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ENDING THE DE NOVO DROUGHT: 

EXAMINING THE APPLICATION 

PROCESS FOR DE NOVO 

FINANCIAL INSTITUTIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

MARCH 21, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–7 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

BLAINE LUETKEMEYER, Missouri, Chairman 

KEITH J. ROTHFUS, Pennsylvania, Vice 

Chairman 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

BILL POSEY, Florida 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

MIA LOVE, Utah 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

MICHAEL E. CAPUANO, Massachusetts 

DENNY HECK, Washington 

GWEN MOORE, Wisconsin 

CHARLIE CRIST, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 21, 2017 ................................................................................................. 1 

Appendix: 

March 21, 2017 ................................................................................................. 47 

WITNESSES 

TUESDAY, MARCH 21, 2017 

Burgess, Kenneth L., Chairman, FirstCapital Bank of Texas, on behalf of 

the American Bankers Association (ABA) ......................................................... 5 

Edelman, Sarah, Director of Housing Finance, Center for American Progress . 10 

Kennedy, Patrick J., Jr., Managing Partner, Kennedy Sutherland LLP, on 

behalf of the Subchapter S Bank Association .................................................... 8 

Stone, Keith, President and Chief Executive Officer, The Finest Federal Credit Union, on behalf of the National Association of Federally-Insured Credit 

Unions (NAFCU) .................................................................................................. 7 

APPENDIX 

Prepared statements: 

Burgess, Kenneth L. ......................................................................................... 48 

Edelman, Sarah ................................................................................................ 59 

Kennedy, Patrick J., Jr. ................................................................................... 70 

Stone, Keith ...................................................................................................... 74 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written statement of the American Financial Services Association ............ 98 

Written statement of the Independent Community Bankers of America .... 102 

Barr, Hon. Andy: 

Chart entitled, ‘‘Correlation of De Novo Bank Formation and Interest 

Rates .............................................................................................................. 104 

Ellison, Hon. Keith: 

Slides ................................................................................................................. 105 

Written statement of the American Bankers Association, the Community 

Development Bankers Association, the Independent Community Bankers of America, and the National Bankers Association ............................. 107 

Love, Hon. Mia: 

Written statement of the National Association of Industrial Bankers, 

the Nevada Bankers Association, and the Utah Bankers Association ..... 109 

(1) 

ENDING THE DE NOVO DROUGHT: 

EXAMINING THE APPLICATION 

PROCESS FOR DE NOVO 

FINANCIAL INSTITUTIONS 

Tuesday, March 21, 2017 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:03 p.m., in room 

2128, Rayburn House Office Building, Hon. Blaine Luetkemeyer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Luetkemeyer, Rothfus, Royce, 

Ross, Pittenger, Barr, Tipton, Williams, Love, Trott, Loudermilk, 

Kustoff, Tenney; Clay, Maloney, Scott, Velazquez, Green, Ellison, 

Heck, and Crist. 

Ex officio present: Representative Hensarling. 

Chairman LUETKEMEYER. The Subcommittee on Financial Institutions and Consumer Credit will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Today’s hearing is entitled, ‘‘Ending the De Novo Drought: Examining the Application Process for De Novo Financial Institutions.’’ 

Before we begin, I would like to thank the witnesses for appearing today. We appreciate your participation and look forward to a 

robust conversation. 

I will now recognize myself for 3 minutes for an opening statement. 

Banking isn’t what it used to be, according to Ernest Patrikis, a 

30-year veteran of the Federal Reserve. In a 2015 interview with 

CNNMoney regarding the lack of de novo charters, Mr. Patrikis 

added that the Dodd-Frank Act was like football players jumping 

on top of the pile. 

Unfortunately, Mr. Patrikis was right, banking isn’t what it used 

to be. My father spent his adult life working as a community banker in our town of 300 people. I got into the business before I was 

a teenager collecting deposits at our front door since we didn’t have 

a night deposit at our local bank. After college, I spent 2 years as 

a State bank examiner before I came back home to work in the 

bank for the next 35 years, and I have seen lots and lots of changes 

in the landscape since then. 

2 

Today, the de novo application process is managed in some cases 

by overzealous examiners paralyzed by the fear of making mistakes. Banks and credit unions fortunate enough to make it 

through the chartering process then face an unmanageable regulatory onslaught. It is not surprising that I hear too many lenders 

lament that they wouldn’t encourage their children to follow in 

their footsteps. 

From 2000 to 2008, there were more than 1,300 de novo bank 

charters granted and 75 new credit union charters. Let’s compare 

that to a post-Dodd-Frank world. From 2010 to 2016, there were 

just 5 new bank charters and 16 new credit union charters. And 

since 2010, more than 2,000 charters have disappeared. 

Thankfully, we have seen an uptick in the number of de novo 

charters since President Trump took office. According to recent 

data compiled by The Wall Street Journal, there have been eight 

de novo bank applications in the past few months alone. 

From Connecticut to California, it seems that de novo financial 

institutions are beginning to stage a modest comeback. Perhaps 

this is because, for the first time in a long time, people have confidence in the economy and see a path forward with more responsible regulation. 

Today’s hearing will serve to examine the causes of the de novo 

drought stemming from both the application process itself and the 

regulatory environment for banks and credit unions alike. Over the 

next 2 years, this subcommittee will devote its time to pursuing financial reform that benefits Main Street, that fosters choice and 

accessibility in the financial marketplace, and that puts all Americans on a path to financial independence. 

But the simple truth is that we can’t do that without banks and 

credit unions. We have an excellent panel of witnesses today, some 

of whom are in the midst of or have recently gone through the 

chartering process. I know your insights will be most valuable to 

the members of the subcommittee. 

With that, the Chair now recognizes the ranking member of the 

subcommittee, the gentleman from Missouri, my good friend, Mr. 

Clay, for 5 minutes for an opening statement. 

Mr. CLAY. Thank you, Mr. Chairman. 

And I guess I will use the analogy that we see things differently 

sometimes. When you see a half glass of water, some people see it 

as half full; others see it as half empty. But since the financial crisis there have been relatively few de novo or new bank and credit 

union charters. 

I have long supported community financial institutions, as they 

are the best institutions to finance our Nation’s small businesses 

and meet the financial needs of everyday Americans. However, I 

am concerned that the proposed fix that my colleagues want would 

only make the future of community banks and credit unions much 

bleaker. 

New charters of financial institutions are not just affected by financial regulation, but also existing economic conditions, including 

the level of interest rates and the lingering effects of the financial 

crisis and the ongoing consolidation of the banking industry, which 

began more than 30 years ago. 

3 

In fact, by rolling back merger and concentration limits for the 

largest banks, as the Financial CHOICE Act proposes, Republicans 

would likely accelerate the decline of the community bank. 

What is also frustrating is that the Majority continues to suggest 

that the Dodd-Frank Act is harming community banks, credit 

unions, and business lending. And yet, business lending is up 75 

percent since Dodd-Frank. Imagine that. 

In addition, most of Dodd-Frank’s bank rules impose new requirements on community bank competitors, the megabanks and 

nonbanks, thereby helping level the playing field. As a result, it is 

not surprising that small banks are posting record profits and credit unions are expanding membership. 

It is my hope that the witnesses today will comment not just on 

ways to improve the de novo chartering process, but also on what 

the future of community banking would be if the reins are taken 

off of megabanks and nonbank lenders. 

I yield back. 

Chairman LUETKEMEYER. I recognize the gentleman from Tennessee, Mr. Kustoff, for 1 minute. 

Mr. KUSTOFF. Thank you very much. 

I would like to thank the chairman and the ranking member for 

holding this hearing today to discuss the importance of de novo financial institutions to the banking industry. And I do want to 

thank the witnesses for joining us today in this discussion. 

Over the last 6 years, we have seen a dramatic decline in de novo 

charter applications. In fact, there have been 5 new bank and 16 

new credit union charters issued since 2010. If you compare that 

to the 8 years prior to the implementation of Dodd-Frank, the numbers are staggering, because during that time we saw over 1,300 

bank applications and 75 credit union charters issued in those 8 

years prior to Dodd-Frank. 

I am looking forward today to hearing from all of you about your 

experiences. I want to read a quote from a banker in my district, 

in Gibson County, which is in rural west Tennessee. 

He said, ‘‘Dodd-Frank has had a direct cost to our community bank of at least $100,000 per year, not including additional salaries 

and benefits for support people to monitor and to make sure we are 

in compliance. Another $25,000 has been spent making sure our 

auditors are keeping us in compliance. Dodd-Frank has taken away 

much of the essence of allowing us to serve our communities.’’ 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we will recognize the gentleman from Michigan, Mr. 

Trott, for 1 minute, if he is ready. 

Mr. TROTT. Thank you, Mr. Chairman. And thank you for holding this hearing today. 

When I travel around my district, I hear from small bankers 

every time who are worried about their future. And these are not 

fat cats from Wall Street with big expense accounts; these are people who likely sponsor your child’s little league team, give you a 

loan for your first home, help the new sandwich shop open up, or 

set up a bank account that helps you save for college. 

They worry because they see their peers disappearing by the 

hundreds each day. They see their profits flow into negative terriVerDate Nov 24 2008 16:37 Feb 09, 2018 Jkt 027248 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\27248.TXT TERI
4 

tory and wonder if they will be next. Their small-business clients 

wonder if the bigger bank that took over the previous lender will 

give them the same chance. 

Mr. Chairman, when I come to Washington, it almost feels like 

a different world. I read reports by people in this town saying that 

our regulators make it easier for small banks to thrive. I don’t 

think I have found anyone in southeast Michigan who believes this. 

I have spent the past few weeks speaking with bankers in southeast Michigan. They say in the past, they would have needed a few 

million dollars in assets to be profitable. Now, they can barely hope 

to become profitable until they have a billion dollars in assets. This 

is too high. No new banks are likely to start if they know they need 

to reach this height. 

I see my time is over. But, Mr. Chairman, we need our small 

banks. We also need regulations. However, regulations must be 

smart. I yield back the balance of my time. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, opening statements are over, and we want to welcome 

our guests. 

First, we have Mr. Ken Burgess, the chairman of FirstCapital 

Bank of Texas, who is testifying on behalf of the American Bankers 

Association. 

Second, we have Mr. Keith Stone, the president and chief executive officer of The Finest Federal Credit Union, who is testifying on 

behalf of the National Association of Federally-Insured Credit 

Unions. I am sure it is a wonderful credit union, if it is the finest 

one. 

Next, we have Mr. Patrick Kennedy, a managing partner of Kennedy Sutherland LLP, who is testifying on behalf of the Subchapter 

S Bank Association. 

And finally, we have Ms. Sarah Edelman, the director of housing 

finance at the Center for American Progress. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your 

written statements will be made a part of the record. 

Before we hear testimony, I would like to yield to the gentleman 

from Texas, Mr. Williams, for an introduction. Without objection, 

the gentleman from Texas is recognized. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

It is always a pleasure to introduce a fellow Texan to testify before our subcommittee, even if he did go to Texas Tech instead of 

TCU. 

Ken Burgess went to work for the original First National Bank 

of Midland after graduating from Texas Tech, moving to Waco in 

1985, where he served as executive vice president of Texas National Bank of Waco. 

In 1993, Mr. Burgess and his family moved to Abilene, where he 

took the position of president of Security State Bank of Abilene. 

Upon the sale of the bank in 1998, Mr. Burgess left to form the 

First National Bank of Midland, now known as the FirstCapital 

Bank of Texas. The bank presently stands at $993 million in assets. 

In addition to his role at FirstCapital, Mr. Burgess serves as 

Chair-elect of the American Bankers Association, having previously 

5 

served as chairman of the Community Bankers Council. He also is 

the most recent past chairman of the Texas Bankers Association. 

So to say the least, we are honored that you are here today, and 

we look forward to hearing your unique experience and perspective 

on the current trends and challenges facing new bank formation. 

So with that, Mr. Chairman, I proudly yield back. 

Chairman LUETKEMEYER. I would now like to take a moment of 

personal privilege. In the audience today is a former president of 

the Missouri Bankers Association, my State, Mr. Dan Robb, and 

his wife Diana. 

Raise your hand, Dan. 

And I understand that this is also sort of a fly-in day for a lot 

of the other bankers around the country. So do we have any other 

bankers in the audience? I see a few name tags of those who may 

be bankers. If you wouldn’t mind holding your hands up? The 

whole back row, cheap seats, all right. Great. 

Welcome, thank you very much. We welcome your participation. 

And hopefully you can keep the cheering down in the back of the 

room back there just in case. But it is great to have you, and we 

welcome you. 

With that, we want to open up the testimony with Mr. Burgess. 

Mr. Burgess, you are recognized for 5 minutes. 

STATEMENT OF KENNETH L. BURGESS, CHAIRMAN, 

FIRSTCAPITAL BANK OF TEXAS, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. BURGESS. Thank you, Mr. Chairman. 

Chairman Luetkemeyer and Ranking Member Clay, my name is 

Ken Burgess, and I am chairman of the FirstCapital Bank of 

Texas. My bank was chartered in 1998, and in less than 20 years 

we have grown our assets to just over $1 billion. We serve the Midland, Lubbock, and Amarillo markets in west Texas, as well as a 

new market in central Texas near the Austin area. We are primarily a commercial bank lending to small businesses, and we also 

have a strong mortgage lending arm. 

ABA appreciates the opportunity to testify on the drought of new 

bank charters. The lack of de novo banks is strong evidence that 

the economics for new community banks doesn’t work. Investors 

have options. If the impediments to starting a new bank are too 

great, they will invest elsewhere. 

Sadly, the forces that have acted to stop new bank charters are 

the same ones that have led to the dramatic consolidation of the 

banking industry: excessive and complex regulations that are not 

tailored to the risks of specific institutions. This, not the local economic conditions, is often the tipping point that drives small banks 

to merge with one another and is a barrier to entry for new banks. 

Since the Dodd-Frank Act was enacted in 2010, community 

banks have shown great resilience and have worked to provide 

credit in spite of the onslaught of new regulations. The fact that 

they continue to lend and strive for profitability in no way suggests 

that the Dodd-Frank Act and its 25,000 pages of proposed and final 

rules has not had a negative impact on banks’ customers and their 

communities. It has had an impact. 

6 

While not the sole reason, it is very troubling that 1,917 banks, 

or about 24 percent of the industry, have disappeared since DoddFrank was enacted. Contrast that with only six de novo banks 

since Dodd-Frank. 

