[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]





                      ENDING THE DE NOVO DROUGHT:
                      EXAMINING THE APPLICATION
                         PROCESS FOR DE NOVO
                         FINANCIAL INSTITUTIONS

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 21, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 115-7









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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                 BLAINE LUETKEMEYER, Missouri, Chairman

KEITH J. ROTHFUS, Pennsylvania,      WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida              NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina     AL GREEN, Texas
ANDY BARR, Kentucky                  KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado               MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas                DENNY HECK, Washington
MIA LOVE, Utah                       GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York




























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 21, 2017...............................................     1
Appendix:
    March 21, 2017...............................................    47

                               WITNESSES
                        Tuesday, March 21, 2017

Burgess, Kenneth L., Chairman, FirstCapital Bank of Texas, on 
  behalf of the American Bankers Association (ABA)...............     5
Edelman, Sarah, Director of Housing Finance, Center for American 
  Progress.......................................................    10
Kennedy, Patrick J., Jr., Managing Partner, Kennedy Sutherland 
  LLP, on behalf of the Subchapter S Bank Association............     8
Stone, Keith, President and Chief Executive Officer, The Finest 
  Federal Credit Union, on behalf of the National Association of 
  Federally-Insured Credit Unions (NAFCU)........................     7

                                APPENDIX

Prepared statements:
    Burgess, Kenneth L...........................................    48
    Edelman, Sarah...............................................    59
    Kennedy, Patrick J., Jr......................................    70
    Stone, Keith.................................................    74

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Written statement of the American Financial Services 
      Association................................................    98
    Written statement of the Independent Community Bankers of 
      America....................................................   102
Barr, Hon. Andy:
    Chart entitled, ``Correlation of De Novo Bank Formation and 
      Interest Rates.............................................   104
Ellison, Hon. Keith:
    Slides.......................................................   105
    Written statement of the American Bankers Association, the 
      Community Development Bankers Association, the Independent 
      Community Bankers of America, and the National Bankers 
      Association................................................   107
Love, Hon. Mia:
    Written statement of the National Association of Industrial 
      Bankers, the Nevada Bankers Association, and the Utah 
      Bankers Association........................................   109

 
                      ENDING THE DE NOVO DROUGHT:
                       EXAMINING THE APPLICATION
                         PROCESS FOR DE NOVO
                         FINANCIAL INSTITUTIONS

                              ----------                              


                        Tuesday, March 21, 2017

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Members present: Representatives Luetkemeyer, Rothfus, 
Royce, Ross, Pittenger, Barr, Tipton, Williams, Love, Trott, 
Loudermilk, Kustoff, Tenney; Clay, Maloney, Scott, Velazquez, 
Green, Ellison, Heck, and Crist.
    Ex officio present: Representative Hensarling.
    Chairman Luetkemeyer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Ending the De Novo Drought: 
Examining the Application Process for De Novo Financial 
Institutions.''
    Before we begin, I would like to thank the witnesses for 
appearing today. We appreciate your participation and look 
forward to a robust conversation.
    I will now recognize myself for 3 minutes for an opening 
statement.
    Banking isn't what it used to be, according to Ernest 
Patrikis, a 30-year veteran of the Federal Reserve. In a 2015 
interview with CNNMoney regarding the lack of de novo charters, 
Mr. Patrikis added that the Dodd-Frank Act was like football 
players jumping on top of the pile.
    Unfortunately, Mr. Patrikis was right, banking isn't what 
it used to be. My father spent his adult life working as a 
community banker in our town of 300 people. I got into the 
business before I was a teenager collecting deposits at our 
front door since we didn't have a night deposit at our local 
bank. After college, I spent 2 years as a State bank examiner 
before I came back home to work in the bank for the next 35 
years, and I have seen lots and lots of changes in the 
landscape since then.
    Today, the de novo application process is managed in some 
cases by overzealous examiners paralyzed by the fear of making 
mistakes. Banks and credit unions fortunate enough to make it 
through the chartering process then face an unmanageable 
regulatory onslaught. It is not surprising that I hear too many 
lenders lament that they wouldn't encourage their children to 
follow in their footsteps.
    From 2000 to 2008, there were more than 1,300 de novo bank 
charters granted and 75 new credit union charters. Let's 
compare that to a post-Dodd-Frank world. From 2010 to 2016, 
there were just 5 new bank charters and 16 new credit union 
charters. And since 2010, more than 2,000 charters have 
disappeared.
    Thankfully, we have seen an uptick in the number of de novo 
charters since President Trump took office. According to recent 
data compiled by The Wall Street Journal, there have been eight 
de novo bank applications in the past few months alone.
    From Connecticut to California, it seems that de novo 
financial institutions are beginning to stage a modest 
comeback. Perhaps this is because, for the first time in a long 
time, people have confidence in the economy and see a path 
forward with more responsible regulation.
    Today's hearing will serve to examine the causes of the de 
novo drought stemming from both the application process itself 
and the regulatory environment for banks and credit unions 
alike. Over the next 2 years, this subcommittee will devote its 
time to pursuing financial reform that benefits Main Street, 
that fosters choice and accessibility in the financial 
marketplace, and that puts all Americans on a path to financial 
independence.
    But the simple truth is that we can't do that without banks 
and credit unions. We have an excellent panel of witnesses 
today, some of whom are in the midst of or have recently gone 
through the chartering process. I know your insights will be 
most valuable to the members of the subcommittee.
    With that, the Chair now recognizes the ranking member of 
the subcommittee, the gentleman from Missouri, my good friend, 
Mr. Clay, for 5 minutes for an opening statement.
    Mr. Clay. Thank you, Mr. Chairman.
    And I guess I will use the analogy that we see things 
differently sometimes. When you see a half glass of water, some 
people see it as half full; others see it as half empty. But 
since the financial crisis there have been relatively few de 
novo or new bank and credit union charters.
    I have long supported community financial institutions, as 
they are the best institutions to finance our Nation's small 
businesses and meet the financial needs of everyday Americans. 
However, I am concerned that the proposed fix that my 
colleagues want would only make the future of community banks 
and credit unions much bleaker.
    New charters of financial institutions are not just 
affected by financial regulation, but also existing economic 
conditions, including the level of interest rates and the 
lingering effects of the financial crisis and the ongoing 
consolidation of the banking industry, which began more than 30 
years ago.
    In fact, by rolling back merger and concentration limits 
for the largest banks, as the Financial CHOICE Act proposes, 
Republicans would likely accelerate the decline of the 
community bank.
    What is also frustrating is that the Majority continues to 
suggest that the Dodd-Frank Act is harming community banks, 
credit unions, and business lending. And yet, business lending 
is up 75 percent since Dodd-Frank. Imagine that.
    In addition, most of Dodd-Frank's bank rules impose new 
requirements on community bank competitors, the megabanks and 
nonbanks, thereby helping level the playing field. As a result, 
it is not surprising that small banks are posting record 
profits and credit unions are expanding membership.
    It is my hope that the witnesses today will comment not 
just on ways to improve the de novo chartering process, but 
also on what the future of community banking would be if the 
reins are taken off of megabanks and nonbank lenders.
    I yield back.
    Chairman Luetkemeyer. I recognize the gentleman from 
Tennessee, Mr. Kustoff, for 1 minute.
    Mr. Kustoff. Thank you very much.
    I would like to thank the chairman and the ranking member 
for holding this hearing today to discuss the importance of de 
novo financial institutions to the banking industry. And I do 
want to thank the witnesses for joining us today in this 
discussion.
    Over the last 6 years, we have seen a dramatic decline in 
de novo charter applications. In fact, there have been 5 new 
bank and 16 new credit union charters issued since 2010. If you 
compare that to the 8 years prior to the implementation of 
Dodd-Frank, the numbers are staggering, because during that 
time we saw over 1,300 bank applications and 75 credit union 
charters issued in those 8 years prior to Dodd-Frank.
    I am looking forward today to hearing from all of you about 
your experiences. I want to read a quote from a banker in my 
district, in Gibson County, which is in rural west Tennessee.
    He said, ``Dodd-Frank has had a direct cost to our 
community bank of at least $100,000 per year, not including 
additional salaries and benefits for support people to monitor 
and to make sure we are in compliance. Another $25,000 has been 
spent making sure our auditors are keeping us in compliance. 
Dodd-Frank has taken away much of the essence of allowing us to 
serve our communities.''
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, we will recognize the gentleman from Michigan, 
Mr. Trott, for 1 minute, if he is ready.
    Mr. Trott. Thank you, Mr. Chairman. And thank you for 
holding this hearing today.
    When I travel around my district, I hear from small bankers 
every time who are worried about their future. And these are 
not fat cats from Wall Street with big expense accounts; these 
are people who likely sponsor your child's little league team, 
give you a loan for your first home, help the new sandwich shop 
open up, or set up a bank account that helps you save for 
college.
    They worry because they see their peers disappearing by the 
hundreds each day. They see their profits flow into negative 
territory and wonder if they will be next. Their small-business 
clients wonder if the bigger bank that took over the previous 
lender will give them the same chance.
    Mr. Chairman, when I come to Washington, it almost feels 
like a different world. I read reports by people in this town 
saying that our regulators make it easier for small banks to 
thrive. I don't think I have found anyone in southeast Michigan 
who believes this.
    I have spent the past few weeks speaking with bankers in 
southeast Michigan. They say in the past, they would have 
needed a few million dollars in assets to be profitable. Now, 
they can barely hope to become profitable until they have a 
billion dollars in assets. This is too high. No new banks are 
likely to start if they know they need to reach this height.
    I see my time is over. But, Mr. Chairman, we need our small 
banks. We also need regulations. However, regulations must be 
smart. I yield back the balance of my time.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, opening statements are over, and we want to 
welcome our guests.
    First, we have Mr. Ken Burgess, the chairman of 
FirstCapital Bank of Texas, who is testifying on behalf of the 
American Bankers Association.
    Second, we have Mr. Keith Stone, the president and chief 
executive officer of The Finest Federal Credit Union, who is 
testifying on behalf of the National Association of Federally-
Insured Credit Unions. I am sure it is a wonderful credit 
union, if it is the finest one.
    Next, we have Mr. Patrick Kennedy, a managing partner of 
Kennedy Sutherland LLP, who is testifying on behalf of the 
Subchapter S Bank Association.
    And finally, we have Ms. Sarah Edelman, the director of 
housing finance at the Center for American Progress.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Before we hear testimony, I would like to yield to the 
gentleman from Texas, Mr. Williams, for an introduction. 
Without objection, the gentleman from Texas is recognized.
    Mr. Williams. Thank you, Mr. Chairman.
    It is always a pleasure to introduce a fellow Texan to 
testify before our subcommittee, even if he did go to Texas 
Tech instead of TCU.
    Ken Burgess went to work for the original First National 
Bank of Midland after graduating from Texas Tech, moving to 
Waco in 1985, where he served as executive vice president of 
Texas National Bank of Waco.
    In 1993, Mr. Burgess and his family moved to Abilene, where 
he took the position of president of Security State Bank of 
Abilene. Upon the sale of the bank in 1998, Mr. Burgess left to 
form the First National Bank of Midland, now known as the 
FirstCapital Bank of Texas. The bank presently stands at $993 
million in assets.
    In addition to his role at FirstCapital, Mr. Burgess serves 
as Chair-elect of the American Bankers Association, having 
previously served as chairman of the Community Bankers Council. 
He also is the most recent past chairman of the Texas Bankers 
Association.
    So to say the least, we are honored that you are here 
today, and we look forward to hearing your unique experience 
and perspective on the current trends and challenges facing new 
bank formation.
    So with that, Mr. Chairman, I proudly yield back.
    Chairman Luetkemeyer. I would now like to take a moment of 
personal privilege. In the audience today is a former president 
of the Missouri Bankers Association, my State, Mr. Dan Robb, 
and his wife Diana.
    Raise your hand, Dan.
    And I understand that this is also sort of a fly-in day for 
a lot of the other bankers around the country. So do we have 
any other bankers in the audience? I see a few name tags of 
those who may be bankers. If you wouldn't mind holding your 
hands up? The whole back row, cheap seats, all right. Great.
    Welcome, thank you very much. We welcome your 
participation. And hopefully you can keep the cheering down in 
the back of the room back there just in case. But it is great 
to have you, and we welcome you.
    With that, we want to open up the testimony with Mr. 
Burgess.
    Mr. Burgess, you are recognized for 5 minutes.

