[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF BANKING:
HOW CONSOLIDATION, NONBANK
COMPETITION, AND TECHNOLOGY
ARE RESHAPING THE BANKING SYSTEM
=======================================================================
HYBRID HEARING
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION
AND FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 29, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-49
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
46-008 PDF WASHINGTON : 2021
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on Consumer Protection and Financial Institutions
ED PERLMUTTER, Colorado, Chairman
GREGORY W. MEEKS, New York BLAINE LUETKEMEYER, Missouri,
DAVID SCOTT, Georgia Ranking Member
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California BILL POSEY, Florida
AL GREEN, Texas ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JUAN VARGAS, California BARRY LOUDERMILK, Georgia
AL LAWSON, Florida TED BUDD, North Carolina
MICHAEL SAN NICOLAS, Guam DAVID KUSTOFF, Tennessee, Vice
SEAN CASTEN, Illinois Ranking Member
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York WILLIAM TIMMONS, South Carolina
C O N T E N T S
----------
Page
Hearing held on:
September 29, 2021........................................... 1
Appendix:
September 29, 2021........................................... 51
WITNESSES
Wednesday, September 29, 2021
Gonzalez-Brito, Paulina, Executive Director, California
Reinvestment Coalition......................................... 5
Henry-Nickie, Makada, Fellow, Governance Studies, Brookings
Institution.................................................... 7
Hughes, Sarah Jane, University Scholar and Fellow in Commercial
Law, Maurer School of Law, Indiana University.................. 9
Jackson, Desiree, Assistant Vice President, Treasury Management,
Beneficial State Bank.......................................... 10
Reuter, Jim, Chief Executive Officer, FirstBank, on behalf of the
American Bankers Association................................... 12
APPENDIX
Prepared statements:
McHenry, Hon. Patrick........................................ 52
Gonzalez-Brito, Paulina...................................... 54
Henry-Nickie, Makada......................................... 72
Hughes, Sarah Jane........................................... 78
Jackson, Desiree............................................. 92
Reuter, Jim.................................................. 97
Additional Material Submitted for the Record
Perlmutter, Hon. Ed:
Written statement of the American Financial Services
Association................................................ 106
Written statement of the Bank Policy Institute............... 108
Written statement of the Credit Union National Association... 119
Written statement of the Electronic Transactions Association. 122
Written statement of the Financial Data and Technology
Association................................................ 125
Written statement of the Independent Community Bankers of
America.................................................... 129
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 132
Written statement of the National Armored Car Association.... 139
Written statement of Hon. Donald M. Payne, Jr., a
Representative in Congress from the State of New Jersey.... 141
THE FUTURE OF BANKING:
HOW CONSOLIDATION, NONBANK
COMPETITION, AND TECHNOLOGY
ARE RESHAPING THE BANKING SYSTEM
----------
Wednesday, September 29, 2021
U.S. House of Representatives,
Subcommittee on Consumer Protection
and Financial Institutions,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Ed Perlmutter
[chairman of the subcommittee] presiding.
Members present: Representatives Perlmutter, Meeks, Scott,
Velazquez, Sherman, Green, Foster, Vargas, Lawson, Casten,
Pressley; Luetkemeyer, Posey, Barr, Williams of Texas,
Loudermilk, Budd, Kustoff, Rose, and Timmons.
Ex officio present: Representative Waters.
Also present: Representatives Garcia of Illinois and Emmer.
Chairman Perlmutter. The Subcommittee on Consumer
Protection and Financial Institutions will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
With the hybrid format of this hearing, we have some
Members and witnesses participating in-person and others on the
Webex platform.
I would like to remind all Members participating remotely
to keep themselves muted when they are not being recognized by
the Chair. The staff has been instructed not to mute Members,
except when a Member is not being recognized by the Chair, and
there is inadvertent background noise.
Members are also reminded that that they may only
participate in one remote proceeding at a time. And I am aware
that there are several hearings going on even as we speak, but
you can only participate in one at a time. If you are
participating remotely today, please keep your camera on. And
if you choose to attend a different remote proceeding, please
turn your camera off.
Today's hearing is entitled, ``The Future of Banking: How
Consolidation, Nonbank Competition, and Technology are
Reshaping the Banking System.''
I now recognize myself for 4 minutes to give an opening
statement.
Following the financial crisis, former Federal Reserve
Chair Paul Volcker was once asked about financial innovation
and regulatory reform, and he said, ``The most important
financial innovation that I have seen in the past 20 years is
the automatic teller machine (ATM). It really helps people
prevents visits to the bank, and it is a real convenience. How
many other innovations can you tell me of that have been as
important to the individual as the ATM, which is more of a
mechanical innovation than a financial one?''
I don't bring this up to say that financial innovation is
bad, and bank technology needs to stop at ATMs, but there is a
point to what Mr. Volcker said. From the consumer perspective,
the ATM is a wildly-useful product, and it is not such a
complicated idea.
However, many so-called innovative and complex financial
products, like credit default swaps or balloon mortgage
payments, got us into a lot of trouble back in 2008.
But in the dozen years since the financial crisis, there
have been many real innovations in banking with clear benefits
to consumers. You can access your accounts and transfer funds
with your smartphone.
Credit unions and banks have developed advanced fraud
detection to address the rise in cybersecurity threats. I was
recently notified that there had been some fraudulent activity
on one of my accounts that was actually noticed within hours of
the activity.
New tools in analytics help consumers set and track savings
and spending goals. We are also seeing more financial
institutions use artificial intelligence, machine learning, and
algorithmic-based decisions. These technologies offer a great
deal of promise, but also raise new consumer protection issues.
Another trend over the past decades has been the
consolidation in the banking sector. In 1984, there were 18,000
different banks across the country. Today, there are less than
5,000, and the number of new bank charters has fallen to a
record low.
The number of credit unions has also fallen from about
15,000 in 2004, to about 5,000 today.
With fewer banks and credit unions, there is less consumer
choice when it comes to depository institutions.
But this is not to say that traditional financial
institutions are completely without new competition. Financial
technology companies, often referred to as fintech, have
captured a larger and larger share of consumer mortgage and
small business lending markets.
These firms are often not subject to the same regulations
that banks and credit unions are, but often compete in the same
markets. In April, this subcommittee held a hearing on the
trends of financial institution charters. We looked back in
history at the powers of the National Bank Act, the original
purpose of industrial loan companies in examining how banking
laws are being used and, in some cases, stretched to fit an
evolving financial services sector.
As illustrated by that hearing, there are significant
challenges for Congress and regulators to keep up with modern-
day trends.
My time has expired, so I will now yield to Mr.
Luetkemeyer, the ranking member of this subcommittee, for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. I would like to
ask unanimous consent to insert Full Committee Ranking Member
McHenry's statement into the record.
Chairman Perlmutter. Without objection, it is so ordered.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and thank you for
having this important hearing today, and I thank our witnesses
also for testifying before us. We look forward to your
insightful information.
This hearing asks us to consider the future of banking, a
very broad subject. In order to understand where banking is
going, we need to examine what has happened to banking in the
past.
At the turn of the century, there were 9,600 FDIC-insured
banks. Today, there are a little more than 4,900. Potentially
more troubling, the number of banks with less than a $100
million in assets has declined by 92 percent since 1985.
What are the leading factors driving consolidation in the
banking sector? What are the practical impacts on consumers?
And what are common-sense private-sector solutions to this
problem? These are the questions we should be examining at this
hearing today.
Consolidation in the banking sector has been occurring for
the past 3 decades. However, there is no doubt that the impacts
of a post-Dodd-Frank Act regulatory regime are hurting small
financial institutions.
A 2020 FDIC study examined the per-unit costs associated
with operating a community bank with below $10 billion in
assets. They found that in the year 2000, the most efficient
size for a community bank was $350 million. In 2019, the most
efficient size of a bank was $3.2 billion. In short, the FDIC
study found that the current regulatory landscape has created
an ecosystem where size equals survival.
While community banks continue to consolidate, non-bank
firms, including fintechs, have risen sharply in their absence.
It is clear that fintechs have spurred innovation in the
financial services sector and increased access to credit for
consumers.
Much of this innovation and inclusion has come through
bank-fintech partnerships. These relationships allow fintechs
to innovate, while being regulated by bank regulators through
their examination and supervision of a banks' third-party risk.
All of this information begs the question, what should
Congress do? First, we should examine what specifically is
driving up the costs for community financial institutions and
look at ways of alleviating those costs through regulatory
reform.
Second, we should examine the processes and requirements in
place for de novo institutions. We saw the formation of 15 de
novo institutions in 2020, a far cry from the 149 the year
before Dodd-Frank.
Third, we should ensure that a bank-fintech partnership
model remains intact. Unfortunately, my colleagues on the other
side of the aisle are dismantling the bank-fintech ecosystem by
reversing the OCC's True Lender Rule.
While Republicans are looking to solutions that allow the
private sector to innovate in a manner that solves these
problems, improves inclusion, and decreases banking deserts, my
colleagues on the other side of the aisle have a very different
view of the future of banking.
In just this Congress, we have seen the Majority put
forward proposals to turn the Consumer Financial Protection
Bureau (CFPB) into a public credit bureau, establish postal
banking, and establish government control of the banking system
through FedAccounts.
In fact, the recent Biden nomination for Comptroller of the
Office of the Comptroller of the Currency (OCC) argued for
FedAccounts even though, in her own words, it would, ``end
banking as we know it.''
A government takeover of the banking system is truly one of
the most radical ideas I have heard in my time in Congress, and
yet it has become a mainstream tenet of the Majority's
platform. It truly terrifies me that these ideas are receiving
serious consideration in this committee.
At a time when the leaders of the House and the Senate are
desperately pursuing Bernie Sanders' socialist agenda, and the
President appointed an OCC Chair with hopes of ending banking,
the future of banking couldn't be in more limbo.
I thank the witnesses for being here today. I look forward
to discussing how Congress can and should allow the private
sector to improve the banking system.
And with that, Mr. Chairman, I yield back.
Chairman Perlmutter. I thank the gentleman.
And seeing that the Chair of the Full Committee isn't here,
I will take that last 49 seconds I had left for her to just
say, given the challenges of keeping up with the present, I am
excited for today's hearing. This hearing is about ensuring
that 10 or 20 years down the road, we have a banking system
that is innovative, consumer-driven, and competitive, and
making sure it works for every American.
I would now like to introduce our witnesses. And I thank
you all for appearing virtually.
First, I would like to begin with Paulina Gonzalez-Brito,
who is the executive director of the California Reinvestment
Coalition. Paulina has more than 20 years of experience working
on economic justice and community empowerment issues, and
currently serves on the board of directors for the National
Association for Latino Community Asset Builders.
Second, Dr. Makada Henry-Nickie, who is the Robert and
Virginia Hartley Fellow in Governance Studies at the Brookings
Institution. Makada is an expert in fintech issues and
equitable access to financial services, and formerly worked as
a senior analyst with the Consumer Financial Protection Bureau.
Third, Sarah Jane Hughes is a university scholar and fellow
in commercial law at Indiana University's School of Law. She is
an expert on payment systems, online banking, and privacy
issues.
Fourth, Desiree Jackson is the assistant vice president for
treasury management at Beneficial State Bank. She is a member
of the Communication Workers of America Local 9412, and has
worked in the financial services sector for more than 25 years.
And finally, Jim Reuter is the chief executive of FirstBank
headquartered in Colorado, and a friend of mine, who is
testifying on behalf of the American Bankers Association. Jim
started his career at FirstBank in 1987 and has worked in
various departments within the bank including mortgage
operations, IT, online banking, payments, contact center, and
treasury management. He is the former Chair of the American
Bankers Council.
Witnesses, you are reminded that your oral testimony will
be limited to 5 minutes. You should be able to see a timer at
the bottom of your screen that will indicate how much time you
have left. When you have 1 minute remaining, a yellow light
will appear. I would ask you all to be mindful of the timer,
and when the red light appears, to wrap up your testimony so we
can be respectful of both the other witnesses' and the
subcommittee members' time.
And without objection, your written statements will be made
a part of the record.
We will begin with Paulina Gonzalez-Brito. You are now
recognized for 5 minutes for your testimony.
STATEMENT OF PAULINA GONZALEZ-BRITO, EXECUTIVE DIRECTOR,
CALIFORNIA REINVESTMENT COALITION
Ms. Gonzalez-Brito. Good morning. Thank you for inviting me
to join you today, Chairman Perlmutter and Ranking Member
Luetkemeyer.
My name is Paulina Gonzalez-Brito, and I go by the pronouns
they/them. I am Purepecha, Chicane, and my people come from the
original people of Michoacan and Zacatecas.
I am the executive director of the California Reinvestment
Coalition, or CRC, and we work to close the racial wealth gap.
From the stealing of land to the enslavement of Black
people through housing, lending, and financial policies, the
U.S. has always profited from the labor of Black, Indigenous,
and people of color (BIPOC), while simultaneously denying us
wealth.
As we continue to march down the path of mergers and
acquisitions resulting in fewer financial institutions, the
closure of branches, and less reinvestment, it is no surprise
to anyone that communities of color are disproportionately
impacted.
With the support of Chairwoman Waters, President Biden
recently issued an Executive Order meant to improve regulatory
oversight of bank mergers. It is imperative that regulators not
rubber-stamp merger applications but give the mergers the
scrutiny they deserve.
This year alone, in California, CRC and our members have
negotiated three community benefits agreements to ensure that
proposed bank mergers have a public benefit. The agreements
with banks articulate community needs and how the bank will
meet those needs and, therefore, further Community Reinvestment
Act (CRA) implementation.
Just last week, U.S. Bank announced plans to acquire Union
Bank. Currently, neither bank has community benefits
agreements. In addition to looking at whether a merger will
create a public benefit, regulators must also evaluate the
possibility of public harm.
In the case of U.S. Bank's proposed merger with Union Bank,
U.S. Bank plans to make cuts. These planned cuts are made
possible by branch overlap in four big California counties--
L.A., Orange, San Diego, and Santa Clara--where more than 50
percent of the Union's branches are located. It is our position
that there should be no branch closures as a result of this
merger.
As we experience branch closures, we are told to embrace
fintech. In our society, we like to think of technology as the
great equalizer. This is certainly not the case.
In fact, technology benefits financial institutions by
lowering overhead costs, but the benefits to BIPOC communities
are less clear. Case in point, the Federal Reserve of Kansas
found that there are two reasons for the lack of adoption of
financial services: financial exclusion; and individual
exclusion.
These findings are consistent with what we see in CRC's
Economic Wellness Promotora Program, which supports the
financial well-being of low-income BIPOC families.
Black and Latinx participants reported experiencing poor
and/or unfriendly service from banks. Participants expressed
being made to feel not good enough or wrong or unwelcome when
attempting to access banking products and services.
