EGRPRA Outreach Meeting 12-2-2015

Good morning, everybody, and welcome
to the FDIC’s Seidman Center. This is the sixth and final
outreach event hosted by the OCC, the Federal Reserve,
and the FDIC pursuant to the Economic
Growth and Regulatory Paperwork Reduction Act,
fondly known as EGRPRA. Our previous outreach sessions
in Los Angeles, Dallas, Boston, Kansas City,
and Chicago featured a diverse range
of banking organizations as well as representatives from
consumer and community groups, and other interested parties. These sessions had provided
specific and constructive feedback, and numerous
concrete suggestions. We are looking forward
to hearing directly from today’s panelists
and audience members as you share with us
your suggestions about ways we can streamline
banking regulations. The banking agencies
have issued three notices of proposed rulemaking
to solicit written comments and the fourth and final notice
will be released this month. These notices are available
on our websites and on the EGRPRA website
for the Federal Financial Institutions Examination
Council, or FFIEC. We will carefully review
the written submissions received during
the open comment period as well as the comments we hear
at our outreach sessions. I also want to point out
that we are expressly inviting comments on newly implemented
rules as well. The regulatory review process
is one we take very seriously. Of particular interest
to the FDIC, as I think of all the agencies, is the impact of our regulations
on community and rural banks. As you know, the FDIC is
the primary federal regulator for the majority of
the community banks in the United States. Community banks play a critical
role in our financial system. The FDIC’s community banking
study showed that while community banks hold
14 percent of the banking assets in the United States,
they account for approximately 45 percent
of all the small loans to businesses and farms made by all banks
in the United States. In addition, nearly one in five
counties in the United States, including small towns,
rural communities, and urban neighborhoods, would have no physical
banking presence if not for the community banks
operating there. The basic business model
of community banks, careful relationship blending,
funded by staple core deposits, and focused on a local
geographic community that the bank knows well, remains highly viable
and actually held up quite well during the recent
financial crisis. The essential role of community
banks in our financial system underscores
the importance of conducting a comprehensive regulator review to identify areas in which
burden can be reduced while preserving
supervisory standards. Thus far, several themes
are emerging through the EGRPRA process. We have heard frequent comments
from participants that regulators should consider
whether laws and regulations based on longstanding
thresholds should be changed. For example, dollar thresholds
for transactions requiring an appraisal, and asset thresholds
on the size of the institutions eligible for longer
examination cycles. Commenters have also asked
that we ensure that supervisory expectations
intended for large banks are not applied to
community banks, the so-called
trickle-down effect, and that regulators have
open and regular lines of communication
with community bankers. We’ve also heard concerns
about burdens and costs related to Call Reports and suggestions for
improving the process, again, especially
for community banks. As the EGRPRA process
is unfolding, it’s fair to say
that the banking agencies are not waiting
to take action. For example, the FFIEC
has established the process for identifying how
some Call Report requirements can be streamlined. In September,
the federal banking agencies issued a proposal for comment
that includes the elimination or revision of several
Call Report data items. We also announced that we will
accelerate the start of a statutorily required review
of the continued appropriateness of the data collected
in the Call Report, and are evaluating
the feasibility and merits of creating
a streamlined version of the quarterly Call Report
for community banks. We are talking with
community institutions and the trade associations
to get their views on reducing reporting burden. This has included visits
to several institutions to get a better sense of
the report preparation process. We are also reaching out to
banks and savings associations through teleconferences
and webinars to explain
upcoming reporting changes and to clarify technical
reporting requirements. Finally, if I may,
I’d like to mention three initial actions
the FDIC has taken in response to
EGRPRA comments. First, we issued
questions and answers to eight applicants
in developing proposals for federal deposit insurance, and to provide transparency
about the application process. Second, we issued new procedures
that eliminate or reduce the number of applications to
conduct permissible activities for certain bank subsidiaries organized as limited liability
companies, or LLCs, and in addition, we issued
a financial institution letter to the banks we supervise
describing how the FDIC will consider requests
from S Corp banks to pay dividends
to their shareholders to cover taxes on their
pass through share of the bank’s earnings
when those dividends are otherwise not permitted
under the new capital rules. In conclusion, let me underscore
that the banking agencies will continue to look for ways
to reduce or eliminate outdated or unnecessary
requirements as we move forward
with this review. Based on comments we’ve received
during these outreach sessions, we have formed an interagency
working group, for example, to review the appropriateness
of dollar thresholds for transactions
requiring appraisals and other requirements of the interagency appraisal
regulations. As you can see, we still have
a lot of work to do and are pursuing this process
with, I believe, great commitment
and dedication. As you can see, or let me say,
in conclusion, let me thank you all
for your participation today and we look forward to
hearing your comments. And if I may,
let me turn the floor over now to Comptroller Curry. COMPTROLLER CURRY: Thank you,
Chairman Gruenberg, and good morning to everyone. I want to thank you all
for being here today to help join us
in this discussion about how we can reduce
unnecessary regulatory burden on community banks. As Chairman Gruenberg noted,
this is the sixth, or grand finale,
in a series of meetings we’ve held
under the EGRPRA statute. Interestingly, the first
took place exactly one year ago on December 2, 2014
in Los Angeles. The discussion generated
at that meeting, and at those that followed, was quite vigorous
and very informative. Today’s meeting is,
as I mentioned, is the final session
in this process and I’m hoping for a discussion
that is every bit as lively and meaningful
as the first five. As you know, we are working
on this project on an interagency basis as well as through the offices
of the Federal Financial Institutions Examination
Council, or FFIEC, which brings together
the banking agencies, the National Credit Union
Administration, and the state’s
supervisory agencies. The FFIEC participation
is especially appropriate since we have been making
increasing use of it to provide support
to community banks, particularly in
resource-intensive areas like cybersecurity. Smaller banks and thrifts don’t
have the same kind of resources that large institutions
can bring to bear on regulatory compliance. And if we can eliminate
unnecessary rules and streamline others, we can make it easier
for these institutions to serve the economic needs
of their communities. Of course, it’s true
that regulations, by their very nature,
carry at least some burden. Most provide public benefits
that outweigh the burden that they impose,
but what worries me is the way that the regulatory
rulebook builds up over time, adding layer after layer
of requirements that can be quite onerous
for small banks, so we at the OCC are taking
this process very seriously. I’m very interested in hearing
from the panelists and members of the audience
about specific regulations that are either outdated,
unnecessary, or needlessly burdensome, as well as your ideas
for improvement. If you don’t get a chance
to speak today, I would, as Chairman Gruenberg mentioned, encourage you to submit
a written comment. While this process will unfold
over some time, I can assure you
that we at the OCC, and our colleagues
at the FDIC and the Fed, will not wait until it’s over
to make changes when a solid case
has been made for reform. If it is clear that a regulation
is unduly burdensome, and if we have authority
to make changes to eliminate that burden,
we will act. Already, the banking agencies,
acting through the FFIEC, are seeking comment on proposals to eliminate or revise
several Call Report items. Among the other proposals
we are looking at is one that would create
a streamlined version of the Call Report
for community banks. These Call Repot initiatives
are consistent with the early feedback
that the OCC, FDIC, and the Fed have received from
the EGRPRA review process. However, many regulatory
requirements are rooted in laws
passed by Congress and changes may require
legislative action. In those cases, we will work
with Congress to remove unnecessary burdens. The OCC has advanced
specific legislative proposals to eliminate regulatory burden, and let me talk briefly
about two of them. First, we think
a greater number of healthy, well-managed community
institutions ought to qualify for the 18-month
examination cycle. That would not only
reduce the burden on those well-managed
institutions, it would allow the federal
banking agencies to focus
our supervisory resources on those banks and thrifts
that present capital, managerial, or other issues
of significant supervisory or systemic concern. I’m pleased that the House
voted in October to raise the asset threshold
to $1 billion and that the proposal
has been included in another funding measure that is likely to be signed
by the president. The Congressional Budget Office says that as many as
600 additional banks would qualify for
the 18-month cycle under the higher threshold. Second, we’ve developed
a proposal to provide federal savings associations
with greater flexibility to expand their business model without changing
their governance structure. It’s important that
federal savings associations, like other businesses,
have the flexibility to adapt to changing economic
and business environments to meet the needs
of their communities and they should not
have to bear the expense of changing charters
in order to do so. We have recommended authorizing
a basic set of powers that both federal savings
associations and national banks can exercise,
regardless of their charter, so that savings associations
can change business strategies without moving to
a different charter. And I’m pleased to tell you
that this proposal recently passed the House
Financial Services Committee and I’m hopeful that the full
House will consider it soon. I think these legislative
proposals are meaningful steps which could help a greater
number of smaller institutions, but we shouldn’t stop there. We should be looking at
every approach that might help
community banks thrive in the modern financial world. One especially promising
approach involves collaboration, which was the subject of
a paper we issued recently. By pooling resources,
smaller institutions can trim costs
and serve customers that might otherwise lie
beyond their reach. At the OCC, we’ve seen
a number of examples of successful collaborative
efforts. For example,
several community banks formed an alliance through
a loan participation agreement to bid on larger loan projects in competition with larger
financial institutions. Elsewhere, a group of banks
pooled their resources to finance community development
activities through multi-bank community
development corporations, loan pools,
and loan consortia. And I hope that community banks
won’t stop with those projects. There are opportunities
to save money by collaborating on accounting,
clerical support, data processing,
employee benefit planning, health insurance,
IT and cybersecurity, and the list goes on. Speaking only for
the federal banking system, federal law
and OCC regulations facilitate collaborative arrangements
through operating subsidiaries, service companies,
and other structures. I would encourage you
to take a look at our paper on the subject,
which is entitled, An Opportunity
for Community Banks: Working Together
Collaboratively, and you can find it
on our website, Let me finish by saying
that while much has been done since that first meeting
in Los Angeles, we have much work ahead of us. I can tell you though
that all of us here are committed to
making this process work and to do everything possible to eliminate unnecessary
regulatory burden. Thank you
for being with us today, and I’d like to turn the podium
over to Governor Tarullo. GOVERNOR TARULLO: Thanks, Tom. The third outreach meeting
this past spring, I suggested that we could regard
the EGRPRA process as a success only if it leads to significant
reduction in regulatory burden for smaller banks in particular. Over the course of the year, there’s been
a wide range of comments on a wide range
of regulatory practices that may be candidates
for change, but many have been concentrated
in a few key areas of concern to smaller banks, and I want to mention
three of those areas as we begin this morning. They include, first, simplifying
the regulatory capital rules for smaller community banks, second, modifying
the information collected by consolidated reports
of condition, the so-called Call Report, and third, updating
certain regulations and supervisory practices under
the Community Reinvestment Act to reflect current
banking practices. So, going back to the first, many commenters
have urged change regarding the application of the Basel III
capital requirements to community banks. They’ve argued that simpler
capital rules are needed to reduce the compliance burden
for smaller institutions because it is disproportionate
to the benefits of the framework’s
increased risk sensitivity. The greater detail
the Basel III framework requires a degree of
categorization, record keeping, and reporting that can be
particularly costly for smaller community banks. As I have publicly stated
before, I believe that it is possible
to develop a simpler set of capital
requirements for smaller banks that will be consistent
both with the safety and soundness aims
of prudential regulation and with our statutory
obligations, such as the Collins Amendment. Second, commenters have called
for changes to the Call Report. Many have advocated
modifying the types and amounts of information
collected by the report for community banks
to align more closely with the relatively straightforward
business models of these firms. As Marty and Tom
have already noted, the federal banking agencies
didn’t wait for the end of the EGRPRA process
to respond and through the– under the auspices of the FFIEC, we have already issued
some proposals that would eliminate or revise
several Call Report data items, but as we complete
the EGRPRA review process, we’ll certainly be considering
other opportunities for change. Third, commenters have made
recommendations as to how regulations
and supervisory practices implementing the Community
Reinvestment Act should be modernized
to reflect the way that banking services
are now being provided and the ways in which
banks are interacting with the communities
that they serve. Here again, I believe
there should be ways that the federal banking
agencies can be responsive to this set of concerns. As this is the last outreach
meeting of the EGRPRA process, I think it’s useful to add,
as Marty noted too, that we’re committed to
a systematic analysis and consideration of all
the comments that we receive. And I think this will allow us
to prioritize recommendations and act as quickly as possible
to adopt them. It’s in the spirit of creating
priorities for action that I’ve identified
those three areas, although, I don’t, at all,
intend for them to be exclusive, that have commanded attention
from so many of the commenters in the first five meetings
and also in written comments. So, let me join my colleagues
in thanking all of you for your participation
in today’s session and I look forward to hearing
the views of the panelists and people in the audience. Thank you.
Thank you, Governor Tarullo, and Chairman Gruenberg,
and Comptroller Curry. Good morning. Thank you for attending
this EGRPRA outreach meeting, and welcome
to the D.C. Metro area. My name is Joe Face, and I am the Commissioner
of Financial Institutions for the Commonwealth
of Virginia. Through the state liaison
committee of the FFIEC, my fellow state regulators and I
have been involved in the EGRPRA review with
the planning of EGRPRA meetings and we very much appreciate your
participation in this process. EGRPRA requires that regulations
prescribed by the FFIEC, the FDIC, the Federal Reserve,
and the OCC be reviewed by the agencies
at least once every ten years. The purpose of this review
is to identify outdated, unnecessary, and unduly
burdensome regulations and consider how much regulatory
burden there is on banks. When I think of
regulatory burden, I sometimes think of the old
saying about the weather; everybody likes to talk
about the weather, but nobody does anything
about it. Seems like everybody likes to
talk about regulatory burden, but it feels like sometimes
nobody does enough about it. The EGRPRA process
is a timely opportunity to do something about it at a very critical time
for the banking industry. Let’s not let it go to waste. In another ten years, many of
the banks represented here today may not be around,
due in large part to the crush of regulations
that are already on the books and the new regulations that
will, no doubt, be forthcoming. This process is also vital to ensure our unique
dual-banking system can thrive. We have, literally, thousands
of pages of regulations that have evolved
over the decades. Most were promulgated
as a result of laws passed by Congress
in response to some crisis. It is important to look at the
cumulative layers of regulations and how they could be
streamlined to make a more coherent
regulatory system. Policymakers and regulators
also need to step back to understand the full impact
of legislation and regulation on the financial system
as a whole and to achieve
a supervisory model that is appropriate for
the diverse business models of the industry. Such a model allows banks
to serve their customers, small businesses, and local
and state economies. This is the real strength
of our financial system and our economy. This outreach meeting and
the larger EGRPRA review process are key to informing regulators
and policymakers of areas where improvement
to the regulatory framework can be made. Your input to this process
is essential. Who knows better than
the industry and consumer groups the full impact regulations
have upon consumers and industry’s ability
to serve your customers in your communities? As such, I am very much
appreciative of your willingness to participate in this process, and I encourage you
and your colleagues to submit comments
to the agencies. I would like to mention
a few ideas that have come out of
the EGRPRA process out of state regulators’ work on right-sizing
community bank regulation and the work that Congress
is doing to look at the banking
regulatory environment. Recent regulatory reform efforts
have rightfully centered on addressing the problems
posed by the largest most systemically important
banks. However, there is widespread
concern among regulators, policymaker, and the industry
that many of these new rules, in addition to existing
regulatory requirements, pose an undue burden
for community banks. Congress and federal regulators
have undertaken measures to provide community
institutions with relief. While these efforts
are positive, there remains a need for
a more comprehensive approach based on a common and consistent
definition of community banks that does not rely solely upon
hard asset thresholds that differ by regulation. Certain qualitative factors
should be considered, factors such as whether
an institution operates predominantly
in local markets, whether an institution derives
its funding primarily from deposits from the communities
in which it operates, and whether a bank’s lending
model is based on relationships and a detailed knowledge
of the community, not volume-driven
or automated models. There are
congressional proposals to lengthen the current
examination cycle to 24 months and raise the threshold
for banks eligible for an extended exam cycle, and the primary goal
of regulators should be to better tailor the examination
process to the business model and the risk profile
of the bank being examined. Extending the time between exams could run counter to state law
in some states and negatively impact
our ability to ensure safety and soundness
and consumer protection. Federal law currently provides
for an 18-month exam cycle for institutions
with $500 million or less. The OCC has offered support
for raising the threshold from $500 million
to $750 million. Since banks with assets
under $1 billion do not pose the same risk
as larger banks, absent a definition
of a community bank, I think raising the threshold
would be a welcome step and allow regulators
to focus their resources on higher risk institutions. Thank you again for attending
this important meeting. I am very hopeful that valuable
feedback that bankers, and consumers,
and others provide today will lead to
an improved regulatory system and supervisory efficiency.
Thank you very much. COMMISSIONER TAYLOR: All right.
Thank you, Commissioner Face. And then,
thank you, Mr. Chairman, Mr. Comptroller,
and Mr. Governor for hosting
this excellent meeting. Good morning, everybody.
My name is Stephen Taylor. I am the Commissioner
for the District of Columbia Department of Insurance
Securities and Banking. And again, I want to thank you
for allowing me to be part of this remarkable group
of individuals here. I echo the other speakers’
remarks about this
very important process, and I appreciate you
attending this meeting to provide your input. Looking at
this impressive agenda, I think this meeting will be, to use a popular
campaign phrase, huge, but I think we have a huge
opportunity to really do some good work here, so I look forward to
all the great dialog and input. I would like to take a minute to build upon
Commissioner Face’s comments and discuss some other
recommendations from state regulators to enhance
the supervisory experience for financial institutions. One issue is restrictions
on proprietary trading, the Volcker Rule, I support
the intent of the Volcker Rule to limit speculative trading
activities at banks, including limiting
the involvement of banks with private equity firms
and hedge funds. I do support the exemptions
to the rule related to hedging, market making, underwriting,
and government obligations. The original intent
of the Volcker Rule was not to burden
small institutions with insignificant
trading operations, thus, some federal agencies
are looking at an exemption from the rule
for banks under $10 billion. While there may be
little experience as the Volcker Rule
is taking hold, it might be also helpful
for institutions to start tracking paperwork and
other bureaucratic requirements, with which they have comply, to determine if it creates
any unnecessary burdens for small institutions,
and whether an exemption, based on size or business model,
is needed. So again, I look forward
to hearing some more on this during the panel sessions later. Another issue,
portfolio lending. Banks that hold the full risk
of default of a loan are fully incented to determine the borrower’s repayment
ability. Thus, laws and regulations
regarding mortgage lending should reflect this reality. Thus, I support the granting of qualified mortgage
liability safe harbor to all mortgages held in
portfolio by community banks. Third issue, a review
of the Call Report. I know that there is some doubt
in the industry about the EGRPRA procedure, but I really think
it’s worthwhile to take the time now
to engage in this process. For example, the challenges
of smaller institutions in completing the Call Report has been raised repeatedly
during these outreach sessions. Recently, the FFIEC issued
a federal register notice seeking input
on the Call Report. This is part of a larger effort
by the FFIEC to review the Call Report
item-by-item. Some of this work includes
the goal of gaining a better understanding of those items
requiring manual input and those that are most often
left blank. Again, I applaud the industry’s
advocacy on this issue. I’d like to conclude by
thanking, again, my fellow regulators
in attendance today. The FFIEC
and the federal agencies are putting in significant time
and resources to meet both the letter
and the spirit of EGRPRA, not just checking a box because they’re
required to do so by law. I have heard the skepticism
by some in the industry, given the experience
of ten years ago when there was a lot of effort,
but few results. I believe that this time
is different. State and federal regulators
have heard about the challenges facing community banks and are committed to do
whatever they can to reduce unnecessary burden. The commitment of the agencies
is evident today by the attendance of
Chairman Gruenberg, Comptroller Curry,
Governor Tarullo, and Commissioner Face. I thank you and your staff for organizing this important
outreach meeting. I look forward to hearing everyone’s
valuable comments today and thank you again
for attending, and please enjoy your time
in the Washington, D.C. area. Thank you. MS. MILLER:
Thank you very much. Before we get started, I just
wanted to tell the participants that there are comment forms
in your packets. If you wish to prepare
written comments, you can use those forms
and my colleagues out front are accepting those forms. And at the end
of the presentations, if you wish to make a comment, we have a microphone up here
at the front that will help the folks on
the webcast hear the questions. And just as a reminder, we don’t speak about
individual institutions or cases in these events. So, I’m going to turn it over
to the first moderator, Maryann Hunter, and Maryann
is the Deputy Director at the Federal Reserve Board. MS. HUNTER:
Thank you very much, Rae-Ann. Well, good morning, everyone,
and it is my pleasure to be able to introduce
the very first panel for today. I will keep the introductions
short, I think there’s
biographical information in the packets that you have, in the spirit of allowing
the most time to hearing from
our panel of bankers. First, I would just say,
logistically, the way we’ll operate
the panel is, we are going to cover,
in this first panel, we’re going to focus on
the capital-related rules, CRA, consumer protection,
and directors and officers, rules related to
directors and officers, such as Regulation O. I will note that we will have
another panel giving a consumer perspective
for the consumer regulations and CRA, so in this one, we will be hearing
a banker’s perspective on those particular rules. When we begin the panel, each member will have about
10 minutes to make some remarks and our hope is,
I would say 10-ish, in that previous meeting, sometimes it’s been
a little bit longer, but our hope is to have time
at the end of the session so that anyone in the room here
who wishes to add a comment or make a comment
can do so at the microphones. Well, to begin with
the introductions, it is my pleasure,
first, to introduce to my immediate right,
Bruce Cleveland. Bruce is president
and CEO, and founder, of Presidential Bank. It’s a bank that’s just over
$500 million in assets, and a national bank. He’s also the founder and CEO
of GIT Investment Funds, a group of no-load mutual funds. Bruce, if you look at the bio, has a very interesting
and varied background, including experience with
Drexel, Burnham, Lambert in New York City,
and a brief stint with the SBA, and I thought also interesting,
in the early ’90s, served as a consultant to
the European Bank for reconstruction development, and advising
the Republic of Poland on its privatization efforts, so certainly varied experience and we’re glad to have you
with us today, Bruce. Next, we will hear
from Ron Paul. I guess we should note
the other Ron Paul. [chuckles] Ron is the chairman, CEO,
and president of both Eagle Bank
and Eagle Bank Corp., which was founded in 1998
here in Bethesda, Maryland. This bank does focus on
real estate development, so I suspect
we’ll hear a little bit about that type of activity
from Ron. Ron is also very active in
bankers’ associations and the ICBA, and Virginia and
Maryland Bankers Association, so welcome, Ron. Next, we will hear from
Frank Robleto. Frank is the president and CEO
of BAC Florida Bank from Coral Gables, Florida. It’s a $1.7 billion institution and I believe
examined by the FDIC. Frank comes with many years
of banking experience, and in particular,
international experience, and he was the former president of the Florida International
Bankers Association, so welcome, Frank, as well. Finally, we will hear from
Gary Shook. Gary is the chief executive
officer and president of Middleburg Financial
Corporation. That is a $1.3 billion
institution and a state member bank
in that organization. Gary has held a number of
executive positions with that company and also had previous
senior positions with Fauquier Bank Shares. And he’s very active
in the community in Warrenton, Virginia, and also active
in the bankers’ associations, so welcome to our panel
and with that, we’ll start, and I’ll turn the microphone
over to Bruce, for 10 minutes-ish,
of remarks. Thank you. MR. CLEVELAND:
I’ll try to keep it 10-ish. Good morning. The remarks I have today are
a mix of fairly narrow comments intended to address
the specific regulations that are under review
and some are much broader. And I realize
that the banking regulators are largely bound by statutes that they can’t change
very easily and also some of my comments
will relate to CFPB and the Treasury,
who, of course, are not involved in this review,
but I think very germane to what’s going on
in the banking industry. And finally,
I will limit my comments to the four
subject matter areas that our panel
is supposed to address. [clears throat]
Excuse me. So first is CRA. I would like to say that CRA
has sort of stabilized where it isn’t a large problem
for most banks, I believe. We’re kind of fortunate
in the fact that we have a large level of
loan originations for our size, which means that we generally
get an outstanding rating, primarily due to that fact. But there is a frustration that,
in the other assessment areas, it’s sort of hard to find,
I’ll call it, projects or investments
that both have practical, meaningful impact for people
in the community, and are workable
from our point of view from a safety and soundness
point of view. So, I welcome the efforts
of the regulators to try to, let’s say,
sharpen the focus of CRA to make it more meaningful
and effective, and I look forward to
hearing the comments from the consumer groups
on that. Second, a very narrow issue,
we’re privately held, unlike, I think,
the other banks here, and so, we normally just have
five directors, which is the statutory minimum. We had a situation
where a director passed away unexpectedly just before
Christmas last year, and that left us with
a violation of law that there was really
no way to fix immediately. So, I would think it would be
within the purview of the regulatory agencies
to have a transition period when there is a vacancy
that drops an institution below the five minimum so that you would be able
to proceed promptly to replace a director
without having a violation. The third comment relates to
capital under Basel III. This is pretty narrow,
but the SSFA calculation for risk weighting
of structured products has the perverse effect
of having a higher risk rate, the lower the risk
of the portfolio is. And well, the reason
is kind of technical, but basically,
lower risk portfolios need less subordination,
which raises the risk weight, so somebody ought to
look at that and try to fix it, and come up
with a better formula that more accurately
reflects the actual risk of the particular investment. The next comment I have
relates to Reg E, and this is much more general. Reg E, I forgot to lookup
when it was adopted, but it was
quite a long time ago, I think, and the world has changed a lot
since that time, electronic funds transfers
were pretty novel for the average consumer. My kids think–
don’t know about checks, they think that’s the way
you move money. So, I think
it could use an overhaul. And in particular,
the requirement that a consumer can dispute an unauthorized
charge within 60 days creates an unnecessary
credit risk for the institution without much benefit
to the consumer, I think, particularly since consumers
have online access to their bank accounts
in real time, typically, it shouldn’t take 60 days
to figure out that they want to
dispute a charge. Next is BSA and looming, I’m not sure exactly when,
a few years out, I guess, but sort of ominously,
is the regulatory proposal to require banks to obtain
the beneficial ownership of all equity interests,
I think it’s all, a substantial portion anyway, equity interests in
corporations and LLCs, and I see this
as kind of creating a revolutionary upheaval
because, traditionally, corporate entities, LLCs,
have had anonymous ownership. And I see an enormous burden
of making that transition. It seems quite intrusive for
the vast majority of customers who are not terrorists
or other kinds of target people, so it seems to me that there
should be another look at that to try to minimize the impact. I know there has to be
a balance between the needs for making sure
terrorists’ money is tracked versus privacy, but I think
that balance shifts too far towards intrusiveness. And then finally,
I guess the big one, CFPB, and again, I know
they’re not present here, but there are a number of areas
that I could comment on, but basically, the mortgage
industry seems to be moving more towards public utility
style regulation, maybe like the airlines were
back in the ’70s, where there’s a minute level
of regulation of all aspects of the business,
and I feel like it’s– it gets to the point where
the cost to the consumer probably doesn’t justify
the expense. For example, with
the new TRID regulations, our people say
that it’s introduced about a five-day delay
in the closing of loans. Well, those days aren’t free because almost every mortgage
borrower locks his rate and the cost of the rate lock
is about two basis points a day. So on a typical–
well, on our average size loan, that’s about $50 a day, and our people say that
the total delay is about $5, so it appears as though
the cost of that regulation to the consumer may be $250. Is it really worth it to them to get those eight pages
of disclosure in the new form dumped on them and have no way
to waive the delay? Similarly,
this is an old problem, but the right of rescission
on refinancing. Only about one in 1000
refinancing borrowers exercises
their right of rescission, so we’re making about
1000 people wait three days in order to give that right
to the 1/1000th borrower. It seems to me that,
that is statutory too, but, it bears looking at. And then finally,
QM and ability to repay. It seems to me
that this has introduced an element of uncertainty
to portfolio lenders who may not want to go over
that magic 43 percent back ratio number,
even though there is a structure where you can do it,
but you’re taking– the regulation’s fairly new, nobody knows exactly
what the risks are going to be, so it seems to me that some
borrowers who might get served, won’t get served
because of that, and there should be
more of a safe harbor for the non-43 ATR borrowers,
at least for portfolio lending. I can understand why it doesn’t
make sense in securitizations, because it’s hard to assign
responsibility, but for portfolio lending, it seems to me
there should be an exemption. So, I hope I didn’t go
beyond 10-ish. So that concludes my remarks
and thank you. MS. HUNTER:
Well within the time. Thank you. Ron, we’ll turn it over to you. MR. PAUL: Good morning.
