[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
BEARING THE BURDEN: OVER-REGULATION'S
IMPACT ON SMALL BANKS AND RURAL
COMMUNITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JUNE 9, 2016
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-064
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Jan Oliver, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Tim Huelskamp............................................... 1
Hon. Judy Chu.................................................... 2
WITNESSES
Mr. Roger M. Beverage, President & CEO, Oklahoma Bankers
Association, Oklahoma City, OK, testifying on behalf of the
American Bankers Association................................... 3
Mr. Shan Hanes, President/CEO, First National Bank of Elkhart,
Elkhart, KS.................................................... 5
Mr. Marcus Stanley, Policy Director, Americans for Financial
Reform, Washington, DC......................................... 8
APPENDIX
Prepared Statements:
Mr. Roger M. Beverage, President & CEO, Oklahoma Bankers
Association, Oklahoma City, OK, testifying on behalf of the
American Bankers Association............................... 21
Mr. Shan Hanes, President/CEO, First National Bank of
Elkhart, Elkhart, KS....................................... 30
Mr. Marcus Stanley, Policy Director, Americans for Financial
Reform, Washington, DC..................................... 37
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
CUNA - Credit Union National Association..................... 44
ICBA - Independent Community Bankers of America.............. 50
NAFCU - National Association of Federal Credit Unions........ 59
BEARING THE BURDEN: OVER-REGULATION'S IMPACT ON SMALL BANKS AND RURAL
COMMUNITIES
----------
THURSDAY, JUNE 9, 2016
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Tim Huelskamp
[chairman of the Subcommittee] presiding.
Present: Representatives Huelskamp, Luetkemeyer, Kelly, and
Chu.
Chairman HUELSKAMP. I call this hearing to order.
It has been just about 6 years since the passage of the
Dodd-Frank Wall Street Reform, and in that time we have seen a
steady stream of new rules and regulations imposed upon
financial institutions. These hundreds of rules and thousands
of pages of regulation have been touted as necessary to secure
financial stability, and targeting just those large
institutions which were blamed for the financial collapse. But
as this Committee has learned, our small community banks have
not been spared from the regulatory burden.
Across the country, community banks are seeing the costs of
complying with regulations soar, and the result has been less
capital available for the main street shop looking to expand,
for the entrepreneur looking to start a business, and for our
neighbors hoping to purchase a new home. The impact of
regulation on community banks is felt especially hard in our
country's rural areas, like my district in Kansas.
The rising cost of regulation is causing many small banks
to be forced to merge with larger entities that may not
understand the local community, or causing them to shut their
doors entirely. In rural towns without many other alternatives
for access to capital, the results of these top-down
regulations can be devastating and impact the whole town and
the entire county and region. Home mortgage lending, small
business lending, agricultural lending, all areas where
community banks play a leading role in providing capital,
become much more difficult and much more costly to consumers.
Our rural communities are still feeling the harsh effects
of the recession. During the so-called ``recovery,'' growth in
business establishments was reserved for the big cities. From
2010-2014, a full half of all new business were started in just
20 of our Nation's counties, all near large metro areas. During
that same time, most rural counties have actually seen a
decrease in business establishments. More businesses are
closing for good than opening up.
At today's hearing, we will hear about the impact financial
regulations are having on our rural communities from those who
see it every day, including from within my home district,
Kansas's ``Big First'' District. Discussions of financial
reform are often centered on big cities and large institutions
on Wall Street, but today we will hear from those areas of
rural America, form Main Street, which can too often be
overlooked in these conversations.
I thank the witnesses for being here this morning, and I
look forward to your testimony.
I now yield to Ranking Member Chu for her opening remarks.
Ms. CHU. Thank you, Mr. Chair.
Just 6 years ago, our nation was in the early stages of
recovery from one of the worst economic downturns in history.
We lost 4 million jobs, 7 million people faced foreclosure, and
families saw over $16 trillion in wealth disappear as the
bottom fell out of the housing and stock markets. After taking
extraordinary steps to stem the losses and stabilize the
economy, Congress enacted the Dodd-Frank Act in 2010 to address
the many loopholes that caused the collapse. The bill
established strong new standards for the regulation of large,
leveraged financial institutions and made the protection of
consumers seeking mortgages and credit products a top priority.
Dodd-Frank was directed primarily at the largest financial
services firms and significant efforts were made to ensure that
any new regulatory burden on the small banking community was
properly mitigated. For example, many of the Dodd-Frank Act
provisions only apply to institutions with over $10 billion in
assets, leaving 98 percent of all banks in the U.S. largely
exempt. Additionally, the Consumer Financial Protection Bureau
has gone to great lengths to balance the burden of new
regulations on small banks with the ultimate goal of protecting
consumers.
Initially, there was significant concern that regulatory
burdens would have a negative effect on access to capital for
small businesses, but fortunately, it appears to be having less
impact than originally feared. According to the PayNet Small
Business Lending Index, access to credit continues to improve
for small businesses. In fact, lending is up 70 percent since
Dodd-Frank's enactment. Similarly, the Wells Fargo Gallup Small
Business Index poll indicates small business owner optimism is
at its highest point since 2008. Furthermore, data from federal
regulators also points to a healthy small business lending
market. The Federal Reserve has found that lending standards
for small firms have eased considerably since the recession
while loan and lease balances at community banks have increased
$21 billion in this past quarter alone. SBA lending, too, has
come roaring back to surpass prerecession levels. In 2015, the
Agency made 63,000 loans totaling $23.5 billion.
Although the small business lending environment appears to
be robust, critics of the act continue to point to the
decreasing number of small financial institutions as proof of
burdensome regulation. However, it is important to remember
that the decline in the number of community banks is not
something that started happening after Dodd-Frank was
implemented. The sector has actually been consolidating for the
past 30 years.
Experts can disagree on the reasons for consolidation in
the community bank sector but I think we can all agree that
things are improving. Revenue is up, lending has increased,
asset quality is steady, and credit worthiness of borrowers is
on the rebound. As both lenders and borrowers, small businesses
have much at stake when it comes to financial regulatory
reform. The Dodd-Frank Act has the potential to make the entire
system more stable and safer for small firms and the real
economy to grow and create jobs. It is my hope that the
testimony today will add important perspectives on the
interaction between Dodd-Frank and Main Street, and I want to
thank the witnesses for being here today.
Thank you. I yield back.
Chairman HUELSKAMP. Thank you, Ms. Chu.
If Committee members have an opening statement prepared, I
would ask they be submitted for the record. Let me explain the
opening statements and timing for the witnesses.
You each have 5 minutes to deliver your testimony. The
light will start out as green. When you have 1 minute
remaining, the light will turn yellow. And finally, at the end
of your 5 minutes, it will turn red. I ask that you try to
adhere to that time limit.
With that, I would like to introduce our first witness this
morning, Mr. Roger Beverage, who is visiting us today from
Oklahoma City, or Edmond. Mr. Beverage is the former Executive
Vice President of the Nebraska Bankers Association and is
currently the President and CEO of the Oklahoma Bankers
Association. He has held this position for over 25 years. Mr.
Beverage is testifying today on behalf of the American Bankers
Association, and Mr. Beverage, we welcome you here today. You
have 5 minutes, and you may begin.
STATEMENTS OF ROGER M. BEVERAGE, PRESIDENT AND CEO, OKLAHOMA
BANKERS ASSOCIATION; SHAN HANES, PRESIDENT/CEO, FIRST NATION AL
BANK OF ELKHART; MARCUS STANLEY, POLICY DIRECTOR, AMERICANS FOR
FINANCIAL REFORM
STATEMENT OF ROGER M. BEVERAGE
Mr. BEVERAGE. Chairman Huelskamp, Ranking Member Chu, thank
you so much for the opportunity to be here today to present
about how the growing volume of bank regulation, particularly
for smaller hometown banks in rural areas, is negatively
impacting consumers.
Let me be clear. Banks are a resilient group. They have
found ways to meet customers' needs despite the ups and downs
of the economy, but it is a job that has become much more
difficult because of new rules, guidances, and the seemingly
ever-changing expectations of federal banking regulators. It is
this cumulative impact of regulatory overload that often pushes
small banks out of existence, either to merge or to sell. In
fact, there are nearly 1,500 fewer community banks today than
there were just 5 years ago.
When I came to Oklahoma in 1988, there were well over 400
banks in our state. Today in Oklahoma, there are 211 that are
chartered by the State of Oklahoma or a national bank doing
business in Oklahoma. But more frightening to me right now is
the seeming lack of interest in granting new charters. This
trend apparently will continue unless changes are made that
provide relief to community banks, but particularly those that
serve rural areas.
Let me also be clear about the kinds of banks I am talking
about. These banks are very small. In Oklahoma, for example,
out of the 211, 97 of them are under $100 million, 46 are under
$50 million. Those are very, very small banks that had nothing
to do with the financial crisis that led up to the issues of
2008 and Dodd-Frank. In Kansas, you have 156 banks that are
under $100 million in total assets. These banks have a handful
of full-time employees and they all perform a lot of different
functions. There is no one functionality that you have in a
small bank like that. These are the kinds of banks that serve
rural America.
Regulations shape the way banks do business and can help or
hinder the smooth functioning of the credit cycle, but every
regulatory change that applies to America's hometown banks
directly affects the cost of banking products and services for
consumers. Even small changes can reduce credit availability.
They can raise costs. What the ranking member talked about is
driving consolidation. We have seen that considerably in our
state. What that does is ultimately those three things limit
consumer choice.
I believe Congress must take steps to ensure and enhance
the banking industry's ability to serve their consumers and
rural areas. When a bank reduces its product and service
offerings or disappears, everyone in that community is
impacted.
Importantly, in rural communities, local banks are in many
instances the exclusive source of capital for farmers,
ranchers, small business owners, and residents. Once that
capital access system becomes dysfunctional in rural areas as
it is today, then the community itself begins to encounter more
difficult challenges in order to survive.
