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Wednesday, May 12, 2004
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 10:02 a.m., in Room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.
    Present: Representatives Bachus, Baker, Gillmor, Biggert, Hensarling, Garrett, Brown-Waite, Barrett, Sanders, Maloney, Watt, Sherman, Meeks, Moore, Waters, Carson, Hinojosa, and Lucas of Kentucky.
    Chairman BACHUS. [Presiding.] Good morning. The subcommittee will come to order.
    Today's hearing was requested by Congressman Hensarling. We will focus on how to strengthen and preserve the important role that small banks serve in the communities by reducing the burdens imposed on those institutions by outdated and unnecessary regulatory requirements.
    Among those testifying at the hearing will be Treasury Assistant Secretary Wayne Abernathy, Federal Deposit Insurance Corporation Vice Chairman John Reich, North Carolina Banking Commissioner Joseph A. Smith, on behalf of the Conference of State Banking Supervisors; and a number of industry and consumer group witnesses.
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    For generations, community-based banks have been the financial underpinning for millions of consumers, small businesses, family farms, local merchants and rural economies throughout the United States. Community-based banks form the building blocks of our nation's communities by providing credit to all geographic regions of the country. They have contributed substantially to the stability and growth of each of the 50 states by facilitating a decentralized source of lending. This dispersion of our nation's assets and investments helps preserve the safety, soundness, fairness and stability of our entire financial system.
    Community banks are often the linchpin to the survival and well being of local communities, particularly small towns in rural America. They specialize in doing business in their respective cities and towns and reinvest their deposits into these communities through local lending. Currently, more than 8,700 community banks with almost $2.3 trillion in assets continue in the tradition of giving back to their local communities through nearly 40,000 banking offices. Annually, community banks have made more than $3 billion in loans to small businesses, totaling over $275 billion and 720,500 loans to small farms, totaling more than $37 billion.
    Recently, I introduced H.R. 591, which recognizes the importance of small banks in developing our communities and the nation as a whole, and designates April as Community Banking Month. I am hopeful this legislation will be considered on the House floor soon. Although small banks have been prosperous in recent years, they face a disproportionate regulatory burden in relation to their large bank counterparts. When a new regulation is created or an old regulation is changed, small institutions must devote a large percentage of the staff's time to review the regulation to determine if and how it will affect them.
    In addition, compliance with the regulation can take large amounts of time that cannot be devoted to serving customers or business planning. Easing the regulatory burdens on small banks frees up more of the bank's resources for loans to small businesses and creditworthy borrowers, helping to promote economic growth and greater consumer choice.
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    In closing, I would like to thank Mr. Hensarling for working with us on this hearing. Congressman Hensarling recently introduced H.R. 3952, the Promoting Community Investment Act, which would require the banking regulators to give banks with less than $1 billion in assets the streamlined exam for compliance with the Community Reinvestment Act. Currently, streamlined CRA exams are limited to banks with less than $250 million in assets. This is just one example of Mr. Hensarling's strong commitment to issues affecting community banks.
    I see Mr. Baker here. Mr. Baker has also made some significant proposals concerning deregulation.
    The Chair now recognizes the Ranking Member of the subcommittee, Mr. Sanders, for any opening statement that he wishes to make.
    [The prepared statement of Hon. Spencer Bachus can be found on page 52 in the appendix.]
    Mr. SANDERS. Thank you, Mr. Chairman.
    As a strong supporter of community banks and of credit unions, one of the concerns that I have, and Mr. Chairman, one of the issues that we might want to be addressing is to try to understand why throughout America and in my own State of Vermont, there are fewer and fewer community banks. One of the, in my view, very dangerous trends that is taking place within the financial services industry, as well as virtually every other industry in America, is that fewer and fewer large often multinational institutions are controlling those industries. The smaller guys, the people like community banks who know the folks in their neighborhood, who trust people, who have good working relationships, they are dissolving all over America. I think that that is a bad trend.
    One of the topics that will be raised at this hearing will be an attempt to weaken Community Reinvestment Act requirements for mid-sized banks. Banking regulators have already proposed a regulation to substantially reduce CRA requirements for 1,100 mid-size banks with assets of $250 million to $500 million, and legislation has been introduced to weaken CRA requirements for banks even further. If the proposed regulations go into effect and this legislation is signed into law, fewer people will realize the dream of homeownership; fewer small businesses will get off the ground; fewer jobs will be created; and fewer neighborhoods will be rebuilt. We must allow that to happen.
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    Mr. Chairman, CRA is making homeownership accessible to more Americans. It is helping to start small businesses and create decent-paying jobs. It is responsible for over $1 trillion in loans in low- and moderate-income communities. In my view the Community Reinvestment Act must be strengthened, and not weakened.
    Mr. Chairman, I understand the focus of this hearing is to provide regulatory relief to community banks. I happen to believe that we need more small banks and credit unions, not fewer. I have met with community bankers, as well as credit unions in the State of Vermont, and I believe that they are doing a very good job. For example, they tell me that they are not pulling bait-and-switch credit card interest rate scams like many big banks are doing in this country. The reason it is important to have community banks, the reason it is important to have credit unions is that all over this country, people are being ripped off by large banks that are charging excessive fees, and extraordinarily high interest rates. That is why we need more community banks, not fewer.
    But unfortunately, the massive deregulation of the banking industry over the past 2 decades has led to fewer and fewer small banks. This has been a disaster for consumers who have seen higher credit card interest rates and bank fees as a result. Mr. Chairman, according to a 2002 Federal Reserve study published in 2002 entitled Whither the Community Bank, ''the number of small community banks with assets of less than $100 million has fallen from around 11,000 banks in 1980 to less than 5,000 today. About 55 percent of the bank mergers during the past two decades combined two community banks. These mergers would not have been possible without the repeal of federal and State banking regulations that historically restricted the size and geographic mobility of U.S. banks.''
    Mr. Chairman, I am concerned that providing more regulatory relief in this instance could lead to even fewer small banks. Mr. Chairman, the issue you are touching upon today is important, but our goal must be to strengthen community banks, allow for diversity all over this country, and not to see fewer and fewer large institutions.
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    Thank you.
    Chairman BACHUS. Thank you, Mr. Sanders.
    Chairman Baker?
    Mr. BAKER. Chairman Bachus, I want to commend you for your initiative in calling this hearing and your leadership in the past on seeking regulatory relief through the Congress for community institutions. I also want to say a word about Mr. Hensarling's efforts and introduction of his own legislation and his initiatives in trying to bring additional relief to a critical part of our economy.
    It is a clear fact that America is a nation of small businesses. Some testimony I read from this morning's presentation of witnesses indicates that 75 percent of all new jobs created in America come from companies with less than 500 employees. Frankly, I thought it was more like 90 percent of employment opportunities were created by companies with less than 25 employees. Whatever the number, it is clearly established that mom-and-pops are the employment engine in America today. They are the entrepreneurs. They are the innovators. They are the folks who bring products to market that we have not seen before.
    Those folks do not get credit by going to Wall Street with their widget design. They start in small-town America; sit across the desk from the hometown banker who says, I have confidence in you, Joe; I am going to extend this credit to see how it works out.
    The reality is that we are losing significant numbers of those community banking opportunities, that business engine development opportunity. One of the contributors, I happen to believe, is the plethora of regulatory interventions required by the federal government. Since 1989, I was shocked to learn by either agency or congressional action, 801 new regulations required of community-based institutions. Even for a conscientious person doing the best they can with lots of resources, that is a lot of change to absorb.
    Second, as Mr. Sanders pointed out in his statement, we have gone from 11,780 institutions in 1989 to 4,390 defined as community banking institutions by 2003. That is a problem. Anyone concerned about concentration of economic assets in a handful of very large institutions has got to be troubled by these developments. These concerns must be addressed. The question I raise is, of course, where do we go? On March 17, Chairman Bachus authored a letter to the various federal regulators concerning the regulatory burden surrounding CRA, a letter which I cosigned with the Chairman because I believe that his request was certainly more than appropriate.
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    But rather than zero in solely on asset size, isn't what Mr. Sanders raised in his concerns this morning about inappropriate conduct and where credit is deployed really the key? Shouldn't we develop innovative ways to measure community institution performance, the percentage of loans that go to small businesses, the percentage of loans within a geographic area, the percentage of loans to low-income individuals, the percentage of loans held in portfolio because loans held in portfolio are generally nonconforming loans that cannot be sold off to the secondary market because there is some unique asset to that lending requirement that the banker thinks is good to extend the credit, but does not meet the cookie-cutter approach of Wall Street.
    We have to get away from that. I suggest that providing regulatory relief after, not in front of, but after someone has demonstrated their extending credit to small business in their community, especially to low-income people and holding loans in portfolio might be the beginning of a measurement screen that enables this number of banks to go up instead of down. If we are in the middle of a jobless recovery, as some allege, I do not believe, this could be one change that might accelerate the growth of job opportunities.
    Mr. Chairman, I stand ready to vote for and support any measure which you develop which will provide meaningful relief for this important engine of economic recovery.
    Thank you. I yield back.
    Chairman BACHUS. Thank you, Mr. Baker.
    Mr. Sherman?
    Mr. SHERMAN. Thank you, Mr. Chairman. Thank you for holding these important hearings. I hope we persuade the other body to take a look at H.R. 1375, the good work of this committee. I think we should focus on the recent actions of the OCC in preempting all State consumer protection laws for the big national banks. First, this is a disaster for states rights. Second, it is a disaster for consumers. And third, it is a potential disaster for those banks that are not national banks, since it creates an unequal playing field and since it also allows those who want to evade state laws to tarnish the name of all banks in the community, because the average American really does not draw a distinction between national and state-chartered banks in evaluating whether banks are doing a good job for our community.
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    When the 5 o'clock news is out there, to talk to a woman who has lost her home due to practices that the State legislature tried to protect her from, and where a runaway federal agency decided she should lose her home and should be subject to the very practices that a State tried to prohibit, when that 5 o'clock news appears, the public is not going to say, oh, but that was an OCC-regulated bank. Instead, your State legislatures are going to pass even more consumer protection laws, some of which may be ill-advised, which again will only affect those that are state-chartered, thus driving a consolidation, driving a migration to the national charter, and achieving what may be the purpose of the OCC, and that is to expand its regulatory market share.
    So I look forward to us not only providing reasonable regulatory relief, but also make sure that when national standards are called for, they are the standards voted on democratically in this committee and in this House. And that they therefore apply to all banks, whether you have the national charter or the State charter, rather than a runaway agency providing a special benefit to only a segment of the banking industry, and in particular the segment that in general competes with the community bankers represented here.
    I yield back.
    Chairman BACHUS. Thank you, Mr. Sherman.
    Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman. Thank you for holding this very important hearing.
    Nearly every community throughout America is served by at least one small locally based and usually locally owned bank, which focuses on meeting the financial needs of the citizens living and working within that community. They are built on personal contact, communities ties and close lender-borrower relationships. They are often the economic lifeblood of rural America.
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    Chairman Alan Greenspan has called them, ''one of the jewels of the international financial system,'' because of their uniqueness. They are our nation's community banks. They create jobs and hope and opportunity, and they are threatened. In 1984, we had approximately 11,000 community banks. Today, the number is roughly half that.
    One has to ask why. Now, if banking customers within a competitive marketplace are simply deciding through their free will they no longer want or need community banks, then we should not interfere. However, I fear that it is our interference in the first place which is helping cause the decline. When you ask community bankers what is the main obstacle they face in surviving and/or thriving, the answer is almost always the same: overly burdensome, costly and time-consuming federal regulations. Currency transaction reports, know-your-customer requirements, reg D, reg C, Community Reinvestment Act, Privacy Act notices, reg Z, and the list goes on and on.
    The federal regulatory burden on smaller banks can be significantly disproportionate to their larger counterparts, especially for institutions with branches located in rural and more scarcely populated areas. This is mainly because the compliance costs for banks of all sizes contain a significant fixed cost component that all banks have to pay. These fixed costs will come out of a much smaller revenue base in a small bank. Larger regional or national banks can spread these costs out over a much larger revenue base.
    I am convinced that action is needed to remove some of the restrictions on community banks and permit them to operate in a manner that preserves more resources for creating jobs, saving farms and serving their communities. When bankers tell me that they spend $300,000 per year on non-safety and soundness compliance alone, it is time that we take a hard look at their regulatory burden.
    When I hear that two-thirds of many banks's total compliance costs are not even related to the safety and soundness of the institution, it is time we take a hard look at their regulatory burden. When community bank employees can spend more than 31,000 hours per year on compliance matters alone, it is time we take a hard look at their regulatory burden. When approximately one out of every four dollars goes to regulatory compliance for the average small bank, it is time we take a hard look at the regulatory burden.
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    So I believe it is imperative that Congress continue to examine the regulations that banks are forced to comply with, and act to remove or restructure antiquated and outdated regulations that stifle lending opportunities for banks working to serve their communities.
    In many cases, the most burdensome of these regulations is the Community Reinvestment Act or CRA, which is why Chairman Baker and I have introduced legislation that would allow banks with less than $1 billion in assets to participate in a streamlined small bank CRA exam. $1 billion in assets appears to be the industry standard as well as the cut-off for the Federal Reserve.
    Today, American consumers at all income levels have access to great credit products, great credit availability at low cost. We need to keep this phenomena alive, but excess regulation is harming that. So I look forward to working with you, Chairman Bachus, Chairman Oxley and Chairman Baker, as well as other members of this committee to address these issues.
    Thank you.
    [The prepared statement of Hon. Jeb Hensarling can be found on page 57 in the appendix.]
    Chairman BACHUS. Thank you.
    Mr. Lucas?
    Mr. LUCAS OF KENTUCKY. Mr. Chairman, I look forward to hearing from our witnesses.
    Chairman BACHUS. Thank you.
    Mr. Garrett?
    Mr. GARRETT. Likewise, Mr. Chairman. I look forward to the testimony. Good to see you again, Mr. Abernathy. I commend you on holding these hearings.
    The point that I will be interested to see at the end of the day is to what end as far as all the regulations that we have had, in the business world I guess it would be a cost-benefit analysis as to what has occurred over the years. From what I hear back at home, and what I hear in previous hearings, it has been a negative impact. I commend my colleague figuratively, but not literally, to my left, Mr. Hensarling, as far as the legislation he has put in play with regard to community bankers. What I am hearing back at home is that there is a negative impact, so I will be interested to see whether we can refute that or whether we can address that.
