CONSIDERATION OF REGULATORY RELIEF PROPOSALS 

S. HRG. 109–993

CONSIDERATION OF

REGULATORY RELIEF PROPOSALS

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

ON

EXAMINE REGULATORY RELIEF PROPOSALS TO REMOVE REGULATORY 

BURDEN FROM THE BANKING INDUSTRY

MARCH 1, 2006

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

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37–514 PDF 2007

S. HRG. 109–993

CONSIDERATION OF

REGULATORY RELIEF PROPOSALS

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

ON

REGULATORY RELIEF PROPOSALS TO REMOVE REGULATORY BURDEN 

FROM THE BANKING INDUSTRY

MARCH 1, 2006

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

PAUL S. SARBANES, Maryland 

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel 

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel 

DEAN V. SHAHINIAN, Democratic Counsel 

PATIENCE R. SINGLETON, Democratic Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor

(II)

(III)

CONTENTS

WEDNESDAY, MARCH 1, 2006

Page

Opening statement of Senator Crapo ..................................................................... 1

Prepared statement .......................................................................................... 50

Opening statements, comments, or prepared statements of: 

Senator Enzi ..................................................................................................... 1

Prepared statement ................................................................................... 51

Senator Hagel ................................................................................................... 16

Prepared statement ................................................................................... 52

Senator Carper ................................................................................................. 16

Senator Martinez .............................................................................................. 52

Senator Shelby .................................................................................................. 53

Senator Stabenow ............................................................................................. 53

WITNESSES 

John M. Reich, Director, Office of Thrift Supervision .......................................... 4

Prepared statement .......................................................................................... 54

Response to written questions of: 

Senator Santorum ..................................................................................... 238

Senator Shelby ........................................................................................... 240

Gavin Gee, Director of Finance, Idaho Department of Finance on behalf 

of the Conference of State Bank Supervisors .................................................... 6

Prepared statement .......................................................................................... 107

Donald L. Kohn, Member, Board of Governors of the Federal Reserve System 8 

Prepared statement .......................................................................................... 112

Response to written questions of Senator Shelby .......................................... 244

Douglas H. Jones, Acting General Counsel, Federal Deposit Insurance Corporation ................................................................................................................. 10

Prepared statement .......................................................................................... 118

Response to written questions of Senator Shelby .......................................... 248

Julie L. Williams, First Senior Deputy Comptroller and Chief Counsel, Office 

of the Comptroller of the Currency ..................................................................... 11

Prepared statement .......................................................................................... 126

Response to written questions of Senator Shelby .......................................... 252

JoAnn M. Johnson, Chairman, National Credit Union Administration ............. 12

Prepared statement .......................................................................................... 134

Response to written questions of Senator Shelby .......................................... 255

Linda Jekel, Director of Credit Unions, Washington Department of Financial 

Institutions, Division of Credit Unions and Chairman, National Association 

of State Credit Union Supervisors ...................................................................... 14

Prepared statement .......................................................................................... 143

Response to written questions of Senator Shelby .......................................... 257

Bradley E. Rock, President and CEO, Bank of Smithtown on behalf of the 

American Bankers Association ........................................................................... 29

Prepared statement .......................................................................................... 150

Response to written questions of Senator Shelby .......................................... 259

Edmund Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group ........................................................................................................ 31

Prepared statement .......................................................................................... 156

F. Weller Meyer, Chairman, President, and CEO, Acacia Federal Savings 

Bank, Falls Church, VA and Chairman, Board of Directors, America’s Community Bankers, Washington, DC ...................................................................... 32

Prepared statement .......................................................................................... 194

Page

IV

H. Greg McClellan, President and Chief Executive Officer, MAX Federal 

Credit Union on behalf of the National Association of Federal Credit 

Unions ................................................................................................................... 34

Prepared statement .......................................................................................... 202

Response to written questions of Senator Shelby .......................................... 265

Travis Plunkett, Legislative Director, Consumer Federation of America ........... 36

