[Senate Hearing 115-81]
[From the U.S. Government Publishing Office]
S. Hrg. 115-81
FOSTERING ECONOMIC GROWTH: THE ROLE OF FINANCIAL INSTITUTIONS IN LOCAL
COMMUNITIES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE CURRENT STATE OF COMMUNITY BANKS AND CREDIT UNIONS,
INCLUDING THEIR EXISTING REGULATORY FRAMEWORK AND IMPACT ON THEIR
CUSTOMERS, AND GATHERING LEGISLATIVE AND REGULATORY RECOMMENDATIONS
THAT WOULD FOSTER ECONOMIC GROWTH
__________
JUNE 8, 2017
__________
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Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Jared Sawyer, Senior Counsel
Brandon Beall, Professional Staff Member
Matt Jones, Professional Staff Member
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Elisha Tuku, Democratic Senior Counsel
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, JUNE 8, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Dorothy A. Savarese, Chairman, President, and Chief Executive
Officer, Cape Cod Five Cents Savings Bank, on behalf of the
American Bankers Association................................... 5
Prepared statement........................................... 33
Responses to written questions of:
Senator Brown............................................ 91
Senator Sasse............................................ 95
Steve Grooms, President and CEO, 1st Liberty Federal Credit
Union, on behalf of the National Association of Federally
Insured Credit Unions.......................................... 6
Prepared statement........................................... 45
Responses to written questions of:
Senator Brown............................................ 99
Senator Sasse............................................ 101
R. Scott Heitkamp, President and CEO, ValueBank Texas, on behalf
of the Independent Community Bankers of America................ 7
Prepared statement........................................... 55
Dallas Bergl, Chief Executive Officer, Inova Federal Credit
Union, on behalf of the Credit Union National Association...... 8
Prepared statement........................................... 58
Responses to written questions of:
Senator Brown............................................ 104
Senator Sasse............................................ 108
John Bissell, President and CEO, Greylock Federal Credit Union... 9
Prepared statement........................................... 72
Responses to written questions of:
Senator Brown............................................ 112
Senator Sasse............................................ 115
Senator Toomey........................................... 117
Adam J. Levitin, Professor of Law, Georgetown University Law
Center......................................................... 11
Prepared statement........................................... 74
Responses to written questions of:
Senator Brown............................................ 118
Senator Reed............................................. 119
Senator Sasse............................................ 120
(iii)
FOSTERING ECONOMIC GROWTH: THE ROLE OF FINANCIAL INSTITUTIONS IN LOCAL
COMMUNITIES
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THURSDAY, JUNE 8, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:04 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
Before we begin the formal hearing, I want to take a point
of personal privilege right now and give my thanks and best
wishes to one of my great staffers who has chosen to move on
to--I was going to say ``greener pastures,'' but newer
pastures. You cannot get greener pastures than here in the
Banking Committee.
[Laughter.]
Chairman Crapo. But Jared Sawyer is going to be moving over
to the Department of Treasury as the Deputy Assistant Secretary
for Financial Institution Policy, and Jared has just been an
outstanding help to me for years now on all the issues that we
have been working on here in the Banking Committee. So, Jared,
best wishes.
And now let us move on into the meat of the hearing. Today
we will receive testimony on the role financial institutions
play in fostering economic growth in local communities.
Community financial institutions are the pillars of communities
across America, particularly those in mostly rural States like
Idaho.
A Harvard University study appropriately described
community banking by stating, ``Their competitive advantage is
a knowledge and history of their customers and a willingness to
be flexible.''
Unfortunately, the operating landscape facing these
institutions has changed dramatically over the last several
years. The industry has become increasingly concentrated, and
that concentration has accelerated since the passage of Dodd-
Frank. The regulatory rules dictated from Washington are often
contradictory, complex, and confusing, and they sharply
restrict community lenders' ability to be flexible.
I am concerned that in a rush to implement new regulation,
regulators have often ignored the cumulative impact of the
rules and that there is a lack of coordination among them. We
want our
Nation's financial institutions to be well capitalized and well
regulated, but they should not be drowned by unnecessary
compliance costs.
Financial regulation should promote safety and soundness
while enabling a vibrant and growing economy. This is
especially important for community financial institutions,
which lack the personnel and infrastructure to handle the
overwhelming regulatory burden of the past few years.
Since 2010 we have lost roughly 2,000 banks and over 1,500
credit unions. In local economies, this places a strain on
small businesses looking to open or grow. Further, it can cause
American consumers to lose access to traditional banking
services or pay more for these services.
Today, however, I am hopeful about the prospects of
reversing the damaging trends facing these types of
institutions. In March, Senator Brown and I announced a process
to receive and consider proposals to help foster economic
growth. Similarly, the Federal banking agencies submitted their
EGRPRA report to Congress with several recommendations. The
Treasury Department is also currently working on several
reports to identify ways to improve our regulatory framework.
Together, these steps demonstrate a commitment to reviewing our
financial regulatory framework to determine what is working and
what is not working.
Today's hearing is the first of several Committee hearings
over the coming months that will begin to explore these
proposals with the goal of ultimately passing a meaningful and
bipartisan reform package. Community financial institutions are
critically important to the constituents in each of our States.
That has been clearly demonstrated in the conversations I have
had with Members on both sides of the aisle who are committed
to pursuing bipartisan reform measures.
Some measures would have an immediate impact on the
regulatory burden facing these institutions. For example, an
automatic qualified mortgage status for loans held in portfolio
would provide much needed flexibility for lenders without
increasing risk in the system. Another example is to simplify
and streamline capital requirements for community financial
institutions by reexamining Basel III and the risk-based
capital rule. Finally, an exemption for some financial
institutions from some HMDA reporting requirements would
decrease the paperwork burden for small lenders.
As this process moves forward, I want to encourage all
Members of the Committee to engage with us, work together with
each other, and bring bipartisan legislation forward. Together,
we can have a very strong opportunity to make a significant
impact.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Crapo, and thanks for
holding this hearing and for the work we have done together to
solicit ideas from any and all who have useful, productive
thoughts about economic growth and some maybe that were not
useful and thoughtful, but thank you for that.
[Laughter.]
Senator Brown. I want to echo the Chairman thanking all the
groups and individuals who submitted those proposals.
With the loss of good manufacturing jobs afflicting pretty
much all of our States, but especially through the industrial
heartland, prior to and during the 2008 financial crisis, it is
no wonder the economic crisis and the economic recovery has
been uneven. The crisis was devastating to millions of our
fellow citizens, and for those who want full-time work, the
jobs just are not there.
Foreclosures and job losses hit African American and Latino
communities particularly hard during the crisis. One study
found the average wealth of white families has grown 3 times as
fast as the rate for African American families and 1.2 times
the growth rate for Latino families. At these rates, it will
take hundreds of years for these families just to match what
white families have today.
Across Ohio, I have seen the impact of the uneven economic
recovery in both urban and rural areas. The lack of
opportunities in communities has contributed to an increase, as
we know, in prescription opioid abuse and dependence. Between
now and lunchtime, odds are that one Ohioan, at least, will die
of an overdose.
One of my staff members was meeting with the Chair of a
small bank in Gallipolis, Ohio, on the Ohio River. He thought
the banker would want to talk about Dodd-Frank, but what he
really wanted to talk about was opioid addiction and how it was
ravaging his community. By one estimate, this crisis has cost
our economy more than $70 billion, to say nothing of the
physical and the social and the emotional cost to individuals
and families who cope with addiction.
We cannot ignore issues like this and pretend they do not
affect the economy. We also know that the opioid epidemic is
not unique to Ohio or to the industrial Midwest. I am curious
to hear how it impacts our witnesses' communities and the
institutions they represent.
Yet the President's proposed budget makes the situation
worse. He wants to slash or eliminate entirely programs that
support economic development in both urban and rural
communities, including job creation and transportation. It cuts
important programs to provide access to affordable housing. It
takes away health care from literally millions of Americans,
including as many as 1 million Ohioans. Right now in Ohio,
200,000 people are getting opioid treatment who have that
treatment because they are insured by the Affordable Care Act.
Yet members of this body and in the House of Representatives
who have Government-paid insurance are willing to take that
insurance--who have Government-paid insurance ourselves are
willing to take it away from those 200,000 families.
While I keep hearing promises of an infrastructure
package--the President was in my State, in Cincinnati
yesterday--the infrastructure package to make up for housing
and transportation cuts and other things, you cannot build a
bridge with bullet points or Wall Street fees. So as we discuss
the role of financial institutions in local communities, I look
forward to hearing ideas, real ideas about promoting economic
growth. I am less interested in hearing old complaints about
issues that have little to do with solving the economic issues
plaguing our communities.
The evidence from the crisis shows that deregulation does
not lead to sustainable economic growth, but a breakdown in
consumer protections can lead to a financial crisis. Community
banks and credit unions play a vital role in urban and rural
communities. I am glad their loan volume has grown and they are
on a solid financial footing, those communities banks and small
credit unions.
I am pleased we have a representative from the community
development financial institutions community at this hearing.
Every dollar of public investment in CDFIs generates $12 of
private capital. They work in low-income communities. They find
alternatives to payday loans. And institutions like John
Bissell's are finding solutions in communities where
manufacturers have left, giving small business loans to former
employees of GE, for instance, and working to solve housing and
transportation needs. For that we thank you.
They also are not afraid to do work in communities that
other financial institutions have left. There are 242 CDFIs in
35 States headquartered in counties hard hit by the opioid
epidemic, and CDFI program awardees have made nearly 115,000
loans in these communities across 43 States totaling $6.5
billion, helping to create or retain some 65,000 jobs. Yet the
Trump budget has proposed to eliminate CDFI, yet another
example of the President's agenda that I believe will do more
harm than good to struggling communities in my State.
I am open to considering proposals for small institutions
that lower costs or cut red tape so they can better serve their
customers. There is obviously no point in paying for red tape
we do not need. And Congress has passed bills to do that. The
regulators have made changes at the urging of pretty much every
Member of this Committee, Democrat and Republican alike.
But I will be interested in hearing the amount, the real
amount of economic growth that such changes would produce. For
real economic growth, financial institutions need to be
partners with struggling communities, finding solutions to
create jobs, to make housing more affordable, and to access
transportation. I look forward to hearing about ideas from all
six of you.
Thank you so much.
Chairman Crapo. Thank you, Senator.
Now we will turn to the oral testimony. First we will
receive testimony from Ms. Dorothy Savarese, Chairman and CEO
of Cape Cod Five Cents Savings Bank, and on behalf of the
American Bankers Association.
Following her----
Ms. Savarese. Thank you----
Chairman Crapo. I will introduce all six first, and then we
will let you start.
Following Dorothy, we will hear from Mr. Steve Grooms,
President and CEO of 1st Liberty Federal Credit Union, on
behalf of the National Association of Federally Insured Credit
Unions.
Then we will hear from Mr. Scott Heitkamp, President and
CEO of ValueBank, on behalf of the Independent Community
Bankers of America.
Following Mr. Heitkamp, we will hear from Mr. Dallas Bergl,
CEO of INOVA Federal Credit Union, on behalf of the Credit
Union National Association.
Then we will hear from Mr. John Bissell, President and CEO
of Greylock Federal Credit Union.
And, finally, we will hear from Mr. Adam Levitin, Professor
of Law at Georgetown University Law Center.
There has been an intense interest in this hearing, and
that is why we have six witnesses. Because of that, however, it
is going to require that we reduce the time allocated to each
of you, and I think you have each been told that we are going
to reduce your time for your presentations to 3 minutes. But do
not worry, there will be plenty of opportunity for you to
continue addressing the issue as you get questions from the
Senators.
I will tell the Senators we are still having 5 minutes for
each Senator, but we are starting to have Senators try to push
that limit. So I am going to remind the Senators they have 5
minutes, not 5 \1/2\, 6, or 7.
So, with that, now let us return and, Ms. Savarese, you may
begin.
STATEMENT OF DOROTHY A. SAVARESE, CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER, CAPE COD FIVE CENTS SAVINGS BANK, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Ms. Savarese. Thank you, Chairman Crapo, Ranking Member
Brown, Members of the Committee. My name, as the Chairman said,
is Dorothy Savarese, and I am Chairman, President, and CEO of
Cape Cod Five Cents Savings Bank, which was formed in 1855. I
appreciate the opportunity to be here to present ABA's views on
the important role of community financial institutions growing
their local economies.
Let me begin by stressing that we agree on the need for
strong regulation. Indeed, lawmakers, regulators, and bankers
themselves took important steps after the crisis to improve
safety and soundness. Our experience since Dodd-Frank became
law demonstrated the effectiveness of many of these measures,
and at the same time showed that included in the 25,000 pages
of new and proposed rules are requirements that are harming our
ability to serve creditworthy customers and our communities.
ABA is committed to working with Members of the Senate on
targeted, sensible changes to financial regulations that will
help us accelerate economic growth and opportunities for all
Americans without compromising safety and soundness.
Some observers have used the community banks' resilience in
the face of these regulatory challenges as an excuse to leave
the regulatory environment untouched. Indeed, banks are
profitable and loans are growing. That is a good thing and a
sign of economic recovery. We have found ways to meet our
customers' needs in spite of the unnecessary burden we must
carry. That burden is too much for some banks. The fact remains
that every business day a bank in this country is either
acquired or merged. That is not good for competition,
consumers, or the U.S. economy.
We have the potential to do more for our economy. Loans are
growing--however, at half the pace they did years before the
financial crisis. Without reasonable reform, we will never
realize the thousands of businesses that could be started or
scaled, the hundreds of thousands of creditworthy families that
could move into a new home, and the millions of dreams that
could come true because they did not fit into the restrictive
boxes our policymakers have contrived.
The avalanche of new regulations has caused some banks to
stop offering some products or to cease operations. I just
heard a story of a branch closing down in a town in a rural
area in the Intermountain West, and the family wrote a letter
to their local banking official saying this meant their mother
would have to drive 60 miles to get to a bank, and they were
not going to let her do that.
As I travel the country, I hear story after story like
this, and I know Members of the Committee have heard these
stories as well. Each and every bank in this country helps fuel
our economy. Each has a direct impact on job creation, growth,
and prosperity. That is why it is imperative that Congress take
reasonable steps to fix the regulatory burden before it becomes
impossible to reverse the negative impact.
My written testimony includes several recommendations that
are part of ABA's blueprint for growth and were also included
in our recommendations to this Committee.
I am happy to discuss ideas and answer any questions you
may have about the impact of regulations on the Nation's banks
and how we can work to refine them to support the American
economy.
Thank you.
Chairman Crapo. Thank you, Ms. Savarese.
Mr. Grooms.
STATEMENT OF STEVE GROOMS, PRESIDENT AND CEO, 1ST LIBERTY
FEDERAL CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF
FEDERALLY INSURED CREDIT UNIONS
Mr. Grooms. Good morning, Chairman Crapo, Ranking Member
Brown, Members of the Committee. My name is Steve Grooms, and I
serve as the President and CEO of Liberty Federal Credit Union.
First Liberty is a $170 million institution with over 17,000
members, with branches in Montana and North Dakota. I am
testifying today on behalf of NAFCU. Thank you for holding this
important hearing on community financial institutions fostering
economic growth.
NAFCU believes that credit unions play an essential role in
their local economies, and their 108 million members agree.
During the recent financial crisis, credit unions were able to
continue to lend and help creditworthy consumers and small
businesses during difficult times, often when no one else
would. Despite the fact that credit unions played no part in
causing the financial crisis, they are still heavily regulated
and affected by many of the rules meant for those entities that
did.
We have lost more than 1,500 federally insured credit
unions--over 20 percent of the industry--since the second
quarter of 2010, with many citing the growing compliance burden
as a reason they cannot survive. My written testimony outlines
what will ensure a healthy and competitive environment and help
credit unions foster economic growth. I would like to highlight
five key principles from my testimony.
First, NAFCU supports a regulatory environment that allows
credit unions to grow. To accomplish this, we would encourage
the Committee to act on improving field of membership
restrictions for credit unions, modernizing credit union
capital standards, and ensuring credit unions can meet the
needs of small businesses.
Second, NAFCU supports appropriate, tailored regulation for
credit unions and relief from growing regulatory burdens. We
would encourage the Committee to exempt all credit unions from
the CFPB; ensure credit unions have greater exemptions from new
rules, such as the new HMDA requirements; and require better
tailoring of regulations, including accurate cost burdens.
Third, NAFCU supports a fair playing field and believes
that credit unions should have as many opportunities as banks
and nonregulated entities to provide provident credit to our
Nation's consumers. This includes ensuring regulatory relief is
balanced
between credit unions and banks, keeping nonbank financial
entities such as payday lenders subject to regulation, and
enacting a national data security standard for all who would
handle financial
information.
Fourth, NAFCU supports transparency and independent
oversight. Steps to accomplish this include making common-sense
improvements to the CFPB, requiring the CFPB to provide
rulemaking or guidance on UDAAP, and enacting common-sense
examination reforms.
Fifth, NAFCU supports a strong, independent NCUA as the
regulator for credit unions. NCUA's independence and structure
should be maintained, and we believe it should have the sole
authority for rule writing and supervision of credit unions.
In conclusion, if Congress wants to help foster economic
growth, enacting the regulatory relief provisions outlined in
my testimony is key. The time to act is now, and we stand ready
to work with you.
Thank you for the opportunity to share our thoughts with
you today. I welcome any questions you might have.
Chairman Crapo. Thank you.
Mr. Heitkamp.
STATEMENT OF R. SCOTT HEITKAMP, PRESIDENT AND CEO, VALUEBANK
TEXAS, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF
AMERICA
Mr. Heitkamp. Good morning, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. My name is Scott Heitkamp,
and I am President and CEO of ValueBank Texas, in Corpus
Christi, Texas. I am also Chairman of the Independent Community
Bankers of America, and I testify today on behalf of more than
5,800 community banks we represent. Thank you for convening
today's hearing.
ValueBank Texas is a $213 million bank with nine offices in
Corpus Christi, Texas, and Houston and 114 employees. We
specialize in small business and residential mortgage lending.
What ValueBank and other community banks do from inside a local
community cannot be done from outside the community. With the
direct knowledge of the borrower, the community, and local
economic conditions, we offer customized terms and make loans
that larger banks pass over. This is our competitive advantage
and the reason why we must be part of any plan to foster local
economic growth.
The economic recovery has been painfully slow and has
failed to reach many individuals and communities. Community
banks are uniquely suited to reach struggling households and
small businesses. We have a direct stake in the success of
communities, and we are eager to help.
Unfortunately, in recent years a sharp growth in regulatory
burden has made it increasingly difficult for community banks
to lend and foster local economic growth. Regulatory overreach
has created two problems in particular:
First, it has contributed to rapid consolidations. Banks
need a larger scale to amortize the increasing cost of
compliance. Today there are some 1,700 fewer community banks
than there were in 2010. This will harm competition and leave
many small communities stranded without a local community bank.
Second, overregulation has created a very tight credit box.
Too many would-be borrowers are being denied credit in today's
environment.
The good news is that solutions are at hand. ICBA's Plan
for Prosperity includes over 40 recommendations that will allow
Main Street and rural America to prosper. A copy of the plan is
attached to my written statement. Provisions of the Plan for
Prosperity are found in a number of bills introduced in the
House and the Senate, including the CLEAR Relief Act, S. 1002,
a consensus, bipartisan bill introduced by Senators Moran and
Tester. ICBA thanks the Members of this Committee who have
cosponsored S. 1002.
I would also like to thank Senators Rounds and Heitkamp for
introducing S. 1310, a bill to provide relief from the new HMDA
mandates. The bill is also cosponsored by Senators Hoeven,
Kennedy, Donnelly, and Tester. We strongly encourage this
Committee to consider S. 1002 and S. 1310 and other bills that
would include meaningful regulatory relief for community banks.
Thank you again for this opportunity to testify today, and
I look forward to your questions.
Chairman Crapo. Thank you, Mr. Heitkamp.
Mr. Bergl.
STATEMENT OF DALLAS BERGL, CHIEF EXECUTIVE OFFICER, INOVA
FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT UNION NATIONAL
ASSOCIATION
Mr. Bergl. Chairman Crapo, Ranking Member Brown, Members of
the Committee, I am Dallas Bergl, the CEO of INOVA Federal
Credit Union, in Elkhart, Indiana. I am also a member of the
Board of Directors of the Credit Union National Association on
whose behalf I testify today.
INOVA Federal Credit Union is celebrating our 75th
anniversary and proudly serves over 32,000 members with small
loans, auto loans, mortgages, and a variety of deposit
accounts, along with member financial education. INOVA has $336
million in assets, but we are quite small compared to the large
national banks. To our community, however, our credit union is
an invaluable financial lifeline because we provide products
and services that larger financial institutions and nonbank
lenders often do not.
Elkhart became a symbol of distressed Middle America during
the Great Recession. Our area is a national leader for RV
manufacturing, and we were really hit hard during the
recession. In fact, our community's unemployment rate tripled,
to over 20 percent. It was during this downturn that the
importance of a credit union to a community like ours became
even more apparent.
Many consumers across America are facing financial
struggles. Our credit union strives to meet their needs. That
is because Congress gave us a mission to promote thrift and
provide access to credit for productive purposes, and this
investment pays off. When individual communities like Elkhart
thrive, so does the Nation.
I would like to be able to say that credit unions face no
hurdles in our pursuit to fulfill this statutory mission.
Sadly, this is not the case. We supported the Government's
reaction to the bad policies that allowed anti-consumer
practices, ``too big to fail'' institutions, and economic harm
to Americans. We did not expect and we do not support the
onslaught of new regulatory burdens on credit unions while the
biggest banks get even bigger. That simply does not make sense,
but we are the ones who put our members first.
Credit unions have expressed concern over new regulations
on mortgages, remittances, and other financial products. We
have repeatedly asked for tailored regulations that allow
credit unions to responsibly serve their members and protect
consumers from bad practices elsewhere in the industry.
Contrary to what has been said, opposing one-size-fits-all
regulations is not caving in to Wall Street; rather, it is
untying the hands of credit unions and small banks to allow us
to better serve our communities. In truth, the current
regulatory scheme only serves to benefit the largest banks and
predatory lenders that have resources to game the system. This
should not be how the world works.
I truly believe that my credit union and their members, as
they thrive, so does our community. My written testimony
provides specific recommendations on how Congress and the
regulators can provide common-sense regulations to ensure that
credit unions can do even more to promote economic growth
across the country. I fear that without regulatory reforms,
credit unions and community banks in their current form will
not survive.
Thank you.
Chairman Crapo. Thank you.
Mr. Bissell.
STATEMENT OF JOHN BISSELL, PRESIDENT AND CEO, GREYLOCK FEDERAL
CREDIT UNION
Mr. Bissell. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, it is my honor today to share the
experiences of Greylock Federal, where we serve more than
75,000 families and small businesses in rural Berkshire County
in the hills of western Massachusetts. Our region, like so
many, is making the painful transition from a manufacturing
base that once offered 12,000 GE jobs to a service economy with
close to zero GE jobs. The population in my hometown of
Pittsfield, Massachussetts, has dropped from 58,000 to 40,000
just during the course of my lifetime.
While we are relieved to now see our local economy
recovering, too many families are being left out. Twenty
percent of families with children younger than 5 are living in
poverty, and 34 percent of children in my area are growing up
in single-parent households.
In addition, when we think about putting people back to
work, our mass transit system in western Massachusetts is very
weak. For working families living on the edge of financial
stability, a failed transmission or a dead battery in their car
means an immediate loss of income.
As the only CDFI credit union in the region and with our
strong $1 billion balance sheet, we at Greylock recognize our
responsibility to do more. We formed a community development
team with two full-time employees and seven certified financial
counselors who are now offering free financial education,
credit counseling, and budgeting assistance to every person in
our community.
Further, to put more people to work, we are expanding our
New Road Loan Program for people with credit challenges. When
they buy a reliable car and make on-time payments, their credit
score goes up and their interest rate goes down. We are also
expanding our Greylock Safety Net lending so that when a family
has an unexpected emergency, they can come to us instead of
falling in with a predatory lender. And, finally, we are
broadening our small business lending and technical assistance
to help more people transition to entrepreneurship. These steps
all taken together should help nearly 3,000 more local families
participate in the economic turnaround.
In conclusion, I want to offer my own thoughts on the role
of regulation. The people I am concerned about in Berkshire
County are still hurting. And make no mistake about it, these
consumers need protection. The abuses and predatory practices
that brought about the Great Recession destroyed 40 percent of
American household wealth. Black families lost 50 percent of
their household wealth, and Latino families lost 67 percent.
If we thought the abusive and fraudulent practices
exercised by big banks had ended, we received a rude awakening
with the Wells Fargo scandal.
Consumers need and deserve much stronger protection than
they had previous to 2010. And while I want smarter regulation
as much as anybody, I ask that you please, as you think about
steps to refine regulation, do not allow a repeat of the
excesses and predatory practices that precipitated the crisis
in the first place. Please remember that 6,000 credit unions
across this country are hard at work to grow their local
economies, and we are a vital force in that effort.
I thank you for your kind attention, and I am happy to
answer any questions you may have.
Chairman Crapo. Thank you.
Mr. Levitin.
STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER
Mr. Levitin. Chairman Crapo, Ranking Member Brown, Members
of the Committee, good morning and thank you for inviting me to
testify today.
There is good news and bad news about the role of local
financial institutions in creating economic growth. The good
news is that community banks and credit unions are thriving. A
higher percentage of community banks are profitable today than
at any point in the last 20 years, and the percentage of
profitable credit unions has increased every year since the
Dodd-Frank Act.
To be sure, consolidation continues among both banks and
credit unions, but industry consolidation is a long-term trend
that predates Dodd-Frank. There is no indication that Dodd-
Frank is contributing to community banking or credit union
consolidation. The chart on page 6 of my written testimony
shows that there is no change in the rate of consolidation
since Dodd-Frank. Instead, consolidation is driven by small
institutions' lack of economies of scale and for community
banks by generational transition problems when they are family-
owned banks.
In spite of these challenges, however, credit unions and
community banks are prospering. Credit union assets and
membership are up substantially since Dodd-Frank. Likewise,
community banks' return on assets and return on equity are both
up substantially. In fact, since Dodd-Frank, community banks'
equity has substantially outperformed the S&P 500. That is the
good news.
The bad news is that most American families do not have it
so good. Most American families have seen their real incomes
drop since 2010. Thus, during a period when the U.S. economy
grew 9 percent on an inflation-adjusted basis, median household
income fell by 0.6 percent.
Of course, not all families are doing poorly. The real
income of the top 10 percent of American households increased,
and most of that went to the top 1 percent. And what this tells
us is that the problem is not one of economic growth but of
economic distribution. It is important that economic growth be
a tide that lifts all ships, and that has not been happening.
Unfortunately, many of the proposals made by the financial
services industry in response to this Committee's request for
proposals have little or nothing to do with improving the
economic condition of American families. Instead, the bank
trade groups have proposed a set of deregulations that are not
appropriately tailored to small institutions but would also
cover mega banks and, thus, put the American families and the
stability of the financial system at risk.
Rather than pretending that deregulation is synonymous with
growth, we should be having a conversation about how to ensure
that growth benefits all Americans. In terms of this
Committee's ambit, it means addressing the continued specter of
too-big-to-fail so that we do not end up with privatized gains
and socialized losses and that we do not have harmful
spillovers from risky behavior by mega banks that hurt
families, small businesses, and small banks and credit unions.
It means addressing anticompetitive practices such as
credit card swipe fee pricing, which is a $73 billion annual
regressive wealth transfer from American consumers to banks. It
means facilitating more robust competition among financial
institutions for deposits by enhancing account and financial
data portability. And it means tamping down on excessive
speculative activity, such as by maintaining the Volcker rule
and enacting a 21st century Glass-Steagall Act.
I look forward to having that conversation.
Chairman Crapo. Thank you very much.
My first question will be to Ms. Savarese and Mr. Heitkamp.
The Volcker rule was implemented to prohibit trading by banks
using their own money or proprietary trading. Community banks,
by and large, have very little trading activity with the
exception of general operational hedging. The OCC and former
Governor Tarullo have expressed support for exempting community
banks from the Volcker rule.
Ms. Savarese and Mr. Heitkamp, can you elaborate on the
importance of reforming the Volcker rule by exempting financial
institutions that do not engage in significant trading
activity?
Ms. Savarese. Chairman Crapo, no one would encourage the
speculative use of customers' money for investments, and so the
Volcker rule was intended to direct itself at that. You know,
one of the things in my bank is we consider ourselves a
learning organization, and I think that we have seen from the
implementation of the Volcker rule that there have been
complications that have arisen as a result of that. And to your
point, there are some institutions for which it is just simply
not applicable.
Having a more nuanced approach, which has been encouraged
by the regulatory agencies, to reflect an appropriate
application of this rule based on size and complexity certainly
seems to be in order.
Chairman Crapo. Mr. Heitkamp.
Mr. Heitkamp. I tend to agree. The Volcker rule--size and
complexity is where we need to be. I think you are looking at
how you handle those individual issues are very important, size
and matter, and how they are fundamentally handled.
Chairman Crapo. Thank you.
Mr. Levitin, you mentioned the Volcker rule. I was curious
as to whether you agree that, with regard to community banks
and credit unions, there is a justification for exemption.
Mr. Levitin. I believe that for small community banks and
credit unions there is reasonable grounds for an exemption. But
I think it is important to keep any exemption narrowly tailored
to what are truly community financial institutions.
Institutions that start passing a $10 billion threshold I think
we need to be much more careful about.
Chairman Crapo. All right. Thank you.
And for Mr. Grooms and Mr. Bergl, studies demonstrate that
many small lenders have stopped or significantly decreased
mortgage lending since the passage of the qualified mortgage
rule. There has been bipartisan support for providing qualified
mortgage status for loans held in portfolio by the lender.
Mr. Grooms and Mr. Bergl, can you describe how this reform
would allow you to have more flexibility in extending credit?
Mr. Grooms. Thank you, Chairman Crapo. We feel mortgages
are an integral part of what we do to take care of our members.
What we have seen is an increase in regulation associated with
the paperwork and the ability to grant loans to our members.
Our goal is to make it easy for them, and what we have seen
recently with Dodd-Frank and the increased paperwork associated
with that is anywhere from 85 to 100 pages worth of
documentation that they have to review and sign, and the
reality is that they are just not going to go through and read
each one of those.
With the qualified mortgage rule, with a debt-to-income
ratio of 43 percent, it limits our ability to go beyond that
and to exercise some good judgment to those that really would
qualify. Our concern is we do not want to put ourselves at risk
and take any undue risk to make that loan. So it has made it a
little bit more difficult as well as a little bit more
expensive with the costs associated with the increased
regulation.
Chairman Crapo. Mr. Bergl.
Mr. Bergl. Thank you, Chairman. The changes in the mortgage
rules, particularly around TRID and QM, have adversely affected
our mortgage lending considerably. It has become about three
times more expensive to produce the documents under the TRID
rules, and the QM rule's 43 percent debt-to-income is adversely
selecting borrowers that might otherwise qualify had the QM
rules not been in place.
The peril to us as a financial institution for holding QM
loans on our portfolio would be that they are potentially not
going to be available for sale in the secondary market for
liquidity reasons and other asset/liability management reasons
for a credit union. So relief from that would certainly be a
helpful thing both for consumers, for economic growth in our
community, and for our credit union, and any relief around the
mortgage rules would also help our mortgage lending. Mortgage
lending has truly grown. However, the fact of the matter is
that smaller banks and credit unions are not getting as much of
that business.
Chairman Crapo. All right. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
I remember about a decade ago, soon after I got on this
Committee--maybe a little less than a decade--when it was clear
what was happening to the financial industry in large part
because of Wall Street malfeasance and misfeasance, I remember
a conservation I had with a community banker in southwest Ohio
who was pretty shocked by what was happening to his FDIC costs
and FDIC assessments.
Wall Street reform, as you remember, changed to be very--as
we were very aware of what was happening in community banks
with FDIC charges, assessments, we changed under Dodd-Frank how
the FDIC charges those assessments on insured banks. Risky or
large banks now pay more than smaller, less risky banks.
Ms. Savarese and Mr. Heitkamp, how much have you saved on
assessments since the second quarter of 2011 when the change
was put in place? You spoke eloquently and directly on what
Dodd-Frank meant to you on maybe the more negative side. What
did it mean to you in terms of FDIC assessments beginning, as I
said, the second quarter of 2011? Ms. Savarese, if you would
answer, and then Mr. Heitkamp.
Ms. Savarese. Ranking Member Brown, that is not information
I have with me today, but I would be more than happy to share
that with you as a follow-up and give you detailed information.
Senator Brown. Thank you. Do you remember, Ms. Savarese,
that it was significant for your bottom line and for your cost
savings?