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    Also, in the hearings that we have heard to date in other committees and other subcommittees's hearing on money laundering and terrorism and those areas, the concern was the plethora of information that is coming into Washington today from all sources, financial and otherwise, that is just something that they just cannot keep up with. It goes back to the days prior to the PATRIOT Act with the $10,000 reports and now with the PATRIOT Act and others as well. They just literally cannot keep up with the information. So at the end, it is a question of to what end are some of these regulations that we have put in place; maybe it is doing, quite honestly, as Jeb's bill is saying, more harm than good both to an industry that is suffering under the weight of the burden and from our intelligence community as well, from the deluge of information that they really just cannot do anything with anymore.
    So I appreciate your testimony today. Thank you.
    Chairman BACHUS. Thank you.
    If there are no more opening statements, we will go to our first panel. I have been told there are no more opening statements.
    At this time, we will introduce our first panel. Our first panel, and I will introduce from my left to right, we have an esteemed first panel. Wayne A. Abernathy was sworn in as Treasury Assistant Secretary for Financial Institutions on December 2, 2002; nominated by President Bush on August 1, 2002 and confirmed by the Senate in November of that year. He brings more than 20 years of financial policy expertise to the position. He most recently served as the Republican Staff Director of the U. S. Senate Committee on Banking, Housing and Urban Affairs, where he also served as committee Staff Director to Chairman Phil Gramm from 1999 to 2001. I am sure you probably worked with Mr. Hensarling in that position.
    His previous experience with the Senate Banking Committee includes serving as Staff Director of the Subcommittee on Securities. Prior to that, he was Republican economist for the committee. Prior to that, he worked as a Senior Legislative Assistant for Senator Gramm and as an economist for the Banking Committee Subcommittee on International Finance and Monetary Policy.
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    He earned his bachelor's degree from Johns Hopkins University, graduating with honors in 1980. He earned his master's in international economics, international law and organizations from Johns Hopkins.
    I welcome you, Mr. Secretary.
    Mr. John Reich became Vice Chairman of the FDIC board of directors on November 15, 2002. He served on the board since January of 2001. Following Chairman Donna Tanoue's resignation in July 2001, until Mr. Powell took office in August of 2001, he was Acting Chairman of the FDIC. He enjoyed a 23-year career as a community banker in Illinois and Florida, the last 10 years as President and CEO of the National Bank of Sarasota.
    Before that, he served for 12 years on the staff of U.S. Senator Connie Mack. From 1998 to 2000, he was Senator Mack's Chief of Staff. His substantial community service includes serving as chairman of the board of trustees of a public hospital in Fort Myers, Florida and chairman of the board of directors of the Sarasota Family YMCA.
    He holds a BS degree from Southern Illinois University and an MBA from the University of South Florida, and also is a graduate of Louisiana State University School of Banking of the South.
    We welcome you, Mr. Reich.
    Commissioner Smith is the North Carolina Commissioner of Banks, having been appointed in June 2002 to fill an unexpired firm of a retiring commissioner and was reappointed for a 4-year term in June 2003. Was that by Governor Easley?
    Mr. SMITH. Yes, sir.
    Chairman BACHUS. Okay. Prior to his appointment, Mr. Smith was counsel in the Washington office of the New York law firm of Thacher, Profitt and Wood, where he was a practitioner in the corporate and financial institutions practice group. Before moving to Washington, Mr. Smith served as general counsel and secretary of Centura Banks, now RBC Centura, in Rocky Mount, North Carolina, and engaged in the private practice of law in Raleigh.
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    A graduate of Davidson College and the University of Virginia Law School, he lives in Raleigh, North Carolina. He is married and has two grown sons. Any grandchildren yet?
    Mr. SMITH. None that I know of, sir.
    Chairman BACHUS. Okay. That is good.
    We very much look forward to your testimony. I think our tradition is to start with Mr. Abernathy. Is that right? Have you all agreed on a different order?
    Mr. ABERNATHY. We were flipping coins here for a while, but we only had a two-sided coin and it did not work out.
    Chairman BACHUS. Whoever is most anxious can go first.
    Secretary Abernathy?
    Mr. ABERNATHY. Thank you, Mr. Chairman. It is a pleasure to be here with you and the members of the subcommittee today. This is a very good opportunity to testify on the regulatory burden faced by community banking institutions.
    Small community banks and thrifts provide services that are greatly valued by their neighbors. I emphasize the word ''neighbors.'' Their longstanding focus on individual customer relationships and in-depth knowledge of local credit needs serve our nation's communities well.
    Of significant importance in achieving major goals set for us by President Bush, community bankers' expertise enables them to provide financial services to small businesses and hard-to-reach customers that might otherwise be overlooked. If we chose $1 billion in assets as the dividing line today between small banks and medium and large banks, the total number of small banks and thrifts declined from 1993 to year-end 2003 by almost one-third. Some have raised concerns about what these trends may mean for the future of community banking.
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    Fortunately, chartering activity in recent years demonstrates the vitality and attractiveness of community banking. According to the FDIC, there were over 1,200 new community banks and thrifts established since the beginning of 1992. Nearly all of these new institutions continue to serve their communities today.
    The profitability of small banks and thrifts has been relatively stable over the past decade as measured both by return on assets and return on equity. It is true that small depository institutions have lower returns on equity than larger institutions, but that is in large measure because smaller banks tend to have more equity and are therefore more strongly capitalized than are larger banks.
    Strong capital levels empower small banks to meet the particular and often unique business characteristics and credit needs of local households and the local businesses in their communities, while preserving the safety and soundness of the system.
    Though we have great confidence in the strength and vitality of small banks and thrifts, they continue to face challenges from a variety of sources. A significant challenge arises from the burden that regulations impose. Many regulatory requirements carry some degree of fixed costs, but these can weigh more heavily upon the comparatively smaller revenue base of community banks.
    To try to compensate for this imbalance, many of our laws, regulations and supervisory practices take into account differences between smaller and larger banking institutions in ways that help to mitigate potential competitive disadvantages. For example, banks and thrifts that have less than $250 million in assets are subject to a streamlined CRA test. Smaller depository institutions have more liberal access to Federal Home Loan Bank advances. At the end of last year, 2019 small banks and thrifts received the benefits of subchapter S corporation tax treatment, up from 604 institutions at year-end 1997.
    Still, we believe that more can and should be done to reduce burdensome regulations without compromising prudential concerns. This was reinforced by a recent call by President Bush that we should be sure that all federal, state and local regulations are absolutely necessary. An interagency task force under the direction of my colleague sitting next to me, FDIC Vice Chairman John Reich, has taken on this very important task. Last summer, the financial agencies published the first of a series of notices seeking feedback on three specific regulatory groups: applications and reporting, powers and activities, and international operations. In January of this year, a second notice was published requesting comment on consumer protection lending-related regulations.
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    This careful and comprehensive approach to the review of regulations could prove fruitful in identifying ways to reduce regulatory and compliance burdens on banks, especially on small banks, while also relieving corresponding strains on supervisory resources without sacrificing important supervisory objectives.
    Earlier this year, the banking agencies also issued a proposed rule that would make more community banks eligible for streamlined CRA examinations. Institutions with under $500 million in assets would be eligible for this streamlined test. The agencies estimate that the proposal would cut in half the number of institutions subject to the large retail institution test.
    Congress has joined this regulatory relief effort as well, moving forward several items of legislation. For example, the Treasury Department has consistently supported legislative proposals to repeal the prohibition on paying interest on business demand deposits. The House of Representatives has several times passed legislation that includes this repeal. Repeal would also benefit the nation's small businesses by allowing them to earn a positive return on their transaction balances.
    Depository institutions of all sizes face a heavy regulatory burden. This burden falls disproportionately on small banks and thrifts. The costs are ultimately passed on to banks, consumers and taxpayers. When regulatory burdens are excessive and fail to add net value, they take a toll on the competitiveness of our financial system and on overall economic efficiency. The Treasury Department encourages efforts by the banking agencies to reduce regulatory burdens on banks of all sizes, an effort that is likely to benefit community banks and their customers in particular. We stand ready to work with Congress to further these objectives.
    In closing, many have commented on the tremendous benefits we derive from our great dual banking system. When they do so, they usually refer to the dual system of state and national bank charters. But I think that we should include in that concept a vibrant, competitive array of banks of all sizes meeting the financial needs of our businesses and communities, which also come in all sizes, large and small. That is not only something worth preserving, it is something worth promoting.
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    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Wayne A. Abernathy can be found on page 61 in the appendix.]
    Chairman BACHUS. Thank you.
    Chairman Reich?
    Mr. REICH. Thank you, Mr. Chairman, for this opportunity to testify on a subject near and dear to my heart, the impact of regulatory burden on community banks.
    As a former community banker with 23 years experience, 12 years as a community bank CEO, I hope to elevate the concern of Congress over the future of small community banks in the United States. To summarize and characterize my message to you this morning, Mr. Chairman and members of the committee, the small community banks of America face an uncertain future and may be in danger of becoming an endangered species.
    Mr. Chairman, as you recently noted, community banks play a vital role in the economic well being of countless individuals, neighborhoods, businesses and organizations throughout our country, often serving as the lifeblood of our communities. I believe they are too important as sources of local credit and economic growth for us to sit idly by and watch them disappear due to the unintended consequences of past, present and future policy decisions, and also significantly due to the weight of accumulated regulatory burdens.
    Most people recognize the considerable consolidation in the banking industry that has taken place over the last 20 years, but not everyone fully appreciates the extent to which community banks have been rapidly disappearing from the scene. As chart one indicates, at year-end 1984 there were 11,780 banks and savings institutions with assets of less than $100 million. I am talking about small community banks, making up nearly 78 percent of all FDIC-insured institutions in 1984. By the end of last year, that number had dwindled to 4,390, making up only 48 percent of the total number of institutions in the United States.
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    Even more dramatically, as depicted in the next chart, the total market share of small community banks has declined from 9 percent, this is an inflation-adjusted number, in 1984 to 2 percent at the end of last year. The size of the community banking industry in the United States, the small community banks, represent less than 2 percent of all industry assets. By contrast, as shown in chart three, the share of industry assets attributable to the largest banks in the country, those with more than $10 billion in assets, of which there are 110 banks, went from 27 percent at year-end 1984 to 70 percent of total industry assets at the end of last year.
    It has been widely reported that the industry as a whole earned a record $120.6 billion last year, surpassing the previous record of the previous year of $105.1 billion set in 2002. But what is not often reported is the considerable disparity in earnings between the largest and the smallest institutions. It is indeed, as Chairman Don Powell of the FDIC recently said, a tale of two industries. Last year, the 110 largest banks with assets over $10 billion, which represent only 1.2 percent in number of the total institutions in the country, earned 73 percent of total industry earnings; 1.2 percent of the number of institutions represented 73 percent of total industry earnings. By contrast, the 4,390 community banks that represent 48 percent of the total number of institutions earned $2.1 billion in toto, just 1.7 percent of total industry earnings.
    As chart four shows, the community bank share of industry earnings has been on a downward slope since 1990, and though I have seen no official projections going forward, I believe the trend is going to continue. Average return on assets for the industry as a whole last year was a record 1.38 percent. But when you dig deeper, you see that the large banks, those of $10 billion or more in assets, the 110 institutions that had $10 billion or more in assets, had an average return on assets of 1.42 percent, while the small community banks, under $100 million, had a return on assets of 0.95 percent.
    As indicated on chart five, community banks with assets under $100 million generally operated at a higher profitability level than the larger banks in the past until the mid-1990s, when the lines crossed and larger banks began outperforming smaller institutions. I believe this disparity in profitability can be attributed at least in part to the disproportionate impact of the costs of compliance with accumulated regulations on community banks. Smaller institutions generally cannot absorb the costs and other burdens of regulations as easily as mid-size and larger banks. Since larger banks can spread the cost of compliance over many more transactions, the overall cost per transaction is often significantly lower for them than for community banks.
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    As chart six vividly indicates, there is a growing gap in the efficiency ratios of smaller versus larger institutions. Overhead costs are absorbing a much greater share of community bank revenues when compared to larger institutions. I believe that this, too, is a direct result of the disproportionate impact of regulatory burden on community banks. Since the enactment of FIRREA in 1989, the banking and thrift industry regulators have issued a grand total of 801 final rules, a tremendous number of rule changes for the industry to digest, particularly small community banks with limited staff. The cost involved in reprogramming computers, retraining staff, rewriting procedure manuals and producing new forms for some rules can be considerable.
    So what are the regulators doing about this? Today, we are engaged in a concerted effort to review all of our existing regulations in an effort to identify and eliminate regulatory requirements that are outdated, unnecessary and unduly burdensome. The agencies have divided all of our regulations into 12 categories and are putting one or more categories out for comment every 6 months until the project is completed in 2006.
    We are also conducting banker and consumer community group outreach meetings around the country to hear directly from all interested parties. Our interagency EGRPRA task force is responsible for reviewing and analyzing all the written and oral comments that we receive for possible regulatory burden reduction initiatives. The agencies will then propose amendments to their regulations as appropriate. In those cases where statutory changes are required to eliminate unnecessary burdens, we will recommend such changes to Congress.
    I expect an interim set of recommendations to be made to Congress within the next few weeks, with a final report to Congress on the EGRPRA project to be submitted upon completion of the project in 2006. I want to emphasize that this is an interagency effort and all of the agencies are working together superbly in this effort.
    Finally, I want to repeat my concern that if we do not do something in the near future to stem the tide of what bankers characterize as a continuing avalanche of ever-increasing regulation, I fear that America's community banks will continue their rapid disappearance from our towns and communities. That is why I believe it is incumbent upon all of us, Congress, regulators, industry and consumer groups, to work together in the short run to eliminate outdated, unnecessary and unduly burdensome regulations and to develop longer-range solutions, including the possibility of a two-tiered system of regulation for the two very diverse industries which make up our banking system today in the United States.
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    In closing, Mr. Chairman, I wish to thank you again and your colleagues for holding this hearing on the impact of bank regulation on community banks today, and I look forward to your questions.
    [The prepared statement of Hon. John M. Reich can be found on page 123 in the appendix.]
    Chairman BACHUS. I thank you. That was compelling testimony, Vice Chairman Reich, indeed. I am not sure that that has been widely publicized, some of the facts that you have gone over. I very much appreciate it. You have been very valuable to this committee moving forward.