I am Ron Paul. Maryann, thank you for
clarifying who my relatives are. By way of background, Eagle Bank is a $5.8 billion
community bank headquartered
and focused on serving the Washington
Metropolitan area. We’re 18 years old. We have a very successful
track record of profitability, strong balance sheet,
demonstrated by growth and excellent credit quality,
as demonstrated by both levels of non-performing assets
and net charge-offs. I’m please to tell you
that we’ve reported 27 consecutive quarters
of record increased earnings, dating back to 2008. Despite our high concentration
in real estate, our charge-offs have
been negligible. Since the recession of 2008,
we have averaged 27 basis points of annualized net charge-offs
to average loans, with the highest point
being 47 basis points. We’ve achieved these results
through our consistent approach to quality, local lending,
generating core deposits, and always maintaining
strong capital ratios. In my comments this morning, I’d like to address
two recent developments that are impacting
community banks like ours. The first is
capital requirements, and in particular, Basel III. I think we all understand
that the intention of Basel III was to raise the bar on capital
levels across the industry and we fully agree
with that intent. At Eagle Bank, we understand
the importance of maintaining a strong capital position
and have always done so. Eagle Bank is active and a successful
commercial real estate lender. Your regulatory teams
can vouch for the credit quality
of our loan portfolio and the consistent level
of low charge-offs. However, in its calculations
for capital ratios, Basel III penalizes banks with
local commercial real estate and construction loans without considering
the historic track record of the current portfolio quality
of the individual bank. This higher capital weighting and the cash equity requirements
for those loans defined by HVCRE,
appears to have been intended to discourage banks
away from CRE lending. We feel that it is shortsighted
because, as we have proven, it can be an attractive,
profitable business for a well-run bank and has a dramatic impact
on our local economy. We are most troubled
by the onerous requirement that a real estate secured loan
must be considered HVCRE, and therefore, subject to the
150 percent capital weighting unless the borrower has a
15 percent cash equity injection in the project
for the entire life of the loan. There are many
good loan opportunities where the presence
of 15 percent cash injection is relatively irrelevant. For example, should a loan
on a 20-year-old property with significant depreciation and little cash needs for
development fall under HVCRE? Should a loan
on a piece of ground that was originally
zoned farmland, but subsequently entitled
to a much higher use with dramatically higher value
be considered HVCRE? Should a vacant office building
that has been re-tenanted qualify for HVCRE? Should a five-unit
multi-family property with a significant appreciation
be treated differently than a four-unit
multi-family project? Should a borrower be permitted
to roll a property that has been successfully
repositioned into a committed term-out or should they be required
to refinance and incur significant
transaction costs for the mere purpose
of avoiding HVCRE? These are examples
and there are many more of how the Basel III
treatment of CRE loan have created an inefficient and
very costly capital structure for our community
banking system. If this is all about
mitigating risk, which we all agree it should be, why doesn’t the capital
weighting analysis consider appraised values,
loan-to-values, debt service coverage,
and other matrixes as regulators customarily do in all other credit quality
evaluations? The Basel III methodology
will cause banks to both raise the price
of CRE construction loans and constrict the level
of CRE lending. This has doubly negative impact on driving attractive
loan business to our non-banking competitors or reducing the amount of
real estate investment activity, which is such an important
driver of job creation and related economic activity in
communities across the country. For example,
in Montgomery County, Maryland, where our bank is headquartered,
the construction trade has the highest
unemployment level of any industry in the county. Restricting real estate lending
will also reduce the quality of the commercial building
and housing stock in many communities, further impacting
their economies. The second topic I’d like to
address this morning is the subject of
wholesale deposits, and specifically,
reciprocal deposits. At Eagle Bank,
like most community banks, we focus on generating
core deposits from our local customers as our primary source
of funding and liquidity. However, we also use
wholesale deposits as an ancillary funding source
on occasion to balance with
our loan funding needs and maintain appropriate
on-balance-sheet liquidity. In evaluating our non-core
funding sources, we limit the use
of wholesale deposits but often find them to be
attractive source of funding as comparable to advances
from the Federal Home Loan Bank. The process is more efficient and these deposits provide
a lower cost of funds across the yield curve. We reserve our FHLB availability as a future contingent
source of liquidity. However, most importantly, I want to state emphatically
that reciprocal deposits, in our opinion,
should not be considered wholesale deposits for
regulatory calculation purposes. Let me explain why. At Eagle Bank, we have
$4.9 billion in deposits. We serve 12,000 customers
through 22 branch offices. About 12 percent of our deposits
are held in fully FDIC-insured reciprocal deposit accounts. This is not an alternative
source of funding, but accounts that have been
opened with us by our local customers. These accounts include
checking accounts, money market accounts,
certificates of deposit, and our held by our customers,
including individuals, small and medium-sized
businesses, non-profit organizations,
and local government agencies. Many of these customers
are required to have FDIC insurance
on their deposits. For example, one of our
longest-term customers is a local law firm which is often required
by the court system to hold their client’s
escrowed funds in a fully FDIC-insured
accounts. They currently have approximately $80 million
with Eagle Bank; $250,000 held in Eagle Bank and $79,750,000 held in
reciprocal deposits. Are these funds wholesale funds?
Not really. The customer uses these
reciprocal deposit products, not because of
any unusual features, but because they present no risk due to the FDIC insurance
feature, as required by the court system. These reciprocal deposits
are not hot money and are not sourced
through brokers. These accounts are key
components of our relationship with core customers. The bottom-line is
that these customers are placing these deposits because of the safety offered
by the FDIC insurance and those required
by the court system. If unlimited FDIC insurance
was available to all customers, there would be no need
for reciprocal deposit products, and the funds would be
all considered core deposits. We would ask for your support
in urging the FDIC to reconsider its position
regarding its consideration of reciprocal deposits
as wholesale deposits. Thank you for the opportunity
to appear before you and provide these comments, and I’ll be pleased to take
any questions later on. Thank you again. MS. HUNTER: Thank you, Ron.
Turning it on to Frank. MR. ROBLETO:
Thank you very much and thank you for inviting me
to this important meeting and give you some probably
different perspectives from what you will hear
the whole morning and afternoon. In BAC Florida Bank, we are part of that group
of community banks that provide a lot of
trade financing to importers and exporters
and foreign banks. And I would like to talk
a little bit about the impact of Basel III
in one of the activities which I believe, it is completely
an unintended consequence of what developed
after Dodd-Frank. For many decades, U.S. banks–
particularly banks in Florida– have developed corresponding
banking relationships, which include trade financing,
short-term trade financing, to foreign banks. These trade financing loans have been extremely safe
through years, and our regulators
can attest to this. Why? Because normally, the central banks give
a preferential treatment to repayment of these loans
all the time because they don’t want
these banks to lose their lines of credit that
they have with foreign banks. Also, during the crisis,
it became as they were able to deploy
loans that were safe, and they never had any losses
during the crisis. So, what is Basel III, and how does this
impact this business? There is a lot complexity
in the Basel III rules. For that reason,
the federal regulators conducted several seminars,
webinars, conference calls, to guide U.S. banks through
the main changes of Basel III. Unfortunately, these events
did not cover in detail the new regulations that were
affecting the risk weighting of loans to foreign banks, and I’m talking about
short-term loans, and probably– probably, which is worse– not that many banks
included this issue in the comments letters
that the regulator asked to all of us to include. So, let’s talk about
the risk weightings, and I’m going to give
specific examples of this issue and the unintended consequences. Loans to foreign banks, independently
of tenor or product, are now risk-based,
based upon something that probably
a lot of people haven’t heard, which is called the CRC. This is the Country Risk
Classification of the OECD, which is the Organization for Economic Co-operation
and Development, an organization that really,
really was created to help the European countries. I think the regulators,
following Dodd-Frank, of course, did not want or could not use
the rating agencies, and what did they turn to? They turned to the OECD. Now, the OECD ratings
really do not refer to short-term trade lending. They do refer, basically,
to what they call the ECA, or the ECA,
which are these agencies that promote long-term financing
to its importers and to governments. So the risk classifications,
now, are based on the Country Risk
Classification. In Latin America, which is
very important for Florida banks in terms of trade financing, they normally go, these ratings,
from 3 to 7. What has happened then– again, the unintended
consequence I am sure– is that the risk weighting went
from 20 percent to 50 percent, to 100 percent,
and to 150 percent. And I’ll give you
some examples of– and the consequence
will go in crescendo. You will see it. A loan, for example,
short-term loan, trade loan, to a bank in Peru, okay, that loan used to be rated
20 percent. Now, it is risk weighted
100 percent. Why? Because Peru
is a rated 3 country. There are not
that many 3 countries. In Latin America, for example,
we have Mexico, we have Uruguay, we have Panama,
and we have Costa Rica. Why are these countries
rated at 3? Probably we will
have to ask the OECD. A second example. If we go and lend
a five-year loan to a company in a country,
say, for example, Honduras; the risk weighting for that loan
will be 100 percent; five-year. However, if we go and have
a trade transaction, a trade loan to a largest bank
organization in Honduras, for example, Honduras, being a country
that is rated above 3; that risk weighting
is going to be now, 150 percent. And I’ll give you
the last example, which is even more interesting. Colombia is rated a 4 country. Why is Colombia rated
the 4 country versus Uruguay a 3 country? I don’t know.
We will have to ask the OECD. But a short-term loan
to the largest bank in Colombia, is rated 150 percent. Doesn’t make any sense. A loan to the subsidiary
of that bank in Panama, Panama being rated 3 country,
is risk weighted 100 percent. A bank in Colombia,
for example, likeBancolombiahas
almost $7 billion in net worth. A subsidiary in Panama
has $1 billion. And yet, one is 150,
the other is 100. I can lend to five years
in Panama at 100; three months in Columbia
will go 150. Of course, this regulation
has imposed what? An additional
capital requirement. Before, a loan, trade loan,
short term, to a bank in any country
was weighted, again, 20 percent. What does that mean? A $1 million loan,
risk weighted 20 percent, converts into a $200,000 loan. Using the magic 10 percent
risk weight capital according to one of your
recent expositions, we will need
a capital of $20,000. Right now, for example,
in a country rated over 4, 4 or over,
the loan, $1 million loan, will actually risk weight
$1 million, capital at 10 percent,
you are looking at $100,000. Five times what it used to be. In a 150 percent country,
then it will go 7.5 times. What does that mean? That means
that our capital requirements have increased with same risk. Over the years,
the losses in these loans have been extremely minimal, and our regulators
can attest to that. In our particular case–
and this is public information, so I’m not divulging anything
that is confidential. You can look at it
in the Call Report; you can look at it in the UBPR. Last year, as of September, our risk-based Tier 1
capital ratio was 17.5 percent. Okay? September of this year, with the application of
Basel III, is 14.7. That’s 270 basis points less,
with the same risk, than last year. The total capital ratio
we had before, 18.76, right now,
is almost 16 percent. Again, 275 basis points. Well, what is the effect?
Our buffer disappeared. The famous buffer of 250 basis
points that we have to achieve, I think, in three more years
or so, is gone, just with the strike of a pen. Now, what do we do? Because there’s a problem,
we need a solution. We need to continue advocating
with our federal regulators. We have proposed, through FIBA– the Florida International
Bankers Association– the introduction
of an additional factor for short-term
trade-related transactions. This should be
very, very easy to implement. It’s just another column, okay, in the now extremely long
Call Report, which, by the way, I really applaud the efforts
of the regulators, and especially Governor Tarullo,
to really try to help us out because the amount of paperwork,
the amount of regulations, the amount of things
that we can do is actually tremendous. Not only that,
for example, in October, Brazil was downgraded
by the OECD from 3 to 4. Probably rightfully so
for what the OECD was intended. Well, that means that a loan
to the largest bank in Brazil– and a lot of you have heard
of Banco Itau in Brazil– short-term again, is now
risk weighted 150 percent. I used, in one of my comment
letters to our regulators, the example of a bank
that already disappeared, which is Espirito Santo Bank, because I was trying to compare
with specific names, the effect of this rule. This is like three years ago. Well, the bank in Brazil,
as you know, sorry, in Portugal, Novo Banco, which is the new bank
that was divided, remember, Espirito Santo was divided into,
bad bank and new bank. The new bank
was called Novo Banco, new bank, Banco Novo Bank. Well, vis-a-vis the banks, Portugal Novo Banco brought
$1.5 billion capital hold because they failed
the stress test. Okay. That bank is, again, rated,
you know, in the OECD, and given the same rating
that they had before, meaning that a loan to that bank
will go 20 percent; short-term. A trade transaction
that involves that bank will go 20 percent. Banco Itau, a bank with almost
$50 billion in capital, will go 150 percent. That doesn’t make,
really, any sense. And again, it can be fixed
very quickly by adding a new factor
for product and tenor, or by using, Governor Tarullo,
two years ago, I think, a proposition that banks
below $10 billion, pay one simple measure
of ten percent of capital and eliminate everything else. I think that would be great. Hopefully it’s not
too good to be true. But if we do that, it will actually take
a lot of burden from the banks. And why do I talk about
the community banks? We all use
the standardized methodology. We don’t use
the advanced methodology. That’s for the systemic
important banks. The banks are for what I think
Dodd-Frank was intended for; however, you know,
it applied to us as well. Well, a systemic
important bank– a large bank using
the advanced methodology– they actually have
their own morals. Under those morals, since these loans have
very long history, I bet that their capital ratios
are actually lower, capital requirements, than what we have required,
been required, by Basel III. And again,
that’s unfair competition for small banks
versus the large banks. So, thank you very much, and I’ll be very glad
to answer any questions. MS. HUNTER:
Thank you, Frank. Now we’ll move on
to the last panelist. MR. SHOOK:
Thank you, Maryann. Gary Shook, as I said,
with Middleburg Bank. We’re out in the western–
we wouldn’t call it suburbs; we’d call it the Northern
Piedmont of Virginia. We try to distance ourselves
somewhat from this part of the world,
but that being what it is, we’ve been in business
for 92 years and sit at $1.3 billion
in assets, and we also have
$2 billion we manage in our money management
operation part of Middleburg Trust Company,
which is based down in Richmond. And I can tell you
right off the top of my head that the regulation,
the regulatory burden, in our trust company operation versus the regulatory burden
in our bank are completely different worlds. We don’t deal with
this level of minutiae at the trust company level. My comments are going to
focus upon the Regulation O, and Chairman Gruenberg’s
heard me on a couple of occasions now speak to the need
to simplify things– simplify it in the name
of attracting directors and qualified personnel
to the business. And Regulation O, is probably
the central core of that. It’s not what, particularly,
anybody wants to talk about because it is not
the politically favorite topic of how we deal with
these issues, but it’s an important one in the overall scheme
of what we’re doing. And I think as you go back
and look at the regulations, and I’m going to go through
in a bullet-point form of the ones I think that just
jump off the page at me that somebody probably
needs to take a look at. And if you go back,
it seems to me that there wanted to be,
at some point, an avoidance of
special treatment, whether that’s
credit considerations or someone gets a fee waiver
where someone else wouldn’t. And as it’s evolved
over the years, it appears to me that, yes, our directors and insiders
do get special treatment, that that’s negative
special treatment as opposed to special treatment
in concessions and the way we can do business
with them. Let me go through a couple of– several bullet points
that sort of underscore that. The one we run into some,
and all of these, we run into, these are specific examples. First one is increase
the aggregate limit on loans to executive officers
above $100,000, for those loans
that aren’t exempt from the aggregate limitation. This tends to be a negative
impact on those officers– those ones you want to take care
of within your corporation, and these would be officers
that fall underneath the Reg O definition
of an executive officer. As an alternative to that,
raising that limit, and part of what I did
in my research, I played back some of
your previous meetings, and nobody seemed to
want to talk about Reg O, so I couldn’t get any direction
from out there. But looking through the regs,
I couldn’t really figure out when these numbers were added
into the regulatory code. You know, was it– I’ve been in the business
30 years and I think I’ve seen these
numbers for that period of time, so I’m not really sure
what that period of time is. An alternative to raising
the limit of $100,000 for executive officers, and I think a much
more back to my simpler– let’s just make it simpler
concept, is let’s make all insiders– whether you have
a principle shareholder, a director,
or an executive officer– let’s just make all those rules
the same. You know, determine
whatever those hoops are, make them all the same
for everybody so we don’t have varying tiers
of what I call opportunities to screw
something up as we’re trying to look at
Reg O within the corporation, so that would be a great tactic for simplifying burden
on all banks, but especially community banks
that have to track all this. Also, I think increase
the $500,000 aggregate limit on loans to insiders where
prior approval is required. In a normal mortgage loan
situation– and I will put on my D.C.