We ask for bipartisan support for legislation introduced by
Congressman Tipton that would require regulators to tailor bank
supervision and that would take into account the charter, the
business model, and the scope of each bank's operations.
Regulators should be empowered and directed to make sure that
rules, regulations, and compliance requirements only apply to
those segments of the industry where warranted. Representative
Barr's American Jobs and Community Revitalization Act also
contains provisions that will reduce regulatory requirements
for smaller community banks in ways that make it easier for
those banks to meet their customers' needs.
Additionally, Congress should help reduce needless
impediments to mortgage lending that have constrained the
ability of community banks to help homebuyers and dampen the
growth of prosperity across our Nation's rural communities. In
Oklahoma, approximately 25 percent of the state's banks are no
longer in the home mortgage business. They have concluded that
the litigation and regulatory risk are simply too great given
the limited number of those kinds of loans that they make in a
given year. That means that the consumer is denied credit or
asked to find some other source for it.
We encourage Congress to support legislative efforts like
H.R. 1210 that would treat loans held in portfolio, which is
one of the most traditional and lowest-risk lending in which a
bank can engage as qualified mortgages. This would provide a
much needed direction to the current restricted standards.
There is additional legislation introduced by
Representatives Luetkemeyer, Neugebauer, and Barr that contain
measures to help America's hometown banks get back to serving
their communities by ensuring that costs and benefits are
considered before changing or issuing new regulations and that
streamline currency transaction reporting and require a review
and reconciliation of existing regulations.
ABA stands ready to help Congress address these important
issues that will in turn help community banks, particularly
those in rural areas, better serve their customers and their
communities.
Thank you very much, and I will be happy to try and answer
some of the questions you may have.
Chairman HUELSKAMP. Thank you, Mr. Beverage. I appreciate
your testimony.
Our second witness this morning is Mr. Shan Hanes, who is
visiting us today from Elkhart, Kansas, which is located in my
home district, Kansas's ``Big First.'' Elkhart is a community
in southwest Kansas with a population just over 2,000 folks,
and I might add, 26 graduates in the senior class. Where I come
from that is actually kind of a big school. For the past 9
years, Mr. Hanes has served as president and CEO of the First
National Bank of Elkhart--and by the way, when you are in
Elkhart, you are not quite in Oklahoma or Colorado, but you can
see them from there--and previously has served as President of
the Kansas Ag Bankers Division of the Kansas Bankers
Association.
Mr. Hanes, we welcome you here today. Thank you for joining
us, and you may begin.
STATEMENT OF SHAN HANES
Mr. HANES. Thank you, Chairman Huelskamp, Ranking Member
Chu, and members of the Subcommittee. My name is Shan Hanes,
president and CEO of First National Bank of Elkhart, Kansas. I
appreciate the opportunity to present the views of rural banks
and the impact of overregulation in rural America.
First National Bank is a $78 million bank with a main bank
location in Elkhart, Kansas, the county seat, and one branch
serving Rolla, Kansas. We have 20 employees, and we are a
typical agriculture (ag) bank. Despite our small size, we are
the largest lender in the county and represent an average-size
bank in rural Kansas.
I have been very proud to be an Ag banker in a rural
community for 20-plus years. There are days we can still get in
our unlocked pickup truck to go to work in the morning and have
cash lying in the seat. We simply take it to work as it is a
payment from a customer who will call us eventually and tell us
which of their loans to apply it to.
One of my loan officer's customers actually won a
multimillion dollar lottery, and he did not feel safe holding
the ticket in his possession over the weekend, so he took it to
his loan officer's house. He did not want us to put it in the
vault. He just wanted him to hold the lottery ticket for him
over the weekend. That is community banking. That is what it
means to be a community rural banker.
When I started in lending, a typical consumer loan was one
page and the consumer would actually read the note and
disclosure. Now a typical consumer loan is closer to 20 pages
with many documents to sign and customers have no interest in
reading that many documents. We made a simple loan so
complicated that customers simply will not read the documents.
The topic of today's hearing is very timely. Increased
regulations made it much more difficult to lend and be a main
driving force in our local community. Despite this, the banking
industry is well-positioned to meet the needs of rural America.
In 2015, farm banks, like mine, increased ag lending 8
percent and now provide over $100 billion in total farm loans.
Interest rates continue to be near record lows and banks have
the people, capital, and liquidity to help rural America
through any turbulence in the rural economy. Rural banks are
healthy and continue to be forward-looking, growing capital,
and increasing reserves.
I would like to thank Congress for its commitment to the
guaranteed lending programs, both SBA and USDA. However, I
believe Congress needs to consider reforms to these programs,
specifically, to allow greater flexibility with SBA loans for
agriculture and to raise the cap on USDA farm service agency
guaranteed loans simply due to the rising cost of agriculture.
There needs to be an additional in-depth look and discussion in
modernizing these programs, providing something as simple as
electronic signatures. Guaranteed loans have allowed our
customers to continue to get access from banks like mine as
they grow, ensuring credit for bank customers across the
country.
We remain concerned, however, with competition on an uneven
playing field. Overburdensome regulations and a lack of
appraisers in rural America means small, rural banks simply
cannot survive. The result would be devastating to the local
residents in those communities. Every day my bank competes with
other banks in parts of Kansas, but we also compete with Farm
Credit System, which is a 300 billion GSE. This lender has a
huge tax advantage over my bank. Currently, with the combined
State and Federal tax rate of 38 percent, we have to work until
July just to pay our tax bill. There needs to be serious
discussion on leveling the playing field between banks and Farm
Credit.
In addition to unfair competition, banks have to deal with
ever-changing and expanding regulations. Due to the Dodd-Frank
Act, a bank like mine has to outsource much of our compliance,
and we are more than paying a full-time teller's salary for
compliance and outside audit teams. The impact is one fewer
bank employee serving our customers, one less paying job in a
rural community.
Due to regulations, many banks in rural Kansas have moved
out of the mortgage-lending business completely, often due to
increased compliance. What used to be a staple for every
community bank is no longer even a product offering. When you
consider a bank like mine where we keep our loans in our
portfolio, we are taking the risk, and any adverse decision
affects our bottom line. This is why I believe that if the loan
is held in portfolio, it should automatically be a qualified
mortgage.
Through regulation, our loan closings have become much
slower. We have had to hire an outside consultant to assist us
in completing a pre- and post-closing review. In my area, there
are many more houses on the market now. I believe it is
partially due to the increased time it takes to close these
loans. This only further slows down an already slowing rural
economy.
On a real estate loan, the bank no longer makes a credit
decision; the bank makes a compliance decision to determine if
a loan will be made.
Lastly, there are a lack of rural appraisers, not just in
Kansas, but across rural America. Increased regulations have
made it harder for someone to become an appraiser, and it is
especially hard for young people to get into that line of work.
Lenders need appraisers or they cannot close a loan. Congress
should examine the current rules of becoming an appraiser,
especially in rural areas, so banks can continue to lend
effectively.
Banks like mine are proud of the work we do to support our
rural communities. However, it will be very difficult to simply
survive to continue lending to our customers and provide for
our community and your constituents if there are no reforms to
the many obstacles that stand in our way. The lending decision
should be made locally to customers by their community bank,
not by rules and regulations from Washington, D.C. that does
not understand my business or my customers.
Thank you. I would be happy to answer any questions you
might have.
Chairman HUELSKAMP. Thank you, Mr. Hanes. I appreciate your
testimony and you joining us today.
I now yield to Ranking Member Chu for the introduction of
our final witness, Mr. Marcus Stanley.
Ms. CHU. Yes, I am honored to introduce Mr. Marcus Stanley.
Marcus Stanley is the Policy Director of Americans for
Financial Reform, a coalition of more than 250 national, state,
and local groups, who have come together to improve regulation
of the financial sector. Members of AFR include consumer,
labor, civil rights, investor, retiree, community, faith-based,
and business groups, along with prominent, independent experts.
Mr. Stanley has a Ph.D. in public policy from Harvard
University, previously worked as an economic and policy advisor
to Senator Barbara Boxer, as a senior economic economist at the
U.S. Joint Economic Committee, and as an assistant professor of
Economics at Case Western Reserve University.
Dr. Stanley, thank you for joining us today.
Chairman HUELSKAMP. Thank you for the introduction. Mr.
Stanley, you may begin. Thank you.
STATEMENT OF MARCUS STANLEY
Mr. STANLEY. Thank you. Chairman Huelskamp, Ranking Member
Chu, and members of the Committee, thank you for the
opportunity to testify here today.
Today's hearing asks us to consider the impact of the Dodd-
Frank Act on small banks. I want to make two broad points.
First, community banks face economic headwinds that are
unrelated to Dodd-Frank, connected both to long-term trends and
to the effects of the financial crisis itself.
Second, the big picture is that community banks have
returned to profitability under Dodd-Frank. In 2015, just over
95 percent of community banks earned a profit. That is compared
to 78 percent in 2010, the year Dodd-Frank was passed.
Consolidation in the banking industry is not a new
phenomenon. The number of FDIC insured banks has declined by 2/
3 over the past 30 years with the decline concentrated among
banks with less than $1 billion in assets. The number of
community banks has declined every single year since 1984.
The causes of these long-term trends include changes in
economies of scale in banking and deregulatory measures that
assisted the expansion of large regional and global banks. The
catastrophic effect of the financial crisis made things worse.
Over 400 community banks failed between 2008 and 2011. Facing
huge losses in the Deposit Insurance Fund and historically
devastating recession, FDIC's supervisors cracked down on risks
in existing banks and made it more difficult to open new banks,
a regulatory response that would have occurred even if the
Dodd-Frank Act had never passed.
When we look at the well-being of community banks since the
passage of Dodd-Frank, as well as specific provisions of the
law, we see a better picture. Not only have more than 95
percent of community banks returned to profitability today, but
return on equity has been steadily increasing. Average
community bank ROE has gone up every year since the passage of
Dodd-Frank and reached almost 9 percent in 2015, a level that
some larger banks, such as Citigroup or Bank of America might
envy.
