and go forward from there.
    That really affects us.
        Ms. Wood. I am not sure I could pick just one. But I will
    think about that, and I will get something to you.
        Senator Rounds. Thank you.
        Mr. Foster. I would concur. It would be hard to pick one.
        Senator Rounds. Thank you.
        Thank you, Mr. Chairman.
        Chairman Toomey. Senator Warren.
        Senator Warren. Thank you, Mr. Chairman. Thank you all for
    being here today.
        We have heard a lot about the regulatory burden on our
    smaller banks, and, look, I get it. There are certain rules
    that are either too broad or too burdensome given the risks
    that smaller banks pose. And that is why I have joined with all
    of my Democratic colleagues on the Banking Committee to
    introduce a bill that would provide targeted relief to small
    lenders without rolling back the rules on big banks that pose a
    real threat to our financial system.
        But I do want to take a closer look at the idea that Dodd-
    Frank has dramatically increased costs for small banks and
    undermined their financial performance. So let us start with
    the costs part of this.
        Dodd-Frank Act changed the law on how FDIC calculated what
    banks owe in deposit insurance assessments. The Dodd-Frank
    change allowed community banks to pay far less in assessments,
    while bigger banks would pay far more. The Independent
    Community Bankers of America, the main lobbying group for
    community banks, said at the time of Dodd-Frank that the change
    would save community banks collectively about $4.5 billion in
    just a 3-year period.
        Now, Mr. Porch, do you know how much your bank has saved on
    FDIC assessments because of this change in Dodd-Frank?
        Mr. Porch. I do not know the answer to that question,
    ma'am. Thank you.
        Senator Warren. OK. Maybe you could get back to me later on
    that?
        Mr. Porch. I certainly would.
        Senator Warren. OK. Mr. Foster, do you know how much your
    bank saved?
        Mr. Foster. If I could answer that maybe in a little bit
    different way, when I joined the Bank 20 years ago, up until
    the late 1990s, we were only paying the FICO assessment, which
    to our bank----
        Senator Warren. I appreciate that, Mr. Foster, that there
    was a big change.
        Mr. Foster. OK.
        Senator Warren. What I am asking is that Dodd-Frank, when
    it was passed in 2010, changed the way FDIC assessments are
    calculated. The estimate was that over a 3-year period it would
    save community banks about $4.5 billion, and I wondered how
    much your bank saved.
        Mr. Foster. I can give you the exact number. We have saved
    from that point forward. I can submit that.
        Senator Warren. I would appreciate having that.
        Mr. Foster. Sure.
        Senator Warren. And just for the sake of comparison, I
    think you said, Mr. Porch, that your bank spent $222,000 in
    total regulatory costs last year. That is all in, that is
    everything. The regulations you did before Dodd-Frank, after
    Dodd-Frank, everything. Is that right?
        Mr. Porch. That is correct, but be mindful that of that
    $222,000, that does not include any salaries.
        Senator Warren. I understand.
        Mr. Porch. OK.
        Senator Warren. This is what you identified in your
    testimony, because I am trying to do the math on this, because
    according to the ICBA, the average community bank saves about
    $250,000 every year because of the change in FDIC assessments.
        Now, I know that savings will vary depending on the size of
    the bank, but the point is Dodd-Frank included a tradeoff. It
    imposed new rules to protect consumers and our markets,
    necessary rules to stop the kind of behavior that led to the
    last crisis. And then, to reduce the financial burden on
    community banks, it also significantly reduced the cost of
    insurance that those banks had to pay.
        To get the full picture of Dodd-Frank's impact, it is
    necessary to add both the regulatory costs and the regulatory
    savings, and that brings me to the issue of financial
    performance, which, since I am running low on time, I will just
    try to hit this as quickly as I can.
        Ultimately, financial performance seems like a pretty good
    measure of the health of our community banks, and according to
    the latest quarterly report from the FDIC, year over year
    earnings for community banks in the first quarter of this year
    were up over 16 percent, which was three times the growth of
    larger banks in that same time period. Only 5.8 percent of
    community banks were not profitable in this quarter. That is
    the lowest level since the second quarter of 2005, long before
    Dodd-Frank was passed.
        You know, community banks play a critical role in
    Massachusetts, all across this country, and Congress should
    look for ways to get rid of unnecessary rules for smaller banks
    and for credit unions. But as we consider legislation, we need
    to move past the idea that Dodd-Frank has crushed community
    banks. It is just not true. No matter how many times lobbyists
    say it in hearings or in the media or in our offices, when I
    look at the data, I see two big things: According to the
    banking lobby itself, Dodd-Frank was projected to save
    community banks billions of dollars in FDIC fees, and 5 years
    after the adoption of Dodd-Frank, the community banks
    collectively had their best quarter in a decade, and their
    profitability is increasing three times faster than the
    profitability of big banks.
        This Committee should legislate based on the facts, not on
    a make-believe narrative that is pushed by lobbyists looking
    for sweeping changes to our financial rules, changes that would
    mostly help the big banks.
        Thank you, Mr. Chairman.
        Chairman Toomey. Senator Scott.
        Senator Scott. Thank you, Mr. Chairman, and thank you for
    holding this important Subcommittee hearing, and certainly
    seeing the impact that the regulatory environment is having in
    Pennsylvania has been important for me to read the testimony of
    your Pennsylvania witnesses. I thank you for taking the time
    and having the courage to bring this issue to the forefront.
        Just to follow up on the Senator's question, the three
    bankers at the table and the credit union, are you guys paid
    lobbyists? Paid lobbyists, no? OK. So my question is: Has the
    cost of complying with the regulatory burden increased or
    decreased since Dodd-Frank, the overall cost?
        Mr. Foster. I would say it has increased.
        Senator Scott. Mr. Porch.
        Mr. Porch. I am going to argue that it increased as well. I
    did submit the data for the current year. It is my dereliction
    of duty perhaps that I did not submit it from the year before,
    but I believe that it has increased.
        Senator Scott. OK.
        Ms. Wood. And I would concur. The forms, the staff time
    that we spend on compliance has been much greater.
        Senator Scott. Right. And in your asset size, how many of
    your institutions of your asset size were involved in the
    economic crisis, causing the economic crisis in 2008? Short
    answers.
        Ms. Wood. None.
        Mr. Porch. None.
        Mr. Foster. I agree.
        Senator Scott. Thank you. So with 800 pages of legislative
    text and nearly 20,000 pages of regulatory text, Dodd-Frank,
    which is only 70 percent implemented--only 70 percent
    implemented--is increasing the compliance costs for
    institutions all around the country and certainly for
    institutions that are smaller. The pain is felt by the
    customers. I think you said, Mr. Porch, the negative impact is
    passed down to the customer, and that is a reality. How does
    that look? Restricted access to products, elimination of
    services, and negative impact includes areas like residential
    mortgages, mortgage servicing, home equity lines of credit,
    overdraft protection, and if I read it correctly, one out of
    four small banks are either merging or looking at being
    acquired. Is that about accurate as far as you know?
        Mr. Foster. I am not sure about the exact statistics as far
    as the one in four, but that is the trend. We see it in
    discussions in our market quite frequently. We have seen a
    number within Pennsylvania announcements this year already, and
    there are, I think, more in the offing before year end.
        Senator Scott. All right. And I have about 2 minutes left,
    so I am going to ask just a couple questions. Thank you for
    your answer to the first two questions.
        Mr. Foster, too often too many regulations are crafted from
    an urban, high-density paradigm. The economies of scale often
    work against smaller institutions like yours. Your mission to
    serve a dispersed population can be expensive. Therefore, any
    increase in regulatory burden makes profitability much harder
    to achieve. Is that accurate?
        Mr. Foster. It is. As I mentioned in my testimony, our
    number of branches in relation to size, by nature of the
    market, we do have to have more facilities in place to be able
    to reach out and provide those services to our customers.
    Again, the Amish community, as I mentioned, a very unique
    population dynamic. They do not use mobile banking. You know,
    if they need to go to the bank--and we have a lot of Amish who
    are small businessmen as well, they have cash needs, they need
    to be at the bank on a daily basis. And if they do not have a
    branch in their community or very close by, that is a big part
    of their day that is tied up with doing their basic banking.
        Senator Scott. Thank you. My final question, as my time is
    running out here, and the Chairman says he is keeping us on a
    very tight 5-minute timeline, and I want to respect the
    Chairman there.
        Mr. Foster and Ms. Wood or Mr. Porch, Senator Donnelly and
    I continue to work on fixing issues with TRID. All around the
    country, lenders are using the new TRID forms required by the
    CFPB for mortgage originations and refinancings. While I
    appreciate Director Cordray's promise that the implementation
    phase will not be punitive, I think legislation is still the
    only way to achieve that sense of certainty. So I continue to
    work with my colleagues.
        Are you able to share with us any firsthand accounts or
    data of how the risk of liability deriving from the new TRID
    forms is affecting lending or other loan variables in rural
    communities? We only have about 30 seconds.
        Ms. Wood. I can take that one. One of the things that
    happened with us when we--and I put that in my testimony. When
    we flipped the switch to the new forms, we had a glitch in the
    system. So we had to use the new forms. October 2nd we used the
    old forms. October 3rd we used the new forms. We dusted off the
    40-year-old typewriter that we had at the office and brought it
    out, and we are hand-inputting some of that information on the
    forms because the computer system just--it was a glitch. So
    that a lot more time is put into printing out a simple form
    than what it really should be.
        Senator Scott. Which only increases the likelihood of more
    human errors.
        Ms. Wood. Right.
        Senator Scott. So by default, you are having a harder
    workload and, frankly, as the president and CEO of a small
    institution, realizing the number of jobs that you mentioned
    earlier, it is like you are a one-armed paper hanger. God bless
    your soul.
        Mr. Foster. If I could just add to that real quick, we are
    just basically backlogging mortgage applications at this point
    because there are a number of bugs that we are still trying to
    work out. And so we are being ultra conservative, and we are
    not going to write the loan until we are confident that the
    bugs are fixed out and there are not going to be any glitches
    in the final paperwork.
        Senator Scott. Remarkable impact. Thank you, Chairman.
        Chairman Toomey. Thank you.
        Senator Donnelly.
        Senator Donnelly. Thank you, Mr. Chairman. I want to follow
    up on what my colleague Senator Scott, who is our partner in
    this effort in the TRID rules that we are looking at, and,
    again, to Mr. Foster and to Ms. Wood, because you had cited
    this in your testimony. We have heard similar concerns in my
    home State of Indiana about the additional challenges that this
    has caused. And so what would a good-faith grace period do to
    help you in the mortgage process? Mr. Foster, if you could talk
    to that, if you had a grace period for getting to the point
    where this process, instead of just landing on you, that you
    kind of eased into it.
        Mr. Foster. If I can just maybe make sure I understand your
    question. In terms of good faith in terms of the liability
    issue, is that the crux of your question?
        Senator Donnelly. Well, like a grace period where you look
    and you go, yeah, liability, everything else, 3 to 4 months you
    have a chance to learn this, to work with it, to get there
    without incurring any liability in the process.
        Mr. Foster. We are still relying on our vendors. That is
    our biggest fear right now, is in terms of the vendor
    applications. I mentioned in my testimony we are a couple weeks
    into this, and our vendor is on the fifth update trying to
    fix--and I looked at just the other day the litany of bugs in
    each update they are trying to fix. We are so dependent there.
    I hate to answer a question in the sense of--I mean, off the
    top of my head if we had, you know----
        Senator Donnelly. Would it make your life easier?
        Mr. Foster. Yes. The answer is yes, and a 3- to 6-month
    delay would be phenomenal.
        Senator Donnelly. Ms. Wood.