The encroachment of fintech into banking bring concerns of
hypercharged harm. Venmo, PayPal, Square, SoFi, Google, Apple,
and the growing number of tech financial services companies use
complicated and rapidly-changing algorithms that process mass
amounts of data to make credit decisions.
If technology advances faster than our understanding of it,
regulation becomes very difficult, if not impossible, and the
threat of resulting discrimination is greater.
In pursuit of profits, financial institutions will take as
many liberties as they are given. Let's take Amazon as an
example. Amazon has long been in the fintech space and has done
so without becoming a bank and without banking regulator
oversight or CRA obligations.
Amazon Lending advises sellers to apply for their loans and
has effectively created a 21st Century company store. Amazon
loans can only be used for inventory or marketing on the e-
commerce site. And if a merchant cannot make a payment, Amazon
can seize the merchant's inventory and collateral to pay back
the loan.
Our communities lack access to safe, affordable credit and
banking services. There is another solution to be considered.
We must nurture public banking, either through the creation
of local public banks that are tied to the Federal Reserve or
the creation of postal banking. Every American has a post
office in their community. They should have a bank too.
Congress can stop the abuses of the foreseeable future by
supporting a strong Community Reinvestment Act that explicitly
considers race, enhances the role of community voices and
community benefits agreements, downgrades banks that harm, and
discourages further branch closures.
We also urge all regulators to develop a coordinated and
robust regulatory response to fintech that ensures strong
compliance with consumer protection and fair lending laws.
Thank you for this opportunity to address you today.
[The prepared statement of Ms. Gonzalez-Brito can be found
on page 54 of the appendix.]
Chairman Perlmutter. Thank you, Director Gonzalez-Brito.
Our next witness is Dr. Henry-Nickie. You are now
recognized for 5 minutes for your testimony.
STATEMENT OF MAKADA HENRY-NICKIE, FELLOW, GOVERNANCE STUDIES,
BROOKINGS INSTITUTION
Ms. Henry-Nickie. Chairman Perlmutter, Ranking Member
Luetkemeyer, and distinguished members of the subcommittee, I
am pleased to join today's hearing on the future of banking. I
am Makada Henry-Nickie, a governance studies fellow at the
Brookings Institution.
My comments today will focus on market trends, the rise of
fintechs as consequential market players, and the impacts of
these shifts on marginalized consumers. My comments on these
issues are my own and do not reflect any official position of
the Brookings Institution.
The U.S. is facing a major demographic transition driven
exclusively by communities of color. In the last decade alone,
Asian and Hispanic American populations grew by 36 and 23
percent, respectively.
But the financial services sector has yet to respond to
these representational changes within the consumer financial
market. Minority households systematically occupy status quo
roles on the fringe, rather than sitting at the center of
market models as gross drivers.
According to the FDIC's 2019 Banking Survey, 7.1 million
households remain unbanked. The overwhelming majority of these
households, 64 percent to be precise, were Black and Hispanic.
Indigenous communities have an unenviable, longstanding
experience of exclusion. Despite modest progress in promoting
financial inclusion, 16.3 percent of Indigenous Americans are
unbanked, and are disproportionately exposed to alternative
financial products such as predatorial payday and title loans.
The prosperity of the U.S. is stifled when the future
growth segments are excluded from fully participating in the
economy.
The Biden Administration has drawn on a comprehensive
accountability model to orient the Federal Government's policy
framework towards racial inclusion.
Now, while President Biden's racial equity agenda marks a
sea change, it is only a first step towards closing profound
racial wealth gaps. Financial intermediaries and regulators
must do their part to ensure that the financial services
ecosystem responds to the unmet needs of minority communities.
The Great Recession has dramatically altered the banking
landscape as we know it. More than a decade after the subprime
crisis, the banking infrastructure continues to contract.
In the years since the housing bubble, the number of
commercial banks has fallen sharply from 7,300 institutions in
2007, to 4,375 in 2020. That is an astonishing 40-percent
decline.
This shrinkage is in large part due to consolidation
through mergers and acquisitions, with larger banks absorbing
small ones.
The vast majority of these mergers and acquisitions
unfolded in the community banking sector, which, according to
the FDIC, accounted for 91 percent of this consolidation trend.
It is important to know that acquired community banks
tended to be less profitable than their peers and were often
cited as problematic by the FDIC.
Another concerning trend is a lack of new bank formation
that has shaped the competition dynamics during the same time.
A combination of enhanced regulatory oversight and market
dynamics undermines bank formation and increases complexities
in the post-crisis world.
Contrary to broader trends in select segments within
underserved communities, these communities disproportionately
rely on physical retail outlets to connect with mainstream
banking.
This retail network is shrinking, contracting, and under
threat with the increased and accelerated pace of mergers and
acquisitions. The FDIC's 2019 survey underscored the importance
of retail outlets to groups that visit branches more than 10
times a year.
Those are older Americans, people with disabilities,
individuals experiencing regular income volatility, and Native
peoples.
The hollowing out of the retail bank footprint also impacts
the small business community. Studies have shown that bank
closures adversely affect small business lending, and bank
branches that have lenders--excuse me--with all bank branches
allocate less capital to small businesses and those with
branches in low-income communities.
Now, efficiency gains are celebrated, right? That is the
mantra of merging institutions. But low-income communities
rarely, if ever, realize these economies of scale.
Instead, the mergers have resulted in a rise in FHA loan
denials, and substantial increases in interest rate loans on
non-agency mortgages, particularly for subprime borrowers.
The lack of existing bank relationships is a defining
characteristic for Black Paycheck Protection Program (PPP)
applicants. Congress has a duty to create a framework to ensure
that consumers remain protected during this dynamic innovation
process in which fintechs and banks and nonbanks are vying to
serve and find the right balance of a mix of products to bring
to market.
Congress can take clear steps to protect consumers and
restore their ability to hold innovators and abdicators
responsible for their decisions.
This subcommittee should examine how to extend the
authority of the Consumer Financial Protection Bureau (CFPB) to
include oversight of the Community Reinvestment Act (CRA).
Compliance with CRA is a crucial tool that allows regulators to
hold lenders accountable, while deepening lending in low-income
communities.
Again, thank you for hosting this critical conversation on
the future of banking.
[The prepared statement of Dr. Henry-Nickie can be found on
page 72 of the appendix.]
Chairman Perlmutter. Thank you, Dr. Henry-Nickie.
Professor Sarah Jane Hughes, you are now recognized for 5
minutes.
STATEMENT OF SARAH JANE HUGHES, UNIVERSITY SCHOLAR AND FELLOW
IN COMMERCIAL LAW, MAURER SCHOOL OF LAW, INDIANA UNIVERSITY
Ms. Hughes. Good morning, Chairman Perlmutter, Ranking
Member Luetkemeyer, and honorable members of the Subcommittee
on Consumer Protection and Financial Institutions of the
Committee on Financial Services. It is a great honor to appear
before you today to discuss topics that are of great
consequence--bank consolidation, nonbank competition, and
technology--and the manner in which they are reshaping American
banking, some pieces for the good and other pieces, as other
witnesses have mentioned, with less desirable effects in some
respects.
My prepared statement touches upon many of these subjects,
including just bank consolidation, the challenges that
consolidation poses for small towns and rural communities that
are still very important to us, including here in south central
Indiana, how nonbank competition is changing banking, and the
role that technology is playing in driving changes to banking
services and availability, including for the partnerships that
the chairman mentioned in his opening statement.
In the interest of time, I think it is important to realize
that we are in a perhaps more robust phase of nonbank
competitors. But we have basically been in this space, with
nonbank competitors taking over pieces of bank action, for
approximately 40 years, if not longer, because the credit card
industry might be claimed to do that as well.
So, it is not like it is new. It is just that it is a
little more robust, and it is based on the internet and other
forms of online services that are available.
Some nonbank competitors have been around for a hundred
years, and they were beginning to be very robust in the late
1950s and early 1960s, but not at the level we see today.
I would like to speak about industrial loan companies
(ILCs) for a moment, because industrial loan companies have
been around for quite a long time, since Congress authorized
them.
The States and the FDIC are the regulators for industrial
loan companies. They are subject to thorough investigation
before they obtain their State charters and before they obtain
FDIC deposit insurance.
I have no reason to believe that it is less robust than
what happens with other State banks that the FDIC is reviewing,
and as one of the witnesses mentioned, there have been a few--
not very many--de novo banks, which we think of as rising to
take the place often of what happens after banks consolidate.
ILCs are not in that space. The States have expanded the
powers of ILCs and industrial banks since the late 1980s so
that their powers now are very close to, if not identical to,
the lending powers that other State banks have, and the FDIC
insures the nonretail deposits that are there.
But it is the thorough supervision and examination by both
the FDIC and the States that is very successful and has
resulted in very few complaints of which I am aware. And, at
least once a quarter, I review the complaint database for the
CFPB just to be sure that I am still keeping current with that.
It is very hard to estimate how many fintechs are out
there. We know that the American Fintech Council earlier this
year revealed that it had 75 members, and they have, as I
described in my prepared statement, some specific sorts of
responsibility.
The fintechs also hold State licenses, either as lenders or
as money transmitters, and like industrial loan companies, they
are subject to examination and supervision by the States. They
don't have FDIC insurance at this point, so they don't have the
FDIC behind them.
But because they have this same State, boots-on-the-ground,
close-to-consumers orientation in many cases with State
regulators being in charge, they are not unregulated. And I
think it is very important to realize that they are not
unregulated, just as ILCs and State-chartered banks are not
unregulated.
The Bank Service Corporation piece of my prepared statement
is important because I am aware of the fact that Bank Service
Corporation authority is pending in Congress, and with that, I
would like to close my remarks by telling you that I am a big
fan of State-chartered banks, and I am a big fan of State
regulation of nonbank providers. I think they do a pretty good
job.
Thank you for including me today.
[The prepared statement of Professor Hughes can be found on
page 78 of the appendix.]
Chairman Perlmutter. Thank you, Professor.
The next witness is Ms. Desiree Jackson. You are now
recognized for 5 minutes.
STATEMENT OF DESIREE JACKSON, ASSISTANT VICE PRESIDENT,
TREASURY MANAGEMENT, BENEFICIAL STATE BANK
Ms. Jackson. Thank you.
Good morning, Subcommittee Chairman Perlmutter, and members
of the subcommittee.
My name is Desiree Jackson. I am an assistant vice
president for treasury management services at Beneficial State
Bank in Oakland, California. And I am also a proud member of
the Communications Workers of America Local 9412.
Last year, my coworkers and I made history when we became
the first group of bank workers to organize a union in over 40
years. And this past Sunday, we ratified our first union
contract.
I have worked in the banking industry for over 25 years,
including 18 years at Wells Fargo, so I am excited to share my
perspective on the future of our banking system.
Frontline bank jobs are stressful. We are under extreme
time pressures, and we know that mistakes can harm our
customers. Whether or not a bank respects its workers' rights
greatly impacts our stress levels. It is also a good predictor
of whether a merger will impact us and our customers positively
or negatively.
During my time at Wells Fargo, I worked in a call center as
a customer service representative where I was responsible for
opening accounts after they were sold.
When Wells Fargo bought other banks, like Norwest Bank and
Wachovia Bank, it made our workload more intense. We had to do
more with less. Our performance metrics got more excessive,
meaning we had to complete all of our assigned work each day or
we would get a talking-to by our manager.
We had to answer our phone by the second ring. Emails had
to be responded to within 2 hours, and we had strict deadlines
for opening customer accounts. But there was no opportunity to
get raises even though the expectations of our jobs had
increased.
Managers pressured us to work as many hours as necessary to
complete our daily assigned tasks, like making sure every
account was opened. But they didn't care how many hours we
worked because the bank misclassified us as salaried employees
so they didn't have to pay us overtime.
On top of that, departments closed, and people were laid
off, instilling even more stress and fear. Basically, Wells
Fargo used mergers to cut staff, even if it meant getting rid
of experienced staff who were skilled at serving the best
interests of our customers.
This management style is all too common in the industry. It
means that bank workers often experience huge stress, and there
are sometimes incentives for workers to take actions that harm
consumers. That is why I strongly support the Financial
Services Worker Bill of Rights.
Luckily, my experience at Beneficial State Bank couldn't be
more different. Beneficial is a mission-driven bank, owned by a
nonprofit foundation, and is committed to serving communities
that need access to financial services.
When Beneficial has acquired small banks over the last few
years, they have been like-minded community banks, enabling us
to serve more communities in need. And no one lost their job,
and there was an open communication process with much better
transparency. We held monthly bank-wide meetings to explain
what was going on.
And now, with our union contract, we will have regular
labor-management meetings where we can discuss a range of
issues, including how we can improve customer service.
The reality is there has been too much consolidation in the
industry, and I want to make sure that small, mission-oriented
banks like Beneficial can thrive and not be swallowed up by
predatory megabanks.
That is why I think Congress should strengthen the merger
standards to ensure that mergers are in the public interest and
improve wages and working conditions.
Meanwhile, online banking is creating more cashless banks
and reducing the number of brick-and-mortar branches,
threatening the livelihood of 423,000 bank tellers in the
country and possibly reducing access to banking for the
underserved consumer who can't utilize the newer technology.
From my 25 years of experience in banking, I think there is
room to ensure that employees are taken care of when there are
mergers, and that is through unionizing.
Making sure frontline bank workers' rights are protected by
empowering more of us to organize will not only reduce our
unhealthy stress levels, but it will be better for our
customers, better for our communities, and better for our
entire financial system. Thank you for this opportunity.
[The prepared statement of Ms. Jackson can be found on page
92 of the appendix.]
Chairman Perlmutter. Thank you for your testimony, Ms.
Jackson.
And our final witness is Mr. Jim Reuter. You are now
recognized for 5 minutes for your testimony, sir.
STATEMENT OF JIM REUTER, CHIEF EXECUTIVE OFFICER, FIRSTBANK, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Mr. Reuter. Chairman Perlmutter, Ranking Member
Luetkemeyer, and members of the subcommittee, thank you for the
opportunity to testify today on the future of banking.
As a banker for over 34 years, this hearing could not be
more timely given the changes underway in our industry. I am
pleased today to speak not only on the behalf of FirstBank and
our 3,000 employees, but also on behalf of the American Bankers
Association (ABA), which represents banks of all sizes, and the
2 million women and men who work at those banks and serve your
constituents every day.
Founded in 1963, FirstBank has grown organically to more
than 100 locations in Colorado and Arizona. We are currently
the largest bank headquartered in Colorado.
Despite our footprint, we were one of the first banks to
join a real-time payments network and offer Zelle payment
services to customers. While our business is banking, our
commitment to the communities we serve goes well beyond that.
Our 300 bank officers sit on 2 to 3 nonprofit boards each,
and our most recent Colorado Gives Day raised over $50 million
for more than 2,000 nonprofits in 24 hours.
