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20–698 2016

BEARING THE BURDEN: OVER-REGULATION’S 

IMPACT ON SMALL BANKS AND RURAL 

COMMUNITIES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

JUNE 9, 2016 

Small Business Committee Document Number 114–064 

Available via the GPO Website: www.fdsys.gov 

SBREP-219A with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARK, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

JAN OLIVER, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Tim Huelskamp .............................................................................................. 1 

Hon. Judy Chu ......................................................................................................... 2 

WITNESSES 

Mr. Roger M. Beverage, President & CEO, Oklahoma Bankers Association, 

Oklahoma City, OK, testifying on behalf of the American Bankers Association ........................................................................................................................ 3 

Mr. Shan Hanes, President/CEO, First National Bank of Elkhart, Elkhart, 

KS .......................................................................................................................... 5 

Mr. Marcus Stanley, Policy Director, Americans for Financial Reform, Washington, DC ............................................................................................................. 8 

APPENDIX 

Prepared Statements: 

Mr. Roger M. Beverage, President & CEO, Oklahoma Bankers Association, Oklahoma City, OK, testifying on behalf of the American Bankers 

Association ..................................................................................................... 21 

Mr. Shan Hanes, President/CEO, First National Bank of Elkhart, Elkhart, KS ......................................................................................................... 30 

Mr. Marcus Stanley, Policy Director, Americans for Financial Reform, 

Washington, DC ............................................................................................ 37 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

CUNA - Credit Union National Association ................................................... 44 

ICBA - Independent Community Bankers of America .................................. 50 

NAFCU - National Association of Federal Credit Unions ............................ 59 

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SBREP-219A with DISTILLER

(1) 

BEARING THE BURDEN: OVER-REGULATION’S 

IMPACT ON SMALL BANKS AND RURAL 

COMMUNITIES 

THURSDAY, JUNE 9, 2016 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX AND CAPITAL ACCESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Tim Huelskamp [chairman of the Subcommittee] presiding. 

Present: Representatives Huelskamp, Luetkemeyer, Kelly, and 

Chu. 

Chairman HUELSKAMP. I call this hearing to order. 

It has been just about 6 years since the passage of the DoddFrank Wall Street Reform, and in that time we have seen a steady 

stream of new rules and regulations imposed upon financial institutions. These hundreds of rules and thousands of pages of regulation have been touted as necessary to secure financial stability, and 

targeting just those large institutions which were blamed for the 

financial collapse. But as this Committee has learned, our small 

community banks have not been spared from the regulatory burden. 

Across the country, community banks are seeing the costs of complying with regulations soar, and the result has been less capital 

available for the main street shop looking to expand, for the entrepreneur looking to start a business, and for our neighbors hoping 

to purchase a new home. The impact of regulation on community 

banks is felt especially hard in our country’s rural areas, like my 

district in Kansas. 

The rising cost of regulation is causing many small banks to be 

forced to merge with larger entities that may not understand the 

local community, or causing them to shut their doors entirely. In 

rural towns without many other alternatives for access to capital, 

the results of these top-down regulations can be devastating and 

impact the whole town and the entire county and region. Home 

mortgage lending, small business lending, agricultural lending, all 

areas where community banks play a leading role in providing capital, become much more difficult and much more costly to consumers. 

Our rural communities are still feeling the harsh effects of the 

recession. During the so-called ‘‘recovery,’’ growth in business esSBREP-219A with DISTILLER

2 

tablishments was reserved for the big cities. From 2010–2014, a 

full half of all new business were started in just 20 of our Nation’s 

counties, all near large metro areas. During that same time, most 

rural counties have actually seen a decrease in business establishments. More businesses are closing for good than opening up. 

At today’s hearing, we will hear about the impact financial regulations are having on our rural communities from those who see it 

every day, including from within my home district, Kansas’s ‘‘Big 

First’’ District. Discussions of financial reform are often centered on 

big cities and large institutions on Wall Street, but today we will 

hear from those areas of rural America, form Main Street, which 

can too often be overlooked in these conversations. 

I thank the witnesses for being here this morning, and I look forward to your testimony. 

I now yield to Ranking Member Chu for her opening remarks. 

Ms. CHU. Thank you, Mr. Chair. 

Just 6 years ago, our nation was in the early stages of recovery 

from one of the worst economic downturns in history. We lost 4 

million jobs, 7 million people faced foreclosure, and families saw 

over $16 trillion in wealth disappear as the bottom fell out of the 

housing and stock markets. After taking extraordinary steps to 

stem the losses and stabilize the economy, Congress enacted the 

Dodd-Frank Act in 2010 to address the many loopholes that caused 

the collapse. The bill established strong new standards for the regulation of large, leveraged financial institutions and made the protection of consumers seeking mortgages and credit products a top 

priority. 

Dodd-Frank was directed primarily at the largest financial services firms and significant efforts were made to ensure that any new 

regulatory burden on the small banking community was properly 

mitigated. For example, many of the Dodd-Frank Act provisions 

only apply to institutions with over $10 billion in assets, leaving 98 

percent of all banks in the U.S. largely exempt. Additionally, the 

Consumer Financial Protection Bureau has gone to great lengths 

to balance the burden of new regulations on small banks with the 

ultimate goal of protecting consumers. 

Initially, there was significant concern that regulatory burdens 

would have a negative effect on access to capital for small businesses, but fortunately, it appears to be having less impact than 

originally feared. According to the PayNet Small Business Lending 

Index, access to credit continues to improve for small businesses. 

In fact, lending is up 70 percent since Dodd-Frank’s enactment. 

Similarly, the Wells Fargo Gallup Small Business Index poll indicates small business owner optimism is at its highest point since 

2008. Furthermore, data from federal regulators also points to a 

healthy small business lending market. The Federal Reserve has 

found that lending standards for small firms have eased considerably since the recession while loan and lease balances at community banks have increased $21 billion in this past quarter alone. 

SBA lending, too, has come roaring back to surpass prerecession 

levels. In 2015, the Agency made 63,000 loans totaling $23.5 billion. 

Although the small business lending environment appears to be 

robust, critics of the act continue to point to the decreasing number 

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3 

of small financial institutions as proof of burdensome regulation. 

However, it is important to remember that the decline in the number of community banks is not something that started happening 

after Dodd-Frank was implemented. The sector has actually been 

consolidating for the past 30 years. 

Experts can disagree on the reasons for consolidation in the community bank sector but I think we can all agree that things are improving. Revenue is up, lending has increased, asset quality is 

steady, and credit worthiness of borrowers is on the rebound. As 

both lenders and borrowers, small businesses have much at stake 

when it comes to financial regulatory reform. The Dodd-Frank Act 

has the potential to make the entire system more stable and safer 

for small firms and the real economy to grow and create jobs. It 

is my hope that the testimony today will add important perspectives on the interaction between Dodd-Frank and Main Street, and 

I want to thank the witnesses for being here today. 

Thank you. I yield back. 

Chairman HUELSKAMP. Thank you, Ms. Chu. 

If Committee members have an opening statement prepared, I 

would ask they be submitted for the record. Let me explain the 

opening statements and timing for the witnesses. 

You each have 5 minutes to deliver your testimony. The light will 

start out as green. When you have 1 minute remaining, the light 

will turn yellow. And finally, at the end of your 5 minutes, it will 

turn red. I ask that you try to adhere to that time limit. 

With that, I would like to introduce our first witness this morning, Mr. Roger Beverage, who is visiting us today from Oklahoma 

City, or Edmond. Mr. Beverage is the former Executive Vice President of the Nebraska Bankers Association and is currently the 

President and CEO of the Oklahoma Bankers Association. He has 

held this position for over 25 years. Mr. Beverage is testifying 

today on behalf of the American Bankers Association, and Mr. Beverage, we welcome you here today. You have 5 minutes, and you 

may begin. 

STATEMENTS OF ROGER M. BEVERAGE, PRESIDENT AND CEO, 

OKLAHOMA BANKERS ASSOCIATION; SHAN HANES, PRESIDENT/CEO, FIRST NATION AL BANK OF ELKHART; MARCUS 

STANLEY, POLICY DIRECTOR, AMERICANS FOR FINANCIAL 

REFORM 

STATEMENT OF ROGER M. BEVERAGE 

Mr. BEVERAGE. Chairman Huelskamp, Ranking Member Chu, 

thank you so much for the opportunity to be here today to present 

about how the growing volume of bank regulation, particularly for 

smaller hometown banks in rural areas, is negatively impacting 

consumers. 

Let me be clear. Banks are a resilient group. They have found 

ways to meet customers’ needs despite the ups and downs of the 

economy, but it is a job that has become much more difficult because of new rules, guidances, and the seemingly ever-changing expectations of federal banking regulators. It is this cumulative impact of regulatory overload that often pushes small banks out of exSBREP-219A with DISTILLER

4 

istence, either to merge or to sell. In fact, there are nearly 1,500 

fewer community banks today than there were just 5 years ago. 

When I came to Oklahoma in 1988, there were well over 400 

banks in our state. Today in Oklahoma, there are 211 that are 

chartered by the State of Oklahoma or a national bank doing business in Oklahoma. But more frightening to me right now is the 

seeming lack of interest in granting new charters. This trend apparently will continue unless changes are made that provide relief 

to community banks, but particularly those that serve rural areas. 

Let me also be clear about the kinds of banks I am talking about. 

These banks are very small. In Oklahoma, for example, out of the 

211, 97 of them are under $100 million, 46 are under $50 million. 

Those are very, very small banks that had nothing to do with the 

financial crisis that led up to the issues of 2008 and Dodd-Frank. 

In Kansas, you have 156 banks that are under $100 million in total 

assets. These banks have a handful of full-time employees and they 

all perform a lot of different functions. There is no one functionality 

that you have in a small bank like that. These are the kinds of 

banks that serve rural America. 

Regulations shape the way banks do business and can help or 

hinder the smooth functioning of the credit cycle, but every regulatory change that applies to America’s hometown banks directly 

affects the cost of banking products and services for consumers. 

Even small changes can reduce credit availability. They can raise 

costs. What the ranking member talked about is driving consolidation. We have seen that considerably in our state. What that does 

is ultimately those three things limit consumer choice. 

I believe Congress must take steps to ensure and enhance the 

banking industry’s ability to serve their consumers and rural areas. 