One reason for this is that in drafting Dodd-Frank,
Congress made major efforts to shield small banks from
additional regulations targeted at the large banks and nonbanks
who were at the center of the 2008 crisis. Smaller banks are
exempted from numerous provisions in the law, including new
heightened prudential standards in Title I, new over-the-
counter derivatives regulation, and direct CFPB examination .
As detailed in my written testimony, regulators have
continued this practice in implementing the law with efforts to
shield small banks from compliance burdens in areas ranging
from the Volcker Rule to new mortgage regulations. The Dodd-
Frank Act was major legislation passed in response to the worst
financial and economic crisis since the 1930s, so it clearly
does have impacts throughout the financial system. But, those
impacts are concentrated on the large banks and nonbanks that
are, in fact, the major competitors of community banks.
At the same time, I do not wish to imply that there are not
real issues with small business access to credit and issues in
rural areas that this Committee can and should address.
Although small business lending has increased significantly in
recent years, it has still lagged during the recovery, and the
economic expansion has been more concentrated in urban areas.
Helping small banks to address this issue should be high on our
agenda, but looking at the Dodd-Frank Act as it is caused seems
misguided. Instead, I would urge the Committee to look at
credit guarantees from entities like the Small Business
Administration, the Department of Agriculture, and other forms
of credit that are under the jurisdiction of the Committee.
We must also make sure that nonbank financial entities are
competing on a level playing field with regulated banks. Online
marketplace lenders are a rapidly growing provider of small
business lending and are subject neither to consumer protection
laws nor risk controls. The evidence indicates that they often
provide a substandard and even exploitative product. Just 15
percent of small business borrowers from online lenders express
satisfaction with their experience, while 75 percent of small
business borrowers from community banks did. That is from a
joint study by seven regional Federal Reserve banks that cover
pretty much the whole country. Congress should consider
expanding oversight of online marketplace lenders.
Thank you for the opportunity to testify, and I look
forward to taking questions.
Chairman HUELSKAMP. Thank you, Mr. Stanley. We appreciate
your testimony. We will now begin our questioning. I recognize
myself for 5 minutes.
I will first start with Mr. Hanes. I cannot imagine you got
into this business to navigate your way through miles of red
tape. What brought you in this line of work, and what do you
see as your role in the community of Elkhart, Kansas?
Mr. HANES. I have been a community lender for 20-plus
years, do not want to give the exact number. I enjoy being part
of production agriculture. Growing up on a farm myself, that
was my lifestyle and that was my livelihood. Now I get the
opportunity to help a number of customers continue their
lifestyle and continue their goals. Being in a small community,
being with the bank and being a leader in that community, you
are on a number of boards, and we understand how vital it is to
keep our community together, to keep our community whole. We
need new businesses. We need people coming to town. The bank is
the lifeblood of that. That is who is going to be able to bring
those individuals to town. That is who is going to be able to
fund those loans to allow them to realize their dreams. That is
what I enjoy doing, seeing somebody be able to start their own
business.
Chairman HUELSKAMP. You talked a little bit about home
mortgage lending, perhaps small business loans as well. I would
like for you to explain how the regulations have restricted
your ability to meet those needs. Secondly, who will take care
of those needs if the First National Bank of Elkhart were not
there?
Mr. HANES. That is a huge challenge from our side. I
brought a couple things I would like to show. When I came to
banking 20-plus years ago, this was a real estate note. We had
a note, green, nice pretty form being a bank. A mortgage, that
was it. A customer would actually read that, understand it, ask
us questions. This is a real estate note, now. It is a half-
inch thick, lots of pages to sign. We could not get a customer
to read this if we forced them to. It is just flat too thick.
We have taken it from something simple to something overly
complex.
In our local market we do not have a lot of secondary
mortgage options. We were just informed some time ago that our
secondary mortgage lender that has been a big supporter of
southwest Kansas now will no longer make a real estate loan
less than $50,000. Well, that seems small. The average loan
size of residential loans in our portfolio, $33,000. There
would not be anybody in our portfolio that would even qualify
to apply for a residential loan. I understand that is not a
jumbo loan in your line of work, but at our bank that is a
house loan. That is a typical house loan. We have to continue
to serve that market as best we can, but we have to figure out
a way that we can do it within the regulatory constraints, and
that is the challenge we are not meeting.
Chairman HUELSKAMP. I am hearing this from other
communities as well. Who is going to issue the home mortgage in
these situations? I know many of the folks in the Kansas
Bankers Association, in Oklahoma as well, are exiting the
marketplace. Mr. Stanley is worried about online and some of
these other entities, but what are the other options you have?
Mr. HANES. There are not a lot of options because our
customers do not fit the model. They do not always have a W-2
that allows them to get paid once a month, and it is an easy
way to figure their income. They have farm income. They have
Schedule Fs, it does not fit the box. The loans that we wind up
with are the ones that do not have access, cannot get access to
those other markets. As a result, they have limited access to
credit.
Chairman HUELSKAMP. Thank you, Mr. Hanes.
Mr. Beverage?
Mr. BEVERAGE. If I might add to that just a moment, Mr.
Chairman, as I said earlier, banks are fairly resilient and try
to figure out a way to meet their customers' needs. One of the
things that has happened in Oklahoma is that our Bankers Bank
has created an opportunity for referrals to Oklahoma City for
consideration of those rural mortgages, because they do a lot
of them, and they are able to withstand the litigation and
regulatory risk that a much smaller bank cannot. In addition,
one bank family has created a mortgage business that they
offer, but since you are giving it up to your competitor, you
might not get quite as many referrals to that instance.
My point is that with that referral also goes access to the
community bank, and it is that relationship that is at risk
here. It is that relationship, that reliability, the trust, the
bond of trust that a banker like Shan has with his customers. A
community bank is just simply so much more than a bank.
Chairman HUELSKAMP. Does Dodd-Frank understand or take that
into account at all?
Mr. BEVERAGE. Some of the language does, but in the real
world, no. The answer is based on the reality that the
mentality is one size fits all.
A friend of mine had a $15 million bank. Very, very small.
3-1/2 employees. He had to do the same thing that JPMorgan
Chase does. He made cattle loans and he made wheat loans. That
is it, he did not do anything else. He did not have any
derivatives. I mean, I am not sure he could spell derivative.
Nevertheless, he was just a simple community bank in a simple
little town of about 250 people. He just sold because he could
not deal with it anymore. He is not the only one that is going
to do that, and that is part of the issue.
My question to you, Mr. Chairman, is if rural community
banks go away, who is going to finance the business of food
production?
Chairman HUELSKAMP. That is a worry I have as well, as a
farmer and a resident of small town America in western Kansas.
Thank you.
I next recognize Representative Chu for her questions.
Ms. CHU. Thank you. Mr. Stanley, low income and minority
neighborhoods were devastated by predatory mortgage lending in
the years leading up to the housing crisis. Do you think these
communities are better off today with the ability to repay in
qualified mortgage rules that were enacted under Dodd-Frank?
Mr. STANLEY. Yes, I do. One thing we saw prior to the
crisis was that people with equity in their homes were being
targeted for exploitative loans that they could not pay back,
at which point the bank would seize the collateral and perhaps
profit on a loan that never should have been made. I do think
that the QM and the Ability-to-Repay rules have made a critical
difference in a lot of areas across America and will make a
critical difference in addressing that.
Ms. CHU. While small financial institutions are
particularly critical of these rules, how has the CFPB, the
Consumer Financial Protection Bureau, specifically tailored the
rules to account for the relationship banking model of small
institutions?
Mr. STANLEY. The CFPB has made a lot of efforts to do that.
One thing we have heard several times from the other witnesses
is the desire to exempt on portfolio loans, loans that are held
in portfolio from regulation. That can make sense for a bank
that truly has a relationship lending model, and the CFPB has,
in fact, exempted loans held in portfolio from many of the
requirements under the new mortgage rules. It has been very
responsive to that.
One thing that we see here in Washington, D.C., is that
when you actually look at legislation that would roll back
parts of Dodd-Frank and would do things like exempt loans held
on portfolio, you see it does not just apply to small rural
banks. It does not just apply to community banks. It applies
across the board to large regional banks. Frankly, the reason
that legislation draws fire from organizations like Americans
for Financial Reform, from proponents of reform, is that it is
not limited to the kinds of banks that we are talking about
here today. I think that there is space both with regulators,
and even possibly in Congress on a bipartisan basis, for
legislation that is truly targeted at the kind of small rural
banks we are talking about today.
Ms. CHU. Yes, Mr. Beverage?
Mr. BEVERAGE. Just to add something to what Mr. Stanley
said about the CFPB and their willingness to accommodate some
of these issues, he is correct. But, it has taken a while to
get there. One of the things that we have done is that we have
invited CFPB employees to come to Oklahoma. Two of them have
taken us up on that, and I have taken them to small rural banks
to show them how they work. I think that has had an impact as
it enables the CFPB experts to understand the differences
between a $40 million bank in Allen, Oklahoma, and Bank of
America. I think that is important. But Mr. Stanley is right;
it is getting better.
Ms. CHU. Thank you. I do appreciate that greatly.
Dr. Stanley, the CFPB is required to carry out extensive
analysis before issuing regulations that will impact smaller
institutions. As you know, a number of changes were made to
accommodate small, rural lenders under CFPB's mortgage rules.
Do you think the small creditor exemption allows community
banks to continue making the mortgages that are the best for
the customers?
Mr. STANLEY. The small creditor exemption does include a
lot of additional flexibility on things like balloon payments,
escrow requirements, debt-to-income ratios, and these kind of
things. That is the flexibility that we need to see in small
rural areas. Yes.
Ms. CHU. We have heard on many occasions that Dodd-Frank is
the reason for many of the problems facing community banks. Can
you explain how the Dodd-Frank Act can actually do the opposite
and help level the playing field with their larger
multinational competitors?