metropolitan area hat on this one–
a $500,000 loan is fairly small. A $1 million loan
is probably the norm– $750 to $1.2 million,
as we approach the Beltway. And like all real estate
transactions, everything’s timely, but to then have to get
the board to approve it prior to the granting
of a normal mortgage loan, it gets it out of sequence
of what really makes sense given the dollars
that are in a market such as Washington, D.C., so to increase
that aggregate limit, I would contend to double it
from the standpoint, or exempt mortgages,
those types of things, where the prior approval
of the full board is required, or a majority of directors
is required. The one that I think is, maybe,
the most comical in my mind, and that is, our prohibition
of paying a check, an overdraft on a director,
that exceeds $1,000. I think we would all agree, and if you follow
the check cashing programs that some banks offer
that I don’t, a lot of clients
get checks cashed for a whole lot more than that. Also, for our best clients, which we tend to think
our directors would be, we would cash checks
considerably higher than that knowing the reputation of
the client with which we deal. The $1,000 number, and this is the one I really
did the research on, that one has been in place
my entire career and probably needs to
get pushed up to something that’s a little more reasonable
in today’s day. And you may think, well,
that’s no big deal, but you return
your director’s check, that sends a lot of messages,
and the tracking mechanisms that we have to run
our directors on to make sure
nothing slips through, because I’ll tell you, a field examiner finds
that $1,001 overdraft faster than anything else
on an examination and that is something
that I think we could spend some time
on creating. The other one would be
to change the requirement for also prior approval
of an extension of credit on a line of credit unless
the credit has been approved within a 14-month
period of time. I’m getting down
into the nuance of it, but to do an advance,
if there hadn’t been a specific approval of
that director or insider’s line, then that 14-month
period of time requires a majority of board
approval to be able to make an advance
on that line, and that’s probably outdated
at this point as well. The one that I’m always speaking
to that has a lot of meaning, and this is all around my world of trying to attract qualified
directors to the business, is also be able to
insure directors for their D&O obligations
for the full gamut of what a normal company
would be able to, public company,
would be able to insure them, and that specifically includes civil money penalties
for compliance related issues, which are currently exempted
from our ability to insure, which, it’s sort of hard
to explain to a director, why am I subject to that when you can insure me
for everything else? It just doesn’t– the crime doesn’t fit
the pattern of circumstances I think you run into
when it’s something like– well, the $1,000 limit or some
of the other things like that if you haven’t followed
compliance issues, which is more of
a management issue, that the directors
can’t be insured for that needs to be looked at
and a new appreciation for that. I’m watching my time
and I do want to hit a couple of other things
as we go through it, but as I roll-up
on the Reg O side, it hasn’t been discussed much
here, but there are really
some archaic rules that sit out in Reg O that,
if you all could put a committee on taking a look at
to see if we can refresh some of those thresholds and make them
a little more current with what we see today. Of course, I would be remiss
if I didn’t talk about the need for a safe harbor
for qualified mortgages that we put on our bank’s
portfolio. I sometimes scratch my head
and wonder, you know, whose money is it? And it’s our money as the
bank management and directors representing depositors
and shareholders as well, and we don’t want to do
anything, we’re on the same team. We don’t want to do anything
that would damage our reputation and our portfolio
that we take great pride in. And to have a safe harbor
for loans that we do want to put on our own books
makes a lot of sense. We talked about
the 18-month safety and soundness examination. Sounds like you all
are working on that. Another one I bring up
are CTR reporting issues, and to go through that– and I don’t know if this is
over in another area, or where this falls– but there’s a lot of
unnecessary filings that could probably
be eliminated there. And once again,
in taking a look at the specific number dollar
amounts, you’re probably– rather than have
a $10,000 threshold for the aggregation of deposits and for the tracking
of CTR purposes– probably doubling to $20,000
or some new number that’s probably
more representative of where the crime
really fits the risk of all of the paperwork. And somebody on your end has
got to read all the paperwork, and somebody on our end has got
to create all the paperwork, and there’s probably
a higher threshold that really makes
some sense there. I think we’ve talked about
mailing our privacy notices, and that sounds like
that’ll be dealt with. A short-term Call Report. Looks like,
here’s another one that, it’s what I call arcane nuance, but it’s something that creates
a lot of tracking within a bank, and that’s under Regulation D,
Federal Reserve Reg D, and that’s the transaction
withdrawal limits on savings accounts. And right now, you can have
six withdrawals a month, three of those can be by check–
paper check. We need to move that number,
I would suggest, to at least 20 per month,
basically, one per day, with no restriction
on what type of means. For example, the checks
for the restriction on the six per month
currently applies to an ACH, a phone transfer,
online transfer, overdraft transfers, they don’t apply if you do
the transaction in person, ATM, mail,
or night depository. Well, in a world of
trying to simplify the world, let’s just make one simple rule
that you can have this many transactions
through the cycle and not worry about what
kind of device it is, because I tell you what, that’s another one
that they like to find in a very quick manner
in a field audit of, oh, you’ve had– this one had
four checks, or this or that. That’s minutiae. I mean, that’s purely minutiae when it comes down
to a savings account, a standard savings account,
and trying to come up with what makes sense
in today’s world. On capital,
I only have one comment that I want to make there
in the essence of time, and that is,
with all the new rules, CECL, Basel III, everything else
coming into play, the current restriction is, only 1.25 percent
of the allowance for loan losses can be contributed and allocated
to the Tier 2 capital. With everything pushing
the requirements for capital up, I think it would make
a lot of sense and it would be a big plus for,
certainly, community banks, to raise that allowance amount
of the 1.25 percent of the allowance
for loan loss reserves to a higher number or include it all
for the purposes of capital, because it is sitting there and it’s serving
as a capital buffer. And the ability for those banks,
and I’m one, that carries
more than 1.25 percent in the allowance for loan loss,
we are directly penalized for trying to be prudent
in the things that we’re doing in allocating more capital
towards loans. Again, thank you all
for the opportunity to be here. Always excited to be
in front of Commissioner Face, my primary regulator,
who I think sets a great example as how a regulator should
operate in times of crisis and in good times as well,
so thank you all. MS. HUNTER:
Well, thank you very much for each of the panelists
and the comments. I’ll turn to the principals
to see if there are any questions or follow-up
comments that you’d like to– GOVERNOR TARULLO: I have
a couple. Thanks, Maryann. So, Mr. Paul,
when you were talking about all the varieties of CRE
or CRE-associated lending, you know, one conclusion
that one might draw from that is that the capital regulations
need to be more granular, you know, more nuanced,
more complicated in order to distinguish. I assume that’s not
really the direction that you’d like to end up going
and that something more along the lines of
a simplified capital framework that maybe has a trade-off
of higher capital ratio in return for many fewer
Basel I, like categories, rather than Basel III,
like categories, might be your first choice? Am I correct in that? MR. PAUL:
I think a lot of it really comes down to the equity
side, the equity definition, as it relates to, you know, 15 percent equity
being defined by Basel III as cash could be a much broader
spectrum of equity. So where I do believe
that there are certain types of real estate
that should require more equity than others, to me, equity just doesn’t
always equate to the cash, as my examples of properties
that have been around for a long time
that have significant equity. So putting in cash,
as opposed to a project that’s appreciated
over the past 20 years, just, to me, is missing
the point of work off of the appraised value
of the asset as opposed to just the cash
infusion of that asset. But I do agree that
it should be more granular because there are certain
pieces of real estate that clearly have a higher
risk rating than others. GOVERNOR TARULLO: Thank you. CHAIRMAN GRUENBERG: Just before
letting you all go, I just wanted to thank you
for your testimony just with the presentations
we’ve had previously. The specificity and the detail
that you provided to us, I think, is very helpful and very much would be
the subject of our agenda. COMMISSIONER FACE: Maryann? This is for Gary. Gary, you said something– thank you for your comments. You must be needing something
from me pretty soon. Gary, you mentioned the–
what did you call it– archaic nuance of Reg O, and some of the things
that you mentioned. I’m just curious
if you can put, you know, some kind of quantitative value
to it as to, maybe, how much time you spend
or your staff spends on these things
and how much it might cost? And maybe for the topics that the other bankers
touched on too, if maybe they could, sort of, quantify that to time
and money, I guess. Does that make sense? MR. SHOOK: Yes. You know, to this getting
absolutely specific, I can talk. Let me use the– I’m using
the $1,000 returned check overdraft thing as my example because it’s one that I see
on a directly basis. There are six people, three of them
executive officers, that are tuned into
the overdraft list to make sure we’re not letting an executive
officer slip through. Now, of course, our systems
are coded to kick them out, but, you know, this account,
this guy might have this much in this account
and that account, or he might have
written instructions that provide all the little outs
that you have from that, but in that case,
there’s six people that are tuned
to this one thing, three of them
being executive officers, with the rule is, we can’t let
one of these slip through, because we’ve been stung by it,
and we shouldn’t be. But to me it’s, is the crime
worth the punishment of having to allocate
the time of six people to make sure a director
doesn’t cash a check for $1,001, that gets paid
and sent through the system? So, there’s an example
on that particular one. I think on the one that– and on the loan side
is probably where I become– I have my greater concern because when you choose
a director, you like to have them
as a good client, and what I’m finding,
it’s much easier to make my good director
my former good borrowing client, because it’s a whole lot easier to send them over to the bank
across the street with my voucher
that this is a good client, to please take care
of my director for me because the rules
are too onerous and they don’t really want to
jump through them. And that gets down
to the 14-month cycles, the approvals
before the loan gets made, the over $500,000
aggregate limit; and then my executive officers,
you know, whether it’s professional
courtesy or whatnot, generally all have to go
somewhere else to do borrowing business, and that isn’t the way
it should be. I know there’s been bad actors
in the past, you know, but for the sins of a few, you know, we’ve sort of impugned
an entire class of folks that are insiders that you want
to be your very best clients, and it’s hard to under the regs. MR. PAUL: Commissioner, if I
could just answer the question. As it relates to Basel III, we calculated
that the difference between 100 percent
and 150 percent comes out to about 98 basis points
of additional cost of capital for us on our CRE– again, without getting granular
into different buckets– but as a totality, it would be
about 98 basis points. MS. HUNTER: If there are
no other comments there, I would invite, if there’s
any member of the audience that would like to
make a comment, you’re welcome to step up
to the microphone. I know we have
a couple of minutes left. Looks like we have one. And I’d ask that you please
introduce yourself and mention who you’re with. MR. RICCOBONO:
I’m Rick Riccobono, Director of Banks
for the State of Washington. I came today
with quite a list of issues, but they were actually pretty
much mentioned today, so I would just like to sort of
reinforce some of those issues that I see actually out there
in the State of Washington in the field. One was, Mr. Paul mentioned, you know, this concept
of reciprocal deposits. I know in the past
I’ve mentioned, I think we need to rethink how
we’re defining broker deposits, and more importantly,
how they can actually be used to the benefit
of an institution, a small community bank, to manage
its interest rate risk. We’ve kind of gone 180 degrees. We were accepting–
brokered the money as a given when we were chartering
institutions, back when we were doing that, and then now,
we’re at a point where, you know, wholesale money
is just evil across the board, and I guess I would tell you
it’s not. And while we’re faced with
statutory changes perhaps we can’t do,
we certainly could look at this concept of
reciprocal deposits. In support of community banks, it’s kind of a nice way
to insure your larger customers, particularly
your small business customers, who get very nervous
when their balances get up over the insurance limits, or a homeowner’s association
required, by their rules,
to be insured. I don’t see the harm in saying
that brokered deposits put into a reciprocal
arrangement, I’m putting my core deposits
out there just simply to insure
all my deposits, I don’t think that necessarily
creates the evil intended by the rules. I mean, we can look at
what they’re doing with wholesale money, and if they’re growing rapidly
with it, we stop them, but at this point in time, I think we create
a tremendous disadvantage for community banks not allowing them,
or counting in their core, I mean,
in their brokered deposits, the concept of reciprocal. I would just reiterate,
we’ve watched our banks, most of our community banks,
now get out of mortgage lending. They were only doing
mortgage lending. They would never take on
a 30-year, fixed-rate loan, put it into portfolio, but they would take on
the five-year, right, fixed for five years and then
they would rewrite the loan. They were not abusing
their customers, they wouldn’t do that,
they have a reputation issue, but we’ve kind of
thrown the baby out with the bath water. Because the balloons
were abused, they’re no longer available and we’ve kind of approached it
with the rural definition, and so I think we need to
continue without– if we can’t get it
through Congress, kind of expand that definition to allow the community banks
to get back to 1 to 4 lending. If it’s held in portfolio,
it shouldn’t be subject to QM. And then lastly, this really
affects the savings banks, federal associations,
and the holding companies where we have the FDIC
enforcing this now on any state-chartered
depository that has a savings
and loan holding company, is the QTL test–
Qualified Thrift Lender. The background
of all of that QTL was about the powers of a savings
and loan holding company. If you had a savings
and loan holding company and you were
engaged in activities that weren’t permissible
for a bank holding company, the check and balance
in that was, you had to meet the
qualified thrift lender test, and that’s why
we’d allow savings and loan holding companies
to engage in activities beyond that of commercial bank’s
bank holding companies. We’ve fixed all that.
It’s gone. You know,
savings and holding companies, there are still some
grandfathered, so perhaps the QTL has
some application there, but for the vast majority–
98 percent out there– the QTL has no relevance, and yet we’re out there
trying to enforce it when they have a savings
and loan holding company that’s not engaged
in any activity at all or the activities
of the holding company are that of a bank holding
company. So I think we need to–
again, we really need to rethink whether or not we should be
enforcing the QTL, because as Comptroller Curry
pointed out, it just forces these institutions
to change their charter and get rid of
the holding company; unnecessary expenses. MS. HUNTER: Thank you very much.
MR. RICCOBONO: Thank you. MS. HUNTER: And with that,
our time is up and we now– so it’s the end
of the first panel. Thank you again
for taking the time to provide us
with such helpful comments, and I believe we have a–
MS. MILLER: We have a break. MS. HUNTER:
Yes, we have a break. Please come back at 10:45.
Thank you very much. [applause] MS. MILLER: Folks,
if we could take our seats, we’re gonna get ready to
get started again, pretty soon. Okay. Let’s get started. We have our Community
and Consumer Group Panel today that is hosted by
Jonathan Miller, and Jonathan
is the Deputy Director at FDIC’s Division of Consumer
and Depositor Protection. MR. MILLER: Thanks, Rae-Ann, and good morning again,
everybody. Thanks for being here. I know some people
have to travel to get here and it’s a miserable day
out there, so thanks for making the effort. As Rae-Ann mentioned,
my name is Jonathan Miller. I’m the Deputy Director
for Policy and Research at FDIC’s Division of Depositor
and Consumer Protection. Today’s second panel
will focus on consumer and community-related issues with respect to
federal banking rules. Unlike the other panels today, this panel will
really be focused on the community and consumer’s
perspective on issues related to
regulatory relief, reform and improvement. Panelists will discuss topics
such as the Community Reinvestment Act,
CRA; rules related to
community development financial institutions,
CDFIs; fair lending rules,
Dodd-Frank rules, such as those
related to mortgages and mortgage servicing,
and others. The comments
will focus on suggestions for how the panelists believe
rules may be updated or amended to get better outcomes for the communities
their organizations represent. I’m really honored and pleased to have our distinguished panel
here with us today. Individually and as a group,
they bring a wealth of knowledge,
experience, and expertise regarding a host of
financial services and consumer protection issues. I’m going to begin by introducing briefly
each of the panelists and they’ll be given
about ten minutes to speak– as Maryann put it,
10-ish minutes. Their full bios are in the
materials that were distributed when you checked in
at the front desk outside. After the panelists’
presentations, we’ll give the agency principals
an opportunity to ask questions or get any clarifications, then the audience
will get a chance to comment as well,
and as moderator, I may ask a question or two
in addition. So, our first speaker today
is Margot Saunders. Margot is a counsel for the
National Consumer Law Center, or NCLC. The non-profit NCLC
has used its expertise in consumer law to work for
consumer protection and economic security
for low-income and other disadvantaged people,
including older adults. Margot has testified before
Congress on dozens of occasions regarding a wide range
of consumer law matters, including predatory lending,
payments laws, electronic commerce, and
other financial credit issues. She is a co-author
of the publication Consumer Banking
and Payments Law, published by NCLC, and a contributor to numerous
other NCLC legal manuals. Next, we have Josh Silver, who is a senior advisor
at the National Community Reinvestment Coalition,
or NCRC. In your programs,
John Taylor, who is the CEO and president
of NCRC was listed. He was, unfortunately,
unable to attend, but Josh will take his place
today. NCRC has grown to include
more than 600 community-based organizations
around the country. These organizations
promote basic access to basic banking services in order to create and sustain
affordable housing, job development, and
economically vibrant communities for America’s working families. Seated next to Josh,
is Liz Lopez, Executive Vice President
for Public Policy at the Opportunity Finance
Network, or OFN. OFN is the leading national
network of CDFIs, which focus on investing
in opportunities that benefit low-income,
low-wealth, and other disadvantaged
communities across America. Liz leads OFN’s federal
and state policy efforts, focusing on developing,
supporting, and influencing implementation
of policies that benefit CDFIs and the markets and communities
that they serve. Our next panelist
is Wade Henderson, President and CEO
of the Leadership Conference on Civil and Human Rights,
or LCCHR. LCCHR is the nation’s
leading civil and human rights coalition,
with a diverse membership of more than 200
national organizations working to promote and protect
the civil and human rights of all persons
in the United States. Wade has headed LCCHR since 1996
and is a well-known and well-regarded expert
on a wide range of civil rights, civil liberties,
and human rights issues. Our final panelist will be
Mike Calhoun, President of the Center
for Responsible Lending, known as CRL. CRL is a non-partisan,
non-profit research and policy institute, focusing
on consumer lending issues. Mike has more than
30 years of experience in the consumer lending field and has been
an active participant in crafting consumer financial
legislation and regulation at the state and federal levels. So we’re going to begin
with Margot and go down the line. Again, each panelist will have
about ten minutes, so, Margot, go ahead. MS. SAUNDERS:
Hello, and thank you for
having me here today. I’m here to speak on behalf of
the low-income clients of the National Consumer
Law Center on a variety of topics. First, I want to talk about–
does this sound all right? Is this– okay. First, I want to talk about
the benefit of regulations to consumers, to industry,
and to the general economy. Nineteen years ago, when
the EGRPRA law was first passed, it was the heyday
of regulatory relief efforts. It was very lonely for me
back then arguing for more regulation
because the focus in both Congress
and the regulatory agencies was on eradicating regulations. But we should all remember, what this fever of
regulatory relief brought us– the 2008 financial crisis. Consumers, investors,
honest market players and the country, as a whole,
suffered. There should be
no misunderstanding, the financial crisis
was the direct result of the massive reduction
of common sense regulations, as well as
the race to the bottom engaged in by many
financial institutions. The passage of
the Dodd-Frank Act brought significant and
important regulatory reform, establishing the CFPB, the federal agency
designed to protect consumers, provided, for the first time, some real balance
in the marketplace between the relative powers
of creditors and borrowers. Eradicating the Office
of Thrift Supervision and placing both banks
and national savings– and federal savings bank under
the same regulatory umbrella, also eliminated the very
dangerous dynamic of banks demanding more deregulation
in order to maintain their position
with their regulator. We’re all better off today. But there’s still
some distance to go. First, I want to talk about
preserving qualified mortgages. Among the most important changes
made by the Dodd-Frank Act were the provisions injected
into the mortgage market, requiring lenders to determine
their borrowers’ ability to repay mortgage loans. These evolved into
the requirement that the homeowner either be
provided the qualified mortgage or that the lender
actually engage in the comprehensive evaluation
of the homeowner’s ability to repay the mortgage. It seems really absurd that
we needed an act of Congress to require lenders to evaluate
their borrower’s ability to repay their mortgages. But I’m still seeing
pre-Dodd-Frank mortgages cross my desk
in which the lender forbade the statement
of the homeowner’s income in the underwriting documents
and made the loan based solely
on the borrower’s credit score. For example,
I have a case from Queens in which a Hispanic woman
who could not speak English and earned between $15,000
and $20,000 a year as a housekeeper was provided
a mortgage of $450,000 on a rundown townhouse
in Queens. The loan was a NINA loan,
No Income, No Assets. That meant that the originator,
a national bank, forbade either her income
or her assets to be stated anywhere
in the mortgage documents. And you know why that is,
because if they had been stated, she wouldn’t have qualified. Because the loan was high cost,
interest only, adjustable, and had a 100 percent
loan-to-value ratio with huge upfront fees
to the broker, everyone piled
on to defraud this woman. But she and her tenants
in her little house struggled to make
the mortgage payments for years before she faced foreclosure. Now, legal aid attorneys
are trying to use the predatory nature
of the loan to save her home. We’ll see what happens. The critical issue here
is that NINA loans are no longer legal and we shouldn’t get
anywhere close to allowing loans like this
to be made ever again. I also want to talk about
the importance of preserving and extending the protections
for successors in interest. This is something
that is particularly within the Office
of the Comptroller’s realm. We see, quite often, problems
resulting from the refusal– particularly
of mortgage servicers– to recognize the interests
and the legal rights of successors in interests. It’s become apparent
that it’s critically important to change and improve
these regulations. There are spouses, children,
and other relatives who, by law, court decrees,
or transfers pursuant to a will, become the owner of the home
after the mortgage was provided. Servicers sometimes cite
due on sale clauses in the mortgage contracts
and alleged restriction on assumption of mortgage loans, as reasons for denying
loan modifications to the widow or the child
of the original mortgagor. A successor is often told
she cannot apply for a loan modification
to reduce her payment because she’s not the borrower and because she’s not qualified
to assume the loan or because the loan
was in default. I had a case in Ohio
in which a father deliberately left his daughter
his house, yet after he died, when
there was a lapse in payments for a few months,
the national bank servicer would not talk to the daughter
despite her repeated attempts. The daughter was repetitively
required to prove her right to talk to the servicer
about the loan. She sent in her father’s
death certificate to the servicer
five different times, yet the servicer kept postponing
all discussions about the loan mod. The daughter
had even figured out how to reach the president
of the bank’s office and had corresponded with them and was trying
to get them to help. They said they were helping
and in the meantime, the home was sold in foreclosure to a bona fide
third-party buyer. The death of a homeowner
can precipitate a financial crisis
as well as an emotional one. We should not allow
mortgage servicers to continue to refuse
to modify the loan or even provide basic
loan transfer information after transfers like these
where the successor homeowner was not the original
borrower of the note. That was one of
the main purposes of the Garn-St.Germain
protections, to preempt state laws that allowed the calling
of the mortgage when this kind of transfer
occurred and we ask that the OCC,
improve these regulations and implement protections
that would actually assure that successors
have access to loan mods. I have a few more points. We hope that you deal decisively
with the rent-a-bank schemes, I know Mike is going to talk
about this more, I just want to add
that I’ve been involved, somewhat, in dealing with
rent-a-bank evaluations with payday lenders, and the problems
are just as serious when the loans are marketed
as marketplace loans. When there’s a high-cost,
high interest rate loan, we ask you to consider
that the basis for that high interest rate is the expected large number
of defaults. And when lenders make
loans with an anticipation that 35, 45 percent
of their borrowers will default, you know they’re not losing
money on the overall product. They are, instead, figuring out
just how much money they need to make
over how long a term in order to make their profit. And in the meantime,
they are creating havoc for the borrowers who are
entering into these loans and suffering with the
consequences of defaults. The amount of wisdom,
and knowledge, and understanding
of the consequences of defaults is way uneven. Bankers, the creditors,
should be responsible for making sure
that loans are affordable and not likely to lead
to default. Finally, in the new
faster payment systems that are being developed
by the Federal Reserve Board, we urge you to make sure
that consumers have the right to challenge fraud in
the inducement as unauthorized, so that when you have the scams
that we keep seeing, of the grandmother scams, or some other scams
that have nothing to do with the actual
payment mechanism, but result
in a payment being made from an innocent duped party
to the scammer, there should be some way
in the new payment system to allow the payments
to be recalled if the scammer
can’t be reached. I can go into more detail, but I see I’m running
out of time, so thank you, and I’ll be happy
to answer any questions. MR. MILLER: Okay.
