[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
REVAMPING AND REVITALIZING
BANKING IN THE 21ST CENTURY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 8, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-2
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-360 PDF WASHINGTON : 2026
=======================================================================
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on Financial Institutions and Monetary Policy
ANDY BARR, Kentucky, Chairman
BILL POSEY, Florida BILL FOSTER, Illinois, Ranking
BLAINE LUETKEMEYER, Missouri Member
ROGER WILLIAMS, Texas NYDIA M. VELAZQUEZ, New York
BARRY LOUDERMILK, Vice BRAD SHERMAN, California
ChairmanGeorgia GREGORY W. MEEKS, New York
JOHN ROSE, Tennessee DAVID SCOTT, Georgia
WILLIAM TIMMONS, South Carolina AL GREEN, Texas
RALPH NORMAN, South Carolina JOYCE BEATTY, Ohio
SCOTT FITZGERALD, Wisconsin JUAN VARGAS, California
YOUNG KIM, California SEAN CASTEN, Illinois
BYRON DONALDS, Florida AYANNA PRESSLEY, Massachusetts
MONICA DE LA CRUZ, Texas
ANDY OGLES, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
February 8, 2023............................................. 1
Appendix:
February 8, 2023............................................. 49
WITNESSES
Wednesday, February 8, 2023
Berlau, John, Senior Fellow & Director of Finance Policy,
Competitive Enterprise Institute............................... 5
Knight, Brian, Director and Senior Research Fellow, Program on
Innovation and Governance, Mercatus Center at George Mason
University..................................................... 7
Lee, Penny, President and Chief Executive Officer, Financial
Technology Association......................................... 9
Marcellin, Renita, Advocacy & Legislative Director, Americans for
Financial Reform............................................... 12
Reuter, Jim, Chief Executive Officer and President, FirstBank,
testifying on behalf of FirstBank and the American Bankers
Association (ABA).............................................. 10
APPENDIX
Prepared statements:
Berlau, John................................................. 50
Knight, Brian................................................ 54
Lee, Penny................................................... 60
Marcellin, Renita............................................ 65
Reuter, Jim.................................................. 74
Additional Material Submitted for the Record
Barr, Hon. Andy:
Opening statement of Financial Services Committee Chairman
Patrick McHenry............................................ 87
Written statement of the Consumer Bankers Association........ 89
Letter from the Independent Community Bankers of America,
dated February 6, 2023..................................... 92
Letter from the Independent Community Bankers of America,
dated February 8, 2023..................................... 94
Written statement of the Independent Insurance Agents &
Brokers of America......................................... 96
Letter from Rocket Mortgage clarifying testimony that was
made during the hearing.................................... 99
Green, Hon. Al:
Draft to amend the Dodd-Frank Act............................ 101
Draft to amend the Securities and Exchange Act of 1934....... 105
Waters, Hon. Maxine:
Written statement of the American Association for Justice.... 109
Written statement of the California Privacy Protection Agency 112
Written statement of the Center for Democracy and Technology. 114
Written statement of Consumer Reports........................ 115
Written statement of EPIC.................................... 118
Written statement of the Main Street Privacy Coalition....... 121
Written statement of the National Community Reinvestment
Coalition (NCRC)........................................... 125
Written statement of Public Citizen.......................... 138
Written statement of various undersigned consumer groups..... 143
REVAMPING AND REVITALIZING
BANKING IN THE 21ST CENTURY
----------
Wednesday, February 8, 2023
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Members present: Representatives Barr, Posey, Luetkemeyer,
Williams of Texas, Loudermilk, Rose, Timmons, Norman,
Fitzgerald, Kim, Donalds, De La Cruz, Ogles; Foster, Velazquez,
Sherman, Green, Beatty, Vargas, Casten, and Pressley.
Ex officio present: Representative Waters.
Chairman Barr. The Subcommittee on Financial Institutions
and Monetary Policy will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Welcome to the first hearing of the Financial Institutions
and Monetary Policy Subcommittee for the 118th Congress.
Today's hearing is entitled, ``Revamping and Revitalizing
Banking in the 21st Century.''
I now recognize myself for 5 minutes to deliver an opening
statement.
Thank you to our witnesses for joining us today for the
first hearing of the Financial Institutions and Monetary Policy
Subcommittee in this session of Congress.
Today's hearing will examine areas where banking
regulations can be updated to align with existing and emerging
technologies, barriers to entry for de novo banks and impacts
on competition in community banking, the current framework
governing consumer data privacy, and transparency and
accountability in bank regulation and supervision.
For years, I have been raising the alarm and pushing for
regulatory changes to address the crisis of de novo bank
charters. According to the FDIC, only 60 new banks have been
chartered in the past decade. In contrast, more than 2,000
banks were formed from 1990 to 2008. Obviously, this is a trend
that we need to examine.
In addition to fewer new banks, there has also been a
growing trend of community banks merging, being acquired, or
simply closing their doors, which has accelerated following the
financial crisis.
While low interest rates and a weak economy may have
contributed to this decline over the past decade, we also know
these trends are caused by a number of factors including cost,
compliance, and regulatory burden.
Congress should be encouraging an economic and regulatory
environment that allows community financial institutions to
thrive, let alone survive.
My bill, the Promoting Access to Capital in Underbanked
Communities Act, seeks to increase de novo bank formations
through a reduction in burdensome initial capital requirements
and restrictions.
And a bill sponsored by Representative Auchincloss directs
the Federal banking agencies to study and report to Congress on
ways to promote the establishment of new banks and credit
unions, including community development financial institutions
(CDFIs) and minority depository institutions (MDIs).
These bills are steps toward identifying and addressing the
challenges posed to the chartering of new financial
institutions. The fact is, encouraging the establishment of de
novo financial institutions will help fill the needs left by a
drought of new community financial institutions, along with
consolidation and closures over the past decade. Enabling new
bank formation will increase banking options and competition to
better serve families, small businesses, farms, and local
communities.
We will also be discussing bills sponsored by
Representative Williams and Representative Foster that
encourage coordination of State banking agencies and Federal
banking agencies in regulating and examining the activities of
bank service companies, and preventing the Financial Stability
Oversight Council (FSOC) from voting to determine that a non-
bank financial company will be supervised by the Federal
Reserve without first considering alternatives.
These bipartisan bills are first steps toward clearly
demonstrating Congress' intent when it comes to transparency
and accountability in financial regulation and supervision.
Technology has fundamentally changed the way consumers
participate in our financial system by improving both access
and inclusion. It has also increased the amount of sensitive
data shared with service providers and the government. Our
privacy laws, especially as they relate to consumers'
financial, data must keep up.
The financial services industry is already highly regulated
with regard to consumer financial information disclosed under
the Gramm-Leach-Bliley Act (GLBA). However, the ways in which
consumer data is collected and disclosed has changed
dramatically in the past 20 years, due primarily to the
proliferation of new technologies that consumers interact with
on a daily basis. It is time for Congress to update the
protections in GLBA to bring our regulations into better
alignment with existing and emerging technologies.
The discussion draft we are discussing in this hearing is
intended to modernize the Gramm-Leach-Bliley Act by using a
technology-agnostic approach to put control back in the hands
of the consumer, protect against the misuse or overuse of
consumer nonpublic personal information, empower consumers by
requiring privacy terms and conditions to be transparent and
easily understandable, and provide a national standard for data
privacy, thereby reducing compliance burdens and providing
certainty to both consumers and entities that handle their
financial data on a uniform basis nationwide.
I look forward to continuing to work with my colleagues on
this discussion draft to secure Americans' privacy without
strangling innovation.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Illinois, Dr. Foster,--and I
congratulate my friend from Illinois for his position as
ranking member of the subcommittee and I look forward to
working with him in a bipartisan way--for 4 minutes for an
opening statement.
Mr. Foster. Thank you. And congratulations yourself,
Chairman Barr.
It has been an interesting journey for me. I took office
for the first time in March of 2008, and was down in the front
rows there during the financial crisis. I was reading
Kindleberger in the weeks before Lehman Brothers fell, and I
decided I would actually finish reading it over the weekend
after that happened.
I think the most important thing we need to have in this
committee generally, and in this subcommittee in particular, is
a complete and correct understanding of history. And I will be
distributing a picture which sort of encapsulates that. This is
simply a history of bank failures in the United States from
1864 until the financial crisis, basically. And it is
interesting to look at the general picture of this.
First, you see that prior to the 1930s, bank failures were
very common. They happened almost on a weekly basis, and then
there was a crescendo of them in the 1920s and 1930s. And then,
we passed the FDIC bill and Glass-Steagall, and so on, and,
boom, they went to zero for about 40 years, near zero for 40
years.
And then, we had a burst of deregulation in the 1980s, and
we were rewarded by the savings and loan crisis, which is not
something that is on a lot of our consciousness at this point.
But, in fact, the taxpayer paid something like 1 percent--it
was 1.7 percent of GDP, a dead loss to the taxpayers because of
the savings and loan crisis, which was not a failure of a few
giant banks; it was a failure of thousands of small banks that
were, in retrospect, underregulated and got on the wrong side
of some interest rate bets and some rather corrupt practices,
in some cases.
But we put that behind us, and then had another wave of
deregulation in the early 2000s and, of course, paid the price
tremendously in the financial collapse.
Our first goal, our prime directive in this subcommittee is
we do not want to be having hearings on the next wave of bank
failures and collapses, and we have to understand the
importance of proper regulation in that.
The second thing is just generally the merit of regulation,
and I will also be distributing this table, a table that I made
probably a decade ago--in 2015, I think. It was simply a list
of all of the failures, the giant failures, bailouts and
bankruptcies of giant businesses, most of them financial
businesses.
And I don't think the list has changed significantly since
then. At the top, of course, are Fannie Mae and Freddie Mac,
Lehman Brothers, and Washington Mutual. These are just sorted
by the assets of failure. And behind every one of these
failures is grief for thousands of American families. The
employees of Enron suffered tremendously because there was not
proper regulation of Enron. Continental Illinois Bank and Trust
is still remembered in my State of Illinois as something that--
interestingly, of the top 16 largest firms by assets of
failure, every one of them happened under Republican watch. And
I think that is significant.
So, we have to be careful not to just follow the
traditional partisan split on this and repeat mistakes that
were important in the past. Because when giant businesses fail,
it is not just Wall Street that suffers; it is ordinary
families. And we have to understand that.
I want to thank the witnesses for their written testimony
because it represents the full spread of issues that we have
been and will be and should be discussing on this.
And I just want to touch on one thing, preemption_there is
a long list of issues that some people argue require a Federal
floor, a Federal ceiling, a Federal standard. Other
institutions love the idea that we have 50 different standards
because they enjoy it as a barrier to entry to new competitors.
And the idea that I want to throw out there as an area of
potential compromise on this, is the idea that any group
representing 20 percent of the States should be able to get
together and adopt a common standard, so that new entries would
only have a handful of standards instead of 50 different
standards or a single, one-size-fits-all standard.
Anyway, thank you, Mr. Chairman. And I look forward to
working with you.
Chairman Barr. Thank you to the ranking member.
And finally, the Chair recognizes the ranking member of the
full Financial Services Committee, the gentlewoman from
California, Ms. Waters, for 1 minute.
Ms. Waters. Thank you, Chairman Barr.
I am very pleased we are considering reforming the banking
sector, because consumers are sick and tired of banks ripping
them off, saddling them with junk fees, and otherwise engaging
in abusive and illegal behavior.
Similarly, I look forward to reviewing Chairman McHenry's
bill on data privacy, which is something that should be
strengthened. But the details matter, and I understand consumer
advocates have already raised serious questions.
Additionally, the Dodd-Frank Act has been lauded for
preventing a financial crisis when the pandemic struck. We
should now be wary of deregulating our way into another
financial crisis.
Finally, Republicans must end their brinksmanship around
whether the U.S. can pay its debts. Otherwise, any reforms to
the banking industry passed by this committee will be undone
when our markets collapse.
I yield back the balance of my time.
Chairman Barr. Thank you, Madam Ranking Member, and I look
forward to the robust discussion about whether deregulation or
government policy was responsible for many of these financial
crises.
We will now welcome the testimony of our witnesses.
First, Mr. John Berlau. Mr. Berlau's work focuses on how
public policy affects access to capital, entrepreneurship, and
investments made by the public and business community alike. He
has also studied the consequences of financial reform efforts
passed by Congress, like the Sarbanes-Oxley Act and the
government's response to the 2008 financial crisis, including
the Dodd-Frank Act.
Second, Mr. Brian Knight. Mr. Knight's research focuses on
numerous aspects of financial regulation, including the
creation of pro-innovation regulatory environments, the role of
federalism in fintech regulation, the use of digital assets for
financial transactions, the role of regulation for credit
markets and consumer protection, and the provision of capital
to businesses.
Third, Ms. Penny Lee. Ms. Lee previously served as chief
strategy officer of 1776, a prominent technology incubator and
accelerator servicing over 1,200 startups. She also co-founded
a Washington, D.C.-based angel investment group, K Street
Capital, and can provide insights on how our regulations affect
innovation and new technologies.
Fourth, Mr. Jim Reuter. Mr. Reuter has extensive banking
experience, starting his career at FirstBank in 1987, and
holding several different roles within the organization.
FirstBank has attributed many of the bank's products and IT
innovations over the years to Mr. Reuter's leadership and
guidance.
And finally, Ms. Renita Marcellin. Ms. Marcellin is the
advocacy and legislative director with Americans for Financial
Reform. She previously served as a senior associate at JPMorgan
Chase, where she worked to strengthen the bank's anti-money
laundering controls.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony.
And without objection, each of your written statements will
be made a part of the record.
Mr. Berlau, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF JOHN BERLAU, SENIOR FELLOW & DIRECTOR OF FINANCE
POLICY, COMPETITIVE ENTERPRISE INSTITUTE
Mr. Berlau. Thank you.
Thank you, Chairman Barr, Ranking Member Foster, and
honorable members of the subcommittee. Thank you all for this
opportunity to present testimony on behalf of my organization,
the Competitive Enterprise Institute (CEI), at this hearing on
the vital topics of financial inclusion and financial
innovation and on the regulatory barriers preventing the
formation of new banks that could be a vital part of reaching
consumers and small businesses that aren't being served
adequately by the existing financial system.
CEI is a Washington-based free-market think tank founded in
1984 that studies the effects of regulations on job growth and
economic well-being.
Since, ``competitive,'' is the first word in our name, we
are also very concerned about the extraordinary regulatory
barriers that have been erected since the financial crisis of
2008 to the formation of new, or de novo, banks. In every
business sector, new entrants are essential to the functioning
of a competitive free market economy, the creation of jobs, and
spurring innovation.