In April, the FDIC announced some welcome changes to help prospective de novos. Unfortunately, they did not address the underlying barriers to entry: capital hurdles; unreasonable regulatory expectations on directors; funding constraints; and an inflexible regulatory infrastructure. When my bank was started, we raised $6.5 million to capitalize 

the bank. The expectation for de novos now is somewhere between 

$20 million and $30 million, many multiples beyond what successful banks needed in the past for a startup. For my bank, the $6.5 million was an amount we felt we could 

grow into in a reasonable period of time, which would allow us to 

provide a reasonable return to our shareholders and grow the bank 

in a safe and sound manner. 

As we grew, we raised additional capital 6 different times to keep 

the bank adequately capitalized, but we were careful not to overcapitalize. Had we raised it all in the beginning, shareholders 

would have been unhappy and would not have been willing to invest more when the time came and that capital was needed for 

growth. 

I would not start a bank under today’s conditions. Even though 

with my experience, I could likely raise the funds necessary, I 

would have to grow the bank so quickly to put the capital to work 

that it would pose undue risk on our shareholders. 

Starting a new bank in a small community would be even more 

difficult. It would be very hard to raise capital and impossible to 

grow the bank quickly enough to utilize that capital. 

Moreover, with all the regulations, a highly experienced compliance officer is needed. Yet, good compliance officers now easily 

make six figures, far more than what the highest paid staff member receives in most small community banks. This makes it very 

hard to start and run a profitable bank. 

It is time to think differently to encourage new banks by requiring less startup capital, reducing regulatory burden, permitting 

greater flexibility in business plans, and lifting funding restrictions. 

I grew up in a banking family. My father managed three small 

community banks in west Texas. From childhood, I saw the impact 

that a small town community bank has on its community. They are 

involved in or behind almost every initiative, they support almost 

every nonprofit, and they support the small businesses in those 

communities like no other bank can. When a small community 

loses its bank, it quickly begins to die. 

We urge Congress to act now and pass legislation to help turn 

the tide of community bank consolidation, to create an economic 

environment that encourages new bank charters, and to protect 

communities from losing a key partner to support economic growth. 

Thank you. I would be glad to answer any questions when the 

time comes. 

[The prepared statement of Mr. Burgess can be found on page 48 

of the appendix.] 

7 

Chairman LUETKEMEYER. Thank you. 

With that, we recognize Mr. Stone for 5 minutes. 

STATEMENT OF KEITH STONE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE FINEST FEDERAL CREDIT UNION, ON 

BEHALF OF THE NATIONAL ASSOCIATION OF FEDERALLYINSURED CREDIT UNIONS (NAFCU) 

Mr. STONE. Good afternoon, Chairman Luetkemeyer, Ranking 

Member Clay, and members of the subcommittee. My name is 

Keith Stone, and I am testifying today on behalf of NAFCU. I appreciate the opportunity to share with you my experience with 

chartering a new credit union. 

I currently serve as the president and CEO of The Finest Federal 

Credit Union, headquartered in New York City. The Finest’s charter was approved in January of 2015 to serve the needs of New 

York State’s law enforcement community. We currently have $5 

million in assets and serve over 2,400 members. 

The idea for the Finest Federal Credit Union came from Mr. Paul 

McCormack, a retired NYPD deputy inspector. In his travels, he 

was introduced to officials from Saint Raphaels Garda Credit 

Union, the largest credit union in Ireland. Mr. McCormack was intrigued and amazed at the services offered by this cooperative, 

which led him to ask the question: Why doesn’t the world’s largest 

police force, the NYPD, have their own credit union tailor made to 

fit their own unique needs? 

In 2007, Paul and several other organizers went to work trying 

to find a way to fund the venture. After more than a year of research and organizing, it became apparent that the financial crisis 

of 2008 scared away the would-be capital sources, so their efforts 

were put on hold. 

A few years later, AmTrust Financial Services announced its interest in helping fund our credit union launch. Once funding was 

secured, we went to work drafting the application and business 

plan and finally submitted them to NCUA. This process lasted over 

18 months. 

As we learned, chartering a credit union is not quick or easy. The 

process involves 17 steps that I outlined in my written testimony. 

The entire process can take up to 3 years, depending on the complexity of the business model and how many amendments must be 

made. 

While we were fortunate to have support, the initial capital infusion and cash outlays to start a credit union are often too great for 

many communities. Starting a new credit union is essentially an 

altruistic endeavor as there is no ultimate financial incentive for 

those who are successful. 

Furthermore, the complex chartering process may seem relatively easy and straightforward when compared to what a de novo 

credit union will face once it is chartered and operating. The industry has seen a significant decline in the pace of de novo credit 

unions post-Dodd-Frank enactment, averaging nearly eight charters per year before but only about two afterwards. Approximately 

one-third of credit union charters established in recent years have 

not survived. 

8 

Despite the challenges, we have been successful at The Finest 

due to some key factors, including our commitment to keep the underlying goal in focus, to provide specific help and services to the 

officers of the NYPD through all stages of life, and our ability to 

secure a financial supporter in AmTrust Financial Services to help 

fund the chartering effort. 

Even after securing funding, we continued to face a number of 

challenges, such as the significant cost needed to run day-to-day 

operations and keep up with the ever-changing post-Dodd-Frank 

regulatory environment and limitations in our current powers that 

deny us the ability to fully serve our member needs by offering expanded products, such as mortgages. 

While NCUA is an important partner, and their Office of Consumer Protection takes an active role in helping new credit unions 

form, there are additional steps that they can take to help de novo 

charters meet their unique challenges. The agency could establish 

timetables for responses at various stages of the chartering process 

and set an advocate at the agency for de novo credit unions to work 

with. NCUA could also provide limited flexibility on a case-by-case 

basis for new credit unions, such as additional time to meet certain 

requirements or faster approval for additional services. 

Congress can also help de novo charters by passing meaningful 

and comprehensive regulatory relief, including providing credit 

unions greater relief from some of the burdens in the Dodd-Frank 

Act and by adopting more flexibility in the Federal Credit Union 

Act, such as expanding access to supplemental capital, ability to 

serve underserved areas, and modernizing outdated governance 

provisions in the Act. 

In conclusion, chartering a new credit union is not an easy process, and de novo credit unions face a series of challenges once they 

are created. Still, new credit unions are an important way to meet 

the unmet needs of the American financial consumer. Both Congress and the regulators need to do more to help reverse the declining trend of new charters. 

We thank you for the opportunity to share our thoughts with you 

today. I welcome any questions you may have. 

[The prepared statement of Mr. Stone can be found on page 74 

of the appendix.] 

Chairman LUETKEMEYER. Thank you. 

Mr. Kennedy, you are now recognized for 5 minutes. 

STATEMENT OF PATRICK J. KENNEDY, JR., MANAGING PARTNER, KENNEDY SUTHERLAND LLP, ON BEHALF OF THE SUBCHAPTER S BANK ASSOCIATION 

Mr. KENNEDY. Mr. Chairman, Ranking Member Clay, and members of the subcommittee, my name is Patrick J. Kennedy, Jr., and 

I want to thank you for inviting me to appear at this hearing and 

to submit written testimony. 

I have been a practicing lawyer for 30-plus years representing 

community banks, their shareholders, directors, officers, and related entities on a wide range of corporate regulatory matters. And 

over those years, together with my various partners, our firm has 

represented over 30 de novo charter groups, and we are today honored to be representing a group of Florida businessmen who have 

9 

filed the first national bank charter in the United States since 

2008. 

I also am president and founder of the Subchapter S Bank Association, which is primarily an educational organization which provides substantive advice and content to shareholders, directors, and 

officers of banks that have elected Subchapter S tax treatment 

under the Internal Revenue Code. 

There are over 2,000 banks in the United States which maintain 

that S election, accounting for approximately a third of the charters 

in the United States. Ninety percent of these Sub S banks are 

under a billion dollars in total assets, and 90 percent of that number are located in rural communities. 

In 2008, there were 101 applications for new bank charter insurance filed with the FDIC, of which 28 were approved. Thirty-three 

were filed in 2009, but none were approved. The filings dropped to 

6 in 2010 and a total of 10 from 2011 through June 30, 2016, with 

only 3 charters being approved in that period of time. 

In my opinion, the reasons for the significant decline of new bank 

charters is a direct result of the decision made by the FDIC in 2009 

to require that applicants for FDIC insurance provide a 7-year 

business plan, evidence of capital sufficient to maintain a comfortable cushion above that of the required minimums for that entire period of time, and in addition mandated that the initial conditions and enhanced supervisory monitoring imposed on new charters would also be extended from the traditional 3 years to 7 years. 

One of the many conditions that the FDIC imposed was requiring 

prior approval of any change or deviation in the business plan, and 

the FDIC began imposing similar conditions on just changes in control of existing banks. These had a significantly negative impact. 

The regulatory oversight and examination processes post-2008 

also created additional capital and regulatory pressures, and informal capital ratios were increased 1 to 2 percent, even for well and 

good operating banks. Clearly, the enactment of Dodd-Frank unleashed a new plethora of requirements and costs on banks and led 

to further significant increases in cost. 

And in June of 2012, the Federal regulators imposed the Basel 

III international capital standard on every bank in the United 

States, sending really another tremor through the industry, and we 

began to immediately notice a significant shift in our bank clients’ 

attitude. Many began to believe that they would be unable to continue to operate or only do so in a marginally profitable way, if at 

all. 

In response to the chairman’s specific request, these added costs 

occasioned by Dodd-Frank, Basel III, and the discretionary supervisory action significantly impaired existing financial institutions’ 

ability to provide financial services and products to consumers. 

In the past few years, we have heard regulators explain the lack 

of new charters as a result of low interest rates and the expectation 

that charters would not be viable; however, in my opinion, the 7- 

year business plan and compliance period was the most significant 

reason. 

At the urging of many in the industry, the FDIC began to change 

these discretionary regulations. In 2004, they reduced the business 

plan from a 7- to a 3-year period, but there was still confusion in 

10 

the marketplace. In April of 2016, the chairman clearly eliminated 

and returned to the 3-year business plan capital period, and I think 

that is the reason we see the number of charters beginning to increase. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Kennedy can be found on page 

70 of the appendix.] 

Chairman LUETKEMEYER. Thank you. 

Ms. Edelman, you are now recognized for 5 minutes. 

STATEMENT OF SARAH EDELMAN, DIRECTOR OF HOUSING 

FINANCE, CENTER FOR AMERICAN PROGRESS 

Ms. EDELMAN. Thank you. 

Good afternoon, Chairman Luetkemeyer, Ranking Member Clay, 

and members of the subcommittee. My name is Sarah Edelman, 

and I direct the Housing Policy Program at the Center for American Progress. Thanks so much for having me here to testify today. 

And thank you for your interest in ensuring a robust community 

banking sector that serves all communities. 

A family or a small business should be able to build a strong relationship with their community bank or credit union whether they 

live in a downtown commercial center, a neighborhood suffering 

from disinvestment, or a small town. However, watering down the 

FDIC requirements for new banks is not likely to help Americans 

better meet their credit needs over the long term. 

The decline in de novo banks since the financial crisis has far 

more to do with macroeconomic conditions than the FDIC application process or higher standards for banks. Researchers at the Federal Reserve found that macroeconomic conditions, including interest rates, account for over two-thirds of the recent decline in de 

novo applications. 

Since the financial crisis, interest rates have been at historic 

lows. While necessary for helping consumers and businesses and 

for creating jobs, low interest rates have made it harder for new 

banks to be profitable. This is because a community bank’s primary 

source of revenue is derived from net interest margin revenue, basically the spread between what a bank pays to fund a loan versus 

the interest rate the borrower pays to the bank. 

Lower interest rates narrow the spread, which means the bank 

earns less. While existing banks can earn higher profits on loans 

they originated when interest rates were higher, new banks can’t 

bolster earnings through legacy loans. 

It is true that the FDIC made changes to its application process 

for de novo banks during the financial crisis. In 2009, the FDIC 

lengthened the period of supervision it requires for new banks from 

3 years to 7 years. This change came amid widespread bank failures and hard economic conditions. 

By the end of 2009, the FDIC insurance fund had fallen into the 

red by $20.9 billion. FDIC research shows that during the crisis, 

newly formed de novo banks failed at twice the rate of existing 

small banks. It makes sense then that the FDIC would have required additional supervision during a new bank’s early years. 

However, in 2016, as conditions improved, the FDIC reduced its 

supervision period back to 3 years. The FDIC is also making the 

11 

application process more transparent and easier to understand, including through clearer guidelines for applicants and a series of 

local roundtables. 

If we care about making sure that families and businesses have 

access to credit, we should address factors that have more directly 

led to the decline in the number of small community banks over 

the years. For instance, members of the relevant committees in 

Congress and regulators should make it their full-time job to ensure that the Nation never endures another devastating financial 

crisis. 

According to FDIC data, between 1985 and 2013, over 2,500 

banks and thrifts failed. Ninety-seven percent of these failures took 

place during a financial crisis, either during the savings and loan 

crisis or during the recent global financial crisis. Put simply, the 

Nation has lost too many small banks to financial crises caused by 

the big banks. 

In 2010, Congress enacted financial reform to prevent the large 

banks from taking down community banks and our economy again. 

Despite the claims of some banking industry representatives, these 

standards do not appear to be hurting the health of community 

banks. First, community banks enjoy large exemptions from the 

new standards. For instance, they aren’t subject to CFPB enforcement, stress testing, or many of the new mortgage rules. 

Moreover, community bank profits are up, back to where they 

were before the financial crisis. Business lending has increased 

since the passage of Dodd-Frank. Small communities banks are 

doing more mortgage lending than they were before the crisis. 

Lowering FDIC standards for new banks, or deregulating Wall 

Street, as some Members of Congress have proposed, is not likely 

to help community banks over the long term or aspiring small de 

novos. 

One immediate step Congress can take to strengthen small 

banks and credit unions is to ensure that community development 

financial institutions serving their communities are properly funded. I believe my copanelists share my disappointment with the 

President’s proposal last week to eliminate the CDFI Fund, which 

funds hundreds of CDFIs across the country and generated over $4 

billion in lending in 2013. Congress can take an important step towards serving Main Street by making sure CDFIs can continue 

serving communities often overlooked by larger institutions. 