Ms. Savarese. It was a meaningful impact. It certainly was.
I just cannot recall percentage-wise what that was.
Senator Brown. I would like to see the numbers. Fair
enough.
Ms. Savarese. I would be happy to, Senator.
Senator Brown. OK. Thank you.
Senator Brown. Mr. Heitkamp.
Mr. Heitkamp. I do not have the numbers here either. I can
tell you that it did help us. I do not think it was something
that was huge, but it was a positive way to get the assessments
back. But I do not have that number, and I can provide that for
you, too.
Senator Brown. I just think it is important. I asked that
question; I did not expect you necessarily to be able to just,
you know, easily regurgitate the number. But I think it is
important to remember that sometimes some of these rules may
have cost some money, but they helped with safety and soundness
of the whole system, always understanding that you two did not
contribute to the financial implosion that Wall Street
contributed to. But I think it is important to sort of look at
all sides of savings and costs.
Mr. Bissell, similarly, the cost to the NCUA Corporate
Stabilization Program was $4.8 billion, which came straight out
of the pockets of credit unions and was a direct result of the
financial crisis. These costs obviously hurt credit union
bottom lines. How did these costs impact your credit union in
relation to the costs of regulation or compliance?
Mr. Bissell. If I could use the example that has been
brought up so far of the TRID changes, when that change came
down, our teams got together, figured out what the impact was
going to be on our systems and our membership, and we made
plans to replace one of our software vendors so that we could
keep up with the changes in TRID. And that entire process cost
us about $50,000.
By contrast, the corporate credit union bailout that you
referenced that took place during the crash, the Great
Recession, cost our credit union more than $8 million. So the
cost, as I said, is unacceptably high of the factors that led
to the Great Recession. So Greylock's share of the corporate
credit union bailout process was more than $8 million.
Senator Brown. Would you think that when something happens
like happened 10 years ago, when we tried to--people suggest
cost-benefit analysis, which may be a little easier on a worker
safety rule or a clean up Lake Erie rule cost-benefit analysis
than it is a financial services rule. Would you suggest that
the cost of a rule or something you need to implement may be
significantly less than the cost to your institution if there
is a financial implosion of some kind?
Mr. Bissell. Well, I certainly would. The $50,000 expense
that we put in place to deal with TRID was largely a one-time
expense. We now run a better software platform than we ran
before. But that $8 million is not coming back. That is our
members' money. It came straight out of our capital.
In addition, it cost us a great deal more than that in loan
charge-offs when the Great Recession hit, both mortgage loans
and commercial loans. We took a big hit. Our entire community
did. So, yeah, I mean, the cost-benefit to me is not at all
equal.
Senator Brown. Are you different from any other--are you
markedly different in that assessment of the cost you had
versus the--the cost you had with TRID versus the cost of the
bailout, as you call it, are you significantly different from
other credit unions, or is that pretty widely held----
Mr. Bissell. No, my understanding is it was based on, you
know, a ratio across assets, and healthy credit unions needed
to pay--I mean, the good news is that the credit union system
bailed itself out. There was no taxpayer dollars expended
during that. That is the really good news. We were the
resilient system that we are supposed to be during a downturn.
The bad news is it cost my credit union $8 million, and if you
look at other credit unions that might be smaller, they also
paid a large percentage based on their assets.
Senator Brown. Thank you very much.
Mr. Bissell. Thank you.
Chairman Crapo. Thank you.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman. Good morning to the
panel. Certainly I have some experience with credit unions. I
served on a credit union board for about 7 years in a former
life many, many years ago, so I appreciate the impact that
small financial institutions have in our communities. It is an
impact that is really hard to replace. You do not have a
number. You have a name, and you have a relationship with so
many folks in those financial institutions, so it is without
doubt very important that we continue to see more credit unions
and more small banks populate throughout our Nation.
Unfortunately, that is not the trend, and that leads to a
very
important point that in South Carolina, about 9 percent of our
population is totally unbanked; another 23.5 percent or so are
underbanked. When you look at the trends in financial
institutions
consolidating as well as closing, it means that those folks in
rural communities in South Carolina--South Carolina being such
a rural State--will have fewer options, less access--less
access to start a business, less access to sit down and have
the conversation with someone in a financial institution who is
an expert at borrowing money for a home. So these impacts have
a real manifestation on the quality of life that will be
experienced by those folks.
I think that we are seeing a financial institution or
credit union closing at least about one a day. Somewhere around
1,917 banks have disappeared since Dodd-Frank. We have only
seen, I think it is, one credit union open in the last year or
so. We were averaging eight beforehand. This is a devastating
and persistent trend that means it really has a negative impact
on the very folks who are fragile and vulnerable in our
economy.
I would love to hear, Ms. Savarese, what you think the
major factors are driving the consolidation that is happening
as well as the lack of new financial institutions. And, Mr.
Grooms, I would love to hear your comments as well.
Ms. Savarese. Thank you, Senator Scott. You have said so
much that I would like to say. In fact, there has only been
five new banks chartered in the last 7 years, so to your point,
and this consolidation trend continues to accelerate.
I have spent the last 3 years traveling around the country
into a lot of rural areas. I have visited with bankers from 33
States and heard from all 50, and I was just with a banker on
Monday who lives in a town of 68, and I know that if he goes
away, the people in his town will not have access to that.
So what are the factors that are leading to that, you are
asking. Well, certainly, we can argue the low interest rate
environment, the protracted recovery have had an implication
for this. Economies of scale and technology, those are all
factors.
In addition, the additional regulatory burden and the
expenses with that are something that these bankers tell me are
forcing them to make the strategic decisions about merging or
selling or closing. Succession issues are a challenge in rural
areas. They have that as well. But if you think about it, do we
really want to add to that consolidation trend if there is a
way that we can support those communities banks in serving the
unique needs of their communities? And you have heard all the
stories from your constituents about that person-to-person
relationship. Right now, in one out of five counties in the
United States, the only financial services they have there is a
community bank. And if that community banker and our brethren,
the credit unions, go away, what is going to happen?
So what can we do to lessen the expense of the compliance
overlay? And how can we mitigate that to help those community
banks and financial institutions?
Senator Scott. Mr. Grooms, I only have about 40 seconds
left.
Ms. Savarese. Sorry.
Senator Scott. You will have to be succinct.
Mr. Grooms. Not a problem. Thank you for that question.
Because of the financial meltdown, margins shrunk as rates went
down. The increase in regulatory burdens, expenses associated
with that, we have seen smaller credit unions not able to take
care of the costs associated with that and have to merge.
Senator Scott. Yes, sir.
Mr. Grooms. We have shut 3 out of 10 branches down over the
last 4 years as a result of the challenges that we have faced
with costs associated with increased regulatory burdens.
Senator Scott. Thank you. And, Mr. Chairman, I will just
say in my last seconds here that a couple days ago we had Dr.
Hassett testifying before this Committee, and he was testifying
on the fact that we have had a very uneven economic recovery.
If you think about the lack of access to financial institutions
to borrow money for a home or to start a new business, we might
ask ourselves how do we expect for those rural areas that are
on the wrong side of an uneven economic recovery to stimulate
growth and opportunities when the access to the capital, the
glue that makes things happen, is missing.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman. And I would want
to welcome my friend Steve Grooms here today. Steve, we do not
often get a Montanan in front of this Committee. I think we
have two this month. You are here this week, and we have got
another one next week. But I just want to let the Committee
know that Steve runs a great institution, and he understands
small institutions but, more importantly, understands rural
America. So it is great to have you here.
I am going to start out with my question to Mr. Levitin,
and that is, would you agree that access to capital is pretty
critical when it comes to economic development?
Mr. Levitin. Absolutely.
Senator Tester. Yes. Let me give you the lay of the land in
Montana, not from a credit union standpoint but from a banking
standpoint, because I have got those statistics in front of me.
We
currently have 42 banks that are domiciled in Montana. Twenty
of those banks are less than $100 million. Twenty of those,
almost half, less than $100 million. Three are over $1 billion,
and we do not have a one over $10 billion. Since 2010, we have
had 30 mergers in the banks alone--not the credit unions, just
the banks. And so that is a pretty good cut. Now, that is the
bad news.
The good news is that they have been bought up mostly by
banks inside Montana, so those branches have stayed open. But
if we continue down this line, I will tell you they will sell
out to the big guys, to one of the five big ones, and then I
guarantee you those communities will not have branches because
they will close them down the same way Steve has had to with
four of his branches. And those communities will not have
access to credit.
We are talking about areas where, if you close the bank
down in my little town, I have got to go 50 miles. And I
guarantee you that if JPMorgan Chase owned that bank, they
would close the one down that is 50 miles away.
So we have got a real problem in rural America, and it is
one of the reasons why I think it is very critical that we
address this issue of regulation because, as Ms. Savarese has
pointed out, you have economies of scale with regulation and
technology. And if we continue the way we are, the very people
that we are concerned about, the big guys, we are empowering
them by reducing competition in the marketplace.
So, Steve, I am going to go back to you now since I have
been talking about banks. Over the last 8 years, can you tell
me how your regulatory burden has changed in a credit union of
$170 million?
Mr. Grooms. Thank you, Senator Tester. Thank you for your
support of credit unions and all you do to help the little guy,
make sure they are taken care of.
Over the last 8 years, we have seen significant increases
to the regulatory burden. With CFPB, we have an additional
regulator that is an added burden that we have to deal with. We
have talked about the TRID, the qualified mortgages. It has
been about $350,000 worth of added expense we have calculated,
as we have had to hire an additional compliance specialist. We
have had to bring in three or four different pieces of software
to assist us. We are having to do some reporting with the HMDA
manually and collect some of this information. So rules are
changing in January of 2018, went from 13 to 25, they are
talking 40 to 48 more data points that we have to figure out
how to collect. This is a pretty significant burden, and when
the financial meltdown took place, we felt like we were wearing
the white hat helping those that needed the help. But we are
getting painted with a broad brush with the big guys that has
really made it difficult, particularly for small credit unions.
Senator Tester. So in your bank of $170 million, it was an
additional cost of about $350,000. Is that over the 8 years or
is that per year?
Mr. Grooms. That is over the last 7 years.
Senator Tester. Over the last 7 years. And could you, Ms.
Savarese, very quickly tell me what kind of impact it has had
on your bank?
Ms. Savarese. Well, one of the things that we just did,
Senator, was an analysis of our non-interest expense in the
institution and how much was related to compliance. And I do
not have a baseline from before Dodd-Frank, but right now over
24 percent--so $1 out of every $4--goes to compliance-related
expenses. And on the mortgage side, it is over a third. So out
of every dollar that I spend that is not related to interest,
is related to compliance.
Senator Tester. Thanks for those comments. I would just say
this: I mean, I think that we need to have profitable community
banks. We need to have a profitable banking system, quite
frankly, and we need to have credit unions out there that are
doing what they need to do to make sure that they are serving
their customers.
My concern is from a Montana perspective that if we
continue without adjustment, with all the best of interest, we
will end up not having access to capital in rural America. When
that happens, we have got a big problem in this country.
I want to thank the Chairman and Ranking Member for having
this hearing.
Chairman Crapo. Thank you, Senator Tester. I agree with
those concerns.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
During the 114th Congress, I introduced legislation that
would provide relief for community financial institutions that
would have to report new data points as a result of CFPB's
amending of the Home Mortgage Disclosure Act, or HMDA. I have
been working at introducing new legislation in this Congress--
as a matter of fact, we introduced it yesterday--that basically
would exempt smaller institutions from the post Dodd-Frank HMDA
data reporting requirements due to come online in January of
2018, I believe. Senator Heitkamp and I are cosponsoring that
legislation.
For those on the panel whose institutions would be involved
in the consumer mortgage market, could you comment on some of
the challenges you face getting ready for the new HMDA data
reporting requirements and the relief that this legislation
might offer to you and your institutions?
Mr. Heitkamp. Happy to. I think it is huge. I want to tell
you thank you very much for that. Right now, the 23 points that
we are collecting right now is already a lot of work that we
are doing, but we are already trying to get ready for the new
collection. We are starting to implement processes in the bank
to actually collect that data so we will be ready for next year
when we do have to start reporting. And I can tell you my staff
has already reported it is substantial because it is now going
to 48 data points. So it is checking. So we have hired
several--well, we have two people in our bank instead of one,
and then we have also hired outside counsel to help us with
making sure that we are getting the right data in the right
places.
Senator Rounds. It would be an ongoing cost?
Mr. Heitkamp. It would be ongoing.
Ms. Savarese. And, Senator, in addition to the ongoing
cost, the startup cost, as Scott is saying, is--we set up
priorities for strategic projects in the bank, and it sort of
makes me sad that on top of doing things like introducing new
basic banking, checking account, and some things that serve our
consumers more effectively, we have to have the HMDA
preparation as a major initiative taking up time, technology,
and taking it away from the things that we could do to serve
our customers.
Senator Rounds. Well, unfortunately, we probably will not
be able to save the costs, the originating costs that some of
you are going to bear, and I notice all of you--have all of you
made money in the last couple years? Is anybody not making
money? See, you are business people. You are going to make
money. You are going to spend the money when it comes to the
regulatory requirements. But then you are going to pass it on.
Somebody else is going to take that cost, and I think that is
the part that sometimes gets lost, particularly in our smaller
banks.
Let me just ask--and I am just going to ask for a yes or
no. Have you raised fees in the last couple of years to your
consumers? Let us go right down the line.
Ms. Savarese. Yes.
Mr. Grooms. Yes.
Mr. Heitkamp. Yes.
Mr. Bergl. We had to raise our mortgage origination fees
specifically.
Senator Rounds. Sir?
Mr. Bissell. We have begun to cut as many fees as possible
for our customers. You are right that those costs have to go
somewhere, but we have tried very hard to not put that into
fees and put it on the backs of our membership.
Senator Rounds. In this particular case--and I will ask
this of Mr. Bissell--would the HMDA legislation that we have
proposed impact your institution?
Mr. Bissell. It would, yes. We are the top mortgage
provider in our market. About one out of every four mortgages
is originated by Greylock.
Senator Rounds. I recognize that each of you will have a
different opinion on it, but I am just curious. Do you see the
additional data points that would be required under this
legislation--did you feel it was necessary that your
institution collect those data points?
Mr. Bissell. Well, I want to acknowledge up front that we
are a larger institution. We are $1 billion. And so as a larger
institution, I have the luxury of a large IT department, a
large lending department, and a large risk management and
compliance department. So I am certainly conscious of the fact
that at a smaller institution the impact of collecting those
data points could feel much larger to them. So our approach is
we understand what is coming down, and we adjust our business
model to meet that.
Senator Rounds. And I think that is a lot of what we are
hearing here today when we talk about fewer banks being created
in terms of new ones coming online, and those that are smaller
are being picked up by large ones who actually have the size to
be able to afford the added regulatory compliance capabilities.
I am just curious. I want to run into another one that we
have talked about, and that is the TAILOR Act. Earlier this
year, we introduced the TAILOR Act, which would require Federal
regulators to more precisely tailor the regulations they issued
based upon the risk profile of the institutions. Secretary
Mnuchin echoed the idea that the bank regulations should be
tailored to the activity, not based on size alone. And I am
running out of time, but could I just very quickly get either
agree or disagree that something along the lines of the TAILOR
Act would be beneficial or not beneficial to the consumers that
you serve?
Ms. Savarese. Completely agree.
Mr. Grooms. Agree.
Mr. Heitkamp. Agree.
Mr. Bergl. Agree.
Mr. Bissell. I think scaling things appropriately makes
sense.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you all for
being here. I am glad to see that two of our witnesses here
today are from Massachusetts: Ms. Savarese, Mr. Bissell. So
thank you for the work you do. It is good to see you in DC.
These hearings are about ideas to encourage economic
growth, and every single banking trade group represented on
this panel sings pretty much the same song, and that is that
the key to stimulating economic growth is rolling back the
rules in their part of the banking industry.
I have concerns about these proposals, but today I want to
focus on just one. In Dodd-Frank, Congress directed the Fed to
impose tougher rules on banks with more than $50 billion in
assets. That is about 40 giant banks altogether, the top one-
half of 1 percent. Now, together, these 40 banks control more
than $14 trillion in assets, which is about 95 percent of all
the banking assets in the country by just these 40 banks.
One proposal which Republicans on this Committee pushed
last year is to raise that $50 billion threshold to $500
billion, exempting dozens of huge banks from tougher scrutiny.
Professor Levitin, do you think that this poses risks to
the safety of the financial system?
Mr. Levitin. Yes, I absolutely do, Senator Warren. We know
that the failure of banks that were far smaller than $500
billion--such as Washington Mutual, which I think was around
$300 billion; Countrywide, which was never more than about $120
billion--we know that the failures of much smaller institutions
than $500 billion have had serious systemic effects on the
financial system. Frankly, it is rather reckless to consider a
$500 billion threshold.
Senator Warren. So this change would pose real risks. In
your view, would the change stimulate any meaningful economic
growth?
Mr. Levitin. No. To the extent that there are any savings
from compliance costs there for the larger banks, it is much
more likely that they would get passed on to the banks'
shareholders in the form of higher dividends than to consumers
in terms of lower rates on loans because the market for capital
is more competitive than the market for--than the consumer
market.
Senator Warren. Thank you.
Now, an alternative proposal may actually be worse, and
that is eliminate the $50 billion threshold entirely, cut
nearly every giant bank loose, and direct American regulators
to apply stricter standards to these banks only if they meet a
set of criteria established by an international banking
regulatory body.
Ms. Savarese, your organization submitted a letter to this
Committee in support of that proposal. One of the factors the
bill requires is that our regulators must look at the global
reach of a bank. Do you think that a bank can impose a risk on
the U.S. economy only if it has international operations?
Ms. Savarese. I think what the bill proposes is that there
is a broader analysis of the complexity of the institution and
the systemic risk that it presents. And so there were actually
five different things that could be taken into account. Each
one was not mandatory, so, for example, you could have an
institution that did not have international interconnectedness
and, therefore, that would not be applicable to that
circumstance.
However, what they are saying is for those that do, you
should take that into account in judging the risk. It is a
risk-based approach.
Senator Warren. If I can, I just want to understand, and
that is the part I am not quite getting. There are only five
factors. One of the five factors is about international
connections, and I am just trying to understand why it is
there.
The way I see it, it makes no sense to apply a set of
international standards to determine whether or not there is a
threat to our domestic economic system, that that is actually
where we should keep our attention. And I do not quite
understand the ABA's argument on this aspect of financial
regulation.
Ms. Savarese. I think that the point is to enhance the
risk-based analysis by adding factors, and if you think about
it, if a bank has international interconnectedness, it actually
has a little bit of a higher risk profile than one that does
not. And so if I am the regulator, I am going to want to
understand that so that I can then say, hey, are those global
events going to impact this? And, by the way, we still have an
invitation to you to come to our bank.
Senator Warren. And I am ready.
Ms. Savarese. I would like you to do that. Good.
Senator Warren. You know, the only thing I would say on
this--because I do worry about banks like Countrywide that were
entirely--had nothing but domestic operations, obviously got
big and brought down the economy. I think it is really
dangerous to mess with the $50 billion threshold. The banks
that would be cut loose under these proposals can pose a real
threat to the economy. Look at what happened in the 2008
crisis. You know, Countrywide in 2006 had less than $200
billion in assets, but was responsible for 17 percent of all
the mortgage originations in the country. And when they failed,
it sent shock waves throughout the entire economy.
The same thing could happen again with a bank of that size.
In my view, it is better to keep the regulation threshold where
it is. Let the Fed tailor their rules, as it has been doing
already, and stay focused on risk.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. And I want to
also thank our Ranking Member. And I want to quickly recognize
one of today's witnesses: Dallas Bergl, the CEO of INOVA
Federal Credit Union, in Elkhart, Indiana. I am pleased to see
someone else from Indiana here before us. I have known Dallas
for a long time. He has been an extraordinary leader not only
in the credit union world but in the financial world as well.
As I said, within the credit union industry, Dallas is
very, very respected not only in Indiana but nationally, as he
serves on the Board of Directors of both the Indiana Credit
Union League and CUNA. We appreciate you being here today, Mr.
Bergl, and I look forward to your testimony and, therefore, I
will start with you.
While we look at this, last summer Senator Ben Sasse and I
wrote a letter to CFPB Director Cordray, garnered roughly 70
signatures from our colleagues urging the CFPB to utilize their
Dodd-Frank authority to more carefully tailor financial rules
to match the unique roles of community banks and credit unions.
The fact that 70 Senators agreed to sign speaks to the
widespread support here for common-sense regulatory relief.
And so what I would like to ask you is to bring that
Hoosier common-sense perspective to this. Can you highlight the
section of your testimony that you think speaks to the need for
a more tailored approach from the CFPB and from any other
regulators?
Mr. Bergl. Thank you, Senator, and we very much appreciate
your leadership on that letter and the work you did in the
House as Dodd-Frank was being structured to try to provide a
system in which smaller banks and credit unions would not be
swept up with the bad players of the time.
Unfortunately, today the reality is we have effectively,
although we are well below that threshold, the $10 billion
threshold at $336 million in assets, gotten swept up in most of
the regulatory reforms that have been promulgated by the CFPB.
Our organization is not large enough or structured, and
certainly was not prior to a number of these regulations coming
out, to handle the additional financial burden related to that.
So we have had to make numerous changes within our own
organization, and, in fact, we have reduced the overall force,
the head count in our organization, in order to generate enough
revenue for some of the implementation of the software we
needed and to bring in the kind of expertise that we needed in
reg compliance, not only in the mortgage area but globally. So
the financial burden for us has been greater than what may be a
$1 billion credit union or larger.
Senator Donnelly. And those people could have been out
developing or approving loans for small businesses, for
mortgages, for similar things that can make the community grow?
Mr. Bergl. Yes, Senator. I tell people that when I was
younger, I used to wake up every day working for a credit
union. I loved the job, and I would think, ``What great things
can I do for my members today?'' I wake up today thinking,
``How am I going to deal with the regulations and avoid my
regulator in NCUA coming down on me, let alone the CFPB?''
Senator Donnelly. Well, not to get personal, but I like the
way you used to wake up before rather than now.
[Laughter.]
Senator Donnelly. To the other witnesses as well, most of
us agree community banks and credit unions are overburdened by
regulations and need relief, but--and you have all said it,
too--at the same time, there is no desire to roll back the
rules on the Wall Street banks and financial institutions that
caused so much of the pain. Even the regulators, however, do
not always have a uniform opinion on what makes a community
financial institution.
And so, you know, is it institutions below $10 billion in
assets? Below 50? Should we consider geographic scope in
lending activities?
I would love for each of you to tell me what you think
helps to define a community financial institution. Ms.
Savarese?
Ms. Savarese. Thank you, and----
Senator Donnelly. If I had 5 cents, I would save with you.
Ms. Savarese. Well, thank you.
Senator Donnelly. Actually, I would save with Dallas.
[Laughter.]
Ms. Savarese. Well, it is good to know you are loyal. You
know, when I keynoted at the first Federal Reserve Community
Bank Conference, that was half of what we were trying to focus
on, is what defines a community bank. What I think is wonderful
about the approach that has been taken by this Committee is
understanding there are many factors that go into defining
that.
I have a colleague who has a bank that is now exceeding $10
billion, and yet if you looked at his operations, you would say
it is so values-driven, it is so focused on his community, he
is so generous.
So I think arbitrary thresholds are very difficult, and
instead, taking in scale and scope and complexity and risk
profile is the appropriate way to deal with it. We are $3
billion now. When I started with my institution, we were 500. I
would say we are still a community bank.
Senator Donnelly. Well, thank you. And I can see I am out
of time, and I know our Chairman is trying to keep this in
line. But I want to say to Mr. Heitkamp that your cousin is a
terrific member of the Committee.
[Laughter.]
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. I am sorry I have
been popping in and out, but they do not check with us first
before the Chairman schedules these hearings, you see. So we
have to be several places at one time.
Since I am here on the end, I cannot see your name plates,
so I will just--thank you. Thank you. I will just kind of throw
this out to anyone. Do you still think we have institutions
that are too-big-to-fail in America?
Mr. Bergl. I believe that to be the case, Senator. I think
that we have--if you just look at the pure numbers in the
banking industry, the largest banks have gotten even larger at
the same time that we have lost the smallest financial
institutions in both credit union and banking space over the
last decade.
Senator Kennedy. Does anybody disagree with that?
Ms. Savarese. Yeah, I would like to take a contrary view. I
think one of the things that the legislature has done with its
leadership in the last 7 years, and the regulators, and the
banks themselves in terms of simplification, is mitigated those
exposures.
One of the things we have to think about is we have a large
and diverse economy, and we want our large customers to go to
our institutions, not have to go overseas----
Senator Kennedy. I do not mean to be rude, but I want to
respect my 5 minutes. Well, let me ask you this: Let us suppose
Morgan Stanley went bankrupt tomorrow. You do not think it
would have a substantial impact on the American economy----
Ms. Savarese. You asked----
Senator Kennedy.----scare the living daylights out of
everybody else and cause other banks to stop trusting each
other?
Ms. Savarese. I think that it would certainly have an
impact. I would argue that I think that through Dodd-Frank and
a variety of other measures that have been taken, we have an
orderly, nonchaotic way to deal with that that would protect
the financial system.
Senator Kennedy. Have you read Dodd-Frank?
Ms. Savarese. Yes, sir.
Senator Kennedy. All 2,000 pages?
Ms. Savarese. Yes, sir.
Senator Kennedy. And 22,000 regulations?
Ms. Savarese. Twenty-five thousand.
Senator Kennedy. You can stand on it and paint that
ceiling.
Ms. Savarese. Yes, sir. I know that.
Senator Kennedy. It is an embarrassment.
Does anybody really believe on the panel that our
community--I will call them our ``community banks.'' I am
talking about banks and credit unions with less than, say, $10
billion in assets. Does anybody here believe they did anything
to contribute to the meltdown in 2008?
[A chorus of noes.]
Senator Kennedy. Well, geez, I thought this great bill,
Dodd-Frank, decided to regulate them to half to death. Am I
wrong? Haven't we lost 1,700 small banks and credit unions
which have been forced, because of the outrageous regulatory
costs, to either sell or merge, which further concentrates
assets, which undermines the whole purpose of Dodd-Frank? I
mean, was I playing Frisbee in the quad when they discussed
that in class?
Mr. Levitin. With respect, Senator, there has certainly
been consolidation of the community banking and credit union
industry, but I do not know that it can be pinned on Dodd-
Frank. That consolidation has been going on for decades. Credit
unions have been declining in number since 1979, and the pace
has not picked up since Dodd-Frank.
Now, Dodd-Frank certainly increases regulatory burdens, but
there are a lot of other factors that are going on.
Senator Kennedy. Mr. Levitin, have you ever run a small
bank?
Mr. Levitin. No, I have not.
Senator Kennedy. OK. If you were head of a small bank, you
have got, let us say, 60 employees, and all of a sudden they
put in front of you a 2,000-plus-page bill and 25,000 pages of
regulations. You are telling me that is not going to dominate
your entire business to the point that you cannot even worry
about making loans to the community? Are you telling me this is
a coincidence?
Mr. Levitin. First of all, I think I would dispute your
characterization of the number of pages of regulations. The
actual regulations are more like a few hundred pages, and they
apply to very specific things. Most of it is----
Senator Kennedy. Well, one of you all is wrong then.
Mr. Levitin. Most of that is--no, I can tell you what the
rest of the number is. It is the background materials on why
the regulation is needed. Those can be hundreds and hundreds of
pages for each regulation. The actual rules are not very long.
I read these, I teach these. They are masterable. It takes some
time. I am not going to argue with you that there is an
increase in regulatory costs from Dodd-Frank. But it is not a
game changer.
Senator Kennedy. I am out of time. Thank you, folks, very
much. Forgive me for being so candid, but you have got to cover
a lot of ground in 5 minutes.
Chairman Crapo. You did a good job.
Senator Heitkamp.
Senator Heitkamp. Thank you so much, Mr. Chairman, and I
want to take a little credit for Mr. Grooms, too, because you
represent my State, and you are part of that vibrant community
bank network that we have. We are grateful to have you, and I
am not going to let Tester take all the credit.
Mr. Grooms. Thank you. We are pleased to be in North Dakota
as well.
Senator Heitkamp. You like it better than Montana, don't
you?
Mr. Grooms. That will be our secret.
[Laughter.]
Senator Heitkamp. Yeah, do not tell anyone, especially Jon.
And, also, if the last name is Heitkamp, we are related. And we
have tried to trace it back, but, you know, it is great to see
you here, and it is great to see all of you. A lot of ground
has been covered that I wanted to also cover, especially as it
relates to mortgage lending. But I will start out by saying I
think there is a great will on this Committee to actually do
what you need us to do.
Unfortunately, in Washington, DC, trying seems to get some
attention, but doing, we never seem to get it over the finish
line. And I know the Chairman and the Ranking Member,
especially the Chairman, we have been involved in a number of
groups since I have been on this Committee that, really, we get
it. We understand what you are saying. We understand the
additional burdens, the additional costs, and we understand how
difficult that is to maneuver.
One of the things that I will say that we see trends on is
that the application of artificial intelligence in compliance,
and I wonder: Well, how is Lincoln State Bank in Hankinson
going to be able to afford? So they are going to have to do all
the compliance by hiring people. But the big banks, the big
institutions, will see their compliance go down by application
of artificial intelligence, and that is something that we have
not even had a conversation about.
And so kind of looking forward beyond the challenges of
Dodd-Frank, I would like to just have a discussion on what you
think threatens banks your size. You know, take us out of the
regulatory world. And what can we anticipate 10, 15 years into
the future so that we can keep you in business? And we will
start with Ms. Savarese?
Ms. Savarese. You know, Senator Heitkamp, I was just with
your constituents on Monday.
Senator Heitkamp. Yes, and thank you.
Ms. Savarese. And they all say thank you for your support.
You know, it is such a forward-looking question, and thank you.
And also to your point about the bipartisan approach that this
Committee is taking, it is so exciting to see. You know,
FinTech--you talked about AI, artificial intelligence--is a
huge issue, and what has been wonderful is the regulatory
agencies are trying to support community banks, understanding
how to partner with FinTech so that they can be competitive. It
could be a leveler, a field leveler, for them.
Senator Heitkamp. That is very interesting.
Ms. Savarese. So we are working at ABA--we actually
published a playbook for community banks on how to navigate
through FinTech. I think that is a big thing.
Senator Heitkamp. OK. Mr. Grooms?
Mr. Grooms. Thank you, Senator Heitkamp. Thank you for your
support of credit unions as well. FinTech and nonregulated
entities, payday lenders, a big issue, and we want to make sure
we take care of those that need taking care of and not let the
entities that are not regulated get away with things that we
cannot.
Senator Heitkamp. That is a dirty little secret about
payday and predatory lending. The more we squeeze legitimate
community-based organizations, the more the nefarious, truly
predatory folks crop up.
Mr. Grooms. Exactly. Thank you.
Senator Heitkamp. Mr. Heitkamp.
Mr. Heitkamp. I kind of agree with--FinTech is going to
where we are going to be able to look in the future, how we are
going to deal with technology, how we are going to deal with
those--what did you say, the word that you used for pseudo----
Mr. Grooms. AI.
Mr. Heitkamp. AI, artificial intelligence, yeah, is what
you are looking for down the future is what we are going to
have to really pay attention to and how we are going to comply
with that.
Senator Heitkamp. OK. Thank you.
Mr. Bergl. I would say what you might see in the future 10
years from now if things do not change is that the small credit
unions and banks that you are looking at might be $100 billion
or $500 billion instead of what you are looking at today. But a
couple of things, quickly, that could help in the credit union
space, there is a 15-year consumer loan limit. We cannot make
loans longer than 15 years by statute. That could quickly and
easily be corrected. There is also a one-to-four family home
regulation whereby if you are a bank and you do a home for one-
to-four family for an investor, it is a mortgage, which it
should be. In the credit union world, it is considered a
commercial loan or a business loan. So that is a little bit of
a road block for us, a major road block for us in serving small
individual investors who want to buy these homes because it
counts against their business gap. Those two relief items could
help us immensely in improving economic growth in our
community.
Senator Heitkamp. Mr. Bissell?
Mr. Bissell. Thank you for the question. I think you had
asked what is the biggest threat or the biggest opportunity for
us going forward. I actually want to go back to one other issue
that came up earlier, and that is the opioid crisis. When I
think about economic development, growing the economy, I think
about putting people back to work. One of our largest and best-
run family-owned companies in my region is a concrete
construction firm that won a contract, needed to hire hundreds
of people. Sixty-plus percent of the people that applied failed
the drug test. Another chunk of them refused to take the drug
test upon learning that it was necessary. So those are good-
paying union jobs with full benefits that they eventually were
able to fill, but you can imagine what a struggle that was. And
it is because the opioid epidemic is all across the Northeast.
