[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
REGULATORY BURDENS: THE IMPACT OF DODD-FRANK ON COMMUNITY BANKING
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH,
JOB CREATION AND REGULATORY AFFAIRS
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JULY 18, 2013
__________
Serial No. 113-47
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland,
MICHAEL R. TURNER, Ohio Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT,
TREY GOWDY, South Carolina Pennsylvania
BLAKE FARENTHOLD, Texas MARK POCAN, Wisconsin
DOC HASTINGS, Washington TAMMY DUCKWORTH, Illinois
CYNTHIA M. LUMMIS, Wyoming ROBIN L. KELLY, Illinois
ROB WOODALL, Georgia DANNY K. DAVIS, Illinois
THOMAS MASSIE, Kentucky PETER WELCH, Vermont
DOUG COLLINS, Georgia TONY CARDENAS, California
MARK MEADOWS, North Carolina STEVEN A. HORSFORD, Nevada
KERRY L. BENTIVOLIO, Michigan MICHELLE LUJAN GRISHAM, New Mexico
RON DeSANTIS, Florida VACANCY
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Stephen Castor, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
Subcommittee on Economic Growth, Job Creation and Regulatory Affairs
JIM JORDAN, Ohio, Chairman
JOHN DUNCAN, Tennessee MATTHEW A. CARTWRIGHT,
PATRICK T. McHENRY, North Carolina Pennsylvania, Ranking Minority
PAUL GOSAR, Arizona Member
PATRICK MEEHAN, Pennsylvania TAMMY DUCKWORTH, Illinois
SCOTT DesJARLAIS, Tennessee GERALD E. CONNOLLY, Virginia
DOC HASTINGS, Washington MARK POCAN, Wisconsin
CYNTHIA LUMMIS, Wyoming DANNY K. DAVIS, Illinois
DOUG COLLINS, Georgia STEVEN A. HORSFORD, Nevada
MARK MEADOWS, North Carolina
KERRY BENTIVOLIO, Michigan
RON DeSantis Florida
C O N T E N T S
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Page
Hearing held on June 18, 2013.................................... 1
WITNESSES
Mr. Eddie Creamer, President and CEO, Prosperity Bank, ST.
Augustine, Florida
Oral Statement............................................... 5
Written Statement............................................ 7
Mr. Hester Peirce, Senior Research Fellow, Mercatus Center,
George Mason University
Oral Statement............................................... 19
Written Statement............................................ 21
Hon. R. Bradley Miller, Former Member of Congress, Senior Fellow,
Center for American Progress
Oral Statement............................................... 28
Written Statement............................................ 30
Tanya Marsh, Assistant Professor of Law, Wake forest University
School of Law
Oral Statement............................................... 33
Written Statement............................................ 35
APPENDIX
A Letter to Rep. Jordan from Bill Cheney, Credit Union National
Assoc., submitted for the record by Rep. DeSantis.............. 66
REGULATORY BURDENS: THE IMPACT OF DODD-FRANK ON COMMUNITY BANKING
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Thursday, July 18, 2013
House of Representatives
Subcommittee on Economic Growth, Job Creation, and
Regulatory Affairs
Committee on Oversight and Government Reform
Washington, D.C.
The subcommittee met, pursuant to call, at 2:44 p.m., in
Room 2154, Rayburn House Office Building, Hon. Jim Jordan
[chairman of the subcommittee] presiding.
Present: Representatives Jordan, DeSantis, Duncan, McHenry,
Lummis, Collins, Cartwright, Cummings, and Duckworth.
Staff Present: Brian Daner, Majority Counsel; Michael R.
Kiko, Majority Staff Assistant; Emily Martin, Majority Counsel;
Jedd Bellman, Minority Counsel; Jaron Bourke, Minority Director
of Administration; Jennifer Hoffman, Minority Communications
Director; Elisa LaNier, Minority Director of Operations; and
Brian Quinn, Minority Counsel.
Mr. Jordan. The subcommittee will come to order. We are
going to get started.
I know Congressman--the ranking member, Congressman
Cartwright is on his way. And as I think the witnesses know, we
have some other hearings going on.
But I will now recognize the vice chair of the committee,
Mr. DeSantis, for an opening statement.
Mr. DeSantis. Thanks, Mr. Chairman.
Thank you to the witnesses for coming today and appreciate
your flexibility. Obviously, we have a hearing downstairs that
is taking quite a while.
Millions of Americans are out of work, millions are
unemployed, and millions have given up looking for a job. A top
priority of this Congress should be to remove barriers to job
creation so Americans can get back to work, and small
businesses are the key to this goal. They provide half of all
employment in the United States and 42 percent of all payroll
spending. Most importantly, small businesses are the leader in
creating new jobs.
If small businesses are the engine of job creation, then
community banks are the engine of small business because
community banks are the leaders in making small business loans.
At the end of 2010, community banks held $160 billion in small
business loans on their books, representing almost half of all
outstanding small business loans. In other words, $1 out of
every $2 loaned to a small business comes from a community
bank.
Community banks, characterized by local ownership, local
control, and local decision-making, are best positioned to
evaluate the precise business environment in a local community.
Furthermore, community banks' ability to offer highly
customized financial services ensures that each small business
receive products that are tailored to fit that business'
individual needs.
Congress has an obligation to support and promote the
business model that community banks have used so successfully.
Unfortunately, the regulatory regime imposed by the traditional
banking regulators, as well as the Dodd-Frank Act, needlessly
raise community banks' costs of doing business. There will be
only one consequence from this regulatory burden, a reduction
in community banks' ability to serve their communities.
Fewer services will be offered, fewer loans will be made,
and those loans that are made will come at higher prices. Fewer
small businesses will get off the ground. Less Americans will
have a good job.
This regulation is not necessary. It seeks to solve a
problem that doesn't exist. Just 2 weeks ago, the Comptroller
of the Currency, one of three primary banking regulators in the
U.S., emphatically stated, ``Community banks and thrifts had
nothing to do with bringing on the financial crisis.'' Yet
community banks all across the country are feeling the brunt of
the Federal leviathan.
This demonstrates a truism that is not unique to banking.
Big, burdensome government typically gives big business a
competitive advantage over existing and would-be small
businesses. As J.P. Morgan CEO Jamie Dimon explained, increased
regulatory burdens make it easier for large firms to gain
market share because they create substantial barriers to entry
for smaller competitors.
The sad thing is that much of the regulatory burden faced
by community banks does not serve a compelling purpose but is
simply an exercise in rote compliance. If the official position
of this administration is that community banks were in no way
responsible for the financial crisis, then why are we
subjecting them to such onerous regulation?
The fundamental goal of this hearing is to understand just
how burdensome Federal banking regulations have become on our
community banks and, in turn, how that affects our small
businesses.
I thank our witnesses with their individual expertise, and
I thank them for being here. In particular, I would like to
thank one of my constituents, Eddie Creamer from St. Augustine,
Florida--he is a community banker in my district--to offer his
personal experience as a community bank leader.
Mr. Chairman, thank you for having this hearing, and I
yield back the balance of my time.
Mr. Jordan. I thank the gentleman for his statement, for
his hard work in Congress, and specifically for helping us put
this hearing together.
I now recognize the ranking member, the gentleman from
Pennsylvania, Mr. Cartwright.
Mr. Cartwright. Thank you, Mr. Chairman.
And thank you, Mr. DeSantis, for that fine opening
statement as well.
Thanks to the witnesses for showing up today on this chilly
day in Washington, D.C.
[Laughter.]
Mr. Cartwright. I represent northeastern Pennsylvania, a
place where people rely on community banks for their banking
needs. In fact, in one out of five counties in America,
community banks are the exclusive source of credit.
Individuals, homeowners, small business people, and farmers
need community banks to be open for business in their
communities.
So protecting the sustained viability of community banks is
important for the quality of life in small towns and rural
counties all across this Nation. But a long-term trend of
consolidation in the banking industry threatens the continued
existence of community banks. According to the FDIC, the
decline in the number of banks with assets less than $100
million was large enough to account for all of the net decline
in total banking charters between 1984 and 2011.
At the same time, banks with assets over $10 billion have
expanded their share of industry assets from 27 percent in 1984
to 80 percent in 2011. In fact, just 90 banks now control $11
trillion in assets in this country.
We are still recovering from our national experience with
the big banks that fail. The hearing today probes the extent to
which the Wall Street Reform and Consumer Protection Act of
2010, also known as the Dodd-Frank Act, has contributed to this
30-year trend in bank consolidation.
I hope today's hearing is not just another attempt by those
opposed to reforming Wall Street and protecting consumers from
predatory banking practices. Unfortunately, some of the folks
across the aisle from me have devoted considerable effort to
stymie the law's new protections. Until just days ago,
Republicans in the Senate refused to consider President Obama's
nominee to head the Consumer Financial Protection Board until
the Dodd-Frank Act was amended to their liking.