    At this time, I would like to recognize the gentleman from North Carolina, Mr. Watt.
    Mr. WATT. Thank you, Mr. Chairman. I believe you have already introduced my State Banking Commissioner, Joe Smith, but I appreciate your extending the courtesy to me to extend a personal welcome to him, and rave about the magnificent job that he has done in North Carolina.
    North Carolina, of course, has a great reputation for its national and State banks. The regulation at the State level and the supervision at the State level is a testament to the leadership of our State banking commissioner. I appreciate the opportunity to welcome him here and put him on a national platform. I look forward to his testimony.
    Thank you.
    Chairman BACHUS. Thank you.
    Congressman Watt is a valuable member of our committee and we appreciate him giving us that additional introduction.
    Mr. SMITH. Thank you for those kind words.
    Chairman BACHUS. Thank you.
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    Mr. SMITH. One gets so few in this business.
    Chairman BACHUS. You ought to use those to campaign for office.
    Mr. SMITH. No, thank you.
    Chairman BACHUS. Commissioner?
    Mr. WATT. I think I embarrassed him, so he forgot to turn on his microphone.
    Mr. SMITH. It is on. I am just naturally quiet and soft-spoken.
    Mr. WATT. Okay.
    Mr. SMITH. Good morning, Chairman Bachus, Representative Watt, members of the subcommittee, I am Joseph A. Smith, Jr., North Carolina Commissioner of Banks and Chairman of the Conference of Sate Bank Supervisors's Legislative Committee.
    Thank you for inviting CSBS here today to discuss strategies for supporting our country's unique community banking system. To support our diversified system of community banking, CSBS and the State banking commissioners are now working with the federal financial institutions examination council to implement EGRPRA. This process has highlighted several insights that we believe should inform this committee's work. I should say, that we hope will inform your work.
    First, a bank's most important tool against regulatory burden is its ability to make meaningful choices about its regulatory structure. The State banking system sets our financial system apart from every other developed nation and is a primary contributor to our nation's diverse and responsive economy. But diversity in our financial system is not inevitable. Community banking, as the charts just showed, is not inevitable. Both are products of a consciously developed stated-federal system.
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    The state charter has been and continues to be the charter of choice for community-based institutions because the supervisory environment, locally oriented, hands-on and flexible, matches the way these banks do business. A bank's ability to choose its charter encourages regulators to operate more efficiently, more effectively and in a more measured fashion. A monolithic regulatory regime would have no incentive to efficiency. The state system remains as a structural curb on excessive federal regulatory burden and a means of promoting wide diversity of financial institutions.
    Second, while our current regulatory structure does recognize differences between financial institutions, it too often imposes one-size-fits-all requirements that are unduly burdensome on smaller or community-based institutions. Regulatory burden always falls hardest on smaller institutions and state-chartered banks tend to be smaller than their federally chartered counterparts.
    The Conference of State Bank Supervisors asked its Bankers Advisory Board about regulatory burden. Their responses illustrated how disproportionately heavily the regulatory burden falls on smaller institutions. One member of our Banker's Advisory Board, the CEO of a $150 million bank, reported that his bank employs the equivalent of four or five full-time employees who focus exclusively on compliance, rather than on customer service or lending. This commitment places the bank at a competitive disadvantage not only to larger banks, but also to non-bank financial services providers that are not subject to many federal banking regulations.
    We suggest that Congress and the regulatory agencies seek creative ways to tailor regulatory requirements for institutions that focus not only on size, but on a wider range of factors that might include geographic locations, structure, management performance and lines of business. Every new national standard is generally a new regulatory burden for the majority of banks. Regulatory relief for the handful of market-dominating banks that operate in multiple states usually means new and unanticipated regulatory burdens for the thousands of community banks that operate in a single state or even a single community.
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    Third, while technology continues to be an invaluable tool of regulatory burden relief, it is not a panacea. Technology has helped reduce regulatory burden in countless ways. State banking departments, like their federal counterparts, now collect information from their financial institutions electronically, as well as through on-site examinations. Shared technology allows the State and federal banking agencies to work together constantly to improve examination processes, while making the process less intrusive for financial institutions.
    The fact that technology makes it so much easier to gather information, however, should not keep us from asking whether it is necessary to gather all of this information or what we intend to do with this information once we have it. Information gathering is not cost-free.
    Fourth, no amount of legislative reform can be effective unless regulators coordinate to reduce unnecessary duplication. The regulatory structure that makes choice possible in our banking system also creates a complex network of overlapping, sometimes contradictory regulations and policies. Coordination among regulatory agencies is the only way to eliminate unnecessary duplication, while preserving diversity in our system. CSBS brings state and federal regulators together in a variety of forums to improve communication and coordination among states and with federal agencies.
    Finally, although regulators constantly review regulations for their continued relevance and usefulness, many regulations and supervisory procedures still endure past the time that anyone can remember their original purpose. Many State banking statutes include automatic sunset provisions that require legislators and regulators to review their laws at regular intervals to determine whether they are still necessary or meaningful. We urge Congress to apply this approach to as wide a range of federal banking statutes as possible.
    The current trend toward greater more sweeping federal preemption of State banking laws and a push toward uniformity weighs against all of the insights I have just discussed. We appreciate that the largest financial services providers want more coordinated regulation. We share these goals, but not at the expense of distorting our marketplace, denying our citizens the protection of state law, or eliminating the diversity of regulation and institutions that makes our financial system the envy of the world.
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    The regulatory environment for our nation's banks has improved significantly over the last 10 years, in part, sir, because of your vigilance. As you consider additional ways to reduce burden on our financial institutions, we urge you to remember that the strength of our banking system is its diversity. While some federal intervention may be necessary to reduce burden, relief measures should allow for further innovation and coordination at both the State and federal levels.
    The continuing effort to streamline our regulatory process, while preserving the safety and soundness of our nation's financial system, is critical to our economic well being, as well as to the health of our financial institutions. State bank supervisors continue to work with each other, with our legislatures and with our federal counterparts to balance the public benefits of regulatory action against their direct and indirect costs.
    We commend you, Mr. Chairman and the members of this subcommittee, for your efforts in this area. We thank you for this opportunity to testify and look forward to any questions that you and the members of the subcommittee might have.
    Thank you very much indeed.
    [The prepared statement of Hon. Joseph A. Smith Jr. can be found on page 170 in the appendix.]
    Chairman BACHUS. I thank you, Commissioner Smith.
    At this time, the panel will ask questions. I will start by asking Mr. Abernathy. Mr. Abernathy, Chairman Powell recently suggested that policymakers might want to consider a two-tiered approach in pricing of deposit insurance between the large complex banks and the smaller institutions. I think Vice Chairman Reich suggested the possibility of expanding this two-tiered approach to other areas of bank regulation. What are your views? What are the possible benefits of separate regulatory regimes and also some potential downsides?
    Mr. ABERNATHY. Mr. Chairman, from a general point of view, to the degree that you can tailor the costs of regulation and the details of regulation to the nature of the institutions you are supervising, to the extent that you can do that, you are improving the quality and the effectiveness of your regulations and reducing unnecessary costs. So conceptually, it is a great idea. That is one of the reasons why we have supported with all of the other financial regulators a package for FDIC reform that would give increased flexibility to the FDIC to run their fund much the same way an insurance company would, which is matching the cost of the insurance with the risk that is presented. We think that makes a lot of sense.
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    Chairman BACHUS. My next question, Title V of Gramm-Leach-Bliley has imposed some significant financial burden or regulatory burdens on our small institutions. One of them is the privacy notice, which I think most of us agree a lot of them have very little benefit to the consumers, who indicate that a large number of consumers find them confusing. I know that bank regulators have solicited public comments on ways to improve these privacy notices. Do you agree that the current system needs to be improved? Has the Treasury developed any recommendations for both easing the compliance burden on banks, particularly smaller banks, and making the privacy notices themselves more meaningful for consumers?
    Mr. ABERNATHY. Mr. Chairman, one of the first assignments that I had in my current responsibility as Assistant Secretary was looking at these notices. In that process, I have yet to find anyone who is satisfied with the current State of the notices. I do not travel very much in the attorney circles. Maybe there are some attorneys who are happy with the notices because they seem to be made for attorneys, by and for the use of attorneys, perhaps, but they do not benefit consumers. I do not find any consumers who feel that they are getting information they can use. The financial institutions I talked to, they indicate that these notices carry significant costs to provide, and yet they wonder if they are providing any benefit to their customers.
    So for now over a year, Treasury has been advocating that we ought to simplify significantly the Gramm-Leach-Bliley privacy notices so that they present in the types of information that customers can use and understand, and make use of at the time that they are making their consumer decisions. We have looked at, as an example, the information notices that are provided with food labeling. There we have some very important information. It is important to consumers that they can understand it, that it is presented in a format that is easy for them to grasp. We encourage the regulators to move forward and look for something that is that easy to use and understand.
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    Chairman BACHUS. I appreciate that.
    Vice Chairman Reich, I know the FDIC and its fellow bank regulators have recently proposed regulations that would update CRA. Many of us on the committee are concerned that CRA, while a well-intended attempt to promote investment in the local community, may have had actually the opposite effect of strangling community banks with red tape and making it more difficult for them to meet their customers's credit needs.
    Can you explain to the committee how the recently proposed CRA regulations address those concerns? Are there other reforms that the regulators are considering that would further CRA's underlying objectives, while at the same time easing the compliance burden on our community banks?
    Mr. REICH. With respect to the proposed changes in CRA, Mr. Chairman, the agencies have proposed to increase the threshold for large bank compliance from $250 million to $500 million. The impact of this would cover about 1,100 banks in the country and would not relieve them of compliance and CRA responsibilities. They would continue to be subject to the lending requirements of the Community Reinvestment Act. But it would streamline the examination process and relieve them of some of the burdens of compliance with the Community Reinvestment Act.
    In my view, community banks are the personification of community reinvestment in their communities. They are concerned about their communities. They each have boards of directors who are actively involved in their communities; who care about their communities; who care about their bank and its impact on the community. So I believe that the small community bank about which I am so concerned carries out the spirit and the purpose of the Community Reinvestment Act every day that it is open for business in its community.
    With regard to the proposed increase from $250 million to $500 million, in my own personal view, I would have liked to have seen it go to $1 billion, because I really believe that the definition of a community bank today encompasses institutions up to $1 billion. The proposed move to $500 million is a very good move that will provide some relief for community banks.
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    Other areas that we are working on, we do have, or did have recently a revised privacy notice out for comment. It was an effort to produce a simplified privacy notice. I think it was an improvement, but it has not been universally received as a great improvement by the banking industry. Small community banks feel that if they do not share information with anyone, why should they have to send out a privacy notice every year to their customers? They would like to be relieved of that responsibility and be required to file a privacy notice only when they change their practices. If they are a local institution that does not share information with any other agencies, they would prefer to file privacy notices only when their policies change.
    Chairman BACHUS. Okay. Thank you. We appreciate your remarks and look forward to your continuing to work with us to find ways to reverse what appears to be some negative trends for our community banks.
    At this time, what we are doing on both sides is going in order of members's arrival. At this time, I would recognize Ms. Carson. Do you have questions for the panel?
    Ms. CARSON. Thank you very much, Mr. Chairman. I think they have answered my questions in terms of where they are. My concern is where we are as a committee in terms of continuing to infuse local communities with tax credits and financial support in various neighborhoods to continue to rebuild neighborhoods in America. I am afraid your strategy here may injure that process, but we will wait and see. I appreciate your comments.
    Chairman BACHUS. Okay. I thank the lady.
    At this time, Mr. Watt?
    Mr. WATT. Thank you, Mr. Chairman.
    Welcome again, Commissioner Smith. I hope I did not embarrass you with my earlier welcome.
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    Let me ask you, Commissioner Smith, North Carolina and 15 other states, plus Puerto Rico, either have usury laws or interest caps or direct laws dealing with payday lending. That is an issue that has traditionally been handled at the State level, is it not?
    Mr. SMITH. Yes, sir. That is correct.
    Mr. WATT. Generally, the federal regulators pretty much stay out of the way of that?
    Mr. SMITH. Yes.
    Mr. WATT. Mr. Reich, I am advised that the OTS, the Federal Reserve and the OCC each have taken steps to prevent regulated institutions from renting or using their charters to enable payday lending where there are state laws that prohibit it. Why is it that the FDIC is the only bank regulator that has not done that?
    Mr. REICH. Congressman, the FDIC has developed the reputation of being soft on payday lending because we have not exclusively restricted payday lending activities. I think it is our view that there is a market of underserved people who are being served by payday lending, and that certain kinds of payday lending activities, if tightly supervised and controlled, do not represent safety and soundness concerns to the banks who engage in those activities. We have not opened the door to payday lenders at the FDIC.
    Mr. WATT. Do you have criticism of the other regulators that have specifically prohibited their member institutions or banks under their regulation from renting their charters?
    Mr. REICH. No, I am not here to criticize any other agency for their approach toward payday lending.
    Mr. WATT. How do you reconcile the FDIC's position with those other regulators?
    Mr. REICH. I think we are comfortable with the restricted nature, with the restricted environment under which we permit payday lending activity to take place in institutions. We limit payday loans on the books of our institutions to 25 percent of their capital. Typically, we require them to fund their payday loans with $1 of capital for every $1 of payday loans that are on their books. It is essentially self-funding with their own assets.
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    Mr. WATT. But where a State has prohibited that activity in that particular state, isn't that in effect a substitution of your judgment for the judgment of the State lawmakers and/or regulators who have made a judgment about that particular activity in that state?
    Mr. REICH. We are not cheerleaders for payday lending, Congressman.
    Mr. WATT. I am not asking you whether you are cheerleading for it. I am just trying to reconcile where you are with the other regulators. I guess my concern is there is an ongoing kind of tug-of-war, not intentional tug-of-war, but ongoing debate about what the States will have control over and what the federal government will have control over. When you have something that has clearly been regulated by the States, and there are specific statutory provisions that deal with it, I am trying to figure out why the federal regulator, one in particular, one out of four, would fail to honor that.
    Mr. REICH. There are very few institutions in the country involved in payday lending, and not many states involved. It is an issue that we are not championing; that we have been reactive to, not proactive about. Those institutions that are under our domain that are engaged in payday lending activity, we feel they are subject to the terms and conditions of our supervisory guidance, and we have been comfortable with our experience.