Mr. STANLEY. Yes. What we saw prior to the crisis was large
banks gaming the system in a lot of ways. They would use
complex international models to claim that their assets were
less risky than the assets held by smaller banks, and they
would use that to hold less capital and borrow more, be
overleveraged. And Dodd-Frank has taken a lot of steps to even
that. I think the CFPBs' jurisdiction over nonbanks is also
very significant in terms of leveling the playing field.
Ms. CHU. Can you elaborate on your testimony regarding the
issue of the declining number of community banks and the role
of the FDIC's s supervisorial practices?
Mr. STANLEY. Yes. I think there is no question that the
FDIC cracked down as a supervisor on a lot of bank risks in the
parade around the crisis. I think a lot of that was justified
because there were a lot of banks that had made loans in the
commercial real estate space that had valuations that were
inflated. As the economy was damaged, some of those risks were
excessive. We saw a lot of banks failing, and the FDIC was
concerned about that. They did crack down. I think there are
issues and questions. They also cracked down, as one of the
witnesses mentioned, on the opening of new banks and put in new
requirements because they saw a lot of newer banks fail during
the crisis. That is something that could be reexamined and
thought about in terms of how they have done that.
Ms. CHU. Thank you. I yield back.
Chairman HUELSKAMP. Next, I recognize Representative Trent
Kelly for questions.
Mr. KELLY. Thank you, Mr. Chairman, and Ranking Member.
Thank you, witnesses, for being here.
Community banks are very important. I am from Mississippi,
in a rural area with a lot of manufacturing, and a lot of
agriculture. Quite frankly, it used to be the post office was
the center of gravity for most small communities. The post
office has consolidated, so now you have a town because you
have a community bank. When you lose that bank, you lose the
town. It is not just the banking. It is the guy who coaches
softball or kids' baseball with you. It is the guy who goes to
church with you on Sunday and sits by the pew. Your banker in
those small communities is much more than your banker, and I
understand that.
Unfortunately, based on your testimonies here today, it is
not just Dodd-Frank. I can tell you my bankers do not have the
same view as Mr. Stanley about Dodd-Frank and the impact it has
on small banks. I can tell you they have talked to me again and
again. I can tell you that the regulations are five binders
this thick that they have to comply with, and they do not get
paid for compliance. They have to comply with that, and they do
not have the expertise. The net effect of that is a cost to the
consumer, it has to be sucked up by the consumer because it is
a nonrevenue-generating process.
Based on that, what is the impact that Dodd-Frank and other
regulations have on the consumer and their financial ability to
get along? Mr. Hanes?
Mr. HANES. I appreciate the question because that is
exactly why I am here. That has been the big challenge. As I
testified earlier, it used to be a source of pride within our
little community bank. When we would do audits, or something
internally, we would use it as a cross-training opportunity. We
would grab somebody that might be from the other side of the
bank and have them audit a loan side, or have a loan side audit
an operations side. It was a way we could educate, we could
cross train, we could bring that next level of leaders into the
bank. Because they have gotten so thick, so heavy, and frankly,
they are ever-changing, we cannot do that anymore. We do not
have the expertise. We cannot have the expertise in our little
20-employee shop. What we have had to do is outsource to
outside firms that come in for a period of a week or a few days
and do those audits. Well, that comes at a cost. In our
respect, we are paying more than a full-time employee's salary
to outside firms to come in and do audits that we used to be
able to do ourselves. I do not have a problem doing the audits.
I do not have a problem following the regs, but they have
gotten so large, so cumbersome, and frankly, they seem to
change and we cannot do that anymore. The effects one less
employee, one less teller serving our customers, our customers
do not get as good a service, one less job in the community.
You are right, we are the t-ball coach and the swim coach and
the basketball coach. It is one less job.
Mr. KELLY. Let me follow up on that a little bit because my
community seems like it is a lot like yours in Elkhart. A lot
of my loans are not $50,000, and a lot of times they are for
homes because the state prices are much better in rural areas.
You can get a lot more house for a lot less money. It is also
because of the same economic things where you do not have the
steady W-2 necessarily. What impact does it have for those
$50,000 or less loans, for folks that are not going to be able
to get that money anywhere, which means they do not have a
house and those things. Can you expand on that just a little
bit?
Mr. HANES. Sure. Thank you, I appreciate that.
The biggest house loan in town probably would struggle to
get to six digits. We do not have that large of a housing
market. The largest number of people looking for a house loan
do not want, do not need, and would not ask for a loan in six
digits. They are looking for that $50,000 to $60,000, that
$40,000 house to get them started. The secondary market is not
an option because they simply will not even take an application
if it is under $50,000 because they have determined anything
below that is not profitable for them. So, their only option is
their local community bank, and the majority of the banks
around me do not make residential real estate loans anymore. As
a result of that, they have far less access to credit than they
would have had before, and it has put them at a disadvantage
both now and for the long term. They cannot own a house.
Mr. KELLY. Mr. Chairman, if I can, I will let Mr. Beverage
comment.
Mr. BEVERAGE. I wanted to add to what Shan said. The
primary impact on consumers is that it increases their costs.
In a rural area, you simply do not have a pool of compliance
officers who are knowledgeable about everything that is going
on and everything that is required of a bank today. You do not
have any choices regardless of what you would pay them, so you
have to outsource. You have to use the association, or a
program that we would sponsor, or your own private expert to
help you get through what the OCC has told us is the principal
issue for examination s. Compliance is one. Cyber security is
two. Credit is three. That is important to understand.
Mr. KELLY. My time is expired. I yield back, Mr. Chairman,
thank you.
Chairman HUELSKAMP. Thank you.
Next, I recognize Representative Luetkemeyer, Vice Chairman
of the Committee. Welcome to the Subcommittee.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. Glad to be with
you.
I also serve on the Financial Services Committee, and so we
have been working on some Dodd-Frank issues and some Dodd-Frank
reform. We have heard a lot of testimony. Let me read you a few
statistics. Before Dodd-Frank became law, 75 percent of banks
offered free checking; now only 37 percent at the end of 2015.
Dodd-Frank fueled a 21 percent surge in checking fees, 15
percent fewer credit card accounts since 2008 at a cost now of
more than 200 basis points more than what they had. 73 percent
of community banks report regulatory burdens are preventing
them from making residential loans. We have heard that
testimony. One last number here. The cost of the smallest
commercial industrial loans has risen at least 10 percent from
the pre-crisis average.
I can tell you, I am from Missouri, at the end of 2015, we
had 44 banks that were $50 million or less. Those are little
bitty guys. Remember, we are talking about small, rural
communities, and that is probably the only bank in town, like
probably yours is, Mr. Hanes, and those guys, out of 44, 26
lost money last year.
FDIC did a study back in 2013. It said within the next 5
years, any bank $250 million or less is probably going to go
out of business. Not because they are bad banks, not because of
the economy, but because the rules and regulations that are
coming are going to force them to consolidate, and Dodd-Frank
is the culprit. Dodd-Frank created all of this group of
regulations that is out there.
Mr. Hanes, you talked a minute ago about QM rules. QM, at
your size, you are supposed to be exempt from it; right? But,
if you want to sell a mortgage to the secondary market, do you
have to comply with it?
Mr. HANES. Yes, we do.
Mr. LUETKEMEYER. So even hough you were exempted, you still
have to comply. These rules roll downhill, do they not?
Mr. HANES. That is the part I would like to say, Ms. Chu.
We were supposed to be exempted from a lot of Dodd-Frank and
that threshold. But what happened, whether intentionally or
probably unintentionally, was the trickle-down effect, exactly
what we are talking about. What is a best practice for Bank of
America, the examiners see that and they see that is a nice
stress test, that is a nice little study, why do you guys not
do that, too? It trickles down to where, all of a sudden, we
are doing that same thing as Bank of America. The big banks,
they might have a team, a department, a program that they
developed to handle that, we do not. We have got Excel. We have
to come up with something that is going to work. That trickle-
down effect is what we were not exempted from. I agree that is
a challenge.
Mr. LUETKEMEYER. I have another question for you, Mr.
Beverage. I have a question with regards to Dodd-Frank, we are
losing one community bank a day across the country right now.
Dodd-Frank was supposed to be the cure all here. It was
supposed to keep the big guys under control, but I believe--let
me make this statement, and Mr. Beverage, I will appreciate
your comment on it--I believe Dodd-Frank has caused the big
banks to get bigger and put the pressure on the small banks to
go out of business and merge with them. Would that be a fair
statement?
Mr. BEVERAGE. Yes, sir. It does not tell the whole story,
but it is certainly relevant.
One of the things that I wanted to add to what Shan said,
and in response to what Mr. Stanley testified about, is the
exemption that banks under $10 billion are supposed to have
from the CFPB. They do have exemption from direct examination
authority, although there is ride-along authority, and that is
a different issue, but they are not exempt from the rules and
regulations that the CFPB has revised and imposed. They still
have to follow those. The primary federal banking regulator is
then the one that examines for compliance. In smaller banks,
that is a cost, that does not bring a dime to the bottom line,
which means less capital, and more importantly, less ability to
lend to consumers.
Mr. LUETKEMEYER. Okay, very quickly. My experience keep
discussing this with bankers across the country of all
different sizes, and I have asked this question of a lot of
them and they say anytime, because of the increased costs of
compliance and the complexity of it. When you hire a loan
officer, you have to hire one compliance officer. When you look
at these small banks, when you hire a loan officer, the
compliance officer does not make you any money. You have to
spread those costs out over your bank, and you reach a point at
which the rubber band breaks and then you have to do something
different. This is where they are.
I think I could go on all day here but I see my time is
about out, but I appreciate you gentlemen's testimony this
morning, and I think that small banks make loans to small
businesses. That was the testimony in this Committee not too
long ago, and I think that we need to make sure that we keep
the banks in business so the small businesses have an access to
credit ability. Without that, small business communities dry
up, and whenever rural America goes away it hurts the ability
to produce food and produce all the rest of the things this
country relies on.