Thank you, Margot. Josh? MR. SILVER: Good morning. I thank you and I’m honored
to testify this morning. The National Community
Reinvestment Coalition is an association of more
than 600 based community organizations
that promote access to basic banking services,
capital, and credit for America’s working families
and communities. Lending in America is stagnant. The number
of home purchase loans in 2014 is half the number
of loans in 2006. African-Americans
receive 8.7 percent of all home purchase loans
in 2006, but only 5.2 percent
of loans in 2014. Low and moderate income
borrowers received 34 percent of home
purchase loans in 2011, but just 27 percent in 2014. Branches continue
to close in minority and low and moderate
communities. Banks are pulling
out of small business lending. This week, an article
in the Wall Street Journal reported that banks originated
43 percent of all small business loans
this year, which is a decrease
of 58 percent from the bank’s share in 2009. Each and every day, NCRC,
and our members institutions, experience the fallout
or the devastation racked on working class
communities due to the foreclosure crisis and the continued retreat
of lending and banking services. We hear heart-wrenching stories
every day. The lending that Margot
discusses seems like the lending
in the 2000s, before the foreclosure crisis. It’s still going on. Banks continue to be replaced
by predatory lenders and payday operators. Meanwhile, more than 98 percent
of banks pass their CRA exams. Something is rotten in America. I want to challenge
the bank agencies today. I ask you to take a hard look at your statutory mandates
and mission statements. For the Federal Reserve, the Full Employment
and Balanced Growth Act of 1978, known informally as
the Humphrey-Hawkins Full Employment Act,
imposes a dual mandate to combat unemployment
as well as inflation. Part of the fight
against unemployment would be to ensure
that banks are lending to qualified small businesses
and homeowners. The Office of the Comptroller
of the Currency describes its mission
to ensure that national banks operate in a safe
and sound manner, but also to provide fair access
to financial services and treat consumers fairly. The federal agencies
must not only ensure that banks are successful,
but that the banking industry is successfully
serving communities, particularly minority and low
and moderate income communities. There is not a more
important institution in working class communities
than the bank. The provision of credit
and capital is the lifeblood of communities. I want you, the agencies,
to show more urgency and to get more vigorous
and rigorous in examining banks for CRA and compliance
of fair lending laws. Here are some of NCRC’s
major recommendations. We have several other
recommendations, but I cannot discuss
all of them in ten minutes. Banks must demonstrate
a public benefit when seeking to merge. The Bank Holding Company Act
and the Bank Merger Act require federal agencies
to consider whether a proposed merger
benefits the public. This requirement was enhanced
by Dodd-Frank. However, the regulatory agencies
have not provided clear guidelines for banks
and community organizations regarding what constitutes
a public benefit arising from a merger. This results in weeks of
community group letters and bank replies
that are often not productive and extend the process
without a win-win resolution for all parties. It would be much better
if regulatory agencies established clear expectations
and guidelines. This would make it more likely that mergers would result in
more responsible lending. Examine retail lending
beyond CRA assessment areas. Several banks make
considerable numbers of home
and small business lending outside of
their assessment areas, but this retail lending
is not evaluated by CRA exams. Therefore, banks
have reduced motivation to ensure that lending
outside of assessment areas is reaching low and moderate
income borrowers and communities in a responsible fashion. If a bank makes
a significant portion, such as 25 percent
of its retail loans outside of its assessment areas, examiners must evaluate
retail lending outside of assessment areas
to assess whether the retail lending is consistent
or inconsistent with retail lending performance to low and moderate income
borrowers in communities in the assessment areas. If the lending outside of
the assessment areas is inconsistent,
in that the performance is worse than inside
the assessment areas, the rating on the lending test
should be downgraded. There are cases of examiners
looking at retail lending beyond assessment areas, which we describe more fully
in the written testimony, but these cases
do not make clear what happens
when the retail lending is worse outside than inside
the assessment areas. Quoting from the Federal
Register Notice, the EGRPRA process is often
devoted to determining outdated and unnecessary
regulations. NCRC asserts that CRA
and fair lending regulations have become outdated
due to benign neglect and the failure
to update them. A lack of updating CRA
is a burden on minority and modest income communities. It is burden
on communities of color, who receive either
abusive loans or few loans. Yet, CRA continues to neglect
examining lending to communities of color. Ironically,
exams scrutinized lending to minorities communities before the 1995
regulatory reforms to CRA. It is a burden
on all communities when affiliates continue
to be excluded from CRA exams at the bank’s choice. As a result, affiliates
simply have more license to either engage
in abusive practices or neglect modest income
communities. It is a burden for communities
when CRA exams pass more than 98 percent
of all banks, yet lending keeps going down
year after year. Ratings do not reflect
the reality of differences in bank performance
in serving communities. We recommend replacing
the 1 to 24 point scale with a point system
of 1 to 100. More detail is in
the written testimony. It is a burden for smaller
cities and rural counties when CRA exams call their areas “limited scope
assessment areas,” meaning that bank performance
in these areas does not count at all
or to a very small extent in the CRA rating. At the very least,
the performance in so-called limited scope areas
for each state ought to be aggregated
or summed and count as
one full scope area. And here is one that our bank
partners should applaud. CRA sunshine submissions
are a burden and should be retired. CRA exams and decisions
on mergers often miss opportunities
for enforcement when CRA exams pass banks
or when agencies approve mergers without any requirements
for improvement. In recent years,
the agencies have imposed more conditional
merger approvals require some specific
improvements in performance, but I can still count
on one hand the number of these approvals. The number of conditional merger
approvals need to increase in order to ensure that public
benefits are realized. Moreover,
while readers of CRA exams know which geographical areas
have lower ratings, the exams are not that helpful
in succinctly summarizing why the bank scored poorly
in these areas and what specific steps
it could take to improve performance
in these areas. Why not include
specific requirements for improvements in CRA exams
to address areas of weaknesses? For example,
these could be requirements to improve lending
to African-Americans as well as low and moderate
income borrowers or increasing investments
in smaller cities. Communication is poor between
the agencies and communities. The agencies have responded
to NCRC recommendations for improving their websites,
thank you, but their websites
still have a tendency to bury CRA
and merger information, and thus make it hard
for communities to use the CRA and merger
application process. It is hard to figure out,
for example, who to contact, if a member of the public
has questions about CRA or the merger application
process. CRA examiner training
needs to be greatly enhanced. It is still too rare
for examiners to talk to community groups
when conducting exams. When they do talk to groups,
the community group comments are summarized
in a very general and non-informative manner
on CRA exams. In closing, NCRC
will strongly oppose any proposals to rollback
existing CRA requirements. For example, we will
vigorously oppose expedited merger approvals for banks receiving
outstanding ratings and any adjustment
to asset thresholds that result in more banks
receiving streamlined exams. These proposals
do not reduce burden, but they do reduce the rigor
of CRA and merger enforcement, and will result in fewer
loans and investments in underserved communities. Exactly what
we don’t need now. In the EGRPRA process, the agencies
should reduce burden by increasing clarity,
like describing what is required to demonstrate
a public benefit. The EGRPRA process
can be a win-win for banks and communities if it creates a predictable
and clearly rigorous CRA and merger enforcement regime, but it will be a loser
for communities if it replaces CRA’s continuing
and affirmative obligations to serve communities with a periodic obligation
to serve communities. Thank you very much. MR. MILLER:
Thank you, Josh. Liz? MS. LOPEZ: Thank you. As Jonathan mentioned,
my name is Liz Lopez, and I am the Executive
Vice President of Public Policy for the Opportunity
Finance Network. On behalf of OFN,
I would like to thank you for the opportunity to be part
of this conversation on the decennial review
of the EGRPRA. OFN greatly appreciates
your commitment and focus of this review
of the regulations. I would like to start
by providing you with an overview about OFN, our members and the communities
they serve, as well as an overview of CDFIs’
relationships with banks and comments on the Community
Reinvestment Act. OFN is a leading national
network of community development financial institutions,
or CDFIs. CDFIs invest in opportunities
that create vital community services
and entrepreneurial capital in urban, rural,
and Native American communities. There are four types of CDFIs
and over 900 CDFIs certified by the U.S.
Department of Treasury. Loan funds make up more than
50 percent of the industry. Credit unions are next
with 26 percent; banks, thrifts, and holding
companies with 19 percent; and venture capitals with
1 percent of the CDFI market. As of February, the CDFI
industry total assets were over $90 billion. CDFI asset sizes
are very diverse and ranges from
less than $100,000 to over $6 billion in assets. As you can tell,
it’s a very diverse industry. OFN Network includes nearly 240
performance-oriented CDFIs. What makes our network unique
is that CDFIs must meet OFN’s eligibility criteria
and performance expectations. In 2014, OFN’s members
achieved their results with a net charge-off ratio
of less than 1 percent, comparable to the rate for
FDIC-insured institutions. OFN members partner across
the public and private sector with government agencies,
foundations, corporations, and banks, to provide innovative solutions and to scale capital
into larger investments. Over the past 30 years,
our network has originated more than $33 billion
in financing to people, businesses, and markets
and communities just outside the margins of
conventional mainstream finance. In November, OFN released
a groundbreaking report outlining an analysis
of CDFIs’ performance, impact, and growth
over the last 20 years, from 1994 to 2013. Some of the findings are: that CDFIs have
maintained their ability to provide capital
in underserved communities, even during
recessionary periods when conventional banks
retrench. CDFIs’ average loans outstanding
increased slightly in the wake of
the 2008 recession, from $28.2 million
to $28.6 million, helping to create jobs,
housing, and community services during the downturn, and that CDFI’s industry growth
has been impacted by capital supplied by banks,
thrifts, and credit unions, $12.7 million in 1994
to $1.7 billion in 2013. During this period of growth,
OFN has supported banks’ CDFI partnerships
in three-ways. By creating CDFI investment
strategies. These are customized,
bank-focused, capacity-building strategic plans to help
individual banks understand the CDFI industry; identify CDFIs
in the bank’s footprint, to have the capacity
to work with banks, and develop relevant products
and services for CDFIs. By providing asset
management services to banks that includes educating staff
on how to underwrite CDFIs, providing underwriting services, and managing CDFI portfolios
for banks, and by designing and developing
capacity-building programs that may also provide CRA credit
to banks for their investment. Two examples of
OFN work with banks includes working with a bank
to decide and execute a program to increase its commitment
of annual assets to community development
investments and expand its portfolio
of financial services targeted towards underbanked,
low to moderate income markets, and minority populations. Another example is OFN’s
work with a bank to develop a strategy
aimed at CDFIs through which the bank committed
more than $10 billion to increase economic development
activities, including LMI mortgage activity,
small business lending, and community development
investments. When regulators modernized CRA
in 1995, they tied CRA to CDFIs
in a way that, together, with the CDFI Fund,
has fueled our industry growth. Now, because it is impossible
for any bank that participated in TARP to get
an outstanding CRA rating, banks will no longer try. Because a bank can get
a satisfactory rating without stretching itself, banks no longer have
meaningful CRA strategies. Instead, banks have
broader corporate social responsibility programs. This is one of the major factors
affecting the change in CDFI capitalization. Because banks no longer are
under regulatory pressure to stretch,
they will extend credit in more conventional forms
for shorter terms with greater scrutiny. What we’re hearing
from our members is that banks’ lendings
to CDFI has plateaued and is currently declining, and that not all banks
understand how CDFIs operate and how banks can identify
the best CDFIs to partner with. We urge for CRA enforcement
to be strong and for bank performance
under CRA to be disciplined and community-centered. We would also ask
you to consider how bank CRA assessments
are determined, applying the same consideration
to partnerships with CDFIs that are extended
to qualified investments in minority
and women-owned institutions and low-income credit unions, as well as CDFI training for CRA compliance
officers and banks. Currently, there is a disconnect
between how banks do business and how CRA assessments
are measured. Our ask is that you consider
adding to the bank’s assessment, those areas it reaches
by means other than branches and deposit-taking ATMs,
and for financial institutions to have a commensurate community
reinvestment obligations in those markets. Federal agencies have
rightly recognized that financial institutions
can reach low and moderate income people
through means other than bank branches and ATMs. Providing consideration
for these types of activities when they happen to reach
low and moderate income people is not the same as requiring
financial institutions to meet the needs of low
and moderate income people in all the markets
in which they do business. Another area
that we urge you to consider is applying
the same consideration to partnerships with CDFIs that are extended to
qualified investments in minority, and
women-owned institutions and low income credit unions. Both the requirements and the actual performance
of Treasury-certified CDFIs support the addition of CDFIs
to the list of institutions included in the qualified
investment category. CDFIs are a recognized
CRA financial intermediary in the CRA and they are
specifically highlighted as an example of community
development loans. CDFIs frequently serve
the same market interests as minority-owned
financial institutions, women-owned financial
institutions, and low-income credit unions. More important, they serve
the same markets targeted by CRA and so will help meet
the CRA’s purpose in the same way
as those institutions. In 2014, OFN’s data indicates that 73 percent of the Network’s
clients were low income, 48 percent were minority,
and 48 percent were women. Because of this clear overlap,
CDFIs should be accorded the same treatment
under the CRA as minority, and women-owned institutions
and low-income credit unions. The inclusion will help solidify
the unique value of CDFIs in helping low and moderate
income people and communities with their credit needs. This is, after all, the purpose
of both CDFIs and the CRA. Our last request is that
you consider requiring CRA compliance
officers and banks to participate in CDFI
orientation training. Our experience in working
with CRA-comp lawyers at each of your agencies
has been excellent, but we know that gaining
an in-depth understanding about CDFIs can take time, and this is further complicated
by the fact that, even after 30 years, our industry continues
to evolve and grow. In regards to banks, we believe
that a required CDFI training could help them understand
how CDFIs operate and about the CDFI industry’s
diversity, including type, size, capital,
and communities that are served. Understanding both is essential
to ensure that banks can select the best CDFI to partner with to meet their specific
market needs and also their CRA goals. OFN appreciates your
consideration of our comments to modernize CRA
and ensure it keeps pace with the changing
financial services industry. We look forward to continued
partnership with you and support of a thriving
CDFI industry that provides responsible access
to federal and private resources and achieves a positive impact
in communities across America. Thank you for your time. MR. MILLER:
Thank you very much, Liz. Wade? MR. HENDERSON:
Jonathan, thank you. To Chairman Gruenberg and the distinguished members
of the EGRPRA panel, I’m honored to be with you
this morning, honored to be a part
of this panel of distinguished participants representing consumer
and community groups. As Jonathan said,
I’m Wade Henderson, President and CEO
of the Leadership Conference on Civil and Human Rights, the nation’s premier civil
and human rights coalition, with over 200
national organizations working to build an America
as good as its ideals. I’m also honored to be
the Joseph L. Rauh Junior Professor
of Public Interest Law at the University
of the District of Columbia. But for these purposes,
I’m most proud to be a member of the FDIC’s Advisory Committee
on Economic Inclusion, one of the nation’s
leading forums on financial regulatory
issues and innovations that aim to bring all Americans
into the financial mainstream. Now, I know that
much of today’s hearing has been devoted to discussing
the regulatory burdens that financial service providers
face in today’s environment, with an eye toward
the elimination of regulations that are unnecessary,
duplicative, or outdated. Now, these, of course,
are worthy goals that few could disagree with. However, I want to caution
against the overzealous or too narrow an application
of these principles in a manner that might well
exacerbate the growing problem of economic inequality
in our nation. Now, for my testimony today, I’d like to offer
the perspective of a lifelong advocate
for civil and human rights, by discussing how we arrived at our current regulatory
environment, the importance of protecting
the financial health of all communities– particularly
communities of color that far too often bear
a disproportionate burden of under-regulated loans and other consumer
financial instruments– and a few of the challenges
that I believe we’ll face as a nation moving forward. Now, let me begin, with one of the most basic
understandings that lies at the heart
of the Fair Housing Act of 1968, and other important steps
our nation has taken in fair housing
and fair lending. Where you decide to live,
or, in some cases, where someone else decides
you ought to live, has implications that affect virtually every aspect
of your life. This one decision has more
impact than anything else on which schools
your children attend, it affects whether you can find
a decent-paying job and whether
the transportation systems exist to actually
get you to that job. Historically, it has determined
how much you’ll pay to cash your paycheck
or get an emergency loan, and it also still determines
whether you can use the money to put healthy food
on the table and get the best
of healthcare. Now, as we’ve seen
with the heartbreaking case of Freddie Gray
of Baltimore, Maryland, who died mysteriously
in the back of a police van transporting him into custody
earlier this year– or last year–
it affects whether you will be exposed to lead
or other toxins that, even decades
after the rest of the country has eliminated them,
still keep many people from reaching
their full potential. That’s what happened
with Freddie Gray. And as we have recently seen
in other cities, it affects whether
you’ll live in fear of violence or face a two-tiered
system of justice if you happen to find yourself accused of doing
something wrong. Well, needless to say,
whether you can get a mortgage, and on what terms,
is one of the biggest factors involved in the decisions
of where families live. And getting to the point
of today’s hearing, this is an area that was
in desperate need of stronger
and more responsive regulation, and remains so today. Now, I understand
that this is the first time the EGRPRA process has been
convened in nearly a decade, and it is staggering
to look back and see how much has changed since then. Some of you may remember
a Time magazine cover from 2006, which showed a man
literally hugging his house, and which proclaimed
that America was “going gaga over real estate.” Now, on the surface, that is
certainly how things appeared. Yet the truth of what
many civil rights and consumer advocates,
and even some regulators, like Sheila Bair
and Ned Gramlich, had by the time
had been arguing for years, that the mortgage lending system
was profoundly flawed. Tradition lenders had abandoned
their responsibility to communities they served, enforcement of
consumer protection laws was being neglected, the lines between investment
and consumer banking had been eliminated,
and as a result, countless numbers of unsound
and abusive loans were being made. It was also clear
who was being hurt the most. In 2005, the year that marked the height
of the housing bubble, African-Americans
were 3.2 percent, and Latinos 2.7 times
more likely to receive subprime purchase loans
than white borrowers. And the numbers
were not much better for mortgage refinances. And it also
should have been more clear where all of this was headed. In 2006, my colleagues at the Center
for Responsible Lending– Mike Calhoun,
representing them today– predicted that 2.2 million
subprime loans, a number that they had to revise
upward the following year, would end in foreclosure, and that CRL was criticized
for “betting against housing.” I don’t bring this up
to lay blame. There was more than enough
going around without my contribution. I recall hearings
over the past several years in which mortgage lenders
blamed brokers, brokers blamed appraisers,
appraisers blamed realtors, realtors blamed developers, and borrowers blamed
all of the above, and vice versa. Now, my point is
that we should remember that the legal
and regulatory structures that had governed
mortgage lending were completely broken. And the consequences
of that breakdown, particularly for communities
of color, were disastrous. And while it is understandable
to question and scrutinize and debate the finer points
of a new regulatory system that has been enacted in
the wake of the Dodd-Frank bill, I would only ask that we keep
that history in mind as we do, because a lot of people–
and I’m guessing not too many of them
in this room today– are mired in the consequences
of our failure to properly regulate when
regulation was clearly needed. Now, as this ongoing debate
over the regulatory process moves forward, there are
a few challenges in particular that I’d like to flag, and I’m happy
to elaborate on these once we have a chance
for further conversation. First, since the ink
on Dodd-Frank was still wet, we have seen attack
after attack on the work, and more importantly,
on the very existence, of the Consumer Financial
Protection Bureau. It’s one thing to debate
the finer points of regulation with the CFPB experts who have been entrusted
with writing them. But to the civil rights and
consumer advocacy communities, the efforts we’re seeing
in Congress to overrule the Bureau– as in the case of auto lending
just last week– and to undermine
its independence, demonstrate not just
a failure to learn from fairly recent history, but a stubborn determination
to live it all over again. Defending the work of the CFPB
is going to remain a top priority for the civil
and human rights community going forward. Second, we are still faced
with the issue of what to do with our nation’s
housing finance system in which the majority
of home loans are guaranteed by Fannie Mae
and Freddie Mac. And, of course, since 2008, that system has been
in a tenuous position. Fannie and Freddie
remain in conservatorship, and with shrinking
capital buffers, they remain at risk
of being bailed out again with potentially serious
consequences for the affordable housing
mission they were meant to fulfill. Now, while the leadership
conference remains open to discussing the best way
to reform the GSEs, including an explicit federal
guarantee of mortgages, we also believe it’s important
to face reality. Their current position is not
sustainable in the long run and there is no consensus
or timeline on how or when Congress might come up
with a better system. Now, until such time that
we might see legislative reform, we have called for allowing
Fannie and Freddie to rebuild their capital buffer and eventually allowing them
to exit from conservatorship. Now, let me just say
that some people have referred to our position
as “recap and release,” as if we’re proposing to go back
to the same system we had before the housing crisis, and I reject
that characterization. Thanks to the 2008 law
that gave us the FHFA, with its stronger oversight, and the Dodd-Frank law, that gave us
the consumer bureau, and protections
like qualified mortgages, we are operating
in a very different world than we had before. I think we should give
those reforms a chance to work, and we’re going to continue
making the case for that. Now, finally,
in the coming months, we expect to see the CFPB
issue a rule addressing another one
of the most problematic financial products
in communities today, especially communities of color,
and that’s payday lending. Ultimately,
and after a long fight that will most likely
be taken up in Congress, I expect the CFPB will prevail
in putting a stop to this devastating and immoral
type of lending. At the same time,
the need for small-dollar credit in low-income communities
of color will still exist. I want to encourage the FDIC, including through the Committee
of Economic Inclusion, and other regulators, to continue laying out
the regulatory path for better alternatives to take
the place of payday loans. Now, with that, I’ll stop and I thank you again for
the opportunity to be with you. MR. MILLER:
Thanks very much, Wade. And, Mike,
finish us off here. MR. CALHOUN:
That’s a tough one to follow and you’ll see I have
a bit of a handicap today. [indistinct conversation] Thank you for the opportunity
to speak today, and thank you for the attention
and care that you are providing, you and your agencies,
to the EGRPRA process. My comments follow with
the last point that Wade made. Banks, as everyone here knows, play such a critical role
in our economy. And accordingly,
they’re given special powers in order to carry out that role. And it’s what we’re seeing
today, and we’ve seen this before, is a growing effort
by non-bank entities to try and obtain access
to those powers without the corresponding
obligations and supervision that come with it. And it is really imperative
in this process that we protect both the integrity
of the bank charter, and most importantly, the consumers
in the overall economy which depend upon
that protection. Now, we have seen
these attempts before and they have been
appropriately rejected with a lot of work
by your agencies. Last year, I noticed, when issuing
the new CIF Handbook, the OCC made it clear that banks
may not “rent their charters,” and that was in accord
with longstanding policy. I think Comptroller Hawke put it
well more than a decade ago. Referring to preemption
privileges, he said, “They are not a commodity
that can be transferred for a fee to non-bank lenders.” But we are seeing
growing efforts for that, in fact, to occur. Courts have scrutinized those
that try to rent bank charters to evade state consumer
protection laws. Typically, these arrangements
that we see– and we’re seeing
lots of them today– involve the following
characteristics. The loans will be nominally
originated in the name of the bank, but the non-bank entity
will design the program, market the loans,
provide funding for the loans, service the loans,
and usually guarantee the bank against any losses
from the loans. Often– and I tried this
recently– you can go to the website
and other materials, to the bank itself, and find
no reference to these loans. You can only find reference
to them through the non-bank entity. Courts have seen through
these shams, and the majority of them
apply a test called the “predominant economic
interest” to see who’s the real party
in interest in these loans rather than the nominal lender. And that’s consistent with
what you’ve done, and I would argue it’s also
consistent with Dodd-Frank, which reaffirmed
that rent-a-bank charters are not allowed. As everyone here will recall, previously operating
subsidiaries of banks were accorded preemption. Dodd-Frank reversed
that position and said, if you want preemption, you need to operate
through the bank itself. And for these non-bank entities to make an even much more
tenuous claim to preemption just runs in the face
of what Congress did in the Dodd-Frank Act. But as I noted, we are seeing
a surge of these in the new world. I’ll give the example
where it’s most predominant, is the online lending
by non-bank entities. Many of these entities
are charging 200 percent interest or more and they’re seeking
to make these loans in states where that would
exceed the state usury limits. And they also do not comply
with state licensing. This surge of high-cost lending
has been a reaction to rulemaking efforts
of the CFPB, on payday and installment loans, and to the general expansion
of FinTech online lending, which offers promise to provide some of the affordable loans
as well. And it’s how to balance that
to come up with products that actually help consumers. Essentially, what happened is payday lenders were able to
convince states to create exceptions
to their state usury laws by arguing that their fees
were not interests. They were one-time fee
for deferral of a check for one pay period. The industry, though, morphed into a model
of repeat lending, with the average borrower
now being in a payday loan for more than half of the year. The CFPB found that
the majority, the majority, of payday loans
were going to people who had more than ten loans
in a row with no break, and that is where
the industry has moved. And so, now the industry
is faced with ability to repay and other standards that
may be proposed by the CFPB, hopefully soon. And so payday lenders
are quickly morphing into these high-cost
installment lenders. And a final reason that this
