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U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 2:00 p.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the subcommittee], presiding.

    Present: Chairwoman Roukema; Representatives Royce, Metcalf, Kelly, Vento, C. Maloney of New York, Bentsen, Sherman, Mascara, Inslee, and Moore.

    Chairwoman ROUKEMA. I am going to call this hearing to order. I am afraid we have time constraints today, both in combination with a voting schedule as well as some of the other competition on the time of some members of the panel, so we need to get started. I would note that they have already called a vote on the floor.

    All right. Let me give my opening statement, if you will, so at least that can be done before Mr. Vento and I have to leave. I want to make it clear however that this is an important meeting and important hearing and I suspect that other Members will be arriving shortly.

    This legislation on regulatory burden relief will be a top priority in the upcoming months, and I think you all know my commitment to that. It is not only about regulation, but I believe it comes down to a supervisory system that is relevant and integral to protecting the safety and soundness of the banking system. I do believe it is important for us to review banking laws and regulations in a periodic and orderly way, and I think obviously this is the time to do it.
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    As you will remember, those of you who followed this issue, we had a bill that passed the House last year on regulatory relief. It was passed in October under suspension of the rules. It was totally non-controversial. This bill, H.R. 1585, is virtually identical to the one last year. Unfortunately the bill that we passed last year was not passed by the Senate.

    So we are in a sense starting over or from the beginning here. Hopefully the good record of last year will be a road map for us. I hope there are not a lot of diversions and add-ons, and we are not going to make this bill a wish list—a vehicle for a wish list. But in any case, I certainly hope that we move ahead quickly so that we can force Senate action.

    There are four major provisions of H.R. 1585. The four provisions: Section 101, the payment of interest on the Federal Reserve Board—I am sorry, payment of interest by the Federal Reserve Board on sterile reserves; Section 102, the payment of interest on business checking accounts; Sections 501 and 502, a new privilege for documents and information gathered from financial institutions by the regulators in the supervisory process; and Section 701, which would eliminate the SAIF special reserve.

    They are not the only issues in the bill, but those that I think we have intention of focusing on today. The interest on the sterile reserves I think is well-known to everyone here. Section 101 would authorize the Federal Reserve Board to pay interest on reserve balances held at the Federal Reserve banks, and it would apply to both required reserves and excess reserves.

    I would be remiss, and I wish our colleague, Representative Jake Metcalf were here, because he has taken the lead on both of these issues, Section 101 and 102, in the last Congress, and he is to be commended for focusing our attention on these.
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    I am going to shorten my introductory comments, but there are financial considerations here with respect to the Federal Reserve Board and those payments. CBO scoring questions come up on sterile reserves and they may come up during the further consideration. I am not going to go over that now, but I am most anxious to learn the perspective of the Fed, and we will reserve some of those questions for the Fed.

    I will not go into some of the other questions that I had here, but I would note an observation about the repeal of the SAIF special reserve and the questions that it raises. Mr. Vento and I have introduced a separate bill to repeal the SAIF Special Reserve, because we felt this was such an important issue. I am not quite sure that this stand-alone bill will be moved separately. I am hopeful that it will be integrated into this bill that the larger bill will go forward quickly.

    And with that I will yield to my Ranking Member, Mr. Vento, for his comments.

    Mr. VENTO. Thank you, Madam Chairwoman. And the news of the day won't be this regulatory relief hearing. Obviously the news today is the tremendous announcement, surprising announcement that Secretary Rubin will be departing the Administration. He has been a friend to all of us, I think I can say, and an extremely effective Secretary of the Treasury, a real pillar of support within the Administration during six-and-one-half years, someone from the private sector with great skills and enterprise that has devoted really a significant time, years of his life, so we are all grateful for it.

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    And I certainly offer my full support to Larry Summers, who has appeared before the subcommittee often, and we wish him well. Madam Chairwoman, I know that you share that sentiment, and there is probably more to be said about that by all of us in a different location or venue, as the word is popular today, even though we are not attorneys.

    The fact is, this bill is familiar to you all. It is a bill in which you will deal with some of the specifics. Obviously the interest on checking accounts, demand deposits by businesses, and interest on sterile reserves are key elements of this bill that evoke quite a response from the banks and from the Treasury, I might say, with regards to their lack of revenue being sent over from our friends at the Fed. And other provisions are key, I think, and important in terms of updating our laws.

    And as much as I might like to see a little regulatory relief, I would also like to see some consumer relief and some updating of those laws that need it, like Truth in Lending and some of the other provisions that consumers are looking to as a solution. I hope that we can work together on this bill, bearing in mind that it isn't satisfactory just to stand still on some of the other matters. But, I hope we can work together on this bill and develop a bipartisan support that will in fact send it early in the session through to the Senate, and that it won't become the object of attention or diversion by those amongst us as we work on it. Obviously, given this year, we have a chance to do that as opposed to October of an election year.

    Madam Chairwoman, with that I will just ask unanimous consent to put my remarks in the record in their complete form.

    Chairwoman ROUKEMA. Absolutely, so moved.
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    I would mention that Comptroller Hawke is here. He has a conflict in his schedule. Comptroller, you will be free to use your discretion as to what time you have to leave. Mr. Vento and I will race away now, but if you are not here and your substitute is testifying in your behalf, we will be bringing up your announcement today on the OCC regarding the community bank proposal. But thank you for your patience, and we will be back as soon as possible.

    Mr. HAWKE. Thank you, Madam Chairwoman.


    Chairwoman ROUKEMA. I think we are organized now. Thank you. I appreciate it, and I appreciate Congressman Vento getting back so promptly as well.

    Just as a matter of order for those that are not completely familiar with our procedures here, the witnesses will be presenting written testimony, and of course that will be included in the full record of the hearing.

    We will also be permitting Members the ability to submit written questions to our witnesses if they so desire. That is a unanimous consent request for anyone here present or for those that are Members of the subcommittee who may not be able to be here.

    The hearing record will remain open for the usual period of time for the submission of additional information relevant to the subject matter today. In this respect, I would like to note that the U.S. Chamber of Commerce will be submitting testimony for the hearing record, and I recognize that the Chamber strongly supports elimination of the statutory prohibition on the payment of interest on business checking accounts.
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    Without objection, their testimony and those of other parties that will be submitting testimony will be in the hearing record.

    All right. With that, I would like to introduce our first panel, and I would like to introduce them in the order in which we are going to be hearing from them.

    First we welcome someone who is very familiar to this subcommittee and indeed to the full committee, from the Board of Governors of the Federal Reserve System, Governor Laurence Meyer. We have had you before our committee and our subcommittees on several occasions, and of course we are very anxiously looking forward to your testimony. After all, you are essential to any understanding that we have for regulatory reform and the safety and the soundness questions that we have in mind.

    Governor Meyer, please.


    Mr. MEYER. Thank you, Chairwoman Roukema, Representative Vento, Members of the subcommittee.

    The Board of Governors appreciates this opportunity to comment on H.R. 1585, the Depository Institution Regulatory Streamlining Act of 1999. The Board welcomes this legislation, which contains several important reforms, and the Board recommends their adoption.
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    I would like to highlight some of the provisions the Board supports. I will also discuss a few provisions with which the Board has concerns. My prepared statement details these matters at greater length.

    The Board strongly supports Section 101 of the bill, which would permit the Federal Reserve to pay interest on both required and excess reserve balances held at Federal Reserve banks. Because required reserve balances do not currently earn interest, banks and other depository institutions employ costly procedures to reduce such balances to a minimum. The cost of designing and maintaining the systems that facilitate reserve avoidance techniques are a waste of resources to the economy and place smaller institutions at a competitive disadvantage.

    The reserve avoidance measures used by depository institutions could also complicate the implementation of monetary policy. Declines in required reserve balances through avoidance schemes could lead to increased volatility in the Federal funds rate.

    Allowing the payment of interest on required reserve balances, as authorized by this bill, would directly address this concern by reducing current incentives for reserve avoidance and by inducing the rebuilding of reserve balances over time. It would also reduce the economic inefficiencies and competitive inequities associated with reserve avoidance mentioned earlier. Should volatility in the Federal funds rate nevertheless become a persistent concern, the bill's authorization of interest payments on excess reserves would be a useful addition to the tools that the Federal Reserve has to deal with such contingencies.

    The Board also strongly supports permitting the payment of interest on demand deposits held by businesses. The current prohibition of interest on the demand accounts of businesses was enacted in the 1930's, when Congress was concerned that large money center banks might bid deposits away from country banks to make loans to stock market speculators. The rationale for the prohibition is certainly not applicable today. Funds flow freely around the country and among banks of all sizes. The absence of interest on demand deposits is no bar to the movement of money from depositories with surpluses to the markets where funds can be profitably employed.
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    However, the prohibition imposes a significant burden both on banks and on those holding demand deposits, especially small banks and small businesses. Smaller banks complain they are unable to compete for the deposits of businesses precisely because of their inability to offer interest on demand deposit accounts. Small businesses, which often earn no interest on their demand deposits because they do not have account balances large enough to justify the fees charged for sweep programs, stand to gain the most from the elimination of the prohibition of interest on demand deposits.

    For these reasons, the Board strongly supports the immediate repeal of the prohibition of interest on demand deposits. In contrast, Section 102 of the bill would allow payment of interest on demand deposits to begin on October 1st, 2004 and during a transition period would authorize a fully reservable, 24-transaction-per-month money market deposit account.

    While a relatively short transition period prior to the authorization of direct payments on demand deposits would not be objectionable, delaying the authorization of such payments for any extended period, such as the five years or so proposed in the bill, is not advisable. With a considerably shorter transition period before direct payment of interest on demand deposits, the provision in Section 102 of the bill would be acceptable to the Board in preference to the status quo.

    The Board also supports other parts of this bill. For example, the Board supports Title V of the bill, the Bank Examination Report Privilege Act. This title would clarify that depository institutions may voluntarily disclose privileged information to supervisors without waiving their privileges with respect to third parties, and would establish procedures under which third parties could seek supervisory information directly from the banking agencies. This measure would help ensure that examiners have access to important information and help preserve the integrity and effectiveness of examination process.
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    Other provisions in this bill would relieve regulatory burden without raising safety and soundness, consumer protection, or other policy concerns. For example, Section 311 would repeal Section 11(m) of the Federal Reserve Act, which imposes an outdated ceiling on the percentage of bank capital and surplus that may be represented by loans collateralized by securities.

    Section 312 would eliminate Section 3(f) of the Bank Holding Company Act, which imposes restrictions on the non-banking activities of certain savings banks, but does not apply to other depository institutions.

    And Section 303 of the bill authorizes the banking agencies to act jointly to allow up to 100 percent of the fair market value of an institution's purchased mortgage servicing rights to be included in its Tier 1 capital, a change that would alleviate regulatory burden without compromising safety and soundness.

    A few provisions of the bill, however, cause us concern. These provisions may give certain entities unfair competitive advantages or are unnecessary.

    Sections 222 and 223 of the bill would eliminate limitations that have been applied to non-bank banks. Eliminating restrictions on non-bank banks at first glance may have intuitive appeal; however, for important reasons the Board is concerned about doing so.

    Non-bank banks, which despite their name, are federally-insured, national or State-chartered banks, came into existence by exploiting a loophole in the law. By means of this loophole, industrial, commercial and other companies have acquired insured banks and mixed banking and commerce in a manner that is statutorily prohibited for banking organizations.
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    In 1987 Congress closed the non-bank bank loophole, grandfathered the then 57 non-bank banks, and imposed a carefully crafted set of limitations on the activities of those non-bank banks and their parents. Today, there are fewer than fifteen non-bank banks. This bill would enhance advantages that owners of non-bank banks already possess over other owners of banks, and would permit the increased combination of banking and commerce for a few commercial companies.

    The Board continues to believe that the questions of whether and to what extent it is appropriate to enhance the position of non-banks are questions most fairly determined in connection with broad financial modernization. In that context, it may be possible to relieve restraints on an existing handful of non-bank banks without seriously disadvantaging the majority of banking organizations.

    The Board would be pleased to work with the subcommittee to further the goals of this bill, and I would be happy to respond to any questions.

    Chairwoman ROUKEMA. Thank you for that.

    Now we have Ms. Julie Williams, sitting in for Comptroller Hawke, who had to leave. You are Chief Counsel of the OCC?

    Ms. WILLIAMS. That is correct.

    Chairwoman ROUKEMA. We welcome you on such short notice.

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    Ms. WILLIAMS. Madam Chairwoman, Ranking Member Vento and Members of the subcommittee, I appreciate this opportunity to offer the views of the Office of the Comptroller of the Currency on H.R. 1585 and to discuss additional ways to reduce unnecessary regulatory burdens on the banking industry.

    I thank you, Madam Chairwoman and Members of the subcommittee and your staffs, for working with the OCC and other Federal banking regulators to craft a bill that takes into account many of our concerns and suggestions for appropriate regulatory burden relief. In this bill and in previous regulatory burden relief legislation, this subcommittee has played a leadership role in identifying opportunities to enhance efficiencies and reduce unnecessary requirements applicable to banks without compromising safety and soundness or the interests of consumers.

    Effective bank supervision requires a regulatory infrastructure that maintains the safety and soundness of the industry, ensures that the credit needs of the public are served, and protects the interests of banking customers. The pursuit of those goals necessarily imposes some regulatory burdens on the banking industry. Needless burdens, however, make banking more costly, inhibit the ability of banks to serve their important role in our national economy, and, in the long run, undermine safety and soundness.

    Recently, we initiated a review of our regulations to identify those that are particularly onerous for community banks. Today's edition of the Federal Register contains an advance notice of proposed rulemaking that solicits public comment and suggestions for addressing the regulatory burdens that community national banks bear, consistent with maintaining safety and soundness.
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    The Comptroller's written statement and attachments provide detailed comments on the bill and some recommendations the subcommittee may wish to consider for additional changes that we think would provide meaningful burden relief for banks. I will briefly highlight a few changes that would enhance the ability of banks to compete, enable national banks to organize their operations more efficiently, particularly as the industry consolidates, and remove uncertainty about the ability of national banks to branch in certain historically underserved parts of this country.

    H.R. 1585 eliminates outdated prohibitions on the ability of banks to operate efficiently in a competitive market for financial services. The bill removes the statutory prohibitions that prevent depository institutions from paying interest on demand deposits. These provisions would eliminate the obsolete policy of restricting the rates banks pay on deposits, and we support elimination of those restrictions.