Members on this committee spent a week of hearings
interrogating Elizabeth Warren, formerly the appointed head of
the CFPB, who was trying to stand up the new agency. I wish
that effort could have been spent interrogating the people who
caused the financial crisis, rather than the public servants
who were trying to prevent the next one from occurring.
What is clear from looking at the Dodd-Frank Act and its
implementation so far is the real awareness by the law's
authors and regulators of the dangers of banks that get too big
and the importance of protecting small-sized community banks.
In example after example, we have seen evidence that
requirements imposed by the law specifically exempt small
community banks, and the costs of new regulations are largely
borne by the large banks. That is as it should be and I think
was the intention of the law's authors.
Fortunately, today we have with us former Congressman Brad
Miller, who was our participant in drafting of the bill. If the
intention to protect small community banks has not been
fulfilled, I want to hear about that. That is the purpose of
congressional oversight.
But if the purpose of this hearing is to impede
implementation of new consumer protections and to address the
causes of the financial crisis, I strongly reject that. I look
forward to hearing from the witnesses today, and again, I thank
the chairman and Congressman DeSantis for being here today.
Thank you.
Mr. DeSantis. [Presiding] Thank the gentleman.
And the gentlemen from Tennessee like to make an opening
statement?
Mr. Duncan. Well, very briefly, Mr. Chairman, thank you for
requesting this hearing. I think this is a very important
topic.
And I will tell you that just a few weeks ago, there was a
column in the Washington Times, which said that it has been 3
years since the House and Senate passed the Dodd-Frank
financial reform legislation. So far, the effects are not what
Washington promised.
More than 200 smaller banks have failed in the wake of
Dodd-Frank. And it says, and he said, we have learned once
again that whenever Washington announces new regulations, hold
onto your wallets.
And very similar to that, I have a column by Louise
Bennetts from the Cato Institute, an article that appeared in
the American Banker. And she said this, ``The Dodd-Frank Act,
sold to the public as the tamer of the Wall Street titans, may
well end up having a disproportionate impact on smaller
institutions, thanks to the costs of capital implications? of
being not too big to fail and the advent of the Consumer
Financial Protection Bureau.''
And that is the problem. When you overregulate something,
it hurts the little guys first, then the medium size, and it
ends up helping the big giants. And I can tell you, I have no
problems with the regulators being very strict, very tough on
the big giants. But that is not the way this law is working,
and I have had many bankers in my district in east Tennessee
complain about this and tell about how expensive it has been
for them already.
And it is only going to get worse if we don't do something
about it. So I thank you for calling this very important
hearing.
Mr. DeSantis. Thank you.
And the committee received a letter from the Credit Union
National Association, explaining how credit unions are
similarly burdened by onerous regulations in Dodd-Frank. Like
community banks, credit unions were similarly blameless for the
financial crisis of 2008.
And with unanimous consent, we will enter this letter that
they sent to the committee into the record.
Members may have 7 days to submit opening statements for
the record.
We will now recognize our panel. Mr. Eddie Creamer is
president and CEO of Prosperity Bank of St. Augustine, Florida.
Professor Tanya Marsh is assistant professor of law at Wake
Forest University School of Law. The Honorable Bradley Miller
is a former Member of Congress and senior fellow at the Center
for American Progress. And Ms. Hester Peirce is senior research
fellow at the Mercatus Center at George Mason University.
Pursuant to committee rules, all witnesses will be sworn in
before they testify. Please stand. Please rise and raise your
right hand.
[Witnesses sworn.]
Mr. DeSantis. Let the record reflect that the witnesses
answered in the affirmative.
Now you will each be recognized for 5 minutes. I know some
of you prepared statements. You feel free to read from that or
provide whatever information you would like to provide.
So, Mr. Creamer, you are up.
WITNESS STATEMENTS
STATEMENT OF EDDIE CREAMER
Mr. Creamer. Thank you, Vice Chairman DeSantis and Ranking
Member Cartwright, Ms. Duckworth, and Mr. Duncan.
I appreciate this opportunity to speak to you today. It's
both an honor and a privilege for me to talk to you on behalf
of my 160 employees about the sometime damaging, but always
overwhelming and ever-changing regulatory environment that a
community bank faces.
As my written testimony states, I've been a community
banker in Florida for over 31 years. And while I understand
that all banks must be regulated and the consumer must be
protected, I also understand that these regulations must be
clear, concise, uniformly applied to banks so they can reach
their--or meet their intended purpose.
I also understand that the vast difference between
community banks and very large banks, that a one-size-fits-all
regulatory approach is impractical and, frankly, does not work.
There is certainly more complexity and systemic risk in a $2
trillion bank than there is my $748 million bank in northeast
Florida.
Today's Wall Street Journal headline reporting that one our
country's largest banks will likely agree to a record fine for
manipulating the electricity market is the best example I could
give you of this difference today. While I do not understand
how a bank could manipulate the electricity market, nor do I
think I want to understand that, I do understand the crystal
clear difference when contrasted to what a community bank does
and the purpose it serves.
Over my 31-year career, I've experienced law after law,
regulation after regulation, rule after rule--FIRREA, Gramm-
Leach-Bliley, Truth-in-Lending, Truth-in-Savings, Fair Lending,
Know Your Customer, and now Dodd-Frank. Dodd-Frank, by the way,
which by some reports almost 63 percent is yet to be written.
So I can't judge the impact of that.
All of these regulations, while well intended, had the
stated purpose to protect, defend, amend, enforce, or simplify
something. There are thousands and thousands of pages that a
community banker must understand and attempt to comply with,
and rarely, if ever, are existing regulations amended,
repealed, or modernized in consideration of the new
regulations.
These laws and regulations and rules are often and
inconsistently--or often inconsistently interpreted and
implied--applied from exam to exam and examiner to examiner
and, frankly, from agency to agency. This has created
regulatory fatigue in our bank and among our employees, and the
cost of compliance with these regulations skyrocketing for us.
You have seen in the written testimony here and you already
know that community banks play a vital role in our economy. To
continue to play this vital role, it is important that
community banks have clear, concise, uniformly applied
regulations commensurate to their business model and their
inherent risk.
If not, I am confident there will be fewer community banks.
And if there are fewer community banks, there will be fewer
choices for the consumer and fewer products. Fewer choices,
fewer products mean higher cost for the consumer.
Again, I'm deeply grateful for this opportunity to talk to
you about my industry and my profession, of which I'm deeply
passionate, and I welcome the opportunity to address your
questions.
Thank you.
[Prepared statement of Mr. Creamer follows:]
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Mr. DeSantis. Thank you for that statement.
And the chair will now recognize Ms. Peirce for her opening
statement.
STATEMENT OF HESTER PEIRCE
Ms. Peirce. Sorry. It's an honor to be here today. I
appreciate the opportunity.
One of the wonderful things about our financial system is
its diversity, its flexibility, and the competition that it
affords. And this is good for consumers because it allows
consumers of all different types to find something that works
for them.
Unfortunately, the regulatory system that we're putting in
place is not consistent with that competitiveness, flexibility,
and diversity. Instead, it prefers large banks over small. It
imposes regulatory costs that disproportionately burden the
small banks, and its consumer protection model is one that
works much better for large banks than it does for small.
A lot of people say Dodd-Frank is not about community
banks. It's about big financial institutions. And they're
right. It's about a partnership between big financial
institutions and the Government.
This manifests itself most directly in the designation of
systemically important financial institutions under Dodd-Frank.
And while it's true that as a designated institution, you are
subject to many more regulations, but what is also true is that
the Government has made a statement that they stand behind
those institutions that they think they're too important to
fail.
And so, when times of trouble come, when there's a
liquidity crisis, customers of these institutions and also
creditors are going to know that it's the large banks--that the
Government has the back of the large banks. And that's a real
advantage for large banks.
But there are also more subtle--more subtle disadvantages
for the smaller entities, and that comes in the form of
regulatory burden. The financial industry was, as we just
heard, quite regulated before Dodd-Frank. But Dodd-Frank came
along with almost 1,000 pages of legislative text. And then add
to that 11,000 pages and counting of proposals and final rules
and guidance.
For a large bank with an army of in-house lawyers, outside
experts to assist them in figuring out how to comply and how to
comply efficiently, it's a burden, but it's not the type of
burden that it is for a community bank. For a community bank
that has to hire a new compliance person or pay high-priced
outside consultants to help it understand what applies to them,
it could be the difference between a profitable year and not a
profitable year.
But more important I think than the monetary cost is the
distraction. If you think of your average community banker who
got to where she is because she loved the community she serves
and she wanted to figure out how to help small businesses in
that community grow, how to help families buy homes, she didn't
want to spend her time thinking about regulation. But now the
cloud of uncertainty, of regulatory uncertainty is what's
keeping her up at night, and that's not good for the consumers
that she wants to serve.