lending has gone unscrutinized, and it puts more burden
on the regulators, is, virtually every one of
these agreements contain binding
arbitration clause that immunize them
against any challenges from private attorneys. So it is only public oversight
that can provide relief here. So we expect that these more
blatant rent-a-bank schemes will morph into efforts
to try and appear to pass economic interests
to the banks. An agreement
I looked at recently had artifices such as complex
loan participation structures, offshore funding sources, and complex
guarantee agreements. And the regulators,
we would urge, should scrutinize
these arrangements to see who really does have
the economic interest. But beyond that,
we urge the regulators to look at the terms
and conditions of these loans themselves. In the early 2000s, we went
through this exact scenario with payday lenders. Many states,
including North Carolina, where we are based, decided to
prohibit the payday loans. The payday lenders responded
by partnering with banks in these rent-a-bank
charter deals. The FDIC, under Don Powell,
responded in 2005, by focusing on the product
itself, noting how it had morphed
from this one short-time bridge into what had become
a long-term debt trap. And they imposed standards that applied to both banks
and the rent-a-charter. Their modest standard was, don’t put people
in these two-week loans for more than 1/4 of a year. And that made the model
not work, and addressed it both for banks
and the rent-a-charter. And we would urge you again,
today, that these high-cost
installment loans pose similar problems
to the payday loans. So, like the payday loans,
they are dependent on the lender obtaining direct access to
the borrower’s bank account. Every one of these, usually it’s 99 percent
plus of the loans, have ACH payment on the date
of the borrower’s paycheck, and it is virtually impossible
to get one of these loans without that. They ensure that the lender
is repaid even when the borrower
cannot afford to still pay their remaining bills. Let me close with an example
of one lender, of these lenders, who did direct lending
as well as, one of these
rent-a-bank arrangements. Its loans often exceeded
200 percent for a loan of $3,000
for a four-year term. So, after paying on a loan
like that, for a year and a half, borrowers had paid thousands
of dollars in payments. But due to the up-front fees
and the high interest rate, they often had paid
less than $100 down on the principal
that they borrowed. As Margot had indicated, these loans have
high default rates. And at that point,
over 1/3 of the borrowers were in default on the loans. And what is alarming,
perhaps more so, is the lender had predicted
that default rate. That was not
an accidental outcome. It was where they were
maximizing their returns. And then finally,
on the back end, this lender inundated borrowers
and their family members and friends and employers
with debt collection calls. In one state, this lender
had 292 borrowers. In a court case, it was found
that they had made over 84,000 collection calls
to that group of borrowers. That’s more than 250 calls
to every borrower. Now, again, these are loans that were originated
in the name of a bank and insured
by federal insurance. So, in closing, I want to
correct, I think, what’s often a misconception about the upcoming
CFPB rules in this area. The CFPB
has been very explicit: their rules are not intended as comprehensive regulation
of this lending, and they are going to be
highly dependent upon and particularly
their lending partnerships with some of these lenders. So, we would urge you
that regulatory reform should ensure that the oversight
remains vigilant to both enforce
consumer protections and maintain the integrity
of the bank charter. Thank you. MR. MILLER: I appreciate
the panelists very much for your
very insightful comments. I turn to the principals for any questions
or clarifications. [indistinct conversation] COMMISSIONER TAYLOR:
All right, again, I want to thank the panel. That was very, very helpful
information that you guys gave. A number of you have
talked about and advocated that the banks should be doing
more small loan lending. And I’ve heard some banks
want to actually do more small loan lending, but they say the regulations
are kind of burdensome, the supervision is burdensome. Are there hurdles that stop them
from doing that, and if so, how can we address some of those
regulatory hurdles? MR. CALHOUN: So I think
there are two things there. One, I would note the CFPB, in their at least
brief of proposal– and we expect something similar
will be in their proposed rule– has looked to provide exemptions
for bank lending. It makes sense for this lending
to take place in banks because it is so much more
efficient. They know the customer, they don’t have to build
a separate infrastructure, and they’re subject
to your supervision. At the same time– and I’ve had some bankers
candidly say this to me, that banks today are extremely
reluctant to do this because it would have the effect
of cannibalizing the very profitable overdraft
product that they offer, which is, in many ways, operating as a small-dollar
lending program. And so, I think it’s noteworthy,
the CFPB, I think they looked at this
through the same lens, that their regulatory agenda
has overdraft coming right on the heels
of payday for that reason, to open up this. I mean, there’s a principle
we often talk about where bad products can drive
the good products out of the system. It’s kind of tough to go up
to the C-suite and say, “Let’s do this program that will
knockout all the revenue from this other
very profitable program.” So I think that is the real key
to moving forward with this access. MR. SILVER: I would like to add
that more data sheds sunlight. You have the Home Mortgage
Disclosure Act data that requires the public
availability of home lending. Consumer lending and credit card
lending over the years has been in a dark shroud because there is a lack of
publicly available data. And data on the number
of these loans, the terms and conditions,
I think would be very helpful. And this is always
very puzzling to me, because banks make
credit card loans and there’s been a lot of– credit card lending
has also been rife with abuses– but I think more thought
needs to be made about to what extent can
credit card lending serve some of these needs, to what extent can
bank small consumer lending serve some of these needs? You know, why are people
running to payday lenders? And I think one reason people
are running to payday lenders is a lack of bank branches
in minority communities and low and moderate income
communities. So I think all these things
work together. I think more vigorous
enforcement of the Community
Reinvestment Act. And when banks merge, if they’re
proposing branch closures, that ought to be scrutinized
very carefully. I think all these things
work together. And, you know, access to credit
is too tight right now. It was irrationally too loose in the years running up
to the financial crisis, but now it is too tight. And there is a way to loosen
some of these underwriting requirements
and do it in a safe and sound and responsible manner
and really serve needs. MR. HENDERSON:
I think my colleagues have both cited examples
for why banks have difficulty in stepping in this area. And they’re both right. But I would ask the panel to
at least be open to a conversation about trying
to expand the availability of small-dollar lending
beyond the conventional sources that have been the subject of
your attention over the years. There is a proposal
on the table, a very modest proposal,
to allow the U.S. Postal Service to engage in some aspects of
tightly controlled small-dollar lending. While I understand that
that may be anathema to banks and to traditional
financial institutions, we would urge you to step back
for a minute, take a look
at the available data, study it carefully,
think about the opportunity to provide venues
for small-dollar lending, in response to Josh Silver’s
comment that banks don’t have adequate and sufficient
branches in communities around the country, but recognizing that
the U.S. Postal Service is literally in every community
in the country, both urban and rural. And so, the ability to explore
this as one way of expanding the availability of
small-dollar lending is certainly
worthy of consideration, regardless of how you come out
on the analysis. We hope you’ll at least
be open to looking at it. GOVERNOR TARULLO: Thanks. I actually wanted to generalize
Commissioner Taylor’s question a little bit, because you all,
the five of you, spoke very forcefully to,
I think, two sets of issues: one, the affirmative
obligations of banks under the CRA, in particular; and secondly,
the need to prohibit predatory and harmful practices, some of the authority for which
still lies with us and some of it lies elsewhere. But what I wanted to ask is,
as Steve did a little bit, whether there are regulations
that our three agencies have in place
for prudential reasons, which you all assess as
unnecessarily impeding the ability to make
small-dollar loans, to make loans into
low and moderate income areas, to make mortgage loans. Anything that we’re doing,
or have done, or maybe the legacy of things
that were done in the past, that you don’t see either a good safety
and soundness reason for– well, you don’t see a good
safety and soundness reason for it, and you think it may,
even at the margin, be inhibiting
the ability of the banks to make those kinds of loans. MR. SILVER: Well, I don’t
want the EGRPRA process to result in an attack
on the qualified mortgage or the other
important regulations that have been implemented
as required by Dodd-Frank, because I think
that these protections are very, very important. The ability to repay,
as Margot says, why do you even have to write
a law about that? But you did have to
write a law about that. Lenders and brokers
are making loans that you would not make
to your grandmother or to your mother. You know, there should be
a grandmother and mother test, but unfortunately,
not all human beings are moral and you need to
write these rules. In the 1990s, there was
an upsurge of CRA lending that was not subprime lending, but that was
responsible lending, relaxing down
payment requirements, considering sources of saving in non-traditional ways
that worked. Study after study has shown
that CRA-regulated lending was much safer and sounder, and reached more low
and moderate income people, than mortgage company lending
and other lending that was outside the CRA realm. So I think we need to get back
to those practices that promoted
safe and sound home lending, small business lending, that was regulated under CRA
and the other laws. And I think just some– you know, one thing
that the regulators can do, rather than, you know, eliminating QM protections
for portfolio lending, I think
that’s very, very important, because what could happen
to a portfolio loan? It could be sold
the next year. Conduct roundtables
with community organizations and lenders
and other stakeholders, and try to figure this out. Why isn’t there more
CRA programs to expand lending? Meet about it,
write about it, discuss about it,
get it in the media, and then I hope– and more vigorous application
of CRA, and I hope we see more safe and
sound lending in communities. MS. SANDERS:
So, I think some have said that I’ve never seen
a regulation I didn’t like, but I would– I think,
as you might expect, we, at this table,
most of us, are not thinking
about the problem the same way you are. I sit at my desk, I’ve been working for
the National Consumer Law Center 24 years now,
and I get the calls from the legal aid lawyers
and private attorneys who are dealing with people who have gotten loans
they can’t afford. And I don’t get any calls
from people who can’t get loans. I’m not negating
that that is not a problem, but the problem that is causing
the greatest amount of loss and heartburn and cost
to the low-income community are the loans
that shouldn’t be made. And one of the problems
that I think causes that is the conflation
of affordability with ability to repay. The bank’s obligations,
the banking regulators have required that banks
only make loans where they are assured that the borrower
has the ability to repay. Well, that means the bank
has assured itself that it can take the money
from the borrower, and thus the loan
can be repaid. That is a different concept
than whether the borrower to not get the loan. And we have so many stories,
legal aid stories, one story I remember
from East St. Louis, where a woman was so pleased
originally to get her home loan, and then two years later
she went crying to her lawyer and said, “Whoever said
this was a good idea? I can’t afford it.
I’ve lost everything. My children’s lives
have been disrupted.” It’s not a good idea
to make people loans that they can’t afford to repay. MS. LOPEZ: And just to add
on to what Margot was saying, actually, the Opportunity
Finance Network is launching
an education campaign, because one of the challenges
that we’re seeing is that consumers
are not properly informed about all the different
options. We’re at the very early stages
of this campaign, but one of the things that
we really needed to assess are about the diversity
of the markets and how do you best reach
Native American communities, Latino communities,
African-American communities, Asian communities,
urban and rural areas. So that is something on our end that we’ve been focusing
on the consumer side. MR. SILVER: Just real quick,
there is a huge issue of access to credit
for small business lending. NCRC has a small business
technical assistance program for women, and minority-owned
businesses. And this has been also
written about extensively in the media,
so there is a problem. And non-bank lenders that are
high interest rate lenders, it’s all very familiar, are stepping into the small
business lending field. And I worked for a while
for a non-profit organization called Manna,
a housing non-profit developer, and I can tell you, the American dream
of home ownership is still a great dream
for many people. I would see them every day
in the offices of Manna. The question is, is a non-profit
with responsible counselors going to reach low and moderate
income and minority people and offer them responsible
home ownership that lasts? Or is a predator? And what we’re doing as
regulators and non-profits and banks is creating
an infrastructure, and hopefully the infrastructure
works to promote long-lasting and sustainable
home ownership and small business ownership, and keep it away
from the predators who want to extract wealth. MR. CALHOUN: So, if I can add, just one place
that I would urge you to look, and I think it reflects
the perspective you have here, is, most people know
we’re the affiliate of a lender that does a good bit
of mortgage lending. So we get to comply
with the regulations also. When you talk to people
in the mortgage field, I hear a broad consensus that this is a fundamentally
safer mortgage environment that we have. And it’s not just safer
for the individual loans. It makes it safer
that you will not have a broad, catastrophic event. Because so much we saw,
for example, all of our loans were 30-year
fixed rate, fully documented, we had them across the country,
48 states, and when unemployment
hit 12 percent, you know, you could underwrite them
as well as you want, you’re going to have
some high losses. But I think those should be
factored in when you look at
the capital requirements, because one of the things
we have seen is, it is hard for many
community banks to hold loans, particularly non-conforming
loans, on their books, because of
capital treatment there. And you want to make sure we have safety
and soundness there, but I would urge you just to use
care of the balancing there and have those
capital requirements reflect these other protections,
that, as long as they are there, do make it a much safer mortgage
market than it was before. CHAIRMAN GRUENBERG: If I could
ask Ms. Lopez just briefly: we’ve had a longstanding
interest in partnerships between banks and community development
financial institutions; is it your view
that the environment today is actually more challenging
for developing and sustaining
these relationships? And on the regulatory side,
from your perspective, what are the particular issues
that you think we need to be involved in? MS. LOPEZ: Yes. So, one of the things that OFN
just actually did in November is that we released a study of,
really, 20 years worth of data. And what that showed is
that banks had really fueled the significant growth
of the industry. That data went up to 2013. And what we’re hearing now
from our members is that they’re feeling
that the lending has plateaued and that it actually
is going on the decline. And one of the reasons being
is that the CRA amendments that were made are no longer
as, really, impactful as they were early on
because of the changes that we’re currently facing. No more banks merging,
and therefore, really aiming for a higher
rating in terms of CRA from satisfactory
to outstanding. So it’s great to kind of have
this 20-year perspective to really have seen the impact
that banks have and to then have
the immediate feedback of what our members
are telling us what the situation is currently. In terms of what can be done
to address the issue, one of the challenges
that we’re also hearing from our members,
is that our industry is complex and not all CDFIs
are created equally. And that is truly a challenge even if banks are willing
to partner with us because of the complexity
of our industry. Not every CDFI
will be a great match and a lot of the times, that can be due to
capacity issues, but there are certainly
plenty of CDFIs, and they truly understand
what are the asset sides, who are the communities
that they serve, and what their capabilities are, so there are definitely
significant CDFIs that can be good partners,
but it’s not one of those things that all CDFIs
can be treated equally. MR. MILLER: Any other questions
from the principals and any comments
from the audience? We have the microphone
in the front. Well, if that’s the case, then I think we stand
between you and lunch. MS. MILLER: Thank you
very much, Jonathan. Folks, lunch is outside. You’re welcome to take lunch and bring it in the room
and eat it. We’ll return at 1:15.
Thank you. [applause] MS. MILLER:
Okay. It’s 1:15. Before we start the next panel,
I just want to remind folks that in your packages,
we have forms for comments. The ladies up front tell me
we don’t have any comments yet, you don’t have to,
but if you wish to, just fill out one of these forms
with your comments, and you can drop it off
out front, and it will get entered
into the record. So thanks very much. We’re going to move
to our second banker panel and our moderator today
is Toney Bland, and Toney is the Senior Deputy
Comptroller at the OCC. So, Toney, why don’t you
take us away. MR. BLAND: Okay.
Rae-Ann, thank you very much. I also want to thank you
all for staying around. And if you didn’t know,
we were taking attendance, so we know who left. We have panel three,
and as Rae-Ann said, we’re the second banker panel. What our panel
is asked to address is rules pertaining to
applications and reporting, powers and activities, international,
and banking operations. What I want to do
is spend a moment and just touch on
what is covered under those particular rules. Under applications
and reporting, we’re talking about
the Bank Merger Act, change in bank control,
Call Reports, deposit insurance,
filing procedures. Under powers and activities, that includes investment
in bank premises, investment securities,
sales of insurance, fiduciary powers, community development
investments. Under international, it’s foreign operations
of national banks, Edge Act corporations,
and then lastly, under banking operations,
we’re talking about assessments, availability of funds,
collections of checks, record keeping requirements,
and reserve requirements. And that’s not all inclusive, but just to hopefully give you
a sample of the areas under each one of those
rule categories. As– similar to
the other panels, we have asked our panelists
to provide specific comments on regulations that are
outdated, unnecessary, or unduly burdensome. Now I’d like to introduce
a very distinguished panel and I think
it’s important to note we have institutions
represented here of different sizes and
representing different markets. To my right
is Jim Consagra, he’s the President
and Chief Executive Officer of United Bank
in Vienna, Virginia. It has approximately
$6.3 billion in assets. It is part of the United
Bankshares, Incorporated, which is
a $12.6 billion in assets and operates from 129
full service offices in West Virginia,
Ohio, Pennsylvania, Virginia, Maryland,
and Washington, D.C. Did I miss a state? The bank is supervised
by the Federal Reserve, and it was founded in 1979. Next to Jim,
we have Peggy Fullmer. Peggy is
the Chief Executive Officer and Chief Financial Officer
of the Milton Savings Bank in Milton, Pennsylvania. Milton has approximately
$66 million in assets. It is supervised by the OCC. The bank was established
in 1920. Next to Peggy
we have Martin Neat. Martin is the President
and Chief Executive Officer of First Shore Federal
of Salisbury, Maryland. First Shore Federal
is a federally chartered savings and loan association. It has approximately
$301 million in assets and operate from nine offices across the lower eastern shore
of Maryland. And First Federal
is supervised by the OCC, and it was founded in 1953. And lastly,
we have Gwen Thompson. She is the President
and Chief Executive Officer of Clover Community Bank and Clover Community
Bank Bankshares in Clover, South Carolina. Clover Community Bank has over
$126 million in assets. It operates from two offices
in South Carolina. It is supervised by the FDIC, and the bank was established
in 1987. Thank you all for agreeing
to be a panelist. Similar to the first
and second panels, each panelist will take
no more than 10 minutes, or as we like to say, 10-ish, to share their specific thoughts
and views on the regulations. And again, our goal is to get
specific comments. And so we’ll start with Jim,
to my immediate right. Jim. MR. CONSAGRA:
Thank you, Toney. I really appreciate
the opportunity to participate on this panel and to address the nation’s
top regulators. I am very optimistic about
the results of this process as evidenced by the significant
improvements and changes that we have already seen. I would like to start
by giving a brief bio on United Bankshares. I believe it will help add important perspective
to my comments. As Toney mentioned, we are
a regional bank holding company with $12.6 billion in assets
and we operate 129 offices throughout Washington, D.C.,
Virginia, Maryland, Pennsylvania, Ohio,
and West Virginia. We employ approximately
1700 people and have successfully completed
and integrated 29 acquisitions. Our most recent transaction was the purchase of
Virginia Commerce Bancorp, a three billion dollar bank
holding company located right here
in Northern Virginia. That transaction was announced
in January of 2013, but for reasons
I will discuss later, didn’t close
until January of 2014, almost a year later. In addition, we recently
announced the signing of a definitive agreement
on November 9th of this year to acquire
the Bank of Georgetown, our 30th acquisition,
so we are currently in the process of preparing
the merger applications. So as you can see from
that brief history, M&A is an important line
of business for UBSI. Therefore, I would like to
begin my comments with the merger application
process. I would like to use the Virginia
Commerce transaction as a basis for my discussion. During this process, our communication
with the Federal Reserve Bank of Richmond, and the Virginia Bureau
of Financial Institutions were excellent. We had meetings
prior to the signing of the definitive agreement, we communicated
during the application process, and we were diligent
in providing the requested information. We filed
our merger applications and posted
the appropriate notices. During this period, things
were moving along smoothly and we were very optimistic
that we would be approved under delegated authority. However, the Federal
Reserve Bank of Richmond received a single
consumer protest letter on the very last day
of the notice period, eliminating
delegated authority and automatically requiring
approval from Washington, D.C. And we are very proud
of our CRA record and all our previous deals
were approved under delegated authority, so you can imagine
we were very disappointed. And it ultimately added
over four months, almost five months,
to the process. Obviously, any time
regulatory approval is delayed, it causes significant
challenges, both to the bank
that’s acquiring and the bank
that’s being acquired. We had to postpone
a data conversion– data processing conversion, we lost key Virginia Commerce
personnel during this process, and retaining
Virginia Commerce customers became more of a challenge. As you are all aware,
due to the gun-jumping rules, the acquiring institution
is limited in what it can do to protect the franchise value
of the investment until the application
is approved. And I didn’t even cover
the challenges that the bank
that’s being acquired has with maintaining people,
customers in a period of
significant uncertainty. I believe
a lengthy approval process and uncertainty around
the timing of the approval adds significant risk
to the transaction. In addition, we have been told
by our legal counsel in our Bank of Georgetown deal, regardless of our CRA
and fair lending record, we should expect
a consumer protest letter. During our recent
reverse due diligence with the Bank of Georgetown,
there was extended discussion concerning potential
regulatory delay due to the length of time
it took us to close the Virginia Commerce deal. Unfortunately,
we were unable to provide clear guidance
as to timeframe to the Bank of Georgetown
management group. I understand
that certain applications must be approved by Washington, but it shouldn’t be based
on a single letter from a consumer protest group, particularly when
the acquiring company is financially sound,
a proven acquirer, and has a solid CRA record. The next topic
I would like to discuss falls under powers
and activities, specifically real estate
lending standards under 12 CFR part 208,
subpart E. This section of the Code
includes important guidance on portfolio underwriting
and monitoring. As a banking company that
successfully navigated through the most
recent recession, I certainly appreciate the need for stringent
underwriting standards and portfolio monitoring. However, I am concerned
about the HVCRE rules and their potentially
negative impact on real estate lending practices
for our industry. For example,
there’s a requirement that the borrower
must contribute cash of at least 15 percent
of the as-completed value. In addition, this capital
must remain in the project during the life
of the project, including any excess
over that 15 percent minimum. With this last requirement,
we are, in effect, penalizing the projects with
the stronger equity positions. In addition, the 15 percent
minimum is based on the as-completed value,
so the borrower is required to hold more capital
for creating additional value. Finally, HVCRE
does not allow the lender to count true land equity
as capital, which is inconsistent with
how we would underwrite a deal. I believe these requirements
can be inconsistent with prudent
underwriting standards and it creates
an untenable requirement for us to impose
on our borrowers. When the cost of
regulatory capital does not reflect
the true risk in a project and is not consistent with
the cost of real capital, it may result in poor lending
decisions for the industry. I do, however, believe
that the concept of additional capital for HVCRE
is extremely important and I totally support
the theory behind it. I also believe that
if the industry collaborates, we can make significant
improvements to the HVCRE rules in very short order. I’m going to move on
to appraisals now. I would like to offer
a few brief thoughts on Reg Y concerning appraisals. In my opinion, the minimums
are set too low at $250,000 for income producing
real estate, or non-business purpose loans, and at one million dollars
for business purpose loans. I believe the appraisal
thresholds create problems that penalize
the small CRE deals with this restrictive
one-size-fits-all approach. I think these minimums
are extremely low for the much larger institutions and could be adjusted
based on the bank’s capital and/or asset size. Next, I would like to
touch briefly on the quarterly
Call Report filings. There’s been a lot of
discussion at previous sessions concerning the length
and time associated with the preparation
of these reports. I think Call Reports
are very important, provide valuable
and useful information for regulators, banks,
investors, underwriters, the general public, and I frequently use
the Call Report system as well when we are looking at
additional merger and acquisition candidates. However, I do think we can
move to more of a 10-Q, 10-K concept with
three quarterly reports and then one year-end report. This would relieve
a significant burden and still provide
much needed information to the end users. I won’t go into
specific detail, as it’s been covered
in previous sessions, but I believe there’s
significant opportunity here to eliminate obsolete
and unnecessary data. My final suggestion on
Call Report relates to coding. The quality of Call Report data for the purpose of monitoring
the risk profile of individual banks,
as stated in CFR 304.3(a), would significantly improve
if we incorporated consistent definitions of all
relevant loan concentrations into a single coding system, and I believe this would be
especially beneficial with CRE and HVCRE
concentrations. If we use the Call Report data
as it exists today to approximate a bank’s
CRE concentration, despite the inconsistent
definitions, they could be significantly
overestimating or underestimating individual
banks’ true concentration. And finally,
I believe HVCRE should have its own call code category instead of being a subset
of other call codes. In this way, the banks
and the feds could benchmark their HVCRE exposure
against that of their peers and the rule could be applied
with greater uniformity. Under the category
of fed reporting, specifically FR 2052(b),
liquidity monitoring report, we cannot currently upload
the information to the system. The information must be retyped
into the system, increasing the potential
for error, so I think if we could
come up with a way to upload the information, allow us to upload
Excel spreadsheets, I think it’ll be
much more efficient and eliminate the potential
for errors there. Also, a portion of the report
of selected money market rates, which is FR 2420, is required
to be filed by 7:00 a.m. daily. Although we are not subject
to that reporting at this time, it seems just to be unnecessary to require filing
at this time of day to analyze and monitor
money market rates. Some relief from
the early morning deadline would be very helpful. And my final comments will be under the category
of banking operations, and I’ll start briefly
with Reg S, which is reimbursement
for providing financial records. I believe we need to update
the reimbursement rates to reflect today’s labor costs. I believe they haven’t
been updated in some time, and that’s probably been covered
in previous sessions. And finally, I was looking
over the materials, I saw that debit card
interchange fees fell under that, and I just could not