        Ms. Wood. And I agree. The longer that we can delay, with
    the grace period of TRID, you know, the better off that we will
    be. Like I said, we are manually typing stuff into forms
    because we do not--you know, our members want to purchase the
    home. They want to get their home equity. They have the home
    repairs that they need to do, college tuition, whatever it may
    be that they are doing their equity for. So we have to do that
    loan or, you know, we are not backlogging them. We want to be
    compliant. We want to do the right things. But we need some
    grace.
        Senator Donnelly. As part of your experience, when you look
    at this now, do you have a lot of homeowners who are not
    homeowners yet who are kind of in the queue, as you mentioned,
    that they want to get into the house, they want to buy the
    house, they want to complete everything, and you are just hung
    up right now?
        Ms. Wood. I think there have been a few cases of that. I
    cannot think of any specific examples right now.
        Senator Donnelly. OK.
        Mr. Foster. I would say we have just a few at this point.
        Senator Donnelly. OK. Going to a longer exam cycle, Mr.
    Porch, I have joined with our Chair, Senator Toomey, in
    legislation so that highly rated small financial institutions
    qualify for an 18-month onsite examination cycle instead of the
    usual 12-month cycle. This bill allows an increase from $500
    million to $1 billion for the asset threshold, and what I am
    wondering, Mr. Porch, is: If this is enacted, will that
    regulatory relief to your organization, would that make things
    simple for you? Would that make your operations easier? And
    would it also be able to save you money that you should not be
    wasting?
        Mr. Porch. Actually, it would not affect our bank because I
    think the--we are $250 million, and we are CAMELS 2. And so we
    are on an 18-month exam cycle.
        Senator Donnelly. OK. Is anybody here between that $500
    million to $1 billion?
        Mr. Foster. We are as well on an 18-month cycle currently.
        Senator Donnelly. OK. Well, if they had 500, they would
    need it.
        With that, Mr. Chairman, I will kick it back.
        Chairman Toomey. And we hope for a booming economy so they
    grow into that threshold.
        Well, I want to thank all of our witnesses for their
    testimony and for answering the questions we had. All Members
    will be able to submit additional written questions to each of
    the witnesses. Thank you very much for being here today.
        The hearing is adjourned.
        [Whereupon, at 11:17 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                       PREPARED STATEMENT OF TERRY FOSTER
     Executive Vice President and Chief Executive Officer, Mifflin County
     Savings Bank, Lewistown, Pennsylvania, on behalf of the Pennsylvania
                        Association of Community Bankers
                                October 28, 2015
        Chairman Toomey, Ranking Member Merkley, and Members of the
    Subcommittee, my name is Terry Foster. I serve as Executive Vice
    President and CEO of MCS Bank (Mifflin County Savings Bank), a $137
    million dollar asset bank headquartered in Lewistown, Pennsylvania. We
    are a State-chartered mutual savings bank, which was originally
    chartered in 1923 as Mifflin County Building and Loan Association. Our
    bank serves exclusively rural populations in the central part of the
    State, with a market area primarily defined as Mifflin, Snyder, and
    Huntingdon Counties. I have served in my current role at MCS Bank since
    2009, but I have served the bank in other capacities for the past
    twenty (20) years. I am a locally raised banker who grew up in a
    community long served by MCS Bank and my connection to the bank started
    many years earlier when I opened my first savings account in order to
    save monies I earned from a newspaper route and mowing lawns. In
    addition to my role at MCS Bank I also serve as the current Chairman of
    the Pennsylvania Association of Community Bankers (PACB) as well as
    serve on the Mutual Bank Council of the Independent Community Bankers
    of America (ICBA). I wish to thank you for convening today's hearing on
    ``The State of Rural Banking: Challenges and Consequences'' and
    providing me with the opportunity to testify.
        I wish to state that my testimony is based upon my own experiences
    and observations as a rural community banker, as well as from the
    perspectives of my fellow bank employees' dealings with our customers
    and stakeholders. Further, my testimony is from the perspective of a
    $137 million institution trying to preserve its ability to survive and
    maintain a presence in communities where local banking and service is
    so very important; I hope to be able to illustrate this last point with
    an example in my testimony.
        MCS Bank is headquartered in Lewistown, PA, the county seat of
    Mifflin County. The bank was originally formed as Mifflin County
    Building & Loan Association in 1923. In 1956, Mifflin County Building &
    Loan Association converted to Mifflin County Savings & Loan
    Association. In 1992 a final conversion occurred, creating Mifflin
    County Savings Bank (AKA MCS Bank). MCS Bank now operates five (5)
    full-service branches and one (1) loan operations office within the
    three-county market. Exclusive of our headquarters branch, the average
    size of our branch network is $12 million in assets. Within two (2)
    communities in which MCS Bank maintains branches, no other banking
    outlets exist. The Bank operates with a staff of forty-two (42) full
    and part-time employees, or 37 full-time-equivalent employees (FTEs).
        The bank's market is comprised of an approximate 1,600 square-miles
    area with a population density of eighty-one (81) residents/square
    mile. Median household income across the market is $43.7 thousand,
    which is lower than both our State and the national figures. The
    percentage of persons below the poverty level is in line with the State
    average and below the national average. Population growth in our market
    is historically low, and has been nearly flat in more recent years.
        By their nature, rural markets create unique efficiency challenges
    in terms of serving dispersed populations as compared to the more
    densely populated suburban and urban areas. The fact that MCS Bank, at
    just $137 million in assets, operates five (5) full-service branches to
    serve thinly served communities illustrates my point. Every dollar of
    cost rural institutions must incur to maintain compliance with new or
    heightened regulatory requirements disproportionately impact
    institution like mine.
        A unique population dynamic in our market, although not exclusive
    to us in the central part of Pennsylvania, but one that I feel is a
    perfect example of why it is critically important that independent
    community banks in rural markets survive, is the existence the unique
    populations that require unique servicing, in our case, the ``plain
    sect'' or Amish community.
        For those Subcommittee Members not familiar with the Amish and
    their unique traditions, they are a group of traditional Christian
    church fellowships of Anabaptist origins. The Amish live simple,
    agrarian existences, dress very plainly, avoid the use of most modern
    technologies, including electricity, telephones, automobiles, and
    modern banking conveniences, such as web banking, and more recently,
    mobile banking. In place of traveling by automobile, Amish travel by
    horse-drawn ``buggy''. Because of their social and religious
    conventions and aversion to technology, serving this demographic is
    difficult and it takes a keen, local understanding of this
    ``community'' to meet its members' needs; a community that will never
    be understood by banks headquartered in suburban or urban centers and
    whose needs are not a part of the equation when branch consolidation or
    closure decisions are being contemplated.
        Proof positive: in 2011, a large regional bank, serving a rural
    community in our market with a high concentration of Amish residents,
    shuttered a branch that long served that community. Over the years the
    branch had changed ownership through acquisitions by successively
    larger organizations. Ultimately, the branch, along with other branches
    in other rural communities, were closed as a result of the current
    bank's internal ``branch rationalization'' process that concluded that
    the subject branches would not be retained due to size and other
    factors. What we learned at the time, anecdotally, was that the bank
    was closing rural branches that were under $15 million in size. In
    comparison, MCS Bank's branch network averages $12 million in size. The
    loss of this branch was devastating to the community's residents and
    businesses, particularly to the Amish residents whose transportation
    limitations created an unusual hardship by forcing them to travel long
    distances to another community to do their banking at a branch to which
    their account servicing was transferred.
        In response to this community's loss, MCS Bank worked with
    community leaders and business owners to try to find a workable
    solution to allow the community to retain its banking outlet. After a
    lengthy process, numerous fact-finding community meetings and mail
    surveys, the Bank partnered with a member of the business community to
    build and open a 530 square-foot branch within a building supply/
    hardware store. Four years later, this branch, albeit very small, is
    thriving and supporting the community. To date, the bank has provided
    financing to the Amish community for such projects as the purchase of
    land for farm expansion and for the construction of a new retail store.
        The potential loss by this particular community is just one example
    of situations that are playing out in communities across the Nation. I
    believe very strongly that the community banking industry is
    experiencing consolidation, particularly in rural markets, at an
    accelerating rate, for a host of reasons, but one being escalating
    compliance-related cost and complexity. Yet another occurrence of
    branch consolidation is taking place this very month within our market,
    which will force customers of that bank to travel more than twenty (20)
    miles to the next closest bank branch.
        At MCS Bank, we now have six (6) of forty-two (42) employees who
    devote significant amounts of their routine workdays to compliance;
    from our Compliance Officer down to lenders and loan processors.
        I argue that a great deal of time and resources we are devoting
    toward our efforts to comply with the letter of the laws and
    regulations, their complexities and many inconsistencies, have had a
    detrimental impact on our ability to serve our customers with both
    products and service delivery.
        Has Dodd-Frank impacted the products our bank offers? Yes. Since
    the introduction of QM and Ability-To-Repay, MCS Bank has discontinued
    offering balloon loans. For us, the decision wasn't a matter of whether
    or not we have the latitude within the new rules to continue to offer
    this product, but rather it boiled down to a matter of resource
    allocation. With the volume of rules to interpret and implement, we
    simply had to decide on which products we were going to focus our
    attention. Because we historically originate fewer balloon loans in
    comparison to our other mortgage products, we opted to not create a new
    note and disclosures, under the new rules. Secondarily, we were
    concerned about the potential higher level of examination scrutiny.
        The required escalation of our compliance focus negatively impacts
    bank stakeholders such as community organizations, charities, etc.,
    which have historically been the beneficiaries of our philanthropic
    efforts, both monetarily and otherwise. The more time our people must
    devote to compliance matters is less time available for them to spend
    on volunteer and charitable endeavors. Increased regulatory costs also
    negatively impact the community by way of diverting financial resources
    away from community investment. As increased costs and other pressures
    work collectively to incentivize further consolidation, larger
    organizations with distant headquarters locations lack the appreciation
    and commitment to local needs in rural areas. I know from personal
    experience of such situations in our market. In a community into which
    we are contributing thousands of dollars annually in charitable
    donations and other types of community giving, a large regional bank,
    by comparison, is contributing very little. We have a branch manager in
    our community office who previously worked in the same capacity for the
    regional bank, whose office was allocated only $100.00 annually for
    community support.
        Are theories behind the consumer-focused regulations well intended?
    Absolutely! The notion of ``ability-to-repay'', as generally defined,
    has long been an underwriting practice of prudent community lenders,
    but the codification of such concepts into regulation is fraught with
    complexity, inconsistencies, and in some cases lacks logic. The
    unintended consequence is confusion for our people as they attempt to
    implement and administer new rules, which ultimately leads to human
    error, additional cost and potential examiner criticism, despite best
    efforts to do the right thing. I argue there are elements that have no
    meaningful benefit to consumers, and in fact create greater consumer
    confusion.
        To the issue of human error, consider the following example we
    experienced in a purchase-mortgage transaction:

        In the sale negotiation, the buyer agreed to pay the full
            transfer tax to the county authority. The loan processor, when
            preparing the early disclosures, overlooked this detail when
            reviewing the Sales Contract. As a result, the early disclosure
            was prepared, as is customary, with the buyer and seller paying
            one-half each of the transfer tax. This error, when discovered,
            was not a redisclosable event under (RESPA Reform of 2010);
            therefore we could not reissue a revised early disclose to
            correct the error. Consequently, we absorbed the cost of one-
            half of the transfer tax by compensating the buyer for an
            expense he fully intended pay as a part of the negotiated
            transaction. Under the new TILA-RESPA Integrated Disclosure
            (TRID) rules, there remains no latitude for us to rectify this
            type of mistake, thus forcing cost onto the bank as a result of
            simple human error.

        Because the timing of today's hearing coincides with our ongoing
    work to fully implement the rules promulgated by the TILA-RESPA
    Integrated Disclosure (TRID), which had an effective date of October 3,
    2015, I have included a TRID related example in my testimony:

        One (1) of two (2) definitions of a Business Day apply for
            disclosure purposes depending upon the nature of the disclosure
            (Initial or Revised Loan Estimate, or Closing Disclosure).

        Formatting differences exist between the Loan Estimate and
            Closing Disclosure documents.

          Estimated fees costs are required to be truncated on the
            Loan Estimate while they are required to be taken out to two
            (2) decimals on the Closing Disclosure (i.e., Estimated Taxes
            and Insurance must be disclosed as $xxx. on the Loan Estimate
            and as $xxx.xx on the Closing Disclosure, even when the
            estimates do not change from the time the Loan Estimate and
            Closing Disclosures are prepared and provided to the customer).

        The complexity involved in implementing TRID is taxing all parties
    involved. In our case, our third-party Loan Origination Software (LOS)
    provider's applications were not ready to go on October 3rd; therefore
    our testing protocols were delayed. If fact, as of Friday of last week,
    our loan origination software is on its fifth (5th) update, post
    October 3rd, to correct a host of technical issues. Despite the amount
    of training our lending and compliance staff has attended to be ready
    for the changes, we were still not fully prepared to go on day one,
    which in my estimation is a function of over complexity of, and
    inconsistencies within, the rules. Director Cordray acknowledged the
    delays some of the vendors are experiencing in readying their platforms
    to handle the new TRID rules. \1\
    ---------------------------------------------------------------------------
         \1\ ``ICBA Opposes CFPB Overdraft Data Request'' (2015, October).
    ICBA Independent Banker, p.11.
    ---------------------------------------------------------------------------
        As things stand now, in terms of product delivery, we are wrestling
    with whether or not the new rules will allow us to continue to offer
    single-closing construction loans when the customer chooses and
    adjustable-rate mortgage (ARM). Our compliance consultant with thirty
    (30) years of experience is of the opinion that the new disclosure
    rules do not accommodate a single-close construction loan that has a
    variable-rate during the construction period then converts to an ARM
    loan when the loan enters the postconstruction repayment phase. Single-
    close construction loans benefit consumers in terms of both time and
    cost. This inability to originate an ARM loan in this situation also
    reduces our ability to manage interest rate risk. In today's low-rate
    environment, this is most critical.
        As a small institution, not only do we rely on software vendors,
    but we also must rely on consultants for guidance and interpretations
    of the application of the rules. While working through TRID
    implementation and training, our compliance consultant cited instances
    in which requests to the CFPB staff for clarification have been met by
    being pointed back to the guidance. An example of this instance being
    the construction loan disclosure illustration previously cited.
        The CFPB order, issued in 2014, to financial institution data
    processors to provide client bank overdraft program system settings and
    overdraft activity, for analytical purposes, imposes a real cost to
    community banks. Our data processor, Fiserv Inc., responded to this
    order by stating, ``The request will impose significant expenses that
    will have to be passed to its bank clients.'' \2\ The financial
    institution themselves, not CFPB, bear the cost of the data processors
    efforts to comply with the CFPB request in order that the Bureau may
    ferret out practices tied to ``overdraft privilege programs'' that it
    perceives as wholly bad for consumers.
    ---------------------------------------------------------------------------
         \2\ Swanson, J. (2015, October 20). ``CFPB Warning: Cordray
    `Disturbed by Reports' of TRID Implementation'',
    (mortgagenewsdaily.com).
    ---------------------------------------------------------------------------
        At MCS Bank we've long held to a traditional approach to consumer
    overdrafts. Long ago our board and management team took a philosophical
    stance against ``overdraft privilege programs'' because we didn't want
    to create the perception with either regulators or customers that we
    encourage overdraft behavior for the sole sake of generating overdraft
    revenues. Our approach is simple: we work one-on-one with customers
    exhibiting overdraft behavior. We counsel those experiencing financial
    difficulty and attempt to provide assistance to redress the underlying
    issue. When we believe circumstances warrant closing an account and
    moving a customer to a more suitable account, we will do so.
        There are several important issues related to the CFPB's order to
    the financial services third-party core processors to provide the
    requested data, such issues as authority and due process under 1022 of
    Dodd-Frank. For our bank, the more basic issue is who ultimately bears
    the cost of compliance. Our data processor clearly has signaled it will
    pass the cost onto us; a cost that we will be forced to absorb.
    Unfortunately, we as an institution, and few other community bank
    institutions I know of, have never engaged in the type of behavior that
    gives the CFPB such concern.
        Flood map ``creep'' in recent years has exposed MCS Bank to
    reputation damage, an instance of a formal consumer complaint being
    lodged with the Pennsylvania Department of Banking and Securities and
    ultimately a lost customer.
        In 2013, a customer disputed a Flood Redetermination and refused to
    purchase flood insurance. The bank advised the customer of their need
    to obtain an elevation determination in order to potentially avoid the
    need for flood insurance. In the interim, the bank forced placed
    insurance on the property to ensure coverage is in-place within 45-days
    of our receipt of the redetermination notice. The subsequent elevation
    determination concluded that the customer's home was not in a flood
    zone and thus flood insurance was not required. The bank promptly
    canceled the force-placed flood insurance and refunded the unearned
    premiums returned by the insurer. The customer then demanded a refund
    of the entire premium because of the elevation-determination results.
    Not being satisfied with the reason for a partial refund, the customer
    filed a complaint against the bank with the Pennsylvania Department of
    Banking and Securities. A review by the Department concluded that the
    bank acted properly. As you might imagine, this borrower no longer does
    business with MCS Bank.
    Recommendations
        A number of bills have been introduced in the House and Senate that
    would provide significant relief from many of the concerns noted above:

        S.1711, introduced by Senators Tim Scott and Joe Donnelly,
            would provide a critical safe harbor from enforcement actions
            and private law suits for compliance errors arising from the
            implementation of the TRID rule, provided the lender has acted
            in good faith to implement and comply with the new rule. As
            with any new rule of this magnitude and complexity, before it
            went ``live'' on October 3, it was impossible for community
            banks and other stake holders to begin to identify problems and
            develop and implement solutions. This is particularly true
            because there was no opportunity under the new rule to comply
            early, testing systems in real time and under real
            circumstances. A safe harbor will allow mortgage closings to
            proceed apace without fear of enforcement and liability for
            minor errors.

