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Thursday, March 27, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 10:10 a.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.

    Present: Representatives Bachus, Bereuter, Baker, Royce, Gillmor, Biggert, Capito, Tiberi, Hensarling, Brown-Waite, Barrett, Oxley (ex-officio), Sanders, Maloney, Watt, Sherman, Moore, Waters, Hooley, Lucas of Kentucky, and Ross.
    Chairman BACHUS. [Presiding.] Good morning. This is the Subcommittee on Financial Institutions and Consumer Credit. The subcommittee meets today for a legislative hearing on H.R. 1375, the Financial Services Regulatory Relief Act of 2003. That legislation was introduced by our colleagues on the subcommittee, Ms. Capito, of West Virginia and Mr. Ross of Arkansas. It is similar to the regulatory relief package, H.R. 3951, that was approved last year by the subcommittee and by the full committee after two hearings before our subcommittee. That legislation was largely a product of recommendations that the committee received from federal and state financial regulators in response to a request for regulatory relief recommendations from Chairman Mike Oxley.
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    Earlier this year the Chairman again requested that the financial regulators recommend regulatory relief proposals. And, H.R. 1375 is essentially last year's legislation with the addition of various, what we think are uncontroversial provisions recommended by regulators. The banking industry estimates that it spends somewhere in the neighborhood of $25 billion annually to comply with regulatory requirements imposed at both the federal and state level. A large portion of that regulatory burden is justified by the need to ensure safety and soundness of our banking institutions to enforce compliance with various consumer protection statutes and combat money laundering and other financial crimes.
    However, not all regulatory mandates that emanate from Washington or State capitols across the country are created equal. Some are overly burdensome, unnecessarily costly or duplicate other legal requirements. Where examples of such regulatory overkill can be identified, Congress should act to eliminate them. The bill that Congresswoman Capito and Congressman Ross have introduced, and which, I, Chairman Oxley and several other members of this body are co-sponsors, contains a broad range of constructive provisions that, taken as a whole, will allow banks and other depository institutions to devote more resources to the business of lending to consumers and less to the bureaucratic maze of compliance of outdated and unnecessary regulations.
    Reducing the regulatory burden on financial institutions lowers the cost of credit and will help our economy as it strives to emerge from recession.
    In closing, let me once again commend Ms. Capito and Mr. Ross for this important legislative initiative, as well as the full committee chairman, Mr. Oxley, who is an original co-sponsor of the legislation. I also commend the ranking member, Mr. Sanders, for the cooperation that his staff and the democratic staff has put forth in composing this bill.
    Chairman Oxley's demonstrated a strong commitment to getting regulatory relief legislation enacted this year. The Leadership has endorsed his efforts. And, finally, I want to thank the federal banking agencies represented on our first panel for their important input and technical assistance in the drafting in process.
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    With that, I am pleased to recognize, the ranking member, Mr. Sanders, for an opening statement.
    Mr. SANDERS. Thank you, Mr. Chairman. And thank you for holding this hearing. Let me begin by apologizing and saying I am going to be running back and forth between this hearing and another hearing on a committee that I am in. So, I will be drifting back and forth.
    Among other things, the Financial Services Regulatory Relief Act would make it easier for some of the largest banks and other financial institutions in this country to merge. Specifically, the bill would reduce the federal review process for bank mergers from 30 days to a mere five days. The bill would allow the Office of the Comptroller of the Currency to waive notice requirements for national bank mergers located within the same State. The bill would end the prohibition of out of state banks merging with in-state banks that have been in existence for less than five years.
    The bill also gives federal thrifts the ability to merge with one or more of their non-thrift affiliates. Finally, the bill would eliminate certain reporting requirements for bank CEO's in regards to inside lending activities.
    Mr. Chairman, I have serious concerns regarding these provisions in the bill. During the past 22 years the banking industry has experienced unprecedented merger activity. From 1980 to 2002 there were over 9,500 banking mergers with total acquired assets of more than $2.4 trillion. During the 1990s many of these mergers involved large banks. Some of the proposed mergers had the potential for serious anti-competitive effects in local markets.
    Yet, during this period, hardly any mergers were denied based on competitive grounds. Huge anti-competitive situations, but none of these mergers, very few of them were denied. As a result of merger mania there has been a substantial decline in the number of commercial banking organizations in the United States. We have gone from 12,741 commercial banks in 1989 to 7,903 in 2002. In 1998 several of the largest bank mergers in history took place. For example Nations Bank merged with Bank of America resulting in the third largest banking organization with approximately 580 billion in assets.
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    In addition, Norwest merged with Wells Fargo and Bank One merged with First Chicago. Finally, Travelers Group and Citicorp has merged and formed the largest banking organization in the United States. The 25 largest banks in this country now account for more than half of all of the total deposits in the United States. It is my understanding that the Federal Reserve Board and the Office of the Comptroller of the Currency have published descriptive material on fewer and fewer of these merger decisions. And I think that that is, in itself a serious problem.
    I am very concerned that as a result of these mergers an increasing number of banks are considered too big to sale, too big to sale. In other words, these banks are now so big that if they should get into trouble it will be the American taxpayer who will have to bail them out because the argument will be made that the consequences of those failures are so great for our economy that the taxpayers of this country must bail them out.
    I would like to hear discussion today from some of our witnesses as to how many banks they consider too big to fail. What are the dangers for the taxpayers of this country in terms of reliving the S&L crisis, which cost us so many billions of dollars?
    Mr. Chairman, has merger mania led to reduction in bank fees for the American consumers? We are talking about fewer and fewer and larger and larger banks that obviously the assumption is the average person benefits. I guess fees must have been reduced. Low-income people, working people, must be better off. Unfortunately, the evidence seems to indicate that mergers have not worked for the benefit of ordinary people. In fact, the American consumers today are facing a real crisis in banking services. More than 12 million American families cannot afford bank accounts and those who can afford them are paying too much, especially if they bank at big banks.
    Since bank deregulation began in the early 1980s consumer groups, such as U.S. PIRG have documented skyrocketing consumer banking fees. Bank fees are rising dramatically. Big banks are getting bigger and bank fees are going up. And I think the American people want a hard look at that. The average annual cost to a consumer of maintaining a regular checking account rose to more than $200 over the past few years, an increase of $17 compared to 1997. Consumers who bank at big banks paid more than $220 a year for the privilege of maintaining a regular checking account, that is a lot of money for a regular checking account.
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    Furthermore, what needs to be looked at what are the implications of these mergers for workers, the people who work at banks? Are we creating more jobs or are we creating fewer jobs? What happens when the workers in one bank have a defined benefit pension plan and they merger with another bank that has a cash balance pension plan and when these two banks merge, do the workers who had the better pension lose out? There is evidence that that may be the case.
    So, Mr. Chairman, I want to thank you for holding this important hearing. And I will be skipping in and out and apologize for that. But, there are some important questions that I think need to be answered by our witnesses and I thank you, again, for holding this hearing.
    Chairman BACHUS. Thank you, Mr. Sanders for pointing out those issues.
    I want to first apologize to our State banking regulators and credit union regulators. Mr. Gee and Ms. Lattimore are here representing State regulators. So, when I commended our Federal regulators for being here, I did not mean to leave the two of you out, but obviously I did and I apologize for that. Our state regulatory bodies are very important to us. So, please accept my apologies.
    At this time I am going to recognize the chairman of the full committee for remarks. And, then, the ranking member, Mr. Frank, is not here, if he arrives. And then the two sponsors of the legislation for their opening remarks.
    So, at this time I am going to go to Chairman Oxley.
    Mr. OXLEY. Thank you, Mr. Chairman. And I appreciate you holding the hearing today on this important subject of regulatory relief. Two years ago I asked the financial regulators to recommend current statutes that could be altered or eliminated to lighten the regulatory burden on insured depository institutions, as well as much needed technical corrections. Part of our role in this committee is to periodically review and, if necessary, change banking statutes that have outlived their usefulness. It was also my intention to counter-balance the added regulatory responsibility given to the financial services industry in the Patriot Act, which had gone through our committee in the last Congress.
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    In response, the regulators, as well as the industry, submitted a number of wide-ranging proposals affecting banks, savings associations and credit unions resulting in H.R. 3951, which was introduced last year by Representative Capito and approved by this subcommittee and the full committee. I am pleased that Ms. Capito recently introduced H.R. 1375, the Financial Services Regulatory Relief Act of 2003. H.R. 1375 is essentially last year's bill with a few revisions and about a dozen new items requested by regulators to achieve the balancing act necessary for this bill. Not only does Representative Capito deserve a great deal of credit, but so do the regulators who have come to the table to identify the provisions included in this bill and are testifying today.
    And, let me say that we are particularly appreciative of the regulatory agencies' suggestions. It is pretty easy to go to the regulated community and ask for horror stories and ask them about regulations that they feel are unfair or burdensome. It is quite another for the regulators to step up and identify those regulations and, indeed, some statutes that have outlived their usefulness as a result of changes in technology and changes in the market place. The financial services industry spends a lot of money complying with outdated and ineffective regulations. That is money that could instead be lent to consumers and businesses for new homes, cars and projects that fuel growth in the local community.
    Financial institutions play an important role in preventing money laundering and protecting against terrorist financing. They should not be burdened by unnecessary regulatory requirements.
    So, I look forward, Mr. Chairman, to working with you and Ms. Capito and Representative Ross, who have joined me as original co-sponsors as we begin hearings on this important legislation. I am pleased to yield back.
    Chairman BACHUS. Thank you.
    At this time Ms. Capito?
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    Mrs. CAPITO. Thank you, Mr. Chairman. I appreciate you holding this hearing today and I want to thank our distinguished witnesses for appearing before this subcommittee. I want to thank Chairman Oxley and my colleague from Arkansas, Mike Ross, for working with me on this legislation.
    As was the case last year, the intent of this bill is to eliminate outdated laws, update those requirements that have not kept pace with technology and streamline several reporting requirements to eliminate unnecessary redundancies. This type of regulatory review is especially important, given the significant changes that the Gramm-Leach-Bliley Act and the Patriot Act brought to the financial services industry.
    H.R. 1735 is essentially the same legislation the committee considered last year, incorporating most of the changes made during the subcommittee and full committee markup. Regrettably, we were unable to consider this on the floor in the 107th Congress, but since that time we have received additional feedback from the various regulators, and, as a result, have added several new sections to the bill, many of which I hope will be discussed during this hearing.
    Many of the provisions in this legislation are very technical in nature. And I will encourage my colleagues to take full advantage of the experts before us this morning.
    Mr. Chairman, while federal regulation plays an important role in protecting consumers, instilling confidence and ensuring a level playing field, over regulation can depress innovation, stifle competition and actually inhibit our economy's ability to grow.
    I look forward to working with my colleagues and the chairman in reviewing the changes outlined in this legislation with the goal of creating common sense regulatory relief bill that will help the financial services community thrive, compete and offer the best services for its consumers.
    I thank the Chair.
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    Chairman BACHUS. Thank you.
    At this time I am going to recognize Mr. Ross for an opening statement. And are there other members on our side that wish to make an opening statement? So, if not, we will have Mr. Ross's opening statement and then we will hear from the panel.
    Mr. ROSS. Well, good morning, Chairman Bachus and Ranking Members Sanders and members of the committee and I think by the time it gets to me just about everything that can be said has probably been said. But, I want to thank you, Mr. Chairman for this hearing today on H.R. 1375 to discuss ways that Congress can provide the regulators with the assistance needed to streamline the operations and hopefully improve productivity.
    I can say a lot of things about this bill that I am proud to co-sponsor, but the bottom line is its common sense legislation that is badly needed. And I look forward to the testimony of the witnesses and working with my colleagues on this important piece of legislation.
    Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you.
    At this time, if no other members have an opening statement, let me introduce the panel. And I am going to go from my left to right. We have the Honorable Mark Olson, who is a member of the Board of Governors of the Federal Reserve System here in Washington. Welcome. We have the Honorable Dennis Dollar, Chairman, National Credit Union Administration. We have Ms. Julie L. Williams who is the First Senior Deputy, Comptroller and Chief Counsel for the Office of Comptroller of the Currency. We have Mr. William Kroener, General Counsel of the Federal Deposit Insurance Corporation. And, I drop the third from my name sometimes, so I am doing this to you this morning.
    Ms. Carolyn Buck, Chief Counsel, Office of Thrift Supervision; Mr. Gavin Gee, Director of Finance, Idaho Department of Finance, on behalf of the Conference of State Banking Supervisors; and Ms. Jerrie J. Lattimore, who is the Administrator of the Credit Union Division, State of North Carolina, on behalf of the National Association of State Credit Union Supervisors.
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    So, we welcome all of you all. We will start our opening statements. You have probably been told to limit it to the five minutes. But, we do allow people to run over a minute or two. And we will do that this morning. But, it is not encouraging you to go more than five minutes, but you do have that opportunity.
    Governor Olson, we will start with you.