And then, as far as consumer protection goes, the Dodd-
Frank model of consumer protection is one in which the
regulators in Washington will figure out what works best for
consumers all across the Nation. And that means designing plain
vanilla products that will work for every consumer in every
circumstance. And that works pretty well for large banks, which
have a mechanistic approach to lending.
But for a community bank, which prides itself on getting to
know its customers and its communities and tailoring products
to them, it doesn't work so well. And so, this could end up
leading community banks into areas that they're not--into new
business lines that they're not comfortable with, into new
products, and into more aggressive ways to fund themselves and
more aggressive product lines.
So what can we do about this? Well, first, we can find out
more. We can find out what the good, the bad, and the
indifferent parts of Dodd-Frank are for community banks, which
the Mercatus Center, where I work, is now trying to do that.
We're conducting an online survey of small bankers, and we hope
to present the information that we get from that to
policymakers so that they can figure out which parts are truly
the worst.
And the second thing that we can do is now we have 3 years
of objective hindsight with which we can look at Dodd-Frank and
say, okay, what's working and what's not? What do we need to
fix? What do we need to throw out?
And then we can look at designing better exemptions for
small entities. And these exemptions can't be ones that are
conditioned on very complicated criteria because then that,
too, becomes a regulatory burden for the small banks.
And then we can ask the regulators, ask the financial
regulators to do economic analysis. This is something that they
don't traditionally do, but it's not too much to ask them to
look through an economic lens, figure out what the problem
they're trying to solve is, look at the alternatives, and look
at the costs and benefits of those alternatives.
Thank you very much, and I'd be happy to answer any
questions.
[Prepared statement of Ms. Peirce follows:]
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Mr. DeSantis. Appreciate that statement.
Mr. Miller, thank you for joining us. You are up for 5
minutes.
STATEMENT OF HON. R. BRADLEY MILLER
Mr. Miller. Thank you, Mr. Chairman.
I'm Brad Miller. I've served for a decade as a Member of
the House and left at the beginning of the year. I'm now of
counsel to the law firm of Grais & Ellsworth and a senior
fellow at the Center for American Progress.
The consolidation of the banking industry has largely
reduced the role of community banks to a niche in the economy,
but it is an important niche, as almost everyone who has spoken
has noted. Community banks still hold a majority of deposits in
rural and small town America. One out of five rural and
micropolitan counties--that's small towns--the only physical
banking offices are those of community banks.
Community banks are locally owned and controlled. They
gather deposits locally, and they make lending decisions
locally. As of 2011, 46 percent of the banking industry's small
loans to farms and businesses were by community banks, and
community banks just had 14 percent of banking assets.
Congress and regulators should recognize real differences
between community banks and too big to fail institutions. Avoid
needless compliance costs because compliance costs are largely
a fixed cost rather than a variable cost. Avoid giving large
institutions an unfair competitive advantage. Allowing
examination of smaller banks for CFPB compliance by existing
safety and soundness regulators, rather than having too
disruptive regulations, is a sensible recognition the
differences between community banks and bigger banks. I got
some grief at the time from some of my usual allies on
financial reform for leading that compromise. But I thought
then, and I still think, that different compliance examination
rules made sense.
Similarly, the CFPB created a sensible, limited exception
from the qualified mortgage, or QM, rule for portfolio
mortgages by community banks and credit unions with less than
$2 billion in assets that make fewer than 500 first lien
mortgages a year. The Dodd-Frank Act was the most significant
set of financial reforms since the New Deal, and the financial
crisis was the most significant financial crisis since the
Great Depression.
A GAO study last fall concluded that some provisions will
help community banks, such as supervision by the CFPB of
nonbank lenders that competed unfairly with responsible
community banks in the past and changes in the calculation of
deposit insurance premiums.
Other visions inevitably will result in some compliance
costs for community banks, the GAO found. But how much will
depend upon the implementing regulations. So this is all kind
of a guess in what compliance costs may be.
Regulators should certainly make sensible exceptions, like
CFPB's exemption from the QM rule for some portfolio mortgages
by community banks. But other provisions really should apply
equally to all lenders. Community bank lending may be more
relationship based than lending by bigger banks, but no one
walks into a community bank with a legal pad or a laptop and
says, ``I need a loan. Do you want to be the party of the first
part, or do you want me to be the party of the first part?''
They all use standard forms. They use the same forms for
all of their lending. No lender's standard form should include
predatory, equity-stripping provisions. Community banks were
generally not guilty of some of the worst abuses of the last
decade, and community banks remain more constrained by
reputational concerns than are the biggest banks.
But community banks are not incapable of bad conduct. In
the movie, ``It's a Wonderful Life,'' George Bailey was a
community banker, but so was Mr. Potter. I know that I've just
made a reference that no one under the age of 30 caught.
[Laughter.]
Mr. Miller. Which is--which means 97 percent of
congressional staffers.
There is litigation pending now against a New York
community bank for mortgages that the banks made to homeowners
with lots of equity but problem credit. The mortgages had an
interest rate that adjusted to almost 10 percent.
If a mortgager--if a homeowner was late with a payment, the
rate went to 18 percent and stayed at 18 percent until the
homeowner got completely current. Almost half of the 5,000
mortgages, 5,000 homeowners who got those mortgages are losing
their home.
If Congress is serious about helping community banks
compete, there are a lot of things Congress can do. Congress
can limit ATM charges that are unrelated to the cost of
transactions. There is a Bank of America cash machine just two
blocks from here on Pennsylvania Avenue. Good luck with finding
one for Prosperity Bank.
Most important, Congress should end the implicit subsidy of
too big to fail banks. The ICBA has joined in the chorus
calling for ending too big to fail because of the unfair
competitive advantage it gives too big to fail banks over
community banks, and Congress should pay attention.
Again, Mr. Chairman, thank you for this opportunity to
testify.
[Prepared statement of Mr. Miller follows:]
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Mr. DeSantis. Thank you for your attendance.
And Ms. Marsh, thank you for attending as well, and you are
up for 5 minutes.
STATEMENT OF TANYA MARSH
Ms. Marsh. Thank you, Chairman, members of the
subcommittee.
I appreciate you convening this hearing today and for
inviting me to testify.
My name is Tanya Marsh. I'm an associate professor at the
Wake Forest University School of Law in Winston-Salem, North
Carolina, and I'm an adjunct scholar with the American
Enterprise Institute.
In May, I coauthored a research paper for AEI, entitled
``The Impact of Dodd-Frank on Community Banks.'' A copy of that
paper is included in my written testimony, but I just wanted to
highlight a couple of key points from it for you today.
The purpose of Dodd-Frank, as everyone has noted, is to
prevent another financial crisis by enhancing consumer
protection and ending the era of too big to fail. But the
regulatory burden imposed by Dodd-Frank on community banks I
believe undermines both goals, and ultimately, it will harm
both consumers and the economy by first forcing community banks
to consolidate or go out of business, furthering the
concentration of assets in too big to fail institutions, and,
second, encouraging standardization of financial products,
which potentially will leave millions of vulnerable borrowers
without meaningful access to credit or banking services.
The American system of banking regulation is really a
system of regulation by accretion. And what I mean by that is
it's a result of about 200 years of very well-meaning
legislative responses to financial and banking crises. But the
net effect of all of these policies is a one-size-fits-all
system that is fundamentally flawed.
My key message today is I think we need to take a step back
and rethink our regulatory approach to banking in general, to
target our resources on the real risks to the American consumer
and the American economy, rather than doubling down on a
regulatory approach that represents more of a historical
accident than a deliberate policy choice.
It's a simple fact that a depository institution with $165
million in assets, the median American bank, poses different
risks to consumers and the economy than a $2 trillion bank. And
I think we should take a more tailored approach to regulating
them both.
We need to remember that financial services sector is not a
free market. It's a highly regulated market. Therefore, our
policy choices can have a substantial impact on the ability of
institutions to compete within that market. Although few would
argue, and no one is arguing here today, that community banks
caused the financial crisis, 7 of the 16 titles of Dodd-Frank
are expected to impact community banks in some way.
Hundreds of regulations are anticipated to be promulgated.
Most of these rules are very complex, and the stakes for
understanding and following them are high. It is not an
insignificant cost to have an expert read the new regulations
as they're proposed and determine whether or not they are
applicable, let alone implement them.
As the Federal Reserve determined in 1998, a small bank is
less able to absorb this regulatory burden than a large bank.
So by imposing unnecessary regulation on smaller institutions,
we are awarding the larger banks a further competitive
advantage.
A recurring theme in Dodd-Frank, particularly with respect
to the Consumer Financial Protection Bureau, is that the
standardization of financial products and forms will protect
consumers. But this focus on standardization fails to recognize
the challenges posed by--posed by borrowers who lack the deep
credit history or documentation necessary for the model-based
lending that's used by the larger banks.
The self-employed, seasonal workers, farmers, people
transitioning to work are particularly at risk, I believe, by
increased standardization. Financial activities that are
fundamental to the average American are only really worth the
time of a megabank if they involve a completely standardized
product and if the borrower is a completely standardized
borrower. You either fit in the box, or you don't.
