[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
AN EXAMINATION OF THE DECLINE
OF MINORITY DEPOSITORY
INSTITUTIONS AND THE IMPACT
ON UNDERSERVED COMMUNITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION
AND FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 22, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-62
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-451 PDF WASHINGTON : 2020
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York PETER T. KING, New York
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio ROGER WILLIAMS, Texas
DENNY HECK, Washington FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan TED BUDD, North Carolina
KATIE PORTER, California DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
BEN McADAMS, Utah BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
Subcommittee on Consumer Protection and Financial Institutions
GREGORY W. MEEKS, New York, Chairman
NYDIA M. VELAZQUEZ, New York BLAINE LUETKEMEYER, Missouri,
DAVID SCOTT, Georgia Ranking Member
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DENNY HECK, Washington BILL POSEY, Florida
BILL FOSTER, Illinois ANDY BARR, Kentucky
AL LAWSON, Florida SCOTT TIPTON, Colorado, Vice
RASHIDA TLAIB, Michigan Ranking Member
KATIE PORTER, California ROGER WILLIAMS, Texas
AYANNA PRESSLEY, Massachusetts BARRY LOUDERMILK, Georgia
BEN McADAMS, Utah TED BUDD, North Carolina
ALEXANDRIA OCASIO-CORTEZ, New York DAVID KUSTOFF, Tennessee
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
C O N T E N T S
----------
Page
Hearing held on:
October 22, 2019............................................. 1
Appendix:
October 22, 2019............................................. 35
WITNESSES
Tuesday, October 22, 2019
Betru, Aron, Managing Director, Center for Financial Markets,
Milken Institute............................................... 12
Bowman, Jeff, President and CEO, Bay Bank........................ 11
Falero, Mara, Vice President, Marketing and Communications,
JetStream Federal Credit Union, on behalf of the National
Association of Federally-Insured Credit Unions (NAFCU)......... 9
Kelly, Kenneth, Chairman and CEO, First Independence Bank, and
Chair, Board of Directors, National Bankers Association (NBA).. 6
Sung, Jill, CEO and President, Abacus Federal Savings Bank, and
Chair, Independent Community Bankers of America's (ICBA's)
Minority Bank Advisory Council, on behalf of the ICBA.......... 7
APPENDIX
Prepared statements:
Betru, Aron.................................................. 36
Bowman, Jeff................................................. 43
Falero, Mara................................................. 48
Kelly, Kenneth............................................... 61
Sung, Jill................................................... 67
Additional Material Submitted for the Record
Meeks, Hon. Gregory W.:
Written statement of Creative Investment Research............ 76
Written statement of the Credit Union National Association... 83
Written statement of Inclusiv................................ 87
OCC press release............................................ 91
Luetkemeyer, Hon. Blaine:
Written statement of the National Bankers Association........ 93
AN EXAMINATION OF THE DECLINE
OF MINORITY DEPOSITORY
INSTITUTIONS AND THE IMPACT
ON UNDERSERVED COMMUNITIES
----------
Tuesday, October 22, 2019
U.S. House of Representatives,
Subcommittee on Consumer Protection
and Financial Institutions,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks
[chairman of the subcommittee] presiding.
Members present: Representatives Meeks, Scott, Clay,
Foster, Lawson, Tlaib, Porter, Ocasio-Cortez; Luetkemeyer,
Lucas, Barr, Tipton, Williams, Loudermilk, and Kustoff.
Ex officio present: Representatives Waters and McHenry.
Chairman Meeks. The Subcommittee on Consumer Protection and
Financial Institutions will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. And, without objection,
members of the full Financial Services Committee who are not
members of this subcommittee are authorized to participate in
today's hearing.
Today's hearing is entitled, ``An Examination of the
Decline of Minority Depository Institutions and the Impact on
Underserved Communities.''
And I know that we are in competition this afternoon with
several different hearings, so I expect Members to be running
in and out.
I now recognize myself for 4 minutes to give an opening
statement.
To my friend and colleague, Ranking Member Luetkemeyer, and
the members of the subcommittee, welcome to this hearing on the
decline of minority depository institutions (MDIs) and the
impact on underserved communities.
This hearing continues our consideration of the challenges
faced by disenfranchised marginalized communities, including,
in particular, communities of color that face discrimination in
access to financial services.
It is regrettable in many ways that, in 2019, we still need
to hold hearings to draw attention to the systemic challenges
and structural discrimination faced by minority communities. It
is frankly regrettable that, in 2019, we must still talk about
the challenges faced by Asian banks, Hispanic banks, African-
American banks, Native American banks, and the dramatic
disparities in lending to minority communities and low- and
moderate-income (LMI) communities. But the data and the
generational impact is irrefutable.
Today, we will not only consider the problems, but we will
also have a substantive conversation about actionable
solutions, and a discussion of the draft of a bill I plan to
introduce that was attached to this hearing. The bill seeks to
tackle several key challenges faced by minority banks,
including in particular those that focus primarily on serving
unbanked and low-income communities.
Specifically, the bill on which I look forward to feedback
from our panel of experts here today addresses the following:
one, access to capital. Overall, minority banks are smaller
than their peers and typically well below a billion dollars in
assets. These banks pose no credible systemic risk and focus on
underbanked communities investing in homeownership and small
business lending in LMI communities.
Given the communities they serve, these banks often
struggle to mobilize savings to redeploy in their communities.
My bill tackles this by making it somewhat easier for minority
banks that are also community development organizations to
raise capital from private investors and from Opportunity Zone
funds, and pushes the Federal Government to deposit funds that
are fully insured within these institutions.
Two, regulator engagement. The bill calls on the regulators
to harmonize and strengthen the minority bank advisory boards
and take ownership of their failings in the area of diversity.
Specifically, the bill calls for regular auditing of the
diversity of the bank examiner corps, publication of the data,
and consideration of how the lack of diversity in this area and
lack of special training of examiners engaging with minority
banks in low-income communities harm their effectiveness.
The bill also calls on the prudential regulators to
consider more effective and coherent Community Reinvestment Act
(CRA) examinations of minority banks that are also Community
Development Financial Institutions (CDFIs).
Furthering the CDFI fund, finally, the bills calls on
Congress to fully fund the CDFI fund of the Treasury
Department. The CDFI fund is a unique tool which leverages
limited government funding to crowd in significant private
sector capital and foster innovation investments in market-
oriented solutions to tackle some of our nation's most
persistent challenges in poverty alleviation. This program
deserves strong bipartisan support.
In closing, I wish to highlight that I am very aware that,
while today's hearing is very focused on minority banks and
issues of discrimination, I recognize that any discussion of
banking deserts and underbanked communities must also include
consideration of rural and agricultural communities. These
issues cut across districts and party affiliation, and I look
forward to working with my colleagues on a bipartisan basis to
tackle these important challenges.
I look forward to the testimony of our witnesses here
today.
And I now recognize the ranking member of the subcommittee,
Mr. Luetkemeyer, for 5 minutes for an opening statement.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Minority Depository Institutions (MDIs), like all financial
institutions, have struggled under the weight of the regulatory
burden of the Dodd-Frank Act.
According to a Harvard University study, Dodd-Frank has
created an uneven regulatory playing field. This playing field
resulted in additional legal and compliance costs for small
institutions, preventing them from serving their customers,
particularly the businesses and consumers within their
community.
MDIs play a unique role in serving their community.
According to the FDIC and the Federal Reserve, MDIs serve
consumers in low- to moderate-income communities at higher
rates than non-MDIs.
This committee should be focused on alleviating the burden
on these institutions so they can serve their communities,
specifically the minority and LMI communities.
One such burden that will have a devastating effect on
small depository institutions, and particularly Minority
Depository Institutions, is the proposed Current Expected
Credit Losses (CECL) accounting standard. Now, as many on this
panel know, I could spend the length of this hearing discussing
the pitfalls of this ill-conceived proposal. Instead, I will
simply read an excerpt from a letter to the committee regarding
CECL from the National Bankers' Association, which identifies
itself as the voice of minority banking in the United States.
And I quote: ``To the extent that CECL increases the cost
of lending to borrowers that are perceived by regulators as
being riskier or lower credit quality, such as low- and
moderate-income consumers and small businesses located in low-
and moderate-income communities, the economics of our lending
decisions could be altered dramatically. This would further
restrict access to credit for consumers and businesses that
already experience limited credit options.''
In addition, I would like to read a statement from the
Center for Responsible Lending President Michael Calhoun on
CECL, in which he said, ``As proposed, CECL creates a
significant disincentive for lenders to originate loans to low-
and moderate-income families and communities of color.''
I would like to ask unanimous consent that the full
statements from both of these organizations be entered into the
record.
Chairman Meeks. Without objection, it is so ordered.
Mr. Luetkemeyer. The statements I just read are not unique.
The truth is that numerous consumer interest groups have voiced
concerns over CECL. Despite the warning signs these groups have
raised, this committee has not taken any formal action to
better understand the effects that CECL will have an low- to
moderate-income consumers and minorities. No Full Committee
hearings, no subcommittee hearings, no markups, no nothing.
This inaction flies in the face of LMI borrowers in minority
communities across the country who will be adversely affected
by this accounting standard.
For all of the rhetoric from the other side of the aisle
about how consumers and minorities can struggle in the
financial services industry, the Democratic leadership on this
committee remains woefully silent on an issue that has direct
impact on Minority Depository Institutions and the consumers
they serve.
I specifically mention that the Democratic leadership of
this committee has been inactive because CECL is a bipartisan
issue that has support from Members on both sides of the aisle:
52 bipartisan Members have signed onto a bill to delay
implementation of CECL until a study is completed that examines
access to credit for consumers.
In addition, roughly 30 members of this committee just last
week signed a bipartisan letter I sent to FSOC urging the
Office of Financial Research to study the impacts of CECL.
Despite this bipartisan support, the chairwoman of this
committee has done nothing to address an issue that could
devastate low- and moderate-income lending and lending to
minority communities.
In front of this committee today are witnesses representing
three separate organizations that have voiced concerns over the
effects of CECL, effects that it could have on their member
institutions as well as the consumers they serve. And yet, this
committee has shown no interest in bringing this issue up and,
in fact, seems completely content to let CECL go into place,
despite the warning signs related to minority- and low-income
borrowers.
This committee is tasked with ensuring a healthy financial
services industry and promoting economic freedom for everyday
Americans. That responsibility includes ensuring financial
institutions are not driven out of the marketplace by onerous
requirements, and protecting the ability of consumers to gain
access to credit.