Prepared statement .......................................................................................... 156

Steve Bartlett, President and Chief Executive Officer, Financial Services 

Roundtable ............................................................................................................ 37

Prepared statement .......................................................................................... 209

Response to written questions of Senator Shelby .......................................... 266

Joe McGee, President and CEO, Legacy Community Federal Credit Union, 

Birmingham, AL on behalf of the Credit Union National Association ............ 38

Prepared statement .......................................................................................... 216

Margot Saunders, Managing Attorney, National Consumer Law Center ........... 40

Prepared statement .......................................................................................... 156

Response to written questions of Senator Shelby .......................................... 267

Terry Jorde, President and CEO, CountryBank USA, Cando, ND and Chairman-Elect, Independent Community Bankers of America, Washington, DC . 42

Prepared statement .......................................................................................... 230

Response to written questions of Senator Shelby .......................................... 268

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Matrix of Financial Services Regulatory Relief Proposals ................................... 271

Statement of the North American Securities Administrators Association dated 

March 1, 2006 ....................................................................................................... 327

(1)

CONSIDERATION OF

REGULATORY RELIEF PROPOSALS 

WEDNESDAY, MARCH 1, 2006

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC.

The Committee met at 10:19 a.m., in room SD–538, Dirksen Senate Office Building, Senator Michael Crapo, presiding. 

OPENING STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. This hearing will come to order. This is the hearing of the Banking Committee on Consideration of Regulatory Relief Proposals. We apologize to everyone that we got a late start, 

but we had a vote down on the floor, and got tangled up down 

there for a few minutes, but we are now under way there. Before 

I make my opening statement or get it started, I want to turn the 

time over to Senator Enzi from Wyoming, because he has another 

urgent joint session of Congress to attend over in the House side, 

and we need to get him on his way over there. 

So, Senator Enzi, would you like to make any opening statement 

that you would like to give? 

STATEMENT OF SENATOR MICHAEL B. ENZI 

Senator ENZI. Thank you, Mr. Chairman. Us Italians have to 

help out the Prime Minister of Italy. 

[Laughter.] 

So, I appreciate this opportunity. 

Senator CRAPO. Give him my best regards. 

Senator ENZI. Okay. I also want to thank you for your hard work 

on this issue. I appreciate the way that you have waded through 

all the stakeholders’ interests and worked to get some balance, and 

also to take care of over 200 different suggestions for ways that we 

can improve the banking system for banks and credit unions, and 

I really admire the work that you have put in on it. 

I would ask that my entire statement be a part of the record. 

Senator CRAPO. Without objection. 

Senator ENZI. A lot of fantastic comments in here about the way 

that this will affect Wyoming that I want to be sure is part of the 

record. 

Senator CRAPO. Then we will make sure that it is included. 

Senator ENZI. But the part that I want to concentrate on this 

morning is the part that is important for an industry that is familiar to me, which is the accounting industry. When this Committee 

2

considered the bill that became the Gramm-Leach-Bliley bill of 

1999, we knew it would drastically change the way our financial 

industry operated. For example, Title V of the Act enumerated the 

obligation of financial institutions to protect their customers’ private information, something that had never been done on such a 

large scale before. 

But for those in the accounting industry, this was old news. Certified public accountants are bound by privacy laws older and 

stricter than Gramm-Leach-Bliley. However, with the passage of 

Gramm-Leach-Bliley, CPA’s were required to disclose privacy notices the same way as everyone else. So what difference does that 

make? State-licensed CPA’s in all of the States are prohibited from 

disclosing personal information unless specifically allowed by the 

customer. Now, under Gramm-Leach-Bliley, institutions can share 

information unless prohibited by a customer, a much looser standard. There is a significant difference here, and one that makes annual privacy disclosures for CPA’s unnecessary. 

I have been working closely with Congressman Mark Kennedy 

from Minnesota on an exemption of this annual disclosure for 

State-licensed CPA’s who follow the stricter privacy laws. While the 

cost of this annual disclosure can be annoying for larger firms, it 

can be deadly for small firms or sole proprietors. An exemption 

could save these firms valuable resources, and their clients lots of 

dollars. 