    Mr. OLSON. Thank you very much, Mr. Chairman, and thank you for holding this hearing. And, thanks also, to the chairman of the full committee for his asking us, as you pointed out in your opening remarks, to submit suggestions to you for inclusion in this legislation.
    We have submitted a statement for the record. I would just like to highlight a few of the items that we have included and then we will be able to respond to questions in greater detail if there are any from the members. One of the suggestions that we have included concerns interstate branching. In the Riegle-Neal legislation interstate branching was allowed for the first time, but it was allowed on an opt-in basis by the State.
    17 States have adopted the opt-in and 33 have not. And, as a result of that, it particularly impacts, we believe, the smaller banks whose natural markets are along State borders. Whereas, a large bank organization could branch into a state through an acquisition, a smaller bank would find that to be expensive and cumbersome. And we think that this will encourage branches in those markets, many of which are now somewhat underserved.
    We would also point out, however, that if the committee chooses to include this recommendation, that it would not include the ILC's, the industrial loan companies that operate outside of the construct of the Gramm-Leach-Bliley provisions that were so carefully put together by the Congress in 1999.
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    A second issue that is important is allowing insured banks to engage in interstate mergers with thrifts. Right now banks are allowed to merge interstate with other banks, but not with thrifts or with uninsured trust companies. So, those acquisitions now do take place, but they only take place after the thrift goes through a conversion to a bank charter. And it is an unnecessary, expensive and time-consuming step.
    The third provision that we have interest in involves the merchant banking provisions under the Gramm-Leach-Bliley Act. There are certain cross marketing opportunities that are allowed in a very narrow sense for merchant banking, companies that are held in the merchant banking portfolio by insurance entities that are part of the financial holding company, but are not allowed at the moment for banks that have ownership of a corporation in its merchant banking portfolio. These are very limited cross marketing opportunities, and we are suggesting that the banks ought to have the same opportunities as the thrifts.
    Also, we do not believe that the cross marketing provision should be included where the banks portion consists of less than a controlling ownership in the merchant banking investment.
    A fourth provision that is of interest concerns the attribution rule for stock that is owned under trust provisions. In certain instances, where a company's stock is owned under certain trust provisions for the benefit of the employees or stockholders or members, those shares are included in the attribution rule for purposes of determining whether or not there is control.
    We have found that there are a certain limited number of cases, mostly involving the 401k's or IRA's where there are self-directed investments; where the attribution rule in net appropriation. We are asking for the opportunity to waive the right, not to repeal the statute, but to waive the right in certain instances where that is determined to be the case.
    A final one that I would like to mention this morning is the post-approval waiting period. That is now a 30-day period by statute. It can be reduced to 15 days. We are suggesting that it could be reduced again to a five-day waiting period. Importantly, that would only be done after the U.S. Attorney had reviewed the case and determined that there were no anti-competitive issues involved.
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    We have some other provisions, Mr. Chairman, that I would be happy to respond to questions, but I think those are the ones that I would like to mention in my opening statement.

    [The prepared statement of Hon. Mark Olson can be found on page 124 in the appendix.]

    Chairman BACHUS. Thank you.
    Chairman Dollar?


    Mr. DOLLAR. Well, thank you, Mr. Chairman. We appreciate so much the opportunity to be here today on behalf of the National Credit Union Administration. I think it would be very difficult with our names for Ms. Buck and I not to be here to discuss common sense legislation.
    Chairman Oxley, we appreciate his leadership and Representative Capito and Representative Ross for theirs as well on this particular piece of legislation.
    We continue to believe that this legislation will positively impact our ability to provide a safe and sound regulatory environment for America's credit unions in what is, indeed, an ever-changing and dynamic financial marketplace. And I would like to just briefly discuss the following recommendations that are included in H.R. 1375 that address regulatory relief and productivity improvement for federal credit unions.
    These proposals, as presented in the bill, are consistent with the mission of credit unions and the principles of safety and soundness. First is regarding check cashing, wire transfer and other money transfer services. In order to reach the unbanked, Mr. Chairman, Federal credit unions should be authorized, we believe, to provide these services to anyone eligible to become a member. This is particularly important to the overwhelming majority of federal credit unions whose field of a membership include individuals of limited income or means. These individuals, in many instances, do not have mainstream financial services available to them and are often forced to pay excessive fees for check cashing, wire services, wire transfers and the like. We are pleased to see that Section 307 of the bill does include this provision and we certainly support that.
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    The one-size-fits all 12-year maturity limit on federal credit union loans is also outdated and unnecessarily restricts federal credit unions' lending authority. NCUA is pleased that our recommendation regarding this has also been incorporated in the bill in Section 304, and we support this.
    The 1 percent aggregate investment limit for a credit union in a CUSO or a credit union service organization, is a statutory provision that is unrealistically low and forces many credit unions to either bring services in-house, thus, potentially increasing risk of the credit union and the insurance fund or to turn to outside providers and run the risk of losing control.
    NCUA is very comfortable with the solution that has been proposed by the legislation in Section 305, which increases that CUSO investment limitation from 1 percent to 3 percent.
    The Federal Credit Union Act also, we feel should be amended and this legislation does do so to provide some additional conservative investment authorities that have been proven sound and safe by State chartered credit union and some other financial institutions. With proper restrictions as drafted in the legislation, as has been provided in Section 303, we can support the provisions that you have given to expand credit union investment options in a safe, sound and conservative manner.
    The Federal Credit Union Membership Act also allows voluntary mergers of healthy federal credit unions. There is no logical reason, however, to require in connection with those mergers, that groups of over 3,000, or any group for that matter, be required to spin-off and form a separate credit union. These groups are already included in a credit union in accordance with statutory standards and that status is unaffected by a merger. NCUA is pleased to see that Section 308 of the proposed legislation as drafted addresses these concerns.
    Another item that we are pleased to see included in this year's bill, Section 313, is the provision to provide regulatory relief from the requirement that credit unions register with the Securities and Exchange Commission as broker dealers when engaging in certain specified de minimus securities activities. The requested parity relief is consistent with that granted to thrifts in this legislation and it would apply only to those activities otherwise authorized for credit unions under applicable credit union chartering statutes. It does not in any way increase the authorities of credit union for such things, but it does allow them to continue to do such things as third party brokerage arrangements, sweep accounts and certain safekeeping and custodial activities without requiring the cost and the burden of registration.
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    We have also reviewed the other provisions that have been added to the bill that were above and beyond the items that were submitted by us as a regulator last year. All of those provisions we have reviewed from a safety and soundness perspective and have no safety and soundness concerns whatsoever with those additions.
    One last item I would like to address before I close, Mr. Chairman, is regarding the issue of privately insured credit unions and the Federal Home Loan Bank membership. Last year, NCUA took no formal position on that section of the bill. And, again, we take no official position on the public policy issue involved in that section this year. However, we do find ourselves uncomfortable with changes to Section 301 as it appears in that section of the bill this year for the following reasons:
    Our concern stems from the language which has been added to the original section, which makes it appear that oversight responsibility for non-federally insured credit unions and certain State regulated private share insurance companies rest with NCUA. NCUA, Mr. Chairman, has no legal authority, regulatory or supervisory jurisdiction over these non-federally insured credit unions or commercial insurance companies, nor do we seek it. In our view the language requiring private insurance providers to submit copies of their annual audit reports to NCUA should be considered for being removed to avoid any potential consumer confusion and misunderstanding. In its passage of the FDICCIA Act in 1991, Congress designated the Federal Trade Commission as the agency responsible for oversight of private deposit insurance companies and the protection of consumers through appropriate disclosure provisions. As the matter remains one of consumer awareness, disclosure and notification, and not of federal credit union regulation, NCUA feels strongly that the Federal Trade Commission should retain this oversight authority. The additional language, which could be interpreted to infer an NCUA role that is neither appropriate, nor statutorily authorized to provide oversight to either State chartered privately insured credit unions or a private insurance company regulated by an agency designated by State statute should, in our opinion, be removed from Section 301.
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    It has been five years, Mr. Chairman, since Congress has thoroughly addressed our statutes and the regulations that emanate from them. The review and relief sought in this proposed legislation is, indeed, both needed and timely. Our goal at NCUA as we implement these regulatory relief provisions and any others that Congress ultimately chooses to enact, will be to take all actions with an eye towards removing unnecessary regulatory burdens while maintaining, as is proven by the historical strong performance of America's credit unions, our first and foremost priority and commitment to both safety and soundness and necessary regulation to protect the American public. On behalf of the NCUA board, I am glad to be here today to work with the committee, to work with the subcommittee as we draft this important, and, I agree, again, common sense legislation.
    Thank you, Mr. Chairman.

    [The prepared statement of Hon. Dennis Dollar can be found on page 62 in the appendix.]

    Chairman BACHUS. Deputy Comptroller Williams?