With that said, I urge all of my colleagues on both sides
of the aisle to call for a committee hearing on CECL, or better
yet, have the Financial Accounting Standards Board (FASB) come
before this committee and defend this standard.
I yield back.
Chairman Meeks. I now yield 1 minute to the gentleman from
Georgia, Mr. Scott.
Mr. Scott. Yes. Thank you, Mr. Chairman.
I do want to let my colleague from Missouri, Mr.
Luetkemeyer, know that I agree with him, and will work with him
on CECL. But I also want to clarify that Chairwoman Waters, who
is the Chair of the full Financial Services Committee, is very
much concerned about the status of minority-owned depository
institutions, and she has asked us to look at that as well as
she has an open mind to the CECL question as we get to it.
But in my last few seconds, it is very important to say
that banks are the heart of our financial system. And with the
growing population among minorities, there could not be a more
crucial hearing than today, Mr. Chairman, and I look forward to
a very excellent hearing.
Thank you.
Chairman Meeks. Thank you. The gentleman's time has
expired.
Today, we welcome the testimony of, first, Mr. Kenneth
Kelly, who is the chairman and CEO of the First Independence
Bank, and the Chair of the National Bankers Association.
First Independence Bank, headquartered in Detroit,
Michigan, is now the seventh largest African-American-
controlled commercial bank in the country. He has been
appointed to the Fed's Depository Institutions Advisory Council
for a 3-year term, and has been appointed nationally to the
FDIC's Community Bank Advisory Committee.
Second, we will hear from Ms. Jill Sung, president and CEO
of Abacus Federal Savings Bank in my home City of New York, and
Chair of the Independent Community Bankers of America's
(ICBA's) Minority Bank Council.
Ms. Sung joined Abacus, the bank her father started in
1984, as vice president and general counsel in 1996, later
rising to executive vice president and then taking over as
president and CEO in 2005. She serves in several leadership
positions within the Independent Community Bankers of America,
as Chair of the Consumer Financial Services Committee, and as
Chair of the ICBA's Minority Bank Council.
Third, Ms. Mara Falero, vice president of marketing and
communications at Jetstream Federal Credit Union, a low-income
CDFI operating in Miami-Dade County Florida, and in Puerto
Rico.
She has over 33 years of financial institution experience
in both credit unions and banks, and she is very active in her
community, serving on several chamber and credit union boards,
and as the past Chair of the Town of Miami Lakes Economic
Development Committee.
Fourth, Mr. Jeff Bowman, president and CEO of Bay Bank, a
Tribally-owned bank within the Oneida Indian Tribe of
Wisconsin. Mr. Bowman has over 30 years in the banking
industry, with the majority of his career working in bank
management and commercial lending positions. He specializes in
helping small businesses, by providing technical assistance. He
is also active with several organizations that facilitate
economic development and small business development. He
specializes in assisting and capitalizing minority businesses,
particularly Native American-owned small businesses.
And last but not least, Mr. Aaron Betru, managing director
of the Center for Financial Markets at the Milken Institute. He
has over 20 years of experience and leads the Center's Access
to Capital and Strategic Innovative Financing initiatives to
enhance social impact, both in the United States and in
developing countries.
He also leads the Institute's work on Opportunity Zones and
Qualified Opportunity Funds. Mr. Betru was a member of the
steering group for the Blended Finance Task Force launched by
the Business and Sustainable Development Commission, as well as
co-chairing the Partnership for Lending in Underserved Markets,
a joint initiative with the U.S. Small Business Administration.
He is also a term member of the Council on Foreign Relations,
and is a member of the Board of Directors for the Calvert
Impact Capital NFHI Foundation.
The witnesses are reminded that your oral testimony will be
limited to 5 minutes. And, without objection, your written
statements will be made a part of the record.
Mr. Kelly, you are now recognized for 5 minutes to give
your oral presentation of your testimony.
STATEMENT OF KENNETH KELLY, CHAIRMAN AND CEO, FIRST
INDEPENDENCE BANK, AND CHAIR, BOARD OF DIRECTORS, NATIONAL
BANKERS ASSOCIATION (NBA)
Mr. Kelly. Chairman Meeks, Ranking Member Luetkemeyer,
members of the subcommittee, thank you for the opportunity to
testify on behalf of First Independence Bank and the National
Bankers Association.
I serve as chairman and CEO of First Independence Bank, a
$272 million MDI headquartered in Detroit, Michigan. We are the
only African-American bank in the State of Michigan and one of
only two banks in the City headquartered in Detroit, and we are
also a Community Development Financial Institution (CDFI). I
also Chair the board of directors of the National Bankers
Association, the leading voice of MDIs since 1927.
Our banks are in crisis. They fail at a higher rate, and
while there is broad diversity in the MDI sector in terms of
profitability, mission-oriented financial institutions
encounter unique challenges ranging from investors who don't
understand the value of the services we provide, to,
oftentimes, regulatory review that does not understand the
communities we serve.
We are the banks of first and last resort of our
communities. Relative to non-MDIs, we do more small business
and mortgage lending on a pro rata share. We often do specialty
lending in terms of religious institutions and other community-
based organizations.
We fully understand the value of our work, but absent
intervention from Washington, fewer of our banks will exist to
do this work.
The top issue for NBA members is raising capital, as we
mentioned. Congress can take four steps now to alleviate our
capital-raising concerns by: one, amending the Community
Reinvestment Act (CRA) such that the majority institutions
automatically receive positive CRA consideration in addition to
enhanced CRA credit for equity investment in MDIs; two,
amending the Investment in Opportunity Act such that MDIs are
eligible for equity investments; three, exempting MDIs under $3
billion from the Bank Holding Company Act and change of control
provisions; and four, creating an investment tax credit for
equity investments in MDIs.
Congress can also act now to help our banks diversify their
deposit basis by: one, lowering the barrier to participation in
the Minority Bank Deposit program; and two, modernizing the
Federal Deposit Insurance Act approach toward broker deposits
so that smaller MDIs can diversify their deposit basis.
Congress is also well-positioned to use existing tools,
like the Community Development Financial Institutions Fund, to
create a fairer process for new markets tax credit allocation
and to urge congressional appropriators to increase funding for
all CDFI programs.
Should it become law, Congress should leverage the Improve
Access to Traditional Banking Act to create a fund for MDIs for
financial literacy and alternatives to predatory products.
Targeted deregulatory measures would benefit the NBA banks.
The current leadership in the industry, the Executive Branch,
and regulatory environments are working collaboratively within
these constraints today.
Examples include the bolstering of the Treasury Mentor
Protege Program and the FDIC's MDI roundtable. But there is an
immediate need to streamline BSA/AML reporting requirements for
smaller banks, and there is still a need to strengthen Section
308 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), requiring that significant
regulatory developments include an impact analysis on MDIs and
support MDIs' sustainability.
In order to do the work that we do, we often look to
Washington for support. The actions outlined above and in our
written submission provide a roadmap for helping us to do this.
Examples of that include actions taken by the forefathers
of this great nation, including creating the Federal Reserve in
1913, creating the FDIC in 1933, and, particular to MDI's,
creating the Freedman's Bank over 154 years ago in 1865.
You will hear a recurring theme throughout the hearing that
demonstrates that leadership matters on issues related to these
institutions, and in particular, policy matters more.
We commend the subcommittee and the committee, and
Chairwoman Waters and Chairman Meeks on their longstanding
leadership on MDI issues and, most importantly, for holding
this hearing.
I look forward to answering the subcommittee's questions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Kelly can be found on page
61 of the appendix.]
Chairman Meeks. Thank you for your testimony.
I now recognize Ms. Sung for 5 minutes.
STATEMENT OF JILL SUNG, CEO AND PRESIDENT, ABACUS FEDERAL
SAVINGS BANK, AND CHAIR, INDEPENDENT COMMUNITY BANKERS OF
AMERICA'S (ICBA'S) MINORITY BANK ADVISORY COUNCIL, ON BEHALF OF
THE ICBA
Ms. Sung. Chairman Meeks, Ranking Member Luetkemeyer, and
members of the subcommittee, I am Jill Sung, CEO and president
of Abacus Federal Savings Bank in New York.
I testify today on behalf of the Independent Community
Bankers of America, where I serve as Chair of the Minority Bank
Advisory Council and the Consumer Financial Services Committee.
Thank you for this opportunity to testify at today's hearing.
MDIs play a critical role in promoting economic prosperity
in historically marginalized communities. I would like to thank
Chairman Meeks for his work on a thoughtful discussion draft.
We are pleased to have the opportunity to offer input on this
draft and hope to continue to work with you as it advances
through the process.
Abacus Bank is a $350 million asset privately held savings
and loan association headquartered in Chinatown, New York City,
with branches in Chinese-American communities in Brooklyn,
Queens, Edison, New Jersey, and Philadelphia. Abacus was
founded in 1984 by my father, Thomas Sung, who immigrated
through Ellis Island as a teenager from China. He went on to
attend law school and eventually opened his own immigration law
practice in Chinatown to help others like him find a better
life in this country.
He was motivated to open Abacus Bank by the realization
that banks were more than happy to take his deposits but were
not willing to give him or people like him a loan. Abacus was
founded to change that and to ensure that our community has
access to credit, a fundamental factor for the economic
stability and growth of any community.
The majority of our lending is in residential mortgages,
particularly first-time homebuyers, a natural fit for our
community, where the aspiration of owning your own home is
almost sacred. We also lend on small multifamily and mixed-use
investment properties. Our lending policy is extremely
conservative, and our delinquency rates have always been
unusually low, before, during, and after the financial crisis.
We attribute this to our deep understanding of our customers,
and we are very proud of how we have helped our community over
the past 35 years, and we look forward to serving future
generations.
I would like to speak to some of the unique challenges we
face as MDIs that serve immigrants. These challenges reflect
the vulnerabilities of our customers in the financial system.
The first is the language barrier. Because most of our
customers speak Chinese as a primary language, we must hire
employees who are fluent in Chinese. This limits the supply of
qualified employees, and we often have to hire people with
little or no banking experience and train them at a significant
expense to us.
The language barrier also increases our operating costs, as
we spend much of our time translating, explaining to our
customers disclosure forms and regulatory concepts with which
there is often no literal translation in Chinese. The language
barrier makes implementing a regulatory change, of which there
have been many in recent years, twice as costly and time-
consuming.
The second challenge is serving customers who come from a
starkly different cultural and sociopolitical system. Many of
them view not only the government but the banking system with
deep suspicion. In order to overcome this lack of trust, we
must heavily invest in financial education. We feel a
tremendous responsibility to act as trust advisors to this
vulnerable population and guide their decisions while at the
same time respecting their concerns.