    Mr. WATT. Since this is a hearing about regulatory relief, maybe I should ask the question, how many regulations has the FDIC issued in this area that is imposing additional burdens, whereas if they just said we are going to honor the States, wouldn't that reduce some regulatory burdens?
    Mr. REICH. I do not have an answer to that question, Congressman.
    Mr. WATT. I yield back.
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    Chairman BACHUS. Thank you.
    What I am going to do, because I actually recognized two on this side, and I am going to recognize Mr. Hensarling and then go to Mr. Garrett. And then we will be back in order.
    Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman.
    Gentlemen, I have the honor and privilege of serving the Fifth Congressional District in Texas, which stretches almost from downtown Dallas to the piney woods of East Texas. I have had the opportunity in that capacity to meet with community banks in urban Dallas, suburban Dallas County and in rural East Texas. In speaking to these community bankers, and granted this is an unscientific survey, universally they seem to tell me that well over half, up to two-thirds of their compliance costs, has nothing to do with the safety or soundness of their institutions.
    Have your institutions conducted any surveys? Do you have a feel if these results are accurate? Starting with you, Secretary Abernathy.
    Mr. ABERNATHY. Congressman, I learned my banking from Texas bankers, so I would give a lot of credit to what they have to say.
    Mr. HENSARLING. So do I.
    Mr. ABERNATHY. But having said that, we have not conducted any kind of what I would call a scientific survey of that. I think there would be great value in doing that. I think to the extent we ask our safety and soundness regulators to engage in a lot of other types of activities, we have to ask ourselves, are we distracting them from their number one responsibility, which is the safety and soundness of the financial system. I think that would be a very valuable exercise.
    Mr. HENSARLING. Thank you.
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    Mr. Reich, do you have a comment?
    Mr. REICH. I think the Federal Reserve did a study last in 1999, which indicated that the costs of compliance totaled approximately 12 percent to 13 percent of non-interest expenses, a number I think approaching $40 billion annually for the industry.
    Anecdotally and in the outreach meetings that I have had with bankers around the country in the past year, they tell me the same kinds of comments that you are hearing, that the additional operating costs in recent years have been substantially attributable to the costs of compliance. I think it is borne out in one of the charts that I presented, which was a chart of a bank's efficiency ratio, the ratio of its non-interest expenses to its total operating revenue. In the last 7 or 8 years, the efficiency ratios of community banks in comparison to larger banks have been flat or increasing, largely attributable to compliance costs.
    Mr. HENSARLING. Thank you, Mr. Reich.
    Unfortunately in the interest of time, Mr. Smith, I think I am going to move on to another subject.
    I have read in a Congressional Research Service Report that a streamlined CRA Exam can save 40 percent of a bank's overall compliance costs. Speaking to the same Texas bankers that I alluded to earlier, many cite the large bank CRA exam as their number one compliance cost. Assuming CRS got it right, is there any data point that we have that proves that banks that engage in a small bank CRA exam somehow are serving their communities less than those who are subject to the larger test? Do we have any hard data on this?
    Mr. Smith, we will start with you.
    Mr. SMITH. Thanks. To my knowledge, sir, the answer to that question is no.
    Mr. HENSARLING. Okay. Mr. Reich, do you have any information?
    Mr. REICH. I do not, Congressman.
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    Mr. HENSARLING. Okay. Secretary Abernathy?
    Mr. ABERNATHY. I have not seen any data that says that.
    Mr. HENSARLING. Okay, next question. Obviously, we have a line of demarcation presently between the large exam and the smaller exam at $250 million in assets. Myself and Chairman Baker have proposed a bill to move that to $1 billion. Mr. Abernathy and Mr. Reich, I think both of you cited in your testimony the $1 billion figure as your line of demarcation for the small bank. That appears to be the Federal Reserve definition. It appears to be industry standard. So I am curious, what is the derivation of your feeling that $1 billion ought to be the line of demarcation?
    Mr. ABERNATHY. It is certainly nothing scientific, frankly. It seems to be a number where when you draw that line and you look at the banks that are below that line, they seem to fit the image that most people have of what community and local banks are. When you have the largest bank in the country having assets in excess of $1 trillion, to say that the line you are going to draw is one one-thousandth of that size suggests to me, if you are trying to define the difference between the large and the small, that certainly is not drawing the line too high.
    Mr. HENSARLING. Mr. Chairman, if I could ask one more question to Mr. Reich. I have had one banker in Athens, Texas ask me: Congressman Hensarling, who reads all these reports that my bank has to fill out? What do I tell this gentleman?
    Mr. REICH. Consumer groups read the data. The data is collected by our staffs and it is put back out into the public arena. It is massaged and manipulated as the users see fit. When I started in banking in 1961, the call report form was one page, two sides, one piece of paper. Today, it is 40 pages long. And whether you are a $10 million bank or a $10 billion bank, you fill out the same report. There are some supplemental reports, but there is so much information that I believe could be eliminated from the reporting requirements.
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    Mr. HENSARLING. Thank you.
    Thank you, Mr. Chairman.
    Chairman BACHUS. Thank you.
    Mr. Garrett?
    Mr. GARRETT. Just a flippant comment, I guess. If the consumers had to pay for these reports themselves, then I guess we could save a lot of money on the other end. Maybe not.
    Before there was the PATRIOT Act, there was the Bank Secrecy Act. Now, I am not a constitutional attorney. I am just a plain slip-and-fall attorney, so I never did quite understand what the constitutional underpinning was of the Bank Secrecy Act, that when I engage in a financial transaction with this individual, a bank, I give up some of my rights; and when I engage in a financial transaction with somebody else, I do not give up those privacy rights. So I will just put two questions to you.
    At the very least, is there any consideration being given to raising the threshold as far as the Bank Secrecy Act, as far as what triggers reporting the $10,000 figure up to a more realistic higher number of $20,000, $30,000 or higher? Although I know there were earlier court cases on it, I would appreciate your opinion as to the constitutionality of this requirement that I have to turn over my private information in that manner as we currently do.
    Mr. ABERNATHY. Congressman, with regard to the level of the CTRs, it is really a factual issue. The question is, at what level do we draw the line that is going to give us the kind of information that is important in fighting the crooks that want to make use of our financial system, whether it is the terrorist, the mobsters or whoever else.
    That is a factual question that we are constantly asking. Right now, the law says it is at $10,000. Is that too high, too low? I think we need to continue to evaluate the data and say if we drew that line at a different place, what would the result be with regard to the ability to halt money laundering. I do not think it should be a static number. I think it is something we should continue to investigate, and in fact it is something we do continue to look at.
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    Mr. GARRETT. Maybe along that line, just following Mr. Hensarling's question, who looks at that information? This is not consumer groups that are looking at this information. This is law enforcement that looks at this information. What is the word that you get from law enforcement as to the value of this information? I understand that it is just a deluge of reports that are coming in and in order for them to weed through, it is the proverbial needle in the haystack approach. Can you cite any specificity as to the value of these reports to law enforcement and their use?
    Mr. ABERNATHY. It is really looking for the needle in the haystack. When you want to find that needle in the haystack, you do not want to pile on more hay. You want to remove some of the hay, but you do not know where the needle is so you do not know where to move the hay. That is why it really is a factual exercise that we engage in with financial institutions. We ask them, where should we look; where don't we need to look.
    Frankly, we get our best information from the suspicious activity reports (SARS) because they provide more detailed information. To the extent that we can put this information in electronic form, we can digest it and use it more effectively. That is why we have been trying to encourage financial institutions to provide the information as much as possible electronically, because we can use it better that way.
    Mr. GARRETT. I guess that is another area where I have to scratch my head as far as making the law enforcement and making the banks and the community banks an extension of law enforcement as far as suspicious activity reports as well. I do not think most of them said, when I am getting into the banking business, I am getting into law enforcement at the same time.
    What sort of feedback, then, is there between Treasury and the banks, so to speak, on the suspicious activity reports and the validity of these reports and the value of the reports? I think this is something that was moving up along the line time-wise on the PATRIOT Act. This is where it is supposed to be going on.
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    Mr. ABERNATHY. I think there are significant conversations that take place, but I think we need to have more. The new Chairman of the Financial Crimes Enforcement Network, FinCEN, Mr. Bill Fox, has particularly given tremendous emphasis to finding out from the financial institutions themselves just what is most effective, and helping them know what they are providing that we can use.
    Mr. GARRETT. Very briefly, can you say that in a timeline, shall we look to any changes within the next month, 6 months, 1 year, 2 years as far as any of these numbers or activities?
    Mr. ABERNATHY. I am hopeful that on a continuing basis, within the next several months, within the next year, to see some improvements, significant and important improvements in our anti-money laundering efforts.
    Mr. GARRETT. Thank you.
    Mr. REICH. May I address that question, Congressman Garrett?
    Mr. GARRETT. Are you going to give me the constitutional basis for that? Certainly, you can answer.
    Mr. REICH. I have had six outreach meetings with bankers over the last 9 months across the country. This issue is at the top of their list. Twelve million CTRs were filed by the banking industry last year. We are working with Director Fox at FinCEN. We have had some very good conversations. He came to our outreach meeting in Nashville 3 weeks ago. He is very interested and anxious to work with us in developing a process and processes which will be more efficient. He has expressed a hope that by the end of this year, that there will be some reform to the CTR process.
    What form that will take, I cannot say. There has been some discussion of raising the threshold for businesses. I want to emphasize, though, that the banking industry is not looking to escape from this responsibility. Bankers are patriots. They are good citizens. They want to continue to be. But to the extent that there can be greater efficiency put into the process, the filing of CTRs, they are hopeful that we can accomplish efficiency in the process.
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    Mr. GARRETT. I thank you for that. I see my time has run out. If I had the time, I would just ask you about your extension as far as your reporting is being done by 2006 as far as your hearings, and how many community banks we may have lost by that time, and whether that can be contracted in any manner.
    Mr. REICH. When I first undertook the project, I thought it would only take a year to a year-and-a-half to complete, but it is a mammoth undertaking and it does require a 3-year time period in order to give it thorough consideration.
    Mr. GARRETT. Thank you.
    Chairman BACHUS. Thank you, Congressman Garrett.
    Did you say you were a slip-and-fall attorney?
    He does not show any ill-effects.
    Mr. Hinojosa?
    Mr. HINOJOSA. Thank you, Mr. Chairman.
    I want to say that at the present time, I am reviewing Mr. Hensarling's legislation, H.R. 3952, entitled Promoting Community Reinvestment Act, which should allow community banks with less than $1 billion in assets to participate in a small bank institution CRA examination.
    I want to determine if this legislation is the appropriate regulatory relief to consider at this time, or if we should wait until the regulators complete their regulatory relief review. I am also reviewing the Independent Bankers Association of Texas's idea for a community bank charter. I welcome their appearance here today.
    Mr. Chairman, I want to ask a question of Vice Chairman Reich. You state in your testimony that the volume and complexity of existing banking regulations, coupled with the new laws and regulations, may ultimately threaten the survival of our community banks. That concerns me, because they play a very important role in my 15th Congressional District in Texas.
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    You later note that community banks are healthy in terms of their supervisory ratings, but are operating at a lower level of profitability than the largest banks in the country. You also contend that credit unions, on the other hand, have a number of regulatory advantages over banks and thrifts, and Congress should reexamine these advantages and see if they can resolve them.
    What particular regulatory legislation would you recommend that Congress enact? And how do you recommend Congress or regulators establish a level competitive playing field for our community banks and their counterparts?
    Mr. REICH. Thank you for that question.
    You mentioned Congressman Hensarling's proposal to increase the limit on CRA from $250 million to $1 billion. As one regulator, I would be very supportive of that effort, and as one regulator who has talked with thousands of bankers in the past 3 years, that would have a major impact on their institutions in a positive way.
    There are a number of other steps, and frankly I would not want to see the committee or the Congress wait until 2006 until our comprehensive review is totally completed, to enact legislation which would relieve regulatory burden. When there are good ideas existing such as that one, I would hope that it could be enacted as soon as possible.
    There are a number of regulatory issues, Congressman, which bankers are concerned about. I mentioned the Bank Secrecy Act. That actually is an area that would not require statutory or congressional approval. I think the Treasury Department has all the authority that it needs to make changes there. There are a number of other areas that bankers are concerned about. Regulation D, the limitations on transfers and withdrawals from money market deposit accounts, was a regulation that was enacted in the mid-1980s, and is a regulation which in today's economic environment seems to no longer make sense.
    As I indicated earlier, I expect to be coming to the Hill within the next few weeks with a platform of legislative recommendations which will emanate from our first year of activity on this EGRPRA regulatory reduction effort. I think that changing the threshold CRA certainly would be a major assistance to community banks.
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    Mr. HINOJOSA. How will we be able to get a copy of that platform of recommendations that you propose to bring us?
    Mr. REICH. I assure you, I will hand-deliver it to your office.
    Mr. HINOJOSA. We certainly have the community bankers visiting members just like myself, and expressing those concerns, and looking at the charts of what has happened to profitability of small community bankers versus the large ones, it is a matter of concern to those of us who have such large rural districts.
    In closing, Mr. Chairman, I want to ask, or rather make a statement more than a question. I want to thank Ms. Judith A. Kennedy for stressing in the testimony I read prior to her formal presentation here today, how important it is that we fully fund HUD's Section 8 voucher program. I have cosigned Ms. Nydia Velazquez's letter to the House appropriators requesting such funding.
    With that, Mr. Chairman, I yield back the balance of my time.
    Chairman BACHUS. Thank you.
    We will now recognize Mr. Meeks. That will then conclude the questioning for the first panel. I believe, Mr. Abernathy, you have an engagement and need to leave at quarter of. We tried to facilitate that, so we will recognize Mr. Meeks and then close the first panel.
    Mr. ABERNATHY. Thank you, Mr. Chairman.
    Mr. MEEKS. Thank you, Mr. Chairman.
    Let me first say, I just want to make sure of some concerns with regard to the CRA because I have found that CRA is good business, not only good for local communities, but it is good business for the financial institutions also. I know that for some of the small banks, we are trying to eliminate some of the paperwork and make sure that they do not get caught under the deep files.
    So let me ask Mr. Abernathy, how much relief do you think the changes in CRA requirements for banks under 500K provide? Do you have any idea?
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    Mr. ABERNATHY. That is a factual question. I think the process that we are engaged in, during the comment period, should reveal to what extent that will be a benefit; whether that is the right line to draw. Certainly, the question has been asked, and I think there is a lot of validity to it, namely is to what extent do you need to remind community banks to do business in their communities. I think, frankly, in my experience, any community bank that is not doing banking in its own community is not going to stay in business very long.