STATEMENT OF KENNETH L. BURGESS, CHAIRMAN, FIRSTCAPITAL BANK OF 
   TEXAS, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA)

    Mr. Burgess. Thank you, Mr. Chairman.
    Chairman Luetkemeyer and Ranking Member Clay, my name is 
Ken Burgess, and I am chairman of the FirstCapital Bank of 
Texas. My bank was chartered in 1998, and in less than 20 years 
we have grown our assets to just over $1 billion. We serve the 
Midland, Lubbock, and Amarillo markets in west Texas, as well 
as a new market in central Texas near the Austin area. We are 
primarily a commercial bank lending to small businesses, and we 
also have a strong mortgage lending arm.
    ABA appreciates the opportunity to testify on the drought 
of new bank charters. The lack of de novo banks is strong 
evidence that the economics for new community banks doesn't 
work. Investors have options. If the impediments to starting a 
new bank are too great, they will invest elsewhere.
    Sadly, the forces that have acted to stop new bank charters 
are the same ones that have led to the dramatic consolidation 
of the banking industry: excessive and complex regulations that 
are not tailored to the risks of specific institutions. This, 
not the local economic conditions, is often the tipping point 
that drives small banks to merge with one another and is a 
barrier to entry for new banks.
    Since the Dodd-Frank Act was enacted in 2010, community 
banks have shown great resilience and have worked to provide 
credit in spite of the onslaught of new regulations. The fact 
that they continue to lend and strive for profitability in no 
way suggests that the Dodd-Frank Act and its 25,000 pages of 
proposed and final rules has not had a negative impact on 
banks' customers and their communities. It has had an impact.
    While not the sole reason, it is very troubling that 1,917 
banks, or about 24 percent of the industry, have disappeared 
since Dodd-Frank was enacted. Contrast that with only six de 
novo banks since Dodd-Frank.
    In April, the FDIC announced some welcome changes to help 
prospective de novos. Unfortunately, they did not address the 
underlying barriers to entry: capital hurdles; unreasonable 
regulatory expectations on directors; funding constraints; and 
an inflexible regulatory infrastructure.
    When my bank was started, we raised $6.5 million to 
capitalize the bank. The expectation for de novos now is 
somewhere between $20 million and $30 million, many multiples 
beyond what successful banks needed in the past for a startup.
    For my bank, the $6.5 million was an amount we felt we 
could grow into in a reasonable period of time, which would 
allow us to provide a reasonable return to our shareholders and 
grow the bank in a safe and sound manner.
    As we grew, we raised additional capital 6 different times 
to keep the bank adequately capitalized, but we were careful 
not to overcapitalize. Had we raised it all in the beginning, 
shareholders would have been unhappy and would not have been 
willing to invest more when the time came and that capital was 
needed for growth.
    I would not start a bank under today's conditions. Even 
though with my experience, I could likely raise the funds 
necessary, I would have to grow the bank so quickly to put the 
capital to work that it would pose undue risk on our 
shareholders.
    Starting a new bank in a small community would be even more 
difficult. It would be very hard to raise capital and 
impossible to grow the bank quickly enough to utilize that 
capital.
    Moreover, with all the regulations, a highly experienced 
compliance officer is needed. Yet, good compliance officers now 
easily make six figures, far more than what the highest paid 
staff member receives in most small community banks. This makes 
it very hard to start and run a profitable bank.
    It is time to think differently to encourage new banks by 
requiring less startup capital, reducing regulatory burden, 
permitting greater flexibility in business plans, and lifting 
funding restrictions.
    I grew up in a banking family. My father managed three 
small community banks in west Texas. From childhood, I saw the 
impact that a small town community bank has on its community. 
They are involved in or behind almost every initiative, they 
support almost every nonprofit, and they support the small 
businesses in those communities like no other bank can. When a 
small community loses its bank, it quickly begins to die.
    We urge Congress to act now and pass legislation to help 
turn the tide of community bank consolidation, to create an 
economic environment that encourages new bank charters, and to 
protect communities from losing a key partner to support 
economic growth.
    Thank you. I would be glad to answer any questions when the 
time comes.
    [The prepared statement of Mr. Burgess can be found on page 
48 of the appendix.]
    Chairman Luetkemeyer. Thank you.
    With that, we recognize Mr. Stone for 5 minutes.

    STATEMENT OF KEITH STONE, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, THE FINEST FEDERAL CREDIT UNION, ON BEHALF OF THE 
NATIONAL ASSOCIATION OF FEDERALLY-INSURED CREDIT UNIONS (NAFCU)

    Mr. Stone. Good afternoon, Chairman Luetkemeyer, Ranking 
Member Clay, and members of the subcommittee. My name is Keith 
Stone, and I am testifying today on behalf of NAFCU. I 
appreciate the opportunity to share with you my experience with 
chartering a new credit union.
    I currently serve as the president and CEO of The Finest 
Federal Credit Union, headquartered in New York City. The 
Finest's charter was approved in January of 2015 to serve the 
needs of New York State's law enforcement community. We 
currently have $5 million in assets and serve over 2,400 
members.
    The idea for the Finest Federal Credit Union came from Mr. 
Paul McCormack, a retired NYPD deputy inspector. In his 
travels, he was introduced to officials from Saint Raphaels 
Garda Credit Union, the largest credit union in Ireland. Mr. 
McCormack was intrigued and amazed at the services offered by 
this cooperative, which led him to ask the question: Why 
doesn't the world's largest police force, the NYPD, have their 
own credit union tailor made to fit their own unique needs?
    In 2007, Paul and several other organizers went to work 
trying to find a way to fund the venture. After more than a 
year of research and organizing, it became apparent that the 
financial crisis of 2008 scared away the would-be capital 
sources, so their efforts were put on hold.
    A few years later, AmTrust Financial Services announced its 
interest in helping fund our credit union launch. Once funding 
was secured, we went to work drafting the application and 
business plan and finally submitted them to NCUA. This process 
lasted over 18 months.
    As we learned, chartering a credit union is not quick or 
easy. The process involves 17 steps that I outlined in my 
written testimony. The entire process can take up to 3 years, 
depending on the complexity of the business model and how many 
amendments must be made.
    While we were fortunate to have support, the initial 
capital infusion and cash outlays to start a credit union are 
often too great for many communities. Starting a new credit 
union is essentially an altruistic endeavor as there is no 
ultimate financial incentive for those who are successful.
    Furthermore, the complex chartering process may seem 
relatively easy and straightforward when compared to what a de 
novo credit union will face once it is chartered and operating. 
The industry has seen a significant decline in the pace of de 
novo credit unions post-Dodd-Frank enactment, averaging nearly 
eight charters per year before but only about two afterwards. 
Approximately one-third of credit union charters established in 
recent years have not survived.
    Despite the challenges, we have been successful at The 
Finest due to some key factors, including our commitment to 
keep the underlying goal in focus, to provide specific help and 
services to the officers of the NYPD through all stages of 
life, and our ability to secure a financial supporter in 
AmTrust Financial Services to help fund the chartering effort.
    Even after securing funding, we continued to face a number 
of challenges, such as the significant cost needed to run day-
to-day operations and keep up with the ever-changing post-Dodd-
Frank regulatory environment and limitations in our current 
powers that deny us the ability to fully serve our member needs 
by offering expanded products, such as mortgages.
    While NCUA is an important partner, and their Office of 
Consumer Protection takes an active role in helping new credit 
unions form, there are additional steps that they can take to 
help de novo charters meet their unique challenges. The agency 
could establish timetables for responses at various stages of 
the chartering process and set an advocate at the agency for de 
novo credit unions to work with. NCUA could also provide 
limited flexibility on a case-by-case basis for new credit 
unions, such as additional time to meet certain requirements or 
faster approval for additional services.
    Congress can also help de novo charters by passing 
meaningful and comprehensive regulatory relief, including 
providing credit unions greater relief from some of the burdens 
in the Dodd-Frank Act and by adopting more flexibility in the 
Federal Credit Union Act, such as expanding access to 
supplemental capital, ability to serve underserved areas, and 
modernizing outdated governance provisions in the Act.
    In conclusion, chartering a new credit union is not an easy 
process, and de novo credit unions face a series of challenges 
once they are created. Still, new credit unions are an 
important way to meet the unmet needs of the American financial 
consumer. Both Congress and the regulators need to do more to 
help reverse the declining trend of new charters.
    We thank you for the opportunity to share our thoughts with 
you today. I welcome any questions you may have.
    [The prepared statement of Mr. Stone can be found on page 
74 of the appendix.]
    Chairman Luetkemeyer. Thank you.
    Mr. Kennedy, you are now recognized for 5 minutes.

STATEMENT OF PATRICK J. KENNEDY, JR., MANAGING PARTNER, KENNEDY 
 SUTHERLAND LLP, ON BEHALF OF THE SUBCHAPTER S BANK ASSOCIATION

    Mr. Kennedy. Mr. Chairman, Ranking Member Clay, and members 
of the subcommittee, my name is Patrick J. Kennedy, Jr., and I 
want to thank you for inviting me to appear at this hearing and 
to submit written testimony.
    I have been a practicing lawyer for 30-plus years 
representing community banks, their shareholders, directors, 
officers, and related entities on a wide range of corporate 
regulatory matters. And over those years, together with my 
various partners, our firm has represented over 30 de novo 
charter groups, and we are today honored to be representing a 
group of Florida businessmen who have filed the first national 
bank charter in the United States since 2008.
    I also am president and founder of the Subchapter S Bank 
Association, which is primarily an educational organization 
which provides substantive advice and content to shareholders, 
directors, and officers of banks that have elected Subchapter S 
tax treatment under the Internal Revenue Code.
    There are over 2,000 banks in the United States which 
maintain that S election, accounting for approximately a third 
of the charters in the United States. Ninety percent of these 
Sub S banks are under a billion dollars in total assets, and 90 
percent of that number are located in rural communities.
    In 2008, there were 101 applications for new bank charter 
insurance filed with the FDIC, of which 28 were approved. 
Thirty-three were filed in 2009, but none were approved. The 
filings dropped to 6 in 2010 and a total of 10 from 2011 
through June 30, 2016, with only 3 charters being approved in 
that period of time.
    In my opinion, the reasons for the significant decline of 
new bank charters is a direct result of the decision made by 
the FDIC in 2009 to require that applicants for FDIC insurance 
provide a 7-year business plan, evidence of capital sufficient 
to maintain a comfortable cushion above that of the required 
minimums for that entire period of time, and in addition 
mandated that the initial conditions and enhanced supervisory 
monitoring imposed on new charters would also be extended from 
the traditional 3 years to 7 years.
    One of the many conditions that the FDIC imposed was 
requiring prior approval of any change or deviation in the 
business plan, and the FDIC began imposing similar conditions 
on just changes in control of existing banks. These had a 
significantly negative impact.
    The regulatory oversight and examination processes post-
2008 also created additional capital and regulatory pressures, 
and informal capital ratios were increased 1 to 2 percent, even 
for well and good operating banks. Clearly, the enactment of 
Dodd-Frank unleashed a new plethora of requirements and costs 
on banks and led to further significant increases in cost.
    And in June of 2012, the Federal regulators imposed the 
Basel III international capital standard on every bank in the 
United States, sending really another tremor through the 
industry, and we began to immediately notice a significant 
shift in our bank clients' attitude. Many began to believe that 
they would be unable to continue to operate or only do so in a 
marginally profitable way, if at all.
    In response to the chairman's specific request, these added 
costs occasioned by Dodd-Frank, Basel III, and the 
discretionary supervisory action significantly impaired 
existing financial institutions' ability to provide financial 
services and products to consumers.
    In the past few years, we have heard regulators explain the 
lack of new charters as a result of low interest rates and the 
expectation that charters would not be viable; however, in my 
opinion, the 7-year business plan and compliance period was the 
most significant reason.
    At the urging of many in the industry, the FDIC began to 
change these discretionary regulations. In 2004, they reduced 
the business plan from a 7- to a 3-year period, but there was 
still confusion in the marketplace. In April of 2016, the 
chairman clearly eliminated and returned to the 3-year business 
plan capital period, and I think that is the reason we see the 
number of charters beginning to increase.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Kennedy can be found on page 
70 of the appendix.]
    Chairman Luetkemeyer. Thank you.
    Ms. Edelman, you are now recognized for 5 minutes.