Technology, which is transforming financial services, is
not always suitable for this population. Some of our most
popular products are safe deposit boxes and passbook savings
accounts, old school products which cannot be automated and are
costly and labor-intensive for us to maintain. Despite this, we
continue to offer these products to ensure that the
particularly vulnerable pockets of our community, like the
elderly, still have access to the banking system in ways they
feel safe and comfortable to use.
As a small MDI, our business model does not easily lend
itself to high margins and high profits. This is why access to
capital is so key. We do not have access to public capital
markets, and raising private capital through the regular
channels is challenging, given our specific missions and our
concentration of disadvantaged communities.
I know this predicament of lack of capital faces all MDIs.
We need to find ways to help MDIs obtain capital, such as
reducing our regulatory costs so we can retain more of our
earnings, diversify our income stream, and come up with new,
nontraditional ways of raising capital. This is critical for
our preservation, to ensure the fair and equitable access to
the financial system is preserved for all.
When we look at Chairman Meeks' discussion draft, this is
the perspective we bring, the unique challenges I discussed and
the need for new capital resources. My written statement
provides a more detailed assessment of the draft.
I would like to thank you again for your work on the
promising constructive draft. We hope to continue to work with
you to ensure the legislation reaches its true potential for
strengthening MDIs in the communities we serve.
With that, I am happy to answer any questions you may have.
[The prepared statement of Ms. Sung can be found on page 67
of the appendix.]
Chairman Meeks. Thank you.
Ms. Falero, you are now recognized for 5 minutes.
STATEMENT OF MARA FALERO, VICE PRESIDENT, MARKETING AND
COMMUNICATIONS, JETSTREAM FEDERAL CREDIT UNION, ON BEHALF OF
THE NATIONAL ASSOCIATION OF FEDERALLY-INSURED CREDIT UNIONS
(NAFCU)
Ms. Falero. Good afternoon, Chairman Meeks, Ranking Member
Luetkemeyer, and members of the subcommittee. My name is Mara
Falero, and I am testifying today on behalf of NAFCU.
I currently serve as the vice president of marketing and
communications at JetStream Federal Credit Union. We appreciate
the opportunity to share our views on the important role that
Minority Depository Institutions serve in our economy.
JetStream Federal has over $200 million in assets and
serves more than 18,000 members in Miami-Dade County and parts
of Puerto Rico. JetStream Federal is an NCUA-designated low-
income credit union, a Minority Depository Institution, as well
as CDFI-certified. All of our employees are community
development certified financial counselors. This program trains
our staff to identify financial distress within our membership
and proactively work to prevent financial catastrophe. Our
membership is diverse and reflective of the communities we
serve.
Seventy-one percent of JetStream members are classified as
low income, of which 40 percent are extremely low income; 68
percent of our members are Hispanic, of which 27 percent are
Puerto Rican; and 19 percent of our membership is African
American.
JetStream Federal is also a Juntos Avanzamos credit union,
which is a community of credit unions committed to serving and
empowering Hispanic communities. We were the first credit union
in Florida to receive this designation.
JetStream Federal is committed to meeting the needs of our
members, which has led us to offer a number of products to help
newly arrived immigrants and those with lower incomes, such as
a second chance checking program, no credit check loans, and
even a resettlement loan program for those moving from Puerto
Rico to the mainland.
Due to the areas that JetStream Federal serves, Hurricanes
Irma and Maria critically affected our members in 2017. These
hurricanes were a life-defining moment for many of our members,
and we knew we had to act. JetStream Federal provided $2.5
million of critical financial relief to our members during the
first stages of recovery, including no-cost, zero-percent APR
short-term loans, deferment of existing loan payments,
elimination of transactional fees, and financial coaching for
our members who were dealing with insurance cases while
attempting to rebuild their homes.
The credit union industry strives to lead when it comes to
diversity, equity, and inclusion. The majority of credit union
CEOs are women. The minority of MDIs are credit unions: 528 in
2018, according to the NCUA.
MDI credit unions serve 3.9 million members and tend to be
smaller institutions. Eighty-seven percent of MDI credit unions
have assets of less than $100 million. They also tend to
underperform growth in all categories, including asset size,
membership, and loan volume, in comparison to the rest of the
credit union industry, largely due to a decline in membership.
In my written testimony, I outline in detail several areas
where Congress can act to help credit union MDIs such as
JetStream Federal, and these include, first, fully funding the
Community Development Financial Institutions Fund program.
These grants have been an important tool for us to serve our
members.
Second, allowing all credit unions to serve underserved
areas. Field of membership restrictions on credit unions, such
as JetStream, hamper our ability to serve those in neighboring
counties who have the same needs as our members.
Third, making it easier to charter new credit unions by
providing greater flexibility in the Federal Credit Union Act
and giving NCUA the appropriate tools. This includes ensuring
that NCUA has the authority it needs in areas such as credit
union capital, subordinated debt, and loan maturity limits.
NAFCU is generally supportive of the efforts in the
discussion draft of the Ensuring Diversity in Community Banking
Act. In particular, we are pleased to see the idea of creating
an MDI Advisory Committee within each regulator. We welcome the
opportunity to continue to work with the subcommittee as you
consider legislative approaches to address this critical issue.
In conclusion, credit unions are proud of the work we have
done to serve minority and underserved populations. Still, MDI
credit unions face a number of challenges. We urge the
subcommittee to support efforts to improve the regulatory
environment for MDI credit unions and modernize the Federal
Credit Union Act.
Thank you, again, Chairman Meeks, Ranking Member
Luetkemeyer, and members of the subcommittee for the invitation
to testify before you. I welcome any questions you may have.
[The prepared statement of Ms. Falero can be found on page
48 of the appendix.]
Chairman Meeks. Thank you.
I now recognize Mr. Bowman for 5 minutes.
STATEMENT OF JEFF BOWMAN, PRESIDENT AND CEO, BAY BANK
Mr. Bowman. Good afternoon, Chairman Meeks, Ranking Member
Luetkemeyer, and members of the subcommittee.
My name is Jeff Bowman, and I am the president and CEO of
Bay Bank. We are a small community bank located in Green Bay,
Wisconsin. Our bank is owned by the Oneida Nation.
One of the things that makes us unique as an MDI is that
there are only 18 Native American-owned institutions in the
entire country, of the approximately 5,500 FDIC-insured
institutions.
We are also the smallest bank in Green Bay. Part of the
Oneida Reservation overlaps the City of Green Bay, so we have
an urban and a rural market from which we solicit our
customers.
Some of the services that we are very strong in and
committed to include community and economic development as a
small-dollar loan program. We do not base our credit decisions
on credit scores. We look at expanded guidelines. This creates
increased access, and it helps move people out of predatory
lending.
There is a huge problem with Native American people
utilizing payday loan stores and short-term lenders, where a
$500 loan turns into a $3,000 debt. We dedicate a lot of
resources to make sure that we have a robust and easy-to-access
small-dollar loan program.
We are also very strong in mortgage lending. One of the
original reasons why the bank was started in 1995 is, during
the 1990s, there were a lot of bank mergers and acquisitions
that left a void in community banking, Green Bay included.
There were no small institutions. So, the Oneida Tribe
partnered up with some local investors and started a brand new
bank.
One of the reasons why the Tribe was interested in forming
the bank is making sure that their Tribal members had access to
financing to purchase a home.
If you are familiar with reservation communities, much of
the land is checker-boarded, where it is a combination of fee
land and then trust land. It is difficult to obtain a mortgage
on trust land, especially when you go back in time to the
1990s. One of the reasons for forming the bank was to make sure
that the bank was going to be the responsible party and figure
out a creative way to make mortgage loans on trust land.
We are very good and strong in that space. We have
originated over $90 million worth of mortgage loans to Native
American borrowers throughout the Great Lakes area. So, we
figured out how to solve that problem.
We are also very active in the small business space.
Minority small business owners, we don't always feel, get a
fair shake. And when they apply for a business loan at Bay
Bank, they are going to have a Native American person in the
management team looking at their credit decision.
It is interesting, and everybody's story and testimony here
is we all have unique stories about our neighborhoods and our
communities that we love. They can be ethnic-based. They can be
low- to moderate-income. And one of the things that is
encouraging in this bill is the formation of the advisory
committee in which we have a voice. This is the first time that
a Native American bank has had the opportunity to come and talk
about what we do.
We all have important stories, and we all need additional
resources. But this advisory committee has an opportunity to
share these stories with bank examiners.
We are a $100 million dollar bank. We are the smallest bank
in our community. But we are not just a bank. We effect social
change. We are also a CDFI. We have an outstanding CRA rating,
and we wear that like a badge of honor. We earned that. So, it
is important that we recognize the efforts that MDIs are doing,
and I think that has to trickle down to the bank examiner level
to let them know you are not just looking at another $100
million bank; you are looking at an institution that is
effecting change.
This bill has the opportunity to heighten the awareness of
MDIs, and bring in additional resources, and we are in favor of
that.
In my testimony, I paint a picture of what the Oneida
Community looks like. We have a 22-percent poverty rate and a
9-percent unemployment rate. There are 11 Tribal communities in
Wisconsin, 11 federally recognized Tribes. Oneida has some of
the strongest economic indicators. When I mention a 22 percent
poverty rate and 9 percent unemployment, there are several
other communities where it is much worse.
So, there is a role for what we do. We appreciate this
opportunity to tell our story, and we hope that you will take
this to the next level and keep bringing us additional
resources so we can keep doing the work that we love to do.
[The prepared statement of Mr. Bowman can be found on page
43 of the appendix.]
Chairman Meeks. Thank you.
And I now recognize Mr. Betru for 5 minutes.
STATEMENT OF ARON BETRU, MANAGING DIRECTOR, CENTER FOR
FINANCIAL MARKETS, MILKEN INSTITUTE
Mr. Betru. Thank you. Thank you, Chairman Meeks, Ranking
Member Luetkemeyer, and members of the subcommittee. It is an
honor to be here.
My name is Aaron Betru, and I am the managing director for
the Center for Financial Markets at the Milken Institute. The
Milken Institute is a nonprofit, nonpartisan think tank that
promotes evidence-based research that serves as a platform for
policymakers, industry practitioners, and community members to
come together and address challenges we face here in the U.S.
as well as globally.
For the past century, steady economic growth and ongoing
job creation has led to prosperity in the United States.