    Mr. MEEKS. Let me ask this, then, in regard to some of the banks that would be exempted based upon the proposed rules from rigorous CRA standards, are you aware of any previous patterns of violations of CRA requirements by any of those, or antidiscrimination laws by any of those institutions?
    Mr. ABERNATHY. CRA is not an antidiscrimination statute, as you know. CRA's main requirement is that banks are to do business in the communities where they are located. There are other antidiscrimination statutes.
    Mr. MEEKS. Right. I am saying either/or, understand that.
    Mr. ABERNATHY. Yes. I believe violations that have occurred have been fairly small, but I think they have been by some small institutions, but still a very minor number, a minuscule number of institutions.
    Mr. MEEKS. Do you have any idea of how these banks generally have scored on CRA examinations?
    Mr. ABERNATHY. The smaller banks?
    Mr. MEEKS. Yes.
    Mr. ABERNATHY. The vast majority of them have obtained satisfactory examination scores.
    Mr. MEEKS. Right.
    Mr. Smith, let me ask you a question. Do you think there would be any community banking system without a State banking system?
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    Mr. SMITH. I think that the evidence that we have so far is that most community banks are state-chartered banks; that most community banks being created now are state-chartered banks. Other things equal, I think there would be many fewer community banks without a State system.
    Mr. MEEKS. What do you think is the greatest threat to the State banking system?
    Mr. SMITH. The greatest threat to the State banking system is, in my opinion right now, the perception that the comptroller's actions with regard to preemption have created an advantage which will lead at the margin to larger state-chartered institutions considering more seriously flipping charters to the national system. If that happens, then our written testimony has some stats in it. There could be a significant decrease in the State system in the number of total assets, which is the assessment base on which the whole system rests. I think that is a serious issue, frankly, for the Congress because ultimately this body is going to be in control of that issue.
    Mr. MEEKS. I agree with you.
    Do you think consumers generally recognize the difference between state-chartered and nationally chartered banks?
    Mr. SMITH. I think consumers generally recognize the difference between a local bank and a bank that is not local. I have formed, I will say by way of background, we have had 10 new charters issued by my agency in the last year, and the story I hear is always the same story. It is the leadership of small business people who believe that larger institutions, for good reasons and bad, do not serve the needs of the community in the way they used to when they were smaller. I try to talk them out of it, frankly, because starting a bank is a rough business, but they are not dissuaded. Many people in many parts of North Carolina, at least, believe very strongly that a locally established, locally controlled institution is very important, in fact crucial to their economic development. I hear this over and over again.
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    Mr. MEEKS. Do you think that disclosure requirement would be helpful, if national banks were required to disclose to consumers that they did not follow State consumer protection laws because there is a difference, you know. Some federally chartered banks may not provide the same consumer protections.
    Mr. SMITH. I would prefer, frankly, to have a system where there is an even playing field, where that is not required. Actually, some of my best friends are national bankers, so I do not think it is a question of burdening them. I think it is a question of being sure that the playing field is in fact even. That is more of a concern to me personally.
    Mr. MEEKS. Thank you.
    Let me ask Mr. Reich one quick question. In reading your written testimony, you do not make any comments on the FDIC and the payday lending issue. In this committee, different members have had various opinions on the use of it as a financial instrument. My biggest concern is the FDIC's role in allowing banks to partner with payday lenders so that they can circumvent state law, an issue that we are also dealing with regarding to OCC.
    What do you feel should be some of the best practices for payday lenders and the bank affiliates?
    Mr. REICH. As I indicated to an earlier question on this subject, the FDIC is not a cheerleader for payday lending. We have issued guidance for the industry and for our examination personnel that indicate under what conditions payday lending activity may take place, and have placed strong capital requirements on those institutions that are involved in payday lending activity.
    We believe that it is an activity that carried on at a moderate level does not pose safety and soundness problems for those banks that we supervise that are involved in that activity.
    Mr. MEEKS. Okay. I guess I am out of time. I yield back, Mr. Chairman.
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    Chairman BACHUS. Thank you.
    I want to again thank this panel for their testimony. Without objection, your written statements in their entirety will be included in the record, as will the opening statements of the members, if there is no objection, and any written questions that the members may wish to submit. Ms. Ginny Brown-Waite of Florida has two questions specifically for Mr. Abernathy and Mr. Reich, which we will submit to the record along with any others.
    I want to conclude by saying that I think your testimony today is an alarm bell for what Chairman Greenspan has said is the crown jewel of our banking system, and that is our network of community banks, which he pointed out is really unique worldwide in their scope, their diversity and their mission. It is something that is a treasure to our country and its people, both to rural America, to agriculture, but to small business and to many of our small cities and towns. It gives consumers choice.
    I join Vice Chairman Reich in saying that I have serious concerns about the future of community banking, and see a regulatory burden on them as an important factor in the equation for their future success. We have in recent years given beneficial treatment to some of their competition. I believe that that is beginning to show up in the facts and statistics we have heard today. I think the answer to that is extending benefits and regulatory relief to our community banks. I think that would be the approach to so-called level the playing field.
    With that, the first panel is discharged and we thank the gentlemen. Watch your step as you leave.
    I would like to welcome the second panel. At this time, I am going to recognize the gentleman from Texas, Mr. Hensarling, to introduce our first witness.
    Mr. HENSARLING. Thank you, Mr. Chairman.
    I am privileged and honored to introduce Mr. Jim Goldston, who happens to be the President of City Bank, that is City Bank with a ''y.'' In Forney, Texas, they know how to spell ''city.'' He is the President of City Bank in Forney, Texas in Kaufman County which I have the privilege of representing as part of the Fifth Congressional District.
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    Mr. Goldston has not only been a bank President, but also has the unique attribute of having previously been a bank examiner as well, and brings a unique perspective to this particular hearing. In addition, I just think to a great extent Mr. Goldston represents what is good, what is unique about community banking in Texas and I wager in America. Not only has he worked to make a very successful bank, but he has previously served as the President of the Chamber of Commerce. He has served on two different committees of the school district. He has been the President of the Lions Club. He has been a deacon in his church. He has been a hospital board member. He served as a director on the North Texas Council of Substance Abuse.
    Mr. Chairman, I read this items out to let you know that by definition community banks have to be involved in their communities. Indeed, it goes back to buttress the argument that they are indeed the lifeblood of many of our rural communities. It is with a great honor and privilege that I introduce Mr. Goldston to our committee.
    Chairman BACHUS. I thank you and welcome, Mr. Goldston.
    Our second witness, Mr. Dale Leighty, is chairman of the Independent Community Bankers of America; chairman and president of the First National Bank of Las Animas. We talked yesterday, and I have been through there. That is a lovely town. Dale, we welcome you. That bank is a $125 million asset bank in the northeast corner of Colorado. He is also the past President of the Independent Bankers of Colorado.
    In addition to his leadership in the community banking industry, he serves on numerous civic organizations, including volunteering as treasurer of his local Lions Club chapter, executive committee member of the Bent County Development Foundation. That is where Bent Fort is in Las Animas, which is a historic fort. He is also active, as is Mr. Goldston, and the gentleman from Happy, Texas, very active in his local church, where he serves many youth groups. He graduated from Kansas State University. We welcome you, Dale, to today's hearing.
    Our next witness is Bradley Rock, chairman of the board, President and CEO of the Bank of Smithtown and Smithtown Bancorp, it is a public holding company, for the past 15 years. That is in Long Island, New York. During his tenure, the market value of the company stock has risen by more than 2000 percent, and the Bank of Smithtown has been recognized by several magazines and rating services as the number one community bank its size in the United States. That is quite an accomplishment.
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    He also serves as vice chairman of the Governmental Relations Council of the American Bankers Association, and he is representing that association today.
    I may have said, Mr. Leighty, you are actually representing the Independent Community Bankers of America at the hearing.
    So we welcome you, Mr. Rock.
    Mr. ROCK. Thank you.
    Chairman BACHUS. Our third witness is Mark Macomber, President and CEO of Litchfield Bancorp in Litchfield, Connecticut, a $162 million mutual organization where he has been since 1993. He serves as President and CEO of Connecticut Mutual Holding Company, a multibank mutual holding company that includes Northwest Community Bank in Winsted, Connecticut as an affiliate. He is a member of the ICB board of directors and executive committee. As are our other gentlemen, he is active in many community activities, including President of the United Way.
    Our next witness is Judith Kennedy. We welcome you back to the committee. She serves as President and CEO of the National Association of Affordable Housing Lenders, representing American lenders in moving private capital to those in need. Under her leadership, the NAAHL has become recognized as the premier authority in the nation's capital on private lending and investment in low- and moderate-income communities.
    Prior to joining NAAHL, Ms. Kennedy managed government relations at two Fortune 100 financial corporations, Sallie Mae and Freddie Mac. Her government service has included staff positions on the Senate, as well as on this committee, on the House Banking Committee. As I said, welcome back. She has many awards and community activities, including DC Youth Orchestra Foundation. So, we welcome you today.
    Our next witness is John Taylor. You have testified before the committee prior to this. I think it was last year. He is President and CEO of National Community Reinvestment Coalition. He is on the board of directors and is chairman of the executive committee of America Works Partnership, an AFL-CIO national organization to stimulate job development in poor urban areas. He also serves on the board of directors of the Association for Enterprise Opportunity. He also is the current chairman of National Neighbors, a pro-diversity organization and has made appearances in many foreign countries promoting economic justice matters. We welcome you back to the committee.
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    Did you mention to us last time that you had run for Congress? That would have been in Massachusetts. We welcome you back.
    Our last witness is J. Pat Hickman. He is the President and CEO of Happy State Bank, so it is obviously a bank in good shape.
    He is current volunteer chairman of the Independent Bankers Association of Texas. He is also very active in his community and his church. He put an investor group together in 1989 to purchase Happy State Bank in Happy, Texas. The bank was a $100 million bank with one office and five employees. The bank has expanded to eight communities, Happy, Canyon, Amarillo, Stratford, Dalhart. That is on the Colorado Southern Railroad, isn't it? Dumas, Sunray and Panhandle, with 11 total offices. In fact, it is a railroad town, isn't it? Yes, like a lot of towns. Its assets total $290 million and he employs 130 people. I would like to welcome you.
    I would like to go back and mention that Mr. Macomber is on the board of directors of American Community Bankers, not ICBA. I think I said ICBA and I wanted to correct that. You are actually testifying on behalf of America's Community Bankers, which we well know the difference, so I do not know what I was thinking. We welcome you, and you represent a fine organization.
    With that, we will start from my left to right. The first witness is Mr. Goldston.
    Mr. GOLDSTON. I would like to ask that the written comments be made a part of the record.
    Chairman BACHUS. I am sorry. I did omit to say that without objection, your written statements will be made a part of the record. You will each be recognized for a 5-minute summary of your testimony. So thank you for reminding me of that.
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    Mr. GOLDSTON. Mr. Chairman and members of the committee, I am honored to appear before you today to discuss the importance of community banks to our nation and to ask for your help in reducing unnecessary and burdensome regulations.
    My name is Jim Goldston. I live and work in Forney, Texas, a small town just east of Dallas. Congressman Jeb Hensarling will soon represent our community and I am here today at his invitation.
    I have worked in banking for over 20 years, and the past 5 years I have been branch President for City Bank. That is C-I-T-Y, not C-I-T-I. But for 3 years, I was a bank examiner for the Texas Department of Banking. During that time, I observed many banks both good and bad, and gained some understanding of how state and federal regulations can and should improve the safety and performance of our banking system to benefit and protect both our customers and our FDIC deposit insurance structure.
    As an ex-examiner, I have the deepest respect for our regulatory forces. Like bankers, they have a tough job digesting and enforcing an ever-growing mound of regulations. I only want to point out today some consequences, probably unintended consequences, of regulations that affect community banks like us.
    We are a small but growing bank with just over $800 million in assets spread across 12 communities in west and north central Texas. We offer a full range of financial services to our customers, focusing on doing what we can to meet the financial needs of our customers and growing the economies of our local communities, while earning an acceptable return for our shareholders. One-hundred percent of our stock is owned by residents of the communities we serve, and over 63 percent is owned by my fellow bank employees and their families. Each year, our bank adopts 73 different policies covering all facets of our operation and addressing the hundreds of regulations now in place.
    Last year, we paid over $565,000 to our internal compliance and audit staff and over $160,000 to outside firms just to be sure that we are complying with applicable regulations and policies. These figures do not include the expense of our other employees's time spent actually in complying with those regulations. It also does not include the cost of the time spent by our state and federal regulators checking up on our checking up.
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    We believe that regulations should either improve the safety and soundness of our financial system or improve the services we give our customers. Those that only add to the paperwork burden should be abolished. I have gone into more detail in regards to some of the burdens dealing with a few of the regulations in my submitted testimony.
    Now, I would like to share with you in a graphic way the paperwork burden on just one type of loan, the home mortgage loan. Recently, I personally refinanced my mortgage. This is the stack of paperwork that my wife and I had to sign at closing. As we began to sign the papers, my wife asked me if I understood what it is all about. I responded, of course, I am a loan officer. I know what these documents do and say. When I looked more closely at one of the disclosures, I realized that truly I was not familiar with this form.
    If a traditional mortgage closing is confusing to an experienced bank officer, how much more confusing is it to the average customer? This stack includes disclosures mandated by truth-in-lending, Real Estate Settlement Procedures Act, Flood Disclosure Protection Act, Gramm-Leach-Bliley Act, Internal Revenue Code, title insurance requirements. At application time, there were disclosures to comply with the Equal Credit Opportunity Act, Home Mortgage Disclosure Act, Fair Housing Act and the U.S. PATRIOT Act, just to name a few.
    Finally, the expansion of the small bank classification for CRA rules has greatly helped many community banks, but many of us are still caught in a web of trying to comply with the rules for advanced testing designated for massive complex nationwide organizations that bear little resemblance to even the biggest community banks. The current review of banking regulations taking place on the Economic Growth Recovery and Paperwork Reduction Act is a good start on seriously reviewing regulatory burden, but it must be coupled with statutory change as well. Many of the burdensome requirements described in this testimony are not a matter of regulation, but rather mandated by statute. We community bankers implore you to seriously take up reduction of regulatory burden. As a community banker, I, like my peers, want to serve my community with reasonably priced products, home loans, small business loans, agriculture loans and deposit products in investment services, but the cost of unnecessary and burdensome regulations increases my cost while not truly benefiting the public. Please make real regulatory burden relief a reality.