        The Financial Regulatory Improvement Act (S.1484),
            introduced by Chairman Richard Shelby and marked up by this
            Committee in May, contains a number of provisions that would
            help community banks like mine better focus our resources on
            the communities we serve. For example, S.1484 would provide
            that any mortgage held in portfolio, including the balloon
            loans that play an important role in our local market, would be
            a ``qualified mortgage'' (QM), under the CFPB's ability-to-
            repay rule. The bill would also create an 18-month exam cycle
            and streamlined call reports for well-rated community banks
            with assets of less than $1 billion. These provisions would
            better reflect the significantly lower risk profile of
            community banks. S.1484 would require the Federal Housing
            Finance Agency to withdraw a proposed rule that would impose a
            mortgage lending test on Federal Home Loan Bank (FHLB) members.
            The FHFA proposal cuts against the grain of Congress' clearly
            expressed intention of expanding the mission and role of FHLBs
            beyond residential housing finance to supporting small and
            medium-sized businesses and other critical community needs.
            These are just a few of the more significant regulatory relief
            provisions of S.1848.

        S.970, introduced by Chairman Pat Toomey and Senator Joe
            Donnelly, would allow a highly rated bank (CAMELS 1 or 2) with
            assets of less than $1 billion to be examined on an 18-month
            rather than a 12-month cycle. S.970, which is identical to a
            provision of S.1484 noted above, would allow examiners to
            better target their resources at the true sources of systemic
            risk.

        The Community Lending Enhancement and Regulatory Relief Act
            of 2015 (the ``CLEAR Act'', S.812), introduced by Senators
            Jerry Moran and Jon Tester, would provide QM status for any
            mortgage held in portfolio and an exemption for loans held in
            portfolio from new escrow requirements for higher priced
            mortgages for any lender with less than $10 billion in assets.
            S.812 would also provide an exemption from internal control
            attestation requirements for community banks with assets of
            less than $1 billion.

        The Privacy Notice Modernization Act (S.423), introduced by
            Senators Jerry Moran and Heidi Heitkamp, would eliminate annual
            privacy notice mailings when an institution has not changed its
            privacy policies. These notices are costly, redundant, and a
            source of confusion to many customers.

        This is just a sampling of the legislation before this Committee
    that would provide meaningful regulatory relief for community banks,
    help stave off further industry consolidation, and ultimately benefit
    consumers, particularly in rural communities such as the ones that I
    serve.
        I thank you again for the opportunity to testify today and I hope
    that my comments are beneficial to the work of the Subcommittee.
        I am happy to answer any questions you may have.
                                     ______

                      PREPARED STATEMENT OF ROGER A. PORCH
           Vice President, First National Bank, Philip, South Dakota
                                October 28, 2015
        Chairman Toomey, Ranking Member Merkley, and Members of the
    Subcommittee, my name is Roger Porch and I am a Vice President at First
    National Bank in Philip, South Dakota. I would like to thank you for
    affording me the opportunity to appear before you to share some
    information about regulatory challenges faced by rural banks. My hope
    is we can find some regulatory relief that will help community banks
    across the country. More importantly, however, we hope we can--by
    making credit more readily available to those who live in rural areas--
    sustain our lifestyles and expand local economies. The area in which I
    live--western South Dakota--is highly reliant on agriculture and
    tourism, and we are doing well for the time being with some notable
    exceptions which I will touch upon later. But, we take nothing for
    granted and are pleased to be here this morning.
        My bank is headquartered in Philip, South Dakota, and we have one
    branch in Faith, South Dakota, located 85 miles to the north. You can
    see by that distance that our environment is one of sprawling prairies
    with miles between towns. We are a $250 million bank, and serve a large
    area of western South Dakota. We have customers as far west as Wyoming
    and south to Nebraska. First National Bank is privately owned, and has
    successfully served the needs of our trade area for over 100 years. We
    live by our motto, ``Partners in Banking''. Our principal scope of
    business is the financing of farmers and ranchers with lines of credit
    and real estate and machinery loans. Our bank is, and has been, well-
    managed. Perhaps this is presumptuous of me to say, but we like to
    think we know what we are doing. However, excessive, unfocused
    regulations are changing the way we do business.
        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 ability to meet local needs has not been easy with the
    increased regulatory costs and second-guessing by bank examiners.
    During the last decade, the regulatory burden for community banks has
    increased dramatically and it is no surprise that nearly 18 percent of
    community banks disappeared in that period.
        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 my testimony today I would like to make the following three
    points:

        Unnecessary regulatory burden limits banks' ability to
            serve their customers,

        These challenges have real costs for our banks and the
            communities they serve, and