    The bill also contains important burden reducing provisions that allow banks greater flexibility in their organization and governance. In light of the ongoing restructuring and consolidation in the banking industry, we agree it is critical to remove needless restrictions that prevent banking companies from organizing their operations efficiently. We support the bill's provisions in this regard, and offer some suggestions for additional amendments that would complement those already included in the bill.

    For example, Section 203 reduces regulatory burdens by expediting the procedure by which a national bank may reorganize to become a subsidiary of a bank holding company. This would be particularly useful to community banks. Also, Section 201 would permit the OCC to give banks more flexibility in determining the size and composition of their board of directors, which would provide greater flexibility to banks involved in mergers in maintaining more local representation on their boards of directors.
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    We urge Congress to take steps to make sure the law does not hinder national banks that want to locate in historically underserved parts of the country. In particular, we recommend that Congress clarify the national bank branching statute to specifically permit a national bank to establish and operate branches on Indian reservations, consistent with tribal law.

    We also ask Congress to consider removing governmentally-imposed requirements that have the effect of limiting competition by insulating some parts of the financial services industry from competition. An obvious example is the so-called ''place of 5,000'' restriction on national bank insurance sales. This outdated restriction shields one sales channel from competition from another. Ultimately, consumers bear this cost because they have fewer choices when they buy insurance. Clearly, this is another example of a regulatory burden that serves no public purpose and should be eliminated.

    Finally, the OCC also supports the Bank Examination Report Privilege Act, which would establish a bank supervisory privilege to protect confidential supervisory information, such as depository institution exam reports and other documents relating to the exam process. These sections favorably resolve many of the unsettled issues regarding the handling of access to supervisory information while preserving a fair process, including judicial review, by which third parties can seek access to supervisory information.

    The OCC remains committed to the reduction of unnecessary regulatory and supervisory burdens. We believe this can be done without compromising either the safety and soundness or the community and consumer responsibilities of insured depository institutions. We applaud you, Madam Chairwoman, and the subcommittee for your efforts to reduce unnecessary regulatory burdens.
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    Thank you very much.

    Chairwoman ROUKEMA. All right. I thank you very much for your testimony and keeping within the prescribed time limit.

    Our third witness is Andrew Hove, Vice Chairman of the FDIC. Mr. Hove is testifying today in place of Chairwoman Tanoue, who unfortunately took ill yesterday, and I hope we can look forward to an early recovery from Ms. Tanoue. But in any case we welcome you, Mr. Hove, today.


    Mr. HOVE. Thank you, Chairwoman Roukema, Congressman Vento and Members of the subcommittee. I appreciate the opportunity to present the views of the FDIC on regulatory relief legislation.

    The FDIC has long shared the subcommittee's commitment to eliminating unnecessary regulatory burden. Indeed, since the passage of the Riegle Community Development and Regulatory Improvement Act of 1994, the FDIC has rescinded or revised over two-thirds of its regulations and policy statements.

    Although the FDIC and other banking regulators continually strive for more efficient regulation and procedures, some potential improvements are outside the regulators purview and must be addressed through legislation. To that end, your subcommittee is to be commended for your efforts in this regard.
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    The FDIC supported many of the provisions in H.R. 4364, which was passed by the House last October. We applaud the recent introduction by Chairwoman Roukema of H.R. 1585, and support many of the bill's provisions. This afternoon I want to point out four provisions we support in particular.

    Number one, we support the provision that eliminates the SAIF special reserve. The existence of the special reserve could potentially result in an assessment rate disparity between the BIF and the SAIF, re-creating the same circumstances that the Deposit Insurance Funds Act of 1996 was intended to eliminate.

    To complete the job of addressing structural problems in the insurance funds, the FDIC again urges Congress to merge the BIF and the SAIF. Given the current condition of the industry, and of the funds, there is no better time than now to remove this statutory relic of a bygone era.

    Number two, we support Title V, which provides for a statutory privilege to protect confidential information provided by banks to their banking regulators. This provision will help preserve the cooperative, non-adversarial exchange of information between supervised institutions and their examiners, and that is critical to the examination process.

    Number three, we support provisions of the bill that provide for payment of interest on demand deposits. The prohibition against paying interest on demand deposits is antiquated and no longer serves a useful purpose.

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    And finally, number four, the FDIC supports the provision that provides for the payment of interest on reserves maintained at the Federal Reserve bank.

    In conclusion, the FDIC supports the subcommittee's continued efforts to reduce unnecessary burden on insured depository institutions without compromising safety and soundness or consumer protection. We at the FDIC continually strive for greater efficiency in the regulatory process, and are pleased to work with the subcommittee in accomplishing this goal. I would be happy to respond to your questions. Thank you very much.

    Chairwoman ROUKEMA. Thank you very much.

    Next we have Ms. Carolyn Buck, who is Chief Counsel for the Office of Thrift Supervision. Welcome.


    Ms. BUCK. Thank you, Madam Chairwoman, Ranking Member Vento and Members of the subcommittee, thank you for the opportunity to represent the Office of Thrift Supervision's views on H.R. 1585.

    Eliminating unnecessary regulatory burden is an important issue for insured depository institutions. Heightened competition in the financial services industry has compelled institutions to improve their efficiency in order to survive. As regulators, we have an obligation to minimize regulatory burden for the institutions we supervise, subject to prudent oversight of their safety and soundness and compliance with laws.
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    Except for a few relatively minor concerns, we support this legislation and thank Chairwoman Roukema for her leadership and her staff for their efforts in preparing for this legislation. The bill includes many worthwhile burden reduction initiatives. For example, the proposed legislation includes two provisions that allow thrifts to provide financial products and services to their local communities more easily and effectively.

    First, we strongly support the provision that would remove the current requirement that a Federal thrift may only invest in a service cooperation chartered in its home State. This requirement has impeded the ability of thrifts, many of which operate interstate, to make community development and other eligible investments outside of the State of their home office. They may only do so now if they engage in the additional expense and burden of establishing a second-tier service corporation. Removing this geographic limitation would enhance a thrift's ability to participate in community development activities wherever its business is located.

    Consistent with the purpose of this amendment to encourage community development investments, we would support an additional amendment that would allow thrifts to invest in first-tier service corporations owned jointly with banks and other entities to carry out activities that are reasonably related to the activities of financial institutions.

    Currently, for example, a Federal thrift cannot invest jointly with a national bank in a community development corporation unless it sets up a second-tier service corporation. The expense of this process has discouraged partnerships between thrifts and banks in community development investments, and so we urge the subcommittee to ease this ownership restriction.
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    Second, we support the provision of the bill that would update statutory authority permitting thrifts to invest in community development activities. This provision would replace an obsolete statutory cross-reference to HUD's Community Development Block Grant program. As a result of changes to this program, thrift investment opportunities that meet the technical requirements of the statute are rare, and OTS has found it cumbersome to authorize community development investments as the statute is written.

    To remedy the problem, the bill would provide thrifts with community development and investment authority more comparable to that of national and State member banks. In adopting the community investment standard applicable to banks, the proposed legislation would reduce the amount that thrifts are able to invest in community development programs. While we prefer the current limit for thrifts, we do not object to the amendment, since it does not appear at this point to significantly constrain their operations.

    With respect to issues involving the Federal deposit insurance funds, let me first state that OTS strongly supports the provision in the bill that would repeal the SAIF special reserve and restore the funds held in reserve to the SAIF. This would avoid exposing SAIF members to the possibility of increased premiums and, once again, to a BIF-SAIF premium differential.

    In addition, we join the FDIC in urging Congress to merge the BIF and SAIF funds. This important step would eliminate the economic and managerial efficiencies of having two separate funds to support one product, Federal deposit insurance.

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    As to other parts of the bill, we support provisions that are designed to protect confidential supervisory information. The bank examination protection provisions are the same as those introduced by Congressman McCollum earlier this year in H.R. 174. The legislation would codify various Federal court holdings that supervisory communications between regulators and regulated institutions are privileged and protected from disclosure.

    We also urge the subcommittee to consider another amendment to protect confidential agency information. This amendment would clarify that a statute permitting a limited disclosure of confidential information is intended only to protect persons who pass on confidential information to the Attorney General or a banking agency, since those are the entities that are in a position to address possible violations of law. There should be no doubt that it does not protect persons seeking to alert others that they may be under investigation for possible wrongdoing.

    With respect to the proposed repeal of requirements that savings associations owned by a savings and loan holding company must notify OTS before paying a dividend, we have reconsidered our position on this. Recent holding company applications have raised challenging policy and supervisory issues, and have caused us to look at our entire holding company process. We would like to learn more about the payment of dividends in these company structures and their effect on thrifts. After our review, if we conclude that repeal is appropriate, we will advise the subcommittee.

    On the subject of the thrift liquidity requirement, OTS would strongly support an amendment to repeal Section 6 of the Homeowners' Loan Act. We favor repeal because this section no longer serves its original purpose and is redundant with other liquidity requirements. If the repeal is not enacted by this fall, OTS would support a suspension of the provision to give institutions greater flexibility during the millennium changeover. Although several conforming amendments would be required if Section 6 is repealed, let me assure you that none of them would loosen the qualified thrift lender test in any way.
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    And, finally, OTS would strongly support an amendment to provide statutory authority for up to four deputy directors of OTS, closely based on long-standing OCC authority. In the absence of a Senate-confirmed OTS director, there should be no question about the authority of the agency to carry out its responsibilities to regulate and supervise thrifts in order to protect the public.

    OTS is committed to reducing existing burden wherever we have the ability to do so consistent with safety and soundness in compliance with law. I believe this proposed legislation advances this objective, and we appreciate that many of the reforms we have long desired are included in the bill.

    I would be pleased to answer your questions. Thank you.

    Chairwoman ROUKEMA. Thank you.

    And now we have Mr. Robert Fenner, who is General Counsel for the National Credit Union Administration. We welcome you, Mr. Fenner. I believe this is your first time before this subcommittee. You are most welcome.

    Mr. FENNER. This is the first time in a long time.

    Chairwoman ROUKEMA. In a long time. All right. Thank you.

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    Mr. FENNER. Thank you, Chairwoman Roukema, Ranking Member Vento, Members of the subcommittee. Like my fellow panelists, I very much appreciate the opportunity to be here today, in my case to present the views of the National Credit Union Administration, and I will be brief in my oral statement.

    I would like to note first that NCUA supports the elimination of unnecessary regulation for all financial institutions. And I would like to note in the case of credit unions, we have an ongoing program of regulatory review in place at NCUA that calls for a review of all of our regulations on a three-year cycle, and we are currently meeting that goal. We believe this program is proving very effective and we are, of course, always open to new ideas and improvements.

    We support H.R. 1585. And while my written testimony addresses all of the issues that are of importance to NCUA, I would like to specifically mention just three of those issues today.

    First, we strongly favor Section 221, which would prohibit insiders from benefiting from the conversion of an insured credit union to a savings bank charter. This amendment would ensure that conversions are not driven by the desire of management officials to convert the credit union members' capital to their own pockets. And the amendment is needed because the Credit Union Membership Access Act removed NCUA's regulatory authority to afford this protection to credit unions and their members.

    My second comment concerns Section 103, which requires the FDIC to study issues related to the reserve ratios of the Federal deposit insurance funds. It is unclear to us whether the National Credit Union Share Insurance Fund is included in this study.
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    First, we would suggest that it may not be necessary to include the Share Insurance Fund since these issues were addressed in the Membership Access Act. If, however, it is the subcommittee's intent to include the credit union fund, then we would request that NCUA be included as a full participant in the study.

    And, finally, while we fully support Title V of the bill concerning examination report privilege issues, we do request certain amendments to ensure that information from examinations of credit union service organizations and information collected by State credit union supervisors receives the same protection as credit union examination information that is collected by NCUA.

    Our suggested amendments are attached to my written statement. We believe these amendments would simply afford NCUA and credit unions and their State regulators the same range of protection that is provided by the bill to the banking agencies and their institutions.

    And, again, I thank you for the opportunity to be here today.

    Chairwoman ROUKEMA. Thank you.

    Our sixth and final witness on this panel is Mr. John Burke, who is the Commissioner of Banking for the State of Connecticut, but he is representing here today the Conference of State Bank Supervisors of which I believe, Mr. Burke, you are chairman.

    Mr. BURKE. I am.
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    Chairwoman ROUKEMA. Welcome.


    Mr. BURKE. Thank you very much. Good afternoon, Chairwoman Roukema, Congressman Vento and Members of the subcommittee, I am Jack Burke, Commissioner of Banking for the State of Connecticut and Chairman of the Conference of State Bank Supervisors. Thanks for asking us to be here today to share our views on regulatory burden reduction.

    We also applaud your commitment and efforts to reduce the burdens imposed by unnecessary and duplicative regulations. One of the most important contributions toward reducing regulatory burden may be empowering the dual banking system. We commend this subcommittee's historical dedication to dual banking. A monopoly isn't good for business and it isn't good for government. Without the existence of a parallel regulatory system, an expensive, inefficient and sometimes even arrogant regulatory regime could easily develop that would burden and restrict financial institutions, disadvantage them in the marketplace, and create a less healthy banking system.

    The State banking departments have always sought to measure the implementation of each regulatory requirement against its benefit to the public. In supervising State-chartered institutions, we have seen how the cumulative effect of regulatory requirements can actually interfere with a bank's ability to serve their customers.
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    Over the past few years the States, independently and in conjunction with our Federal counterparts, have focused our efforts on reducing the burdens on State-chartered institutions.

    In Connecticut, for example, we have undertaken an extensive project to streamline our regulations. The entire book of regulations is now only half-an-inch thick. We have also eliminated the need to apply for a new ATM location, and are currently developing a proposal to simplify the branching application and approval process. Additionally, to give banks greater flexibility to serve their customers' needs, we even allow them to choose their own bank holidays.

    Technology has also played a large part in this relief effort. Through the use of technology and the development of automated examination tools, State and Federal banking agencies have been able to improve the quality of the examination process while making the process less intrusive for financial institutions.

    Coordination and cooperation have been hallmarks of State bank supervision in the 1990's. With Riegle-Neal's enactment in 1994, CSBS undertook to create a single supervisory system for State-chartered banks operating on an interstate basis. Our system of coordinated supervision for the State banks that operate in more than one State is progressing successfully.