Thank you for your time. 

[The prepared statement of Ms. Edelman can be found on page 

59 of the appendix.] 

Chairman LUETKEMEYER. Thank you. 

I will now recognize myself for 5 minutes for questions. 

Mr. Kennedy, I want to start with you. You are in the midst 

right now, I understand, of working with a bank with regards to 

getting a new charter. Is that correct? 

Mr. KENNEDY. Yes, Mr. Chairman. 

Chairman LUETKEMEYER. And when you were talking about your 

testimony there, you had over 30 of these banks that you worked 

with before, so you have a lot of background, a lot of experience on 

it. And you are saying that in 2010, I believe it was, there were 

12 

30-some that applied for a charter—maybe it was 2009—and none 

were approved. Can you tell me why none were approved? 

Mr. KENNEDY. I don’t know. The Chair of the FDIC was testifying in July before the House Oversight Committee, and the FDIC 

produced the statistics that I drew from. And it just was very clear, 

you could see a dramatic decline. And I pinpoint that as the change 

that I referred to in 2009 that the FDIC made to their rules. 

Chairman LUETKEMEYER. I think one of the concerns that we 

have—and this is why the subcommittee is having the hearing 

today—is we saw prior to 2008 about 150 bank charters and a 

number of credit union charters as well, and then after that it 

seemed like it fell off the charts. 

And I think, Mr. Burgess, you alluded to the fact that there is 

a lot of—you made the comment that the economics don’t work. So 

apparently there were a lot of folks who looked at the economics 

of putting together multimillion-dollar businesses here and it 

wasn’t going to pay back. So can you elaborate a little bit on what 

you were talking about there? 

Mr. BURGESS. I know probably a number of you grew up in small 

towns like I did. And if you look at a startup organization, in our 

case we started with $6.5 million, and about 6 employees. I took 

a large cut in salary from a bigger bank I came from to do that, 

and I was making less than $100,000. 

Today, if I was going to start a new bank, I would have to hire 

a compliance officer who would make over $100,000, and the economics do not work when you have to put a salary in at that level 

to get started with a bank that doesn’t really have any assets on 

the books. It also takes probably in the neighborhood of $750,000 

in upfront costs to go through the application process before you 

even have any revenues. 

Chairman LUETKEMEYER. So what you are pointing out is that 

you have a lot of compliance costs, a lot of rules and regulations 

you have to comply to that cause you to spend more money than 

had previously been done prior to 2008. Therefore, the economics 

of it have changed significantly. Is that a fair statement? 

Mr. BURGESS. That is a fair statement. 

Chairman LUETKEMEYER. And that your business model has 

changed significantly as a result of all the rules and regulations. 

Can you point to a particular rule or regulation or group of rules 

or regulations that are problematic for you, very costly? 

Mr. BURGESS. I can point to a number of rules and regulations 

that are problematic. But I think it is the accumulation of rule 

after rule after rule. And if you have a bank that has six or seven 

employees in it when you start out and they have to get their arms 

around all of the rules and regulations that were in place before 

that, and now you have 25,000 pages of new regulations, you can 

imagine, even if you have a highly experienced compliance person, 

trying to get your arms around that, number one, training all the 

employees to make sure that they can meet a zero-tolerance compliance policy in many cases is almost impossible. We are human 

beings. That is pretty tough. 

Chairman LUETKEMEYER. Thank you, Mr. Burgess. 

Mr. Stone, you were shaking your head a minute ago when I was 

talking about rules and regulations. 

13 

Mr. STONE. Yes, sir. 

Chairman LUETKEMEYER. Do you have a lot of experience with 

that? 

Mr. STONE. Mr. Chairman, I concur with a lot of what Mr. Burgess said. We started with $2 million in capital. We are now a $5 

million institution. I was actually speaking yesterday—I was at 

NASCUS, which are credit union State controllers, and they recommend that you need to start with at least $5 million. 

We have the same difficulties. I have a staff of four full-time, and 

two part-time people. We have the income expense conundrum. We 

have the regulatory burdens. And I couldn’t agree more, my BSA 

officer is also my compliance officer, and my chief operating officer. 

And to be able to keep up with salaries of a small staff—in addition to lack of income right now, because due to certain regulatory 

concerns we are not allowed to offer certain products right now 

which would bring in the income which would help grow our credit 

union. 

So it is a catch-22. We want to grow, we want to add services, 

but we can’t because of certain restrictions right now we have on 

us with a letter of understanding and agreement from the NCUA, 

and with the regulatory burden, and that is stopping us from growing, from adding these products. 

Chairman LUETKEMEYER. You made the comment about relieving 

the burden of Dodd-Frank. I have almost no time here. Can you 

just very quickly— 

Mr. STONE. That is correct, sir, Dodd-Frank regulations— 

Chairman LUETKEMEYER. Okay. My time has expired. 

I will recognize the gentleman from Missouri, the ranking member of the subcommittee, Mr. Clay, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. 

Let me thank the witnesses for their testimony today and your 

answers. 

Ms. Edelman, your fellow panelists are suggesting that de novo 

bank and credit union charters are experiencing a current drought 

as a result of Dodd-Frank protections intended to prevent another 

financial crisis and harm to consumers. However, I understand the 

Federal Reserve staff has done research showing that de novo applications tend to closely track interest rates. 

You have also done research showing that there has also been 

considerable consolidation in the banking industry long before 

Dodd-Frank. 

Would you please elaborate on these factors, the role the interest 

rate environment may play, along with the very long industry consolidation trend, and any other factors and how they affect de novo 

bank and credit union charters? 

Ms. EDELMAN. Sure. Thanks for the question. 

Community banks have been having challenges over the past 

several decades. And most recently what we have been seeing with 

the lack of de novo charter applications, research from the Federal 

Reserve has shown that new bank charters are highly correlated to 

interest rate levels. And so when interest rate levels have been low 

over the decades, you have seen fewer bank charter applications. 

They also found that since the financial crisis, not only have we 

seen a decline in de novo charters, but we have also seen a decline 

14 

in the number of new bank branches that are opened by existing 

banks, pointing out that there is something else going on than just 

the FDIC de novo process, because those existing banks don’t have 

to go through the de novo process. So there are some macroeconomic factors that seem to have made it less attractive to investors to invest in new banks. 

And in terms of consolidation since the mid-1980s, we have 

seen—as I mentioned in my testimony, most of the small banks 

that we have lost or seen periods of massive consolidation have 

happened around the financial crisis, so right after the savings and 

loan crisis or right after the global financial crisis that was triggered in 2008. 

We also saw things like liberalization of interstate banking rules 

in the 1980s and 1990s that made it far more attractive to consolidate than to open up a new bank. 

So there are all sorts of reasons why we have been seeing a decline. 

One other thing to point out is that when small banks are doing 

well, oftentimes they grow into midsized banks, like Mr. Burgess’ 

bank. So 20 percent of the banks that had less than $100 in million 

assets in 1985 had grown to be midsized community banks by 

2011, and some of them even have over $10 billion in assets. 

So it is a more complicated picture than simply saying it is the 

FDIC’s fault or it is Dodd-Frank’s fault. 

Mr. CLAY. And thank you for that. 

Mr. Burgess, it is my understanding that your community bank 

has been in existence for nearly 20 years. You have weathered both 

the pop of the tech bubble and the financial crisis. As a result of 

both of those downturns, many community banks, including a large 

proportion of de novo banks, failed. 

It is also my understanding that de novo banks fail in significantly larger proportions than other community banks during a recession, which helps explain why the FDIC imposed additional 

guardrails around those institutions in 2009. In fact, FDIC researchers found that out of the 1,042 de novo banks chartered between 2000 and 2008, 133 failed or 12.8 percent. In comparison, 4.9 

percent of small established banks failed during the same period. 

These researchers also noted that de novo banks’ higher failure 

rate is consistent with previous studies which found that they are 

financially fragile and more susceptible to failure. 

My question to you is, when banks fail and the FDIC steps in 

to make depositors whole, is it not remaining banks, such as your 

bank, that have to pay additional deposit insurance premiums to 

recover those losses? 

And my time is up. 

Mr. BURGESS. Thank you. 

Yes, that is true. We do see additional increases in deposit premiums, and we had to rebuild the FDIC fund after the financial 

crisis. 

I am not really familiar with the study that you just discussed, 

but there were a lot of de novos that started prior to the financial 

crisis. I would like to see the geographical dispersion of those, because I would assume a lot of those were in the Georgia area and 

that was hit very heavily during that time. And I would say a lot 

15 

of those numbers likely came in that area. I am not sure. But you 

are correct. 

Mr. CLAY. Thank you. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we go to the vice chairman of the subcommittee, the 

gentleman from Pennsylvania, Mr. Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Mr. Burgess, you mentioned in your testimony that you had to raise about $6.5 million in order to start your bank about 19 years 

ago. And you estimated that a similar effort would require between 

$20 million and $30 million today. This is certainly in line with 

what I am hearing from community bankers in my own district. 

Clearly, having to raise 4 or 5 times more money today than a few 

years ago—likely from a broader pool of investors—to start a bank 

is a big hurdle to overcome. 

I also wonder whether raising so much capital at the start to satisfy regulators also has the potential to change firm behavior, perhaps inducing banks to make riskier choices. This would seem to 

be against the spirit of what the regulators are hoping to achieve. 

You seem to share this concern. In your testimony you wrote, ‘‘If 

I was in the position of starting a bank today, under today’s conditions, I would not do so. Even though, with my experience, I could 

raise the funds necessary, I would have to grow the bank so quickly to put the capital to work that it would pose undue risk on our 

shareholders.’’ 

Can you elaborate on that statement? 

Mr. BURGESS. Yes, thank you for the question. 

When an investor looks at where they are going to make an investment, they are looking for a reasonable return. And if they can 

get a better return somewhere else, that is where that money is 

going to flow. So if they are going to make an investment in the 

banking industry, they are going to look for an investment where 

they know they are going to make a reasonable return. 

If you set the capital levels too high and it is going to take 5 to 

6 years before they can receive a reasonable return, then they are 

not going to be very happy with that investment. And when you 

do get to the point where you need to get more capital, it is unlikely you are going to be able to get those investors to put more 

in because the return is going to be so low. 

Mr. ROTHFUS. Do these higher capital requirements for de novos, 

would they induce riskier behavior? Are you going to be looking for 

a return in some way to satisfy the shareholders? 

Mr. BURGESS. If you went ahead and started a bank in a community, in a small community especially, and you had to raise $20 

million, that means that you would need to have a bank of somewhere around $200 million in assets to support that. A lot of small 

towns don’t have banks that have been there for 100 years that are 

$200 million in assets. 

So it is unlikely you are going to grow a bank to $200 million 

in a short period of time. If you did, you would have to be looking 

for alternative ways to bring in deposits, and alternative ways to 

bring in loans. 

More than likely those would have to come in from other markets 

and other places, which are out of market and are frowned upon 

16 

by regulators. So it would cause them to use an out-of-the-box plan 

to try to get to the level to leverage that capital appropriately. 

Mr. ROTHFUS. I want to switch to Mr. Kennedy for a second. In 

your testimony you state that the lack of new charters is not a result of low interest rates. Why do you think that regulators pin the 

de novo drought partly on low interest rates? 

Mr. KENNEDY. I guess the chart that the Federal Reserve produced might be one reason, Congressman. I think it could be one 

of the reasons, but I do not think it is the only reason. There are 

examples of banks that were actually chartered and open for business in 2008 just going into the crisis that did very well during 

that low- interest-rate period. 

Mr. ROTHFUS. They were able to make money during those 3 

years and they did okay? 

Mr. KENNEDY. Yes, sir. 

Mr. ROTHFUS. Again, Mr. Kennedy, as you know, the FDIC 

strongly discourages any deviations from business plans and requires that banks seek their approval before making any changes. 

While I understand that the FDIC has an interest in making sure 

that banks stick to their initial plans, we should also be mindful 

of the fact that economic conditions change and a well-managed institution should be able to respond to change effectively. 

Given the FDIC’s insistence on sticking to the plan, how can an 

institution adjust to changing realities quickly enough to succeed? 

Mr. KENNEDY. It is a very difficult thing. Thanks for the question. 

The good news is that the FDIC did kind of clarify what they 

mean by adverse or by changes to the plan in April of 2016 and 

put a 25 percent deviation standard, which provides a little more 

flexibility than I think they were imposing previously. 

Mr. ROTHFUS. Are there any similar requirements that may be 

an impediment to de novo success? 

Mr. KENNEDY. The capital ratios continue to be difficult, particularly on Subchapter S banks, which I think is one of the reasons 

we have as many community banks in the United States as we do, 

because they are community banks, largely rural banks that are 

family owned, like Mr. Burgess’, that are able to take advantage 

of flow-through tax treatment. 

But there are caps on the number of shareholders. And so, particularly in the case that we are representing in Florida that I 

made reference to that is a charter, it is going to begin as a Subchapter S bank, but there are concerns about the number of shareholders being at that 100 shareholder cap. So changing that would 

be helpful. 

Mr. ROTHFUS. I yield back. Thank you, Mr. Chairman. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentlelady from New York, Mrs. Maloney, is now recognized 

for 5 minutes. 

Mrs. MALONEY. Thank you very much. And thank you, Mr. 

Chairman and Mr. Ranking Member, for this important hearing. 

I agree with the statements of Ms. Edelman that the CDFIs need 

to be refunded and funded. They provide a critical form of financial 

services to many communities. And I very strongly agree with Mr. 

Burgess’ statement that often the banks and the credit unions are 

17 

the key employer, the most important civic leader in these neighborhoods, and are absolutely critical to banking. 

And I think we are seeing more and more that larger banks that 

are involved in the international don’t even want to get involved 

in daily banking of small business loans and mortgages. So community banks really didn’t cause the financial crisis; they certainly 

were the backbone of helping our communities recover and bounce 

back. 

So I just want to thank you, Mr. Burgess, and ask you a little 

bit more about your statement that banks with less than $100 million in assets have seen by far the steepest drop-off after the crisis. 

And as you noted in your testimony, more than 43 percent of these 

smaller banks have disappeared since 2010, which is truly shocking. 

And whether the cause of this decline is a higher regulatory burden or economics of scale that make it difficult for small banks to 

competes with larger rivals or just to survive in general, I think we 

can all agree that it has become more difficult with a bank with 

less than $100 million in assets to survive. 