When we hear terms like, ``innovation,'' in regard to any
business sector, we often think of things like apps, digital
wallets, and artificial intelligence, all of which are great
things. But all that innovation really means in financial
services and other businesses is creating a better way to serve
existing customers and bring in new business.
With that example, I think it is worth looking at what one
de novo bank did to better serve its customers involving things
more associated with the 19th Century, like horses and buggies.
The Bank of Bird-in-Hand became a de novo bank in 2013,
serving the Amish community in rural Pennsylvania. And one of
the things it did was make drive-through lanes accessible to
horses and buggies, and build a barn-like shelter for the
horses, mobile banking units that could come to some of the
farm communities for those who couldn't make the trek with a
horse and buggy. And this is an example of the kind of
innovation a de novo bank can do.
But unfortunately, Bird-in-Hand was the first de novo bank
chartered in more than 3 years by the FDIC, and only a handful
have been given approval, given the green light since then.
Whereas, by contrast, in pretty much all of the decades before,
even right after the S&L crisis, the FDIC would approve more
than 100 de novo banks per year.
No doubt there was more than one factor in the stunning
drop in the number of new banks per year, including the costly
provisions of Dodd-Frank, which imposed a crushing burden on
many existing community banks and credit unions.
But there was also a new FDIC policy that required de novo
banks to put up really a massive amount, like 7 years' worth
all at once, of up-front capital, so that if a de novo bank or
people who were trying to organize it thought that maybe it
would have $500 million in assets in 7 years, it would have to
come up with $40 million right at the time.
In underserved areas where there aren't venture capitalists
falling out of trees, that can be a hard thing to do. So, it
was sort of like the FDIC was hanging a sign that said: ``No
new banks need apply.''
And although those things have improved, the policy has
been modified somewhat as far as up-front capital, it still
doesn't compare to even the decades before, even in the years
after the S&L crisis.
Unduly restricting the emergence of de novo banks may be
justified by some as preventing risk, yet the practice poses
its own risks. A lack of new entrants in the banking sector
increases the chances that a large bank failure could severely
curtail the supply of credit and availability of financial
services. And that, in turn, sets the stage for a continuing
cycle of government bailout and increases a demand for it.
A competitive market, free of heavy-handed regulation,
enables a financial system and an economy that is
simultaneously dynamic, inclusive, and resilient.
Thank you again for inviting me to testify, and I look
forward to your questions.
[The prepared statement of Mr. Berlau can be found on page
50 of the appendix.]
Chairman Barr. Thank you, Mr. Berlau.
Mr. Knight, you are now recognized for 5 minutes to give
your oral remarks.
STATEMENT OF BRIAN KNIGHT, DIRECTOR AND SENIOR RESEARCH FELLOW,
PROGRAM ON INNOVATION AND GOVERNANCE, MERCATUS CENTER AT GEORGE
MASON UNIVERSITY
Mr. Knight. Thank you.
Good morning, Chairman Barr, Ranking Member Foster, and
members of the Subcommittee on Financial Institutions and
Monetary Policy. It is an honor to testify before you.
My name is Brian Knight, and I am the director and a senior
research fellow for the Program on Innovation and Governance at
the Mercatus Center at George Mason University. Any opinions I
express today are my own and do not necessarily reflect those
of my employer.
I intend to discuss the following key themes:
collaboration; accountability; and Congress' role.
The business of banking is changing, in large part due to
technology. For example, the merger of two large banks, BB&T
and SunTrust, into Truist was justified in large part by the
need to achieve scale so that they could afford to produce the
technology necessary to compete.
An average community bank is unlikely to merge its way to
the scale of Truist. So, what can they do? One important option
is to partner with innovative service providers that can
leverage technology beyond what the average community bank can
develop internally. This technology can assist with a range of
functions, including customer acquisition, intake, and
underwriting.
These technological innovations can provide better service.
The use of alternative data has been shown to provide better
pricing for borrowers with limited credit histories. Fintech
firms have increased the availability of credit to relatively-
underserved markets. For example, there is evidence that during
the Paycheck Protection Program (PPP), fintech enabled loans to
be extended at higher rates to the smallest businesses,
minority-owned businesses, and businesses without a preexisting
relationship to a lender.
Now, nothing is perfect. For example, some fintech lenders
have been identified as having significantly higher fraud rates
on their PPP loans. Even here, though, the value of the bank
partnership is apparent. As per a congressional report, some
bank partners were able to insist upon improved due diligence
and compliance with their fintech partners, likely lowering the
rate of fraud.
Small banks will be better able to compete if they can
partner with other firms. Unfortunately, unwarranted or inapt
regulation imperil the value of bank partnerships. While some
regulation of these relationships is entirely appropriate, we
must be certain that it is not excessive and that it does not
unfairly penalize smaller banks.
This brings me to my next point: The relationship between
government and banks is unique. Banks are regulated in a more
intimate and intense manner than almost any other industry.
Banks are subject to ongoing supervision that results in
regulators exercising power and discretion outside the view of
the public, that leaves banks feeling like they are bound by
nominally-nonbinding guidance, and they are loath to challenge
their regulators in court.
Fortunately, there is evidence that this dynamic has
resulted in past abuses where regulators have de facto punished
banks for engaging in legal but disfavored activity. The most
notable examples are the efforts of FDIC employees to prevent
banks from offering refund anticipation loans or working with
payday lenders.
In both cases, regulators frequently could not rely on a
violation of law or some other objective criteria and, instead,
relied on nebulous concepts like reputation risk as
justification to threaten and penalize banks for engaging in
lawful business.
While the FDIC has since disclaimed the aggressive acts of
some of its employees, there has been no concrete legal change.
Likewise, while some courts limit the concept of, ``unsafe and
unsound,'' to require a concrete threat to a bank's stability,
regulators and some other courts do not recognize this
limitation. It is critical that bank regulation be transparent,
accountable, and consistent with the law and the Constitution.
To be clear, I don't think that most regulators are
inherently malicious. Rather, the nature of the regulatory
system creates poor incentives for all involved. Congress can
and should help address these problems.
The first thing Congress should do is engage in vigorous
oversight. Congress should engage fully with the regulators and
with regulated entities to get more insight into how regulators
use their power.
The second thing Congress should do is ensure that
regulators' material supervisory decisions can be appealed to a
truly neutral third party.
Third, Congress should provide more clarity as to the scope
of a regulator's authority. At a minimum, Congress should make
clear that for something to be an unsafe or unsound practice,
there must be concrete harm, rather than speculative harm, and
that harm must pose a significant risk to the bank's financial
condition, not just mere potential lost profit.
Congress should also consider eliminating things like
reputational risk from the regulator's purview in favor of more
objective criteria.
Small banks are an important part of the American economy.
Congress and regulators should foster an environment that
enables innovation, as well as clarify the scope of regulators'
authority to make bank regulation more transparent, objective,
and resistant to abuse.
Thank you again for the opportunity to testify. I look
forward to your questions.
[The prepared statement of Mr. Knight can be found on page
54 of the appendix.]
Chairman Barr. Thank you, Mr. Knight.
Ms. Lee, you are now recognized for 5 minutes to give your
oral remarks.
STATEMENT OF PENNY LEE, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
FINANCIAL TECHNOLOGY ASSOCIATION
Ms. Lee. Thank you, Chairman Barr, Ranking Member Foster,
and members of the subcommittee, for the opportunity to testify
today on this important and timely topic.
My name is Penny Lee, and I am president and CEO of the
Financial Technology Association (FTA). We are a relatively new
trade group representing the industry leaders shaping the
future of finance. We champion the power of technology-centered
financial services and believe in a world where everyone
anywhere can access the financial products they need to
succeed.
Digital tools are putting people in control of their
finances and making it easier and cheaper to move, save,
manage, keep, and invest their money. Our members are the
innovators helping aspiring entrepreneurs in every ZIP Code
access the capital and resources they need to start a small
business, from selling products on an e-commerce marketplace to
helping them make payments, reach customers, manage payroll,
and track costs more efficiently.
Millions of small businesses are powered by fintech, from
your local florist to your neighborhood restaurant. Financial
technology helps college students purchase books or supplies
for the next semester in a way that better fits their budget.
It allows families to send money overseas to loved ones more
quickly, safely, and cheaply, and helps all of us get our
dinner delivered and have the driver paid as well in real time.
These financial digital tools help people keep their money
while also saving them time. According to a recent survey by
The Harris Poll, 8 in 10 Americans used fintech to manage their
money in 2022, and 93 percent said they benefited from it.
Consumers used to primarily conduct their financial
business in a bank branch. Today, they expect to manage their
finances on their mobile phone or via the internet. Therefore,
it is critical that the statutory and regulatory framework that
applies to financial services keeps pace and modernizes
accordingly.
FTA and its members believe that consumer choice, trust,
and protection are the cornerstones of financial services, and
support efforts to modernize financial data privacy
expectations and create a clear, consistent, and uniform
Federal privacy standard that preempts the patchwork of State
privacy laws while satisfying consumer needs and expectation,
safeguarding consumer data, and supporting broader societal
objectives, and other legal requirements.
In particular, modernizing Federal privacy laws like GLBA
will help ensure a level playing field for all financial
services participants, enhance consumer rights, and ensure that
privacy and security standards fit the digital age. We
appreciate Chairman McHenry's, Chairman Barr's, and the
committee's efforts in this space.
Last year, we released data privacy principles adopted by
all of our members, and they include the following: consumers
should control their personal data; information provided to
consumers should be clear and transparent; consumer data should
only be collected for stated and transparent purposes, and it
should be protected by leading security practices; and consumer
data should not be used in a discriminatory manner, and
consumers should not fear retaliation for exercising their
rights.
We believe these principles should inform any financial
data privacy modernization effort.
Proper use of consumer financial data is the future and
will underpin a more fair, accessible, and inclusive financial
system capable of better serving all American consumers and
small businesses.
On behalf of FTA's 22 member companies, I appreciate the
opportunity to engage with the subcommittee today on
modernizing Federal financial data privacy requirements and
other efforts.
Fintech innovations are driving competition, enabling
access, and powering choice for consumers and small businesses,
resulting in lower costs, enhanced convenience, and strong
financial futures. We believe that today's digital
infrastructure enables consumers to plan and shape their
financial tomorrow.
To that end, we support policy efforts that prioritize
regulatory frameworks and spur innovation, while safeguarding
consumers, and we look forward to working with the subcommittee
and other members on this important matter.
Thank you.
[The prepared statement of Ms. Lee can be found on page 60
of the appendix.]
Chairman Barr. Thank you, Ms. Lee.
Mr. Reuter, you are recognized for 5 minutes to give your
oral remarks.
STATEMENT OF JIM REUTER, CHIEF EXECUTIVE OFFICER AND PRESIDENT,
FIRSTBANK, TESTIFYING ON BEHALF OF FIRSTBANK AND THE AMERICAN
BANKERS ASSOCIATION (ABA)
Mr. Reuter. Thank you.
Chairman Barr, Ranking Member Foster, and members of the
subcommittee, thank you for the opportunity to testify today on
revamping and revitalizing banking in the 21st Century.
I have been fortunate enough to testify before this
subcommittee in the past, and I look forward to, once again,
sharing my perspective as a banker for over 35 years on changes
underway in our industry.
Today I am speaking on behalf of Denver-based FirstBank and
our 3,000 employees, as well as the American Bankers
Association, whose members include small, mid-sized, regional,
and large banks, who together employ more than 2 million
people.
Founded in 1963, FirstBank has grown organically to more
than 100 locations in Colorado, Arizona, and California. We are
currently the largest headquartered bank in Colorado. While our
business is banking, everyone who works at FirstBank
understands the commitment to the communities we serve.
For example, our 300 bank officers sit on 2 to 3 nonprofit
boards each, bringing support and leadership to hundreds of
nonprofits. Further, our most recent Colorado Gives Day raised
over $53 million for more than 3,000 nonprofits in just 24
hours.
That commitment also goes to the services we provide our
customers. Our motto is to meet our customers where, when, and
how they want to be met. That meant offering mobile banking
before many others, as well as being an early adopter of
instant payment services before others. That, coupled with our
banking for good mission, is what has enabled FirstBank to be a
successful community bank.
I would also like to take a moment to reflect on the
banking industry over the last several years. During the COVID-
19 pandemic, banks were a source of strength to the country,
providing critical financial support for the economy in a time
of uncertainty and stress, all while maintaining near-record
capital levels despite the economic disruption.
We come here today with a healthy, robust banking industry
continuing to meet the needs of Americans. However, like many
industries in this country, we face challenges from uncertain
economic and business conditions. And despite that, we expect
to remain strong and resilient going forward.
While my comments today will address several bills being
discussed as part of the hearing, I would also like to note
that the ABA has outlined in its Blueprint for Growth
additional legislative and regulatory steps, which we believe
policymakers such as yourselves can take to support a dynamic
and innovating banking industry and help foster a competitive
financial services market.
Of the several bills of interest to the committee today,
Chairman Barr's and Representative Auchincloss' proposals would
help promote de novo charters, increasing availability of
banking and financial services. I will also discuss Chairman
McHenry's draft legislation on data privacy.
ABA has long supported efforts to promote the formation of
new banks in urban and rural areas, and our industry has always
welcomed competition. In the face of consolidation, new
entrants bring new vitality to the industry, while expanding
banking access for both individuals and small and medium-sized
businesses in the communities they serve.
Among other provisions, Chairman Barr's legislation would
establish a 3-year phase-in period for new banks to comply with
capital standards, a reasonable and temporary regulatory
adjustment that will encourage de novo formation of banks that
will be well-equipped to serve and respond to the pressing
banking and financial needs of their local communities. ABA
strongly supports this legislation.
Representative Auchincloss' legislation requires Federal
banking agencies to undertake a long-overdue study to report on
the challenges faced by entities attempting to become de novo
institutions and to develop a strategic plan to assist in the
de novo application process. ABA also supports this
legislation.
As to Chairman McHenry's efforts to modernize financial
data privacy laws, ABA supports several aspects of the draft,
and will continue working with the committee to ensure any
final legislation implements any new privacy rights in a
thoughtful manner.
ABA supports the addition of meaningful preemption and
additional clarity about the application of the Gramm-Leach-
Bliley Act (GLBA) to data aggregators.
As the committee continues its efforts, we recommend that
any legislation include comprehensive preemption of State law,
not add a private right of action or enforcement by State
attorneys general, preserve the GLBA's administrative
enforcement structure by the prudential regulatory agencies,
and ensure that any new privacy rights do not impair or
interrupt the operation of the financial system, impose undue
compliance burdens on banks, and provide real value to
consumers like the approach taken by Congress when the GLBA was
initially adopted.