    And we recently have seen all the States adopt a uniform application to open closed branches. We have just completed the latest State-to-State and Federal agreements developed for international banks that operate in more than one State. We are also in the process of finalizing an agreement with the National Association of Insurance Commissioners to facilitate the coordinated supervision of banks engaged in the sale of insurance.
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    Again, our thanks to the subcommittee for considering our views on H.R. 1585. In particular, we commend you for extending the Administration's initiative on plain language to all Federal banking agencies. Although regulations will always be necessary, plain language will help make new rules less mind-numbing and will go a long way toward reducing regulatory burden.

    Also we strongly support the bill's provision to repel Section 3(f) of the Bank Holding Company Act, which was intended to be a special grant of authority, not a restriction. Repeal of this provision would bring the regulation of savings banks in line with the regulations governing all other financial institutions in a bank holding company structure.

    In addition, you are to be commended for including the Bank Examination Report Protection Act, commonly known as BERPA. The free flow of information from a financial institution to its regulators is critical for the effectiveness of the supervisory process.

    We would also like to bring to the subcommittee's attention a change to current law that would allow international banks operating in the U.S. to expand their operations, as was always intended in the Riegle-Neal Interstate Banking and Branching Act of 1994. We ask the subcommittee to include this non-controversial provision in regulatory relief legislation and allow these banks to upgrade their agencies to branches.

    It would be very helpful to include in H.R. 1585 a clarification of Federal law to allow U.S. Attorneys to share grand jury information with State bank regulators, as is the current practice with Federal banking regulators.
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    In conclusion, the quest to streamline the regulatory process while preserving the safety and soundness of our Nation's financial system is critical to our economic well-being and health of our Nation's financial institutions. Again, we commend this subcommittee for its considerable efforts in this area.

    We look forward to any questions you and the Members of the subcommittee might have. Thank you.

    Chairwoman ROUKEMA. Thank you, Mr. Burke. Thank you very much.

    I guess my general observation will be that it looks as though, although we have some differences, we have a broad consensus on the fundamental issues here in this legislation. I can assure you that I and others will be going into some depth on the differences of approach.

    I would like to note, first with the Federal Reserve, Governor Meyer, that there is nothing more to say about the CBO costs that I mentioned in my introductory statement with respect to eliminating the sterile reserves. There is a cost here to the public that will have to be absorbed, without question. The Fed feels that the benefits far outweigh the costs. I gather from the Fed point of view having a certain amount of ''reserves'' is integral to monetary policy, sound monetary policy.

    Is that the way you would justify it, or because we do have technology, that we are absorbing a cost here, a significant one, over a ten-year period?
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    Mr. MEYER. Right. I think there are three justifications. One, it is inefficient. It requires that costs be incurred that have no social value at all, except to evade a regulation. And, second, it promotes competitive equity for banks and depository institutions who are subject to reserve requirements, that they be able to earn interest on these reserves. That makes them more competitive with non-depository institutions. And then we have the policy impairment question, so I think all three reasons.

    Chairwoman ROUKEMA. The policy impairment question?

    Mr. MEYER. The reduction in required reserves could threaten to make monetary policy less effective by making the Federal funds rate more volatile.

    So those are the three reasons why we would support it, and we understand that there is a budgetary cost, and we feel it is our obligation to come here and explain why we think this is important and in the public's interest. We recognize that we leave you with the burden of figuring out how to pay for it. With respect to the estimates, of course, we leave it to CBO.

    Chairwoman ROUKEMA. If you can assure us that forever we will have a sound economy, that will not be a problem.

    Mr. MEYER. Right. We leave it to CBO to make those revenue estimates.

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    Chairwoman ROUKEMA. If you have more to add for the record, please, I would invite you to do so. But you did raise a concern that I perhaps didn't anticipate, and that was your question regarding Sections 222 and 223 eliminating the limitations on non-bank banks. I am not sure if there is anything more that we need go over here now, but I may want to follow up with you in that regard, because I for one did not anticipate that as a problem here within this regulatory burden relief bill.

    Mr. MEYER. I would just remind you, we testified on this last year. It is a long-standing position at the Federal Reserve.

    Chairwoman ROUKEMA. And we haven't taken care of it yet?

    Mr. MEYER. The issue here is that we think that non-bank banks were basically a mistake and that the idea is to contain that mistake. That is the purpose of the restrictions that have been imposed on non-bank banks. We should only deal with relief from these restrictions in the context of broader financial modernization.

    Chairwoman ROUKEMA. All right.

    Mr. MEYER. The financial modernization bill would be a place to take up some of these relief measures.

    Chairwoman ROUKEMA. It is not essential that it be included here, it can be taken up in the context of H.R. 10?

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    Mr. MEYER. We think it would be better handled there.

    Chairwoman ROUKEMA. There. I don't want to cut you short. If there is a further word that you want to include, please feel free.

    But I did want to get to Ms. Williams regarding—you made reference to the OCC announcement today regarding the new community bank proposal. I have not had a chance to review it, and I only know the brief account that I read in the paper today, in the American Banker, but I do have some concerns.

    I am concerned for instance about the OCC having lower capital requirements and increasing the loans to one borrower limit for community banks. I always equate strong capital requirements with safety and soundness and as being absolutely essential; and then there is the question regarding significant loan concentration, the percentage of capital loaned to one borrower. Increased loan concentration may lead to large unanticipated losses and undermine safety and soundness.

    Could you amplify just briefly on what the compelling reason is for the announcement today with respect to community banks, and whether or not you are really establishing an unfair competitive advantage here?

    Ms. WILLIAMS. Madam Chairwoman, I am very glad to have the opportunity to make sure that there is no misunderstanding about what we are proposing. As you and the Members of the subcommittee may be aware, a couple of months ago Comptroller Hawke noted that one of the things he wanted to look at as an agency-wide initiative is just how we go about supervising community banks. There are a number of facets to that initiative. One is what was announced today—something known in bureaucratic lingo as an advance notice of proposed rulemaking. It is not a proposal to change any rule. It is a step agencies can take when they want to ask for comment on a wide range of issues to help narrow the scope of what they might consider in the future for rulemaking.
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    So the first point that I think may allay some of your concerns is that we haven't proposed to do anything. What we have asked is that bankers indicate to us areas where we have regulatory treatments that may be imposing a disproportionate or unnecessary burden on the smaller banks we regulate. And in that advance notice, we flagged some areas that struck us as areas we might want to look at.

    The capital requirements area was mentioned in the advance notice. We do not make changes to capital rules on our own. We emphasized in the advance notice, and I know you haven't had time to look at it, that any ideas that were suggested as part of the advance notice would be put into the interagency discussion process to see if there were things that the other agencies might be interested in looking at. The situation is also complicated by the fact that many of the capital regulations are the product of international discussions. So this is very much just asking for ideas from community bankers about the capital rules.

    Lending limits are very much in the same vein. We have heard from community bankers that because the nature of their bread and butter business in recent years is evolving more to small business lending, as their small business customers grow a bit, some banks are hitting lending limit caps and are not able to serve certain types of customers as fully as they would like. We wanted to ask whether this is what is happening, whether this is what banks are experiencing, and get feedback from the industry as to what the problem is. We are extremely sensitive to the safety and soundness implications of dealing with the lending limit rules, and so I share very much the concerns that you raise. But that is the overall context of what we announced today.

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    Chairwoman ROUKEMA. Thank you. I think you have begun a good debate and a good discussion. I am sure you are going to get lots of comments. We will look forward to sharing our thoughts with you and working with you on these questions, interagency, as you noted.

    Thank you.

    My colleague, Mr. Vento.

    Mr. VENTO. Thank you, Madam Chairwoman.

    Governor Meyer, what is the status with the reserves and the sweep account phenomena that is going on with the Fed? Are you still continuing to lose money?

    Mr. MEYER. Required reserves balances have fallen from about $28 billion in the beginning of 1994 when this process began and they have been in the range of $7 to $8 billion in the last six months. We believe it is still an ongoing process and we are projecting that over the next two or three years required reserve balances will fall to a low of $5 billion.

    Mr. VENTO. Do you pay interest on excesses of reserves right away right now or how does that work?

    Mr. MEYER. If we were granted the authority, we would not do that right away. We would consider that a tool that we would use if we got increased volatility of the Federal funds rate.
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    Mr. VENTO. It wouldn't take you five years, I guess?

    Mr. MEYER. It wouldn't take five years, thank you. No, but it is something in reserve, not something that we would really plan to do.

    Mr. VENTO. I am just trying to get symmetry in terms of the testimony. I also note that you obviously have raised some concerns about the CEBA banks and the fact they, of course, have these commerce powers and so forth. Of course, you regulate the State banks or have a regulatory role in the State-chartered CEBA banks, wouldn't you, insofar as they are State-chartered?

    Mr. MEYER. I understand. That is true. As you know, however, these banks are not subject to the Bank Holding Company Act and therefore not subject to consolidated supervision, even though many of them are owned by investment banks, and so forth, so that makes them quite different from other banking organizations.

    Mr. VENTO. Well, some State charters have obviously similar types of equity positions that you regulate, do they not?

    Mr. MEYER. Have what?

    Mr. VENTO. Similar type equity positions that you do regulate? Some State-chartered banks have similar equity positions that you do regulate?

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    Mr. MEYER. Equity positions of what kind?

    Mr. VENTO. Various kinds, depending on what State law prevents.

    Mr. MEYER. The point here, though, is that these banks have the competitive advantage relative to other banks. The whole purpose of CEBA seemed to me to impose a set of restrictions to limit that competitive advantage by restricting the further expansion and growth of these banks. And we think that any relief from these restrictions should only be made in the context of broader reform of the financial system, and financial modernization would be the better place to get this done than in this regulatory relief.

    Mr. VENTO. I think we have it in both places, but I don't know substantively if the difference is going to be—in other words, you are suggesting that the integration of the financial institutions and activities ought to flow with modernization?

    Mr. MEYER. I think the main reason is that to provide regulatory relief to this small number of banks gives them an advantage relative to others. If we do it in the context where we are providing relief to other banking organizations, giving them new powers, and so forth, then I think it is easier to accept.

    Mr. VENTO. I think in an analysis maybe you will understand more what I was getting at here. I was bemused by this. I note that the FDIC and, of course, the OTS have proposed additions to this bill; that is to say, merging the funds, the SAIF and BIF funds. And I note that the explanations that are given, obviously we have some other issues that are outstanding with regards to that. In other words, what you are saying, Director Hove, is that there is no reason that we shouldn't do that. In other words, it is necessary actually, isn't it?
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    Mr. HOVE. It is necessary in that both funds are very healthy. Both industries are very healthy. They are at approximately the same reserve ratio. It makes a lot of sense to do it. There is the potential that we could have a disparity of rates once again which was the exact situation that caused the SAIF recapitalization to take place. And that is the worst of all cases if that would happen.

    Mr. VENTO. I expect the GAO would come to us and tell us there isn't broad enough diversity within the OTS, within the SAIF fund, in order to in fact sustain the type of economic downturns in the cycle that might cause some problems in terms of that fund, even though today it is quite solvent, especially based on its capitalizations. Just simply the size of it now. Maybe they wouldn't come back with that particular statement, but based on the initial analysis that was the case.

    I am concerned about a number of issues that aren't in the bill as well, including both the modernization of the Truth in Lending Act, issues like debit card transactions and check cards without pin numbers, payday loans, and other matters that are going to be testified to by the last panel, to include what we call, I suppose, the consumer panel.

    You heard me talk about consumer relief as well in terms of modernizing and making some hopefully non-controversial changes along those lines. So if you had any comments about those, you know, I hope that you will respond in writing as my time has expired. I would ask consent that we be able to submit questions.

    Chairwoman ROUKEMA. Absolutely. That is understood by unanimous consent.
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    We are going in order in which Members have arrived and Mrs. Kelly will be the next questioner.

    Mrs. KELLY. Thank you, Madam Chairwoman. Before I begin, I would like to ask unanimous consent that my opening statement be included in the record, and in my opening statement, I was going to ask for unanimous consent to make a May 11 letter to me by the New York Bankers Association part of the record. I request that consent.

    Chairwoman ROUKEMA. So moved.

    Mrs. KELLY. Thank you.

    I have a couple of questions for Governor Meyer.

    Mr. Meyer, on page 4 of your testimony, you state, ''Delaying direct interest payments on demand deposits for any extended period such as the five years or so proposed in the bill is not advisable. Such a long delay would be associated with further wasteful sweep activities and would disadvantage small banks and their business customers relative to the larger organizations already using sweep programs that can be modified to incorporate a new MMDA product.'' I would like to explore this just for a minute with you.

    I understand the Board's view as a purely economic perspective. The law that is prohibiting the paying of interest serves no current purpose so it should be repealed. But tell me, would the Board want to avoid any large disruptions to the small banks that could potentially hurt the small banks?
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    Mr. MEYER. Certainly. And although we think there is not a lot of disruption, banks have been paying interest on consumer NOW accounts for a long time. They know how to do this. This isn't very disruptive. It is relatively easy to do. It is very difficult, I might add, to put into place a sweep program. That is quite difficult for a small bank, but relatively easy for a small bank to pay interest on its demand deposits.

    Mrs. KELLY. If the smaller banks are going to be disadvantaged by a long transition period, then why do they encourage us to consider the MMDA as an alternative to repealing the prohibition? They clearly state in their testimony that ''The ICBA does not support the outright repeal of the restrictions on paying interest on business checking accounts. However, if the subcommittee decides to repeal the prohibition, we believe it should be delayed for a substantial period of time.''

    Mr. MEYER. As you I am sure appreciate, this is an issue of considerable debate and controversy within the banking community. Those banks that currently offer sweep accounts have a competitive advantage relative to smaller banks that do not and cannot afford to and apparently believe that their private interests will be better served by maintaining that competitive advantage.

    In addition, I don't want to speculate—well, maybe I do want to speculate on what could be behind this. I suspect it all has to do with the fact that the use of a 24-transaction MMDA could be the equivalent of paying interest on demand deposits, except it is more expensive and less transparent. It is less transparent because there is still the option of having a customer having a demand deposit account which pays zero interest. And so when the customer comes into the bank, well, if that person isn't very knowledgeable, that customer may end up getting zero interest on its balances.
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    We prefer a more transparent system. It gives everybody the best opportunity to take advantage of interest-earning transactions balances. They can certainly speak for themselves in terms of what their motivation is. That is the only one I can think of.

    Mrs. KELLY. Madam Chairwoman, I would like to ask unanimous consent to insert this article from the April 27 American Banker on the growth of sweep accounts into the record. In the article it stated that the majority of banks, 59 percent to be exact, with assets under $2 billion already have sweep accounts.