When a bank reduces its product and service offerings or disappears, everyone in that community is impacted. 

Importantly, in rural communities, local banks are in many instances the exclusive source of capital for farmers, ranchers, small 

business owners, and residents. Once that capital access system becomes dysfunctional in rural areas as it is today, then the community itself begins to encounter more difficult challenges in order to 

survive. 

We ask for bipartisan support for legislation introduced by Congressman Tipton that would require regulators to tailor bank supervision and that would take into account the charter, the business model, and the scope of each bank’s operations. Regulators 

should be empowered and directed to make sure that rules, regulations, and compliance requirements only apply to those segments 

of the industry where warranted. Representative Barr’s American 

Jobs and Community Revitalization Act also contains provisions 

that will reduce regulatory requirements for smaller community 

banks in ways that make it easier for those banks to meet their 

customers’ needs. 

Additionally, Congress should help reduce needless impediments 

to mortgage lending that have constrained the ability of community 

banks to help homebuyers and dampen the growth of prosperity 

across our Nation’s rural communities. In Oklahoma, approximately 25 percent of the state’s banks are no longer in the home 

mortgage business. They have concluded that the litigation and 

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regulatory risk are simply too great given the limited number of 

those kinds of loans that they make in a given year. That means 

that the consumer is denied credit or asked to find some other 

source for it. 

We encourage Congress to support legislative efforts like H.R. 

1210 that would treat loans held in portfolio, which is one of the 

most traditional and lowest-risk lending in which a bank can engage as qualified mortgages. This would provide a much needed direction to the current restricted standards. 

There is additional legislation introduced by Representatives 

Luetkemeyer, Neugebauer, and Barr that contain measures to help 

America’s hometown banks get back to serving their communities 

by ensuring that costs and benefits are considered before changing 

or issuing new regulations and that streamline currency transaction reporting and require a review and reconciliation of existing 

regulations. 

ABA stands ready to help Congress address these important 

issues that will in turn help community banks, particularly those 

in rural areas, better serve their customers and their communities. 

Thank you very much, and I will be happy to try and answer 

some of the questions you may have. 

Chairman HUELSKAMP. Thank you, Mr. Beverage. I appreciate 

your testimony. 

Our second witness this morning is Mr. Shan Hanes, who is visiting us today from Elkhart, Kansas, which is located in my home 

district, Kansas’s ‘‘Big First.’’ Elkhart is a community in southwest 

Kansas with a population just over 2,000 folks, and I might add, 

26 graduates in the senior class. Where I come from that is actually kind of a big school. For the past 9 years, Mr. Hanes has 

served as president and CEO of the First National Bank of Elkhart—and by the way, when you are in Elkhart, you are not quite 

in Oklahoma or Colorado, but you can see them from there—and 

previously has served as President of the Kansas Ag Bankers Division of the Kansas Bankers Association. 

Mr. Hanes, we welcome you here today. Thank you for joining us, 

and you may begin. 

STATEMENT OF SHAN HANES 

Mr. HANES. Thank you, Chairman Huelskamp, Ranking Member Chu, and members of the Subcommittee. My name is Shan 

Hanes, president and CEO of First National Bank of Elkhart, Kansas. I appreciate the opportunity to present the views of rural 

banks and the impact of overregulation in rural America. 

First National Bank is a $78 million bank with a main bank location in Elkhart, Kansas, the county seat, and one branch serving 

Rolla, Kansas. We have 20 employees, and we are a typical agriculture (ag) bank. Despite our small size, we are the largest lender 

in the county and represent an average-size bank in rural Kansas. 

I have been very proud to be an Ag banker in a rural community 

for 20-plus years. There are days we can still get in our unlocked 

pickup truck to go to work in the morning and have cash lying in 

the seat. We simply take it to work as it is a payment from a customer who will call us eventually and tell us which of their loans 

to apply it to. 

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6 

One of my loan officer’s customers actually won a multimillion 

dollar lottery, and he did not feel safe holding the ticket in his possession over the weekend, so he took it to his loan officer’s house. 

He did not want us to put it in the vault. He just wanted him to 

hold the lottery ticket for him over the weekend. That is community banking. That is what it means to be a community rural banker. 

When I started in lending, a typical consumer loan was one page 

and the consumer would actually read the note and disclosure. 

Now a typical consumer loan is closer to 20 pages with many documents to sign and customers have no interest in reading that many 

documents. We made a simple loan so complicated that customers 

simply will not read the documents. 

The topic of today’s hearing is very timely. Increased regulations 

made it much more difficult to lend and be a main driving force 

in our local community. Despite this, the banking industry is wellpositioned to meet the needs of rural America. 

In 2015, farm banks, like mine, increased ag lending 8 percent and now provide over $100 billion in total farm loans. Interest 

rates continue to be near record lows and banks have the people, 

capital, and liquidity to help rural America through any turbulence 

in the rural economy. Rural banks are healthy and continue to be 

forward-looking, growing capital, and increasing reserves. 

I would like to thank Congress for its commitment to the guaranteed lending programs, both SBA and USDA. However, I believe 

Congress needs to consider reforms to these programs, specifically, 

to allow greater flexibility with SBA loans for agriculture and to 

raise the cap on USDA farm service agency guaranteed loans simply due to the rising cost of agriculture. There needs to be an additional in-depth look and discussion in modernizing these programs, 

providing something as simple as electronic signatures. Guaranteed 

loans have allowed our customers to continue to get access from 

banks like mine as they grow, ensuring credit for bank customers 

across the country. 

We remain concerned, however, with competition on an uneven 

playing field. Overburdensome regulations and a lack of appraisers 

in rural America means small, rural banks simply cannot survive. 

The result would be devastating to the local residents in those communities. Every day my bank competes with other banks in parts 

of Kansas, but we also compete with Farm Credit System, which 

is a 300 billion GSE. This lender has a huge tax advantage over 

my bank. Currently, with the combined State and Federal tax rate 

of 38 percent, we have to work until July just to pay our tax bill. 

There needs to be serious discussion on leveling the playing field 

between banks and Farm Credit. 

In addition to unfair competition, banks have to deal with everchanging and expanding regulations. Due to the Dodd-Frank Act, 

a bank like mine has to outsource much of our compliance, and we 

are more than paying a full-time teller’s salary for compliance and 

outside audit teams. The impact is one fewer bank employee serving our customers, one less paying job in a rural community. 

Due to regulations, many banks in rural Kansas have moved out 

of the mortgage-lending business completely, often due to increased 

compliance. What used to be a staple for every community bank is 

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no longer even a product offering. When you consider a bank like 

mine where we keep our loans in our portfolio, we are taking the 

risk, and any adverse decision affects our bottom line. This is why 

I believe that if the loan is held in portfolio, it should automatically 

be a qualified mortgage. 

Through regulation, our loan closings have become much slower. 

We have had to hire an outside consultant to assist us in completing a pre- and post-closing review. In my area, there are many 

more houses on the market now. I believe it is partially due to the 

increased time it takes to close these loans. This only further slows 

down an already slowing rural economy. 

On a real estate loan, the bank no longer makes a credit decision; the bank makes a compliance decision to determine if a loan 

will be made. 

Lastly, there are a lack of rural appraisers, not just in Kansas, 

but across rural America. Increased regulations have made it harder for someone to become an appraiser, and it is especially hard for 

young people to get into that line of work. Lenders need appraisers 

or they cannot close a loan. Congress should examine the current 

rules of becoming an appraiser, especially in rural areas, so banks 

can continue to lend effectively. 

Banks like mine are proud of the work we do to support our 

rural communities. However, it will be very difficult to simply survive to continue lending to our customers and provide for our community and your constituents if there are no reforms to the many 

obstacles that stand in our way. The lending decision should be 

made locally to customers by their community bank, not by rules 

and regulations from Washington, D.C. that does not understand 

my business or my customers. 

Thank you. I would be happy to answer any questions you might 

have. 

Chairman HUELSKAMP. Thank you, Mr. Hanes. I appreciate 

your testimony and you joining us today. 

I now yield to Ranking Member Chu for the introduction of our 

final witness, Mr. Marcus Stanley. 

Ms. CHU. Yes, I am honored to introduce Mr. Marcus Stanley. 

Marcus Stanley is the Policy Director of Americans for Financial 

Reform, a coalition of more than 250 national, state, and local 

groups, who have come together to improve regulation of the financial sector. Members of AFR include consumer, labor, civil rights, 

investor, retiree, community, faith-based, and business groups, 

along with prominent, independent experts. Mr. Stanley has a 

Ph.D. in public policy from Harvard University, previously worked 

as an economic and policy advisor to Senator Barbara Boxer, as a 

senior economic economist at the U.S. Joint Economic Committee, 

and as an assistant professor of Economics at Case Western Reserve University. 

Dr. Stanley, thank you for joining us today. 

Chairman HUELSKAMP. Thank you for the introduction. Mr. 

Stanley, you may begin. Thank you. 

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STATEMENT OF MARCUS STANLEY 

Mr. STANLEY. Thank you. Chairman Huelskamp, Ranking 

Member Chu, and members of the Committee, thank you for the 

opportunity to testify here today. 

Today’s hearing asks us to consider the impact of the DoddFrank Act on small banks. I want to make two broad points. First, 

community banks face economic headwinds that are unrelated to 

Dodd-Frank, connected both to long-term trends and to the effects 

of the financial crisis itself. 

Second, the big picture is that community banks have returned 

to profitability under Dodd-Frank. In 2015, just over 95 percent of 

community banks earned a profit. That is compared to 78 percent 

in 2010, the year Dodd-Frank was passed. 

Consolidation in the banking industry is not a new phenomenon. 

The number of FDIC insured banks has declined by 2/3 over the 

past 30 years with the decline concentrated among banks with less 

than $1 billion in assets. The number of community banks has declined every single year since 1984. 

The causes of these long-term trends include changes in economies of scale in banking and deregulatory measures that assisted 

the expansion of large regional and global banks. The catastrophic 

effect of the financial crisis made things worse. Over 400 community banks failed between 2008 and 2011. Facing huge losses in the 

Deposit Insurance Fund and historically devastating recession, 

FDIC’s supervisors cracked down on risks in existing banks and 

made it more difficult to open new banks, a regulatory response 

that would have occurred even if the Dodd-Frank Act had never 

passed. 