        Commonsense solutions would help alleviate this burden.
    Unnecessary Regulatory Burden Limits Banks' Ability To Serve Their
            Communities
        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.
        Make no mistake about it, this burden is keenly felt by all banks,
    but particularly small banks that do not have as many resources to
    manage all the new regulations and the changes in existing ones. The
    role of community banks serving their rural communities has been placed
    in jeopardy by the broad array of new regulations. The Dodd-Frank Act
    alone has charged Federal financial regulators with writing and
    enforcing 398 new rules, resulting in at least 22,534 pages of proposed
    and final regulations, and that's with regulators only two-thirds of
    the way through the rulemaking process. Community banks are
    disproportionately affected by regulatory overkill since there is a
    small asset base over which to spread the costs. First National Bank
    spent $222,000 on regulatory expense which is 19 percent of overhead.
    Importantly, that doesn't include salaries. One could argue our total
    financial burden is 30 percent of overhead. We epitomize the rural
    community bank and our burden is noticeable. Regulation comes at a
    cost, most often to local economic growth, job creation, and community
    well-being.
    Overly Burdensome Mortgage Regulations Leave Customers Unserved
        National Bank does not make home loans. The avalanche of mortgage
    regulations is too complex and costly to comply with. The added cost
    and risk of making these loans is not something our bank can justify
    changing our long-standing policy. The economic life of rural America
    depends upon financial products and services only community banks
    provide. By forcing many community banks out of mortgage lending, there
    will be significant harm to the rural communities bankers are trying to
    serve.
    Examiner Understanding of Farm Lending Is Limited
        Our main scope of business is lending operating money to ranchers
    and farmers. Although we do use projected cash flows in our annual
    credit analyses, we consider ourselves equity lenders. We measure
    equity for each customer once a year. The problem is our examiners are
    accustomed to analyzing commercial businesses which are more reliant
    upon cash flow. Agriculture income is projected to fall by 36 percent
    this year, and we are already seeing livestock prices down by 24
    percent from last year. Our ag customers could see some erosion of
    equity and problems with cash flow. If we are required to rely on cash
    flow analysis, we could possibly find ourselves in the situation of not
    being able to loan operating money to a rancher even though the rancher
    may have equity in the millions simply because the cash flow is
    fluctuating due to dropping commodity prices. In the past, these loans
    have been made safely and successfully
    Uniform Overdraft Requirements Will Harm Rural Customers
        The Consumer Financial Protection Bureau (CFPB) is inquiring into
    overdraft procedures to determine how those practices are impacting
    consumers. First National Bank considers itself an ``ad hoc'' meaning
    we generally cover overdrafts rather than return checks. We are willing
    to assume that risk in most cases. However, we are being told that we
    should counsel those account holders that are routinely overdrawn. But,
    we don't know what counseling means and we don't know at what level
    counseling begins. Statistics show that 8 percent of account holders
    pay 75 percent of the charges, and the burden falls disproportionally
    on those between 18 and 25 years of age. Should regulations force us to
    close accounts, there would be many who wouldn't be able to own an
    account at a bank. First National Bank in Philip has voluntarily
    limited overdraft charges to five items per day in the hope that impact
    upon account holders be minimized. We don't want to close accounts and
    force people to pawn shops and pay day lenders. This is a perfect
    example of unintended consequences.
    The Bank Call Report Is Unnecessarily Burdensome
        Twenty-five years ago, the call report required by FFIEC was less
    than 10 pages long. Today, for our bank, it is 86 pages. Ironically,
    many of the pages are not applicable to us or other rural community
    banks.
    Nonbank Lenders Compete With Unjustified Competitive Advantages
        Competition from nonbank lenders is an ongoing problem. Farm Credit
    System (FCS) and credit unions enjoy special tax treatments giving
    these institutions a competitive advantage over banks. The special tax
    treatments were gifted to these nonbank lenders in order to encourage
    lending to certain groups of individuals. The advantages afforded to
    these institutions need to be reexamined and reduced in terms of tax
    exemptions and regulatory burden. For example, the FCS paid only 4.5
    percent tax rate last year while earning approximately $5 billion in
    net income. Why should multibillion dollar GSE lenders be exempted from
    taxation earned on their real estate and mortgage lending when
    competing to serve the same borrowers as much smaller community banks?
    Why were FCS institutions exempted from the burdens of the Dodd-Frank
    Act since the FCS also has authority to make residential mortgage loans
    in small rural towns to the same types of borrows community banks
    serve? Of great concern, we see the FCS's regulator allowing FCS
    institutions to venture into non-farm lending, although they were not
    created to serve both farm and non-farm customers.
        We are also very concerned about a new regulatory proposal to allow
    credit unions to dramatically increase their business lending.
        The increased business lending activity by both the credit unions
    and the FCS institutions will come at the expense of community banks
    which will lose loans to these institutions due to their tax
    exemptions. These institutions are all too happy to siphon away loans
    from community banks, but they strenuously refuse to pay taxes that are
    used to finance schools and other services necessary to keep America's
    communities viable.
    These Challenges Have Costs for Banks and the Communities They Serve
        While the situation is different for every bank, it should be
    helpful to examine specific financial burdens to our bank. The staff at
    First National Bank reviewed our records to determine the actual cost
    of regulation. Specifically, we have found that we spend over $222,000
    on compliance costs every year. This amounts to over 18 percent of our
    total overhead.
        Be mindful, this analysis doesn't include any personnel expense. We
    have 33 FTE's, and we assume that one could conclude four of them spend
    their time on studying, enforcing and analyzing regulations. The
    financial burden of unnecessary regulations is a struggle for all
    community banks.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Ultimately our customers and communities are the ones who feel the
    true cost of this burden. They feel it in the form of more expensive
    financial services and fewer options. For example 58 percent of banks
    have held off or canceled the launch of new products--designed to meet
    consumer demand--due to expected increases in regulatory costs or
    risks. Additionally, 44 percent of banks have been forced to reduce
    existing consumer products or services due to compliance or regulatory
    burden. This means less credit in our communities. Less credit means
    fewer jobs, lower income for workers, and less economic growth.
    Commonsense Solutions Would Help Banks Alleviate This Burden
        I believe my time in front of this Subcommittee would be wasted if
    some possible solutions weren't offered. However, I know enough about
    the legislative process to also know that if I suggested that CFPB be
    repealed entirely, my time would also be wasted. The current regulatory
    environment in which we live was created with good intentions. But, as
    with many good intentions, there are always unintended consequences.
    That, I believe, is the case we find ourselves in today. Below I note
    selected bills that would provide viable and effective solutions to
    many of the concerns I have noted in this testimony.
        The Community Lending Enhancement and Regulatory Relief Act of 2015
    (the ``CLEAR Act'', S.812), introduced by Senators Jerry Moran and Jon
    Tester, would provide qualified mortgage status for any mortgage held
    in portfolio and an exemption for loans held in portfolio from new
    escrow requirements for higher priced mortgages for any lender with
    less than $10 billion in assets. Like S.1816 (noted above), S.812 would
    provide an exemption from internal control attestation requirements for
    community banks with assets of less than $1 billion.
        Chairman Pat Toomey and Senator Joe Donnelly have introduced
    legislation (S.970) which would allow a highly rated bank (CAMELS 1 or
    2) with assets of less than $1 billion to be examined on an 18-month
    cycle. Under current statute and agency guidance, only a highly rated
    bank with assets of less than $500 million is allowed to use an 18-
    month exam cycle; all others are on a 12-month cycle. Preparations for
    bank exams, and the exams themselves, distract bank management from
    serving their communities to their full potential. S.970 is identical
    to a provision of S.1484 noted above.
        In addition to a longer exam cycle, we would request there be some
    directive given to bank examiners in the area of cash flow lending vs.
    equity and collateral based lending. As previously stated, First
    National Bank in Philip is an equity lender, and over our history, we
    have experienced few losses. At least, we would ask that examiners
    understand the uniqueness of farming and ranching and the difficulty in
    cash flowing with fluctuating grain and livestock prices.
        In addition to these bills, we hope that account overdrafts can be
    managed internally, especially for rural community banks. We know our
    customers' needs and don't want to be forced to close accounts because
    of excessive oversight.
        Call reports could be simplified to reflect a bank's business model
    and size. It seems unreasonable to assume that the same call report is
    needed for a $10 billion bank as a $250 million bank. One size does not
    fit all.
        This hearing is most likely not the time or place to take up the
    issue of Farm Credit System and credit unions, but the issue needs to
    be noted.
    Conclusion
        Credit will only remain available in rural America as long as local
    financial institutions remain healthy and viable. Local banks, many of
    which have been in business for generations, understand the risks
    associated with lending in rural areas. They are good at what they do.
    Now, many of them feel under assault by excessive regulations.
    Regulations that take the ``one size fits all'' approach don't
    understand the unique relation rural banks play in individuals' lives
    and communities.
        First National Bank in Philip recently hired a team of auditors to
    complete a Directors' exam. At the exit interview, the auditor stated
    that banks are more highly regulated than hospitals. I sit on the local
    hospital board and understand all too well how highly regulated
    hospitals are. To have someone who examines both state that banks are
    more regulated was an eye opener.
        We ask for regulation and oversight that is truly beneficial to
    rural consumers who rely on local banks for credit. The focus should be
    on enforcing existing laws rather than creating new rules and
    regulations that threaten banks' future existence. Rural banks can
    compete, but they can't compete while burdened with red tape and
    unnecessary, unfocused regulations. It's not fair to local banks and
    the communities that rely on them.
        At the end of the day, this isn't about banks. It's not about First
    National Bank in Philip. It is about people. It is about communities
    and lifestyles of those who populate rural America. We have a unique
    opportunity this morning to begin the process of effecting change which
    will truly help the residents of rural America.
        Thank you and I look forward to your questions.
                                     ______

                       PREPARED STATEMENT OF CARRIE WOOD
    President and Chief Executive Officer, Timberland Federal Credit Union,
                              DuBois, Pennsylvania
                                October 28, 2015
        Chairman Toomey, Ranking Member Merkley, Members of the
    Subcommittee: Thank you for the opportunity to testify at today's
    hearing. The Committee's continued focus on the regulatory burden
    facing small community financial institutions is critical.
        My name is Carrie Wood, and I am president and chief executive
    officer of Timberland FCU, a $60 million credit union located in
    DuBois, Pennsylvania. We serve 9,800 members, over three-quarters of
    which are low-income. The 15 full-time members of my staff and I work
    hard every day to help meet their financial service needs.
        As a CEO of a credit union serving a rural area, I am faced with
    the mile-wide, inch-deep dilemma that other credit unions and small
    banks face: I am forced to comply with many of the same regulations as
    the largest financial institutions, but with far fewer resources than
    the too-big-to-fail banks.
        While my title is CEO, I am also the security administrator, human
    resources department, compliance officer, marketing and business
    development department, backup IT person and NMLS administrator. To
    help me keep up with the changes in rules coming out of Washington, I
    have assigned a team of five staff, a full third of my total, from
    various departments across the credit union.
        When these team members are working on compliance issues, they are
    not serving our members. They're not helping them get loans. They're
    not providing financial counseling. They're not helping improve our
    processes and how we offer our services.
        The time and resources we spend complying with rules designed for
    bad actors and large institutions are unnecessary costs that rob our
    members of the services we could have provided them.
        Since the beginning of the financial crisis, credit unions have
    been subjected to at least 202 regulatory changes from nearly two dozen
    Federal agencies totaling more than 6,000 Federal Register pages. These
    numbers do not take into account regulatory changes that may emanate
    from State regulators. Every time a rule is changed credit unions and
    members incur costs--even if we are not ultimately required to comply
    with the rule. The credit union staff and board must make the time to
    understand the new requirement, modify our computer systems, update our
    internal processes, properly train staff on the compliance liability
    and new policies, design and print new forms and produce materials to
    help the credit union member understand the new requirement. Even
    simple changes in regulation cost credit unions thousands of dollars
    and many hours: time and resources that could be more appropriately
    spent on serving the needs of credit union members.
        Rules are often changed in the name of consumer protection, but
    when they make it harder or more expensive for me to serve my members,
    that's not consumer protection. Sometimes the new rules are difficult
    for us to decipher, and more so to explain and educate our members on
    the changes we are forced to make.
        Since the passage of the Dodd-Frank Act the sheer volume and
    complexity of the rules that we must comply have increased
    substantially, which means that I need to hire specialists in order to
    comply and keep the regulators from citing me for violations. One of
    the most recent demands is that NCUA would like me to have two
    technology specialists on staff to comply with cyber security
    requirements. As CEO, I above anyone, understand the importance of
    protecting my members, however, it can be very expensive and difficult
    to attract high quality personnel with the necessary experience because
    they are not always found locally, and they don't often want to give up
    urban life for rural living. A real-world issue that is not considered
    by my regulator.
        The constant churn of new regulatory requirements not only takes a
    hit on our bottom line--which for a not-for-profit institution directly
    affects our members and service--it also has kept us from entering new
    markets.
        Our members want us to offer small business loans, but we are
    hesitant because of the regulatory and statutory restrictions in place
    today.
        We also delayed our entry into indirect auto lending because the
    ongoing dilemma of who is going to oversee the program and administer
    the day-to-day, what compliance issues are there, when are we going to
    train for it, what procedures do we need, who will audit, what is NCUA
    going to be require in our policy and for a compliant program. We know
    these programs are on the regulators radar and have proceeded with
    caution. As a result, we find ourselves behind on meeting member
    demands, perhaps to the detriment of their credit, in the name of
    convenience.
        On top of that, the CFPB has added an entire new level of
    regulatory anxiety for my credit union and others like us. In the
    interest of time, I will raise an immediate issue we are facing related
    to the implementation of the TILA-RESPA Integrated Disclosure (TRID)
    forms. But rest assured there are many others.
        We have known TRID is coming down the pipe for some time and we
    have worked with our vendors to comply. TRID is a complicated rule and
    the CFPB provided us absolutely no transition time. One day we have to
    do things the way we've always done them; the next day, we were
    required to abruptly change and do things differently. No transition
    period. No enforcement delay. No protection from legal liability if we
    made a mistake. As a small institution, we rely on outside vendors on
    many things. With this particular change, we are vendor-dependent to
    ensure our data processing system pulls all the right information into
    the correct fields on the forms. When we ran into an unanticipated
    problem after we flipped the switch to the new form, we were forced to
    manually input information into the new forms, slowing down the process
    for our members and potentially exposing us to errors.
        I know the NCUA, which will supervise our compliance, has said that
    their examiners are going to exercise tolerance for a reasonable amount
    of time. But what I don't understand is why Congress will not protect
    us from legal liability as we work out the kinks in the system. We're
    trying to comply as we continue to serve our members, but I don't want
    to see our credit union hit with a lawsuit 3 or 5 years down the road
    because we made a mistake in the first few months of this new system.
        Despite the ever increasing regulatory burden, we continue to do
    what we can to help our members. And, in closing, let me tell you about
    a few of those services.
        When members open an account, we offer a free credit review. We are
    also working on having three current staff members receive their
    Certified Financial Counselor designation to have free, in-house credit
    counseling for our members.
        We participate in our State program called ``Better Choice'', which
    allows us to offer an alternative to pay day lending. For members to
    take advantage of this program, we require financial counseling and
    partner with our local Community Action to provide that counseling.
    Timberland FCU makes absolutely no money on this program; we offer it
    as a member service.
        Additionally, small, underwritten loans are pretty common here.
    Members request small loans to get fuel, payoff pay day lenders, buy an
    Amish mattress, among other things. I once did a loan for a man who
    just had his 5 granddaughters move back in with him because his
    daughter lost her job. He needed $200 because the girls had contracted
    a medical condition at school. He couldn't afford the treatments until
    his next social security check, and the girls couldn't go back to
    school until he took care of them. I've written car loans for members
    who've totaled their cars due to hitting a deer, and once, for a member
    who hit a horse. Public transportation is a struggle because we are so
    spread out. I drive 23 miles one way to work every day, but it only
    takes me \1/2\ hour. My members need a car, which makes expediency of
    these types of loans a must. The work we do at Timberland FCU--like the
    work credit unions across the country do--helps families stay in their
    homes, members hold their jobs, and children stay in school. We're a
    lifeline for our members.
        My members need their credit union to be in a position to help them
    in these situations. Unfortunately, every time a rule is created or
    modified it makes it much more difficult for us to be there when they
    need us.
        There is a reason that we are losing a credit union a day--and it's
    coming out of Washington in the form of ever-changing and ever-
    increasing regulatory burden. Again, your focus on the crisis facing
    small community financial institutions is critical, and I applaud your
    efforts.
        Thank you for the opportunity to testify.
                                     ______