Before we look to the future, I would like to reflect for a
moment on where banking stands today. As Federal regulators
have noted, banks have been a source of strength during the
pandemic, providing critical financial support for the economy
while maintaining record levels of capital and deposits.
At FirstBank, we were the number-one bank in Colorado for
PPP loans, originating more than 20,000, which helped save over
120,000 jobs in the State.
We also realize that the ongoing pandemic is not over, and
many Americans are still struggling. Like many banks around the
country, we continue to prioritize financial inclusion.
ABA has sounded the alarm on this issue and urged banks of
all sizes to offer safe, low-fee, BankOn-certified accounts,
which are helping to reduce the number of unbanked. Today,
BankOn accounts are offered at more than half of the bank
branches in this country.
Our industry is optimistic about the future, but like all
businesses, we face challenges. You encouraged us to focus on
how consolidation, nonbank competition, and technology are
reshaping the banking system.
Bank consolidation is a long-term trend. Today, there are
just under 5,000 banks in the U.S., down from nearly 18,000 in
1984, and we expect consolidation to continue for a variety of
reasons.
The need for scale is the main driver. Banks at every level
of the asset ladder are seeking to scale to invest in the
ongoing digital transformation reshaping our industry.
At FirstBank, our strategy has been to focus on organic
growth without significant M&A, but other banks are taking
different approaches.
Bank consolidation has likely been accelerated by policy
decisions, including a regulatory framework that imposes
significant compliance costs and deters de novo bank creation.
One troubling new trend we urge this committee to review is
that tax-exempt credit unions are increasingly using their tax
subsidy to buy up tax-paying banks. From 2018 to 2020, more
than 28 banks were acquired by credit unions.
Despite consolidation, banking remains a healthy, diverse,
and highly competitive industry. As the banking industry
consolidates, many of our biggest competitors have emerged
outside the regulated banking space.
The list includes tax-advantaged lenders like credit unions
and the Farm Credit System, monoline fintech firms, nonbank
payment providers, and decentralized finance technologies like
cryptocurrency.
Many of those competitors have business models that rely on
a kind of regulatory arbitrage in which they can offer one or
several aspects of banking services while avoiding the full
banking regulatory framework.
We see this most clearly in the rise of payments charters,
or special purpose national bank charters that would aim to
provide payment system access to companies but would not be
subject to the same regulations as banks.
In our view, the stringent rules in place for banks should
be applied to others looking to offer bank-like services.
Anything less than a level playing field will put consumers and
financial systems at risk.
The pandemic has only accelerated banking's digital
transformation. At FirstBank, we have more than 400 people in
our information technology unit, up from 250, 5 years ago. ABA
firmly believes that banks in the private sector will continue
to drive this technological revolution.
The one innovation we don't need is the government trying
to replace the nation's banks. We will continue to firmly
oppose efforts to create direct consumer accounts at the
Federal Reserve, or to turn the Postal Service into a consumer
bank, or to create a central bank digital currency that
disintermediates banks.
These are solutions in search of a problem that, if
implemented, would drain deposits out of banks and undermine
the valued banks that deliver convenient funds access and loans
to consumers to support local economic growth.
Ultimately, these approaches would put at risk the many
benefits of the modern banking system. Despite challenges, we
believe the future of banking is bright, provided the policy
environment continues to support growth and close gaps that
promote regulatory arbitrage and put the financial system and
consumers at risk.
Thank you for the opportunity to testify, and I look
forward to answering your questions.
[The prepared statement of Mr. Reuter can be found on page
97 of the appendix.]
Chairman Perlmutter. Thank you, Mr. Reuter. Thank you for
your testimony.
Now, I will recognize myself for 5 minutes for questions.
And the first thing is, I will just say, being one of the older
members of this committee, much of the consolidation, much of
the reduction in the number of banks occurred in the late 1980s
and 1990s when the savings and loan system failed, and many
small and medium-sized banks across the country either went out
of business or were acquired by others.
But there has been a continued reduction and consolidation
of the industry.
Mr. Reuter, one of the principal reasons you cite is the
need for financial institutions to scale up in order to invest
in technology. As more banks and credit unions continue to
scale up, either through mergers and acquisitions or organic
growth, do you see the bar to entry becoming even greater for
de novo banks?
Mr. Reuter. Thank you for that question, Mr. Chairman. I do
see the bar for entry for de novo charter to be higher. One of
the reasons is the regulatory burden. We have a number of
regulations that haven't been reviewed for decades, and some of
them have not kept up with the changing times.
The other one is investment in technology. I mentioned
earlier that we went from 250 employees in technology up to
over 500 in 5 years. Our annual spending has gone from $50
million a year to over $110 million a year.
Ranking Member Luetkemeyer pointed out a study that in
2000, $350 million was the asset size to be efficient, and
today that has climbed to $3.2 billion.
So, when you think about someone starting a single-bank
location or a two-bank location de novo charter, those barriers
to entry are significant.
Chairman Perlmutter. Let me follow up then. You have said
that we expect this consolidation to continue, and the ability
to get a de novo charter seems to be pretty difficult.
Should we be concerned that we may be left with only a
handful of banks and fintech companies in 10 or 20 years?
Mr. Reuter. I think the banking industry, at nearly 5,000,
is still very competitive, Mr. Chairman, and while I think
there will be continued consolidation, I think there is a place
for community banks.
Clearly, we are one of those community banks, and you saw
what we did with PPP. So, while I believe there will be
continued consolidation to find efficiencies given the
regulatory requirements, as well as the lift in technology, I
think there will continue to be a diverse banking system.
But one thing I think is really important is a level
playing field from a regulatory perspective with the fintechs.
Many of them purposely are picking off parts of our business,
avoiding holding deposits and different things, so they can
avoid the regulatory requirements.
I think it is important that we have a level playing field,
or you will drive even more bank consolidation.
Chairman Perlmutter. Thank you.
Dr. Henry-Nickie, can you talk about the role fintechs play
as partners with small and medium-sized financial institutions,
and do you think these partnerships help or hurt the smaller
banks to compete with larger banks?
Ms. Henry-Nickie. Thank you for your question. I think you
point to an important externality, a potential upside for
community banks that do partner with fintech institutions.
As Mr. Reuter pointed out, the hurdles to transforming and
modernizing community banks are substantial when it comes to
transforming legacy infrastructure, old Cobalt Systems into new
systems that can intersect with mobile banking that consumers
have grown to expect and demand at their banks.
So, in that regard, I think these partnerships with
fintechs are helping to: one, reduce the technical barriers;
and two, really drag along the community banking sector.
And those benefits accrue to the communities, the local
communities that these banks tend to serve.
I think, moving forward, we really want to be careful and
mindful about how these vendor contracts are structured. What
are the implications for consumers? Do these banks have full
capacity on their staff to fully vet, to fully stand up
contracts that are beneficial to their longevity in the system
that doesn't sort of set them up for perhaps a picking off in
the future?
I think, again, going back to where we started around these
mergers and where fintechs are entering into the space, these
community arrangements can be helpful, these partnerships, but
always with a cautionary tag attached.
Chairman Perlmutter. Thank you for your testimony.
My time is about to expire, so I will recognize the ranking
member of the subcommittee, the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And I thank the witnesses for being here today. It's an
interesting discussion we are having this morning. I want to
follow up a little bit on the chairman's question here with
regard to banks and fintechs.
As the ranking member on the House Small Business
Committee, we saw the banks being very, very effective with the
PPP loans, and any problems with regards to fraud or misuse of
funds seems to be pretty well located in the fintech part of
this.
So, Mr. Reuter, let me just ask you this question: What
about rules and regulations for fintech folks? I am not against
innovation. I think it is important. We have to continue to do
it.
But at some point, the PPP program points out the inability
to control fintechs and some of the things they are doing, and
shows the amount of fraud that could be perpetrated in that
area. What do you think about the rules and regulations around
them?
Mr. Reuter. Ranking Member Luetkemeyer, thank you for that
question. I think the rules need to be much like a bank because
their activities are very bank-like.
As I mentioned earlier, we were the number-one bank in
Colorado with PPP loans. We are on the phone with those
customers. We are forging relationships. It is not just a
transaction for us.
With many of the online lenders, you fill everything out
online, and you get a decision within minutes. So, you tell me
how well they are vetting the business, how well they are
understanding what the needs are of that business and taking a
relationship approach?
To me, that is a fundamental difference between banks and
fintech providers, and I do think there needs to be more
regulation in that space.
Mr. Luetkemeyer. Thank you. This week in The Washington
Times, there is an article entitled, ``The Death of Financial
Privacy.''
Now, the other party is wanting to weaponize the financial
services system and the IRS to monitor all of the transactions
of every bank account over $600. This is going to cause a
tremendous amount of cost on all of the banks.
So, Mr. Reuter, are you set up right now to be able to
handle that situation, to where you can forward on to the IRS
every transaction of every person and every business in your
bank over $600?
Mr. Reuter. We are not set up to be able to do that.
Mr. Luetkemeyer. Do you have any idea what it would cost
your bank to be able to do that?
Mr. Reuter. It would be significant. And I think the bigger
issue as well is the concerns our customers would have over
privacy.
Many people and the unbanked have chosen not to bank with
banks because of trust, and I think reporting all the
information to the government would not help us in that regard.
Mr. Luetkemeyer. Even for the big banks, it is going to be
a significant cost, but the community banks, it would seem to
me, you are just going to actually run them out of business
with an issue like this.
Professor Hughes, you talked a little bit about some of the
rules, regulations, and size. I want to run something by you
really quickly. It would seem to me that if you are going to
try and regulate the local hardware store or you are going to
regulate Walmart, there would almost have to be two different
sets of rules for those folks because you couldn't regulate the
local folks the same way you would a regular Walmart.
To take that analogy and put it into banking, a community
bank with $100 million or $200 million versus JPMorgan, how can
you use those same rules and regulations and apply it to the
banks?
To me, this is one of our problems in causing banks to
really have to comply with all of these rules. The cost is just
running away, just like this new rule that is being proposed
would cause them probably to be unable to do that.
So, do you agree that perhaps we need to size all of our
regulations based on the size of the banks? In other words,
small community banks would have one set of rules they would
have to abide by but not necessarily every single rule that the
big banks would have to abide by? Is that a reasonable
expectation?
Ms. Hughes. Yes. I think this is a very complicated
question because we don't want to make community banks--and I
have said in my prepared statement that I am a huge fan of
community banks. They serve the community I live in and those
around us very, very capably.
I don't think we want to make them targets for bad behavior
by customers. So, I think the scaling of it would have to be
done with great care.
I do think that there are rules that are being applied to
community banks that make it harder for them to survive because
of costs. And, to that extent, I heard Dr. Henry-Nickie and Ms.
Jackson make claims that we need to be certain that we do not
lose banks serving every community in the United States that
can reasonably be served.
I am in favor of looking for opportunities to reduce
regulatory burdens on community banks and community national
banks to the extent that those regulations--that they are not
participating in some of the same kinds of transactions that
the giants in this country are participating in--
Mr. Luetkemeyer. Professor?
Ms. Hughes. Yes?
Mr. Luetkemeyer. Thank you for your comment, Professor. I
am out of time.
Chairman Perlmutter. Thank you, Professor.
Mr. Luetkemeyer. I yield back.
Chairman Perlmutter. The gentleman's time has expired.
I would like to now recognize the Chair of the full
Financial Services Committee, the gentlewoman from California,
Chairwoman Waters, for 5 minutes.
Chairwoman Waters. Thank you very much, Mr. Perlmutter, for
this hearing. This is extraordinarily important. We have done
considerable work dealing with our banks, but so much more has
to be done.
Let me just say that, of course, most of the banks in this
country take credit for the work that they did with our PPP
loans. But, if you can remember in the beginning of the PPP
loans, many of the big banks set up special portals for their
concierge clients, and we ran out of money for the PPP loans,
and we came back and we put in another $60 billion so that our
minority depository institutions (MDIs) and our credit unions
and our community banks would have an opportunity to
participate more fully with PPP.
So, we thank those banks for having participated, but we
still have to do work with the banks, when we are talking about
PPP loans and the way that they were handled in the beginning
with the portals, again, that served their concierge clients.
But, on consolidation, back in the day, there used to be
hearings that were held by the Federal Reserve, where they
invited the community in on mergers, and we had an opportunity
to get people from our communities who were very much involved
with oversight in their own way of these banks. We had an
opportunity to weigh in on the mergers.
Now our committee, Mr. Perlmutter, must get back with the
Federal Reserve, and we must open up this opportunity, because
this business of mergers without real community involvement has
to stop. And this is an issue that we must deal with.
Not only that, I am concerned that we get many complaints
about banks, but people feel helpless to absolutely correct the
problems that are created within the banks.
We have experienced a lot of this, and we know that a lot
of work still has to be done in dealing with the servicing of
these mortgages, where people find that fraud has been
committed, and they have nowhere to turn, and on and on and on.
So, we have to pay more attention to servicing, and I
think, Mr. Perlmutter, I want us to take a look at advisory
committees. Some of the banks say they have advisory
committees, but I have been thinking about--and we will talk
about this--whether or not we need to have advisory committees
for every bank, and not only at the headquarters level but at
all of the community levels for the banks, so that people get
more involved.
CRA kind of alludes to that in some way, that there should
be advisory committees of some kind, and some of the banks say
that they have them, but I don't think that they are real.
And so, I want to look at how we can get, for these
branches in the communities, advisory committees for all of
them, so the communities are invited in and they can
participate in what is going on at the banks.
We know that some banks have improved their pay, their
wages. We have had the banks in, and when we brought them in
for oversight on our committee--they hadn't been in for 10
years--they began to do things before they came to the hearing,
in terms of wages.
And, as you know, Bank of America, I think, is kind of the
leader now in having increased the minimum wage up to about $20
per hour. So, we need to do everything we can to encourage that
in every way that we can.
And when the banks--we will continue to bring them before
us so that we can have them understand that we are very serious
in this committee about doing what we need to do for all of the
clients of the banks.
Let me just ask Ms. Jackson, do you think that it is wise
for us to ensure that the Federal Reserve has these open
meetings when mergers are being proposed, and do you think we
should have these advisory committees at every branch in all of
the banks? What do you think?
Ms. Jackson. Thank you, Chairwoman Waters. I totally agree.
I think it would be beneficial. I sat on various advisory
boards in other arenas, and I would definitely like to see that
happen--
Chairwoman Waters. Thank you very much.
Ms. Jackson. I think we can all benefit from that.
Chairwoman Waters. And thank you for your contribution here
today, to everyone who came here today to help us learn more
about what we could and should be doing.
I yield back the balance of my time. Thank you.
Chairman Perlmutter. The gentlelady yields back.
The gentleman from Kentucky, Mr. Barr, is recognized for 5
minutes.
Mr. Barr. Thank you, Chairman Perlmutter, for your
leadership in holding this very, very--
Chairman Perlmutter. Mr. Barr, can I stop you?