When we look at the well-being of community banks since the 

passage of Dodd-Frank, as well as specific provisions of the law, we 

see a better picture. Not only have more than 95 percent of community banks returned to profitability today, but return on equity has 

been steadily increasing. Average community bank ROE has gone 

up every year since the passage of Dodd-Frank and reached almost 

9 percent in 2015, a level that some larger banks, such as 

Citigroup or Bank of America might envy. 

One reason for this is that in drafting Dodd-Frank, Congress 

made major efforts to shield small banks from additional regulations targeted at the large banks and nonbanks who were at the 

center of the 2008 crisis. Smaller banks are exempted from numerous provisions in the law, including new heightened prudential 

standards in Title I, new over-the-counter derivatives regulation, 

and direct CFPB examination . 

As detailed in my written testimony, regulators have continued 

this practice in implementing the law with efforts to shield small 

banks from compliance burdens in areas ranging from the Volcker 

Rule to new mortgage regulations. The Dodd-Frank Act was major 

legislation passed in response to the worst financial and economic 

crisis since the 1930s, so it clearly does have impacts throughout 

the financial system. But, those impacts are concentrated on the 

large banks and nonbanks that are, in fact, the major competitors 

of community banks. 

At the same time, I do not wish to imply that there are not real 

issues with small business access to credit and issues in rural 

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9 

areas that this Committee can and should address. Although small 

business lending has increased significantly in recent years, it has 

still lagged during the recovery, and the economic expansion has 

been more concentrated in urban areas. Helping small banks to address this issue should be high on our agenda, but looking at the 

Dodd-Frank Act as it is caused seems misguided. Instead, I would 

urge the Committee to look at credit guarantees from entities like 

the Small Business Administration, the Department of Agriculture, 

and other forms of credit that are under the jurisdiction of the 

Committee. 

We must also make sure that nonbank financial entities are competing on a level playing field with regulated banks. Online marketplace lenders are a rapidly growing provider of small business 

lending and are subject neither to consumer protection laws nor 

risk controls. The evidence indicates that they often provide a substandard and even exploitative product. Just 15 percent of small 

business borrowers from online lenders express satisfaction with 

their experience, while 75 percent of small business borrowers from 

community banks did. That is from a joint study by seven regional 

Federal Reserve banks that cover pretty much the whole country. 

Congress should consider expanding oversight of online marketplace lenders. 

Thank you for the opportunity to testify, and I look forward to 

taking questions. 

Chairman HUELSKAMP. Thank you, Mr. Stanley. We appreciate your testimony. We will now begin our questioning. I recognize myself for 5 minutes. 

I will first start with Mr. Hanes. I cannot imagine you got into 

this business to navigate your way through miles of red tape. What 

brought you in this line of work, and what do you see as your role 

in the community of Elkhart, Kansas? 

Mr. HANES. I have been a community lender for 20-plus years, 

do not want to give the exact number. I enjoy being part of production agriculture. Growing up on a farm myself, that was my lifestyle and that was my livelihood. Now I get the opportunity to help 

a number of customers continue their lifestyle and continue their 

goals. Being in a small community, being with the bank and being 

a leader in that community, you are on a number of boards, and 

we understand how vital it is to keep our community together, to 

keep our community whole. We need new businesses. We need people coming to town. The bank is the lifeblood of that. That is who 

is going to be able to bring those individuals to town. That is who 

is going to be able to fund those loans to allow them to realize their 

dreams. That is what I enjoy doing, seeing somebody be able to 

start their own business. 

Chairman HUELSKAMP. You talked a little bit about home 

mortgage lending, perhaps small business loans as well. I would 

like for you to explain how the regulations have restricted your 

ability to meet those needs. Secondly, who will take care of those 

needs if the First National Bank of Elkhart were not there? 

Mr. HANES. That is a huge challenge from our side. I brought 

a couple things I would like to show. When I came to banking 20- 

plus years ago, this was a real estate note. We had a note, green, 

nice pretty form being a bank. A mortgage, that was it. A customer 

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would actually read that, understand it, ask us questions. This is 

a real estate note, now. It is a half-inch thick, lots of pages to sign. 

We could not get a customer to read this if we forced them to. It 

is just flat too thick. We have taken it from something simple to 

something overly complex. 

In our local market we do not have a lot of secondary mortgage 

options. We were just informed some time ago that our secondary 

mortgage lender that has been a big supporter of southwest Kansas 

now will no longer make a real estate loan less than $50,000. Well, 

that seems small. The average loan size of residential loans in our 

portfolio, $33,000. There would not be anybody in our portfolio that 

would even qualify to apply for a residential loan. I understand 

that is not a jumbo loan in your line of work, but at our bank that 

is a house loan. That is a typical house loan. We have to continue 

to serve that market as best we can, but we have to figure out a 

way that we can do it within the regulatory constraints, and that 

is the challenge we are not meeting. 

Chairman HUELSKAMP. I am hearing this from other communities as well. Who is going to issue the home mortgage in these 

situations? I know many of the folks in the Kansas Bankers Association, in Oklahoma as well, are exiting the marketplace. Mr. 

Stanley is worried about online and some of these other entities, 

but what are the other options you have? 

Mr. HANES. There are not a lot of options because our customers do not fit the model. They do not always have a W-2 that 

allows them to get paid once a month, and it is an easy way to figure their income. They have farm income. They have Schedule Fs, 

it does not fit the box. The loans that we wind up with are the ones 

that do not have access, cannot get access to those other markets. 

As a result, they have limited access to credit. 

Chairman HUELSKAMP. Thank you, Mr. Hanes. 

Mr. Beverage? 

Mr. BEVERAGE. If I might add to that just a moment, Mr. 

Chairman, as I said earlier, banks are fairly resilient and try to figure out a way to meet their customers’ needs. One of the things 

that has happened in Oklahoma is that our Bankers Bank has created an opportunity for referrals to Oklahoma City for consideration of those rural mortgages, because they do a lot of them, and 

they are able to withstand the litigation and regulatory risk that 

a much smaller bank cannot. In addition, one bank family has created a mortgage business that they offer, but since you are giving 

it up to your competitor, you might not get quite as many referrals 

to that instance. 

My point is that with that referral also goes access to the community bank, and it is that relationship that is at risk here. It is 

that relationship, that reliability, the trust, the bond of trust that 

a banker like Shan has with his customers. A community bank is 

just simply so much more than a bank. 

Chairman HUELSKAMP. Does Dodd-Frank understand or take 

that into account at all? 

Mr. BEVERAGE. Some of the language does, but in the real 

world, no. The answer is based on the reality that the mentality 

is one size fits all. 

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A friend of mine had a $15 million bank. Very, very small. 3-1/ 

2 employees. He had to do the same thing that JPMorgan Chase 

does. He made cattle loans and he made wheat loans. That is it, 

he did not do anything else. He did not have any derivatives. I 

mean, I am not sure he could spell derivative. Nevertheless, he was 

just a simple community bank in a simple little town of about 250 

people. He just sold because he could not deal with it anymore. He 

is not the only one that is going to do that, and that is part of the 

issue. 

My question to you, Mr. Chairman, is if rural community banks 

go away, who is going to finance the business of food production? 

Chairman HUELSKAMP. That is a worry I have as well, as a 

farmer and a resident of small town America in western Kansas. 

Thank you. 

I next recognize Representative Chu for her questions. 

Ms. CHU. Thank you. Mr. Stanley, low income and minority 

neighborhoods were devastated by predatory mortgage lending in 

the years leading up to the housing crisis. Do you think these communities are better off today with the ability to repay in qualified 

mortgage rules that were enacted under Dodd-Frank? 

Mr. STANLEY. Yes, I do. One thing we saw prior to the crisis 

was that people with equity in their homes were being targeted for 

exploitative loans that they could not pay back, at which point the 

bank would seize the collateral and perhaps profit on a loan that 

never should have been made. I do think that the QM and the Ability-to-Repay rules have made a critical difference in a lot of areas 

across America and will make a critical difference in addressing 

that. 

Ms. CHU. While small financial institutions are particularly critical of these rules, how has the CFPB, the Consumer Financial 

Protection Bureau, specifically tailored the rules to account for the 

relationship banking model of small institutions? 

Mr. STANLEY. The CFPB has made a lot of efforts to do that. 

One thing we have heard several times from the other witnesses 

is the desire to exempt on portfolio loans, loans that are held in 

portfolio from regulation. That can make sense for a bank that 

truly has a relationship lending model, and the CFPB has, in fact, 

exempted loans held in portfolio from many of the requirements 

under the new mortgage rules. It has been very responsive to that. 

One thing that we see here in Washington, D.C., is that when 

you actually look at legislation that would roll back parts of DoddFrank and would do things like exempt loans held on portfolio, you 

see it does not just apply to small rural banks. It does not just 

apply to community banks. It applies across the board to large regional banks. Frankly, the reason that legislation draws fire from 

organizations like Americans for Financial Reform, from proponents of reform, is that it is not limited to the kinds of banks 

that we are talking about here today. I think that there is space 

both with regulators, and even possibly in Congress on a bipartisan 

basis, for legislation that is truly targeted at the kind of small 

rural banks we are talking about today. 

Ms. CHU. Yes, Mr. Beverage? 

Mr. BEVERAGE. Just to add something to what Mr. Stanley 

said about the CFPB and their willingness to accommodate some 

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of these issues, he is correct. But, it has taken a while to get there. 

One of the things that we have done is that we have invited CFPB 

employees to come to Oklahoma. Two of them have taken us up on 

that, and I have taken them to small rural banks to show them 

how they work. I think that has had an impact as it enables the 

CFPB experts to understand the differences between a $40 million 

bank in Allen, Oklahoma, and Bank of America. I think that is important. But Mr. Stanley is right; it is getting better. 

Ms. CHU. Thank you. I do appreciate that greatly. 

Dr. Stanley, the CFPB is required to carry out extensive analysis 

before issuing regulations that will impact smaller institutions. As 

you know, a number of changes were made to accommodate small, 

rural lenders under CFPB’s mortgage rules. Do you think the small 

creditor exemption allows community banks to continue making 

the mortgages that are the best for the customers? 

Mr. STANLEY. The small creditor exemption does include a lot 

of additional flexibility on things like balloon payments, escrow requirements, debt-to-income ratios, and these kind of things. That 

is the flexibility that we need to see in small rural areas. Yes. 