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

    Ms. Edelman. Thank you.
    Good afternoon, Chairman Luetkemeyer, Ranking Member Clay, 
and members of the subcommittee. My name is Sarah Edelman, and 
I direct the Housing Policy Program at the Center for American 
Progress. Thanks so much for having me here to testify today. 
And thank you for your interest in ensuring a robust community 
banking sector that serves all communities.
    A family or a small business should be able to build a 
strong relationship with their community bank or credit union 
whether they live in a downtown commercial center, a 
neighborhood suffering from disinvestment, or a small town. 
However, watering down the FDIC requirements for new banks is 
not likely to help Americans better meet their credit needs 
over the long term.
    The decline in de novo banks since the financial crisis has 
far more to do with macroeconomic conditions than the FDIC 
application process or higher standards for banks. Researchers 
at the Federal Reserve found that macroeconomic conditions, 
including interest rates, account for over two-thirds of the 
recent decline in de novo applications.
    Since the financial crisis, interest rates have been at 
historic lows. While necessary for helping consumers and 
businesses and for creating jobs, low interest rates have made 
it harder for new banks to be profitable. This is because a 
community bank's primary source of revenue is derived from net 
interest margin revenue, basically the spread between what a 
bank pays to fund a loan versus the interest rate the borrower 
pays to the bank.
    Lower interest rates narrow the spread, which means the 
bank earns less. While existing banks can earn higher profits 
on loans they originated when interest rates were higher, new 
banks can't bolster earnings through legacy loans.
    It is true that the FDIC made changes to its application 
process for de novo banks during the financial crisis. In 2009, 
the FDIC lengthened the period of supervision it requires for 
new banks from 3 years to 7 years. This change came amid 
widespread bank failures and hard economic conditions.
    By the end of 2009, the FDIC insurance fund had fallen into 
the red by $20.9 billion. FDIC research shows that during the 
crisis, newly formed de novo banks failed at twice the rate of 
existing small banks. It makes sense then that the FDIC would 
have required additional supervision during a new bank's early 
years.
    However, in 2016, as conditions improved, the FDIC reduced 
its supervision period back to 3 years. The FDIC is also making 
the application process more transparent and easier to 
understand, including through clearer guidelines for applicants 
and a series of local roundtables.
    If we care about making sure that families and businesses 
have access to credit, we should address factors that have more 
directly led to the decline in the number of small community 
banks over the years. For instance, members of the relevant 
committees in Congress and regulators should make it their 
full-time job to ensure that the Nation never endures another 
devastating financial crisis.
    According to FDIC data, between 1985 and 2013, over 2,500 
banks and thrifts failed. Ninety-seven percent of these 
failures took place during a financial crisis, either during 
the savings and loan crisis or during the recent global 
financial crisis. Put simply, the Nation has lost too many 
small banks to financial crises caused by the big banks.
    In 2010, Congress enacted financial reform to prevent the 
large banks from taking down community banks and our economy 
again. Despite the claims of some banking industry 
representatives, these standards do not appear to be hurting 
the health of community banks. First, community banks enjoy 
large exemptions from the new standards. For instance, they 
aren't subject to CFPB enforcement, stress testing, or many of 
the new mortgage rules.
    Moreover, community bank profits are up, back to where they 
were before the financial crisis. Business lending has 
increased since the passage of Dodd-Frank. Small communities 
banks are doing more mortgage lending than they were before the 
crisis.
    Lowering FDIC standards for new banks, or deregulating Wall 
Street, as some Members of Congress have proposed, is not 
likely to help community banks over the long term or aspiring 
small de novos.
    One immediate step Congress can take to strengthen small 
banks and credit unions is to ensure that community development 
financial institutions serving their communities are properly 
funded. I believe my copanelists share my disappointment with 
the President's proposal last week to eliminate the CDFI Fund, 
which funds hundreds of CDFIs across the country and generated 
over $4 billion in lending in 2013. Congress can take an 
important step towards serving Main Street by making sure CDFIs 
can continue serving communities often overlooked by larger 
institutions.
    Thank you for your time.
    [The prepared statement of Ms. Edelman can be found on page 
59 of the appendix.]
    Chairman Luetkemeyer. Thank you.
    I will now recognize myself for 5 minutes for questions.
    Mr. Kennedy, I want to start with you. You are in the midst 
right now, I understand, of working with a bank with regards to 
getting a new charter. Is that correct?
    Mr. Kennedy. Yes, Mr. Chairman.
    Chairman Luetkemeyer. And when you were talking about your 
testimony there, you had over 30 of these banks that you worked 
with before, so you have a lot of background, a lot of 
experience on it. And you are saying that in 2010, I believe it 
was, there were 30-some that applied for a charter--maybe it 
was 2009--and none were approved. Can you tell me why none were 
approved?
    Mr. Kennedy. I don't know. The Chair of the FDIC was 
testifying in July before the House Oversight Committee, and 
the FDIC produced the statistics that I drew from. And it just 
was very clear, you could see a dramatic decline. And I 
pinpoint that as the change that I referred to in 2009 that the 
FDIC made to their rules.
    Chairman Luetkemeyer. I think one of the concerns that we 
have--and this is why the subcommittee is having the hearing 
today--is we saw prior to 2008 about 150 bank charters and a 
number of credit union charters as well, and then after that it 
seemed like it fell off the charts.
    And I think, Mr. Burgess, you alluded to the fact that 
there is a lot of--you made the comment that the economics 
don't work. So apparently there were a lot of folks who looked 
at the economics of putting together multimillion-dollar 
businesses here and it wasn't going to pay back. So can you 
elaborate a little bit on what you were talking about there?
    Mr. Burgess. I know probably a number of you grew up in 
small towns like I did. And if you look at a startup 
organization, in our case we started with $6.5 million, and 
about 6 employees. I took a large cut in salary from a bigger 
bank I came from to do that, and I was making less than 
$100,000.
    Today, if I was going to start a new bank, I would have to 
hire a compliance officer who would make over $100,000, and the 
economics do not work when you have to put a salary in at that 
level to get started with a bank that doesn't really have any 
assets on the books. It also takes probably in the neighborhood 
of $750,000 in upfront costs to go through the application 
process before you even have any revenues.
    Chairman Luetkemeyer. So what you are pointing out is that 
you have a lot of compliance costs, a lot of rules and 
regulations you have to comply to that cause you to spend more 
money than had previously been done prior to 2008. Therefore, 
the economics of it have changed significantly. Is that a fair 
statement?
    Mr. Burgess. That is a fair statement.
    Chairman Luetkemeyer. And that your business model has 
changed significantly as a result of all the rules and 
regulations.
    Can you point to a particular rule or regulation or group 
of rules or regulations that are problematic for you, very 
costly?
    Mr. Burgess. I can point to a number of rules and 
regulations that are problematic. But I think it is the 
accumulation of rule after rule after rule. And if you have a 
bank that has six or seven employees in it when you start out 
and they have to get their arms around all of the rules and 
regulations that were in place before that, and now you have 
25,000 pages of new regulations, you can imagine, even if you 
have a highly experienced compliance person, trying to get your 
arms around that, number one, training all the employees to 
make sure that they can meet a zero-tolerance compliance policy 
in many cases is almost impossible. We are human beings. That 
is pretty tough.
    Chairman Luetkemeyer. Thank you, Mr. Burgess.
    Mr. Stone, you were shaking your head a minute ago when I 
was talking about rules and regulations.
    Mr. Stone. Yes, sir.
    Chairman Luetkemeyer. Do you have a lot of experience with 
that?
    Mr. Stone. Mr. Chairman, I concur with a lot of what Mr. 
Burgess said. We started with $2 million in capital. We are now 
a $5 million institution. I was actually speaking yesterday--I 
was at NASCUS, which are credit union State controllers, and 
they recommend that you need to start with at least $5 million.
    We have the same difficulties. I have a staff of four full-
time, and two part-time people. We have the income expense 
conundrum. We have the regulatory burdens. And I couldn't agree 
more, my BSA officer is also my compliance officer, and my 
chief operating officer.
    And to be able to keep up with salaries of a small staff--
in addition to lack of income right now, because due to certain 
regulatory concerns we are not allowed to offer certain 
products right now which would bring in the income which would 
help grow our credit union.
    So it is a catch-22. We want to grow, we want to add 
services, but we can't because of certain restrictions right 
now we have on us with a letter of understanding and agreement 
from the NCUA, and with the regulatory burden, and that is 
stopping us from growing, from adding these products.
    Chairman Luetkemeyer. You made the comment about relieving 
the burden of Dodd-Frank. I have almost no time here. Can you 
just very quickly--
    Mr. Stone. That is correct, sir, Dodd-Frank regulations--
    Chairman Luetkemeyer. Okay. My time has expired.
    I will recognize the gentleman from Missouri, the ranking 
member of the subcommittee, Mr. Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    Let me thank the witnesses for their testimony today and 
your answers.
    Ms. Edelman, your fellow panelists are suggesting that de 
novo bank and credit union charters are experiencing a current 
drought as a result of Dodd-Frank protections intended to 
prevent another financial crisis and harm to consumers. 
However, I understand the Federal Reserve staff has done 
research showing that de novo applications tend to closely 
track interest rates.
    You have also done research showing that there has also 
been considerable consolidation in the banking industry long 
before Dodd-Frank.
    Would you please elaborate on these factors, the role the 
interest rate environment may play, along with the very long 
industry consolidation trend, and any other factors and how 
they affect de novo bank and credit union charters?
    Ms. Edelman. Sure. Thanks for the question.
    Community banks have been having challenges over the past 
several decades. And most recently what we have been seeing 
with the lack of de novo charter applications, research from 
the Federal Reserve has shown that new bank charters are highly 
correlated to interest rate levels. And so when interest rate 
levels have been low over the decades, you have seen fewer bank 
charter applications.
    They also found that since the financial crisis, not only 
have we seen a decline in de novo charters, but we have also 
seen a decline in the number of new bank branches that are 
opened by existing banks, pointing out that there is something 
else going on than just the FDIC de novo process, because those 
existing banks don't have to go through the de novo process. So 
there are some macroeconomic factors that seem to have made it 
less attractive to investors to invest in new banks.
    And in terms of consolidation since the mid-1980s, we have 
seen--as I mentioned in my testimony, most of the small banks 
that we have lost or seen periods of massive consolidation have 
happened around the financial crisis, so right after the 
savings and loan crisis or right after the global financial 
crisis that was triggered in 2008.
    We also saw things like liberalization of interstate 
banking rules in the 1980s and 1990s that made it far more 
attractive to consolidate than to open up a new bank.
    So there are all sorts of reasons why we have been seeing a 
decline.
    One other thing to point out is that when small banks are 
doing well, oftentimes they grow into midsized banks, like Mr. 
Burgess' bank. So 20 percent of the banks that had less than 
$100 in million assets in 1985 had grown to be midsized 
community banks by 2011, and some of them even have over $10 
billion in assets.
    So it is a more complicated picture than simply saying it 
is the FDIC's fault or it is Dodd-Frank's fault.
    Mr. Clay. And thank you for that.
    Mr. Burgess, it is my understanding that your community 
bank has been in existence for nearly 20 years. You have 
weathered both the pop of the tech bubble and the financial 
crisis. As a result of both of those downturns, many community 
banks, including a large proportion of de novo banks, failed.
    It is also my understanding that de novo banks fail in 
significantly larger proportions than other community banks 
during a recession, which helps explain why the FDIC imposed 
additional guardrails around those institutions in 2009. In 
fact, FDIC researchers found that out of the 1,042 de novo 
banks chartered between 2000 and 2008, 133 failed or 12.8 
percent. In comparison, 4.9 percent of small established banks 
failed during the same period.
    These researchers also noted that de novo banks' higher 
failure rate is consistent with previous studies which found 
that they are financially fragile and more susceptible to 
failure.
    My question to you is, when banks fail and the FDIC steps 
in to make depositors whole, is it not remaining banks, such as 
your bank, that have to pay additional deposit insurance 
premiums to recover those losses?
    And my time is up.
    Mr. Burgess. Thank you.
    Yes, that is true. We do see additional increases in 
deposit premiums, and we had to rebuild the FDIC fund after the 
financial crisis.
    I am not really familiar with the study that you just 
discussed, but there were a lot of de novos that started prior 
to the financial crisis. I would like to see the geographical 
dispersion of those, because I would assume a lot of those were 
in the Georgia area and that was hit very heavily during that 
time. And I would say a lot of those numbers likely came in 
that area. I am not sure. But you are correct.
    Mr. Clay. Thank you.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, we go to the vice chairman of the subcommittee, 
the gentleman from Pennsylvania, Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Burgess, you mentioned in your testimony that you had 
to raise about $6.5 million in order to start your bank about 
19 years ago. And you estimated that a similar effort would 
require between $20 million and $30 million today. This is 
certainly in line with what I am hearing from community bankers 
in my own district. Clearly, having to raise 4 or 5 times more 
money today than a few years ago--likely from a broader pool of 
investors--to start a bank is a big hurdle to overcome.
    I also wonder whether raising so much capital at the start 
to satisfy regulators also has the potential to change firm 
behavior, perhaps inducing banks to make riskier choices. This 
would seem to be against the spirit of what the regulators are 
hoping to achieve.
    You seem to share this concern. In your testimony you 
wrote, ``If I was in the position of starting a bank today, 
under today's conditions, I would not do so. Even though, with 
my experience, I could raise the funds necessary, I would have 
to grow the bank so quickly to put the capital to work that it 
would pose undue risk on our shareholders.''
    Can you elaborate on that statement?
    Mr. Burgess. Yes, thank you for the question.
    When an investor looks at where they are going to make an 
investment, they are looking for a reasonable return. And if 
they can get a better return somewhere else, that is where that 
money is going to flow. So if they are going to make an 
investment in the banking industry, they are going to look for 
an investment where they know they are going to make a 
reasonable return.
    If you set the capital levels too high and it is going to 
take 5 to 6 years before they can receive a reasonable return, 
then they are not going to be very happy with that investment. 
And when you do get to the point where you need to get more 
capital, it is unlikely you are going to be able to get those 
investors to put more in because the return is going to be so 
low.
    Mr. Rothfus. Do these higher capital requirements for de 
novos, would they induce riskier behavior? Are you going to be 
looking for a return in some way to satisfy the shareholders?
    Mr. Burgess. If you went ahead and started a bank in a 
community, in a small community especially, and you had to 
raise $20 million, that means that you would need to have a 
bank of somewhere around $200 million in assets to support 
that. A lot of small towns don't have banks that have been 
there for 100 years that are $200 million in assets.
    So it is unlikely you are going to grow a bank to $200 
million in a short period of time. If you did, you would have 
to be looking for alternative ways to bring in deposits, and 
alternative ways to bring in loans.
    More than likely those would have to come in from other 
markets and other places, which are out of market and are 