    Ms. WILLIAMS. Chairman Bachus and Members of the Subcommittee, I appreciate this opportunity to appear before you again to express the views of the Office of the Comptroller of the Currency on H.R. 1375. Let me also thank Congresswoman Capito again for sponsoring a bill that includes sensible and appropriate regulatory burden relief for national banks and for other financial institutions. Let me also note that we very much appreciate the courtesies extended by Committee staff as we and the other federal banking agencies have developed proposals and discussed issues with the staff leading up to today's hearing.
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    This morning I will highlight just a few of the provisions in the bill that we believe are especially important. My written testimony goes into additional detail and covers a number of other provisions.     The bill contains several provisions that streamline and modernize aspects of the corporate governance and interstate operations of national banks. We strongly support these measures. Although some may seem like relatively technical points, as Congresswoman Capito pointed out in her opening remarks, they can make a big difference in practice for banking institutions.
    For example, the bill modifies the so-called qualifying shares requirement currently in the National Bank Act, which has made it difficult for some national banks to obtain favorable tax treatment as a Subchapter S corporation. The qualifying shares provision currently requires every national bank director to hold a minimum equity interest in his or her national bank. Because of this requirement, however, some national banks may end up with more shareholders than the law permits for a corporation wishing to elect Sub-S status. Community banks are most disadvantaged by this result.
    The bill would solve this problem by authorizing the Comptroller to permit the directors of banks seeking Sub-S status to hold subordinated debt instead of equity securities. Holding subordinated debt would not cause a director to be counted as a shareholder for purposes of Subchapter S and would address the problem that I described.
    A second important provision that has been added to the bill this year clarifies that the OCC may permit a national bank to organize in business forms other than what is known as a body corporate. This may sound arcane, but if a national bank were able to organize as a limited liability national association, for example, the bank may be able to take advantage of the pass-through tax treatment that is available to comparable limited liability entities under certain tax laws. This would eliminate double taxation under which the same earnings are taxed both at the corporate level as corporate income and at the shareholder level as dividends.
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    Some States already permit state banks to be organized as unincorporated limited liability companies, and the FDICC has recently adopted a rule allowing state bank LLC's to qualify for deposit insurance if they meet certain conditions. This provision in the bill may be especially useful for community national banks, again, in the long run.
    Another provision we strongly endorse repeals the requirement in current law that a State must affirmatively enact legislation in order to permit national and State banks to conduct interstate expansion through so-called de novo branching. Banks and their customers would benefit from this change, which would permit a bank to choose the form of interstate expansion that makes the most sense for its business needs and customer demand.
    Federal thrifts have enjoyed this type of flexibility for decades. In today's internet age when customers can communicate remotely with banks located in any state, restrictions on where a bank may establish branch facilities in order to serve customers in person are an unnecessary legacy from a protectionist era that detracts from healthy competition and from customer service.
    The bill also contains provisions that help enhance the safety and soundness of the banking system. For example, the bill expressly authorizes the agencies to enforce an institution-affiliated party's or a controlling shareholder's written commitment to provide capital to an insured depository institution. This provision would enable the agencies to hold parties to the capital commitments that they make and could help mitigate lawsuits against the deposit insurance funds.
    Two other important new provisions have been added to the bill since last year that promote safety and soundness. First, the bill addresses the fact that independent contractors, such as accountants for insured depository institutions, are treated more leniently under the enforcement provisions in the current banking law than are directors, officers, employees, controlling shareholders and even agents for the institution. The bill addresses this disparity by holding independent contractors to a standard that is more like the standard that applies to other institution-affiliated parties.
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    The bill also addresses safety and soundness issues that have arisen for the banking regulators when a so-called stripped-charter institution is used to acquire a bank with deposit insurance through a Change in Bank Control Act notice without the prospective acquirer submitting an application for a new charter or an application for deposit insurance. The agency's primary concern with this type of Change in Bank Control Act notice is that the acquirer of the stripped charter is effectively buying a bank charter without the scope of safety and soundness review that the law requires when applicants seek a new charter and deposit insurance even though the risks presented by the two sets of circumstances may be substantively identical.
    In conclusion, as I noted, my written statement makes suggestions for some additional amendments to the current law that we believe would make useful improvements to the bill. We very much look forward to working with the Subcommittee and with the other federal banking agencies as the bill advances.
    Mr. Chairman, Congresswoman Capito, on behalf of the OCC, we thank you for your support of this legislation. At the appropriate time I will be happy to answer any questions you may have.

    [The prepared statement of Julie L. Williams can be found on page 134 in the appendix.]

    Chairman BACHUS. Thank you.
    Chief Counsel Kroener?


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    Mr. KROENER. Thank you. Mr. Chairman, and Members of the Subcommittee, I appreciate the opportunity to present, again, the views of the Federal Deposit Insurance Corporation on proposed legislation to provide regulatory burden relief.
    The FDICC shares the Subcommittee's continuing commitment to eliminate unnecessary burden and to streamline and modernize laws and regulations as the financial industry evolves. FDICC Vice Chairman John Reich is leading the Federal Financial Institutions Examination Council effort to conduct a thorough review of regulations to identify outdated and otherwise unnecessary ones.
    This review, which is mandated by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, is not due until 2006. By advancing it as we have, the FDICC sees it as an opportunity to reinforce ongoing efforts to lessen regulatory burden and identify other areas of regulatory overlap and inefficiencies. The FDICC is also leading interagency efforts to implement improved collection management and distribution of Call Report information using XBRL, a data standard for transporting and displaying financial reporting information using the Internet.
    We are working with other regulators, accounting firms, software companies and financial services providers around the world to promote transparency, processing efficiency and improved risk management techniques using the new data standards.
    The FDICC continues its extensive efforts to provide regulatory relief for the industry by streamlining examination processes and procedures with an eye toward better allocating FDICC resources to areas that could pose the greatest risk to the insurance funds. These FDICC efforts to reduce burden include targeted examinations based on the institution's risk profile. By use of risk focused examination procedures the FDICC has reduced the average time spent conducting risk management examinations in qualifying institutions by well over our original 20 percent goal.
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    Chairman Powell remains keenly interested in exploring all measures to eliminate inefficiencies and costs in the supervisory and regulatory systems. We have on our website an opportunity for institutions to suggest ways to reduce burden, and we take those suggestions seriously and follow-up on them as promptly as we can.
    The FDICC commends the Subcommittee for holding this hearing and Representative Capito for introducing legislative changes to lessen the regulatory compliance burden on insured depository institutions. The FDICC staff worked closely with the Subcommittee staff in developing several of the provisions contained in the proposed legislation, including many that will help the FDICC become more efficient and effective in regulating insured institutions.
    The FDICC enthusiastically supports the provisions in H.R. 1375 that we suggested for inclusion in the bill. The provisions that the FDICC endorses include:
    (1) those that clarify that the agency may suspend or prohibit individuals from participation in the affairs of any depository institution and not solely the insured depository institution with which the individual is or was associated;
    (2) those that specify the time period during which the appointment of the FDICC as conservator or receiver of a failed insured depository institution could be challenged;
    (3) those that modify the requirement for retention of old records of a failed insured depository institution at the time a receiver is appointed;
    (4) those that permit the FDICC to rely on records preserved electronically such as optically imaged or computer scanned images; and,
    (5) those that clarify existing authority of the FDICC as receiver or conservator to enforce written conditions or agreements entered into between insured depository institutions and institution affiliated parties and controlling shareholders.
    The FDICC also supports section 409 that amends the Change in Bank Control Act to address an issue that arises when a ''stripped charter'' institution is the subject of a change in control notice. This is the provision that Deputy Williams mentioned in her oral statement. Section 409 clarifies the base on which such notices may be disapproved and expands the base for extensions of time for considerations of notices raising novel or significant issues.
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    The FDICC also supports a number of the provisions that were requested by our fellow regulators here on the panel today and were included in the proposal. For example, the provisions that streamline merger application requirements and those that permit bank examiners to receive credit from any insured depository institution so long as it is on the same terms and conditions as credit offered to the general public.
    The FDICC recommends that the Subcommittee include a number of additional regulatory relief items in the bill. For example, we recommend inclusion of language that provides each of the other federal banking agencies with express authority to take enforcement action against banks they supervise based on violations of conditions imposed by the FDICC in writing in connection with approval of an institution's application for deposit insurance. We also recommend amendments to the Bank Merger Act and Bank Holding Company Act to require consideration of potentially adverse effects on the insurance funds of any proposed bank merger transaction or holding company formation or acquisition and language that improves our ability to act as receiver of failed institutions—language that provides for the FDICC to gain access to individual FICO scores to improve our ability to evaluate assets and recommend transaction structures for failing banks, and a provision to clarify the FDIC Act relating to the resolution of deposit insurance disputes in the case of failed insured depository institutions.
    I have included the legislative language on these and several other provisions with my written statement. Thank you, again, for the opportunity to present the FDICC's views on these issues. The FDICC supports the Subcommittee's continued efforts to reduce unnecessary burden on insured depository institutions and we continually strive for efficiency in the regulatory process and are pleased to work with the Subcommittee in accomplishing this goal.
    I look forward to your questions at the appropriate time, Mr. Chairman. Thank you.

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    [The prepared statement of William F. Kroener, III can be found on page 84 in the appendix.]

    Chairman BACHUS. I thank the General Counsel.
    Now, we will hear from Chief Counsel Buck.


    Ms. BUCK. Good morning, Mr. Chairman and members of the subcommittee. Thank you for the opportunity on behalf of OTS to testify on H.R. 1375, the Financial Services Regulatory Relief Act of 2003 sponsored by Congresswoman Capito and Congressman Ross. I commend them on the bill and their efforts to reduce regulatory burden on depository institutions.
    During periods of economic uncertainty it is particularly important that we make every effort to remove unnecessary regulatory obstacles that divert valuable resources and hinder innovation and competition in our financial services industry. In my written testimony I discuss a number of proposals that we believe would significantly reduce burden on thrift institutions. And I ask that the full text of that statement be included in the record.
    Today, I will highlight the portion of H.R. 1375 that would provide the most significant relief to thrifts. These are the proposed amendments that would treat thrifts and banks the same under the federal securities laws. Banks and thrifts may engage in the same types of activities covered by the investment advisor and broker dealer requirements of the federal securities laws. And these activities are subject to substantially similar supervision by OTS and bank regulators. The key point is that banks, but not thrifts, are exempt from registration under the Investment Advisors Act of 1940 and banks, but not thrifts, enjoy an exemption from broker dealer registration under the 1934 act for certain activities specified in the Gramm-Leach-Bliley Act. For purposes of the broker dealer requirements the SEC does treat thrifts the same as banks. That is the commission has exercised its exceptive authority, for now, to treat thrifts the same as banks. But the SEC has not extended that same parity to the investment advisor requirements. We believe that treating thrifts and banks the same under the federal securities laws makes sense for a number of reasons. Thrifts fill an important niche in the financial services arena by focusing their activities primarily on residential, community, small business and consumer lending. The Homeowners Loan Act allows thrifts to provide trust and custody services on the same basis as national banks, and investment advisor and third party brokerage in the same manner as banks. Not only are the authorized activities the same, but OTS examines activities in the same manner as the other banking agencies.
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    While the bank and thrift charters are tailored to provide powers focused on different business strategies, in areas where the powers are similar, the rules should be similar. No legitimate public policy rationale is serviced by imposing additional and superfluous administrative costs on thrifts to register as an investment advisor or broker dealer when banks are exempt from registration. There should be similar treatments for regulated entities under similar circumstances.
    And the circumstances here are that, first, thrifts, like banks, have a regulator that specifically supervises the type of activities covered by the investment advisor and broker dealer registration requirements. Second, thrifts, like banks, are subject to the same functional regulatory scheme that was endorsed by the Gramm-Leach-Bliley Act. And, third, thrifts, like banks, are subject to substantially similar customer protections with respect to the activities covered by the registration requirements, which, by the way, are based on the SEC's own customer protection rules.
    The only difference is that thrift, unlike banks, are subject to an additional and clearly burdensome administrative registration requirement. As best stated in the SEC's own words, from the preamble to their May 2001 interim rule extending broker dealer parity to thrifts, quote, insured savings associations are subject to a similar regulatory structure and examination standard as banks. Extending the exemption for banks to savings associations and savings banks is necessary or appropriate in the public interest and is consistent with the protection of investors. End quote. We could not have said this better ourselves.
    For that reason, OTS strongly supports the amendments in H.R. 1375 to extend the bank registration exemption to thrifts. Absent this treatment, thrifts are placed at a competitive disadvantage that is without merit and that imposes significant regulatory costs and burdens. As recently as the Gramm-Leach-Bliley Act, Congress affirmed the principles underlying the bank registration exemption. We believe the best way to resolve this matter for thrifts with certainty and finality is for Congress to extend by statute the same exemption to thrifts.
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    This would also have the beneficial effect of avoiding the need for a series of SEC administrative exemptions as the need arises, another potential regulatory burden. OTS itself is committed to reducing burden whenever it has the ability to do so, consistent with safety and soundness and compliance with law. The proposed legislation advances this objective and we appreciate that many of the reforms that we have long desired are included in the bill.
    I especially thank you, Mr. Chairman, Congresswoman Capito, Congressman Ross and all the others who have shown leadership on this issue and we look forward to working with the subcommittee on this legislation. Thank you.