Mr. Barr. Sure.
Chairman Perlmutter. Apparently, I was supposed to go to
Mr. Posey.
Mr. Barr. Sure.
Chairman Perlmutter. Mr. Posey, you are now recognized. I
am sorry I messed up the order--well, now he is going to leave
us.
Okay. You are recognized for 5 minutes. I will take away
what I said about Mr. Barr.
Mr. Posey. Thank you very much, Chairman Perlmutter. I
appreciate it.
Professor Hughes, how should we measure the delivery of
financial services to U.S. consumers, and what does your
research suggest about how well the U.S. financial system meets
those metrics?
Ms. Hughes. That is a very interesting question,
Congressman. In preparing for this testimony, I was thinking
about the importance of serving rural and small communities,
because one of the strengths of our economy is specifically due
to the fact that we had banking services available across the
country pretty early in our nationwide economy, with the
railroads and telegraphs and things of that sort.
So, the lifelines of small communities include community
banks and community national banks where people get loans, and
small business lending is vital. Because we had an economy,
when I was a child, where large corporations dominated the
number of people who worked.
But that is not true anymore. Startups and small
businesses, battered badly through the pandemic but helped by
banks and others--small business lending is vital to the
continued prosperity in our communities, to the ability of
people to recognize the American Dream by building new
businesses.
And Main Street cash services are also very important. We
have heard from time to time that there have been problems with
banks banking Main Street businesses that were cash-intensive.
So, I would like very much to see the services that are needed
by consumers and small businesses to be an important point of
focus for the committee as a whole and for this subcommittee in
particular.
Mr. Posey. Thank you. Can you comment on how the course of
financial system regulation has impacted the incentives for
bank mergers over the last several years?
Ms. Hughes. We see ebbs and flows in the interest of bank
regulators in approving mergers and acquisitions, but mostly we
have been seeing encouragement or not dissuasion from that.
And I think that there is a concern that we are seeing a
lot of mergers and acquisitions at the moment. There is a lot
of money, capital around to assist with this, and that is fair.
But I think we need to continue to have a well-balanced dual
system which includes the States as charterers of banks and
ILCs and licenses for other kinds of providers of these
services.
Mr. Posey. Have recent regulatory changes in bank capital
requirements, such as risk-weighted capital, provided
incentives for banks to merge?
Ms. Hughes. I don't think there can be much question,
although I do not have data to prove it. I think the capital
requirements, especially as applied to small banks, may be a
problem, but that is something for which I know there is some
data, but I don't have the data. I suspect that the American
Bankers Association would have some of that data, and that
other organizations would as well; I just don't.
Mr. Posey. Okay. Can you explain how scale economies in
banking and other financial services have played a role in
driving the bank mergers?
Ms. Hughes. Certainly. As Mr. Reuter was testifying, the
cost of technology, the cost in certain ways of compliance has
continued to grow, and we have added responsibilities without
necessarily looking at older requirements to see if they are
still needed or if they are in some ways duplicative.
So, scalability is a big factor, I believe. It is not just
how many deposits you have or how much unimpaired capital and
surplus you have to use for the bank measure of making a loan
if you are using section 84 of the National Bank Act, for
example, but it is a big factor driving consolidation, and it
has been a big factor all the way back to the Supreme Court's
first case, Philadelphia National Bank, which continues to be
the standard for mergers, even when the market has change very
dramatically.
Mr. Posey. Thank you. I see my time is about to expire, and
I yield back.
Mr. Reuter. Mr. Chairman, could I make a--
Chairman Perlmutter. Mr. Reuter, did you have something you
wanted to add?
Mr. Reuter. I just wanted to comment that the American
Bankers Association has been very supportive of tailoring,
which would make a huge difference in what we are talking about
here.
Chairman Perlmutter. Thank you. Thank you, Mr. Posey. The
gentleman's time has expired.
The gentleman from New York, Mr. Meeks, who is also the
Chair of the House Foreign Affairs Committee, is now recognized
for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman, and thank you for
holding this very timely hearing.
Let me ask Mr. Reuter first, in the past several years, we
have seen that it is becoming more difficult for new banks to
be created to help serve their communities. And this is
especially true in communities where bank consolidations have
led to access challenges for people of color, but, particularly
in districts like mine, they are becoming banking deserts.
So What do you believe is the biggest challenge to de novo
bank charters, and what do you think that we can do in Congress
to assist and ensure that de novo banks are successful?
Mr. Reuter. Thank you for that question, Congressman Meeks.
As I mentioned in my opening testimony, there are two things I
think make a big difference: regulatory burden; and the
investment required in technology. U.S. policymakers could make
a big difference on the regulatory burden by tailoring. We as a
bank are very different when compared to JPMorgan Chase and
Bank of America, yet some of the compliance infrastructure and
things we have to put in place are very much the same.
From a technology standpoint, there are great opportunities
for banks to partner with fintechs and we are doing that every
day, but where it becomes an issue is when we are competing
with those same organizations or like organizations and they
are not regulated at the same level. That drives up our cost of
business because we are competing with a branch infrastructure
that they do not have.
I agree with you wholeheartedly that branches are very
important in the community, and it is something that we take
very seriously.
Mr. Meeks. Thank you. Thank you very much for that.
Let me ask Ms. Gonzalez-Brito, your organization is very
engaged in the process of bank mergers, particularly analyzing
bank mergers and community benefits. How banks comply with the
Community Reinvestment Act (CRA) is critical to that analysis.
As you know, the banking regulators are rethinking the CRA's
regulatory framework.
So my question to you is, in what ways can CRA play a more
meaningful role in the bank merger process, and are there
specific policies this committee should advocate for regarding
CRA's role in bank mergers?
Ms. Gonzalez-Brito. Thank you for that question. In terms
of CRA, we agree with Chairwoman Waters that hearings are
extremely important for bank mergers, and we would ask that the
CRA require hearings and require community benefit agreements
in order to encourage banks to actually meet with the community
and engage around community need.
The other piece that I think is incredibly important is
that CRA be race-conscious. It is something that would really
ensure that we are meeting the needs of Black, Indigenous, and
people of color. And so we really need to ensure that, as CRA
moves forward, these things are included.
And I would just add that the Bank Merger Act is also
important to ensure that review of mergers and acquisitions is
not harming communities.
Mr. Meeks. Thank you for that.
I will go to Ms. Hughes quickly, because there are a lot of
issues and questions in regards to fintechs and fintech
companies. And I heard some talk, for example, that fintech
companies operate the way they were doing to help with the PPP
loans efficiently and effectively. I agree with Chairwoman
Waters and her statement. We had to do certain things on our
side also.
So, it is something that is important. But we have this
debate going on oftentimes in regards to fintechs--I was
talking to some members of my staff who actually say that they
don't know the last time that they visited a physical bank. I
talk to my daughters, who are young, and they are now doing
things online with loans and basically utilizing fintechs.
Nevertheless, as indicated, fintechs are largely dependent
on banks to meet their commitments to their investors and their
customers also. And just this past August, the FDIC and the OCC
issued guidance for how banks and fintechs could partner and
the concerns that existed, some of which were mentioned by the
witnesses here today and other Members.
So, Ms. Hughes, what is your reaction to that recently-
issued guidance, and are there legal or regulatory gaps with
the bank-fintech partnership model that Congress should still
consider looking at and possibly closing?
Ms. Hughes. Thank you so much, Congressman Meeks, for that
question, or Chairman Meeks for different purposes, for that
question.
The August 2021 guidance that was issued for community
banks to use fintech partners, I think is going to be very
valuable. I think Congress should pay careful attention to what
it does and whether it begins to resolve the kinds of questions
that community banks have had in this arena so that they can
take advantage, as I mention in my prepared statement, of some
of the facilities and bring them in as vendors. I am going to
use, ``vendor,'' not, ``partner.''
Chairman Perlmutter. Professor Hughes?
Ms. Hughes. Yes.
Chairman Perlmutter. I am going to have to cut you off. The
gentleman's time has expired.
And now, I would like to recognize the gentleman from
Kentucky, Mr. Barr, and I mean it this time.
Mr. Barr. I thank Chairman Perlmutter for that, and I thank
him also again for his leadership, and for holding this very,
very important hearing that underscores the problem that we are
seeing in bank deserts, with bank consolidation, and with the
lack of new bank formation that is impairing our local
economies.
I applaud my good friend, Greg Meeks, for identifying this
problem in his area in a more urban congressional district. I
have a similar problem with rural banking deserts in Kentucky.
We have talked about the solution. I also want to applaud my
friend, Mr. Auchincloss, for identifying this in a more
suburban district.
And the data on the dearth of de novo bank formation in
recent years, combined with the trends in bank consolidation
and closure, are troubling to all of us, because too many
communities are left without access to traditional financial
services.
This committee advanced Mr. Auchincloss' bill that calls
for a study, and I appreciate the American Bankers Association
and Mr. Reuter for pointing out that the ABA endorsed Mr.
Auchincloss' bill that would commission additional studies.
But I would respectfully, Mr. Reuter, argue that another
study is insufficient. You have identified yourself in your
testimony that we know what the solution is. The solution is
tailoring, regulatory tailoring.
And my bill, which is also, Mr. Reuter, endorsed by the
American Bankers Association but was not mentioned in your
testimony, is the actual solution. It is the solution that you
just prescribed. H.R. 2561, the Promoting Access to Capital in
Underbanked Communities Act, would provide targeted temporary
phase-in of regulatory capital requirements to fuel new bank
formation and bring banking services to underserved areas.
This is precisely the bill, Mr. Reuter, that your
organization has endorsed. It goes beyond what Mr. Auchincloss
has done. I applaud Mr. Auchincloss for his leadership. I
applaud the ABA for endorsing his bill. But his bill,
respectfully, is just another study. My legislation is the
solution. It is the solution to the lack of new bank formation
in Mr. Auchincloss' district. It is the solution to the lack of
new bank formation in my rural district, and it is the solution
to the lack of new bank formation in Mr. Meeks' district, an
urban district.
So my question to you is, why should we have another study?
Why shouldn't we just go ahead and pass the ABA-, ICBA-endorsed
legislation that actually implements the regulatory tailoring
that is required, Mr. Reuter?
Mr. Reuter. First of all, Congressman Barr, thank you for
your sponsorship of that bill. And I agree with you. I think
another study just lets more time go by and more bank
consolidation occur. So, I agree 100 percent.
Another thing I would like to point out in the cost of a de
novo is one of the things you have to raise to start a bank is
capital. And what you are seeing is some individuals and some
groups form a fintech versus a bank because, due to the
regulatory arbitrage, the market is valuing them higher.
And anybody who is making an investment to run a bank or
run any company needs to have a return, so, again, that's why a
level playing field is very important. But thank you for your
sponsorship of the bill, and I agree with you wholeheartedly.
Mr. Barr. Thank you very much.
And, Professor Hughes, let me talk about why this is so
important. A recent FDIC study showed that large banks are much
more likely than small community banks to have minimum
requirements for small business loan amounts and less likely to
offer tailored small business loan products. Often, small
businesses rely on the relationship banking and the community
ties of small banks, especially those banks that are de novo
charters and smaller. PPP was an illustrative example of the
value of small community banks for the smallest businesses.
Professor Hughes, what impact does the trend in
consolidation and the closure of community banks have on small
businesses, particularly in rural, underserved areas, and what
does it mean for small entrepreneurs and startups?
Ms. Hughes. Thank you, Congressman Barr, for that question.
It is very important to have lending facilities in
communities of the types that we have just been discussing:
inner city deserts small community and suburban areas; and
rural communities. And we need to have robust opportunities for
lending maintained in those communities so that all of the
capital in the country doesn't flow to larger cities, as we
have been seeing in some cases over the last 50 years.
So we need to maintain the ability and we need to be
certain that there are realistically tailored--I am going to
use that word because I think it is the best word we have heard
today for this--tailored ability for small banks to originate
loans, smaller loans for startups, perhaps, than they might
give other kinds of businesses because we need startups. We
need small businesses. They are the growth opportunity. And we
need to be certain that we have the best means of addressing
the way in which startups and small businesses contribute to
our economy, employ lots of people, provide benefits, but also
keep our small communities alive--
Chairman Perlmutter. Professor, I'm sorry; I have to cut
you off again. Everybody keeps asking you their question right
at the end of their 5 minutes. So, I apologize for cutting you
off.
I would like to now yield 5 minutes to the gentleman from
Georgia, Mr. Scott, who is also the Chair of the House
Agriculture Committee.
Mr. Scott. Thank you, Chairman Perlmutter.
Ladies and gentlemen on the panel, I am concerned about how
technology and artificial intelligence is reshaping our banking
system. And nowhere is my concern as great as it is impacting
African Americans. Let me share with you why I say that.
According to the Census Bureau, the rate of home ownership
for African-American families sits at 44 percent, versus 74
percent for White people. This huge and dramatic 30-point gap
is a major contributor to racial economic disparities, and it
is especially impactful in home ownership, which is where we
develop and nurture our wealth consideration.
So, I am concerned that this new technology, the use of
artificial intelligence, and this inherent bias seem to be
contributing factors in rejecting Black home loan approvals.
And not only do Black home applicants receive higher loan
rejections, they also suffer from race premiums on interest
rates, paying as much as 8 percent or more on mortgage
interest.
Ms. Hughes, you and Ms. Henry-Nickie,tell me, in your
opinion, am I right here? Can you all see this disparity? And
how detrimental is this secret bias hidden in some fintechs'
lending systems for African Americans and other minority
consumers who may be seeking a mortgage? How impactful is this?
Ms. Hughes. Congressman, would you like me to go first or
Ms. Henry-Nickie to go first?
Mr. Scott. Oh, I would love for either one. Go ahead, Ms.
Hughes, and then Ms. Henry-Nickie. I want to get both of your
points on this. I only have 2 minutes.
Ms. Hughes. Fair lending laws in the United States apply to
banks, and they should be not causing either unwarranted
rejections of mortgage applications or race premiums in
applications.
I have not had an opportunity to study the degree to which
fintechs and artificial intelligence may be contributing to a
shift, but it is conceivable that Dr. Henry-Nickie has more
data on that subject. So while I believe that we need to be
sure that people are evaluated fairly, I don't have the data to
give you a better response. I would ask--
Mr. Scott. Ms. Henry-Nickie, would you comment, please?
Ms. Henry-Nickie. Thank you. You raise a crucial, important
question that nobody else has sort of addressed today, and that
is, what is happening to the state of the banking system when
it comes to broadening access to credit for African American
and Hispanic communities? And at the heart of that, at the
heart of your question stands fintech.
To Mr. Reuter's point, leveling the playing field means
that we need to figure out ways to ensure that our consumer
protection framework applies equally to banks, nonbanks, and
fintech lenders. There is a good amount of research coming up
showing that fintechs have done an incredible job, I think a
commendable job in expanding access to credit, but they are
capable, just as their conventional lender counterparts, of
reproducing particularly pricing disparities.