So my question, Mr. Burgess, is, does this suggest that new 

banks will need to be larger when they first start out in order to 

have a decent chance of surviving? You said you started yours with 

$20 million, I think you said? 

Mr. BURGESS. We started ours with $6.5 million. 

Mrs. MALONEY. $6.5 million. So you are saying that can’t happen 

now. Can you elaborate a little more on what this means for starting new banks? 

Mr. BURGESS. The first thing it means is in a small community 

it is unlikely that the community has the resources to even put 

that amount of money together to start a bank. 

But I will give you a story that is a good example of how a small 

community is impacted. As the chairman of the Texas Bankers Association last year, I traveled all around our State. I remember 

walking in one morning to a small bank in south Texas and talking 

to the owner, and he was lamenting the fact that he had lost several of the products that he had been able to do in the past, primarily mortgage lending. 

He was the only bank in that community. He quit making mortgage loans because he did not have the staff to get their arms 

around all of the regulatory requirements for being able to make 

a mortgage loan. And since there is more or less a zero-tolerance 

policy for making mistakes, he did not feel like he could take the 

risk to do that. 

So that community is now left with nobody making mortgage 

loans, and the only people who are going to make mortgage loans 

in that community would be investors who would come in and buy 

up those houses and sell those back to people and finance them 

themselves, which is generally at much higher interest rates. 

Mrs. MALONEY. I want to talk to you, Mr. Kennedy, about your 

testimony. You said that you saw a noted difference after 2012 

when it was announced that regulators would impose the international large bank capital standards, known as Basel III, on every 

bank in the United States. 

18 

It seems to me that we have a two-bank system. We have international banks that compete in the international global community, 

and we have community banks that provide services in communities. And I, for one, have never understood why Basel III capital 

standards should apply international banking standards when you 

are not involved in the risky products, you are not involved in the 

high-risk activities that some of our larger banks are involved in. 

So I, for one, would like to explore—and I have raised this in letters and conversations with regulators over and over again—that 

community banks should not have that same standard. And they 

say they have a different standard, but I am not hearing that there 

is a different standard coming from you. 

But I would support legislation that would say community banks 

should not be held to the Basel III capital standards. They should 

be held to capital standards, but they are not competing in the 

international market. And that burden seems like an unfair burden, in my belief, on community banks. 

And I agree with the statement from Mr. Burgess that community banks provide, I would say, an essential service, really an essential service to America. And if you don’t have a bank in your 

community, you are in big trouble. You can’t finance, you can’t get 

things going. 

So I really would like to explore that with some of my colleagues 

on some aspects that we could do, and that seems like a commonsense one to me. 

I think the chairman is telling me my time has expired. Thank 

you. 

Chairman LUETKEMEYER. The gentlelady’s time has expired. 

With that, we go to the gentleman from Florida, Mr. Ross, for 5 

minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

It is my understanding that the number of community banks 

that now exist is at the lowest number since prior to the Great Depression in 1928. And as we look at the number of banks and the 

stagnant growth in the banking industry, I have to speculate that 

most industries are demand-driven by consumer demand. 

And so what effect has the lack of—or is there a lack of—consumer demand for banking services in the industry over the last 

10 years? 

Mr. Burgess, I will let you start with that. 

Mr. BURGESS. No. 

Mr. ROSS. There isn’t, is there? 

Mr. BURGESS. I am not seeing a lack of consumer demand. I am 

seeing a lack of ability to meet some of the consumers’ needs because we created a box that everyone has to fit into. 

Mr. ROSS. And so the only way you can stay alive is through acquisition and mergers? 

Mr. BURGESS. We can grow our business some. But one of the 

reasons that I am in the banking business and one of the things 

I have enjoyed so much since I started was over the years I have 

been able to sit down with a customer who walked into my office— 

Mr. ROSS. Exactly. 

19 

Mr. BURGESS. —listen to their story, try to create a custom package for them that meets their needs the way they need their needs 

to be met. 

Mr. ROSS. And since Dodd-Frank, your hands have been tied, 

have they not? 

Mr. BURGESS. In many cases, especially in the mortgage lending 

area. 

Mr. ROSS. And so that consumer demand continues to exist both 

in the banking and in the credit union industry. Wouldn’t you 

agree, Mr. Stone? 

Mr. STONE. I would agree. Currently, we are being restricted due 

to Dodd-Frank, due to the fact that we are not allowed to offer 

mortgages, yet because of the size of our institution and the regulatory compliance costs that it would take to offer mortgages. 

Mr. ROSS. Such as the qualified mortgage rule? 

Mr. STONE. I’m sorry? 

Mr. ROSS. Such as the qualified mortgage rule? 

Mr. STONE. That is correct. 

Mr. ROSS. And so the regulators are telling you how to do your 

business because they apparently know better. But my concern is 

that if the consumer demand is there, which it is, in fact, it is probably there more now than it has been in the last 8 years, and yet 

where are the consumers going to go? Where will they go if they 

can’t go to their credit unions or their community banks? 

Mr. STONE. We currently have the demand, and I will give you 

an example. Currently, we are offering products that no other institution can offer my field of membership, which is all law enforcement officials in the State of New York. 

We have a product coming out called ‘‘killed in the line of duty’’ 

insurance. What that means is one of our members’ biggest concerns is not the fact that they need to go to work every day; it’s 

the fact that they might not come home to their families every day. 

So we have a product coming out that is going to be ‘‘killed in the 

line of duty’’ insurance, and we will be able to offer loans up to 

$850,000, and if that member— 

Mr. ROSS. You have had to diversify your products, haven’t you? 

Mr. STONE. That is correct. In addition, we have something 

called the ‘‘uniform loan.’’ So we go out to the new rookies from day 

one, they could get a loan from us for up to $5,000 for their equipment, to pay off high-interest-rate debt, to help them get started, 

and they can’t walk into Chase Bank right now and get a $5,000 

unsecured loan at a very competitive low rate. 

Mr. ROSS. But my point is, there is consumer demand out there, 

and if they can’t have their needs met at their community bank or 

their credit union, they are going to go somewhere else, and that 

somewhere may not be the safest place; in fact, it may be the most 

unregulated place. 

Mr. STONE. We are hurting our community, we are hurting our 

field of membership, and we are pushing them to entities like predatory lending. 

Mr. ROSS. Mr. Burgess—and maybe Mr. Kennedy might be able 

to speak on this—because there is also what has been out there is 

an overregulatory, what I call regulatory intimidation. Take Operation Choke Point, for example, where the DOJ and the Fed come 

20 

in and say: Because of reputational risks, you can’t give loans, we 

don’t recommend that you give loans to these legitimate businesses 

because we don’t like their reputation. 

Now, let me ask you this: Has that played any role, do you think, 

in not only the lack of your ability to expand your bank, but also 

in the lack of the ability to start de novo banks? 

Mr. Burgess, I will let you start, and then Mr. Kennedy. 

Mr. BURGESS. I have not seen that, I don’t think necessarily, in 

the area of starting a de novo bank. I know there are a lot of bankers who have certain lines of business where they have felt like 

they needed to get out of that business because of pressure to— 

Mr. ROSS. From the Fed? 

Mr. BURGESS. From the regulators. 

Mr. ROSS. Yes. 

Mr. Kennedy, can you comment? 

Mr. KENNEDY. It is interesting. Just people who need loans, businesses that need loans, Ken made reference to the unique requirements of each individual businessman or person or woman, et 

cetera. And what we are finding is that the bankers have to kind 

of do what the regulators think is best. And they are getting way 

down into the weeds rather than being— 

Mr. ROSS. And is that more of like an overreaction, because of 

what happened prior to the 2008 crisis? 

Mr. KENNEDY. I believe it is. It has just continued to increase. 

I have been doing this for 35 years, and it has just continued to 

increase. When I first started practicing law and representing 

banks, there was no specific capital standard. You just had to have 

some prudential capital standards. 

Mr. ROSS. I see my time is up. And being from Florida, I am delighted to see that you have clients who are starting a new bank 

in the State of Florida. 

Thank you. I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from Georgia, Mr. Scott, is recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

A priority of mine has always been to help the little guy. And I 

really mean it when I say it. And if I think a bill will help community banks and credit unions, I am usually the first Democrat to 

get on board and tirelessly fight to work in a bipartisan way and 

move legislation across the finish line. My record speaks for that 

in the 14 years that I have been on the Financial Services Committee. And the reason I do it is so that we can make the lives better for our community banks, for our credit unions. 

But when I was preparing for this hearing my staff presented me 

with some compelling data about why new banks, de novo banks, 

have just stopped forming. If you recall, on December 16, 2014, the 

Federal Reserve study that was presented to us found that the biggest contributor to the steep decline in the creation of new banks 

was the low interest rate environment and the distressed demand 

for basic banking services. 

So with that said, I want to sincerely pose this question to each 

of you distinguished individuals, and that is, what can we do on 

the Financial Services Committee to correct this problem? But we 

21 

should not be focused on weakening Dodd-Frank. We should be focused instead on trends that are happening, such as low interest 

rates. 

Would you all comment and give me an answer on that? Am I 

correct in stating that the focus should be on what the Fed said 

was the source of the problem, low interest rate environments and 

depressed demand, Mr. Burgess? 

Mr. BURGESS. Thank you for that question. 

Part of our business, and it has been for as long as we have had 

banks, is riding through interest rate cycles. That is a normal part 

of what we do. We have to be able to manage that. We always have 

been able to manage that. 

But what is different this time is that when you have all these 

new costs that are being placed on you to meet regulatory demands, you have increasing cost, you have decreasing revenue, and 

the two of those things working together makes it very difficult to 

maintain profitability to allow you to grow and serve your community. 

One thing you mentioned too that I would like to talk about is 

the small person or the people who have less resources to work 

with. The huge amount of regulation that has been placed on the 

mortgage lending side has hurt those small borrowers more than 

anybody else, because it makes it so costly to make a small loan 

that some banks have walked away from the smaller loans, and 

those are the ones that we specifically need for the group of people 

who are trying to buy the lower-cost houses. We have to be able 

to reduce those costs so we can meet that segment of the population. 

Mr. SCOTT. Okay. 

Mr. Stone? 

Mr. STONE. Thank you for the question, Congressman. 

In the credit union world our process, starting up a credit union, 

chartering it is a 17-step process. What we would appreciate is if 

Congress could help us reduce the amount of inefficiency and 

miscommunication in the chartering process starting up. 

In addition, we feel possibly, pre-Dodd-Frank, I believe—and I 

have worked in the credit union world prior to 2003—the NCUA 

had sufficient restrictions and governance on credit unions. I feel 

even though we fall a bit under the umbrella of the current CFPB 

guidelines, I think it would be great for the credit union world 

right now if some of those were restricted and the credit unions 

didn’t have to be under that umbrella. 

Mr. SCOTT. Okay. I have 20 seconds, but I did want to get an answer just as a matter of fact. Do each of you agree when the Federal Reserve says that there is a depressed demand for basic banking services in this country? 

Mr. BURGESS. I do not agree with that. 

Mr. KENNEDY. I do not agree with that either. 

Mr. STONE. I do not agree. 

Mr. SCOTT. Why do you think the Fed came up with this? Because you all in the banking industry ought to know the answer 

to whether the demand is increasing. 

Mr. BURGESS. We see it every day. I don’t know where they came 

up with those numbers. 

22 

Mr. SCOTT. All right. I am glad I asked that question to clear it 

up. Thank you. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from North Carolina, Mr. Pittenger, is now recognized for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And I thank each of you for being here today. As a former bank 

board member of a small community bank, I have great interest in 

your testimony and what you have offered for us today. It has been 

very helpful and confirming to me of my experience in the banking 

business. 

I was at our bank from the time we chartered until the time that 

we sold the bank some 11 years later. We sold it at maybe a little 

over 21⁄2 times book value. It was a good return, and we were 

pleased with what we did. 

But the interesting thing about our experience was we knew who 

was creditworthy, and there was a box to check for character, and 

know your customer. That is what it was all about. And we enjoyed 

a great experience. I think our loan losses were never over 2 percent, but usually less than 1 percent. It was a great accomplishment, a great experience for me. 

And so, to that end, I recognize the impediments that have been 

placed upon the banking industry today—in North Carolina alone 

we have lost 40 percent of our banks—and truly restricting credit 

and capital, particularly in the rural communities which I serve. I 

serve eight counties, six of which are very rural, and they are impeded. That small farmer, that small-business guy doesn’t have access to capital. 

Ms. Edelman, I would like to ask you a question or two with the 

little time we have. I have read some about your background. You 

graduated, I believe, from the University of Maryland? 

Ms. EDELMAN. That is right. 

Mr. PITTENGER. And also from George Washington University. 

Ms. EDELMAN. Correct. And I am originally from Pennsylvania. 

Mr. PITTENGER. From where? 

Ms. EDELMAN. Pennsylvania. 

Mr. PITTENGER. Welcome. 

Ms. EDELMAN. Thank you. 

Mr. PITTENGER. You served in the Peace Corps. 

Ms. EDELMAN. That is right. 

Mr. PITTENGER. You served in AmeriCorps. 

Ms. EDELMAN. Correct. 

Mr. PITTENGER. You have been a community organizer, worked 

on community legal services, many other efforts of social intent. I 

am certain we would have much to learn from you of your experience, since you have been throughout the world in your public service, and I commend you for it. 

I would say to you and inquire, have you ever worked in a bank? 

Ms. EDELMAN. I have never worked in a bank. I worked on small 

economic development projects, and so community banks were part 

of— 

Mr. PITTENGER. You have never worked at a bank. Have you ever 

been on a bank board? 

Ms. EDELMAN. No. 

23 

Mr. PITTENGER. So you have never been involved in the loan 

process, never been involved in a bank and what it takes in terms 

of credit and establishing credit and what they do to— 

Ms. EDELMAN. No. I am here today because I focus on working 

families and their ability to get a mortgage. 

Mr. PITTENGER. And I appreciate that. 

Ms. EDELMAN. So the issues that— 

Mr. PITTENGER. What I am inquiring, Ms. Edelman, today— 

Ms. EDELMAN. Yes. 

Mr. Pittenger. —is understanding the realities of the real world. 