Thank you very much for your testimony today.
Chairman HUELSKAMP. I appreciate those questions, I will
note Mr. Hanes has come a long way and I would like to ask him
another question. I think you drove 100-plus miles to an
airport, then took a connection, two of them to get here. You
have come a long way. One other subject you did bring up, Shan,
is that you thought it an unfair playing field in the
particular area of agriculture, which is the bread and butter
of your bank, it is hard to compete. Can you describe that a
little bit more and what would you suggest as a way to level
that playing field?
Mr. HANES. I believe there are several ways. I believe you
are referring to Farm Credit Services and their tax-exempt
status on real estate loans. They currently have a tax rate of
about 4 percent. If you compare that to my 38 percent bracket,
that is a huge, unlevel playing field. There are several ideas
that I would like to consider. The biggest and the most obvious
is they do not pay income tax on income earned from interest on
real estate loans. Give us that same opportunity. I do not mind
competing with anybody, that is what made America great. But
let us compete on a level playing field and do not let me start
34 percentage points behind them on a tax rate.
Chairman HUELSKAMP. I appreciate that.
I want to follow up with Mr. Stanley, in trying to
understand your perspective of what is occurring here, and I do
not know if you have ever been in a small town or a community
bank we are talking about, looked at that, but frankly, Mr.
Stanley, I do not know how they are able to compete with the
Bank of America. The regulatory or the legal changes coming out
hopefully at a Financial Services Committee, Bank of America
does not want the changes. They do not want to change Dodd-
Frank. They like the setup. As I understand, they are opposed
to making changes. They found out how to game the system. But
when you have Mr. Hanes and other banks across western Kansas,
I think we all agree we want consumers to have more options,
not fewer of them. When I hear from community banks that they
are saying any loan under $100,000, and there are very few of
those, are losers--they are going to lose money on them, and
the Feds do not want them to do it anyway--they are left with
some of the predatory lenders you are talking about. Bank of
America is not going to come to Elkhart, Kansas. I guarantee
you that. They have no desire. What they want to do is maybe
buy up your bank. I do not know what they would want to do, I
think they would just want to ignore that. I am just trying to
understand from the perspective and the group you represent,
which in inner cities I think you saw those predatory
practices, but how does that apply to a small rural town if
they are going to have no options when we are done with Dodd-
Frank? I open it up to you, Mr. Stanley.
Mr. STANLEY. I think, first of all, you are going to see a
lot of large financial institutions that end up supporting the
package that comes out of Chairman Hensarling. I think that
there is enormous diversity in the American banking system. We
have 6,500 banks across all different sizes of communities.
What we are very focused on and concerned about is that any
changes to tailor these regulations, and there have been
changes made both at the regulatory level and in the Dodd-Frank
statute, do not become loopholes that can then be used by
larger banks or can be used in rent-a-charter situations where
somebody gets a bank charter and then sells stuff out into the
secondary market that does not meet certain kinds of standards.
One thing I see with a lot of the legislation that comes
out is it is not limited to the kinds of banks that are in
Elkhart, Kansas. It is not limited to $100 million banks, $250
million banks. It does open the door to either banks that are
in that $50 to $500 billion space, the very large regional
banks that are among the largest couple dozen banks in the
country, or even to the top six or seven global banks that
dominate Wall Street. I think that there is space, there has
been space in the Senate. Actually, there was a package passed
for community banks that was limited to community banks, so I
think there is bipartisan space for legislation that is very
targeted and crafted to the kinds of banks that you are talking
about in Elkhart, Kansas, but we do not often see that.
Chairman HUELSKAMP. Do you think they represent any threat
to the economic system? Why are they being punished by these
regulations at all? I mean, we have experts. They spent hours
and days and weeks and months and years of putting it together,
and the other day Mr. Hanes comes in and says most of my
competitors are leaving the marketplace. The big city said,
well, that is just too bad you cannot get a home mortgage in
Elkhart, Kansas. That is one of the costs of taking care of the
big banks. But I agree with Mr. Luetkemeyer. The end result is
they are too big to fail and too small to succeed, and I think
that is happening in this arena.
Mr. STANLEY. Would you like me to respond?
Chairman HUELSKAMP. Please.
Mr. STANLEY. I think there are a couple things. First of
all, with respect to consumer protection, if something happens
that damages a consumer, it may not matter to that consumer
whether that happened at the hands of a small bank or a large
bank. I think the vast majority of cases, there is no intent to
harm consumers, some of these rules that we are talking about--
overdraft fees, things like that, the CARD act that affected
credit cards. That probably does not affect you guys much. But,
overdraft fees were a source of revenue for small banks. There
were abuses in terms of overdraft fees and there were consumer
protection things that were done to address that. Interchange
fees. That is something there were complaints about from small
businesses, but small banks had issues and problems with the
regulatory changes that were made for interchange fees. That is
one set of things on these consumer protection things.
I think in terms of prudential protections, we do have to
remember that even if you do not threaten the national global
financial system, you are dealing with insured deposits. There
is a backstop, a government backstop behind those deposits, so
there is an interest by the FDIC in prudential risk regulation
as long as those insured deposits are there.
Chairman HUELSKAMP. Mr. Stanley, I appreciate that, and I
will note I do not know of a single bank in the western half of
the State of Kansas that failed in this situation. They get to
take on all the regulations, so I am not worried so much about
consumer protection; I am worried that they will not have any
more choices. We will probably be sitting here in 3 or 4 years
saying gosh darn it, what are we going to do to make sure they
can get a loan in Elkhart, Kansas? We are about at the end of
that stick.
I am going to ask Ms. Chu or Mr. Luetkemeyer, I am being a
little flexible here, if you have any follow-up questions.
Seeing none, or if you had another round of questions?
Mr. LUETKEMEYER. I have a couple more here.
Mr. Beverage, we have been discussing a little bit about
new banks being chartered. There have only been, what, two in
the last 5 years, I think?
Mr. BEVERAGE. Maybe three.
Mr. LUETKEMEYER. Maybe three? You know, if you are an
investor and you go out here and you see the numbers we have
been throwing around here today, especially small banks, if you
are an investor, why would you want to invest in a business
like this where you are going to get regulation from the top
down, and more of it when the CFPB is just out of control with
the TRID rule, the QM rule that basically runs real estate
mortgages out of existence in small communities? If you are a
new bank trying to get started, what are you going to make
loans on? Can you give me some insight? I do not see why an
investor would go in and try to buy, start a new bank.
Mr. BEVERAGE. In this environment, neither do I. I would
advise against it until we get some changes that will help
community banks serve consumers in ways that do not jeopardize
them. I just cannot help but say this. Community bankers do not
get up in the morning thinking about how they can screw their
customers. They get up in the morning thinking about how they
can take care of them because those customers are vital to the
survival of that community. When a bank makes a loan,
basically, there are two questions. You know this. One, can you
and will you repay it? If all of that works, then the bank
wins, the customer wins, and the community wins because you get
jobs, you get economic involvement, you get economic activity.
These people grow up together, for heaven's sake. They know
everybody. They have a list of things that they can no longer
do because they are afraid of fair lending allegations. They
are afraid if I screw up on an appraisal or on a valuation, or
if I do not dot an I, or cross a T properly, I am going to get
sued. Now, rightly or wrongly, that is a fear.
Mr. LUETKEMEYER. One of the problems with the QM rule is
that by saying it is a qualified mortgage means it is a
qualified mortgage, inferring that it is a preferred mortgage.
If it is a nonqualified mortgage, they are by inference saying
there must be some additional risk there. There must be a
problem here. It opens you up as a banker to a lot of liability
exposure even though it may not be. Just the inference it is a
nonqualified loan, by differentiating between the two, suddenly
now you are put in a position to decide is there a liability
risk that I have got to take here by making this kind of a
loan, a nonportfolio loan? This is the predicament that banks
are in, and this is why you wind up not making real estate
loans and getting out of the business because you see the
liability situation sit in front of you, like I cannot take
this risk.
Mr. LUETKEMEYER. Mr. Hanes, I see you have been anxious to
jump in here.
Mr. HANES. Sorry about that.
Number one, as I said earlier, we are now making a
compliance decision, not a credit decision--when we look at a
loan--and that is wrong. That is not what we are built to do.
That is not what we should be doing, but we are making a
compliance decision. Are we going to make this loan? Is this
one that we are not going to get written up for later? Is this
one that we are not going to have to redisclose everything
because we got something on a wrong line? It is a compliance
decision to not make a loan versus a credit decision.
I would like to follow up on your original comment there, I
had an opportunity in 2011 to put a holding company together to
buy the local bank, a great source of pride and a great
opportunity. I have actually gone down that exact path. To
follow up on what Mr. Stanley said, community banks have become
profitable in spite of Dodd-Frank; definitely not because of
Dodd-Frank. We continue to work around and with those rules.
The reason you invest in the local small bank, I can tell you
is because you want the bank there. You do not want it being
sold. You do not want it closed. The group that we put
together, they grew up there. They want their local bank there.
They grew up knowing that that was their bank and that was
where their kids banked, and those kids are now customers. They
have moved on to California or wherever, and they are still our
customers. The reason you get investors to invest is because
they want their local bank and they want to be a part of their
local bank. We are not getting investors from outside; we are
getting investors from down the street and across the street.
Mr. LUETKEMEYER. Just to show you, I did not bring it with
me this morning, but I have a sheet at home that details how
you go through a real estate mortgage. There are 247 things on
this sheet of paper here that you go down and you check a box.
Okay, it is this size, so you go here. Then I got this kind of
collateral, so you go here. It is a sole proprietorship or it
is a husband and wife, so you go here. There are 247 ways you
can get tripped up when you make a loan. A lot of that is on
the CFPB. That is their problem.