So that is an issue that actually ties directly into economic
development for us.
Senator Heitkamp. Thank you.
Mr. Levitin. FinTechs offer a lot of possible
opportunities, especially on the compliance side. But,
remember, FinTechs also include consumer-facing FinTechs, and
those pose some real risks because they may not have the same
regulatory burdens as community financial institutions. They
are competition. So a company like Quicken Loans that is not a
bank, if they get a Federal FinTech charter, they are going to
be able to operate nationally presumably without regard to any
State usury laws and the like. But they are not going to have
the same regulatory burdens as other banks, and that seems to
me to be a problem.
Senator Heitkamp. And I only do this because, honestly, we
spend a lot of time--we have been swirling around all the
issues on qualified mortgages and appraisals and all the things
we know that challenge local folks. I think way too often in
Washington, DC, we deal with the problem that is immediate in
front of us, only to look up and see a crisis looming. And if
the Chairman will just indulge me one question, since there is
no one else here, if----
Chairman Crapo. One very brief question and a brief answer.
Senator Heitkamp. One very brief question. Ex-Im Bank, I
know that your bank, Mr. Bissell, does a lot of work, obviously
with GE being a major employer and no longer a major employer,
can you just give me some idea on how significant you think Ex-
Im Bank is to the work that banks your size do?
Mr. Bissell. Yeah. In our region, there are quite a few
spinoffs, smaller subsidiaries that came off of GE's presence
formerly in our community, and there are a lot of specialty
manufacturers that do import and export work. And so it is
troubling to see the Export-Import Bank really not functioning.
I was reading that some of those GE jobs, they are no longer in
my community, but they are actually moving to Europe now
because there are export-import type agencies that are fully
functioning in competing countries.
Senator Heitkamp. We need you guys to tell that story more.
Mr. Bissell. Thank you.
Senator Heitkamp. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you. And Senator Brown has one more
question.
Senator Brown. Actually, I thought it was one more round.
Is it?
Chairman Crapo. One more round for you.
Senator Brown. OK. Thank you. Considering this is the first
time ever that Senator Heitkamp has had her first cousin,
although they do not admit to knowing each other----
[Laughter.]
Senator Brown. How many Heitkamps have any of us ever met?
So I would stand up for my friend from North Dakota.
Senator Heitkamp. And all Heitkamps are high quality. I
want you to know that.
Chairman Crapo. So stipulated.
Senator Brown. That counted as her second round, that
comment.
Mr. Levitin and Mr. Bissell, some witnesses suggested that
one way to spur economic growth is to change the structure and
funding of the Consumer Bureau, the CFPB. Would you agree with
this, the two of you?
Mr. Levitin. Absolutely not. The CFPB certainly does have a
different structure than other bank regulators, but that was
deliberate because Congress learned that there were problems
with the effectiveness of other regulators. The CFPB has been
remarkably effective, and to the extent that you hear industry
complaints about it, that is probably an indication that it
might be doing its job. No industry likes a regulator that is
being tough about enforcing rules, but that is what the CFPB
does. And the almost $12 billion in
consumer relief that the CFPB has brought in in 6 years is
unparalleled to anything we saw from financial regulators in
the decades before it.
Senator Brown. Mr. Bissell.
Mr. Bissell. Senator, how the CFPB is structured, how it is
structured going forward, is above my pay grade, but I will
give you my opinion on the importance of it. When I think
about, as I said, the $8 million of expense that we paid during
the recession and I think about the tens of millions of dollars
in loan losses that we took and the vast loss of American
household wealth, it is a cost that is just unacceptably high.
And what I worry about is that somewhere in the U.S. financial
system right now is the next Wells Fargo scandal taking shape.
None of us knows where it is or what it is, but we cannot
afford to let those kinds of scandals and unethical predatory
practices take hold. When they do and they get out of control,
we experience the significant financial crisis that we just
finally are healing from. That is what I worry about.
Senator Brown. Thank you. And my last question, Mr.
Chairman, will be a yes or no across the panel, but thank you.
And I have one comment on their comments, particularly on Mr.
Levitin's. I sat through this Committee for 2 years. Senator
Crapo was not the Chairman. It would have been different, I
believe, if he had been. But this Committee did not--failed to
fill out, failed to confirm, even to have hearings on a number
of nominees to fill out the Federal Reserve, the SEC, the
Export-Import Bank. This Committee, for whatever reason,
refused to do it, Senator Crapo's predecessor. Again, no blame
at all on Senator Crapo.
My question is a yes or no, and I will start with Mr.
Levitin. The President proposes to eliminate two important
programs for economic development: Community Development Block
Grants and the CDFI Fund, which we have talked about. Could you
just give yeses or noes? Have these programs been valuable to
economic development in your region? Speaking for all of you,
each of you, Community Development Block Grants and Community
Development Financial Institution Funds, have they been
valuable to economic development in your region? Mr. Levitin.
Mr. Levitin. Yes.
Mr. Bissell. Yes, absolutely.
Mr. Bergl. They have been a part of much bigger programs in
our community.
Mr. Heitkamp. Yeah, they have been a part also.
Mr. Grooms. Yes.
Ms. Savarese. Not as much of an impact in our community
because of the demographics.
Senator Brown. OK. Perfect. Thank you. Thank you all, and
thank you, Mr. Chairman, always for your help.
Chairman Crapo. Thank you, Senator Brown.
Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chairman and Ranking
Member, and thank you to all of you.
I have been in and out because I am juggling three meetings
at the same time, so not only as freshmen Senators, they make
us run around, so I may be a little bit out of breath, but they
put me at the kids' table. So I am over here. And I appreciate
you being here today. Thank you. And I appreciate the
conversation, and along with that a lot of the written
testimony that you provided ahead of time.
Let me start with Mr. Bissell. Mr. Bissell, in Nevada, like
Massachusetts, we have legalized recreational use of marijuana,
and the legalization of cannabis at the State level raises many
concerns and ambiguities for banks and credit unions subject to
Federal rules. As a result, many lawful marijuana businesses
find themselves unbanked. Employees, vendors, and taxes must be
paid in cash. Customers cannot pay with debit or credit cards,
and legal businesses may have trouble getting small business
loans or mortgages.
From a law enforcement perspective--and I worked in law
enforcement for most of my career--I am concerned about the
security risks that this presents, which is why I cosponsored
legislation to provide certainty for lawful cannabis-related
businesses to gain access to the banking system.
As a Massachusetts financial institution, what would it
take at a Federal level for you to become comfortable doing
business with a lawful marijuana business? And I am not only
curious about how you will respond, but the rest of you as
well, because I am sure you have thought about this, the other
panel members as well.
Mr. Bissell. Yes, Senator. Thank you for that question. In
my opinion, it is critical that the Federal structure line up
with the State structures. As these kinds of businesses have
been legalized State by State, it does create, as you said, a
significant security risk. I have talked to credit union
colleagues in Colorado who have been working on these issues
for years, and they did see initially significant amounts of
cash moving around in a very concerning way.
Some of my colleagues in that State were able to come up
with a safe harbor banking approach that was effective, but it
took a ton of work, a lot of investment. I think it would be
much, much better for the whole financial system and for these
businesses if the regulatory structure were rationalized so
that--I think in Massachusetts there is only one bank providing
these services currently to marijuana-related businesses.
Senator Cortez Masto. Thank you.
Any other comments from anyone else?
Mr. Bergl. Our position is that legitimate businesses--
credit unions should be allowed to serve legitimate businesses
in the United States. That is not our job to sort out what
those are.
Senator Cortez Masto. I appreciate that. Thank you.
I am going to open this question up as well, and this is
really around GSE reform and small lender access. When FHFA
Director Watt was before this Committee a few weeks ago, I
asked him about small lender access in the context of reform of
Fannie Mae and Freddie Mac, and specifically I think any reform
of the GSEs should ensure that community banks and credit
unions have equal access to the secondary mortgage market, and
any efforts to expand credit risk transfer should not unfairly
privilege the big banks with securitization operations over
small lenders without them.
Can you discuss the Credit Union National Association's
priorities for GSE reform and specific concerns about small
lender
access? And let me start with Mr. Bergl, and if anybody else
wants to join in.
Mr. Bergl. Absolutely. Thank you very much for the
question. We are very concerned about ensuring any GSE reform,
including small banks and credit unions, and particularly
access to secondary market, is vital to our ability to continue
mortgage lending. Smaller institutions can easily outlend their
asset base if they do not have a market to provide--or to sell
mortgages into. And credit unions actually have a fantastic
track record through the financial crisis that our loans
perform better than the ones that were being done at some of
the larger national banks. And I think that we should--well, we
definitely need to ensure that we have continued access and the
same pricing that is made available to those kind of
institutions.
Senator Cortez Masto. Thank you.
Anyone else?
Mr. Bissell. I would agree. At Greylock, we sell about $30
to $40 million of mortgages into the secondary market every
year to Fannie Mae. We still service those mortgages. We are
the top mortgage provider in our market. So it is critically
important that the GSEs--the resolution there be done very
carefully and in a way that maintains ample access for us.
Senator Cortez Masto. OK. Thank you.
And I know my time is running out, but I have a quick
question, because I am from Nevada and we were ground zero for
the crisis. And I know that oftentimes we have to find that
balance between regulation but letting the community grow and
the economy grow as well. And we certainly want to calibrate
rules appropriately for community financial institutions, but
at the same time, we do not want to forget the causes and
consequences of the last crisis.
And so I guess, Mr. Levitin, I am curious: In the long run,
would it be bad for community banks, credit unions, small
businesses, and consumers to roll back some of the safeguards
we imposed after the crisis?
Mr. Levitin. To roll back the safeguards wholesale,
absolutely. To have targeted rollbacks, no. But, unfortunately,
the asks that are being put forward by some of the trade groups
are not tailored just to small institutions. Let me give you
one example. National Association of Federal Credit Unions has
proposed raising the threshold for CFPB examination and
supervision to $150 billion from $10 billion. That is a
proposal that will benefit only, I think, three of NAFCU's
members directly, which makes it a little strange. But it is
not in any way about small institutions. We already have a
small institutions exemption from CFPB examination and
enforcement. The CFPB has itself enacted a number of small
institution exemptions. Continuing on that path of tailored
small institution exemptions I think is a very reasonable
approach. But wholesale exemptions of institutions of $150
billion or, as Senator Warren was asking me about, a $500
billion level, there is no cause for that.
Senator Cortez Masto. Great. Thank you. Thank you all very
much. I appreciate the conversation today.
Chairman Crapo. Thank you, Senator. And I, too, thank all
of our witnesses for being here today and sharing your
information with us.
Some Senators may wish to submit questions to you. I will
tell the Senators those questions are due Monday, and we would
encourage the witnesses, if you receive further questions, to
please respond promptly.
Before we end today's hearing, I would like to touch
briefly on housing finance reform. Housing finance reform is a
top priority for this Committee, and the role of small lenders
in that discussion is very important. And so actually I guess I
am asking another question but not one I want you to answer
today. I would like to ask each of your organizations to commit
to work with us and with each other to engage with the
Committee as we examine how small lender access in the
secondary market can be achieved effectively and efficiently.
Also, one more bit of housekeeping. This morning, Senator
Brown and I have made public the stakeholder submissions that
the Committee has received in response to our request for
recommendations about how we can approach and achieve greater
economic growth, and those submissions may be found on the
Committee's website. I encourage not only our witnesses but
everyone to review those, and we welcome further comment and
analysis on these issues as well.
With that, this hearing is adjourned.
[Whereupon, at 11:38 a.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow]:
PREPARED STATEMENT OF STEVE GROOMS
President and CEO, 1st Liberty Federal Credit Union,
on behalf of the National Association of Federally Insured Credit
Unions
June 8, 2017
Introduction
Good morning, Chairman Crapo, Ranking Member Brown and Members of
the Committee. My name is Steve Grooms and I serve as the President/CEO
of 1st Liberty Federal Credit Union in Great Falls, Montana. I am
testifying today on behalf of the National Association of Federally
Insured Credit Unions (NAFCU). Thank you for holding this important
hearing today on ways to help community financial institutions foster
economic growth.
I have 34 years of experience in the credit union industry,
including the last 17 as the President/CEO of 1st Liberty Federal
Credit Union. 1st Liberty FCU is a $170 million Federal credit union
with over 17,000 members. It has seven branch offices and serves as the
on-base credit union for Malmstrom AFB. In addition 1st Liberty FCU is
located in the communities of Grand Forks, North Dakota and North
Central Montana serving members of Grand Forks AFB, and the communities
of Grand Forks, Conrad, and Cut Bank, Montana.
As you may know, NAFCU is the only national organization that
exclusively represents the interests of the Nation's federally insured
credit unions at the Federal level. NAFCU is celebrating its 50th
anniversary this year. NAFCU member credit unions collectively account
for approximately 70 percent of the assets of federally insured credit
unions. NAFCU and the entire credit union community appreciate the
opportunity to participate in this discussion on fostering economic
growth.
Background on Credit Unions
Historically, credit unions have served a unique function in the
delivery of essential financial services to American consumers.
Established by an Act of Congress in 1934, the Federal credit union
system was created, and has been recognized, as a way to promote thrift
and to make financial services available to all Americans, many of whom
may otherwise have limited access to such services. Congress
established credit unions as an alternative to banks and to meet a
precise public need--a niche that credit unions still fill today.
Every credit union, regardless of size, is a cooperative
institution organized ``for the purpose of promoting thrift among its
members and creating a source of credit for provident or productive
purposes.'' (12 USC 1752(1)). While over 80 years have passed since the
Federal Credit Union Act (FCUA) was signed into law, two fundamental
principles regarding the operation of credit unions remain every bit as
important today as in 1934:
credit unions remain wholly committed to providing their
members with efficient, low-cost, personal financial service;
and
credit unions continue to emphasize traditional cooperative
values such as democracy and volunteerism.
Credit unions are not banks. The Nation's approximately 6,000
federally insured credit unions serve a different purpose and have a
fundamentally different structure than banks. Credit unions exist
solely for the purpose of providing financial services to their
members, while banks aim to make a profit for a limited number of
shareholders. As owners of cooperative financial institutions united by
a common bond, all credit union members have an equal say in the
operation of their credit union--``one member, one vote''--regardless
of the dollar amount they have on account. Furthermore, unlike their
counterparts at banks and thrifts, Federal credit union directors
generally serve without remuneration--a fact epitomizing the true
``volunteer spirit'' permeating the credit union community.
Credit unions have always been some of the most highly regulated of
all financial institutions, facing restrictions on who they can serve
and their ability to raise capital. There are many consumer protections
built into the Federal Credit Union Act, such as the only Federal usury
ceiling on financial institutions and the prohibition on prepayment
penalties that other institutions have often used to bait and trap
consumers into high cost products.
Despite the fact that credit unions are already heavily regulated,
were not the cause of the financial crisis, and actually helped blunt
the crisis by continuing to lend to credit worthy consumers during
difficult times, they are still firmly within the regulatory reach of
the Dodd-Frank Act, including all rules promulgated by the Consumer
Financial Protection Bureau (CFPB).
The growing regulatory burden on credit unions was demonstrated by
a recent NAFCU survey of our membership that found that nearly 97
percent of respondents were spending more time on regulatory compliance
issues than they did in 2009. In addition to hiring new compliance
personnel, many credit unions have reported that noncompliance staff
are regularly called upon to help with the compliance workload. In
fact, another recent survey found that over 70 percent of respondents
have had noncompliance staff members take on compliance-related duties
due to the increasing regulatory burden. This highlights the fact that
many noncompliance staff are forced to take time away from serving
members to spend time on compliance issues. Most credit unions have
limited staff to tackle their daily challenges, and often find
themselves in a situation where compliance, not service, becomes the
main focus. Every dollar, or hour, spent on compliance is time or money
taken away from member service, additional loans, or better rates.
At 1st Liberty, we conservatively estimate that our compliance
costs have increased by over $350,000 since 2009. While that may not
seem like a lot to Washington bureaucrats, it is a lot in Great Falls,
Montana. These costs come from hiring new compliance employees, dealing
with third-party vendors, increased software costs, as well as time and
training for our staff. As regulation increases compliance costs
smaller credit unions like mine are having an increasingly difficult
time surviving. We've had to shut down three branches in the last 4
years because of increased costs and tighter margins. Many other
smaller credit unions have been merged into larger credit unions, and,
while their members maintain the credit union benefits, relationship
banking found in towns like Great Falls and Grand Forks is lost.
Lawmakers and regulators readily agree that credit unions did not
participate in the reckless activities that led to the financial
crisis, so they shouldn't be caught in the crosshairs of regulations
aimed at those entities that did. Unfortunately, that has not been the
case thus far. Accordingly, finding ways to cut-down on burdensome and
unnecessary regulations and compliance costs is a chief priority of
NAFCU members.
Regulatory Environment and Economic Growth
NAFCU has always believed that credit unions play an essential and
vital role in the economic health of local economies. This was again
demonstrated during the recent financial crisis when credit unions were
able to continue to lend and help credit-worthy consumers and small
businesses during difficult times, often when no one else would.
Despite the fact that credit unions played no part in causing the
financial crisis, they are still heavily regulated and affected by many
of the rules meant for those entities that did.
During the consideration of financial reform, NAFCU was concerned
about the possibility of overregulation of good actors such as credit
unions, and this is why NAFCU was the only credit union trade
association to oppose the CFPB having authority over credit unions.
Unfortunately, many of our concerns about the increased regulatory
burdens that credit unions would face under the CFPB have proven true.
As expected, the breadth and pace of the CFPB's rulemaking is
troublesome, and the unprecedented new compliance burden placed on
credit unions has been immense. NAFCU continues to believe that credit
unions should be exempted from CFPB rulemaking, with authority returned
to the National Credit Union Administration (NCUA). As you examine the
Federal financial regulatory system, we urge you to support such a
reform.
The impact of the growing compliance burden is evident in the
declining number of credit unions. Since the second quarter of 2010, we
have lost more than 1,500 federally insured credit unions--over 20
percent of the industry. The overwhelming majority of these were
smaller institutions below $100 million in assets. While it is true
that there has been a historical consolidation trend in the industry,
the passage of the Dodd-Frank Act has accelerated this trend. The fact
is that many smaller institutions simply cannot keep up with the new
regulatory tide and have had to merge out of business or close their
doors. This is why regulatory relief remains a top priority for our
Nation's credit unions and a key to the continuation of relationship
banking in the communities where my credit union operates.
We are pleased to see Senators recognizing this need and
introducing regulatory relief packages to help community financial
institutions. An example is S. 1002, The Community Lending Enhancement
and Regulatory Relief Act of 2017 (CLEAR Relief Act), introduced by
Senators Moran, Tester, Heitkamp and Tillis. This regulatory relief
package is a positive first step for community institutions. Section 3
on escrow requirements, section 4 on QM relief and section 6 on TILA/
RESPA relief would have benefits to credit unions and their members.
Should this legislation move
forward, we would also urge you to include the additional provisions
from the
House-introduced version of this legislation, H.R. 2133, from
Representative Blaine Leutkemeyer. Including this language would
provide additional and meaningful relief to credit unions on mortgage
lending and capital requirements, in addition to regulatory relief and
greater clarity from the CFPB.
Tenets of a Healthy and Appropriate Regulatory Environment for Credit
Unions
NAFCU believes a healthy and appropriate environment is important
for credit unions to thrive. History has shown that a robust and
thriving credit union industry is good for our Nation's economy, as
credit unions fill a need for consumers and small businesses in the
financial services marketplace that may otherwise not be met by other
institutions.
There are some basic tenets of a healthy and appropriate regulatory
environment that NAFCU supports:
NAFCU supports a regulatory environment that allows credit unions
to grow. NAFCU believes that there must be a regulatory environment
that neither stifles innovation nor discourages credit unions from
providing consumers and small businesses with access to credit. This
includes the ability of credit unions to establish healthy fields of
membership that are not limited by outdated laws or regulatory red
tape. It also includes modernized capital standards for credit unions
that reflect the realities of the 21st century financial marketplace.
NAFCU supports appropriate, tailored regulation for credit unions
and relief from growing regulatory burdens. Credit unions are swamped
by an ever-increasing regulatory burden from the CFPB, often on rules
that are targeting bad actors and not community institutions. NAFCU
supports cost-benefit analysis in regulation, and wants to ensure that
we have an effective regulatory environment where positive regulations
may be easily implemented and negative ones may be quickly eliminated.
NAFCU also believes that enforcement orders from regulators should not
take the place of regulation or agency guidance to provide clear rules
of the road.
NAFCU supports a fair playing field. NAFCU believes that credit
unions should have as many opportunities as banks and nonregulated
entities to provide provident credit to our Nations' consumers. NAFCU
wants to ensure that all similarly situated depositories follow the
same rules of the road and unregulated entities, such as payday
lenders, do not escape oversight. We also believe that there should be
a Federal regulatory structure for nonbank financial services market
players that do not have a prudential regulator, including emerging
Fintech companies.
NAFCU supports transparency and independent oversight. NAFCU
believes regulators need to be transparent in their actions, with the
opportunity for public input, and should respect possible different
viewpoints. We believe a bipartisan commission structure is the best
form of regulatory governance for independent agencies, and all
stakeholders should be able to have input into the regulatory process.
NAFCU supports a strong, independent NCUA as the primary regulator
for credit unions. NAFCU believes that the National Credit Union
Administration is best situated with the knowledge and expertise to
regulate credit unions due to their unique nature. The current
structure of NCUA, including a 3-person board, has a track record of
success. NCUA should be the sole regulator for credit unions and work
with other regulators on joint rulemaking when appropriate. Congress
should make sure that NCUA has the tools and powers that it needs to
effectively regulate the industry.
Ideas to Help Foster Economic Growth
We need both congressional and regulatory action under each of
these tenets to help credit unions and the communities that they serve.
Action to reduce and streamline unnecessary regulatory burdens will
help credit unions, and all community financial institutions, foster
economic growth. The next several pages of my testimony will outline
areas under each of these tenets where legislative or regulatory action
can help foster economic growth.
A. Credit Unions Need an Environment to Thrive and Grow
Credit unions play a key role in providing consumers and small
businesses access to credit, often when others will not. These are
areas where action will help credit unions:
Improvements to Field-of-Membership Restrictions for Credit
Unions
While NCUA has taken recent steps on the regulatory side, NAFCU
believes there should be improvements to the Federal Credit Union Act
to help enhance the
Federal credit union charter. First, a series of improvements should be
made to the field of membership (FOM) restrictions that credit unions
face expanding the criteria for defining ``urban'' and ``rural.''
Furthermore, the Federal Credit Union Act should be updated to allow
voluntary mergers involving multiple common bond credit unions and to
allow credit unions that convert to community charters to retain their
current select employee groups (SEGs). Additionally, the word ``local''
should be removed from the phrase ``well-defined, local community'' in
Section 109(b)(3) of the Federal Credit Union Act.
Second, all credit unions, regardless of charter type, should be
allowed to add underserved areas to their field of membership.
Third, the NCUA should have authority to grant parity to a Federal
credit union on a broader State rule, if such a shift would allow them
to better serve their members and continue to protect the National
Credit Union Share Insurance Fund.
Capital Reforms for Credit Unions
NAFCU believes that capital standards for credit unions should be
modernized to reflect the realities of the 21st century financial
marketplace. As Congress examines and considers modernizing capital
standards for community banks, modernizing credit union capital
standards must be part of the discussion.
First, a true risk-based capital system for credit unions that more
accurately reflects a credit union's risk profile should be authorized
by Congress. As part of this effort, NAFCU supports suspending the
implementation of NCUA's recent risk-based capital rule, to allow the
new leadership at the agency time to review the rule and request any
statutory changes that the agency deems necessary to institute a
capital system for credit unions that accurately accounts for risk.
NAFCU continues to advocate for NCUA to revisit and reconsider the
agency's approach to its risk-based capital (RBC) rule, currently set
to take effect on January 1, 2019. We were pleased to see in the recent
EGRPRA report, Acting Chairman J. Mark McWatters specifically noted
risk-based capital as an area NCUA plans to ``substantially revise''--
which NAFCU strongly supports.
Second, the NCUA should be given the authority to allow
supplemental capital accounts for credit unions that meet certain
standards.
Allow Credit Unions to Meet the Needs of Small Businesses
A critical step to foster economic growth in local communities is
for Congress to modify the arbitrary and outdated credit union member
business lending (MBL) cap. This can be done by raising the current
12.25 percent limit to 27.5 percent for credit unions that meet certain
criteria or by raising the outdated ``definition'' of a MBL from last
century's $50,000 to a new 21st century standard of $250,000, with
indexing for inflation to prevent future erosion. Furthermore, MBLs
made to veterans, nonprofit religious organizations, businesses in
``underserved areas,'' 1-4 non-owner occupied homes, or small
businesses with fewer than 20 employees should be given special
exemptions from the arbitrary cap.
B. Credit Unions Need Appropriate, Tailored Regulation and Relief from
Growing Regulatory Burdens
Credit unions did not cause the financial crisis, but have been
victims in the new tide of regulations aimed at those institutions who
did, with over 1,500 institutions disappearing since the passage of the
Dodd-Frank Act, primarily due to the new regulatory burdens. Many
credit unions have limited compliance teams and, even if they are doing
nothing wrong, burdens can stem from the necessity to read thousands of
pages of regulation and analysis just to figure out that they are
already in compliance or how to use some formula to see if a rule
applies to them.
NAFCU believes that, given their unique nature, all credit unions
should be exempt from CFPB rulemaking and examination authority, with
NCUA once again given authority to write all rules for credit unions,
tailoring new proposals to meet the special nature of the credit union
industry. One way to do this would be to expand on S. 923, the
Reforming Finance for Local Economies Act, introduced by Senator
Kennedy, that exempts financial institutions under $10 billion from
CFPB rules, to include all credit unions.
Short of that, there are other steps which Congress can take to
help:
Provide Greater Clarity to CFPB's 1022 Exemption Authority
Congress should modify Section 1022 of the Dodd-Frank Act to
specify the ability of the CFPB to exempt credit unions from CFPB
rules. NAFCU believes Section 1022 currently gives the CFPB broad
exemption authority to exempt classes of
institutions, including credit unions, from CFPB rules on a case-by-
case basis. We believe that this was also the congressional intent of
this provision. However, CFPB Director Richard Cordray has testified
before Congress that he believes he does not have the authority to
outright exempt credit unions from various CFPB rules under Section
1022. This failure of the Bureau to provide outright exemptions for
credit unions to various rules, has greatly increased the compliance
burden on the credit union industry, as credit unions are now forced to
spend time and resources reviewing rules to see if they meet any
arbitrary exemption threshold the Bureau may set. Time and money spent
on this effort takes away from economic benefits that credit unions
could be providing to their members.
Last year, a bipartisan group of 70 Senators sent a letter to
Director Cordray urging him to do more with the authority under Section
1022 to reduce the burden on community institutions such as credit
unions. We would urge you to adopt legislation to clarify the ability
of the CFPB to specifically exempt credit unions from a CFPB rule. We
were also pleased to see a May 24, 2017, letter from Acting NCUA
Chairman McWatters to CFPB Director Richard Cordray urging CFPB to make
greater use of its 1022 authority when it comes to credit unions.
Require the CFPB to Better Tailor Regulations and Subject
Them to Review
NAFCU supports measures that would require the CFPB to better
tailor its regulations. Despite credit unions being smaller and less
risky than mega banks, they have too often found themselves subject to
burdensome new regulations designed for big banks, and this has a
negative impact on their ability to serve their members and foster
economic development. This is why we support S. 366, the Taking Account
of Institutions with Low Operation Risk (TAILOR) Act (introduced by
Senator Rounds) and S. 21, the Regulations From the Executive in Need
of Scrutiny (REINS) Act (introduced by Senator Paul), as well as
subjecting the CFPB to the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA) review.
Hold Regulators Accountable for Cost and Compliance Burden
Estimates
Cost and time burden estimates issued by regulators such as NCUA
and CFPB are often grossly understated. Unfortunately, there often is
never any effort to go back and review these estimates for accuracy
once a proposal is final. We believe Congress should require periodic
reviews of ``actual'' regulatory burdens of finalized rules and ensure
agencies remove or amend those rules that vastly underestimated the
compliance burden. A recent survey of NAFCU's membership found that
over 55 percent of credit unions believe compliance cost estimates from
NCUA and the CFPB are lower than they are when the credit union
actually has to implement the proposal.
We believe Congress should use their oversight authority to require
regulators to provide specific details on how they determined their
assumptions in their cost estimates when submitting those estimates to
OMB and publishing them with proposed rules. It is important that
regulators be held to a standard that recognizes that burdens at a
financial institution go well beyond additional recordkeeping.
Finally, there are some other areas where the CFPB has been active
that are of growing concern to credit unions:
Home Mortgage Disclosure Act (HMDA)
NAFCU and our members support the intended purpose of HMDA, which
is to promote fair lending and ensure that consumers receive equitable
access to credit in the housing market. Yet the CFPB's Final Rule is
not entirely suitable for achieving this statutory purpose,
particularly where data collection demands are so costly that they
impede lending activity. Furthermore, NAFCU's concerns regarding the
Final Rule remain largely unaddressed, and a recent proposal making
technical revisions to Regulation C does little to mitigate the burdens
arising from collection of increasingly granular HMDA data points.
While NAFCU has appreciated the Bureau's efforts to offer technical
corrections and additional clarifications, the proposed amendments do
not offset the tremendous operational challenges created by the Final
Rule.
Under current reporting thresholds, the collection of a vastly
expanded HMDA dataset from credit unions that do not originate a
significant number of home mortgage loans would be counterproductive
and ultimately harm access to credit. Accordingly, NAFCU urges the
Bureau to consider amendments that would raise the reporting threshold
for close-end mortgage loans in Section 1003.2(g) of the Final Rule.
NAFCU believes that by raising the reporting threshold, smaller
credit unions will be spared unreasonable compliance costs that would
otherwise impact their capacity to originate affordable mortgages.
Furthermore, NAFCU believes that the minimal data received from
institutions reporting just above the thresholds in Section 1003.2(g)
would be statistically insignificant and yield minimal insight about
the communities they serve. NAFCU believes that the resources of small
lenders should be spent in their communities, originating the loans
that members need rather than satiating the CFPB's appetite for data.
We are also concerned that the vastly expanded HMDA data collection
raises serious privacy considerations. HMDA reports currently include
the name of the credit union, mortgage amount, year of transaction, and
census tract of the property. This information already provides an
opportunity to identify the majority of mortgagors being reported under
HMDA. Because there is little privacy protection in HMDA data--and
because the Bureau has so far offered only future assurances that a
balancing test will be developed to determine the extent of public
disclosure--adding more sensitive and nonpublic information, such as
debt-to-income ratios, credit scores, creditworthiness, or borrower
age, will leave members less secure and potentially more vulnerable to
targeted scams. NAFCU asks that the Bureau provide clarification as
soon as possible about how data security concerns will be mitigated
through controls on public disclosure of HMDA data.
NAFCU believes the Bureau has failed to adequately consider the net
cost of requiring credit unions that originate relatively few mortgage
loans to expend considerable resources on reporting new data that would
not aid in fulfilling the statutory objectives of HMDA. Additionally,
the CFPB has not provided satisfactory
justification for requiring collection of new data points that were not
specifically mandated by the Dodd-Frank Act. Although there may be
academic interest in numerous, marginally significant data points, the
Bureau has yet to show that these inputs actually achieve HMDA's stated
purpose, which is to ensure fair lending and nondiscrimination in the
housing market. We agree with Acting NCUA Chairman McWatters' request
of the CFPB to use its authority to exempt credit unions from these
additional data points.
One approach to providing relief on the HMDA issue would be to pass
the Home Mortgage Disclosure Adjustment Act, offered by several Members
of this Committee, to raise the HMDA reporting threshold to 500 loans
for both closed-end mortgage loans and open-end lines of credit. The
new HMDA reporting requirements will be especially burdensome on
smaller credit unions like mine, and that is why we also would support
the CFPB delaying implementation of the new rule while giving Congress
a chance to review it.
Qualified Mortgages
The CFPB has issued a final rule that imposes requirements on
credit unions to assess and verify a borrower's ability to repay a
mortgage loan before extending the loan. In that same rule, the CFPB
defined ``qualified mortgage'' and extended safe harbor legal
protections to mortgages that meet the definition. Many financial
institutions have decided to extend only mortgages that meet the
definition of safe harbor ``qualified mortgage'' as they are concerned
that they will not be able to sell nonqualified mortgages and are
worried about the legal and regulatory risks associated with extending
nonqualified mortgages. At 1st Liberty, even though we are small enough
to be exempt, we still limit our loans to 43 percent debt-to-income
ratio because of concerns about liability.