However, not all segments of society have been able to
participate fully in this prosperity. Inequality does exist.
Ensuring all segments of society have an equal opportunity to
contribute and benefit when the economy grows is critical to an
equitable and just society.
Minority Depository Institutions play a vital role here in
promoting financial inclusion and economic viability for
underserved communities by virtue of their presence and focus.
However, yes, their numbers have dwindled. Those that
remain today are limited in their capacity to serve their
communities. I would like to focus my comments today from both
a bottom-up institutional but also a top-down economic
perspective on understanding the decline of MDIs as well as how
to reverse this decline, all with the perspective of improving
access to capital for underserved communities.
From a bottom-up institutional perspective, I recently
served as the co-Chair of Partnership for Lending in
Underserved Markets, a joint initiative of the U.S. Small
Business Administration and the Milken Institute to promote
access to capital for minority-owned small businesses.
Small businesses are the backbone of broad-based economic
development. But, unfortunately, over the past decade, the
United States has seen a significant and growing
underrepresentation of minority-owned enterprises.
In our work, we identified a series of factors as
contributing to this situation, but one in particular stood
out: access to capital. Without sufficient access to capital
for a small business, not only were they limited in their
ability to grow, but those individuals in the community who
would have been hired lost out on jobs.
Those individuals that the businesses would have provided
in terms of services from a grocery to a computer store to a
day care, never happened. In this context, a lack of access to
capital contributes to a lack of access to the American Dream.
As you have noted in your committee memo, a combination of
factors emerged as contributing to a lack of access to capital.
The 2008 financial crisis fueled bank closures, and home value
reductions in minority neighborhoods, the collateral for these
loans. This was exacerbated by longstanding bias in the banking
sector. This is important, because bank loans nationally are
the second-most prevalent source of start-up capital for a
business. But for minority-owned businesses, it is a credit
card, a far less efficient source of capital for funding long-
term growth.
It has been well-documented. The Office of the Comptroller
of the Currency recently confirmed that if you compare MDIs and
Community Development Financial Institutions (CDFIs) to other
banks, MDIs and CDFIs disproportionately focus on low-income
communities.
However, MDIs are small in the broader commercial banking
context, and the result of the small scale is increased
susceptibility to challenges associated with increased
compliance costs, operational complexity and fast-paced
technology-enabled competitive markets.
If enhancing the scale of their impact is a target,
understanding improvements strategies of MDIs and how to
resource them is critical to assuring MDIs can be greater
economic development engines for underserved markets from the
bottom up.
Now, from the top-down economic perspective, we are sitting
in the tail-end of one of the longest periods of economic
expansion for this country. Yet for the past 30 years, median
household wealth for African Americans and Hispanics, in
particular, has declined by 75 and 50 percent, respectively. A
recent study by McKenzie & Company detailed that closing the
racial wealth gap, just looking at Black and white Americans in
particular, could mean improving the U.S. GDP by as much as 7
percent. That is a trillion dollars.
As a demographic shift, the minority groups become a
majority of the U.S. population, it is no longer a nice-to-
have; it is an economic imperative to promote access to capital
to these communities in order to grow the U.S. economy and
retain our global competitive advantage. And we must meet this
challenge with the full weight of U.S. public policy, and I
believe MDIs are a part of this.
In my written statement, I have provided a more detailed
set of comments and recommendations revolving around a series
of issues, but I will just mention three right now: one,
promoting increased Federal deposits to MDIs; two, exploring
the potential of MDI/FinTech collaborations; and three,
enabling Opportunity Zone investments into MDIs and CDFIs.
Let me conclude here. I thank you for this opportunity, and
I look forward to the discussion today.
[The prepared statement of Mr. Betru can be found on page
36 of the appendix.]
Chairman Meeks. Thank you.
I want to thank all of the witnesses for your excellent
testimony. And I think this might be the first time since I
have been Chair, that all of the witnesses finished within 5
minutes, and I didn't have to use the gavel one time.
Thank you. Maybe what we will do in this round is, I will
recognize myself to ask questions for 5 minutes, but it will
give you an opportunity to put some more meat on the bones of
which you may have testified.
I will start with Mr. Kelly.
Can you please tell us and speak to the challenges that
MDIs face in seeking to raise equity capital to achieve scale?
Mr. Kelly. Certainly. When you think about minority banks
and their mission focus, one of the challenges has been that
they have been measured to larger institutions. And by default,
what happens is, they assume that they are not as profitable or
their intent, in terms of what they are trying to improve, from
a pretax return on assets is not worthy of investment. So you
have what I will call an intra-industry issue.
We also have now an inter-industry issue, where we are
seeing technology companies are moving in and being able to
attract capital, and move into the logistics of moving money in
a way that is attractive to investors.
One of our reasons for asking this committee to support us
is to allow us to demonstrate that with the proper scale and
the proper focus, our institutions can grow, be mission-
oriented in serving the low- to moderate-income communities but
also be profitable.
Chairman Meeks. Thank you.
Ms. Falero, your bank is designated low income by NCUA.
What advantages do you have with such designation, and how does
NCUA work with you as a result of those?
Ms. Falero. Being a low-income credit union allows us to
serve the underserved better. CDFI certified also gives us a
greater opportunity to be able to serve our community, and the
grants that we receive from the Treasury that we have received,
about two grants, helped us rebuild some of our loans in Puerto
Rico, helped us do resettlement loans in Puerto Rico, and also
helped us make people whole in Puerto Rico by assisting them
with all of the items that they can't afford that insurance
doesn't cover, for example, your furniture, your patio
furniture, all of those other types of loans that they are not
able to access. We have been able to do a good job with those
loans.
Chairman Meeks. Thank you.
And, Ms. Sung, listening to Ms. Falero, do you think that
other regulators should have designations similar to NCUA's
low-income designation for banks? And what could some of those
advantages and disadvantages be if they did?
Ms. Sung. I think that any opportunity that we have to be
able to obtain more access to capital, whether it is through a
designation, as you stated, is important. At this point now, I
am not clear, though, based upon the bills that I have seen,
whether or not that would allow us to be able to access
capital.
I am concerned that, as we create this issue of trying to
gather more data and we create data creep in our process, that
the things that we do naturally and the things that we already
do will be stymied as we try to meet certain requirements that
are new.
And I will tell you that my CRA rating has been outstanding
for many years. And I know over 55 percent of my loans are to
low- to moderate-income borrowers or Census tracts. And I feel
already in what I do, I should be able to access that capital
or grants that may be necessary to help us survive.
Chairman Meeks. Thank you.
Mr. Bowman, does government do enough to leverage programs
at its disposal to deposit funds in MDIs, and what more do you
think that we or the government can do in this area?
Mr. Bowman. I am not an expert on that, so I may not have
the perfect answer. However, the only the experience I have is
a couple of years ago I went to a minority banking conference
put on by the joint supervisors, FDIC and OCC, and there was a
pamphlet advertising the Minority Banking Deposit Program. It
had an application: Fill this out; we will contact you.
I had a bad experience. I filled out the paperwork, sent it
in, and couldn't get a real live person to call me back. At
that point in time, I just figured, we are on our own.
So, this bill has the opportunity to create access, and
creating access would help reciprocal deposits. Every bank in
this room needs deposits to make loans. Any opportunity would
be appreciated.
Chairman Meeks. Thank you.
Last, Mr. Betru, I am interested in your comment about
closing the wealth gap. Can you articulate more about that, how
MDI banks would help?
Mr. Betru. Sure. We are all well aware that essentially,
when you look at the biggest driver of wealth creation in this
nation, it definitely comes from the small business sector. In
the small business sector, when you look at post-2008, a number
of things happened in minority neighborhoods, where the biggest
source of collateral that was used typically for small
businesses was home equity value.
After 2008, where in some ZIP Codes in minority
neighborhoods, the value dropped by more than 50 percent, that
collateral was not there anymore. Couple that with my previous
statement with regards to the closures of the banks, and you
had a perfect mixture of issues that actually prevented access
to capital.
If we want to create wealth, to actually bridge this gap,
we have to think about providing the right type of capital,
providing the right type of loan products, equity as well as
debt, to minority-owned businesses so that they can actually
grow those enterprises but also hire more in their
neighborhoods. From there, then we can actually be in a much
better position to create the wealth in minority neighborhoods
to be able to address the gaps that we have been seeing across
30 years.
Chairman Meeks. Thank you very much.
I now yield to the ranking member, the gentleman from
Missouri, Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And witnesses, welcome to the panel today.
The first question is for Mr. Kelly.
Your testimony states that First Independence Bank remains,
like so many CDIs, the bank of first and last resort for the
communities that you serve.
In addition, the letter from the National Bankers that I
read in my opening statement said that CECL would further
restrict access to credit for consumers and businesses that
already experience limited credit options.
Can you describe what limited credit options look like for
individuals that your bank serves in your community?
Mr. Kelly. Thank you, Ranking Member Luetkemeyer.
What we find is that alternative financial services become
very challenging for people. They are very expensive for
individuals to have to do, check cashing, to have to do payday
lending, et cetera.
What our bank and what banks like ours do is provide those
individuals another opportunity for financial alternatives, and
that is what I am describing in that comment.
Mr. Luetkemeyer. My concern is--and I am anxious to hear
your response here--I believe that CECL will raise the cost of
loans that you give, because in order to reserve for those, you
are going to have to find the income from someplace. And to me,
that limits access to credit.
What would happen if access to credit to those consumers
was further restricted due to CECL, where would those
individuals go or what would they do?
Mr. Kelly. I think, exactly as you just referred to, they
would have to resort to alternative lending.
If I heard your comment correctly, you were asking, does
CECL put restraints on our business? Is that correct?
Mr. Luetkemeyer. Yes.
Mr. Kelly. The answer to that is, yes. In fact, I think we
all would agree on this panel that the discussion of CECL being
delayed was something that we were very proud to hear, and that
we celebrated. That has not been our primary fight at this
point because we are talking about issues such as capital.
But your question and your premise is exact in that if we
had to adhere to that, it would create even more pressure for
institutions like ours.
Mr. Luetkemeyer. Very good.
Ms. Falero, your testimony states that 71 percent of your
customers are low income or below and 68 percent of your
customers are Hispanic.
If the statement I read from the Center for Responsible
Lending is correct, and CECL restricts lending to LMI and
minority communities, what will that do to your business model
and customer base? And I think you also--I know your
association was very prompt in getting information to me with
regards to the effect on your credit unions.