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
74 of the appendix.]
Chairman Barr. Thank you very much.
And, Ms. Marcellin, you are now recognized for 5 minutes to
give your opening remarks.
STATEMENT OF RENITA MARCELLIN, ADVOCACY & LEGISLATIVE DIRECTOR,
AMERICANS FOR FINANCIAL REFORM
Ms. Marcellin. Chairman Barr, Ranking Member Foster, and
Ranking Member Waters, thank you for the opportunity to speak
on behalf of my organization, Americans for Financial Reform,
an advocacy and correlation group that was instrumental in
passing the Dodd-Frank Wall Street Reform Act.
It is our mission to maintain the Act's reforms and to
advocate for proposals that further strengthen our financial
system. Unfortunately, many of the proposals being discussed
today take us backward in the path to creating a more fair
banking system that works for working-class communities, like
the one I grew up in in East Flatbush, Brooklyn, New York.
A fairer financial system has strong safeguards for
consumers' financial data, stops excessive corporate power in
its tracks, promotes competition, and applies the same rules to
the same activities that bear similar risk regardless of the
technology used.
First, I would like to lay out principles for protecting
people's financial data. One, our financial data laws should
not be amended to preempt State laws, especially when the
Federal legislation proposed is weaker than the protections
currently provided by many States, including California and
Illinois.
Two, it must include a strong private right of action for
consumers to seek recourse when harmed by a violation.
Three, it must affirm the role of the Consumer Financial
Protection Bureau (CFPB), the agency tasked with protecting
consumers, and their right to access their own data from a
financial services business in regards to products and services
they use. The CFPB is currently writing rules to give consumers
control over their data. Congress should be supporting this and
not undermining them.
The proposed financial data privacy bill before us today
does none of these things. We cannot afford to roll back
protections for consumers that safeguard their data, especially
as we enter this new age of banking that is more and more
defined by the blending of two behemoth industries, Wall Street
and Silicon Valley, the latter of which depends on a business
model of data maximization.
We see the intertwining of these industries manifest in
numerous ways, including digital wallets and peer-to-peer
payments via platforms like Venmo. Last week, Twitter announced
they are working to offer payment services across their
platform. What happens when Twitter combines their data on
where we eat, shop, and sleep with transactional data?
Large tech companies also have the ability to offer a full
suite of banking services, while avoiding the necessary banking
rules by obtaining an industrial loan company charter. AFR
consumer advocates and even bank trade groups have long sought
to close this loophole.
The rise of Buy Now, Pay Later products is another example
of tech and financial services blurring their boundaries. These
products that effectively offer credit often rely on the
expectation of late fees, can be difficult for people to
manage, and can trigger nonsufficient fund fees if linked to a
bank account. Also, they lack the same dispute or refund rights
that credit cards have and can negatively affect your credit
score, even if you pay them all on time.
Lastly, many partnerships between bank and fintech firms
have created a back door for predatory lenders to exploit
vulnerable consumers, including veterans and communities of
color, by offering loans with APRs in the triple digits.
Given the various ways Big Tech now offers financial
services, Congress should work to make our traditional banking
system more resilient, in addition to protecting consumers'
data.
In that vein, Congress should resist the urge to roll back
capital requirements for new or de novo banks, as they are
called. Banks need an adequate capital cushion to absorb their
losses during times of stress. We learned this lesson in 2008
and should not forget it in 2023.
If we are serious about injecting competition into the
banking landscape, Congress should amplify calls to bolster our
bank merger review guidelines so new banks don't have to
compete with larger and larger banks. If we want more banks, we
should not make it so easy for them to merge.
In conclusion, innovation is not a reason to forget proper
regulation. Consumer protections, prudential regulation, and
anti-monopoly laws came after hard-learned lessons in American
history. To create a banking system worthy of the 21st Century,
we should build upon these lessons instead of tearing them
down.
Thank you.
[The prepared statement of Ms. Marcellin can be found on
page 65 of the appendix.]
Chairman Barr. Thank you, Ms. Marcellin.
And before we turn to Member questions, I would ask for
unanimous consent to enter Chairman McHenry's opening statement
into the record.
Without objection, it is so ordered.
The Chair now recognizes himself for 5 minutes for
questioning.
And I will start with Ms. Lee and the data privacy issue.
The financial services industry, as I said in my opening
statement, is already a very highly-regulated sector when it
comes to privacy. However, since GLBA was enacted, we have seen
a proliferation of innovation in the financial services space
requiring the need to update and modernize that law. As we look
to make those updates, deciding on the proper enforcement
mechanism is extremely important.
Ms. Lee, do you have an opinion on what enforcement
mechanism would be best for the financial services industry?
And I say that with reference to Mr. Reuter's view about a
private right of action not being the right answer.
Ms. Lee. Thank you, Chairman Barr. It is something that we
have been in discussions about, and we know this is a
relatively new draft, so what we would love to do is to get
back to you. We know that there are tradeoffs on either side.
We know that there is a private right to action. We know there
are State attorney generals' actions. There are Federal
enforcements and other things. And we would love to work with
this committee on talking through kind of the pros and the
consequences of various different enforcements mechanisms.
But we believe that however we modernize it, it does need
to have some type of strong enforcement mechanism to ensure
that the consumers' data is protected.
Chairman Barr. Mr. Reuter, would a private right of action
affect innovation? Would it open the door to frivolous lawsuits
from trial lawyers?
Mr. Reuter. Chairman Barr, I think it would open the door
to frivolous lawsuits.
The thing I would point to is banks have been in the data
industry for a long time, and GLBA has been around for 20
years. And I think if you look at our track record, it is
really good.
And as a result, I think something that is very important
is preemption to State law, because we operate--I have
customers in all 50 States, even though I am headquartered in
Colorado. And then, two, I think having the prudential
regulators being the ones to oversee enforcement has proven to
work well.
As banks, we have everything that we could ever possibly
know about a customer, but we are in the trust business. And
the way we make money is we gather deposits and we make loans.
And I think we have acted very responsibly with the data, and
that GLBA has stood the test of time.
Chairman Barr. As I mentioned in my opening statement,
since the financial crisis, de novo charter formation has
significantly slowed. Between 2010 and 2019, fewer than 10 new
banks, opened on average, per year. And burdensome regulations
and other roadblocks have reduced de novo community bank
formation, denying individuals and businesses access to banking
services. This is one of the reasons why we have the necessity
for these mergers.
My bill, the Promoting Access to Capital in Underbanked
Communities Act, is relatively straightforward, allowing for a
phase-in of capital for de novo institutions, including some
provisions targeted towards underserved rural areas and several
other commonsense provisions to promote bank access in unbanked
communities.
Mr. Berlau, can you please discuss the impact of bank
consolidation in rural communities? And will increased de novo
bank formation help solve the problem?
Mr. Berlau. Thank you for the question. I don't know that
consolidation itself is necessarily a bad thing. But as Mr.
Knight said, sometimes mergers can provide more efficiencies,
and more services to consumers.
My issue with consolidation is driven by the cost of
regulation. And also, in the case of Bird-in-Hand and other
banks, some of these communities were never really adequately
served, and that is what you really need de novo banks for. And
that is the good that your bill and Congressman Auchincloss'
bill would do as far as phased-in capital, studying the
situation for de novo, and what are the barriers and other
things.
Chairman Barr. Back to Mr. Reuter, and Mr. Knight, I
believe that community banks are what set our country apart
from many other financial services markets around the world.
If you go to Europe, you have large banks, and if you go to
other parts of the world, it is large institutions. They don't
have community financial institutions like we do, and that is
essential to new business formation and entrepreneurship,
relationship banking, lending to someone based on their
character, risk taking. That creates the dynamism of our
economy which sets us apart and helps U.S. competitiveness, in
my view.
Mr. Reuter, in your testimony, you note that my bill would
spur more de novo bank formation, would increase competition,
and would expand banking access for small businesses. Can you
elaborate on that? And do you agree with that argument of
competitiveness with small community banks?
Mr. Reuter. I would strongly agree with that argument. We
are a great example of a community bank. We have, as I
mentioned in my opening comments, 300 officers who serve on 2
or 3 nonprofits each. It is not just the nonprofits that
benefit; it is all of the businesses that are associated with
those nonprofits. We raised $53 million for over 3,000
nonprofits in 24 hours.
Having a group of people on the ground, 300 officers living
in the communities, using the businesses, there is no better
way to have a pulse on what that community needs.
So, we are all for more competition. Bring it on.
Chairman Barr. Thank you. My time has expired.
The Chair now recognizes the ranking member for--oh, I am
going to actually recognize the ranking member of the full
Financial Services Committee first, I believe. The gentlewoman
from California, Ms. Waters, is now recognized.
Ms. Waters. Thank you very much, Mr. Chairman.
I would like to direct my question to Ms. Marcellin. We are
talking about revamping banking at this hearing, and I think
this is the perfect opportunity to talk about complaints from
consumers who have been repeatedly ripped off by megabanks.
In December, the CFPB slapped Wells Fargo with an order to
pay $3.7 billion in fines and compensation to harmed consumers.
I was pleased that Director Chopra said that that fine, as
large as it may be, was just a first step, and that he would
work with banking regulators to consider imposing even stronger
restrictions on the bank.
Ms. Marcellin, do you agree that far too many financial
institutions' fines are just the cost of doing business, and
that our regulators should do more to impose tougher penalties
to curb the illegal and abusive actions of megabanks?
Ms. Marcellin. Thank you, Ranking Member Waters, for that
question.
Yes, I absolutely agree. Companies like Wells Fargo, as you
said, repeatedly break the law and are pretty much in the news
almost every quarter, from their fake account scandal, to
forged documents which they used to illegally repossess
people's homes, just to name a few.
I will turn to Acting Comptroller Hsu's speech recently
where he said that there are things that regulators can do
involving even going as far as revoking their charter, their
national charter, or using a consent order, for example, to
stop them from getting new business.
And we think that the regulators should be using all of
these tools, even when using stress tests, for example, and
getting that back to being a supervisory tool.
However, Comptroller Hsu said it, but we are waiting to see
regulators use their power to the full extent of the law.
Ms. Waters. Thank you very much. Ms. Marcellin, in my bill,
the Repeat Offenders, Megabanks, and Credit Bureaus
Accountability Act, financial regulators are required to draw
up a plan for how they will use their authority to curb repeat
offenses of large financial institutions.
Recently, Acting Comptroller Hsu outlined the first draft
of an escalation plan where regulators would impose tougher
penalties, including breaking up a bank that repeatedly breaks
the law. Recently, Acting Comptroller Hsu outlined the first
draft of such an escalation plan where bank regulators would
impose tougher penalties, including breaking up a bank that
repeatedly breaks the law and is too big to manage.
Does this seem like a good idea? And what should all of our
financial regulators outline? Should they all outline a plan
using the enforcement tools they already have at their
disposal?
Ms. Marcellin. Thank you, again. Yes. I agree, and I am
sure my colleagues at Americans for Financial Reform would
agree. Even going back to the chart that Ranking Member Foster
used earlier showing bank failures, one of the periods he
highlighted was one of the periods after--when we passed the
Glass-Steagall Act, which goes to taming how large banks can
grow. And we can see from then that failures were markedly less
than they are now.
So, plans that make sure to keep banks following--being not
too big to manage, we definitely agree with that.
Thank you.
Ms. Waters. Thank you.
Let me continue. I am interested in learning how we can
strengthen data privacy standards to better protect consumers.
I know this is a priority for Chairman McHenry, but I have
heard some concerns with the approach taken in the discussion
draft we are considering today.
For example, according to the California Privacy Protection
Agency, the discussion draft we are considering would preempt
State laws, including those in my home State of California. The
draft would prevent States from adopting new protections in
response to changes in technology, something the current law
allows.
And so, Mr. Chairman, I would ask unanimous consent to
enter the full statement from the California Privacy Protection
Agency for the record.
Chairman Barr. Without objection, it is so ordered.
Ms. Waters. Thank you, Mr. Chairman.
Ms. Marcellin, what concerns do you have with this
discussion draft? For example, we know the Republicans have
made it their mission to undermine, if not get rid of the CFPB,
but will consumers be better off?
Ms. Marcellin. Thank you.
Chairman Barr. The gentlewoman's time has expired.
If you could submit your response in writing, or please
respond quickly.
Ms. Marcellin. Yes. The CFPB's role in protecting consumer
financial data should be reaffirmed in any proposed
legislation.
Thank you.
Chairman Barr. Okay. Thank you.
Ms. Waters. Thank you. I will yield back.
Chairman Barr. The gentleman from Missouri, Mr.
Luetkemeyer, is now recognized.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Over the last few years, I worked on a beneficial ownership
bill in the 116th Congress alongside Chairwoman Maloney. The
goal of the legislation was to stop law enforcement from
deputizing financial institutions to collect personal data from
consumers. To do this, small businesses would submit simple,
straightforward information to the Financial Crimes Enforcement
Network's (FinCEN's) database regarding who the owner is of a
particular business. This information would help law
enforcement crack down on shell corporations participating in
illicit finance. However, I am concerned that FinCEN is not
appropriately implementing this legislation.
Mr. Reuter, your testimony discusses the beneficial
ownership rule currently being promulgated by FinCEN, which
would result in banks being unable to use the FinCEN database
to fulfill their customer due diligence requirements.
Would you like to elaborate just a little bit on the
aspects of that rule that are particularly troubling to you?
Mr. Reuter. Yes, I would. Thank you, Congressman. The
original intent to have a database that not only FinCEN could
use, but the banking industry could use to identify customers
and beneficial owners was a great idea. Unfortunately, it looks
like the revised versions and many of the current discussions
show that they are going to limit access to that or make it
very difficult. And, in addition, they want us to still collect
all that information, so a complete duplicative process. And
then, there are some concerns that reconciliation of the two
will create additional compliance burdens.
We have 30 people in our Anti-Money Laundering/Bank Secrecy
Act (AML/BSA) operation as a bank right now, and I think this--
Mr. Luetkemeyer. It makes a lot of money, doesn't it, to
shuffle papers around?
Mr. Reuter. Yes.
Mr. Luetkemeyer. It makes you lots of money, doesn't it?
Mr. Reuter. The BSA is super important to catch illicit
activities and anti-money laundering, but we need to do it in
the most efficient way.
Mr. Luetkemeyer. That is not the way that this system was
envisioned, though, was it?
Mr. Reuter. No.