frowned upon by regulators. So it would cause them to use an 
out-of-the-box plan to try to get to the level to leverage that 
capital appropriately.
    Mr. Rothfus. I want to switch to Mr. Kennedy for a second. 
In your testimony you state that the lack of new charters is 
not a result of low interest rates. Why do you think that 
regulators pin the de novo drought partly on low interest 
rates?
    Mr. Kennedy. I guess the chart that the Federal Reserve 
produced might be one reason, Congressman. I think it could be 
one of the reasons, but I do not think it is the only reason. 
There are examples of banks that were actually chartered and 
open for business in 2008 just going into the crisis that did 
very well during that low- interest-rate period.
    Mr. Rothfus. They were able to make money during those 3 
years and they did okay?
    Mr. Kennedy. Yes, sir.
    Mr. Rothfus. Again, Mr. Kennedy, as you know, the FDIC 
strongly discourages any deviations from business plans and 
requires that banks seek their approval before making any 
changes. While I understand that the FDIC has an interest in 
making sure that banks stick to their initial plans, we should 
also be mindful of the fact that economic conditions change and 
a well-managed institution should be able to respond to change 
effectively.
    Given the FDIC's insistence on sticking to the plan, how 
can an institution adjust to changing realities quickly enough 
to succeed?
    Mr. Kennedy. It is a very difficult thing. Thanks for the 
question.
    The good news is that the FDIC did kind of clarify what 
they mean by adverse or by changes to the plan in April of 2016 
and put a 25 percent deviation standard, which provides a 
little more flexibility than I think they were imposing 
previously.
    Mr. Rothfus. Are there any similar requirements that may be 
an impediment to de novo success?
    Mr. Kennedy. The capital ratios continue to be difficult, 
particularly on Subchapter S banks, which I think is one of the 
reasons we have as many community banks in the United States as 
we do, because they are community banks, largely rural banks 
that are family owned, like Mr. Burgess', that are able to take 
advantage of flow-through tax treatment.
    But there are caps on the number of shareholders. And so, 
particularly in the case that we are representing in Florida 
that I made reference to that is a charter, it is going to 
begin as a Subchapter S bank, but there are concerns about the 
number of shareholders being at that 100 shareholder cap. So 
changing that would be helpful.
    Mr. Rothfus. I yield back. Thank you, Mr. Chairman.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentlelady from New York, Mrs. Maloney, is now 
recognized for 5 minutes.
    Mrs. Maloney. Thank you very much. And thank you, Mr. 
Chairman and Mr. Ranking Member, for this important hearing.
    I agree with the statements of Ms. Edelman that the CDFIs 
need to be refunded and funded. They provide a critical form of 
financial services to many communities. And I very strongly 
agree with Mr. Burgess' statement that often the banks and the 
credit unions are the key employer, the most important civic 
leader in these neighborhoods, and are absolutely critical to 
banking.
    And I think we are seeing more and more that larger banks 
that are involved in the international don't even want to get 
involved in daily banking of small business loans and 
mortgages. So community banks really didn't cause the financial 
crisis; they certainly were the backbone of helping our 
communities recover and bounce back.
    So I just want to thank you, Mr. Burgess, and ask you a 
little bit more about your statement that banks with less than 
$100 million in assets have seen by far the steepest drop-off 
after the crisis. And as you noted in your testimony, more than 
43 percent of these smaller banks have disappeared since 2010, 
which is truly shocking.
    And whether the cause of this decline is a higher 
regulatory burden or economics of scale that make it difficult 
for small banks to competes with larger rivals or just to 
survive in general, I think we can all agree that it has become 
more difficult with a bank with less than $100 million in 
assets to survive.
    So my question, Mr. Burgess, is, does this suggest that new 
banks will need to be larger when they first start out in order 
to have a decent chance of surviving? You said you started 
yours with $20 million, I think you said?
    Mr. Burgess. We started ours with $6.5 million.
    Mrs. Maloney. $6.5 million. So you are saying that can't 
happen now. Can you elaborate a little more on what this means 
for starting new banks?
    Mr. Burgess. The first thing it means is in a small 
community it is unlikely that the community has the resources 
to even put that amount of money together to start a bank.
    But I will give you a story that is a good example of how a 
small community is impacted. As the chairman of the Texas 
Bankers Association last year, I traveled all around our State. 
I remember walking in one morning to a small bank in south 
Texas and talking to the owner, and he was lamenting the fact 
that he had lost several of the products that he had been able 
to do in the past, primarily mortgage lending.
    He was the only bank in that community. He quit making 
mortgage loans because he did not have the staff to get their 
arms around all of the regulatory requirements for being able 
to make a mortgage loan. And since there is more or less a 
zero-tolerance policy for making mistakes, he did not feel like 
he could take the risk to do that.
    So that community is now left with nobody making mortgage 
loans, and the only people who are going to make mortgage loans 
in that community would be investors who would come in and buy 
up those houses and sell those back to people and finance them 
themselves, which is generally at much higher interest rates.
    Mrs. Maloney. I want to talk to you, Mr. Kennedy, about 
your testimony. You said that you saw a noted difference after 
2012 when it was announced that regulators would impose the 
international large bank capital standards, known as Basel III, 
on every bank in the United States.
    It seems to me that we have a two-bank system. We have 
international banks that compete in the international global 
community, and we have community banks that provide services in 
communities. And I, for one, have never understood why Basel 
III capital standards should apply international banking 
standards when you are not involved in the risky products, you 
are not involved in the high-risk activities that some of our 
larger banks are involved in.
    So I, for one, would like to explore--and I have raised 
this in letters and conversations with regulators over and over 
again--that community banks should not have that same standard. 
And they say they have a different standard, but I am not 
hearing that there is a different standard coming from you.
    But I would support legislation that would say community 
banks should not be held to the Basel III capital standards. 
They should be held to capital standards, but they are not 
competing in the international market. And that burden seems 
like an unfair burden, in my belief, on community banks.
    And I agree with the statement from Mr. Burgess that 
community banks provide, I would say, an essential service, 
really an essential service to America. And if you don't have a 
bank in your community, you are in big trouble. You can't 
finance, you can't get things going.
    So I really would like to explore that with some of my 
colleagues on some aspects that we could do, and that seems 
like a commonsense one to me.
    I think the chairman is telling me my time has expired. 
Thank you.
    Chairman Luetkemeyer. The gentlelady's time has expired.
    With that, we go to the gentleman from Florida, Mr. Ross, 
for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    It is my understanding that the number of community banks 
that now exist is at the lowest number since prior to the Great 
Depression in 1928. And as we look at the number of banks and 
the stagnant growth in the banking industry, I have to 
speculate that most industries are demand-driven by consumer 
demand.
    And so what effect has the lack of--or is there a lack of--
consumer demand for banking services in the industry over the 
last 10 years?
    Mr. Burgess, I will let you start with that.
    Mr. Burgess. No.
    Mr. Ross. There isn't, is there?
    Mr. Burgess. I am not seeing a lack of consumer demand. I 
am seeing a lack of ability to meet some of the consumers' 
needs because we created a box that everyone has to fit into.
    Mr. Ross. And so the only way you can stay alive is through 
acquisition and mergers?
    Mr. Burgess. We can grow our business some. But one of the 
reasons that I am in the banking business and one of the things 
I have enjoyed so much since I started was over the years I 
have been able to sit down with a customer who walked into my 
office--
    Mr. Ross. Exactly.
    Mr. Burgess. --listen to their story, try to create a 
custom package for them that meets their needs the way they 
need their needs to be met.
    Mr. Ross. And since Dodd-Frank, your hands have been tied, 
have they not?
    Mr. Burgess. In many cases, especially in the mortgage 
lending area.
    Mr. Ross. And so that consumer demand continues to exist 
both in the banking and in the credit union industry. Wouldn't 
you agree, Mr. Stone?
    Mr. Stone. I would agree. Currently, we are being 
restricted due to Dodd-Frank, due to the fact that we are not 
allowed to offer mortgages, yet because of the size of our 
institution and the regulatory compliance costs that it would 
take to offer mortgages.
    Mr. Ross. Such as the qualified mortgage rule?
    Mr. Stone. I'm sorry?
    Mr. Ross. Such as the qualified mortgage rule?
    Mr. Stone. That is correct.
    Mr. Ross. And so the regulators are telling you how to do 
your business because they apparently know better. But my 
concern is that if the consumer demand is there, which it is, 
in fact, it is probably there more now than it has been in the 
last 8 years, and yet where are the consumers going to go? 
Where will they go if they can't go to their credit unions or 
their community banks?
    Mr. Stone. We currently have the demand, and I will give 
you an example. Currently, we are offering products that no 
other institution can offer my field of membership, which is 
all law enforcement officials in the State of New York.
    We have a product coming out called ``killed in the line of 
duty'' insurance. What that means is one of our members' 
biggest concerns is not the fact that they need to go to work 
every day; it's the fact that they might not come home to their 
families every day. So we have a product coming out that is 
going to be ``killed in the line of duty'' insurance, and we 
will be able to offer loans up to $850,000, and if that 
member--
    Mr. Ross. You have had to diversify your products, haven't 
you?
    Mr. Stone. That is correct. In addition, we have something 
called the ``uniform loan.'' So we go out to the new rookies 
from day one, they could get a loan from us for up to $5,000 
for their equipment, to pay off high-interest-rate debt, to 
help them get started, and they can't walk into Chase Bank 
right now and get a $5,000 unsecured loan at a very competitive 
low rate.
    Mr. Ross. But my point is, there is consumer demand out 
there, and if they can't have their needs met at their 
community bank or their credit union, they are going to go 
somewhere else, and that somewhere may not be the safest place; 
in fact, it may be the most unregulated place.
    Mr. Stone. We are hurting our community, we are hurting our 
field of membership, and we are pushing them to entities like 
predatory lending.
    Mr. Ross. Mr. Burgess--and maybe Mr. Kennedy might be able 
to speak on this--because there is also what has been out there 
is an overregulatory, what I call regulatory intimidation. Take 
Operation Choke Point, for example, where the DOJ and the Fed 
come in and say: Because of reputational risks, you can't give 
loans, we don't recommend that you give loans to these 
legitimate businesses because we don't like their reputation.
    Now, let me ask you this: Has that played any role, do you 
think, in not only the lack of your ability to expand your 
bank, but also in the lack of the ability to start de novo 
banks?
    Mr. Burgess, I will let you start, and then Mr. Kennedy.
    Mr. Burgess. I have not seen that, I don't think 
necessarily, in the area of starting a de novo bank. I know 
there are a lot of bankers who have certain lines of business 
where they have felt like they needed to get out of that 
business because of pressure to--
    Mr. Ross. From the Fed?
    Mr. Burgess. From the regulators.
    Mr. Ross. Yes.
    Mr. Kennedy, can you comment?
    Mr. Kennedy. It is interesting. Just people who need loans, 
businesses that need loans, Ken made reference to the unique 
requirements of each individual businessman or person or woman, 
et cetera. And what we are finding is that the bankers have to 
kind of do what the regulators think is best. And they are 
getting way down into the weeds rather than being--
    Mr. Ross. And is that more of like an overreaction, because 
of what happened prior to the 2008 crisis?
    Mr. Kennedy. I believe it is. It has just continued to 
increase. I have been doing this for 35 years, and it has just 
continued to increase. When I first started practicing law and 
representing banks, there was no specific capital standard. You 
just had to have some prudential capital standards.
    Mr. Ross. I see my time is up. And being from Florida, I am 
delighted to see that you have clients who are starting a new 
bank in the State of Florida.
    Thank you. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from Georgia, Mr. Scott, is recognized for 5 
minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    A priority of mine has always been to help the little guy. 
And I really mean it when I say it. And if I think a bill will 
help community banks and credit unions, I am usually the first 
Democrat to get on board and tirelessly fight to work in a 
bipartisan way and move legislation across the finish line. My 
record speaks for that in the 14 years that I have been on the 
Financial Services Committee. And the reason I do it is so that 
we can make the lives better for our community banks, for our 
credit unions.
    But when I was preparing for this hearing my staff 
presented me with some compelling data about why new banks, de 
novo banks, have just stopped forming. If you recall, on 
December 16, 2014, the Federal Reserve study that was presented 
to us found that the biggest contributor to the steep decline 
in the creation of new banks was the low interest rate 
environment and the distressed demand for basic banking 
services.
    So with that said, I want to sincerely pose this question 
to each of you distinguished individuals, and that is, what can 
we do on the Financial Services Committee to correct this 
problem? But we should not be focused on weakening Dodd-Frank. 
We should be focused instead on trends that are happening, such 
as low interest rates.
    Would you all comment and give me an answer on that? Am I 
correct in stating that the focus should be on what the Fed 
said was the source of the problem, low interest rate 
environments and depressed demand, Mr. Burgess?
    Mr. Burgess. Thank you for that question.
    Part of our business, and it has been for as long as we 
have had banks, is riding through interest rate cycles. That is 
a normal part of what we do. We have to be able to manage that. 
We always have been able to manage that.
    But what is different this time is that when you have all 
these new costs that are being placed on you to meet regulatory 
demands, you have increasing cost, you have decreasing revenue, 
and the two of those things working together makes it very 
difficult to maintain profitability to allow you to grow and 
serve your community.
    One thing you mentioned too that I would like to talk about 
is the small person or the people who have less resources to 
work with. The huge amount of regulation that has been placed 
on the mortgage lending side has hurt those small borrowers 
more than anybody else, because it makes it so costly to make a 
small loan that some banks have walked away from the smaller 
loans, and those are the ones that we specifically need for the 
group of people who are trying to buy the lower-cost houses. We 
have to be able to reduce those costs so we can meet that 
segment of the population.
    Mr. Scott. Okay.
    Mr. Stone?
    Mr. Stone. Thank you for the question, Congressman.
    In the credit union world our process, starting up a credit 
union, chartering it is a 17-step process. What we would 
appreciate is if Congress could help us reduce the amount of 
inefficiency and miscommunication in the chartering process 
starting up.
    In addition, we feel possibly, pre-Dodd-Frank, I believe--
and I have worked in the credit union world prior to 2003--the 
NCUA had sufficient restrictions and governance on credit 
unions. I feel even though we fall a bit under the umbrella of 
the current CFPB guidelines, I think it would be great for the 
credit union world right now if some of those were restricted 
and the credit unions didn't have to be under that umbrella.
    Mr. Scott. Okay. I have 20 seconds, but I did want to get 
an answer just as a matter of fact. Do each of you agree when 
the Federal Reserve says that there is a depressed demand for 
basic banking services in this country?
    Mr. Burgess. I do not agree with that.
    Mr. Kennedy. I do not agree with that either.
    Mr. Stone. I do not agree.
    Mr. Scott. Why do you think the Fed came up with this? 
Because you all in the banking industry ought to know the 
answer to whether the demand is increasing.
    Mr. Burgess. We see it every day. I don't know where they 
came up with those numbers.
    Mr. Scott. All right. I am glad I asked that question to 