And as a result, millions of Americans are left out of the
box altogether. According to the FDIC, one in four American
households is unbanked or underbanked. These households
interact with nonbank financial service providers who have been
largely unregulated prior to Dodd-Frank, and they typically
bear far higher costs than those households that are fully
served by banks.
So if regulators push the entire banking industry in
lockstep toward standardization, many small businesses and
individuals that are currently served by community banks may be
denied credit and swell the ranks of the unbanked or
underbanked. In addition, because of their higher operating
costs relative to larger banks, if community banks become
forced through standardization into just small versions of
large financial institutions, they will be at a severe
competitive disadvantage.
So, as a result, credit and banking services will be
eliminated or become more expensive for millions of American
consumers, especially those living in rural communities and
small businesses.
For these reasons, I ask the subcommittee to consider
taking an overall fresh look at the Federal regulation of banks
to determine how to more appropriately regulate both community
banks and large financial institutions.
Thank you again for the opportunity to testify today.
[Prepared statement of Ms. Marsh follows:]
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Mr. DeSantis. Well, thank you for your statement and for
your attendance.
And the chair will recognize himself for the first 5
minutes of questions. You know, it is interesting. I saw an
estimate about once all the Dodd-Frank rules are implemented,
that compliance economy wide is going to be about 24 million
man-hours. And by way of comparison, 20 million man-hours was
sufficient to build the Panama Canal.
So this is a huge diversion of energy into compliance. And
I think today we want to figure out is all this compliance
necessarily a good thing, particularly for institutions who are
not too big to fail and did not cause the financial crisis.
Mr. Creamer, do you have unlimited resources at your bank?
Mr. Creamer. No, sir. I do not.
Mr. DeSantis. So as you face more burdens from the
regulatory apparatus, do you basically have to just diverted
existing resources into meeting that compliance, the compliance
requirements?
Mr. Creamer. We diverted existing resources. In addition to
that, over the past 4 years in a very difficult economy when,
as a small business, a bank or any other business had to watch
every cost, every paper clip, every piece of paper to make sure
that we retained the core profitability that we needed to
survive, those limited resources were strained even further as
we moved away from customer-facing personnel to compliance and
audit-related personnel.
In fact, coming out of the recession now, I went into the
recession with 260 employees. I came out of the recession with
165 employees. I now have more compliance staff than I do small
business lenders.
Mr. DeSantis. And does that have--I would imagine that
would have an effect on how broad you can lend throughout the
community, given those numbers?
Mr. Creamer. It has a negative effect. Obviously, I mean,
first of all, during the recession, there was not a lot of
demand for new loans. But there was a lot of demand from
existing customers for help with existing loans.
As we have seen in northeast Florida now, the economy is
beginning to recover, and there is a demand for new loans. But
resources are still limited. And so, having the compliance and
audit staff and the costs we spend in addition to that for
training and three outside firms we employ for compliance
review, it will cost us in excess of $750,000 this year just
for compliance. That's resources that I cannot devote back into
production people, calling officers, and that sort of thing.
Mr. DeSantis. Now just as an experienced community banker,
does your bank or any community bank that you have seen pose a
systemic risk to the national or world economy?
Mr. Creamer. I don't believe we pose a systemic risk to the
national or world economy. In fact, I'm not sure we pose a
systemic risk to St. Augustine and Palatka, frankly. We perform
a very important function in those markets, but I do not
believe the economy would stop functioning if we ceased to
exist.
Mr. DeSantis. Now I guess one of the--and Mr. Miller
suggested, hey, well, you can cap some fees or do this. Now you
and I talked in the district about some of the purported
consumer protection regulations that come out, and you serve a
lot of low-income people. And you told me the issue you are
having with some of the folks who have this overdraft
protection and how you are basically, in response to the
regulation that is supposed to be pro-consumer, they are now
actually going to probably have less choices.
Can you explain that?
Mr. Creamer. Well, we are a--we are a business like most
other businesses. We are a for-profit business. In fact, our
regulators want to make sure we are a for-profit business
because, obviously, one of the ways we build capital, which is
very important, is through our net profit.
When our profit is strained or our costs are increased, we
have to pass that on, to some extent, to the consumer. We can
only cut costs so much within our organization. And I think,
more specifically, what you and I talked about was in relation
to the overdraft protections, we are--we serve a very blue
collar market. In fact, to a large extent, we serve what I call
a ``no collar'' market--a lot of contractors, a lot of people
who are working for a living.
There is a misconception about banks and overdrafts.
Customers who use overdrafts are normally not customers that
are being abused by the financial institution. They are using
those because they are making a conscious choice. Because it's
2 days before payday, and I'm a schoolteacher. I work for the
city, and I have to pay my rent or I have to buy my groceries.
That's a fact of life in our economy.
I have two choices. I can write a check that I know my bank
is going to pay, which has very little stigma to me, and I will
cover that check later. Or I can go to the payday lender, which
has a huge stigma and a large cost to the consumer.
So in many cases what is represented as being terribly
problematic is more so serving a demand for that individual
customer that is making a choice.
Mr. DeSantis. And as a result of some of the new rules, you
basically are going to be in a situation where they are going
to have less options in that respect?
Mr. Creamer. They already have significantly less options.
Mr. DeSantis. Okay. Ms. Peirce, you kind of hit on this.
But with the advantages that some of the heavy regulatory
burden provides to some of the large banks, obviously, they can
comply with this much easier. They have huge staffs, all this.
Are there funding costs? And you said there is an implicit
taxpayer guarantee here. So does that reflect itself in them
having lower funding costs than small and medium-sized
competitors?
Ms. Peirce. I think it does. Now they don't always compete
in the same capital markets, the small banks and the bigger
banks. But I will say that especially during a time of crisis,
we're going to see that funding gap really spread. And so,
that's when it really matters, when you really--you need to
have liquidity to survive. It's going to really matter, and the
bigger institutions will have a hands-down advantage then.
So I do believe they have a funding advantage now, but it's
even more critical in times of crisis.
Mr. DeSantis. Great. Thank you.
My time has expired, and I will recognize the gentlewoman
from Illinois.
Ms. Duckworth. Thank you, Mr. Chairman.
Thank you to all the witnesses for being here.
I am deeply concerned about the well-being about community
banks. I feel that they are absolutely critical to the success
and economic well-being of our communities. They provide close
to half of the small business loans, at least in my district,
and I think that may be nationwide. And they also provide
something around 16 to 20 percent range of residential
mortgages, mortgage lending.
Community banks operate on a very different business model
than the large banks, and I think it is really critical that we
ensure that any financial regulations that we put into place
respect those differences and don't put our community banks at
a disadvantage.
The last thing I want is more consolidation in the market
and for the big--too big to fail banks to get even bigger. The
housing market in Illinois was particularly hard hit, and as it
recovers, I want to make sure that we are not harming the
ability of families in my State to achieve the American dream
of buying a home.
The CFPB has requested public comments on the proposal to
adjust the qualified mortgage rules for the community banks.
Could each of you provide me with your thoughts on the impact
of this proposed adjustment to the qualified mortgage rule will
have on residential mortgages--residential mortgage lending,
particularly for community banks?
Mr. Creamer. Yes, ma'am. And thank you.
I can speak from my standpoint. I'm not comfortable with
the CFPB defining a qualified mortgage. I think that's the
purview of the bank and its underwriting practices and the
customer individually at the time.
As an example, the definition now, as I understand it, is
if a mortgage loan is made in excess of a 90 percent loan to
value, it may not be a qualified mortgage, and the borrower
could have a rebuttable presumption to put the loan back if
there is a default.
Unfortunately, in our market, that will have the effect of
eliminating a huge segment of needed mortgage loans. I know a
number of people, and I will speak for my son and my daughter-
in-law, who are both college graduates, who are both gainfully
employed, who are both renting an apartment. And at some point,
they'll want to buy a home. And in our market, to buy an
affordable home, it would probably be $175,000, and there will
be closing costs in that.
For them to put 20 percent down on that home would probably
be somewhere around $40,000. Well, not only do they not have
$40,000 saved, they haven't sold a home and made $40,000. Most
Americans have a hard time saving $40,000.
And even though they would fully qualify for the loan, they
would be prohibited from getting the loan because of the down
payment requirement, even though the monthly payment at today's
interest rates would be less than their rent payment.
Ms. Duckworth. Great point.
Ms. Peirce?
Ms. Peirce. Yes, I mean, I just want to echo what Mr.
Creamer said in the sense that it should be the bank's
responsibility to figure out what sound underwriting is for a
loan. It's very difficult to--I think the CFPB has a very
difficult task to try to set underwriting requirements for all
the loans across the country, and that's really what they're
trying to do in the qualified mortgage rulemaking.