resist the opportunity to talk about that
for a few minutes. I’ve talked about it
a lot in private. I’ve never had the chance
to do that publicly, so here we go. The Durbin Amendment has been
discussed ad nauseam, and I realize that any changes would require
legislative action. However, I would be remiss
if I didn’t point out that our company has lost
over six million dollars in annual revenue as a result of passing the
ten billion dollar threshold, and the industry is losing
anywhere between $8 billion
and $14 billion a year, depending on which report
that you have read or believe. But the point remains
that valuable capital continues to be diverted
from the banking industry to the big box retailer
with no benefit to the customer as the banking industry
predicted and warned. In fact, the consumer
ultimately is harmed as the banks seek ways to
recoup their revenue losses, including the elimination
of free checking, points we’ve all heard before. Toney, that concludes my
comments and on behalf of UBSI, I would like to thank you
for the opportunity to participate in
this afternoon’s discussion. MR. BLAND:
Thank you, Jim. Peggy? MS. FULLMER: I appreciate
the invitation to be here today and thank you for
the opportunity to speak to you. In my career
at Milton Savings Bank, I have seen a lot of regulatory
change and burden come forth. Since the 1970s,
most of the regulations have been written
to protect the consumer or simply protect
the whole banking structure, but one fact is sure, they were needed
at the time they were written. But a lot of them
are getting outdated and it is good
that a review is being done. At our bank, we embrace
each new regulation, we study it to death, and find a way
to attempt compliance, and we spend a fortune in audits
to be sure we’re following them and wait to find out if
the examiners will agree at our next examination. Many of my staff spend
most of their days reviewing, documenting, and reporting
on regulations, and it’s my belief
that the regulators are as burdened as we are,
but it is overwhelming, and my bank–
I only have 12 employees. So, we are small and this is
a small bank opinion. Toney asked us to be specific about some of
the recommendations in regard to the ones
being reviewed at this time, and one I want to address that has already been addressed
by other panelists, but under Reg D,
with the excessive transactions, we find that they are all
Internet transfer transactions. So at a minimum, I think
that those should be considered exempt transactions, and in our case,
the customer could come in and do those transactions
personally, which will tie up my employees who do more than just
wait on customers, so if they don’t have to do
that, that would be great. It just increases
the number of transactions that are being done and the customers
who get the letter from us, which we send three,
and the third one says we’re converting it
to a transaction account, though, the customers call me
and they say, “what did I do wrong?” Well, all you did wrong was
transfer money on the Internet. So that’s just one easy fix
that would be great to have happen. It’s a vicious cycle. I also wanted to comment
on Reg CC. We have come to the conclusion
at our bank that, really, there’s no way that those holds
are in place long enough for the checks to come back
in the first place. So most of the time, we aren’t holding
customers’ funds, we basically
look at the relationship, but in the high-tech world where checks are being sent
through electronically now, we don’t get them back
electronically; that would be
very cost efficient to us. So we actually get them
mailed to us by the Fed, and there’s no way
they come back in time for us to even
have held the funds. But one area
that I’m concerned about there is the fraudulent checks,
and many of you know, we can’t even trust
a cashier’s check anymore because it’s probably fraud. I would like a way for us
to put a longer hold on checks that we consider could be fraud, and you’re really limited
by Reg CC to do that. And, you know,
sometimes it takes a while until the customer
whose account was affected realizes checks cleared
that weren’t on their account, notify their bank, and then
they get back to the bank who got them. It’s just a real risk
to the bank. We are training our front line to be the ones
to watch for that, but I’d like to see a longer
restriction in those areas. Another burdensome issue
is the Call Report, but that’s been
hammered to death, so I’m not going to say
much more on that one. We do report a lot of zeros. Being a small bank, there’s a lot of items on there
that we don’t use, so I appreciate
anything you do there. And being a mutual savings bank, I reviewed the specific
regulations relating to deposits,
operations, lending and investments, and electronic operations
that are under review. Deregulation in the 1980s leveled the playing field
for banking and many of these are outdated as there is
really no distinction between a commercial bank
and a thrift anymore, but in regard to the deposits
that they accept, a specific example
is the now checking account. I believe that that was started
in the beginning so that a savings bank– and there was a state,
Massachusetts, yes, that was a way for them
to offer a checking account. And I’ve been in this business
a long time, and really, there used to be differences,
and it was like, well, the banks didn’t want us
to be able to do something because they didn’t want to have
the competition, I guess. We used to be able to pay
a higher rate, that all went away,
which is okay. But the checking accounts are all allowed to
receive interest now, and competition
drives the rates, so some of those things
are just really antiquated, and I would assume
that they’re going to go away. The most interesting regulation
I reviewed was 12 CFR 155, and I would hope that one’s
going to go away, but it requires written notice
to the OCC, if you’re developing
a transactional website. Now, my bank already has
a transactional website, but I would not have even
thought to look for a regulation telling me I had to
notify the OCC. So my gift
to any of you out there, if you have a savings bank
that does not have one, right now, you have to give
a 30-day notice before you launch it,
so I’m sure those are the things that you are looking at
to update, and I would say that we have to do it
all the time in the banks. You know, our policies, we aren’t allowed to let them
get stale and stagnant, and so that’s really
what that is. I want to touch on appraisal
as well. In our bank, we find– I would love if that limit
got increased. A lot of times, we are
very hands-on in our area. My directors will actually
drive by a property and come up with
their own value of what they think
that property is, and we don’t always agree
with what the appraisals show. We have farmland in our area, which we just had
an appraisal done where the appraiser said
the land’s worth $195,000 for 90 acres of farmland. I have a farmer on my board who says that land’s worth
$700,000, so we don’t always agree
with them. So if we didn’t have to get them
and could find another way, that would be great. And other than that,
I really don’t have much more because we aren’t involved
in a whole lot of things at my bank, but I appreciate
being able to speak on what I did. I’m glad that you’re
looking at these things, and again, I appreciate
the opportunity to speak. MR. BLAND:
Peggy, thank you. Martin? MR. NEAT: Toney, I too
appreciate the opportunity to comment as part of
the Economic Growth and Regulatory Paperwork
Reduction Act. It’s certainly
an appropriate forum and a matter of great importance
to our industry. As was noted
in the introduction, First Shore Federal
is a $300 million thrift with nine branches
serving the Delmarva Peninsula, Maryland, Delaware,
and Virginia. Since we serve Delmarva, I’m assuming
that’s why we were included, since the federal law
doesn’t apply, many people think,
to Delmarva. I couldn’t resist. Our association has remained
a savings and loan association in name, as we have evolved
into a community bank. And I’m proud to say
that we have maintained a CRA rating of outstanding
for nearly two decades. I’ve been CEO
of First Shore Federal for more than 20 years, worked in banking
for nearly 30 years. Prior to that, I served on the staff
of a member of Congress and started my career
as a grantsman working with federal and state
programs and regulations for two Maryland counties. So it’s fair to say
that I’ve been around regulation in its various forms
for all my working life. I do believe that the title
of this law, and that’s why I read it,
is very appropriate because there’s little doubt
in my mind that economic growth and reduction of paperwork
and regulation are, indeed, intertwined. And the effort to identify
and eliminate outdated, unnecessary, and
overly burdensome regulations is vitally important. In fact,
in First Shore Federal’s Enterprise Risk Management Plan, a document developed by
our leadership team, approved by our board, incorporated into
our annual strategic plan, and reviewed by several sets
of examiners and auditors, regulatory risk is among
the most significant risk that the association faces. That’s not because we have any
particular regulatory problems. It’s purely and simply
because we are a moderately sized institution, we have limited extra capacity
in our management and staff, and our goal is to serve
our customers and community to the best that we can. That being said, a great deal
of our resources and capacity is spent on dealing with
the regulatory burden that is part of
our industry today. The cost of consultants,
various audits and assessments is very significant,
and more often than not, our best people
are spending their time dealing with compliance
and regulatory matters as opposed to serving
our customers in our community. Of course, we’re not alone
in that respect. I noted that in its May 2015
comment letter, the ICBA recommended
that the regulatory agencies conduct
their own empirical study of the regulatory burden
on community banks to quantify that burden and confirm what numerous
studies seem to show, that it is significant and that it is driving
community banks out of the business of banking. The ABA, in its comment letter
of September of ’15, noted that we’ve lost
1,500 community banks in the last decade, a process that, since the onset
of the great recession, amounts to more than
one bank per business day, so many of us are saying
the same thing. Let me detail
some specific concerns. Mortgage lending. Our association does
a lot of mortgage lending in all three states on Delmarva, in fact, the local regional
newspaper just named us the, “reader’s choice
for mortgages on Delmarva”. So we have experience
with the state laws as well as federal laws
and regulation, and they do differ
and can conflict. Changes in one sector
can impact the others. For example,
over the past seven years we’ve seen significant change
in the foreclosure laws that have had the effect of dramatically
slowing that process. At the same time, our experience
with federal regulation has been that foreclosure
is defined as the, “sale at the courthouse steps.” And that triggers a requirement for us to obtain an appraisal
of the property in question. In actuality,
sale on the courthouse steps does not mean
control of the property and we are not able to
gain access to that property in question,
and in many instances, for an extended period of time. That being the case,
we’re still required to obtain a drive-by appraisal
or some sort of evaluation and base our ALLL calculations
and Call Reports on an incomplete value
of the property, and in many cases, a substantially different number
than would otherwise be true. In fact, the value that
is derived from those drive-bys or evaluations
is virtually useless, but the cost of obtaining
that value is both real and a waste. I would suggest that we be
allowed to use government data such as assessments
or some form of online data, such as Zillow, to establish
values on properties until we can actually gain entry
into the property. And I think
it’s particularly noteworthy that the current process
for the adoption of TRID has been a highly
burdensome one for lenders and everyone involved
in the mortgage process. There are numerous examples
of other banks, including several
that have testified as part of the EGRPRA process, that are significantly reducing,
and in some cases, even eliminating their
mortgage lending activity as a result of this regulation. It is unfortunate
that many regulations that community banks
must comply with are not subject to
review under EGRPRA, since rulemaking authority
for those rules has been transferred
to the CFPB, so I really can’t dwell
on this issue. But it certainly
should be evident that for the EGRPRA process
to work, the CFPB should be
part of this process. We’ve heard earlier from
another mutual institution– and let me say
that First Shore Federal is also a mutual institution and is committed to remaining
in that ownership form. We believe that it suits
our mission most effectively and allows us to best serve
our customers and community. And I’d be remiss
if I didn’t say thanks to the OCC
and to Comptroller Curry for his leadership role on a variety of issues
related to mutual institutions, including proposals
to equalize the lending and investment authorities
of thrifts and national banks. I noted earlier that our rating
for CRA is outstanding. There’s no question in my mind
that being a mutual institution has contributed to our ability
to earn that rating. We can respond to the needs
of the community with a longer-term outlook on what is good
for the community, in our view. As with many mutual
institutions, our association
has good adequate capital to meet its needs both now
and for the immediate future. That being said, we strongly believe
that there is a need for alternative
capital instruments for mutuals
such as have been included in various legislative proposals
over the past several years. And on the other hand, we certainly object
to legislation or rules that have the effect
of diminishing that capital that we do have. As such, we have concern
that the Basel III capital rules could have an unintended impact on the capital
mutual institutions. We’ve heard a number of
comments earlier about Basel. We are ever aware
that regulations and laws passed for one purpose can morph into many other
sectors of business and the economy. And before you know it, we’re all covered by
the regulations that are issued as part of
the lawmaking process. I’ll just cite,
“The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010”, as an example. While it might have been
targeted at Wall Street, it hit a lot of us
on Main Street, and the 8,000 pages of related
final rules and guidance will impact most of us. Quarterly monitoring
and the 18-month exam cycle. Again, Chairman Curry spoke
eloquently on this earlier and I’d like to add some ideas. As our association
has experienced life under a new regulator, the OCC, one consideration has been
particularly evident is the amount of interaction
and communication between examinations
is significantly increased. There are quarterly reviews
and monitoring that can rise to the level
of offsite– and I’ll call them mini-exams, even to the degree of a change
in ratings being made. These quarterly
monitoring conferences include a great deal
of information, financial statements, interest rate risk reports,
ALLL activity, detailed on classified assets,
and updates and support of responses to
prior examinations. I’d suggest that
this increased oversight could allow for the periods
between the examination to be increased from
the current 18-month exam cycle for 18-month non-complex
institutions for well-rated institutions as far as onsite examinations
are concerned to a period of, perhaps,
two and a half or three years. On the other hand, if you don’t extend
the exam cycle, you might consider reducing
the volume of information requested as part of
the quarterly Call Reports. It has been noted
that the Call Reports are in such detail that I would question
whether all this information is really necessary
on a quarterly basis. It takes multiple capable people
many days to complete and confirm the accuracy
of that information. The glossary alone is 87 pages and all instructions
for the report total 700 pages. It’s been suggested that
the Call Reports be provided in summary form
for three quarters, with the full report
due for the fourth quarter, or as I suggested earlier, change the exam cycle
to reduce that burden. QTL alternatives. There have been proposals
to allow federally chartered thrifts
to opt out, in essence, of the QTL test, and we certainly think that
such an option is warranted. Thrift investment
in residential lending is an important part
of their role, but it’s also important
to recognize that major lending capacity
of our system other federal programs in
the secondary market in total. Frankly, it is challenging
for the traditional thrift to compete in residential
lending alone, let alone the risk
inherent in such lending, such as concentrations,
interest rate risk, and additional credit risk. When I started in banking, the safest investment
a bank could make was seen as
a single-family home. We really can’t say that anymore and many of us have chosen
to diversify our portfolio. I would suggest that
the CRE review and rating is sufficient to ensure
that we are addressing the lending needs
of our community and remove the QTL requirement. Not having that requirement
will certainly not reduce our commitment to serving
the communities we love and where we call home. I’ve noted the past testimony
has suggested that some of the thresholds contained in current regulations
need to be increased. Items like the number of checks
and transfers on money market accounts
under Reg D, the appraisal value
threshold of $250,000, the $10,000 value on CTRs,
et cetera. I’d also make a comment,
and hopefully it’s being addressed
at this point, the Privacy Act disclosures
that are required to be mailed. I had some comments about those, but hopefully
that’s going to be addressed and legislation is being
considered even as we speak. Let me conclude
with an interesting one, in case I haven’t already
said enough to get myself in trouble. Medical marijuana. Our association has no plan to get into this line
of business, however, I would note
that this issue has become a significant one
in the states we serve. Delmarva will have
four dispensaries set up under Maryland law, and there are 23 firms
that have applied to run those dispensaries, according to recent
published press reports. There are clear inconsistencies
between federal and state laws and regulations
concerning lending and providing banking services
to medical marijuana businesses. The guidance which we have seen
on this issue certainly doesn’t provide
any confidence level to the bank or to a banker
in terms of providing services to this sector of
the business community. That being said,
it’s not hard to see that it’s a business sector
that might, in fact, be here to stay, so I would suggest that the
regulators have some work to do to develop the appropriate
final oversight of such activities. Again, Toney, I thank you
for the opportunity to make these comments. MR. BLAND:
Martin, thank you. Gwen? MS. THOMPSON:
Thank you, Toney. Well, one of the things about
being the last on the panel, you’re not likely to sound
creative or original because most of the things
that I have to say have already been said,
but do bear repeating too, so I thank you
for being part– allowing me to be
a part of this. As a bank with
$126 million in assets, any regulatory relief
would be greatly appreciated, and I’m going to speak to one
that is dear to my heart, and that’s the Call Report. And I’m sure that many of
my comments will be a repeat of others, which only goes to show
the importance of the requested relief. In my research for this panel, I pulled up the completed report
that had been imaged, from signature page to end,
to find 96 pages. As I reviewed
many of the pages, I noted that there are a lot of
N/As or zeroes in the columns. Still, nonetheless,
it’s a part of the report that has to be read
or dealt with. When I talked with the employee
that completes the report, I listened to her speak
about the data gathering and reviewing
of internal documents with other staff members before she begins
to fill out the schedules. The report itself is automated, but there still seems to be
other processes involved to get there. When I asked her about the
most time-consuming schedule– it won’t come as surprise
to any of you involved with it, it has now become RCR. There is much
about this schedule that still has to be
manually assessed for us, so as a whole, it takes her the better part
of a week each quarter to gather, complete,
and edit the information. This doesn’t include time
that is spent with work papers for auditors and examiners. Now, information’s
vital to all of us and knowing how you stack up
against your peers with the information
from the Call Report that comes out
in the form of a UBPR is informative and helpful. However, you can slice and dice
information over and over and it will only give you
some idea of what’s really going on
in the bank. All this information
didn’t keep us out of trouble, and granted,
it is helping us know that we’re getting better. It’s a moment in time. As most community bankers, I can tell you who
my non-performing loans are by name,
and how much capital I have, and I’ve very aware of
the types of loans I make that impact that capital. I’m glad to report that
to regulatory agencies, but you can get a picture
with a lot less information than we’re providing. I completed the Call Report
for at least 20, of the 40 years
I’ve been a banker. There were many quarters
that I came in on a Saturday or a Sunday afternoon
when it was quiet, to do the report. I would review it on Monday
and file it that same day. Was the industry better
or worse? I don’t think all of
the new data every quarter has made the industry
or the bankers better. I know there are
many other differences now, but hopefully,
you get the picture. As I know from serving on the FDIC’s Community
Bank Advisory Council, there’s a lot of work
being done in this area on the Call Report. But I do ask that you consider
a shorter, more concise report for community banks, and banks
that are a 1 or 2 rated, or at least the highly-requested
two quarters. So, thank you. I’d like to briefly just express
an opinion about Reg CC. While we’re allowed
a two-day hold on a case-by-case situation,
we’re finding this, as Peggy was saying,
that many of our return items don’t make it back
until the third day. Well, then you’re in a situation where you need to do
an extended hold. Well, by the time
they get the extended hold, it’s useless, so that
notification could just go away, and nobody would be
the worse off for it. It doesn’t help the customer, it certainly
doesn’t help the bank, and as some of my panelists
have referred to, I started to jump in
on the Privacy Act notice, but I decided I’ll stay
in my little territory here and know that that one
is being looked at as well. And I’ll move on to Reg D, which governs
the reserve requirements. So that one’s been beat up
pretty good as well, but the six transactions
are restrictive, particularly
in today’s environment. As she said, a lot of it’s
just happening through automatic transfers, and that’s where
we’re taking the industry, and where we try to get
our customers to go. So, it just seems burdensome
to them and to us for all the monitoring
and the notifications, You know, I’ve been
in this business 40 years, I started out as a teller,
and, you know… we don’t sit around
our community bank and awfulize how much trouble or how much burden
the regulations are. We just figure out
how to get them done. You know, we put what resources
we have to them from a staff. We’ve got 30 people. You know, we budget
to make it happen, to get the audits in place,
to do whatever it takes, and we’re glad
to be able to do that, but we also want to be
the community bankers. And there’s a lot of time
spent behind the scenes. This young lady
that does the Call Report, she’s very talented,
we could use her 40 hours, or close to it,
doing a lot of other things. So, you know,
while we are willing to comply and want to be seen
as a good community bank, any help you can give us
would be greatly appreciated. MR. BLAND: Thank you, Gwen, and thank you all
for your comments. Let me first ask the principals
if they have any questions or comments for the panel. COMPTROLLER CURRY:
Thank you, Toney. My question really relates
to the appraisals. We’ve heard about
the thresholds of appraisals at, I think, each of the six
sessions that we’ve held. I was wondering
if you can elaborate on a little different subject
related to appraisals, whether we’ve created
a meaningful distinction between the full appraisal
and evaluation, and whether the agencies should be looking at
the evaluations to see whether or not they’re
a meaningful alternative. MR. NEAT: Let me just comment
from our point of view. One of the concerns that we had
with doing evaluations has been that whether or not they would
actually be considered, be given, you know, the same weight
as full appraisals in an examination context. We actually looked at actually
sending some of our folks to a class on– you know,
appraisal class to, you know, allow them
to have some credentials to do evaluations, and frankly, we found that
that was an extremely expensive long-term response. But there’s no question
that we do– and that’s one of the reasons
that I suggested, I think, using Zillow,
or something like that, to– as documentation in addition to the experience
that we do have is that, we have people
that are specialists in making these loans
and have dealt with properties over many years,
and we would like to think that that would carry
some weight in terms of being able to
establish the value of the property.
And honestly, a lot of appraisers
will hate me for saying this, but the record of appraisers
hasn’t exactly been, you know, tremendous
over the last ten years. There’s not a whole heck
of a lot of accountability to when they do an appraisal, about whether or not that number
is really valid or not, and frankly, by the time
you get a property back, the value of that property
is a whole lot different than the original appraisal
anyway. MR. CONSAGRA:
My only comments are, we do believe we have
the internal expertise to do those
internal evaluations, and obviously, it is
completely independent from the line side,
so we do take advantage of that as the rules allow. We would like to see
the rules allow a little more leeway there, but we feel that we have
the expertise to do that, and many times,
as the comments already– we get an appraisal
and we’re like, this is just flat out wrong, and we would never lend
on that value. In many cases, we’re much more
conservative internally. So, we believe we have
the expertise. We believe if we’re given
more leeway to do that it would result in better
risk/reward decisions for us. MS. THOMPSON: We use
the evaluation process a lot and we’ve put a lot of resources
into the education of someone to be able
to do that, so we’re very grateful
for that process. It’s helped us and, you know,
it helps the customer as well. MS. FULLMER: At our bank,
we always did do them in-house until we were– I mean,
we ordered ones over 250, but we always did it in-house, and I think when you’re
a small bank like we are, and you have the ability
to know your communities, you know if the values
are dropping. A lot of times, it’s frustrating
if somebody’s refinancing and the appraisal’s
five years old, and we have to get a new one,
and we wait for it, and it comes in,
and it didn’t tell us anything more
than we already knew, so if you raised the value
and let this do, I agree we need to have
something in there so when someone’s looking
at a file they have a value, but being able to use
the lower, even in– we used to be able to get
comp books from the realtors in our area,
which was awesome, now if we could find a way
to get back to that even. But we could better serve
our customers, I think, and I agree that a lot of times they aren’t perfect
when they come back. We look at them and think,
really? I mean, you know,
I drive by this house every day. I don’t agree with that.
So… MR. BLAND: Any other questions
or comments from the principals? Are there any comments
from the audience, and if so,
we have a microphone up front. Sir, if you would
state your name and the organization
you’re with. MR. GARBER: Good afternoon.
Thanks for the opportunity. Bill Garber
with the Appraisal Institute. [laughter] Yes, I won’t be able to attend
the last session. I know appraisals
are going to come up again, so I just want to share
a couple thoughts and actually
ask a question as well. We just did a survey
of chief appraisers and appraisal managers at banks, so people working
within institutions in the risk management position, and we asked them questions
about raising the threshold. And 80 percent said
it’s a bad idea to increase the threshold– the 250 threshold. So, we’re hearing
a different story from the people
that are on the ground within the institutions
themselves about safety, and soundness,
and consumer protection. So, I would urge the agencies, when they’re looking at
these issues going forward, make sure you talk with them. Talk with the risk managers, the appraisal managers
within the banks, and find out
what’s really going on within those institutions. I think you’ll hear
some interesting stories there. I did have a question
for Ms. Fullmer about the ag situation. Let’s assume that
that appraisal’s less credible. There’s little credibility
in that appraisal. The question I have is, why would you continue to use
that appraiser on your approve list if they’re doing
substandard work or inaccurate work? And then conversely, what keeps you
from making a loan– I think the example was,
$700,000 was an estimate, why couldn’t you
just document that, that there was
a difference of opinion within your loan committee, document the reasons for making
that $650,000 agriculture loan, with that in the file? What restricts you
from doing that today? MR. BLAND: And then, Peggy,
before you respond, the audience is supposed
to make comments, not question the panel, so I just want to be
clear on that. So…
you don’t have to… MR. GARBER: Well, then I’ll
position it as a comment that– MR. BLAND: All right. MS. FULLMER:
We actually are making a loan and we did exactly
what you said, but it was just
an example for me of some times where
it just doesn’t make sense and there’s a lot of times that we have to tell
our borrowers, here’s the appraisal, because we’re required
to give them a copy, and this happens more
on refinancing than purchases. Purchases’ values are
pretty much already established, but my standard answer
to people is, just because this is
what the appraisal came in at, that does not mean that’s what
you’re going to sell it for. And as far as we’re limited on how many appraisers
we can have on our list, we have removed people that we have felt
were not adequate. This was the first time
this one did an ag loan, and he maybe shouldn’t have. MR. GARBER: Yeah,
because not all appraisers are equally qualified and so
we’re the first to say that. MS. FULLMER: So, I doubt
we will use him again, but basically, it was
a high-valued property that he put more property
on the building, and, you know, there’s no way. The value was in the land,
so when you did the math, it just looked weird,
but we did make the loan. MR. GARBER: Thank you.