    [The prepared statement of Carolyn Buck can be found on page 49 in the appendix.]

    Chairman BACHUS. Thank you.
    And, Mr. Gee, and it is Director Gee, I pronounced your name Gee when I introduced you. We have a Gee's Bend in Alabama and it is spelled the same way, so I guess in Mississippi it may be Gee, but everywhere else it is probably Gee.


    Mr. GEE. That is fine, Mr. Chairman. I have been called much worse.
    Good morning, Mr. Chairman and members of the subcommittee. My name is Gavin Gee I am the Idaho Director of the Department of Finance and Chairman of the Conference of State Banks Supervisors. Thank you for asking us to be here today and to share the view of CSBS, the Conference of State Bank Supervisors, on regulatory burden reduction and the Financial Services Regulatory Relief Act of 2003. And, thanks also to Representatives Capito and Ross for your hard work on this legislation. We applaud your efforts to reduce the burdens imposed by unnecessary or duplicative regulations that do not advance the safety and soundness of the nation's financial institutions.
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    The most important contribution toward reducing regulatory burden may be empowering the State banking system. State banks and State chartering system have created the vast majority of innovations in banking products, services and business structures. For this reason we are disappointed that a provision to allow State chartered member banks to utilize the powers of their charter is not included in the bill. Through innovation, coordination and the dynamic use of technology, States have made great strides in reducing regulatory burden for the institutions that we supervise.
    My submitted testimony describes these efforts in much more detail. The Financial Services Regulatory Relief Act of 2003 can be a valuable federal compliment to these efforts. With respect to interstate branching requirements, as you may know, current Federal law has taken an inconsistent toward to how banks may branch across State lines. While Riegle-Neal gave the appearance that States could control how banks may enter and branch within their borders, this has not always been the reality. Perhaps, because it was believed that the federal thrift charter would be eliminated at the time Riegle-Neal was adopted, the law was not applied to federally chartered thrifts. The result is, that a federal thrift can branch without regard to State law and rules of entry. Since the passage of Riegle-Neal, the OCC has promulgated creative interpretations of the National Banks Act that effectively circumvent the application of Riegle-Neal to branch-like operations.
    The result is that State chartered institutions, particularly community banks wishing to branch interstate are at a competitive disadvantage to those institutions that can use federal options to branch without restrictions. Presently, only 17 States now allow de novo branching. Whatever the outcome of your review of Federal law, we urge Congress to eliminate the disadvantage it has created for State banks because of the inconsistent application of Federal law.
    CSBS also hopes that the committee will rethink, including the State member bank powers amendment. There is a detailed discussion of the amendment in my written testimony. Additionally, we encourage the committee to work with the Internal Revenue Service to reconsider its interpretation of the tax status of State chartered banks structured as limited liability corporations. While we understand that tax issues are not in the committee's jurisdiction, this would be meaningful regulatory relief for community banks.
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    CSBS believes that improved coordination and cooperation between regulators should be a cornerstone of regulatory relief. In that spirit, we suggest that Congress could improve the Federal Financial Institutions Examination Counsel by changing the State position from one of observer to that of full voting member. We also ask the committee and Congress to address the implementation and implications of regulatory preemption by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. CSBS believes this request for review of preemption and applicable law is appropriately a regulatory burden reduction matter as well. Our banking system is a complex and evolving web of State and Federal law, particularly for State chartered institutions. Greater sunshine on OCC and OTS interpretations of applicable law for the institutions they charter would also help clarify applicable law for our nation's more than 6,000 State chartered banks representing nearly 70 percent of all insured depositories.
    A clear articulation of OCC and OTS standards of preemption would also lessen the legal burden of litigation over the federal regulators sometimes-tenuous interpretations of federal law.
    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 to the health of our nation's financial institutions. We commend this committee for its efforts in this area.
    Thank you for the opportunity to testify on this important subject. And we look forward to any questions that you and members of the subcommittee might have. Thank you.

    [The prepared statement of Gavin M. Gee can be found on page 69 in the appendix.]

    Chairman BACHUS. Thank you. And, for the record that was four minutes and 53 seconds. You have the record right now.
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    Administrator Lattimore, we welcome you.


    Ms. LATTIMORE. Thank you, Mr. Chairman and members of the subcommittee. My name is Jerrie J. Lattimore. I am the North Carolina Regulator for State chartered Credit Unions and the Chairman of NASCUS; NASCUS is the National Association of State Credit Union Supervisors. We regulate 4,300 State chartered credit unions throughout the United States, which is almost 50 percent of all the credit unions.
    NASCUS is supportive of your efforts to reduce regulatory burden. I will comment today on those aspects of H.R. 1375 that directly impact State chartered credit unions and also would suggest some further revisions to the Federal Credit Union Act as outlined in our letter to Chairman Oxley dated January 23, 2003.
    Section 301 of H.R. 1375 would authorize State chartered privately insured credit unions to be eligible for membership in the Federal Home Loan Banks. Expanding the field of institutions eligible for membership in no way alters the vigorous credit underwriting standards that an institution must meet in order to join the Federal Home Loan Bank or receive an advance. In addition, every Federal Home Loan Bank advance is fully secured by marketable collateral. It is our understanding that none of the banks has ever had a loss on an advance. This provision would allow qualified institutions to have an additional source of credit to use for the purpose of extending homeownership to their members. We urge the committee to approve this provision of the bill that would help achieve our nation's goals of homeownership.
    Secondly, Section 313, NASCUS supports that section that would provide credit union's relief from the SEC registration requirements. The NCUA has endorsed provisions of this bill that would grant parity of treatment to all Federal and State federally insured credit unions and has previously submitted language to that effect.
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    NASCUS would urge the committee to approve such a provision for all State chartered credit unions. It should be clearly understood that this provision does not create any new powers for State chartered credit unions.
    There are two other legislative issues that NASCUS would like for this committee to consider. The first is relief from member business loan constraints that were added by the Senate to the Credit Union Member Access Act of 1998. Historically, many credit unions have provided loans for their members' business purposes. Member business lending not only meets the credit needs of the member, but also serves as a valuable source of financing for community development and local job creation.
    Credit unions are not in the business of lending to foreign corporations or governments. Their business loans are made locally and the funds recycle throughout the community. In an economic environment where entire industries are severely affected, businesses are closing and jobs are being lost, these member business loans are vital to the economy.
    NASCUS would urge that the restrictions on member business lending be removed from the Federal Credit Union Act for State chartered credit unions and returned to the State legislators and the credit union supervisors to regulate. If that solution is not acceptable, NASCUS would then urge that credit unions be granted business lending authority equivalent to that proposed for federal savings institutions, that is, the asset limitation contained in the Federal Credit Union Act for business loans should be raised from 12.25 percent to 20 percent, which is the same percentage proposed for federal savings associations.
    Secondly, micro member business loans that are less than the Fannie Mae and Freddie Mac ceiling, which is roughly $322,000, be excluded from the member business loan definition.
    The second issue is to permit credit unions to include supplemental capital as part of net worth for prompt corrective action. The combination of prompt corrective action requirements established by Congress in 1998 and the subsequent rapid deposit growth has created a financial and regulatory dilemma for many State chartered credit unions. PCA net worth requirements are higher for credit unions than they are for all other financial institutions. All types of financial institutions currently employ supplemental capital in some form. It is already authorized for low-income and corporate credit unions. All credit unions should be afforded the use of supplemental capital if they so desire. With the flight to quality from the stock market, many credit unions are experiencing rapid share growth, which results in reduced net worth ratios. It makes good business sense to include other forms of capital that lend additional soundness to an institution. We should take every financially feasible step to strengthen this nation's credit unions, which, in turn, strengthens the financial condition of its members.
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    To further support this proposition I have a Filene Research Institute Study done by Dr. James Wilcox of the University of California at Berkley. His conclusion was that marketing of subordinated debt would require increased transparency and disclosure about a credit union's financial condition. And it would create a larger cushion for the share insurance fund. Subordinated debt would impose an element of direct market discipline on the industry. This study is lengthy. I will not submit it for the record. But, I do have it for any members of the committee, who would like a copy.
    During the last Congress, Representatives Brad Sherman and Robert Ney introduced amendments addressing supplemental capital and we hope these amendments will be enacted during this session. Again, we thank you very much for this opportunity to testify and we look forward to helping this subcommittee in any way that we can.
    Thank you.

    [The prepared statement of Jerrie J. Lattimore can be found on page 114 in the appendix.]