clear it up. Thank you.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Pittenger, is now 
recognized for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank each of you for being here today. As a former 
bank board member of a small community bank, I have great 
interest in your testimony and what you have offered for us 
today. It has been very helpful and confirming to me of my 
experience in the banking business.
    I was at our bank from the time we chartered until the time 
that we sold the bank some 11 years later. We sold it at maybe 
a little over 2\1/2\ times book value. It was a good return, 
and we were pleased with what we did.
    But the interesting thing about our experience was we knew 
who was creditworthy, and there was a box to check for 
character, and know your customer. That is what it was all 
about. And we enjoyed a great experience. I think our loan 
losses were never over 2 percent, but usually less than 1 
percent. It was a great accomplishment, a great experience for 
me.
    And so, to that end, I recognize the impediments that have 
been placed upon the banking industry today--in North Carolina 
alone we have lost 40 percent of our banks--and truly 
restricting credit and capital, particularly in the rural 
communities which I serve. I serve eight counties, six of which 
are very rural, and they are impeded. That small farmer, that 
small-business guy doesn't have access to capital.
    Ms. Edelman, I would like to ask you a question or two with 
the little time we have. I have read some about your 
background. You graduated, I believe, from the University of 
Maryland?
    Ms. Edelman. That is right.
    Mr. Pittenger. And also from George Washington University.
    Ms. Edelman. Correct. And I am originally from 
Pennsylvania.
    Mr. Pittenger. From where?
    Ms. Edelman. Pennsylvania.
    Mr. Pittenger. Welcome.
    Ms. Edelman. Thank you.
    Mr. Pittenger. You served in the Peace Corps.
    Ms. Edelman. That is right.
    Mr. Pittenger. You served in AmeriCorps.
    Ms. Edelman. Correct.
    Mr. Pittenger. You have been a community organizer, worked 
on community legal services, many other efforts of social 
intent. I am certain we would have much to learn from you of 
your experience, since you have been throughout the world in 
your public service, and I commend you for it.
    I would say to you and inquire, have you ever worked in a 
bank?
    Ms. Edelman. I have never worked in a bank. I worked on 
small economic development projects, and so community banks 
were part of--
    Mr. Pittenger. You have never worked at a bank. Have you 
ever been on a bank board?
    Ms. Edelman. No.
    Mr. Pittenger. So you have never been involved in the loan 
process, never been involved in a bank and what it takes in 
terms of credit and establishing credit and what they do to--
    Ms. Edelman. No. I am here today because I focus on working 
families and their ability to get a mortgage.
    Mr. Pittenger. And I appreciate that.
    Ms. Edelman. So the issues that--
    Mr. Pittenger. What I am inquiring, Ms. Edelman, today--
    Ms. Edelman. Yes.
    Mr. Pittenger. --is understanding the realities of the real 
world. I would learn much from you, I think, I do believe, from 
your experiences of what you have achieved and accomplished 
through the Peace Corps and AmeriCorps. But I would just 
commend to you that these gentlemen, they validate by personal 
experience, they validate a statement that I heard from a man 
out in the hall earlier, about 30 minutes ago, that they sold 
their bank because of the compliance requirements. They had to 
consolidate. And these requirements, through Basel 
requirements, through the FDIC, have imposed enormous 
impediments on the growth of banks and the access to capital.
    And with all due respect to you, while it is good to see 
academically what could be the concerns, what I hear back in my 
district is that small guy, that small entrepreneur who doesn't 
qualify, and that bank who can't issue credit to that small 
guy. And, frankly, they have been the lifeblood of our economy.
    Ms. Edelman. Sure.
    Mr. Pittenger. While we can say--you can say, well, the 
economy is bad so the banks didn't do well--the reality is, 
would you accept the fact that perhaps these rules, these 
regulations, these compliance requirements imposed upon the 
financial institutions, the credit unions, the small banks, the 
inability to loan to people who could really be the dynamic in 
our economy?
    Ms. Edelman. Here is what I think. I believe it is very 
important that regulators take the challenges that community 
banks and credit unions are facing very seriously.
    Mr. Pittenger. But I asked you a question.
    Ms. Edelman. And it is partly why they have given the 
exemptions. But let me just--
    Mr. Pittenger. Reclaiming my time, excuse me, ma'am.
    I would like to ask you this: Do you believe that these 
impediments, these rules, these regulations, these compliance 
requirements, do you think that they had an impact on what 
these men are talking about? Do you see the merit in what they 
have been trying to say?
    Ms. Edelman. I believe that there has been an adjustment 
period. I also worry that the focus on repealing Dodd-Frank, 
that if you got rid of Dodd-Frank tomorrow, we are still going 
to have 300 small banks failing per year. This has been a trend 
we have seen since 1985. And I worry we are missing the ball.
    Mr. Pittenger. Reclaiming my time, I yield back.
    I would just say real-life experience, I would commend to 
you, would make a different statement upon that.
    Thank you. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    Ms. Velazquez from New York is now recognized for 5 
minutes.
    Ms. Velazquez. Puerto Rican from New York.
    Mr. Burgess, in your testimony, you indicated that the 
ability of consumer banks to engage in small-business lending 
is being threatened by FinTech nonbank lenders, who often make 
loans without the same obligations and oversight as community 
banks.
    How would you recommend regulating nonbank lenders in this 
space?
    Mr. Burgess. The first thing I would like to say is I am 
glad we have the FinTech area, because I think that is where 
the creativity and the innovation is coming from. The only 
thing we would want is we would want a level playing field so 
they don't have an unfair advantage in the same markets we are 
in.
    So I am all for the FinTech area. I think they bring a 
level of innovation that is going to make us better down the 
road. We embrace a lot of what they are doing. We just want to 
make sure that we are playing on the same playing field they 
are.
    Ms. Velazquez. I do, too. And one area of concern for me is 
transparency, so that borrowers know what they are getting, 
what type of fees. So that is why I asked the question.
    Mr. Burgess, you also discussed how complex and the cost 
involved for de novo bank applicants when they are dealing with 
the business plan section of the application. So can you share 
with us how can we streamline the application process for new 
banks?
    Mr. Burgess. Yes. And one thing, while I am answering 
that--I would like to respond to one thing Ms. Edelman said 
earlier--is part of the process you go through when you decide 
you are going to charter a new bank is you go talk to the 
licensing person with whichever regulator you are going to go 
through, and they tell you what the hurdles are. If you decide 
those hurdles are too high, you don't fill out the application.
    But a specific answer to your question is, you generally 
are going to be hiring two or three professional people to work 
with you, to fill out the application, to go through all the 
legal requirements that you have to do to make sure you are in 
line or the application will never happen. And the cost for 
most banks--Pat could probably answer that better than me--but 
I know that a lot of banks I have seen are going to spend 
between $750,000 to a million dollars in startup costs before 
they ever open the doors to start turning a dollar of revenue.
    Ms. Velazquez. Thank you.
    Mr. Stone, credit unions in New York recently informed me 
that it is becoming increasingly difficult to provide overseas 
remittances due to the escalating cost of complying with the 
associated rules and regulations.
    How would you recommend we try and reduce the compliance 
costs for credit unions in this area?
    Mr. Stone. Congresswoman, thank you for asking that 
question. While we have only provided a limited amount of 
remittances so far at The Finest, it is an area where we could 
expand our services if our members request it. However, with 
limited staff and resources, we would have to weigh the benefit 
of expanding against the staff and resources needed to comply 
if we went over the hundred-exemption limit.
    So currently, we are way under the hundred. Being a brand 
new credit union, we have only done really two per month maybe 
we average.
    Ms. Velazquez. Okay.
    Ms. Edelman, last January, you wrote an article in which 
you argued that the decline of community banks is largely due 
to changes in the underlying market. You also offer a number of 
recommendations that you think could revive this important 
institution. Can you walk through some of those 
recommendations?
    Ms. Edelman. Sure. I think it is important that instead of 
focusing on the Dodd-Frank regulations, we focus on some of the 
causes of the 30-year decline in small banks. Larger banks have 
lots of advantages over small banks, and that is partly why we 
have given small banks a number of carve-outs and flexibilities 
from the Dodd-Frank rules. But larger banks also have the 
ability to offer products that smaller banks can't because of 
the overhead required, like credit cards, for instance, which 
are often very profitable for large banks but require marketing 
and a call center and enormous overhead.
    And so I think it is important that we look for ways to 
help small banks be more competitive. They clearly come with 
some innate competitive advantages. They serve the local 
community very well. They can get information from customers 
that larger banks just don't--just completely miss. But we need 
to be thinking about how to bring down administrative costs, 
how to help them leverage technology more. We need to be having 
a conversation about how the Federal Government can support 
them in the years to come.
    Ms. Velazquez. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Luetkemeyer. The gentlelady's time has expired.
    The gentleman from Texas, Mr. Williams, is recognized for 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    And thanks to all the witnesses today. We appreciate you 
being here.
    It is an understatement to say that the current regulatory 
environment isn't working. It isn't working for Main Street 
America, of which I am a member, and it isn't working for the 
American taxpayers. As of this month, in Texas alone, 358 
State- or Federally- chartered banks, credit unions, or thrifts 
have either closed or merged since 2010. According to our Texas 
State Banking Commission, the last bank or credit union 
chartered in Texas was in 2009. And in the Austin metro area, 
which is one of the fastest growing populations in the country 
and in my district--that has been an explosion of growth--can 
claim just 16 locally-chartered banks, down from almost 60 at 
its height in the 1980s.
    So where does this leave us? Fortunately, it looks like 
Texas will get its first new State-chartered bank in almost 8 
years. The Bank of Austin, which would primarily serve central 
Texas, has begun the long process of chartering in the Austin 
area.
    Now, Mr. Burgess, to you, let me begin. In your testimony, 
you indicated that when you started FirstCapital Bank in 1998, 
you capitalized for $6.5 million. You go on to say it is the 
current expectation in the banking community that approximately 
$20 million to $30 million would be needed to start a new bank. 
The Bank of Austin has reportedly raised $40 million.
    So please walk the subcommittee through some of the 
challenges you think the Bank of Austin will face that 
FirstCapital did not when it was chartered 20 years ago.
    Mr. Burgess. Number one, they are in Austin. That helps, 
because there are enough assets in Austin that if they have 
good businesspeople in the bank that can grow business quickly, 
they can probably get to that number. But it is going to take a 
bank of a little over $400 million to put that capital to work 
and provide a reasonable return to the shareholders so that 
they will be able to keep going and growing.
    Mr. Williams. So let me ask you this: Do you believe the 
Bank of Austin is a product of market opportunity or regulatory 
changes?
    Mr. Burgess. I think that they are starting a bank in a 
market where they can make it work, because a bank of $400 
million can probably put the regulatory expertise in place to 
be able to meet the guidelines or meet the expectations.
    Mr. Williams. Assuming the Bank of Austin is approved, the 
regulatory expectations are still very high for new entrants, 
with the FDIC micromanaging their operations for the first few 
years with little or no flexibility. It is hard for new 
entrants to find experienced compliance officers that will make 
sure that they keep up with the regulations. And I think you 
would agree with that, in that you have talked about that.
    Mr. Burgess. I do.
    Mr. Williams. Mr. Stone, we have had some State-chartered 
and one Federally-chartered credit union in Texas since 2010, 
and after 76 mergers, we are now under 500 Statewide. I think 
you would agree that one way to improve the environment and 
viability for community financial institutions is to reduce the 
often complicated and burdensome regulations coming out of the 
CFPB, with which many credit unions and banks must comply.
    So from your perspective, how do you think the current 
regulatory environment impacts or discourages new institutions 
from forming?
    Mr. Stone. Currently, we support the comprehensive relief 
proposed in the Financial CHOICE Act. NAFCU believes credit 
unions should be exempt from the CFPB's authority, with credit 
unions' regulation directly handled by NCUA, as pre-Dodd-Frank.
    Mr. Williams. Okay. Let me ask you another question. Cost 
of operations and new technology, economic risk, capital 
requirements, and the need for immediate results are all 
challenges faced when chartering a new credit union or bank.
    How have these challenges been magnified under a post-Dodd-
Frank regulatory environment?
    Mr. Stone. It is a tremendous burden. So taking into 
account the $2 million that we started with, which is very 
little, then we have the regulatory burdens, the challenges of 
having a regulatory officer, a compliance officer, on top of 
new technology, equipment, phone systems, all of the entities 
that we need to operate and run a credit union, the math 
doesn't add up. And it is a challenge every day that causes me 
problems when I go to sleep at night.
    Mr. Williams. I would ask you, Mr. Kennedy, also, from your 
perspective--you have a very knowledgeable one--how do you 
think the current regulatory environment impacts or discourages 
these new institutions?
    Mr. Kennedy. Not only the new institutions, but existing 
institutions, Congressman. Over the last 8 or so years, it is 
just continuing at a snowballing pace. And I hope that the new 
Administration and the focus on lifting regulation will make 
some big difference here. And clearly, in the de novo charter 
area, I think it will, and particularly the steps that the FDIC 
has taken.
    It is a big deal to reduce that 7-year compliance period 
and a capital requirement back down to 3. That is a big change. 
But I think a lot of people still are skeptical about their 
ability to get approval.
    Mr. Williams. I thank all of you for your testimony.
    Mr. Chairman, I yield back.
    Chairman Luetkemeyer. The gentleman yields back his time.
    The gentleman from Texas, Mr. Green, is recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the ranking 
member as well. And I would like to compliment you, Mr. 
Chairman and Mr. Ranking Member, for holding this hearing, 
because it has been very beneficial.
    It is beneficial because we have heard, of course, about 
the legacy loans, which can be beneficial if you are already in 
business, low interest rates, which can be a detriment to you 
if you are not already in business.
    But what is really important, as I see it, is you have all 
agreed that compliance cost is a significant part of your 
problem, if I may call it a problem. I am sure that there may 
be some other words that might be more appropriate for you, but 
let's call it a problem.
    And in concluding that compliance cost is a problem, you 
have also identified yourselves as community banks that are 
small. This is important, because we have had testimony of 
community banks being capitalized at the $50 billion level. 
That is a pretty big community bank, $50 billion.
    I think the gentleman from the credit union, Mr. Stone, you 
indicated that 90 percent of your credit unions are under a 
billion dollars. Is that what you said?
    Mr. Stone. That is correct, Congressman.
    Mr. Green. And about 90 percent of all banks, maybe 89 
percent I think it is, are a billion or under.
    So the question that I have for you is really not 
complicated, and it becomes complicated when the bankers get to 
my office, but it is not a complicated question. It is this: 
Can we construct legislation for community banks that won't 
reach the $50 billion level?
    Why do I ask? Because I have community bankers who will 
visit with me, and they make the argument that you are making 
today, but the solutions go to the $50 billion level. That 
makes it a heavy lift.
    Is it possible, in your minds, especially my Texas banker, 
can we fashion legislation, that would probably be bipartisan, 
that doesn't have to go to the $50 billion level? You are 
talking about small banks. In your mind, what is a community 
bank capitalization?