At the heart of this is the kinds of data sources that they
draw on to inform the machine learning algorithmic models. We
have talked ad nauseam about machine learning bias here. And
all of these are in play around suppressing that 44 percent
number and driving it even lower.
We need the CFPB to have a leg up when it comes to fairly
protecting consumers across all of the means, particularly when
it comes to fintechs. And they are shaping the market, but they
are escaping their responsibility on the oversight around
consumer protection. And that is what explains and is at the
heart of how these disparities will continue to grow and not
improve in the future.
Mr. Scott. Thank you very much.
Chairman Perlmutter. I thank the gentleman.
Mr. Loudermilk from Georgia is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman.
I have been concerned about the future of our marketplace
lending ever since the Majority made the misguided decision to
restrict access to credit for low- and moderate-income
consumers by replacing the OCC's True Lender Rule. Both the
True Lender and the Valid-When-Made principles are essential to
having a robust financial lending nationwide marketplace.
Ms. Hughes, how have the bank-fintech partnerships been
affected by this returning to the legal uncertainty that we
were in a few years ago?
Ms. Hughes. The True Lender Rule, as I said in my
statement, had big support and lots of criticism. But the
concept that was underlying it that was very important to me
was the concept of assigning specific responsibility for
complying with Federal and State law.
So, the True Lender Rule had that benefit. It did have some
pieces that particularly irritated the States from their
traditional interest in consumer protection. And I think it is
unclear right now how much the repeal will affect that
marketplace, but I think it is worth paying attention to on a
longer term.
However, I would say that one of the reasons that makes
this complicated is the True Lender Rule cannot come back
unless Congress specifically authorizes the bank regulators to
engage in regulation in that respect.
My hunch is that the uncertainty that was expressed will
continue to a degree, and one of the questions that is present
in this is, should the partners of banks, as opposed to the
banks themselves, be entitled to exportation of rates that we
have had since the Civil War, in the National Bank Act?
Mr. Loudermilk. Thank you for that. One of the things that
any business needs is some level of stability, and uncertainty
creates problems in the market, which basically hurts the
consumer.
Other concerns I have is--one is I have always thought that
George Orwell's, ``1984,'' was a futuristic novel, but, based
on some of the proposals that we have been seeing coming out of
the other side, it appears that my colleagues on the other side
of the aisle actually see it not as a novel, but as a best-
practices guide for Big Government.
We have just heard about the proposal to monitor every
American's bank accounts. That is truly Orwellian, in my
opinion. One of the other proposals we have heard recently is
having the Federal Reserve or the U.S. Postal Service become a
bank. This would have the government essentially replace the
private sector banking system and give the government in itself
direct access to everyone's transactions.
Apparently, this is what the Administration wants, because
the President's nominee for Comptroller of the Currency said
just a few months ago, ``We should end banking as we know it,''
which inevitably would be taking away the private sector from
it.
Ms. Hughes, what would the consequences be for consumers
and the economy under these types of proposals?
Ms. Hughes. Yes. Congressman, frankly, I am not certain
that the idea of postal banking is a good one, when we have so
many options currently in some communities and we need to
build, through de novo applications and resistance to closing
of branches. I don't see a need for postal banking to be
allowed, even though it was a factor and it was still present
in some way when I was a small child.
I think that I would prefer to have the banking system, in
many respects, be made more robust in these communities that
some of your colleagues across the aisle have been discussing.
I think that the banks already monitor the influx and outgo
of every account. My understanding of the proposal is that it
would require additional reporting, not additional
recordkeeping, because the banks have to keep records of every
transaction down to about $100, if not more, and they have been
doing that for many years.
But reporting at that level is a very different matter, and
one that I understand at some level the interest in, and at
other levels, I think that would be a crushing blow of
compliance responsibility and cost for the banks that are
serving rural, suburban, and small towns and small businesses.
Especially for small businesses, that would be very burdensome,
and it would bother me greatly.
Mr. Loudermilk. Thank you, Mr. Chairman. I yield back the
balance of my time.
Chairman Perlmutter. The gentleman yields back.
Mr. Reuter. Mr. Chairman, could I make one comment?
Chairman Perlmutter. Sure, Mr. Reuter, go ahead.
Mr. Reuter. I would like to comment on the Federal Reserve
holding direct consumer accounts and put a little exclamation
point on the impact it would have for us as a bank. Sixty
percent of our deposits are consumer retail deposits, and that
is what we put into work into our community.
And so, it is a bit mind-boggling for me to think that
someone in Washington, D.C., would know better how to deploy
those deposits in our community than the 3,000 employees I have
who live here, work here, and send their kids to school here.
So, I find that proposal very troubling.
Chairman Perlmutter. Okay. Thank you, sir.
The gentlewoman from New York, Ms. Velazquez, who is also
the Chair of the House Committee on Small Business, is now
recognized for 5 minutes.
Ms. Velazquez. Thank you, Chairman Perlmutter. Thank you so
much for this hearing.
Ms. Gonzalez-Brito, in 2018, California became the first
State in the country to enact Truth in Lending Act (TILA)-like
requirements for business purpose loans. Senator Mendez and I
are currently preparing to reintroduce small business TILA
legislation here at the Federal level.
First, can you please explain how the enactment of this
legislation in California has brought some much-needed
guardrails for small business loans, particularly those offered
by nonbank lenders, without impacting the availability of
credit?
Ms. Gonzalez-Brito. Thank you, Congresswoman. This is a
really important question. We are really proud of our State
Truth in Lending Act in California. We helped to make that a
reality, along with the Responsible Business Lending Coalition.
So what this provides, what the law provides is, as small
businesses have a hard time accessing credit with traditional
banks, they often are stuck with looking at these very
expensive, high-cost lenders.
And so, it is imperative that this law does allow small
businesses to know the details of the loan they are getting
into so that they can make better decisions.
I would say that TILA in California, through rent bank
charters and industrial loan charters, banks are evading or
trying to evade laws, so we have to be really careful about
that, where they try to secure a charter outside of California
in order to not have to be subject to the State laws.
Ms. Velazquez. Can you also talk about why legislation at
the Federal level is so necessary?
Ms. Gonzalez-Brito. Because of the evasion by charters at
the local level, it is really important to have Federal
legislation in order to be able to stop that kind of evasion of
consumer protection laws at the local level, and we support
that.
Ms. Velazquez. Thank you.
Ms. Jackson, Mr. Reuter, what steps is the banking industry
taking to increase the number of branches in low- and moderate-
income (LMI) communities and communities of color, and how can
Congress help promote the number of branches in this community?
Ms. Jackson, let me start with you.
Ms. Jackson. Okay. Thank you for your question. And,
basically, I am not that knowledgeable about it, but what I
will say is that I think that the banking industry has taken
steps to make banking easy and accessible for all, regardless
of whether there are branch locations down the street.
We just want to use online banking and mobile banking and
bank from your business and office settings, and convenience
and accessibility are all important.
Ms. Velazquez. Mr. Reuter?
Mr. Reuter. Congresswoman, I would answer with a couple of
things. I would agree with Ms. Jackson. We are making lots of
technological tools available. But I will also tell you that,
in addition to branches, our officers and employees are on the
ground in the community.
One of the fundamental changes in banking is that people
don't walk into a branch as often for a loan anymore, even a
mortgage. We are meeting at their home, or whatever the case
may be. At the same time, I would also tell you there is a very
rigorous process with CRA, when we are going to open or close a
branch, to look at the impact to an LMI community. So, there is
existing regulation in that area.
But part of the nature of this hearing is how banking is
changing, and, as Ms. Jackson pointed out, it is technology,
but that has also put us on the ground more. So, I would argue
that feet on the ground, walking a neighborhood, is really
powerful as well.
Ms. Henry-Nickie. Can I just add a comment to the record
there on this question? We have an opportunity to revisit the
Community Reinvestment Act. And there are serious questions
around the utility, the value that retail branches bring to
communities of color and low-income communities in particular.
The goal should be in this sort of discussion how to
encourage the growth, but not just encourage the growth of
banking, but also how to maintain the infrastructure that we
already have. There is no one one-to-one replacement of, close
a branch and then switch a consumer online to a mobile
application.
We know that relationship-building is so incredible for
small businesses, particularly those that need to walk in with
their bank statements and explain why perhaps during the last 2
weeks, inventory was low and that impacted cash flow.
So, as the Acting Comptroller has signaled, he is ready to
revisit this Modernizing CRA Act, let's tailor the presence of
the banking infrastructure to the communities that need it
most.
Ms. Velazquez. We saw it during COVID when all of those
minority and underserved communities that didn't have branches
of banks in their communities or preexisting relationships, how
difficult it was for them to access the help that they needed.
Thank you, Mr. Chairman, I yield back.
Chairman Perlmutter. The gentlelady yields back.
The gentleman from Texas, Mr. Williams, is recognized for 5
minutes for his questions.
Mr. Williams of Texas. Thank you, Mr. Chairman.
As Democrats try to figure out how to pay for their massive
expansion of government programs through the reconciliation
process, they have come up with a proposal that would force
banks and credit unions to report all inflows and outflows of
customers' bank accounts over $600 to the IRS. When I first saw
it, I thought it was a joke.
Now, there are many issues with this type of proposal. I
want to just name a few of them. From a privacy perspective,
the IRS does not have a good track record of using Americans'
tax data responsibly. We saw during the Obama Administration
that conservative nonprofits were being targeted for their
beliefs, and this proposal has the potential to take this kind
of overreach even further.
From a data security perspective, the IRS is the target of
over a billion cyber attacks a year. We don't have the clarity
on how all this additional data on Americans' financial
transactions will be kept secure from the bad actors.
From an administrative perspective, it would be extremely
costly for financial institutions to implement, almost
impossible. We would be better off if banks could do what they
are supposed to do and be focused on hiring more loan officers
to get more money to Main Street businesses, not dealing with
increased compliance costs, hiring more compliance officers,
and creating less opportunities for small business to borrow
money.
And, finally, the Democrats are claiming that this will
generate over $200 billion in new tax revenue. Well, that is a
bogus number. It is an absurd estimate, based on half-thought-
of and half-baked assumptions with no grounding in reality. But
why should reality get in the way of a good story, right?
So, as you can tell, I have a lot of issues with this
proposal. But, Mr. Reuter, I wanted to get your thoughts on it
as well, since you have been a banker for over 34 years. Can
you discuss some of the negative consequences that this new
reporting proposal would place on your bank--and you have done
it a little bit today--and thousands of other financial
institutions all across the country if it were to become law?
Mr. Reuter. Thank you for that question, Congressman
Williams. And you did a great job of summarizing my concerns,
privacy being the first. I think a lot of individuals will
rethink whether to have a bank account if they think everything
they have is being reported to the IRS.
Also, security--no matter how well the IRS does their job,
they are a much bigger target. And if we increase the pot of
gold, if you will, sitting there with everybody's transactional
information, I only think the attacks will increase.
And then, administratively, the cost would be significant.
I know that Professor Hughes mentioned that we already track
data, but it would still be costly to report it. We don't track
it in the manner that is being contemplated here. We might look
for anomalous activity or fraud, but we aren't tracking it in a
way that meets the format of what the IRS is looking for.
And putting this burden on the banking industry, the
purpose of this hearing, one of the things I am hearing is
branch closings, consolidation, all of those concerns. This is
yet another regulatory burden that would only further
consolidation in the industry, which I don't think anybody on
this witness stand or in this hearing wants to see more of.
Mr. Williams of Texas. Thank you. You did a great job with
PPP, and everybody talked about it, and now we are going after
you. It doesn't make sense.
We heard in this hearing that innovation will help drive
financial inclusion.I couldn't agree more and think we need to
empower the private sector, new concept, empower the private
sector to come up with new solutions to give more people access
to financial services. Unfortunately, Democrats want to make
this harder by increasing taxes on businesses and decreasing
their incentive to bring these new innovations to the
marketplace.
So, Mr. Reuter, with the time we have left, I wanted to
give you the opportunity to discuss the effects of increasing
taxes in a time that it is just unbelievable that we think it
would put more burden on the taxpayers and small business would
have on innovation in the banking industry?
Mr. Reuter. Any time you increase taxes, you take money out
of the economy that is put to work. You reduce capital. You
reduce retained earnings and funds available for investment. I
am opposed to increased taxes, because I think it will act
against the stimulus and the momentum we have in the economy
right now. So, I just think it is a bad idea.
Mr. Williams of Texas. Well, you are right. And the economy
still is pretty good because many of the 2016 tax cuts are
still in force. But to increase taxes is a total burden; it is
a total downer for small businesses. Small businesses are
already playing defense, because they don't know what the heck
is down the road, and it gets into less jobs, less opportunity,
basically less taxpayers. So, we need to cut taxes.
With that in mind, Mr. Chairman, I yield back.
Mr. Foster. [presiding]. The gentleman from California, Mr.
Sherman, who is also the Chair of our Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets, is now
recognized for 5 minutes.
Mr. Sherman. Thank you. I will start with a few
observations, and I actually have a question or two hidden in
here somewhere.
I want to commend the chairman of this subcommittee for the
passage of the SAFE Act as a provision of the NDAA. Several of
us have cosponsored that legislation. And the idea that those
who engage in legal business actually carry around huge
quantities of cash is absurd.
I also want to point out that this is a [inaudible]
Subcommittee in that I believe four--well, four of the people
who have already asked questions are Chairs of their own
committees in the House of Representatives.
One of the bills we are considering here today that is
listed for consideration in the UA is the Third Party Vendors
Act. I have concerns about this. [Inaudible] the subject of a
separate hearing. I think that we would want to know whether
the existing authority to force credit unions to sever
relationships with problematic vendors is sufficient.
The questioner just before me talked about our efforts to
enforce tax laws, and it is clear what some in the other party
and maybe even a few in my party would like to see, which is
that the new tax become a tax only on wages. Wage earners get a
W-2 form to collect [inaudible].
But an awful lot of the income in this country is raised
through profits and capital gains, so to make sure that
increasingly sophisticated mechanisms are available to hide
that from the IRS and scuttle any effort for the IRS to keep up
with those methods.
Then, we see an effort to take the cryptocurrency
alternative of hidden money. Who wants to hide their money? The
[inaudible] occasional terrorist to evade taxes. We are on our
way to a situation where the income tax nominally affects the
wealthy, but actually affects only wage earners.
I am concerned with the industrial loan company loophole to
the basic rule in our economy, which is that we keep commerce
separate from financial services. We see that [inaudible] are
still looking toward creating a financial institution.
I commend Chuy Garcia for his discussion draft. He has done
a good job of grandfathering certain ILCs because they have
been fine. But we see that Rakuten, in effect, the Amazon of
Japan, is looking to create an ILC here in the United States.