Ms. Falero. Congressman, the effect of CECL on credit
unions, not only our credit union, would be a tremendous
regulatory burden and additional compliance costs. So, we would
be spending more money dealing with that, and giving us less
opportunity to deal with our actual members who need us.
Mr. Luetkemeyer. We have heard in this committee before,
testimony from the National Association of Home Builders that
for every thousand dollars of increase in a home loan, 100,000
people across the country no longer have access to home
mortgage lending.
And, to me, credit unions and small banks, community banks,
are the crux of where this CECL accounting is going to hit and
the very people who need access to the credit, low- to
moderate-income folks, are where your business model is. Those
are the folks that you take care of.
And so, it is very concerning to me that this is going on.
And I appreciate your response to that. I think in the letter
you said that your capital would be affected roughly $14
billion to $15 billion. How do you recover that? What is your
revenue stream?
Ms. Falero. I couldn't even answer that right now.
Mr. Luetkemeyer. Probably interest rates and fees on the
loans, right?
Ms. Falero. It would have to be--yes. And that is something
that we are not--
Mr. Luetkemeyer. So you are going to raise the cost of the
loan, which restricts the ability of people to have access to--
Ms. Falero. Exactly, and that is not the way our operating
model works.
Mr. Luetkemeyer. Perfect.
Ms. Sung, your testimony states that CECL might make sense
for larger institutions but is misapplied to your institution
and its peers. Can you elaborate on that statement? And when
you say ``peers,'' do you mean small institutions or MDIs?
Ms. Sung. Small institutions and MDIs.
Mr. Luetkemeyer. Okay. How would it affect you?
Ms. Sung. I think the cost of compliance is unknown right
now, and that is what is scaring us. Also, the uncertainty of
how the regulator will look at CECL once it is in effect is
worrying us as well.
As a result, will we have to spend money on consultants? If
so, that will cost money and time for us as well.
Mr. Luetkemeyer. Do you believe there is a procyclinal
effect? In other words, whenever the economy turns down, you
are going to have to reserve more, and therefore you have to
raise costs and it just keeps spiraling the wrong way?
I see Mr. Kelly nodding his head. Do you agree with that?
Ms. Sung. Yes. There is no other way to understand that
otherwise.
Mr. Luetkemeyer. Ms. Falero, you agree with that?
Mr. Bowman, I see you shaking your head.
Mr. Betru, you also as well.
I see my time is up. Thank you so much for your comments
today. I appreciate it.
I yield back.
Chairman Meeks. The Chair now recognizes the gentleman from
Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you very much, Mr. Chairman.
Let me just commend you. This is an extraordinarily
important and critical issue. And let me tell you just how
critical this is. You have to put it in the framework of the
history of our country, when it relates to this issue,
paramount of which came during the Civil War.
Alexander Hamilton, during the Revolutionary War, set the
principles and the foundation of our great system, and we
wouldn't have been here without that great centralized banking
system; it required every State of the 13 States at that time
to have a bank and to organize into a major central bank to
power.
But something happened just a little while later. It was
the Civil War, which tore the whole country apart, and which
ripped this banking system apart. But it had to come back
together very quickly. But here is the point: It didn't come
back for 4.5 million Black slaves. But they realized that they
had to do something. And that is where the Freedman's Bank came
in. And then, later on, with Plessy v. Ferguson, separate but
equal, they wouldn't let the Black folks go in the white folks'
bank, so they had to get Black banks.
Here is my point. Right now, you have Mr. James Ballentine,
who has just left. He is an executive vice president of the
American Bankers Association, as an African American. Mr.
Kelly, you are Chair of the National Bankers Association, as an
African American. Wonderful.
What I am saying is, the pieces are here. But the energy,
the thrust, the urgency of this government to respond to this
is not.
Now, if we had 4.5 million slaves there without banking,
what did they do? They put together the Freedman's Bank. Then
what Plessy v. Ferguson did, they had to put the banks in each
of the former Confederate States where there weren't any.
Government policy moved to that.
The reason I am saying that is, the answer to our unbanked
and underbanked population is to bring and give this as a
tremendous seeding opportunity. What better group of banks do
we have to service and get in there so that we can reduce this
unbanked? There are 58 million unbanked and underbanked people.
Anyway, now that I have my sermon out, let me get to my
question.
I want to get to you, Mr. Kelly. What should we in Congress
be doing to take steps now to get more of these banks in? We
have agencies for everything, but not this. We used to have
some efforts. But unless we get an institutionalized approach,
that there is an entity here in the Federal Government whose
sole purpose is to increase Minority Depository Institutions
and have that as a primary goal of being able to enrich the
banking system by solving this--it is a shame to have 58
million unbanked and underbanked people.
What say you on that? What else should we be doing?
Mr. Kelly. Congressman Scott, thank you for that. And it
aligns with my opening statement. We talked a little bit about
the creation of the Federal Reserve System in 1913, and the
FDIC in 1933.
Mr. Scott. Yes.
Mr. Kelly. My point was that leadership matters, but policy
matters more. And so, to your point, which is how do we help
support the unbanked and underbanked, there is a bill right
now, the Improving Access to Traditional Banking Act. We need
to make that happen soon. We need to ensure that there is a
fund created for MDIs to support financial literacy and
alternatives to predatory products. That is the thing that I
would say immediately.
But the second thing I would say is--
Mr. Scott. I thank you for that. That is my bill. I am on
that. And I didn't ask for that commercial.
Mr. Kelly. You did not, but I--
Mr. Scott. You see the energy--the energy is on this
committee to really get institutionalized on this.
And if they did it for the slaves coming out of the Civil
War, 4.5 million, surely, we can do it to really solve the
problem of getting to 58 million underbanked.
One other point--I know, Mr. Chairman, you want me to make
my point here--but do you all know--and I am finished after
this--that there has not been an additional African American-
owned bank in 20 years, since 2002?
Chairman Meeks. The gentleman's time has expired.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Meeks. The gentleman from Texas, Mr. Williams, is
now recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
Dodd-Frank greatly increased compliance costs on smaller
institutions throughout the country. Even though these banks
pose little threat to financial stability, they have had to
bear the greatest burden from a heavy-handed regulatory
approach by the Federal Government. I have long been an
advocate that banks should be hiring more loan officers than
compliance officers, and this rings especially true for
community banks.
Mr. Betru, how has a greater regulatory burden affected the
number of MDIs as well as the cost of credit to their
customers?
Mr. Betru. Thank you. I think when talking about any of the
regulatory issues, the number of capital rules worth
considering, most of these come from, let's say, the Basel
Committee and the Bank of International Settlements as an
example. In particular, there are rules around the level of
high-quality liquid assets, how much banks should be holding in
reserves, should be rightsized to the inherent risk of the bank
itself. MDIs in particular, given how small they are, we know
that most of them are low $1 billion in assets. I believe there
are only a few that exceed that number, yet the rules that
govern them are pretty much exactly the same up and down the
ladder.
A couple of things to kind of give you an example of this.
The number of foundations that want to participate in
supporting access to capital and work with the various MDIs,
from the various Rockefeller Foundations, Kresge Foundations,
is an unbelievable number. However, the way that they want to
participate is by backstopping the credit risk that these
different institutions have in providing access to capital, and
they are willing to provide guarantees. These guarantees are
governed, not just between the two different institutions, but
those rules are governed by different bank standards around
capital adequacy rules, leverage ratios, and the like.
Now, with these rules, it actually specifically stipulates
whether or not a foundation that provides these guarantees
treats those guarantees in terms of a high-quality liquid asset
that can be both exchangeable within 30 days or tradable on the
open market. That level of scrutiny has forced these
foundations to say, well, the only way that we can provide this
is in certain rules that actually will abide by Basel or the
particular bank regulator that is engaged.
If we want to have the rest of the economy actually
participate in pushing access to capital through the MDIs, we
have to realize the exact rules that govern the capital
adequacy rules, the liquidity ratios that these banks are
subject to, have to be in line with our overall objective. We
can't, in one way, support safety and soundness, and then from
the other side, provide regulations that actually prevent that
access to capital for underserved communities.
Mr. Williams. Thank you. Last week, I questioned CFPB
Director Kraninger on the small business data collection
provision contained in Section 1071 of Dodd-Frank. I spoke with
many community bankers in Texas about the potential costs that
this rule would impose on smaller institutions.
Ms. Sung, I understand that you operate a savings bank
focusing primarily on mortgages. Can you talk about the HMDA
data collection process for mortgages and why the Section 1071
data collection process for small business loans could have an
adverse effect on lending by community banks?
Ms. Sung. Yes. HMDA collection and reporting takes up 3
months of the 12 months of our lending season. We have about
six people in our credit operations department, two of them,
including my top senior credit officer, is actually--operations
officer, is actually involved with the collection and ensuring
the HMDA data scrub carefully, properly matching the fields,
and finally uploaded to the government website.
I believe that this process would be very, very difficult,
even more so difficult in the small business lending, even
though I am not 100 percent in that space. What happens with
residential lending is that at the very least, you have a
uniformed residential application you give to every single
borrower and that borrower is required to fill out those
fields.
In small business lending, I was just in my Consumer
Financial Service Committee meeting with the ICBA, and all of
the business lenders are saying that a lot of them don't even
use an application process in the beginning, and they are
actually having different ways themselves customized to ensure
that they are able to meet the credit needs of their community
in the small business space. This alone is completely--seems to
me going to be very impossible for these small business lenders
to be able to create this uniformity to upload this data and
collect it.
Mr. Williams. Thank you. I yield back.
Chairman Meeks. Thank you. The gentleman yields back.
The gentleman from Missouri, Mr. Clay, who is also the
Chair of our Subcommittee on Housing, Community Development,
and Insurance, is now recognized for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman, especially for
conducting this hearing. And I thank all of the witnesses for
your attendance.
I will start with Mr. Betru. Data shows that MDIs operate
predominantly in low- and moderate-income communities and have
as their client base an overrepresentation of communities of
color. Can you speak to the challenges of having a business
model like that?
Mr. Betru. Sure. I think it is important to put that within
the context of what is actually going to be the financial
services of tomorrow. There are currently a number of online
and mobile banking services that made themselves available
post-2008. We talked earlier about what happened in the
financial crisis in terms of the amount of wealth that was
destroyed, the amount of home values that were destroyed, and
the amount of bank closures that happened in 2008. What swept
in was definitely a number of nonbanks that were providing
financial services.
These financial services firms have a different set of
rules with regards to the type of loans that they provide and
different types of products. If we look at low- to moderate-
income communities, they are still of the exact same ilk as any
business where cash matters, speed in being able to obtain
working capital loans, CapEx loans, and the like.