Mr. Luetkemeyer. When they promulgated this rule initially,
the banks were going to be able to access this so they could
complete their forms, so they could complete the information
they needed to send in, correct?
Mr. Reuter. That is correct.
Mr. Luetkemeyer. So, this is a complete reversal of the
original intent of that bill.
Thank you.
Also, Mr. Reuter, I noticed your testimony mentions my
legislation, the Consumer Information Notification Requirement
Act--thank you for that--which would update GLBA to provide one
robust national data security and breach notification standard.
I would like to thank you for your support of the
legislation. Would you like to elaborate on the problem that it
solves with regards to this patchwork of State laws with which
you have to comply?
Mr. Reuter. Yes. I mentioned earlier that we are in the
business of trust, and we have been trusted with information
for many years. GLBA has been around for 20 years, and I think
it has been a great model for the banking industry.
I would really strongly encourage that the prudential
regulators be the ones that continue to oversee compliance, but
trying to comply with 50 different State laws would be cost-
prohibitive and extremely challenging.
Even though I said we are headquartered in Colorado, we
have customers in all 50 States. So when I think about the
prospects of 50 different State laws, if we had an unfortunate
data breach incident, that would be almost impossible to
administer. Right now, of the five States that have passed
State-level laws, California is the only one that is not giving
preemption for GLBA.
And I think it is really important as we operate--our
customers move. The great thing about technology, as Penny said
earlier, is that people can bank anywhere, and they do that.
And we have done a great job as a bank, so they stay with us
even when they are in another State.
Mr. Luetkemeyer. A really simple fix to what could be a
really major headache for you, is it not?
Mr. Reuter. Correct.
Mr. Luetkemeyer. Thank you.
One key aspect of this hearing is the role of technology in
providing access to credit for unbanked and underbanked
individuals, an issue that receives bipartisan support here in
Congress. However, the actions by this Administration and the
Federal Reserve seem to directly contradict this idea of
increasing access to low- and moderate-income consumers.
Currently, Federal Reserve Vice Chairman Barr is
reexamining the U.S. capital regime and is looking to
significantly increase bank capital in the United States.
Mr. Reuter, how would the ability of your bank to be able
to provide credit to low-income consumers be impacted by your
capital requirements if they were significantly increased?
Mr. Reuter. I think the proposal makes a lot of sense,
because to start with enough capital for the growth you will
see 3 to 4 years down the road, that is a big check to ask the
original investors to write. And as was mentioned earlier, that
makes it almost impossible to start a new bank. So, a phased-in
capital approach is very logical, and I think it is also
prudent from a risk standpoint as the bank grows.
Mr. Luetkemeyer. Okay. But the question is, basically, you
are increasing your capital to be able to address low- and
moderate-income folks. Is that a necessary situation for you to
address low- and moderate-income folks?
Mr. Reuter. Absolutely. It is important we bank the entire
community, and new banks help in that endeavor. And as I said
earlier, our 300 officers on the ground make a big difference.
Mr. Luetkemeyer. I yield back.
Chairman Barr. Thank you.
The ranking member of the subcommittee, the gentleman from
Illinois, Dr. Foster, is now recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman.
We have talked repeatedly about sort of the two main
factors that are both driving consolidation and discouraging de
novo entities. Those are regulatory compliance costs, which are
part of it, but also the digital economies of scale, which I
think are really the most fundamental.
In Mr. Knight's testimony, he referenced the BB&T and
SunTrust merger, and the article that you linked to in your
testimony was exactly on point, that this was a merger driven
by the need, or at least the perceived need to compete in the
high tech_to provide state-of-the-art apps and user interfaces
for people, which is not cheap and is not realistically going
to be done by every little individual community bank.
And I wonder if the witnesses could just weigh in on how we
answer, particularly the second one of those, how do we answer
the digital economies of scale?
I guess, Mr. Reuter, you must be right on the edge of being
able to do that all in-house. I don't know if you contract it
out. But how do you handle that? And how do you avoid this
continuing to drive merging and drive the small players out of
business?
Mr. Reuter. It is an extreme challenge for the industry.
Technology is very important. Technology is also getting
cheaper over time, though. I would tell you that. And you can
find fintech partners to help lower the lift. But it goes
without saying that the cost of investing in technology is a
big challenge for community banks.
Mr. Foster. Any other comments on this?
When I look around at areas of potential bipartisan
agreement, I guess I have mentioned the concept of multilevel
preemption. So instead of having 50 different standards, you
might have a small handful, each one representing 20 percent of
the U.S. population or something like that. It seems like that
is somewhere that we could all end up happy. So those who
agreed with the California approach to something could say,
okay, those States will join California in one consortium.
Others who maybe want to join Louisiana, or something like
that, may come to a different set of standards. And I think
that is something we should investigate on a bipartisan basis
as a way out of the conundrum there.
Another area is that of secured digital ID. I was very
struck, during the COVID crisis, by seeing an estimate of
roughly $400 as the cost of onboarding a new customer. And I
see some nodding that it is somewhere in that range.
And the technology that exists in many countries and ought
to exist here is simply the ability of a consumer to get out
their cell phone, show their thumbprint or their face so that
they are registered with their cell phone, and then use that to
present their REAL ID-compliant digital driver's license or
something, and that way authenticate themselves as a single,
legally-traceable human.
And that, along with an appropriate whitelist or blacklist
of bad players, would allow an emerging fintech, for example,
to very quickly establish a way of onboarding customers at a
much lower cost and avoid the identity fraud, which is the
scourge and a source of huge costs for consumers, for
businesses, and for government.
We actually got very close to getting a big step forward in
the omnibus bill with bipartisan and bicameral elements and
support. But that is something in which I think we have to get
that across the finish line, because it is unnecessary and
falls most severely on low-income people who actually don't
have an established credit history.
But if you have a secure way of proving you are who you say
you are online, it is something that will have huge benefits
across-the-board, particularly to the smallest players and to
startups.
And that is something that we had a very nice colloquy
about with Representative Hill in our organizing session.
I was wondering if any of you have comments on the way to
go, I guess, if any of you operate or are familiar with what
happens internationally, where that is something that is being
provided? Any comments?
Mr. Berlau. Congressman Foster, I would just say that the
new--that is something or an area of a new bank or a de novo
bank that would have expertise on certain technologies such as
blockchain might very well come in handy or could help fill the
void.
Technology is costly, and it may seem on the surface that
larger banks may be more the ones to handle it, but a smaller
bank or a new bank with expertise in a certain type of
technology may add something crucial to data protection in some
context.
Mr. Foster. Thank you. I yield back.
Chairman Barr. Thank you.
The gentleman from Texas, Mr. Williams, who is also the
Chair of the House Small Business Committee, is now recognized
for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman, and I thank
you all for being here today.
As we have heard today in this hearing, innovation will
help to drive and strengthen our economic growth. We need to
empower the private sector to develop innovative solutions to
give more individuals access to financial services to bring
more people into our banking system.
One way the government can help incentivize innovation and
help our nation's entrepreneurs is through the Tax Code. When
an entrepreneur sees the opportunity to keep more of their
profits--a good word, not a bad word, profits--from a
successful business venture, they are more likely to take risks
and invest their capital. Unfortunately, the Biden
Administration wants to increase taxes on businesses and
decrease the incentive to bring these new innovations to the
marketplace. Without profit incentives, it will be difficult to
convince entrepreneurs and startups and investors to take risk
and deploy their own capital.
So, Mr. Reuter, as a banker for over 34 years, can you
discuss the effects that increasing taxes will have on
innovation within the banking industry, and how would this hurt
investors who are taking the financial risk to bring new
products to the market?
Mr. Reuter. It goes without saying, the more money that is
left in the private sector, the more innovation that happens,
and we have seen this time and time again.
Today, we like to talk about big companies like Apple and
Microsoft, but let's remember they started as small companies
with entrepreneurs. So, it absolutely would be beneficial to
keep taxes as low as possible.
Mr. Williams of Texas. And if you have more money, you loan
more money. It's pretty simple.
Mr. Reuter. Correct.
Mr. Williams of Texas. Smaller banks often rely on
partnering with third-party service providers to offer similar
services to their larger counterparts. Current law authorizes
Federal regulators to examine these third-party service
providers to assess potential risk they pose to individual
banks and the banking system.
Now, the problem is that the results of these exams are not
shared between the Federal and State levels, leading to
duplicate exams from both regulators. That is kind of like what
government does.
And I have a bill to fix this common-sense issue by sharing
these regulatory exams across-the-board. And this will promote
more of an efficient supervision of third-party services that
are heavily relied on to provide a wide variety of banking
services, saving smaller entities time and resources.
Mr. Knight, could you talk about how overregulating smaller
entities affects their ability to operate?
Mr. Knight. Yes. Thank you for that question. As is common
sense, regulation requires a--there is a regulatory barrier
that has to be paid for. Now, there may be times and situations
where that is entirely justified, but if we don't regulate
based upon the risk generated by that entity and, instead,
regulate on the basis of a speculative hypothetical or sort of
an inapt model, we risk imposing greater costs.
You referenced taxes earlier. You can view regulatory costs
in some ways as sort of the flip side of taxation. Both are
necessary to some degree, but excessive amounts of either are
going to have negative consequences that are undesirable. And
in both cases, we should be striving to figure out how to
achieve whatever legitimate benefit we are trying to achieve in
the most-efficient and least-invasive way possible.
Mr. Williams of Texas. And also, it is a way of inflation,
too, when you do this.
Mr. Knight. You can certainly make that argument. You can
make an argument that sort of excessive or complex regulation
allows for the provision of favors. There are any number of
challenges or problems to excess regulation.
Mr. Williams of Texas. Thank you.
Since day one of taking office, the Biden Administration
has brought back the heavy hand of government regulations. This
is hurting banks and third-party service providers that have
been crucial in expanding access to financial services for
businesses and entrepreneurs across the country.
Democrats' regulation policies will require banks to hire
more compliance officers. We need banks to be hiring more loan
officers so they can get money to Main Street businesses
quickly rather than having to navigate the complex web of
regulations.
Quickly, Mr. Berlau, can you discuss how this regulatory
uncertainty coming out of the Biden Administration is harming
community banks?
Mr. Berlau. Yes. For a community bank, even one compliance
officer, one extra employee for compliance, as the research
from the Mercatus Center and others has shown, creates a
tradeoff as far as banks making loans.
So, regulation, as we say in competitive enterprise, is
very much a hidden tax. And when it is not rational or related
to the problem, that is especially a cost.
Mr. Williams of Texas. Well, I am in the car business, and
everybody in my business is on commission. And I have even had
to hire a compliance officer. And as you all have heard me say,
how the heck do you pay a compliance officer on commission? If
you think of that, let me know, would you?
And just closing out, I would like to say that Ms. Lee went
to Baylor, and I went to TCU. Go Frogs.
I yield back.
Ms. Lee. Sic 'em, Bears.
Chairman Barr. Okay. It's great to have that rivalry on
full display.
The gentlewoman from New York, Ms. Velazquez, is now
recognized for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman, and Mr. Ranking
Member.
Ms. Marcellin, I agree with Ranking Member Waters that my
friends on the other side of the aisle are intent on
undermining the CFPB and the rules it enforces. They often
justify their actions by arguing that the CFPB and regulations
from the Dodd-Frank Act are burdening community banks and
credit unions with onerous regulation, but isn't it true that
the CFPB must consider how its rules impact small banks before
promulgating the rules?
Ms. Marcellin. Thank you, Congresswoman Velazquez. Yes,
that is exactly right. The CFPB, by matter of law and practice,
consults with small banks, credit unions, and rural banks to
better understand how their regulations will affect these
institutions.
I also want to note that the CFPB authority in regards to
banks_they have authority over banks with over $10 billion in
assets, first of all.
And lastly, regardless of the size of the institution,
consumers should always be protected when they are offered
financial products. It is the one agency that is actually
tasked with the mission of protecting consumers when they are
taking out financial products.
There are lots of other agencies--if you are getting a
toaster or a car or whatever else, there are agencies looking
out for your safety there. And up until, what was it, 2011,
when the CFPB opened its doors, that is when we actually had
someone looking out for consumer financial products.
Ms. Velazquez. Thank you.
Ms. Marcellin, the purpose of this morning's hearing is to
discuss ways we can revitalize banking in the 21st Century.
What is noticeably absent from the Majority's memo, however, is
any mention of the CFPB.
Can you speak to the importance of the CFPB maintaining its
independence in order to protect consumers and revitalize
banking in the 21st Century?
Ms. Marcellin. Thank you, again. Just pointing back to my
initial statement of why the CFPB was created in the first
place, I just want to add that when bipartisan polling was
commissioned and showed that when consumers actually heard what
the CFPB does and what they are mandated to do, 79 percent of
voters across the political spectrum supported it.
I also want to point to the Dodd-Frank Senate report that
was created when the Dodd-Frank bill was being legislated. It
pointed to the Federal Housing Finance Agency's (FHFA's)
predecessor, the Office of Federal Housing Enterprise
Oversight, which oversaw Fannie and Freddie at the time. And it
stated very clearly that one of the reasons that office wasn't
as effective was because they were subjected to the annual
appropriations process, which lessened their independence and
made it unlike other Federal financial regulators at the time.
Having a steady fund of streaming, like most Federal
financial regulators, also helps to secure and lead to the
continuation of rules that help to create market certainty,
whether in our financial system or in the economy at large.
It is very hard to have an independent agency if you are
going to subject it to the annual appropriations process. And
this was done intentionally by Congress, as pointed to by the
report.
Ms. Velazquez. Thank you. This Congress, Ms. Marcellin, I
am once again planning to reintroduce the Promoting Fair
Lending to Small Businesses Act which ensures the CFPB has both
oversight and examination authority over non-bank lenders
pursuant to Section 1071.
Can you speak to the importance of ensuring that the CFPB
has both advisory and fair lending enforcement authority over
non-bank lenders?
Ms. Marcellin. Yes, absolutely. I want to point to the fact
that, I believe it was in 2020, non-lenders issued about two-
thirds of all mortgages issued. And I go into details of this
in my written testimony. We are seeing the rise of the non-bank
sector surpassing to some degree lending by the banking sector.
So, having adequate supervision over that sector is of utmost
importance.
Lastly, we need something to track, and that is what 1071
gets to. The same way we have HMDA data, we need that for small
businesses, and for small borrowers as well.
Ms. Velazquez. Thank you.
Mr. Reuter?
Mr. Reuter. Yes, Congresswoman, I am in support of like
activities being regulated in a like manner, so I would be in
support.
Ms. Velazquez. Thank you. I yield back.