                      PREPARED STATEMENT OF SARAH EDELMAN
             Director, Housing Policy, Center for American Progress
                                October 28, 2015
    Introduction
        Thank you, Chairman Toomey, Ranking Member Merkley, and Members of
    the Subcommittee for the invitation to appear before you today. My name
    is Sarah Edelman, and I am the Director of Housing Policy at the Center
    for American Progress. Thank you for holding a hearing on this
    important topic.*
    ---------------------------------------------------------------------------
        * This testimony is based primarily on an issue brief published
    earlier this year by the Center for American Progress about financial
    reform and community banking and recent testimony provided by the
    Center to the House Subcommittee on Economic Growth, Tax, and Capital
    Access. The full issue brief is attached: David Sanchez, Sarah Edelman,
    and Julia Gordon, ``Do Not Gut Financial Reform in the Name of Helping
    Small Banks'', Center for American Progress: July, 2015, available at
    https://www.americanprogress.org/issues/housing/report/2015/07/07/
    113119/do-not-gut-financial-reform-in-the-name-of-helping-small-banks/.
    For the testimony, see: Julia Gordon, Testimony before the U.S. House
    Committee on Small Business Subcommittee on Economic Growth, Tax, and
    Capital Access, ``Financing Main Street: How Dodd-Frank Is Crippling
    Small Lenders and Access to Capital'', September 17, 2015, available at
    http://smbiz.house.gov/uploadedfiles/9-17-2015_gordon__testimony.pdf.
    ---------------------------------------------------------------------------
        Consumers living in rural areas rely on community banks to meet
    their credit needs. These banks provide vital support to the small
    businesses, farmers, and homeowners that make rural economies function.
    However, for decades, the number of community banks serving these areas
    has been declining. \1\
    ---------------------------------------------------------------------------
         \1\ David Sanchez, Sarah Edelman, and Julia Gordon, ``Do Not Gut
    Financial Reform in the Name of Helping Small Banks'', Center for
    American Progress: July, 2015, available at https://
    www.americanprogress.org/issues/housing/report/2015/07/07/113119/do-
    not-gut-financial-reform-in-the-name-of-helping-small-banks/.
    ---------------------------------------------------------------------------
        This decline long precedes the financial reform measures put into
    place after the 2007 financial crisis. \2\ There are many reasons for
    this trend including slowing population growth in rural areas, changes
    in the financial market, and changes to interstate banking rules that
    made it easier for banks to consolidate.
    ---------------------------------------------------------------------------
         \2\ Ibid.
    ---------------------------------------------------------------------------
        I plan to make the following points in my testimony today:

        Many rural economies are in trouble. Community banks can,
            and should be, an important partner in revitalizing rural
            economies.

        Rolling back financial regulation is not the right approach
            to support community banks. Deregulation of the banking sector
            increases risk to the broader economy and to community banks.