I would learn much from you, I think, I do believe, from your experiences of what you have achieved and accomplished through the 

Peace Corps and AmeriCorps. But I would just commend to you 

that these gentlemen, they validate by personal experience, they 

validate a statement that I heard from a man out in the hall earlier, about 30 minutes ago, that they sold their bank because of the 

compliance requirements. They had to consolidate. And these requirements, through Basel requirements, through the FDIC, have 

imposed enormous impediments on the growth of banks and the access to capital. 

And with all due respect to you, while it is good to see academically what could be the concerns, what I hear back in my district 

is that small guy, that small entrepreneur who doesn’t qualify, and 

that bank who can’t issue credit to that small guy. And, frankly, 

they have been the lifeblood of our economy. 

Ms. EDELMAN. Sure. 

Mr. PITTENGER. While we can say—you can say, well, the economy is bad so the banks didn’t do well—the reality is, would you 

accept the fact that perhaps these rules, these regulations, these 

compliance requirements imposed upon the financial institutions, 

the credit unions, the small banks, the inability to loan to people 

who could really be the dynamic in our economy? 

Ms. EDELMAN. Here is what I think. I believe it is very important 

that regulators take the challenges that community banks and 

credit unions are facing very seriously. 

Mr. PITTENGER. But I asked you a question. 

Ms. EDELMAN. And it is partly why they have given the exemptions. But let me just— 

Mr. PITTENGER. Reclaiming my time, excuse me, ma’am. 

I would like to ask you this: Do you believe that these impediments, these rules, these regulations, these compliance requirements, do you think that they had an impact on what these men 

are talking about? Do you see the merit in what they have been 

trying to say? 

Ms. EDELMAN. I believe that there has been an adjustment period. I also worry that the focus on repealing Dodd-Frank, that if 

you got rid of Dodd-Frank tomorrow, we are still going to have 300 

small banks failing per year. This has been a trend we have seen 

since 1985. And I worry we are missing the ball. 

Mr. PITTENGER. Reclaiming my time, I yield back. 

I would just say real-life experience, I would commend to you, 

would make a different statement upon that. 

Thank you. I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

24 

Ms. Velazquez from New York is now recognized for 5 minutes. 

Ms. VELAZQUEZ. Puerto Rican from New York. 

Mr. Burgess, in your testimony, you indicated that the ability of 

consumer banks to engage in small-business lending is being 

threatened by FinTech nonbank lenders, who often make loans 

without the same obligations and oversight as community banks. 

How would you recommend regulating nonbank lenders in this 

space? 

Mr. BURGESS. The first thing I would like to say is I am glad we 

have the FinTech area, because I think that is where the creativity 

and the innovation is coming from. The only thing we would want 

is we would want a level playing field so they don’t have an unfair 

advantage in the same markets we are in. 

So I am all for the FinTech area. I think they bring a level of 

innovation that is going to make us better down the road. We embrace a lot of what they are doing. We just want to make sure that 

we are playing on the same playing field they are. 

Ms. VELAZQUEZ. I do, too. And one area of concern for me is 

transparency, so that borrowers know what they are getting, what 

type of fees. So that is why I asked the question. 

Mr. Burgess, you also discussed how complex and the cost involved for de novo bank applicants when they are dealing with the 

business plan section of the application. So can you share with us 

how can we streamline the application process for new banks? 

Mr. BURGESS. Yes. And one thing, while I am answering that— 

I would like to respond to one thing Ms. Edelman said earlier—is 

part of the process you go through when you decide you are going 

to charter a new bank is you go talk to the licensing person with 

whichever regulator you are going to go through, and they tell you 

what the hurdles are. If you decide those hurdles are too high, you 

don’t fill out the application. 

But a specific answer to your question is, you generally are going 

to be hiring two or three professional people to work with you, to 

fill out the application, to go through all the legal requirements 

that you have to do to make sure you are in line or the application 

will never happen. And the cost for most banks—Pat could probably answer that better than me—but I know that a lot of banks 

I have seen are going to spend between $750,000 to a million dollars in startup costs before they ever open the doors to start turning a dollar of revenue. 

Ms. VELAZQUEZ. Thank you. 

Mr. Stone, credit unions in New York recently informed me that 

it is becoming increasingly difficult to provide overseas remittances 

due to the escalating cost of complying with the associated rules 

and regulations. 

How would you recommend we try and reduce the compliance 

costs for credit unions in this area? 

Mr. STONE. Congresswoman, thank you for asking that question. 

While we have only provided a limited amount of remittances so 

far at The Finest, it is an area where we could expand our services 

if our members request it. However, with limited staff and resources, we would have to weigh the benefit of expanding against 

the staff and resources needed to comply if we went over the hundred-exemption limit. 

25 

So currently, we are way under the hundred. Being a brand new 

credit union, we have only done really two per month maybe we 

average. 

Ms. VELAZQUEZ. Okay. 

Ms. Edelman, last January, you wrote an article in which you argued that the decline of community banks is largely due to changes 

in the underlying market. You also offer a number of recommendations that you think could revive this important institution. Can 

you walk through some of those recommendations? 

Ms. EDELMAN. Sure. I think it is important that instead of focusing on the Dodd-Frank regulations, we focus on some of the causes 

of the 30-year decline in small banks. Larger banks have lots of advantages over small banks, and that is partly why we have given 

small banks a number of carve-outs and flexibilities from the DoddFrank rules. But larger banks also have the ability to offer products that smaller banks can’t because of the overhead required, like 

credit cards, for instance, which are often very profitable for large 

banks but require marketing and a call center and enormous overhead. 

And so I think it is important that we look for ways to help small 

banks be more competitive. They clearly come with some innate 

competitive advantages. They serve the local community very well. 

They can get information from customers that larger banks just 

don’t—just completely miss. But we need to be thinking about how 

to bring down administrative costs, how to help them leverage 

technology more. We need to be having a conversation about how 

the Federal Government can support them in the years to come. 

Ms. VELAZQUEZ. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman LUETKEMEYER. The gentlelady’s time has expired. 

The gentleman from Texas, Mr. Williams, is recognized for 5 

minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

And thanks to all the witnesses today. We appreciate you being 

here. 

It is an understatement to say that the current regulatory environment isn’t working. It isn’t working for Main Street America, of 

which I am a member, and it isn’t working for the American taxpayers. As of this month, in Texas alone, 358 State- or Federallychartered banks, credit unions, or thrifts have either closed or 

merged since 2010. According to our Texas State Banking Commission, the last bank or credit union chartered in Texas was in 2009. 

And in the Austin metro area, which is one of the fastest growing 

populations in the country and in my district—that has been an explosion of growth—can claim just 16 locally-chartered banks, down 

from almost 60 at its height in the 1980s. 

So where does this leave us? Fortunately, it looks like Texas will 

get its first new State-chartered bank in almost 8 years. The Bank 

of Austin, which would primarily serve central Texas, has begun 

the long process of chartering in the Austin area. 

Now, Mr. Burgess, to you, let me begin. In your testimony, you 

indicated that when you started FirstCapital Bank in 1998, you 

capitalized for $6.5 million. You go on to say it is the current expectation in the banking community that approximately $20 million to 

26 

$30 million would be needed to start a new bank. The Bank of Austin has reportedly raised $40 million. 

So please walk the subcommittee through some of the challenges 

you think the Bank of Austin will face that FirstCapital did not 

when it was chartered 20 years ago. 

Mr. BURGESS. Number one, they are in Austin. That helps, because there are enough assets in Austin that if they have good 

businesspeople in the bank that can grow business quickly, they 

can probably get to that number. But it is going to take a bank of 

a little over $400 million to put that capital to work and provide 

a reasonable return to the shareholders so that they will be able 

to keep going and growing. 

Mr. WILLIAMS. So let me ask you this: Do you believe the Bank 

of Austin is a product of market opportunity or regulatory changes? 

Mr. BURGESS. I think that they are starting a bank in a market 

where they can make it work, because a bank of $400 million can 

probably put the regulatory expertise in place to be able to meet 

the guidelines or meet the expectations. 

Mr. WILLIAMS. Assuming the Bank of Austin is approved, the 

regulatory expectations are still very high for new entrants, with 

the FDIC micromanaging their operations for the first few years 

with little or no flexibility. It is hard for new entrants to find experienced compliance officers that will make sure that they keep up 

with the regulations. And I think you would agree with that, in 

that you have talked about that. 

Mr. BURGESS. I do. 

Mr. WILLIAMS. Mr. Stone, we have had some State-chartered and 

one Federally-chartered credit union in Texas since 2010, and after 

76 mergers, we are now under 500 Statewide. I think you would 

agree that one way to improve the environment and viability for 

community financial institutions is to reduce the often complicated 

and burdensome regulations coming out of the CFPB, with which 

many credit unions and banks must comply. 

So from your perspective, how do you think the current regulatory environment impacts or discourages new institutions from 

forming? 

Mr. STONE. Currently, we support the comprehensive relief proposed in the Financial CHOICE Act. NAFCU believes credit unions 

should be exempt from the CFPB’s authority, with credit unions’ 

regulation directly handled by NCUA, as pre-Dodd-Frank. 

Mr. WILLIAMS. Okay. Let me ask you another question. Cost of 

operations and new technology, economic risk, capital requirements, and the need for immediate results are all challenges faced 

when chartering a new credit union or bank. 

How have these challenges been magnified under a post-DoddFrank regulatory environment? 

Mr. STONE. It is a tremendous burden. So taking into account the 

$2 million that we started with, which is very little, then we have 

the regulatory burdens, the challenges of having a regulatory officer, a compliance officer, on top of new technology, equipment, 

phone systems, all of the entities that we need to operate and run 

a credit union, the math doesn’t add up. And it is a challenge every 

day that causes me problems when I go to sleep at night. 

27 

Mr. WILLIAMS. I would ask you, Mr. Kennedy, also, from your 

perspective—you have a very knowledgeable one—how do you 

think the current regulatory environment impacts or discourages 

these new institutions? 

Mr. KENNEDY. Not only the new institutions, but existing institutions, Congressman. Over the last 8 or so years, it is just continuing at a snowballing pace. And I hope that the new Administration and the focus on lifting regulation will make some big difference here. And clearly, in the de novo charter area, I think it 

will, and particularly the steps that the FDIC has taken. 

It is a big deal to reduce that 7-year compliance period and a 

capital requirement back down to 3. That is a big change. But I 

think a lot of people still are skeptical about their ability to get approval. 

Mr. WILLIAMS. I thank all of you for your testimony. 

Mr. Chairman, I yield back. 

Chairman LUETKEMEYER. The gentleman yields back his time. 

The gentleman from Texas, Mr. Green, is recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member as well. And I would like to compliment you, Mr. Chairman and Mr. Ranking Member, for holding this hearing, because 

it has been very beneficial. 

It is beneficial because we have heard, of course, about the legacy 

loans, which can be beneficial if you are already in business, low 

interest rates, which can be a detriment to you if you are not already in business. 

But what is really important, as I see it, is you have all agreed 

that compliance cost is a significant part of your problem, if I may 

call it a problem. I am sure that there may be some other words 

that might be more appropriate for you, but let’s call it a problem. 

And in concluding that compliance cost is a problem, you have 

also identified yourselves as community banks that are small. This 

is important, because we have had testimony of community banks 

being capitalized at the $50 billion level. That is a pretty big community bank, $50 billion. 

I think the gentleman from the credit union, Mr. Stone, you indicated that 90 percent of your credit unions are under a billion dollars. Is that what you said? 

Mr. STONE. That is correct, Congressman. 

Mr. GREEN. And about 90 percent of all banks, maybe 89 percent 

I think it is, are a billion or under. 

So the question that I have for you is really not complicated, and 

it becomes complicated when the bankers get to my office, but it 

is not a complicated question. It is this: Can we construct legislation for community banks that won’t reach the $50 billion level? 

Why do I ask? Because I have community bankers who will visit 

with me, and they make the argument that you are making today, 

but the solutions go to the $50 billion level. That makes it a heavy 

lift. 

Is it possible, in your minds, especially my Texas banker, can we 

fashion legislation, that would probably be bipartisan, that doesn’t 

have to go to the $50 billion level? You are talking about small 

banks. In your mind, what is a community bank capitalization? 

28 

Mr. BURGESS. Thank you, Congressman. 

I think we could sit down and come up with a list of product 

lines that a community bank is typically in. And a community bank 

generally deals within its geographic region instead of in big, wide 

swathes. I have a little bit of concern about setting everything 

based on thresholds, because I just crossed over from 900-some odd 

million to just over a billion, and now I have to follow a whole different set of rules and I am really the same bank today that I was 

a month ago. 

Mr. GREEN. Listen, you are my friend, but we are getting back 

to the point that I was making earlier. We start talking about 

small banks and doing something to help them, but when we get 

to the remedy, it reaches $50 billion. There has to be a way for us 

to do something for the banks that are 10 and under without going 

to $50 billion. 

There are people here who really want to do something for small 

community banks. They all identify with small community banks. 

But the remedy takes us to $50 billion, it will take us to eliminating sometimes the living wills, all of the things that were put 

in place for larger banks, because they are really not the 

megabanks, but larger banks. 

Again, how do we do this so that we stay with the smaller community banks? 

Mr. Kennedy? 

Mr. KENNEDY. It is an interesting question, but I think you can. 

I think you can draw the line, whether it is total assets or whether 

it is types of products and types of business, although I hate to constrain creativity. I heard our Texas savings and loan commissioner 

describe her definition of community banks as being those that had 

a relationship with their customers. 

Mr. GREEN. Let me share this with you quickly, Mr. Kennedy. 

The $50 billion threshold brings in a trigger, and you are familiar 

with that trigger. So when we do this, it becomes more than helping small community banks that we all want to help. 

I understand that my time is beyond what I have been allotted. 

So thank you, Mr. Chairman, and I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

We now go to the gentlelady from Utah, Mrs. Love, for 5 minutes. 

Mrs. LOVE. Thank you, Mr. Chairman. 

I would like to ask the panel about the effects of the de novo 

drought on small businesses and access to capital. This is a tremendous issue and it is certainly important to the State of Utah, 

which has seen its banking sector shrink due to the exit of certain 

banks on account of the regulatory environment, compounded by 

the inability to charter new institutions. 

This has been particularly damaging in the industrial bank sector, which has been a very stable segment of our banking sector, 

and yet it has suffered from the inability to get FDIC approval for 

new banks in the years since the financial crisis. 