Appreciate it. MR. BLAND:
Anyone else for comments? Well, again,
I want to thank the panel. Thank you for your preparation, but also the depth and
specificity in your comments. I’ll turn it back to Rae-Ann. MS. MILLER:
Thank you very much. It’s actually time for a break and we have a webcast that’s
following along our agenda, so it’ll be a long break,
but please return at 2:30. [applause] If you grab your seats,
we’re going to get ready, we’re going to get
started momentarily. [indistinct conversation] [laughter] I’m getting in trouble here. Thanks very much. Okay. So, we’re getting ready to begin
the final panel of the day and our moderator
is Doreen Eberley, Director of the Division
of Supervision at FDIC. Thanks, Doreen. MS. EBERLEY:
Okay. Thanks, Rae-Ann. So, this is our third
banker panel today and the final panel of the day. We’re going to talk
about securities, money laundering,
safety and soundness, and rules of procedure. And we have four great bankers
with us with a lot of comments. And let me go quickly
through some introductions and then we’ll get started. Jay Kim, to my right, is the President and CEO
of NOA Bank, an FDIC-supervised bank
in Duluth, Georgia. It’s a $230 million
community bank that he co-founded in 2008. The bank primarily serves
the Korean-American and Asian-American communities
in the Atlanta area, providing SBA and conventional
commercial lending products. Jay has over 30 years
of community banking experience, including with BBCN, Industrial Bank of Korea,
and others. He has a BA from Seoul
National University and an MBA from Michigan
State University. To Jay’s right
is Craig Underhill. Craig is President and CEO
of the Freedom Bank of Virginia, a $380 million community bank
in Fairfax, Virginia, that’s supervised by
the Federal Reserve. He previously served
as an executive vice president and chief lending officer and has 30 years
of banking experience specializing in government
contract financing. Craig previously worked for
Potomac Bank of Virginia and M&T Bank. He holds a BBA in finance
from James Madison University and an MBA in finance from
George Washington University. Next is James Sills, III. James is President and CEO
of Mechanics and Farmers Bank, an FDIC-supervised bank
in Durham, North Carolina. M&F is a $300 million
community bank with seven branches
in five major markets. He served as cabinet secretary
and CIO for the State of Delaware
for five years, leading a variety of
IT consolidation, Cloud computing, and
cybersecurity programs. In 2014, James was named
IT executive of the year by Government
Technology Magazine. He also has many years
of banking experience, including executive
vice president of MBNA America Bank, and president and CEO of
Memphis First Community Bank. James serves
in a variety of community and business organizations and has a BA
from Morehouse College and MPA from the University
of Pittsburgh. And on the other end
of the panel here is Michael Clarke. Mike is the President and CEO
of Access National Bank, an OCC-supervised bank
in Reston, Virginia. Access is a $1.2 billion
business bank that provides credit,
treasury services, and wealth advisory to businesses with up to
$100 million in revenue. Mike assembled the business
plan and organized investors to start the bank in 1999. The American Banker has
repeatedly ranked the company among the top 25 performing
community banks in the US. Mike is active
in a number of community and business organizations and he graduated
from Virginia Tech in finance and marketing. So welcome.
Thank you all for coming. We’ve had some great
conversations leading up to today and I’m looking forward
to your comments. Jay, can we start with you? MR. KIM:
Sure. Thank you. Thank you. This is Jay Kim. As background information
of our bank, as introduced by Doreen, we opened the business
in 2008, in Duluth, Georgia and just graduated
from a de novo status. The bank has three branches
and total assets of $230 million. We don’t provide consumers
but provide commercial loans such as SBA-guaranteed loans, commercial real estate loans,
and general business loans. After reading the transcripts of the previous
outreach meetings, I see the most common themes
are regarding the threshold amount
of currency transaction report, the appraisal threshold limit, and the safety and soundness
examination cycle. I agree with my peers
and I also want to support such comments at
the previous outreach meetings. First, about the threshold
currency transaction report. The Bank Secrecy Act
was passed in 1970; 45 years ago. And one dollar in 1970 is about
$6.2 in 2015 terms, after inflation adjustment. Given this large increase,
the discussion and review of the currency transaction
report threshold amount is a very valid issue in the Regulatory Paperwork
Reduction Act. For example, during
this 3rd quarter of this year, our bank filed about 350
currency transaction reports. This is approximately 1400
currency transaction reports per year,
and of these reports, about 1/3 is between
$10,000 to $20,000, and the remaining 2/3 of reports
above $20,000, so that if the threshold amount
is increased to $20,000, we could save
about 500 reports per year. And our savings would increase
as we continue to grow. I know this is anecdotal, but this new limit was
applied to all banks, this could potentially mean saving millions of reports
per year. If the threshold currency
transaction report is increased, the number of
the suspicious activity report could be reduced as well. The threshold amount of
suspicious activity report, which is currently $5000,
and began back in 1996, need to be reevaluated
and adjusted as well. Second, about appraisal
threshold amount. During this year, our bank made
75 commercial real estate loans, either owner-occupied or
non-owner-occupied properties. Out of 75 loans, nine loans,
or 12 percent, are under 250, and 15 loans, or 20 percent,
are between 250 to 500, and 19 loans,
or 25 percent, are between the 500 to one million, and over one million
transactions are 43 percent. If the threshold amount
is increased to $500,000, we could save about 20 percent
of the total numbers of appraisal report annually. As you know, the required
appraisal limit was established in 1994, by the Financial Institution
Letters on Interagency Appraisal
and Evaluation Guidelines. The one dollar in 1994,
is about $1.6 in 2015, after adjusting for inflation. Because of the depression
in late 2000, the inflation adjustment
is not large during this period, but my point is,
that the threshold amount needs to be reviewed
and adjusted. Another issue of the appraisal is about the overall cost
and turnaround time. Since we do not originate
residential mortgages, I’m discussing my thoughts
about the commercial mortgages. Evaluation, which is used
when the transaction amount is less than $250,000,
the cost is about $600 to $700, whereas, the appraisal
costs $3,500 or more. Although the appraisal fee
is paid by the borrower, we could save a lot of money
and resources for our borrowers
and our communities. The turnaround time
for evaluation is generally two weeks or less, whereas, the turnaround time
of the appraisal report is generally
three to four weeks, and sometimes takes even longer. For small transaction loans,
as you know, completing due diligence, and closing those
in timely manner is very, very critical
to our borrowers and customers. Also, the appraisal standards
do not differentiate the threshold amount
between residential and commercial properties, and between owner-occupied and
non-owner-occupied properties. Average commercial property
transaction sizes are bigger than residential
property deals, and the appraisal fee and the complexity
of the commercial property is a lot higher than the average regular residential
property transactions. So, given these differences,
different threshold for residential
and commercial property deals need to be considered
and evaluated. Another comment is about
the owner-occupied property and non-owner-occupied property. As we know, the primary source
of repayment of owner-occupied property is the cash flow of
owner business in the property, which is the same as
the business owned. The regulation has
one million appraisal threshold for the business loan,
but not specific to the owner-occupied
property loans. Lastly, I want to discuss
about safety and soundness examination cycle period. As I mentioned earlier, we just graduated from
our de-novo status. As a de-novo, the examination
cycle was 12 months. So, the current
18-month examination cycle is a big relief for us,
but I support the comments to increase
the examination cycle from 18 months to 24 months
if the financial institution receive the
composite rating of 1 or 2, and the size of the bank is
classified as a small banks. For the last couple of years,
our bank has arranged a semi-annual voluntary meetings
with our case manager at the FDIC and
the state banking department. At this meeting we discuss
with the regulators about the last six months’
performance and our plans
for the next six months. By having more informal interim
and updating discussion with our regulators, I think that extending
the formal examination cycle to 24 months
could work out as well. I think I have finished
a little early, but to conclude, I just want to reiterate
my support of the comments made by my peers at the previous
outreach meetings. To close, I want to say
I’ve enjoyed my time here. I really have learned a lot
throughout this meeting. I really appreciate
the federal regulators for having me here as a panelist and letting me share
my thoughts. Thank you so much. MS. EBERLEY:
Thank you, Jay. Craig. MR. UNDERHILL: Thank you. Chairman Gruenberg,
Comptroller Curry, Governor Tarullo,
Commissioner Taylor, I thank you for the opportunity
to speak with you here today. I’m the president
of Freedom Bank of Virginia. We’re a $400 million bank
in Fairfax County with three branches. We have 68 employees and
the majority of our business is commercial loans
dealing with small businesses and professionals. I’d like to talk with you
briefly about Call Report reform, a little on safety
and soundness, and then a little bit
on compliance as well. So first with the Call Report. Small banks have
less complex data to report and therefore,
it would be much easier if there was a less complex form
for us to fill out. Over the last 20 years, the Call Report form has become
significantly more complex to reflect the significantly
more complex transactions in banking, but for small banks,
it really has not changed. So a simpler Call Report form,
I think, would be not only easier
for the banks, but I also think
it would be easier for many of
the community bank users. Many of our investors are
small investors and local businessmen, and a less complicated form would actually be
more transparent to them. On safety and soundness,
I think that, over time, banks have increased
in asset size. As there’s been consolidation
in the industry, obviously, banks have become larger,
and I think it would make sense to have a longer examination
cycle for larger banks, and I’ve heard this, so I know
I’m repeating the theme, but obviously, banks up to $1 billion are
more common than they once were. And to the extent
that when examiners come in, they take a look at the bank
and they make a decision on when they’re
going to come back, and they always
could pick a shorter timeframe, but giving the longer timeframe,
I think, allows more flexibility
both to the banks and to the examiners, and allows resources
to be focused, maybe, more in areas where they
need to be focused. Another area, I think,
that’s very big is, qualified mortgages when they’re
held to maturity by the bank. I know you’ve
heard this repeatedly throughout
all of your conferences. I will tell you
that community banks, I think, definitely, they fill a need,
and giving us clarity on this, I think, would be better. We do originate mortgages
at Freedom Bank, which are sold
in the secondary market, but we often will have
small business people that will come to us, and for a variety of reasons, they will not qualify
for a secondary mortgage. Often, it’s because
they are businesses file their tax returns
on a cash basis. So we, at the bank, will receive their
audited financial statements showing accrual-based profits, but they will have tax returns
that show a cash loss. So when they give
the tax returns to a typical mortgage
underwriter, they’ll take a look at that, they’ll see the loss
in the business, and they’ll actually discount
the salary took out of it because they’ll say the business
can’t be counted on to provide that income
in the future, so we provide
that needed background. And it would just be, I think,
better for all parties concerned if we’re going to hold
the mortgage in our portfolio, we’re going to take the time
to underwrite it properly, that it be deemed
a qualifying mortgage. On the compliance side,
there’s some simple things, and again,
repeating some things today, but for instance, Reg DD, with the low interest rate
environment that we have now, many of our sweep accounts were converted
to checking accounts and money market accounts, and transfers are occurring and they’re mostly occurring
with online banking. And when I got into
this business, as someone mentioned earlier,
there were NOW accounts, so we were already paying
interest on checking to consumers,
and now we have the ability to do it with businesses. There’s reasons that banks
like to have checking and money market accounts
and I would just say, in the current world
of technology, does it really make sense
to continue with these rules on withdrawals
from money market accounts? So I think
that’s one regulation you definitely
can take a look at revising. I think it’s a minor point,
but it just brings up how technology is affecting
some regulations that are in place. Just general topics,
repeating what we’ve gone over a little bit today, which is,
I would urge you to review anything
with a dollar amount on it. I think Gary Shook
did a great job of talking about Reg O. You know, I think Reg O
goes back to the Carter administration and I don’t think
it’s been addressed since then, so it makes it very hard
for your executive officers and directors
to borrow from a bank. It’s been mentioned many times, and Jay did a good job on this
as well, with appraisals, but the dollar amount is low, particularly in an area like
Northern Virginia, where we’re sitting, $250,000
is a fairly low amount, and it becomes the law of
unintended consequences. So if you have to go out
and get an appraisal, someone has to pay
for the appraisal, maybe $600 or $700, and then, there’s the delay in time
related to the appraisal, it’s going to make
the lending process harder. Any time you set up barriers
to make it harder, you’re going to get less
of that product. So Fannie and Freddie
do make decisions on what constitutes jumbo
in different markets, and I would urge regulators
to think about that as well. Not all markets are the same, so that would definitely
affect appraisals. On CRA, there was
another example of that, but as I prepared this,
in designating CRA market areas, I think there’s a trend to
want to see whole counties and whole cities
as a CRA market, and I think that makes sense. I can tell you, I traveled less
than ten miles to be with you here
this morning, and it took me
50 minutes to do it. So, you know, roads– and
this is not an unusual thing, Fairfax County
is our entire geographic market, but if you’re in Hollin Hall
in Alexandria, you know, I’d like to see you
get to our bank in less than an hour and a half
in the morning or the evening, and so I would just ask people
to understand that sometimes traffic patterns
and roads can be as much a barrier
as rivers and mountains. Several people
have done a great job of mentioning BSA and CTRs. Again, the dollar volume
of them has not been changed into the– a small bank
in particular with a limited number
of tellers, the burden of having to
fill out the paperwork over and over again,
compliance, definitely is a disincentive to
handling businesses legitimately have needs of banking services, so I would ask you
to consider that as well. And I mentioned, we do
do mortgage lending at Freedom, both originating for sale
as well as for holding in our own portfolio,
and one of the things we do is fill out the HMDA reports, which has a number
of data fields. I understand it’s 26 right now,
so in school, if you get 25 out of 26 right,
you get an A, but in HMDA, if you get 25
out of 26 right, you have a problem
with your HMDA report. I understand
that there is a desire to increase
those numbers of fields, and I understand
that getting information is often something
that people want, they want to see,
but please keep in mind that there is a burden to that, and if we were getting
26 out of 26, and now you raise it to 30,
we might get 29 out of 30, so there are consequences to
all the actions that you take. While I am addressing you, I realize this is not something
that affects you directly, but again, one of
the earlier speakers mentioned how capital is capped out for–
I’m sorry, loan loss reserves, our allocation for loan losses, is capped at 1.25 percent
on capital ratios, so capital ratios are an issue, and that certainly
is an important one, but right now, we are looking at the Financial
Accounting Standards Board and their desire to introduce
CECL into the banking community. I know that you don’t work
directly with that, but you certainly have
more than a fleeting interest, and to the extent
that I could address you today, I think they probably are more
inclined to listen to you all than they are to the banks. So I’ve heard numbers anywhere
from 20 to 50 percent increases in total reserves
if CECL is implemented, and that’s coming
down the road right now, so that’s something that
I would urge you to look at. That certainly will affect
safety and soundness. Last thing I would say
on safety and soundness is, growth
is not a four-letter word and to the extent
that you have a bank that is growing at a good pace,
but is improving asset quality, has systems in place, I would urge you all to
not necessarily look at growth in and of itself
as something to be concerned. In fact, that growth generally
comes from making loans in the community and
that is how jobs get created. So last thing I’ll do
is try and talk about the costs of this compliance. As I mentioned, we’re a
$400 million bank and we have finally designated
our first compliance officer. It’s not easy for a bank my size
to tell you the exact dollar volume
of this compliance, but I can tell you
that the compliance officer and the subscription service
we have to look into these various
laws and regulations, in and of itself,
costs us over $150,000. Now, that’s one
of my 68 employees. So it’s fairly easy to imagine from the CSRs
that are doing disclosures and opening accounts
to the lenders that are doing disclosures
on the loans, everybody is involved
at some point in compliance, so I would say it’s fairly easy
to triple that number and put it up to, maybe,
at least $500,000, and I think it’s probably
greater than that. And over the last eight years, the number of banks
in the United States has decreased from 8,000
to about 5,000, so that is a fairly
healthy reduction. Banks are nothing if not
the implement of capitalism in this country, so you would think
that an industry that had 3/8 of its participants
disappear, would have many people
looking to fill the void, but that is not occurring. So I would submit to you
that there’s some evidence that this regulatory burden
is making it unattractive and making it difficult
for us to attract capital. So as you all do review
these regulations, I would ask you to please keep
in mind the cost and burden and to do what you can to
help small banks continue to stay in business. I thank you for your time and look forward
to any questions at the end. MS. EBERLEY:
Thanks, Craig. We’ll move on to James. MR. SILLS: Good afternoon. Sorry about that.
Good afternoon. My name is James Sills. My remarks today
are focused on the impact of the Bank Secrecy Act
and anti-money laundering on our institution. Many community banks
such as ours are really struggling
to balance profitability and be in compliance with
all the various regulations. And I also have a few
specific recommendations related to BSA, that I’d like to share
with you today. Again, I’d just like to tell you
thank you for the opportunity to present to you
and to this distinguished panel this afternoon. I’m relatively new in my role
as the president and CEO of M&F Bank. I’ve been onboard
for about 16 months. And as a community banker, I can really attest to the
increasing regulatory burden. The last time that I actually
worked in an institution was about 15 years ago
and many of my friends, fellow bankers, vendors,
associates, they always ask me, you know, what’s changed
from 15 years ago? And my number one answer is
that the compliance function within many of these
institutions is actually running the bank and the cost of compliance
is just rising dramatically, and I want to share
some of those costs with you this afternoon. From a blocking
and tackling standpoint, we are still making loans,
we’re gathering deposits, we’re generating fee income, we’re leveraging technology
a whole lot more, but the regulatory posture
or attitude in the bank is just pervasive
in our institution. My staff, they almost beat
themselves on the– you know, pat themselves on the back,
or beat their chests, that they’ve,
100 percent in compliance with the regulations. And sometimes this posture is at the expense of
improving earnings or increasing shareholder value, and so there’s just been
an unbelievable change just in the last 15 years in terms of how internal staff,
you know, how they see themselves
working with the customers and their role. I wanted to tell you
a little bit about our bank. Our bank is a 108-year-old
minority deposit institution. We’re also a community
development institution, community development
financial institution, or a CDFI, serving five major
markets in North Carolina. We are the second oldest
African-American bank in the United States, and we’re the eighth largest
out of 22 banks in the United States. And I just would like to say
that Chairman Gruenberg. and Comptroller Curry, have been very supportive
of MDIs and also the National
Bankers Association, so I just want to thank you
for your support. We have had 107 years
of consecutive profitability, and my board does not want me
to break that streak. Overall, our profitability
is okay, however, we are very pleased with the overall strong
compliance posture of our institution. But again, in my view, this balance
needs to be realigned to ensure that we are
also pleased with our earnings. Much of our time,
attention, and resources are directed toward
regulatory compliance versus providing credit
and financial services to our community served. More importantly,
the regulatory burden depresses earnings through the redirection
of critical resources and added costs
from serving communities in need of critical
financial resources. So today, my goal is to move
beyond the frequent headline, community banks
need regulatory relief, and I just want to change that
a little bit to say, we need to tailor
some of these ideas, some of these proposals, to fit the risk profile
of institutions of all different sizes, and so if anything
you hear from me today, I know that that’s the mantra
of a lot of the associations, regulatory relief. Regulatory relief,
but if you could just change certain thresholds to fit
the risk profile of certain institutions, it would actually improve
the overall profitability of a number of institutions
throughout the United States. As I stated earlier,
my challenge is to improve the overall profitability
of the bank without compromising
the adherence to regulations within the banking system. I would like to walk you through
some of our BSA costs and four recommendations that would have
a positive impact on our bank if they were implemented. Believe it or not, today,
we spend– and I did some research
prior to coming here, we spend over
$545,000 on BSA, AML, and other compliance-related
costs. So I asked my staff,
well, how did that compare to, you know, a few years ago? So in 2011, we spent over
$242,000 on BSA, AML, and other compliance-related
costs. And it’s also important to note
that these costs do not include any of our core
processing costs. As a way of background,
the bank added BSA, AML costs, kind of, beginning in 2010. We implemented some BSA
automated monitoring software. This software assists the bank
for suspicious activity, filing CTRs electronically,
OFAC compliance, and 314(a) subject list
searches. Prior to the implementation
of this system, the bank relied on reports
from its core processing system, but however,
a number of those reports did not produce, you know,
the needed reporting that we needed to present
to our various regulators. So this automated BSA,
AML system, it cost the bank in excess of
$140,000 since 2010. Additionally, since 2010, we have hired
two additional employees for the compliance area
for a total of three employees. All three employees
are involved in BSA and AML and the compliance function. The estimated cost per year
for these compliance personnel is $310,000. We’re a publicly traded bank. We have some unbelievable audits from all different types
of entities. We’re audited by third-party
firms for IT compliance, BSA, loan review,
internal audit, SOX. We have auditors,
be it internal or external, or consultants in our bank
reviewing our bank and our portfolio,
nine months out of the year. And it’s just a burden
on an institution that has 70 employees
in five different markets. These costs continue
to increase each year as we strive to remain
in compliance and utilize best practices. But here’s something, and I
went over this prior to, you know, agreeing to serving
on this panel, but based on
a recent bank exam, we had a recommendation
from one of our regulators that the BSA validation model that we were performing
internally was not sufficient, and so they asked us to
actually hire a third-party firm to come in and validate a system
that we’ve had for five years that’s done an excellent job, that’s actually in multiple,
hundreds and thousands of banks all across the country. This is very expensive
for our bank. This is a relatively
new expense. The estimated cost for
this additional audit… [indistinct] [laughter] is $6000, but we actually received
proposals from various vendors
from $6000 to $15,000 a year to perform
this particular service. I wanted to just give you
a few recommendations for BSA, AML efficiencies. A number of the panelists
and a number of the other outreach events
have touched on this, but I would really
just stress to you today if you could consider
a condensed form for CTR reporting. The current form has an
estimated 45 fields and it takes time to complete
and review for accuracy. As Jay said, and also Craig,
the CTR form was adopted, believe it or not, in 1970. It’s been in existence
for 45 years. The threshold is still
at $10,000. We really are recommending that the threshold
be increased to $25,000. It would really reduce
the regulatory burden. Our bank would gain
some unbelievable efficiencies. Probably about 50 percent less
more time spent in that space. Secondly, the Financial Crimes
Enforcement Network, I think they could notify
the financial institutions of CTRs filed on entities
and individuals that are deemed not a threat. It’s amazing how many
of these that we file. We don’t hear anything back,
but we continue to file them. We know that these particular
entities are not threats. We do it every year;
every month. And then I just would like to
close with this. We have to work together
to evaluate and streamline and tailor regulations
where possible to allow for financial institutions
with limited resources to reach
their fullest potential. And compliance, in general,
is just very expensive for an institution like ours, and, you know,
I just want to just leave you with this one statistic. There were 1.6 million
suspicious activity reports that were filed in 2013. 1.6 million. But only 945 investigations
were initiated based on those filings. So, we’re doing
a whole lot of work and there’s not a lot of,
you know, people who are really
looking at the work that we’re submitting
on a daily basis. There’s a lot of work
for the regulators also. So again,
I just want to thank you for the opportunity
to speak with you today. We’re, you know, very pleased
to be a participant in this very important
conversation. And again,
we all have an obligation to continue this discussion
with our state and national associations, our federal regulators, but also, our state
and federal delegations, so thank you very much. MS. EBERLEY: Thank you, James.
Michael? MR. CLARKE:
Thank you. Good afternoon. As the last guy
on the last panel, I probably don’t have a whole
lot new. That’s right.