Ms. CHU. We have heard on many occasions that Dodd-Frank is 

the reason for many of the problems facing community banks. Can 

you explain how the Dodd-Frank Act can actually do the opposite 

and help level the playing field with their larger multinational 

competitors? 

Mr. STANLEY. Yes. What we saw prior to the crisis was large 

banks gaming the system in a lot of ways. They would use complex 

international models to claim that their assets were less risky than 

the assets held by smaller banks, and they would use that to hold 

less capital and borrow more, be overleveraged. And Dodd-Frank 

has taken a lot of steps to even that. I think the CFPBs’ jurisdiction over nonbanks is also very significant in terms of leveling the 

playing field. 

Ms. CHU. Can you elaborate on your testimony regarding the 

issue of the declining number of community banks and the role of 

the FDIC’s s supervisorial practices? 

Mr. STANLEY. Yes. I think there is no question that the FDIC 

cracked down as a supervisor on a lot of bank risks in the parade 

around the crisis. I think a lot of that was justified because there 

were a lot of banks that had made loans in the commercial real estate space that had valuations that were inflated. As the economy 

was damaged, some of those risks were excessive. We saw a lot of 

banks failing, and the FDIC was concerned about that. They did 

crack down. I think there are issues and questions. They also 

cracked down, as one of the witnesses mentioned, on the opening 

of new banks and put in new requirements because they saw a lot 

of newer banks fail during the crisis. That is something that could 

be reexamined and thought about in terms of how they have done 

that. 

Ms. CHU. Thank you. I yield back. 

Chairman HUELSKAMP. Next, I recognize Representative Trent 

Kelly for questions. 

Mr. KELLY. Thank you, Mr. Chairman, and Ranking Member. 

Thank you, witnesses, for being here. 

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Community banks are very important. I am from Mississippi, in 

a rural area with a lot of manufacturing, and a lot of agriculture. 

Quite frankly, it used to be the post office was the center of gravity 

for most small communities. The post office has consolidated, so 

now you have a town because you have a community bank. When 

you lose that bank, you lose the town. It is not just the banking. 

It is the guy who coaches softball or kids’ baseball with you. It is 

the guy who goes to church with you on Sunday and sits by the 

pew. Your banker in those small communities is much more than 

your banker, and I understand that. 

Unfortunately, based on your testimonies here today, it is not 

just Dodd-Frank. I can tell you my bankers do not have the same 

view as Mr. Stanley about Dodd-Frank and the impact it has on 

small banks. I can tell you they have talked to me again and again. 

I can tell you that the regulations are five binders this thick that 

they have to comply with, and they do not get paid for compliance. 

They have to comply with that, and they do not have the expertise. 

The net effect of that is a cost to the consumer, it has to be sucked 

up by the consumer because it is a nonrevenue-generating process. 

Based on that, what is the impact that Dodd-Frank and other 

regulations have on the consumer and their financial ability to get 

along? Mr. Hanes? 

Mr. HANES. I appreciate the question because that is exactly 

why I am here. That has been the big challenge. As I testified earlier, it used to be a source of pride within our little community 

bank. When we would do audits, or something internally, we would 

use it as a cross-training opportunity. We would grab somebody 

that might be from the other side of the bank and have them audit 

a loan side, or have a loan side audit an operations side. It was 

a way we could educate, we could cross train, we could bring that 

next level of leaders into the bank. Because they have gotten so 

thick, so heavy, and frankly, they are ever-changing, we cannot do 

that anymore. We do not have the expertise. We cannot have the 

expertise in our little 20-employee shop. What we have had to do 

is outsource to outside firms that come in for a period of a week 

or a few days and do those audits. Well, that comes at a cost. In 

our respect, we are paying more than a full-time employee’s salary 

to outside firms to come in and do audits that we used to be able 

to do ourselves. I do not have a problem doing the audits. I do not 

have a problem following the regs, but they have gotten so large, 

so cumbersome, and frankly, they seem to change and we cannot 

do that anymore. The effects one less employee, one less teller serving our customers, our customers do not get as good a service, one 

less job in the community. You are right, we are the t-ball coach 

and the swim coach and the basketball coach. It is one less job. 

Mr. KELLY. Let me follow up on that a little bit because my 

community seems like it is a lot like yours in Elkhart. A lot of my 

loans are not $50,000, and a lot of times they are for homes because the state prices are much better in rural areas. You can get 

a lot more house for a lot less money. It is also because of the same 

economic things where you do not have the steady W-2 necessarily. 

What impact does it have for those $50,000 or less loans, for folks 

that are not going to be able to get that money anywhere, which 

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means they do not have a house and those things. Can you expand 

on that just a little bit? 

Mr. HANES. Sure. Thank you, I appreciate that. 

The biggest house loan in town probably would struggle to get 

to six digits. We do not have that large of a housing market. The 

largest number of people looking for a house loan do not want, do 

not need, and would not ask for a loan in six digits. They are looking for that $50,000 to $60,000, that $40,000 house to get them 

started. The secondary market is not an option because they simply 

will not even take an application if it is under $50,000 because 

they have determined anything below that is not profitable for 

them. So, their only option is their local community bank, and the 

majority of the banks around me do not make residential real estate loans anymore. As a result of that, they have far less access 

to credit than they would have had before, and it has put them at 

a disadvantage both now and for the long term. They cannot own 

a house. 

Mr. KELLY. Mr. Chairman, if I can, I will let Mr. Beverage comment. 

Mr. BEVERAGE. I wanted to add to what Shan said. The primary impact on consumers is that it increases their costs. In a 

rural area, you simply do not have a pool of compliance officers 

who are knowledgeable about everything that is going on and everything that is required of a bank today. You do not have any 

choices regardless of what you would pay them, so you have to 

outsource. You have to use the association, or a program that we 

would sponsor, or your own private expert to help you get through 

what the OCC has told us is the principal issue for examination 

s. Compliance is one. Cyber security is two. Credit is three. That 

is important to understand. 

Mr. KELLY. My time is expired. I yield back, Mr. Chairman, 

thank you. 

Chairman HUELSKAMP. Thank you. 

Next, I recognize Representative Luetkemeyer, Vice Chairman of 

the Committee. Welcome to the Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Glad to be 

with you. 

I also serve on the Financial Services Committee, and so we have 

been working on some Dodd-Frank issues and some Dodd-Frank 

reform. We have heard a lot of testimony. Let me read you a few 

statistics. Before Dodd-Frank became law, 75 percent of banks offered free checking; now only 37 percent at the end of 2015. DoddFrank fueled a 21 percent surge in checking fees, 15 percent fewer 

credit card accounts since 2008 at a cost now of more than 200 

basis points more than what they had. 73 percent of community 

banks report regulatory burdens are preventing them from making 

residential loans. We have heard that testimony. One last number 

here. The cost of the smallest commercial industrial loans has risen 

at least 10 percent from the pre-crisis average. 

I can tell you, I am from Missouri, at the end of 2015, we had 

44 banks that were $50 million or less. Those are little bitty guys. 

Remember, we are talking about small, rural communities, and 

that is probably the only bank in town, like probably yours is, Mr. 

Hanes, and those guys, out of 44, 26 lost money last year. 

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FDIC did a study back in 2013. It said within the next 5 years, any bank $250 million or less is probably going to go out of business. Not because they are bad banks, not because of the economy, 

but because the rules and regulations that are coming are going to 

force them to consolidate, and Dodd-Frank is the culprit. DoddFrank created all of this group of regulations that is out there. 

Mr. Hanes, you talked a minute ago about QM rules. QM, at 

your size, you are supposed to be exempt from it; right? But, if you 

want to sell a mortgage to the secondary market, do you have to 

comply with it? 

Mr. HANES. Yes, we do. 

Mr. LUETKEMEYER. So even hough you were exempted, you 

still have to comply. These rules roll downhill, do they not? 

Mr. HANES. That is the part I would like to say, Ms. Chu. We 

were supposed to be exempted from a lot of Dodd-Frank and that 

threshold. But what happened, whether intentionally or probably 

unintentionally, was the trickle-down effect, exactly what we are 

talking about. What is a best practice for Bank of America, the examiners see that and they see that is a nice stress test, that is a 

nice little study, why do you guys not do that, too? It trickles down 

to where, all of a sudden, we are doing that same thing as Bank 

of America. The big banks, they might have a team, a department, 

a program that they developed to handle that, we do not. We have 

got Excel. We have to come up with something that is going to 

work. That trickle-down effect is what we were not exempted from. 

I agree that is a challenge. 

Mr. LUETKEMEYER. I have another question for you, Mr. Beverage. I have a question with regards to Dodd-Frank, we are losing 

one community bank a day across the country right now. DoddFrank was supposed to be the cure all here. It was supposed to 

keep the big guys under control, but I believe—let me make this 

statement, and Mr. Beverage, I will appreciate your comment on 

it—I believe Dodd-Frank has caused the big banks to get bigger 

and put the pressure on the small banks to go out of business and 

merge with them. Would that be a fair statement? 

Mr. BEVERAGE. Yes, sir. It does not tell the whole story, but 

it is certainly relevant. 

One of the things that I wanted to add to what Shan said, and 

in response to what Mr. Stanley testified about, is the exemption 

that banks under $10 billion are supposed to have from the CFPB. 

They do have exemption from direct examination authority, although there is ride-along authority, and that is a different issue, 

but they are not exempt from the rules and regulations that the 

CFPB has revised and imposed. They still have to follow those. The 

primary federal banking regulator is then the one that examines 

for compliance. In smaller banks, that is a cost, that does not bring 

a dime to the bottom line, which means less capital, and more importantly, less ability to lend to consumers. 

Mr. LUETKEMEYER. Okay, very quickly. My experience keep 

discussing this with bankers across the country of all different 

sizes, and I have asked this question of a lot of them and they say 

anytime, because of the increased costs of compliance and the complexity of it. When you hire a loan officer, you have to hire one 

compliance officer. When you look at these small banks, when you 

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hire a loan officer, the compliance officer does not make you any 

money. You have to spread those costs out over your bank, and you 

reach a point at which the rubber band breaks and then you have 

to do something different. This is where they are. 