NAFCU believes the definition of qualified mortgage must be revised
in a number of ways to reduce the enormous negative impact the rule
places on credit unions and their members, in particular the debt-to-
income (DTI) threshold (43 percent of the total loan) and the inclusion
of affiliate fees in the calculation of points and fees. While the CFPB
finalized a cure for unintentional points and fees overages, NAFCU
still believes a legislative change may be necessary to resolve the
issue. We also support legislation to create a safe-harbor for mortgage
loans held in portfolio at credit unions.
Small Business Data Collection
Section 1071 of the Dodd-Frank Act assigns the CFPB the
responsibility to issue implementing regulations for collection of
small business loan data. In general, Section 1071 aims to facilitate
enforcement of fair lending laws and enable communities, businesses and
other entities to better identify the needs of women-owned, minority-
owned, and small businesses. Section 1071 requires financial
institutions to collect and report information to the CFPB using
systems and procedures similar to those currently used in connection
with the Home Mortgage Disclosure Act (HMDA).
While NAFCU acknowledges that taken on its own, Section 1071 is a
well-intentioned provision, but when added to other laws and
regulations, future implementation of this provision could negatively
impact credit unions originating MBLs and other commercial loans. A
disclosure regime similar to HMDA could increase MBL underwriting costs
and necessitate substantially increased spending on compliance
resources. Furthermore, if the ultimate aim of Section 1071 is to
promote small business lending, then credit unions have already
achieved great success. For example, credit union small business loan
growth has dramatically outpaced banks both during and after the
financial crisis. Credit unions have maintained strong small business
loan growth despite field of membership and other statutory
restrictions; however, this trend may experience disruption if the CFPB
sees fit to impose additional regulatory burdens.
NAFCU is also concerned that future implementation of Section 1071
may yield confusing information about credit unions and further
restrict lending activity as a result of increased compliance costs.
Credit unions serve distinct fields of membership, and as a result,
institution-level data related to women-owned, minority-owned, and
small business lending substantially differs in relation to other
lenders. Given the unique characteristics of credit unions and the
limits placed on member business loans (MBLs), the CFPB should seek to
exempt credit unions from any future rulemaking that compels disclosure
of business loan information. We believe it is important that Congress
be prepared to step in and legislate in this area if necessary.
C. There Must be a Fair Playing Field in Financial Services
As Congress looks at measures to foster economic growth, it is
important the any legislative package be balanced in addressing needs
of credit unions and community banks. Capital relief provisions for
banks should be paired with capital relief provisions for credit
unions. Business lending provisions for banks should be paired with
business lending relief provisions for credit unions. Credit unions
want to do their share for economic growth, and they want to ensure
that there is a proper regulatory environment for all players in the
financial services and payments realm.
Provide Credit Unions Parity in the Treatment of
Residential Loans
One easy step to provide parity in business lending relief is in
the treatment of certain residential loans. NAFCU urges you to exempt
loans for one- to four-unit non-owner occupied dwellings from the
credit union member business lending (MBL) definition. This idea was
recently introduced as bipartisan legislation, S. 836, the Credit Union
Residential Loan Parity Act, by Senators Ron Wyden and Lisa Murkowski,
which would allow credit unions to treat loans that qualify for the
exemption as residential loans with lower interest rates--similar to
how banks make those same loans--and not have to count them toward
their MBL cap. This would free up capital for additional lending and
help foster economic growth.
Payday Lenders Need To Be Regulated; Credit Unions Need
Flexibility to Help
The concept of a fair playing field also applies when dealing with
regulated financial institutions and unregulated entities, who should
not be let off the hook as part of regulatory relief.
A prime example is payday lending. NAFCU believes that unregulated
actors in this area need to be regulated, but that flexibility should
be provided to regulated entities that offer regulated products to meet
demand. At 1st Liberty, we were able to help a veteran who was
struggling financially and had gotten into trouble with payday lenders.
He had already filed bankruptcy and had been in debt to nine different
payday lenders for the last 5 years when he came to us. He wasn't even
a member yet. He had $500 loans with each lender, was paying them $10
every week each to roll the debt another week, he had paid them roughly
$21,600 already and had not reduced the principle balance on any of
them.
Based on his circumstances, he did not qualify for a loan, but
based on what we do to try to help members where we are able, he needed
our help fast. We were able to set up a signature loan for $4,500 to be
paid off over 3 years at a 12 percent interest rate (unsecured rate)
with payments of $150 month. We had to go outside of our policies to
deal with his unique circumstance--a prime example of why credit unions
need to have regulatory flexibility to serve the needs of their
members.
In July, 2016, the CFPB published a proposed rule for Payday,
Vehicle Title, and Certain High Cost Installment Loans. NAFCU maintains
serious concerns about this rule and how it will hamper credit union's
ability to meet the credit needs of their members. NCUA has even
weighed-in with a similar concern. NAFCU has asked that the CFPB
withdraw its rule and consult with NCUA regarding any future plans to
regulate short-term, small dollar lending at credit unions. NAFCU
strongly recommends that the Bureau exercise its exemption authority
granted by Congress to preserve the ability of credit unions to
accommodate members with consumer-friendly, short-term, small dollar
loans.
An exemption for credit unions from the entirety of the rule would
represent the only true solution for mitigating the overwhelming burden
imposed by a novel and complex compliance regime. Credit unions cannot
reasonably meet the needs of financially distressed members when the
cost and time associated with originating just one short-term, small-
dollar loan skyrockets to satisfy the CFPB's unwieldly underwriting
requirements.
The need for a fair playing field does not just apply across
financial services, but with others in the payments eco-system, such as
retailers. There is a need for Congress to act to ensure a fair playing
field in this realm as well.
21st Century Data Security Standards Are Needed
Credit unions are being adversely impacted by ongoing cyber-attacks
against the United States and continued data breaches at numerous
merchants. The cost of dealing with these issues hinders the ability of
credit unions to serve their members. Congress needs to enact new 21st
century data security standards that include: the payment of costs
associated with a data breach by those entities that were breached;
establishing national standards for the safekeeping of all financial
information; require merchants to disclose their data security policies
to their customers; requiring the timely disclosure of entities that
have suffered a data breach; establishing enforcement standards for
provisions prohibiting merchants from retaining financial data;
requiring the timely notification of the account servicer if an account
has been compromised by a data breach; and, requiring breached entities
to prove a ``lack-of-fault'' if they have suffered from a data breach.
Repeal the Durbin Debit Interchange Amendment
The interchange price caps passed as part of the Dodd-Frank Act
have failed to produce the consumer benefits that proponents promised.
This provision has essentially been a windfall to merchants and their
stockholders, while costing credit unions and their members billions of
dollars that could have been used to help foster economic growth
through better rates and more loans. We urge you to repeal the debit
interchange provision found in the Dodd-Frank Act and protect community
financial institutions from future harm by opposing any efforts to
expand the Durbin price controls to credit interchange.
D. Transparency and Independent Oversight of Regulators
NAFCU believes regulators need to be transparent in their actions,
with the
opportunity for public input, and should respect possible different
viewpoints. Financial institutions should have clear rules of the road
to follow, and have an independent process to appeal actions of
regulators. Congress should make sure regulators are focusing on sound
public policy and not political agendas.
There are a series of steps NAFCU believes can be taken that will
be beneficial to credit unions and community financial institutions in
this area:
Make Common-Sense Improvements to the CFPB
We believe that one way to improve the Bureau would be to change
the leadership structure from a single director to a five-member
bipartisan commission appointed by the President. NAFCU has long held
the position that, given the broad authority and awesome responsibility
vested in the CFPB, a five-person commission has distinct consumer
benefits over a single director. Regardless of how qualified one person
may be, a commission would allow multiple perspectives and robust
discussion of consumer protection issues throughout the decisionmaking
process. A bipartisan board structure at the CFPB would also help to
provide community financial institutions more regulatory certainty by
lowering the possibility that the Bureau could become subject to
drastic political swings from a single director that could change with
each Administration.
We also believe that the main focus of the CFPB should be on
unregulated entities operating in the financial services arena and
other significant market actors that have a national impact, and thus
we believe that the supervision threshold for the CFPB should be raised
to $150 billion and indexed for inflation. Making this change would
allow functional regulators to focus on community and regional
institutions, while allowing the CFPB to focus on the Nation's largest
financial institutions and otherwise unregulated entities.
Require the CFPB to Provide Guidance or Rulemaking for its
UDAAP Authority
Uncertainty stemming from CFPB's authority to take action on
entities committing unfair, deceptive, or abusive acts or practices
(UDAAP), can prevent institutions from providing services that
consumers may want. Credit unions want to
comply and provide the services that their members want and need.
However, when the CFPB does not provide clarity in regards to UDAAP,
either through rulemaking or guidance, economic opportunity is stymied
as institutions fear the CFPB will only regulate through enforcement
action. We would urge the adoption of legislative language to require
the CFPB to provide more clarity and guidance to those they regulate.
Common-Sense Examination Reform
Credit unions face more examiner scrutiny than ever, as the
examination cycles for credit unions went from 18 months to 12 months
since the onset of the financial crisis, even though credit union
financial conditions continue to improve. We are pleased to see that
NCUA has started to return to extended examination cycles, but we think
the extended cycles should be available to all low-risk, well-run
credit unions. Additional exams mean additional staff time and
resources to prepare and respond to examiner inquiries. NAFCU supports
effective exams that are focused on safety and soundness and flow out
of clear regulatory directives. NAFCU also supports examination
fairness legislation to ensure timeliness, clear guidance and an
independent appeal process free of examiner retaliation.
E. A Strong, Independent NCUA should be the sole regulator of credit
unions
As noted earlier, NAFCU strongly believes that credit unions should
be exempt from CFPB regulation and supervision, with that authority for
all credit unions returned to the National Credit Union Administration
(NCUA). NCUA has the knowledge and expertise that other regulators
simply do not about the unique nature of credit unions.
NCUA should have pre-emption authority over CFPB rules
NCUA should have the authority to delay the implementation of a
CFPB rule that applies to credit unions, if complying with the proposed
timeline would create an undue hardship. Furthermore, given the unique
nature of credit unions, the NCUA should have authority to modify a
CFPB rule for credit unions, provided that the objectives of the CFPB
rule continue to be met.
NCUA Needs Proper Authority and Flexibility To Govern
Credit Unions
We are pleased NCUA has been willing to use its authority in recent
years to provide credit unions with much-needed relief when
congressional action has stalled. A few prime examples of this
willingness are the agency's rules relative to member business lending,
field of membership, and fixed-assets. However, in each of these
rulemakings, the agency stopped short of providing relief to the
fullest extent possible so there is more work to be done, whether by
the agency or by Congressional action.
We continue to appreciate NCUA's voluntary participation in the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA)
regulation review process. This review provided an important
opportunity for credit unions to voice their concerns about outdated,
unnecessary or unduly burdensome requirements within NCUA's Rules and
Regulations. The EGRPRA report issued in March 2017 was the culmination
of a long process and we were encouraged to see the regulators admit
that there are many opportunities to do better. In particular, the NCUA
portion of the report touched on a number of key areas where NAFCU has
sought reform, including risk-based capital. We look forward to
continuing to work with NCUA and other regulators to address the
problem of regulatory burden and we urge Congress to ensure that they
have the tools they need.
NCUA Independence and Structure Should be Maintained
NAFCU also believes that NCUA should continue to be governed by a
three-person bipartisan board, and not subject to congressional
appropriations. However, we do think there are areas where it is
appropriate for congressional oversight of NCUA, including the agency's
budget, which is funded by our Nation's credit unions and, ultimately,
their 108 million members.
Additional Areas To Help Economic Growth
There are a few additional areas where Congress can help credit
unions foster economic growth that I would like to outline:
Promote Regulatory Coordination
NAFCU believes that a large part of the regulatory burden problem
stems from the cumulative impact of numerous regulations. That is why
NAFCU applauded President Donald Trump's ``Executive Order on Core
Principles for Regulating the United States Financial System,'' which
directed the U.S. Department of the
Treasury to conduct a comprehensive review of the financial regulatory
landscape. We are pleased that NCUA has participated in discussions
with Treasury as part of the review process and hope they will continue
to cooperate with the Administration in a productive manner.
With numerous new rulemakings coming from regulators, coordination
between the agencies is more important than ever. Congress should use
its oversight authority to make sure that regulators are coordinating
their efforts and not duplicating burdens on credit unions by working
independently on changes to regulations that impact the same areas of
jurisdiction. There are a number of areas where opportunities for
coordination exist and can be beneficial.
NAFCU has been on the forefront encouraging the Financial Stability
Oversight Council (FSOC) regulators to fulfill their Dodd-Frank
mandated duty to facilitate rule coordination. This duty includes
facilitating information sharing and coordination among the member
agencies of domestic financial services policy development, rulemaking,
examinations, reporting requirements and enforcement actions. Through
this role, the FSOC is effectively charged with ameliorating weaknesses
within the regulatory structure and promoting a safer and more stable
system. It is extremely important to credit unions for our industry's
copious regulators to coordinate with each other to help mitigate
regulatory burden.
In addition, Section 1023 of the Dodd-Frank Act grants the FSOC the
authority to stay and set aside Bureau rules by a vote of two-thirds of
the members of the Council. A decision to set aside a Bureau regulation
renders the rule unenforceable. This authority could spur renewed
dialog between the Bureau and the Federal banking agencies regarding
rules that may actually pose systemic risk to the financial sector.
As the new Administration continues to review and reform financial
regulations, NAFCU welcomes efforts by the members of the FSOC to
strongly consider their authority to start holding the Bureau
accountable for rules that pose serious risks to financial institutions
and the consumers they serve.
Support the CDFI Fund
The Administration's FY 2018 budget proposal has proposed cutting
funding for the Community Development Financial Institution (CDFI)
Fund. As of January 31, 2017, there were 287 credit unions certified as
CDFIs. Representing approximately 27 percent of the total number of
certified institutions, CDFI certified credit unions hold more than 50
percent of total CDFI assets. Clearly, CDFI credit unions are critical
partners in the CDFI Fund's mission. In recognition of this importance,
and in exploring ways to enable even more credit unions to be
recognized as CDFIs, the NCUA, CDFI Fund and Treasury entered into a
trilateral Memorandum of Understanding (MOU) in January 2016. A
significant component of the MOU included the introduction of a
streamlined CDFI application process for credit unions, paving the path
for more credit unions to seek the designation.
Because they are not-for-profit, cooperative financial
institutions, credit unions are focused on providing financial services
that are in the best interest of their members. Since CDFI credit
unions predominantly serve low-income areas and other target markets,
CDFI credit unions are often the only financial services option for
consumers in those communities that live paycheck to paycheck. The CDFI
Fund grant program helps credit unions serve communities and consumers
that large banks don't focus on.
Additionally, because many credit unions cannot raise funds from
the capital markets, access to the CDFI Fund grant program is an
incentive for credit unions to obtain certification. The grants
provided by the Fund are an invaluable resource that aids CDFI credit
unions in providing financial services to millions of credit union
members. Without these grant funds, thousands of consumers could find
themselves without credit union products, such as small dollar loans,
credit builder programs, and access to financial education.
Over the past 2 years, CDFI credit unions received roughly $70
million in grant funding to aid in their efforts to offer financial
services to their low- and moderate-income members. Without the CDFI
grant program, many CDFI credit unions would not have been able offer
new products and loans that provide financial stability for members and
their families. It is with this in mind that we would urge Congress to
continue funding for CDFIs. Providing funding for the grant program is
an important step in helping credit unions foster economic growth in
their local communities.
Fix the Department of Defense (DoD) Military Lending Act
Final Rule
As a defense credit union, I would like to share some concerns over
potential unintended consequences and negative impacts from DoD's
recent MLA rule. NAFCU is in full support of protecting service members
from predatory and unscrupulous lenders. It is clear this is the intent
of the rule DoD has issued. Credit unions have undertaken considerable
efforts to comply with the MLA Rule, and they will continue to do so.
However, the challenges presented by the MLA Rule are substantial and
many financial institutions continue to struggle to determine the
parameters of the rule due to ambiguous text and slim guidance.
Credit unions, as member-owned, not-for-profit cooperatives,
consistently provide their members with products and services designed
to help each member achieve their individual financial goals. In
addition, credit unions have a strong track record of helping active
duty members of the armed forces and their families avoid the kinds of
debt traps that prompted the passage of the MLA by Congress. That is
why NAFCU and our members support the Department's primary goal of
protecting active duty members of the armed forces and their families
from financial exploitation. However, implementing the MLA Rule has
proven to be a difficult undertaking for many credit unions.
NAFCU has, on several occasions, requested the DoD exercise its
authority under Section 232.13(c)(2) of the MLA Rule and issue an order
extending the limited exemption for credit card accounts until October
3, 2018. NAFCU believes that extending the deadline for credit card
account compliance with the MLA Rule is necessary to allow the DoD
additional time to consider the consequences of the MLA Rule as applied
to credit card accounts, and to develop effective solutions to prevent
those consequences from taking place. Given that we are merely months
from the current credit card implementation deadline, it is imperative
the DoD act quickly and provide relief to the industry.
Conclusion
The growing regulatory burden on credit unions is the top challenge
facing the industry today and credit unions are saying ``enough is
enough'' when it comes to the overregulation of the industry. If
Congress wants to help foster economic growth, enacting the regulatory
relief provisions outlined in my testimony to provide regulatory relief
to credit unions and community financial institutions is key. Credit
unions need a healthy regulatory environment to succeed and serve the
needs of their 108 million members. Small credit unions are
disappearing at an ever-increasing pace, and cannot wait forever for
congressional action. The time to act is now. Regulators must also do
their part and we are encouraged that some are starting to take steps
to do so. But more must be done and the Committee should also encourage
regulators to act to provide relief where they can without additional
congressional action.
We thank you for the opportunity to share our thoughts with you
today. I welcome any questions you might have.
______
PREPARED STATEMENT OF R. SCOTT HEITKAMP
President and CEO, ValueBank Texas, on behalf of the Independent
Community Bankers of America
June 8, 2017
Opening
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
my name is Scott Heitkamp, and I am President and CEO of ValueBank
Texas in Corpus Christi, Texas. I am also Chairman of the Independent
Community Bankers of America, and I testify today on behalf of the more
than 5,800 community banks we represent. Thank you for convening
today's hearing on ``Fostering Economic Growth: The Role of Financial
Institutions in Local Communities.''
What ValueBank and other community banks do from inside a local
community cannot be replicated from outside the community. This isn't
just my opinion; this is what a number of empirical studies have
found.\1\ With a direct knowledge of the borrower, the community, and
local economic conditions, community banks offer customized terms and
make loans passed over by larger lenders based outside of the community
or that rely on algorithms and other impersonal methods of evaluating
credit. This is the community bank competitive advantage and the reason
we must be part of any plan to foster local economic growth.
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\1\ See ``The State and Fate of Community Banking.'' Marshall Lux
and Robert Greene. Mossavar-Rahmani Center for Business and Government
at the Harvard Kennedy School. February 2015. This paper discusses a
number of studies, both governmental and academic, that have found a
community bank advantage based on their proximity to the communities
they serve.
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Before I discuss ICBA's plan for fostering local economic growth,
I'd like to give you some background on my bank. ValueBank Texas was
chartered in 1967 and later acquired by my father. I'm proud to carry
on his legacy as a second-generation community banker. Today, ValueBank
Texas is a $213 million-dollar bank with 10 offices in Corpus Christi
and suburban Houston with 114 employees. We specialize in small
business and residential mortgage lending. As our name suggests, we are
dedicated to creating value for our customers and our community.
The economic recovery has been painfully slow and has failed to
reach many individuals and communities. Today, a customer with a
pristine credit score or a large, established business can get a loan.
But this isn't the measure of a strong economy. When the credit box is
artificially tight, we have subpar economic growth. To break out of
this rut and strengthen economic growth, we must expand credit
availability to millions of hardworking households and would-be
borrowers with less-than-perfect credit scores. Many of these borrowers
are on the middle-to-lower end of the income scale.
Community banks are uniquely suited to reach struggling households
and small businesses. An intangible, yet critical, factor that
separates community banks from other financial institutions is the
direct stake and vested interest we have in the success of our
communities. We cannot thrive in a community that is failing or
stagnant. Every loan we make is a vote of confidence in the community
and a deepening of our commitment, not a one-off transaction.
Unfortunately, in recent years, a sharp growth in regulatory burden has
made it increasingly difficult for community banks to lend and foster
local economic growth.
Regulatory overreach has created two problems in particular. First,
it has contributed to rapid consolidation. Banks need a larger scale to
amortize the increasing cost of compliance, and this has been driving
many mergers and acquisitions. At the same time, a daunting compliance
burden and heightened legal risk deter the formation of de novo
charters. As a result, today there are some 1,700 fewer community banks
than there were in 2010 and only a handful of new bank charters. This
often harms competition and leaves many small communities stranded
without a local community bank.
Second, overregulation has created a very tight credit box by
choking off community banks' capacity to take on and manage reasonable
credit risk. Too many would-be borrowers--often people with lower
credit scores and lower income or newly established small businesses
who are still creditworthy--are being denied credit in today's
environment.
Solutions
The good news is that solutions are at hand. ICBA's ``Plan for
Prosperity'' includes over 40 recommendations that will allow Main
Street and rural America to prosper. A copy of the Plan is attached to
my written statement. In April of this year, at the request of Chairman
Crapo and Ranking Member Brown, ICBA submitted a short list of
recommendations, drawn from the Plan for Prosperity, which were
selected based on two criteria: their positive impact on local
communities and their history of bipartisan support. What follows is a
discussion of these recommendations.
Access to Mortgage Credit
The following recommendations would enhance access to mortgage
credit and support a robust housing market by providing relief from new
mortgage regulations, especially for loans held in portfolio.
1. Expand Exemption Thresholds Under the Home Mortgage Disclosure
Act (HMDA) and Repeal New Data Points
The CFPB's new rule under HMDA, when it becomes effective, will
require covered banks and credit unions to collect and report 48 unique
data points on each mortgage loan they make, more than double the
number of data points covered lenders are currently required to
collect. The proliferation of data points will amplify the number of
inadvertent data entry errors and penalties, especially among
institutions that upload data manually, including many community banks
and small credit unions.
ICBA believe the exemption thresholds should be increased to
provide relief for small lenders without materially impacting the
mortgage data available to the CFPB or impairing the purpose of the
HMDA statute. Specifically, ICBA recommends that:
Depository institutions that have originated 1,000 or fewer
closed-end mortgages in each of the two preceding calendar
years be exempt from reporting on such loans; and
Depository institutions that have originated 2,000 or fewer
open-end lines of credit in each of the two preceding calendar
years will be exempt from reporting on such loans.
The exemption thresholds should be applied separately so that a lender
may be exempt from reporting on its closed-end mortgages but not on its
open-end lines of credit, or vice versa.
ICBA also recommends that statutory authority under Dodd-Frank for
the additional data points be repealed.
2. Automatic Qualified Mortgage Status for Loans Held in Portfolio
The ``qualified mortgage'' (QM)/ability-to-repay rule is overly
complex and prescriptive and excludes otherwise creditworthy mortgages.
When a community bank holds a mortgage in portfolio, it has every
incentive to ensure it understands the borrower's financial condition
and to work with the borrower to structure the loan properly and make
sure it is affordable. For this reason, mortgages held in portfolio by
a community bank should have automatic ``qualified mortgage'' (QM)
status under the CFPB's ability-to-repay rule.
3. Ease Escrow and Appraisal Requirements for Community Bank
Portfolio Lenders
Mandatory escrow requirements raise the cost of credit for those
borrowers who can least afford it, and impose additional, unnecessary
compliance costs for community bank lenders. Appraisal requirements
have become costly in recent years, and rural America is experiencing a
shortage of licensed appraisers. Escrow and appraisal requirements
deter community bank mortgage lending and reduce borrower choice.
Portfolio lenders have every incentive to ensure that collateralized
properties are accurately appraised and that taxes and insurance are
paid on a timely basis. Community bank employees often understand local
real property values better than licensed appraisers who operate from
outside of the county or State where the property is located. When a
mortgage is held in portfolio by a community bank, it should be exempt
from escrow requirements and the lender should be able to substitute an
in-house ``property evaluation'' for a full residential property
appraisal completed by a Licensed appraiser.
Access to Capital
Community banks need better access to capital and simplified
capital regulation to best serve the lending needs of their
communities.
4. Exempt Non-Systemically Important Financial Institutions from
Basel III
Basel III was originally intended to apply only to the largest,
systemically important and internationally active banks. Imposing
complex and excessive capital standards on the Nation's community banks
will limit lending, investment, and credit availability in local
communities.
Community banks should be exempt from Basel III and subject to
Basel I, a capital framework that more accurately aligns community
banks' regulatory capital with the types of assets they hold and the
relationship model they follow. Basel I has served the relationship-
based banking model well for over a generation.
Community Bank Small Business Lending
5. Repeal New Small Business Loan Data Collection Requirement for
Small Financial Institutions
Section 1071 of the Dodd-Frank Act requires the collection and
reporting of 12 pieces of data in connection with credit applications
made by women- or minority-owned businesses of any size as well as all
small businesses regardless of ownership, including the race, sex, and
ethnicity of the principal owners of the business. Section 1071 also
gives the Bureau discretion to require the reporting of any additional
information that would assist it in fulfilling the purposes of the
statute. Section 1071 is fraught with unintended consequences that will
only harm small business borrowers.
Small businesses create more new jobs in the American economy than
any other sector. They rely heavily on credit to fund their payrolls,
working capital, inventory, and capital investments. Any new compliance
burden of the magnitude contemplated under Section 1071 will likely
drive smaller creditors out of the marketplace and shrink access to
credit for the most credit-dependent businesses. Because the compliance
costs would be fixed, the smallest borrowers would be at the greatest
risk. Data collection and reporting for a small loan application would
cost a lender the same as for a larger loan application, giving lenders
a strong incentive to forgo smaller borrowers.
Pending Legislation
The recommendations listed above, as well as other recommendations
of the Plan for Prosperity, are found in a number of bills introduced
in the House and Senate.
The Clear Relief Act (S. 1002), a bipartisan bill introduced by
Senators Moran and Tester, provides ``qualified mortgage'' status and
escrow relief for mortgages held in portfolio by institutions with
assets of less than $10 billion. S. 1002 also includes three other
provisions from the Plan for Prosperity: Relief for community banks
with assets of $1 billion or less from redundant internal controls
assessment mandates of Sarbanes-Oxley 404(b); an exemption for banks
with assets of $10 billion or less from the Volcker Rule; and a waiver
from the mandatory waiting period prior to closure that is triggered
when a lender extends a second offer of credit with a lower interest
rate.
ICBA strongly supports S. 1002 and thanks the Members of this
Committee who have cosponsored this bill: Senators Heitkamp, Tillis,
and Donnelly.
I would also like to recommend a bill Senator Rounds introduced
last Congress, the Community Bank Access to Capital Act, which included
an exemption from Basel III for banks with assets of $50 billion or
less; SOX 404(b) relief similar to what is included in S. 1002; and
amendments to the Securities and Exchange Commission's Regulation D
that would make is easier for community banks to raise equity capital
through private securities offerings. These critical capital provisions
would result in more robust community lending and local economic
growth. ICBA looks forward to the reintroduction of the Community Bank
Access to Capital Act.
We strongly encourage this Committee to consider S. 1002, the
Community Bank Access to Capital Act, and other bills that include
meaningful regulatory relief for community banks.
Closing
Thank you again for the invitation to testify today on behalf of
ICBA and community banks nationwide. The 115th Congress has an
opportunity to comprehensively rethink, restructure, and modernize the
regulation of the American financial services industry to ensure that
it promotes local economic growth, prosperity, and job creation.
Regulatory relief for community banks is a critical part of this
effort. Today's hearing will set the parameters for the important work
ahead of us.
______
PREPARED STATEMENT OF DALLAS BERGL
Chief Executive Officer, Inova Federal Credit Union, on behalf of the
Credit Union National Association
June 8, 2017
Chairman Crapo, Ranking Member Brown, Members of the Committee:
Thank you for the opportunity to testify on this important topic.
My name is Dallas Bergl, and I am the Chief Executive Officer for the
INOVA Federal Credit Union, headquartered in Elkhart, Indiana. I am
also a member of the Board of Directors of the Credit Union National
Association (CUNA),\1\ on whose behalf I testify today.
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\1\ Credit Union National Association represents America's credit
unions and their 110 million members.
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INOVA Federal Credit Union proudly serves over 32,000 members,
providing small dollar loans, mortgage loans, and automobile refinance
loans along with a variety of savings and deposit accounts. By asset
size ($336 million), loans outstanding ($285 million), and member
deposits ($291 million), we are small relative to the big banks.
Nevertheless, we are an invaluable financial lifeline to our community:
we provide products and services that larger financial institutions
often do not, because it may not be worth their time or resources to do
so.
Elkhart, in northern Indiana, became a symbol of distressed Middle
America during and after the Great Recession. Among a variety of other
manufacturing activity, the area is a hub of recreational vehicle
manufacturing, one of the first industries to falter in the recession.
In fact, less than a year into the recession, our community's
unemployment rate tripled, peaking at 18.9 percent by early 2009. It
was during this downturn that the importance of a credit union to a
community like ours became apparent.
Life does not treat people equally or fairly, and economic
disparity is clearly seen through the eyes of those with little or no
savings at all. They struggle to afford life, to purchase a home, to
pay their rent, or to put a meal on the table for their family.
Consumers who do not have robust savings often also do not have solid
credit histories or individuals who can cosign a loan for them. And,
they end up
borrowing small amounts of money, where the cost of making the loan
often equals and sometimes exceeds the interest paid. It's
understandable that this is not an attractive investment for larger,
for-profit financial institutions to undertake.
My credit union, and others like it throughout the country, lend
and provide deposit accounts to these individuals, and other credit
union members, because Congress gave us a mission to promote thrift and
provide access to credit for provident purposes to our members. Serving
our members and investing in their success, especially during tough
economic times, is a key element to ensuring our communities grow and
thrive. But the investments credit unions make do not just help our
individual communities. Success begets success, and when individual
communities grow and thrive, so does this country. It is the growth and
success of individual communities, like Elkhart, that allows this
country to achieve economic growth and be a competitive force in the
international community. It is critical that credit unions can continue
to support economic development in the United States. Congress has
given us a big job, and we're helping consumers every day in ways that
large, for-profit institutions simply will not: we're helping them put
gas in their car, buy appliances, cover medical expenses, send their
children to college, and purchase homes of their own.
I would like to say that credit unions face no hurdles in their
pursuit of this statutory mission, but this has not been the case. The
2008 economic crisis hit small communities, like Elkhart, hard. So,
when our Government had to react and fix the bad policies that led to
too-big-to-fail institutions, their irresponsible practices, and the
subsequent economic harm to everyday Americans, we supported this
effort. Consumers were losing their homes, life savings, and everything
they worked for years to earn. Credit unions and their leaders, such as
myself, expected a reaction from our Government that was targeted to
the abusers of consumers. What we did not expect, what we did not
support, and what continues to perplex us, are the considerable new
regulatory requirements for our institutions--the ones who put
consumers, as their member-owners, first.
New mortgage requirements intended to prevent an economic crisis in
the future have had the unintended effect of preventing credit unions
like mine from lending at the same levels as before the crisis. Prior
to the mortgage disclosure and underwriting requirements imposed by the
Consumer Financial Protection Bureau (CFPB), my credit union closed as
many as three mortgage loans in the time it now takes us to originate
just one loan. Increasing the cost of making a loan does not create
economic growth. It leads to fewer consumers getting help. While my
credit union continues to provide mortgage loans, there are other
credit unions in Indiana and elsewhere that are not as fortunate
because they have had to stop their mortgage lending completely because
of the new regulatory burden. This does not make sense: why would
Congress support a regulatory regime that makes it harder for lenders
with histories of safe and affordable lending to serve their members?
Why would Congress allow this regulatory regime to continue and
potentially have a similar effect on other critical lifeline services
provided by credit unions, like small dollar lending?
My testimony presents commonsense proposals that will help
responsible financial institutions, like credit unions and small banks,
continue to serve their members and communities so they can grow and
thrive; regulatory changes that can be tailored to address the problem
institutions in this country without punishing solid ones; and
proactive steps that can be taken with credit unions' regulator, the
National Credit Union Administration (NCUA), to help foster the
continued safety and soundness of the credit union system.
I believe it is my obligation, as a credit union representative
invited to testify, to be honest with you, provide you with my advice
based on years of experience in this industry, and tell you when
ideas--even well intentioned ones--may not be workable. I truly believe
that when credit unions and their members thrive, so does this country.
It is through the prosperity of these individual financial institutions
that we will prosper economically as a Nation.