Chairman Barr. The gentlelady's time has expired.
Before I move to the next witness, the ranking member would
like to be recognized for a request.
Mr. Foster. I would just like to ask unanimous consent to
insert the two charts that my staff [inaudible] for the record.
Chairman Barr. Without objection, it is so ordered.
The Vice Chair of the subcommittee, the gentleman from
Georgia, Mr. Loudermilk, is now recognized for 5 minutes.
Mr. Loudermilk. Thank you, Chairman Barr. And
congratulations on your post leading this committee, and thank
you for holding this hearing.
This is incredibly important, because we need to think back
to when Gramm-Leach-Bliley was enacted. I have 30 years in the
IT industry. I remember that year of 1999 distinctly, because
we were preparing for Y2K, the Nintendo Game Boy had just been
released, dial-up modems were finally on their way out, and we
were getting these whopping speeds of 2 to 6 to 10 megabits on
cable modem and DSL.
These devices were nonexistent at the time. We were just
being introduced to the Blackberry. Needless to say, we have
come a long way. And one other interesting statistic is a dozen
eggs were 89 cents, and Google was only a year old as a search
engine.
We have come a long way since then. Fintech was nonexistent
and a multibillion-dollar industry of big data was nonexistent.
But the law that is regulating us was built around the
technology of that day.
So, Ms. Lee, as you mentioned in your written testimony, 8
in 10 Americans now use fintech, which is technology that was
not even dreamed of when GLBA was enacted, correct? And that
has been many years ago.
Can you give us a bigger picture of how the financial
services industry has changed as well in that time and the role
fintech has played in those changes?
Ms. Lee. Thank you for that question. And you are right; we
have definitely moved from the paper age or the dark ages, as
you might want to allude to, into the digital age. And we need
to have our rules and regulations reflect where the future of
various different products and services are moving.
As I alluded to in my opening statement, you are seeing a
proliferation of technology, specifically financial technology,
enter into people's lives, how they interact, in just simple
things as sharing money with a friend across the dinner table
to be able to pay for meals, to be able to be the
infrastructure.
Financial technology allowed for e-commerce to occur, for
small businesses, especially during the pandemic, to transition
for a restaurant from just a brick-and-mortar into a delivery
service to be able to keep their restaurants open during that
time. It was the underpinning of financial technology that
allowed for that to occur.
As Brian alluded to, also during the pandemic, financial
technology was facilitating a lot of the loans going out to the
smallest smallest businesses that were out there. And you are
seeing it kind of come into various different means, various
different ways. It means something different for every person,
depending on how they interact.
What you see is, today, especially in the millennial
generation, it is no longer going to just one financial
institution to do a full bundle. You are now seeing a
scattering. They might have one app to do budgeting, another
app to do investing, and another app to pay for certain things.
So, you are seeing it being used in very different ways.
Mr. Loudermilk. And in the various ways we are using it, we
have a massive amount of data that is being collected and
retained on each one of these users. And data collection and
data retention is an area with which I am greatly concerned.
Do you believe that it is imperative that we update laws
like GLBA at this point because of that?
Ms. Lee. Absolutely. I would say, though, there is a
distinction between data and financial data. It is protected
under GLBA in a much different way, but we do need to update it
to include things such as giving the consumer the right to
delete, or giving the transparency in what we need to do, so
they have a clear understanding of where their data is going,
but also give them the ability to share it in a manner they
would prefer, to whatever digital service best fits their own
financial needs. So, there are a lot of different elements.
And as we alluded to in our own privacy principles, it is
paramount that consumers should have the choice. All
information and how it is shared should be transparent and
provide them the ability to delete it.
Mr. Loudermilk. Okay. I see my time is quickly eroding, but
I do have to say on data collection and retention, Mr. Reuter,
I think it is time for us to update the Bank Secrecy Act too,
to reduce the amount of data we are forcing small financial
institutions to report to the Federal Government, who retains
it and never looks at it.
With that, Mr. Chairman, I yield back.
Chairman Barr. Thank you.
The gentlewoman from Ohio, Mrs. Beatty, is now recognized
for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member.
My first question goes to you, Ms. Marcellin. As we know
and we have heard today, CDFIs and MDIs play an essential role
in our financial services, providing low- to middle-income
(LMI) communities and underserved businesses with access to
financial services.
I am deeply concerned about the fact that many of these
institutions are falling behind large banks with resources to
adjust to changes in technology and in other areas. Several of
our witnesses today made reference to technology and some of
the things that happened during the PPP loans, where some of
the fintechs were at higher rates, interest rates, than rates
given to smaller banks.
This is kind of personal to me, because I got good news
this morning that in my district, an MDI has been approved and
will open in a few weeks, Adelphi Bank. So, I am very much
invested that it is in the heart of my district and that it is
a Black-owned MDI. As you know, only about 19 or 20 Black-owned
MDIs exist now. And this will provide a great opportunity to
serve underbanked and unbanked communities.
But my question is, what can Congress do to support MDIs
like Adelphi Bank and other CDFIs in communities without
undermining consumer protections and prudential standard
service, such as capital requirements? What can we do to make
them more successful?
Ms. Marcellin. Thank you, Congresswoman Beatty. I would
like to say, first and foremost, increasing funding for the
CDFI Fund. There has been a recent increase in funding there,
but it still doesn't match what it could be. And that would be
the first thing I would recommend.
Second, the Community Reinvestment Act (CRA) is being
rewritten as we speak. Maintain and expand CRA consideration
for community development activities in LMI communities. And I
think this will greatly help to benefit CDFIs.
And lastly, I would say, continue to adopt reforms that can
drive investments in less-populated regions and communities of
color, including rural and Native communities as well.
Mrs. Beatty. Okay. Thank you. Sort of in that same vein, we
know that an FDIC survey found that in 2021, 5.9 million
households lacked a bank account. Although this was still the
lowest rate of unbanked since 2009, we are still struggling to
reach millions of individuals out there.
Do you have any suggestions for why this problem is so
difficult to solve, and what can we do? We have heard both
sides of the aisle talk about unbanked and underbanked. We have
heard about capital, whether we should increase the capital,
what could that do to MDIs or small banks.
Ms. Marcellin. Yes. Thanks again. First, if we point to the
FDIC's recent data, yes, the underbanked population has gone
down. But if you look, exactly like you said, across race, it
is still disproportionately high. First and foremost, one of
the main reasons cited is lack of trust among banks. And
second, not being able to afford the cost of banks.
This goes back to my testimony as well in discussing how
mergers have led to the increased cost of, whether it be
minimum balances for accounts, ATM fees, and such, folks really
just can't afford the cost of maintaining a bank account.
And also, I want to point even to that celebratory fact of
the unbanked population decreasing. One of the main reasons for
that, that the FDIC cited, is because of the stimulus checks
that people received because of the CARES Act. So, it kind of
underlines the main point that when people have money or
income, they open bank accounts. And I think anything that we
can do to support that and increase wages and such, including
what else I said, will help to fix this problem.
Mrs. Beatty. Thank you. I am not going to have time, but to
Mr. Knight, on page 2 of your testimony, you also referenced
what happened with small businesses during the PPP, and that
they were giving loans at higher interest rates. So, maybe you
can address that same question in writing.
Thank you, and I yield back.
Chairman Barr. Thank you. The gentlewoman's time has
expired.
The gentleman from Tennessee, Mr. Rose, is now recognized
for 5 minutes.
Mr. Rose. Thank you, Chairman Barr--that has a nice sound
to it--and Ranking Member Foster, for holding this hearing
today.
I would like to begin by yielding 30 seconds to my
colleague, Mr. Luetkemeyer from Missouri.
Mr. Luetkemeyer. Thank you, Mr. Rose.
Mr. Reuter, I think we missed connections on our question a
minute ago. The question was basically--we have too many,
``Barrs,'' around here; that is our problem. We have a Fed
regulator named, ``Barr.'' We have a chairman named, ``Barr.''
Let's cut all that out.
The Federal Reserve regulator is reexamining the U.S. bank
capital regime and is looking to significantly increase bank
capital in the United States. How would this affect your bank
and its ability to service low- and moderate-income folks?
Mr. Reuter. Increased capital reduces our ability to lend,
period, whether it be in low- to moderate-income neighborhoods
or any part of our community.
Mr. Luetkemeyer. Thank you very much.
I yield back to Mr. Rose.
Mr. Rose. Thank you, Mr. Luetkemeyer.
I am concerned, Mr. Reuter, about the current Bank Secrecy
Act process where the Federal Government deputizes financial
institutions. I spent 10 years on the board of a national bank
where I was tasked with looking at suspicious activity reports
(SARs), as are all bank board members. And the lack of feedback
that banks and other financial institutions receive on whether
a specific filing was helpful in assisting law enforcement is
extremely troubling. I have said it is like shooting at a
target in the dark with a blindfold on.
Mr. Reuter, how much money do you think you spend, your
institution spends every year on BSA filings and related
compliance?
Mr. Reuter. I don't have the exact dollars, but I can tell
you I have a 30-person team, and that is all they do. We do
most of our IT in-house, and there is not a year that goes by
that we don't have two or three IT projects dedicated to AML/
BSA. We would love feedback as to whether we are making a
difference or not.
Mr. Rose. I imagine so. And that was certainly my
experience as a board member.
Mr. Reuter, is that typical of a bank of your size, do you
believe?
Mr. Reuter. It is typical of a bank of our size. And I
think it is even more extreme in States that have higher rates
of potential money laundering risk, which are are States that
have more international activity.
Mr. Rose. And I take it from the answer you have already
given that you are not satisfied with the feedback that you get
from FinCEN or from law enforcement about whether particular
SAR filings were helpful to them?
Mr. Reuter. No. I am trying to motivate a team, and I
always say they are doing great work on the front line, so to
speak, because they are playing a really key role, but some
substantial feedback would even be more meaningful to them.
Mr. Rose. Mr. Reuter, last night, President Biden mentioned
junk fees in his State of the Union Address. As you know, a
junk fee is a made-up term by an overly-aggressive regulator
running a rampantly-unaccountable agency. That is my
assessment.
I have previously asked CFPB Director Chopra, in this room,
to define junk fees for us, and he filibustered, as we have all
become accustomed to in this room.
So, Mr. Reuter, has the CFPB ever given you a succinct
definition of a junk fee?
Mr. Reuter. No. In fact, it is quite confusing when the
fees we are charging are clearly disclosed within compliance of
the existing laws, that suddenly one person can interpret that
a different way.
Mr. Rose. You testified that Congress should urge the CFPB
to streamline its small business lending data collection and
reporting rule under Section 1071 of the Dodd-Frank Act.
Unfortunately, the CFPB does not streamline anything and,
instead, harasses our banks and creditors.
Moreover, Director Chopra has shown a lack of concern for
the costs associated with his rulemaking. His staff estimates
that the annual ongoing costs of this junk rulemaking will be
between $372 million and $392 million.
Mr. Reuter, do you believe that the increased cost
associated with the 1071 rule will reduce competition in small
business lending?
Mr. Reuter. Absolutely. When you significantly increase a
regulatory burden over a line of business, some banks simply
choose, because it is not a big part of their strategy, to get
out of it. We have seen that in the mortgage business. I worry
we will see that effect with some small business lending if we
are not careful.
Mr. Rose. Thank you. And, again, Mr. Reuter, in October,
the FDIC voted to raise deposit insurance assessment rates for
banks by two basis points. The changes amount to a 54-percent
increase in the current average assessment rate.
Given that deposits are dropping and are expected to drop
further, what impact will the new assessment rate have on your
bank?
Mr. Reuter. The bottom line is it has increased our cost of
doing business. There is less net income, which is less
retained earnings, which is less capital to loan out into the
community.
Our deposits grew 42 percent during the pandemic. I think
as an industry, we did an outstanding job of helping customers
with their EIPs and the PPP. We were the number-one bank in the
State of Colorado for PPP lending. And as a result of that
deposit growth, now it is going out, and we are still paying
those higher deposit premiums.
Mr. Rose. Thank you. Mr. Chairman, I yield back.
Chairman Barr. Thank you.
The gentleman from Texas, Mr. Green, is now recognized for
5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the ranking
member as well.
Mr. Chairman, Members and friends, Northwestern University
published an article styled, ``Racial discrimination in
mortgage market persists over the last four decades.'' But they
go on to indicate in a subtitle, ``Discrimination in housing
market sees decrease during the same period of time.'' This was
published on January 23, 2020.
Let me read an excerpt from the article: ``In the mortgage
market, the researchers found that racial gaps in loan denial
have declined only slightly, and racial gaps in mortgage cost
have not declined at all, suggesting persistent racial
discrimination. Black and Hispanic borrowers are more likely to
be rejected when they apply for a loan and more likely to
receive a high-cost mortgage.''
The question that I have for you, dear friends, is one that
has haunted us and continues to haunt us to this very day, and
it is this: What are we going to do about the invidious
discrimination in mortgage lending that allows a person of
color who is more qualified than a White person to receive a
loan at a higher interest rate and receive less in the amount
of the loan?
Ms. Marcellin, what can we do to correct this injustice?
Ms. Marcellin. Thank you, Congressman Green. First of all,
I know that the CFPB has been kind of the talk of the town, but
going back to them, shoring up their authority in this space.
Going back to mortgage lenders, a lot of them being non-banks,
the CFPB just released their non-bank supervisory guidance.
Making sure that is as strong as possible is one thing Congress
can do.
Recently, a lawsuit was filed against them, upgrading their
Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
practices to prevent this sort of thing, on discrimination by
disparate impact, making sure that we are out there really
educating consumers on what the CFPB can do and making sure
that when battles come their way, when folks are looking to
undermine the agency, that we are shoring up their authority in
these various spaces.
Mr. Green. Mr. Reuter, what can we do to correct this
injustice?
Mr. Reuter. Congressman, we have a very robust fair lending
program at our bank. We are also regulated.
Mr. Green. If I may just intercede, please, I don't mean to
be rude, crude, and unrefined, but could you not address your
bank, and please address the injustice?
Mr. Reuter. Yes.
Mr. Green. The injustice. Thank you.
Mr. Reuter. The entire industry is heavily regulated and
tested for fair lending. The number-one originator of mortgages
in the United States in the last year was Intuit, with their
Rocket Mortgage. They do not have the same robust supervision
and regulation as the banking industry. So, I think like
activities with like regulation would be a good place to start
as well.
Mr. Green. Let me make a couple of suggestions, having
lived a good deal of my life as a person of color and having
experienced exactly what I have called to your attention.