I think I could go on all day here but I see my time is about out, 

but I appreciate you gentlemen’s testimony this morning, and I 

think that small banks make loans to small businesses. That was 

the testimony in this Committee not too long ago, and I think that 

we need to make sure that we keep the banks in business so the 

small businesses have an access to credit ability. Without that, 

small business communities dry up, and whenever rural America 

goes away it hurts the ability to produce food and produce all the 

rest of the things this country relies on. 

Thank you very much for your testimony today. 

Chairman HUELSKAMP. I appreciate those questions, I will 

note Mr. Hanes has come a long way and I would like to ask him 

another question. I think you drove 100-plus miles to an airport, 

then took a connection, two of them to get here. You have come a 

long way. One other subject you did bring up, Shan, is that you 

thought it an unfair playing field in the particular area of agriculture, which is the bread and butter of your bank, it is hard to 

compete. Can you describe that a little bit more and what would 

you suggest as a way to level that playing field? 

Mr. HANES. I believe there are several ways. I believe you are 

referring to Farm Credit Services and their tax-exempt status on 

real estate loans. They currently have a tax rate of about 4 percent. 

If you compare that to my 38 percent bracket, that is a huge, 

unlevel playing field. There are several ideas that I would like to 

consider. The biggest and the most obvious is they do not pay income tax on income earned from interest on real estate loans. Give 

us that same opportunity. I do not mind competing with anybody, 

that is what made America great. But let us compete on a level 

playing field and do not let me start 34 percentage points behind 

them on a tax rate. 

Chairman HUELSKAMP. I appreciate that. 

I want to follow up with Mr. Stanley, in trying to understand 

your perspective of what is occurring here, and I do not know if you 

have ever been in a small town or a community bank we are talking about, looked at that, but frankly, Mr. Stanley, I do not know 

how they are able to compete with the Bank of America. The regulatory or the legal changes coming out hopefully at a Financial 

Services Committee, Bank of America does not want the changes. 

They do not want to change Dodd-Frank. They like the setup. As 

I understand, they are opposed to making changes. They found out 

how to game the system. But when you have Mr. Hanes and other 

banks across western Kansas, I think we all agree we want consumers to have more options, not fewer of them. When I hear from 

community banks that they are saying any loan under $100,000, 

and there are very few of those, are losers—they are going to lose 

money on them, and the Feds do not want them to do it anyway— 

they are left with some of the predatory lenders you are talking 

about. Bank of America is not going to come to Elkhart, Kansas. 

I guarantee you that. They have no desire. What they want to do 

is maybe buy up your bank. I do not know what they would want 

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to do, I think they would just want to ignore that. I am just trying 

to understand from the perspective and the group you represent, 

which in inner cities I think you saw those predatory practices, but 

how does that apply to a small rural town if they are going to have 

no options when we are done with Dodd-Frank? I open it up to you, 

Mr. Stanley. 

Mr. STANLEY. I think, first of all, you are going to see a lot of 

large financial institutions that end up supporting the package that 

comes out of Chairman Hensarling. I think that there is enormous 

diversity in the American banking system. We have 6,500 banks 

across all different sizes of communities. What we are very focused 

on and concerned about is that any changes to tailor these regulations, and there have been changes made both at the regulatory 

level and in the Dodd-Frank statute, do not become loopholes that 

can then be used by larger banks or can be used in rent-a-charter 

situations where somebody gets a bank charter and then sells stuff 

out into the secondary market that does not meet certain kinds of 

standards. 

One thing I see with a lot of the legislation that comes out is it 

is not limited to the kinds of banks that are in Elkhart, Kansas. 

It is not limited to $100 million banks, $250 million banks. It does 

open the door to either banks that are in that $50 to $500 billion 

space, the very large regional banks that are among the largest 

couple dozen banks in the country, or even to the top six or seven 

global banks that dominate Wall Street. I think that there is space, 

there has been space in the Senate. Actually, there was a package 

passed for community banks that was limited to community banks, 

so I think there is bipartisan space for legislation that is very targeted and crafted to the kinds of banks that you are talking about 

in Elkhart, Kansas, but we do not often see that. 

Chairman HUELSKAMP. Do you think they represent any 

threat to the economic system? Why are they being punished by 

these regulations at all? I mean, we have experts. They spent hours 

and days and weeks and months and years of putting it together, 

and the other day Mr. Hanes comes in and says most of my competitors are leaving the marketplace. The big city said, well, that 

is just too bad you cannot get a home mortgage in Elkhart, Kansas. 

That is one of the costs of taking care of the big banks. But I agree 

with Mr. Luetkemeyer. The end result is they are too big to fail 

and too small to succeed, and I think that is happening in this 

arena. 

Mr. STANLEY. Would you like me to respond? 

Chairman HUELSKAMP. Please. 

Mr. STANLEY. I think there are a couple things. First of all, 

with respect to consumer protection, if something happens that 

damages a consumer, it may not matter to that consumer whether 

that happened at the hands of a small bank or a large bank. I 

think the vast majority of cases, there is no intent to harm consumers, some of these rules that we are talking about—overdraft 

fees, things like that, the CARD act that affected credit cards. That 

probably does not affect you guys much. But, overdraft fees were 

a source of revenue for small banks. There were abuses in terms 

of overdraft fees and there were consumer protection things that 

were done to address that. Interchange fees. That is something 

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there were complaints about from small businesses, but small 

banks had issues and problems with the regulatory changes that 

were made for interchange fees. That is one set of things on these 

consumer protection things. 

I think in terms of prudential protections, we do have to remember that even if you do not threaten the national global financial 

system, you are dealing with insured deposits. There is a backstop, 

a government backstop behind those deposits, so there is an interest by the FDIC in prudential risk regulation as long as those insured deposits are there. 

Chairman HUELSKAMP. Mr. Stanley, I appreciate that, and I 

will note I do not know of a single bank in the western half of the 

State of Kansas that failed in this situation. They get to take on 

all the regulations, so I am not worried so much about consumer 

protection; I am worried that they will not have any more choices. 

We will probably be sitting here in 3 or 4 years saying gosh darn 

it, what are we going to do to make sure they can get a loan in 

Elkhart, Kansas? We are about at the end of that stick. 

I am going to ask Ms. Chu or Mr. Luetkemeyer, I am being a 

little flexible here, if you have any follow-up questions. 

Seeing none, or if you had another round of questions? 

Mr. LUETKEMEYER. I have a couple more here. 

Mr. Beverage, we have been discussing a little bit about new 

banks being chartered. There have only been, what, two in the last 

5 years, I think? 

Mr. BEVERAGE. Maybe three. 

Mr. LUETKEMEYER. Maybe three? You know, if you are an investor and you go out here and you see the numbers we have been 

throwing around here today, especially small banks, if you are an 

investor, why would you want to invest in a business like this 

where you are going to get regulation from the top down, and more 

of it when the CFPB is just out of control with the TRID rule, the 

QM rule that basically runs real estate mortgages out of existence 

in small communities? If you are a new bank trying to get started, 

what are you going to make loans on? Can you give me some insight? I do not see why an investor would go in and try to buy, 

start a new bank. 

Mr. BEVERAGE. In this environment, neither do I. I would advise against it until we get some changes that will help community 

banks serve consumers in ways that do not jeopardize them. I just 

cannot help but say this. Community bankers do not get up in the 

morning thinking about how they can screw their customers. They 

get up in the morning thinking about how they can take care of 

them because those customers are vital to the survival of that community. When a bank makes a loan, basically, there are two questions. You know this. One, can you and will you repay it? If all of 

that works, then the bank wins, the customer wins, and the community wins because you get jobs, you get economic involvement, 

you get economic activity. These people grow up together, for heaven’s sake. They know everybody. They have a list of things that 

they can no longer do because they are afraid of fair lending allegations. They are afraid if I screw up on an appraisal or on a valuation, or if I do not dot an I, or cross a T properly, I am going to 

get sued. Now, rightly or wrongly, that is a fear. 

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Mr. LUETKEMEYER. One of the problems with the QM rule is 

that by saying it is a qualified mortgage means it is a qualified 

mortgage, inferring that it is a preferred mortgage. If it is a nonqualified mortgage, they are by inference saying there must be 

some additional risk there. There must be a problem here. It opens 

you up as a banker to a lot of liability exposure even though it may 

not be. Just the inference it is a nonqualified loan, by differentiating between the two, suddenly now you are put in a position to 

decide is there a liability risk that I have got to take here by making this kind of a loan, a nonportfolio loan? This is the predicament 

that banks are in, and this is why you wind up not making real 

estate loans and getting out of the business because you see the liability situation sit in front of you, like I cannot take this risk. 

Mr. LUETKEMEYER. Mr. Hanes, I see you have been anxious 

to jump in here. 

Mr. HANES. Sorry about that. 

Number one, as I said earlier, we are now making a compliance 

decision, not a credit decision—when we look at a loan—and that 

is wrong. That is not what we are built to do. That is not what we 

should be doing, but we are making a compliance decision. Are we 

going to make this loan? Is this one that we are not going to get 

written up for later? Is this one that we are not going to have to 

redisclose everything because we got something on a wrong line? 

It is a compliance decision to not make a loan versus a credit decision. 

I would like to follow up on your original comment there, I had 

an opportunity in 2011 to put a holding company together to buy 

the local bank, a great source of pride and a great opportunity. I 

have actually gone down that exact path. To follow up on what Mr. 

Stanley said, community banks have become profitable in spite of 

Dodd-Frank; definitely not because of Dodd-Frank. We continue to 

work around and with those rules. The reason you invest in the 

local small bank, I can tell you is because you want the bank there. 

You do not want it being sold. You do not want it closed. The group 

that we put together, they grew up there. They want their local 

bank there. They grew up knowing that that was their bank and 

that was where their kids banked, and those kids are now customers. They have moved on to California or wherever, and they 

are still our customers. The reason you get investors to invest is 

because they want their local bank and they want to be a part of 

their local bank. We are not getting investors from outside; we are 

getting investors from down the street and across the street. 

Mr. LUETKEMEYER. Just to show you, I did not bring it with 

me this morning, but I have a sheet at home that details how you 

go through a real estate mortgage. There are 247 things on this 

sheet of paper here that you go down and you check a box. Okay, 

it is this size, so you go here. Then I got this kind of collateral, so 

you go here. It is a sole proprietorship or it is a husband and wife, 

so you go here. There are 247 ways you can get tripped up when 

you make a loan. A lot of that is on the CFPB. That is their problem. 