Now, with the absence of minority depository institutions,
what are they doing? They are going to the only sources that
they can find, whether it be payday-based or more reputable
ones. And I think it is important to mention that online firms,
in general, are actually--there is a wide swath of them. We did
an evaluation of more than a hundred different institutions,
different models, different approaches, so you can't paint them
with the same brush.
Mr. Clay. But have the participation levels, has the actual
lending improved as compared to a brick-and-mortar institution?
Mr. Betru. Absolutely. In fact, PayPal Working Capital in
particular released a study, I believe in 2017, that found that
when they launched their service online, the vast majority of
the customers that they serviced were principally minority and
women in the ZIP Codes where they saw a number of bank
closures. Essentially, the answer to your question is, yes.
Mr. Clay. Any explanation for that, or what do you
hypothesize about it?
Mr. Betru. There is a mixture of things. Either, we are
talking about in financial services where, because the banks
were not in their ZIP Codes, they went to alternative sources,
and those alternative sources met the need of the particular
borrowers.
Mr. Clay. Okay. Thank you for that response.
Let me ask Mr. Kelly and Mr. Bowman, minority banks operate
more than their peers in minority and LMI communities. They
also continue to engage with minority small businesses which
face significant discrimination from nonminority banks. How
successful have you been in extending products and services to
those who want to start a business in your community? Mr.
Kelly, you can start.
Mr. Kelly. Certainly. I will say--and thank you,
Congressman Clay. In my opening comments, I mentioned in
several cases where the first and sometimes last resort for
those entrepreneurs, you heard that ethnic minorities typically
don't get to fund out of their home equity; they do it out of
credit cards. That is just a metaphor for the challenges that
we see within our communities, and that is why it is so
important when you look at, on a pro-rata share, these
institutions serve a market that is typically left behind.
It is our intention to continue to be focused on those in
that space of the community and to try to provide services
where they normally wouldn't have an alternative. That is not
predatory.
Mr. Clay. I see.
Mr. Bowman, anything you can add to that?
Mr. Bowman. Yes. I think a real live example is
appropriate. We have conducted outreach into some of the other
Native American Reservations looking for opportunities to help
people, and it is really interesting, because when they have a
Native American banker approach them, they feel that they are
going to get a fair shake. I spent the first half of my career
working for a giant money center bank, and the rules were very
rigid. The guardrails are very narrow. If I utilize those
lending guidelines to help that Native American borrower, I am
not going to make that loan.
What you have to figure out, from an entrepreneurial
standpoint, is how am I going to help? In the center of
Wisconsin, there is a reservation, the Menominee Indian
Reservation. It is 240,000 acres, 95 percent wooded. The
primary industry is logging, and Menominee Tribal members log
that land. I have made equipment loans to loggers with no down
payment, buying a piece of equipment, because if you don't have
a down payment, you can't go to work.
Chairman Meeks. The gentleman's time has expired.
Mr. Clay. My time is up. Thank you.
Chairman Meeks. I now recognize the gentleman from Georgia,
Mr. Loudermilk, for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. I appreciate
everybody on the panel here.
It is a very interesting discussion, especially, Mr.
Bowman, kind of the direction you were going right there are
some of the concerns I have being from Georgia, when our State
lost over 70 banks during the financial crisis, and we still
have a lack of community banks. And that is one of the issues
is, the bank that is managed closest to the people understands
the culture, they understand the people, they understand the
needs, and it is like the Federal Government has come in and
taken away the local decision-making that best fits that
community.
Ranking Member Luetkemeyer brought up CECL, and I fully
agree with his assessment on that. And when I talk to our
community bankers in Georgia--and keep in mind, we still have
50 counties in the State that do not have a locally owned
community bank or credit union in that county. We even have
some counties that don't have a bank branch at all, and that is
a big concern.
And when I ask about the challenges our community banks
face and why we don't have the creation of de novo banks--we
haven't seen them come back. We have had a few, but they are
just not coming back in a way that we think they should--I am
continually told it is like the death of a thousand cuts. It
isn't one thing; it is a multiplicity of things. And I see CECL
is that thousand and first cut into that because of the
uncertainty. It is like, all right, we had a bad situation, now
let's just throw out an idea that is not tested and we will
just see how the market reacts. And it is going to hurt the
local communities more than anyone else if it fails.
Ms. Sung, the scenario I have laid out with community
bankers and just the not seeing a revival of those locally
controlled banks because of multiplicity of existing
regulations, the uncertainty of new regulations, in your
testimony, you said Congress and the banking regulators should
pursue policies to promote the de novo banks and MDIs. Do you
have any specific recommendations of those policies that we
should be pursuing?
Ms. Sung. There is talk about this in the draft bill, and I
believe the streamlined process to be able to apply as a de
novo bank is extremely important. However, I also don't want to
just base it upon an application process. I think it is
important to allow these banks, once they apply and they are
granted a charter, the ability to actually breathe and live,
and that is in the capital ratio requirement. You should not
have a bank that is just starting and hasn't had a chance to
live and to be something with a capital ratio requirement that
is equal to a high-risk, big money center bank.
I believe that one way to do this, other than streamlining,
is to create several tiers of capital requirements that are
lower when the bank begins, and then as it grows and matures,
is higher as it takes on more risk and gets bigger.
Mr. Loudermilk. I agree with you. I think that is one of
the problems we have with Dodd-Frank is lumping everybody into
one category without consideration of the constituency or the
customer base or the community.
Ms. Falero, what are the biggest barriers to de novo credit
unions, particularly MDIs?
Ms. Falero. I have to agree with Ms. Sung, the requirements
to create a de novo credit union are extremely stringent, and
then when they do get their charter, all of the other
requirements and all of the compliance issues that the credit
union has to come to terms with, it is extremely difficult for
them to compete.
Mr. Loudermilk. And, Mr. Bowman, again, I appreciate your
testimony, because I remember when I started my business. Under
today's regulations, I would not have been able to establish a
line of credit, but the bank president knew me, knew my
character, knew me personally, and was willing to take a risk,
and we ended up making a fairly successful business. And that
has just been taken away from our banks.
Mr. Kelly, how is BSA/AML playing in this issue of not
being able to develop new banks? Do you feel that the Bank
Secrecy Act and the regulations around that play a factor?
Mr. Kelly. Yes. I will give you one example of that,
Congressman. The Beneficial Owners Act that we have to comply
with is very challenging. Now, the question is, we have been
given the authority to be the police to know who is actually
behind the business, but the reality is, most of those should
be governmental records, when someone gets a license for a
business, et cetera. That is just one example where that burden
needs to be taken off of the banking system.
But the others have been old and maybe stale. One example
would be the cash requirement of $10,000. People don't use cash
the same way they did 50 years ago, or 40 years ago when that
was put in place, but we still have to adhere to it. So, that
means I have to have personnel in the back office to ensure
that we are tracking those. So, we need a more comprehensive
view of money and how it moves.
And I agree that there are things we need to do to be sure
that there aren't detrimental or prerogative things happening
inside of a bank, but the principles from 40 years ago don't
apply today. And that is just one example.
Mr. Loudermilk. Thank you for that.
I yield back.
Chairman Meeks. The gentleman's time has expired.
I now recognize the gentleman from Illinois, Mr. Foster,
for 5 minutes.
Mr. Foster. Thank you. And thank you to our panelists.
This is something that has been worrying me for a long
time. I am just so worried that small community banks are going
to go the way of small community newspapers, and that our
country will be poorer as a result.
One question I have is whether the competition from
FinTechs is landed disproportionately on minority-owned
financial institutions. Anyone want to pick that up, either in
the mortgage space, where I am pretty sure it probably may
have, and just in the general overall banking?
Mr. Betru. Yes. We looked at, essentially, what has been
going on in terms of the access to capital in underserved
markets and, in particular, because of all the issues again
with regards to lowering of assets, lowering of credit scores,
the absence of the banks in low-income communities, other
providers of capital have definitely stepped in, the FinTechs
in particular. And, again, per my previous statement, there is
a wide number of models and platforms, and so you can't paint
everybody with a broad brush, the same brush. However, they are
using technology in a way that a lot of the banks are having a
hard time adopting because of difference between the regulatory
standards that the nonbanks have versus the banks have.
And so as you look at ensuring some of the rules with
regards to fair lending, disparate impact, it is not at the
same level; however, here is where regulation can actually go a
little bit further. If you look at the access to capital
mission of the CDFI space in particular in targeting low-income
individuals, specifically, if I look at the small business
sector, you have seen the banks essentially utilizing the
entrepreneur's own credit score rather than the cash flow of
the business. That is what the larger banks do in a business
profile. However, utilizing that cash flow requires a
completely different cost profile.
Now, the FinTechs have actually started to use technology
in an unbelievable way to be able to do that, and so we
actually did that test. We brought in a number of institutions
and we looked at, can a cash flow base methodology for
providing access to capital to a small business in underserved
markets actually--does that yield a positive outcome?
And this is a study that we recently released with our
partner organization FinRegLab, but, yes, it does. But the
issue is the ability for the banks to utilize that type of data
is something that is regulated versus on the FinTech side.
Now, we have been asking this question, why can't the MDIs
and the FinTechs actually collaborate more? But this is another
part of regulation. Third-party lending platforms, which are
governed by the OCC, actually are a little bit more complex,
and allow a bank to partner with a FinTech to utilize that
technology, and increase the access to capital. In the absence
of finding that regulation that enables that collaboration,
FinTechs have moved in and actually are doing it in a way that
sometimes is a bit opaque.
Mr. Foster. They come into all of our offices and say how
they are going to provide services to the underbanked and so on
and so forth, but they sound a lot like all of your traditional
customers, that they are going to go cherry pick profitable
opportunities and just make your life harder. And so, it is a
double-edged sword.
We are also very interested in bias in algorithmic lending,
but that may cause them to focus on traditional, mostly white
groups they traditionally lend to because that is their
training set for their artificial intelligence and leave your
customers alone. And so I am just wondering which way the sword
is cutting here and whether you feel like it is just putting
all small banks under stress or preferentially the minority-
owned banks. Mr. Bowman?
Mr. Bowman. Thank you. Wisconsin has 11 Tribal communities.
We are very big in one, and a small presence in others. FinTech
has the opportunity of using this to access those communities.
One of the challenges is when you are a small community bank,
you are a small business. We watch every penny, every dollar,
and everything has to be right every day for it to be a good
business model.