As a matter of fact, I and three other lawyers received a
loan, paid it back early, and never missed a payment. We went
back to get another loan, and had a different loan officer, and
that loan officer denied us a loan and told us we shouldn't
have received the first loan. So, this is something of which I
have personal knowledge. It happens. And I am grateful that you
haven't denied this, because many Members of Congress would
deny it.
I would like to place in the record, if I may, Mr.
Chairman, first, H.R. 166, my Fair Lending for All Act. It
establishes criminal penalties for violations of prohibited
credit discrimination and establishes an Office of Fair Lending
within the Consumer Financial Protection Bureau.
Chairman Barr. Without objection, it is so ordered.
Mr. Green. Thank you.
This next bill was inspired by Mrs. Beatty--and I am so
grateful to her; she was a wonderful chairperson when she had
the mantle--the Securities and Exchange Atonement Act, which
requires issuers of securities to carry out a racial equity
audit every 2 years regarding their diversity, equity, and
inclusion, as well as direct or indirect ties to slavery.
The next would be my promoting diversity and inclusion
bill, the Diversity and Inclusion in Banking Act, requiring
regulators to include diversity in their assessment of
depository institutions under the Federal Reserve's Uniform
Financial Institutions Rating System or a comparable rating
system.
Mr. Chairman, if I may have a unanimous consent on one last
bill?
Chairman Barr. Yes. The gentleman's time has expired, but
quickly, please.
Mr. Green. Thank you, sir.
H.R. 68, the Housing Fairness Act, which mandates that HUD
conduct a nationwide testing program to direct and document
housing discrimination.
Chairman Barr. Without objection, it is so ordered.
Mr. Green. Thank you for your kindness.
Chairman Barr. The gentleman's time has expired.
The gentleman from South Carolina, Mr. Norman, is now
recognized for 5 minutes.
Mr. Norman. Thank you, Mr. Chairman.
I like my good friend, Al Green, but I hope each one of you
can fire back and kick back on some of these allegations. To
bring up slavery, to bring up not getting loans because of your
color.
I sat on a bank board for 20 years. Credit scores apply to
everybody. You are in a competitive business. You have
stockholders to answer to. This constant drumbeat is really
getting tiresome to hear them day in and day out talk about
discrimination. We will fight the regulations, his bills,
because it makes no sense.
Mr. Green. The gentleman called my name. Will the gentleman
yield 10 seconds?
Mr. Norman. I will not. It is my time.
Mr. Green. Yes, sir.
Mr. Norman. We had a situation where a wire transfer was a
fraud that a bank had. When I asked, what mechanism do you have
among banks, they didn't want it out because of obvious
reasons, the devaluation of stock and that type of thing.
Am I missing something? Is there some other line of
communication that banks have? The insurance kicked in, but
guess who is paying the insurance? Banks. So, it doesn't
matter, and any of you can address that.
Mr. Berlau. Congressman Norman, I would agree with
Congressman Green that discrimination where it does exist must
be vigorously fought. I don't know if I would agree with all of
his proposals, but I think one place where all--
Mr. Norman. I am asking about the fraud. I am asking about
how we--the instance I mentioned was about the wire transfer.
And that is a breach, and the insurance paid off. What I am
saying is--and I get the banks could not let it out because of
the publicity and stock devaluation, but are there other things
that we can be doing to help get the word out with that?
Mr. Berlau. I don't know about that specific incident. I
think what everyone in Congress could be doing is making it
easier for all types of de novo banks, including minority-owned
de novo institutions, to open, so that consumers would have
more choices. And as a result, people would be treated more
fairly, and underserved areas would have more choices and be
able to have an easier road to prosperity.
Mr. Norman. Anybody else?
Okay. Mr. Reuter?
Mr. Reuter. Congressman, we do see this where a customer
will_someone will intercept an email and impersonate that they
are someone in their office and ask them to send a wire.
So, we do robust education. We have technology in place to
look for unusual wire activity. We also hold forums for our
customers, a lot of our business customers, to educate them on
the risks. And given the fact that we have a strong
cybersecurity team, we spend time with those customers' teams
to help educate.
And again, I would call that the great work of the
community bank on the ground bringing people in and educating
them.
Mr. Norman. Let me just cover the regulations by this
Administration that I think are strangling banks. The FDIC
cited banks for nonsufficient funds, NSF fee. With the CFPB,
you are talking about a rogue organization that has gone off on
its own interpretations of unfair, deceptive, and abusive acts.
What impact is this having on operating a bank that has to
operate for shareholders, both Black and White? How is this
affecting the banks?
Mr. Reuter. It absolutely affects the capital and the
dollars we have available to make advances and solve for some
of the customer issues that we face every day. So clearly, it
has an impact.
Mr. Norman. I don't have much time. Doesn't it force banks
to pull services that ordinarily they wouldn't have to do if
they didn't have to deal with this?
Mr. Reuter. Correct. There are some banks that simply get
out of lines of business because of the increased cost.
Mr. Norman. I appreciate what each one of you do, taking
your time today, and--
Mrs. Beatty. Would the gentleman yield for a point of
clarification on his statement?
Mr. Norman. I will yield to Mr. Green. He asked earlier.
Mr. Green. Thank you for your kindness. I will extend a
similar courtesy to you at some point in the future, I am sure.
My dear brother, for many people, invidious discrimination
is a term. For others, it is a way of life. Northwestern
University accorded us this intelligence. It is not something I
compiled on my own. And there is much more to be said about the
empirical evidence.
Chairman Barr. The gentleman's time has expired.
The gentleman from Illinois, Mr. Casten, is now recognized
for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. And it's nice to see
you all here.
Last week, my colleagues across the aisle voted to denounce
socialism in all its forms on the House Floor, and I would like
to use my 5 minutes to join them in a full-throated
denunciation.
We are seeing capital markets move massive amounts of
capital right now to protect themselves from climate risk. We
are seeing huge surges away from properties at risk of coastal
flooding or wildfires. We are also seeing a flight to quality.
I was looking just now, and right now, ExxonMobil and Chevron
are both trading at a 6 times multiple on forward earnings.
NextEra, clean energy developers, are trading at a 15 times
multiple. And First Solar is trading at a 60 times multiple. We
are seeing this massive flight of capital.
We are also seeing that the single-biggest class of
investments are these ESG funds. PricewaterhouseCoopers had
reported there were $18.4 trillion in global assets under
management at the end of 2021, projected to grow to over $30
trillion by 2026. This is capitalism, ``red in tooth and
claw,'' as they say.
Yet, we are seeing a number of States who find capitalism
uncomfortable when it is not benefiting them. And we are seeing
States that are now blocking their pension funds from investing
in things that are optimizing risk and return if it has the
name, ``ESG,'' in it.
Mr. Chairman, I would ask unanimous consent to enter two
documents into the record on a couple of points I want to cite
here. These documents show that, in Texas, this law is costing
taxpayers $532 million, as you would expect. If you run away
from capital markets, bad things happen. Kentucky, Florida,
Louisiana. I am forgetting some here_West Virginia, more than
$700 million a year.
In Indiana, the estimate is that this is going to cut
pension returns by 125 basis points, from 6.25 percent to 5
percent. And if we are going to denounce socialism in all its
forms, we need to denounce it even when it comes from our
friends.
My good friend, Mr. Barr, is now leading an effort to
overturn a Department of Labor rulemaking that would allow
fiduciaries to consider climate risk and ESG factors when
selecting investments. And I am here to denounce socialism in
all its forms.
Ms. Marcellin, do you believe that retirement savings are
at risk if that Department of Labor rulemaking is overturned?
Ms. Marcellin. Thank you, Congressman Casten. Yes,
absolutely. Climate change is a hidden risk for retirement
savings. As you said, the anti-ESG movement is not only trying
to get pension fund fiduciaries to ignore the risk of climate
change but, frankly, to also ignore the opportunities.
There are those in the Senate right now who are trying to
repeal the Department of Labor ESG rule. And that will put
retirement savings, especially of the working class, at risk
and like I said, foreclose potential investment opportunities
as well.
Mr. Casten. Help me out with what that risk means. Who is
going to bear the cost, whether it is these Indiana pension
funds that are seeing lower returns? Who is ultimately bearing
the risk of this redoubled commitment to socialism that is
going on in these States?
Ms. Marcellin. Yes. Ultimately, it is the workers, many of
whom are hourly-wage workers who were hoping at the end of a
long career, maybe they retire at 60 to get a pension--a steady
pension to fund themselves into their seniority and live a
comfortable life. And at the end of the day, those are the type
of people who are suffering.
Mr. Casten. Thank you for your time. I will just make the
observation--and many of my colleagues have heard me say this
before--that the absolute loneliest position in Washington is
to advocate for competitive markets. No one ever comes to our
offices and says, ``I wish my industry was more competitive.''
And when you are on the losing end of capitalism, you can
either adapt your business, you can learn to pivot, or you can
call it woke. And I hope that all of my colleagues around here
hold up the vote they took last week and denounce socialism in
all its forms as we try to look out for the workers and the
American people and the investors in our economy.
I yield back.
Chairman Barr. The gentleman yields back.
The gentlewoman from California, Mrs. Kim, is now
recognized.
Mrs. Kim. Thank you, Chairman Barr. I would like to yield 1
minute to you so you can make your remarks.
Chairman Barr. Thank you for yielding. I will be brief, but
I couldn't resist the temptation to rebut my good friend from
Illinois and his comments, since he invoked my bill and my
legislation.
Look, I have no problem with anyone who wants to steer
their own investment, deploy their own capital into less-
diversified, lower-performing, higher-fee funds if that is what
they want. If they want lower returns, capitalism allows that.
I am not for socialism. I am not for forcing people to allocate
their capital in ways that they don't want to.
But the point is that ESG funds, over the last 5 years,
have underperformed the broader market by 250 basis points per
year. And it is because they are less-diversified. They exclude
energy stocks, which have overperformed the market. So if you
want capitalism and free flow of capital, you do not steer
people into lower-performing, higher-fee funds like ESG funds.
And let me just make one final point before yielding back
to my friend from California. The flight to quality that my
friend from Illinois talks about is not a function of improved
corporate performance. It is a function of an asset bubble. It
is a function of a growing pool of capital chasing socially-
conscious investment opportunities that have higher fees and
lower returns. The best reason for investing in ESG-oriented
companies is that everyone else is doing it. That is the
definition of an asset bubble.
And with that, I yield back to my friend from California.
Mrs. Kim. Thank you, Mr. Chairman. I want to thank you and
Ranking Member Foster for holding this very, very timely,
important hearing.
I want to address the bank charters declining by
approximately 20 percent in the last 10 years. If you look at
2022 statistics, there were about 5,900 banks, commercial banks
in the United States, compared to today when we are looking at
just under 4,800. So, the banks have seen the biggest decline.
And to that end, I want to thank our chairman, Chairman
Barr, for his efforts through the legislation that he
introduced, H.R. 758, to incentivize de novo formation.
I want to direct my first question to Mr. Reuter. In your
written statement, you noted that there has been about a 46.3-
percent decline in de novo formation since 2005. Can you talk
about what, in your view, has led to that decline in our
financial system?
Mr. Reuter. There are a few major themes. One is the
compliance regulatory cost, the cost for technology, and then
also the capital that you have to put forward to start the
bank. When you put all three of those together, it is very
difficult to start a brand-new de novo charter.
Mrs. Kim. And quickly, in terms of a regulation that kind
of prevents them from doing so.
Mr. Reuter. Preparing for this hearing today, I don't think
I have ever seen a wider waterfront of new legislation for our
industry. It was one of the most challenging hearings I have
ever prepared for, so that just tells you how much bigger the
burden is today.
Mrs. Kim. We have our work cut out for us in that field.
Mr. Knight, I want to ask you a question. In your
testimony, you laid out several examples like the OCC's broad
definition of, ``reputational risk,'' and ``nonbinding
guidance,'' from regulators as clear disincentives for new
financial institutions and innovation to enter the market.
In your testimony, you also call on Congress to engage in
more rigorous oversight to curb those onerous regulations. So,
can you elaborate on your recommendation, and can you touch on
other recommendations that are separate from our committee's
oversight jurisdiction?
Mr. Knight. Thank you. Quickly, because I see I am running
out of time, I believe the first step is vigorous oversight,
because before you can truly fix a problem, you need to know
the scope and nature.
But I do think that we have seen that there--and I would
argue that part of the challenge to our banking regulatory
paradigm is that we have regulators who are empowered--well, I
don't know if they are empowered, but they certainly believe
they are empowered and they certainly feel like they are asked
to engage in sort of a micromanagement view to prevent risk and
to prevent banks from engaging in unsafe and unsound behavior.
But the definition used is so broad that it functionally means
almost anything.
And while there are some areas where there is at least some
objective criteria, like, say, credit risk, where if you have
excessive defaults, that is an objective thing. But other
things, such as reputational risk, truly becomes in the eye of
the beholder. And the risk you get there is that you don't get
a government of laws; you get a government of people. And that
it is in the eye of the beholder of the line supervisor.
I would recommend the work of Professor Parrillo, that I
cite in my written testimony, to show the dynamic where banks
truly feel like they: first, are bound; and second, can't
challenge it in court, which is where we get a lot of
transparency--
Mrs. Kim. Thank you. It looks like my time is up. I will
yield back, but I would like to submit another question for the
record.
Chairman Barr. Without objection.
The gentlelady's time has expired.
The gentleman from California, Mr. Vargas, is now
recognized for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. First of
all, I would like to say how pleased I am to see you as
chairman. Those of us who have great respect and regard for you
are very happy for you, and we wish you the best of luck. And
where we can work with you, we will, and where we can't, of
course, we won't. But, again, congratulations to you, it is
well-deserved.
I do want to start off by saying that I have been here for
a while now myself, and when I first was here, the big issue
was Dodd-Frank. My good friends on the other side used to
condemn Dodd-Frank, saying how horrible it was, that it was
going to be the undoing of the financial system in the United
States.
And then, during the real stress test, during COVID, we had
the bankers up here, and we asked the bankers_I actually asked
the bankers, what about Dodd-Frank, has it been helpful or not
helpful? And they all said, it has been helpful. Now, to be
fair to them, they didn't say they liked all aspects of it, but
they said that in general, it was helpful, especially the
capital requirements. It was helpful.
It kept the industry afloat and, in fact, not only afloat_I
think, Mr. Reuter, you said it, and I agree that the industry
performed very well, and I think the industry was one of those
shining lights in this very dark time. I think the industry did
well. We could disagree about fees and some other things but,
in general, I think the banking system did very well.
Now, of course, the issue is the CFPB, and I hear again the
demonization of the CFPB.