QM, CFPB’s own sheet is like this. You take two sheets and you 

put them together like this, it is like a Rubik’s cube. You go 

through here, you go out here, you go here, and then you wind up 

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going on this one. It is unbelievable, and you wonder why banks 

get out of lending. You wonder why they are getting exposed to 

this. You wonder why the costs of consumers go up. Somebody has 

to pay for this extra compliance cost when you have one loan officer 

for one compliance officer. 

Thank you, gentlemen, for being here today. I yield back. 

Chairman HUELSKAMP. I would like to thank all of our witnesses for their participation today. It is never easy to take time 

out of your busy schedules and to come and talk with us, but you 

help us understand the unique impact that overregulation can have 

on our rural communities. All too often it is our consumers, our 

small businesses, farms and ranches, and entrepreneurs that ultimately feel the burden. Here at the Committee, we remain dedicated to working to ensure that small businesses are allowed to 

grow, thrive, and provide economic opportunities to the community. 

I ask unanimous consent that members have 5 days to submit 

statements and supporting materials for the record. 

Without objection, so ordered. 

This hearing is adjourned. 

[Whereupon, at 11:06 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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Chairman Huelskamp, Ranking Member Chu and members of 

the subcommittee, my name is Roger Beverage, and I am the President and Chief Executive Officer of the Oklahoma Bankers Association. I appreciate the opportunity to present the views of the American Bankers Association (ABA) on the impact of regulations on 

rural communities. This is a subject near to my heart. The ABA 

is the voice of the nation’s $16 trillion banking industry, which is 

composed of small, regional and large banks that together employ 

more than 2 million people, safeguard $12 trillion in deposits and 

extend nearly $8 trillion in loans. 

ABA appreciates the opportunity to be here today to speak on 

how the growing volume of bank regulation—particularly for America’s hometown banks—is negatively impacting consumers because 

these same, perhaps well-intentioned rules and regulations limit 

the ability of banks throughout the nation to meet the needs of our 

customers’ and communities. This is not a new subject, yet the imperative to do something grows every day. 

America’s hometown banks are resilient, and have found ways of 

meeting our customers’ needs in spite of the ups and downs of the 

economy. But it is a job that has become much more difficult because of the avalanche of new rules, guidances and seemingly everchanging expectations of the regulators. 

This new regulatory atmosphere—not the local economic conditions—is often the tipping point that drives small banks to merge. 

The fact remains that there are nearly 1,500 fewer banks today 

than there were 5 years ago—a trend that will continue until some 

rational changes are made that will provide some relief to America’s hometown banks. 

In fact, today in Oklahoma there are 211 banks chartered in the 

state. When I came to Oklahoma in 1988—there were well over 400 

banks. More frightening is the lack of interest and ability for new 

charters. There have only been two true de novos since 2010, and 

none in Oklahoma. 

Each and every bank in this country helps fuel our economic system. Each has a direct impact on job creation, economic growth and 

prosperity in the community it serves. 

America’s hometown banks are like other businesses—they buy 

their ‘‘product’’ at wholesale and then sell it at ‘‘retail.’’ What that 

means is credit cycle that banks facilitate is simple: customer deposits provide funding to make loans. These loans allow customers 

of all kinds—businesses, individuals, governments and non-profits—to invest in their hometown and across the globe. 

The profits generated by this investment flow back into banks as 

deposits and the cycle repeats—creating jobs, wealth for individuals and capital to expand businesses. As those businesses grow 

up, they, their employees and their customers come to banks for a 

variety of other key financial services such as cash management, 

liquidity, wealth management, trust and custodial services. For individuals, bank loans and services can significantly increase their 

purchasing power and improve their quality of life, helping them 

attain their goals and realize their dreams. 

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This credit cycle does not exist in a vacuum. Regulation shapes 

the way banks do business and can help or hinder the smooth functioning of the credit cycle. Bank regulatory changes—through each 

and every law and regulation, court case and legal settlement—directly affect the cost of providing banking products and services to 

customers. Even small changes can have a big impact on bank customers by reducing credit availability, raising costs and driving 

consolidation in the industry that limits consumer choice. 

Everyone who uses banking products or services is touched by 

changes in bank regulation. It is imperative that Congress take 

steps to ensure and enhance the banking industry’s ability to facilitate job creation and economic growth through the credit cycle. The 

time to address these issues is now before it becomes impossible to 

reverse the negative impacts. When a bank disappears everyone is 

impacted. 

Importantly, in rural communities, smaller community banks are 

(in many instances) the exclusive source of capital farmers, ranchers, small business owners and its residents. Once that capital-access system becomes dysfunctional—as it is today—the community 

itself begins to encounter more difficult challenges in order to survive. 

We urge Congress to work together—Senate and House—to pass 

legislation that will enhance the ability of community banks to 

serve their customers. In particular, Congress can take action to 

ensure credit flows to communities across the country by: 

> Supporting tailored regulations for the banking industry; 

> Improving access to home loans, and; 

> Removing impediments to serving customers. 

In the remainder of my testimony, I will highlight some specific 

actions under each of these suggestions that would help begin the 

process of providing meaningful relief to help community banks 

and help bank customers. 

I. Support Tailored Regulation for the Banking Industry 

Banks are in the business of serving customers and communities. 

Banks are where prospective homeowners obtain home loans, small 

businesses find capital, and customers receive advice on how to 

manage their nest eggs for a financially secure future. 

But the role banks play serving their communities has been 

placed in jeopardy by the broad array of new regulations. For example, the typical small bank with one compliance officer has recently had to contend with more than 2,000 pages of new regulations, and that is just the housing, capital and remittance areas. 

Moreover, the Dodd-Frank Act has charged federal financial regulators with writing and enforcing 398 new rules, resulting in at 

least 13,644 pages of proposed and final regulations, and that’s 

with regulators only halfway through the rulemaking process. 

While not all of those rules apply to all banks, many do. Even the 

rules that do not, tend to have trickle down and become ‘‘best practices’’ as determined by the bank’s primary federal banking reguSBREP-219A with DISTILLER

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lator. Those regulators then apply those requirements to thousands 

of banks otherwise not subject to the rule. 

The key to changing the consolidation trend is to stop treating 

all banks as if they are the same or as if all banks operate in the 

same manner as the largest and most complex institutions. They 

don’t. Financial regulation and examination should not take a onesize fits all approach. To do so, only layers on unnecessary requirements that add little to improve safety and soundness, but add 

much to the cost of providing services—a cost which bank customers ultimately bear. 

Instead, ABA has urged for years that a better approach to regulation is to tailor bank supervision to take into account the charter, 

business model, and scope of each bank’s operations. This would 

ensure that regulations and the exam process add value for banks 

of all sizes and types. 

Regulators should be empowered—and directed—to make sure 

that rules, regulations and compliance burdens only apply to segments of the industry where it is warranted. Only then can America’s hometown banks be freed up to best serve their communities. 

Tailor Regulation to a Bank’s Business Model 

The ABA recommends that Congress ensure that regulation is 

tailored to a bank’s business model. Time and again, I hear from 

bankers wondering why the complex set of rules, reporting requirements, and testing that are imposed upon the largest most diverse 

and global institutions become the standard applied to the smaller 

community banks in the country. The approach seems to be: ‘‘If it’s 

the ‘best practice’ for the biggest banks it must be the best practice 

for all banks.’’ Such an approach makes no sense in our diverse 

banking system with different business models and strategies. 

Of course, the supervisory process should assure risk is identified 

and managed prudently. This risk assessment must be appropriate 

to the type of institution. In the aftermath of the financial crisis, 

the pendulum of bank examination has swung to the extreme—affecting every sized bank. Overbroad, complicated restrictions supplant prudent oversight. Inconsistent examinations hinder lending, 

increase costs, and create procedural roadblocks that undermine 

the development of new products and services for bank customers. 

The banking agencies should move towards customized examinations that consider the nature of a bank’s business model, charter 

type, and perhaps most important, bank management’s success at 

managing credits, including a borrower’s character, prior repayment history and strength of personal guarantees. In today’s complex banking environment, an array of risk factors has had a far 

greater impact on a banks’ ability to serve its customers—as well 

as its likelihood to get in trouble—than an arbitrary asset size. 

The ABA encourages Congress to support legislation that would 

ensure banks are regulated according to their business model, such 

as H.R. 2896, the Taking Account of Institutions with Low Operation Risk Act (TAILOR Act) of 2015, introduced by Rep. Scott Tipton (R-Colo.). This legislation would require regulators to tailor regSBREP-219A with DISTILLER

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ulatory actions so that they apply only when the bank’s business 

model and risk profile require them—not just based on asset size. 

This legislation empowers regulators to make sure that rules, regulations and compliance requirements only apply to segments of the 

industry where warranted. 

II. Improve Access to Home Loans 

The mortgage market touches the lives of nearly every American 

household. Banks help individual consumers achieve lifelong goals 

of homeownership by giving them access to the funding they need. 

Without home loans most Americans would not be able to purchase 

a home. 

Banks are a major source of mortgage loans—holding more than $2 trillion in one-to-four family home loans on their books and originating others under government guarantees. In addition, banks 

support the housing industry with construction and development 

loans, and homeowners with home equity lines of credit. These critical services of banks results in more income and jobs in communities, along with a larger tax base for local governments. 

Borrowers across the country—served by banks of all sizes— 

should be able to obtain safe, sound and well underwritten home 

loans. However, it is clear that new restrictive regulatory requirements have kept some creditworthy borrowers, particularly firsttime homebuyers, from obtaining much needed mortgage credit. 

The complex and liability-laden maze of compliance has made 

home loan origination more difficult, especially for borrowers with 

little or weak credit history. Over-regulation of the mortgage market has reduced credit available to bank customers, raised the cost 

of services, and limited bank products. The result has been a housing market still struggling to gain momentum. 

In Oklahoma, approximately 25 percent of the state’s banks have 

simply elected to get out of the home mortgage lending business. 

They have concluded that both the litigation and regulatory risks 

they would encounter are simply too great given the limited number of such loans they normally would make in a given year. That 

means their customers are either denied credit or must search for 

an alternative source of capital. This is especially true for rural 

areas. 

