[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.
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    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\
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     \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.



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    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\
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     \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.
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    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.
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     \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.


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    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\
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     \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.
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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\
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     \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.
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    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\
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     \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\
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     \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.
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     \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/. 
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    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.
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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.
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    * 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?
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     \1\ http://www.icba.org/files/ICBASites/PDFs/
FinalBillDepositInsurance.pdf

A.1. 

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              Additional Material Supplied for the Record
                  CHARTS SUBMITTED BY CHAIRMAN TOOMEY


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


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



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