    Chairman BACHUS. Thank you.
    I have got one brief question I am going to ask Mr. Gee. And then I am going to surrender the balance of my time to Ms. Capito.
    You talked about a possible disadvantage of a State chartered institution branching across State lines and I want to address that. You talked about the improvements in coordination between the State regulators to support interstate operations. We have received a proposal, which would give greater certainty to State charters operating interstate reflecting the current state cooperative agreements signed by all the States. Does the Conference of State Banking Supervisors support that amendment? Are you aware of it and do you support it?
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    Mr. GEE. Thank you, Mr. Chairman, for the question. You mentioned the interstate cooperative agreements, and yes these agreements have been in place, I believe, since about 1994. Generally they have worked very well among the States. We work to provide seamless supervision, a single point of contact. We have similar agreements with the federal agencies to provide the same thing. And I would have to say from our perspective, for the most part, those work very well on an interstate environment. We are aware of these proposals. And, to answer your question specifically, yes, we do support them. We would look forward to providing greater certainty for those banks that are, I guess, either uncomfortable with just the cooperative agreement that are essentially voluntary cooperative agreements. They do not have the force and effective law. So, we would be very interested in working with the committee and you, Mr. Chairman, on those proposals, and, yes, we would support them.
    Chairman BACHUS. Thank you. And I know that there is some controversy. Mr. Hensarling was here earlier and I know he has some interest in the State of Texas. I am not sure that it will be in this legislation.
    Ms. Capito?
    Mrs. CAPITO. Thank you, Mr. Chairman.
    And, thank you all for your testimony.
    I would like to ask Governor Olson a question as to the shortening of the post-approval waiting period for bank mergers. In some of the opening statements, it was alluded to and I would like for your clarification on this. Would you describe the review process and the waiting periods? And, it is my understanding the Attorney General would have to sign off on this before the five-day waiting period would go into effect.
    Mr. OLSON. You are correct, Congresswoman. The process, the application process is a lengthy and very time-consuming process and there is a lot of input that is received regarding all of the implications of the application. After the approval has been made by all of the appropriate regulatory authorities there is then a time period that is allowed for the U.S. Attorney General to determine if there are any anti-trust implications in it. That is a 30-day period that can now be reduced to 15 days.
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    And we are suggesting that when, and only when, the Attorney General indicates that there are no anti-competitive implications of the merger, that then it could be reduced to a five-day period.
    Mrs. CAPITO. But, in no way would it affect the overview oversight?
    Mr. OLSON. It does not. This is post-application approval, during which time it is the time period allowed only for the Attorney General to respond.
    Mrs. CAPITO. Thank you.
    I have a question for Chairman Dollar. You support Section 313, which exempts the federally insured credit unions from certain broker dealer, and you spoke about this in your opening statement. You point out that this is—this exemption will have somewhat more limited application to credit unions than to other depository institutions. There is some concern from others about this provision. Would you explain how the exemption would apply in the credit union context and why it is more limited at scope and how does NCUA oversee investment and advisor activities specifically regarding disclosure and level of competency?
    Mr. DOLLAR. Well, Congresswoman, the primary reason why it is not as in broad scope as other financial institutions is that credit unions are limited by law as far as the types of services they can provide. And nothing in this provision, as you well know, expands in any way the authorities that credit unions are able to offer.
    I think that the reason that this, of course, comes to the forefront, the reason that it has been included in the bill is because the parity provision that was provided for the thrifts was then brought to bear for credit unions as well. And I think that this is appropriate because there is a burdensome nature to the registration as a broker dealer. When all you are going to be doing is basic safekeeping, serving as a depository, or holding of items that the credit unions are authorized to do. Credit unions that might buy a municipal bond and decide that they are going to hold it in their portfolio rather than having it held by another broker or safe keeper. Certainly there are some sweep account arrangements that credit unions do that are very basic de minimus type of activities that they are able to do that we just feel like it would be very burdensome for them to have to register as an SEC—with SEC as a broker dealer to be able to do that. But, this does not, you are correct, in anyway increase credit union authorities in any areas of investment services or brokerage services that they do not presently have the legal authority to offer.
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    Mrs. CAPITO. Okay. Thank you.
    And I would like to ask Ms. Buck the same question. I know you addressed this in your opening statement. In terms of disclosure or level of competency, do you see this having an impact?
    Ms. BUCK. No, it does not, Congresswoman Capito. We have, just in the last two years, updated all of our examination guidance on these kinds of activities so that they would be equivalent to what is provided in the national bank context and last year we updated our regulation applying to securities and record keeping requirements for entities that are engaged in these kind of activities, again, to make them consistent to those that apply in the bank context.
    We have a regular examination process. We examine every one of our institutions on anywhere from a 12 to 18 month basis, so we are taking look at the kinds of activities they are engaging in and making sure that they are complying with laws. So, I do not see any diminution of customer protections in these activities.
    Mrs. CAPITO. Thank you.
    I would like to ask Ms. Lattimore along the same lines. Do State Regulators oversee this investment advisor activities in terms of competency and disclosure? Do you have any role in that?
    Ms. LATTIMORE. We do. We oversee all parts of the credit unions in every business that they are—and every investment that they are involved in. But, as Mr. Dollar pointed out, the credit union's role is much more limited just by its very nature.
    Mrs. CAPITO. And I have one final question again for Governor Olson. There is a section that is related to insider lending. And, would you explain what the reporting requirements are and why they should be eliminated? My understanding is there is duplication, but if you could just explain it.
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    Mr. OLSON. Well, let me first talk about what they do not alter. They do not alter in any way any of the regulation provisions, and they do not alter any way any of the rules regarding insider lending. But, there are three separate reports that are required now, one of which is a report for loans by an executive offices of a bank from another bank in excess of the lending limit of that bank. Another involves loans that are made between reporting periods. And another involves the report that I cannot—I do not have the third one right in front of me, but I can find it for you real quickly if you would like.
    In each case they are reports that, in our judgment, do not contribute to or assist us in the enforcement of the insider lending provisions, but are simply additional reports that are required under the statute.
    Mrs. CAPITO. Thank you. I would say in the sense of the bill in terms of being common sense regulatory reforms, certainly in eliminating duplication is one of our goals here, but certainly not any kind of lessening of enforcement powers or in any of the areas that we have discussed today.
    Mr. OLSON. That is an important clarification. And this does not in any way reduce any of the impact of the insider lending laws, which we take very seriously.
    Mrs. CAPITO. Thank you.
    I have no further questions. Thank you.
    Chairman BACHUS. Thank you.
    Ms. Waters?
    Ms. WATERS. I thank you very much, Mr. Chairman. I am sorry that I could not be here for the entire hearing. But, I thank all of the representatives of the regulators that are here. I have a lot of questions. I cannot possibly ask them all. But, let me target a little in on payday lending.
    As you know, payday lending is a big concern of some of us who represent districts where these operations are proliferating. As I understand it at OCC you have some oversight when they are connected to a national bank. How do you feel about banks renting their charters or allowing their preemption privileges to be rented or purchased by payday lending? Should this practice continue or should we try and outlaw that practice all together?
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    Ms. WILLIAMS. Congresswoman, we have very, very strong feelings against the so-called rent-a-charter relationships that we have seen. We had four situations, not a whole lot, where we had national banks that entered into contractual arrangements with payday lenders. As a policy matter, those arrangements raised substantial concerns in the rent-a-charter category that you described. I think it is important to also emphasize that as a supervisory matter, the way in which those arrangements were actually being conducted, the way in which the banks were conducting their operations, the way in which customers were being treated pursuant to those arrangements, raised very, very substantial safety and soundness and compliance issues. We have taken consensual enforcement actions in all of those four cases, and there are no longer any national banks——
    Ms. WATERS. I appreciate that, but I do not have a lot of time. Should we outlaw the practice all together?
    Ms. WILLIAMS. I am not sure how you would specifically define a rent-a-charter arrangement; that might be challenging.
    Ms. WATERS. All right. Let me ask some of these payday loan operations have operations in more than one State.
    Ms. WILLIAMS. That is correct.
    Ms. WATERS. The definition of a national bank is a bank that has chapters or operations in more than one state.
    Ms. WILLIAMS. Not necessarily. We have many national banks that are located in multiple states, but we have many community national banks that are locally based.
    Ms. WATERS. If, in fact, we are not sure about whether or not we should outlaw the practice all together because it is hard to define, should we then preempt the states and take under supervision payday loans, particularly where they are interstate operations?
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    Ms. WILLIAMS. I think that raises the larger question of creating a federal standard with respect to payday lending, if I am understanding you correctly.
    Ms. WATERS. Yes.
    Ms. WILLIAMS. That in and of itself raises some issues, but that certainly would be one way to go at the problem.
    Ms. WATERS. Would you favor if we could do nothing else but disallow the practice of postdated checks in these transactions?
    Ms. WILLIAMS. I am not sure if I understand the——
    Ms. WATERS. When pay lenders operate in such a way that when they make these small loans they had to borrow, make out a postdated check for the interest and the principal. So, that if it is $100, as indicated in some of the information we have today, it would be $115. When they come back to repay it two weeks later, if they do not have that money they can roll it over, roll it over, roll it over and I am really interested in what we can do about interfering with the ability for these rollovers that increase the amount of the loan to sometimes 1,000 percent interest rates or something like that.
    Ms. WILLIAMS. I think that one of the areas where the abuses are most notable is where you have multiple rollover situations, and that would be one way to go at it. And, if you are focusing just on the use of the postdated check as the vehicle for the payday loan, I think one important thing to note here is that there can be different ways that one structures a payday loan product. I would not want to foreclose the possibility that you could have a small denomination loan product that would not be abusive.
    Ms. WATERS. Would you favor putting a limit to the number of rollovers that could be done in one of these kinds of loans?
    Ms. WILLIAMS. When we looked at the characteristics of payday lending, we thought that would be one area that would be most promising to avoid abuses. Yes, Congresswoman.
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    Ms. WATERS. I am going to be looking for something in legislation that is going to deal with the abuses of the payday loan industry. And while your oversight is very limited to those national banks who rent their charters, I certainly hope you would help to give us some assistance and leadership to do something about this terrible practice.
    Ms. WILLIAMS. I think probably all of the banking agencies would be very interested in providing what they know about how this affects their regulated institutions if you want to pursue that.
    Ms. WATERS. That is some help in the legislation. Thank you.
    Thank you very much, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Mr. Bereuter?
    Mr. BEREUTER. Thank you, Mr. Chairman. I want to thank the witnesses for their testimony today as we consider this important legislation.
    Prefatory to my questions, I want to say that I think that one of the reasons the stock market is doing so badly, one of the reasons are economic recovery is being delayed is because of lack of investor confidence. They are concerned about high profile abuses in corporate governance and they are concerned about abuses and incestuous relationships between the securities industry and the corporations whose stock they are attempting to advise their clients on.
    And, so, following up the kind of question that Ms. Capito asked to Chairman Dollar, I would like to pursue that area a bit with two other panel witnesses. First, Ms. Buck, the OTS supports Section 201, according to your testimony, which exempts thrifts from broker dealers and investment advisor registration requirements. How would the OTS oversee investment advisors' activities specifically regarding disclosure and level of competence?
    Ms. BUCK. As I was explaining, we have regular examinations that we conduct on 12 to 18-month basis. Initially when the institution or entity comes to us and either asks to engage in trust powers if it is an entity we already regulate, or if an institution or entity comes and want to obtain a thrift chart and wants to engage in trust activities, we look very closely at the competence of the individuals who will be running those operations and determine that they do have the ability both to manage the asset and to provide the necessary protections for the customers. In fact, there are times when we would not allow them to open until we are sure that they have those people on staff and ready to operate.