And there are exceptions, but the exceptions, from my
understanding, aren't broad enough to cover some of the normal
lending practices of community banks.
Ms. Duckworth. Congressman Miller?
Mr. Miller. I understood your question about QRM rather
than QM.
Ms. Duckworth. Okay.
Mr. Miller. One of the criticisms that we heard of what
went wrong before the financial crisis, leading up to the
financial crisis, was that the origination of mortgages was an
originate to distribute, and the originator, which were often
not community banks, were often mortgage companies with
essentially no assets, sold those immediately to Wall Street,
which immediately put them in a pool and sold mortgage-backed
securities based upon them.
And so, the phrase we used, we heard so much at the time
was ``skin in the game.'' That if the originator had some skin
in the game, they would, in fact, apply underwriting standards.
But if they could get somebody to buy 100 percent of the risk,
they didn't care.
So the object of qualified--but then the idea was they had
to keep at least 5 percent. But we heard from a lot of the
financial industry that if we did that, it really would
constrict liquidity, and there should be some kind of obviously
safe mortgages that should not be subject to that 5 percent
retained risk, skin in the game requirement.
Now I have thought that the QRM rules do go too far. I
don't think that they need--we need to go back to Ozzie and
Harriet loans of the 1960s. I don't think we need to have 20
percent prime, you know, all the rest. But I do think that as
an exception to the risk retention rules, the QRM, a QRM
exception does make sense, and leaving it entirely to the banks
just puts us back where we were in the middle part of the last
decade.
Ms. Duckworth. I am out of time, Mr. Chairman.
Mr. DeSantis. Ms. Marsh, if you weigh in on that, give you
----
Ms. Marsh. If I could just briefly? I think that the
qualified mortgage rule is a great example of the
standardization issue that I mentioned in my testimony. So when
I was doing research for my paper, I talked to a community
banker in the upper Midwest, where the economy is very reliant
on timber and mining, seasonal activity. So most people don't
have any cash flow during the winter months.
He structures residential mortgages so they only have to
make payments for 9 out of the 12 months because that matches
their income stream. Under the qualified mortgage rules, he
can't do that.
That's not the kind of activity that we're trying to clamp
down on. We're trying to align underwriting risk with skin in
the game, as Congressman Miller mentioned. And I think
exempting loans that are held in portfolio can accomplish that.
Mr. DeSantis. Thank you.
The chair now recognizes the gentleman from Tennessee.
Mr. Miller. Loans held in portfolio are 100 percent skin
the game.
Ms. Marsh. Right.
Mr. Miller. Okay.
Mr. Duncan. Well, thank you, Mr. Chairman.
The staff asked, I didn't know what the up-to-date
statistics were. So I asked the staff a few minutes ago what
was the average size of a typical bank in this country, and
they tell me the median size, bank size is $165 million, that
80 percent of the 7,100 banks have less than $1 billion. The
average size of the 10 largest banks is $717 billion, and so
there is quite a discrepancy between the very largest.
And I started this hearing saying that I don't have any
objection to going to these trillion dollar banks or these
mega-billion dollar banks because they can handle it. But the
problem is, is that this is--as those quotes I gave, this is
most harmful to the little banks.
In fact, this one article says, thanks to Dodd-Frank,
community banks are too small to survive. We talked about too
big to fail, too small to survive is what we are looking at in
the over 200 that has run out of business since we started
Dodd-Frank.
And Ms. Peirce, I was under the impression--you know, I
remember--every Member gets a thing called the Congress Daily
at their door each morning. And I remember 2 or 3 years ago,
there was a cartoon in there, and it showed these banks with
huge bags full of money, and the banker saying, ``Lend,
lend''--I mean, excuse me, and it showed the President,
President Obama, saying, ``Lend, lend, lend.'' And then it
showed the regulators pulling back, saying, ``No, no, no.''
And I was under the impression that the banking industry,
even before Dodd-Frank, was one of the more heavily regulated
industries in this--or businesses in this country. Is that
correct?
I mean, before you had the 2,300-page Dodd-Frank law and
the hundreds of new rules and regulations, you already had all
kinds of rules and regulations and red tape for these banks
anyway?
Ms. Peirce. That's correct. And unfortunately, some of
those rules directed bankers to instead of using their own
skills in figuring out whether to loan and when, it tried to
direct them when to loan and tried to make decisions for them,
just as you mentioned.
Mr. Duncan. Mr. Creamer, did you start your bank? Or were
you in at the first?
Mr. Creamer. No, sir. I did not.
Mr. Duncan. What size was it when you first got involved?
Mr. Creamer. When I joined Prosperity Bank in--16 years
ago, the bank was about $75 million in assets.
Mr. Duncan. Seventy-five million?
Mr. Creamer. Yes, sir.
Mr. Duncan. How--what do you think would be the effect on a
bank much smaller than yours? Let us say a $100 million or a
$200 million bank?
Mr. Creamer. Of a regulation--of the current regulations?
Mr. Duncan. Yes, of the Dodd-Frank law.
Mr. Creamer. Catastrophic.
Mr. Duncan. Catastrophic?
Mr. Creamer. Yes, because resources are resources. Banks
operate on net interest margin and non-interest income. Both of
those are a function of asset size. The larger the bank,
especially in a community bank that gets over $500 million, and
there's been a lot of conversation that if you're not over $500
million, you probably can't afford to operate in the regulatory
scheme. But economies of scale build in, and you have some
efficiencies at that point to afford compliance staff and, at
some point, outside legal help.
If you're below that level, with net interest margins
compressed, as they are today, and non-interest income being
regulated down as hard as it is today, it's going to be
extremely difficult for those banks to, one, I would say,
survive. And I don't mean survive from a failure standpoint. I
mean without having to merge out. And two, to be profitable to
return any modicum of return to the shareholders.
Mr. Duncan. Ms. Marsh, do you think that this law is going
to continue this trend of forcing smaller banks either out of
business or forced to merge with bigger banks?
Ms. Marsh. Absolutely. It already has, actually.
I think Ms. Peirce and I have both conducted or are
conducting research to try and quantify what the regulatory
burden actually costs banks and to see what actually happens as
a result. It's very difficult to figure that out, especially
since many of the rules are still being created.
But there's all kinds of anecdotal evidence that small
banks are merging, and if you listen to the testimony and the
public statements of the leaders of some of those banks,
they're doing it because, as Mr. Creamer mentioned, a smaller
bank simply can't absorb the costs. And they have to bind
together to survive collectively.
Mr. Duncan. Well, I just think it is very sad that a law
that was aimed at a few big giants on Wall Street is ending up
hurting the little guys and the medium-sized guys most of all.
Thank you very much, Mr. Chairman.
Mr. DeSantis. Thank you.
And the chair will now recognize the ranking member of the
full committee, Mr. Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman.
And I want to thank all of you for being here.
And to Congressman Miller, it was good to see you back. I
always respected your work in so many areas, but particularly
in this area.
Many of the provisions under the Dodd-Frank Act are geared
towards the larger, too big to fail institutions. However,
there are many examples where community banks receive positive
treatment under new regulatory requirements implementing the
Dodd-Frank Act. For example, the Dodd-Frank Act raised the
Federal deposit insurance coverage on consumer bank accounts to
$250,000 while shifting the cost to larger institutions to
better reflect their industry market share.
Community banks have benefited by a significant drop in
Federal deposit insurance premiums paid by the institutions
with less than $10 billion. And it was recently announced that
there will be a refund of $5.8 billion in deposit insurance
fund prepayments from the last 3 years.
Now, Congressman Miller, by reforming the deposit insurance
assessments, do you think that the regulators have it right,
have the right balance in terms of assessments charged to large
banks versus the small banks?
Mr. Miller. Mr. Cummings, I think we did that. We don't
want to give the regulators credit for that.
Mr. Cummings. Okay. All right. Well, we will take credit.
Mr. Miller. I know that Mr. Creamer, in his written
testimony at least, did speak of the burden of deposit
insurance, the assessments, the premiums. But the adjustment of
those was something that truly does help. The GAO study pointed
it out as something that would truly help community banks.
The fact that community banks were having to compete with
nonbank lenders that were not playing by any rules at all was
unfair to community banks, took away business. That is
something else that helps community banks.
And the GAO study said, as for the rest, it's certainly
true that we've passed the most significant financial reform
package since the New Deal because we had the most significant
financial crisis since the Great Depression. So, of course,
there will be some compliance cost.
But until the implementing regulations come down, we can't
know what they will be. So all of what we've heard about how
crushing they will be is--is speculation because we don't know
because most of them have not come down.
The CFPB, at least in their rulemaking to this point, has
taken to heart the suggestions of small banks. They have a
trade association, an Independent Community Bankers
Association, ICBA, that has been very involved in the
rulemaking. The reformers like Center for Responsible Lending,
CRL, is working closely with ICBA and trying to be reasonable
and compromise.