Congress can help reduce needless impediments to mortgage 

lending that have constrained the banking industry’s ability to help 

first-time homebuyers and dampened the growth of prosperity 

across the nation’s communities. For example, Congress should: 

Treat Loans Held in Portfolio as Qualified Mortgages 

The Dodd-Frank Act (DFA) is very restrictive in its definition of 

‘‘ability to repay’’ (ATR) and Qualified Mortgage (QM)—having a 

detrimental impact on the market and consumer access to credit. 

Portfolio lending is among the most traditional and lowest-risk 

lending in which a bank can engage. 

Loans held in portfolio are well underwritten because if a loan 

is to be held in a bank’s portfolio, the bank carries all of the credit 

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and interest rate risk associated with that loan until it is repaid. 

Therefore it must be conservative to protect the safety and soundness of the bank, and these loans are made with no risk to the nation’s taxpayers. 

ABA supports H.R. 1210, the Portfolio Lending and Mortgage Access Act, introduced by Rep. Andy Barr (R-Ky.), which passed the 

House on Nov. 18, 2015. It would treat any loan made by an insured depository institution and held in that lender’s portfolio as 

complaint with the Ability-to-Repay/Qualified Mortgage requirements and would provide an important and much needed correction 

to the restrictive standards that now exist. 

This legislation is fully consistent with the intent behind the 

Dodd-Frank Act in that it encourages ‘‘skin in the game’’ or risk 

retention by the originating lender. By encouraging banks to hold 

these loans on their books, the act will expand safe, affordable 

lending for more borrowers who look to America’s hometown banks 

for safe, affordable credit. 

TILA-RESPA Integrated Disclosure Rule (TRID) 

The TILA-RESPA Integrated Disclosure Rule (TRID) became effective in October 2015 and changed all residential mortgage origination disclosures as well as systems which generate and track 

originations. The new rules are extremely lengthy and technical, 

and carry substantial administrative and legal liabilities. 

ABA has expressed high concerns that this rule contains inadequacies that require immediate clarification and resolution for the 

Consumer of Financial Protection Bureau (CFPB). Uncertainty 

about the treatment of minor errors and oversights has broadly affected mortgage originators. Current legal uncertainties ultimately 

harm the consumer. Such uncertainties threaten liquidity in key 

portions of the market possibly restricting consumers’ access to 

mortgage credit. In addition, lack of legal uncertainty poses risks 

that ultimately inflate prices to the consumer. 

ABA and various industry partners have communicated to Director Cordray that immediate action is urgently needed to allay lender and investor concerns regarding TRID liabilities. We have requested that the CFPB: (1) formally publish authoritative guidance 

clarifying the scope and extent of TRID legal liabilities and assuring stakeholders that there are viable cure provisions for correcting 

technical errors and mistakes; (2) form an internal Task Force to 

engage with industry stakeholders to identify compliance and legal 

problems to be addressed via published guidance or interpretive 

rulemaking, and; (3) extend the current ‘‘good faith’’ implementation period for TRID until all regulatory issues and fixed and banks 

are granted a reasonable period to adapt compliance systems. Such 

actions will ensure a healthy bank mortgage lending environment, 

while ensuring consumers have access to well-priced financial options. 

III. Remove Impediments to Serving Customers 

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Rules and requirements surround every bank activity. When it 

works well, bank regulation helps ensure the safety and soundness 

of the overall banking system. When it does not, it constricts the 

natural cycle of facilitating credit, job growth and economic expansion. Finding the right balance is key to encouraging growth and 

prosperity as unnecessary regulatory requirements lead to inefficiencies and higher expenses which reduce resources devoted to 

serving customers and communities. 

Regulatory requirements for the banking industry have grown 

dramatically in recent years, hindering in particular rural banks’ 

ability to take care of their customers and serve local communities. 

By reducing or minimizing regulatory requirements for these rural 

community banks, Congress would allow banks to provide more 

credit, products and services to meet the needs of their local communities. 

Address the Cumulative Impact of the Increasing Number 

of Regulations 

The ABA supports many bills that would address banks’ concerns 

with growing regulatory requirements on consumers and especially 

rural areas. Several bills incorporating provisions which would provide regulatory relief to America’s hometown bank have been introduced in the House and Senate, such as: 

★ H.R. 1389, the American Jobs and Community Revitalization Act of 2015, introduced by Rep. Andy Barr (R-Ky.), and; 

★ H.R. 1233, the Community Lending Enhancement and 

Regulatory Relief Act (CLEARR Act), introduced by Rep. 

Blaine Luetkemeyer (R-Mo.) 

American Jobs and Community Revitalization Act of 2015 

ABA supports Rep. Andy Barr’s (R-Ky.) American Jobs and Community Revitalization Act of 2015 legislation which contains a 

number of provisions that will reduce the regulatory requirements 

for America’s rural hometown banks around the county in ways 

that make it easier for them to meet their customers’ needs. For 

example, the legislation includes provisions that would: 

• Require a review and reconciliation of existing regulations. Congress should require a review and reconciliation of 

existing regulations that may be in conflict with or duplicative 

of new rules being promulgated by the banking agencies, or 

which in their application badly fit the variety of institutions 

that make up the banking industry. 

• Streamline currency transaction reporting. Antimoney laundering efforts by financial institutions can be improved by eliminating needless currency transaction reporting 

through a ‘‘qualified customer’’ exemption to the Currency 

Transaction Reporting (CTR) rules. This would significantly reduce the more than 13 million CTRs filed annually, saving 

banks many hours each year in filling out unneeded and unused forms. Importantly, it would give them more time to deSBREP-219A with DISTILLER

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vote to what they do best: take care of their customers and 

communities. 

• Ensure Subchapter S banks are treated equitably. 

Banks are required to build capital under the Capital Conservation Buffer requirements of the agencies’ Basel III regulations. However, the current regulations do not take into consideration the unique cash flows applicable to S Corporation 

banks where income is calculated prior to consideration of distributions for payment of taxes arising from S Corporation activities. This puts S Corporation banks at a disadvantage when 

compared to C Corporation banks. 

Community Lending Enhancement and Regulatory Relief 

Act 

ABA supports Rep. Blaine Luetkemeyer (R-Mo.) Community 

Lending Enhancement and Regulatory Relief Act (CLEARR Act) 

which contain a number of provisions that would lift or modify 

many unnecessary restrictions, better allowing community banks to 

meet the needs of their customers. In particular, this legislation 

would: 

• Ensure the costs and benefits are considered before 

issuing new regulation. The bill also would require the Securities and Exchange Commission (SEC) to conduct an analysis of the costs and benefits, including economic benefits, of 

any new or amended accounting principle. Benefits to investors 

would have to outweigh costs before the SEC could recognize 

the principle. 

• Improve Access to Home Loans. This bill also contains 

a number of provisions to ensure consumers have access to 

home loans as discussed above. 

Evaluate Necessity of Basel III Complex Capital Requirements 

In addition, Basel III poses a significant compliance requirements on most rural community banks. The banking agencies estimate that the direct compliance cost of only the risk weighted asset portion of the final rules to be $43,000 per institution for 

banks under $500 million in assets. 

While complex, the risk weighted asset portion of Basel III is just 

one component of the final rules. The overall cost for banks over 

$500 million is almost certainly significantly higher. Unnecessarily, 

complex capital requirements force banks to devote resources away 

from lending opportunities. 

Although the industry is over a year into implementation, many 

institutions continue to struggle with understanding the rule’s complexities. The sections of Basel III ABA members most commonly 

cite as creating the greatest compliance burden include: (1) new 

definition of High Volatility Commercial Real-Estate (HVCRE); (2) 

new risk weighting methodology for private label securitizations; 

and; (3) new credit conversion factors for short-term lines of credit. 

Furthermore, even as America’s hometown banks are working 

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through Basel III implementation, the international Basel Committee has issued a steady stream of new proposals that could be 

adopted in the United States. 

ABA believes that highly capitalized banks and particularly 

those that serve rural America, should be exempt from Basel III 

and any potential future changes to the Basel framework. Using 

data from the Federal Deposit Insurance Corporation (FDIC), ABA 

estimates that some 4,000 banks may already have far more capital than Basel III would require. For these banks, the considerable 

and costly work of Basel III compliance yields no additional supervisory or safety and soundness benefits, and provides no services 

to customers. 

Conclusion 

America’s hometown banks have been the backbone of communities across nation. Our presence in small towns and large cities 

everywhere means we have a personal stake in the economic 

growth, health and vitality of nearly every community. Once again, 

this is particularly true for those banks that serve rural America. 

A bank’s presence is a symbol of hope, a vote of confidence in a 

town’s future. When a bank sets down roots, communities thrive. 

When they leave or reduce services, communities, and consumers 

do not thrive. It’s that simple. 

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

the tide of community bank consolidation and protect communities 

from losing a key partner supporting economic growth. 

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June 2016 

Testimony of 

Shan Hanes 

before the 

Small Business Committee 

Economic Growth, Tax and Capital Access Subcommittee 

United States House of Representatives 

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May 2016 

—————————————————————————————— 

Testimony of 

Shan Hanes 

before the 

Small Business Committee 

Economic Growth, Tax and Capital Access Subcommittee 

of the 

United States House of Representatives 

June 9, 2016 

Chairman Huelskamp, Ranking Member Chu, and members of 

the Subcommittee, my name is Shane Hanes, and I am the President and CEO Board of First National Bank in Elkhart, Kansas. 

First National Bank is a $78 million bank with a main location in 

Elkhart, Kansas and one branch serving Rolla, Kansas and the 

surrounding area. We have 20 employees and we predominantly 

lend to agriculture. Despite our small size, the bank is the largest 

lender in the county and we represent an average sized bank in 

rural Kansas. 

I am also a member of the American Bankers Association’s Agricultural and Rural Bankers Committee. I appreciate the opportunity to present the views of the ABA on credit conditions and 

credit availability in rural America. 

The nation’s $16 trillion banking industry, which is composed of 

small, regional and large banks that together employ more than 2 

million people, safeguard $12 trillion in deposits and extend nearly 

$8 trillion in loans. Rural credit issues are very important to the 

banking industry as banks have provided credit to rural areas 

since the founding of our country. Over 5,000 banks—over 82% of 

all banks—reported agricultural loans on their books at year end 

2015 with a total outstanding portfolio of over $171 billion. 