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    As far as the customer protection requirements are involved, we do look at these for compliance with our own regulations and our handbook requirements on assuring that customers understand that the individuals who are operating the thrift are disclosing any conflicts of interest and are conducting the other kinds of disclosures that are necessary for the customers.
    Mr. BEREUTER. Is the OTS prepared to exercise this regulatory authority very aggressively, especially in light of all the lack of consumer investor confidence?
    Ms. BUCK. Yes, we are. We have approximately 100 institutions right now that have trust powers and we have expanded both the number of examiners who are experienced in this and we have expanded our training in this area to make sure that we are fully capable of overseeing this activity.
    Mr. BEREUTER. Thank you.
    I would like to ask related questions to Administrator Lattimore. You support Section 313, which gives both federal and State chartered credit unions an exemption from broker dealer and investment advisory requirements. Why should we have the confidence in state-by-state quality of regulatory oversight?
    Ms. LATTIMORE. I do not know why there would be a lack of confidence. The state supervisors are very diligent in carrying out their duties. We have a responsibility to the citizens of our State to be sure that the financial institutions that we regulate are closely regulated. We take action when it is necessary. If such a new program were instituted we would carefully examine that program and, as Ms. Buck said, if they were—if we did not feel like the institution could offer the services we would not allow them to do it. But, I think State chartered credit unions are as well regulated as other credit unions. And, certainly the numbers prove that out.
    Mr. BEREUTER. Do you understand my point of view? I think it is representative of a lot of people that you have to pursue this very aggressively if you have this responsibility.
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    Ms. LATTIMORE. Yes, sir. And, we would take that responsibility very seriously. Our credit unions are owned by the members. That is what makes them very unique. And we cannot allow credit unions to offer anything to their own membership that owns them that is not completely on the up and up. So, the members would not stand for it. And, that would create real problems in the credit union, that is why we would ask to take it and would take it very seriously.
    Mr. BEREUTER. Thank you very much.
    Director Gee, I have an unrelated question. There are some 33 States that do not allow de novo interstate branching, I believe, something like that, 33 States. Yet, you say in your testimony we appreciate your revisiting the Riegle-Neal Act and we urge Congress to eliminate the disadvantage it is created for state banks because of inconsistent application of federal law. I am kind of surprised that that point of view is offered for you in behalf of the people you are representing today. Can you explain?
    Mr. GEE. Yes, Representative. Thank you for the question. As I commented in my remarks, and there is more detail in my written comments, the biggest problem is that the state charter is disadvantaged. Right now, federally chartered thrifts, federally chartered credit unions, largely national banks, can branch interstate. And, so, this puts the state charter, the State chartered bank at a disadvantage. They do not have the ability to do that in most states and, because of those interpretations of federal law and because of the application of federal law. And in many States they would like to have that ability especially community banks where they are on the border or near the border of another State to be able to branch across the State line. But, we see it as a charter disadvantage for the State charter and only for the State chartered bank, because virtually every other charter has the ability to engage in that activity across State lines.
    Mr. BEREUTER. It is a disadvantage. But, would you admit that some States are not in favor of de novo branch banking in general for any kind of institutions, federal or State chartered?
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    Mr. GEE. I would absolutely agree with you. The problem is, that because the other charters do have that ability it creates a disadvantage for our charter, for the state bank charter, and we do not like to see our State bank charters disadvantaged.
    Mr. BEREUTER. Mr. Chairman, thank you very much.
    Chairman BACHUS. See, I told you it was controversial. I told you that might be a controversial.
    Mr. Watt, the gentleman from North Carolina?
    Mr. WATT. Thank you, Mr. Chairman. And, I want to do two things preliminarily. First of all apologize to the witnesses for not being able to be here for all of your testimony. Unfortunately, I had to do something on the floor of the House and could not get here until I did. And, second, thank all of you for being here, particularly Ms. Lattimore who does such a find job in the State of North Carolina from whence I hail, and welcome her in particular, not that I am not welcoming everybody else too.
    Ms. Lattimore has put a couple of things on the table that I want to get reactions of other panel members to. The first one has to do with the desire of credit unions to do business loans to their members. And, I am wondering two things about that.
    Number one, Mr. Kroener, whether that would have any deposit insurance implications and if so, what they are.
    And the second thing I am wondering for anybody else on the panel who might have a position on it is whether there are any policy differences that would come into play, is that a good idea, if there is anybody on the panel who has a different perspective about whether it is a good idea as a policy perspective.
    So, Mr. Kroener, first deposit insurance implications. And, second, anybody who might have a different policy perspective.
    Mr. KROENER. I thank you for the question, Congressman Watt. From a deposit insurance perspective, we do not, at least any longer—I think we did in the 1940s—insure credit unions. We insure banks and theifts. So, you are talking about a group of institutions that the FDICC does not insure. So, any deposit insurance implications would be quite indirect instead of direct for that reason. There has been general concern among the institutions we insure about the competitive parity between banks, insured banks as a group and credit unions because of their different tax status. But, that would be quite remote, quite indirect. This would impact that competitive parity I think.
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    But, even those are quite remote from any implications from a deposit insurance standpoint. But, I defer to others on the panel if they care to add anything.
    Mr. DOLLAR. Congressman, if I might and the NCUA is the agency that insures federally insured credit unions.
    Mr. WATT. I got the wrong person to ask the question to, I am sorry.
    Mr. DOLLAR. That is quite all right.
    Mr. WATT. Sorry about that.
    Mr. DOLLAR. I whispered to Bill that he could kick it to me if he wanted to and I do not think he got my whisper. But, let me just say that we are of the belief that there needs to be more start up entrepreneurial capital in this country, not less. And there needs to be more access to it, not less. And we believe that credit unions are a viable source for small start up entrepreneurial capital. We call it member business lending. That is a distinction from commercial lending as we may know it in the traditional financial institutions.
    Mr. WATT. Where would you draw that line? I mean, how do you draw that line?
    Mr. DOLLAR. Well, Congress drew the line in 1998 when Congress said that anything below $50,000 did not have to count as a member business loan. We actually believe, though, that as the credit union community begins to extend itself more and more as it is into underserved communities, one of the advantages of the field of membership law that you passed in 1998 enabled credit unions to adopt underserved areas into their field of membership, which they have done by record numbers, over 40 million Americans living in underserved areas that were not eligible to join a credit union two years ago are now eligible to join. We think if those credit unions are going to really make a true difference in those communities they have to be more than merely an alternative to the payday lenders.
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    Mr. WATT. So, you think it is a good idea. I do not mean to rush you. I just want to make sure I get to the second——
    Mr. DOLLAR. I think it is a great idea.
    Mr. WATT. ——the policy side of this before I run out of time.
    Mr. DOLLAR. But, the one size fits all statute that you have in place which limits credit unions to 12.25 percent of their total assets in member business loans is thwarting many credit unions who would like to offer those small business start up loans.
    Mr. WATT. Okay. Does anybody have a response on the other policy issue?
    Mr. OLSON. Congressman, on behalf of the Federal Reserve Board, we have not taken a position on that issue.
    Mr. WATT. Has any of the regulators taken a position on it or they—you all want us to grapple with it? Okay.
    All right. Well, I thank you. I am just trying to figure out where people—the various regulators stand on these things. I appreciate it.
    I yield back.
    Chairman BACHUS. Instead of alternating, I am going to go to Ms. Maloney. She has been here quite some time and then I will——
    Mrs. MALONEY. I thank you, Mr. Chairman. And I have to mention your positive role in deposit reform. And I understand it is going to be on the floor next week. So, congratulations on your leadership on that.
    And I thank Mr. Bereuter on the help that we—the work we did together to make sure that banks pass credit with observed included in the bill.
    I want to thank the sponsors of this legislation for putting this package together. And I am very supportive of the bill and regulatory relief efforts in general, provided it does not endanger the safety and soundness of the financial system. And, I have a few brief questions about certain sections in the bill and I would like to ask each panelist to respond with their views as to whether these sections will in anyway affect safety and soundness.
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    I do want to make it clear that I supported the legislation last year and it is not my view that the bill negatively affects safety and soundness. However, I believe that it is very important to hear from the regulators and to have your points of view placed on record on this issue.
    First, Ms. Williams, Section 601 of the bill allows the OCC to adjust its mandatory examination schedule to concentrate examination resources on troubled or risking institutions. And what is the impact of this provision on safety and soundness?
    Ms. WILLIAMS. Just to clarify at the outset, it is not limited to the OCC; the flexibility would be available for all of the federal banking agencies. I would hope that the impact of the change would actually be to enhance safety and soundness. It is designed to accomplish that purpose. It would give the regulatory agencies a little more flexibility in scheduling their exams so that they can concentrate their resources on particularly troubled or risky institutions and institutions with emerging problems. None of us intend or envision that this would result in any substantial slippage in the exam schedules, but it will give us a little bit more flexibility in order to tailor where the exam resources are used in order to address the highest risks in the system. So, I think it would enhance safety and soundness.
    Mrs. MALONEY. Okay. Thank you.
    Chairman Dollar, I want to thank the credit unions for providing the financial services in many areas of districts that I have represented that had really no banks there, really. It was the only source of banking services, loans and so forth. But, I would like you to address the impact of Section 308, which repeals the requirement that groups of over 3,000 be spun off into new credit unions during mergers and the impact of Section 303, which relaxes some restrictions on credit union investments and what is this impact, if any, on safety and soundness?
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    Mr. DOLLAR. Let me start with the first one as it relates to the merger authority. In actuality I believe that it would have an adverse effect upon safety and soundness if you have two credit unions that sought to merge and we were to intervene regulatorily to say that before you can merge you have to spin off one of your larger groups because they might or might not be viable enough to charter a credit union on their own. They had already made the business decision to affiliate with the existing credit union that is being merged. So, actually the present situation, which requires us to evaluate the possibility of a spin off has potentially more adverse safety and soundness ramifications than it would with what the bill has provided and that is to say that a spin-off of a group is not required.
    From the safety and soundness perspective as it relates to investment authorities, the investment authority basically that we are looking for and that the language of Section 303 provides is very strictly drawn, very conservative in nature, very consistent with the types of investments that credit unions presently are authorized to make. The only thing we are asking is if some of the investments that have proven to be very conservative and workable at the state level be also authorized for federally chartered credit unions.
    Mrs. MALONEY. Thank you.
    Thank you and my time is almost up, but Governor Olson, Section 404 raises the restriction on the size of institutions that can have common management officials and are you confident that this will not lead to business loans to bank insiders that could endanger safety and soundness?
    Mr. OLSON. Congresswoman, there was a provision put in the law in 1978 allowing for overlapping directors only in standard metropolitan areas, MSA's, where the institutions were very small. And it addressed the issue of small banks being able to attract directors who would be helpful to them in the management of that institution. $20 million was the figure that was put in in 1978, we are suggesting $100 million at this point. If we raise it every 25 years or so, which is what the request would be, we think an appropriate level would be to go to $100 million at this point.
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    Mrs. MALONEY. Thank you very much. My time is up.
    Chairman BACHUS. Thank you.
    Mr. Sherman?
    Mr. SHERMAN. Thank you.
    Mr. Dollar, during the consideration of the regulatory relief at the full committee last year, Representative Nye and myself offered an amendment dealing with supplemental capital. And this would have allowed credit unions to apply secondary capital to their net worth for purposes of meeting the minimum net worth ratio requirements mandated by the prompt corrective action regulations. This supplemental capital would be similar to that available by banks, to banks, rather, by the Office of Comptroller of the Currency in determining the definitions of capital. It is allowed to low income credit unions. They can get supplemental capital. I would like to know whether you think that this is an effective way of allowing credit unions to service their existing customers and accept new customers and whether there has been any problem with the use of supplemental capital by low-income credit unions?