        A comprehensive approach is needed to support rural
            communities and the banks that serve them.
    Community Banks Provide a Vital Source of Credit for Consumers Living
            in Rural Areas
        For many families living in rural areas, access to lending is
    severely limited. For generations, community banks have served as
    important partners to small businesses, family farms, and families
    seeking to buy or refinance a home. Often, the only source of credit
    for rural consumers is their local community bank. \3\ Approximately
    one out of every five counties in the United States is served
    exclusively by community banks--and three quarters of these counties
    are located in rural areas. \4\
    ---------------------------------------------------------------------------
         \3\ Federal Deposit Insurance Corporation, ``FDIC Community
    Banking Study'', December 2012, pp.3-5, available at https://
    www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf.
         \4\ Ibid, p.I.
    ---------------------------------------------------------------------------
        While community banks hold a diminishing share of the banking
    sector's total assets--14 percent in 2011, according to the FDIC--they
    continue to make nearly half of all small business and agricultural
    loans. \5\ Lending to small businesses and farmers remains a core part
    of the community bank business model, even as larger banks have shifted
    away from this type of lending.
    ---------------------------------------------------------------------------
         \5\ Ibid.
    ---------------------------------------------------------------------------
        In the wake of the recession, there is a great need for capital in
    rural communities. The small business and mortgage loans community
    lenders offer in rural communities will play an important role in
    supporting economic recovery and a recovery in the housing market. \6\
    Even as the broader housing market is recovering, some rural housing
    markets are seeing conditions further deteriorate. The percentage of
    mortgaged homes with negative equity in nonmetropolitan rural counties
    increased from an average of 11 percent in the second quarter of 2011
    to 20 percent in the first quarter of 2015. \7\
    ---------------------------------------------------------------------------
         \6\ Forthcoming, Michela Zonta and Sarah Edelman, ``The Uneven
    Housing Recovery'', Center for American Progress: October, 2015.
         \7\ Ibid.
    ---------------------------------------------------------------------------
        Without home equity, small business owners and entrepreneurs have
    fewer reserves to draw upon to make investments in their existing
    business or to start a new one. Through investing in local businesses,
    community banks can help to stimulate economic recovery in rural areas.
    Financial Reform Legislation Is Not Responsible for the Decline in the
            Number of Community Banks
        Despite the important role community banks \8\ play in counties
    across the country, the number of them has declined precipitously for
    over a generation. \9\ This 30-year decline has very little to do with
    postcrisis financial regulation. Factors causing the decline include an
    increasingly complex financial services sector where the size of the
    banking institution matters for profitability, economic challenges in
    the communities these banks tend to serve, and changes in interstate
    banking laws that make it easier for bank mergers and consolidation to
    take place.
    ---------------------------------------------------------------------------
         \8\ There is no one definition for a small or community bank, but
    many analysts use asset size, such as a threshold of $1 billion or
    less, to characterize such a bank. The FDIC uses a definition that
    takes into account a bank's lending and deposit-taking activities, as
    well as the geographic location of its branches. Through its
    definition, the FDIC eliminates certain specialty institutions and
    institutions that operate on more of a national scale. Source: David
    Sanchez, Sarah Edelman, and Julia Gordon, ``Do Not Gut Financial Reform
    in the Name of Helping Small Banks'', See also: Federal Deposit
    Insurance Corporation, ``FDIC Community Banking Study''.
         \9\ Federal Deposit Insurance Corporation, ``FDIC Community
    Banking Study''.
    ---------------------------------------------------------------------------
        The number of community banks has declined at a rate of about 300
    per year over the past 30 years, mostly through consolidation with
    other banks, according to the FDIC. \10\ This decline began far before
    the 2007 financial crisis and the subsequent Dodd-Frank Wall Street
    Reform and Consumer Protection Act. The decline has continued at about
    the same pace since regulators began implementing the law. \11\
    ---------------------------------------------------------------------------
         \10\ David Sanchez, Sarah Edelman, and Julia Gordon, ``Do Not Gut
    Financial Reform in the Name of Helping Small Banks''.
         \11\ Ibid.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The number of locally owned community banks has also declined,
    particularly in rural areas from approximately 80 percent in 1976 to
    approximately 20 percent in 2007. \12\
    ---------------------------------------------------------------------------
         \12\ C. M. Tolbert, ``Restructuring of Financial Industry:
    Disappearance of Locally Owned Traditional Financial Services in Rural
    America'', Rural Sociology 2014.
    ---------------------------------------------------------------------------
        While the number of bank offices operating outside of metropolitan
    areas appears to have been stable during the same period, the offices
    are typically owned by out-of-county or out-of-State banks which may be
    less likely to consider ``soft data'' when making loans, such as the
    applicant's reputation for financial responsibility within the
    community. \13\
    ---------------------------------------------------------------------------
         \13\ Ibid.
    ---------------------------------------------------------------------------
        Over the past 30 years, more than 80 percent of banks that have
    exited the market have not failed, but rather, have merged with an
    unaffiliated bank or consolidated with another chartered bank,
    sometimes within the same organization. \14\ Many banks took advantage
    of changes in interstate banking rules in the 1980s and 1990s to expand
    their scale and geographic footprint through mergers and
    consolidations. Others consolidated because they were at risk of
    failure. \15\
    ---------------------------------------------------------------------------
         \14\ David Sanchez, Sarah Edelman, and Julia Gordon, ``Do Not Gut
    Financial Reform in the Name of Helping Small Banks''.
         \15\ Federal Deposit Insurance Corporation, ``FDIC Community
    Banking Study'', pp.I-II.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Why are there fewer community banks now than there were in the
    1980s? First, the financial market has become more complex in recent
    decades. Large banks can benefit from the economies of scale that make
    certain operations more efficient, while small banks cannot. The
    Government Accountability Office, or GAO, has concluded that, ``larger
    banks generally are more profitable and efficient than smaller banks,
    which may reflect increasing returns to scale.'' \17\ These advantages
    are particularly evident in mortgage lending, where technology can make
    it much easier for a bank to make and service a loan. \18\
    ---------------------------------------------------------------------------
         \16\ Ron J. Feldman and Paul Schreck, ``Assessing Community Bank
    Consolidation'', Federal Reserve Bank of Minneapolis, February 6, 2014,
    available at https://www.minneapolisfed.org/research/economic-policy-
    papers/assessing-community-bank-consolidation.
         \17\ U.S. Government and Accountability Office, ``Community Banks
    and Credit Unions: Impact of the Dodd-Frank Act Depends Largely on
    Future Rule Makings'', September 2012, p.10, available at http://
    www.gao.gov/assets/650/648210.pdf.
         \18\ Dr. Adam J. Levitin, Testimony before the U.S. House
    Committee on Financial Services, ``Preserving Consumer Choice and
    Financial Independence'', March 18, 2015, available at http://
    financialservices.house.gov/uploadedfiles/hhrg-114-ba00-wstate-
    alevitin-20150318.pdf.
    ---------------------------------------------------------------------------
        Community banks are also victim to the population loss and economic
    challenges afflicting rural communities. For example, 86 percent of
    rural counties in the Great Plains experienced population loss between
    1980 and 2010. \19\ As jobs become more concentrated in metropolitan
    areas, many young people are leaving rural areas for these job centers.
    \20\ Further, employment in urban centers has generally recovered more
    quickly than in rural areas, and rural workers earn about 20 percent
    less than those in urban areas. \21\ Unlike a larger bank that may have
    branches across many types of geographies, a community bank may be more
    vulnerable in the case of a local economic downturn or if its local
    customer base declines.
    ---------------------------------------------------------------------------
         \19\ Federal Deposit Insurance Corporation, ``FDIC Community
    Banking Study'', pp.3-8.
         \20\ CAP calculation of U.S. Census Bureau 2000-2010, ``County
    Business Patterns''; and, ``Federal Deposit Insurance Corporation'',
    ``FDIC Community Banking Study'', pp.3-8.
         \21\ U.S. Department of Agriculture Economic Research Service,
    ``Employment & Education'', available at http://www.ers.usda.gov/
    topics/rural-economy-population/employment-education.aspx.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Finally, it is true that smaller institutions may have a more
    difficult time managing the cost of complying with regulation, as the
    resources required to report to State and Federal regulators require a
    greater share of the bank's resources. However, many of these
    compliance costs long precede the Dodd-Frank Wall Street Reform Act. As
    described in greater detail below, regulators have been very careful to
    make sure community banks have the flexibility they need to meet the
    new financial regulatory requirements.
        Despite all of the challenges described above, community banks have
    performed relatively well in recent years. Both smaller and larger
    community banks originated a larger share and number of home purchase
    mortgages today than they did in 2010. \22\ Last year, community banks
    increased their lending volume at almost twice the rate of larger
    banks. \23\ Data from the FDIC also show that the performance and
    financial health of community banks has experienced consistent
    improvement over the past 5 years. \24\
    ---------------------------------------------------------------------------
         \22\ Center for American Progress analysis of Home Mortgage
    Disclosure Act, or HMDA, data for owner-occupied, 1-4 unit home
    purchase mortgages for 2010 and 2013. Community banks are identified
    using the FDIC's definition; smaller community banks are those with
    less than $1 billion in assets. See Consumer Financial Protection
    Bureau, ``The Home Mortgage Disclosure Act'', available at http://
    www.consumerfinance.gov/hmda/explore (last accessed May 2015); Federal
    Deposit Insurance Corporation, ``Community Banking Reference Data'',
    available at https://www.fdic.gov/regulations/resources/cbi/data.html
    (last accessed June 2015).
         \23\ Kate Davidson, ``Dodd-Frank's Effect on Small Banks Is
    Muted'', The Wall Street Journal, October 4, 2015, available at http://
    www.wsj.com/articles/dodd-franks-effect-on-small-banks-is-muted-
    1443993212.
         \24\ Federal Deposit Insurance Corporation, ``Quarterly Banking
    Profile: Second Quarter 2015'', available at https://www.fdic.gov/bank/
    analytical/quarterly/2015_vol9_3/FDIC_2Q2015_v9n3.pdf.
    ---------------------------------------------------------------------------
    Gutting Financial Reform Would Do Little To Help Community Banks and
            May Further Undermine Community Banks
        Policymakers should continue to monitor the implementation of
    financial regulatory requirements to ensure that compliance is as
    simple as possible. However, undermining financial reform in the name
    of helping small banks in rural areas is not the right approach.
    Returning to precrisis regulatory standards would ultimately put more
    banks at risk of failure.
        Most of the bank failures that have occurred over the past 30 years
    have occurred during a financial or economic crisis. \25\ Community
    banks are no exception to this trend and have had failure rates
    comparable to other types of banks. \26\ According to Richard Brown,
    the former chief economist of the FDIC, ``To the extent that future
    crises can be avoided or mitigated, bank failures should contribute
    much less to future consolidation.'' \27\
    ---------------------------------------------------------------------------
         \25\ Richard Brown, Testimony to the U.S. Senate Committee on
    Banking, Housing, and Urban Affairs, ``Lessons Learned From the
    Financial Crisis Regarding Community Banks'', June, 13, 2013, available
    at http://www.banking.senate.gov/public/
    index.cfm?FuseAction=Files.View&FileStore_id=9a223606-f64b-4a72-9874-
    b4886f2f9f2b.
         \26\ The FDIC Community Banking Research Project, ``Community
    Banking by the Numbers'', presentation at the FDIC Future of Community
    Banking Conference, February 12, 2012, slide 15, available at https://
    www.fdic.gov/news/conferences/communitybanking/
    community_banking_by_the_numbers_clean.pdf.
         \27\ Richard Brown, Testimony to the U.S. Senate Committee on
    Banking, Housing, and Urban Affairs, p.4.
    ---------------------------------------------------------------------------
        The Great Recession negatively impacted the community banking
    sector. While generally community banks did not engage in the type of
    predatory residential mortgage lending that brought down larger banks,
    many community banks also failed in the wake of the financial crisis.
    During the bubble years, some community banks aggressively expanded
    their commercial lending, often in the form of construction loans. When
    the financial crisis and subsequent recession caused home prices to
    decline, these banks suffered crippling losses and many failed. \28\
    Between 2008 and 2011, 419 of the 481 depository banks that failed were
    small banks. \29\
    ---------------------------------------------------------------------------
         \28\ Federal Deposit Insurance Corporation, ``FDIC Community
    Banking Study''.
         \29\ Richard Brown, Testimony to the U.S. Senate Committee on
    Banking, Housing, and Urban Affairs, p.1.
    ---------------------------------------------------------------------------
        The long-term health of community banking depends on a healthy
    economy and a stable financial market. Strong regulation helps banks of
    all sizes establish a sturdy foundation and will help prevent future
    financial crises, and the loss of more community banks.
        Moreover, regulators have already taken steps to ensure that
    community banks are able to continue lending in a safe way. Recognizing
    that community banks may need more flexibility to serve rural and
    nonmetropolitan markets, regulators have already provided small banks
    with a series of exemptions from the new mortgage rules:

        Small banks have greater underwriting flexibility when
            making Qualified Mortgage, or QM, loans--those that are
            eligible for the highest level of protection from legal
            challenges--because if small banks hold the loans on portfolio,
            they are not bound to the fixed debt-to-income ratio limit that
            applies to larger lenders. \30\
    ---------------------------------------------------------------------------
         \30\ Consumer Financial Protection Bureau, ``Ability-To-Repay and
    Qualified Mortgage Rule: Small Entity Compliance Guide'' (2013),
    Section 4.3, available at http://files.consumerfinance.gov/f/
    201308_cfpb_atr-qm-implementation-guide_final.pdf.

        Small institutions serving rural or underserved areas can
            get QM protection for loans that require a balloon payment,
            although the general QM definition bans balloon loans. \31\
    ---------------------------------------------------------------------------
         \31\ Consumer Financial Protection Bureau, ``Ability-To-Repay and
    Qualified Mortgage Rule: Small Entity Compliance Guide'', Section
    4.6.2.

        The CFPB recently expanded the definition of small
            institutions, as well as the rural definition, so that more
            banks now qualify for a variety of mortgage rule exemptions,
            including more flexibility to make QM loans. \32\ Under the new
            definitions, roughly 93 percent of all institutions engaged in
            mortgage lending are eligible for these exemptions. \33\
    ---------------------------------------------------------------------------
         \32\ Consumer Financial Protection Bureau, ``CFPB Issues Proposal
    To Facilitate Access To Credit in Rural and Underserved Areas'', Press
    release, January 29, 2015, available at http://www.consumerfinance.gov/
    newsroom/cfpb-issues-proposal-to-facilitate-access-to-credit-in-rural-
    and-underserved-areas/.
         \33\ Consumer Financial Protection Bureau, ``Amendments Relating
    to Small Creditors and Rural or Underserved Areas Under the Truth in
    Lending Act (Regulation Z)'' (2015), available at http://
    files.consumerfinance.gov/f/201501_cfpb_amendments-relating-to-small-
    creditors-and-rural-or-underserved-areas.pdf.