    Mr. Meyer, I really am kind of puzzled about where you think they are disadvantaged. It looks to me like a majority of the small banks would benefit from the MMDA transition period.

    Mr. MEYER. I don't see why. There are many banks that would be put at a disadvantage. This is an issue of competition. Banks that have sweep accounts would like to maintain that competitive advantage. Small banks that don't have the opportunity and that are too small to have these sweep programs will continue to be disadvantaged. This kind of sweep program is still expensive. There is absolutely no redeeming social value to require the only way to get interest on demand deposits is to set up a costly sweep account instead of the simple process of paying interest on demand deposits. It makes no sense.

    Mrs. KELLY. You are already talking about almost 60 percent of small banks. They already have them, so they are not going to have any increase in cost.

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    Mr. MEYER. I am worried about the others.

    Mrs. KELLY. I want to switch gears for a minute to an amendment I offered and withdrew last year at markup. It was a provision in my bill. It was H.R. 4082. It allowed the Federal Reserve to increase flexibility in setting reserve requirements. Last year Chairman Greenspan communicated the Board's view to me in a letter, and I quote: ''We have no present intention of either increasing or decreasing reserve requirement ratios within the limits already allowed by the law. However, it is impossible to know in advance the contingencies that the Federal Reserve may have to address, and adding flexibility in setting reserve requirement ratios might be an advantage at some time in the future.''

    As a tool of monetary policy, it seems to me that reserve requirements might be more of a luxury than a necessity for a successful monetary policy. How much are the reserves actually used as a tool of monetary policy? Isn't it true that the reserves have been dropping in recent years while the Fed has conducted a very successful monetary policy, by all accounts?

    Mr. MEYER. It is not the variation in the required reserve ratio that is important to monetary policy, but a required reserve ratio that helps stabilize required reserves and promotes more stable Federal funds rate is useful to monetary policy. Now, there are many central banks around the world that operate with zero required reserves. That could be done, but it would require us to alter the way in which we conduct open market operations. We would have to change the way we carry out monetary policy. It can be done. But that too would be subject to some uncertainty and some costs.

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    The simplest way for us to retain the effectiveness of monetary policy is with the simple procedure of allowing us to pay interest on reserve requirements. That is the simplest thing that we can do.

    Mrs. KELLY. Thank you. Madam Chairwoman, I have run out of time, but if possible, I would like to have a second round. I still have some more questions that I would like to ask.

    Chairwoman ROUKEMA. Hopefully we will have a second round, but we will take that up after this first round.

    Mrs. KELLY. If not, if we can submit them?

    Chairwoman ROUKEMA. But what you have requested be submitted for the record, it will be so done.

    Mrs. KELLY. Thank you.

    Chairwoman ROUKEMA. Mr. Bentsen from Texas.

    Mr. BENTSEN. Thank you, Madam Chairwoman. Actually, Mrs. Kelly raised a question that I was going to raise, because I opposed her amendment last year on the question of eliminating the statutory reserve requirements. And just for the record, Governor Meyer, the way that—of course, now I don't have it in front of me—but the way that I read your testimony today, you seem to be arguing, or arguing on behalf of the Fed, that one of the ways to strengthen reserve requirements as a tool of monetary policy, as you stated, would be to allow the payment of interest on sterile reserves. I would take that to be a fairly strong endorsement of reserve requirements as a tool of monetary policy.
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    Mr. MEYER. Well, I think that what we would like to have is a stable demand for reserves and both a reserve requirement ratio and a system that prevents required reserves from going to very low levels through sweep accounts. Both of those things are necessary in order for that to remain in place.

    Mr. BENTSEN. Furthermore, I guess you mentioned that right now, reserves are at the $7 to $8 billion level, estimated to drop to the $5 billion level and hopefully this would, by paying interest on sterile reserves, reverse that situation?

    Mr. MEYER. That is correct, Mr. Bentsen. With respect to the budgetary impact, is it your understanding that—right now with the reserves that are held by the Fed banks, there is interest that is earned, but it just is not paid back to the banks themselves, but stays within the Fed system?

    Mr. MEYER. Well, that is right. We hold Government securities.

    Mr. BENTSEN. Right. And that pays as an interest rate. Is that money—you might not be the appropriate person to ask this, but is that money counted as an asset by CBO?

    Mr. MEYER. Well, I don't know what you mean by an asset.

    Mr. BENTSEN. For budget purposes, is it counted——

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    Mr. MEYER. As you know, the interest earnings after paying expenses are paid to the Treasury.

    Mr. BENTSEN. So the net does go back, so it is counted?

    Mr. MEYER. Absolutely.

    Mr. BENTSEN. That is included in the gross amount that gets you to the net.

    On a different note, the bill—and I am sure the third panel may talk about this, but I am curious what the regulators think—Section 401 of the bill would repeal current law that requires, I guess, a pro forma table of variable rate mortgages to show the consumer the potential fluctuation in the mortgage, and would replace that with a fairly simplistic statement that the mortgage rate, the monthly mortgage rate, could go up or down. It is a little more specific than that. I don't have it in front of me at the moment. There is a lot of potential for fluctuation and volatility in variable rate mortgages. Do any of you have a comment on that particular section?

    Mr. MEYER. Well, we support that. In a previous regulatory relief bill, this same measure was implemented for closed-end loans and we, I guess, always assumed that it was an oversight, that it was done for closed-end and not for variable open-end loans. We view this as something which provides a bit of regulatory relief for banks, because it is something that they don't have to update in their statements every year. The simple statement that the interest rates on these loans can increase or decrease significantly over the life of the loan provides, I think, as useful information as looking at some historical period where that historical period may not be very representative of the current environment or future environment in which the consumers are operating.
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    We think the consumer protection is about as good and provides some regulatory relief and that is the nature of regulatory relief: looking at the costs and benefits. We think the benefits do outweigh the costs.

    Ms. WILLIAMS. Congressman, I just note that the disclosure requirements for the maximum APR and the associated minimum payment are still in place. So we don't object to this particular provision, and as Governor Meyer said, it does mirror a change that was made with respect to closed-end credit recently.

    Mr. BENTSEN. Thank you.

    Ms. BUCK. We do question whether it might be an opportunity to see what happens with this new closed-end disclosure in terms of the flexibility that is allowed for closed-end loans that just took effect last December, and maybe see how that works for a while and how consumers deal with this before we move on to allowing this in an open-end situation.

    Mr. BENTSEN. Thank you, Madam Chairwoman.

    Chairwoman ROUKEMA. Thank you.

    Mr. Metcalf. I believe before you arrived today, Mr. Metcalf, in my opening statement I did commend you for your leadership, certainly Sections 101 and 102 of this legislation regarding the interest on sterile reserves and the payment interest on business accounts. I am sure you have a number of questions.
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    Mr. METCALF. Thank you very much. I ask unanimous consent to insert a statement into the record and I would like to thank Madam Chairwoman for holding this hearing and for your cooperation and for your comments just then.

    Governor Meyer seems to be getting a lot of questions now, but if you can bear with me on this, I would like to ask you if you would comment further on just how a sweep account works and how the option of paying interest on business checking by banks will help economic efficiency?

    Mr. MEYER. There are two basic kinds of sweep accounts. The first began in the 1970's for large business deposits that were swept into open market securities overnight so that the deposit account holders could effectively earn an open market interest rate, and in the process, banks reduced the level of demand deposits and reduced reserves.

    But the sweeps that we are particularly focused on in terms of the current bill are what we call retail sweeps. And these began for NOW accounts in January of 1994 and were extended to demand deposits later in 1995.

    What happens is a bank will establish a certain target level for the balances in, say, a NOW account or a demand deposit, and it will sweep anything above that target into a money market deposit account. The money market deposit account pays interest, but it also doesn't carry reserve requirements. So in the process, it allows the bank to lower its reservable deposits and, as a result, that leads to a decline in required reserve balances and the problems about impairment of monetary policy.
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    But in addition, what we would like to do with respect to these accounts is to pay interest on reserve requirements, which would reduce the incentives for having these sweep accounts.

    The payment of interest on demand deposits would also contribute to rebuilding required reserve balances because that would give added incentive for people to hold demand deposits rather than to hold deposits outside the banking system and that would further add to required reserve balances. Of course, if that were done without paying interest on required reserves, that wouldn't be very effective. But if they are done together, one complements the other.

    Mr. METCALF. I have one more question. A particularly large bank—which I won't name, but apparently they think they are a mountain—has been claiming that small banks do not need the option of paying interest on business checking accounts as a competitive tool. The same large bank offers its bigger customers a sweep service, but the minimum investment on this account is $25,000. Would you not agree that this is well beyond the reach of many of the small businesses?

    Mr. MEYER. I would agree.

    Mr. METCALF. No more questions.

    Chairwoman ROUKEMA. Thank you.

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    I thought everything was very straightforward here today, but it is getting a little more complex, isn't it? Yes.

    Mr. Mascara, please.

    Mr. MASCARA. Mo Udall once said, ''Everything that possibly could have been asked has already been asked, but then again not everybody has asked it.'' There are not many—I would like to revisit the sweep account. As a former county comptroller in Washington County, Pennsylvania, and a former accountant, I used to—and I don't know whether we used the term ''sweep'' or not, but in county government we had maybe 15 or 20 accounts and would clean them out and invest those overnight in T-bills. That would be the esoteric term that we used back in the early 1970's. So I guess I was part of the avant garde. I saw that the bank was using my money or the county taxpayers' money, so I thought I would invest it overnight. And I would ask you to revisit—you said ''retail'' sweeps. Would you explain as opposed to a governmental sweep, because that is all I was familiar with at that time.

    Mr. MEYER. These are sweeps in which the money is transferred from a consumer transactions account, a NOW account, or from a business demand deposit account, into a money market deposit account. The key here is that the money market deposit account has no reserve requirement on it. It has zero required reserve ratio, whereas the transaction accounts have marginal 10 percent required reserves. So if the bank can establish these sweep programs, they can lower the amount of required reserves that they have to hold, and some of these programs are very effective. They sometimes are able to reduce their required reserves by 75 percent on a given account.

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    Mr. MASCARA. So the payment of interest then would be in lieu of the sweeps. But do banks invest that money overnight and earn interest by using my money or the county government's money and investing in T-bills? That doesn't reduce their reserves, but they are earning interest on it while we are only getting——

    Mr. MEYER. The key here is to reduce the incentive for banks to go through this process of taking the money out of the demand deposit or NOW accounts and putting it into money market deposit accounts. And the reason they do this is because it is costly to hold and because of the reserve requirements. If you pay interest on the reserve requirements, you reduce the incentive to do so.

    Mr. MASCARA. Is the bank earning interest that they are paying you interest on?

    Mr. MEYER. The bank has those funds and it is lending them out. Of course it is earning income on it. Absolutely.

    Mr. MASCARA. They can't use it while it is invested overnight, though. They can't make any investments on that money like the government did when I was the county comptroller there?

    Mr. MEYER. Right.

    Mr. MASCARA. Thank you, Madam Chairwoman. Appreciate it. Thank you, Governor.
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    Chairwoman ROUKEMA. Thank you.

    Now our colleague, Mr. Royce.

    Mr. ROYCE. Thank you, Madam Chairwoman.

    Mr. Hove, in your written testimony, you state that an increasing number of banks are reluctant to share confidential information with their banking regulators.

    What I would ask you is if the quality of examinations conducted by the FDIC has been affected as a result of that, and if no Federal statutory privilege is enacted that will protect the confidentiality of information provided by banks to their banking regulators, what do you believe will be the result?

    Mr. HOVE. Well, sir, we—it is anecdotal whether the banks are reluctant to share this information. So far we have had a very good relationship between examiners and bankers, and I think that is true with the other regulatory agencies as they make the examinations. The concern we have is if that information is shared with a third party, that then the banker becomes very reluctant to voluntarily give that information to the examiner. And that is our concern.

    So we are very concerned about the confidentiality, about maintaining that confidence. It has been a credibility that we have built up over a long period of time, as have the other regulatory agencies, and we don't want to lose that credibility so that we don't have that free flow of information between banker and examiner.
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    Mr. ROYCE. I see. Let me ask another question. You state that a tentative date for the payment of interest on deposits should be 2001.

    Mr. HOVE. We argue 2001. However, some of my colleagues here on the panel would argue for a later date. It seems to me that there is not a very good reason why we wouldn't do it sooner rather than later. We have stated 2001. I recognize that some of my other colleagues on the panel here have stated a later date.

    Mr. ROYCE. Would that give banks enough time to address—given the computer problems, arguably, would it give banks enough time to address fee structures and commitments with customers that may be tied to interest-free deposit relationships, in your view?

    Mr. HOVE. I feel it would. I would not argue very hard with the other regulatory agencies, but in the opinion of the FDIC and the research that we have had, that would give them sufficient time to make preparations for interest on——

    Mr. ROYCE. Including ironing out any computer glitches?

    Mr. HOVE. Yes, it would.

    Mr. ROYCE. Thank you very much for your testimony. Madam Chairwoman, thank you.

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    Chairwoman ROUKEMA. Thank you, Mr. Royce.

    Congressman Sherman.

    Mr. SHERMAN. Thank you, Madam Chairwoman.

    I would like to follow up Mr. Royce's questions and get the responses from the panelists as to what they think is an appropriate timeframe for phasing in, and I don't see it phased in, but, rather, opening the period in which interest would be paid on business checking. I don't need to hear from everybody, just the two or three most anxious to comment.

    Ms. BUCK. I would join with Chairman Hove. We think this can be done sooner, and as soon as the institutions can take care of the changeover on the Y2K. Probably sometime in 2000 would be appropriate.

    Ms. WILLIAMS. Not wanting to put myself necessarily in the category of those most anxious to comment on this, getting through the Y2K challenge has really been the key benchmark for us. The year 2004 provides a very ample period of time, but it certainly could be shorter.

    Mr. MEYER. Sooner rather than later, but enough time to allow us to get through the Y2K changeover. We think that this could be implemented before the beginning of 2001, but if it were to occur that rapidly, would still be pretty happy.

    Mr. SHERMAN. I would like to comment that I think as difficult as the computer work is, what is far more difficult is to rearrange the relationship that banks have with their business customers. There is no such thing as a free lunch and there is no such thing as free use of money.
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    What the banks do in lieu of paying interest is reduce their fees on a host of things that their customers, or at least their business customers, think are ''free,'' and I would think it would take at least a couple of years from the passage of the legislation for the business community to adjust and for businesses to realize that they are going to start earning interest on some things, but they are going to be paying fees for other things.