The Roadmap for Strengthening Credit Unions and Our Members
My primary goal as CEO of INOVA Federal Credit Union is to run my
credit union successfully so we can best provide products and services
for our members. That is what my volunteer, unpaid board of directors,
consisting of members elected by fellow members, expects of me. It is
what I expect of myself. Congress should enact legislation that allows
credit unions to more effectively serve their members and help promote
economic growth, starting with correcting a disparity in the treatment
of certain residential loans made by credit unions and eliminating the
credit union member business lending cap.
Under current law, when a bank makes a loan for the purchase of a
1-4 unit, non-owner-occupied residential property, the loan is
classified as a residential real estate loan. That is appropriate
because these are generally loans to individuals or households with
regular jobs with modest real estate investments on the side. In fact,
many of these loans can be sold to Fannie Mae and Freddie Mac as
residential home loans. However, when a credit union makes the same
loan, it is required to be classified as a business loan and is
therefore subject to the statutory member business lending cap. This
makes no sense, and Congress should fix it.
Correcting this disparity would provide economic growth in many
ways. It would enable credit unions to provide additional credit to
borrowers seeking to purchase residential units, and help stimulate
investment in affordable rental real estate and employment in the
construction trades. Further, changing the statutory classification of
these loans would free up as much as $4 billion in business lending cap
space, allowing credit unions to more fully serve their small business
members. Serving these members, who want to contribute to our country's
economy, should be the primary goal of all of us here today.
Further, eliminating the statutory cap on credit union member
business lending would foster economic growth. As the Committee knows
well, there is no safety and soundness rationale to the member business
lending cap, and there is no nexus between the business lending cap and
the credit union tax status. The only reason for the cap is to keep
credit unions from serving small businesses to a greater degree.
Perpetuating this policy robs America's small businesses of further
access to safe and affordable credit. Eliminating the credit union
business lending cap would free up significant additional capital for
small businesses and help advance economic activity and job growth in
areas served by business lending credit unions. We estimate that
eliminating the cap on credit union member business lending would
provide nearly $5 billion in new small business lending and help to
create more than 54,000 jobs for Americans in the first year alone.
Macro-Level Changes to Improve the Regulatory Landscape
My credit union and our members experienced the financial crisis
like all Americans did, perhaps even more so. Oftentimes, we felt
helpless because we didn't cause the turmoil that took place. For this
reason, we welcomed policies to address the problem actors. Yet, new
regulations from the CFPB have not protected credit union members as we
expected, nor have they prevented too-big-to-fail banks from getting
bigger and absorbing more market share.
Since the beginning of the crisis, credit unions have been subject
to more than 200 regulatory changes from over a dozen Federal agencies.
These new rules total nearly 8,000 Federal Register pages, and
counting. The constant stream of new regulations from the CFPB
particularly has led to credit union resources being diverted from
serving members and to tough choices to limit or eliminate certain
products and services.
Furthermore, disparity in the cost impact of regulatory burden has
accelerated the consolidation of the credit union system (and the
banking sector), robbing consumers of financial institution choices.
While the number of credit unions has been declining since 1970, the
attrition rate has accelerated since 2010, after the recession and the
creation of the CFPB. Indeed, 2014 and 2015 were among the top 5 years
in terms of attrition rates since 1970, at 4.2 percent and 4.1 percent.
Attrition rates at smaller credit unions have been especially high. In
both 2014 and 2015, the attrition rate at credit unions with less than
$25 million in assets (half of all credit unions are of this size) has
exceeded 6 percent. There is an indisputable connection between both
the dramatically higher regulatory costs incurred by small credit
unions and the increases in those costs since 2010, and their higher
attrition rates.
Earlier this year, CUNA surveyed credit union executives to measure
the impact of these rules on credit union members.\2\ The findings
indicate:
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\2\ Haller, Jon; Ledin, Paul; and Malla, Bandana, Credit Union
National Association Impact of CFPB Rules Survey, available at https://
www.cuna.org/uploadedFiles/CUNA/Legislative_And_Regulatory_Advocacy/
Removing_Barriers_Blog/Removing_Barriers_Blog/
FINAL%20Report%20Summary%20only%20Impact%20of%20CFPB%20Survey%20Analysis
.pdf (February 2017).
Over half (55 percent) of credit unions that have offered
international remittances sometime during the past 5 years have
either cut back (27 percent) or stopped offering them (28
percent), primarily due to burden from CFPB
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regulations.
More than 4 in 10 credit unions (44 percent) that have
offered mortgages sometime during the past 5 years have either
eliminated certain mortgage products and services (33 percent)
or stopped offering them (11 percent), primarily due to burden
from CFPB regulations. Credit unions with assets of less than
$100 million are the asset group most apt to have dropped their
mortgage program altogether.
Truth-in-Lending Act and Real Estate Settlement Procedures
Act Integrated Disclosure (TRID) rules are far and away (80
percent) the single rule most negatively impacting credit
unions that have offered mortgages. This is followed by the
Qualified Mortgage rules (43 percent), Mortgage Servicing (30
percent), and new Home Mortgage Disclosure Act rules (19
percent). TRID rules serve as the most troublesome rule for all
asset groups. (Notably, many credit unions have not yet turned
their full attention to the new requirements in the new HMDA
rules so this impact is likely understated).
One in four credit unions (23 percent) that currently offer
Home Equity Lines of Credit (HELOCs) indicate they plan to
either curtail their HELOC offerings or stop offering them in
response to the new HMDA rules.
The clear majority of credit unions (93 percent) that
either currently offer payday/small-dollar loans or are
considering offering them indicate they are reconsidering their
programs if there are increased regulations: (33 percent) will
likely no longer consider introducing these loans, (43 percent)
will review the impact and then decide whether to continue/
discontinue the currently existing offering, and (17 percent)
will likely discontinue the currently existing loan product
(without an impact review) if there are increased regulations.
These results show consumers are losing options from credit unions, and
the smallest credit unions are being hit the hardest. Common-sense
reforms must be enacted to better protect credit unions from the anti-
competitive rules generated by this rigged regulatory regime that
rewards the largest financial institutions and nonbank lenders that
caused the financial crisis. There are ways that Congress can make the
CFPB more effective and adaptable to our economic landscape.
1. A Five-Person Commission for the CFPB
As presently structured, the CFPB is an anomaly in the Federal
Government--its authority is vested in a single person, removable by
the President only for cause, and absent the appropriate levels of
Congressional oversight. Credit unions and our members benefit from
policymaking that includes more voices and different expertise. This is
how my credit union is run--with a Board consisting of members from the
community that can offer different perspectives and views. This is how
all other Federal financial regulatory agencies are run-with bipartisan
boards made up of members with diverse views.
Director Cordray believes he has done more than enough to
accommodate credit unions in rulemakings despite the substantial
evidence they have been harmed by one-size-fits all rules.\3\ Under the
current structure, it is possible to ignore significant input from
other regulators and Congress about issues such as exempting credit
unions from certain rules, because ultimately, the Director answers to
no one, not even consumers themselves.
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\3\ See e.g., Letter from Director Richard Cordray to Congressman
and Congress Stivers, available at https://www.cuna.org/uploadedFiles/
CUNA/Legislative_And_Regulatory_Advocacy/Removing_Barriers_Blog/
Removing_Barriers_Blog/April%202016%20Response%20
to%20Schiff-Stivers%20CFPB%20Letter.pdf (April 13, 2016).
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A single director structure leaves consumers vulnerable to market
uncertainty and drastic swings in policy due to the political
environment. This uncertainty and the frequent changes in rules and
policy can be problematic for credit unions, forcing membership
resources to be diverted to appease the most recent perspective the
CFPB director has.
Consumer protection is not about politics; it is about creating the
best environment to enable financial health and safety--a mission the
credit union movement has adhered to for many decades with bipartisan
support. The best way to remove politics from this equation is through
a multi-member commission. Perhaps the best indication that this is the
best solution is the fact it is a proposal that both
Democrats,\4\ and Republicans \5\ have supported, only to walk away
from it when it was politically convenient to do so. Credit union
members and other consumers would benefit from a multi-member
Commission that returns fairness and certainty to the rulemaking
process. We urge you to put consumers ahead of politics and change the
structure of the CFPB.
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\4\ Department of Treasury, ``Financial Regulatory Reform: A New
Foundation: Rebuilding Financial Supervision and Regulation.''
Available at https://www.treasury.gov/initiatives/Documents/
FinalReport_web.pdf. 2009, p. 58.
\5\ H.R. 1266 (114th Congress).
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2. Enhance CFPB's Exemption Authority
Congress provided the CFPB with the authority to exempt any class
of covered institutions from any of its rulemakings under Section 1022
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), and we were pleased it did so. However, the CFPB has
resisted using this exemption authority to fully exempt credit unions
from any of its rulemakings. Moreover, while under present law the CFPB
is required to consult with the prudential regulators primarily
responsible for ensuring safety and soundness, it is not engaging with
the NCUA in a meaningful way during the rulemaking process. This is
evidenced by the NCUA's recent objection to the CFPB's proposed rule
for small dollar lending \6\ and a letter sent to the CFPB last month
outlining concerns with other CFPB rules.\7\ This unwillingness to
consider input from the NCUA early in the rulemaking process has
resulted in proposals, final regulations, and guidance that are
conflicting, confusing, and do not take into consideration the concerns
of credit unions' prudential regulator.
---------------------------------------------------------------------------
\6\ National Credit Union Administration Comment Letter to CFPB in
response to the CFPB's proposed rule for Payday, Small Dollar, and High
Cost Loans, available at https://www.ncua.gov/newsroom/Documents/
comment-letter-2016-oct-metsger-payday-rule.pdf (Oct. 3, 2016).
\7\ National Credit Union Administration Letter to CFPB Concerning
Compliance with CFPB Rules, available at https://www.cuna.org/
uploadedFiles/CUNA/Legislative_And_Regulatory
_Advocacy/Removing_Barriers_Blog/Removing_Barriers_Blog/Cordray%20CU%20
Compliance%20with%20CFPB%20Rules%20Letter.pdf (May 24, 2017).
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Furthermore, the CFPB's unwillingness to adequately exercise its
exemption authority has resulted in credit unions reducing the
availability of, or eliminating entirely, safe and affordable financial
products from the market. Nowhere is this seen more clearly than in the
impact of the Bureau's first major rulemaking on remittances. More than
half of the credit unions that offered remittances prior to the rule
have either stopped offering this service to their members or have
significantly reduced offering the service to stay below the low
exemption threshold. Indeed, CFPB Director Richard Cordray himself
noted at a recent hearing in the House Financial Services Committee
that 96 percent of international remittances now run through large
banks or nonbank providers, the very abusers from whom this rule was
designed to protect consumers.\8\ When a `consumer protection' rule
drives out safe providers and forces consumers into the hands of
abusers, this is not consumer protection.
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\8\ CFPB Director Richard Cordray in response to a question by
Representative Nydia Velazquez (D-NY) at a hearing entitled, ``Semi-
Annual Report of the Bureau of Consumer Financial Protection.'' (April
5, 2017).
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Because such one-size-fits-all CFPB rulemakings have harmed credit
union members, the NCUA recently urged the CFPB to use its Section 1022
(b)(3)(A) exemption authority ``whenever possible'' given the credit
union community's long history of serving their members and protecting
consumers. The NCUA further stated, ``Use of this permitted, yet
underutilized, statutory authority is appropriate to address compliance
costs and the unintended consequences of limiting access to affordable
financial services for many millions of middle class credit union
members through the enactment of needless regulatory burden.''
In addition to the NCUA, 399 Members of Congress urged the CFPB to
properly use its authority to exempt credit unions from regulations
that were never intended to apply to them, and to ensure that
regulations do not have the unintended consequences of limiting
services or increasing cost for credit union members.\9\
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\9\ Letter from 329 U.S. Members of the House of Representatives to
CFPB Director Richard Cordray, available at http://www.cuna.org/
Legislative-And-Regulatory-Advocacy/Legislative-Advocacy/Letters-
andTestimony/Letters/2016/Stivers-Schiff-Letter-w-signatures/ (Mar. 14,
2016); Letter from 70 U.S. Senators to CFPB Director Richard Cordray,
available at http://www.cuna.org/Legislative-And-Regulatory-Advocacy/
Legislative-Advocacy/Letters-and-Testimony/Letters/2016/160718-Letter-
to-CFPB-on-Tailoring-Regulations/ (July 2016).
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Further, the Small Business Administration Office of Advocacy
additionally urged the CFPB to exempt credit unions from the CFPB's
proposed small dollar loan rule.\10\ It specifically outlined the
economic impact of not doing so stating, ``The CFPB's proposed rule may
force legitimate businesses to cease operation. Imposing such a
regulation will not alleviate a consumer's financial situation. The
consumer will still need to pay his/her bills and other expenses.
Imposing these strict regulations may deprive consumers of a means of
addressing their financial situation.''
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\10\ Small Business Administration Office of Advocacy Letter to
CFPB in response to the CFPB's proposed rule for Payday, Small Dollar,
and High Cost Loans, available at https://www.sba.gov/advocacy/10-07-
2016-payday-vehicle-title-and-certain-high-cost-installment-loans (Oct.
7, 2016).
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Despite these loud and powerful voices encouraging the CFPB to
exercise its Congressionally bestowed exemption authority, the CFPB has
refused to listen. Therefore, we believe even further clarity about
Congress' intent is prudent.
Congress conveyed the exemption authority for a reason: to make
sure that the rules promulgated by the Bureau took into consideration
the impact on small institutions, like credit unions and small banks.
Congress understood then and we hope it understands now that a one-
size-fits-all structure produces anti-competitive rules that
disadvantage small providers, but rules which are tailored to the size
and risk-profile of the institution allow them to continue to provide
safe and affordable services to their members and customers. Consumers
benefit when credit unions and other good actors spend fewer resources
complying with rules meant to address other's bad behavior.
Sadly, consumers are paying the price for this anti-competitive
rulemaking regime. In 2014, the impact of regulatory burden on credit
unions and their members was $7.2 billion. This represented a 40
percent increase in compliance costs from 2010. Since 2014, significant
new rulemakings have taken effect which will have undoubtedly increased
the cost credit unions and their members are paying to comply with
rules designed for abusers even more.
By more explicitly directing the CFPB to provide meaningful
exemptions for institutions with a history of providing safe and
affordable financial services, these institutions--credit unions and
small banks--can take resources they intend to apply to superfluous
compliance and invest them instead in their local communities. We urge
Congress to enact legislation that exempts credit unions and small
banks from all Bureau rulemakings unless, on an individual rulemaking
basis, the Bureau demonstrates that a pattern of abuse exists that
justifies application of a Bureau rule, and the Bureau receives the
concurrence of the credit union and/or bank prudential regulators.
3. Reexamine the CFPB's UDAAP Authority
The CFPB's Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
authority gives it the power to engage in nearly any policymaking
desired, even in the absence of actual harm to consumers. For instance,
in its proposed Payday and Small Dollar Loan rule, the CFPB is
attempting to include consumer-friendly, credit union small dollar loan
programs using this UDAAP authority.\11\ The proposed rule imposes new,
and extremely complex, requirements on credit unions despite little to
no data suggesting these products have any pattern of harm to
consumers. To the contrary, consumers have stated that credit union
small dollar loans are often their safest and best option for
credit.\12\ My credit union has provided small dollar loans to our
members for years to help them buy groceries, pay for health care, and
pay the rent when they are short for the month.
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\11\ Payday, Vehicle Title, and Certain High-Cost Installment
Loans, 81 Fed. Reg. 47864, 47900 (July 22, 2016).
\12\ Peace, Elizabeth. ``Consumers Prefer Credit Unions to Payday
Lenders,'' Credit Union Times, available at: http://www.cutimes.com/
2015/07/28/consumers-prefer-credit-unions-to-payday-lenders (July 28,
2015).
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Even the NCUA was concerned with the CFPB's overreaching proposal,
and it sent its own comment letter urging the Bureau to exempt aspects
of credit union lending from the rule.\13\ The NCUA recently reiterated
these concerns in a follow-up letter to the CFPB, specifically
addressing its use of UDAAP authority.\14\ The NCUA has also stated
that the CFPB should provide clarity to credit unions with respect to
UDAAP. Specifically, the agency expressed that ``uncertainty regarding
supervisory expectations can limit the ability of credit unions to
provide the services sought by their members.'' The NCUA also expressed
that there is no precedent for understanding the abusive prong of
UDAAP, which can be broad.
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\13\ National Credit Union Administration Comment Letter to CFPB in
response to the CFPB's proposed rule for Payday, Small Dollar, and High
Cost Loans, available at https://www.ncua.gov/newsroom/Documents/
comment-letter-2016-oct-metsger-payday-rule.pdf (Oct. 3, 2016).
\14\ Supra note 9, NCUA Letter to CFPB.
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When credit unions are operating without due process and do not
have a clear picture of the rules they are operating under, we stop
innovating and limit our products and services. The result is
detrimental to our members and our communities. More clarity is needed
about the CFPB's use of UDAAP authority, as this would be in the best
interest of credit unions and their members.
Specific Changes to Strengthen Consumer Regulations
The 2008 financial crisis taught us that it is important to address
the actions of financial services providers who are harming consumers.
While the goal of the CFPB is to protect consumers, there are ways CFPB
regulations could be better tailored to address the problem actors in
the industry without impeding the ability of credit unions and other
community financial institutions from continuing to operate and serve
consumers.
In the past several years, since the creation of the CFPB, credit
unions' ability to provide top quality and consumer-friendly financial
products and services has been significantly impeded by a regulatory
scheme which has favored the large banks and nonbank financial services
providers that can afford to absorb regulatory and compliance changes.
CUNA's recent Regulatory Burden Study found that in 2014, regulatory
burden on credit unions caused $6.1 billion in regulatory costs, and an
additional $1.1 billion in lost revenue. Even more alarming, these
figures do not include the CFPB's recent regulatory additions to the
Home Mortgage Disclosure Act (HMDA) and Truth in Lending Act/Real
Estate Settlement Procedures Act Integrated Disclosure (TRID)
requirements, which we believe have caused the greatest increase in
compliance cost but have yet to be precisely measured. CUNA is in the
process of updating the study to consider the impact of recently
implemented regulations.
The CFPB regularly cites modest thresholds and accommodations it
has provided in some mortgage rules and the remittances rule as proof
it is considering the impact its rules have on credit unions and their
members. And, the exemptions the CFPB provided for small creditors in
the qualified mortgage/ability-to-repay underwriting rules were helpful
to credit unions. Regrettably, the CFPB's efforts have not been
sufficient and have not fully taken into consideration the size,
complexity, structure, or mission of all credit unions. Below are
regulatory changes that could be made to keep credit unions like mine
operating and thriving in these markets. This nuanced policymaking can
foster economic growth for credit unions and their members.
1. Home Mortgage Disclosure Act (HMDA)
The CFPB has acknowledged that credit unions maintained sound
credit practices through the economic crises and did not engage in the
practices that led to the crash of the housing market. Nonetheless, the
HMDA rule penalizes credit unions where there has been no evidence of
wrongful conduct. This makes little sense given credit unions' field of
membership requirements.
The CFPB should modify the 2015 HMDA final rule to provide
meaningful exemptions that will provide relief to credit unions. It
will be difficult for credit unions to effectively participate in the
mortgage lending market if they are forced out because of rules not
tailored to their size or structure. While the 2015 HMDA final rule
included exemption thresholds of 25 closed-end mortgages--2 per month--
and 100 open-end mortgages (HELOCs)--2 per week--from HMDA reporting,
this can hardly be described as tailoring the rule to minimize the
impact on small entities given that prior to the rule, credit unions
were not required to report HMDA data on HELOCs. The new HMDA reporting
requirements are particularly troublesome since many credit unions
process HELOCs on a consumer platform and mortgages on a different
lending platform, a point that credit union leaders repeatedly raised
with Bureau staff during the rulemaking process. The CFPB further added
to credit unions' regulatory burden by drastically increasing the
number of data points they must report to a level well beyond the data
points required by the Dodd-Frank Act.
CUNA's recent survey of credit unions showed that nearly one in
four (23 percent) that currently offer HELOCs plans to either curtail
their offerings or stop offering them completely in response to the new
HMDA rules. We believe this is a conservative estimate since many
credit unions have not fully turned their attention to implementing the
new HMDA rules, given the other regulatory changes that have had their
focus the past few years.
While the NCUA stated recently that there are several areas where
relief is warranted for credit unions, it specifically identified HMDA
as problematic. It urged the CFPB to significantly increase its
exemption thresholds. Additionally, the NCUA
expressed concerns that the CFPB is requiring the reporting of 14
additional data points beyond what was explicitly required in the Dodd-
Frank Act. The NCUA
stated, ``the recording and submission of the additional data fields
create a significant burden on credit unions,'' and it further urged
the CFPB to exempt credit unions from this reporting requirement. The
NCUA also points out the harm such arbitrary requirements could cause
for consumers, stating, ``While the Bureau may consider such additional
data points as value added for economic modeling or other purposes,
please consider the distinct economic burden places on the credit union
community by this exercise.''
Credit unions have provided an abundance of data to the CFPB
showing that the thresholds for HMDA compliance do not provide enough
regulatory relief. Congress should, therefore, encourage the CFPB to
provide an exemption from reporting on HELOCs and a dramatic increase
in the loan volume exemption threshold for closed-end mortgage loans.
These changes would allow credit unions to continue to operate in the
mortgage lending market and allow consumers to have more and safer
choices. A more robust and competitive mortgage market with many
participants benefits consumers most.
In addition, Congress should require the CFPB to make modifications
to the rule so the required data points are limited to the enumerated
data points in the Dodd-Frank Act. The Dodd-Frank Act enumerated data
points are sufficient for purposes of identifying discriminatory
practices and implementing the purpose of the rule.
Finally, Congress should require the CFPB to study the
ramifications on privacy and the potential for identity theft before
collecting any additional data points or making them public. The final
rule also calls for the use of a ``balancing test'' by the CFPB yet
does not otherwise indicate which fields will be made public. The CFPB
should make modifications to the rule to clarify which fields will be
made public and allow for notice and comment on the actual public data
points.
2. Mortgage Origination Rules
In CUNA's recent survey of credit unions, 43 percent cited the
CFPB's QM/ATR rule as most negatively impacting the ability to serve
members with mortgage products. While the CFPB provided a ``small
creditor'' exemption to certain provisions of this rule, it did not
provide full relief for credit unions who in some instances were forced
to change their product offerings. All credit unions, not just the very
smallest, have a different operating structure than banks and for-
profit lenders, and the regulatory changes implemented by the CFPB must
reflect this difference. Modifications in these new underwriting rules
for all credit unions would be appropriate to ensure they can continue
to effectively serve their members.
Furthermore, credit unions agree that borrowers should have
appropriate disclosures when buying a home, but the sweeping
substantive changes made by the new TRID rules in addition to the
Ability-to-Repay (ATR) underwriting requirements increase the
regulatory burden on credit unions and create arbitrary barriers to
homeownership. The CFPB should recognize credit unions are not
predatory lenders but good faith partners for their members seeking to
buy a home. Credit unions would support the following changes to the
TRID framework, which would help us continue to operate in the current
market.
First, origination waiting periods are harmful to consumers and
lenders by delaying closings often not to the benefit of the consumer.
We would support modifications to the rules to allow waiting periods to
be waived. Congress should urge the CFPB to remove the required 3-day
waiting period prior to closings. This waiting period is disruptive to
borrowers and credit unions alike, and can result in credit union home
buyers losing opportunities to other potential buyers, such as
investors paying cash.
Second, credit unions would support a regulatory change that would
allow a safe-harbor from TRID enforcement until it issues clear
guidance and clarifies the technical and prescriptive TRID
requirements. The rule should be modified to be principal-based instead
of prescriptive.
Third, Congress should urge the CFPB to provide a definition for
``residual income'' in the TILA Regulation Z ATR requirements. The lack
of a clear definition forces significant documentation requirements and
creates unnecessary litigation and liability risk. This risk adversely
affects consumers with less than meticulous credit records.
Fourth, the CFPB should make modifications to TILA regulations to
allow for an ability to cure violations prior to the right to proceed
with litigation.
Fifth, credit unions would support removal of the 2021 sunset for
QM loans that are eligible for sale to the Government-Sponsored
Enterprises (GSEs) to prevent market disruptions. The current exemption
allows lenders to exceed the general requirement that QM loans have a
debt-to-income ratio of 43 percent, an onerous standard. The exemption
for GSEs assists in maintaining a functioning mortgage market.
In addition, credit unions would support revision of the loan
originator compensation rules to narrow the overbroad definition of
``loan originator.'' The definition, as currently written, is unclear
and could potentially require registration of all employees of a credit
union. Credit unions would also support clarification of assignee
liability under the lending rules/statutes. This lack of clarity has
the unintended consequence of causing the secondary market to reject
loans because of possible technical, non-impactful errors. This is, in
large part, due to the unclear interpretation of TILA/RESPA rules for
which credit unions have requested additional guidance from the CFPB.
Finally, credit unions would strongly support increases to the
tolerances for appraisal fees. The zero-tolerance requirement has
caused problems and delays for credit unions and consumers.
3. Mortgage Servicing Regulations
The CFPB stated it has tailored its servicing rules by making
certain exemptions for small servicers that service 5,000 or fewer
mortgage loans. However, significant requirements under the servicing
rules are excluded from the exemption and must be followed by large and
small servicers alike. Small servicers remain subject to requirements
related to successors-in-interest, force-placed insurance and in
certain circumstances, early intervention requirements for borrowers in
bankruptcy. CUNA continues to hear the most concerns about CFPB rules
from the smaller credit unions whom the CFPB claims to have helped most
through its thresholds.
Congress should urge the CFPB to provide a more complete exemption
from these requirements for credit unions. First, the CFPB should
change the language of the force-placed hazard insurance notice to
include reference to a policy that provides insufficient coverage.
Second, the CFPB should expand the small servicer exemption to fully
exclude application of Regulation Z provisions to successors in
interest, specifically provisions relating to disclosure requirements
regarding post-consummation events, prohibited acts or practices and
certain requirements for credit secured by a dwelling, mortgage
transfer disclosures, and periodic statements for residential mortgage
loans.
4. Remittances
The CFPB regularly cites the exemption to entities that provide
fewer than 100 remittances annually as an example of regulatory relief
to small entities. However, this exemption threshold--of just two
transactions a week--is a prime example of one that has not provided
significant relief to credit unions, as evidenced by the fact that half
of credit unions offering remittances prior to the implementation of
this rule have exited the market or reduced offerings. For credit
unions to come back into, or continue to, participate in this market,
the CFPB should re-propose this rule with an increased exemption
threshold of at least 1,000. This would allow more credit unions to be
exempt from the rule, providing consumers with more options.
5. Fair Debt Collection Practice Act (FDCPA)
When Congress enacted the FDCPA and for decades since, it
recognized that including credit unions in a statute addressing abusive
debt collection practices is
unnecessary because credit unions are highly regulated and supervised,
and have longstanding relationships with their members. Since the
enactment of the FDCPA, no subsequent law, including the Dodd-Frank
Act, has changed this directive. As such, the CFPB should withdraw debt
collection bulletins that attempt to use its UDAAP authority to place
new requirements on creditors despite no statutory changes in the FDCPA
or Federal Credit Union Act (FCUA). It is unclear what force of law
CFPB bulletins have, and the lack of transparency surrounding them
outside of the rulemaking process creates unclear requirements and due
process concerns. The CPFB should also withdraw its bulletin concerning
service providers. Again, a bulletin issued outside of the rulemaking
process creates confusion and unclear guidance.
The CFPB issued a fair lending guidance bulletin unsupported by
research or data. This guidance bulletin was also not issued through
the normal course of the Administrative Procedures Act or the public
rulemaking process. We are concerned with actions taken by the CFPB
that circumvent the rulemaking process and rob us and our members of
the opportunity to provide input. We, therefore, support the withdrawal
of the CFPB's indirect lending guidance since it lacks transparency and
has caused confusion about the CFPB's jurisdiction and interest in this
market. Policymaking in this area should be open to the public and
responsive to comments.
6. Payday and Small Dollar Loans
In the proposed payday and small dollar loan rule, the CFPB is
attempting to sweep consumer-friendly credit union small dollar loan
products and services into the rule using its UDAAP authority. It,
unfortunately, proposes new and complex requirements on credit unions
despite little to no data suggesting these products have any pattern of
harm to consumers. To the contrary, consumers have stated that credit
union small dollar loans are often their safest and best option for
credit. Accordingly, Congress should urge the CFPB to exempt credit
unions entirely from its proposed payday and small dollar loan
rulemaking.
7. Voluntary Products
Federal credit unions are subject to the FCUA and TILA's Regulation
Z, which are significantly altered by the CFPB's proposed new ``All-in
APR'' calculation. Currently, Federal credit unions typically view
their loans under the TILA Regulation Z definition of cost of credit to
determine what fees are finance charges, which does not include
application fees, insurance, or other ancillary products within the
cost of credit. Therefore, Congress should urge the CFPB to clearly
delineate that ancillary products that are not required as part of the
credit are not fees for the payment for the credit granted, and the
fees are not finance charges for purposes of Regulation Z. This will
ensure that credit unions are not impeded from offering consumers the
safest and most affordable insurance and other voluntary product
options.
8. Arbitration
Credit unions are democratic organizations owned and controlled by
their members. It is difficult to imagine a case in which class action
litigation against a credit union would be the best course of action
for credit union members, since it would put them in a position of
having to sue themselves as owners. Accordingly, Congress should urge
the CFPB to exempt credit unions from new arbitration requirements
because of their unique member ownership structure in which class
action litigation would lead to member harm.
9. Small Business Lending
Section 1071 of the Dodd-Frank Act amends the Equal Credit
Opportunity Act to require financial institutions to compile, maintain,
and submit to the CFPB certain data on credit applications by women-
owned, minority-owned, and small businesses. This is one of the last
remaining required rulemakings in the Dodd-Frank Act. Credit unions'
unique and distinct memberships, as well as the statutory restrictions
on credit union business lending and existing regulatory framework,
would not coincide with the CFPB's plans for data collection and would
likely result in data that does not portray a complete or accurate
picture of credit union lending. Therefore, Congress should exempt
credit unions from the Section 1071 requirements. Regulatory burden
likely to be associated with this rule, particularly for small credit
unions, would harm the ability of small business owners to obtain
credit from their credit union.
10. Access to Financial Records
Per the CFPB, greater access to consumer data by data aggregation
companies benefits consumers because it allows companies to innovate as
they develop tools and services for consumers, such as personal
financial management tools, credit decisions, bill payment, and fraud
protection. Credit unions agree that some of the tools and services
that rely on data aggregation are useful to consumers. However, the
benefits of such practices are certainly not without serious risks.
Accordingly, Congress should direct the CFPB to proceed carefully in
the context of third-party access to consumer data. Credit unions are
concerned with the very real threats to financial account providers,
such as potential liability, and the potential harm to consumers. Such
harm could result from unauthorized account access or authorized access
by unscrupulous third-party aggregators.
Enabling Consumers To Achieve the Dream of Home Ownership
Housing is one of the largest sectors of the American economy and a
key component of economic growth in many communities across the
country. Many credit unions offer mortgages to satisfy member demand,
and credit unions represent an increasingly significant source of
mortgage credit nationally. In 2016, more than two-thirds of credit
unions were active in the first mortgage arena, collectively
originating over $143 billion worth of these loans--an amount equal to
7.5 percent of the total market. By comparison, in 1996 only 43 percent
of credit unions were active and they originated a total of less than
$20 billion in first mortgages. Moreover, credit unions are
increasingly active participants in the secondary market. Whereas in
1996 only about 16 percent of mortgage lending credit unions sold loans
into the secondary market, by 2016, nearly 30 percent of mortgage
lending credit unions sold $56 billion into the secondary market, or 40
percent of total first mortgages originated.
Credit unions that elect to sell mortgages into the secondary
market do so for a variety of reasons, but predominantly it is a tool
to help them manage long-term interest rate risk. Particularly today,
with long-term interest rates at or near historic lows, access to a
highly liquid secondary market with relatively low transaction costs is
vital for the health of credit union mortgage lending. Credit unions,
therefore, have a deep interest in the structure of the housing finance
system going forward, and support the creation of an efficient,
effective, and fair secondary market with equal access for lenders of
all sizes, which adheres to the following principles below.
1. Neutral Third Party
There must be a neutral third party in the secondary market, with
its sole role as a conduit to the secondary market. This entity must be
independent of any firm that has any other role or business
relationship in the mortgage origination and securitization process, to
ensure that no market participant or class of participants enjoys an
unfair advantage in the system.
2. Equal Access
The secondary market must be open to lenders of all sizes on an
equitable basis. Credit unions understands that the users (lenders,
borrowers, etc.) of a secondary market will be required to pay for the
use of such market through fees, appropriate risk premiums, and other
means. However, guarantee fees or other fees/premiums should not have
any relationship to lender volume. Additionally, I caution strongly
against regimes that require lenders to retain significant amounts of
risk beyond that represented by actuarially appropriate guarantee fees,
as these risk retention arrangements may have a disproportionately
negative impact on small lenders that are less able to manage such
risk, and could therefore result in less consumer choice.