    Mr. DOLLAR. Thank you, Congressman. Indeed, as you are aware, Congress in 1998, when you passed the Credit Union Membership Access Act defined in the prompt correction action section of the law, what can count as net worth for credit unions, which was retained earnings only. That was a public policy decision that Congress made at that time. It has been suggested by some credit unions, particularly those that, as a result of deposit growth, may be bumping against some of those prompt corrective action guidelines that an alternative for an additional buffer might be secondary capital.
    Certainly, as the regulator who is responsible for protecting the share insurance fund, which is the buffer against the taxpayers and when net worth is the buffer against the share insurance fund, anything that might provide an additional buffer we would be more than willing to sit down with the committee and work on.
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    But, I am sure that you are aware that the concept of secondary capital for credit unions is quite controversial, both within the credit union community and outside the credit union community. There are issues that we would have to address that we would be willing to work with you on, such as should it be limited to only members of credit unions or could non-members be able to purchase this subordinated debt? Can you restrict one credit union who receives supplemental capital from being able to then deposit in another institution's supplemental capital where you might have one credit union take the same a million dollars, deposit it in this one, then this one deposits in this one and 25 credit unions pass around the same million dollars, all of them counting it in their net worth. There are issues that would have to be addressed.
    Mr. SHERMAN. That we would clearly—since it is quite possible that we will reintroduce an amendment this year, I would hope that your office would provide us with language that might solve that problem.
    Mr. DOLLAR. We would be glad to work with you. If you and the Congress are interested in pursuing this public policy decision of reexamining PCA in this regard, we would be glad to work with you. And may I just quickly say that if we are going to look at reexamining PCA, one of the issues we may want to look at is whether or not PCA should be made risk based instead of based upon total assets as it presently is. Prior to 1998, credit unions reserved based upon their risk assets, not their total assets. One of the reasons credit unions are bumping against the PCA one-size-fits-all target is because it is based upon total assets rather than risk assets. In a risk-based safety and soundness structure, risk-based assets should be the denominator.
    Mr. SHERMAN. That would be more sophisticated. We now have low-income credit unions accepting supplemental capital.
    Mr. DOLLAR. That is correct.
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    Mr. SHERMAN. I am not aware of any of the low-income credit unions getting together and passing around the same million dollars, although it would be good to plug that theoretical loophole. Have you discovered any problems with supplemental capital usage by the low-income credit unions?
    Mr. DOLLAR. Frankly, there are many low-income credit unions, Congressman, that without supplemental capital would not be in operation today. It is essential for the establishment of the net worth that they need. However, at this stage, as you know, it is limited only to low income credit unions. But, there have not been any problems——
    Mr. SHERMAN. So, it has been priory positive, then you are not aware of any negatives?
    Mr. DOLLAR. There have not been any negatives that have not been manageable, Congressman.
    Mr. SHERMAN. Another approach to this would be lowering by 1 percent the required capital, make it more equivalent to other depository institutions. What is your view on that?
    Mr. DOLLAR. Well, there is no doubt that the credit union prompt corrective action, one-size-fits-all number is 1 percent higher than the other financial institutions. I personally think, rather than lowering that number, that, again, a better answer would be to calculate that percentage with a denominator of risk-based assets rather than total assets, then you would have many credit unions that would not fall into potential non-compliance.
    Mr. SHERMAN. Now, with risk-based asset structure, is there subjective decisions that would have to be made by your auditors and, or, is it simply well you are in the category of credit cards, your category of this kind of this kind of asset, credit card or auto loan or home loan. Is it just put it in the right box or is it evaluated loan by loan?
    Mr. DOLLAR. It would have to be done through regulation. And if you did authorize the prompt corrective action percentages for net worth to be calculated on risk-based assets, then we would have to come forward as a board and set that regulatory policy. But, everyone must understand that 7 percent capital in a credit union that has all U.S. Treasury securities is different than the one that has 30-year fixed rate mortgages. There is a difference in the risk portfolio in individual institutions. We would have to, by regulation, draft a proposal that weighted those risk factors. But, this has been done previously. It was the way that we did prior to 1998 by statute and it can be done again.
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    Mr. SHERMAN. So, you do have the staff resources to make and audit these more sophisticated decisions?
    Mr. DOLLAR. Indeed and to address it from what is our first priority of safety and soundness.
    Mr. SHERMAN. I wonder if Ms. Lattimore could comment on this as well?
    Ms. LATTIMORE. Yes, sir, I would be happy to on several issues. We have a lot of low-income credit unions in North Carolina. We probably have 20 CDCUS. I would say that probably all but one of them uses supplemental capital. It does not make good business sense to me to have a low income credit union have that ability, but not a healthy credit union, particularly when you are all in the same PCA box. The standards are not different for those when you put them in PCA. But, your suggestion of lowering from 7 percent, if you lowered it by 1 percent that would match the other financial institutions. That would only help in the percentage, it would not assist in anyway in the retained earnings being the only way to achieve net worth.
    Mr. SHERMAN. And, that was not so much a suggestion as a question. I would like to see credit unions with more capital, with more cushion and able—as far as I am concerned, since I know whose the taxpayers behind is ultimately behind all of this, my constituents would like as many different cushions of as many different sizes, shapes and colors as possible. And the fact that all credit unions do not have this cushion simply exposes taxpayers to more risk then they would face otherwise.
    I have concluded my questions.
    Chairman BACHUS. Thank you.
    General Counsel Kroener, we are attempting in Section Section 615 to address misrepresentations of FDIC deposit insurance coverage. And I know that you we are going to work with you on fine-tuning that section. But, would you briefly describe such misrepresentations, what they are today in the market? Also, what is the extent of your current enforcement abilities, first of all and then I will ask a follow-up on——
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    Mr. KROENER. Right. Let me start with the efforts we undertake. We do it just through monitoring market developments and through people reporting to us. We do become aware, in the course of our normal supervisory and regulatory activities of instances where institutions, that are, in fact, not insured banks, may be misrepresenting, particularly on the Internet—and this is a particularly recent development—that their products, in one way or another are insured products. Under existing law we refer those instances to appropriate U.S. Attorneys. In general we are talking about a violation of a criminal law here. We are not a criminal enforcement agency.
    Frequently these may be involved in jurisdictions that are outside the United States where we do not have the right kind of subpoena power. That describes the legal picture. As a practical matter, where we can find out who it is, we will contact them and seek to get them to discontinue the activity. And, in some instances then, in fact, in most instances where we can find out where it is coming from, which is not always the case, we have been successful in having that activity discontinued. As a legal matter, as I say, what we do is refer it to U.S. Attorneys and they may, depending upon how serious it is and what their priorities may be, they may or may not take action.
    Section 615, as it was proposed, I think is going to require a great deal of work with your staff because there is a mismatch. Right now our jurisdiction is over banks, not persons. The standard that is brought in there is a criminal standard of beyond a reasonable doubt, which is one we do not normally deal with. And, it may be difficult to get to something at the end of the day that we can really get comfortable with. It is worth the effort. I should add that on the pure misrepresentation side it is an area that falls into the FTC jurisdiction right now I believe.
    But, we are prepared to try to work with the staff to see where we can get on this.
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    Chairman BACHUS. Sure.
    Mr. KROENER. Or there might be other ways to approach the problem. As I say, just the straight going back and trying to discourage it has been, I think, reasonably successful in instances where you are not dealing with a remote jurisdiction that we cannot get to.
    Chairman BACHUS. Okay. The section before that, Section 614, concerns your enforcement actions against independent contractors like accountants.
    Mr. KROENER. Right.
    Chairman BACHUS. What problems have you encountered with independent contractors and how will this provision make your job easier? And it is my understanding that you are comfortable with Section 614?
    Mr. KROENER. Right. Yes, we are. Deputy Comptroller Williams, in fact, mentioned that in her oral statement, it is something that affects all the agencies. And, as she said, we have enforcement authority against a wide range of parties. But, for independent contractors, unlike all other parties, the standard is higher. It is a knowing and reckless standard and where, for example, you are dealing with accountants, there has been a concern and a reluctance to bring enforcement actions because of the facts of the higher standard. We have had some situations involving accountants, particularly in recent bank failures, where I think there has been some reluctance to bring enforcement actions because of this higher standard. And the section is intended to address that concern for all of the agencies, not just the FDICC.
    Chairman BACHUS. Chief Counsel Williams, anything you would like to add? Not suggesting that you do.
    Ms. WILLIAMS. No. I agree completely with what Bill just said.
    Chairman BACHUS. Sure. Okay.
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    And, I think my question will be for you, but it is on Section 101. That expands the eligibility of community banks for treatment as Subchapter S corporations. In addition to Section 101 we have got Section 110, which makes it easier for community banks with national bank charters to qualify for certain favorable tax treatment as limited liability companies. Now, both those, I believe, were suggested by the OCC. And, would you explain why you made those requests and that we include them in the present legislation, which we have now? I know easing the tax burden on community banks is commendable and I am sure that is part of it, so they can devote more of their resources to lending to the community. But, I would like your further response.
    Ms. WILLIAMS. I could not really say it too much better than that, Mr. Chairman. Both sections address issues that arise out of relatively old provisions in the National Bank Act that are not completely in sync with some of the flexibilities that are available today under modern corporate forms or, with respect to Section 101, the qualifying shares requirement, the fact that you can reflect the director's interest in the institution in ways other than the typical stock in the institution. And, so, the changes are designed to modernize the law. The burden relief, I think, will be primarily felt by community national banks. And, we are very comfortable that there are not any negative safety and soundness implications with these changes.
    Chairman BACHUS. Thank you. Okay.
    My last question is for Governor Olson. Section 501 amends some cross marketing restrictions that were imposed by Gramm-Leach-Bliley. How would this change current law and practice and will it expand the ability of financial holding companies or their subsidiaries or affiliates to engage in otherwise prohibited commercial activities? Will it expand their merchant banking authority?
    Mr. OLSON. To the last two questions, no. But, let me address your question in reverse order. It does not expand the merchant banking authority. But, there are different provision's within the merchant banking section for an insurance company as opposed to a bank. There is an exception that is now provided for insurance companies that hold stock in companies in their merchant banking portfolio. It is a very limited exception involving statement stuffers and use of the Internet. What we are suggesting is that same provision ought to be allowed for banks. But, it does not, beyond that, broaden in any way the cross marketing provisions and it does not limit in any way the anti-tying provisions either.
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    Chairman BACHUS. So, it tries to eliminate a competitive disadvantage that you might have——
    Mr. OLSON. That is correct.
    Chairman BACHUS. ——with anti——
    Mr. OLSON. And our recommendation includes one more change where the bank, in its merchant banking portfolio does not have a controlling interest, it eliminates the prohibition of cross marketing where control is not at issue.
    Chairman BACHUS. So, it gives parity between——
    Mr. OLSON. That is true.
    Chairman BACHUS. Okay.
    Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman. Again, my apology to you and the panel. I just have to be at another hearing.
    Chairman BACHUS. And, let me say in the defense of all the members, we have briefings this morning again on Iraq. As I am sure to most of you all, some of the reports are very disturbing about Iraqi soldiers basically violating the Geneva Convention in all sorts of ways using civilians as human shields, dressing in coalition uniforms, offering to a surrender and then executing ambushes. And, apparently, some of the latest activity is setting up and firing from schools with children there. So, that obviously is a distraction from this hearing.
    Mr. Sanders?
    Mr. SANDERS. Thank you, Mr. Chairman.
    A couple of issues that I would like to pursue, the first issue, going back to my opening statement is that in recent years, as all of you will concur with, I think, and if you do not, please tell me, there are fewer, as a result of a lot of mergers, there are fewer and fewer banks and they are, in many instances, larger and larger. The phenomenon of too big to fail is something that interests me very much because I think it has huge potential danger for the taxpayers of this country. If a decision is made that a bank is about to fail and it is the economic implications of that are such that it would be a huge disaster for the economy, then what people here in Congress would say, well, we are not happy about it, but we have to bail it out because it will be less painful, less onerous to bail them out then allow them to fail.