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    Thank you.
    [The prepared statement of Jim Goldston can be found on page 65 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Goldston. I think you and Mr. Hensarling are going to get along just fine.
    Mr. Leighty?
    Mr. LEIGHTY. Mr. Chairman and members of the subcommittee, my name is Dale Leighty, as you mentioned. I am chairman of the Independent Community Bankers of America and president and chairman of First National Bank of Las Animas, Colorado, a $140 million community bank located in southeast Colorado.
    I would like to thank the subcommittee for examining the important issue of regulatory relief for community banks. This is one of ICBA's top priorities, and I am pleased to testify today on behalf of our nearly 5,000 community bank members to share with you our views and concerns.
    ICBA supports a bank regulatory system that fosters safety and soundness. However, statutory and regulatory changes continually increase the cumulative regulatory burden for community banks. In the last few years alone, community banks have been saddled with the privacy rules of the Gramm-Leach-Bliley Act; the customer identification rules and other provisions of the USA PATRIOT Act; and the accounting, auditing and corporate governance reforms of the Sarbanes-Oxley Act. Yet relief from any regulatory or compliance obligation comes all too infrequently, while new ones just keep being added.
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    There is not any one regulation that community banks are unable to comply with. It is the cumulative effect that is so burdensome. As ICBA President and CEO Cam Fine recently stated, ''Regulations are like snowflakes. Each one by itself may not be too much, but when you add it all up, it could crush the building.''
    Regulatory and paperwork requirements impose a disproportionate burden on community banks because of our small size and limited resources. We have had to devote so much of our resources and attention to regulatory compliance that our ability to serve our communities and support the credit needs of our customers is diminished.
    Regulatory burden is a perennial problem for community banks. In 1992, Grant Thornton conducted a study for ICBA on the cost of complying with the 13 bank regulations that were deemed the most burdensome for community bankers. At that time, over 10 years ago, the annual compliance costs for community banks for just 13 regulations was estimated to be $3.2 billion. In addition, the study found that 48 million staff hours were spent annually to comply with just those 13 regulations.
    ICBA is pleased that, at the direction of Congress under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, the federal bank regulators are now reviewing all 129 federal bank regulations, with an eye to eliminating rules that are outdated, unnecessary or unduly burdensome. We wholly applaud this effort and fervently hope that it bears fruit.
    However, Congress must recognize there is only so much that the regulators can do to provide relief since many regulatory requirements are hard-wired in federal statutes. Therefore, effective reduction of regulatory burden will require congressional action, and ICBA strongly urges the Congress to be bold and open-minded when considering recommendations offered by the regulators and the industry for relief.
    The litany of burdensome regulations is long. To name a few, truth-in-savings, truth-in-lending, real estate settlement procedures, electronic funds transfer; fair lending, privacy notices, insurance disclosures, funds availability notices, the Home Mortgage Disclosure Act, currency transaction reports, suspicious activity reports, call reports, regulation O reports, regulation D reports, the Bank Secrecy Act, and Community Reinvestment Act, just to name a few. These regulations are overwhelming to the 37 employees of my bank who must grapple with them every day.
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    CRA is a clear example of regulatory overkill. It deserves special mention since there is a pending regulatory proposal to reduce the community bank regulatory and examination burden. Evaluating the CRA performance of large complex banking organizations and small locally owned and operated community banks using the same examination standards simply does not make sense.
    ICBA strongly supports an increase in the asset size limit for eligibility for the small bank streamlined CRA examination process. While we prefer that it be raised to $2 billion, we applaud the regulators's proposal to increase the limit to $500 million in assets and eliminate the separate holding company qualification. Chairman Bachus, we appreciate the letter you and Congressman Baker organized in support of the proposal.
    ICBA also strongly supports Congressman Hensarling's legislation, H.R. 3952, calling for an increase in the CRA small bank size limit to $1 billion, although again we would support amending the bill to raise the threshold to $2 billion.
    While community banks will still be subject to CRA under the regulatory or legislative proposal, many will be free from the more onerous compliance burdens associated with the large bank CRA examination, allowing us to focus on serving the needs of our customers.
    Community banks pose different levels of risk to the banking system and have different abilities to absorb the costs of regulatory burden than large national or regional banks. Therefore, the ICBA strongly urges Congress and the regulators to continue to refine a tiered regulatory and supervisory system that recognizes the differences between community banks and larger, more complex institutions. Less burdensome rules and/or appropriate exemptions for community banks are the hallmark of a tiered regulatory system.
    In conclusion, ICBA member banks are integral to our communities. However, regulatory burden and compliance requirements are consuming more and more of our resources to the detriment of our customers. And because the community banking industry is slowly being crushed under the cumulative weight of regulatory burden, many community bankers are giving serious consideration to selling or merging with larger institutions and taking the community bank out of the community.
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    The ICBA urges the Congress and the regulatory agencies to address these issues before it is too late. My written statement includes more detail including an appendix with detailed discussions of the regulatory burden of selected regulations.
    The ICBA strongly supports the current regulatory and legislative efforts to reduce regulatory burden. We look forward to working with you to identify statutory and regulatory changes that should be made to ensure that the community banks remain vibrant and able to continue to serve our customers and our communities.
    Mr. Chairman, thank you for the invitation to testify today. I will be happy to answer your questions.
    [The prepared statement of Dale Leighty can be found on page 97 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Leighty.
    Mr. Rock?
    Mr. ROCK. Thank you, Mr. Chairman.
    As you noted earlier, I am the chairman of Bank of Smithtown, a 95-year-old, $625 million community bank located on Long Island in Smithtown, New York. I am glad to present the views of the ABA. Reducing regulatory burden is an important issue for all businesses. This morning, I would like to make three key points.
    First, regulatory burden is not just a minor nuisance for banks. It has a significant impact upon our customers and upon local economies. Over the past 25 years, it has steadily grown and now permeates all levels in the bank, from frontline tellers to the CEO. Based on research in the 1990s, the total cost of compliance today for banks is between $26 billion to $40 billion per year.
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    Certainly, many of the regulatory costs are appropriate for safety and soundness reasons and for consumer protection. But if this burden could be reduced by 20 percent and directed to capital, it would support additional bank lending of between $52 billion and $78 billion. The impact on our economy would be huge.
    Secondly, regulatory burden is significant for banks of all sizes, but pound for pound, small banks carry the heaviest load. Community banks are in great danger of being regulated right out of business; 8,000 of the nation's 9,000 banks have less than $500 million in assets, and 3,350 of those banks have fewer than 25 employees. These are the banks that are providing credit and deposit services to people in small towns across America, yet these same community banks do not have the human resources to run the bank and to read, understand and implement the thousands of pages of new and revised regulations they receive every year.
    A week ago, I was with a fellow community banker in Georgia who told me that his bank, with only 20 employees, has had to add a full-time person for the sole purpose of completing reports related to the Bank Secrecy Act. Community banks in such circumstances will not be able to survive for long.
    To illustrate the magnitude of this burden on small banks, consider this. Each year the ABA publishes a reference guide which summarizes and outlines the requirements embodied in thousands of pages of regulations. This summary is 600 pages long and will be even longer next year to cover new responsibilities under the USA PATRIOT Act and the expanded HMDA reporting requirements.
    I personally spend about one-and-a-half days per week just on compliance issues. Some CEOs tell me that they are now spending nearly half of their time on regulatory issues. This means that bank CEOs spend over 5.5 million hours per year on compliance, time that could have been better spent on improving their businesses and meeting the needs of their customers.
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    Many of these regulatory efforts provide little or no meaningful benefit to bank customers. As a banker and a lawyer, I can tell you that, for example, at real estate settlements customers do not read the piles of documents they are required to sign. In fact, the only people who read these voluminous forms are the bank staffers who are required to complete them and process them.
    My third and final point is this: We are hopeful that the review of regulatory costs by the federal bank regulators will reduce the compliance burden. Many bankers are skeptical, however, as we have seen previous efforts at regulatory relief come and go without noticeable effect, while the overall level of regulatory burden has kept rising. It may take congressional action to make a difference.
    The bottom line is that too much time and too many resources are consumed by compliance paperwork of little or no benefit to customers or investors, leaving too little time and resources for providing actual banking services. The losers in this scenario are bank customers and the communities that banks serve.
    Thank you for the opportunity to present our views.
    [The prepared statement of Brad Rock can be found on page 154 in the appendix.]
    Chairman BACHUS. Thank you.
    There are five votes on the floor. We think that we will take, Mr. Macomber, your testimony now, and then we will recess until 1 o'clock, because Mr. Sanders and Mr. Hensarling do have some questions. So we will take your testimony and then recess until 1 o'clock.
    Mr. MACOMBER. Good afternoon.
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    Chairman Bachus, Ranking Member Sanders and members of the subcommittee, I am Mark Macomber, President and CEO of Litchfield Bancorp in Litchfield, Connecticut. Litchfield Bancorp is a $162 million state-chartered community bank, part of a two-bank mutual holding company.
    I am also representing America's Community Bankers, ACB, and we are pleased to have this opportunity to discuss with the subcommittee recommendations to further reduce red tape on community banks. Our goal is that community banks will be able to better serve consumers and small businesses in their local markets. This hearing and this topic are important and timely.
    Ten years ago, there were 12,000 banks in the United States. Today, there are only 9,000 of us left. ACB is concerned that community banks are significantly hindered in their ability to compete because of the cost of regulations. ACB has several recommendations to further reduce regulations on community banks that will help make doing business easier and less costly, further enabling community banks to help their communities prosper and create jobs.
    First, ACB strongly supports passage of H.R. 3952, the Promoting Community Investment Act, sponsored by Congressman Jeb Hensarling. The bill will allow community banks with less than $1 billion in assets to participate in the Community Reinvestment Act small institution examination. By passing H.R. 3952, you will free up capital and other resources for almost 1,700 community banks across our nation, allowing them to invest even more into their local communities.
    We believe that raising the threshold will reduce the regulatory burden for those institutions without diminishing the activities of community banks or their CRA obligations. The goals of CRA are laudable and I take them seriously. But as a community banker, I would not be in business if I did not meet the credit needs of my community. And I do not need costly record keeping or a lengthy examination to tell me if I am doing the job.
    Secondly, ACB supports passage of legislation to reform subchapter S of the Internal Revenue Code. Although not within the jurisdiction of this committee, we urge you to convey support to the leadership of the House Ways and Means Committee. The legislation should include several provisions: one, increase the number of shareholders of community banks who are eligible to form a subchapter S corporation from 75 to 200; two, permit IRAs to be eligible shareholders; three, clarify that interest on investments maintained by a bank to enhance safety and soundness is not disqualifying passive income; and four, permit bad debts to be charged off at the corporate level.
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    Because of recent false rhetoric, I hasten to add that the shareholders of subchapter S banks are fully taxed on their corporate profits. And speaking of taxes, I have to mention that a primary burden for many community banks today is that they pay taxes, but compete against a new breed of credit unions that do not. These credit unions function as full service banks wholly exempt from the taxes that we pay to support federal, state and local governments.
    So the third way you can help community banks is to support Ways and Means Chairman Bill Thomas, who has proposed undertaking a review of the roles of tax-exempt institutions, and how they compete against for-profit companies. In my own state, Charter Oak Federal Credit Union is a $425 million institution that offers virtually every service my bank can provide. Their earnings last year were $4.6 million. They paid not a dime in taxes. Nothing. By simply calling themselves a credit union and requiring a $5 fee to become a member, they avoided paying over $1.5 million in income taxes.
    In addition to paying taxes, bank-like credit unions should also be required to meet the same CRA requirements as banks. Credit unions that operate like banks should be treated like banks.
    ACB's fourth recommendation is for Congress to make sure that Basel II and its attendant capital requirements do not put community banks at a competitive disadvantage with very large institutions. ACB believes that legislators, regulators and the industry should examine and evaluate the cost and complexity of the proposed Basel II capital accord.
    We urge you to consider its competitive impact on banking institutions of different sizes, and the ability of regulators to properly supervise and examine the proposed new minimum capital requirements. Congress must make sure community banks across the country are not adversely affected by Basel II.
    Finally, ACB urges you to review the rules that require community banks to send multiple privacy notices. Banks with limited information-sharing practices should be allowed to provide customers with an initial notice, and provide subsequent notices only when terms are modified. At my bank, we send out thousands of such notices each year at significant cost in both dollars and staff time, even though our policies and procedures have remained consistent for many years. Redundancy in this case does not enhance consumer protection. Instead, it serves to numb our customers with volume. Let me be clear. We do agree a notice should be sent, but it becomes an expensive burden to send it multiple times. Once is enough.
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    On behalf of ACB, I want to thank you for your invitation to testify on the importance of cutting red tape for community banks. We strongly support the committee's efforts in providing regulatory relief. We look forward to working with you and your staff in crafting legislation to further accomplish this goal.
    I will be happy to answer any questions you may have. Thank you.
    [The prepared statement of Mark E. Macomber can be found on page 115 in the appendix.]
    Chairman BACHUS. Thank you, Mr. Macomber.
    At this time, we will be recessed until 1 o'clock. When we return, Ms. Kennedy you will be our first witness. Thank you.
    Mr. HENSARLING. [Presiding.] By Washington standards, to reconvene a 1 o'clock hearing at 1:15 is actually pretty good.
    We will continue to await the return of Chairman Bachus. Until such time, I believe that, Ms. Kennedy, that we will have your testimony at this time. Thank you.
    Ms. KENNEDY. I have been sitting here listening to the horror stories of the banks' encounters with the CRA exam, frustrated and angry that there have been many other bankers there before them who had the same bad experiences. But I am going to tell you that the National Association of Affordable Housing Lenders opposes an increase in the threshold for what is called the large bank exam.
    I am going to ask you to think of it this way. There are not really tiers of regulation in this program. There is the so-called streamlined exam which really is about, are you lending in your community? What is the ratio of loans to your deposits. As one of these gentlemen said, at 70 percent, clearly he is lending in his community.