3. Strong Oversight and Supervision
The entities providing secondary market services must be subject to
appropriate regulatory and supervisory oversight to ensure safety and
soundness by ensuring accountability, effective corporate governance,
and preventing future fraud. These entities should also be subject to
strong capital requirements and have flexibility to operate well and
develop new programs in response to marketplace demands.
4. Durability
Any new system must ensure mortgage loans will continue to be made
to qualified borrowers even in troubled economic times. Without the
backstop of an explicit federally insured or guaranteed component of
any revised system, credit unions will be concerned that private
capital could quickly dry up during difficult economic times, as it did
during the financial crisis, effectively halting mortgage lending
altogether.
5. Financial Education
Credit unions have a noble history of offering a wide variety of
financial counseling and other educational services to their members.
Any new housing finance system should emphasize consumer education and
counseling to ensure that borrowers receive appropriate mortgage loans.
6. Predictable and Affordable Payments
Any new system must include consumer access to a variety of
products that provide for predictable, affordable mortgage payments to
qualified borrowers. Traditionally, this has been through fixed-rate
mortgages (such as the 30-year fixed rate mortgage), but other products
that may be more appropriately tailored to a borrower's specific
circumstances, such as certain standardized adjustable rate mortgages,
should also be available.
7. Loan Limits
Our Nation's housing market is diverse, with wide variation
geographically and between rural and urban communities. Any new housing
finance system should apply reasonable conforming loan limits that take
into consideration local real estate prices in higher cost areas.
8. Affordable Housing
The important role of Government support for affordable housing
(defined as housing for lower-income borrowers but not necessarily high
risk borrowers, historically provided through Fair Housing Act
programs) should be a function separate from the responsibilities of
the secondary market entities. The requirements for a program to
stimulate the supply of credit to lower-income borrowers are not the
same as those for the more general mortgage market. Credit unions
believe a connection between these two goals could be accomplished by
either appropriately pricing guarantee fees to minimize the chance of
taxpayer expense, and/or adding a small supplement to guarantee fees,
the proceeds of which could be used by some other Federal agency in a
more targeted fashion in furtherance of affordable housing goals.
9. Mortgage Servicing
To ensure a completely integrated mortgage experience for member-
borrowers, credit unions should continue to be afforded the opportunity
to retain or sell the right to service their members' mortgages, at the
sole discretion of the credit union, regardless of whether that
member's loan is held in portfolio or sold into the secondary market.
To lose control over this servicing relationship would be detrimental
not only to a large majority of credit union member-borrowers, but
could also result in fewer mortgage choices available to credit unions
and their members, with higher interest rates and fees alike. Moreover,
to the extent national mortgage servicing standards are developed, such
servicing standards should be applied uniformly and not result in the
imposition of any additional or new regulatory burdens upon credit
unions.
10. Reasonable and Orderly Transition
Whatever the outcome of the debate over the housing finance system
in this country, the transition from the current system to any
potential new housing finance system must be reasonable and orderly to
prevent significant disruption to the housing market which would harm
homeowners, potential home buyers, the credit unions who serve them,
the Nation's housing market, and economic growth.
Providing Credit Unions with the Tools for Success
Credit unions have a proven track record of being the responsible
service providers and lenders in this country. Credit unions
representatives, such as myself, believe there should be efforts made
to remove barriers and provide more capabilities so we can continue to
serve our members. We encourage Congress to use its oversight authority
to monitor and encourage our prudential regulator, the NCUA, to
continue with regulatory relief efforts all of which will help foster
economic growth in local communities. As I have stated earlier in this
testimony, it is the growth and health of local communities, like the
ones my credit union serves, that contribute to the overall economic
health of this country. Any effort to reduce the regulatory burden on
credit unions will result in investment in their members through better
rates on savings and loans, stronger capital positions, and the
development of alternative financial products and delivery systems. We
recommend Congress, through its oversight, monitor and encourage the
NCUA to provide regulatory relief for credit unions on the following
issues.
1. Appropriately Tailoring Rules for Credit Unions
Credit unions are member-owned not-for-profit cooperatives which
inherently focus their purpose and existence on the benefit of their
members. Our unique structure demands that the rules governing
operations are tailored to maximize the benefit to our member owners.
As such, we urge Congress to encourage the NCUA to not mimic Federal
prudential banking regulators' rules designed for large banks owned by
stockholders that bear little, if any, resemblance to a credit union.
Rules should be properly tailored to recognize and account for the
unique cooperative structure of credit unions.
2. Examination Flexibility
NCUA has adopted and is implementing an Examination Flexibility
Initiative. Credit unions applaud the NCUA for these efforts which, if
structured properly, will provide efficiencies and reduce costs to the
agency, and reduce the examination burden on credit unions. This
reduced regulatory burden will allow credit unions to focus their
efforts and resources on their members. We urge Congress to monitor the
progress of this effort and ensure that the technology upgrades and
restructuring of the examination process and call report system
ultimately result in budget efficiencies and reduced regulatory burden.
As a further enhancement to these efforts, we urge Congress to
encourage the NCUA to adopt the extended examination cycle for low-risk
credit unions to those with $1 billion or more in assets. Currently,
the extended examination cycle for low-risk credit unions is only
available for those under $1 billion in assets.
3. Minimizing the Negative Impact of Accounting Standards on Credit
Impairment on Credit Union Lending
Congress should ensure the NCUA works with credit unions to
minimize the harmful effects the Financial Accounting Standards Board's
(FASB) current
expected credit loss (CECL) standard will undoubtedly have on their
ability to lend to their members. The CECL standard will require credit
unions and other financial institutions to forecast potential credit
impairment using forward-looking information, as opposed to the current
process of using historical data.
Application of CECL will have two impacts on credit unions: it will
make the calculation of loan loss allowance accounts more complicated
and costly, and it will
require credit unions to hold more in those allowance accounts for any
given loan portfolio. The NCUA has acknowledged that CECL will
adversely affect credit unions' net worth ratios for any fixed level of
credit risk exposure.
In the final standard, the FASB recognized that a one-size-fits-all
approach is
inappropriate in the context of determining credit losses.
Specifically, the final standard contains language not included in the
proposal that provides additional flexibility, stating there is no one
methodology that entities must use in applying CECL. Further, the FASB
stated its intent is that each institution applies the method
appropriate for its portfolio based on the knowledge of its business
and processes. Since the FASB is simply the accounting standard setter,
compliance with CECL will be assessed by the NCUA and the other Federal
financial regulators through the examination process.
Credit unions are required under the FCUA to follow U.S. generally
accepted accounting principles (GAAP). However, the NCUA has
significant latitude on how it applies these standards in the
examination context. While application of CECL will in no way change
economic reality, as noted above, it will result in lower apparent
capital ratios at credit unions (and banks). Therefore, credit unions
have repeatedly urged the NCUA to instruct examiners to make the
appropriate adjustments in assessments of capital adequacy to minimize
the negative impact on credit unions. To illustrate this, assume under
the CECL approach a credit union's net worth ratio falls by 50 basis
points. In such an instance, an examiner who otherwise might have
suggested, for example, a 9 percent net worth ratio should now be
satisfied with 8.5 percent which would provide the same level of loss
absorption capacity as the previous 9 percent.
This scenario makes clear that the NCUA can adjust its processes in
a way that minimizes the negative effect on credit unions' net worth
ratios, which would likely translate directly into a decrease in
consumer and business lending. Not only does the NCUA have the
authority to reduce such harm, it can do so relatively easily and at no
risk to the National Credit Union Share Insurance Fund (NCUSIF).
Therefore, we urge Congress to work with the NCUA to ensure the agency
takes appropriate steps to minimize effects of CECL that will have a
real-life impact on credit union lending to their consumer- and
business-members.
Further, while the standard's effective date is still several years
away, the NCUA is scheduled to begin examining credit unions next year
for CECL preparedness. Application of CECL will require credit unions
to compile and analyze loan data at a level of granularity beyond what
is currently the common practice. Thus, it is crucial that the NCUA
provide credit unions with detailed guidance as soon as possible to
educate them on the specific data they will be required to use for
CECL. While the NCUA has stated its intention to release such guidance,
credit unions are unable to proceed with preparation until they can
study the compliance aid. Recognizing its importance, we ask Congress
to encourage the NCUA to finalize and release this guidance as soon as
possible.
4. Leverage Requirement
Under the FCUA, credit unions are subject to statutory capital
requirements. For prompt corrective action purposes, a credit union
must maintain a leverage ratio of 7 percent to be considered well-
capitalized. This level is 2 percentage points higher than bank capital
requirements. When the credit union requirement was set by Congress,
credit unions were not subject to a Basel-style risk-based capital
requirement. The new risk-based capital rule promulgated by the NCUA
does follow a Basel approach. Therefore, a higher statutory leverage
requirement for credit unions is no longer necessary. Lowering the
leverage requirement, supported by the new risk-based requirement,
would provide regulatory relief for many credit unions and will allow
credit unions to invest more in their members, fostering economic
growth.
5. Corporate Stabilization Fund/NCUSIF
The NCUA is currently considering the process for winding down the
Corporate Credit Union Resolution Program put in place during the
height of the financial
crises for five corporate credit unions conserved by the NCUA. The
performance of the Corporate Stabilization Fund has improved
dramatically as the economy and housing markets have recovered and the
NCUA has obtained settlements from several of the investment banks that
sold legacy assets to the corporate credit unions. Thus, credit unions
have overpaid the projected final costs of the resolution and should
receive refunds in the form of partial rebates of assessments and
partial capital replenishment to members of some of the corporate
credit unions. The assessment
rebates will require a merger of the corporate stabilization fund and
the NCUSIF. To accomplish the merger, NCUA will likely need to
temporarily increase the normal operating level of the NCUSIF above 1.3
percent of insured shares. We urge Congress to monitor this transition
ensuring that the increase in the normal operating level is not larger
than necessary, that NCUA returns the normal operating level to 1.3
percent as soon as possible, and that credit unions receive rebates in
a timely manner.
6. Elimination of the Loan Maturity Limit
Congress should consider lifting the loan maturity limit contained
in 12 U.S.C. 1757(5) which limits maturities to 15 years. While the
NCUA has limited authority to make exceptions to the 15-year limit (and
it has chosen to do so), the statutory restriction still operates as an
antiquated limit to some credit union lending, particularly
Recreational Vehicle (RV), education, and other loans. Elimination of
the loan maturity limit would allow for additional lending in these
markets, which will foster economic development.
We Must Not Move One Step Forward, Two Steps Back
While credit unions support the changes offered in this testimony,
there are other policy positions that have been considered that would
not be in our best interest or the best interest of our members.
For example, credit unions are opposed to legislative changes to
allow Federal savings associations (S&Ls) to operate with the duties
and responsibilities of national banks unless similar legislation
enhancing the flexibility of the credit union charter are provided.
This opposition is a matter of fairness and frankly, in the interest of
good and consistent public policy. We are also opposed to legislative
changes to eliminate a statutory cap on commercial lending for S&Ls,
without eliminating credit unions' commercial lending cap.
While S&Ls were chartered for the specific purpose of mortgage
lending, credit unions have been offering business purpose loans to
their members for over 100 years. Since the beginning of the financial
crisis, business loans have been the fastest growing loan type at
credit unions; during this same period, commercial lending by S&Ls has
decreased more than 17 percent. We disagree that either cap on business
lending should exist in the first place. There are few more provident
uses of credit than to start, maintain, or expand a business, and
America's small businesses need more options to foster economic growth
in this country. Credit unions have a long and rich history of serving
their small business members well, but many credit unions that serve
these members are staring the business lending cap straight in the
face.
Credit unions also do not support any legislative change that would
subject the NCUA, credit unions' prudential regulator, to the
appropriations process. The money that funds the NCUA comes from credit
unions, like mine, and their members, not the taxpayers in general.
Maintaining a separate, independent Federal regulator and insurer is
critically important to the credit union system, and the structural and
mission-driven differences between credit unions and banks necessitate
such a regulatory scheme. Furthermore, credit unions are concerned that
subjecting NCUA to the appropriations process could blur the
independence of the agency and the credit union system, something we
have fought hard to preserve. Credit unions and their members remain
willing to pay for their own regulator provided there is sufficient
transparency with respect to the agency's budget and the overhead
transfer rate. Overall, with all the positive changes that could be
made to help my credit union better serve consumers, this change would
be a solution in search of a problem.
In addition, while credit unions support changes to the CFPB to
make it a better, more focused agency, we do not support a legislative
change that would remove the agency's authority to promulgate rules for
and supervise the payday lending market, vehicle title loans, or other
similar loans. The CFPB should be focusing on the lending activities of
nonbank lenders rather than duplicating the supervision of highly
regulated and examined financial institutions. While we have
significant concerns with the CFPB's proposed rule on small dollar
loans, consumers could benefit from a regulatory approach that balances
the need for access to credit with addressing consumer harms and
predatory behavior. Our concern with the CFPB's small dollar rulemaking
is that it would impede and discourage credit unions from offering
member-friendly small dollar credit to consumers, depriving them of
access to a safe and affordable alternative to entities with well-
established histories of abuse.
We encourage Congress to take a more measured approach to this issue
that provides more protection to consumers, without unnecessarily
limiting safe and affordable options in this market.
Furthermore, credit unions do not support legislative changes that
would give banks with a leverage ratio more than 10 percent an
exemption from ``any Federal law, rule or regulation providing
limitations on mergers, consolidations, or acquisitions of assets or
control, to the extent such limitations relate to capital or liquidity
standards or concentration of deposits or assets, so long as the
banking organization, after such proposed merger, consolidation, or
acquisition, would maintain a quarterly leverage ratio of at least 10
percent.'' Such a policy would provide very well capitalized banks an
exemption from the 10 percent domestic deposit cap. Congress must
consider the systemic risk this type of exemption would present, even
if applied only to very well capitalized banks, as it could easily
enable the very large banks to get substantially larger, increasing
risk to the banking system and reducing consumer choice in the banking
sector. As we have learned the hard way, policies that empower too-big-
to-fail banks do not contribute to the economic growth of our country.
Finally, credit unions would not support legislative changes to
repeal the Chevron deference doctrine of administrative law that gives
Federal agencies deference on their interpretations of statutes. The
implications of such a policy change would prevent our Federal
regulators from doing the very job they were created to do. Credit
unions need a regulator that understands their industry and their
individual operations. The specialized expertise of independent
agencies, when they are run by a bipartisan multi-member board, is
critical to providing the regulated industry with policies to allow
growth and prosperity. Federal agencies need the leeway to make
decisions for their regulated entities within the confines of their
statutory authority. There are alternative ways to monitor the
policymaking of independent agencies, such as insuring the agencies are
run by diverse group of decisionmakers. Repealing the Chevron deference
doctrine would not be the solution to agency overreach.
Conclusion
Thank you again for the opportunity to testify and be a part of
this process. I take my role in the credit union movement, and as part
of the economic environment, seriously. I believe we have an
opportunity for success and greater economic growth if we make the
right choices. And, these choices must not only benefit ourselves and
our neighbors, but all Americans. Thank you for consideration of my
views.
______
PREPARED STATEMENT OF JOHN BISSELL
President and CEO, Greylock Federal Credit Union
June 8, 2017
Thank you for the honor of joining you today to share the
experiences of Greylock Federal, where we serve more than 75,000
families and small businesses in rural Berkshire County. This county
contains about 12 percent of our State's land mass, but only about 2
percent of the population. Our region, like so many across the country,
is making the painful transition from a manufacturing base that once
offered 12,000 GE jobs, to a service economy with close to zero GE
jobs. The population in my hometown of Pittsfield has dropped from
58,000 to 40,000, just during the course of my lifetime. Our largest
local employer is now our health system.
We have met these challenges head on as a region. While we are
relieved to see our local economy recovering, and a brisk pace of
hiring in Berkshire County, we can clearly see that not everyone is
participating in the rebound. Many residents are caught in the bind of
low-wage jobs and unaffordable housing; 45 percent of renters and 37
percent of homeowners live in homes considered ``unaffordable.'' 20
percent of families with children younger than five are in living in
poverty, and 34 percent of children are growing up in single-parent
households. In addition, mass transit is weak, and according to the
U.S. Census Bureau, 92 percent of Berkshire County workers rely on
private transportation as their primary means to get to work. For
working families living on the edge of financial stability, a failed
transmission or a dead battery means an immediate loss of income.
Others may be in between jobs and have a great idea for a small
business, but do not qualify for traditional bank financing.
Local challenges like these need local economic development
solutions. As the only CDFI credit union in the region, and with our
strong $1 billion balance sheet, we at Greylock recognize our
responsibility to redeploy deposits back into our local economy, help
create jobs, boost consumer purchasing power and expand wealth building
opportunities. How can we do that? For starters, we have looked to the
example of other CDFI credit unions around the country--meaning those
with a mission of promoting financial security and community
development in lower-income distressed communities--and we were
inspired to create our own Community Development department. This
team--comprising two full-time employees and seven fully certified
counselors--now offers free financial education, credit counseling, and
budgeting assistance to every person in our community. Our
professionals create new loan and deposit products to help the
underserved and collaborate with local nonprofits to improve the
financial self-sufficiency of working families. Further, to put more
people in our community to work, we are expanding our New Road Auto
Loan program for people with credit challenges. When they buy a
reliable car, and make on time payments, their credit score goes up and
their interest rate goes down. We are also expanding our Safety Net
lending so that when a family has an unexpected emergency, they can
come to Greylock for help instead of falling in with a predatory
lender. Nationally, 16 percent of people take out predatory loans for
emergency expenses and 69 percent for reoccurring expenses (e.g.,
rent), and these payday loans trap consumers into taking out new loans
to pay off previous loans because the lump sum payments are
unrealistic, worsening consumer's financial distress. We need to keep
our members away from these financial predators in the first place.
Finally, we are broadening our small business lending and technical
assistance to help more people transition to entrepreneurship. All of
these taken together should help nearly 3,000 more local families
participate in the economic turnaround.
These are some of the ways that we can help grow our local economy.
Greylock is far from an exception; in fact we are still building our
programs and our product shelf to emulate the best mission-driven CDFI
credit unions in the country.
In conclusion, I want to offer my thoughts on the role of
regulation. The people I am concerned about in Berkshire County are
still hurting, and make no mistake about it, these consumers need
protection. The abuses and predatory practices that brought about the
Great Recession destroyed 40 percent of American household wealth.
Black families lost 50 percent of their household wealth and Latino
families lost 67 percent. Having one half to two thirds of your wealth
taken from you is far too great a price to pay, ever again. And if we
thought the abusive and fraudulent practices exercised by big banks had
ended, we received a rude awakening with the Wells Fargo scandal.
Consumers need, and deserve, much stronger protection than they had
previous to 2010. Credit unions did not create the financial crisis,
and I am proud of the role we played in helping consumers and our local
economies to recover. We are promoting financial literacy, fostering
financial inclusion, and helping to grow small businesses, and we
respectfully ask that with each new regulation, you consider the impact
on our ability to fulfill our mission, especially among smaller credit
unions who lack the resources of Greylock. While I want smarter
regulation as much as anybody, I ask that you please, do not allow a
repeat of the excesses and predatory practices that precipitated the
crisis in the first place.
As you think about the best investments and policy decisions you
can make, please keep in mind that 6,000 credit unions across this
country are hard at work on these challenges already, and that CDFI
credit unions deliver $12 of positive economic impact (in the form of
loans to consumers, small businesses and first-time homeowners) for
every grant dollar invested. Every dollar you approve for the CDFI fund
that is invested through a credit union like mine pays you and the
American taxpayer back many times over. Further, CDFI credit unions
provide a way for banks to reach underserved communities, by making
targeted CRA investments with CDFIs acting as the conduit. Strong
community credit unions are a vital force in growing local economies.
I thank you for your kind attention and I am happy to answer any
questions you may have.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DOROTHY A.
SAVARESE
Q.1. Senator Crapo asked Mr. Bergl and Mr. Grooms about the
impact of Dodd-Frank mortgage rules on each of their financial
institutions. Does your bank or credit union qualify for the
QM-ATR ``small creditor,'' ``rural area,'' or any other
exemption? How does this exemption help your financial
institution?
A.1. Although our Bank, with its focus on local markets and its
straightforward business model, is considered a ``community
bank'' under most definitions, it does not qualify for the
small bank exception because of our size and the number of
residential mortgage loans we close each year. Because of the
unique nature of our market and our community commitment, we do
make certain loans that meet the ATR standard but do not meet
the qualified loan definition. We have very narrow guidelines
for which loans we will make under these circumstances, out of
concern for potential right of private action which may arise
at a later time if someone were to challenge the loan. We keep
these loans in our portfolio. We believe the QM-ATR ``small
creditor'' or ``rural area'' exception would, if it were
available to us, help us better meet local needs. From our
Bank's perspective, the following are our recommendations:
First, ATR should remain in place as it requires
responsible loan documentation and allows for mortgage product
development.
Second, QM should be revised to allow for responsible
access to mortgage credit that it currently inhibits. One of
the most critical items to address is the expiration of the
GSE/QM patch. If nothing is done to address this, some industry
estimates indicate at least 25-30 percent of mortgage credit
originated could disappear. This would also have a significant
impact in restricting CRA/LMI loans which currently fall under
the patch and are purchased by the HFA's. Assuming a bank has
chosen not to take on the additional risk of nonQM loans: the
maximum 43 percent debt ratio is far too arbitrary and does not
allow any other credit factors or loan structures to be taken
into consideration. A simple change in a monthly escrow payment
can cause a last minute change in the ratio to greater than 43
percent (e.g., 43.1) which can cause a loan to be declined, or
cause a price increase to the consumer for the additional risk.
Moreover, Appendix Q is far too rigid in its specific
income and debt documentation requirements creating additional
documentation hardships in extending responsible mortgage
credit to self-employed borrowers, borrowers who work seasonal
jobs, and those that are dependent on part-time and overtime
work. The burden of documenting social security, disability and
child and alimony support unnecessarily inhibits the use of
these critical types of
income.
Our recommendation, therefore, would be to maintain ATR
safeguards to assure that ``no asset and no income'' loans do
not reoccur in the market. Broadening the specific nonflexible
QM rules to allow for community bank underwriter discretion
will help provide much needed mortgage credit and increase
market competition for consumers.
Another one of the problems with the QM-ATR rule, which
became clear early on, is that it would restrict or even
eliminate some popular and essential loan products. Certain
balloon mortgages, for example, remain a useful tool for
serving creditworthy customers who rely upon seasonal income,
such as farm workers. As originally constructed, the ATR rules
would have made it impossible to offer balloon loans. To their
credit, CFPB recognized this problem and the need for these
products, and provided exceptions under the small creditor and
rural categories. However, CFPB is constrained by the statutory
language of Dodd-Frank and cannot expand the exemptions beyond
their current scope absent legislative changes, and the rules
applicable to gain the exemption are complex and convoluted.
The end result is that credit is constrained because many
smaller banks find it too complex to determine the
applicability of the exemption and fear the resulting liability
if they get they fail to meet the demands of the rules. For
example, customers of small banks found a 3-year balloon
product very helpful, but these are not allowed under even the
revised rules. ABA believes the solution to this problem is to
expand the QM definition to include all loans originated and
held in portfolio and to further clarify and simplify the QM
rules applicable to all other mortgages. These changes will
reduce the compliance complexity and the risks of liability
which are inhibiting lenders from offering mortgages.
Q.2. What is your institution doing specifically to help bring
the unbanked or underbanked in your communities into the
financial system?
A.2. The banking industry shares the goal of bringing unbanked
and underbanked people into mainstream banking. Indeed, the
FDIC's latest ``FDIC National Survey of Unbanked and
Underbanked Households (2015) found that 93 percent of
households have a bank account (up from 92.7 percent in 2013)
and 27 percent of those without a bank account use a prepaid
account, a more simple, manageable bank account option. Thus,
almost 95 percent of households use some type of bank account
that allows them to deposit money in a safe place and make
payments to a wide variety of recipients.
The FDIC, at its 2017 Economic Inclusion Summit on April
26, 2017, and the bi-annual meetings of its Advisory Committee
on Economic Inclusion (COME-IN), highlighted some bank efforts
to reach the unbanked and underbanked.
Some regulatory actions have also hurt banks' ability to
offer credit products to underbanked populations. For example,
the OCC and FDIC's guidance on ``Deposit Advance'' products,
which allow customers to take small, short-term loans through
their checking account, eliminated them as an option for small
dollar loans as a practical matter. In addition, the Bureau of
Consumer Financial Protection's proposal that, in effect, would
impose interest rate caps on certain loans (e.g., loans that
are not a mortgage, credit card, or purchase money loan such as
a car loan) have inhibited banks from developing small-dollar
loans products and threaten to prohibit ``accommodation'' small
dollar loans that banks offer to their customers. Finally, the
Credit Card Accountability Responsibility and Disclosure Act of
2009 has resulted in credit cards being less available to
subprime borrowers who have no, limited, or poor credit
histories.
Cape Cod Five Cents Savings Bank's Community Commitment
utilizes five methodologies to address the needs of its
communities, including bringing the unbanked and underbanked
into the system. These are: (1) community banking, (2)
responsible business practices, (3) financial education, (4)
corporate leadership and volunteerism, and (5) philanthropy.
(1) Community Banking: the Bank was an early adopter of the Pew
disclosures, continues to provide a free checking account, and
a basic savings account. (2) The Bank's marketing and social
media tools are utilized to reach out to and engage the
unbanked and underbanked through effective representation of
diversity and inclusion. (3) Financial Education: the Bank has
broad based financial education outreach, reaching thousands of
individuals each year. These include providing financial
education to inmates who are about to be released from the
local correctional facility; working with a local battered
women's shelter to provide financial education to residents;
providing the Credit For Life program to several thousand high
school seniors in its market area; and offering and
participating in first-time home buyer workshops. Also, Bank
representatives provided a presentation at an FDIC regional
Economic Inclusion forum and have participated in others. In
addition, Bank representatives have participated in statewide
organizational efforts on financial education. (4) Through its
corporate leadership and volunteerism, the Bank leads and
provides the manpower for many public/private efforts in the
community to bring the unbanked and underbanked into the
mainstream. (5) Through the Bank and its Foundation, the Cape
Cod Five donates over a million dollars per year to nonprofits
in the community, including those focused on partnering with
and assisting the unbanked and underbanked. The Bank also was
one of five sponsors of a Massachusetts Bankers Association
statewide program on financial education focused on school age
children.
Q.3. As discussed at the hearing, new HMDA data will be
collected starting in January 2018. What do you spend annually
on HMDA compliance, has that changed since before the crisis,
and what additional costs are you incurring to come into
compliance with the new requirements? Do you believe there is
value in collecting this data? How much of this data do you
already collect under the ordinary course of underwriting or
making disclosures to mortgage borrowers?
A.3. On an annual basis, Cape Cod Five incurs approximately
$225,000 in costs related to the collection, verification and
reporting of HMDA data. These costs are up at least 35 percent
since the financial crisis. We anticipate that these costs will
increase as a result of the new requirements, with 25
additional data fields and the modification of 20 existing
fields, requiring more staff time and system enhancements in
order to comply. The additional cost associated with the new
requirements is still to be determined. Using the CFPB's
estimates, we would calculate that the additional costs
associated with the new and modified fields could be $119,000
or 53 percent.
The cost of HMDA compliance is significant. For example, a
2012 ABA survey found that the median time spent collecting,
verifying, and reporting HMDA data was 1.47 hours per Loan
Application Record (LAR), or $32.34 per LAR entry when
calculated in terms of salary costs. Even the Bureau's
Regulatory Flexibility Act (RFA) analysis estimates additional
annual operational expenses of $120,600,000 to which the Bureau
adds $899,000 for institutions that will be required to report
HMDA data quarterly. Further, the Bureau estimates that the
expanded data collection will increase the cost of each closed-
end mortgage application by $23 and the cost of each open-end
line of credit application by over $41 for ``representative low
complexity institutions.'' Overall, the Bureau estimates the
lenders will incur costs in four areas: data collection,
reporting and resubmission, compliance and internal audits, and
HMDA-related exams. Although it is not simple to distill the
cost estimates from the Bureau's analysis, one figure is
telling: the Bureau, which is likely to use conservative
estimates when determining the impact of rule, estimates that
the annualized, one-time additional cost that the new rule will
impose on the industry to be between $177 million and $326.6
million.
The ABA believes that the value of collecting the
additional information is doubtful as it pertains to the
underlying purposes of HMDA. Fundamentally, all the new data
provides information on the mortgage markets, but all the extra
data is unnecessary for fair lending analysis or allocation of
Government funds to support housing. It is unlikely to
encourage greater access to mortgage credit as the added costs
would decrease the demand for mortgages.
Much of the data collected for the purposes of HMDA are
just for the reporting and not instrumental in the process of
assessing the risk for determining whether to fund the loan.
Any additional reporting elements add costs and complexity to
the mortgage process and it is ultimately the borrower that
bears the cost and extra time to close a loan.
Q.4. Can you please detail how your bank ensures compliance
with the Volcker rule and how much that has cost your bank
since the rule became effective on April 1, 2014?
A.4. Like all other banks subject to the Volcker rule, we first
spent substantial time inventorying all of our activities to
determine which, if any, implicated the prohibitions of the
Volcker rule. One of the difficulties we faced in doing that
was the approach taken by the five Volcker agencies to prohibit
everything, and carve out a few permissible activities: this
meant we had to review all of our activities rather than focus
on those that were intended to be captured by the Volcker rule.
Based on that inventory, we had to develop, then train and
implement, compliance processes and policies regarding
activities permissible under the Volcker rule to ensure we do
not stray into impermissible activities. We also had to
develop, then train and implement, compliance processes and
policies regarding any new service or product we offered to
ensure we do not stray into impermissible activities. Our bank
is not subject to the most rigorous compliance or metrics
measuring regime, and we expect those banks that are have had
to develop additional processes and policies to ensure
compliance face much higher costs and monitoring burden. We
have not compiled the cost in man hours as implementation and
other costs cut across many new regulations and changes in
existing ones. It is the mix of activities at any particular
bank that drives the burden of Volcker rule compliance and
therefore our experience may not reflect the struggles other
banks may have related to Volcker implementation or compliance
with other regulations.
At the hearing Mr. Bissell talked about the impact of the
opioid crisis on the communities he serves in Western
Massachusetts. Can you please tell me about the impact the
opioid epidemic is having on the economies in your communities?
The opioid crisis impacts every community and Cape Cod is
not immune from its devastating impact on families and the
community. Bankers, like all citizens, are concerned about
these trends and believe working to correct this trend is in
the best interest of our economic health regardless of the
community. I'm passionate about helping those with any
addictions and it is one reason that I serve on the Board of
Gosnold on Cape Cod which has provided addiction treatment
services for 45 years.
Additionally, a significant portion of the Bank's
charitable efforts, through the five ways listed in Question 2
above, have been directed to addressing the opioid crisis, in
terms of supporting organizations and agencies undertaking
education, prevention, intervention and treatment, which of
course means those funds can't go into housing or other areas
of economic development as they would if there was no opioid
crisis. The Bank expects the opioid crisis to continue to
require resources for the foreseeable future.
Q.5. The Treasury report on financial regulation released on
June 12, 2017, suggests making many changes to the regulation
of the Nation's largest banks. Will relief for the largest
banks help your banks and credit unions?
A.5. Taken as a whole, the Treasury report does hold promise to
help banks of all sizes. The U.S. banking industry is comprised
of institutions of all sizes, which serve a myriad of customers
including consumers, small business, farmers and large
corporations. This integrated, ecosystem of banks has developed
because customers and customer needs are so diverse. There is a
need for each kind and size of bank. Inefficient and overly
burdensome regulation prevents all banks from serving their
customers' needs and, by extension, promote economic growth.
Sensible regulatory relief for any size bank permits it to
better serve its customers, often including other banks, making
a stronger banking system overall.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM DOROTHY A.
SAVARESE
Q.1. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions. What services can these
smaller institutions provide that larger institutions cannot
provide?
A.1. All banks work hard to meet the needs of their
communities, whether rural, urban, or even global. Community
banks, in particular, are often the center of the economic
activity in their community. The bankers are leaders in the
community and support almost every nonprofit organization in
the area. Bankers volunteer thousands of hours each year to
community service and serve on local hospitals, colleges, and
business boards. Community banks are also significant lenders
to small businesses, which drives much of our Nation's job and
economic growth. In fact, community banks make almost half of
the small loans (less than $1 million) to businesses and the
agricultural community. When a small bank disappears--which has
been happening at an alarming rate since Dodd-Frank was
enacted--the community losses a great deal. In many cases, the
community bank is one of a few options for financial services
which leaves the community less well off with fewer choices.