You could go to a FinTech conference and there would be
1,000 FinTechs there. How do you vet them? We have 27
employees. Who is going to vet them? Part of banking regulation
is you have to have a scoring model for your vendor management
program. They are now going to be a critical vendor, just like
your core processor. We are going to stumble. We need some help
to figure that out, but that is the future. We need to embrace
that.
Mr. Foster. Thank you.
Chairman Meeks. The gentleman's time has expired.
I now recognize the gentleman from Colorado, Mr. Tipton,
for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman. I appreciate you
holding this hearing. And I appreciate all of you taking the
time to be here today.
It is an interesting title of this on MDIs. I find it
interesting the commonality between the MDIs, and my district
in Colorado has 29 counties, small, rural areas that qualify
certainly for low- to moderate-income, more on the low-income
strata as well. As I have had the opportunity to be able to go
through, we do have a CDFI that is active, First Southwest
Bank, that is in our district to be able to make some loans,
but those small community banks are echoing the very same
concerns that you are putting out here today in terms of
regulatory compliance and costs.
And I think we probably have--I do want to certainly
associate my thoughts with the ranking member's comments in
regards to CECL as one more additional cost, potentially, that
is going to impact the ability to make loans. But can we just
go down the line, do compliance costs impact your ability to
have profitability and to be able to make loans? Mr. Kelly?
Mr. Kelly. Yes, it does.
Mr. Tipton. Ms. Sung?
Ms. Sung. Yes, it absolutely does.
Mr. Tipton. Ms. Falero?
Ms. Falero. Absolutely, it does.
Mr. Tipton. Mr. Bowman?
Mr. Bowman. Yes, absolutely.
Mr. Tipton. Mr. Betru?
Mr. Betru. Not as a bank, but as a nonprofit, yes.
Mr. Tipton. It does. Great.
In listening to Mr. Kelly during his opening comments, he
said that leadership matters, but policy matters more. And that
is the role, I think, that Congress needs to actually be active
in. We have had Chair Yellen before the Full Committee, and we
have had Chair Powell before the Full Committee. I have a piece
of legislation called the TAILOR Act, to be able to sculpt
regulations to be able to meet the size and the risk portfolio
of the institutions, rather than having one-size-fits-all.
I think many of us recall some of the comments after the
passage of the Dodd-Frank Act, the bigger banks, one CEO had
noted, it becomes a moat around those big banks, making it
harder for the smaller banks to be able to compete simply
because you can't keep up with the regulatory costs that are
coming through.
As we visited with Chair Yellen, and as we visited as well
with Chair Powell, the regulations aren't necessarily supposed
to apply to the smaller institutions, but something called best
practices comes in when the examiners come in the door. And so,
those costs do continue to multiply and inhibit that ability to
be able to grow our communities.
I had a very similar circumstance to Mr. Loudermilk when I
started my business. I filled out a form to the Secretary of
State sales tax license, got a character loan for $10,000, and
I was in business. What bank can really do that today?
You can. You are one of the few who might be able to make
some of those character-type loans. But knowing the clientele
that you work with, knowing your community is something that
ought to be respected by the financial policy that is coming
out of Washington, D.C., because it does have a real impact.
And we are looking at some of the MDIs. Have you seen
mergers between MDIs that have taken place? Ms. Sung, you are
nodding your head. Is some of this a practice really of
regulatory cost, meaning that you have to have the economy of
scale to be able to just simply survive?
Ms. Sung. Yes, it has absolutely had to do that. I have
seen two Asian-American banks in my community in the past 24 or
12 months have merged because of that issue. AML/BSA compliance
regulation is actually one of the highest regulatory costs. I
would say one-half of my compliance resources are used to that
particular regulation, and one-third of my board meetings are
actually spent reviewing AML/BSA reports by my AML/BSA officer.
So, that is an enormous outweighted focus on one regulation.
Mr. Tipton. Thank you for that.
We had a study that was put on by the Council of State Bank
Supervisors, and they found that regulatory costs for State-
chartered community banks was 4.2 percent just in 2018. And as
I have talked to my community banks throughout my district, we
don't have a lot of the big banks that are actually there, but
those regulatory costs and how that is impacting their profits,
which ultimately impacts their ability to be able to pay the
people who work there more and to be able to make those loans,
has become an inhibiting factor for being able to help
underserved and rural areas to be able to grow and to be able
to provide jobs.
I appreciate, Mr. Chairman, you holding this hearing, and I
invite the witnesses to take a look at this TAILOR Act. I think
it is something that might benefit you as well.
Thank you. And I yield back, Mr. Chairman.
Chairman Meeks. The gentleman's time has expired.
I now recognize the gentlewoman from New York, Ms. Ocasio-
Cortez, for 5 minutes.
Ms. Ocasio-Cortez. Thank you, Mr. Chairman. And I would
like to thank all of our witnesses here for being here today.
I think, particularly when we are talking about issues like
the wealth gap, it is important that we operate and have these
discussions with the context of history. And in the United
States, we have a long and ugly history of discrimination and
economic discrimination. And that history of discrimination and
plunder has kept communities of color impoverished, and it is
as apparent today as it was in 1865, when Lincoln signed the
Freedman's Savings and Trust Act. And it dates back to
communities like in New York City, when one of New York City's
first free Black communities was demolished to build Central
Park.
I think it is important that we, again, recognize that
context in history today and see where that inertia of
injustice and identify where those areas may be in our present
financial systems, whether it is for Native communities, Black
communities, Latino immigrant communities, et cetera.
Minority depository institutions lend to minorities at a
dramatically higher rates, is that correct, Mr. Kelly?
Mr. Kelly. Representative, I am not sure of that answer.
Ms. Ocasio-Cortez. Is there someone on the panel who does
know the answer to that question?
Mr. Betru. In terms of the portion of their total lending
and total assets, disproportionately, they focus on minorities
more than others.
Ms. Ocasio-Cortez. Okay. Thank you, Mr. Betru. Is it also
true that despite strong financial performance, minority
depository institutions continue to struggle to raise capital?
Mr. Betru. Yes.
Ms. Ocasio-Cortez. Why is that?
Mr. Betru. There is a misconception, I would say, in terms
of their efficiency. Essentially, there is a perception by MDIs
by virtue of the fact that they predominantly live within
minority neighborhoods, that they are in and of themselves
inefficient and essentially less likely to be a good investment
source for an investor. And that is actually something that we
at the Milken Institute wanted to challenge. So, we decided to
do an analysis of the return on assets in small business
lending efficiencies of MDIs. We collated everything from 2002
to 2019, and did a data and envelope analysis, and actually
found that that is actually not true.
On a size-weighted basis, the efficiencies of MDIs versus
non-MDIs was not different between those two cohorts. We are
actually hoping to have this study published in the next week
or two, but it gets at this point: The perception of
inefficiency belays the reality of what these institutions are
doing.
Ms. Ocasio-Cortez. To clarify, minority depository
institutions, by the books, are strong and exhibit strong
financial performance, but they struggle to raise capital
because of the perception that minority depository institutions
are somehow a bad bet?
Mr. Betru. The perception blocks the ability of investors
to support them and help them to scale. It is the scale the
fact that, A, their inability to attract the right type of
scale to defer the cost of compliance, the scale that actually
drives the real drive towards efficiency, but it is a
triumvirate of scale, perception, and a number of other
compliance-related issues that all conflate the problem that
you are talking about.
Ms. Ocasio-Cortez. Thank you very much for that insight.
Ms. Falero, I wanted to thank you for your testimony today.
As I am sure you are aware, during economic downturns,
communities of color are almost always hit the hardest. We need
look no further than the last financial crisis to see that.
As a lender to Puerto Rico, I am interested in hearing how
your organization approaches lending during economic downturns
and some of the challenges that you face?
Ms. Falero. Thank you, Congresswoman Ocasio-Cortez, for
that question. We are very proud to serve the community of
Puerto Rico. We had a branch there for 25 years, so we are very
familiar with the needs and wants of that community. And during
the hurricanes, we worked with our members, and helped them as
much as we could. We deferred their loan payments. We waived
all their fees, late fees, ATM fees in the islands, anything
that we could do to assist them.
We have a strong auto lending program right now in Puerto
Rico. The unfortunate part of it is that, since we are a credit
union, we are very limited in our field of membership, so we
are only able to serve three cities--Carolina, San Juan, and
Trujillo Alto--because of the field of membership expansion
rules that we have.
Ms. Ocasio-Cortez. Thank you very much.
Chairman Meeks. The gentlelady's time is expired.
I now recognize the gentleman from Kentucky, Mr. Barr, for
5 minutes.
Mr. Barr. Thanks, Mr. Chairman. I appreciate the hearing,
and I appreciate the testimony from the witnesses.
I have a question about mortgage lending for all of you
all, and we will start with Mr. Kelly and work down the panel,
if you don't mind. At the conclusion of the promulgation of the
Qualified Mortgage rule, did you observe a decline in the
availability of mortgage credit, particularly as you reflect
upon the fact that your institution serves low- and moderate-
income borrowers?
Mr. Kelly. Congressman, I am not sure I understood the
first part of your question.
Mr. Barr. Did you observe, in serving your customers after
the Qualified Mortgage rule went into effect, that that
materially reduced access to mortgage credit for your
customers?
Mr. Kelly. Congressman, here is how I would answer that. We
have seen it become more challenging for us, for a number of
reasons, to compete in the marketplace, some FinTech-related,
as one of the witnesses had mentioned here, but also, it is a
combination of many things.
And I will give you one example. On CRA, we have seen
larger banks be able to give rebates to customers for CRA
credit, and these are much larger banks. We have to compete
with that, and we can't compete with that.
The point I am trying to make is that for small
institutions like ours, it is very difficult to play in the
mortgage space with the compliance you have to support the
scale that you have.
Mr. Barr. I guess what I am getting at--
Mr. Kelly. Like HMDA, the following of the HMDA rules and
all of those is a burden for us. And so, for players who are in
the 100 to 200 over the 2-year period, that becomes very
challenging to spread that compliance cost based on the spread
of where we can actually compete and place those mortgages in
the market. That doesn't include the ones we keep on the books
in terms of our portfolio--
Mr. Barr. I guess what I am getting at is, did the
inflexible, rigid 43 percent debt-to-income rule limit your
ability to originate mortgages for your customers?
Mr. Kelly. The answer to that is a simple yes.
Mr. Barr. Yes.
Ms. Sung?