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    But the Community Reinvestment Act was about helping to meet the credit needs of your communities. It is crazy if regulations are forcing a bank that has no investment needs to invest in the community, but it is rational to say, how do we know that banks really are lending to low- and moderate-income people in their community or are investing in things that address the needs of folks in the community, including low and moderate income persons. Maybe it is Section 8 housing. Maybe it is tax credit housing. Maybe it is a homeless shelter. Maybe it is a financial literacy program.
    But I think we have to stop and think, if 1,200 more banks are essentially exempt from having to invest in their communities and from having to document their loans to low- and moderate-income people, how could that play out in the various states?
    Let's take Alabama as an example. Alabama currently has 35 insured depository institutions that are responsible for documenting their loans and their services in low- and moderate-income communities, as well as making investments in those communities. If the regulators' proposal goes through to double the threshold to $500 million, Alabama will go from 35 covered institutions to 18. If the threshold is raised to $1 billion, Alabama will go from 35 today down to nine. I think we have to think about the practical effect of raising the threshold.
    What is the practical effect of that? Again, the streamlined exam is you just prove you that you have made loans. I think the practical effect is that in Alabama, there will be at least $33 million less invested in affordable housing. It could be Section 8. It could be tax credits, homeless shelters, financial literacy. The practical effect of what the regulators have proposed is that going forward, only 12 percent of the insured depository institutions in this country will be responsible for documenting loans to low- and moderate-income folks and making investments. If the $1 billion threshold goes through, only 6 percent of the insured depository institutions in this country will have that responsibility.
    The numbers are huge. Primarily, as you know, because HUD has very little money to spend, leveraging scarce Federal subsidy with private capital is critical. If the HUD budget is $31 billion, $19 billion of it goes for renewals of Section 8 voucher contracts. That leaves $12 billion for all the housing and community development needs of the country. Mid-size banks have been important contributors to housing and community development for low- and moderate-income families. I think we make a mistake if we think it is okay to simply wave a wand and say they do not have to demonstrate that anymore.
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    I think you will see significant declines nationwide, and I have given you some numbers on that. I think rural areas will be hardest hit for obvious reasons. And I will just add that the crisis in funding Section 8 where so many conventional lenders have reached out and made construction loans, but also mortgages for affordable rental housing in their communities, compounds all of the risk of taking this lending and investment out of low- and moderate-income communities.
    Thanks for having me.
    [The prepared statement of Judith A. Kennedy can be found on page 74 in the appendix.]
    Mr. HENSARLING. Thank you, Ms. Kennedy.
    Mr. Taylor, we will receive your testimony now.
    Mr. TAYLOR. Good afternoon, Chairman Bachus, Acting Chairman Hensarling, and other members of this committee. Thank you very much for inviting me.
    I am John Taylor, the President and CEO of the National Community Reinvestment Coalition which represents some 600 community organizations, faith-based organizations, local governments, and others who have asked us to come here today and give the community perspective on what regulatory relief of banks might mean.
    Before I start, I want to say very clearly we love community banks. We have no axe to grind with community banks. So we are not starting from the premise that we are looking to do injury to them. We want them to prosper and do well.
    I also want to point out that most of the members who have testified today on this panel who are from lending institutions are actually including your good friend, Mr. Hensarling from Texas, are actually already under the small bank test. So your relief would do nothing for that bank. With the exception of Long Island, the Smithtown Bank, which I think is over $600 million, which also the bank regulatory proposal would do nothing to impact their test.
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    What stimulates much of this hearing, of course, is the EGRPRA, the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which asked regulators to eliminate any regulatory requirements that are outdated, unnecessary or unduly burdensome. I would like to go through that very quickly as it relates to CRA. Is CRA oversight outdated? Actually, no one's testimony suggests CRA is outdated. Indeed, the record shows many Americans have benefited from increased access to credit and capital since FIRREA and the establishment of clear tests under CRA lending serving investments.
    In fact, the U.S. Treasury and Harvard University's Joint Center for Housing Studies have clearly shown in separate studies the impact of CRA and of the new CRA regulations. EGRPRA says eliminate unnecessary regulations. Again, there are few comments that these tests are in fact unnecessary. We know statistically that lenders who are tested under the three CRA-regulated tests are much more likely to serve low- and moderate-income borrowers. In fact, if you eliminate the service and the investment tests, we know that banks will have little or no obligation to maintain or even open branches in working class or working poor neighborhoods.
    At a time in our history, ironically, where predatory lending has become a national shame, where America's most vulnerable who are elderly and others who are struggling for a better life are now having to turn to payday lenders and pawn shops and check cashing outlets for their basic banking services. In this era, we want to no longer test an additional 1,100 banks on their record of providing basic banking services to underserved people. It makes no sense whatsoever.
    The Baker-Hensarling bill, H.R. 3952, would have the opposite impact implied in the bill's title, Promoting Community Investment Act. More accurately, H.R. 3952 should be called the Demoting Community Investment Act. This bill would remove 93 percent of all banks, 8,667 banks to be precise, from being tested on their record of providing basic banking services.
    Similarly, the investment test, the third leg of the CRA regulatory exam, has proved very necessary, and has tremendous impact. One needs only to look to institutions that acted as intermediaries to assist lenders in making qualified CRA investments. Here, you find less than 10 percent of those who make investments are made by banks that are not tested for CRA investments. Estimates range up to over $50 billion investments in LMI areas that would be eliminated over time if the investment test no longer applied to banks with $1 billion or less in assets.
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    Finally, let us turn to the third EGRPRA threshold, to eliminate regulatory burdens that are unduly burdensome. Frankly, I have sat here through the hearings, the earlier testimony, and if you really look at the testimony and really listen to what people are saying, it sounds like there was an increase in regulatory burden, but it has nothing to do with CRA and everything to do with the PATRIOT Act, the Secrecy Act and a whole bunch of other things that have occurred.
    In fact, what is interesting is, if you go back to 1990, CRA regulations, CRA reporting was number one on the list of lenders whenever they talked about regulatory burden. And now through various polls, whether you read American Banker, look at Mr. Reich's testimony and his studies, and you will find CRA has slipped to fifth place, a dubious honor and one that we are happy with, but one that should not be the basis for why there ought to be consideration of lessening the CRA application to financial institutions.
    In any event, I want to wrap up because I see the light is on and I want to respect the time period. There is one thing I want to make a point of agreeing with my other panelists here, including the first panel. I think Mr. Macomber and others have made their comments in their testimony. There is an unlevel playing field when it comes to credit unions in this country. I am not talking about community development credit unions or the kind of singular company credit unions that only make loans to their employees. I am talking about these credit unions that basically say, our common charter is if you breathe, you can do business in our credit union; those ones that now have geographic distinctions that have no distinction between financial institutions.
    My opinion is, if it quacks like a bank, it walks like a bank, it looks like a bank, and it acts like a bank, it ought to have the same obligations that other financial institutions have, and that is including the extension of CRA. So I would agree with the comments made earlier about that.
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    Mr. Chairman, thank you very much for your indulgence.
    [The prepared statement of John Taylor can be found on page 192 in the appendix.]
    Mr. HENSARLING. Thank you, Mr. Taylor.
    Now, Mr. Hickman from Happy, Texas, please make us all happy.
    Mr. HICKMAN. Thank you, Vice Chairman Hensarling.
    My speech is written ''Dear members of the committee,'' but it is you and me, Mr. Congressman. I hope the tape works well.
    My name is J. Pat Hickman. I appreciate very much this opportunity to appear before the committee today on behalf of the Independent Bankers Association of Texas and the 550 banks that we represent throughout Texas. We thank you all very much for giving us this opportunity, this forum to come together and talk about a plot that is affecting our banks to a huge degree.
    In addition to serving as the volunteer chairman of IBAT, I do have a day job. I am the chairman and chief executive officer of the Happy State Bank in Happy, Texas. Fourteen years ago I put together a group of investors that bought that little $10 million bank. Today, we are in eight communities, 11 different offices. We employ 130 people. We have $300 million in total assets. Of those eight communities, let me also add that four of those communities have less than 2,000 people. We are serving an underserved area. In two of our communities, we are the only financial institution in those communities.
    In the 14 years that we have owned this bank, we have also written you a couple of checks. I went in and totaled it up the other day. Our little bank has paid $4.6 million in income taxes in the last 14 years that we have gotten to partner with you guys, and it is nice to come here and meet some of my silent partners that I am sending this money to.
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    I appreciate greatly your highways. I appreciate greatly the brave men and women who are taking care of us and protecting our security and our freedoms. I so appreciate the opportunities for life, liberty and the pursuit of happiness. You all have been great partners for the most part. But you have also been silent partners with some of my competitors. While you were doing some nice things for me, quite frankly you were doing some nice things for them. Quite frankly, you all have left community banks standing out in the cold. I do not think you have done it on purpose, but you have actually kicked us around pretty good. Just as a reminder in 1997, in H.R. 1151, you gave the credit unions these broad new common bonds, where as some of my former panelists have said, if you can breathe, you can join a credit union. They act like banks. They smell like banks. They quack like banks. They are banks.
    In 1999, you passed the Gramm-Leach-Bliley Act giving the large mega-conglomerate banks all kinds of ways to make more money, but quite honestly there was not very much there for banks like the Happy State Bank. Just recently, the Federal Reserve Bank of Dallas completed a study that proved some things that community bankers have been talking about for years. This study shows, and I think this was pointed out earlier by Vice Chairman Reich, that in 1984 there were 11,000 banks under $1 billion. Today, there are less than 6,000 banks under that size.
    When you have $1 trillion banks, I have a hard time deciding how someone can call a $1 billion bank a medium-size bank. Those are small banks when they get down under $1 billion that have been eliminated. Now, some folks would say that that is because I cannot compete. I do not know that it is so much that I cannot compete as much as it is that my silent partners have been taking good care of my competitors, have been taking better care of my competitors than they have been me.
    I am not coming in here to ask you all to shut down the easy membership rules that the credit unions have, though there are some rather bizarre uses of those rules. I am asking you that if they look like banks, to tax them like banks. I am also not asking you to take away the expanded powers of the larger conglomerates, more power to them. But I am asking that you quit regulating me like you regulate the conglomerates. Ease up some of the rules. I think that is what some of this hearing is about.
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    In Happy, Texas, I get excited when somebody walks in the door. We have 633 people there and we are investing in those people every day. Anybody that walks in the door, we are going to take care of them. That is what we do. Why am I paying the same FDIC insurance premiums that the megabanks pay? I do not own an insurance agency. I certainly do not own an insurance company or a securities firm. We are not investing in derivatives or underwriting proprietary mutual funds that we are going to try to hard sell to our own customers. I will never sell my customer's name to another company. Every time you call my office, I promise you a human being will answer the telephone.
    That same Dallas Fed study that shows that we have 13 percent of the market showed two other things. I will wrap up here. It showed that 37 percent of the small business loans are being made by community banks. It showed that 61 percent of all agriculture loans were being made by community banks. We have 13 percent of the assets, but we are supporting the small businesses of this country that create the jobs, create the output, and the farmers that create the food.
    My contention is, Mr. Chairman, that we are being regulated out of business. The trends that Vice Chairman Reich showed are trends that show we are disappearing. We would like you to please notice those trends and even that playing field some, and take care of the community banks that are so vital to this country.
    Thank you all again very much for the time to make these comments.
    [The prepared statement of J. Pat Hickman can be found on page 68 in the appendix.]
    Mr. HENSARLING. Thank you, Mr. Hickman, for your testimony. If you spend a little bit more time with us, you may discover we are your partners, but we are not quite so silent.
    As I look around the room, I think we will start the questioning with Chairman Baker.
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    Mr. BAKER. I am so glad you are in the chair. You are such a perceptive leader.
    I want to thank each of you and regret the schedule has been prohibitively difficult today, and I have not been able to be here for your testimony, but have read each of your written statements. I want to explore briefly, but as thoroughly as we can, a remedy to the identifiable problems without centering on the issue of asset size. That is as unrelated as to what you do with credit extension as the number of parking spaces, in my view.
    I would prefer to see us flip our current regulatory regime from a penalty box system to a reward system. Today, if you do not meet certain CRA requirements, then you cannot open a new branch or there are other penalties that are incurred. If you do comply, you get to pay off the bill for the compliance cost, but there is no other added benefit to the current process.
    If, however, an institution were to engage in pre-described activities that were beneficial to the community, let's assume X percent of loans are made within a 10-mile geographic radius of the institution, 50-plus; let's assume a certain percentage of loans are held in portfolio; a certain percentage of loans go to low-income people below a certain median income level in the community in which you are located; that a certain percentage of loans goes to small business enterprises.
    As I have listened to the persuasive testimony of those engaged in the business practice, you describe activities that are centered on individual lending criteria and perspectives you have of that particular borrower, and not necessarily the hard bottom-line cash collateral associated with the request, although you do engage in safe and sound business practices.
    My point is that if we were to proscribe, and I am not today saying we have such a screen, but glued together a number of issues that describe in the aggregate the conduct that we wish to incentivize, extending credit to the dairy farmer or to the dry cleaner who otherwise is not bankable somewhere else, and you do it within a geographic limit and you also help low-income individuals, and then as a result of that you are granted certain provisions of regulatory relief. We can talk then about what that list is and how we make it operative. If you drop the ball, then you go back into the pile again.
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    It would seem to me to be a reward for what we all hope is to be appropriate community involvement, whether it is rebuilding a school, helping low-income, providing financing for a water system. To that extent, we did expand the provisions of the federal home loan bank collateralization provisions to allow access for community banks to 15-year fixed-rate portfolio lenders, and there is no other source for that that I am aware of.
    So despite our failure to cross the goal line on a number of other efforts, I do believe that is an essential partnering capability you do now enjoy that you have not had in the past. That may be worthy of exploration and further expansion.
    I will start with you, Mr. Taylor, because I know we have discussed these issues in the past. I am coming at it in a slightly different way than in prior discussions. What is your initial reaction to that?
    Mr. TAYLOR. I am intrigued, actually, except of course you have not used the word, that dirty word they do not like to use in this committee, called quotas, percentages of loans that currently the system does not have that. I have often wondered if we did, that communities might not be better served. Could the reward be that someone who really does that, if there were meaningful measurements that really showed, and the Community Reinvestment Act, as you know, is not about race or gender, but it is about income.
    Unlike what Mr. Abernathy said, it is not just about serving the community credit needs; it is serving the community credit needs, and in the statute, including low- and moderate-income people. So if we had a measurement that could really measure that and showed a standard that was reasonable, to reward people down the line that perhaps their regulatory burden lessened, I think there is something to that. I hedge my comments on this, sir, by saying I do not think the regulatory burden right now on folks on the banks who are here or those who are complaining has anything to do with the CRA, and everything to do with other regulations.