Q.2. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What would the best way be to address this problem?
A.2. While it is impossible to address the specific reasons
that your constituents may cite for the inability to get a
mortgage without further details, we can confirm that both TRID
and QM rules promulgated by the CFPB have increased compliance
and liability costs for all banks, and have had a particularly
onerous impact in some rural areas where the cost of
compliance, the complexity of the rules and the potential
liability costs have caused banks to severely reduce or even
curtail their mortgage lending. TRID rules in particular are
extremely convoluted and costly to comply with, and can subject
lenders to costly and unfair liabilities based upon the actions
of others (such as title companies) which are difficult or
impossible to control. ABA has proposed a number of changes to
TRID including changes to tolerances and providing an
opportunity to correct closing disclosures.
Similarly, QM rules have restricted the Qualified Mortgage
designation to a limited scope of loans which do not
necessarily include otherwise safe, sound and popular loan
products that could be used to serve customers. Although CFPB
has made efforts to expand the ``small creditor'' QM exception,
many areas still do not meet the Bureau's definitions and the
requirements are too convoluted to implement. The result is
that some borrowers in rural areas are able to be offered
mortgages under the exemption while others are not. ABA
believes the solution to this problem is to expand the QM
definition to include all loans originated and held in
portfolio and to further clarify and simplify the QM rules
applicable to all other mortgages. These changes will reduce
the compliance complexity and the risks of liability which may
be inhibiting lenders from offering mortgages.
ABA detailed our proposals on TRID and QM in a recent white
paper to the Treasury Department in response to the President's
Executive order on reducing regulatory burden, which we would
be happy to share with you.
Q.3. What are concrete examples of the CFPB's refusal to tailor
regulations to match the unique profile of community banks and
credit unions?
A.3. There are several, but here are two examples that jump to
mind:
HMDA
ABA recommended adopting a threshold for smaller
institutions with a lower volume of loans be exempt from the
detailed data collection and reporting requirements of the Home
Mortgage Disclosure Act (HMDA). We made a reasoned
recommendation of 25 loans per month or 300 loans annually as
an appropriate threshold. That threshold would not have
compromised the integrity of the overall data but would have
greatly benefited lenders in rural and agricultural
communities. Even excluding lenders with 250 mortgage loans or
less annually would still have captured 95 percent of loans,
based on the Bureau's data.
Remittances
Similarly, ABA recommended a threshold be adopted for the
requirements pertaining to remittances, particularly since
smaller institutions with a low volume often only offer these
as an accommodation to serve their customers such that
compliance costs would cause them to discontinue services. The
Bureau is currently analyzing the impact of the rule, but the
concern raised by ABA was that this would particularly impact
consumers in rural areas without ready access to remittances
services. ABA initially recommended a threshold of 300
remittances per year as a logical threshold. Initially, the
Bureau only provided that the requirement only applied to
senders who offered the service in the normal course of
business but then had to come back later and define that as 100
remittances per year.
Q.4. Which financial regulatory agencies, if any, have
effectively tailored financial regulations to community banks
and credit unions? If so, how have they done so?
A.4. There have been few specific efforts to tailor
regulations. We have seen some tailoring in the following
cases:
Call Reports
Through the FFIEC, the Federal banking agencies have begun
a welcome process to revise and improve the call report. This
has
included revisions that streamline how banks report complex
activities--such as derivatives, trading, or credit card
lending--that enables banks that are not in those lines of
business to avoid entire schedules of the call report.
Bipartisan legislation enacted in recent years has also enabled
the Federal Reserve to let more banks take advantage of the
Small Bank Holding Company Policy Statement and has enabled all
three banking agencies to expand the number of community banks
eligible for the 18 month examination cycle. To their credit,
the agencies acted swiftly to make these newly authorized
changes a reality.
CRA
One of the successful applications of thresholds for
compliance was in the revisions to the Community Reinvestment
Act (CRA) regulations adopted in 1995. Initially, banks were
separated into small institutions and large institutions, with
the former evaluated on loan performance and larger
institutions evaluated on a three-part test of investments,
loans, and services. In 2005, the banking agencies added a
community development assessment for intermediate small
institutions to further refine the assessment for banks on
their CRA performance.
Bank Secrecy Act BSA/Customer Identification Program (CIP) Performance
Since 1986, banks have been evaluated on their anti-money
laundering performance using a risk-based approach. That
approach considers the products and services the bank offers,
the customers it serves and the geographies and markets where
the bank is located and where it offers its services. This
helps to tailor supervision based on the bank. It has been most
successfully applied in CIP analysis where the risk-based
approach was used to provide banks with flexibility in their
compliance efforts. The requirement is that a bank collect
certain information about the customer and then verify the
identity of the customer but individual banks are permitted a
great deal of flexibility in how that goal is achieved.
Q.5. How could Congress best ensure that CFPB regulations are
properly tailored for community banks and credit unions? For
example, some have called to exempt either smaller or less
risky financial institutions from CFPB regulations altogether.
A.5. Congress should require the Bureau to take seriously its
obligation to conduct a Small Business Regulatory Enforcement
Fairness Act (SBREFA) review of any proposal so that community
bank concerns are identified early in the process and less
burdensome alternatives are identified, considered, and where
appropriate adopted. In practice, the SBREFA review process has
been little more than a check-the-box exercise for the Bureau.
A 2016 GAO report found that only 18 out of 57 SBREFA panel
participants said the process was a good opportunity to be
heard and a mere 7 participants were satisfied with the final
rule.
Q.6. My understanding is that only two banks have actually
opened since the passage of Dodd-Frank. Why? What potential
impacts does this have for our financial system?
A.6. It's true that there has been shockingly few new banks
since Dodd-Frank. New entrants into any industry are a sign of
growth potential and economic opportunity. New banks help fill
gaps in the provision of banking services, increases
competition, and ultimately strengthen the community banking
sector. Consumers and businesses have more choices of
competitive products and services which translates into greater
economic activity and growth in local communities.
The lack of de novo activity is concerning to our industry
and sadly reflects the same forces that are driving
consolidation--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 banks typically many times
larger and is a barrier to entry for new banks.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM STEVE
GROOMS
Q.1. Senator Crapo asked Mr. Bergl and Mr. Grooms about the
impact of Dodd-Frank mortgage rules on each of their financial
institutions. Does your bank or credit union qualify for the
QM-ATR ``small creditor,'' ``rural area,'' or any other
exemption? How does this exemption help your financial
institution?
A.1. Yes, we qualify both as a small credit union and as a
rural area credit union. In identifying what these designations
mean to us is not as clear as we would like it to be. There
tends to be some confusion on what we can and can't do in
complying with the regulation and ensuring we qualify for the
``Safe Harbor'' associated with Qualified Mortgages and Ability
to Repay rules, in addition there is confusion on what
constitutes staying in compliance with the Higher-Priced
Mortgage rule that stipulates additional requirements if one of
our loans falls into this category. The risks of noncompliance
are great so we are very conservative in our approach to
compliance and interpretation to the rules the CFPB has set.
Q.2. What is your institution doing specifically to help bring
the unbanked or underbanked in your communities into the
financial system?
A.2. We serve a general area of underserved communities in
North Central Montana, including the city or town of Browning
Montana, which is on the Blackfeet Indian reservation. In
serving individuals that live on a separate sovereign nation,
this creates unique challenges and difficulties when trying to
work through ``a separate legal system'' in resolving
delinquent loans and negative saving and checking accounts and
other member issues. That said, as we serve our communities
including the Browning area, we have held different educational
seminars associated with getting more individuals to understand
the benefits of the banking system, how checking and savings
accounts work and understanding how best to use financial
institutions, including credit unions to meet day to day
personal financial needs. The products and services offered at
our credit union meet the needs of those of modest means and
those that live in an underserved area. We will continue to
look for ways to help all members and individuals we serve to
assist in meeting needs in a convenient, low cost and friendly
approach to banking needs.
It is worth noting that the secondary market investors set
the requirements on the loans they are looking to invest in
relative to mortgage loans sold on the secondary market. As a
lender that serves rural Montana/America, we hold loans in
house that we may not sell on the secondary market, and in
doing so, we serve those that would not otherwise be able to
find financing on a first mortgages through the secondary
marketplace. As regulations increase it makes it more difficult
to exercise judgment on loans that are on the border or fall
outside established guidelines from increased regulation.
Finally, as I outline in my written testimony, Congress
could help more credit unions help underbanked communities by
enacting legislation that would allow all credit unions to add
underserved areas to their fields of membership--legislation
NCUA Chairman Mark McWatters has also endorsed.
Q.3.a. As discussed at the hearing, new HMDA data will be
collected starting in January 2018. What do you spend annually
on HMDA compliance, has that changed since before the crisis,
and what additional costs are you incurring to come into
compliance with the new requirements?
A.3.a. HMDA requirements have changed significantly since the
financial crisis began, including more personnel time needed to
collect and complete the reports and the need to purchase
third-party software used to assist with identifying data and
compliance with RESPA, TILA, and TRID, including HMDA
reporting. Beginning in January 2018 there will be more data
points required and more time associated with collecting,
organizing and reporting the data required. We are now spending
an additional $25,000 a year to collect this information and
anticipate increased hard costs going forward and twice the
time and costs needed to track and record 48 Data points of
information in the future. We currently average one half hour
on each mortgage loan we originate and fund, last year we
funded 107 mortgage loans, with the new requirements we double
the size of our spreadsheet and the time needed to complete the
spread sheet. This information is not in our system so it is
necessary to collect the information manually, which has the
possibly of human error associated with the collection and
recording of these data points. As the number of loans increase
so does the time and cost of data collection increase and the
requirements of compliance continues to be burdensome.
Q.3.b. Do you believe there is value in collecting this data?
A.3.b. We are not sure of the value associated with the data
collected, it does appear more personal data is being required,
some of which may be very specific to a person's financial
strength and may be more than that person would want to share,
like debt ratio, credit score, loan to value, . . . etc.
Some of the information requested is information we cannot
know or take into consideration when underwriting a loan, or
even ask such as a person's age, ethnic background, or gender
to name but a few. These new Data points appear to go too far,
enough is enough, from our perspective we don't need more data
points to collect.
Q.3.c. How much of this data do you already collect under the
ordinary course of underwriting or making disclosures to
mortgage borrowers?
A.3.c. We currently collect 25 Data points and manually input
that information into a spreadsheet. This takes us roughly 5
hours per month. We have most information somewhere in the
file, we need to collect it and it takes time. By doubling the
number of Data points we gather we anticipate doubling the time
we need to spend collecting and recording the data required.
Q.4. At the hearing Mr. Bissell talked about the impact of the
opioid crisis on the communities he serves in Western
Massachusetts. Can you please tell me about the impact the
opioid epidemic is having on the economies in your communities?
A.4. I have not been able to identify any local data for our
City-County Health Department or County Commissioners, but with
what I hear in the news we are not immune from the Opioid
epidemic sweeping the country. We have our fair share of
problems that impact families and businesses both socially as
well as economically in our community of Great Falls, Montana
as a result of the Opioid problem in America today.
Q.5. The Treasury report on financial regulation released on
June 12, 2017, suggests making many changes to the regulation
of the Nation's largest banks. Will relief for the largest
banks help your banks and credit unions?
A.5. The U.S. Department of Treasury Report ``A Financial
System that Creates Economic Opportunities: Banks and Credit
Unions'' contains a number of recommendations that would
provide regulatory relief for credit unions that NAFCU
supports. As I outline in my written testimony under the basic
tenets of a healthy and appropriate regulatory environment for
credit unions, NAFCU does not believe that bad actors or
unregulated entities should escape regulatory oversight. We
would urge the Committee to provide relief to credit unions
while ensuring those who deserve greater oversight are subject
to it.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM STEVE
GROOMS
Q.1. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions. What services can these
smaller institutions provide that larger institutions cannot
provide?
A.1. The impact of growing compliance burdens is evident as the
overall number of credit unions continues to decline. Since the
second quarter of 2010, we have lost over 1,500 federally
insured credit unions--over 20 percent of the industry. The
overwhelming majority (96 percent) of these were smaller
institutions below $100 million in assets. While it is true
that there has been a historical consolidation trend in the
industry, this trend has accelerated since the passage of the
Dodd-Frank Act. Many smaller institutions simply cannot keep up
with the new regulatory tide and have had to merge out of
business or be taken over. Regardless of size--credit unions
are member owned and exist solely for the purpose of providing
financial services to their members unlike banks who aim to
make a profit for a limited number of shareholders. Credit
unions know their members and, by being in their communities
and having a common bond, can tailor their services to meet the
unique needs of their members. If relief is not provided and
this consolidation trend continues, the large banks will only
continue to get larger and the small financial institutions
like credit unions will disappear.
Q.2. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What would the best way be to address this problem?
A.2. NAFCU has many concerns with both CFPB rules and the
overall impact they will have on credit unions ability to
provide needed loans and services to their members. First and
foremost, NAFCU believes that credit unions should be exempt
from the CFPB with rulemaking returned to NCUA for this issue.
This would allow NCUA to better tailor a rule that allows
credit unions to continue to serve the credit needs of their
members.
The CFPB should also be required to better tailor its rules
to address the concerns of community lenders. When the CFPB
issued its Qualified Mortgage Rule, NAFCU proposed revising the
definition of a qualified mortgage in a number of ways to
reduce the enormous negative impact the rule will undoubtedly
have on credit unions and their members, in particular the
debt-to-income (DTI) threshold (43 percent of the total loan)
and the inclusion of affiliate fees in the calculation of
points and fees.
In regards to the final TRID Rule released last week, NAFCU
has urged the CFPB to make adjustments to the rule such as
allowing a revised closing disclosure to reset tolerances under
the same circumstances that the current rule permits credit
unions to issue a revised loan estimate; incorporating informal
guidance into the rule; clarifying that recording fees and
transfer taxes may be charged in connection with housing
assistance lending transactions without losing eligibility for
the existing partial exemption; extending the rule's coverage
to include all cooperative units rather than just transactions
secured by real property; and clarifying how a creditor may
provide separate disclosure forms to the consumer and the
seller.
My written testimony also outlines the tenets NAFCU
believes are necessary for credit unions to thrive.
Q.3. What are concrete examples of the CFPB's refusal to tailor
regulations to match the unique profile of community banks and
credit unions?
A.3. NAFCU supports measures that would require the CFPB to
better tailor its regulations. Despite credit unions being
smaller and less risky than mega-banks, they have too often
found themselves subject to burdensome new CFPB regulations
designed for big banks, and this has a negative impact on their
ability to serve their members and foster economic development.
A prime example is CFPB's Remittance Rule. Congress enacted
legislation in 2006 that would allow credit unions to offer
remittances to anyone in their field of membership, regardless
of membership status. Congress wanted to make it easier for
those who may be unbanked to come into a regulated depository
institution and get services. The CFPB's remittance rule and
its unworkable 100 remittance safe harbor have, instead, driven
many credit unions out of the remittance business due to the
burdens it places on the institution. The CFPB could have
recognized the work of Congress in 2006 and exempted credit
unions as an industry from this rule, but chose not to.
Another example is the new HMDA data collection
requirements. NCUA Chairman Mark McWatters recently asked the
CFPB to exempt credit unions from many of the new requirements
due to the burdens they would place on credit unions.
Q.4. Which financial regulatory agencies, if any, have
effectively tailored financial regulations to community banks
and credit unions? If so, how have they done so?
A.4. NAFCU believes that the National Credit Union
Administration is best situated with the knowledge and
expertise to regulate credit unions due to their unique nature.
As not-for-profit member-owned cooperatives, credit unions are
unique in the financial services marketplace and need to have
regulators that understand their business model and operations.
NCUA has a long track record of success in regulating credit
unions and creating a regulatory environment that allows credit
unions to meet the needs of their members.
Q.5. How could Congress best ensure that CFPB regulations are
properly tailored for community banks and credit unions? For
example, some have called to exempt either smaller or less
risky financial institutions from CFPB regulations altogether.
A.5. NAFCU has long believed that, given their unique nature,
all credit unions should be exempt from CFPB rulemaking and
examination authority, with NCUA once again given authority to
write all rules for credit unions, tailoring new proposals to
meet the special nature of the credit union industry. With that
being said other steps Congress could take that would better
tailor the CFPB's regulations would be to provide greater
clarity to CFPB's Section 1022 exemption authority, hold the
CFPB accountable for the cost and compliance burden estimates,
and passing the bills outlined in my written statement.
Q.6. My understanding is that only two banks have actually
opened since the passage of Dodd-Frank. Why? What potential
impacts does this have for our financial system?
A.6. Since the financial crisis and the passage of Dodd-Frank,
the number of new credit unions seeking charters has decreased
by nearly 70 percent per year, with an average of 7.7 new
charters annually in the 10 years before Dodd-Frank and only
2.3 annually since the passage of Dodd-Frank. The relentless
rising cost of compliance deters many would-be de novo credit
unions. Additionally, the initial capital infusion and cash
outlays are often too great for many communities and
associations, and there is practically no return on investment.
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 which
just helps to exacerbate the declining overall number of credit
unions.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DALLAS
BERGL
Q.1. Senator Crapo asked Mr. Bergl and Mr. Grooms about the
impact of Dodd-Frank mortgage rules on each of their financial
institutions. Does your bank or credit union qualify for the
QM-ATR ``small creditor,'' ``rural area,'' or any other
exemption? How does this exemption help your financial
institution?
A.1. The CFPB continues to cite the expanded qualified mortgage
(QM) safe harbor for small creditors and small creditor
exemption for those operating in rural and underserved areas as
proof that it has helped credit unions continue to serve
members. While there was some consideration for the smallest
financial institutions, the expanded exemption for smaller
creditors was provided after the ATR/QM rule was finalized,
which created compliance burdens that were preventable. In any
event the exemptions are so narrowly tailored that they are
statistically meaningless in the overall mortgage volume.
Some changes were also mandated by Congress in the Helping
Expand Lending Practices in Rural Communities Act at the end of
2015. This is the type of action we would hope the CFPB would
take on its own accord in the future.
Furthermore, in a recent survey of CUNA members, 43 percent
cited the QM rule as most negatively impacting the ability to
serve members with mortgage products. Therefore, these
exemptions, while a step in the right direction, did not
provide full relief for many credit unions, who in some
instances were forced to change their product offerings and/or
discontinue mortgage lending entirely. All credit unions, not
just the very smallest, have a different operating structure
than banks and for-profit lenders, and the regulatory changes
implemented by the CFPB must reflect this difference.
Modifications in the ATR/QM rule for all credit unions would be
appropriate to ensure they can continue to effectively serve
their members.
Q.2. What is your institution doing specifically to help bring
the unbanked or underbanked in your communities into the
financial system?
A.2. Credit unions, by their nature, are member-owned,
cooperative financial institutions that invest in their
communities and seek to offer safe and affordable products that
are more suitable than others in the marketplace for consumers
of modest means. For example, our credit union operates a small
dollar loan program designed to keep members out of the reach
of unscrupulous lenders. We also have done significant
financial education and other financial outreach programs in
the community. Unfortunately, we have had to direct resources
away from this type of outreach due to the increase in
regulatory burden that has emerged since the crisis.
Q.3. As discussed at the hearing, new HMDA data will be
collected starting in January 2018. What do you spend annually
on HMDA compliance, has that changed since before the crisis,
and what additional costs are you incurring to come into
compliance with the new requirements? Do you believe there is
value in collecting this data? How much of this data do you
already collect under the
ordinary course of underwriting or making disclosures to
mortgage borrowers?
A.3. First, it's too soon to know the full annual cost of HMDA
compliance until the rule has been fully implemented. However,
we believe the data currently collected is more than sufficient
to establish potential discrimination. We therefore believe the
additional data the CFPB seeks to collect will be of no value
in reducing discrimination and of limited value to the Bureau
or other stakeholders. Second, while some of this information
may be collected or available in the course of underwriting,
this fact does not take into consideration the costs associated
with new reporting requirements, as each additional data point
to be reported requires separate system development, education
and training, quality control and auditing.
Q.4. At the hearing, Mr. Bissell talked about the impact of the
opioid crisis on the communities he serves in Western
Massachusetts. Can you please tell me about the impact the
opioid epidemic is having on the economies in your communities?
A.4. Elkhart is not immune to the impacts of drug abuse in our
community. I do not feel informed enough on this topic to share
more than my personal concern that addiction seems to be
spreading and my feeling that legalization of gateway drugs in
some States may ultimately cause this and other problems to
worsen.
Q.5. The Treasury report on financial regulation released on
June 12, 2017, suggests making many changes to the regulation
of the Nation's largest banks. Will relief for the largest
banks help your banks and credit unions?
A.5. It's become clear since the crisis that one-size-fits all
regulations designed to curb abusive and destabilizing
practices at the largest financial institutions are
inappropriate and harmful to smaller community-based financial
institutions. All regulations should therefore be appropriately
tailored for the complexity and size of an institution. Those
changes proposed by the Treasury report that would help large
financial institutions become larger should indeed be subject
to careful scrutiny. However, there are a number of changes
included in the Treasury report that would in fact help
America's credit unions. Among these:
National Credit Union Administration
LRecalibration of NCUA Regulations: NCUA regulations
related to credit union capital and stress testing
should be recalibrated:
LRBC: Revise Risk Based Capital to apply to $10
billion and over or eliminate requirements for those
with 10 percent net worth;
LStress Testing: Stress testing threshold raised
from $10 billion to $50 billion;
LSupplemental Capital: Allow credit unions to rely
on appropriately designed supplemental capital to meet
a portion of their Risk Based Capital requirements
LCECL: Revisiting CECL requirements;
LStreamline De Novo Applications: Recommends
streamlining the application process for de novo credit
unions to encourage new charters;
LCall Reports: Recommends call reports be simplified
and streamlined
LExam Thresholds: Exam thresholds for extended exam
cycle (18-month) should be raised over the current $1
billion level or eliminated;
LStatutory Capital: Codify that the statutory rate
to be well capitalized is set by Congress at 7 percent
and not a level higher than that set by a bureaucrat:
LData Collection: Recommends better coordination and
rationalization of examination and data collection
procedures to promote accountability and clarity;
LAgricultural and Rural Credit Unions: Regulators
should tailor and give special consideration for
agricultural and rural financial institutions;
LBoard Duties: Recommends revisions for Boards of
Directors to appropriately tailor duties recognizing
the distinction between management and boards to
restore the balance between regulators, Boards and
management;
LCost-Benefit Analysis: Increased use of Cost-
Benefit Analysis.
Consumer Financial Protection Bureau
Structural Reforms
LMake the CFPB Director removable ``at-will''
instead of ``for cause''
LFunding through the appropriations process
LSubject to OMB apportionment
LCivil Penalty Fund restructured
Increased Regulatory Certainty
LCFPB should issue rules or guidance subject to
public notice and comment procedures before bringing
enforcement actions in areas in which clear guidance is
lacking or the CFPB's position departs from the
historical interpretation of the law.
LThe CFPB should adopt regulations that more clearly
delineate its interpretation of the UDAAP standard. The
agency should seek monetary sanctions only in cases in
which a regulated party had reasonable notice--by
virtue of a CFPB regulation, judicial precedent, or FTC
precedent--that its conduct was unlawful. The CFPB
could implement this reform administratively through
issuance of a regulation limiting the application of
monetary sanctions to cases that satisfy this notice
standard.
LThe CFPB should make the requirements for CFPB no-
action relief less onerous.
Enforcement
LThe CFPB should bring enforcement actions in
Federal district court rather than use administrative
proceedings.
LThe CID process should be reformed to ensure
subjects of an investigation receive the benefit of
existing statutory protections, backed by judicial
review.
Regulatory Review
LThe CFPB should promulgate a regulation committing
it to regularly reviewing all regulations that it
administers to identify outdated or otherwise
unnecessary regulatory requirements imposed on
regulated entities.
Complaint Database
LThe CFPB's Consumer Complaint Database should be
reformed to make the underlying data available only to
Federal and State agencies, and not to the general
public.
Supervisory Authority
LCongress should repeal the CFPB's supervisory
authority. The responsibility to supervise banks should
be entrusted to the prudential regulators. Supervision
of nonbanks should be returned to State regulators.
Mortgage Issues
LAdjust and Clarify the ATR Rule and eliminate the
``QM Patch'': The CFPB should engage in a review of the
ATR/QM rule and work to align QM requirements with GSE
eligibility requirements, ultimately phasing out the QM
Patch and subjecting all market participants to the
same transparent set of requirements. These
requirements should make ample accommodation for
compensating factors that should allow a loan to be a
QM loan even if one particular criterion is deemed to
fall outside the bounds of the existing framework, such
as when a borrower has a high DTI ratio with
compensating factors.
LModify Appendix Q of the ATR Rule: Appendix Q
should be simplified and the CFPB should make much
clearer, binding guidance for use and application. The
CFPB should review Appendix Q standards for determining
borrower debt and income levels to mitigate overly
prescriptive and rigid requirements. Review of these
requirements should be particularly sensitive to
considerations for self-employed and nontraditional
borrowers.
LRevise the Points and Fees Cap for QM Loans: The
CFPB should increase the $103,000 loan threshold for
application of the 3 percent points and fees cap, which
would encourage additional lending in the form of
smaller balance loans. The CFPB should scale points and
fees caps in both dollar and percentage terms for loans
that fall below the adjusted loan amount threshold for
application of the 3 percent points and fees cap.
LIncrease the Threshold for Making Small Creditor QM
Loans: Raising the total asset threshold for making
Small Creditor QM loans from the current $2 billion to
a higher asset threshold of between $5 and $10 billion
is recommended to accommodate loans made and retained
by small depository institutions. In order to maintain
a level playing field across institution types, an
alternative approach to this recommendation would be to
undertake a rulemaking to amend the QM rule and related
processes for all lenders regardless of type.
LClarify and Modify TRID: The CFPB could resolve
uncertainty regarding what constitutes a TRID violation
through notice and comment rulemaking and/or through
the publication of more robust and detailed FAQs in the
Federal Register. The CFPB should allow a more
streamlined waiver for the mandatory waiting periods,
in consultation with all market participants, including
both lenders and realtors. The CFPB should allow
creditors to cure errors in a loan file within a
reasonable period after closing.
LImprove Flexibility and Accountability of Loan
Originator Compensation Rule: The CFPB should improve
flexibility and accountability of the Loan Originator
Compensation Rule, particularly in those instances
where an error is discovered post-closing, in order to
facilitate post-closing corrections of nonmaterial
errors. The CFPB should establish clear ex ante
standards through notice and comment rulemaking, which
will clarify its enforcement priorities with respect to
the Loan Originator Compensation Rule.
LDelay Implementation of HMDA Reporting
Requirements: The CFPB should delay the 2018
implementation of the new HMDA requirements until
borrower privacy is adequately addressed and the
industry is better positioned to implement the new
requirements. The new requirements should be examined
for utility and cost burden, particularly on smaller
lending institutions. Consideration should be given to
moving responsibility for HMDA back to bank regulators,
discontinuing public use, and revising regulatory
applications.
LPlace a Moratorium on Additional Mortgage Servicing
Rules: The CFPB should place a moratorium on additional
rulemaking in mortgage servicing while the industry
updates its operations to comply with the existing
regulations and transitions from HAMP to alternative
loss mitigation options. In addition, the CFPB should
work with prudential regulators and State regulators to
improve alignment where possible in both regulation and
examinations.
Small Business Lending
LRepeal the provisions of Section 1071 of the Dodd-
Frank Act pertaining to small businesses to ensure that
the intended benefits of Section 1071 do not
inadvertently reduce the ability of small businesses to
access credit at a reasonable cost.
LSimplify, adjust, or change certain financial
regulations for financial institutions serving small
businesses.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM DALLAS
BERGL
Q.1. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions. What services can these
smaller institutions provide that larger institutions cannot
provide?
A.1. As locally owned cooperative financial institutions,
credit unions are well positioned to offer products and
services that are tailored to their particular community's
needs. However, the rapid increase in regulatory burden exerts
economic pressures that are driving credit unions to merge and
consolidate.
Nearly every day I receive a communication from one of our
members requesting special attention to their loan or account
relationship. Many times I make exceptions to our general
policies to accommodate their personal situation. It think it
is fair to say that it is unlikely the CEOs of Bank of America
or Wells Fargo see this type of activity as any part of their
role.
During the great financial crisis, numerous small business
owners in our community came to INOVA FCU because their ``to
big to fail'' bank pulled their operating line of credit just
as their business was looking to use the loan for the first
time as an operating life line. They were all told that Elkhart
was no longer a community that the bank was interested in
investing in. Today we are the only small business lender still
headquartered in our city, however the big banks have all
returned to take advantage of the good economic climate we are
currently enjoying.
Q.2. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What would the best way be to address this problem?
A.2. Unfortunately, credit unions' ability to provide their top
quality and consumer-friendly financial products and services
has been significantly impeded in the last several years by a
regulatory scheme, which has favored the large banks and
nonbank financial services providers that can afford to absorb
regulatory and compliance changes. Outlined below is some of
the feedback my credit union friends have given me about
certain areas where the CFPB has provided modifications:
LAbility To Repay/Qualified Mortgage (ATR/QM): The
CFPB continues to cite the expanded qualified mortgage
(QM) safe harbor for small creditors and small creditor
exemption for those operating in rural and underserved
areas as proof that it has helped credit unions
continue to serve members. While there was some
consideration for the smallest financial institutions,
the expanded exemption for smaller creditors was
provided after the ATR/QM rule was finalized, which
created compliance burdens that were preventable. Some
changes were also mandated by Congress in the Helping
Expand Lending Practices in Rural Communities Act at
the end of 2015. This is the type of action we would
hope the CFPB would take on its own accord in the
future.
LMortgage Servicing: The CFPB argues that it has
tailored its servicing rules by making certain
exemptions for small servicers that service 5,000 or
fewer mortgage loans. However, the reality is that
significant requirements under these rules are excluded
from the exemption and must be followed by large and
small servicers alike. Small servicers remain subject
to
requirements related to successors-in-interest, force-
placed insurance and, in certain circumstances, early
intervention requirements for borrowers in bankruptcy.
Indeed, in a recent survey of CUNA members, 30 percent
of credit unions specifically cited the Mortgage
Servicing rule as having negatively impacted their
ability to serve members. Credit unions with assets of
less than $100 million are the asset group most apt to
have dropped their mortgage program altogether.
LHome Mortgage Disclosure Act (HMDA): While the 2015
HMDA final rule included exemption thresholds of 25
closed-end mortgages and 100 open-end mortgages (Home
Equity Lines of Credit or HELOCs) from HMDA reporting,
this can hardly be described as tailoring the rule to
minimize the impact on small entities given that prior
to the rule, credit unions were not required to report
HMDA data on HELOCs. The new HMDA reporting
requirements are particularly troublesome since many
credit unions process HELOCs on a consumer platform and
mortgages on a different lending platform, a point that
credit union leaders repeatedly raised with Bureau
staff during the rulemaking process. The CFPB further
added to credit unions' regulatory burden by
drastically increasing the number of data points they
must report to a level well beyond the data points
required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act. CUNA continues to urge the
CFPB to provide an exemption from reporting on HELOCs,
or at a minimum, a dramatic increase in the loan volume
exemption thresholds. These changes would provide
meaningful relief to credit unions. We also continue to
strongly encourage the Bureau to reduce the number of
required data points and to disclose which data points
it intends to make public.
Q.3. What are concrete examples of the CFPB's refusal to tailor
regulations to match the unique profile of community banks and
credit unions?
A.3. First it is important to note that credit unions were
assured by the very lawmakers that created the CFPB that we
would be provided an exemption from their rulemaking and
oversight because credit unions were the ``good guys'' and did
not contribute to the economic crisis.
The CFPB regularly cites the exemption to entities that
provide fewer than 100 remittances annually as an example of
providing relief to small entities. However, of all its
attempts to provide relief to small entities, this exemption
threshold is probably the clearest example that the CFPB is
simply not listening. We have continually pointed out to the
CFPB that the international remittance transfer final rule has
crippled credit union participation in this market with over
half (55 percent) of credit unions that have offered
international remittances sometime during the past 5 years
having either cut back or eliminating the service. Credit
unions have told CUNA and the CFPB countless times that this
rule has made it more expensive for members to remit payment
and has drawn consumers away from using credit unions and into
the arms of the abusers for which the rule was designed. No one
should be satisfied with consumer protection rules that have
this impact on consumers.
The 2015 HMDA final rule, discussed above, is another
example of a rule in which credit unions should be treated
differently because of their field of membership restrictions
and the absence of a discriminatory lending history.
Finally, while the CFPB's proposed rule to regulate small-
dollar loans purportedly exempts the Payday Alternative Loan
(PAL) program administered by the NCUA, in reality their rule
does not offer a clean exemption, and will impose additional
restrictions on credit unions' ability to offer these safe
alternative products to their members.