So, as I said in my prepared--as I said both in my oral
statement and my written statement, I very much encourage the
regulators to look closely at the concerns raised by community
bankers to see what is not a necessary cost of compliance, as
we did in Congress with having a different examination regime
for the CFPB for small banks, and try to make sense of this.
Not needlessly drive up compliance costs, but also
recognize where the rules do need to be the same.
Mr. Cummings. Okay. The Dodd-Frank provides the CFPB with
supervisory authority over nonbank financial institutions in a
capacity new to that industry. Congressman Miller, in your
testimony today, you have stated, and I quote, ``A GAO study
last fall concluded that some provisions will help community
banks, such as the supervision by the CFPB of certain nonbank
lenders that competed unfairly with responsible community banks
in the past.''
Would you comment on that, please?
Mr. Miller. Certainly. There were some--like the New York
community bank I spoke about in my testimony, my prepared
testimony, there are some bad actors. But generally, the
community banks were not--were not guilty of the worst
practices.
Some of the worst practices were by mortgage companies that
were not depository institutions at all, did not have a charter
from anybody. They were almost completely unregulated.
I've heard Ben Bernanke say in sort of defense of the Fed--
because they had rulemaking authority they never used under
HOEPA, Home Ownership and Equity Protection Act, passed in
1994--that the mortgage market, mortgage practices went to hell
in a very short period of time in a pretty dark part of the
market, where they did not really see what was going on.
You certainly had lenders like Ameriquest that weren't--
weren't depository institutions at all. You also had really a
gray line between brokers and an originator that all you really
needed to be--needed to do to become a mortgage company was to
get a warehouse line of credit and to have a relationship with
a Wall Street investment bank that would buy the mortgages as
soon as you made them.
And those folks were competing with Mr. Creamer. And when
you make them play by the same rules that Mr. Creamer plays by,
that his bank plays by, it's going to help him a lot.
Mr. DeSantis. Thank the gentleman.
And the chair now recognizes the gentleman from Georgia,
Mr. Collins.
[Pause.]
Mr. Collins. May as well go for it. You made a comment
earlier. You made a statement. Micropolitan? What was your ----
Mr. Miller. Micropolitan. It's a Census Bureau term. It
just means small towns.
Mr. Collins. Well, I have another term for it. It's called
home. And ----
Mr. Miller. It was called my district, too. Yes.
Mr. Collins. Exactly. So we understand that. And I think it
sort of sets the stage for my questions and just really where I
am at as well because I like your analogy. And by the way, it
is a traditional favorite at our house of the Baileys and the
Potters, and we understand that.
Mr. Miller. You're raising your children right.
Mr. Collins. Exactly right. But I think there is an issue
of the market taking care of the Potters of the world, and
there is an issue with the Baileys, and neither one were
exactly models of bookkeeping, okay, in that movie.
[Laughter.]
Mr. Collins. But what I see here and what I want to talk
about, Mr. Creamer, as I see you here today, and I sense as we
were talking about this, I just sense a frustration not in
necessarily your voice, but in your eyes. That you are just,
see, you look a lot like the bankers that I talk to in
northeast Georgia.
One of the stories that I have, and it may be similar in
your area of north Florida, was we had a community bank, a
little three-branch community bank, great little lender. Came
in with all the regulations. They came in with--their auditors
came in to their home office.
Their home office had 10 employees. They brought in about
14 auditors and got mad because they didn't have a place to
work out of. This is the kind of things that I think folks just
don't understand.
Mr. Creamer, are you seeing this sort of thing as you talk
to other bankers? I would like just to hear. I have read your
statement, and I am sensing that. But I also want to hear from
you again.
Mr. Creamer. Well, I'd like to apologize first for speaking
with my eyes and not my voice because ----
Mr. Collins. But I think this happens.
Mr. Creamer. There is a large level of frustration. And I
had breakfast with my vice chairman last week, and he told me I
was becoming cynical and I needed to guard against that. So I
am guarding against that.
Mr. Collins. Well, you came to the wrong city for that.
[Laughter.]
Mr. Creamer. Yes. Well, you know, I would first like to say
I was remiss in not thanking the Members for speaking very
complimentary about community banks and even the testimony here
and saying a number of times that we did not cause the
financial crisis. Because, frankly, if you've been on the
business end of 8 safety and soundness exams over the last 6
years like I have, you would believe that you were the sole
cause of the crisis.
It is comforting that the FDIC is going to give back some
of the premiums. However, in the State of Florida, there is
about 200 community banks, plus or minus. Seventy-five of those
were put under consent or cease and desist orders over the past
4 years.
Of those 75 cease and desist orders, 63 read exactly the
same, and they all impose 8 percent and 12 percent capital
ratios, which are above the regulatory standards. If you have
one of those consent orders, you do not get a refund of that
premium. So it is not very helpful in that.
From the examination story, in our bank, it's more like 30
to 35 examiners. It is a 6- to 8-week process. That is new in
the last 4 years, and it's--I mean, it's something we have to
do because we're an insured institution. But it is difficult at
best.
Mr. Collins. And one other thing that I want to emphasize
in the little bit of time I have left here is Georgia has had a
large issue with that problem as well, failed banks and failed
specifically community banks, for a number of reasons, some
good and some bad. But one of the issues that I am having
trouble as we get around just some issues that my banks are
bringing to me was not being able to get into the markets that
are de novo standard, that coming out in 2008 were well
capitalized or limited.
If they were established after 2008, that standard coming
in where they can't reach out in the markets in a different
way. Can you explain to me, and Mr. Creamer or others want to
jump in, explain the change in the de novo status that is meant
for newer community banks trying to come in and fill the gap
where some have been mentioned?
And also has there been an effect of this standard maybe
cutting back the access to residential mortgage markets in
areas that preventing healthy community banks from entering
into those markets? Is that something that would you speak to
or someone else would speak to?
Mr. Creamer. I'm not sure I can speak to the de novo
situation because we're not a de novo.
Mr. Collins. Not de novo, yes.
Mr. Creamer. And I can't imagine anybody would want to
start a bank today anyway.
Mr. Collins. Well, we have had a couple, and I have one
bank in particular that was starting to get into a new market,
had hired consultants, went through the paperwork, and went
through everything else. The consultants then went to another
job because of the length of time it was taking to get this up.
So they finally just put it on hold, and it stopped the market.
And it was just, again, we are in an area which is a little
bit different. So anybody else want to take a stab it,
Congressman and others? I mean, because it seems like we are
limiting our environment here, and that is the one thing we
really don't want to do, as long as the standards are properly
and appropriately applied.
Mr. Miller. I'm not familiar with any--like Mr. Creamer,
I'm really hearing for the first time about a discussion about
newly chartered banks. I think there's probably true there are
not a whole lot.
Now there has been a study of the 200 or 300 community
banks that failed during the financial crisis. I think it was
the GAO. It may have been the FDIC. But in fact, most of those
were fairly newly chartered banks, and they were fairly newly
chartered banks that were chartered specifically to get
involved in what they called at the time the real estate boom,
now we call the real estate bubble.
And that doesn't even take into account--it's like 70 or 80
percent of the failed banks were newly chartered banks that
their business model was largely dirt lending, either
acquisition development in construction loans, a form of
commercial lending, or mortgages. And those were the ones that
they got into trouble.
And then, in addition to that, there were a fair number of
investors who bought community banks specifically to get in on
the real estate boom, now we call the bubble, and a lot of
those got into trouble as well.
But it's probably pretty hard to raise capital right now in
part because the economy is still kind of bad.
Mr. Collins. And especially in those that exist. And Mr.
Chair, I know my time is out.
But I think one of this is the thing that they are actors.
And as you--and I do like the analogy to a point of the Bailey
and Potter issue. But we can't continue to regulate the Potters
of the world at the expense of the Baileys of the world, and I
think that is the problem that I am seeing right now, and it is
the concern that I have.
Mr. Chairman, I yield back.
Mr. DeSantis. Thank the gentleman from Georgia.
Now we don't have anyone from the other side. Obviously, if
they come, they will be recognized. But seeing the lack of
Members on that side, the chair will now recognize the
gentlelady from Wyoming.
Ms. Lummis. Thank you, Mr. Chairman.
Kind of following in on this theme, I, too--I'm from
Wyoming, the smallest population in the Nation. There really
are no big banks in Wyoming, none. We are completely reliant on
community banks, and so the thought that we would all have to
drive to Denver or Salt Lake to bank for an entire State is
absurd.
Professor Marsh, I want to ask you, does too big to fail
give systemically important institutions an advantage that
community banks can't get?
Ms. Marsh. Well, to clarify, what do you mean by ``too big
to fail?'' So, do you mean systemically ----
Ms. Lummis. Systemically ----
Ms. Marsh.--significant designation?
Ms. Lummis. Yes.
Ms. Marsh. That hasn't really been my focus of my research,
but there are a number of people who would argue that that's
true.