    Mr. HENSARLING. But at least you have opened the door.
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    Mr. TAYLOR. Yes.
    Mr. HENSARLING. Thank you.
    Ms. KENNEDY. I think the burden is outrageous. I compare it in my own experience to what HUD was like in the late 1960s and the early 1970s where there were 600 questions and answers defining how you could spend federal funds. Congress threw all that out in 1974 and said, let's have a block grant. Well, these banks, some of them have charters from different agencies, and are dealing with the same crazy-quilt of questions and answers, but there is not one HUD; there are four of them. So this bank cannot get credit for doing something really incredibly creative, but the bank down the road can.
    Having said that, what you describe, Mr. Baker, I think is very much possible under the current regulations. OTS Director Gilleran has actually been promoting it. It is called the strategic plan option. Some of the new entrants, such as a bank I was talking to last night that got a charter in Utah, chose the strategic plan option. Essentially, you come up with a menu of things, as you have described. You are subjected to public hearings. You get feedback from the community, and then you come up with a plan that your regulator thinks is appropriate to your share of the market, including low- and moderate-income people. So that option currently exists and maybe more institutions should and could take it.
    Mr. BAKER. I can assure you I had no prior knowledge. This is not an act of plagiarism. It just seemed to be conceptually a reasonable screen through which we could conduct the public purpose.
    If no one else, Mr. Chairman, I appreciate your courtesies in conducting this hearing and your leadership with the introduction of the bill. I really would like to see us at least have some conversation going forward about the elements that could be put into such a basket for review and then a secondary discussion about what does it mean to current program. But if you are meeting community need and you are at the same time losing customers to credit unions, losing the big borrowers to Wall Street, you have people buying their used car with a credit card, you have a diminishing number of bank customers, I think that is reflected not only as a result of mergers and acquisitions, but banks simply are choosing to do other things because the competitive market is so difficult.
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    I do believe at the margins in some instances the regulatory cost, which is estimated to be 13 percent of non-interest expense, is an element in whether a bank expands services or continues the fight. If we can do something at the margins that makes a competitive difference for these folks, I think it is in not only the community's, but the nation's best interest to do so.
    Thank you, Mr. Chairman.
    Mr. HENSARLING. Thank you, Mr. Chairman. And thank you for all your leadership on the issue of the regulatory burden and what you have done to help make the American financial services industry number one in the world.
    I am not quite as studious and industrious as Chairman Baker. I did not quite read all of the testimony, but I read a lot of the testimony. I noticed a provision of a sentence in your testimony, Mr. Taylor. If I can quote from it, ''Without a comprehensive CRA, communities, particularly rural areas served by smaller banks, would suffer a new round of disinvestments, redlining and decay.''
    Mr. Goldston, let me start with you. Given that you are a community banker, and I am familiar with your community, what is going to happen to Forney, Texas and what is going to happen to Kaufman County if you did not have to fill out a comprehensive CRA exam?
    Mr. GOLDSTON. The way we handle CRA, CRA is not the paperwork we do. Granted, we have a tremendous amount of paperwork associated with CRA. I remember when I was an examiner in the 1980s, one level of earnings that we looked to for banks was 1 percent. Whenever the information was given earlier, community banks were making .095, somewhere around there. Earnings have diminished, and at the same time our regulatory costs have increased.
    When the cost of overhead, we look at loan losses, we look at all the costs associated with running the bank, I believe if we did not have to do all the paperwork, that we did not have to allocate all this money to doing things to say that we are providing service to our community, I think there would be a tremendous amount, more opportunities for us to take a chance on someone, for us to take a chance on businesses. I think it would help us grow the level of loans and to cater to different clienteles and do a better job of banking.
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    Mr. HENSARLING. Let me ask you about a provision in your testimony. I do not know if it came out in your oral testimony. You were alluding at one point to recent changes in regulation C concerning how you report home mortgage and home improvement loans that you are ''charging an interest rate greater than 300 points above treasuries.'' And, ''if we make a $5,000 five-year maturity home improvement loan, we cannot expend the time and paperwork to put that loan on our books, service it for five years, and only earn about $175 per year in interest. The intent is to disclose if we are engaging in predatory lending, but the result is to discourage us from making loans at all.''
    So are you telling us, then, that a regulation is actually de facto denying credit to low- and moderate-income people?
    Mr. GOLDSTON. I believe that credit is denied to low- and moderate-income people because of the stack of paperwork that has to be done. By doing that, I say that whenever you look at the cost of that $5,000 home improvement loan, you are looking at drawing up the deed of trust, the notes. The costs associated with that sometimes are $1,000. To comply with all those regulations and all the disclosures we give, it is not practical for someone to come in and apply for that loan. So to say we deny them, no we do not, but I believe it is cost-prohibitive for those customers. A lot of times they may or may not have the $1,000 for all the closing costs associated with that to apply for the loan or to get the loan.
    Mr. HENSARLING. Okay. Thank you. I also noticed, Mr. Taylor, in your written testimony that you say that most banks no longer complain about the regulatory burden of CRA. For those who represent banks that have to do the full CRA exam, do you consider it to be burdensome?
    Mr. ROCK. Mr. Chairman, my bank is a $625 million bank, so we have been subjected to the large bank exam. We used to be examined under the streamlined exam. I am in Smithtown, Long Island, which is a suburban community about 50 miles outside of New York City. The first time that we were examined under the large bank exam, we were marked down because we had no loans to low-to moderate-income areas. My bank's market area extends for about 30 linear miles on Long Island and we have no, according to the U.S. Census Bureau, no low-to moderate-income areas in our market area.
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    So what we did to try to remedy that, because we wanted to be socially responsible, we do a lot of construction lending. So we looked for builders active in projects building low-to moderate-income housing outside of our market area. We made those loans to construct homes in low-to moderate-income areas outside our market area. The examiners came back and said we do not get credit for that because it is outside our market area.
    So that is really the ultimate catch-22. If we make them in the market area, we cannot because there are no low to moderate, according to the government, in our market area. But if we make them outside the market area, we do not get credit for them. So we think that the objectives of CRA are laudatory and we agree with them, but I think that the issue is how is compliance with those objectives measured and administered. I think it is quite unfair to my bank and to banks of my size.
    Mr. HENSARLING. Thank you.
    I think that I will gavel myself down in respect to Chairman Bachus's time. Mr. Chairman, do you care to be recognized?
    Chairman BACHUS. Thank you.
    My first question, I will ask Mr. Leighty, maybe as a representative of the community banks, or Mr. Macomber, what is a community bank? Is there a definition?
    Mr. LEIGHTY. I am not aware of a specific definition. I know when I started my banking career, a $50 million bank seemed big to me, because I was in a $25 million bank. I have contemporaries who are part of our association who run $1 billion banks, and they are clearly community-oriented banks. So I agree with some of the comments that have been made. It is not just a size issue.
    I have heard it described as if they pose systemic risk to our economy, they are not a community bank. So our association is actually working on the very issue of defining what is a community bank. One thing I am sure, there are many banks that are above the threshold we talk about that are $500 million today, $250 million, $1 billion, that are very much community banks and are meeting the needs of their communities.
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    If I could, I would like to point out that the streamlined CRA, which our bank is small enough that we already qualify for the streamlined exam, I think it is important to point out that it shifts some of the burden to the examiners to determine if we are meeting the needs. But we are still required to meet needs in our geographic area, as well as to income levels. It does not allow us to slide away from those responsibilities. It simply shifts the burden somewhat and makes the exam process more streamlined.
    We believe that while we benefit from it, some of our brethren who are a little bigger than we are and maybe more the size that we would like to be, if we are successful and are able to grow and not become irrelevant as the markets may change, that it just makes sense to extend that streamlined process to some of the larger banks.
    Chairman BACHUS. Mr. Macomber, would you like to comment?
    Mr. MACOMBER. ICBA, ABA, and ACB are always trying to figure out what is a community bank, because we all represent community banks. I do not think that it is a function of size. I do not think it is a function of charter. I think it is a function of focus. The focus of my bank, as is true I think of everyone on this panel and most of the banks that are represented by the trade organizations represented here, their focus is very much on the communities they serve. We are not getting involved in esoteric things.
    From a CRA perspective, good business for my bank; CRA takes care of itself. I do not turn down loans that are not good loans. I would not turn down loans that were good loans if I were a $300 million bank. Mr. Taylor noted that my bank does fall under the streamlined CRA regulations. However, my partner bank and the holding company is now considered a large bank for CRA purposes.
    The way we function in the community is by and large the same. It has to be documented differently. There are more resources being devoted at that bank than at mine for things that are not necessarily helping the community. Those resources, in my opinion, many times could be better focused on doing the business of banking, and that is serving the credit needs of everyone in the community, low income on up.
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    Chairman BACHUS. All right. Mr. Taylor, I am going to ask you a different question. Do you operate a community bank?
    Mr. TAYLOR. Do I operate a community bank?
    Chairman BACHUS. Yes. I would rather ask people that have banks, as opposed to people who, you know.
    Mr. TAYLOR. As opposed to consumer interests who want to respond to this stuff?
    Chairman BACHUS. Yes. I am asking them what a consumer bank is.
    Mr. TAYLOR. Okay. I cannot answer that, what a consumer bank is.
    Chairman BACHUS. No, a community bank. I must have so many questions and so much time. I am going to ask you a question if I have time.
    Mr. HICKMAN. Chairman Bachus, if I may, I would say one thing about community banks. You heard me state that I am in four communities with populations less than 2,000. In two of those, there are no other banks; there are no other credit unions. I am convinced that if I leave that community for any reason, no one else will go into that community. That almost to me defines community reinvestment. I am one of four businesses in Happy, Texas and I am under the threshold. The amount of time that me and my staff have to spend proving that we are serving our communities with a 95 percent loan-to-deposit ratio is ludicrous.
    There are some things that common sense goes out the window, and I think this is one of those fair issues. If it smells like you are serving; if it looks like you are serving; you are serving. We do depend to a great degree also on what the regulators, their interpretation of serving the community is under that threshold.
    Chairman BACHUS. Okay.
    Mr. HICKMAN. It scares me to death, as I grow bigger, if that threshold does not go up.
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    Chairman BACHUS. All right. If I could have a few more minutes, since there is only the two of us.
    Mr. HENSARLING. Absolutely, Mr. Chairman.
    Chairman BACHUS. Mr. Taylor, I apologize to you. I want to hear your answer.
    Mr. TAYLOR. Not necessary, sir. I listened to this gentleman from Happy, Texas. It makes me want to go visit Happy, Texas, to be honest with you.
    Mr. HICKMAN. Come on.
    Mr. TAYLOR. Would you make a loan?
    Mr. HICKMAN. Sure.
    Mr. TAYLOR. It would not count for CRA purposes. Although I did want to say to my friend from Long Island, if you meet the credit needs under CRA in your targeted assessment area and you make loans outside of it, you then get credit for it. If you have problems with the regulators getting credit, we will help you on that.
    Mr. MACOMBER. I need you to come and help be my advocate.
    Mr. TAYLOR. Absolutely.
    Mr. MACOMBER. We have had two exams from the Federal Reserve and they tell me quite to the contrary, John. I think that is part of the problem. As I say, the issue is administration and testing of compliance. I think that is the issue. We have very fragmented administration of compliance right now.
    Mr. TAYLOR. Got it. The point I wanted to make, Mr. Chairman, if I can get the balance of my time back.
    Chairman BACHUS. You have it.
    Mr. TAYLOR. When Mr. Goldston from Texas mentioned the stack of papers that they have to put together for loan closings, a tremendous amount of time and it is not worth it for these loans, there are actually no documents in there that relate to CRA. The fact of the matter is, if we really look at this hearing and listen to what the testimony has been, not just from this panel but from the previous panel, is there is an increased regulatory burden, but it has nothing to do with CRA and everything to do with the Privacy Act and the PATRIOT Act and the Bank Secrecy Act.
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    All the questions relate to CRA, from you folks and most of the comments respond to that because that is what is being asked. I am wondering why we are not asking questions about what happens to the 12 million reports that end up in Detroit in some basement of some building someplace that these banks are spending a tremendous amount of time filling out that information. What happens to all the other things that are occurring? We all want to fight terrorism. We all want to be patriotic. But is CRA going to be the fallout, a weakening of CRA? Is the CRA obligation going to be the fallout under this PATRIOT Act and Secrecy Act? That is what strikes me as very odd about this.
    Chairman BACHUS. I think that is a good point. I will just maybe close with this. That kind of brings to mind something that you were talking about, other than CRA. There was testimony I know from Mr. Macomber about Bill Thomas has some tax relief legislation. Ms. Kennedy, has your organization taken a look at that? I think it is in you all's best interest for these community banks to be strong and competitive. What about those?
    Ms. KENNEDY. Of our 200-member organization, 70 of them are insured depository institutions and probably another 70 or 80 are nonprofit providers that work in communities like the Alabama Multi-Housing Consortium, from zero to $25 million in assets in 5 years, but only with investments from banks. We will look at it.
    Mr. TAYLOR. I am with you on that and I am with the desire to look at nonprofit credit unions. I think you might have missed my comment earlier, a lengthy comment about the need to really look at the impact, particularly not so much obviously community development credit unions or the single-purpose company credit unions that only serve their employees, but the kind of credit unions that have grown into looking, acting, smelling and being just like any bank, but have tax exempt status, have FDIC insurance, and have no obligation under the CRA.
    I should point out, when you look at their records of lending, these folks out-perform those credit unions in loaning to low- and moderate-income people and to people of color and to women, and that speaks very much to the fact that the fair housing laws and CRA, in fact, work because they are applied to these institutions.
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    So leveling the playing field, very much indeed I would agree, taking a strong look at those credit unions and seeing that they at least have the same obligation in those areas as our brothers and sisters here at the table who represent community banks.
    Chairman BACHUS. I think that is a good place to stop, for everybody but one group.
    Mr. HENSARLING. Thank you, Mr. Chairman. I am informed there is due to be markup here in this room in about 60 seconds. I want to thank the lady and all the gentlemen for their testimony. I note that we were joined by Mrs. Maloney.
    The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and place their responses in the record.
    This hearing is adjourned.
    [Whereupon, at 1:59 p.m., the subcommittee was adjourned.]