QM, CFPB's own sheet is like this. You take two sheets and
you put them together like this, it is like a Rubik's cube. You
go through here, you go out here, you go here, and then you
wind up going on this one. It is unbelievable, and you wonder
why banks get out of lending. You wonder why they are getting
exposed to this. You wonder why the costs of consumers go up.
Somebody has to pay for this extra compliance cost when you
have one loan officer for one compliance officer.
Thank you, gentlemen, for being here today. I yield back.
Chairman HUELSKAMP. I would like to thank all of our
witnesses for their participation today. It is never easy to
take time out of your busy schedules and to come and talk with
us, but you help us understand the unique impact that
overregulation can have on our rural communities. All too often
it is our consumers, our small businesses, farms and ranches,
and entrepreneurs that ultimately feel the burden. Here at the
Committee, we remain dedicated to working to ensure that small
businesses are allowed to grow, thrive, and provide economic
opportunities to the community.
I ask unanimous consent that members have 5 days to submit
statements and supporting materials for the record.
Without objection, so ordered.
This hearing is adjourned.
[Whereupon, at 11:06 a.m., the Subcommittee was adjourned.]
A P P E N D I X
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Huelskamp, Ranking Member Chu and members of the
subcommittee, my name is Roger Beverage, and I am the President
and Chief Executive Officer of the Oklahoma Bankers
Association. I appreciate the opportunity to present the views
of the American Bankers Association (ABA) on the impact of
regulations on rural communities. This is a subject near to my
heart. The ABA is the voice of the nation's $16 trillion
banking industry, which is composed of small, regional and
large banks that together employ more than 2 million people,
safeguard $12 trillion in deposits and extend nearly $8
trillion in loans.
ABA appreciates the opportunity to be here today to speak
on how the growing volume of bank regulation--particularly for
America's hometown banks--is negatively impacting consumers
because these same, perhaps well-intentioned rules and
regulations limit the ability of banks throughout the nation to
meet the needs of our customers' and communities. This is not a
new subject, yet the imperative to do something grows every
day.
America's hometown banks are resilient, and have found ways
of meeting our customers' needs in spite of the ups and downs
of the economy. But it is a job that has become much more
difficult because of the avalanche of new rules, guidances and
seemingly ever-changing expectations of the regulators.
This new regulatory atmosphere--not the local economic
conditions--is often the tipping point that drives small banks
to merge. The fact remains that there are nearly 1,500 fewer
banks today than there were 5 years ago--a trend that will
continue until some rational changes are made that will provide
some relief to America's hometown banks.
In fact, today in Oklahoma there are 211 banks chartered in
the state. When I came to Oklahoma in 1988--there were well
over 400 banks. More frightening is the lack of interest and
ability for new charters. There have only been two true de
novos since 2010, and none in Oklahoma.
Each and every bank in this country helps fuel our economic
system. Each has a direct impact on job creation, economic
growth and prosperity in the community it serves.
America's hometown banks are like other businesses--they
buy their ``product'' at wholesale and then sell it at
``retail.'' What that means is credit cycle that banks
facilitate is simple: customer deposits provide funding to make
loans. These loans allow customers of all kinds--businesses,
individuals, governments and non-profits--to invest in their
hometown and across the globe.
The profits generated by this investment flow back into
banks as deposits and the cycle repeats--creating jobs, wealth
for individuals and capital to expand businesses. As those
businesses grow up, they, their employees and their customers
come to banks for a variety of other key financial services
such as cash management, liquidity, wealth management, trust
and custodial services. For individuals, bank loans and
services can significantly increase their purchasing power and
improve their quality of life, helping them attain their goals
and realize their dreams.
This credit cycle does not exist in a vacuum. Regulation
shapes the way banks do business and can help or hinder the
smooth functioning of the credit cycle. Bank regulatory
changes--through each and every law and regulation, court case
and legal settlement--directly affect the cost of providing
banking products and services to customers. Even small changes
can have a big impact on bank customers by reducing credit
availability, raising costs and driving consolidation in the
industry that limits consumer choice.
Everyone who uses banking products or services is touched
by changes in bank regulation. It is imperative that Congress
take steps to ensure and enhance the banking industry's ability
to facilitate job creation and economic growth through the
credit cycle. The time to address these issues is now before it
becomes impossible to reverse the negative impacts. When a bank
disappears everyone is impacted.
Importantly, in rural communities, smaller community banks
are (in many instances) the exclusive source of capital
farmers, ranchers, small business owners and its residents.
Once that capital-access system becomes dysfunctional--as it is
today--the community itself begins to encounter more difficult
challenges in order to survive.
We urge Congress to work together--Senate and House--to
pass legislation that will enhance the ability of community
banks to serve their customers. In particular, Congress can
take action to ensure credit flows to communities across the
country by:
> Supporting tailored regulations for the banking
industry;
> Improving access to home loans, and;
> Removing impediments to serving customers.
In the remainder of my testimony, I will highlight some
specific actions under each of these suggestions that would
help begin the process of providing meaningful relief to help
community banks and help bank customers.
I. Support Tailored Regulation for the Banking Industry
Banks are in the business of serving customers and
communities. Banks are where prospective homeowners obtain home
loans, small businesses find capital, and customers receive
advice on how to manage their nest eggs for a financially
secure future.
But the role banks play serving their communities has been
placed in jeopardy by the broad array of new regulations. For
example, the typical small bank with one compliance officer has
recently had to contend with more than 2,000 pages of new
regulations, and that is just the housing, capital and
remittance areas.
Moreover, the Dodd-Frank Act has charged federal financial
regulators with writing and enforcing 398 new rules, resulting
in at least 13,644 pages of proposed and final regulations, and
that's with regulators only halfway through the rulemaking
process. While not all of those rules apply to all banks, many
do. Even the rules that do not, tend to have trickle down and
become ``best practices'' as determined by the bank's primary
federal banking regulator. Those regulators then apply those
requirements to thousands of banks otherwise not subject to the
rule.
The key to changing the consolidation trend is to stop
treating all banks as if they are the same or as if all banks
operate in the same manner as the largest and most complex
institutions. They don't. Financial regulation and examination
should not take a one-size fits all approach. To do so, only
layers on unnecessary requirements that add little to improve
safety and soundness, but add much to the cost of providing
services--a cost which bank customers ultimately bear.
Instead, ABA has urged for years that a better approach to
regulation is to tailor bank supervision to take into account
the charter, business model, and scope of each bank's
operations. This would ensure that regulations and the exam
process add value for banks of all sizes and types.
Regulators should be empowered--and directed--to make sure
that rules, regulations and compliance burdens only apply to
segments of the industry where it is warranted. Only then can
America's hometown banks be freed up to best serve their
communities.
Tailor Regulation to a Bank's Business Model
The ABA recommends that Congress ensure that regulation is
tailored to a bank's business model. Time and again, I hear
from bankers wondering why the complex set of rules, reporting
requirements, and testing that are imposed upon the largest
most diverse and global institutions become the standard
applied to the smaller community banks in the country. The
approach seems to be: ``If it's the `best practice' for the
biggest banks it must be the best practice for all banks.''
Such an approach makes no sense in our diverse banking system
with different business models and strategies.
Of course, the supervisory process should assure risk is
identified and managed prudently. This risk assessment must be
appropriate to the type of institution. In the aftermath of the
financial crisis, the pendulum of bank examination has swung to
the extreme--affecting every sized bank. Overbroad, complicated
restrictions supplant prudent oversight. Inconsistent
examinations hinder lending, increase costs, and create
procedural roadblocks that undermine the development of new
products and services for bank customers.
The banking agencies should move towards customized
examinations that consider the nature of a bank's business
model, charter type, and perhaps most important, bank
management's success at managing credits, including a
borrower's character, prior repayment history and strength of
personal guarantees. In today's complex banking environment, an
array of risk factors has had a far greater impact on a banks'
ability to serve its customers--as well as its likelihood to
get in trouble--than an arbitrary asset size.
The ABA encourages Congress to support legislation that
would ensure banks are regulated according to their business
model, such as H.R. 2896, the Taking Account of Institutions
with Low Operation Risk Act (TAILOR Act) of 2015, introduced by
Rep. Scott Tipton (R-Colo.). This legislation would require
regulators to tailor regulatory actions so that they apply only
when the bank's business model and risk profile require them--
not just based on asset size. This legislation empowers
regulators to make sure that rules, regulations and compliance
requirements only apply to segments of the industry where
warranted.
II. Improve Access to Home Loans
The mortgage market touches the lives of nearly every
American household. Banks help individual consumers achieve
lifelong goals of homeownership by giving them access to the
funding they need. Without home loans most Americans would not
be able to purchase a home.
Banks are a major source of mortgage loans--holding more
than $2 trillion in one-to-four family home loans on their
books and originating others under government guarantees. In
addition, banks support the housing industry with construction
and development loans, and homeowners with home equity lines of
credit. These critical services of banks results in more income
and jobs in communities, along with a larger tax base for local
governments.
Borrowers across the country--served by banks of all
sizes--should be able to obtain safe, sound and well
underwritten home loans. However, it is clear that new
restrictive regulatory requirements have kept some creditworthy
borrowers, particularly first-time homebuyers, from obtaining
much needed mortgage credit. The complex and liability-laden
maze of compliance has made home loan origination more
difficult, especially for borrowers with little or weak credit
history. Over-regulation of the mortgage market has reduced
credit available to bank customers, raised the cost of
services, and limited bank products. The result has been a
housing market still struggling to gain momentum.
In Oklahoma, approximately 25 percent of the state's banks
have simply elected to get out of the home mortgage lending
business. They have concluded that both the litigation and
regulatory risks they would encounter are simply too great
given the limited number of such loans they normally would make
in a given year. That means their customers are either denied
credit or must search for an alternative source of capital.
This is especially true for rural areas.