    So I would hope our focus would not be just to talk to the computer people and see how quickly could it be done, but rather give a couple of years after the effective date of the Act for businesses to rearrange their relationships.

    Mr. MEYER. I think I would just, if I could, add one point. The bill does not require businesses to pay interest on demand deposits. It lifts a prohibition. They can do so at their own pace and as they feel they are comfortable doing so, subject, of course, to the dictates of the market.

    Mr. SHERMAN. I understand that. But after generations of prohibiting something, you need to let the business community adjust to what will be a new framework.

    I would like to focus now on sweeps. As I understand the situation now using this device, there is no reserve requirement as to sweeps; is that correct?

    Mr. MEYER. No reserve requirements on the money market deposit accounts into which accounts are swept.
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    Mr. SHERMAN. So sweeping allows the bank to pay interest if it wants to enter into these relationships and allows them to have a lower reserve requirement, and right now those reserves pay no interest to the bank. It is an interesting proposal to start paying interest on reserves. How close are we to the day when that is likely to occur?

    Mr. MEYER. That is for you to decide.

    Mr. SHERMAN. I would point out that assuming there is no interest paid on reserves, banks are going to be reluctant to see their reserve requirement go up. As I understand the current bill, and the Chairwoman could indicate if I am wrong, it allows these 24 sweeps during the transition period. I would hope that would allow the Fed to determine what portion of the swept amount would be subject to the reserve requirement. I don't think it would have to be the entire swept amount.

    Mr. MEYER. Of course, we strongly oppose that transition period of any length if the money market deposit accounts were not reservable.

    Mrs. KELLY. Would the gentleman yield?

    Chairwoman ROUKEMA. And the bill provides that, as far as I can understand.

    Mr. MEYER. The Congressman was suggesting that maybe you should be more flexible and not apply reserve requirements to the entire amount. We think that in the transition period, if there are money market deposit accounts, they should be fully reservable.
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    Mr. SHERMAN. I might add, because you may prefer this kind of flexibility——

    Mrs. KELLY. Will the gentleman yield for a moment?

    Mr. SHERMAN. I will yield.

    Mrs. KELLY. The 24 sweep account known as a MMDA is fully reservable right now in the bill.

    Mr. MEYER. In the bill, yes. That is right.

    Mr. SHERMAN. Under present law, there is no reserve in the bill. There is mandatory full reserve. The Governor naturally opposes the flexibility of us deciding that maybe only half would be reserved. How would you feel about granting to the Fed the right to determine what portion of the swept amount would be subject to reserves?

    Mr. MEYER. We never object to flexibility. But if you would like me to, I can tell you how we would utilize that.

    Mr. SHERMAN. You would demand full reserve?

    Mr. MEYER. Correct.

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    Mr. SHERMAN. Thank you.

    Chairwoman ROUKEMA. I thought you were going to tell us.

    Mr. MEYER. I did.

    Chairwoman ROUKEMA. Full reserve.

    Mr. MEYER. Fully reservable.

    Mr. SHERMAN. Yes, he did, through ventriloquism.

    Chairwoman ROUKEMA. I think we are going to have to be patient here. I believe that Mrs. Kelly has another round of questions and I know that Mr. Vento has. If you would be amenable and patient while we go for this vote, we will be back, hopefully as quickly as possible. Mr. Meyer, do you have a problem?

    Mr. MEYER. I do. I have a commitment at 4:30 that I would really like to get to.

    Chairwoman ROUKEMA. Then I guess with unanimous consent, would you like to submit questions to the panelists and then when we return, we will get on with the second panel? Is that all right?

    Mrs. Kelly, is that acceptable to you?
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    Mrs. KELLY. Yes, thank you.

    Chairwoman ROUKEMA. I do thank you. You have been wonderful. You have been patient. You have been very informative. I hope that the bill we have here can be put on the fast track. We will know more about that after we hear the second and third panel today.

    Thank you very much and we welcome any of your further comments in writing for the record and to the subcommittee Members. The hearing is adjourned until after this vote.


    Chairwoman ROUKEMA. We do extend our profound apologies to our witnesses on panels two and three, but it wasn't our fault, was it, Mr. Vento? It is those people that want to have motions to recommit and substitutes and final passage. Unfortunately we didn't know that there were going to be three consecutive votes, so it a took a little longer than we expected.

    But without further delay, I will introduce our witnesses on panel two in order of testimony. We have first Mr. Ed Yingling, who is very well-known to all of us as the Executive Director of Government Relations for the American Bankers Association. And I will introduce the others as you are ready to testify. Mr. Yingling first, please.

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    Mr. YINGLING. Thank you. Madam Chairwoman, I want to thank you for your efforts to roll back unnecessary regulation. The many hours you and Members of the Banking Committee have spent on this issue benefit all consumers of financial products. Representative Vento has also been extremely helpful in these efforts. This process has truly been bipartisan. However, more can be done.

    Regulation costs banks and their communities billions of dollars every year. It also puts a big strain on manpower, especially in small banks. There are more than 4,000 banks and thrifts with fewer than 25 employees, almost 1,300 banks and thrifts have fewer than ten employees. These banks simply do not have the manpower to run the bank and to read, understand and implement the thousands of pages of regulations, policy statements, directives and reporting modifications they receive every year.

    Simply put, too much time and too many resources are consumed by compliance paperwork, leaving too little time for providing actual banking services. Ultimately, it is bank customers that suffer. For these reasons, the ABA strongly supports action to reduce unnecessary regulation, and we support subcommittee and House action on H.R. 1585.

    Today I would like to address three of the many provisions in the bill: first, enabling banks to transfer daily between a business checking account and an interest-bearing account; second, payment of interest on reserves held at the Fed; and, third, credit union conversions to mutual or stock institutions.

    The bill would repel the prohibition of paying interest on demand deposits on October 1st, 2004. Before that date, banks will have an additional account option for their business customers. The banking industry has wrestled with the issue of paying interest on corporate demand deposits for more than a decade and, unfortunately, so far there is no consensus. However, there is broad industry support for creating a new account that would allow 24 transfers per month between a checking account and an interest-bearing account. That is one transfer for each business day.
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    We believe this new account will help banks meet the needs of their large and small business customers. The bill goes beyond our current position by eliminating the prohibition on paying interest on demand deposits. If Congress does decide to take such action on interest payments, it is critical that an adequate transition period be provided, as is the case in this bill, to give banks and their customers time to unwind current arrangements.

    My second point relates to interest on reserves. ABA supports authorizing the Fed to pay interest on sterile reserves. The opportunity costs of holding non-interest-bearing reserves at the Fed have been significant over the years. In fact, the introduction of sweep accounts was prompted at least in part as a way to reduce the costs of holding sterile reserves. We believe that paying market interest rates on reserves is an effective way for the Fed to maintain whatever level of reserves it feels is necessary to facilitate monetary policy.

    My third point relates to credit union conversions. The bill would prohibit credit union directors and senior management from getting ''any economic benefit'' in a conversion to a mutual or a stock organization. While we agree that insiders should not get excessive economic benefits from a conversion, we believe this provision goes too far. We believe that the treatment for a conversion from a credit union to a mutual should be no more limiting than a conversion from a mutual to a stock institution.

    More importantly, the bill reaches beyond the original conversion and applies to any subsequent conversion to a stock organization. Conversions of mutual banks to stock organizations are governed by existing OTS, FDIC regulations. We believe there is no reason to subject a former credit union to different and more stringent rules than apply to all other mutual conversions. Simply put, we believe this provision places unnecessary impediments in the path of credit unions seeking to convert to either a mutual or a stock bank, and runs counter to the intent of last year's credit union bill.
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    Madam Chairwoman, thank you once again for your efforts to reduce regulatory burdens on banks. And I would just add that, listening to the testimony today, it is clear that the benefits of this subcommittee's efforts go well beyond the pending bill. In recent years you have really created a process by which all of us involved in this area constantly review regulations, and so even in cases where legislation doesn't result, I think you and Mr. Vento and others deserve a lot of credit for changes that are taking place in the regulatory agencies. Thank you.

    Chairwoman ROUKEMA. You do want legislation, you want a bill?

    Mr. YINGLING. Absolutely. You bet.

    Chairwoman ROUKEMA. All right, thank you.

    Mr. Barsness. He is Chairman and President of Prior Lake State Bank, in Prior Lake, Minnesota, and is here speaking on behalf of the Independent Community Bankers of America. We certainly welcome you here today.


    Mr. BARSNESS. Madam Chairwoman, Congressman Vento, I am Bob Barsness, Chairman and President of the Prior Lake State Bank in Prior Lake, Minnesota. I am also President of the Independent Community Bankers of America, and I appreciate the opportunity to testify before you today.
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    I would first like to express the appreciation of the ICBA and our Nation's community bankers for your and Congressman Vento's strong leadership in advancing the cause of regulatory burden relief. We are also grateful for your efforts to level the playing field between banks and credit unions. We pledge to continue to work with you toward these goals.

    Banks face fierce competition for every deposit dollar. Not only do we compete with tax-exempt credit unions and farm credit associations, but also with mutual funds you can buy over the Internet, with brokerage houses in virtually every town, and with a booming equities market.

    While the competition grows stronger, the regulatory burden disparity grows wider. Credit unions don't pay taxes. Our non-bank competition does not have to worry about CRA and other costly regulations; even local branches of interstate banks may never see a CRA examiner. The cost of regulatory compliance falls most heavily on the smaller financial institutions, making it more difficult for us to support the credit needs of our community.

    Let me now turn to the questions you posed in your letter. First, the ICBA supports allowing the Federal Reserve to pay interest on reserve balances held at the Fed. While we support this provision, I would note that it will benefit larger banks to a much greater degree than smaller banks. Nearly half of ICBA members have less than $50 million in assets and can generally meet their reserve requirements using bulk cash. The Federal Reserve said in a letter to the ICBA that if interest were paid on reserves, the dollar payments would be heavily skewed to banks ranking in the top fifth of deposits.

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    Second, on the issue of repealing the prohibition of paying interest on business checking accounts, this issue has been debated at length over the past several years, and bankers still hold widely divergent views about the impact of such a change. Therefore, the ICBA adopted a policy resolution to amend the money market rules to permit one inter-account transfer per day. This would enable community banks to remain competitive in providing cash management services to their commercial customers, but it would not force those bankers operating on small margins to move deposits from interest free to interest bearing accounts.

    Third, you asked for our view on the effective day of October 1st, 2004, for the repeal of the restriction on paying interest on commercial checking accounts. We do not support the outright repeal of the restriction. However, if Congress decides to repeal the restriction, we believe banks will require at least six years to make a smooth transition, and we would recommend that Congress take another look at the impact on banks before this goes into effect.

    Fourth, we have concerns about permitting grandfathered non-bank banks that accept insured deposits to offer business credit cards. Allowing non-bank banks to offer business credit cards is tantamount to making a commercial loan. The non-bank bank loophole has eroded the separation of banking and commerce and created competitive inequalities in the financial system. Keeping banking and commerce separate ensures that credit is allocated impartially and without conflicts of interest. This principal should be upheld. Similarly, we can find no justification for liberalizing the divesture requirements when non-bank banks violate their operating restrictions.

    Finally I would like to comment on Section 221 of your bill, which would prohibit accrual to insiders of economic benefits from credit union conversions. We are concerned that this prohibition could serve as a disincentive for conversions of credit unions to thrift or bank charters. This would undermine one of the purposes of last year's Credit Union Membership Access Act, which was to eliminate impediments to credit union conversions, and it would be incompatible with your regulatory burden relief bill by imposing additional regulatory burdens. We would urge you to drop this provision from the bill.
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    That concludes my testimony, Madam Chairwoman. Thank you again for your strong leadership and support of reducing the paperwork and regulatory burden on community banks. We believe your bill is moving in the right direction and would enhance the competitiveness of all banks without jeopardizing the safety and soundness of the financial system. Thank you.

    Chairwoman ROUKEMA. The last person on this panel is, whom I should remember well, Mr. Taylor, because he is a New Jerseyite from Red Bank; not my district, however, we all know each other in New Jersey, don't we? It is a small enough State. Mr. David Taylor is President and CEO of the Rahway Savings Institution in Rahway, New Jersey, and he is testifying today on behalf of America's Community Bankers. Welcome.


    Mr. TAYLOR. Thank you. Madam Chairwoman and Members of the subcommittee, my name is David Taylor. I am the President and the Chief Executive Officer of the Rahway Savings Institution. We are located in Rahway, New Jersey. We are a State-chartered savings bank with just under $400 million in assets. I am testifying before you today as a member of the board of directors of American's Community Bankers, otherwise known as ACB, which is a national trade association for progressive community banks.

    I welcome the opportunity to speak with you on the Depository Institution Regulatory Streamlining Act of 1999, which ACB supports, a sound public policy both for depository institutions and for our customers. A detailed analysis of the bill's specific provisions, as well as a list of suggested revisions and additions to that bill, are included in my written testimony which I would like to submit for the record.
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    Today I would like to touch on two key issues: First, the need to eliminate the prohibition on banks paying interest on business checking accounts, and to authorize the payment of interest on reserves held at the Federal Reserve banks; and, second, the need to repeal the statutory provisions for a SAIF special reserve created on January 1st, 1999.

    Madam Chairwoman, ACB commends you for including in this bill provisions giving banks the option of offering interest-bearing business checking accounts, and allowing the Federal Reserve to pay interest on sterile reserves. By lifting the outdated and anticompetitive ban on such activities, your bill will benefit community banks, their small business customers, and all Americans.

    My bank has actively sought to develop a more complete relationship with the small businesses in the communities we serve. These businesses are family owned and operated, and believe me, every nickel counts for these folks. They are constantly looking to banks like mine for the financial support they need, and in so doing, they expect to have the same services at their fingertips as they would at a multiregional bank, plus the added advantage of local decisionmaking and local staffing.

    One of the products that could mean the difference between a small business meeting a payroll or not is interest on business checking, but because we are prohibited from offering this product, we will soon have to resort to more costly and cumbersome sweep services to meet this need. The benefits of offering a less complex and less costly financial product like interest bearing business checking accounts should be clear.

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    While we were pleased by the provisions in the bill generally, ACB is concerned that the prohibition would not be lifted until October 1, 2004. There is no reason to delay the adoption of a more rational system for such an extended period of time, and therefore we ask that you significantly shorten that transition period.