        Small institutions serving rural or underserved areas are
            exempt from requirements that they maintain escrow accounts for
            higher-cost loans. \34\
    ---------------------------------------------------------------------------
         \34\ Consumer Financial Protection Bureau, ``TILA Higher Priced
    Mortgage Loans (HPML) Escrow Rule: Small Entity Compliance Guide''
    (2014), Section 4, available at http://files.consumerfinance.gov/f/
    201401_cfpb_tila-hpml-escrow_compliance-guide.pdf.

        Small creditors are exempt from most mortgage-servicing
            rules. \35\
    ---------------------------------------------------------------------------
         \35\ Consumer Financial Protection Bureau, ``2013 Real Estate
    Settlement Procedures Act (Regulation X) and Truth in Lending Act
    (Regulation Z) Mortgage Servicing Final Rules: Small Entity Compliance
    Guide'' (2013), Section 3, available at http://
    files.consumerfinance.gov/f/201306_cfpb_compliance-guide_2013-mortgage-
    servicing-rules.pdf.

        An array of mission-oriented lenders, such as Community
            Development Financial Institutions and State housing finance
            agencies, are fully exempt from the entire CFPB Ability-To-
            Repay requirement. \36\
    ---------------------------------------------------------------------------
         \36\ Consumer Financial Protection Bureau, ``Ability-To-Repay and
    Qualified Mortgage Rule: Small Entity Compliance Guide'', Section 3.13.

        There are also various opportunities for small banks to weigh in
    with regulators about the regulatory process. The CFPB, the FDIC and
    the Federal Reserve have all formed community bank advisory councils
    since the financial crisis. Moreover, the CFPB has to permit small
    businesses, including community banks, to weigh in on rulemaking
    efforts before proposed rules are released for public comment. The
    voices of community banks are well represented and regulators continue
    to be responsive to their concerns.
        These exemptions may actually help to make community banks more
    competitive relative to larger banks serving the same communities.
    Rolling back regulations for bigger institutions in the name of helping
    small banks may erode this competitive advantage while exposing all
    banks to greater risk of failure.
    A More Sensible Approach
        Instead of pursuing sweeping deregulatory legislation that will do
    little to help small banks, policymakers should take a more
    comprehensive approach.
        First, regulators are the best positioned to work with community
    banks to help ensure that regulatory compliance is as simple and
    straightforward as possible. As new regulations are fully implemented,
    the CFPB, FDIC, and other regulators should continue to communicate
    with small banks and to monitor for any challenges that may arise. To
    the extent the data suggest specific policy changes that can help
    community banks address compliance costs without weakening consumer
    protections or endangering their safety and soundness, policymakers
    should pursue these reforms in a targeted and careful way. Otherwise,
    rolling back financial regulation will simply expose consumers,
    communities, or our banking system to greater risk.
        More attention should also be directed toward helping community
    banks upgrade technological systems. Improved technology could help
    bring down compliance costs and reduce the cost of lending in the long
    run. The recent CFPB e-closing pilot provided helpful learning about
    ways technology can be used to improve efficiency and generate savings
    for consumers and banks alike. \37\ More research is needed to identify
    best practices among community banks and ways the Government may be
    able to support technological innovation among community banks.
    ---------------------------------------------------------------------------
         \37\ Consumer Financial Protection Bureau, ``CFPB Study Finds
    Electronic Mortgage Closings Can Benefit Customers'', Press release,
    August 5, 2015, available at http://www.consumerfinance.gov/newsroom/
    cfpb-study-finds-electronic-mortgage-closings-can-benefit-consumers/.
    ---------------------------------------------------------------------------
        Finally, the Federal Government has served as an important partner
    to rural communities and community banks over the years. Lending
    programs through the United States Department of Agriculture, or USDA,
    and Small Business Administration, or SBA, help to ensure that the
    credit needs of rural businesses and homeowners are met. \38\ In
    addition to these lending programs, both agencies can partner with
    community banks to help them serve their communities. While Congress
    has said it will fully fund critical lending programs in the coming
    year, lawmakers have proposed serious cuts to the agencies responsible
    for administering them. \39\ Undermining the capacity of USDA and SBA
    to manage these programs is a bad idea for consumers in rural areas as
    well as for taxpayers. These agencies should be fully funded to help
    ensure that lending programs are available for prospective homeowners
    and small businesses in rural communities.
    ---------------------------------------------------------------------------
         \38\ The White House Council of Economic Advisors, ``Strengthening
    the Rural Economy--Growing New Businesses in Rural America'', available
    at https://www.whitehouse.gov/administration/eop/cea/factsheets-
    reports/strengthening-the-rural-economy/growing-new-businesses-in-
    rural-america.
         \39\ Agriculture, Rural Development, Food and Drug Administration,
    and Related Agencies Appropriations Bill, 2016, H. Rept. 205, 114 Cong.
    1 Sess. June 14, 2015, available at https://www.congress.gov/114/crpt/
    hrpt205/CRPT-114hrpt205.pdf; Agriculture, Rural Development, Food and
    Drug Administration, and Related Agencies Appropriations Bill, 2016, S.
    Rept. 82, 114 Cong. 1 Sess. July 16, 2015, available at https://
    www.congress.gov/114/crpt/srpt82/CRPT-114srpt82.pdf; Financial Services
    and General Government Appropriations Bill, 2016, H. Rept. 194. 114
    Cong. 1 Sess. July 9, 2015, available at https://www.congress.gov/114/
    crpt/hrpt194/CRPT-114hrpt194.pdf; and, Financial Services and General
    Government Appropriations Bill, 2016, S. Rept. 97. 114 Cong. 1 Sess.
    July 30, 2015, available at https://www.congress.gov/114/crpt/srpt97/
    CRPT-114srpt97.pdf.
    ---------------------------------------------------------------------------
        The Federal Housing Finance Agency can also take steps to support
    more lending in rural areas. The FHFA is currently working to finalize
    the proposed duty to serve rule, a rule mandated by the Housing and
    Economic Recovery Act of 2008 that requires Fannie Mae and Freddie Mac
    to help ensure that the credit needs of underserved and rural markets
    are met. \40\ FHFA should encourage Fannie Mae and Freddie Mac to work
    more with community lenders in rural areas and to help design products
    that meet the needs of consumers in rural communities.
    ---------------------------------------------------------------------------
         \40\ ``Duty To Serve Underserved Markets for Enterprises'',
    Advanced Notice of Proposed Rulemaking, Federal Housing Finance Agency,
    12 CFR. Part 1282, available at http://www.gpo.gov/fdsys/pkg/FR-2009-
    08-04/pdf/E9-18515.pdf.
    ---------------------------------------------------------------------------
    Conclusion
        Community banks play an important role in rural communities. Over
    the last generation, there has been a significant decline in the number
    of these banks. Changes in the underlying market are largely
    responsible for their decline. However, in recent years the community
    banks that are serving rural communities have become stronger and are
    doing more consumer lending. Going forward, regulators and Federal
    agencies should continue to partner with community banks to help them
    revitalize local economies.
            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                           FROM TERRY FOSTER

    Q.1. In the Dodd-Frank Act, Congress directed the Federal
    Deposit Insurance Corporation (FDIC) to change how it
    calculates deposit insurance assessments. At the time, the
    Independent Community Bankers of America (ICBA) estimated that
    the change would save community banks $4.5 billion in just the
    first 3 years the change was in effect. Could you estimate how
    much your institution has saved in total assessments because of
    this change?

    A.1. For assessment periods September 30, 2011, through June
    30, 2015, MCS Bank paid BIF premiums of $340,000. In
    comparison, using an assumed* premium rate for future periods
    had the Domestic Deposit basis for premium assessments remained
    in place, estimated premiums would have been $522,000, or
    $182,000 higher than what they are under the current assessment
    model.
    ---------------------------------------------------------------------------
        * The ``assumed'' premium rate is MCS Bank's average BIF assessment
    rate for the prior thirteen (13) quarters (beginning with the 3/31/2008
    assessment period) during which the Bank paid BIF premiums.
        Prior to 3/31/2008, MCS Bank, based upon its risk profile, was only
    subject to the FICO Assessment and thus did NOT pay BIF premiums.
        Despite the ``reduction'' of premiums which resulted from the Dodd-
    Frank Act, BIF premiums remain high from a historical perspective,
    representing eight basis points of pretax earnings/average assets.

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                          FROM ROGER A. PORCH

    Q.1. In the Dodd-Frank Act, Congress directed the Federal
    Deposit Insurance Corporation (FDIC) to change how it
    calculates deposit insurance assessments. At the time, the
    Independent Community Bankers of America (ICBA) estimated that
    the change would save community banks $4.5 billion in just the
    first 3 years the change was in effect. \1\ Could you estimate
    how much your institution has saved in total assessments
    because of this change?
    ---------------------------------------------------------------------------
         \1\ http://www.icba.org/files/ICBASites/PDFs/
    FinalBillDepositInsurance.pdf

    A.1.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                  Additional Material Supplied for the Record
                      CHARTS SUBMITTED BY CHAIRMAN TOOMEY

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      SUMMARY OF THE DEMOCRATIC ALTERNATIVE TO THE ``FINANCIAL REGULATORY
             IMPROVEMENT ACT OF 2015'' SUBMITTED BY SENATOR MERKLEY

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        LETTER SUBMITTED BY JIM NUSSLE, PRESIDENT AND CEO, CREDIT UNION
                              NATIONAL ASSOCIATION

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]