    Mr. Burgess. Thank you, Congressman.
    I think we could sit down and come up with a list of 
product lines that a community bank is typically in. And a 
community bank generally deals within its geographic region 
instead of in big, wide swathes. I have a little bit of concern 
about setting everything based on thresholds, because I just 
crossed over from 900-some odd million to just over a billion, 
and now I have to follow a whole different set of rules and I 
am really the same bank today that I was a month ago.
    Mr. Green. Listen, you are my friend, but we are getting 
back to the point that I was making earlier. We start talking 
about small banks and doing something to help them, but when we 
get to the remedy, it reaches $50 billion. There has to be a 
way for us to do something for the banks that are 10 and under 
without going to $50 billion.
    There are people here who really want to do something for 
small community banks. They all identify with small community 
banks. But the remedy takes us to $50 billion, it will take us 
to eliminating sometimes the living wills, all of the things 
that were put in place for larger banks, because they are 
really not the megabanks, but larger banks.
    Again, how do we do this so that we stay with the smaller 
community banks?
    Mr. Kennedy?
    Mr. Kennedy. It is an interesting question, but I think you 
can. I think you can draw the line, whether it is total assets 
or whether it is types of products and types of business, 
although I hate to constrain creativity. I heard our Texas 
savings and loan commissioner describe her definition of 
community banks as being those that had a relationship with 
their customers.
    Mr. Green. Let me share this with you quickly, Mr. Kennedy. 
The $50 billion threshold brings in a trigger, and you are 
familiar with that trigger. So when we do this, it becomes more 
than helping small community banks that we all want to help.
    I understand that my time is beyond what I have been 
allotted. So thank you, Mr. Chairman, and I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We now go to the gentlelady from Utah, Mrs. Love, for 5 
minutes.
    Mrs. Love. Thank you, Mr. Chairman.
    I would like to ask the panel about the effects of the de 
novo drought on small businesses and access to capital. This is 
a tremendous issue and it is certainly important to the State 
of Utah, which has seen its banking sector shrink due to the 
exit of certain banks on account of the regulatory environment, 
compounded by the inability to charter new institutions.
    This has been particularly damaging in the industrial bank 
sector, which has been a very stable segment of our banking 
sector, and yet it has suffered from the inability to get FDIC 
approval for new banks in the years since the financial crisis.
    So I have just a quick question for Ms. Edelman. Do you 
have any evidence that industrial loan companies were part of 
or contributed to the financial crisis?
    Ms. Edelman. I can't give you a definitive answer that no 
industrial loan company did anything wrong, but, no, they were 
not the driving force behind the crisis.
    Mrs. Love. Okay. Yet--and I am making a point here--we 
haven't seen any approval of industrial banks. So I have to 
question the FDIC's requirements and the soundness of their 
decisionmaking not to approve new banks for FDIC insurance.
    Banks of all sizes play roles in the economy while 
delivering safety and convenience. If you look at some of the 
things that they offer, safeguards, $12.7 trillion in deposits, 
$2.4 trillion in home loans originated by banks, $380 billion 
in loans to small businesses, $175 billion in loans to farmers 
and ranchers.
    Mr. Burgess, you mentioned in your testimony, you cited 
that since Dodd-Frank, more than 43 percent of banks under $100 
million in assets have disappeared, as have 17 percent of banks 
between $100 million and $1 billion. Those are a lot of assets 
that have been lost to the banking sector. I look at the 
numbers that I cited here. To me, it would seem that fewer bank 
options would mean fewer of these numbers going into the 
economy, fewer people getting the ability to have access to 
credit, and job losses.
    Can you talk to me a little bit more about what your 
thoughts are on that?
    Mr. Burgess. Thank you, Congresswoman.
    A lot of the banks that have gone away have not failed. So 
those assets haven't left the system, but they have been 
consolidated with other banks, bigger banks. And when you do 
that, number one, one of the things you do is you reduce 
competition. There is less competition. And by less 
competition, you have less options, less pricing options for 
the customers.
    And in some cases, if those banks are in small communities, 
like I would assume you have a lot of in your State, you have a 
large bank with just a branch in that community rather than a 
community bank with local ownership and local leadership that 
really has a focused interest on making that community better. 
So you lose a little bit of that value of a community bank when 
that becomes a branch rather than a community bank.
    Mrs. Love. Let me just talk about what I have experienced 
as a mayor in Saratoga Springs, Utah. We have a City that is 
just starting up, and a lot of our constituents, our residents, 
wanted to have a library. As you all know, libraries are all 
expenditure. They don't get incomes from libraries. And we 
didn't have the base to sustain a library.
    So the people who came through for us were the banks that 
were actually in our community. You have the Bank of American 
Fork that donated thousands and thousands of dollars, actually 
sponsored the children's section in our library. We had 
communities that were coming together that were volunteering 
their time. And these were all donations from the banks that 
were really wanting to infuse themselves in our community.
    So I just want to say that, to me, this is not about trying 
to save banks' hides. This is not about me taking your side. 
This is about the people who need access to the services that 
you offer. This is about the farmer who is trying to get access 
to credit to purchase a tractor so he can plow his fields so we 
can have food to eat. This is about the young women in my 
neighborhoods who are trying to make a little bit of extra 
money while staying with their children by trying to expand 
their homes, to teach kids how to read.
    These are the people who need access to credit, and when we 
are not allowing more banks, not allowing more resources and 
options out there, we lose competition, and the people end up 
losing their ability to reach their dreams.
    Thank you. I yield back.
    Chairman Luetkemeyer. The gentleman from Washington, Mr. 
Heck, is recognized for 5 minutes--no, Mr. Ellison, you guys 
decide how you want to go.
    Mr. Heck. I am glad to go before him. Am I before him? Am I 
senior? I am, because I arrived earlier, didn't I? Don't start 
the clock yet.
    Chairman Luetkemeyer. We won't start the clock. We want to 
get this straight. We were told it was Mr. Heck, then Mr. 
Ellison. Is that not correct?
    Mr. Ellison. I defer to the gentleman from Missouri.
    Mr. Heck. It is the new rule, and I love this new rule. 
Thank you, Mr. Chairman.
    Chairman Luetkemeyer. Okay. Mr. Heck is recognized for 5 
minutes. Make a decision. Go.
    Mr. Heck. Ms. Edelman, thank you so much for being here. Is 
it essentially your position that when interest rates 
normalize, de novo startups will?
    Is it your position that when interest rates normalize 
through the Fed's increasing of rates, that de novo startups 
will as well?
    Ms. Edelman. Yes. We should see an increase in de novos 
when the interest rates rise for sure, and if we don't, we can 
revisit.
    Mr. Heck. So let me say a couple of things to you. I am 
really glad you are here. I actually largely accept your macro 
frame for this, that interest rates and overall status of the 
economy are much more correlative to this than regulatory 
burden per se. But I do want to make a couple of comments that 
I hope you will just consider.
    Number one, you have 75 to 80 percent associated with those 
2 factors. That means there are 25 to 30 that are--or 20 to 25 
that are not.
    Secondly, I spent a good part of my life over the last year 
going from credit union to community bank to actually large 
banks as well and asking to sit down with their compliance 
officers and show me, in concrete terms, what their compliance 
requirements were today versus pre-Dodd-Frank and it is 
measurable in terms of the thickness of the paper stack.
    So, look, I am not going to lecture you about your real-
life experiences, because actually I think you have had a 
stellar career and I compliment you for it. But I am going to 
suggest to you that while it may not be purely correlative or 
causative, here is one thing that we can know: It still makes 
it harder going forward, because the truth is that compliance 
burden costs go straight off the lower right-hand number. And 
to the degree that lower right-hand number has shrunk makes it 
that more difficult to operate a small community bank or 
continue to operate a credit union.
    So I would hope that we don't buy into, can't touch a hair 
on the head of Dodd-Frank, can't touch a hair on the FDIC. And 
let me tell you why I am especially concerned about this, 
because it is part of the larger frame that I have tried--and I 
hope that maybe the chairman is listening as he looks forward 
to future scheduling--and that is the issue of small-business 
loans and access to capital by small businesses.
    We know some things here that are pretty disturbing. We 
know that the percent of businesses that are startups has 
almost been cut in half from the late 1970s to the last year 
for which we have good data, 2011, actually. We also know that 
small-business failure rates are up. We know that access to 
capital by small businesses has been impeded.
    We also know, thanks to the incredibly enterprising work of 
a postdoc student at MIT, that when branches close--and, again, 
there are lots of causes for that. I would turn to you first to 
say, what are some of those causes, like technology. I had one 
of my colleagues on this committee indicate here recently that 
he has a regional bank headquartered in his district that in 
the last, I can't remember the exact number, it is like 6 or 8 
years, branch visits have been cut in half by the customers. 
That is one of the reasons why branches are closing. We know 
that. But branches are closing also, in part, for a variety of 
reasons.
    And here is what happens. This postdoc student's work 
reveals consumer loans don't suffer. Mortgages don't suffer. 
Small-business loans suffer. And that is very disconcerting to 
me, especially when you consider that it is startup small 
businesses that are such an important contributor to 
productivity growth.
    Now, you and I, you are from CAP, you and I could have a 
cup of coffee and have a good long mutually supportive 
conversation about how we are way overdue on America getting a 
raise and real wage increases. There is no small part of the 
failure of that to happen--some of it is policy, some of it is 
macroeconomic--there is no small part of that--that is, we have 
not experience of late productivity increases that we used to. 
In fact, the whole measurement of productivity has been drawn 
into question. But I think intuitively, we know fewer small-
business startups, lesser growth on the productivity side.
    And I also want to finish on this cautionary note. I have 
raised this in committee before, Mr. Chairman, and it is this: 
There is a part of Dodd-Frank that requires the CFPB to begin 
collecting business data. They don't have a rule yet to do 
that. But once they start collecting data on businesses, that 
might lead to another layer of regulation that I am personally 
concerned about, even somebody who sits on this side of the 
aisle, sir. And I will tell you why.
    Mortgage products have become standardized. They are 
subject to computer algorithms and processes. You cannot 
standardize small-business loans. That is judgment and 
subjectivity and relationship. And to the degree that we go 
down that track, as we have--you like hearing this, you are 
going to give me 2 more seconds--like we have mortgages, which 
I support, is dangerous for even more access to capital by 
small businesses. And we don't want to go there.
    And I am really glad you are here, Ms. Edelman, because 
that data was really important in this speech.
    Mr. Chairman, you are so indulgent. Thank you, sir.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The Fed has done a study on small-business lending, for the 
gentleman's information, and the SBA has a lot of information 
with regards to small-business lending. So there is some data 
out there if you want to go after that, Mr. Heck. I appreciate 
your comments, though.
    With that, we will recognize the gentleman from Tennessee, 
Mr. Kustoff, for 5 minutes.
    Mr. Kustoff. Thank you, Mr. Chairman. At this time, I would 
like to yield to my colleague, Mrs. Love.
    Mrs. Love. Mr. Chairman, I would like to ask unanimous 
consent to enter into the record a letter from the National 
Association of Industrial Bankers, the Nevada Bankers 
Association, and the Utah Bankers Association on the topic of 
de novo.
    Chairman Luetkemeyer. Without objection, it is so ordered.
    Mrs. Love. Thank you. I yield back.
    Chairman Luetkemeyer. Mr. Kustoff is again recognized.
    Mr. Kustoff. Thank you, Mr. Chairman.
    Mr. Burgess, if we could, going back to your experience 
chartering the bank in 1998, do you have an opinion, examining 
the time it takes to create a de novo bank to become chartered 
in this post-crisis environment, in your best estimate, how 
long does it take for a de novo to become profitable now as 
opposed to back in 1998? And if you could compare the two.
    Mr. Burgess. I can really only speak to my experience. I 
started putting the application together and started raising 
money in about January of 1998, and we opened the bank in 
November of 1998. So it took us about 11 months.
    The only example I have heard recently--because there have 
not been any de novo banks to speak of, so it is kind of hard 
to measure that. I do know of an instance in Texas where a bank 
that has been in existence for many, many years had some 
branches in another State, and they chartered a new bank to 
fold those branches into a new charter in that State, so that 
they would have a charter in Texas and they would have a 
charter in that other State. It look them 14 months. Keeping in 
mind that they had been examined for years and years by their 
regulator, it took 14 months to get approved for a new charter, 
just to roll the branches together and put them under a 
separate bank in that State. That is the only example I have.
    Mr. Kustoff. Thank you, Mr. Burgess.
    Mr. Kennedy, we have heard testimony today surrounding the 
regulatory burdens that have discouraged capital formation 
around de novo banks. Today, as a matter of fact, I met with 
members from my State, the Tennessee Bankers Association, who 
said that for each dollar spent on compliance, that results in 
$10 that can't be lent into the community. And I have a 
community banking background. I served on a bank board in my 
part of Tennessee, west Tennessee, for 6 years before becoming 
a Member of Congress.
    But my point is that it must create a burden on small 
community banks. And while some question the effect of Dodd-
Frank on the ability of smaller institutions to operate, I 
believe you said or you testified earlier that there wasn't a 
question that regulatory compliance costs have increased 
significantly and sometimes suggesting operating costs by 
almost a third.
    And so my question is, how do those increased costs affect 
the ability of institutions to provide products and services to 
the communities that they serve?
    Mr. Kennedy. Combined with the increased capital levels and 
just the compliance costs, it makes it difficult to operate. 
You have to continue to hire additional staff. It is a much 
more complex environment to be operating in. And so that takes 
away the ability to deliver financial services and products to 
consumers.
    Mr. Kustoff. Thank you, Mr. Kennedy.
    I yield the balance of my time.
    Chairman Luetkemeyer. The gentleman from Minnesota, Mr. 
Ellison, is recognized for 5 minutes.
    Mr. Ellison. Mr. Burgess, the day before the President sent 
to Congress his initial budget proposal last week, the 
organization you represent, the American Bankers Association, 
along with other bank associations, wrote to Congress. And an 
excerpt of your letter is on the screen. I would direct you to 
take a look at it if you like.
    These banking organizations wrote, ``We are gravely 
concerned that the Administration's forthcoming fiscal year 
2018 budget may propose cuts to the CDFI Fund. We strongly urge 
you to maintain strong funding levels. During the 2016 
Presidential campaign, the need to create jobs and revitalize 
the economies of disenfranchised rural communities and 
neglected inner cities was a key theme. CDFI banks work in the 
exact communities that were the focus of this conversation. 
Community-based financial institutions are uniquely positioned 
to understand local credit needs, which is why there is 
historic bipartisan support for the CDFI Fund.''
    And yet the President's budget, which I am sure you know, 
in contradiction to the campaign talk to help the forgotten 
women and men, has proposed not only cuts, but a complete 
defunding of CDFI.
    Does ABA have a position and does it stand by its letter or 
is there a new position?
    Mr. Burgess. I don't really know the thought processes that 
went into the whole budget process, because I am not involved 
in that. But we definitely support anything that will help 
communities develop and that will give us more tools to work 
with to help small businesses survive and do better.
    Mr. Ellison. So that is your letter. Do you stand by that 