I think it is true that that designation means that many
people in the marketplace consider that the Government, even
though Dodd-Frank repeatedly says we're not bailing anyone out,
the marketplace doesn't believe it. And the marketplace is
giving a premium to the larger banks at the expense of the
smaller banks.
So ----
Ms. Lummis. Why doesn't the marketplace believe it?
Ms. Marsh. I think because if you allow an institution to
remain that large, if we found it difficult to imagine a world
where they all cascaded in failure 5 years ago, and they've
only gotten bigger since then, how can we imagine a world where
the Government would allow them to all cascade in failure this
time?
Ms. Lummis. Mr. Creamer, why didn't your bank--why doesn't
your bank believe it?
Mr. Creamer. Because it's been the practice that too big to
fail, whether you are a financial institution or an automobile
manufacturer, it has just been a practice that you've been
bailed out. The moral hazard has been created. And as a
financial person, we fully understand that a $2.3 trillion
financial institution that can manipulate the electricity
market cannot be allowed to fail.
Ms. Lummis. So how is this going to affect the needs of
customers in States like mine and communities like Mr. Collins'
in northern Georgia, very rural areas? What are we going to do?
Mr. Creamer. Well, as Mr. Miller said earlier, and he's
accurate on residential loans that all the forms are basically
the same, not so on small business loans where the forms can be
different. But the difference then is the customers are not all
the same. And in a community bank, it's about the story of the
customer.
It's about the need of the customer, what the customer is
trying to accomplish, and how can the community bank help that
customer accomplish what they're trying to accomplish. Because
if we're successful in helping a small business owner
accomplish what they want to accomplish, then they hire more
people.
More people potentially bank with us. More people then
potentially borrow for their homes and their cars, which makes
our community stronger, and it makes our bank stronger, and
it's just a good thing.
Ms. Lummis. So how many Fortune 500 companies do you think
are incorporated in Wyoming, have their home offices in
Wyoming? What would you guess? Anybody?
Mr. Creamer. None?
Ms. Lummis. You got it. So with places like Wyoming or any
of these districts that are really comprised of small towns,
what is the future for the borrower, for the small business
person, the small business person?
Mr. Creamer. The future should be a strong, viable
community banking system.
Ms. Lummis. How do we get it back?
Mr. Creamer. We have to relieve the overwhelming regulatory
burden off of the community banks, and we have to allow
community banks to be able to effectively compete in the niches
they compete in.
Ms. Lummis. Professor Marsh, and you can answer that as
well, but in addition, would you answer this question? Will the
regulations coming out of Dodd-Frank make smaller banks more or
less able to compete with larger banking institutions?
Ms. Marsh. Well, I'll answer both questions at once, if I
may?
Ms. Lummis. That would be great.
Ms. Marsh. Because I think that, as I've said before and
others have said, the issue is not to look at Dodd-Frank in a
vacuum because no bank can look at Dodd-Frank in a vacuum. It's
regulation by accretion. So it's on top of decades and decades
and decades of regulations that the banks have to deal with.
And so, that's our problem, right? That we just react to
crises and add new laws. And what we need to do is take a step
back and fundamentally re-imagine what is the appropriate way
to regulate a bank that is located in rural Wyoming and most of
its business is farm lending.
Ms. Lummis. And the community banks, did they create this
crisis that Dodd-Frank was built to address?
Ms. Marsh. I do not think so.
Ms. Lummis. I yield back, Mr. Chairman.
Mr. DeSantis. Thank you for that.
I am going to go ahead and do a second round. We may have--
I know there are some Democratic Members coming. I did see,
just on kind of some of the news that I know Mr. Cartwright is
down there for an IRS hearing. So it should give him a chance
to come back up here.
In terms of just the cause of the financial crisis, and I
know you got to it a little bit in your report, but there was a
narrative developed that it was Wall Street decided, you know,
they got greedy and they tanked the whole economy.
And I have no problem with criticism directed at Wall
Street, but it seems to me that really overlooks the extent to
which Government policy created incentives that created the
environment to where you would have that. So is that something
that you would agree with just in your research?
Ms. Marsh. I very deliberately stayed away from researching
that.
[Laughter.]
Ms. Marsh. Well, I mean, I am much more interested in what
the impact is because from the perspective of what I was trying
to write about, I don't care what caused the financial crisis.
I care what's going to cause the next financial crisis and
what's going to cause problems for small businesses and farmers
and rural communities.
Rural communities, I think, are the most vulnerable to this
increased pressure on the small banks. And you didn't hear
about a lot of problems in rural communities in the lead-up to
the financial crisis.
Mr. DeSantis. Sure. Ms. Peirce, do you have anything on
that? Because it just seems to me that--and I wasn't in
Congress during this. This is my first term. But it seems to me
that people here are quick to try to say, oh, it was this, but
not very quick to do a little self-examination in terms of bad
policies that have created--that have helped create some of
these problems.
Ms. Peirce. Yes, I mean, I think that institutions will
take advantage of bad policies to work for their own advantage.
And unfortunately, the Government has set up a regulatory
regime that really takes away consequences for poor decisions
made by people in the private sector.
And so, what we need to do and what we should have done
instead of doing what Dodd-Frank did, we should have put more
responsibility on the people who actually make bad decisions to
pay for them. And I think community bankers will pay for their
bad decisions because they're going to go out of business if
they make a lot of bad lending decisions.
But these bigger banks, we let them stay in business even
though they continue to make very bad decisions. So, yes,
there's definitely a role of Government policy.
Mr. DeSantis. So shifting the risk from taxpayers to
shareholders, basically, do you think that would be good
policy?
Ms. Peirce. It would be good policy. And making creditors
responsible, too, because they should be monitoring the
institutions to which they lend.
Mr. DeSantis. When I walk around here, I will get people
bringing me these leaflets or whatever, and every week for
sure, but sometimes even every day, someone will come up and
Glass-Steagall, Glass-Steagall. Do you, Mr. Miller or Ms.
Peirce, anyone, that repeal of Glass-Steagall, it is kind of a
simplistic narrative that Glass-Steagall is repealed and then,
lo and behold, the economy cratered.
What role do you think that that had in the financial
crisis?
Mr. Miller. I think the deregulation generally in the '80s
and '90s played a very large role. The separation of commercial
investment banking or the ending of that separation at least
had the role of making the institutions very large and very
complex and, therefore, too big to fail.
The problem with too big to fail, the reason that it's a
problem for community banks is that there is an assumption in
the market, which I think Ms Peirce talked about generally, or
someone talked about the assumption. The assumption is that
they will not be allowed to fail. So if you lend them money,
you're going to get paid back one way or the other.
If they can't pay you back, then the taxpayers will, one
way or the other, pay you back. So you're going to get paid
back. And that's worth something.
There have been various estimates. Bloomberg, I think,
estimated that it's a quarter to a half a percent advantage.
The rating agencies point to that to give better credit
rating--credit ratings to big banks, the assumption that they
would not be allowed to fail.
They're almost impossible to underwrite. They're too big to
fail, too big to manage, too big for the market to discipline,
too bit to underwrite. And so, they're getting at least a half
a point less when they borrow money than Mr. Creamer's bank
does.
ICBA is now very much on the issue of too big to fail, and
their issue is that they get money more cheaply. There is a GAO
study coming on it, I think, shortly, if it hasn't already come
out, but on too big to fail. And that is an unfair competitive
advantage for Mr. Creamer and every other community bank.
Mr. DeSantis. Do you want to weigh in, Ms. Peirce?
Ms. Peirce. Yes, with respect to Glass-Steagall, I don't
think that--I mean, I think it's a nice rallying cry. But I
don't think that that's going to solve the problem to put
Glass-Steagall back ----
Mr. DeSantis. Because Lehman Brothers was pretty much a
pure investment bank. Correct?
Ms. Peirce. Right.
Mr. DeSantis. Now in terms of ending too big to fail, some
have said, hey, let us just set kind of some arbitrary caps on
capital requirements or size. I have concerns about whether
Members of Congress have the competence to decide those things.
So in terms of ending too big to fail, what would be your
policy prescriptions in that respect?
Ms. Peirce. Well, if we could trade capital requirements
for all the other regulations, then we could pare back a lot of
the other regulations that, as Professor Marsh said, have
accreted over time. Unfortunately, I think if we do increase
capital requirements, it's not going to be at the expense of
other requirements.
And also we put in risk-based capital requirements, which
don't work as well as a simple leverage ratio. I mean,
community banks tend to be more heavily capitalized than the
larger banks. And so, I think we need to think creatively about
perhaps even increasing the liability for shareholders so that
if your bank fails, you end up having to kick in some more
money. That will make you pay a little more attention.
Mr. DeSantis. Ms. Marsh?
Ms. Marsh. I don't know that it's going to be a magic
bullet for anything, but if we're trying to limit the size of
these institutions, I think it makes more sense to separate
depository institutions from investment banks than it does to
put a cap on, an artificial cap that you said. I mean, none of
us are really in a position to determine what is too big to
fail.