Congress can help reduce needless impediments to mortgage
lending that have constrained the banking industry's ability to
help first-time homebuyers and dampened the growth of
prosperity across the nation's communities. For example,
Congress should:
Treat Loans Held in Portfolio as Qualified Mortgages
The Dodd-Frank Act (DFA) is very restrictive in its
definition of ``ability to repay'' (ATR) and Qualified Mortgage
(QM)--having a detrimental impact on the market and consumer
access to credit. Portfolio lending is among the most
traditional and lowest-risk lending in which a bank can engage.
Loans held in portfolio are well underwritten because if a
loan is to be held in a bank's portfolio, the bank carries all
of the credit and interest rate risk associated with that loan
until it is repaid. Therefore it must be conservative to
protect the safety and soundness of the bank, and these loans
are made with no risk to the nation's taxpayers.
ABA supports H.R. 1210, the Portfolio Lending and Mortgage
Access Act, introduced by Rep. Andy Barr (R-Ky.), which passed
the House on Nov. 18, 2015. It would treat any loan made by an
insured depository institution and held in that lender's
portfolio as complaint with the Ability-to-Repay/Qualified
Mortgage requirements and would provide an important and much
needed correction to the restrictive standards that now exist.
This legislation is fully consistent with the intent behind
the Dodd-Frank Act in that it encourages ``skin in the game''
or risk retention by the originating lender. By encouraging
banks to hold these loans on their books, the act will expand
safe, affordable lending for more borrowers who look to
America's hometown banks for safe, affordable credit.
TILA-RESPA Integrated Disclosure Rule (TRID)
The TILA-RESPA Integrated Disclosure Rule (TRID) became
effective in October 2015 and changed all residential mortgage
origination disclosures as well as systems which generate and
track originations. The new rules are extremely lengthy and
technical, and carry substantial administrative and legal
liabilities.
ABA has expressed high concerns that this rule contains
inadequacies that require immediate clarification and
resolution for the Consumer of Financial Protection Bureau
(CFPB). Uncertainty about the treatment of minor errors and
oversights has broadly affected mortgage originators. Current
legal uncertainties ultimately harm the consumer. Such
uncertainties threaten liquidity in key portions of the market
possibly restricting consumers' access to mortgage credit. In
addition, lack of legal uncertainty poses risks that ultimately
inflate prices to the consumer.
ABA and various industry partners have communicated to
Director Cordray that immediate action is urgently needed to
allay lender and investor concerns regarding TRID liabilities.
We have requested that the CFPB: (1) formally publish
authoritative guidance clarifying the scope and extent of TRID
legal liabilities and assuring stakeholders that there are
viable cure provisions for correcting technical errors and
mistakes; (2) form an internal Task Force to engage with
industry stakeholders to identify compliance and legal problems
to be addressed via published guidance or interpretive
rulemaking, and; (3) extend the current ``good faith''
implementation period for TRID until all regulatory issues and
fixed and banks are granted a reasonable period to adapt
compliance systems. Such actions will ensure a healthy bank
mortgage lending environment, while ensuring consumers have
access to well-priced financial options.
III. Remove Impediments to Serving Customers
Rules and requirements surround every bank activity. When
it works well, bank regulation helps ensure the safety and
soundness of the overall banking system. When it does not, it
constricts the natural cycle of facilitating credit, job growth
and economic expansion. Finding the right balance is key to
encouraging growth and prosperity as unnecessary regulatory
requirements lead to inefficiencies and higher expenses which
reduce resources devoted to serving customers and communities.
Regulatory requirements for the banking industry have grown
dramatically in recent years, hindering in particular rural
banks' ability to take care of their customers and serve local
communities. By reducing or minimizing regulatory requirements
for these rural community banks, Congress would allow banks to
provide more credit, products and services to meet the needs of
their local communities.
Address the Cumulative Impact of the Increasing Number of
Regulations
The ABA supports many bills that would address banks'
concerns with growing regulatory requirements on consumers and
especially rural areas. Several bills incorporating provisions
which would provide regulatory relief to America's hometown
bank have been introduced in the House and Senate, such as:
< H.R. 1389, the American Jobs and Community
Revitalization Act of 2015, introduced by Rep. Andy
Barr (R-Ky.), and;
< H.R. 1233, the Community Lending Enhancement and
Regulatory Relief Act (CLEARR Act), introduced by Rep.
Blaine Luetkemeyer (R-Mo.)
American Jobs and Community Revitalization Act of 2015
ABA supports Rep. Andy Barr's (R-Ky.) American Jobs and
Community Revitalization Act of 2015 legislation which contains
a number of provisions that will reduce the regulatory
requirements for America's rural hometown banks around the
county in ways that make it easier for them to meet their
customers' needs. For example, the legislation includes
provisions that would:
Require a review and reconciliation of
existing regulations. Congress should require a review
and reconciliation of existing regulations that may be
in conflict with or duplicative of new rules being
promulgated by the banking agencies, or which in their
application badly fit the variety of institutions that
make up the banking industry.
Streamline currency transaction reporting.
Anti-money laundering efforts by financial institutions
can be improved by eliminating needless currency
transaction reporting through a ``qualified customer''
exemption to the Currency Transaction Reporting (CTR)
rules. This would significantly reduce the more than 13
million CTRs filed annually, saving banks many hours
each year in filling out unneeded and unused forms.
Importantly, it would give them more time to devote to
what they do best: take care of their customers and
communities.
Ensure Subchapter S banks are treated
equitably. Banks are required to build capital under
the Capital Conservation Buffer requirements of the
agencies' Basel III regulations. However, the current
regulations do not take into consideration the unique
cash flows applicable to S Corporation banks where
income is calculated prior to consideration of
distributions for payment of taxes arising from S
Corporation activities. This puts S Corporation banks
at a disadvantage when compared to C Corporation banks.
Community Lending Enhancement and Regulatory Relief Act
ABA supports Rep. Blaine Luetkemeyer (R-Mo.) Community
Lending Enhancement and Regulatory Relief Act (CLEARR Act)
which contain a number of provisions that would lift or modify
many unnecessary restrictions, better allowing community banks
to meet the needs of their customers. In particular, this
legislation would:
Ensure the costs and benefits are considered
before issuing new regulation. The bill also would
require the Securities and Exchange Commission (SEC) to
conduct an analysis of the costs and benefits,
including economic benefits, of any new or amended
accounting principle. Benefits to investors would have
to outweigh costs before the SEC could recognize the
principle.
Improve Access to Home Loans. This bill also
contains a number of provisions to ensure consumers
have access to home loans as discussed above.
Evaluate Necessity of Basel III Complex Capital
Requirements
In addition, Basel III poses a significant compliance
requirements on most rural community banks. The banking
agencies estimate that the direct compliance cost of only the
risk weighted asset portion of the final rules to be $43,000
per institution for banks under $500 million in assets.
While complex, the risk weighted asset portion of Basel III
is just one component of the final rules. The overall cost for
banks over $500 million is almost certainly significantly
higher. Unnecessarily, complex capital requirements force banks
to devote resources away from lending opportunities.
Although the industry is over a year into implementation,
many institutions continue to struggle with understanding the
rule's complexities. The sections of Basel III ABA members most
commonly cite as creating the greatest compliance burden
include: (1) new definition of High Volatility Commercial Real-
Estate (HVCRE); (2) new risk weighting methodology for private
label securitizations; and; (3) new credit conversion factors
for short-term lines of credit. Furthermore, even as America's
hometown banks are working through Basel III implementation,
the international Basel Committee has issued a steady stream of
new proposals that could be adopted in the United States.
ABA believes that highly capitalized banks and particularly
those that serve rural America, should be exempt from Basel III
and any potential future changes to the Basel framework. Using
data from the Federal Deposit Insurance Corporation (FDIC), ABA
estimates that some 4,000 banks may already have far more
capital than Basel III would require. For these banks, the
considerable and costly work of Basel III compliance yields no
additional supervisory or safety and soundness benefits, and
provides no services to customers.
Conclusion
America's hometown banks have been the backbone of
communities across nation. Our presence in small towns and
large cities everywhere means we have a personal stake in the
economic growth, health and vitality of nearly every community.
Once again, this is particularly true for those banks that
serve rural America.
A bank's presence is a symbol of hope, a vote of confidence
in a town's future. When a bank sets down roots, communities
thrive. When they leave or reduce services, communities, and
consumers do not thrive. It's that simple.
We urge Congress to act now and pass legislation to help
turn the tide of community bank consolidation and protect
communities from losing a key partner supporting economic
growth.
June 2016
Testimony of
Shan Hanes
before the
Small Business Committee
Economic Growth, Tax and Capital Access Subcommittee
United States House of Representatives
May 2016
----------------------------------------------------------
Testimony of
Shan Hanes
before the
Small Business Committee
Economic Growth, Tax and Capital Access Subcommittee
of the
United States House of Representatives
June 9, 2016
Chairman Huelskamp, Ranking Member Chu, and members of the
Subcommittee, my name is Shane Hanes, and I am the President
and CEO Board of First National Bank in Elkhart, Kansas. First
National Bank is a $78 million bank with a main location in
Elkhart, Kansas and one branch serving Rolla, Kansas and the
surrounding area. We have 20 employees and we predominantly
lend to agriculture. Despite our small size, the bank is the
largest lender in the county and we represent an average sized
bank in rural Kansas.
I am also a member of the American Bankers Association's
Agricultural and Rural Bankers Committee. I appreciate the
opportunity to present the views of the ABA on credit
conditions and credit availability in rural America.
The nation's $16 trillion banking industry, which is
composed of small, regional and large banks that together
employ more than 2 million people, safeguard $12 trillion in
deposits and extend nearly $8 trillion in loans. Rural credit
issues are very important to the banking industry as banks have
provided credit to rural areas since the founding of our
country. Over 5,000 banks--over 82% of all banks--reported
agricultural loans on their books at year end 2015 with a total
outstanding portfolio of over $171 billion.