So I have just a quick question for Ms. Edelman. Do you have 

any evidence that industrial loan companies were part of or contributed to the financial crisis? 

29 

Ms. EDELMAN. I can’t give you a definitive answer that no industrial loan company did anything wrong, but, no, they were not the 

driving force behind the crisis. 

Mrs. LOVE. Okay. Yet—and I am making a point here—we 

haven’t seen any approval of industrial banks. So I have to question the FDIC’s requirements and the soundness of their decisionmaking not to approve new banks for FDIC insurance. 

Banks of all sizes play roles in the economy while delivering safety and convenience. If you look at some of the things that they 

offer, safeguards, $12.7 trillion in deposits, $2.4 trillion in home 

loans originated by banks, $380 billion in loans to small businesses, 

$175 billion in loans to farmers and ranchers. 

Mr. Burgess, you mentioned in your testimony, you cited that since Dodd-Frank, more than 43 percent of banks under $100 million in assets have disappeared, as have 17 percent of banks between $100 million and $1 billion. Those are a lot of assets that 

have been lost to the banking sector. I look at the numbers that 

I cited here. To me, it would seem that fewer bank options would 

mean fewer of these numbers going into the economy, fewer people 

getting the ability to have access to credit, and job losses. 

Can you talk to me a little bit more about what your thoughts 

are on that? 

Mr. BURGESS. Thank you, Congresswoman. 

A lot of the banks that have gone away have not failed. So those 

assets haven’t left the system, but they have been consolidated 

with other banks, bigger banks. And when you do that, number 

one, one of the things you do is you reduce competition. There is 

less competition. And by less competition, you have less options, 

less pricing options for the customers. 

And in some cases, if those banks are in small communities, like 

I would assume you have a lot of in your State, you have a large 

bank with just a branch in that community rather than a community bank with local ownership and local leadership that really has 

a focused interest on making that community better. So you lose 

a little bit of that value of a community bank when that becomes 

a branch rather than a community bank. 

Mrs. LOVE. Let me just talk about what I have experienced as 

a mayor in Saratoga Springs, Utah. We have a City that is just 

starting up, and a lot of our constituents, our residents, wanted to 

have a library. As you all know, libraries are all expenditure. They 

don’t get incomes from libraries. And we didn’t have the base to 

sustain a library. 

So the people who came through for us were the banks that were 

actually in our community. You have the Bank of American Fork 

that donated thousands and thousands of dollars, actually sponsored the children’s section in our library. We had communities 

that were coming together that were volunteering their time. And 

these were all donations from the banks that were really wanting 

to infuse themselves in our community. 

So I just want to say that, to me, this is not about trying to save 

banks’ hides. This is not about me taking your side. This is about 

the people who need access to the services that you offer. This is 

about the farmer who is trying to get access to credit to purchase 

a tractor so he can plow his fields so we can have food to eat. This 

30 

is about the young women in my neighborhoods who are trying to 

make a little bit of extra money while staying with their children 

by trying to expand their homes, to teach kids how to read. 

These are the people who need access to credit, and when we are 

not allowing more banks, not allowing more resources and options 

out there, we lose competition, and the people end up losing their 

ability to reach their dreams. 

Thank you. I yield back. 

Chairman LUETKEMEYER. The gentleman from Washington, Mr. 

Heck, is recognized for 5 minutes—no, Mr. Ellison, you guys decide 

how you want to go. 

Mr. HECK. I am glad to go before him. Am I before him? Am I 

senior? I am, because I arrived earlier, didn’t I? Don’t start the 

clock yet. 

Chairman LUETKEMEYER. We won’t start the clock. We want to 

get this straight. We were told it was Mr. Heck, then Mr. Ellison. 

Is that not correct? 

Mr. ELLISON. I defer to the gentleman from Missouri. 

Mr. HECK. It is the new rule, and I love this new rule. Thank 

you, Mr. Chairman. 

Chairman LUETKEMEYER. Okay. Mr. Heck is recognized for 5 

minutes. Make a decision. Go. 

Mr. HECK. Ms. Edelman, thank you so much for being here. Is 

it essentially your position that when interest rates normalize, de 

novo startups will? 

Is it your position that when interest rates normalize through 

the Fed’s increasing of rates, that de novo startups will as well? 

Ms. EDELMAN. Yes. We should see an increase in de novos when 

the interest rates rise for sure, and if we don’t, we can revisit. 

Mr. HECK. So let me say a couple of things to you. I am really 

glad you are here. I actually largely accept your macro frame for 

this, that interest rates and overall status of the economy are much 

more correlative to this than regulatory burden per se. But I do 

want to make a couple of comments that I hope you will just consider. 

Number one, you have 75 to 80 percent associated with those 2 

factors. That means there are 25 to 30 that are—or 20 to 25 that 

are not. 

Secondly, I spent a good part of my life over the last year going 

from credit union to community bank to actually large banks as 

well and asking to sit down with their compliance officers and show 

me, in concrete terms, what their compliance requirements were 

today versus pre-Dodd-Frank and it is measurable in terms of the 

thickness of the paper stack. 

So, look, I am not going to lecture you about your real-life experiences, because actually I think you have had a stellar career and 

I compliment you for it. But I am going to suggest to you that 

while it may not be purely correlative or causative, here is one 

thing that we can know: It still makes it harder going forward, because the truth is that compliance burden costs go straight off the 

lower right-hand number. And to the degree that lower right-hand 

number has shrunk makes it that more difficult to operate a small 

community bank or continue to operate a credit union. 

31 

So I would hope that we don’t buy into, can’t touch a hair on the 

head of Dodd-Frank, can’t touch a hair on the FDIC. And let me 

tell you why I am especially concerned about this, because it is part 

of the larger frame that I have tried—and I hope that maybe the 

chairman is listening as he looks forward to future scheduling— 

and that is the issue of small-business loans and access to capital 

by small businesses. 

We know some things here that are pretty disturbing. We know 

that the percent of businesses that are startups has almost been 

cut in half from the late 1970s to the last year for which we have 

good data, 2011, actually. We also know that small-business failure 

rates are up. We know that access to capital by small businesses 

has been impeded. 

We also know, thanks to the incredibly enterprising work of a 

postdoc student at MIT, that when branches close—and, again, 

there are lots of causes for that. I would turn to you first to say, 

what are some of those causes, like technology. I had one of my colleagues on this committee indicate here recently that he has a regional bank headquartered in his district that in the last, I can’t 

remember the exact number, it is like 6 or 8 years, branch visits 

have been cut in half by the customers. That is one of the reasons 

why branches are closing. We know that. But branches are closing 

also, in part, for a variety of reasons. 

And here is what happens. This postdoc student’s work reveals 

consumer loans don’t suffer. Mortgages don’t suffer. Small-business 

loans suffer. And that is very disconcerting to me, especially when 

you consider that it is startup small businesses that are such an 

important contributor to productivity growth. 

Now, you and I, you are from CAP, you and I could have a cup 

of coffee and have a good long mutually supportive conversation 

about how we are way overdue on America getting a raise and real 

wage increases. There is no small part of the failure of that to happen—some of it is policy, some of it is macroeconomic—there is no 

small part of that—that is, we have not experience of late productivity increases that we used to. In fact, the whole measurement 

of productivity has been drawn into question. But I think intuitively, we know fewer small-business startups, lesser growth on 

the productivity side. 

And I also want to finish on this cautionary note. I have raised 

this in committee before, Mr. Chairman, and it is this: There is a 

part of Dodd-Frank that requires the CFPB to begin collecting 

business data. They don’t have a rule yet to do that. But once they 

start collecting data on businesses, that might lead to another layer 

of regulation that I am personally concerned about, even somebody 

who sits on this side of the aisle, sir. And I will tell you why. 

Mortgage products have become standardized. They are subject 

to computer algorithms and processes. You cannot standardize 

small-business loans. That is judgment and subjectivity and relationship. And to the degree that we go down that track, as we 

have—you like hearing this, you are going to give me 2 more seconds—like we have mortgages, which I support, is dangerous for 

even more access to capital by small businesses. And we don’t want 

to go there. 

32 

And I am really glad you are here, Ms. Edelman, because that 

data was really important in this speech. 

Mr. Chairman, you are so indulgent. Thank you, sir. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The Fed has done a study on small-business lending, for the gentleman’s information, and the SBA has a lot of information with regards to small-business lending. So there is some data out there if 

you want to go after that, Mr. Heck. I appreciate your comments, 

though. 

With that, we will recognize the gentleman from Tennessee, Mr. 

Kustoff, for 5 minutes. 

Mr. KUSTOFF. Thank you, Mr. Chairman. At this time, I would 

like to yield to my colleague, Mrs. Love. 

Mrs. LOVE. Mr. Chairman, I would like to ask unanimous consent to enter into the record a letter from the National Association 

of Industrial Bankers, the Nevada Bankers Association, and the 

Utah Bankers Association on the topic of de novo. 

Chairman LUETKEMEYER. Without objection, it is so ordered. 

Mrs. LOVE. Thank you. I yield back. 

Chairman LUETKEMEYER. Mr. Kustoff is again recognized. 

Mr. KUSTOFF. Thank you, Mr. Chairman. 

Mr. Burgess, if we could, going back to your experience chartering the bank in 1998, do you have an opinion, examining the 

time it takes to create a de novo bank to become chartered in this 

post-crisis environment, in your best estimate, how long does it 

take for a de novo to become profitable now as opposed to back in 

1998? And if you could compare the two. 

Mr. BURGESS. I can really only speak to my experience. I started 

putting the application together and started raising money in about 

January of 1998, and we opened the bank in November of 1998. So 

it took us about 11 months. 

The only example I have heard recently—because there have not 

been any de novo banks to speak of, so it is kind of hard to measure that. I do know of an instance in Texas where a bank that has 

been in existence for many, many years had some branches in another State, and they chartered a new bank to fold those branches 

into a new charter in that State, so that they would have a charter 

in Texas and they would have a charter in that other State. It look 

them 14 months. Keeping in mind that they had been examined for 

years and years by their regulator, it took 14 months to get approved for a new charter, just to roll the branches together and put 

them under a separate bank in that State. That is the only example I have. 

Mr. KUSTOFF. Thank you, Mr. Burgess. 

Mr. Kennedy, we have heard testimony today surrounding the 

regulatory burdens that have discouraged capital formation around 

de novo banks. Today, as a matter of fact, I met with members 

from my State, the Tennessee Bankers Association, who said that 

for each dollar spent on compliance, that results in $10 that can’t 

be lent into the community. And I have a community banking background. I served on a bank board in my part of Tennessee, west 

Tennessee, for 6 years before becoming a Member of Congress. 

But my point is that it must create a burden on small community 

banks. And while some question the effect of Dodd-Frank on the 

33 

ability of smaller institutions to operate, I believe you said or you 

testified earlier that there wasn’t a question that regulatory compliance costs have increased significantly and sometimes suggesting operating costs by almost a third. 

And so my question is, how do those increased costs affect the 

ability of institutions to provide products and services to the communities that they serve? 

Mr. KENNEDY. Combined with the increased capital levels and 

just the compliance costs, it makes it difficult to operate. You have 

to continue to hire additional staff. It is a much more complex environment to be operating in. And so that takes away the ability to 

deliver financial services and products to consumers. 

Mr. KUSTOFF. Thank you, Mr. Kennedy. 

I yield the balance of my time. 

Chairman LUETKEMEYER. The gentleman from Minnesota, Mr. 

Ellison, is recognized for 5 minutes. 

Mr. ELLISON. Mr. Burgess, the day before the President sent to 

Congress his initial budget proposal last week, the organization 

you represent, the American Bankers Association, along with other 

bank associations, wrote to Congress. And an excerpt of your letter 

is on the screen. I would direct you to take a look at it if you like. 

These banking organizations wrote, ‘‘We are gravely concerned 

that the Administration’s forthcoming fiscal year 2018 budget may 

propose cuts to the CDFI Fund. We strongly urge you to maintain 

strong funding levels. During the 2016 Presidential campaign, the 

need to create jobs and revitalize the economies of disenfranchised 

rural communities and neglected inner cities was a key theme. 

CDFI banks work in the exact communities that were the focus of 

this conversation. Community-based financial institutions are 

uniquely positioned to understand local credit needs, which is why 

there is historic bipartisan support for the CDFI Fund.’’ 

And yet the President’s budget, which I am sure you know, in 

contradiction to the campaign talk to help the forgotten women and 

men, has proposed not only cuts, but a complete defunding of 

CDFI. 

Does ABA have a position and does it stand by its letter or is 

there a new position? 

Mr. BURGESS. I don’t really know the thought processes that 

went into the whole budget process, because I am not involved in 

that. But we definitely support anything that will help communities develop and that will give us more tools to work with to help 

small businesses survive and do better. 

Mr. ELLISON. So that is your letter. Do you stand by that letter? 

Mr. BURGESS. That is not my letter. 

Mr. ELLISON. It is a bank that ABA joined, and you are still with 

it, right? 

Mr. BURGESS. Yes, we support that. 

Mr. ELLISON. Okay. Thank you. 

Mr. Stone? 

Mr. STONE. Yes, Congressman. 

Mr. ELLISON. Thank you for being here today, sir. 

In your testimony, you note that your credit union was recently 

certified as a CDFI, and you are currently drafting your grant reVerDate Nov 24 2008 16:37 Feb 09, 2018 Jkt 027248 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\27248.TXT TERI
34 

quest. You also note that, ‘‘The CDFI Fund can be an important 

tool for small and de novo institutions.’’ 

So if the Congress, following the President’s budget, decides to 

eliminate the CDFI fund, what would be the impact on your institution and the community you represent? 

Mr. STONE. Great question. Thank you, Congressman. 

This year was the first year. We were certified in a short period 

of time, so we are a CDFI institution. And just let me preface that 

by saying the limited resources we have even to complete the 

grants and the grant requests. So we are working with a third 

party, which costs a certain amount of dollars which we don’t have 

to spend, but we have to be willing to take the chance to possibly 

obtain those CDFI funds by paying the money we don’t have, because we need to help our members and that money is available. 

We are a low-income designated credit union. We have specific 

needs, including things like EMV cards. We currently have magnetic stripe debit cards; and moving it within compliance, moving 

into the future, we need the EMV cards. The process could cost 

$40,000 to $50,000 of funds we don’t have. So we are expending 

funds we don’t have to try to get a chance at the CDFI funds. So 

the answer is, those funds are very important to us. 