Ms. Henry-Nickie, what risks do you think are associated
with having a Walmart or a Japanese alternative given an ILC
and FDIC insurance [inaudible]?
Ms. Henry-Nickie. Congressman Sherman, what I think I heard
you ask is, what are the risks of having these nontraditional
players, large players, now sort of show up and shape the
financial services market? And I think the risk to consumers is
great. These institutions do not come to this market with an
organic culture of consumer protection, an organic culture of
building and creating wealth for communities of color.
And so, I try to think about systemic solutions and harken
back to the CFPB's larger participant rule, that availability,
that jurisdiction that is available to the CFPB, and hoping
that they, under new leadership, will be more aggressive and
assertive in revisiting the kinds of institutions that fall
under a larger participant rulemaking, and be more flexible.
When you have Amazon, to Ms. Brito's testimony, playing in
the financial services space, deciding who gets credit, who
gets to sell, and really sort of shaping the lives of startups,
entrepreneurs, and small businesses, particularly for minority-
owned and women-owned businesses, we want those activities to
be examined, and to be supervised.
We want there to be substantive guidance around these
fringe intermediaries that seem like they are on the edge of
the market, but they are so large. They are shaping the market
and changing all of the trends even as we speak here. So, I
really want us to reexamine how the CFPB does its work there.
Mr. Sherman. We have heard from many Members whose
constituents are trapped in a banking desert. And if you are in
a desert, you can become delirious. You can run toward a
mirage. You can drink brackish water. And we have to make sure
that those answers [inaudible] not mirages.
I yield back.
Mr. Foster. Thank you.
The gentleman from North Carolina, Mr. Budd, is now
recognized for 5 minutes.
Mr. Budd. I thank the chairman, and I thank the panel as
well.
We have seen a lot of peer-to-peer payment services come on
the scene in the last several years, including ones where they
don't have to hold traditional bank accounts. They can make
payments and transfer money. There is a lot of great promise
here to help underserved communities.
This question is for you, Ms. Hughes: How can fintechs and
banks work together? How can they collaborate to expand access
to financial services, especially for these underserved
communities?
Ms. Hughes. This is a very interesting question,
Congressman Budd. I think that we have to be very careful to
protect community banks and community national banks and
smaller regional banks, as Mr. Reuter suggested, by not taking
deposits away from them.
I am concerned every time I see an advertisement that
suggests that you can deposit money with somebody who isn't
claiming to be a bank. I realize that they may have a bank
supporting them, but I think we should be very cautious about
that, even though there are opportunities for inclusion in some
of those areas that fintechs can provide.
But I would prefer to see a perpetuation and even
strengthening of the opportunities that local banks with
relationships with their depositors are offering. At the same
time, I think we will see services that are provided. But among
the services, because we don't let securities firms take
deposits, insured deposits by the FDIC, I don't believe that we
should have fintechs do that either. As much as they offer
certain forms of promise, I think we risk undermining the
capacity of regional and community banks with, both State and
Federal charters, to provide lending opportunities in their own
communities of service.
Mr. Budd. Thank you for that. I would still want to look
for opportunities for collaboration.
I want to change the question up a little bit. Ms. Hughes,
this is still for you. Earlier this year, Democrats led a joint
resolution to revoke the OCC's final True Lender Rule. And we
think that really restricted access to affordable credit, hurt
small businesses, hurt consumers, and created a lot of
uncertainty in an industry that ultimately negatively impacts
borrowers.
So, Ms. Hughes, how has the repeal of the True Lender Rule
affected consumer choice and their access to credit?
Ms. Hughes. Congressman, I regret to tell you that I think
it is too early to answer that question. I think the prospect
that there could be some shifts of not having a True Lender
Rule are present. I think that the remarks that have been made
about the opportunities for partnerships, because certainly
fintechs can originate loans at much lower cost than banks can,
but it is important to recognize that those loan originations
may come with other costs to local communities.
And I know that you, among others on the panel on both
sides of the aisle, are passionate about keeping local
opportunities available in rural areas, in suburban areas, and
in urban bank deserts, and I think that this is one of the
places where we have to be especially cautious.
But, essentially, I have stopped paying attention to the
True Lender Rule as it was because, until Congress reauthorizes
it, it is a dead letter. I have been focused instead on how we
can support the banks that still exist or that may become
available in the three sets of communities that are currently
experiencing the negative side of bank consolidation. And I
just stopped paying attention on June 30th, when the rule was
repealed.
I also would say and could provide information to you
separately that there are some costs to the lenders that may be
attributable, that were not necessarily described by the OCC.
So, if that needs to be an offline conversation, let's have it.
Mr. Budd. Certainly. Thank you.
In my remaining seconds, Mr. Reuter, is there anything you
see driving the trend of closures and consolidation among rural
community banks?
Mr. Reuter. I think rural community banks--I grew up in a
town of 500 people in Wisconsin, on a dairy farm. Rural
community banks are very important, and I think they are on the
ground making loans, doing things. So, I think rural banking
remains strong. One of the challenges will be them garnering
deposits.
So, again, to the extent we allow fintechs to be able to
draw deposits out of those communities without being regulated
the same as banks, I think that is a threat for rural banking
as we know it today.
Mr. Budd. Thank you, sir.
And thank you, Mr. Chairman. I yield back.
Mr. Foster. Thank you.
The gentleman from Texas, Mr. Green, who is also the Chair
of our Subcommittee on Oversight and Investigations, is now
recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank the witnesses for appearing. This is a very
timely hearing.
And, Mr. Budd, I want to thank you for your advocacy,
because I, too, am concerned about rural banks. I have
relatives who live in rural communities.
But I am very much concerned about small banks. I have had
at least two groups of persons who are trying to acquire a bank
de novo, and they are having extreme difficulties with the de
novo process.
I am going to agree with you, Mr. Reuter; the process has
to be reformed. It is very time-consuming. Money is on the
line. The paperwork is enormous. And it just seems to take too
long. I am not sure how we reform it, but there is something
that has to be done to let us get more banks because, looking
at the intelligence that has been shared with me by staff, in
2014 and 2016, there were no de novo charters issued, zero.
That is quite disturbing just to see that number, zero, for 2
years.
These fintechs don't have to comply with CRA. They don't
have to have physical facilities located in communities, and
they don't pay FDIC fees. So, we are making it pretty easy for
them to create these deserts because they are not regulated to
the same extent as banks are. I am very much concerned.
Let me ask you, Ms. Hughes, to what extent do you think
fintechs are contributing to the banking deserts?
Ms. Hughes. Congressman Green, this is a really interesting
question. And I don't know that we have data, but what we do
have, as many witnesses have suggested this morning, is a
significant unlevel playing field.
And to the extent that we want to have banks--and banks
perform many valuable functions in our economy--we need to be
sure that they--I don't want to say that they are protected
from competition, because that is not the right decision, but
they need to not be undermined by people who can disrupt and
disintermediate what we have used for all time in this country
to support local economies and local economic growth.
And that is as important today, and it is more important
today in certain communities, rural communities, in inner-city
communities that don't have many banks, so they can't get easy
loans because they don't have relationships, and even suburban
communities.
I have lived in just about every one of those kinds of
communities in my life, all along the northern tier, I would
have to admit. My father was from Wenatchee, Washington, which
is a small town; Wilmington, Indiana, is only a little bigger.
My mother was originally from Donnybrook, North Dakota.
So what I think is important is that we not turn our backs
on those communities. And it is not clear to me that we have
sufficient incentives for fintechs to continue to help in those
communities. And, if we don't have sufficient incentives for
them to help in those communities, then we have to be sure that
we retain robust chartered--whether Federal or State--banks
available to serve those communities, who are still responsible
for job growth, startups, small businesses--
Mr. Green. I hate to intercede, but I have to go to Mr.
Reuter quickly.
Mr. Reuter, same question: To what extent are fintechs
contributing to the bank deserts that we are seeing?
Mr. Reuter. I think the lack of a level playing field is
absolutely contributing. We have talked about the online small
lending capabilities they have where they are not regulated the
same. They are taking deposits out of those communities.
When I talk to rural bankers, one of their biggest
challenges is source of funding to make loans in the community.
So, to the extent we let those tech companies extract deposits
and not be regulated the same, that is a negative.
And, to the previous Congressman, I think the way you
enhance more collaboration is you do make it a level playing
field. I am not against competition. I just want to make sure
that we lean into the trust that is already there in the
banking system.
And I think you, as policymakers, deserve a lot of credit
for that trust and resiliency. So, let's not forget the
history, and let's make sure the new technology abides by the
same rule.
Mr. Green. Mr. Chairman, I don't have my timepiece up, so I
don't know how much time I have left, and I want to be
respectful of you.
I am going to simply close with this: We are at a point now
where African-American banks are about to become an endangered
species, and we have to do something. We have to do something
to protect them and to assure us an opportunity to have more.
And I want to stand with those who want rural banks protected.
You have a friend in Al Green.
We have to get together, Mr. Budd. Thank you, everybody.
I yield back.
Chairman Perlmutter. The gentleman yields back. Thank you.
The gentleman from Tennessee, Mr. Kustoff, is now
recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman. And thank you for
calling today's hearing.
Thank you also to the witnesses for being here.
Ms. Jackson, I wanted to discuss a bill, the Payment Choice
Act, which is H.R. 4395. It would require retail businesses to
accept cash payments and would not allow retail businesses to
charge a higher price to customers paying with cash.
My question to you is, of course, there are rights to
privacy when people make purchases and sales. I think that is
an important part of cash. But could you talk about--you talked
in your testimony, your written testimony, about cash, about
the importance of cash as it relates to financial privacy. Ms.
Jackson?
Ms. Jackson. Thank you for your question.
And I am not too certain on what I--I can't recall what I
wrote in my statement, but I do believe in the bank that I am
working for now, we do honor the privacy. The cashless, cash
for retail, for retail banking is something that I think should
continue to happen. I don't want to see it go away. And I am
not sure if I am answering your question correctly.
And so, we just stick by our model. We continue to do the
best we can to reinvest into the community and we listen to the
community. We listen to their needs.
Mr. Kustoff. I don't know if you know if there is any data
out there, but are Americans in rural communities and more
urban communities more likely to use cash than people in other
areas?
Ms. Jackson. I would probably say yes. And you are correct,
I don't have the data on that, but I would probably say, yes,
that would be accurate.
Mr. Kustoff. Thank you very much, Ms. Jackson.
Mr. Reuter, in your banking system, and you have banks all
over, do you know if there is any data or can you say
subjectively that people in rural areas or more urban areas are
more likely, to use cash than those in other areas?
Mr. Reuter. I do not know whether there is a difference
between rural and urban. I can tell you there is a difference
in that minority communities and low- to moderate-income
communities use more cash.
Ms. Henry-Nickie. Can I just offer for the record one
interject here, that the 2019 FDIC survey looks at different
kinds of ways that consumers are transacting in the banking
system. And what is really helpful is how they unpack the use
of check cashing, and bill payment services by racial and
socioeconomic demographics.
If you look at those tables, you kind of get a sense that
people who have disabilities, those who live in Indigenous
American communities that tend to be rural, that tend to be
remote and spatially isolated, overwhelmingly use these
services more so than other groups.
That gives you a sense that they probably--these are stores
that you need cash to transact in are likely to be the kinds of
communities that need to continue to have our retail sector
accept our legal tender, cash, and then think of digital
payments as some sort of supplement to expanding the way that
we interact and engage with these communities.
But that is a good source of data that helps you proxy
which communities still rely heavily on transacting in cash.
Mr. Kustoff. Thank you.
Mr. Reuter, if I could, there have been several questions
about the $600 IRS reporting question. I think Ranking Member
Luetkemeyer and Congressman Williams asked you about that. And
you talked about the--now, set aside the privacy concerns, just
the administrative hurdles that that would place on your bank.
And all I know is what the news reports are. Apparently,
there is some negotiation in raising that limit from $600 maybe
up to $10,000. Even if that were to change, does that affect
your opinion on what that does to you administratively,
administering these requirements for your banks?
Mr. Reuter. No. We would still be opposed, because the
effort would be the same, and all of the other issues, the
privacy and security are in existence.
And I would like to connect it back to the conversation we
just had on cash. I think one of the things I heard is that
people like the anonymity and the privacy of cash. This goes
completely counter to that line of thinking.
Mr. Kustoff. Thank you very much.
I yield back my time. And thank you to the witnesses.
Chairman Perlmutter. The gentleman yields back.
The gentleman from Illinois, Mr. Foster, who is also the
Chair of our Task Force on Artificial Intelligence, is now
recognized for 5 minutes. And he actually is the person who
wanted to talk about the future of banking, whether or not
technology was going to cause the elimination of banking or
whether mergers and acquisitions are too much government
burden. But I will yield to the gentleman from Illinois.
Mr. Foster. Thank you, Mr. Chairman, for stealing about
half of my talking points for the beginning of my testimony.
Chairman Perlmutter. Sorry.
Mr. Foster. But you are actually correct. There is some of
this existential banter going on between fintech at one end,
and small, traditional community banks at the other. And the
part of the fintech model that relies on regulatory arbitrage
has very little support on either side of the aisle here. And
leveling the playing field, in that sense, I think has to be
one of our goals here.
But the part of the business model for fintechs that relies
on the efficiencies of scale, I think we have to look at much
more carefully. For example, a lot has been said about the
value of small community banks in the PPP program, but there
were examples of small fintechs who were able to help tens of
thousands of small businesses get loans, often with 15 minutes
online.
And so, there are advantages of the digital economy.
Professor Hughes, you mentioned a couple of questions back,
that if a fintech was capable of originating a lower-cost loan,
that would be detrimental to the communities they serve. Could
you go a little deeper into that, because it sort of confused
me? How would a community be hurt by having an option of
getting a lower-cost loan online?
Ms. Hughes. I don't know that we are thinking necessarily
about that, Congressman Foster. What I intended was to suggest
that the origination piece of how fintechs work is a model that
is very attractive.
It may be because they do not have all of the regulatory
requirements that are on banks, so they can perhaps originate
loans faster and for less money.
The problem is that, if you want banks to be in business--
and I am not opposed to fintechs by any means, this is a real
struggle--banks have to make money. And one of the ways banks
make money is through loans. They don't make money--they make
money on fees, but they also make money on loans.
The loan balance comes back into the bank, and because of
fractional reserve requirements, the loan can be recycled into
the community. So, a small amount can become $5,000 of new
money in the community in a very short period of time.
That is not necessarily going to happen if fintechs take
over more of the lending, unless they are working in
partnership with banks that would otherwise be doing the same.
But we want to be sure they are not subject to fractional
reserve banking. They are subject to corporate level if they
are corporations, corporate level capital requirements that are
very different.
So, we don't get the synergy from lending that we get from
lending under the fractional reserve requirement system that we
have been using in this country for many years and that banks
are observing.