Q.4. Which financial regulatory agencies, if any, have
effectively tailored financial regulations to community banks
and credit unions? If so, how have they done so?
A.4. The NCUA's Member Business Lending rule is an example of a
regulator tailoring a financial regulation to credit unions.
They accomplished this by moving from a prescriptive rule to a
principle-based rule, which could serve as a model for other
regulators in their approach.
Q.5. How could Congress best ensure that CFPB regulations are
properly tailored for community banks and credit unions? For
example, some have called to exempt either smaller or less
risky financial institutions from CFPB regulations altogether.
A.5. First and foremost, credit unions should be exempt from
all CFPB regulations unless the Bureau demonstrates a pattern
of harm or abuse on the part of credit unions, and the Bureau
obtains the concurrence of credit unions' prudential regulator,
the National Credit Union Administration. As I mentioned
earlier, Congress specifically granted the CFPB the authority
to exempt credit unions because of our structure. Additionally,
Congress could help ensure CFPB regulations are properly
tailored by changing the leadership structure at the Bureau
from a single director to a bipartisan commission, or by
exercising additional oversight of the Bureau through the
appropriations process.
Q.6. My understanding is that only two banks have actually
opened since the passage of Dodd-Frank. Why? What potential
impacts does this have for our financial system?
A.6. The barriers to chartering new credit unions are not
insignificant, and include higher capital requirements and
significantly increased regulatory burden. The impact of lack
of access to sound financial services is well documented;
however, in the case of credit unions, one way to achieve
greater penetration and reach would be simply to loosen
restrictions on field of membership, thereby permitting already
existing credit unions to serve more individuals and
communities.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JOHN
BISSELL
Q.1. Senator Crapo asked Mr. Bergl and Mr. Grooms about the
impact of Dodd-Frank mortgage rules on each of their financial
institutions. Does your bank or credit union qualify for the
QM-ATR ``small creditor,'' ``rural area,'' or any other
exemption? How does this exemption help your financial
institution?
A.1. Greylock Federal Credit Union is exempt from the ATR/QM
provisions since we are a Community Development Financial
Institution (CDFI). This exemption helps our credit union by
allowing us to make mortgages to members who would otherwise
not qualify under the ATR/QM safe harbor provisions, namely the
maximum debt-to-income (DTI) ratio of 43 percent. This
additional underwriting flexibility allows us to better serve
all prospective borrowers in our marketplace. Prior to
obtaining the CDFI exemption, we had adjusted our loan policy
to meet the ATR/QM DTI requirement; however, this led directly
to a reduction in overall mortgage lending, particularly to
those who were otherwise credit-qualified. Empowering financial
institutions to make risk-based lending decisions based on the
unique characteristics within their market areas allows for
increased access to credit, especially to first-time home
buyers and other underserved or unbanked segments of the
population. Unfortunately, many financial institutions who do
not have an exemption to this rule have either limited, or in
some cases even eliminated, certain credit offerings.
Q.2. What is your institution doing specifically to help bring
the unbanked or underbanked in your communities into the
financial system?
A.2. In 2016, Greylock Federal Credit Union created a dedicated
community development department. This department is tasked
with community outreach and education and is staffed by 2 full-
time employees. These skilled and experienced employees are
highly engaged within the communities we serve and also possess
multi-lingual skills. In short, this department was created to
connect with, assist and educate those who are unbanked,
underbanked or generally underserved. By partnering with
community organizations, we are able to connect directly with
those in most need of banking and/or credit related information
and services.
In addition to the creation of our Community Development
department, we also offer free financial education courses,
available to all who live within the communities we serve. We
currently have a total of 9 Certified Credit Union Financial
Counselors (CCUFCs) on staff and hope to add 2-3 additional
CCUFCs by year end. We have partnered with GreenPath Financial
Wellness to offer credit counseling and debt management
services to our members. We have even identified 15 employees
who speak a total of 10 different languages who are available
to assist members who may not be proficient in English. Our
organization has taken a holistic approach and is focused on
providing the tools and education necessary to bring as many
unbanked or underbanked individuals into the financial system
as possible.
Q.3. As discussed at the hearing, new HMDA data will be
collected starting in January 2018. What do you spend annually
on HMDA compliance, has that changed since before the crisis,
and what additional costs are you incurring to come into
compliance with the new requirements?
A.3. Based on our current loan volume, we spend approximately
$100,000-$150,000 on HMDA compliance annually, including the
cost of technology and human resources. The cost of HMDA
compliance has remained relatively unchanged with only nominal
increases since before the crisis as the reporting requirements
really did not change during this timeframe. We would like to
point out that the accurate collection and reporting of this
data involves individual mortgage loan originators, commercial
loan officers, loan underwriting, processing and servicing
staff, information technology staff, credit analysts, training
and compliance staff. It is not simply one person or group that
is impacted by changes to this regulation.
We do anticipate an increase in HMDA compliance costs
related to the new collection requirements starting in 2018.
These costs will be difficult to calculate in advance of full
implementation, but we estimate the increase may be as much as
30 percent-40 percent. Our technology costs are anticipated to
increase as our vendor has invested time and resources to
ensure their financial institution clients will be able to meet
the updated reporting criteria and those costs will be passed
on to us. The time our employees spend on HMDA compliance is
anticipated to increase significantly. While the technology
that we use will help us in our quest to collect and report
accurate data, the volume of information collected will
increase so significantly--from 26 unique fields per loan today
to a total of 110 unique fields per loan beginning in January
2018--that we will need to dedicate additional time and
resources to verify the data collected is accurate and
verifiable for audit, examination and reporting purposes. In
addition, we do not have an automated solution that will assist
us in assimilating this data for our commercial loans that are
HMDA reportable. This means that for each commercial HMDA
reportable loan we originate all data fields will have to be
calculated and entered manually, thereby at least doubling, if
not tripling the time spent on HMDA compliance in this area of
our operations.
It is important to remember that the vast majority of
financial institutions depend heavily on their technology
vendors to meet regulatory compliance requirements as we do not
have the financial or technological capacity to create these
systems in-house. Therefore, any time there is a substantive
regulatory change, we are at the mercy of one or more of our
vendors. With the recent pace of regulatory change we have
witnessed over the past 7 years, this has proved to be a
challenge.
Q.4. Do you believe there is value in collecting this data? How
much of this data do you already collect under the ordinary
course of underwriting or making disclosures to mortgage
borrowers?
A.4. While there may be value to regulatory agencies or the
Federal Government, given the time and financial resources our
credit union spends collecting, verifying and reporting HMDA
data, there is very little reciprocal value to our
organization. However, management and our board of directors
does utilize the HMDA data to conduct a fair lending analysis
of or mortgage loan data to ensure we do not see any potential
violations or areas of concern. Beyond that, there is little to
no additional value to our organization or our members as
illustrated by the fact that we have not once had a member
request our public HMDA data.
With respect to the changes in HMDA data collection, as
noted above, we are currently collecting 26 unique pieces of
data per loan as compared to the 110 data points that will be
required beginning in 2018, or approximately 24 percent. This
would mean that roughly 76 percent of the data collected going
forward would be new. However, when looking at the totality of
the data collected by category (as opposed to unique fields),
there are 33 new categories of information to be collected, 11
categories of information that will be modified from their
current state, while only 10 categories of information will
remain unchanged. This means that the majority, or roughly 61
percent of the data has never been collected before, 20 percent
of the information collected will be different than what we've
been collecting and only 19 percent of the data collected is
unchanged. In conclusion on this topic, regardless of the math
used, less than one-quarter of the information to be collected
beginning in 2018 is already being collected and reported.
What has gotten less attention in comparison to the HMDA
rule change, but is also critical, is the fact that the Uniform
Residential Loan Application (URLA), used by the majority of
financial institutions who originate mortgage loans, will also
be changing January 1, 2018. While this new application will
aid in collecting some of the newly required data for HMDA
reporting purposes, this represents another unique
technological challenge with respect to financial institutions
and their vendors as well as a new training requirement for
mortgage loan originators. It will also negatively impact
consumers as there will be even more information requested of
them when they apply for a mortgage loan that provides little
to no additional value with respect to a financial
institution's ability to make a lending decision.
Greylock Federal Credit Union is sincerely concerned with
the significant increase in the amount of information that will
be collected beginning in 2018, how our members' information
will be protected when made available to the public and the
heightened potential for regulatory scrutiny based on the new
and expanded data fields.
Q.5. The Treasury report on financial regulation released on
June 12, 2017, suggests making many changes to the regulation
of the Nation's largest banks. Will relief for the largest
banks help your banks and credit unions?
A.5. There are a significant number of suggestions and
recommendations made in the referenced Treasury report.
Generally speaking, ``relief'' for the largest banks in the
United States would have little to no effect on Greylock
Federal Credit Union's operations. However, depending on what
form the ``relief'' came in, there may be benefits to our
credit union. To the extent that the relief could have benefits
for Greylock and other community institutions, we are very
supportive of a tailored approach to regulatory reform.
Conversely, we would be hesitant to see relief for the
largest banks that may promote future risk-taking activities or
regressive actions that may threaten the safety of our
financial system as a whole.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JOHN
BISSELL
Q.1. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions. What services can these
smaller institutions provide that larger institutions cannot
provide?
A.1. We believe credit unions provide high quality service for
our member-owners by knowing them personally and the community
they live in. Credit unions on the whole tend to be smaller
which allows them the flexibility to adapt more quickly and
truly tailor products and services to meet the needs of its
unique members rather than have a one-size-fits-all mindset. We
feel that we are also able to make meaningful and sustainable
community investments, both financial and from a human resource
standpoint. We encourage our employees to volunteer within the
community and allow flexible work schedules to accommodate
their engagement. As noted in our response to Ranking Member
Brown, we have an active Community Development department whose
sole focus is engaging with our community and partnering with
local agencies and businesses to ensure basic financial and
educational needs are being met. This becomes particularly
important in times when local, State and Federal aid decreases
or is eliminated altogether.
Q.2. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What would the best way be to address this problem?
A.2. Not knowing the unique challenges in Nebraska, I can only
say that mortgage lending growth at smaller financial
institutions has been a challenge, particularly in recent
years. Providing additional opportunities for exemption from
certain regulatory requirements is one possible way to address
this issue. For example, a CDFI financial institution is exempt
from the ATR/QM requirements thus allowing for expanded lending
capabilities. Greylock's share of the local mortgage market has
actually increased in the past 5 years from 19 percent to 24
percent. Whenever possible, Greylock Federal Credit Union will
provide its employees and expertise to other credit unions in
order to help them navigate certain regulatory requirements.
Unfortunately, this is not always a sustainable or practical
business model depending on the unique characteristics of
individual States, markets, or the financial institutions
themselves.
Q.3. What are concrete examples of the CFPB's refusal to tailor
regulations to match the unique profile of community banks and
credit unions?
A.3. I am not aware of the CFPB specifically ``refusing'' to
tailor regulations to match the profile of community banks or
credit unions. However, I do believe that many of the
regulatory requirements that have stemmed from the passage of
Dodd-Frank have had a proportionally larger negative impact on
smaller community banks and credit unions. Larger institutions
generally have more capital, technological resources and
personnel capacity to be able to interpret, understand, and
implement regulatory requirements, while smaller institutions
are forced to try to comply utilizing already scarce resources.
This often leads to the need for additional technologies to
compensate for the lack in human resources. However, technology
is expensive, contracting with new vendors can be cumbersome
and no technology will work as intended without commensurate
human resources. In addition to considering consumers,
businesses and the general well being of the financial system
as a whole, we respectfully request that the impact to the
institutions themselves be more closely considered. Otherwise,
there will inevitably be unintended consequences that
negatively impact those whom the regulation is intended to
protect.
Q.4. Which financial regulatory agencies, if any, have
effectively tailored financial regulations to community banks
and credit unions? If so, how have they done so?
A.4. We believe the NCUA has done the best job over the years
to tailor regulations appropriately to fit the size and
complexity of the credit unions under its jurisdiction. They
truly take a risk-based approach to examinations and have both
the financial system and the credit union's members at the
heart of their work. The recently amended MBL Rule is a good
example of this. In addition, the NCUA has created many
``exemptions'' and other carve-outs for smaller, less complex,
and often very well capitalized institutions. The NCUA also
continues to review and refine its regulations and expectations
on an ongoing basis. The punitive nature with which other
prudential regulators approach regulatory compliance ultimately
adversely impacts consumers as these banking institutions are
fearful of fines or more severe regulatory action. Therefore,
more time is spent trying to be compliant rather than helping
serve their customers, create innovative products and services
or engage with their communities.
Q.5. How could Congress best ensure that CFPB regulations are
properly tailored for community banks and credit unions? For
example, some have called to exempt either smaller or less
risky financial institutions from CFPB regulations altogether.
A.5. Certainly asset size is one unit of measure. Other
measures could include key financial metrics like regulatory
capital, return on assets, delinquency, and CAMEL ratings.
Additionally, perhaps the community mission and impact of an
institution could be considered in tailoring regulation, as is
the case with the flexibility afforded to CDFIs.
Q.6. My understanding is that only two banks have actually
opened since the passage of Dodd-Frank. Why? What potential
impacts does this have for our financial system?
A.6. Personally, I feel that the financial crisis itself had
more to do with the number of new financial institutions
opening than Dodd-Frank. Other factors might include regulatory
burdens, the low interest rate environment, fair lending
concerns, UDAAP fears, the abundance of alternative investment
options, the number of existing financial institutions and
financial technology companies
already operating in the banking space or even population and
demographic shifts. But, record low margins are likely the
biggest factor holding back the formation of new institutions.
This is simply not an opportune time for investors to seek
returns by opening a de novo bank.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM JOHN
BISSELL
Q.1. Professor Levitin's testimony cited a study of the
economic effects of regulations imposed by the Federal Reserve
Board on interchange fees charged for debit card transactions:
The Costs and Benefits of Half a Loaf: The Economic Effects of
Recent Regulation of Debit Card Interchange by Robert J.
Shapiro.
LPlease comment on the study and provide any
analysis that will help this Committee evaluate the
study and its claims.
A.1. My initial response is that the report is outdated and
should be updated to include the significant negative impact
that merchant data breaches have had on consumer debit card
transactions. Fraud losses due to merchant data breaches at my
credit union since 2013 have exceeded $500,000 and continue to
rise. It appears that merchants have profited from the reduced
interchange rates while not demonstrably passing those savings
on to consumers. Many of the merchants have hidden behind the
Visa and MasterCard rules allowing them to escape liability for
costly data breaches.
Q.2. Additionally, Professor Levitin's testimony described
credit card swipe fee pricing as a ``$73 billion annual
regressive wealth transfer from American consumers to banks.''
LDo you agree with Professor Levitin's analysis?
A.2. Mr. John Bissell: Our credit union does not charge our
members to use their debit card. We bear all the costs for the
transactions including fraud losses. The revenue we receive
from debit card interchange offsets costs to maintain this
valuable electronic method. We disagree with the notion that
Debit Card swipe fees are regressive.
Q.3. Please comment, from the point of view of credit unions
that participate in electronic payments networks, as to the
role of consumers in these systems and what benefits, if any,
they accrue?
A.3. Consumers benefit by having a convenient and free method
of payment across multiple merchant platforms, online, and over
the phone. Consumers can track their balances almost
immediately and don't have to rely on checks and cash as
standard payment methods. Consumers are also protected from
fraud and immediate provisional credit is provided for disputed
transactions. Technology is also available to the consumer that
allows them to be in control of their transactions using mobile
smart phones and other transactions verification features. A
number of mobile wallet applications are also available that
extend the use of their debit cards to smart phone payment
options.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM ADAM J.
LEVITIN
Q.1. During the hearing, consolidation of banks and credit
unions was discussed. In addition to fewer banks, we are also
seeing fewer branches especially in low-income areas. That
said, CDFI banks and credit unions continue to serve low-income
areas. Why do you believe banks are closing branches?
A.1. My assumption is that banks are closing branches in low-
income areas because they are not sufficiently profitable.
There are high fixed costs in operating a branch--purchase or
rental or real estate, modification of the property to be
suitable to serving as a bank branch, utilities, equipment,
salaries, monthly account statement mailings, etc. In order to
recoup such costs a bank needs to have a sufficient number of
accounts generating a sufficient margin. Low-income consumers
tend to have low balances in their bank accounts, such that the
net interest margin on those accounts will be too small to
generate the revenue necessary to cover the branch's fixed
costs. Overdraft and NSF fees may produce additional revenue,
but come with the risk of uncollectible negative balances.
Additionally, the opportunities to cross-sell low-income
consumers are larger loan products--home mortgages, car loans,
and retirement products--tend to be more limited than with
wealthier consumers, so it can be difficult for bank branches
in low-income communities to generate enough income to cover
the branch's expenses and generate enough of a profit margin to
please the banks' shareholders. CDFIs and credit unions do not
face the same type of shareholder pressure for returns as stock
corporation banks, which might explain why they are willing to
continue to serve low-income communities.
Q.2. What do you think about the Treasury report on financial
regulation released on June 12, 2017?
A.2. I don't think very much of the Trump Treasury Report on
Financial Regulation. The Report is a sloppy and highly
partisan document that relied heavily on input from industry
and from attorneys representing industry. It is not a basis for
a serious consideration of improvements to the financial
regulatory system, but a regurgitated industry wish list.
To give but one example, the Report spends more pages on
the CFPB (including its mortgage regulations) than on any other
issue. The Report parrots a long-standing industry talking
point that the CFPB's power to proscribe ``abusive'' acts and
practices is problematic because the term ``abusive'' is novel
and undefined and that this creates uncertainty that is
chilling economic growth. This is simply false, and if the
authors of the Treasury Report had taken time to do some
research rather than just repeating industry talking points,
they would have recognized this.
First, the term ``abusive'' is defined by statute 12 U.S.C.
5531. The statutory definition is quite detailed, unlike the
term ``deceptive,'' which is undefined in the statute. Second,
there are now 6 years of CFPB enforcement activity to
understand how the agency has used this power and what it
means. Unfortunately, it seems that no one at Treasury bothered
to look through any of the CFPB's enforcement actions to see
how the agency has actually used its power to prosecute
``abusive'' acts and practices. An examination of those cases
makes clear two things.
First the CFPB has been very sparing in alleging that acts
and practices are ``abusive''. The CFPB has brought around 185
enforcement actions to date. Only 22 of these (less than 12
percent of all enforcement actions) have included counts
alleging ``abusive'' acts and practices. In all but one
instance in these 22 cases, the very same behavior alleged to
be ``abusive'' was also alleged to be ``unfair'' and/or
``deceptive.'' Unfair and deceptive are not new standards. They
have been around in the FTC Act since 1935. While these
standards weren't applied to banks for half a century
(Regulation AA was from 1985), no institution, bank or nonbank,
should be wholly surprised at what might be alleged to be
unfair or deceptive. And indeed, when the CFPB has brought
unfairness charges, they have generally been in situations in
which there is no consumer benefit whatsoever from the practice
(e.g., Wells Fargo's creation of false accounts). What this
means is that the CFPB has not actually been surprising anyone
when it has alleged ``abusive'' acts and practices because to
date, the ``abusive'' power has been little more than a belt to
go with the suspenders of ``unfair and deceptive''.
Second, the behaviors alleged to be abusive are almost all
in the context of pre-existing customer relationships, such as
Citizens Bank's ``we keep the change'' policy of resolving
discrepancies in recorded deposit amounts in its favor. In
other words, ``abusive'' is getting applied to function as a
publicly enforceable duty of good faith and fair dealing, an
implied term in all contracts.
All of this suggests that contrary to the Trump Treasury's
hand-waving, there's really no crisis of uncertainty about what
is ``abusive''. The Trump Treasury Report's assertion that
``Without meaningful standards that provide fair notice, many
consumer financial firms are reluctant to innovate or offer new
financial products or services,'' is utterly unsupported. The
types of behavior that the CFPB has targeted are not behaviors
that any reasonable person would think are OK, such as
collecting debts that are unenforceable under State law or
requiring servicemembers to litigate debt collection suits in a
distant and inconvenient forum with which they have no
connection, resulting, of course, in default judgments. The
CFPB has not brought actions involving ``grey'' behaviors, only
those that are ``black and white'' matters. That's why the
Report cannot cite any actual examples of legitimate business
behavior getting improperly tagged as ``abusive.''
Obviously there are far more issues in the Trump Treasury
Report, but this sort of lazy and uncritical adoption of
industry talking points as Treasury's policy positions is
typical of the Report.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM ADAM J.
LEVITIN
Q.1. Can you please expand on why the Orderly Liquidation
Authority of the Wall Street Reform and Consumer Protection Act
is so important to the safety and soundness of our economy?
A.1. The failure of a large financial institution can have a
domino effect throughout the financial sector and ultimately
into the real economy. Orderly Liquidation Authority (OLA)
provides the legal authority for the FDIC and the Federal
Reserve Board to take over failing financial institutions and
manage their resolution so as to mitigate the effects of the
failure and thereby protect the economy as a whole. While the
FDIC has separate authority to resolve failed depository
institutions, OLA provides authority for dealing with
nondepositories as well, including affiliates of depositories.
Absent OLA Federal bankruptcy courts provide the only
formal resolution mechanism for failed nondepository financial
institutions. As a bankruptcy professor and former bankruptcy
lawyer, I think the world of U.S. bankruptcy courts; they do an
outstanding job dealing with failed nonfinancial firms. But
they are not equipped to deal with financial institutions,
because they cannot respond fast enough, cannot ensure that
firms have enough liquidity during resolution, and lack
sufficient international coordination mechanisms.
By way of analogy, a financial crisis at a large financial
institution is like a fire in a nuclear plant. If it's not
handled properly, it can cause a meltdown and result in a
catastrophe that reaches far beyond the nuclear plant itself.
In such a situation, you don't want to send in the local fire
department, as brave as they are. You need firefighters with
special training and with special equipment. That's what OLA
provides. Legislation like the Financial Institutions
Bankruptcy Act of 2017 (H.R. 1667) or the CHOICE Act (H.R. 10)
both mistakenly insist on resolving large financial
institutions in bankruptcy, while failing to ensure that there
will be the financing necessary for the resolution. That's
equivalent to calling in the local volunteer fire brigade to
deal with the nuclear plant fire while also taking away the
hoses and engines. This is a recipe for disaster. What's more,
a provision in these bills, would exculpate financial
institution executives for actions taken ``in connection with
the bankruptcy filing''. That's potentially a get-out-of-jail-
free provision for financial arsonists. A regulatory, rather
than judicial resolution process ensures that failed financial
institutions can be resolved with utmost speed and minimum
economic disruption and uncertainty, while preserving political
accountability, as the regulators are themselves answerable to
Congress and ultimately the Administration is answerable to the
American people.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM ADAM J.
LEVITIN
Q.1. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions. What services can these
smaller institutions provide that larger institutions cannot
provide?
A.1. Community banks and credit unions play an important role
in local economies, particularly in the areas of small business
lending and construction lending. These are areas where local
knowledge is critical for underwriting loans, and small, local
financial institutions have a comparative advantage in this
regard. While community banks and credit unions face a serious
competitive disadvantage in more commoditized consumer
financial product markets, such as mortgages, deposits, credit
cards, and car loans, they are often able to offer more
personalized customer service and
customized lending products precisely because, unlike their
larger competitors, they are not built to take advantage of
economies of scale.
Q.2. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What would the best way be to address this problem?
A.2. While I do not doubt that Nebraskans in rural counties may
face difficulty obtaining mortgage financing, the problem is
not TRID or the QM rule. TRID, the TILA-RESPA Integrated
Disclosure, is simply a disclosure rule, requiring lenders to
disclose the terms of mortgage loans in a standardized form
both a week prior to closing and at closing. There are
undoubtedly some transition costs for lenders to get up to
speed on what is required by TRID, but TRID was required by
Congress after unhappiness with the Federal Reserve Board and
Federal Trade Commission's attempt at TILA-RESPA integration.
12 U.S.C. 5532(f). Transition costs for the TRID are the
result of Congress's decision, not the CFPB's. In any case,
however, the idea that the additional compliance costs from
learning to use the TRID disclosures are making mortgage
lending impossible is not plausible--the transition costs are
minimal, even for a small institution.
Likewise, the QM or Qualified Mortgage Rule, is a safe
harbor from a statutory requirement that mortgage loans be made
only to consumers who have demonstrated an ability to repay the
loan according to its original terms. The CFPB was required by
statute to promulgate the QM safe harbor. 15 U.S.C. 1639c(b).
The safe harbor is hardly causing lenders not to lend; to the
contrary, it enables loans by creating certainty for lenders
about regulatory interpretation of the statute.
Finally, I note that 12 U.S.C. 5512(b)(2)(A) requires the
CFPB to consider the potential reduction in access by consumers
to consumer financial products or services from any rulemaking
as well as the impact on smaller depositories and credit unions
and the impact on consumers in rural areas. The CFPB has done
this in its rulemakings, and to the extent regulated
institutions or their trade associations believe that the CFPB
has failed to do so, they are free to challenge the rulemaking
under the Administrative Procedures Act. No challenge has been
brought against either the TRID or the QM rulemaking on this
basis, however.
Q.3. What are concrete examples of the CFPB's refusal to tailor
regulations to match the unique profile of community banks and
credit unions?
A.3. I am not aware of any such examples. To the contrary, the
CFPB has included numerous exceptions for small institutions in
its rulemakings, as I detailed in my written testimony. I am
sure that there are some institutions that would have liked
these exceptions to be broader--what institution would not like
less regulatory requirements. The CFPB has been quite
reasonable in balancing general consumer protection concerns
with the particular situation of small financial institutions
(generally defined as those with less than $2 billion of total
assets or undertaking activities on a very small scale).
Indeed, the CFBP is required to do so by 12 U.S.C.
5512(b)(2)(A), at least to the extent that it can do so while
still complying with 12 U.S.C. 5511(b)(4), which requires
that the CFPB enforce Federal consumer financial law
``consistently, without regard to the status of a person as a
depository institution, in order to promote fair competition''.
I note that there is a legislative proposal (S. 1310--the
Home Mortgage Disclosure Adjustment Act) sponsored by several
members of this Committee to exempt small institutions from the
new Home Mortgage Disclosure Act (HMDA) data collection
requirements. This proposal is a mistake.
The new HMDA requirements are almost all for data
collection that banks are already required to collect for the
TILA-RESPA integrated disclosure or would have in the loan
underwriting file as a matter of normal practice.\1\ The
additional compliance costs for the new HMDA regulations are
going to be quite small; the CFPB's estimate per the Paperwork
Reduction Act is that the compliance costs for truly small
banks will be between 143 and 173 hours of time annually for
all HMDA compliance, meaning that the additional costs from the
new regulation are less. A reasonable estimate of costs would
be $10,000 or less. This should not be make-or-break money to a
financial institution of any size, and exempting small
institutions from HMDA reporting will seriously impair the HMDA
data in some communities and even in some entire (rural) States
in which large financial institutions do not have much of a
presence. The effect will be to leave consumers in those States
more vulnerable to discriminatory lending.
---------------------------------------------------------------------------
\1\ Adam J. Levitin, The New HMDA Regs Require Banks to Collect
Lots of Data . . . That They Already Have, Creditslips.org, June 15,
2017, at http://www.creditslips.org/creditslips/2017/06/new-hmda-regs-
require-banks-to-collect-data-they-already-have.html.
Q.4. Which financial regulatory agencies, if any, have
effectively tailored financial regulations to community banks
---------------------------------------------------------------------------
and credit unions? If so, how have they done so?
A.4. I believe the CFPB has already done so with some success
regarding small mortgage lenders and small mortgage servicers,
as detailed in my written testimony. The CFPB might not have
given the banks everything they wanted, but its duty is to
balance out consumer protection benefits with the goal of
reducing unnecessary regulatory burdens for small institutions.
As noted above, I do not know of specific examples where it has
acted unreasonably in this regard.
Q.5. How could Congress best ensure that CFPB regulations are
properly tailored for community banks and credit unions? For
example, some have called to exempt either smaller or less
risky financial institutions from CFPB regulations altogether.
A.5. The best thing would be to do nothing. The CFPB is already
required by statute to consider smaller financial institutions
concerns in its rulemakings, 12 U.S.C. 5511(b)(4), and it has
done exactly this. If Congress wanted to be more precise, it
could amend 12 U.S.C. 5511(b)(4) to specifically require
consideration of institutions with $2 billion total assets or
less. A blanket exemption, however, would be misguided.
Consumers should have the same level of protections
irrespective of whether they deal with a community bank or a
megabank. A consumer shouldn't have to check on whether a
particular bank is subject to CFPB regulation. While
reputational concerns probably exercise a stronger check on
community banks, there are many rural communities in which
there aren't real choices for financial services. In such
situations, one cannot rely on reputational factors and market
forces (e.g., ``Make it right or I'll take my business
elsewhere'') to be a check on for-profit institutions'
behavior.
Q.6. My understanding is that only two banks have actually
opened since the passage of Dodd-Frank. Why? What potential
impacts does this have for our financial system?
A.6. There are numerous factors behind the lack of de novo
chartering. I've detailed these factors in a submission to the
House Financial Services Committee that was entered into the
record for a March 21, 2017, hearing on de novo chartering. The
short answer, however, is that we're not seeing de novo
charters because they are not an attractive investment, whether
relative to existing charters or as an absolute matter. It may
simply be cheaper to buy an existing charter than obtain a new
one. Moreover, the banking business may not be especially
attractive to new entrants in general. New banks tend to be
smaller banks, and small banks face serious competitive
disadvantages because they lack economies of scale and
geographic diversification in their business markets. Add on to
this that an investment in a bank requires large amounts of
locked-in capital and an environment with compressed interest
spreads, and there may simply be limited interest in obtaining
banking charters.
There is no evidence, however, that increased regulatory
burdens are resulting in investors shying away from obtaining
bank charters. Given that banks' returns on equity and returns
on assets are extremely healthy as an industry, it is hard to
see regulation as the explaining factor, such that deregulatory
proposals would spur bank chartering. Indeed, radical
deregulatory proposals, such as the CHOICE Act (H.R. 10), are
likely chilling the interest in investment in banking charters
because they create an unprecedented degree of political risk
for any investment in a bank. Investors like predictable
regulatory environments; predictable regulation facilitates
business planning. It's hard to run a business in an
environment in which regulation flips on and off they way a
child plays with a light switch. Whatever bank investors may
think of Dodd-Frank as a whole or any particular provision
thereof, few, if any of them want to operate in a world of
violently see-sawing regulation and deregulation.
The lack of de novo chartering is not itself an inherent
cause for concern. The number of banks in the United States is
still very much a product of historical regulatory restrictions
on interstate branch banking. By carving the United States up
into 50 separate retail banking markets (or truly more given
that some States had inter-county branching restrictions), bank
regulation artificially inflated the number of banks in the
country. I do not profess to know what the ``right'' number of
banks is, but the decline in the number of banks can be seen as
reflecting an adjustment toward a free market equilibrium
following the repeal of branch banking restrictions, and viewed
nationwide, it can hardly be said that there is a shortage of
banking services.
Less important than the total number of banks or the number
of de novo charters is the distribution of banking services.
The supply of banking services is not distributed equally
throughout the Nation. Some communities are saturated with
banking services, while other communities, both urban and
rural, lack adequate (or even any) banking services. This is
the real problem; lack of de novo chartering only matters to
the extent that it is impeding adequate provision of banking
services to underserved communities. An increase in de novo
charters is no guaranty that there will be any change in
service to underserved rural and urban communities; there is no
guaranty that the demand would be for charters to operating in
underserved communities. Indeed, it is quite possible that new
charters would merely saturate already well-served markets,
resulting in cannibalistic competition that erodes safety-and-
soundness for all institutions in those markets.
Rather than focus on the question of lack of de novo
chartering, a better line of inquiry would be on what can be
done to encourage financial institutions to serve all
communities. A first step in this direction would be an
updating of the Community Reinvestment Act to better reflect
the realities of the banking market, as well as steps to level
the playing field between banks (which are subject to the
Community Reinvestment Act) and nonbanks (which are not), in
keeping with the spirit of 12 U.S.C. 5511(b)(4) (referenced
above). A banking charter is a privilege, and such privileges
can be conditioned on responsibilities, including the duty to
serve rural communities, etc. The Community Reinvestment Act
presents a potential vehicle for conditioning such privileges
on duties to serve, similar to free rural delivery of the post
and rural broadband mandates.
I recognize how politically divisive the Community
Reinvestment Act is, but the CRA is increasingly out-of-date,
such that there is increasingly little for anyone to like in
the CRA, and it offers a potential tool for ensuring that rural
and poor urban communities can access financial services on par
with the rest of the Nation.
[all]