Mr. ELLISON. Thanks a lot for mentioning that. And if you have 

any other examples of what the elimination of the CDFI might 

mean to you, please forward that information, because we really 

want to fight for that program. 

Mr. STONE. Yes, sir. 

Mr. ELLISON. Ms. Edelman, do you agree with the recent Forbes 

article headline that reads, ‘‘Why Trump’s plan to defund CDFIs 

would be disastrous for small businesses?’’ See it up there on the 

screen? 

Ms. EDELMAN. Yes. So CDFI funds have stepped into many communities that larger banks have forgotten about a long time ago. 

They make loans that aren’t as profitable. They are really important sources for small-business lending. In 2013, the CDFI Fund 

helped generate over $4 billion in lending. It played an incredibly 

important role in our communities. It was appalling for someone to 

run on creating jobs, on economic development, and then slashing 

the very resources that are needed to do this work. 

Mr. ELLISON. I would like to agree with that. But let me remind 

Members that I have a CDFI bill, and it would expand the secondary market for small business and community development 

loans made by CDFIs. I hope that you guys take a look at it, and 

perhaps support it. And my bill, the Small Business and Community Investments Expansion Act, H.R. 704, is led with Mr. Stivers, 

Mr. Pittenger, Mrs. Maloney, and other members of the committee. 

It is a bipartisan effort. 

And let me tell you, I don’t know how you say you are going to 

help working people across America and want to eliminate the 

CDFI Fund. 

I think that is about how much time I have. Thank you for your 

time. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from Colorado, Mr. Tipton, is now recognized for 

5 minutes. 

35 

Mr. TIPTON. Thank you, Mr. Chairman. 

And I would like to thank all of our panelists for taking the time 

to be here today. 

I think listening on both sides of the aisle, we are hearing testimony about the importance of our community banks’ concern that 

we are not getting access to capital at those local areas. I particularly appreciated Mr. Heck’s comments when it came to talking 

about the importance of those small-business loans. 

And I have been struck by the report that came out which cited 

that for the first time in our history, we are seeing more small 

businesses shut down in this country than there are new business 

startups. 

Mr. Burgess, have you had difficulty in terms of being able to 

make some of those small-business loans that Mr. Heck and myself 

are concerned about, and I believe many others? 

Mr. BURGESS. Thank you, Congressman, for that question. 

Our whole business—our bank is primarily a small-business 

lending bank. So we spend most of our time trying to find smallbusiness loans. We are definitely under more scrutiny from various 

different places for how we make loans in the small-business arena. 

So it slowed us down. Like I spoke to earlier, there is a little more 

of a box that we have to fit people into. 

What I also said is one of the most satisfying things to me in my 

job is being able to sit down with a small-business owner, listen to 

what he is trying to do, and try to custom tailor a plan that is 

going to best fit his or her situation. And I am less able to do that 

now than I have been able to do in earlier parts of my career. 

Mr. TIPTON. How about even with existing customers? I am 

struck by a story we had out of Pueblo, Colorado, about regulations 

basically killing a small business, a small construction company. It 

was doing reasonably well, had paid off its line of credit. And I 

came from a construction family, so I understood this. The pipeline 

ran dry. 

They are trying to be able to bid new jobs to be able to keep their 

people employed, to be able to keep their equipment moving. When 

they went back to the bank, a local bank in Pueblo, to be able to 

re-up that line of credit, they were informed that the bank would 

have liked to have made that loan, but regulatorily they could not. 

As a result, the small construction company lined up their equipment, auctioned it off, and laid off their 23 core employees. 

Have you had that kind of an example down in Texas as well? 

Mr. BURGESS. I don’t have a specific example in mind right now, 

but I have had that happen in the past. And it is very unfortunate 

when that does happen. It hurts. 

Mr. TIPTON. I find it curious, we have had Chair Yellen before 

our committee, and she has spoken to what is the reality, I think, 

that we are feeling at many of our community banks, what is called 

that trickle-down effect. 

As we look at the chart that has been up on the board, it would 

look very reasonable that community banks are exempt from so 

much of Dodd-Frank. But are we seeing that trickle-down regulatory effect that is increasing cost, making it harder to be able to 

make loans and harder to be able to actually support those small 

businesses that are helping our communities grow? 

36 

Mr. BURGESS. Yes, we are seeing trickle down. Just one example 

would be stress testing. That is really not supposed to apply, but 

it is being pushed toward us. It is being suggested to us that we 

do stress testing, which we have started doing. That is not supposed to be something the smaller banks are required to do, but 

that is just one example. 

Mr. TIPTON. I also appreciate some of our colleagues, again, on 

both sides of the aisle, who are trying to be solutions-oriented. It 

is something I think we have had the opportunity to be able to visit 

about. We have introduced legislation called the TAILOR Act, to be 

able to actually have rules and regulations that are going to be 

sculpted to be able to meet the risk portfolio, the model of the 

bank. 

Is that a sensible way forward to actually address what I think 

I am hearing we all seem to be having in common, let’s open up 

that market once again for community banks, not only to be started, but to be able to loan once again to our communities? 

Mr. BURGESS. Absolutely. And we thank you for that, for sponsoring that bill. We feel that banks should be regulated based on 

the complexity of their business model, not based on necessarily an 

absolute size. And I heard the comments before, but we feel that 

the smaller banks especially are much less complicated, and we 

need to figure out how to have a less stressful environmental program over those banks so that they can operate and meet the needs 

of their customers. 

Mr. TIPTON. Thank you. 

And, Mr. Chairman, my time is about to expire. I yield back. 

Chairman LUETKEMEYER. I now recognize the gentlelady from 

New York, Ms. Tenney, for 5 minutes. 

Ms. TENNEY. Thank you, Mr. Chairman. 

And thank you, panel. I appreciate you being here. 

I am from New York, where I live in a very rural area where we 

have few small community banks and credit unions left. We have 

seen a lot of consolidations and a lot less access to credit. We have 

a lot of rural areas, farming, and also have small cities, where we 

have people in urban poor zones who have a hard time getting access to credit for even basic items. 

And it seems to me, and I would argue just as someone who was 

a bank attorney in my past, it was a huge problem to deal with 

regulations, especially smaller banks. And I am the owner of a 

small business as well. And so trying to comply with the regulations is actually more onerous on a small community institution, 

including a bank, which to me has caused us to have less banks, 

in my estimation. 

I was just wondering—I think I would address this to Mr. Kennedy first—do you think the cost of attaining the actual de novo 

charter affects interested candidates? 

Mr. KENNEDY. I apologize, but I couldn’t understand. 

Ms. TENNEY. Do you think that the cost of actually trying to obtain a de novo charter affects candidates or discourages them from 

being able to get into the market? 

Mr. KENNEDY. I don’t think so. And I again want to underscore, 

there has been a dramatic shift in the way the FDIC has viewed 

this in the last 12 to 18 months. And I think they are actively proVerDate Nov 24 2008 16:37 Feb 09, 2018 Jkt 027248 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\27248.TXT TERI
37 

moting. The OCC is doing the same thing. That is our personal experience. They are being as accommodating as they can through 

this chartering process. They are, frankly, enthusiastic about it. 

And I don’t think the actual cost—clearly, there is additional 

scrutiny, business plan analysis. We are living in a much more 

complex time now because of the compliance costs and all those requirements. So there is a little increased cost, but if I think about 

the 30 charters over the years that we have been involved in, I 

wouldn’t say it is dramatic. 

Ms. TENNEY. I come from an area where I can walk into my local 

community bank and hand the teller my checking account. They 

balance it for me, and I can go back and talk to the bank president. 

There is about one bank left in our area like that. There used to 

be so many small banks, and they now just can’t afford the compliance costs in many cases. Whether they have had to cut branches 

or consolidate, I have found it seems to be an issue. 

Mr. Stone, I just want to ask you if you could identify any areas 

where we can streamline the process and allow more financial institutions like the ones I described, in a small community with a 

farm-based economy, how we can actually bring them in without 

resorting to regulations. 

Mr. STONE. Congresswoman, thank you for this opportunity. 

I think a very important step that we didn’t touch upon here regarding your question is, in order to secure funds to charter our 

credit union, it takes an altruistic effort from an entity to start the 

credit union. So it is not a loan. It is not an investment. Whoever 

gives that money, it is a gift. They are not getting it back. They 

are not getting interest on it. It is very different than shareholders 

in a bank, very, very different. 

That being said, to secure those funds is—in today’s market, you 

have to find a group that has an affinity, some kind of special bond 

to the field of membership that you are starting with because otherwise why would they give those funds to start with, getting nothing in return. 

There is a 17-step process under the NCUA for chartering a credit union. I have been through it not that long ago. So it wasn’t 10 

years ago. It wasn’t 20 years ago. It was less than 3 years ago we 

went through this process. It is difficult at times and it is inefficient. So if we could have Congress improve the efficiency of the 

process, that would greatly help the process of starting a credit 

union, in addition to securing the funding, which is very difficult. 

Ms. TENNEY. Thank you. We do have less and less credit unions. 

I used to represent a credit union in my district as an attorney. 

We touch on just that the Community Reinvestment Act is underserved, underbank communities would have less access to financial services. That is sometimes the case, especially in an area like 

mine that is fairly economically depressed. 

I would argue that, again, increasing the number of institutions, 

small institutions that don’t have to be burdened with some of the 

regulations, that we certainly want to regulate, especially whether 

it is a bank or a small credit union, but can’t we have more banks? 

Would you argue that there are more banks, more credit unions, 

to have competition and drive down the costs and increase the access to services, especially in some of our urban areas, where they 

38 

really just don’t have a place to go? Is that something that you 

would support? 

Mr. STONE. We are a proponent of exactly what you said. So we 

are able to give—our average rookie who comes into the academy 

makes $42,000 a year, and they might have a family, a small family. And living in New York City, that is not a lot of money. They 

don’t have access. A lot them had predatory loans at very high interest rates. 

So we were able to offer from the get-go a very low unsecured 

interest rate for personal loans up to $5,000, which would help 

them either pay off high-interest-rate credit cards, help them buy 

equipment, or help them build up credit if they didn’t have credit. 

Ms. TENNEY. I think my time is about to expire, but I want to 

say thank you to all of you for testifying on this important issue. 

And hopefully, we can thank the chairman because— 

Chairman LUETKEMEYER. The gentleman from Georgia, Mr. 

Loudermilk, is recognized for 5 minutes. 

Mr. LOUDERMILK. Thank you, Mr. Chairman. And I appreciate 

the panel being here today. 

The lack of de novo banks in Georgia is especially concerning to 

me, seeing that Georgia lost more banks than any other State during the crisis, and we have had a difficulty of seeing new banks 

open up. In fact, of Georgia’s counties, we have 3 that have absolutely no bank branch at all now, and we have 47 Georgia counties 

that don’t have a community bank headquartered in the counties. 

As a small-business owner, I relied heavily on my small community bank because I served with the bank president on the chamber 

of commerce board and they knew the needs of the community. 

So it is actually really concerning that we haven’t seen these. 

And even though large banks are important, there is a specific 

need, especially in rural communities, for these small community 

banks. 

And so, Mr. Burgess, how can we increase, just in the rural area, 

how are we going to be able to bring these underserved areas some 

new banking? 

Mr. BURGESS. I think some of the things we can do is reduce the 

upfront capital threshold somewhat: $20 million to $30 million is 

not going to work in the communities that you are talking about; 

probably $10 million would be a more reasonable number because 

that would take about a $100 million bank, and that is probably 

a doable number that they can get to in a reasonable period of 

time. 

Probably reduce the minimum capital ratios for maybe the first 

3 years to let them get on their feet to 6 or 7 percent instead of 

maybe this 10 percent number we are kind of talking about right 

now. 

Create possibly a fast-track application process to make it a little 

bit easier for them to navigate that and move toward a quicker application process to get them in business. 

Possibly reduce that penalty box from 3 years to a little bit shorter so that there are not so many restrictions, like he talked about 

a minute ago, to get that business off the ground. If you have too 

many restrictions, you can’t get going very fast. 

39 

And there are probably some more, but I will let some other people talk. 

Mr. LOUDERMILK. Okay. I do have another question. We have 

seen a trend of financial institutions switching from Federal charters to State charters, mainly because it seems that the State regulatory environment is more favorable. What is the primary difference that you see between the State charters and the Federal or 

the regulator? 

Mr. BURGESS. I am a little different. I am a national charter, and 

I like being a national charter, but it is a choice. The State charter 

is a little bit less expensive to the bank. One of the things I prefer 

with the national charter is that I have one regulator as opposed 

to, if you are a State charter, you have the State and the FDIC 

coming in at different times. I just don’t like it that way. It is a 

choice. 

Mr. LOUDERMILK. Now, I am glad to see the credit unions and 

the banks sitting next to each other and getting along very well. 

That is unique in some cases, at least in Georgia. 

I have seen more credit unions popping up in some of these communities. Are we seeing a growth in credit unions nationally or are 

they filling in some of the voids that we have seen from small community banks? 

Mr. STONE. Congressman, we feel the credit unions are being reduced. The credit unions are being absorbed into larger credit 

unions. We found that it is very difficult to survive being a small 

credit union. As much as we try to help our field of membership, 

with all of the products they want, the more that we—if we increase products, increase services, we need to put another person 

on member services and create those products. This takes away 

from the regulatory compliance. We have to put someone back on 

regulatory compliance and then it takes away from member service. So it is difficult for small credit unions to survive. 

Mr. LOUDERMILK. If we were to remove some of what I feel is an 

overregulated environment, would that stimulate de novo banks, 

new credit unions coming into these— 

Mr. STONE. I think 100 percent, if that also included in the chartering process to reduce the inefficiencies that are there and improve the communication with the chartering entity, with the supervisor—in our case it is the NCUA—and the chartering the institution. 

Mr. LOUDERMILK. Mr. Burgess, cutting back on some regulations 

would— 

Mr. BURGESS. I definitely think if we could tailor the regulation 

a little bit more for the startup banks, maybe the regulators stay 

closer to them for a while and have more communication. But if we 

could relax that a little bit so they can not have to spend so much 

money on personnel to get off the ground. 

Mr. LOUDERMILK. All right. Mr. Chairman, thank you. I yield 

back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from Michigan, Mr. Trott, is recognized for 5 minutes. 