The topic of today’s hearing is very timely. The rural economy 

has been slowing, with farm sector profitability expected to decline 

further in 2016 for the third consecutive decline. However, farm 

and ranch incomes for the past five years have been some of the 

best in history. With the new Farm Bill in place, farmers, ranchers, 

and their bankers have certainty from Washington about future agricultural policy and how it will affect rural America. Interest rates 

continue to be at or near record lows, and the banking industry has 

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the people, capital and liquidity to help rural America sustain 

through any turbulence in the rural economy. 

Banks continue to be one of the first places that farmers and 

ranchers turn when looking for agricultural loans. Our agricultural 

credit portfolio is very diverse—we finance large and small farms, 

urban farmers, beginning farmers, women farmers and minority 

farmers. To bankers, agricultural lending is good business and we 

make credit available to all who can demonstrate they have a 

sound business plan and the ability to repay. 

In 2015, farm banks—banks with more than 15.5% of their loans 

made to farmers or ranchers—increased agricultural lending 7.9 

percent to meet these rising credit needs of farmers and ranchers, 

and now provide over $100 billion in total farm loans. Farm banks 

are an essential resource for small farmers, holding $48 billion in 

small farm loans, with $11.5 billion in micro-small farm loans 

(loans with origination values less than $100,000). These farm 

banks are healthy and well capitalized and stand ready to meet the 

credit demands of our nation’s farmers large and small. 

In addition to our commitment to farmers and ranchers, thousands of farm dependent businesses—food processors, retailers, 

transportation companies, storage facilities, manufacturers, etc.— 

receive financing from the banking industry as well. Agriculture is 

a vital industry to our country, and financing it is an essential 

business for many banks, mine included. 

Banks work closely with the Small Business Administration to 

provide credit through the 7(a) and Section 504 guaranteed lending 

programs. Additionally, banks like mine utilize USDA to make additional credit available by working with the Farm Service Agency 

to promote Guaranteed Farm Loan Programs and Rural Development for their many programs available for rural communities. The 

repeal of borrower limits on USDA’s Farm Service Agency guaranteed loans has allowed farmers to continue to access credit from 

banks like mine as they grow, ensuring credit access for farmers 

across the country and the guaranteed funding of USDA’s Rural 

Development programs has encouraged banks like mine to use 

these programs when applicable. 

In my testimony today I would like to elaborate on the following 

points: 

> Banks compete with competition on an uneven playing 

field; 

> Banks must deal with the daily impact of new and enhanced bank regulations and impediments to growth for rural 

communities; 

> Bank’s specific impediments to growth and impact on 

rural lenders; 

> The current issues with appraisers in rural America and 

the impact on our business as lenders. 

I. Unfair competition 

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The Farm Credit System is a government sponsored entity that 

has veered away from its intended mission and now represents an 

unwarranted risk to taxpayers. The Farm Credit System was 

founded in 1916 to ensure that young, beginning, and small farmers and ranchers had access to credit. It has since grown into a 

$304 billion behemoth offering complex financial services. To put 

this in perspective, if the Farm Credit System were a bank it 

would be the ninth largest in the United States, and larger 

than 99.9% of the banks in the country. This system operates 

as a Government Sponsored Entity and represents a risk to taxpayers in the same way that Fannie Mae and Freddie Mac do. It 

benefits from significant tax breaks—valued at $1.3 billion in 

2015—giving it a significant edge over private sector competitors. 

Moreover, the Farm Credit System enjoys a government backing, 

formalized by the creation of a $10 billion line of credit with the 

U.S. treasury in 2013. The Farm Credit System has veered significantly from its charter to serve young, beginning, and small farmers and ranchers, and now primarily serves large established 

farms, who could easily obtain credit from the private sector. In 

fact, the majority of Farm Credit System loans outstanding are in 

excess of $1 million. Any farmer able to take on over $1 million in 

debt does not need subsidized credit. Moreover, the volume of small 

borrower loans accounted for 14% of all new Farm Credit System 

loans in 2015. In addition to the Farm Credit System, the Credit 

Union industry has grown to over $1 trillion in assets and their tax 

benefit is estimated to exceed $26.75 billion over the next ten 

years. 

II. Impact of new and enhanced bank regulations and impediments to growth for rural communities 

One of the most daunting challenges has been the sheer volume 

of recent regulations. For many years, our compliance was primarily handled within the bank by employees. It allowed for crosstraining of employees and fostered individual education regarding 

the regulations and bank policies. When necessary, the bank would 

outsource an audit to provide independence or a specific expertise. 

However, the rules and regulations change so often that a banker 

cannot stay abreast or competent to review the details of the new 

rules and regulations. Therefore, we have begun outsourcing most 

audits to a point that we are paying a full-time teller salary to 

compliance audit teams. The impact is one fewer bank employee serving customers on a daily basis and one less salary paid to a member of our community. 

III. Specific impediments to growth and impact on rural 

lenders on real estate lending 

Reduced Credit Offerings: Many banks in rural Kansas have 

moved out of the mortgage lending business. Not because the loans 

are not safe and profitable, but due to compliance. Historically, because we only make standard real estate loans with 20% down payment, these loans were safe and sound credit decisions with some 

of the lowest loss ratios and were the ‘‘bread and butter’’ for both 

the bank and community. In my bank, we don’t sell mortgages on 

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the secondary market, so a poor credit decision would affect our 

bottom line and shareholders directly. Due to these factors in 

banks similar to mine, banks are exiting the mortgage lending 

market not due to credit decisions, but due to compliance and regulatory decisions. The mortgage lending rules were intended to address the credit risk side; however the compliance risk has become 

greater than the credit risk. If the loan is held in the bank’s 

portfolio, it should automatically be a qualified mortgage 

(QM) loan as the credit risk lies with the bank. 

Loan Closings: To try and comply with the onerous regulations, 

we’ve hired an outside consultant to assist us completing pre-closing and post-closing real estate reviews of all consumer real estate 

loans. This added time and expense became necessary as we did 

not possess the necessary compliance expertise in house. Additionally, my bank doesn’t close enough consumer real estate loans on 

a monthly basis to gain the expertise in house. This added compliance has increased the closing costs to the consumer and 

delayed the closing of their loan to allow for extra review 

of loan documents. 

Payment Structure and Reduced Standard Loan Options: 

One of the biggest advantages that rural banks had over large commercial banks was the ability to customize payment structure to 

meet their specific needs. We know our customers, we know when 

they receive paychecks and we know their cash flow needs. We 

could leverage this to compete against large lenders and better 

serve our community. However, due to the regulatory constraints, 

we’ve moved to a canned loan product system. We now make 

‘‘monthly payment consumer loans’’ regardless of how and when 

the customer is paid. Because this product ‘‘fits the system.’’ In an 

effort to protect the consumer, the regulatory environment has 

harmed the consumer’s access to credit and flexibility of their bank 

to tailor the repayment to their specific needs. Local lending decisions should be made locally, not by a bureaucrat in Washington, D.C. 

Costs to Make a Real Estate Loan: Every rural bank has a 

similar story: A little elderly lady with her house free and clear 

comes to the bank for a loan because her air conditioner unit is out. 

Historically, the bank would have placed a small mortgage on her 

house, produced a quick valuation on the home, and funded the 

purchase of a new air conditioner unit. However, due to the costs 

and time required to close a consumer real estate loan, the loan is 

not a profitable loan. We have to make a choice to either make the 

loan going through the regulatory hoops and cost to the borrower, 

or make the loan unsecured to the customer at a significantly higher interest rate and shorter repayment terms. The sad reality is 

that due to compliance on loans like this, some banks will not be 

involved in this type of lending. We have chosen to make more 

loans, like the above example, unsecured as we believe it is 

our duty to help the customer despite increased regulatory 

costs. 

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Houses for Sale: Historically, our rural town has 40 to 60 

homes for sale as customers have their existing home for sale and 

are looking to upgrade to a larger home. However, we currently 

have between 100 and 120 homes for sale in a small county of 

3,000 people. The unusually high number of homes for sale may be 

partially due to other external factors, but I would argue strongly 

that it is partially due to increased regulatory compliance and few 

lenders in that credit market. The lenders who are still in the 

mortgage credit space are more conservative, have higher closing 

costs, and are much slower to complete the transaction. These factors all further slow-down an already slowing down rural 

economy. 

Secondary Market: The most widely used secondary real estate 

market provider in our market recently changed their policy to not 

make any real estate loans less than $50,000. The average residential real estate loan at our bank is less than $33,000. Many of our 

customers would not qualify to even apply for a mortgage 

on the secondary market due to these new rules. 

IV. Current issues with appraisers in rural America and 

the impact on our business as lenders 

Appraisers: When a bank is making a loan on an agricultural 

or commercial property, one of the initial steps is to receive a certified general appraisal. However, due to a shortage of appraisers 

and the ever increasing demands on appraisals, receiving a timely 

appraisal is very difficult. We’ve had to wait six months or more 

to receive an appraisal. Due to the impediments to becoming a certified appraiser, it is difficult for new individuals to acquire a license and there is limited desire for an existing appraiser to take 

on an apprentice who will eventually be his direct competitor. Customers shouldn’t have to wait six months for a credit decision simply because the bank cannot receive a completed appraisal. 

The American Bankers Association has been very involved in the 

issue of the lack of rural appraisers. The ABA has held two large 

meetings with various stake-holders to create a working solution on 

the appraisers issue. The most common them, however, is that 

there needs to be more incentive for individuals to become involved 

in the real estate appraisal business, especially in rural areas. Congress needs to get involved in making it easier to become an appraiser or we will continue to see long delays in customers closing 

on home mortgages. 

Conclusion 

Rural banks will continue to serve their customers to the best of 

their abilities despite the many obstacles that have hurt their business models. Rural banks will compete with anyone on a level playing field and they have not backed down from such competition in 

the past. But when there is a combination of an unfair playing field 

and over burdensome regulations, all banks have great difficulty in 

surviving, not just competing. Banks are drivers of the economy, 

and this is especially true for rural banks. With smart reforms to 

unfair competition, regulations that hold banks back from helping 

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their customers and providing incentives for people to become involved in rural appraising, rural banks will once again be able to 

help their local economies grow. 

Thanks you for the opportunity to address the subcommittee and 

share my view on rural banking. I would be happy to answer any 

questions that you may have. 

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Æ 

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