Ms. Sung. When the Dodd-Frank rule came out on the
Qualified Mortgage, we saw a tremendous drop in lending. It
took me a year to review the rule and to understand the small
creditor exception, which was very important for us to be able
to continue to lend and to lend on our portfolio. I had to go
to my regulator, despite the fact this was legislatively
approved, to get them to approve. I had to literally write a
research and White Paper for them, for them to accept and allow
me to do this.
To this day, they are continuing to monitor my lending in
the small creditor exception space continuously. They are
worried about concentration risks. I tell them that my mission
is to serve my community, and my community cannot fall in the
cookie-cutter profile that other bigger banks are, I must go to
that. However, they are concerned about concentration risk.
Mr. Barr. And, Ms. Falero, did your members see a drop in
access to mortgage credit after the Qualified Mortgage rule
went into effect?
Ms. Falero. Unfortunately, we are not able to offer first
mortgages right now because of the cost involved and our size
credit union and all the regulations involved.
Mr. Barr. So you just got out of the business altogether?
Ms. Falero. We did.
Mr. Barr. So, QM to you is quitting mortgages?
Ms. Falero. Yes.
Mr. Barr. Mr. Bowman?
Mr. Bowman. We did see a decline in lending. We are
fortunate, however, because we have a niche product. We serve a
Native American customer base. There is a product called the
HUD Section 184 loan, and one of the eligibility requirements
is you have to be an enrolled member of a federally recognized
Tribe. Our business continued when QMI came in. What suffered
were the applicants who didn't qualify, who were non-Native
American and couldn't qualify for the specialty.
Mr. Barr. Mr. Betru, I am going to come back to you. But
just for the other witnesses, I am sorry that the CFPB's rule
negatively impacted your customers. What we were able to do in
a bipartisan basis in the last Congress was, through a
portfolio lending provision for institutions below $10 billion
in consolidated assets, is provide that portfolio lending
relief, and our hope is and our intent was to provide your
institutions and, more importantly, your customers, that
flexibility to access mortgage credit where you can retain that
risk and hold those credits on your books.
And that is what we were trying to remedy there. Last
question to Mr. Betru, Mr. Betru, the valid-when-made doctrine,
if we were to restore valid when made and overturn Madden,
would that help invite FinTech assistance for minority-owned
institutions?
Mr. Betru. I believe on valid-when-made component, and I
think both sides of the argument have a valid point. On one
end, you have proponents that are making the right case that
when a loan is made from a borrower and a provider, that
financial services having that clarity throughout the life of
that loan makes absolute sense. I think the fact that we have
differences with regards to what is affordable across multiple
States, in some places like in Utah where there are no usury
laws, is putting a little bit of consternation for various
lenders. That being said, from a FinTech's perspective, they
are operating throughout multiple different jurisdictions.
I think the biggest point that we have to figure out is,
the banks that are sitting here are dealing with a different
regulatory regime than the nonbanks, and bringing parity to
that absolutely makes sense. In the absence of that parity, I
think the situation we are dealing with is, we have FinTechs
that are able to provide a type of financing that a lot of
these banks are not.
Chairman Meeks. The gentleman's time is expired.
I now recognize the gentleman from Florida, Mr. Lawson, for
5 minutes.
Mr. Lawson. Thank you, Mr. Chairman, and witnesses, welcome
to the committee.
Mr. Kelly, could you tell me how many African-American
banks are still in existence? Do you have that number?
Mr. Kelly. There is a round number that I would say is
roughly around 21, 22, is the number in the country out of
roughly 5,500-plus banks.
Mr. Lawson. Okay. The other question would be--and I might
know some of the answers, but I would like to hear some of the
answers from you, if you are aware. What led to the major
decline? It wasn't a financial crisis; it probably started
before then. But what led to the major decline of African-
American banks?
Mr. Kelly. I would say it is a host of things. I think it
was Representative Loudermilk who mentioned that it is death by
a thousand cuts, and that has been prevalent in the industry.
The challenges that you heard him describe in Georgia, I think
Georgia lost more banks than any other State in the country.
These are not MDIs, but I think it is somewhat prevalent.
The other aspect of it that I would say to you,
Congressman, is the propensity of where African-American banks
were built. You heard Congressman Scott mention there hasn't
been one chartered in 20-plus years. Our banks were centered in
the heart of what used to be the middle-class African-American
community where the doctors, and the lawyers, et cetera, lived.
Some of that was because of redlining issues that the
Congresswoman made reference to, but the reality is, through
kind of some of the changes in our economy where you saw people
move away from the city and to the suburbs, our institutions
weren't capable of being able to deliver beyond the brick and
mortar and the circumferences that they were built in. And so
you saw kind of a decline of business activity around some of
these institutions that have been somewhat challenging for
them.
Mr. Lawson. Mr. Betru, would you like to comment on that?
Mr. Betru. Sure. In answering your question, I think it is
important to take the Congresswoman's comment earlier about
making a historical context point. I think when we look at the
middle of this previous century dealing with redlining, it
wasn't, at least on paper, an overtly racist issue. It was
utilizing the construct of these markets are too risky to
engage in.
Now, if we are talking about the failure of MDIs in
quotations, and I don't believe the failure is an accurate
description, it is a mixture of everything that happened post-
2008, in terms of the individuals being targeted by certain
unscrupulous mortgage lenders, their wealth being destroyed.
Eventually, those institutions that served them felt the brunt
of the 2008 crisis. And post, what do we do, we started
introducing a number of regulatory standards that were unfairly
at parity between an institution that is sub-$1 billion in
assets with all the other banks.
In essence, are we looking at introducing, it is too risky
for these banks to operate in these areas in a similar way that
is unfair? The MDIs are $250 billion in assets, the entire 150
of them, $250 billion. That is like 1 percent of the total
assets of the all 5,500 institutions, yet we are subjecting
them to the exact same level of regulatory scrutiny as we have
other banks north of $200 billion in assets. If we want them to
actually deploy capital to the exact communities that need it,
then we have to rightsize the rules which govern them.
Mr. Lawson. That is amazing.
And the last question is, if I have enough time, it seems
like the credit unions that are associated with a university
seem to have a much higher opportunity to survive during the
financial crisis and so forth. Is it because they have built-in
depositories that are used from the universities, especially
with minority universities? Is that one of the reasons why you
can still find credit unions associated with the universities
and in many of the cities where there are minority
institutions?
Mr. Bowman, you seemed like you wanted to say something?
Mr. Bowman. I work in the banking industry, and I think I
would defer to Ms. Falero. She runs a credit union.
Ms. Falero. Congressman, yes, I work at a credit union, and
I believe the reason why credit unions are a little bit more
able to survive is the way we do our loans. We are very
conservative, highly regulated, and our mission in life is to
deal with the underserved. That is what we do.
Mr. Lawson. Okay. I yield back, Mr. Chairman.
Chairman Meeks. Thank you.
I am now going to yield a minute and a half to the ranking
member for a closing statement.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I thank each one of you for being here today. You have done
a great job of stating your case and informing us. It has been
very informative for me to be able to ascertain some of the
things that I think are important.
I think from the standpoint that small banks and credit
unions provide many resources to the communities that you
serve, you have the same problems that every small community
bank, every small credit union in the country has from the
standpoint of compliance, because it is just through the roof.
It is driving consolidation, it is driving them out of
business, and we need to find ways to minimize that, if not get
rid of it altogether.
Obviously, my focus has been on CECL today because I think
it is a huge problem for, I think, our economy and especially
for small banks and credit unions in particular from the
standpoint of having to reserve more money for that, and there
is only one place to go get that and that is when you make that
loan. And that is going to raise the cost. It is going to keep
people from having access to credit.
I think one of the things we talked about, I think Ms. Sung
talked about, was concentration of credit or concentration of
risk. If you are doing a good job of representing your
community, you are going to be invested in your community. You
know what you are going to do? You are going to have a lot of
risk in your community, because that is where your risk is.
That is what you want to do, you want to improve your
community.
As a small institution, yes, you have your investments in
the community and that is where your risk is, but if you do a
good job of--and this is where the analysis of the regulator
needs to be. And as a former regulator, I can tell you some of
them do a good job and some of them don't. You wind up with
some folks who don't want to do their job, and they are lazy,
but they need to go in there and depend on you to give them a
review of the economic activity in your area and how you can
help interact with that and build a better community.
Each of you, I can see, have your community at heart. I
thank you for that.
And with that, I will yield back.
Chairman Meeks. Thank you.
First, let me ask unanimous consent to enter statements
into the record submitted by the Credit Union National
Association, the Creative Investment Research, and the
inclusive and its network of CDFI credit unions.
Also, without objection, I ask for unanimous consent to
submit an article published on the OCC website entitled,
``Citibank: Partnering With Community Banks to Expand Financial
Access,'' which speaks out about Citi's program which provides
over 440,000 customers of 25 participating community banks,
minority deposit institutions, and Federal credit unions with
surcharge-free access at 2,300 Citibank branch ATMs.
Without objection, it is so ordered.
And I now recognize myself for a minute and a half for a
closing statement.
As we conclude this hearing, I first wish to thank the
witnesses for your testimony and for choosing to tackle some of
the most difficult challenges in banking, namely, ensuring
access to financial services for marginalized, underbanked, and
discriminated communities. We sometimes portray banking and
bankers as a monolith, but it is a complex and diverse industry
that is reflective of the diversity of America, but it is also
reflective of the problems in America.
We cannot allow minority banks to disappear. And we must
work in earnest to tackle the challenges of banking
discrimination in lending and foster genuine diversity in the
banking sector. We must do that, because that is the way we
close the wealth gap. If we look at what took place prior to
2008, we were closing the wealth gap, but after 2008 and the
crisis, when individuals in minority communities were most
directly affected, that wealth gap just blew open, and we are
not lending in the way or having access to capital in the way
that we should in our MDIs.
So, I have taken note. I have been listening very carefully
to the feedback on my bill, and I will work to make appropriate
changes ahead of its introduction.
I must close with thanking, again, Chairwoman Waters, for
putting issues of diversity and inclusion at the heart of our
committee's work, as well as to congratulate my colleague, Mrs.
Beatty, for her able leadership on the Diversity & Inclusion
Subcommittee.
But I also want to thank my colleagues from across the
aisle, Mr. McHenry and Mrs. Wagner, and, of course, the ranking
member of this subcommittee, Mr. Luetkemeyer, for engaging with
us constructively on issues of diversity and, in particular, on
today's hearing on minority banks and tackling issues faced by
underbanked communities. These issues cut across parties and
districts, and I believe that our work here matters to the
vulnerable communities we all represent in Congress.
Again, I thank the witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
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