Mr. TROTT. Thank you, Mr. Chairman. 

40 

I want to thank the panel for their time and insight today. And 

I apologize, I missed your opening statements. I ducked out to 

speak to the Michigan Bankers Association. And I am glad I did 

because they gave me this hat. You can’t read it from there probably, but it says, ‘‘Make Banking Great Again.’’ And if they had 

given me four more, I would give one to each of you to thank you 

for your time today. 

But I want to start with Ms. Edelman at kind of a high level before we dive into the de novo drought. What do you think caused 

the financial crisis in 2008? 

Ms. EDELMAN. The financial crisis in 2008 was caused primarily 

by—it was triggered by predatory mortgage lending, mortgages 

that were packaged up and sold through the private label security 

market, and folks buying, investors buying things that they didn’t 

really know the quality of. 

Mr. TROTT. What do you think caused all those predatory mortgages and subprime loans to be made? What was the impetus 

there? 

Ms. EDELMAN. Maybe I can save you some time. It was largely 

not small community banks that were making these loans. 

Mr. TROTT. Do you think it was the responsibility of the private 

sector or the responsibility of the Federal Government—the role of 

the Federal Government that caused it? 

Ms. EDELMAN. Oh, I think it was the private sector. The regulation at the time was inadequate. 

Mr. TROTT. So it wasn’t the change in direction with respect to 

housing policies promulgated by Presidents Clinton and Bush insofar as they relaxed the underwriting standards at FHA for Fannie 

Mae and Freddie Mac and who should receive mortgages, that 

didn’t have a role in loans being made to people who really 

shouldn’t have them? 

Ms. EDELMAN. FHA had less than 5 percent of the mortgage 

market share in the lead-up to the crisis. Fannie and Freddie’s 

market share had also dropped significantly. Most of the mortgages 

that were made that were predatory in the leadup to the crisis had 

nothing to do with the Federal Government. 

Mr. TROTT. Okay. We probably can just agree to disagree on that. 

Let’s talk about a little bank in Birmingham, Michigan, the Bank 

of Birmingham. I was at their holiday party in December, and the 

CEO pulled me in his office, and he said, ‘‘Dave, I don’t want to 

have to tell you this, but we have sold.’’ And I said, ‘‘Oh, I am surprised by that. The bank is doing well, it is a successful little bank 

in my town.’’ 

And he said, ‘‘Yes, we sold it to the Bank of Ann Arbor, and we 

just could not handle the regulatory burden. We had to sell.’’ 

And I wish I had brought a picture to throw up on the screen. 

This is much too small. But this is just the regulations that have 

been promulgated since 2010. It only lists 15 of the many different 

bodies that regulate the financial institutions. And when I saw 

this, I really had a keen understanding of why the Bank of Birmingham had to sell, because they couldn’t afford to exist in this 

environment. 

You talked earlier about kind of defending Dodd-Frank and suggesting that really Dodd-Frank is not the cause of the de novo criVerDate Nov 24 2008 16:37 Feb 09, 2018 Jkt 027248 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\27248.TXT TERI
41 

sis. And I had a chart that I brought. This one you probably can 

see. It talks about the number of banks that had disappeared over 

the last 25 years. 

And so when I looked at this chart earlier today, I thought, in 

response to your testimony, well, maybe you are right, maybe 

Dodd-Frank really is not the cause. I don’t think it has helped, but 

we can argue about that. But maybe it is not the cause. Maybe it 

is just a factor. 

But then I realized, for the last 25 or 30 years, wouldn’t you 

agree that the regulations generally on banks have increased tremendously, hence, that is the explanation for this chart? 

Ms. EDELMAN. I think there were—particularly in the lead-up to 

the crisis, we went through over a decade of major deregulation. So 

I don’t know that—I am not sure that is correct. 

Mr. TROTT. Mrs. Love from Utah brought up a small business in 

her district. So if I am an automotive supplier in southeast Michigan, and I have maybe $2 million a year in revenue, and I want 

to spend $100,000 on a piece of equipment, and I need to get a 

loan, do you think Citi or Bank of America or Chase would even 

talk to me? I know from your response to Mr. Pittenger that you 

haven’t been a loan officer, so just speculate for me. 

Ms. EDELMAN. I have met a loan officer. I have gotten a mortgage. 

Mr. TROTT. No, no, but you told him you hadn’t been a loan officer. 

Ms. EDELMAN. No, I have never been a loan officer. 

I completely agree with you that small businesses need small 

community banks in order to get credit. These are the banks that 

stay when the times get tough. These are the banks that make it 

possible for small businesses to do business. What I am concerned 

about is focusing on Dodd-Frank when we have had 30 years of decline, and I am worried we are missing the bigger picture. 

Mr. TROTT. My time is about to expire. 

Mr. Burgess, I want to ask you a question. 

And maybe if there is a second for you to comment on his answer, Ms. Edelman, that would be great. 

So if we relax the regulations, streamline the approval process, 

what is going to be the consequence of that succinctly? 

And then, Ms. Edelman, if you have any concerns about that, I 

would love to hear them. 

Mr. BURGESS. Number one, I think it will allow us, as community banks, to go back to what we have been able to do in the past, 

as I have stated already, that we can more easily tailor specific 

packages for people based on their individual circumstances. 

Mr. TROTT. And my time has expired. You would agree that is 

all good, Ms. Edelman? 

Ms. EDELMAN. If we are talking about finding ways to make it 

easier for small community banks, I think we have a lot to talk 

about. 

Mr. TROTT. Thank you. I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we go to the gentleman from Kentucky, the chairman 

of our Monetary Policy and Trade Subcommittee, Mr. Barr, for 5 

minutes. 

42 

Mr. BARR. Thank you, Mr. Chairman. Thanks for hosting this 

very important hearing about the de novo charter drought in the 

aftermath of the Dodd-Frank law. 

According to the Kentucky Bankers Association, which I represent, the number of banks in the Commonwealth of Kentucky 

has dropped from 198 to 164 since the enactment of Dodd-Frank. 

That means that roughly one in five banks that existed prior to 

Dodd-Frank has closed its doors. 

And contrary to Ms. Edelman’s testimony, at least in Kentucky, 

I can tell you that most of this decline occurred not in the immediate aftermath of the financial crisis, but instead in 2013, 2014, 

2015, and 2016, well into the implementation of the qualified mortgage rule, the TRID rules, and implementation of Dodd-Frank regulations. 

Now, we know from Mr. Burgess’ testimony earlier today that 

Kentucky isn’t the only State that has this problem in terms of the 

decline in community banks in this country. Ms. Edelman and my 

friends on the other side of the aisle, with reference to their slide 

that is on display here, they are blaming this decline in new 

banks—they are blaming low interest rates on this, monetary policy. Ms. Edelman’s testimony is that 75 or 80 percent of the decline 

in new banks can be explained by low interest rates and weak macroeconomic factors. 

I just have to note, as the chairman of the Monetary Policy Subcommittee, that my friends on the other side of the aisle are blaming unconventional monetary policy for macroeconomic trends in 

this hearing. But in the other hearing, in my subcommittee, they 

credit unconventional monetary policy for positive economic developments. So I don’t know which one it is. I don’t know what their 

narrative is. 

But here is what my community bankers tell me. What my community bankers tell me about this chart, and Ms. Edelman’s testimony, is that if you are a good banker, you know how to work in 

a low-interest-rate environment, you know how to adjust your rates 

to reach the margin and the spread that you need to be profitable. 

What is different, though, now that coincides with this trend 

from 2008 to 2013 with the decline in new bank formation is the 

Dodd-Frank law. The low interest rate environment is not to 

blame. A community banker who was in my office today from central Kentucky told me that his bank—his net income, the profits 

of his bank are down $8 million a year, year after year, since the 

Dodd-Frank law. 

So this idea that low interest rates are the cause of the decline 

in new charters, the decline in banks just doesn’t hold water. This 

trend coincides not just with low rates, which good bankers can 

deal with, it coincides with the Dodd-Frank law. 

So I will just ask Mr. Burgess to respond to that. Do you agree 

with that analysis? 

Mr. BURGESS. Yes, I do agree with that. We, as bankers, always 

go through different interest rate cycles, and we have to manage 

our balance sheets in a way that we can appropriately deal with 

that. The difference this time is that our regulatory cost is significantly higher. It makes it much harder to reduce the cost side of 

43 

the income statement to be able to adjust to those changes in interest rates. 

Mr. BARR. Now, my friends on the other side of the aisle also— 

and Ms. Edelman makes a big deal about the fact that Dodd-Frank 

law is tailored, and they say that there are exemptions from some 

of these regulations for small banks. According to Kentucky banks, 

what they say is the most time-consuming and burdensome regulations are the real estate disclosure rules, fair lending regulations, 

ability to repay, QM rule, and TRID, and that these regulations are 

doubling the amount of time required to close a mortgage even assuming the disclosure contains no errors. 

Ms. Edelman makes the argument that there is a small creditor 

exemption on QM. Tell me why the small creditor exemption is insufficient to deliver the relief to a community bank, Mr. Burgess? 

Mr. BURGESS. Let me just tell you our experience. Before we 

started implementing the Dodd-Frank rules, our bank was making 

about $220 million a year at our peak in the four markets that we 

serve. We had to go back and retool our entire mortgage lending 

process. We are just now getting back up to about $80 million a 

year. So we are less than half in mortgage loan volume than where 

we were before we started implementing all the new rules. 

Mr. BARR. Thank you for your testimony. My time has expired. 

I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

The gentleman from California, Mr. Royce, is now recognized for 

5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. Thanks for holding this 

hearing as well. 

Mr. Burgess made a comment earlier that I was going to go back 

to, and that was your declaration this morning that you would not 

start a new bank in this regulatory climate. And I think if you are 

saying it, a lot of other people are thinking it, which could be what 

explains exactly the challenge we see and the lack of formation 

across the country. 

And then you go to the issues of why. And I think the gentleman 

from Kentucky raised the point about why we are not seeing the 

small-business loans, the mortgage loans, the financing of the local 

economic growth, why we didn’t see the traditional function played 

at the local level that would have gotten the country moving out 

of the recession. And it goes to this issue—this is why I am a cosponsor of the TAILOR Act—it goes to this issue where I don’t 

think that Friendly Hills Bank in Whittier, California, should be 

regulated like a Wall Street firm. 

I think what has happened here is that the overleverage of the 

systemically risky institutions brought about a flood tide of regulation that came down like a ton of bricks on the community banks 

that could least be capable with handling, given economies of scale, 

this ever-changing, ever-morphing regulatory environment in which 

they did nothing to bring this on. They were not the systemically 

risky institutions that created the crisis. 

So there was no excuse, in my opinion, for the way the legislation 

created the atrophy that exists today where, as you say, you and 

your friends and colleagues wouldn’t really consider walking into 

this kind of environment. It just doesn’t make sense. 

44 

You are trying to keep your heads above water now. You are trying to support your local communities and stay alive in an environment where your best talent has to be spent trying to keep up with 

these ever-changing regulations instead of reaching out into the 

marketplace and doing what you have traditionally done commercially and with home loans and so forth. 

But I was hoping that you could also address a case where this 

tailored approach was promised and where that promise hasn’t 

been delivered, and that is on the Durbin amendment. And I will 

give you my thoughts on that. 

I was a conferee for the Dodd-Frank Act, and I was very concerned about—and I laid out the arguments—what the impact was 

going to be on financial institutions with respect to this Durbin 

amendment. 

But one of the arguments that was thrown back was that the exemption for low asset institutions would protect community banks. 

It would protect community banks and credit unions. I remember 

that argument being made in retort. Even though, by the way, we 

had never heard this in committee. It came out of nowhere, if you 

remember the markup. And there we were with this Durbin 

amendment. 

So this hasn’t come to fruition from any evidence I have seen. 

The Durbin amendment was passed without debate in the House, 

and the cost in the payments to the ecosystem were passed along 

to whom? To the small financial institutions. 

So how has the Durbin amendment impacted the calculus when 

it comes to starting new community financial institutions? That is 

the question I would ask. And did the exemption do what it promised to do? And what products or services have consumers lost out 

on in the aftermath of this passage? Because I guarantee you there 

were tradeoffs there as well. So those are the three questions I 

would ask. 

Yes, sir. Thank you. 

Mr. BURGESS. Thank you for the question. 

The first thing is the Durbin amendment, in my mind, is fixing 

the price on our industry for a product that we created. And the 

amount that has been taken away has been given to another industry, and they had nothing to do with creating that product. 

Mr. ROYCE. And I haven’t seen any real evidence that the beneficiary of that is the consumer either, by the way. 

Mr. BURGESS. None that we can see. 

So as to how that would impact new startups, it really is part 

of the overall picture. You are taking income away from the industry, you are increasing the cost of the industry, you are increasing 

the bar to get into the industry. And all of those things working 

together is what would have an impact on startups. 

Mr. ROYCE. And what about that promise that was made that 

smaller financial institutions would not be impacted by this? 

Mr. BURGESS. In our particular case, we fall under the threshold 

to where it is supposed to impact us. But if you look at the net income that we derive from that particular line of business, it has 

been declining ever since that happened. 

45 

Mr. ROYCE. And what products, what services, in your opinion, 

maybe have consumers lost out on in the aftermath as you faced 

this consequence as well as the— 

Mr. BURGESS. We have had to look at other products and services 

and figure out where we can make up that difference so that it 

doesn’t impact our bottom line. We either have to increase pricing 

or eliminate certain products. 

Mr. ROYCE. I thank you very much. 

And, Mr. Chairman, thank you again. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

And with that, we are at the end of the hearing. They have actually called votes, so we are all going to—as you can see, most of 

the folks have already rushed out. I apologize for that, but we are 

trying to get done here for the day. 

I would like to thank the witnesses for your testimony today. You 

have been great, you really have answered a lot of very good questions, and your testimony has confirmed some of our suspicions of 

some of the problems with de novo situations in some circumstance, and also raised other ones. 

That is what we hoped to accomplish today, to be able to get a 

handle on what is going on in the financial services world so we 

can basically lay the predicate for what we need to do over the next 

couple of years with regards to looking into different rules, regulations, and situations that are affecting the financial services community as well, particularly with regards to the competitiveness 

and operation of those financial institutions. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

With that, this hearing is adjourned. 

[Whereupon, at 4:25 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

March 21, 2017 

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