    Another key and timely change made by the bill repels the special reserve for the Savings Association Insurance Fund or SAIF. ACB strongly supports FDIC's position that Congress should eliminate the special reserve, and commends the subcommittee for including such language in this bill. I concur and support ACB's position even though my institution is BIF-insured. We do not have SAIF deposits.

    The deposit insurance system is weakened by this artificial reserve that limits the FDIC's discretion and flexibility to the deposit insurance fund. Earlier this year over $1 billion was placed in that special reserve, and as a result, these funds are not readily available to the SAIF and the FDIC for the protection of depositors and taxpayers.

    Instead of being able to be used to bolster the SAIF, the special reserve is segregated from that fund. On January 1 of this year the SAIF reserve ratio automatically declined to the statutory minimal 1.25 percent due to the establishment of that reserve. This increases the chance that the SAIF reserve ratio could actually drop below the required reserve ratio, especially if the FDIC has to add to SAIF loss provisions due to such unforeseen developments like Y2K or a downturn in the economy.

    While it is likely that the FDIC would also have to set aside provisions for losses to the BIF under such circumstances, similar excess amounts that would remain in the BIF would likely be sufficient to meet such contingencies without dropping that below the 1.25 percent minimum. In stark contrast, however, the SAIF would be uniquely exposed to unforeseen events and would most likely go back to premium disparities.
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    I would like to thank you again, Madam Chairwoman, for giving me the opportunity to testify before this subcommittee today and on this important legislation, and I will be pleased to answer any of your questions.

    Chairwoman ROUKEMA. Well, thank you very much. If I am hearing you correctly, and of course I have heard that there are some distinctions between of three of you, but not fundamental as far as I can tell. Although perhaps I may be mistaken, Mr. Barsness, I want to call you IBAA, but you are not IBAA, you are ICBA?

    Mr. BARSNESS. I do the same thing, Madam Chairwoman.

    Chairwoman ROUKEMA. Well, unless, of course, Mr. Barsness, your group may have had a more fundamental difference on a particular issue, but I did not hear it.

    I am asking all three of you this general question. I will go over in detail your testimony, because there is a lot of substance in your testimony, but I am asking you the general question, because you have heard how deeply concerned we are about expediting this process through the House again this year, so that we can give the Senate the time to really deal with it and so that we won't be obstructed in the Senate. I think we are running out of time here, and we ought to be doing this in the very near future.

    But is there any way that we can expedite resolution of any differences that you have among the three of you? I didn't hear anything, except perhaps how Mr. Barsness might feel on the credit union conversions. It is not clear from my notes. It could have been the reserve requirements and the cash management services. Am I picking out the wrong item there? It seemed to me that there was maybe one issue that you were more opposed to than either of our other two witnesses here.
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    Mr. BARSNESS. Madam Chairwoman, unless it be on the transition period for payment of interest on business accounts. There is a transition issue. More than the ultimate outcome, it is a timing issue.

    Chairwoman ROUKEMA. You referenced them as loopholes? No?

    Mr. BARSNESS. No, no, I am referring to the timing as far as paying interest on business accounts. We suggest that one transfer per day versus automatically paying on all business accounts. Going through that transition period, allowing that six-year time for people to make that adjustment, still allows people to do it. But those that are not in a position, based on competition and who they are dealing with, are not pushed into doing it. Because even though it is not obligatory, it becomes that, just in the fact that the rule is changed and people feel an obligation to change because everyone else is allowed to do it that way.

    So this transition allows people to create it, but it does not push them to do it faster than they are able to based on the competitive environment they are dealing in.

    Mr. YINGLING. From my point of view——

    Chairwoman ROUKEMA. Go right ahead.

    Mr. YINGLING.—one issue that I think we have all looked at, that we urge you to look at again, is the credit union provision in this bill, because I really think that the net effect of it is that you would have almost no conversions, and I don't think that is the intent. But all of this testimony——
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    Chairwoman ROUKEMA. You said the limit on credit union conversions goes too far?

    Mr. YINGLING. Yes, and I don't think we have any problem with trying to prevent insiders from benefiting too much from—or taking advantage of—a conversion, but I am afraid that this provision would have the effect of cutting off conversions.

    Chairwoman ROUKEMA. All right. Yes, I did note that your statement made that point.

    Mr. Barsness, do you want to comment on that?

    Mr. BARSNESS. We would agree. We don't want anyone to gain too much benefit. This would seem to go too far. It would restrict it so people would just say that we can't make that conversation. And I think the intent of the bill was to make it easier to make conversion, less regulation, we want to make it easier to make that conversion.

    Chairwoman ROUKEMA. That was our intention.

    Mr. Taylor, yes?

    Mr. TAYLOR. We would agree, but I would like to go back to the point that you raise regarding differences. One of the things that we are suggesting is that there not be a transfer between accounts within an institution, but that they actually be allowed to have interest on the checking account itself. We see that as duplicative. Having two separate accounts, it accomplishes the same thing, but it certainly is more costly, and it causes you to have oversight over the transfer between a money market or whatever other account it is that you'd be sweeping once a day for 24 days in a row.
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    Also, we feel that we are currently offering interest on all the other accounts in our institution, including NOW and Super-NOW accounts for the individual, and it would not be overall difficult to bring on a new product which would be an interest-bearing checking account, and that certainly we would not need three or six years to get that accomplished, but by 2001 would give us more than enough time to open up an account to the business community that we are already offering to the individual.

    Chairwoman ROUKEMA. All right, thank you. We have duly noted that. I will make one other observation with reference to the non-bank bank loopholes. That was a cause for concern itemized by the Federal Reserve, Governor Meyer. It was my impression that the Fed had no objections to the CEBA relief provisions. We will have to be looking at that again, too. Thank you.

    Mr. Vento.

    Mr. VENTO. Thanks. I guess there are some minor differences all the way around in terms of many of the issues that are presented. I think the issue with the mutual changes grows out of this example of what had gone on in the Midwest with some insurance, and it was a pretty blatant effort in which it enriched, frankly, the officers of an insurance company tremendously. In this case it moved from mutual to stock.

    And so I think there is some interest in reviewing that issue to make certain that there is adequate understanding in terms of the notification. I don't know if that is all ours, but it is certainly something that got all of our attention, I think most of yours.
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    Other than that particular issue, on the issue I note, Mr. Yingling, that a couple of the regulators, the party line seems to be on these call reports that, you know, this is really a reiteration of the same language we had in the 1994 Riegle-Neal Bill, the Branch Banking Bill, and they think that, they sort of feel that most of this issue has been resolved.

    And so are we really—I mean you are suggesting here—and the reason I am bringing it up—and I was going to ask this question of the regulators, but I will probably do so in writing, is to point out that you are concerned about that. They bring out some other concerns about reprogramming at this time in terms of Y2K and, you know, so they have got a number of excuses why they don't want this.

    Do you want to respond a little bit to that here? I note that you have some specific provisions that you have articulated in your testimony, but I don't want to——

    Mr. YINGLING. Well, if there is a problem with the Y2K concern, obviously you can make the effective date of that provision beyond that. But my feeling is that if they start now, they are not going to finish till past the year 2000 in any event, so I don't think that there really is an issue.

    But, from our perspective, you did work hard in writing the previous law and put in some good provisions, but they just haven't been fully implemented. So it is necessary to go back to the regulators and say, well, let us try again, because there are, for example, two different call report forms for the holding company and the bank.
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    And so if you are a bank in a holding company, a small bank, there is no reason why there have to be two different versions. Why can't they have a base form that is consistent? There are some things around the margins they can do that would save money. And again, these are forms that are filed every year.

    Mr. VENTO. One of the observations I made this morning when we had the regulator here for a different reason was that we often exempt the regulators of financial institutions from some of the so-called reforms that have been superimposed on the other departments and agencies of Government under the Administrative Procedures Act, and with good reason. We don't want—because sometimes rules and regulations have to be put out on an emergency basis, there isn't the time to necessarily go through a cost benefit analysis, as an example.

    Mr. YINGLING. I said every year; they are, of course, filed quarterly. One of the problems may be in this instance, it is not just one regulator. You actually have all of the regulators that have to sit down in the Exam Council, and that may be another reason why they need a push, they are having trouble reaching agreement within the Exam Council.

    Mr. VENTO. Well, I appreciate that. And it sort of speaks to the point, I think, but the only explanation I was trying to make here is that there is a reason that we have to move somewhat cautiously and maybe to look at, as you pointed out, informally that the oversight hearings have fulfilled a mission in terms of pushing folks along to the point where the regulators—along to the point where they are more responsive in some of these areas. You may also want to do something.
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    So I think I tend to agree, I think you are right about this particular call report simplification issue. But I did want to raise the a question because a couple of regulators came out with these others, sort of saying—concluded as not being that significant.

    The other issue of course the regulators brought out was the BIF-SAIF merger, I guess. Obviously everyone is not quite as opposed to the elimination of the special reserve that has been introduced, and probably would want that to wait for another bill or another day, but it is going to probably be in this bill or in the modernization bill. So I think we are on track there because we don't want to create a problem that doesn't exist.

    But another one is the merger of BIF-SAIF, and I assume Mr. Taylor agrees with that and others have questions about that. Is that a correct assumption?

    Mr. TAYLOR. From my perspective that would be a correct assumption. We believe that the special reserves should obviously be repealed immediately. And once that occurs, if you look at the reserve positions of both the BIF and the SAIF, you will find that they are pretty much on an equal footing. There is not much difference between the ratios, so certainly an appropriate time and place to merge.

    Mr. VENTO. And that time and place isn't now. Is that right, Mr. Yingling?

    Mr. YINGLING. Well, first we support the elimination of the special reserve in whatever vehicle is the fastest vehicle to do it in. It really is artificial, totally artificial accounting. I was tempted to say it was a gimmick for congressional budget purposes. But on the merger of the funds, we have raised concerns about just merging the funds without addressing some other issues.
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    We are going to be taking up one proposal that is fairly interesting, something I think you all looked at in the context of H.R. 10 last year, briefly. Several State associations that have both bank and thrift members have suggested that we look at a concept in which, very briefly, you merge the funds, but you also merge the OTS and the OCC so you have a common regulator, maybe keeping separate departments; you leave the charters the way they are, and then you can go ahead and merge the funds and get rid of some of these issues.

    So we are going to be looking at that proposal along with other proposals to address some of these leftover issues from previous years.

    Mr. VENTO. Let me—my time has expired. I want to put on the table though, Madam Chairwoman, with your indulgence, I know Mr. Barsness would probably—my Minnesotan would like to respond to every question I raised, and one maybe he could respond to, and that is where there is a sharp difference in how we ought to approach the phase-in of interest on business accounts.

    You know, my view is that if you have this done, small institutions actually benefit more, because they would just have the single accountant, they are able to pay the interest, and they would not see the flow of dollars out into other types of money market accounts. Sweep accounts might not be a service that they can offer without great difficulty. So wouldn't that, in a sense, tend to hold the dollars in the institutions, if in fact we moved this in a deliberate way rather than six years as you had asked in your testimony, Mr. Barsness?

    Mr. BARSNESS. Well, we have a divergence of opinion within our membership, and that is why we have come to this conclusion. This would satisfy both ends of that spectrum. We, in fact, are able to do sweep accounts ourselves and so it is not a problem from our standpoint to do it. And many of our banks can do that. It has become more of a competitive issue in the marketplace where they are dealing with maybe money market mutual funds. If they have to go to this route, they have to pay that kind of rate, and the spread is narrow.
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    So it varies and it depends upon the marketplace. And it is not as much I think the problem of creating the vehicle to do it, it is really a competitive issue in their particular marketplace. But we do have a divergence within our membership, that some say yes, some say no. So this is the conclusion we have come to: Allow everyone the opportunity to do it, but those that are on a competitive basis, are not comfortable, cannot handle it at this point from the economic standpoint, this gives them time to adjust to it.

    Mr. VENTO. And, Mr. Yingling, I am sure it wasn't lost on you that the Fed was not that anxious to start paying interest on reserves tomorrow, but they certainly thought five years would have been adequate, I guess.

    Mr. YINGLING. I will just make one comment on the transition period. There is a good economic argument that you do need time to adjust, because you have these contracts, in many cases with small business, where you bundle services. But I go back to what the Chairwoman said in the beginning: Let us get a bill that can pass. And it seems to me that from a political point of view this is obviously controversial. We could be here in the year 2004 still trying to pass this, particularly with what happens sometimes on the Senate side, and so you may have——

    Chairwoman ROUKEMA. Don't even suggest it.

    Mr. YINGLING. What I am saying is you may have it about right in the bill, in terms of bringing everybody together.

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    Mr. VENTO. Thank you.

    Chairwoman ROUKEMA. Thank you.

    Mr. Metcalf.

    Mr. METCALF. Thank you very much, Madam Chairwoman.

    My first question is for Mr. Yingling. If getting rid of the prohibition on paying interest on business checking accounts will help your members compete with mutual companies and investment houses that are drawing away banking customers, why would you not want to get rid of this prohibition just as soon as possible?

    Mr. YINGLING. As has been testified to by both the ICBA, their new name, and the ABA, there really isn't a consensus on it, and you will find some community banks that will say let us do it fast, right away; you will find some that will say not to do it at all.

    There is a strong feeling that you do need a transition period, because there is a long history to the way services to small business, particularly, are priced. These have been negotiated, and so you may have a package, for example, where you say ''We will give you a certain rate on a loan, which is a little lower rate, because you are going to have a balance with us on which no interest is paid; we will process your payroll at a low cost, we will give you free lock box service, which is where your bills are delivered to the bank directly.''

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    And so you need some transition period to unwind over time these kinds of deals, and it is not just for the bank, it is also for the small business. The small business has built all its pricing with the bank and its relationship with the bank around a former system. We are saying you do need some kind of transition.

    I would also point out that there is a very good precedent for this and that is a good old Reg Q, which was the interest rate regime that governed consumer accounts. When that was changed, there was widespread concern that there would be major problems in the marketplace, but because there was, as I recall, a six-year transition in that case, there really turned out to be no problems. And so I think a transition period is very important.

    Mr. METCALF. OK. The follow-up is this, the Fed has just stated that delaying implementation for many years as this bill does would, and I quote, ''be associated with further wasteful sweep activities and would disadvantage small banks and their business customers relative to larger organizations already using sweep programs.''

    How do you respond to that?