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    But, you have that potential when you have banks that reach huge size.
    So, Mr. Olson, if I may start off when you and anyone else who wants to pipe in on this, please do. In your judgment, how many banks do we have in this country that, in fact, are too big to fail? Is Citigroup too big to fail? Is Bank of America too big to fail? Is JP Morgan Chase too big to fail?
    Mr. OLSON. Zero. There are no banks in this country that are too big to fail. You are on a subject that I feel very strongly about and I have looked at very carefully. I began most of my banking career as a community banker, although I did work for a large banking organization. During the deliberations on FDICCIA, during which the Congress directed the regulators as to what our responsibilities are with respect to that issue, I do not see how any regulator could read the provisions of FDICCIA and have any feeling that there is any ambiguity in the directive that has been given to us by the Congress with respect to too big to fail.
    There is a provision in the FDICCIA legislation that would require a process that would go all the way to the president if we were to pursue it. But, I would say to you that one of the reasons that we have continuous supervision of our largest banking organizations is that we do not believe there should be and do not believe that there is a too big to fail policy.
    Mr. SANDERS. Let me just—I am glad to hear that. I am not sure that I agree with you.
    Mr. OLSON. Well, can I——
    Mr. SANDERS. Let me just ask you this——
    Mr. OLSON. Okay.
    Mr. SANDERS. Several years before the S&L fiasco, which costs us what, several hundred billion dollars, the taxpayers?
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    Mr. OLSON. It is a large number, you are right.
    Mr. SANDERS. Okay. Might it not have been possible that somebody sitting over your chair would have said the same thing in response to a question from up here? Now, for example, we can all understand that this is a very unstable international economy. I do not think there is any doubt about that. You have got war. You have got terrorism. You got all kinds of strange economic things happening all over the world. Now, what happens if a bank like Citigroup, which has huge foreign investments, suddenly started losing their shirt? What you are telling the chairman and myself, now that you have not the slightest doubt that Citigroup, you know, the airlines are running in here for their welfare payments right now. But, you are absolutely assured that CitiGroup and JP Morgan will never come in here and say, look, if you do not bail us out these are the ramifications. And, you better bail us out because it will be worse if you do not.
    Mr. OLSON. I cannot tell you what they will do. But, what I can tell you is what we will do. Because you have given us a very specific directive in the prompt corrective action that we do not have in this policy is too big to fail. We do not have in this country a too big to fail policy. I do not see how you can read the prompt corrective actions provisions and have any other—if you are a regulator, and have a sense that we have any other policy at work in this country.
    Mr. SANDERS. But let me, in English, for the three people that might be watching this on closed circuit television, what you are saying, and I am not sure that I agree with you, is that the chairman and I need not worry that there will be a hearing at some day lined up with all of the big banking executives begging for their welfare payments and telling us what will happen if the taxpayers do not bail them out? You are absolutely assuring us that they will never come?
    Mr. OLSON. Well, now you have just changed the question.
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    Mr. SANDERS. Not really.
    Mr. OLSON. Because what you have asked me now is will the chairman hold a hearing where the banks will be invited——
    Mr. SANDERS. Well, no, let's not play with words.
    Mr. OLSON. Okay.
    Mr. SANDERS. You know what I mean. Are the taxpayers going to be held liable for these huge mergers, which have enormous potential dangers?
    Mr. OLSON. I can say to you with absolute full confidence that we do not have a too big to fail policy with respect to large banks.
    Mr. SANDERS. But, you are not answering my question. You may not have that policy. Now, you are acting like a lawyer here. Are you a lawyer, sir?
    Mr. OLSON. By the grace of God I am not burdened with a law degree.
    Mr. SANDERS. All right, then do not sound like one. All right. You are telling me—I am asking you about the danger——
    Mr. OLSON. Yes.
    Mr. SANDERS. Are you telling me, in your judgment, there is no danger that taxpayers in this country will be held liable when banks become so big that if they fail the economic implications are so huge that it makes sense for the government to bail them out?
    Mr. OLSON. The reason I think there is—I cannot tell you with that sort of specificity. And the reason I cannot is there is a provision in the bill that does allow for a too big to fail. But, that is only—that would involve all the regulators, it would involve the Secretary of Treasury and it would involve the President of the United States. And I believe that the reasons that that provision is in the bill and it would require that sort of complexity is because the direction that the Congress has given to the regulators is not to have a too big to fail policy.
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    Now, I think there is a difference between today and the time to which you referred to the thrift industry problems of the early 1980s. My association with this issue goes back to the early 1980s with Continental Illinois. There is an all-together different regulatory environment, post FIRREA and FDICCIA. And, so, I think we have been given very specific instruction. And I share your concern. And I applaud you for brining it up.
    Mr. SANDERS. You share my concern. Boy, that sort of popped up. I thought you did not share my concern. Do you share my concerns or do you not share my concerns.
    Mr. OLSON. No, our concerns are the same——
    Chairman BACHUS. He said that he had concerns, but not—I think what he was saying is he feels those institutions are sound at this time.
    Mr. SANDERS. Well, I am not arguing that. But, we are worrying about in an unstable, as you know, Mr. Chairman, it is a very volatile world out there. I assure you the airline industry five years ago probably felt pretty good too.
    All right. Let me go on to another.
    Mr. KROENER. Mr. Sanders, if I could please?
    Mr. SANDERS. Yes, please.
    Mr. KROENER. Bill Kroener from the FDICC. First of all, let me say that I agree with everything that Governor Olson has said on this subject. I just wanted to add that to the extent there is a macro concern about going through resources in the insurance fund and ultimately reaching the taxpayers, one of the ways that that can be mitigated and this Congress can mitigate that, is with the deposit insurance reform proposal that I guess is going to the floor next week we now understand, because it would merge the funds and give us more flexibility to deal with your concerns. And I would call that to your attention and suggest that that is one way of responding to the concerns.
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    Mr. SANDERS. I understand that. But, you will, perhaps, disagree with me or not, but in the event of a real financial calamity there may not be enough money in those funds to do what has to be done and there be a necessity of going to taxpayers. Is that true or not?
    Mr. KROENER. I agree with the prior discussion with Governor Olson that you had—yes.
    Mr. SANDERS. Let me change subjects, if I might, Mr. Chairman.
    Chairman BACHUS. And I would remind—you know, this hearing is not on FDICCIA. It is on a limited bill——
    Mr. SANDERS. No, I do understand that.
    Chairman BACHUS. ——on reg relief, so it really is not the subject matter of this hearing. But, it is a concern.
    Mr. SANDERS. And it touches in the sense that we——
    Chairman BACHUS. ——and I know you are addressing it.
    Mr. SANDERS. Because it——
    Chairman BACHUS. This legislation is not——
    Mr. SANDERS. No, I know. It is not 100 percent——
    Chairman BACHUS. Except in that it will—and I think that it has such broad bipartisan support it will relieve some unnecessary regulatory burdens, which will strengthen all our institutions and be good for our economy.
    Mr. SANDERS. If I might, Mr. Chairman, because, again, going back to the implications of mergers and I think too big to fail is one. Let me touch on another one that concerns me. And, I do not know about you, Mr. Chairman, but I hear from constituents fairly often on this, and that is the issue of banking fees. When people have an account at a bank. My question is, let me start off with the easy one. I am assuming people disagree with me if you might, if you want, my assumption is that bank fees have gone up in the last five to 10 years. Does anyone disagree with that?
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    As they say for the record, Mr. Chairman, I do not see anyone jumping up and down and saying they disagree with this. I am taking that as a yes.
    In terms of bank consolidation why should the average person, who is paying more for bank fees? And, in some instances really getting ripped off, if I might say so. Why would they want to see banks become larger, less competition and be forced to pay more in fees? Why is that a good thing Ms. Williams?
    Ms. WILLIAMS. Congressman, I think that what you are raising is a very complicated issue. What we have seen evolving in the banking industry over the period of time that you are describing is more large institutions, but also many very healthy and competitive community-based institutions. And, in fact, in many situations in many markets, what we have seen is that consolidation has actually created opportunities for new banks to be chartered and for banks that have a more local orientation, a more specialized orientation to operate. So, I think that customers of financial institutions today have more choices. There may be certain institutions that have had fees that have been increased, but there are other institutions that compete very effectively by promoting the fact that they have lower fees then their competitors.
    Mr. SANDERS. Well, I am sure that in some parts of the country what you are saying is exactly true. But, would you not deny that with fewer numbers of banks that, in fact, in many communities, the majority of communities, there is less competition, not more. I am not going to say that is true in every instance, and that the result of that has been or at least one of the results of that has been higher fees for the average person?
    Ms. WILLIAMS. I am not in a position to say that that is across the board the case.
    Mr. SANDERS. Well, I am not saying it is across the board. But, I am saying in many instances——
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    Ms. WILLIAMS. I think the other thing to introduce here is that with the increased use of technology in the provision of financial services, individuals that are located in particular communities can do their banking very effectively with an out-of-market institution that offers them the best price. So, the mix here, I think is more complicated than just that consolidation means higher fees across the board.
    Chairman BACHUS. Mr. Sanders, actually we have run about seven minutes over, but I am going to allow——
    Mr. SANDERS. I am sorry.
    Chairman BACHUS. ——you one other question.
    Mr. SANDERS. Okay. Thanks. Thank you, Mr. Chairman.
    A question for anybody who might know something about the issue, I represent a lot of workers who are concerned about various aspects of the economy. In your judgment, would somebody want to comment, how has—my impression is that mergers in many ways are resulted in fewer number of employees, layoffs and in some instances cut backs in pension benefits. Have mergers—my impression is that mergers have not been a positive thing for workers in the banking industry. Will somebody comment on that? Am I right or am I wrong?
    Mr. OLSON. Congressman, I cannot speak to the pension benefits issue, because I do not have that information in front of me. But, there has been a reduction in the numbers of people employed in the banking industry. And, in part, I think it is because of the fact the banking industry is a mature industry. It is an industry that has not had the opportunity to grow laterally like a number of other industries have. And, as a result, as the banks have become increasingly efficient, largely through the opportunities available through technology, there has been a reduction in the numbers of jobs in the industry.
    Mr. SANDERS. So, the growth, mergers, technology has resulted in fewer employees?
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    Mr. OLSON. I could not break it down specifically as to the extent to which it has been merger related. But, certainly there is a great deal for efficiency, much of which is a result of the—well, it is a result of a number of things. It is the desire to become increasingly efficient——
    Mr. SANDERS. You are looking at it from the bank——
    Mr. OLSON. ——and the opportunities of technology.
    Mr. SANDERS. ——when you use the word efficiency, I use the word layoffs and workers who have lost decent jobs. And I understand where you are coming from. But, do not always look at it from one said.
    Mr. OLSON. Okay.
    Mr. SANDERS. Look at it from the worker who had a job for 20 years, no longer has a job. Okay.
    Okay, Mr. Chairman, thank you very much.
    Chairman BACHUS. This will conclude the hearing. I do want to make one general response to Mr. Sanders, just something for us all to think about. Twenty years ago if I wanted to bank I had to do it between the hours of 9:00 and 5:00. And I normally had to go anywhere from five to 15 miles to do it. Now, most of the transactions I want to do I can do within two blocks of where I am or four blocks from where I am. There are underserved areas. But, I can go to an ATM machine and quickly conduct my business and I pay a fee that did not exist 20 years ago, but certainly it saves me a lot of time and effort. So, in that regard, technology has certainly opened up our opportunity and the locations for banking.
    One thing that Mr. Dollar has said, and I would agree with him, is that we all go into certain communities where we see loan title shops, we see payday lenders, we see check cashers, we see pawn shops. And we are trying to find ways to give those people alternatives through both the provision in the FDICC for people with low income to have basically check free services, and some to reduce their fees, and also to allow our institutions to meet some of those that are underserved. In that area, I would agree that we have more work to be done. But, I think the way to eliminate payday lenders, is to offer an alternative to those people.
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    Thank you.
    I appreciate the professional manner in which you all have responded to questions and given your testimony. And I ask unanimous consent to enter into the record statements that the subcommittee regards concerning this hearing. If there no other business before the committee, the committee is adjourned and the panel is discharged.
    [Whereupon, at 12:21 p.m., the subcommittee was adjourned.]