I have the final word. But perhaps I can offer
some additional perspective. As Doreen noted,
my name is Mike Clarke. I’m CEO of Access National Bank. We’re a $1.2 billion bank located not far from here
in Reston, Virginia, and we serve all of
the D.C. Metropolitan area. We started as a de novo
16 years ago with $10 million of capital
and nine employees. If we were to open today,
I shudder to think how many employees
it would take, if it’s even possible, and I know that $10 million
would be inadequate. As Doreen mentioned, our bank
has been quite successful over the years financially. We too have been profitable
in every quarter since our first year
of business, not as long as James’ bank, but 16 years to us
is quite an accomplishment. Importantly,
we didn’t skip a beat during the recession, we didn’t accept
any TARP or SBLF. Today, we have 225 employees
serving over 5,000 small to midsize businesses
in this community. I’m very honored
to have the opportunity to speak with you today and I hope I can lend a hand
in stemming the tide that threatens our community
banking system. As industry practitioners, we must stand up
and call for change. If we don’t make serious changes
and take a serious approach, the community bank
will become extinct. As small banks disappear, small business formation
will suffer, and economic prosperity
will become more challenging. In preparing for today,
I reviewed the outcome report from the last time
the EGRPRA process took place, and I must say
I was disappointed. I was struck by
two startling observations, the process seemed to be
very unproductive in yielding results, and the regulatory body
participation was reactionary and defensive. I ask that you take ownership
of the recommendations that are being made today
and recommend meaningful change. The following represents
some of my specifics. And again, you’ve heard
most of these. Relative to dollar thresholds,
and I limited my scope to the assignment
for this group, all of the dollar thresholds
should be revisited. Generally speaking,
they need to be doubled, and that would apply to the Regulation U
purpose statement, the CTR threshold, the threshold for purchase and
sale of monetary instruments, the appraisal exemption
thresholds, we’ve heard a lot about
and I agree with, and the dollar threshold
for small bank exam frequency; the lengthening frequency. Back to appraisal standards, the property evaluation
requirement, I have not heard this comment
today, but there is a requirement
for property evaluations when an appraisal
is not required, that the evaluation
include an inspection. And I would suggest
that we consider for small dollar transactions,
a borrower certification in lieu of an inspection
by the bank. What this requirement does is it elevates the cost
to the consumer and it discourages
small balance loans. Turning to a backdoor
safety and soundness issue, Regulation Z, specifically,
the ATR and QM rules. We need to recommend to Congress to remove all
prescriptive underwriting and loan structuring
requirements for any portfolio loan and declare all bank portfolio
loans as QM loans. I believe that
legislative mandates of underwriting criterion
are bad public policy. The bank
and the regulatory community should have responsibility
for setting and monitoring the credit underwriting
criteria that deliver appropriate
risk adjusted credit into the marketplace. I would appreciate your
recommending this to Congress. Next is the FDICIA
reporting requirements. Our company
is a NASDAQ listed company. We’re subject to
the SOX requirements. The FDICIA requirements
for a small public company are duplicative. I have a couple
other recommendations outside of the scope
of this group that I do indirectly impact
safety and soundness. Capital is an important topic
that’s been talked about. We just need to simplify
the capital rules for banks under $10 billion. Our capital worksheet
is eight pages long and it really doesn’t tell me
anything that’s not different than what our tangible
capital equity ratio tells me, and furthermore, it creates
an awful lot of confusion. Two examples of the confusion that’s created by
the capital requirements. We’ve heard about
HVCRE earlier. It seems to me
that there is a concern over loan-to-value in equity and commercial
real estate transactions. I believe that that
appropriately belongs in Regulation H, or the supervisory
LTV requirements, that should not belong
in the capital worksheet. If we don’t like
those types of loans, let’s talk about it
in that area and not have backdoor
asset quality monitoring in the capital account. Another example
in the capital account of backdoor insecurities
about asset quality is, there is a premium for past-due
and non-accrual loans in the capital calculation. It tells me that there’s concern
about the adequacy of reserves for those troubled assets. So perhaps we need to increase
the specific reserves on those troubled assets
and let the capital account be. Next is a hot topic
that no one wants to touch and that’s fair lending;
ECO Regulation B. I think
that as a unified industry, we should go to Congress
and recommend that Congress clarify and simplify
the guidance on this issue. The banks, the real estate
and automotive industries are pawns in this controversial
political football. The regulators are
constantly second guessed by their inspector generals,
Department of Justice, political activists,
and now the CFPB. I ask that you recommend
Congress undertake a project to create legislative clarity
on this. We all waste vast resources. And finally, a comprehensive
regulatory simplification. I’m not asking that we change
any of the laws or regulations, other than that have been
mentioned, but perhaps the EGRPRA process
is a unique opportunity to take all of the web of rules
and requirements that we have, and just restructure them into an easier to understand
framework, perhaps something
that we’re all accustomed to, like using the CAMELS framework,
and each law or regulation that deals with asset quality
should belong in asset quality, things that deal with liquidity,
and so forth. The amount of time and energy that is spent by the supervisory
staff in the banks finding and defending “gotchas” because they’re
in obscure regulations is just enormous. If we could create some clarity, I think the public
perception and view of the regulatory bodies
would rise significantly. I thank you for your time and ask that you proceed
with the seriousness and gravity that this assignment warrants.
Thank you. MS. EBERLEY: Thank you, Michael,
and thank you to all of you for your comments. I’m going to look over
to the principals and see if we have
any comments or questions that you’d like to raise.
Chairman Gruenberg? CHAIRMAN GRUENBERG:
Thank you, Doreen. I wanted to ask Mr. Clarke, you made a reference
to small balance loans and I think self-certification
by the borrower, I just wanted to
get a sense from you, when you say
small balance loans, what do you have in mind? When you say
self-certification, also, what do you have in mind? MR. CLARKE: Well, of course,
the devil’s in the details. Our bank generally does not
make small equity lines as an example, but I would say,
in this market, $50,000 would be small. Self-certification,
it seems that there is a wave, a lot of these appraisal
requirements are embedded from the ’90s and the FIRREA,
and all of that, and at that time, there was a distrust
of the banking industry, and appraisals,
and evaluations, and then the latest wave
is a distrust of the banks, and the consumers
are always right. And so maybe the balance
is somewhere in-between, so if there’s somebody
that’s an otherwise good credit, I’m not talking about
predatory lending, that is $50,000 or less, then perhaps they can certify
the condition of the property. MS. EBERLEY:
Other questions or comments? COMMISSIONER TAYLOR:
I actually got a question. I haven’t heard anything
about cybersecurity. Cybersecurity is on the mind of
regulators and industry alike, and I’m wondering,
are there any regulations that are outdated or get
in the way of the industry actually preparing for the risk
that we should take a look at. MR. SILLS:
I’ll try to take that one. I have an IT background. We’re currently applying
your new cybersecurity framework to our institution
and we’ve been presenting that information to our board
on a quarterly basis, and it’s kind of
way over their heads, but it is something
that we think is very, very important. We’ve also signed up
for the FS-ISAC, it is just
too much information for an institution
of our size to receive. We receive hundreds of emails
on a daily basis on different threats,
and it’s just– this whole cybersecurity,
you know, the management of it,
and the vendor management of it, is really a challenge for
a small institution like ours. We are looking forward to
our next bank exam where they’re going to come in
and see, you know, that we’ve been presenting
to our board, and we have the framework
developed, but, you know, I just think it’s important
that everybody’s vigilant and you keep that issue
in front of, you know, your customers,
your shareholders, your board, your staff. MR. CLARKE: If I can jump
on an opportunity for this. I’ve spoken to Comptroller Curry
about this, and that is compelling
the core processors to have the contractual ability
to get their supervisory reports in a more timely basis,
require them to provide us with the copies of
their internal audit and SAS 70s to find out
what their deficiencies are and what
their remediation plans are. And furthermore,
contractual obligations for them to give us timely
notification of cases where their system
has been compromised. We just renegotiated
our contracts and I was not successful
on any of these points. CHAIRMAN GRUENBERG:
I actually was intrigued by Mr. Sills’ comment
on the information from FS-ISAC because we’ve generally
encouraged institutions, including smaller institutions,
to become members of FS-ISAC as a way to gain information
relevant to cyber threats. Have you found the information
you’re getting– you were suggesting
it was so voluminous that it was tough for you
to manage it. Is that what was–
MR. SILLS: Yes, you know, a number of those threats really do not apply
to an institution of our size. We actually outsource
the majority of our IT, but I do want you to know
we have signed up because the FDIC wants us
to sign up and receive those reports, but a lot of the threats
really do not apply to us, but we are reviewing them,
but it is a burden. You know, again,
we only have 70 employees. We have one and a half people
who actually serve in the IT role
for our institution, and, you know,
I’ve been to enough conferences where I know this first
go-around in 2016, you’re not going to ding us,
but at least we’re, you know, making progress in being
more compliant with that threat, but it is very tough. MS. EBERLEY:
May I ask a question? James, have you joined
or looked into, or are you aware of
the community banker, kind of, working group, the support
group, under FS-ISAC? So they do have
a community bank working group. And also, the emails
that they send, a two to three-page email
every week, to community bank CEOs
about, kind of, at high level, what happened in cyber
this week, and whether or not it’s
actionable to community banks, and if so, how to take action. Those were a few things,
I know, you know, and they’ve acknowledged
that there’s just a tremendous volume of
information that’s out there, but those are a couple of things
they’ve tried to do to support community banks, and perhaps we need to
do a better job of making sure everybody’s
aware of those things, or encouraging FS-ISAC to do so, but just wanted to
check on that. MR. SILLS: I do not receive
that summary report, so I’m going to look into it. Our chief operations officer
may receive it. I’m just not sure. MS. EBERLEY: It’s nice. It’s
written in layman’s language, so you don’t have to have
an IT background to read it, which is good. All right. Do we have any
questions from the audience? MS. FULLMER: Peggy Fullmer
from Milton Savings Bank. Mr. Gruenberg, when you ask
about the appraisals, what I want to point out is
that, all over the country, values are different,
so that one’s a really hard one to put a dollar amount on. I have homes in my area
that are only worth $50,000, so I wouldn’t want to do
a valuation when it’s only worth $50,000, so maybe it should be based
on a loan-to-value, which is what we do at our bank. If it’s under 60 percent, we consider doing
an in-house evaluation. If it’s under
the $250,000 threshold, and possibly,
instead of a certification, I’d have the customer email me
pictures so that I can see that there is not deferred
maintenance in their house, and maybe certify
that those pictures are pictures of their house, but anyway, it probably
should be based more on that. And if I can, while I have
regulator’s ears, I don’t know if you can do
anything with Congress, but we live along a river
in Milton, flood insurance is a big issue,
and we have– when the new rates were
coming out two years ago, I had a property that,
actually, their escrow was going to be
over $400 a month for their premium. I know they pulled back on that, and I don’t know
when that expires. We monitor every single
property of ours, which is approximately
10 percent of our portfolio, that are in flood zones. We monitor the premium so that
we can watch what they are because it’s definitely going to
impact safety and soundness, so if you can get
the voice or view to Congress to make sure
that places like Milton, the water comes up,
the water goes down, you clean out the mud,
and you move back in. It’s not like Katrina
and New Jersey, or, you know, somewhere where it totally
wiped out homes, so even if they apply
different premiums for those kind of situations. I actually lived in a house, had to move out twice
while it was in the flood, and literally,
you clean the mud out, you blow it dry,
you move back in, and the house has been
sitting there since 1906 and it has not floated away. So if there’s anything
you can do there, I would certainly appreciate it with the concentration
that we have in our area, and those houses are not
going to float away. The river is not coming
from the ocean as a hurricane that will wipe
them away, so thank you. MR. ALEXANDER: Hello.
I’m Rick Alexander from B Lab. We’re a non-profit that
promotes an infrastructure where businesses can be
a force for good. I really appreciate your time. It’s a great honor to be
in front of this panel. And I’m afraid
what I’m going to say will sound a little off-topic
from the subjects of appraisal and size of currency
transactions, but I’ve tried my best
to look at the schedule and see where this would fit in
and I thought perhaps it was under safety and soundness. B Lab, where I work, we promote a form of
corporate governance called Benefit Corporation, and we’ve gone to
about 31 states now, including the State of Delaware, where we worked with
Jack Markell closely to pass this statute, and the idea of
the Benefit Corporation statute is to change what is
the traditional corporate law in the United States
where boards of directors are required
under traditional law to only think about
the interests of stockholders. So they can do well
by doing good, perhaps, be good to the community,
be good to their employees, but it’s all
with the primary goal of making money for stockholders and there’s no room for,
sort of, an equal weight to go toward the community
or others, and that’s different
than other countries. So we’ve amended the law
in 31 states. We now have 3,000
Benefit Corporations, and we have had discussions
with the staff at the OCC about banks becoming
Benefit Corporations. And the reaction that we got
was they thought it would be difficult to do or that the staff would be
uncomfortable with that. And I did some work
to try to figure out why that might be,
and I looked at Subpart D at Section 72000(b), which says you can have anything
in your charter as a bank that’s in the charter
where you’re incorporated or that’s in the Delaware
corporate statute. So it looked to me
like we satisfied that, but it then went on to say, but you couldn’t do anything
that violated the regs, there was nothing
that violated the regs, or that affected safety
and soundness. So I had to sort of
piece together that it was a safety
and soundness concern. And what I wanted
to just present was the idea
that I actually think that becoming
a Benefit Corporation contributes to safety
and soundness. As a traditional corporation,
your goal, as I said earlier, is kind of– has to be, your fiduciary duty
as directors, has to be to maximize
stockholder value. Obviously,
you have to comply with the regulatory and legal
regimes towards your subject, but you only do that
instrumentally. In other words,
you go to the limit, but otherwise, you need to take
the risk you need to take to satisfy your stockholders. As a Benefit Corporation, you actually
don’t have to do that. You can try to make a profit,
but at the same time, have genuine concern
for the community in which you operate,
for your depositors, for your employees,
and others, so we thought it would satisfy. And we have more
that underlies this, and we did put in a letter, and I have submitted
written testimony today. But I’ll just say,
there’s sort of three things that we thought
really spoke in favor of permitting corporations
that are banks or that are holding companies
for banks to be Benefit Corporations. One is what
I spoke to earlier. It really contributes
to safety and soundness. The second is that,
many states already have something called
other constituency statutes. Without going into detail,
if you’re incorporated in one of those states
as a bank, you already have, sort of, this governance,
in a slightly different way, automatically, and third point
I would make is, this is extremely appropriate,
I think, for community banks, and we have at B Lab right now, over 20 banks that are looking
into getting certified by us under our performance principles
because what we do and what Benefit Corporation
does really fits right in with what community banks
try to achieve. And the last thing I’ll say is,
it isn’t clear to me that this is something where we
need to change the regulations. Again, we spoke to the staff. They were not comfortable
with putting this into the corporate charter and
becoming a Benefit Corporation, but it could be just
a matter of interpretation, so it’s not entirely clear to me that this is a rewrite
of the regulations. Thank you. MS. EBERLEY: Thank you.
MS. MILLER: Thank you. All right. Thanks. So I think
this concludes the final panel and so I was going to go ahead
and dismiss the panel and move into our final segment
of the event today, which is just the general
audience comments, so thank you very much,
Doreen and panel. [applause] So if anybody has any general
comments they want to make, please proceed to the mic,
and remember to state your name and what organization
you’re from. MR. RUSSELL: Thank you,
and good afternoon. My name is John Russell. I’m the Director
of Government Relations for the American Society
of Appraisers and I also provide that service to the National Association
of Independent Fee Appraisers and the American Society
of Farm Managers and Rural Appraisers. First, I want to thank
Chairman Gruenberg, Comptroller Curry,
and Governor Tarullo, as well as your agencies
and your staff for putting on these events. They’ve been fantastic
and they’re to be applauded for the effort you’ve put
into this process. I also do want to mention
before going into my substance, I understand from the comments
at the start today from Chairman Gruenberg,
that the IAEG task force is up and running,
and we certainly appreciate an opportunity, as the appraisal stakeholder
community, to be participatory
in that as well, we look forward to that. I have two comment letters I’ll be leaving behind
with you this afternoon. One is from a coalition of eight professional
appraisal organizations and the Farm Credit Council, as well as an additional
codicil from ASA and NAIFA. We are opposing any
suggested increase in the de minimis and support leaving
the threshold at $250,000 for a couple of reasons
I do want to go through, but before I get there,
I do want to point out, we’ve heard a lot of people
saying today, well, we should increase it,
we should double it, all I’ve heard is it takes time
and it costs money. I haven’t heard
a substantive reason beyond those two
why it should go up. And typically,
when you’re in business, it takes time and it costs money
to run a business, so, absent further reasons
to increase the de minimis, I’m not seeing a clear
and convincing case being made to shift that number upward. In fact, what we would point to
are a number of data points and things that we’re seeing
from our membership that suggest leaving it intact
is the thing to do. I’ll point first to two facts that come out of the Government
Accountability Office, so they’re not from my group,
they’re not from anybody else, they’re from the independent
neutral government board that looks into these things. And they looked, in 2012,
at this exact question of, should the threshold
be increased? And they asked a wide range
of stakeholders that exact question. Not one stakeholder
supported an increase. Not one. In fact, most
stakeholders who were pressed said it should go lower, but since that’s not
the question on the table, we can set that aside
and simply point out, not one stakeholder was
supportive of an increase when the GAO looked
at this question. You know, further, in 2012, when the GAO testified
on Capitol Hill, on a range of issues,
but again, to the de minimis, they pointed out
that between 2006 and 2009, the peak pre-bubble years and the first wave of
the post-bubble economy, 70 percent of all residential
real estate transactions in this country
at the most overheated time we’ve ever seen were not covered
by the $250,000 threshold. Now, I would probably
posit to you that that number
is significantly higher in our current economic
climate today, which again,
begs the question, if most are falling
beneath that number, is there a need, in fact,
to raise it? The question came up as well in the differences between
evaluations and appraisals, I’ll touch on it
briefly here, but I would point you
to the ASA/NAIFA letter, we go into that very in-depth
because we kind of had a feeling this question would come up. As a threshold matter,
to be an appraiser, you have to meet
the requirements laid out
by the appraisal foundation, which is a Congressionally
authorized progenitor of standards and qualifications
in the United States, which means at a minimum,
you have to have certain education criteria
that you meet, you have to have additional
qualifying education to become an appraiser, you must take
continuing education as prescribed by the state
or states in which you are licensed,
and you have oversight from a state appraiser
licensing board. Right off the bat,
I can give you four points of differentiation between an appraiser
doing an appraisal and someone
who is not an appraiser doing an evaluation. By the way, and I’m hoping,
really hoping, no eyebrows go up behind me, but I’ll judge
from your reactions, did you know
that in the 38 states where appraisal licensing
is mandatory, if you are doing an evaluation
and putting an opinion of value on that piece of paper,
congratulations, it’s an appraisal. You are subject to your state’s
licensing requirements as well as oversight. So that’s another thing
to point out is that, already, in many of these jurisdictions, even though you’re calling it
an evaluation, you still have to check a bunch
of the same appraisal boxes. Again, I would reiterate
a point that Bill Garber, my colleague from
the Appraisal Institute, brought up with you earlier,
the fact that when bank risk management
professionals were surveyed, those who were in
the chief appraiser position, should this threshold go up,
80 percent of the people on the front line every day looking at these issues said
no, it should be left intact. These are the people
on the ground seeing what is coming through and in a position
to best tell you whether or not the current limit
is meeting the dual goals of safety and soundness
as well as consumer protection, which is more and more
becoming an emergent concern among consumers, especially now
if they’re getting the appraisal three days before closing
as opposed to after the fact, thanks to Dodd-Frank.
They’re now understanding before they go to the table
whether or not the collateral is worth what they’re
going to pay for, and in some instances,
they’re deciding, hey, the value isn’t here. I’m going to walk
from this deal. So that concern
has to be weighed as well. I guess my final point
I would make, and this is, I guess,
more so to the room generally, they’re talking about
the need to increase this to remove burden.
Well, think about this, if you’re doing
Fannie Mae lending, Freddie Mac lending,
if you’re doing FHA work, if you’re doing a higher cost or
a higher priced mortgage loan, if you’re doing
subprime lending, if you’re doing
manufactured housing, there’s appraisal requirements
that will attach whether or not
this number changes. So simply asking this number
to go up doesn’t obviate the requirements
that are going to pervade the majority of the work
that you’re doing today. So again, I ask the question, other than saying it takes time
and it costs money, why are we raising
this threshold? With that, I again,
want to thank you all for putting on this event. I’d be happy to entertain
any questions you have, either now or in writing,
subsequently, and again, thank you
for your attention. MS. MILLER:
Thank you very much. Any other comments? MR. RICCOBONO: Rick Riccobono,
Director of Banks, if you got that. So I had two more things
on my list. You know, I guess I would
sort of categorize these as sort of supervisory process, you don’t really need
statutory changes or regulation changes, but I think there are
two things out there that we should probably
start the dialog about. One is the way we rate earnings
at these institutions. And I think what’s out there
at the examiner level is more a traditional approach
to earnings. We have sort of
a bit of a mindset of what banks should be making, and alternatively,
we look to peer group. That’s always worked for us, but I would tell you
in this extended, very low interest rate
environment, where all of the new loans,
if they can make any, are being made
at far less rates, and everything they’re rewriting
is much less, so there’s tremendous
compression, and they’re not getting
any more benefit on the liability side. The cost of funds is pretty low,
historically low, and still down there. I think what we need to do is
look at earnings in the context of the overall risk profile
of the institution. So when you’re seeing
that an institution’s got satisfactory capital,
has satisfactory asset quality, satisfactory management,
and then we get to earnings, and because they’re earning
45 basis points, you say, oh, that’s unsatisfactory,
and liquidity is fine, sensitivity is fine. The message that we’re sending
management and the board is, take more risk, and I’m not sure
that’s in the best interest of the insurance fund
or the regulator. So I think, you know,
I tried to work this through at the examiner level,
but they’re really looking towards Washington
for policy on this, and it may
just be only temporary that we move away from
the traditional analysis, but force the discussion on, is that really
unsatisfactory earnings given the risk profile
of the institution? And I think that would be
a better– serve us better and not send
the wrong message because despite, maybe,
the institution, and the cases
that I’ve been involved in, have been rated satisfactory
overall, that management and the board
is focused on that unsatisfactory rating
in earnings, and I think we’re pushing them
in the wrong direction. And my second topic is,
maybe now is the time that asset quality has recovered and most of our institutions
are community banks, is to rethink this whole, what I coined, the performing
non-performing loan. This isn’t statutory,
this isn’t regulatory, this is really derived
from Call Report instructions. But when you have a commercial
real estate loan and your only recourse
is to the real estate itself and not a personal guarantee
of the grantor, what we do is we come in
and we make the institutions write the loan down
to the appraised value, I know we just heard quite
a discussion about appraisals, the question is,
in an environment like we’ve just witnessed
with the great recession, how accurate were
any of those values? But the point being, the values
of these properties drop, the loan is paid
and continues to pay, but nevertheless we say,
charge off the difference between the loan amount and what you now have
the new appraisal on, and put this loan
on non-accrual. I think this is self-defeating. We’re wiping out
our institution’s capital on a loan that has
continually paid and will pay, and yet, we can’t even
accrue that. I think the way
to address this is, think through it better with,
you know, there’s a point in time,
perhaps, we’re going to require
more reserves be put on that, specific reserves on that loan,
but I think we need to look beyond just
simply the appraisal, we need to see the wherewithal
of the borrower, they’re maintaining
the performance of the loan, where’s that coming from? There are better things
to look at than simply
the hard and fast rule that we should charge it off
and put it on non-accrual. Thank you. MS. MILLER: Thank you.
Any other comments today? Doesn’t look like it. So we’ll conclude today’s events
and thank you very much. CHAIRMAN GRUENBERG:
Thank you all for coming. [applause]

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