Mr. Foster. Right. I understand. And that is exactly an
example of the sort of regulatory arbitrage advantage that the
fintechs may have.
Now, The Wall Street Journal was running a series of
articles about the stress of rural banks, I don't know,
probably about a year ago. They ran a series of very
interesting articles, and they have examples, for example, of
small rural banks that didn't want to continue in the small
town they lived in, so they moved, and established a secondary
branch in the nearest big city, and were holding onto the rural
things just to extract deposits.
Because frankly, the bind they were in is that there are no
profitable business investments in small, dying rural towns, to
put it bluntly.
And so, they didn't see a future there, and they were
actually extracting--even though these were traditional
community banks, they ended up extracting deposits and then
investing them at best in the nearest big city.
How do we deal with that trend, or is that just part of the
free market decision-making of banks? Does anyone want to
respond to that? It is something I have struggled with--I have
represented very rural areas, and I am trying to figure out
what to do with that sort of dynamic. It has been a struggle
with which I have dealt. Does anyone have any ideas how to--
yes?
Ms. Henry-Nickie. I think there is no relationship between
labeling a bank, the size of a bank, and the risk the bank
poses to a community. Community banks are just as well-
positioned as a Wells Fargo to extract wealth out of any
community, and we need to think about ways to empower them, I
think, to work with collaborative partners like community
development financial institutions (CDFIs) to reintroduce cash-
to-credit programs that help to repurpose the deposits that
they control and invest it in low-cost, responsible credit
products, particularly for small businesses.
I would like to dismiss the notion that community banks,
because they are community banks, do better in lower-risk work
than other kinds of financial intermediaries. We need to think
holistically about all of the systems, all of the loan products
that are present in the community, and ways to encourage that
legislatively as well as regulatorily.
Mr. Foster. Thank you. And--
Ms. Gonzalez-Brito. Can I just add something, Mr. Chairman?
Mr. Foster. Yes.
Ms. Gonzalez-Brito. Just in terms of rural communities, in
California, our members are really concerned about the closure
of branches and the impacts that has, for instance, on
reinvestment back into those communities.
So, it is really important that CRA require of banking
institutions, a CRA investment back into communities,
effectively those that are underserved like rural communities.
I would add that broadband and the digital divide in these
communities is great because of the lack of infrastructure. So,
banking can help with that as well in terms of investing in
broadband and the infrastructure in those communities.
Mr. Foster. Okay. I am afraid the chairman has his finger
on the gavel here, so I am out of time.
Chairman Perlmutter. Yes. The gentleman's time has expired.
I gave him--I have given everybody a little extra time. I gave
him more, since this hearing was his idea.
I now yield to the gentleman from Tennessee, Mr. Rose, for
5 minutes.
Mr. Rose. Chairman Perlmutter and Ranking Member
Luetkemeyer, thank you for holding this hearing, and thank you
to our witnesses for providing your expertise and your time
today.
I think that, as we work to shape the banking system of the
future, we must look to innovation but also aim to implement a
regulatory framework that allows banks of all sizes--of all
sizes--to be successful.
As a former community bank board member, I have seen and
witnessed firsthand how the crush of regulation deters
particularly our smaller banks from being able to succeed and
thrive, and particularly to thrive in rural communities, as we
have heard many of my colleagues say today.
Between 2008 and 2020, over 13,000 bank branches closed in
the U.S.--we have heard that data today--representing 14
percent of all branches.
Many communities report that, following a bank closure--and
I have witnessed this firsthand--they also lose financial and
community resources, including financial advisers and civil
leadership. Sometimes, it is simple as the tee ball teams in
your community not being able to find the resources to succeed.
These losses leave communities with unanswered questions,
instability, and less access to services. And, again, in the
rural community, where my own farm is, I have witnessed this
firsthand.
Mr. Reuter, what factors do you see driving the trend of
closures and consolidation among community banks?
Mr. Reuter. I think you touched on one in your opening
statement, Congressman, and that is the regulatory burden. We
really need to look at tailoring so that it is lighter for a
bank that is less complicated.
What we operate at FirstBank, where we don't offer
insurance or wealth management and other services, is much
simpler. So, from a regulatory standpoint, it should have less
regulatory burden.
Also, I think the fintech, the level playing field, one of
the benefits of doing that is, you get rid of the negative
arbitrage that is there so that capital flows back into the
banking industry and partnerships do form between tech
companies and banks. And that also then, to me, leverages the
trust and resiliency of the industry.
So, I think those things would make a big difference in
what is happening in rural markets.
Mr. Rose. Thank you, and I certainly agree, as I have
already said, about the regulatory framework. I think it is
noteworthy that, when we implement huge regulatory expansions,
that maybe in the eyes of folks sitting on high in Washington
seem reasonable, when they make their way down to our local
communities, they have a crushing impact on both the sustenance
of our local small community banks and very much on new ones
starting.
Professor Hughes, what can we do in Congress to ensure the
regulatory environment allows community banks to keep their
doors open?
Ms. Hughes. I think we have been talking about it all
morning in terms of retaining the robustness of community
banks, possibly by tailoring some of the requirements that they
are operating under, that, as Mr. Reuter has suggested, are
really designed to protect mostly the Deposit Insurance Fund
from excessive risk-taking, which crops up every once in a
while in every form of business. So, it is not unique to one.
What I think we have, though, is a real crisis in bank
deserts, and that, while we would like to think that there
might be other models, like fintechs, that would address those,
in some of those communities, the presence of a community bank
that depends on relationships is going to be even more
important going forward in helping small businesses and
consumers get start-up money that they can't get from capital
markets because they are too small, and getting loans to
acquire business locations and things of the like that are
important to building communities.
So, unless we want to see a lot of desert ghost towns
around the United States, we have to do what we can to lighten
the load on community banks so that they can continue to be
there because we do still have very valuable parts of our
economy emanating from smaller communities, not tiny towns, but
they are important.
But we are seeing lots of startups in towns like
Bloomington, Indiana, towns close to universities, and we need
to be sure that there are adequate banking services on a
relationship level, to protect the robustness of the economies
in those communities on which we all actually depend.
Mr. Rose. Thank you, Professor Hughes.
I am pleased--and I might indulge the Chair for a few extra
moments--to see that the Payment Choice Act is attached to this
hearing. As an original cosponsor, I hope to see this
legislation included in our next markup.
Throughout the pandemic, we faced not only a coin shortage,
but businesses were refusing to accept cash as a form of
payment at an alarming rate, leaving many consumers unable to
purchase necessities.
Cashless policies disproportionately harm seniors,
minorities, immigrants, low-income populations, and working-
class communities such as exist across the Sixth District of
Tennessee.
Consumers want the freedom to conduct transactions in a way
that works best for them. Of the 80 percent of non-bill
payments made in person in 2020, cash was used for 28 percent
of these transactions, despite the pandemic-driven shift in
shopping behaviors.
I believe that all consumers should have the freedom to
choose to pay with cash at grocery stores, restaurants,
businesses, or anywhere they choose.
And I might conclude just by saying that, if we see some of
the heightened regulation about reporting by financial
institutions, I think we will see more consumers, particularly
in places like the district that I represent, closing their
bank accounts, and going purely to cash.
Thank you for your indulgence. I yield back.
Chairman Perlmutter. The gentleman yields back.
You can all see my chairing style is to kind of allow
people to keep going.
Mr. Lawson, the gentleman from Florida, is now recognized
for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman, and Ranking Member
Luetkemeyer, for hosting this hearing. This is a very, very
important hearing that we are having today, and I want to thank
all of the panelists for being here.
There has been a considerable amount of discussion about
banking deserts, almost like food deserts. And I know that
between 2008 and 2016, about 25 percent of the banks and so
forth have closed in rural areas which affect majority and
minority during the Census tract.
My question, to everyone is--because I don't see that there
were any clear, distinct answers this morning, and maybe there
are not any right now--since we are seeing this increase in the
amount of bank deserts, what are the long-term consequences in
majority and minority communities, regarding the economic
opportunity and access to credit?
What does this current trend in banking mean to low-income
communities as we enter the economic recovery period of COVID-
19?
And this is open to the whole panel, because I guess it is
something that we have to deal with, but I know there have been
more and more.
And then, there is some criticism about all of these
options that low-income individuals have to go to different
areas to get access to capital, their payday loans, and
everything else. And people say we don't need them, but what is
going to happen? Can you give us any idea of what the future is
going to be for our rural communities?
I represent quite a few rural communities myself, always
have, and I see this trend all over the place, and I just
wanted to get each one of your perspectives on where we are
going from here, because of what has happened in the last
couple of years.
Ms. Gonzalez-Brito. Congressman, in terms of the long-term
consequences for rural banking closures, I would say we saw
that with bank PPP loans; half of the PPP loans that banks made
were with branches within 2 miles of the borrower. So, if we
don't have a bank branch, those relationships are not there,
and we saw it very clearly during COVID.
I would say that also when we talk about regulatory burden
for banks, we really need to center the burden of communities
of not having banking. We need to remember that these banks are
profit-driven, and we need to be able to think about
alternatives to serve communities that have never been served
by the market.
And that could include postal banking and public banking,
and mission-driven banking, which takes the profit-driven
motive to close branches out of the picture. Thank you.
Mr. Lawson. Would anyone else like to respond?
Ms. Jackson. I would like to add to that.
I do agree with--the Beneficial State Bank is a mission-
driven bank, just as the other panelists were saying, and I
think just the fact that we always reinvest into our community
is very important, it is very beneficial, and I think that will
help out in some way if other banks can adopt our model that we
are doing.
Ms. Henry-Nickie. I would just add to these comments that
banking deserts are a consequence of decisions, of banks saying
that these markets are no longer valuable to me.
To fill that gap, just like fintechs have done since the
great financial subprime crisis, we need gap fillers to now
come in and see the opportunities in this market.
And to do that, we need to really lean in on encouraging de
novo bank charters. Black-owned banks see the value in Black
communities. Minority depository institutions have always seen
the value in our communities.
We need to encourage their growth, encourage them to hold
on, as opposed to just sitting by as passive bystanders and
letting them whittle away. We are 50 percent fewer in MDIs than
we were in 2007.
So, how do we replace the gap? By encouraging new physical
branches and banks to grow in these communities, and whatever
kinds of subsidies we can corral--because we can corral them--
to facilitate and subsidize their growth, that should be our
mission.
Mr. Reuter. And, Congressman Lawson, I share your concern.
I think it is a challenging issue because one of the drivers
for branch closures--and I would like to point out, branch
closing, we talked about it earlier, we have 50 percent of the
banks we had at one time.
And, if you look, it is universal across all neighborhoods
that there is a reduction in branches. And it is really because
of how people are using their bank. Half of our deposits are
now made with someone taking a picture of their check.
And so, in order for us to adapt and make the technology
investments, we have to look at how customers are choosing to
do business.
But I will tell you that we are mission-driven as a
community bank, because we only grow if we are serving the
community that we are part of. And so, I share the sentiments
of others.
I don't support postal bankingz, because it is already a
struggling entity for the same reasons that we are talking
today. Technology has changed its business model. So, to layer
another industry that is being attacked by technology on top of
that, I am not sure that is a good doubling down on the U.S.
Postal Service.
Mr. Lawson. Mr. Chairman, thanks for letting me go over.
With that, I will yield back. This is a topic that we need
to bring up again.
Chairman Perlmutter. If I didn't let you go over, I would
have been in real trouble, since I let everybody else go over.
The gentleman from Illinois, Mr. Casten, who is also the
Vice Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Casten. Thank you, Mr. Chairman.
I feel like I am under a lot of obligation to try to make
up all the time you have allowed us to all go over, but I will
do my best.
Mr. Reuter, I want to start with you, and I just want to
give you an opportunity. We talked a lot about the decline in
small, local bank branches and the rise in fintechs and, in
particular, given a lot of those fintechs are not regulated
under the Bank Holding Company Act.
Are there any concerns you have with fintechs' ability to
serve the underbanked so long as they remain not subject to the
Banking Holding Company Act, that you haven't already covered?
And I just want to give you a chance. I know we have corners of
that so far. Is there anything else you would like to add to
that?
Mr. Reuter. Thank you, Congressman Casten. I do have
concerns. One of the concerns I have, we talked a little bit
about, with the ILC charter. While I think it is well-designed
for the purpose originally intended, you are seeing some of
these fintechs and technology companies wanting to creatively
get that charter to get access to the payment system.
They want that, because they want the data. Where do you
buy? How do you spend your money? Because they want to use that
data in the advertising side of their business.
So, if you think about it, their motives are very
different. As a bank, we have always been in the trust
business. I know everything about our customers based on their
account information. It is part of why I am nervous about
shipping all of it to the IRS.
The difference is that banks make their money by taking in
deposits and making loans. Their core business is not data,
like many of these tech companies.
Our fiduciary responsibility is different, and our motive
is different, and our behavior has been different. So, yes, I
have a big concern about turning over the banking industry to
some of these technology companies.
Mr. Casten. I am glad you raised the industrial loan
corporations, because you have sailed directly into my second
question for Ms. Gonzalez-Brito.
Ms. Gonzalez-Brito, you talked with Mr. Meeks about some of
the CRA issues that come into play with fintechs. Can you talk
about what CRA issues or concerns you may have if a fintech is
registered as an ILC and uses that to enter the banking system?
Are they subject to the same rules as other players in the
banking sector?
Ms. Gonzalez-Brito. This is a great question. No, they are
not, and they often use these charters to be able to evade
local State protections that they have in relation to, for
instance, interest rate caps.
So, I find myself agreeing with Mr. Reuter on the
importance of regulatory rules being equal across the playing
field.
And I am going to sound like a broken record, but these
ILCs that are forming in other parts--or any part of the
country, are not subject to CRA. And we need those fintechs, if
they are taking deposits, if they are making loans in our
communities, which they are, to have a CRA requirement.
And then, lastly, I would just say that fair lending
algorithms are being used that we don't understand, and
sometimes, the CEOs don't even understand.
So, it is incredibly important that we have regulatory
oversight, especially on fair lending and fair housing.
Mr. Casten. Thank you.
And, with the time I have left, I want to pivot a little
bit away from fintechs, because these things are overlaid.
But a number of the crypto-based companies like Paxos and
Anchorage and Protego have been asking for, and receiving,
Federal trust charters from the OCC. And we are creating this
sort of blurry area between fintech and crypto.
Dr. Henry-Nickie, with my remaining time, I welcome your
thoughts on what factors we should be taking into account
reviewing bank charters from crypto companies, and, in
particular, with a real focus on the volatility.
We are essentially giving, as I think of it, 4X risk on
deposits. What is the right way for us to be thinking about
those charters and, in particular, with respect to the
volatility exposure that this might place on depositors?
Ms. Henry-Nickie. Thanks for the question, Congressman
Casten. While I think it is a really important issue, I, too,
am concerned about how these cryptocurrencies are playing
inside our economy without figuring out how to manage the
volatility and the vulnerability.