    Mr. YINGLING. Well, I would think the most straightforward response is, we have asked community banks time after time, year after year, and again there is a wide diversity of opinion, but I have very few community banks that didn't want some kind of a transition period. Some don't want to remove the prohibition at all, some want a short transition period, some want a medium transition period. But they are very concerned about unwinding these relationships that I referred to earlier.

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    Mr. METCALF. OK. And my next question is to Mr. Barsness. I have a similar question. According to your testimony, you disagree with Mr. Meyer and the Federal Reserve that later implementation of this bill would disadvantage small banks and their business customers relative to larger organizations already using sweep programs. Am I misunderstanding anything here?

    Mr. BARSNESS. Well, my suggestion was that the interest paid by the Fed is much less to community banks because they don't have the reserve requirements. Most of their reserves are taken up with vault cash and the like, so they are not going to have the dollars outstanding for those reserves.

    So most of the interest payment that he is talking about would go to larger institutions, so there is really no benefit to us. You say we are going to pay you interest, but if we don't have any money in the pot, you can pay me whatever rate you want, we are not going to get anything because we don't have any money that is applicable in that category. So that is really what we are saying.

    Mr. METCALF. OK. The follow-up I have here, a survey, which I imagine you have seen, it is the ICBA survey on interest-bearing commercial transaction accounts. And you have seen it, then?

    Mr. BARSNESS. Yes.

    Mr. METCALF. OK. Madam Chairwoman, I would like to ask unanimous consent that this survey conducted by the ICBA be entered into the record.
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    Chairwoman ROUKEMA. Without objection.

    Are you going to describe that survey now?

    Mr. METCALF. Well, I am just using it in the question, but I will not go into any detail.

    Chairwoman ROUKEMA. Without objection, so ordered.

    Mr. METCALF. OK.

    Mr. BARSNESS. Do you want to ask me a question about that, Mr. Congressman?

    Mr. METCALF. This survey, conducted a while back, states that 71 percent of your membership supports getting rid of the prohibition on paying interest on business checking accounts. Even in Congress, you know, 71 percent is a pretty high approval rating. Why is your association not embracing what an overwhelming number of your members are asking for?

    Mr. BARSNESS. Well, sir, that survey was done in 1997, but 70 percent supported the paying of interest on business checking accounts is also 70 percent supported paying interest on money market—or transferring once a day from money market to deposit accounts. So they wanted both, so it was inconsistent in their reaction to the survey.
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    It probably wasn't done properly. But they were asking for both, and we were suggesting that we want the consensus of doing the money market deposit account once every day. So the two are somewhat inconsistent in their reading, so you have to look at both of them in terms of how the survey goes.

    Mr. METCALF. Thank you. Maybe I am being somewhat unfair, but it appears to me that some want to keep in place a 65-year-old statute that the four Federal banking regulators and the largest small business trade group in this Nation, the U.S. Chamber of Commerce, and the NFIB want to get rid of it. Any comment?

    Mr. BARSNESS. Comment on the Chamber's opinion on that?

    Mr. METCALF. Well, yes. It seems to me that you are sort of swimming against the tide here.

    Mr. BARSNESS. Well, I will go back to my original comment. We have people on both sides of this issue. Some people say let us pay interest immediately and some, let us hold off on this, and to come to a consensus and a compromise, if you will, the use of the money market deposit account does that. It does allow people to do that. Those of us who have the capability of making the sweeps have not found it expensive to do it that.

    So this allows everyone to do it their way, but does not push them into a position where, because of the nature of the legislation, it forces them to pay it even though they are not prepared to do it at this time.
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    Mr. METCALF. OK. I have no further questions.

    Mr. TAYLOR. Could I respond, Madam Chairwoman?

    Chairwoman ROUKEMA. Yes, please, Mr. Taylor.

    Mr. TAYLOR. There would be nothing in this regulation that would require banks to offer this product in this way. So it would behoove everyone to take a look at it, certainly, and I am one of those institutions that would certainly take a look at this. But that does not mean that you would have to get rid of sweep accounts. Those institutions that find it advantageous to continue to use that mechanism can continue to do so.

    I could best possibly answer one of your questions with a personal example. Many banks in New Jersey, smaller savings institutions particularly, are finding business customers, and generally smaller business customers, coming to them for what would traditionally be commercial products. I am one of those institutions, and I have traditionally offered my services to individual consumers, not to businesses.

    But as more and more businesses come to me, I would find it far easier if I could offer them a product that was not convoluted, was not tied to another arrangement, did not cause me to sweep money out of my institution or to other products in my institution, could simply say ''Here is an account and, yes, you can earn interest on it.''

    When it accomplishes the same thing in the end, it certainly seems to be the most pragmatic approach and to certainly look at that which is the simplest and gets the job done, and certainly allowing interest on checking for businesses would certainly do that, in our belief.
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    As far as the timeframe is concerned, the product is already there in the way of consumer accounts. And I am not going to suggest that there is not some time to unravel some of the business relationships that others have developed over time, but certainly you don't have to unravel them immediately because you can continue to offer the sweep. There is nothing that prohibits that in this legislation.

    Chairwoman ROUKEMA. Thank you very much.

    Mr. Barsness. Yes, I will give you another opportunity and see if Mr. Vento has a question. Yes.

    Mr. BARSNESS. Madam Chairwoman, I didn't mean to suggest it was a requirement, but because of the tremendous pressure that would be put on these individuals because of the changes in the law, they would feel almost a mandatory requirement to change to that configuration.

    Chairwoman ROUKEMA. All right. Thank you.

    Mr. Vento, do you have any follow-up questions? I do not.

    Mr. VENTO. No, I will submit in writing whatever. We appreciate your patience.

    Chairwoman ROUKEMA. Yes. We do appreciate it. We have another panel. But if there are any final one-minute statements you would like to make, I am sure we will continue to work with you.
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    I have got to make a minor confession here. Evidently these sweep accounts are more complex than I think I understood. We will be sure to go over your testimony in detail, as well as the testimony of the previous panel. Certainly Mr. Metcalf and Mrs. Kelly have brought up these sweeping questions about sweep accounts, and we will certainly review them with great care. Thank you very much.

    The next panel come forward, please. Yes, thank you very much. I know that you are last, but I hope you know that you are not least, so we welcome this panel of consumer representatives here today.

    We have first Mr. Frank Torres, the Legislative Counsel for the Consumers Union, so if you will be first to testify, and then we will call on the other two panelists in order. Thank you.


    Mr. TORRES. Good afternoon, or good evening I guess it is now. Madam Chairwoman, Congressman Vento, Members of the subcommittee, I am pleased to be here today to discuss this legislation.

    At the outset, let me say that you and your staffs deserve credit for not including many controversial provisions in this bill. We appreciate your willingness to not only listen, but to make some changes. In fact, one suggestion I had today, adding the word ''substantially'' to Section 401, has already been incorporated in the text of the bill. And I wish our work on other legislation like the bankruptcy bill could have been like this.
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    At hearings last year on this bill, Madam Chairwoman, you recognized that the financial markets and the banking industry are evolving at a tremendous pace. You said ''as these rapid changes occur, old approaches may or may not be appropriate and new rational regulation needs to be put in place.'' Consumers Union agrees, not just for banks, but for their customers, the consumers as well. So while we understand that the intent of this bill is to address issues of the banking industry, we believe that Congress and this subcommittee should also help consumers navigate through these remarkable times.

    In the midst of all of these goings on, we also get word today that Secretary Rubin is resigning. I don't think it is because of the mine fields that exist in moving forward with H.R. 10. But I believe, given the timing, it is so that he can wait in line to get tickets to the new Star Wars movie and not get in trouble about it.

    But seriously, with Treasury playing such a key role, we hope that Mr. Summers—or whoever becomes Treasury head—will place the interests of consumers high on his agenda and take a leadership role on consumers' issues, because it is not always just about the banks.

    If this legislation passes, banks will get a $600 or $800 million windfall through interest payments on reserve balances. That is a pretty tidy sum, and the banks have wrapped up quite a bit this last week. They got a bankruptcy bill they say will add billions to their bottom line, and they can taste the financial modernization bill. They can just taste it.

    And they also got a lot of attention about hedge funds, which highlights that these are taxpayer-backed institutions. That means they get to engage in risky endeavors, make a buck or two, and if things don't go well, the taxpayers, consumers, their customers get to bail them out. It is money out of the consumers' pocketbooks and into the bank's coffers.
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    And what do taxpayers get in return? High fees, high balances to avoid fees, double charging for using ATMs, getting red-lighted for not being profitable enough bank branches, loss of privacy, predatory loans, and all of this at a time when banks are making more money and are more profitable than ever.

    So in addition to just taking a look at the banks and the relief that you can provide to the banks in this legislation, perhaps now is the appropriate time to also look at some things that Congress can do for the consumers as well, and I will outline just a few things here. I have attached to my statement kind of a blueprint that Consumers Union has put together that provides greater details on some of these issues, and it also talks about more of them.

    One of the primary things we think Congress can do is to make sure that all Americans have access to affordable bank accounts. I mean the banking industry is changing, there is all of these new products, perhaps now is a time for Congress to remind banks that one of their primary roles in the United States is to provide a place for people to put their money and provide a mechanism for consumers to pay their bills.

    Let us get back to that. Every month millions of American families are hit with fees they can't avoid. These are hard-working Americans who are simply looking for a place to safely deposit their hard-earned dollars and an affordable means to pay their bills. Basic bank accounts will give them a tool they need to keep money in their pockets, allow them to take care of their families, and can really contribute to a sound economy.

    The second thing Congress can do is to address the concerns about financial privacy. Financial privacy is a paramount concern for many Americans, and Congress should protect it in ways that are meaningful, and I know, Madam Chairwoman, you understand these issues. Banks, their affiliates and third parties should not be allowed to sell or share sensitive financial information without a consumer's prior approval. The banks want to protect their information, and they are getting some relief from that in this bill. Why can't consumers be afforded some similar type of protections?
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    Another way Congress can help consumers is to help consumers deal with the credit industry. Why does the credit industry not want consumers to know how much their credit costs? And now they are trying to hook American kids on credit, too. Now is the time to do something about it by at least giving people some tools to make informed choices. I see there is a plain English requirement in this legislation. Why shouldn't there be some plain English disclosure requirements so consumers can make some informed choices?

    Thank you for this opportunity to discuss these opportunities with you. Consumers Union looks forward to working with you and your staff. And, again, I would just like to commend the way this process worked on this bill. We have had a lot of good discussion with members of your staff about our concerns, and they were addressed, and we appreciate that very much. Thank you.

    Chairwoman ROUKEMA. Thank you.

    Our second witness is Ms. Margot Saunders. Now, you have been here many times before. Margot Saunders is the Managing Attorney for the National Consumer Law Center. Welcome again.


    Ms. SAUNDERS. Thank you, Madam Chairwoman. I appreciate the opportunity to be here on behalf of our low-income clients. I have worked with you and Mr. Vento quite a bit in the past, and we appreciate that.
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    This bill does provide regulatory streamlining to the financial services industry. And we appreciate what is not in the bill. But as my colleague, Frank Torres, so eloquently put it, consumers need relief as well.

    I want to focus on three main issues: One, you do have one small anti-consumer provision in this bill, and that is Section 401. That section would change the current disclosure for open-end, variable rate loans under the Truth in Lending Act which are secured by the home. That section would allow creditors to no longer provide the information in the historical table, and instead replace that historical table with the simple words that ''Your periodic payments may substantially increase or decrease.'' That sentence does not describe adequately what may happen to consumers.

    I have provided an alternative proposal on how these disclosures could be made that would provide the same regulatory relief to the industry, but yet assure that consumers had a little more information about their potential payments when they were entering into an open-end, variable rate loan secured by their home.

    Second, I would like to focus very quickly on some very technical changes that we need to the regulatory structures that govern consumer credit. Truth in Lending is an excellent place to start.

    In 1968 when Truth in Lending was passed, the jurisdictional limit was $25,000. The equivalent of $25,000 in 1999 dollars is over $120,000. We need to increase the jurisdictional limit of Truth in Lending, or else very soon there will essentially be no disclosures that apply to most car loans and other closed and open-end credit transactions.
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    Mr. LaFalce has proposed a bill that was cosigned by Mr. Vento and others that would increase the jurisdictional limit to $50,000, and we strongly support this bill and hope that you will consider it carefully as part of regulatory relief.

    There are several other pro-consumer amendments that I have outlined in our testimony that are not huge issues, but are very specific targeted changes in the law that consumers need to have addressed, changes needed for the proper interpretation of the Truth in Lending Act.

    But I want to spend a moment ensuring that you all understand how important it is that you not add any other anti-consumer amendment to this bill. Although you have done that so far, I think it is worth mentioning that there have been a number of proposals floating around in the Senate, as well as in the House, that would amend the Fair Debt Collection Practices Act, and this would seem to some to be the appropriate vehicle for those amendments.

    The Fair Debt Collection Practices Act is the law that protects debtors not from paying their just debts, but just from the overreaching, unfair, deceptive, harassing activities of debt collectors. The law needs updating; it needs updating for consumers. It does not need changes to benefit collectors, at least without a full hearing on the issue and the impact of those changes.

    There are also proposals floating around that would deal with rent-to-own transactions or rental purchase agreements. We strongly urge you not to consider those proposals without a full hearing on the issues. We have a lot of concerns.
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    Thank you very much. I would be glad to answer any questions.

    Chairwoman ROUKEMA. Thank you, Ms. Saunders.

    And our third and final witness on this panel is Jean Fox, Director of Consumer Protection for the Consumer Federation of America Foundation.

    Ms. FOX. I am just from the Consumer Federation of America.

    Chairwoman ROUKEMA. I am sorry.

    Ms. FOX. Yes.

    Chairwoman ROUKEMA. I did stumble over that foundation.

    Ms. FOX. Right. We have two entities, and I work for the Consumer Federation of America, the advocacy side of the organization.

    Chairwoman ROUKEMA. I see, thank you.


    Ms. FOX. Thank you, Madam Chairwoman and Congressman Vento. I appreciate this opportunity to speak with you on behalf of the Consumer Federation of America.
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    The Chairwoman's bill on regulatory relief benefits banks, but it does not provide any direct benefit for consumers. We believe that consumers are harmed by the failure to adjust Federal laws and regulations as conditions and markets change, just as banks are burdened by outdated requirements.

    We strongly urge this subcommittee to amend H.R. 1585 to update and streamline financial regulations to benefit consumers, and one of the ways you can do that is to add Congressman LaFalce's bill that is addressed to changing the Truth in Lending Act, H.R. 1332, to this bill. These are not controversial changes. One of them Margot has mentioned is the jurisdictional limit. It also increases the penalties to address the fact that the value of money has changed.