It makes more sense to split them up functionally as Glass-
Steagall did than to set an arbitrary cap.
Mr. DeSantis. Yes, I mean, I think some of us--look, I
mean, if you are a big bank, and you are not getting special
policies that give you competitive advantage, and if you are
bearing the risk, I think a lot of us are concerned when you
have a system of privatized gains and socialized losses.
Obviously, there is a moral hazard issue, and there is just
an unfairness issue because no one is going to care outside of
our community if your bank fails. You are not going to get
bailed out, obviously. But when one of the big banks, then they
would get a disparate treatment. So that is just a problem with
our policy.
The gentlewoman from Wyoming, do you have any other
questions? Because if you do, I can recognize you to give maybe
Mr. Cartwright some time. And then, otherwise, I will just
probably the gavel the hearing to a close.
Ms. Lummis. I do have additional questions, Mr. Chairman.
Mr. DeSantis. Okay. The chair recognizes the gentlewoman
from Wyoming for 5 minutes.
Ms. Lummis. Thank you very much.
Could I ask any of you to comment on the proposed Basel III
regulations?
Ms. Peirce. Well, I mean, I would just say that, first of
all, having our regulations decided by central bankers across
the world and imposing one uniform standard doesn't seem like
the wisest approach to me.
But second of all, the focus on risk-based capital, which
Basel III embodies, is I think a very dangerous approach
because it homogenizes the banking sector further, and it
forces people to try to gain--I mean, it's an invitation to
arbitrage, and that's what happened ----
Ms. Lummis. Isn't it true that banking is more concentrated
in Europe than it is in the United States?
Ms. Peirce. It is. We have a more--we have a much more
competitive landscape than Europe does.
Ms. Lummis. So, Basel III, Mr. Creamer, would do what to
American banking?
Mr. Creamer. Well, to go back very briefly to what Mr.
DeSantis had said about regulation incenting some things, first
of all, risk-based capital regulation incented residential
mortgage loans because they were risk-weighted lower, and it
required lower capital requirements. In many cases, there's
more inherent risk in a residential mortgage loan than there is
in an owner-occupied commercial real estate loan to an
operating business.
In addition to that, Fannie Mae and Freddie Mac put
explicit Government guarantees. Now they were implicit at the
time, but we all know they're explicit. So when you have an
incentive to capital and you have explicit guarantees by the
Government in a product, you'll probably create a price bubble.
Basel III doesn't really address that. Basel III still
risk-weights residential mortgage loans at 50 percent. So
there's still an encouragement to make residential mortgage
loans. It still risk-weights small business loans at 100
percent.
Right now, each quarter my bank files a call report. That
call report is about 78 pages. All call reports--all banks file
call reports. The call report instructions are 626 pages for
that 78 pages.
This is a mailer we received last week from a very
reputable brokerage firm with a breakdown of Basel III as it
relates to community banks. Basel III doesn't simplify that. It
makes it more complicated for our staff to calculate. And while
they say they have simplified the definition of leverage
capital, I'd simply refer to one section of this, which is
about 16 lines of the deductions from what is qualified as
regulatory capital.
And I am a banker and an accountant by trade, and I don't
recognize the acronyms that are in here, and these are the ones
that supposedly apply to me.
Ms. Lummis. I hear a lot about Basel III from the banks in
my communities, and they are expressing true alarm over them.
Another question for anyone on the panel who wishes to
address it. The Consumer Protection Financial Bureau has only
completed about a third, a little more than a third of its
regulations thus far, and they were supposed to have them all
completed at this time. So given that, and the fact that the
interpretations of those regulations was really given to the
regulators, so how is a bank supposed to determine what
services you can provide based on rules that haven't been
written or rules that haven't been interpreted?
Mr. Creamer. Well, I think Ms. Marsh said it--Professor
Marsh said it very well a while ago. It is an accretion of
regulation. We already have consumer protection regulations. We
have the Federal Reserve alphabet regulations, Regulation A
through YY.
Equal Credit Opportunity, Home Mortgage Disclosure,
Electronic Funds Transfer, Privacy of Consumer Information,
Fair Credit Reporting, Truth in Lending, Unfair Deceptive Acts
or Practices, Community Reinvestment, on and on and on. These
laws are very effective. And yes, as Mr. Miller said, there are
bad actors.
As a community banker who has been doing this for 31 years,
I expect bad actors to be dealt with. But it's difficult to
deal with the entire industry because of one or two bad actors,
and that makes this more difficult.
I have heard that the Consumer Financial Protection Bureau
is going to make it easier for consumers. Well, these
regulations are Government-promulgated as well, and I'll simply
point out to you that under Fair Lending, in Regulation Z, this
is a residential mortgage application that a consumer that
comes into any bank has to fill out and understand.
Now the easiest way to take care--to take advantage of a
consumer is something like this. Now I shudder to think what
the unwritten regulations that are coming down the pike will do
to this and what that will do to my customer, who is normally a
plumber or electrician or a carpenter who is buying their first
home, who has no chance of understanding what this is.
Ms. Lummis. Mr. Chairman, would you indulge one other of
the respondents to weigh in on that?
Mr. DeSantis. Sure.
Ms. Lummis. Anyone wish to?
Mr. Miller. Ms. Lummis, I have heard differently. I've
heard that CFPB is doing a better job of hitting their
deadlines than any of the other agencies, which may be a low
standard, but I think ----
Ms. Lummis. That is a low standard, I would suggest.
Mr. Miller.--they are actually getting their regs in on
time. And they've also shown a willingness that Congress rarely
shows of adjusting their regulations after they've adopted
them.
Just within the last--either last week or even earlier this
week, they just issued a lot of little changes to the QM rules,
the qualified mortgage rules, based upon concerns that were
raised. Congress tends to enact some big act and then not touch
it for a generation.
And when the inevitable little things that aren't working
exactly the way Congress thought they would work come forward,
instead of just fixing that, usually the people who've been
opposed to the bill now point to that as evidence that it
should never have been passed, and the people who supported the
bill are unwilling to admit any error.
So CFPB is actually showing some reasonableness and
flexibility and a willingness to listen. And some of what
they're doing is designed to make forms more readable, more
understandable. The Truth in Lending Act and RESPA, TILA and
RESPA, the Real Estate Settlement Practices Act, required
really almost identical disclosures, but not quite identical.
And one thing I've heard from--when I was in Congress, one
of the things I heard from my community bankers and my credit
unions was that their lawyers told them that they were afraid
to try to take statutory language, which was legalese, and turn
it into plain English for fear they might get it wrong. And so,
with TILA and RESPA, what they would do is set out in the
statutory language, which no one could read.
And with TILA and RESPA, they set out all of TILA and then
all of RESPA. So CFPB has issued a form that is both
disclosures, TILA and RESPA, on one form that is plain English.
That is clearly better for consumers. I assume that Mr. Creamer
prefers it as well.
And so, I think there is some hope with CFPB, if part of
their mission is to make finance understandable, that they will
actually turn unreadable forms into something that can be
understood by a normal human being.
Ms. Lummis. I hope so, too, Mr. Miller. Everything I hear
so far from my community banks and their borrowers, their
customers, is to the contrary.
Mr. Miller. The baseline against which we're working was
complete inability to understand anything.
Ms. Lummis. Thank you.
I yield back. Thank you, Mr. Chairman, for your indulgence.
Mr. DeSantis. Thank you.
Well, we really appreciate the witnesses here. I think you
all did a great job. I think what we were trying to establish
here is when Government takes on, Congress implements, passes
these big bills designed to deal with certain issues, that
oftentimes we can create new problems and disadvantage smaller
institutions vis-a-vis competing with larger institutions or
even just make life more difficult for smaller institutions.
So I think we were able to demonstrate that. I think that
from what I heard from the comments on the other side, I don't
think that many of these folks, who probably supported Dodd-
Frank, want to see community banks harmed. And so, there may be
some opportunity to get some bipartisan relief from some of the
onerous regulations.
We talked a little bit towards the end about CFPB, and I
think that may be something for another day. But I think that
that is going to be something that is very concerning to me
because if you look at the way CFPB is structured, it is
essentially immune from any type of congressional oversight. We
don't have any way to affect their budget or conduct meaningful
oversight.
And really, the President is limited in removing the head
of that agency or the head of the board, and the courts are
limited in their review of that. So, to me, that is
problematic.
Madison in Federalist 51 said, ``If men were angels, no
government would be necessary. If angels were to govern men,
neither internal nor external constraints would be necessary.''
The way the CFPB is structured we better hope that he was wrong
about that and that these folks are angels because, otherwise,
I fear that there will be some unintended consequences, or
maybe even intended down the--but that is something for another
day.
At this time, I want to thank again the witnesses for their
time, and this hearing is adjourned.
[Whereupon, at 4:08 p.m., the subcommittee was adjourned.]
APPENDIX
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Material Submitted for the Hearing Record
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