The topic of today's hearing is very timely. The rural
economy has been slowing, with farm sector profitability
expected to decline further in 2016 for the third consecutive
decline. However, farm and ranch incomes for the past five
years have been some of the best in history. With the new Farm
Bill in place, farmers, ranchers, and their bankers have
certainty from Washington about future agricultural policy and
how it will affect rural America. Interest rates continue to be
at or near record lows, and the banking industry has the
people, capital and liquidity to help rural America sustain
through any turbulence in the rural economy.
Banks continue to be one of the first places that farmers
and ranchers turn when looking for agricultural loans. Our
agricultural credit portfolio is very diverse--we finance large
and small farms, urban farmers, beginning farmers, women
farmers and minority farmers. To bankers, agricultural lending
is good business and we make credit available to all who can
demonstrate they have a sound business plan and the ability to
repay.
In 2015, farm banks--banks with more than 15.5% of their
loans made to farmers or ranchers--increased agricultural
lending 7.9 percent to meet these rising credit needs of
farmers and ranchers, and now provide over $100 billion in
total farm loans. Farm banks are an essential resource for
small farmers, holding $48 billion in small farm loans, with
$11.5 billion in micro-small farm loans (loans with origination
values less than $100,000). These farm banks are healthy and
well capitalized and stand ready to meet the credit demands of
our nation's farmers large and small.
In addition to our commitment to farmers and ranchers,
thousands of farm dependent businesses--food processors,
retailers, transportation companies, storage facilities,
manufacturers, etc.--receive financing from the banking
industry as well. Agriculture is a vital industry to our
country, and financing it is an essential business for many
banks, mine included.
Banks work closely with the Small Business Administration
to provide credit through the 7(a) and Section 504 guaranteed
lending programs. Additionally, banks like mine utilize USDA to
make additional credit available by working with the Farm
Service Agency to promote Guaranteed Farm Loan Programs and
Rural Development for their many programs available for rural
communities. The repeal of borrower limits on USDA's Farm
Service Agency guaranteed loans has allowed farmers to continue
to access credit from banks like mine as they grow, ensuring
credit access for farmers across the country and the guaranteed
funding of USDA's Rural Development programs has encouraged
banks like mine to use these programs when applicable.
In my testimony today I would like to elaborate on the
following points:
> Banks compete with competition on an uneven playing
field;
> Banks must deal with the daily impact of new and
enhanced bank regulations and impediments to growth for
rural communities;
> Bank's specific impediments to growth and impact on
rural lenders;
> The current issues with appraisers in rural America
and the impact on our business as lenders.
I. Unfair competition
The Farm Credit System is a government sponsored entity
that has veered away from its intended mission and now
represents an unwarranted risk to taxpayers. The Farm Credit
System was founded in 1916 to ensure that young, beginning, and
small farmers and ranchers had access to credit. It has since
grown into a $304 billion behemoth offering complex financial
services. To put this in perspective, if the Farm Credit System
were a bank it would be the ninth largest in the United States,
and larger than 99.9% of the banks in the country. This system
operates as a Government Sponsored Entity and represents a risk
to taxpayers in the same way that Fannie Mae and Freddie Mac
do. It benefits from significant tax breaks--valued at $1.3
billion in 2015--giving it a significant edge over private
sector competitors. Moreover, the Farm Credit System enjoys a
government backing, formalized by the creation of a $10 billion
line of credit with the U.S. treasury in 2013. The Farm Credit
System has veered significantly from its charter to serve
young, beginning, and small farmers and ranchers, and now
primarily serves large established farms, who could easily
obtain credit from the private sector. In fact, the majority of
Farm Credit System loans outstanding are in excess of $1
million. Any farmer able to take on over $1 million in debt
does not need subsidized credit. Moreover, the volume of small
borrower loans accounted for 14% of all new Farm Credit System
loans in 2015. In addition to the Farm Credit System, the
Credit Union industry has grown to over $1 trillion in assets
and their tax benefit is estimated to exceed $26.75 billion
over the next ten years.
II. Impact of new and enhanced bank regulations and
impediments to growth for rural communities
One of the most daunting challenges has been the sheer
volume of recent regulations. For many years, our compliance
was primarily handled within the bank by employees. It allowed
for cross-training of employees and fostered individual
education regarding the regulations and bank policies. When
necessary, the bank would outsource an audit to provide
independence or a specific expertise. However, the rules and
regulations change so often that a banker cannot stay abreast
or competent to review the details of the new rules and
regulations. Therefore, we have begun outsourcing most audits
to a point that we are paying a full-time teller salary to
compliance audit teams. The impact is one fewer bank employee
serving customers on a daily basis and one less salary paid to
a member of our community.
III. Specific impediments to growth and impact on rural
lenders on real estate lending
Reduced Credit Offerings: Many banks in rural Kansas have
moved out of the mortgage lending business. Not because the
loans are not safe and profitable, but due to compliance.
Historically, because we only make standard real estate loans
with 20% down payment, these loans were safe and sound credit
decisions with some of the lowest loss ratios and were the
``bread and butter'' for both the bank and community. In my
bank, we don't sell mortgages on the secondary market, so a
poor credit decision would affect our bottom line and
shareholders directly. Due to these factors in banks similar to
mine, banks are exiting the mortgage lending market not due to
credit decisions, but due to compliance and regulatory
decisions. The mortgage lending rules were intended to address
the credit risk side; however the compliance risk has become
greater than the credit risk. If the loan is held in the bank's
portfolio, it should automatically be a qualified mortgage (QM)
loan as the credit risk lies with the bank.
Loan Closings: To try and comply with the onerous
regulations, we've hired an outside consultant to assist us
completing pre-closing and post-closing real estate reviews of
all consumer real estate loans. This added time and expense
became necessary as we did not possess the necessary compliance
expertise in house. Additionally, my bank doesn't close enough
consumer real estate loans on a monthly basis to gain the
expertise in house. This added compliance has increased the
closing costs to the consumer and delayed the closing of their
loan to allow for extra review of loan documents.
Payment Structure and Reduced Standard Loan Options: One of
the biggest advantages that rural banks had over large
commercial banks was the ability to customize payment structure
to meet their specific needs. We know our customers, we know
when they receive paychecks and we know their cash flow needs.
We could leverage this to compete against large lenders and
better serve our community. However, due to the regulatory
constraints, we've moved to a canned loan product system. We
now make ``monthly payment consumer loans'' regardless of how
and when the customer is paid. Because this product ``fits the
system.'' In an effort to protect the consumer, the regulatory
environment has harmed the consumer's access to credit and
flexibility of their bank to tailor the repayment to their
specific needs. Local lending decisions should be made locally,
not by a bureaucrat in Washington, D.C.
Costs to Make a Real Estate Loan: Every rural bank has a
similar story: A little elderly lady with her house free and
clear comes to the bank for a loan because her air conditioner
unit is out. Historically, the bank would have placed a small
mortgage on her house, produced a quick valuation on the home,
and funded the purchase of a new air conditioner unit. However,
due to the costs and time required to close a consumer real
estate loan, the loan is not a profitable loan. We have to make
a choice to either make the loan going through the regulatory
hoops and cost to the borrower, or make the loan unsecured to
the customer at a significantly higher interest rate and
shorter repayment terms. The sad reality is that due to
compliance on loans like this, some banks will not be involved
in this type of lending. We have chosen to make more loans,
like the above example, unsecured as we believe it is our duty
to help the customer despite increased regulatory costs.
Houses for Sale: Historically, our rural town has 40 to 60
homes for sale as customers have their existing home for sale
and are looking to upgrade to a larger home. However, we
currently have between 100 and 120 homes for sale in a small
county of 3,000 people. The unusually high number of homes for
sale may be partially due to other external factors, but I
would argue strongly that it is partially due to increased
regulatory compliance and few lenders in that credit market.
The lenders who are still in the mortgage credit space are more
conservative, have higher closing costs, and are much slower to
complete the transaction. These factors all further slow-down
an already slowing down rural economy.
Secondary Market: The most widely used secondary real
estate market provider in our market recently changed their
policy to not make any real estate loans less than $50,000. The
average residential real estate loan at our bank is less than
$33,000. Many of our customers would not qualify to even apply
for a mortgage on the secondary market due to these new rules.
IV. Current issues with appraisers in rural America and the
impact on our business as lenders
Appraisers: When a bank is making a loan on an agricultural
or commercial property, one of the initial steps is to receive
a certified general appraisal. However, due to a shortage of
appraisers and the ever increasing demands on appraisals,
receiving a timely appraisal is very difficult. We've had to
wait six months or more to receive an appraisal. Due to the
impediments to becoming a certified appraiser, it is difficult
for new individuals to acquire a license and there is limited
desire for an existing appraiser to take on an apprentice who
will eventually be his direct competitor. Customers shouldn't
have to wait six months for a credit decision simply because
the bank cannot receive a completed appraisal.
The American Bankers Association has been very involved in
the issue of the lack of rural appraisers. The ABA has held two
large meetings with various stake-holders to create a working
solution on the appraisers issue. The most common them,
however, is that there needs to be more incentive for
individuals to become involved in the real estate appraisal
business, especially in rural areas. Congress needs to get
involved in making it easier to become an appraiser or we will
continue to see long delays in customers closing on home
mortgages.
Conclusion
Rural banks will continue to serve their customers to the
best of their abilities despite the many obstacles that have
hurt their business models. Rural banks will compete with
anyone on a level playing field and they have not backed down
from such competition in the past. But when there is a
combination of an unfair playing field and over burdensome
regulations, all banks have great difficulty in surviving, not
just competing. Banks are drivers of the economy, and this is
especially true for rural banks. With smart reforms to unfair
competition, regulations that hold banks back from helping
their customers and providing incentives for people to become
involved in rural appraising, rural banks will once again be
able to help their local economies grow.
Thanks you for the opportunity to address the subcommittee
and share my view on rural banking. I would be happy to answer
any questions that you may have.
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