    There is one other reform in that bill that we think is particularly appropriate to add to your legislation, because it deals with something that is truly archaic, and that is the use of the ''Rule of 78s'' to rebate unearned precomputed interest on installment contracts when consumers pay off their loans early because they want to get out of debt, or because they have refinanced a loan such as a car loan, or because they have defaulted and the debt has accelerated.

    The Rule of 78s is still used by some lenders. Congress has been slowly phasing it out over the last few years. It is an inaccurate, rough approximation of the actual interest that has been earned. It always overcharges the borrower. And there is no reason to keep it in use in this country, other than the fact that it makes more money for lenders, but it is always unfair to borrowers.
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    We would urge you to add H.R. 1332's provisions to this bill, not only to bring the Truth in Lending dollar limits up to date, but to finish the job of eliminating use of the Rule of 78s in consumer credit.

    Another issue we would like to bring to your attention to benefit consumers as you update banking law is to close the bank loophole that is used to permit payday loans in jurisdictions where payday loans are not otherwise legal. I don't know if you are familiar with payday lending. It is the fastest growing area of consumer credit that we are aware of in the country. We conservatively estimated last year that over $1 billion in payday loans were being made to consumers.

    These loans are written by check cashers, stand-alone payday lenders and a handful of banks. They are loans based on a personal check drawn on your checking account. The loans are made for a few days up to two weeks, typically, and the finance charge translates to triple digit interest or worse.

    In some States these loans are banned by check cashing laws, by State usury ceilings, by small loan interest rate limits. But there are some States that have legalized payday lending, or where payday lending takes place because there are no usury or interest rate caps to restrain these extremely expensive loans.

    Payday loans harm consumers, principally in three ways. They are extremely expensive. They are 10 times as expensive as a small loan, for example, from a small loan company. They are designed to keep consumers in perpetual debt, and they can lead to coercive debt collection practices because the lender is holding a personal check and can threaten to prosecute for criminal bad check writing.
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    There are some States that have tried to keep payday lending out, but because a few check cashers are affiliated with a bank, the lenders are exporting deregulated bank fees into States where payday loans are not allowed. So in Virginia, where the legislature said we will not have payday lending and where three Attorneys General of both parties have enforced the small loan interest rate law, there is a chain of check cashers making loans at almost 450 percent interest all around the military bases in Tidewater Virginia because they are using a bank to do so.

    Congressman Bobby Rush has introduced a bill to restrain payday lending, which is one approach you can support. I understand that a Member of the Banking Committee is also looking at a simpler fix that would simply prohibit banks from loaning money secured by personal checks. This is a problem area, and we urge your attention. I have attached to my testimony a report that the CFA issued last year on payday lending, and I would be glad to answer any questions. Thank you.

    Chairwoman ROUKEMA. Thank you.

    Well, you have—all three of you have outlined some interesting issues. I would suggest to you that I am going to keep an open mind on this. My overall reaction is I am not sure, particularly, Ms. Fox, with the last points that you made that this is the appropriate vehicle to deal with those consumer lending questions. Whether it be the LaFalce bill or the payday lending loopholes that you outlined. I am just not at all convinced that this is the vehicle to deal with those issues. They are legitimate consumer concerns, and the Fair Debt Practices Act that I believe Ms. Saunders mentioned, may be the appropriate act to amend. Maybe not. I will have to devote some additional thought on this issue. Would you want to comment on that?
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    Ms. SAUNDERS. I just want to encourage you to not amend the bill without further hearings on this Act. I was just warning you about the repercussions to consumers.

    Chairwoman ROUKEMA. I am sorry, to protect the debtors. But you do not want us to add that?

    Ms. SAUNDERS. That is correct.

    Chairwoman ROUKEMA. Exactly. But what I am doing is using as an example how I think there are other consumer issues that are more appropriately taken up in a different piece of legislation rather than being attached to this legislation. Again, I will keep an open mind and we will look at this further. You characterize the interest on the reserve accounts as a windfall. I am not quite sure about that. In any case, we will go over this with some care, but the case, I think, is far from made that it should be attached to this legislation. Ms. Saunders, do you want a last comment on that in that respect?

    Ms. SAUNDERS. Madam Chairwoman, what about increasing the jurisdictional limits on the Truth in Lending Act? It seems to me that is so relevant if you are addressing other regulatory update matters and Truth in Lending, it is a non-controversial——

    Chairwoman ROUKEMA. The amount referenced—the LaFalce increase, for example, of $50,000, that perhaps very well could be done. It is Truth in Lending, 1968, has a jurisdictional amount of $25,000, and the LaFalce legislation would increase it to $50,000. I have taken due note of that.
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    Mr. TORRES. Madam Chairwoman, I would just ask you to truly consider something in this bill to make it a balanced approach, and I truly meant it when I said it, you know, that——

    Chairwoman ROUKEMA. It is not just about banks. It is about consumers.

    Mr. TORRES. The last panel was talking about regulations and having to understand it and the man-hours and all these things. Step into the consumer's shoes and what they are going to have to deal with as the whole financial services landscape changes. I think all of our message to you today is give them some consideration; and what more appropriate vehicle than a regulatory release bill, because it is not just about—that is my message.

    Chairwoman ROUKEMA. I hear you, but we will have to go over it in greater detail.

    Mr. Vento, please.

    Mr. VENTO. I think the Truth in Lending is a perfect example, because very often when the law was initially written, there was hardly an average vehicle that a person would buy that was over the amounts that were in the lot. Today it is pretty hard to find one that isn't over the threshold. You simply buy a nice truck, like my son did about three weeks ago, much to the chagrin of his father, that cost $29,000. It is great, you know. But the fact is that, he wasn't covered by the Truth in Lending Act. He doesn't have the requisite information that he could or should have that we would expect as a consumer.
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    I think that with this payday loan thing, I think that that is a very serious issue in whether or not we want to have banks intricately involved in facilitating circumvention of what State laws are. I think a simple prohibition with regards to banks not being involved in that type of business, once we get down the road and have the contracts written and they are involved, I just think we ought to pause there for a minute.

    One of the questions that I had with regards to the electronic transfer accounts that the Treasury has set up, which I think they have done a pretty good job with, and which more, I think, should be accepted by some of the financial institutions, because if there is a savings in terms of issuing a Federal check, you know, the national Government or the issuer could in fact absorb some of the costs, because clearly banks have gone to a situation where they have a fee-for-service type of approach and in terms that they don't have—for instance, are not holding sterile reserves as often. This is at least an observation I think we would all have to agree that there is some relevance to that.

    But in any case, the point I have is that as I recall, that then-Under Secretary Hawke, now the Comptroller of the Currency, related this to us. He was explaining that in fact that financial institutions were working with check cashers to provide the electronic transfer account. And so what I am suggesting that we would have to be somewhat cautious about what we would do in this area.

    Ms. Saunders.

    Ms. SAUNDERS. Mr. Vento, I think there is a little bit of confusion here.
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    Mr. VENTO. It is in my mind, not your——

    Ms. SAUNDERS. Treasury has contemplated that Federal recipients will receive their money in a number of different ways. They are hoping that most of them will receive direct deposits through bank accounts. That is one way.

    Two, there is all this large group of people that will waive the obligation to receive Federal payments electronically and they will continue to receive them by check. That is the second way.

    Three, Treasury has designed an ETA account, they call it an Electronic Transfer Account. Treasury specifically said in the proposed standards for those accounts, that banks could not enter into contracts with check cashers; that the banks would have to have the account in the recipient's name at the bank and have to deliver the money directly to the recipient.

    There is some concern about the ETA accounts. A lot of advocates are very pleased about the many attributes about these accounts, but one of the concerns is that many banks are not going to enter into the ETA accounts. It is entirely voluntary. And if the banks don't provide the ETA accounts voluntarily around the country, these accounts won't be available.

    And one of the reasons that we believe many banks will not provide the ETA accounts is because of the fourth potential way the consumers will receive their money. That is, under current law and regulations, there is no prohibition against a Federal recipient entering into a contract with a check casher to receive the Federal payment at the check casher's. The money is deposited at a bank which then transfers the money to the check casher. The recipient must then go to the check casher to pick the Federal payment.
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    Mr. VENTO. This is an important point. Would you repeat that?

    Ms. SAUNDERS. It is currently legal and a matter of some concern by everyone at this table, and others. Because it is currently legal for a Federal recipient to walk into a check casher, sign a piece of paper, have the Federal payments deposited at a bank somewhere else in the country, and then have only access to that money through the check casher. We have just submitted extensive comments to Treasury on their advance notice of public rulemaking regarding the problems that we have seen around the country with these arrangements through check cashers and the exorbitant costs involved in these transactions.

    Mr. VENTO. There is a convergence. Basically the interest that you have testified to, and that Ms. Fox has testified to, are the same. In other words, they converge on this particular point of trying to define a relationship, in essence, between a financial institution and a check casher as it relates to, in this case in my example, an ETA account, and in your example, Ms. Fox, to the circumvention of what State laws are with regards to usury and other consumer treatment.

    Ms. FOX. Correct. And, in fact, in the comments that NCLC-CFA filed jointly with Treasury on their advance notice of proposed rulemaking, we did point out that in a few cases, the check cashers who are partnering with banks to provide a second-class kind of account for these Federal recipients are hoping to go into the payday lending business so that they can loan you money against the anticipated direct deposit of your Social Security check. I don't really think that is what Congress had in mind.

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    Mr. VENTO. I think, you know, frankly this is an alarming situation in the sense that this would make the Federal Government complicit in terms of this activity, so I think it is beyond—you know, Truth in Lending is—it would be good if we could do it, but it certainly is, I think, resolvable, at least some aspects of it, perhaps not all of the changes that you have articulated.

    And I wanted to ask another question, Madam Chairwoman. I don't want to keep you and this panel.

    Chairwoman ROUKEMA. Go ahead.

    Mr. VENTO. This is really extremely important, but the question had to do with what was in the bill in Section 401, Ms. Saunders. Could you give us some real-life examples of the type loans most often made to typical customers and why it is important to give thorough disclosures to them under the—I think we are talking about here the average, you know, the variable rate interest. We have had a lot of problems with this. I think one of the issues—the reason this worked its way into the bill and last year at the end of the session we didn't reject this was because it came across that you could not really make these types of advertisements and representations in terms of ads on TV and so forth. So there was an exception for that type of ad too at one point. Maybe we took that out. I don't know.

    Chairwoman ROUKEMA. Are you referencing the Section 401?

    Mr. VENTO. 401 is what I am referencing now.

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    Ms. SAUNDERS. If you go to a bank today and you apply for a $25,000 closed-end loan secured by your home, you will be provided information when you close on the loan and when you apply for the loan or three days after application about the total amount of your payments, the actual payments that you will have to make, and the total of the finance charge that you will make over the course of that loan.

    I am talking about closed-end credit. If the rate will be variable, then the Federal Reserve has come out with some rules that explain, that tell the creditor how to use the variableness of the rate to provide that information.

    If on the same day, however, you decide that you might not want to borrow the entire $25,000, but you want to have the option to borrow it, you will get an open-end line of credit. Generally, the interest rate is about the same as on closed-end loans, they they are variable rate as well. On this open-end line of credit, with a variable rate, you will be told the interest rate and that is all. You will not be told the amount of the minimum payment required regardless of how much you borrow. You will not be told the amount of the finance charge and you will not be told the total of payments.

    What this leads to is a lot of people entering into home equity, open-end lines of credit, without having any understanding about the minimum payments that they will make. There are dangers in high minimum payments when the interest rates vary. Most open-end lines of credit have interest rate caps in the range of about 24 percent, so when the consumer enters into the line of credit originally, the payments may be affordable. Let's take, for example, let's say the interest rate is 10 percent. They ask the banker, ''What are my payments going to be on $25,000 at 10 percent?'' They are told a number that they find affordable. They are not told what those payments will be when the rate rises to 24 percent.
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    Mr. VENTO. Who are these people? Are they seniors? Are they—is it my son Peter buying the truck? It could be.

    Ms. SAUNDERS. It is anybody. The people who are worst abused by the problem are very often my low-income elderly clients, but I have to say middle-income people have just as many problems from this.

    Mr. VENTO. Somebody has to have some equity in the house already. The issue is—so it has to be someone that has—when we talk about this example, an open-ended credit, up to $25,000, or whatever the amount is that it is up to. Obviously if it gets over that, Truth in Lending doesn't apply is our problem.

    Ms. SAUNDERS. Truth in Lending does apply to any loan secured by the home, regardless of the amount of the loan. It is really everybody that will suffer from this disclosure.

    Mr. VENTO. We need to revisit that in terms of how it is articulated in terms of maybe if it is up to a certain amount, they ought to present the entire maximum that they are opening the line of credit to at that point.

    Chairwoman ROUKEMA. We may also have to revisit that, but I also thought I understood—and I can't find a note on this—but I do think that I remember that Mr. Torres had accepted that as an improvement when we used the word ''substantial.''

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    Mr. TORRES. And I believe that is an improvement, Madam Chairwoman, but at the same time I would like to echo at least the concerns raised by Margot in the sense that, you know, if there is a reasonable approach so that consumers aren't confused about how the interest rates might change, I mean, given all the technology today, perhaps there is a way to provide the information. If it is not—the historical table, I think, in Ms. Saunders' testimony, she does give I think a good way to perhaps fix it that should be considered.

    Chairwoman ROUKEMA. I will simply say I think this has been very useful and thought-provoking. I am sorry that it came at such a late hour in the afternoon; but as they say, we are making progress. I do have to say, however, I will again go over this with an open mind. I do believe that there are substantial enough questions here that are raised, aside from whatever adjustment we can make in that Section 401.

    A lot of the other overlapping issues that you raise, I think, have to be part of a separate bill. I don't see how we could possibly write another consumer credit bill into this bill. I just don't see it. And particularly when you get into the payday lending and those loopholes, that is very complex.

    And as Mr. LaFalce has pointed out in his own bill, Truth in Lending, there are extensive numbers of issues that are all interrelated that we could deal with. I don't think they can reasonably be introduced into this bill now, but we will go over your testimony carefully. And if you want to come back in the face of some of the questions that have been raised here, please submit your statements to both Mr. Vento and myself and we will distribute them to the subcommittee. Thank you so much.

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    [Whereupon, at 6:12 p.m., the hearing was adjourned.