I look forward to working with my Banking Committee colleagues on this issue, and the other meaningful reforms of our Nation’s small financial institutions. 

I thank the Chairman for his tremendous work on this, and also 

for the opportunity to make my statement early. Thank you. 

Senator CRAPO. Thank you very much, Senator, and we appreciate your attention to these issues. I know that even though you 

have to leave, you are very engaged on these matters, and we appreciate that. 

Senator Shelby will not be able to make the hearing today, and 

frankly, this is a very busy time. There is a Joint Session of Congress going on at this very moment, which probably will impact our 

attendance here for at least a period of time, as well as many other 

matters. I had three hearings myself scheduled at 10 o’clock this 

morning. So he has asked me to chair the hearing this morning, 

and I was very pleased to be able to do so. 

An effective regulatory system appropriately balances due costs 

and benefits of public laws and regulations. All of us want to protect consumers and ensure that the system’s safety and soundness 

are protected. However, excessive regulation increases the cost of 

producing financial products. It stifles productivity and innovation, 

and misallocates resources. Responding to the steady stream of 

new regulations, while complying with the existing ones, has been 

a challenge for all financial institutions. 

Rule changes, particularly for smaller institutions with limited 

staff, can be costly, and these changes are inevitably passed on to 

consumers. It is also important for us to understand that the resources that are expended working to meet governmental compliance and paperwork requirements are time and effort that are not 

available to serve customers and communities. 

3

In Idaho, one of the specific issues that I have been told that results in high cost for community banks and credit unions with little 

benefit to consumers, is the mailing of annual privacy notices when 

the institution does not share information with third parties or 

make changes to its privacy policies. One community banker in 

Idaho told me that his community bank spends an estimated 

$15,000 a year per mailing, approximately 50,000 privacy notices. 

In 2004, his bank received one customer call in response to his 

bank’s privacy notice mailing, and received no customer responses 

at all in 2005. Another community banker in Idaho said that most 

customers do not read the annual privacy notices. Most end up in 

the garbage. This is one of the obvious provisions that we need to 

look at. 

Compliance costs for the financial services industry costs billions 

of dollars each year. For smaller institution, one out of every four 

dollars in operating expenses goes to pay for the cost of Government regulation. While much of this is necessary to assure the 

soundness and the safety of our financial system, it is obvious that 

there are many unnecessary and outdated provisions that should 

be eliminated to reduce the costly burdens imposed on our financial 

institutions. If this burden were reduced by even 10 to 20 percent, 

and those funds were made available, billions of additional lending 

would be made available that would have a direct and positive impact on the economic growth and on consumers. 

The bottom line is that too much time and money is spent on 

outdated and unnecessary compliance and paperwork, leaving less 

time and less resources for actually providing financial services. 

The House Financial Services Committee has recognized this 

problem, and in December 2005, it passed its own regulatory relief 

legislation by a vote of 67 to 0. In 2004, the Banking Committee 

held hearings on proposals regarding regulatory relief for banks, 

thrifts, and credit unions. The hearing covered all points of view 

and was made up of three panels of witnesses, Members of Congress, regulators and trade associations, and consumer groups. 

The Office of Thrift Supervision, Director John Reich, as leader 

of the Interagency Economic Growth and Regulatory Paperwork 

Reduction Act—and we have an acronym for that, EGRPRA—the 

task force was asked to review the testimony presented at the 

hearing and prepare a matrix which listed all the recommendations 

and positions presented to the Committee. The results brought forward 136 burden reduction proposals. By the second hearing held 

in June, the list of proposals had grown to 187 items, many of 

which are in the House passed bill, H.R. 3505. 

This was a huge undertaking, and I appreciate the hard work 

and cooperation of so many involved, especially the OTS Director 

Reich, for his perseverance in leading this effort. 