I don't follow these issues as a scholar, and I think
perhaps Ms. Hughes might be better-positioned to render an
opinion on the subject.
Mr. Casten. Okay.
Ms. Hughes, we seem to always curse you with 30 seconds to
answer a 10-minute question, but I will give you your best
shot.
Ms. Hughes. I will be happy to answer it separately,
Congressman, so we can have that conversation.
The rigorous evaluation of anybody who gets a Federal trust
charter, or from the States that are offering charters, is
still present, and I do not think that these companies are
getting less rigorous reviews when they are getting these
permissions.
But one of the differences is the scope of the operational
powers that they have, and when the States have been offering
opportunities to these businesses, they have been cabined in
certain fields that are not necessarily going to be in direct
competition with the kinds of banks, the community banks, that
we have been talking about so much today.
I have the same problem. This is a long answer. We need to
have a separate conversation about it. And I do think that we
have different management issues--different risk-management
issues with cryptocurrency because of price volatility than we
have with traditional banks and even with some of the larger
fintechs, including some that are now acquiring.
Mr. Casten. Okay. Thank you, and notwithstanding my initial
promise, it looks like our chairman is going to be managing
penalty time at the end of this hearing. But I appreciate you
all, and I yield back my penalty time.
Chairman Perlmutter. The gentleman yields back.
We will go now to the gentlewoman from Massachusetts, Ms.
Pressley, the Vice Chair of this subcommittee. She is
recognized for 5 minutes.
Then we will go to Mr. Emmer, and then, we will go to Mr.
Garcia to close out.
Ms. Pressley?
Ms. Pressley. Thank you, Chairman Perlmutter, for convening
this hearing. I, along with many of my colleagues, have been
sounding the alarm for many years about rising bank branch
closures in predominantly Black and Brown communities, and the
negative impact that this will have on small businesses owned
by people of color. That impact was certainly made abundantly
clear during the pandemic.
Congress created the Paycheck Protection Program to serve
as a lifeline to small businesses and their employees, but we
now know proximity to banks played a significant role in who
actually received funds. Half of bank PPP loans came from banks
with branches within 2 miles of the borrower. Borrowers using a
nearby bank received credit sooner, which was a critical
advantage, as PPP money ran out rapidly.
It is no surprise, but egregious nonetheless, that Black-
owned businesses received only 2 percent of PPP loans from the
CARES Act. According to the Boston Federal Reserve, one in five
Black-owned small businesses had never even heard of the
program.
Ms. Gonzalez-Brito, nearly half of Black-owned businesses
were wiped out in the early months of the pandemic. Can you
briefly summarize the long-term impact these business closures
will have on Black and Brown communities?
Ms. Gonzalez-Brito. Thank you for that question. You are
absolutely right; there was a disparate impact in terms of the
way PPP loans were administered.
And, if you think about the banks in communities of color,
counties that are majority Black and Brown have about 27
financial institutions per 100 people. For Indigenous Native-
American communities, it is even less. And for the White
communities that are majority White, we have over 40 branches.
So, when we close branches in these communities, small
businesses really suffer. We know that they need local banks to
be able to really have this relationship that they trust and to
be able to get the kind of support that they need, especially
in a financial crisis.
Ms. Pressley. Thank you. So, the closure of branches and
consolidation of banks limits opportunities for Black-owned
small businesses and, as a result, our broader communities.
It is critical that Black and Brown voices are heard during
the bank merger process and that Congress pursues every
solution to close these gaps, including public banking and
postal banking.
Democrats control the House, the Senate, and the White
House, and together we have made strides to exact economic
justice in our pandemic recovery efforts.
But, from the priority application period for minority-
owned restaurants under the Restaurant Revitalization Fund, to
the USDA loans for Black farmers, right-wing, private-interest
groups have claimed reverse discrimination in the courts and
blocked these overdue investments.
Ms. Gonzalez-Brito, the Freedman's Savings Bank was created
by Congress in 1865 to offer banking to newly-freed Black
Americans. Can you please briefly summarize what happened to
the Freedman's Bank and the millions of dollars that Black
Americans deposited into it?
Ms. Gonzalez-Brito. The Freedman's Bank is a good example
of the way that wealth is extracted from Black Americans. And,
unfortunately, when that bank was created, the mission and what
it was created for was absolutely noble, but all of the
trustees that were running that bank were White, they did not
know the community, and not only did they not know, we are
talking about a whole different timeframe in terms of White
people in this country and the enslavement of Black Americans.
And so, it is really important that as we think about the
impact that this has, where the banks are actually run by
people of color, that we have minority deposit institutions
that are run by people of color, and that we support them with
as much community support and government support that we can--
Ms. Pressley. Thank you.
Ms. Gonzalez-Brito. --in order to better serve the
communities.
Ms. Pressley. Thank you very much. And this is important
history, which I think many are unaware of, and it just goes to
show that there has been precise legislative harm done. From
the Freedman's Bank to redlining to exclusion from the GI Bill
and the Social Security Act, Black and Brown workers have been
pushed out of our economic and financial systems for really far
too long.
So, race-conscious relief is necessary because the heart
and harm was precise and race conscious. So, race-conscious
relief is not discrimination; it is justice. It is a necessary
step toward equality and liberation.
Thank you, and I yield back.
Ms. Gonzalez-Brito. Can I add one more thing? In terms of
race-conscious initiatives, the special purpose credit program
is one that banks really should be implementing. And we have
been able to successfully work with some banks in California to
be able to do that.
It really focuses credit products on those communities that
have been not only excluded but, as we talked about, had their
wealth extracted from them. And so, we encourage banks to look
at these kinds of programs, and we look forward to working with
them to do that.
Ms. Pressley. Thank you.
Chairman Perlmutter. The gentlelady yields back.
The gentleman from Minnesota, Mr. Emmer, is recognized for
5 minutes.
Mr. Emmer. Thank you, Chairman Perlmutter.
Before I begin my remarks, I also want to thank Mr.
Luetkemeyer and Mr. Reuter for bringing up the compliance and
privacy concerns of requiring financial institutions to report
transactional data to the IRS on all accounts with $600 or
more.
I led a letter with 141 of my colleagues on this issue, and
we are watching it very closely.
As we convene today to discuss modernizing financial
services institutions, I implore my colleagues to think outside
the box on how Congress can assist in improving the manner in
which consumers access financial products and services, because
that is what we are here for today.
Congressman Perlmutter, I would like to recognize you for a
moment for your work as the co-lead on our bill, the Credit
Union Governance Modernization Act, a bill that thoughtfully
revisits antiquated regulations that prevent credit unions from
doing what they need to do: serve their communities.
I am happy to see that this bill is noticed in this
hearing, because it revises the procedure for expelling members
from a Federal credit union to make it safer for the members
and employees. It is imperative that we consider this
bipartisan legislation in this committee.
Financial institutions have the important responsibility of
providing safe, reliable financial services for Americans
across the country. But what happens when a credit union member
makes threats of violence to other members or the credit
union's employees? What happens when a credit union member
repeatedly deposits fraudulent checks and jeopardizes the
stability of their credit union? What happens when a member
damages credit union property and places other members and
employees in harm's way?
Right now, due to the antiquated regulations that exist, it
would be hard to remove members who make credit unions unsafe.
My bill revises these regulations and crafts a process with an
emphasis on due process and respect for members' ownership in
the credit union to remove dangerous members so that credit
unions can best carry out their obligation, again, to provide
safe and reliable financial services for Americans.
We really have to move banking into the future. And I guess
with that, Ms. Hughes, if you don't mind--thank you, by the
way, to all of the witnesses for being here today and for your
time and participation and your expertise.
Ms. Hughes, I want to direct this to you. Given the issues
I just addressed, do you believe there is cause for a
legislative solution, like the Credit Union Governance
Modernization Act, to ensure credit unions' safety as credit
unions provide financial services to their communities?
Ms. Hughes. Congressman Emmer, I have to apologize and tell
you that I have not read that bill, so I am not going to be
able to comment about it very specifically.
But I would say that the credit unions are a little bit
different, but the idea that banks and credit unions cannot
protect themselves from dangerous members is just appalling.
The question then is, how do you establish parameters--if
you want to legislate this--that will not have an unduly
adverse effect on small businesses that have licenses from the
States and the communities that are a part of the fabric on
Main Street in many communities? How will we fashion this?
And so, that is why I need to read the bill, and perhaps we
can have an offline conversation about the bill if you remain
interested in my views about it.
Mr. Emmer. Just so everybody on this panel knows--because I
know there has been a lot of techie stuff talked about, and
this is kind of more like meat-and-potatoes stuff--the
antiquated rules, as Chairman Perlmutter will tell you, and I
am going to do this right now if I can do this in a streamlined
fashion, would require a vote of the entire membership to deal
with a member who is making violent threats against other
members and/or credit union employees, who is threatening
damage or committing damage to credit union property.
This seems to be an antiquated way and, frankly, very
difficult way to expel a member who is presenting these dangers
to credit union employees and their customers.
So, what this bill does is it streamlines that process
while protecting the due process concerns so that they can make
a quick decision under the right circumstances and make sure
that everybody is safe and the credit union is protected.
So, I do hope you have a chance to read it. I think you
will be supportive of what we are doing.
And, again, Chairman Perlmutter, I thank you for your work
with us on this bill, and thank you for the time today. I yield
back.
Ms. Gonzalez-Brito. Chairman Perlmutter?
Chairman Perlmutter. The gentleman yields back. I have read
your bill, and it is meritorious, and it should be passed. That
is my opinion.
Mr. Emmer. Well, then it is done. Thank you.
Chairman Perlmutter. Our final panelist is Mr. Garcia from
Illinois, and he is now recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Chairman Perlmutter,
and, of course, thank you to the ranking member for convening
this important hearing.
This hearing is called the, ``Future of Banking,'' but it
is not just about CEOs and Wall Street. The future of banking
is about the future of working-class neighborhoods like the
ones I represent.
My neighbors lost their homes in the Great Recession. Many
lost small businesses during the COVID-19 pandemic. This isn't
inevitable. Congress can create and enable a more equitable
financial system.
So today, I am introducing the Bank Merger Review
Modernization Act, to strengthen oversight of bank mergers so
our regulators aren't just a rubber stamp for creating mega
banks.
And soon, I will introduce the Close the ILC Loophole Act,
to address the huge threat that the underregulated banks can
pose to our markets and our financial systems.
I would like to begin with a question for Ms. Gonzalez-
Brito. Yesterday, the Committee for Better Banks reported that
BB&T and SunTrust merged. Their new combined bank, Truist, not
only fell short of the CEO's promise to Congress to open 15
bank branches in low- to moderate-income areas, the merger
slowed down the pace of opening bank branches in lower-income
areas and increased the pace of bank branches in higher-income
areas.
Banks can be hard to come by in my neighborhood, and that
means my constituents often need to turn to riskier loans.
Ms. Gonzalez-Brito, it looks like these mergers have
reduced access to financial services for the people who need it
most.
Does this new report square with your own work? Do bank
mergers tend to limit access to capital for working-class
people, and who is hurt when regulators serve as rubber stamps
for bank mergers?
Ms. Gonzalez-Brito. Thank you so much. This is a really
important question, and it also goes back to Congresswoman
Pressley's statement about making sure that community voices in
the most impacted communities, Black and Brown communities, are
at the center of any discussions around mergers and
acquisitions.
We are seeing that mergers and acquisitions are leading to
not only a closure of bank branches, but they are also leading
to less reinvestment, because where you had two banks prior to
the merger reinvesting back into communities, you now have only
one. And one plus one also doesn't equal two; it equals less
than two.
So what we really need is to ensure that any merger, before
it is approved, has a public benefit and does not have a public
harm.
And I really want to thank you for your work on the Bank
Merger Review Modernization Act. It is exactly what we need.
I would just add--I want to go back to the credit union
discussion, because I was surprised it took us this long to get
there. But credit unions are not subject to the Community
Reinvestment Act, and so we actually don't know how much they
are reinvesting back into communities, and that is critical for
low-income communities and communities of color.
And I would say in relation to, I am not sure where this
conversation went in terms of violence, but really what credit
unions should be concerned about and what we are concerned
about is that their membership actually doesn't represent the
communities that they are in. And that is critical for a
successful community and economic development and community
development.
Mr. Garcia of Illinois. Thank you for that.
Dr. Henry-Nickie, last year, the FDIC approved deposit
insurance applications for two new ILCs, the first in many
years. Of course, a lot has changed since the last ILCs were
approved.
In 2005, Walmart's ILC application sparked fears about
anticompetitive practices and the potential for financial risk
of large commercial ILCs.
And now, in the new world of Amazon, Facebook, and Google,
it seems to me that the potential for corporate monopoly and
abuse is greater than ever.
Do you think that granting ILC charters to Big Tech or
large commercial firms could threaten competitive markets,
consumer privacy, or financial stability?
Ms. Henry-Nickie. Thank you for the question, and also for
your work in bringing this incredible piece of legislation to
the House Floor. I think you are right in calling out the
scariness that involves putting these massive firms that are
really good at sort of killing competition and monopolizing the
entire landscape.
I would be tremendously concerned about those kinds of
firms getting access to ILC charters, but I just want to go
back a little to the question around race-conscious policies.
In this legislation, giving the CFPB a vote to stop these
kinds of--a scaling of bad bank practices is actually really
important to maintaining our hold for communities of color on
the bank branches that are remaining. And also, it is a really
impactful way to generate new bank branches.
Part of the consumer restitution work that the CFPB does is
to legislate where that presence should be reinstated to help
rehabilitate the damage and disinvestment that is done to
consumers.
So, thank you again for the incredible work. I really want
this piece of legislation to advance and to pass because the
CFPB can do a fantastic job of holding institutions accountable
and stopping the spread of banking deserts through branch
losses.
Mr. Garcia of Illinois. Thank you so much.
And thank you, Mr. Chairman, for your indulgence.
Chairman Perlmutter. You're welcome. The gentleman yields
back.
Without objection, statements will be entered into the
record on behalf of the following Members of Congress and
organizations: the Honorable Donald M. Payne, Jr.; the American
Financial Services Association; the Bank Policy Institute; the
Credit Union National Association; the Electronic Transactions
Association; the Financial Data and Technology Association; the
Independent Community Bankers of America; the National Armored
Car Association; and the National Association of Federally-
Insured Credit Unions.
I would like to thank our witnesses for your testimony
today. Thank you for allowing me to be lenient with the Members
in allowing their time to kind of run over. We appreciate the
time that you have extended to us, and your expertise and your
testimony today.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Thank you very much. Thanks for your testimony.
This hearing is now adjourned.
[Whereupon, at 12:44 p.m., the hearing was adjourned.]
A P P E N D I X
September 29, 2021
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]