Mr. Reuter, why don't I start with you? Should we disband
the CFPB?
Mr. Reuter. I think we should put a bipartisan, Senate-
confirmed oversight committee over the CFPB, so it doesn't
swing so greatly from Administration to Administration.
Mr. Vargas. Okay. Should we disband it?
Mr. Reuter. I do not think we should disband the CFPB.
There have been a lot of regulations moved over to that agency.
But I do think an oversight board would be a great step.
Mr. Vargas. Okay. Fair enough.
I do want to comment a little bit on these ESG funds. I
agree very much with Mr. Casten, of course, on this. We both
now head up a caucus on this issue.
And talking about socialized benefits, it is interesting.
On the issue of Social Security and Medicare, I think I heard
quite clearly last night that my good friends on the other side
are not for doing away with both of those socialized programs,
because that is what they are, those are both socialized
programs.
And, in fact, there was an amendment that Mr. Cicilline
from Rhode Island put forward to say that we were against
socialism but not against these socialized benefits, which
wasn't allowed as an amendment, sadly.
But anyway, when we prevent States and localities from
investing in ESG funds, I think we do a great disservice to the
communities there and to the hardworking people, especially
those who have pensions. I could see why a State like Kentucky
or a State like Texas wouldn't want to do that because of their
industry. Obviously, they are trying to protect their industry.
But that shouldn't be a reason to harm investors, especially
hardworking people who have invested in their pensions. So, I
certainly agree with Mr. Casten.
I do want to ask a couple of questions, if I can,
especially to you, Ms. Marcellin. The issue of MDIs and CDFIs_
unfortunately, in my community, we don't have a broad selection
of these and we have a lot of historically-underbanked
communities.
What can we do in an area like my area in San Diego to help
these people who are underbanked or unbanked?
Ms. Marcellin. Thank you, Congressman Vargas, for that
question. Again, going back to my original statements, one,
increasing funding for the CDFI Fund. Again, it has received
increased funding over the years, but it is nowhere near enough
to fully fund and support a robust program.
Even going back to CRA requirements, and I am happy to work
with your office more on this, but lending done to CDFIs by
banks should probably count as CRA credits. And just driving
more support, more programs in distressed, low- to moderate-
income communities can help shore up CDFIs and MDIs as well.
Mr. Vargas. Thank you very much. Just to conclude here, I
have 20 seconds. I hope there are things that we can work on. I
heard from some colleagues on the other side about suspicious
activity reports and the amount that is and the burden. I agree
with some of that. And I hope that there is a place that we can
find a middle ground and get something done this year.
Again, I congratulate you, sir, and I yield back.
Chairman Barr. I thank my friend for his kind words.
And the gentleman from Wisconsin, Mr. Fitzgerald, is
recognized for 5 minutes.
Mr. Fitzgerald. Thank you, Mr. Chairman.
For small banking markets, a community bank is often
prevented from selling to a crosstown rival because of a market
concentration regulation, even if it might be in the best
interest of the consumers. For example, a large, out-of-market
bank may have less interest in local institutions and market
conditions.
Under current law, regulators are not required to define a
banking market for each bank in the United States prior to a
merger request. As a result, banking markets are defined on a
case-by-case basis. I am not telling anybody on the panel
anything they don't know. But every time there is a proposed
bank merger or acquisition, it obviously makes banking market
definitions subject to change, and it also means that some
banking markets are currently undefined.
Mr. Reuter, if Federal regulators were to define these
undefined markets, would that provide the regulatory relief
benefit to banks like yours seeking a merger or an acquisition?
Mr. Reuter. Congressman, I think the mergers and
acquisition manual is up for revision right now. I think the
definition of competition, in general, needs to be reassessed.
Not only do you have the issues that you just mentioned, but
also with fintech, lots of activity now happens online,
regardless of the branch location.
So, in general, what defines a competitive market is much
different today than when that manual was originally drafted.
Mr. Fitzgerald. Very good. Thank you.
While Gramm-Leach-Bliley does not address a consumer's
right to access their own data, Section 1033 of Dodd-Frank
grants consumers a right to access a portion of the data held
by a covered firm related to their transactions and accounts in
a usable electronic format. But, again, as you probably know,
it is not clear that Section 1033 extends to the agents of
customers of data aggregators.
Ms. Lee, how should liability be allocated in an event
where an agent, firm, or aggregator's negligence results in a
breach or a fraudulent transaction? It is obvious that it has
become very complex. I am just wondering what your opinion on
that would be?
Ms. Lee. It is a complex issue, and it is one that we have
called for in our recent comments on the 1033 rulemaking that
they just did. It is for the supervision of data aggregators to
allow for the CFPB to have that authority to oversee and to
understand.
On the part of a data breach, I think it depends--what we
have said is not only should the aggregators be supervised, but
at where that breach occurs, at what point in the chain of
custody of where it occurs. I think that we need to take a look
at it when we craft these laws to determine who is the beholder
of that information, where that breach occurred, and what the
custody of it is.
Mr. Fitzgerald. Very good. Mr. Knight, do you have a
comment on that?
Mr. Knight. I guess one note I would say is that this is an
area where, honestly, congressional involvement might be
merited, because it does appear that 1033 has teed up some very
difficult, kind of intransigent questions that are probably
more appropriate for Congress to resolve rather than the CFPB.
And Congress is likely in a better position to weigh tradeoffs
and take action. So, I do think that is something that is worth
consideration.
Mr. Fitzgerald. Very good.
Mr. Reuter, just a quick one here, I see in your testimony
that you don't think allowing private rights of action as an
enforcement tool for data privacy violations really makes much
sense.
Any ideas on what else could maybe be more effective than
that?
Mr. Reuter. I still think using the prudential regulators
as the ones that supervise and take care of any enforcement
actions, if there is an issue, is the best way to go.
I also think preemption with 50 different States--I have
customers in all 50 States, and trying to handle something at a
State level would be very difficult.
Mr. Fitzgerald. Very good.
Thank you, Mr. Chairman. I yield back.
Chairman Barr. The gentleman yields back.
The gentlewoman from Massachusetts, Ms. Pressley, is now
recognized for 5 minutes.
Ms. Pressley. Thank you, Mr. Chairman.
As the Congresswoman representing the Massachusetts Seventh
District, which includes the City of Boston--it is one of the
largest cities in my district--and around 10 percent of our
households are currently unbanked and another 20 percent are
considered underbanked. That is over 80,000 families.
So, being unbanked is incredibly expensive. Unbanked people
in my district are forced to pay high fees for everyday
financial services such as check cashing and money orders. And
this doesn't even include the exorbitant costs of payday loans
and being credit-invisible.
Then, there are systemic closures of bank branches in low-
income communities, predominantly Black and Brown
neighborhoods, which has really created banking deserts and
exacerbated disparities, another example of big banks really
prioritizing profits over people.
It is no accident that low-income communities of color in
my district, such as Dorchester, East Boston, and Roxbury,
contain 57 percent of the City's check-cashing locations_67
percent_but only 12 percent of the City's commercial bank
branches.
Ms. Marcellin, I know we have been talking today about
solutions that Congress could enact to support those who are
unbanked or underbanked, and that is our job here in government
to solve problems, to alleviate and mitigate hardship.
Can you describe how postal banking could be a solution and
help people who are unbanked?
Ms. Marcellin. Absolutely. Thank you, Congresswoman
Pressley, for that question.
So, yes, Americans for Financial Reform strongly supports
postal banking proposals to decrease the underbanked
population, again, going back to the things that the
underbanked population usually cites: lack of trust; and the
inability to afford a bank account. You don't hear people
talking about how they don't trust their post office. It may be
a little cumbersome to go to them, but you trust them. You know
that your packages will be there. You probably have a good
relationship with your postman and such. So, that is number
one, and then it has the added value of having a branch in
every ZIP Code.
Second, in many of these proposals for postal banking, it
is a free account. It is basic banking services. You can make
deposits and do basic withdrawals. And it is mostly for low- to
moderate-income folks. So, it's a quick and easy way to access
funds and then, as you said, not having to pay to get your own
money.
Ms. Pressley. Thank you.
Absolutely, our post offices are indeed--they have that
shovel-ready infrastructure since there are brick-and-mortar
locations in every ZIP Code and they can provide those basic
financial services like check cashing, bill payment, and small-
dollar loans. So, it could really be very transformative.
Instead of people going to shady predatory lenders, they can go
through their local post office.
Banking deserts and exclusionary practices of financial
institutions, which are real, are widening the racial wealth
gap, and we need bold, intentional proposals to build an
exclusive equitable economy.
In this final minute, Ms. Marcellin, can you elaborate on
how a postal banking system would narrow the racial wealth gap?
Ms. Marcellin. Thank you. Absolutely.
Again, if you increase the number of folks who are banked,
you basically give them access to the financial system. Not
having a bank account, how do you buy a home, for example?
There are a lot of things that you don't have access to if you
don't have the basic--it is unfortunate that I have to say
privilege, but the basic privilege of having a bank account. If
you want to open a brokerage account, for example, all of these
things require being linked--even many of the fintech apps that
are being talked about today still require being linked to a
bank account, which many low-income communities and communities
of color can't afford. So, that cuts off their ability to build
wealth and just gain access to the traditional financial system
in many ways.
Ms. Pressley. Thank you.
I also wanted to just highlight legislation introduced, a
bicameral bill by myself and Senator Booker, the American
Opportunity Accounts Act, also known as, ``baby bonds,'' which
would ensure that every child is provided with a savings
account at birth which would be seeded with funds that can be
used for wealth-building activities such as starting a
business, buying a home, or pursuing higher education.
Do you have any thoughts, Ms. Marcellin, on our national
baby bonds proposal?
Chairman Barr. The gentlelady's time has expired. She will
have to submit that in writing.
Ms. Pressley. Okay. Thank you, Mr. Chairman.
Chairman Barr. The gentleman from Florida, Mr. Donalds, is
now recognized for 5 minutes.
Mr. Donalds. Thank you, Mr. Chairman.
And witnesses, thanks for being here. I really appreciate
it.
Mr. Chairman, I just want to first thank you for your work
and your leadership in data privacy. I think that is going to
be really critical for our country, for Americans. So, I thank
you for all of your efforts.
I want to touch on a couple of things. Mr. Reuter, you may
be able to help me with this.
So the witnesses understand, I am a recovering banker. I
used to work--I got my start in commercial banking, community
banking actually. That is where I started. I went from a teller
to a credit analyst. I underwrote loans. I helped small
businesses get access to capital. I was in the banking industry
before Dodd-Frank, before the financial collapse, and I left
because I didn't want to do bank workouts, frankly. I went to
work in insurance. But I remember a lot of my colleagues, some
of whom I hired, who stayed, and they would tell me about all
of the work that they had to do post Dodd-Frank.
I think one of the things that has come up, not just in
this hearing but in a lot of discussions, has been the fact
that there are limits of banking locations across the country.
Could you speak to some of the impacts that Dodd-Frank has
had on small community banks and even some subregional mid-
sized banks?
Mr. Reuter. Yes. I think one area where that is really
evident is the mortgage lending business. You have seen a lot
of small and mid-sized banks exit that business due to the new
regulatory requirements.
We have always been a strong mortgage lender, and our
mortgage portfolio performed extremely well during the
financial crisis. Why? Because we are in the community. We
underwrote those loans. We know the local businesses. We know
their employers. So, they were well-made loans.
Some of the new regulations that came out of Dodd-Frank
make it hard to make loans to self-employed borrowers. Lots of
different parts of the regulations make it difficult to run an
efficient, cost-effective business, so some have just simply
exited the mortgage business.
Mr. Donalds. Let me follow up on that. If you are a small
lender--and I was a small lender--and the regulatory burden of
Dodd-Frank just makes it prohibitively more expensive to do
business, what happens when you leave a community? Is the
community basically left too? And this is no disrespect to Bank
of America or Citi or Wells Fargo--they do good business. But
are the people in that community now left to larger
institutions which have the capability to deal with the
regulatory burdens of Dodd-Frank?
Mr. Reuter. Those banks do a good job on the ground with
good teams, but it is different than when it is a locally-
headquartered bank with the ownership also in that community.
Mr. Donalds. Let me shift a little bit and ask you about--I
like to reimagine regulation. I think we are at this point in
American history where we can start really rethinking the
regulatory environment for the next hundred years of what the
United States is going to look like.
In your opinion--and Ms. Lee, Mr. Knight and Mr. Berlau,
you can all chime in--what do you think the regulatory
environment should look like going forward in the United
States?
Mr. Reuter. I think at its core, regulation is good. It is
when we start adding layer upon layer upon layer and making it
more complex and difficult to comply with.
So, I think we should always go back to, what will
ultimately protect consumers and help communities thrive? That
should be the main motive whenever regulation is initially
drawn up and amended as time goes on.
Mr. Berlau. Congressman Donalds, I would say that
regulators--in one of the key principles that we talk about, we
say the words, ``regulate the regulators.'' The regulators
themselves need to be just as accountable as the businesses
they regulate. That is why it is so important for the CFPB to
have appropriations from Congress, given what all it does,
having that direct oversight of appropriation and not--an
agency should not do regulation by enforcement to come up with
the rule. They should follow the Administrative Procedure Act.
And, ultimately, Congress should be able to overturn a
regulation as it basically acts like a law, or at the very
least have the REINS Act for the cost of regulations.
So, I think accountability for the regulators is a very
important principle that we at the Competitive Enterprise
Institute are promoting.
Mr. Donalds. I would agree with you. We will see if the
third branch of government will help to rein in the second
branch.
Ms. Lee, your thoughts?
Ms. Lee. As the technology evolves, back to Jim's point, we
do need to have that strong consumer protection. But we also
need to have it fit for purpose in the sense that a lot of the
technologies that are coming onto line and using it aren't
fitting into a 1930 rule, aren't fitting into a 1990 rule, and
we need to make sure we have proper rulemaking to oversee, to
be able to address the actual risks in which these new products
are doing, the services in which they are actually providing,
instead of slipping them into an old rule that really doesn't
apply to them and put maybe arbitrary overlay onto them, which
doesn't apply to actually the businesses in which they are
doing.
Mr. Donalds. Mr. Knight, I'm sorry, I am out of time.
Mr. Chairman, I yield back.
Chairman Barr. The gentleman's time has expired.
The gentleman from California, Mr. Sherman, is now
recognized for 5 minutes.
Mr. Sherman. Thank you, Mr. Reuter, for mentioning the
importance of having a bank where the bank is based in your
city. And I will take a moment just to bemoan the fact that Los
Angeles is the largest megalopolis in this country where most
couldn't even name the largest bank that is actually
headquartered in Los Angeles, since we don't have one befitting
the size of our City.