To ensure transparency in the process, the matrix of 187 items 

was then circulated among regulators, trade associations, and consumer groups, and all the various viewpoints have been recorded. 

We have hard witnesses’ testimony in two previous hearings, and 

numerous meetings have been held with all interested parties 

throughout the process. Witnesses have thoroughly detailed the 

ever-increasing number of requirements and outdated restrictions 

placed on our financial institutions. Each requirement, restriction, 

4

report, and examination imposed, may individually have been justified when adopted, but as time passes and markets and consumer 

demand changes, the necessity for imposing some of these requirements and restrictions become outdated or subsides. 

I think that all of us want to try to turn this around, and I know 

that the witnesses we are going to hear from today will help us 

identify where we can trim the regulatory fat without adversely impacting regulatory oversight. 

I look forward to working with all of my colleagues as we quickly 

move to a markup after this hearing, and I would encourage them 

to identify which proposals they support or oppose. Some Members 

have expressed interest in proposals that have both defenders and 

detractors here today, and which we will hopefully have an opportunity to explore with our witnesses. 

With that, let me go to the panel. As you can see from the panel, 

we have a large panel, and we also have a second panel following 

which is even larger, so we have our work cut out for us here 

today. I would encourage everybody to remember the instructions 

that you have received, and that is, we have asked you to keep 

your presentation to 5 minutes. There is a clock in front of you. It 

does not have a bell or anything, so you are going to have to try 

to be sure to pay attention to it. If I understand how this thing 

works, the sum-up button will come on at one minute. So when you 

see the light go from green to yellow that means you have one 

minute to start summing up. When it hits red, which is stop, we 

ask you to finish your thoughts. You will have an opportunity during questions and answers to get further into your testimony, and 

your written testimony will be presented and made part of the 

record, which all of us will review very carefully. 

Now let me go to our panel and introduce them. John Reich, who 

is the Director of the Office of Thrift Supervision is our first panelist, followed by Gavin Gee, Director of Finance of the Idaho Department of Finance; Donald Kohn, who is a Member of the Board 

of Governors of the Federal Reserve System; Douglas Jones, Acting 

General Counsel for the FDIC; Julie Williams who is the First Senior Deputy Comptroller and Chief Counsel for the Office of the 

Comptroller of the Currency; JoAnn Johnson, Chairman of the 

Board of Directors of the National Credit Union Administration; 

and Linda Jekel, Chair and Director of Credit Unions for the National Association of State Credit Union Supervisors. 

Ladies and gentlemen, we will go through the panel in that 

order, and I do not know if I said this already, but if you do start 

forgetting the clock, I will just lightly tap this. So that means look 

at clock if you hear that sound. 

[Laughter.] 

Director Reich. 

STATEMENT OF JOHN M. REICH

DIRECTOR, OFFICE OF THRIFT SUPERVISION 

Mr. REICH. Thank you very much, Senator Crapo. I appreciate 

the opportunity to be here, and I deeply appreciate your leadership 

on regulatory burden relief in the Senate, and your willingness to 

push this along. 

5

As the nominal leader of the Interagency EGRPRA Project, I am 

gratified that all of the agencies that are represented at this table 

are supporting numerous regulatory relief provisions for the institutions that they supervise, as well as for the industry as a whole. 

My written statement highlights several important provisions for 

saving associations on behalf of the Office of Thrift Supervision, 

where I now sit, and I ask that you consider these, but in my remarks today I am going to address the larger picture, and the importance of moving forward on regulatory relief legislation. 

I think we all recognize the substantial additional burdens that 

have been placed on the industry in recent years with increased responsibilities under the Bank Secrecy and the USA PATRIOT Act, 

as well new accounting adjustments and changes to privacy laws, 

to name just a few. 

As I have said in previous testimony before this Committee, the 

Federal Bank and Thrift Regulatory agencies have promulgated 

more than 850 regulations or amendments to existing regulations 

since FIRREA was enacted in 1989. In light of this formidable 

number, I strongly believe that it is incumbent upon us to carry 

out the purpose of the EGRPRA legislation to eliminate any regulatory requirements that are outdated, unduly burdensome, and no 

longer necessary. 