letter?
    Mr. Burgess. That is not my letter.
    Mr. Ellison. It is a bank that ABA joined, and you are 
still with it, right?
    Mr. Burgess. Yes, we support that.
    Mr. Ellison. Okay. Thank you.
    Mr. Stone?
    Mr. Stone. Yes, Congressman.
    Mr. Ellison. Thank you for being here today, sir.
    In your testimony, you note that your credit union was 
recently certified as a CDFI, and you are currently drafting 
your grant request. You also note that, ``The CDFI Fund can be 
an important tool for small and de novo institutions.''
    So if the Congress, following the President's budget, 
decides to eliminate the CDFI fund, what would be the impact on 
your institution and the community you represent?
    Mr. Stone. Great question. Thank you, Congressman.
    This year was the first year. We were certified in a short 
period of time, so we are a CDFI institution. And just let me 
preface that by saying the limited resources we have even to 
complete the grants and the grant requests. So we are working 
with a third party, which costs a certain amount of dollars 
which we don't have to spend, but we have to be willing to take 
the chance to possibly obtain those CDFI funds by paying the 
money we don't have, because we need to help our members and 
that money is available.
    We are a low-income designated credit union. We have 
specific needs, including things like EMV cards. We currently 
have magnetic stripe debit cards; and moving it within 
compliance, moving into the future, we need the EMV cards. The 
process could cost $40,000 to $50,000 of funds we don't have. 
So we are expending funds we don't have to try to get a chance 
at the CDFI funds. So the answer is, those funds are very 
important to us.
    Mr. Ellison. Thanks a lot for mentioning that. And if you 
have any other examples of what the elimination of the CDFI 
might mean to you, please forward that information, because we 
really want to fight for that program.
    Mr. Stone. Yes, sir.
    Mr. Ellison. Ms. Edelman, do you agree with the recent 
Forbes article headline that reads, ``Why Trump's plan to 
defund CDFIs would be disastrous for small businesses?'' See it 
up there on the screen?
    Ms. Edelman. Yes. So CDFI funds have stepped into many 
communities that larger banks have forgotten about a long time 
ago. They make loans that aren't as profitable. They are really 
important sources for small-business lending. In 2013, the CDFI 
Fund helped generate over $4 billion in lending. It played an 
incredibly important role in our communities. It was appalling 
for someone to run on creating jobs, on economic development, 
and then slashing the very resources that are needed to do this 
work.
    Mr. Ellison. I would like to agree with that. But let me 
remind Members that I have a CDFI bill, and it would expand the 
secondary market for small business and community development 
loans made by CDFIs. I hope that you guys take a look at it, 
and perhaps support it. And my bill, the Small Business and 
Community Investments Expansion Act, H.R. 704, is led with Mr. 
Stivers, Mr. Pittenger, Mrs. Maloney, and other members of the 
committee. It is a bipartisan effort.
    And let me tell you, I don't know how you say you are going 
to help working people across America and want to eliminate the 
CDFI Fund.
    I think that is about how much time I have. Thank you for 
your time.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from Colorado, Mr. Tipton, is now recognized 
for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman.
    And I would like to thank all of our panelists for taking 
the time to be here today.
    I think listening on both sides of the aisle, we are 
hearing testimony about the importance of our community banks' 
concern that we are not getting access to capital at those 
local areas. I particularly appreciated Mr. Heck's comments 
when it came to talking about the importance of those small-
business loans.
    And I have been struck by the report that came out which 
cited that for the first time in our history, we are seeing 
more small businesses shut down in this country than there are 
new business startups.
    Mr. Burgess, have you had difficulty in terms of being able 
to make some of those small-business loans that Mr. Heck and 
myself are concerned about, and I believe many others?
    Mr. Burgess. Thank you, Congressman, for that question.
    Our whole business--our bank is primarily a small-business 
lending bank. So we spend most of our time trying to find 
small-business loans. We are definitely under more scrutiny 
from various different places for how we make loans in the 
small-business arena. So it slowed us down. Like I spoke to 
earlier, there is a little more of a box that we have to fit 
people into.
    What I also said is one of the most satisfying things to me 
in my job is being able to sit down with a small-business 
owner, listen to what he is trying to do, and try to custom 
tailor a plan that is going to best fit his or her situation. 
And I am less able to do that now than I have been able to do 
in earlier parts of my career.
    Mr. Tipton. How about even with existing customers? I am 
struck by a story we had out of Pueblo, Colorado, about 
regulations basically killing a small business, a small 
construction company. It was doing reasonably well, had paid 
off its line of credit. And I came from a construction family, 
so I understood this. The pipeline ran dry.
    They are trying to be able to bid new jobs to be able to 
keep their people employed, to be able to keep their equipment 
moving. When they went back to the bank, a local bank in 
Pueblo, to be able to re-up that line of credit, they were 
informed that the bank would have liked to have made that loan, 
but regulatorily they could not. As a result, the small 
construction company lined up their equipment, auctioned it 
off, and laid off their 23 core employees.
    Have you had that kind of an example down in Texas as well?
    Mr. Burgess. I don't have a specific example in mind right 
now, but I have had that happen in the past. And it is very 
unfortunate when that does happen. It hurts.
    Mr. Tipton. I find it curious, we have had Chair Yellen 
before our committee, and she has spoken to what is the 
reality, I think, that we are feeling at many of our community 
banks, what is called that trickle-down effect.
    As we look at the chart that has been up on the board, it 
would look very reasonable that community banks are exempt from 
so much of Dodd-Frank. But are we seeing that trickle-down 
regulatory effect that is increasing cost, making it harder to 
be able to make loans and harder to be able to actually support 
those small businesses that are helping our communities grow?
    Mr. Burgess. Yes, we are seeing trickle down. Just one 
example would be stress testing. That is really not supposed to 
apply, but it is being pushed toward us. It is being suggested 
to us that we do stress testing, which we have started doing. 
That is not supposed to be something the smaller banks are 
required to do, but that is just one example.
    Mr. Tipton. I also appreciate some of our colleagues, 
again, on both sides of the aisle, who are trying to be 
solutions-oriented. It is something I think we have had the 
opportunity to be able to visit about. We have introduced 
legislation called the TAILOR Act, to be able to actually have 
rules and regulations that are going to be sculpted to be able 
to meet the risk portfolio, the model of the bank.
    Is that a sensible way forward to actually address what I 
think I am hearing we all seem to be having in common, let's 
open up that market once again for community banks, not only to 
be started, but to be able to loan once again to our 
communities?
    Mr. Burgess. Absolutely. And we thank you for that, for 
sponsoring that bill. We feel that banks should be regulated 
based on the complexity of their business model, not based on 
necessarily an absolute size. And I heard the comments before, 
but we feel that the smaller banks especially are much less 
complicated, and we need to figure out how to have a less 
stressful environmental program over those banks so that they 
can operate and meet the needs of their customers.
    Mr. Tipton. Thank you.
    And, Mr. Chairman, my time is about to expire. I yield 
back.
    Chairman Luetkemeyer. I now recognize the gentlelady from 
New York, Ms. Tenney, for 5 minutes.
    Ms. Tenney. Thank you, Mr. Chairman.
    And thank you, panel. I appreciate you being here.
    I am from New York, where I live in a very rural area where 
we have few small community banks and credit unions left. We 
have seen a lot of consolidations and a lot less access to 
credit. We have a lot of rural areas, farming, and also have 
small cities, where we have people in urban poor zones who have 
a hard time getting access to credit for even basic items.
    And it seems to me, and I would argue just as someone who 
was a bank attorney in my past, it was a huge problem to deal 
with regulations, especially smaller banks. And I am the owner 
of a small business as well. And so trying to comply with the 
regulations is actually more onerous on a small community 
institution, including a bank, which to me has caused us to 
have less banks, in my estimation.
    I was just wondering--I think I would address this to Mr. 
Kennedy first--do you think the cost of attaining the actual de 
novo charter affects interested candidates?
    Mr. Kennedy. I apologize, but I couldn't understand.
    Ms. Tenney. Do you think that the cost of actually trying 
to obtain a de novo charter affects candidates or discourages 
them from being able to get into the market?
    Mr. Kennedy. I don't think so. And I again want to 
underscore, there has been a dramatic shift in the way the FDIC 
has viewed this in the last 12 to 18 months. And I think they 
are actively promoting. The OCC is doing the same thing. That 
is our personal experience. They are being as accommodating as 
they can through this chartering process. They are, frankly, 
enthusiastic about it.
    And I don't think the actual cost--clearly, there is 
additional scrutiny, business plan analysis. We are living in a 
much more complex time now because of the compliance costs and 
all those requirements. So there is a little increased cost, 
but if I think about the 30 charters over the years that we 
have been involved in, I wouldn't say it is dramatic.
    Ms. Tenney. I come from an area where I can walk into my 
local community bank and hand the teller my checking account. 
They balance it for me, and I can go back and talk to the bank 
president. There is about one bank left in our area like that. 
There used to be so many small banks, and they now just can't 
afford the compliance costs in many cases. Whether they have 
had to cut branches or consolidate, I have found it seems to be 
an issue.
    Mr. Stone, I just want to ask you if you could identify any 
areas where we can streamline the process and allow more 
financial institutions like the ones I described, in a small 
community with a farm-based economy, how we can actually bring 
them in without resorting to regulations.
    Mr. Stone. Congresswoman, thank you for this opportunity.
    I think a very important step that we didn't touch upon 
here regarding your question is, in order to secure funds to 
charter our credit union, it takes an altruistic effort from an 
entity to start the credit union. So it is not a loan. It is 
not an investment. Whoever gives that money, it is a gift. They 
are not getting it back. They are not getting interest on it. 
It is very different than shareholders in a bank, very, very 
different.
    That being said, to secure those funds is--in today's 
market, you have to find a group that has an affinity, some 
kind of special bond to the field of membership that you are 
starting with because otherwise why would they give those funds 
to start with, getting nothing in return.
    There is a 17-step process under the NCUA for chartering a 
credit union. I have been through it not that long ago. So it 
wasn't 10 years ago. It wasn't 20 years ago. It was less than 3 
years ago we went through this process. It is difficult at 
times and it is inefficient. So if we could have Congress 
improve the efficiency of the process, that would greatly help 
the process of starting a credit union, in addition to securing 
the funding, which is very difficult.
    Ms. Tenney. Thank you. We do have less and less credit 
unions. I used to represent a credit union in my district as an 
attorney.
    We touch on just that the Community Reinvestment Act is 
underserved, underbank communities would have less access to 
financial services. That is sometimes the case, especially in 
an area like mine that is fairly economically depressed.
    I would argue that, again, increasing the number of 
institutions, small institutions that don't have to be burdened 
with some of the regulations, that we certainly want to 
regulate, especially whether it is a bank or a small credit 
union, but can't we have more banks? Would you argue that there 
are more banks, more credit unions, to have competition and 
drive down the costs and increase the access to services, 
especially in some of our urban areas, where they really just 
don't have a place to go? Is that something that you would 
support?
    Mr. Stone. We are a proponent of exactly what you said. So 
we are able to give--our average rookie who comes into the 
academy makes $42,000 a year, and they might have a family, a 
small family. And living in New York City, that is not a lot of 
money. They don't have access. A lot them had predatory loans 
at very high interest rates.
    So we were able to offer from the get-go a very low 
unsecured interest rate for personal loans up to $5,000, which 
would help them either pay off high-interest-rate credit cards, 
help them buy equipment, or help them build up credit if they 
didn't have credit.
    Ms. Tenney. I think my time is about to expire, but I want 
to say thank you to all of you for testifying on this important 
issue.
    And hopefully, we can thank the chairman because--
    Chairman Luetkemeyer. The gentleman from Georgia, Mr. 
Loudermilk, is recognized for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman. And I appreciate 
the panel being here today.
    The lack of de novo banks in Georgia is especially 
concerning to me, seeing that Georgia lost more banks than any 
other State during the crisis, and we have had a difficulty of 
seeing new banks open up. In fact, of Georgia's counties, we 
have 3 that have absolutely no bank branch at all now, and we 
have 47 Georgia counties that don't have a community bank 
headquartered in the counties.
    As a small-business owner, I relied heavily on my small 
community bank because I served with the bank president on the 
chamber of commerce board and they knew the needs of the 
community.
    So it is actually really concerning that we haven't seen 
these. And even though large banks are important, there is a 
specific need, especially in rural communities, for these small 
community banks.
    And so, Mr. Burgess, how can we increase, just in the rural 
area, how are we going to be able to bring these underserved 
areas some new banking?
    Mr. Burgess. I think some of the things we can do is reduce 
the upfront capital threshold somewhat: $20 million to $30 
million is not going to work in the communities that you are 
talking about; probably $10 million would be a more reasonable 
number because that would take about a $100 million bank, and 
that is probably a doable number that they can get to in a 
reasonable period of time.
    Probably reduce the minimum capital ratios for maybe the 
first 3 years to let them get on their feet to 6 or 7 percent 
instead of maybe this 10 percent number we are kind of talking 
about right now.
    Create possibly a fast-track application process to make it 
a little bit easier for them to navigate that and move toward a 
quicker application process to get them in business.
    Possibly reduce that penalty box from 3 years to a little 
bit shorter so that there are not so many restrictions, like he 
talked about a minute ago, to get that business off the ground. 
If you have too many restrictions, you can't get going very 
fast.
    And there are probably some more, but I will let some other 
people talk.
    Mr. Loudermilk. Okay. I do have another question. We have 
seen a trend of financial institutions switching from Federal 
charters to State charters, mainly because it seems that the 
State regulatory environment is more favorable. What is the 
primary difference that you see between the State charters and 
the Federal or the regulator?
    Mr. Burgess. I am a little different. I am a national 
charter, and I like being a national charter, but it is a 
choice. The State charter is a little bit less expensive to the 
bank. One of the things I prefer with the national charter is 
that I have one regulator as opposed to, if you are a State 
charter, you have the State and the FDIC coming in at different 
times. I just don't like it that way. It is a choice.
    Mr. Loudermilk. Now, I am glad to see the credit unions and 
the banks sitting next to each other and getting along very 
well. That is unique in some cases, at least in Georgia.
    I have seen more credit unions popping up in some of these 
communities. Are we seeing a growth in credit unions nationally 
or are they filling in some of the voids that we have seen from 
small community banks?
    Mr. Stone. Congressman, we feel the credit unions are being 
reduced. The credit unions are being absorbed into larger 
credit unions. We found that it is very difficult to survive 
being a small credit union. As much as we try to help our field 
of membership, with all of the products they want, the more 
that we--if we increase products, increase services, we need to 
put another person on member services and create those 
products. This takes away from the regulatory compliance. We 
have to put someone back on regulatory compliance and then it 
takes away from member service. So it is difficult for small 