And I will advise my colleagues that San Francisco is not a
suburb of Los Angeles, much as we in Los Angeles would like to
think so. It is over 400 miles away. That is farther than it is
from here to Boston.
Back in my day--and that was many days ago--banks could
make prime plus 3, prime plus 4, and even prime plus 5 loans.
And that wouldn't be the whole portfolio, but that would be a
chunk of the portfolio. And a local business could--that could
be their source of capital. Local small businesses have a
chance of failing, so prime plus 5 was not an outrageous amount
to charge when a business had a 5 percent chance of defaulting,
and if there is a default, maybe you get half of your money
back, but you certainly don't get it all.
How difficult is it for a bank to make a loan to a business
that has a 5 percent chance of defaulting? Is it impossible
under today's regulation?
Mr. Reuter. It is not impossible, but it is more difficult
with today's regulation, absolutely.
Mr. Sherman. And we talk a lot about--we just had hearings
of the subcommittee on which I am the ranking member about
getting capital to small businesses.
A pizzeria in my district needs a new stove. They are not
looking to do a Reg D offering. They are not looking to talk to
a venture capitalist. They go to a bank. And since the pizza
really isn't that good, their chance of failing is 5 percent,
and they don't get the loan.
But if we can't get money to businesses that have a 5
percent chance of defaulting, a 5 percent chance of you losing
half of your money, you have to build in 2.5, 3 percent, then
that small business isn't going to get funded, unless your
brother-in-law can come help you out.
Ms. Marcellin, we have talked a little bit about de novo
banks. There are other institutions that can be helpful.
How can credit unions act as a vehicle to address the
unbanked and underbanked communities, both on the business and
the depositor side?
Ms. Marcellin. Thank you, Congressman Sherman, for that
question.
Yes. Going back to credit unions, one of the pieces of
legislation that AFR supports is the Overdraft Protection Act.
We would like to see credit unions also limit how much--or
actually pretty much stop their practices of charging overdraft
fees and NSF fees. The same thing with minimum account
balances; basically decreasing barriers to making people,
especially low- to moderate-income folks and communities of
color from opening a bank account. And as the name implies, the
credit union, it should be a pretty low barrier.
Mr. Sherman. I would point out that if a business actually
incurs costs, they have to charge something. But some of the
fees that you talked about are much higher than they should be.
Mr. Reuter, I think Mr. Barr has a bill that provides
relief in the first 3 years for a de novo bank from a lot of
the standards on liquidity and capital. Does that pose a
problem of the bank not having the liquidity that it needs to
meet its obligations during its first 3 years?
Mr. Reuter. I do not think it poses an issue, because it
takes time for a bank to acquire customers and acquire the
assets. And so to start out day one with an assumption that
they are going to be much bigger in 3 to 5 years without a
ramp-up, I think isn't a good strategy.
Mr. Sherman. I yield back.
Chairman Barr. The gentleman yields back.
The gentlewoman from Texas, Ms. De La Cruz, is now
recognized for 5 minutes. And I welcome her to the committee.
Ms. De La Cruz. Thank you.
Thank you, Mr. Chairman, for holding this important hearing
on how to revamp and revitalize the banking sector.
And I would also like to thank all of the witnesses for
being here today and joining us to offer your insight into this
area.
I am glad we are here today on this committee, and Congress
as a whole, to update banking regulations, and to address
emerging technologies. I am a small business owner, and I have
grown my business in the good times and in the bad times. And I
understand the important need for capital to help develop a
business and also for the capital to develop local communities.
I am proud to have worked with several community banks
throughout my career and I want to see that they are able to
remain in our communities to be helpful.
I would like to touch particularly on how to reduce
barriers of entry for new banks and how to foster an
environment that allows community banks to succeed.
I am increasingly worried about the fact that only 60 new
banks have been formed in the past decade. And with that being
said, specifically on local community banks, what needs of
local communities do smaller, local financial institutions
serve that their larger regional and national counterparts do
not serve?
Would one of you be able to share with us?
Mr. Berlau. Yes, Congresswoman De La Cruz.
I would say that the--that is a new bank can--a new bank,
not just a community bank, a new bank can fill a void, and that
is why it is so important to lift the barriers to a de novo
bank, as an example, in my testimony, of the Bird-in-Hand Bank
which literally built horse-and-buggy lanes in its drive-
through for the Amish community.
It is very important that new businesses in any industry
can fill a void and in banking and financial services as well.
And that is why Chairman Barr's bill and Congressman
Auchincloss' bill encouraging de novos and lifting the
regulatory barriers to them are so important.
Ms. De La Cruz. And may I ask, how are they different than
a regional or a national counterpart? What can they do
differently than the national counterpart?
Mr. Berlau. Ultimately, it is up to them to demonstrate,
but consumers should be given a choice that if they like the
services better in a community bank than a regional or national
counterpart, they should have that choice. And the FDIC and
other regulatory agencies should certainly lift the unnecessary
barriers. And Congress should look at lifting the unnecessary
barriers thus far that prevent them from thriving and giving
consumers more of that competition and choice.
Mr. Knight. Representative, may I speak to your question?
Ms. De La Cruz. Yes, sir.
Mr. Knight. So at least historically, the advantage the
community banks have had is what is called soft information,
right? It has been referenced earlier that, oh, we know you, we
know your employer, we know the community, we understand,
whereas by necessity, a large national bank is going to rely
more on metrics. And I am not trying to denigrate metrics, and
there is a live debate about which is better.
But my understanding is that one of the effects of
regulation has been to chill the use of soft information,
because if loans go bad, it is harder to satisfy your
supervisor, to say, well, we knew them and we thought they were
a good risk, whereas if you can point to a metric and say,
look, there is this line. The line was above the other line.
What do you want from me? It is easier to satisfy regulatory
scrutiny.
And so to the extent that we are disincentivizing soft
information and local information, that is going to: first,
place community banks at something of a disadvantage because
they are less able to use advanced analytics; and second,
create the risk that worthwhile customers whose metrics don't
necessarily look good might be frozen out.
Now, I should reference, in my written testimony, this is
an area where non-bank technology firms do seem to be helping
in some degree by using sort of nontraditional metrics or using
metrics in new ways. But I don't want to say that is a
substitute for the on-the-ground rooted knowledge that a
community bank can provide.
Ms. De La Cruz. Thank you. I yield back.
Chairman Barr. The gentlelady yields back.
The gentleman from Tennessee, Mr. Ogles, is now recognized
for 5 minutes. And I welcome him to the committee.
Mr. Ogles. Thank you, Mr. Chairman, and welcome, esteemed
guests.
When I think about the industry, the sea of regulation, and
the complex metrics that make up the banking sector, I am
curious, yes or no, when you look at the cost of regulation,
the cost of compliance, fines levied by out-of-control
agencies, are those costs passed on to the consumer? Yes or no?
Mr. Berlau?
Mr. Berlau. They certainly are. One of the examples I had
was the Durbin Amendment where basically you cap what big
retailers are paying banks and credit unions to process debit
cards, and that resulted almost immediately in the end of free
checking, and may have resulted, according to scholars from
George Mason University, in 1 million unbanked.
That was one of the examples, Dodd-Frank Section 1075, but
there are lots of other examples as well.
Mr. Ogle. Thank you.
Mr. Knight, yes or no?
Mr. Knight. It is reasonable to expect this cost would be
passed on to either consumers, investors, or both.
Mr. Ogles. Ms. Lee?
Ms. Lee. It depends on the products and services, but I
would say yes, in certain cases.
Mr. Ogles. Mr. Reuter?
Mr. Reuter. Yes.
Mr. Ogles. At Koch Industries, there is a management
philosophy, market-based management, now called principle-based
management, and within that construct, you have creative
destruction. When you are talking about a sector or an industry
or even a business, if they are not constantly innovating,
evolving, and adapting to the marketplace, they become
obsolete. Think of a Kodak or an IBM that once were powerhouses
in their sector, but they were pushed out. They were displaced
by new industry and innovation.
So you are before this committee, and you are seeking
assistance, let's say, and you have one bite at the apple, one
request for us to take action, whether it is a regulation that
needs to be stricken, a code that needs to be modified or,
quite frankly, an agency that needs to be defanged, that is
going to allow competition, that is going to spur innovation in
the marketplace, then, in essence, will create this creative
destruction that we need to see in the banking industry and
current technologies.
Yes, sir?
Mr. Berlau. I would say Chairman Barr's de novo bank bill,
along with the Auchincloss bill, which I think goes along with
it, would basically force the FDIC to go toward more of a
system of phased-in capital. But, more importantly, sort of
give a yay or nay if they disapprove an application, what are
the reasons for it, but have a time limit.
I think encouraging new banks is one of the best things we
can do, and it is also someplace where it shows having the two
bills there and having bipartisan cosponsorship on it last year
where there actually is somewhat of a consensus emerging that
we need new banks, so get rid of barriers to them.
Mr. Ogles. Thank you.
Mr. Knight?
Mr. Knight. Restrict bank regulator authority over non-
objective criteria and move to a more objective system for bank
regulation to avoid some of the abuses I reference in my
written testimony.
Mr. Ogles. Thank you, sir.
Ms. Lee?
Ms. Lee. The promulgation of Rule 1033, which is an open
banking rule, which will allow consumers to be able to share
their financial data with the technology services that are out
there so that they can have personalized banking in a way that
fits them best.
Mr. Ogles. Mr. Reuter?
Mr. Reuter. I would second what Mr. Knight said, regulatory
certainty, ensuring that the leads of the regulatory agencies
enforce the existing laws rather than create new ones or
interpret.
Mr. Ogles. I thank you all.
Mr. Chairman, I yield back.
Chairman Barr. The gentleman yields back.
And the gentleman from South Carolina, Mr. Timmons, is now
recognized.
Mr. Timmons. Thank you, Mr. Chairman.
Mr. Reuter, what are the economic effects on communities,
urban and rural and otherwise, of such a steep decline in the
formation of new, local financial institutions? And what are
the effects on both individuals and small businesses?
Mr. Reuter. The lack of de novo charters no doubt hurts
communities. One of the questions asked earlier was: What is
the difference between a large bank or a regional bank and a de
novo community bank?
The Congressman from California mentioned earlier, when a
bank would start, it would have local investors. And so, when
you have your primary shareholders, your initial investors in
the community, it just makes a difference on what that bank can
do.
Our banking industry needs the very large banks. They
handle things we can't handle. But we also need smaller banks
to have a robust community.
Mr. Timmons. Thank you.
What has been the impact of consolidation and less
competition, particularly as it relates to the drop-off in
formation of new, local financial institutions, on depositors
and on borrowers?
Mr. Reuter. The consolidation has to happen. It has to be
allowed in order for banks to handle the communication--or the
IT costs, increased compliance costs. But at the same time, we
need new startups.
I mentioned earlier that Apple started as a small company.
There is a new Apple that started today somewhere out there in
the technology world.
In banking, we need the same thing. JPMorgan Chase does
amazing things, but we need the new version of JPMorgan Chase
starting in a community.
Mr. Timmons. Do you think that it has to be a physical
presence or could it be technology app-based?
Mr. Reuter. It could be technology app-based or a physical
presence. It depends on the needs of the community and the
strategy of that bank.
Mr. Timmons. Thank you.
I will stick with you, for one more question.
A core principle on which we can all agree is that
consumers should understand the pieces of their data that are
being collected and how that data is being used. But as we
know, most consumers do not read the pages and pages of fine
print that are provided when we sign up for a new product or
service. We also know how annoying it can be to click, ``accept
cookies,'' on every new website we open.
Would you talk a little bit about how to thread the needle
of making sure consumers are informed about terms and
conditions in a way that provides them with a meaningful
understanding of these terms and conditions?
Mr. Reuter. I think the Gramm-Leach-Bliley Act, while it is
20-years-old and needs updating, has stood the test of time of
working well for banking, where we have to disclose to a
customer if we are going to share their data with an
unaffiliated party, and they have an option to opt out of that.
I think it has worked very well for our industry.
Mr. Timmons. Would you agree that technology,
cybersecurity, and just general internet platforms create a
challenge for smaller banks that don't have the bandwidth to
manage those challenges?
Mr. Reuter. Absolutely. That is an additional cost of doing
business.
Mr. Timmons. Do you have any thoughts of how that could be
mitigated through maybe some streamlined regulation to give the
smaller banks a chance to compete?
Mr. Reuter. Absolutely. Tailoring of regulation is really
important, and we have seen examples of that throughout
history, and it is important going forward. The risks and the
complexities of a community bank are much different than that
of a larger institution. So, regulation should make sense based
on the size of the bank.
Mr. Timmons. Sure.
Ms. Lee, a question for you. I know we have touched on this
before, but a topic that is front of mind right now is the
concept of data portability. Would you discuss what that term
means and how it can serve as a benefit to consumers?
Ms. Lee. Sure. And it's good to see you again. Data
portability is the ability of the consumer to be able to
control their financial data, where it goes, what services they
will be sending it to, and the applications with which they can
interact.
So it is the notion that, for example, if they want to get
a small business loan, that they have access to their cash
flow, that they have a full understanding of who they are as a
consumer and are able to share that and get a very competitive
loan, whether it be online, at their community bank, or other
services.
And it gives them the ability to personalize what financial
services they want to choose to interact with and be a part of,
to be able to have a fuller financial life.
Mr. Timmons. And there is also value to that data to
different parties. Could you speak of the ways that data is
monetized?
Ms. Lee. I can speak only for our member companies, and
they do not monetize off of financial data. They keep it
comported to kind of the delivery of service, whether or not
that means in--if they use a Buy Now, Pay Later to actually
fulfill the order or if they are using it to complete the
transaction on the app on which they are. So, ours do not
monetize off of the data.
Mr. Timmons. Sure. Thank you.
Mr. Chairman, I yield back.
Chairman Barr. Thank you very much.
And I thank all of our witnesses for the outstanding
testimony, for everyone's participation, and for the Members'
questions today. I think we learned a lot about the value of
community financial institutions and the innovation happening
in fintech.
We learned that streamlined regulations, whether it is data
privacy or whether it is safety and soundness, consumer
protection, that that tailored regulation and regulation that
enables the private sector to continue to innovate serves
customers, protects customers the best, and makes sure that
businesses and families have access to capital.
I would just note for the record that while Members may
continue to insert bills into the record, they are not
officially attached to this hearing per our committee rules,
specifically Rule 3(d)(1)(B). I encourage my colleagues to work
with us going forward to ensure that all bills are noticed
appropriately.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
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