credit unions to survive.
    Mr. Loudermilk. If we were to remove some of what I feel is 
an overregulated environment, would that stimulate de novo 
banks, new credit unions coming into these--
    Mr. Stone. I think 100 percent, if that also included in 
the chartering process to reduce the inefficiencies that are 
there and improve the communication with the chartering entity, 
with the supervisor--in our case it is the NCUA--and the 
chartering the institution.
    Mr. Loudermilk. Mr. Burgess, cutting back on some 
regulations would--
    Mr. Burgess. I definitely think if we could tailor the 
regulation a little bit more for the startup banks, maybe the 
regulators stay closer to them for a while and have more 
communication. But if we could relax that a little bit so they 
can not have to spend so much money on personnel to get off the 
ground.
    Mr. Loudermilk. All right. Mr. Chairman, thank you. I yield 
back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from Michigan, Mr. Trott, is recognized for 5 
minutes.
    Mr. Trott. Thank you, Mr. Chairman.
    I want to thank the panel for their time and insight today. 
And I apologize, I missed your opening statements. I ducked out 
to speak to the Michigan Bankers Association. And I am glad I 
did because they gave me this hat. You can't read it from there 
probably, but it says, ``Make Banking Great Again.'' And if 
they had given me four more, I would give one to each of you to 
thank you for your time today.
    But I want to start with Ms. Edelman at kind of a high 
level before we dive into the de novo drought. What do you 
think caused the financial crisis in 2008?
    Ms. Edelman. The financial crisis in 2008 was caused 
primarily by--it was triggered by predatory mortgage lending, 
mortgages that were packaged up and sold through the private 
label security market, and folks buying, investors buying 
things that they didn't really know the quality of.
    Mr. Trott. What do you think caused all those predatory 
mortgages and subprime loans to be made? What was the impetus 
there?
    Ms. Edelman. Maybe I can save you some time. It was largely 
not small community banks that were making these loans.
    Mr. Trott. Do you think it was the responsibility of the 
private sector or the responsibility of the Federal 
Government--the role of the Federal Government that caused it?
    Ms. Edelman. Oh, I think it was the private sector. The 
regulation at the time was inadequate.
    Mr. Trott. So it wasn't the change in direction with 
respect to housing policies promulgated by Presidents Clinton 
and Bush insofar as they relaxed the underwriting standards at 
FHA for Fannie Mae and Freddie Mac and who should receive 
mortgages, that didn't have a role in loans being made to 
people who really shouldn't have them?
    Ms. Edelman. FHA had less than 5 percent of the mortgage 
market share in the lead-up to the crisis. Fannie and Freddie's 
market share had also dropped significantly. Most of the 
mortgages that were made that were predatory in the leadup to 
the crisis had nothing to do with the Federal Government.
    Mr. Trott. Okay. We probably can just agree to disagree on 
that.
    Let's talk about a little bank in Birmingham, Michigan, the 
Bank of Birmingham. I was at their holiday party in December, 
and the CEO pulled me in his office, and he said, ``Dave, I 
don't want to have to tell you this, but we have sold.'' And I 
said, ``Oh, I am surprised by that. The bank is doing well, it 
is a successful little bank in my town.''
    And he said, ``Yes, we sold it to the Bank of Ann Arbor, 
and we just could not handle the regulatory burden. We had to 
sell.''
    And I wish I had brought a picture to throw up on the 
screen. This is much too small. But this is just the 
regulations that have been promulgated since 2010. It only 
lists 15 of the many different bodies that regulate the 
financial institutions. And when I saw this, I really had a 
keen understanding of why the Bank of Birmingham had to sell, 
because they couldn't afford to exist in this environment.
    You talked earlier about kind of defending Dodd-Frank and 
suggesting that really Dodd-Frank is not the cause of the de 
novo crisis. And I had a chart that I brought. This one you 
probably can see. It talks about the number of banks that had 
disappeared over the last 25 years.
    And so when I looked at this chart earlier today, I 
thought, in response to your testimony, well, maybe you are 
right, maybe Dodd-Frank really is not the cause. I don't think 
it has helped, but we can argue about that. But maybe it is not 
the cause. Maybe it is just a factor.
    But then I realized, for the last 25 or 30 years, wouldn't 
you agree that the regulations generally on banks have 
increased tremendously, hence, that is the explanation for this 
chart?
    Ms. Edelman. I think there were--particularly in the lead-
up to the crisis, we went through over a decade of major 
deregulation. So I don't know that--I am not sure that is 
correct.
    Mr. Trott. Mrs. Love from Utah brought up a small business 
in her district. So if I am an automotive supplier in southeast 
Michigan, and I have maybe $2 million a year in revenue, and I 
want to spend $100,000 on a piece of equipment, and I need to 
get a loan, do you think Citi or Bank of America or Chase would 
even talk to me? I know from your response to Mr. Pittenger 
that you haven't been a loan officer, so just speculate for me.
    Ms. Edelman. I have met a loan officer. I have gotten a 
mortgage.
    Mr. Trott. No, no, but you told him you hadn't been a loan 
officer.
    Ms. Edelman. No, I have never been a loan officer.
    I completely agree with you that small businesses need 
small community banks in order to get credit. These are the 
banks that stay when the times get tough. These are the banks 
that make it possible for small businesses to do business. What 
I am concerned about is focusing on Dodd-Frank when we have had 
30 years of decline, and I am worried we are missing the bigger 
picture.
    Mr. Trott. My time is about to expire.
    Mr. Burgess, I want to ask you a question.
    And maybe if there is a second for you to comment on his 
answer, Ms. Edelman, that would be great.
    So if we relax the regulations, streamline the approval 
process, what is going to be the consequence of that 
succinctly?
    And then, Ms. Edelman, if you have any concerns about that, 
I would love to hear them.
    Mr. Burgess. Number one, I think it will allow us, as 
community banks, to go back to what we have been able to do in 
the past, as I have stated already, that we can more easily 
tailor specific packages for people based on their individual 
circumstances.
    Mr. Trott. And my time has expired. You would agree that is 
all good, Ms. Edelman?
    Ms. Edelman. If we are talking about finding ways to make 
it easier for small community banks, I think we have a lot to 
talk about.
    Mr. Trott. Thank you. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, we go to the gentleman from Kentucky, the 
chairman of our Monetary Policy and Trade Subcommittee, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman. Thanks for hosting this 
very important hearing about the de novo charter drought in the 
aftermath of the Dodd-Frank law.
    According to the Kentucky Bankers Association, which I 
represent, the number of banks in the Commonwealth of Kentucky 
has dropped from 198 to 164 since the enactment of Dodd-Frank. 
That means that roughly one in five banks that existed prior to 
Dodd-Frank has closed its doors.
    And contrary to Ms. Edelman's testimony, at least in 
Kentucky, I can tell you that most of this decline occurred not 
in the immediate aftermath of the financial crisis, but instead 
in 2013, 2014, 2015, and 2016, well into the implementation of 
the qualified mortgage rule, the TRID rules, and implementation 
of Dodd-Frank regulations.
    Now, we know from Mr. Burgess' testimony earlier today that 
Kentucky isn't the only State that has this problem in terms of 
the decline in community banks in this country. Ms. Edelman and 
my friends on the other side of the aisle, with reference to 
their slide that is on display here, they are blaming this 
decline in new banks--they are blaming low interest rates on 
this, monetary policy. Ms. Edelman's testimony is that 75 or 80 
percent of the decline in new banks can be explained by low 
interest rates and weak macroeconomic factors.
    I just have to note, as the chairman of the Monetary Policy 
Subcommittee, that my friends on the other side of the aisle 
are blaming unconventional monetary policy for macroeconomic 
trends in this hearing. But in the other hearing, in my 
subcommittee, they credit unconventional monetary policy for 
positive economic developments. So I don't know which one it 
is. I don't know what their narrative is.
    But here is what my community bankers tell me. What my 
community bankers tell me about this chart, and Ms. Edelman's 
testimony, is that if you are a good banker, you know how to 
work in a low-interest-rate environment, you know how to adjust 
your rates to reach the margin and the spread that you need to 
be profitable.
    What is different, though, now that coincides with this 
trend from 2008 to 2013 with the decline in new bank formation 
is the Dodd-Frank law. The low interest rate environment is not 
to blame. A community banker who was in my office today from 
central Kentucky told me that his bank--his net income, the 
profits of his bank are down $8 million a year, year after 
year, since the Dodd-Frank law.
    So this idea that low interest rates are the cause of the 
decline in new charters, the decline in banks just doesn't hold 
water. This trend coincides not just with low rates, which good 
bankers can deal with, it coincides with the Dodd-Frank law.
    So I will just ask Mr. Burgess to respond to that. Do you 
agree with that analysis?
    Mr. Burgess. Yes, I do agree with that. We, as bankers, 
always go through different interest rate cycles, and we have 
to manage our balance sheets in a way that we can appropriately 
deal with that. The difference this time is that our regulatory 
cost is significantly higher. It makes it much harder to reduce 
the cost side of the income statement to be able to adjust to 
those changes in interest rates.
    Mr. Barr. Now, my friends on the other side of the aisle 
also--and Ms. Edelman makes a big deal about the fact that 
Dodd-Frank law is tailored, and they say that there are 
exemptions from some of these regulations for small banks. 
According to Kentucky banks, what they say is the most time-
consuming and burdensome regulations are the real estate 
disclosure rules, fair lending regulations, ability to repay, 
QM rule, and TRID, and that these regulations are doubling the 
amount of time required to close a mortgage even assuming the 
disclosure contains no errors.
    Ms. Edelman makes the argument that there is a small 
creditor exemption on QM. Tell me why the small creditor 
exemption is insufficient to deliver the relief to a community 
bank, Mr. Burgess?
    Mr. Burgess. Let me just tell you our experience. Before we 
started implementing the Dodd-Frank rules, our bank was making 
about $220 million a year at our peak in the four markets that 
we serve. We had to go back and retool our entire mortgage 
lending process. We are just now getting back up to about $80 
million a year. So we are less than half in mortgage loan 
volume than where we were before we started implementing all 
the new rules.
    Mr. Barr. Thank you for your testimony. My time has 
expired. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from California, Mr. Royce, is now recognized 
for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. Thanks for holding this 
hearing as well.
    Mr. Burgess made a comment earlier that I was going to go 
back to, and that was your declaration this morning that you 
would not start a new bank in this regulatory climate. And I 
think if you are saying it, a lot of other people are thinking 
it, which could be what explains exactly the challenge we see 
and the lack of formation across the country.
    And then you go to the issues of why. And I think the 
gentleman from Kentucky raised the point about why we are not 
seeing the small-business loans, the mortgage loans, the 
financing of the local economic growth, why we didn't see the 
traditional function played at the local level that would have 
gotten the country moving out of the recession. And it goes to 
this issue--this is why I am a cosponsor of the TAILOR Act--it 
goes to this issue where I don't think that Friendly Hills Bank 
in Whittier, California, should be regulated like a Wall Street 
firm.
    I think what has happened here is that the overleverage of 
the systemically risky institutions brought about a flood tide 
of regulation that came down like a ton of bricks on the 
community banks that could least be capable with handling, 
given economies of scale, this ever-changing, ever-morphing 
regulatory environment in which they did nothing to bring this 
on. They were not the systemically risky institutions that 
created the crisis.
    So there was no excuse, in my opinion, for the way the 
legislation created the atrophy that exists today where, as you 
say, you and your friends and colleagues wouldn't really 
consider walking into this kind of environment. It just doesn't 
make sense.
    You are trying to keep your heads above water now. You are 
trying to support your local communities and stay alive in an 
environment where your best talent has to be spent trying to 
keep up with these ever-changing regulations instead of 
reaching out into the marketplace and doing what you have 
traditionally done commercially and with home loans and so 
forth.
    But I was hoping that you could also address a case where 
this tailored approach was promised and where that promise 
hasn't been delivered, and that is on the Durbin amendment. And 
I will give you my thoughts on that.
    I was a conferee for the Dodd-Frank Act, and I was very 
concerned about--and I laid out the arguments--what the impact 
was going to be on financial institutions with respect to this 
Durbin amendment.
    But one of the arguments that was thrown back was that the 
exemption for low asset institutions would protect community 
banks. It would protect community banks and credit unions. I 
remember that argument being made in retort. Even though, by 
the way, we had never heard this in committee. It came out of 
nowhere, if you remember the markup. And there we were with 
this Durbin amendment.
    So this hasn't come to fruition from any evidence I have 
seen. The Durbin amendment was passed without debate in the 
House, and the cost in the payments to the ecosystem were 
passed along to whom? To the small financial institutions.
    So how has the Durbin amendment impacted the calculus when 
it comes to starting new community financial institutions? That 
is the question I would ask. And did the exemption do what it 
promised to do? And what products or services have consumers 
lost out on in the aftermath of this passage? Because I 
guarantee you there were tradeoffs there as well. So those are 
the three questions I would ask.
    Yes, sir. Thank you.
    Mr. Burgess. Thank you for the question.
    The first thing is the Durbin amendment, in my mind, is 
fixing the price on our industry for a product that we created. 
And the amount that has been taken away has been given to 
another industry, and they had nothing to do with creating that 
product.
    Mr. Royce. And I haven't seen any real evidence that the 
beneficiary of that is the consumer either, by the way.
    Mr. Burgess. None that we can see.
    So as to how that would impact new startups, it really is 
part of the overall picture. You are taking income away from 
the industry, you are increasing the cost of the industry, you 
are increasing the bar to get into the industry. And all of 
those things working together is what would have an impact on 
startups.
    Mr. Royce. And what about that promise that was made that 
smaller financial institutions would not be impacted by this?
    Mr. Burgess. In our particular case, we fall under the 
threshold to where it is supposed to impact us. But if you look 
at the net income that we derive from that particular line of 
business, it has been declining ever since that happened.
    Mr. Royce. And what products, what services, in your 
opinion, maybe have consumers lost out on in the aftermath as 
you faced this consequence as well as the--
    Mr. Burgess. We have had to look at other products and 
services and figure out where we can make up that difference so 
that it doesn't impact our bottom line. We either have to 
increase pricing or eliminate certain products.
    Mr. Royce. I thank you very much.
    And, Mr. Chairman, thank you again.
    Chairman Luetkemeyer. The gentleman's time has expired.
    And with that, we are at the end of the hearing. They have 
actually called votes, so we are all going to--as you can see, 
most of the folks have already rushed out. I apologize for 
that, but we are trying to get done here for the day.
    I would like to thank the witnesses for your testimony 
today. You have been great, you really have answered a lot of 
very good questions, and your testimony has confirmed some of 
our suspicions of some of the problems with de novo situations 
in some circumstance, and also raised other ones.
    That is what we hoped to accomplish today, to be able to 
get a handle on what is going on in the financial services 
world so we can basically lay the predicate for what we need to 
do over the next couple of years with regards to looking into 
different rules, regulations, and situations that are affecting 
the financial services community as well, particularly with 
regards to the competitiveness and operation of those financial 
institutions.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 4:25 p.m., the hearing was adjourned.]






                            A P P E N D I X



                             March 21, 2017





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