Accumulated regulatory burden is suffocating the industry, despite the fact that the industry is doing and has done so well in 

recent years with successively record profits. However, to characterize the entire banking industry as enjoying record profits, in my 

opinion, is misleading, in that not readily known is the fact that 

only 7 percent of the industry accounts for 87.6 percent of the industry earnings. That is 670 banks with over a billion dollars in 

assets account for 87 percent of industry earnings. The remaining 

8,200 institutions represent 93 percent of the number of institutions, and they share in the remaining 12.4 percent of industry 

profits. Furthermore, there are 3,863 community banks under $100 million in assets. They represent almost 44 percent of the industry in 

terms of total number. They account for less than 11⁄2 percent of 

industry earnings. 

Record profits in the industry is a label not shared by smaller 

institutions. Community bank return on assets are generally declining over the past 10 years. Their efficiency ratios are relatively 

flat during the same period of time, while large bank return on assets are generally increasing with their efficiency ratios declining. 

Make no mistake, regulatory burden impacts all institutions, 

large and small. I believe it has a potentially greater competitive 

impact, however, on smaller institutions. There is considerable anecdotal evidence around the country that regulatory burden has 

risen to the top of the list of reasons why banks sell out. Investment bankers at recent M&A conferences confirm this fact. 

To those who say let market forces determine the future of community banking, my response is that our industry is not a free 

market. It is a highly regulated market, and this fact is having a 

great influence on market behavior of bank managements and 

shareholders of smaller community institutions. Regulatory forces 

that unduly impact industry competitiveness are not good for instiVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
6

tutions of any size when they skew market forces, and that is what 

we are faced with today. 

It is my fear that smaller institutions will continue to disappear 

from our landscape, and local communities and consumers across 

the country will be the losers, for they will continue to lose their 

local independent banks with their local directors, who are business owners with vested interests in their banks and in their local 

communities. 

The loss of these human resources not only impacts local banking 

relationships with small businesses and individuals, but it also reduces human resources available for leadership of community service organizations on which senior bank officers and directors frequently serve. There is definitely an unquantified social cost to industry consolidation that is attributable to the weight of accumulated regulatory burden. A growing problem in communities across 

the country with implications that I fear are largely ignored by 

many policymakers. 

Ten years ago, Congress passed the EGRPRA statute, the Economic Growth and Regulatory Paperwork Reduction Act, which required all Federal regulators to review all of our regulations in an 

effort to reduce the regulatory burden on the industry. We have 

taken this mandate seriously, and are approaching the conclusion 

of this effort in the next few months. 

Over the past 3 years, the regulatory agencies have published 

more than 125 regulations for comment, received more than 1,000 

comment letters with suggestions for change, and held 16 banker 

and consumer group outreach sessions around the country. Pursuant to Senator Sarbanes’ suggestion the last time I appeared before 

this Committee, we made a concerted effort to engage community 

and consumer groups in the process. Based on the suggestions received, we have made the changes that we could to our own regulations, policies, and procedures to reduce regulatory burden, and 

testified on a number of occasions on things that can only be 

changed by legislation. 

I believe we have a limited window of opportunity this year to 

make the most significant progress ever made with regulatory relief legislation. I am committed, as is OTS, to reducing regulatory 

burden wherever we have the ability to do so, consistent with safety and soundness and in compliance with law, and without undue 

impact on existing consumer protections. 

We strongly support proposed legislation that advances this objective. 

I want to thank you again, Senator Crapo, for your leadership on 

this effort, and I look forward to continuing to work with you. 

Senator CRAPO. Thank you very much, Director Reich. 

Mr. Gee. 

STATEMENT OF GAVIN GEE

DIRECTOR OF FINANCE, IDAHO DEPARTMENT OF FINANCE

ON BEHALF OF THE

CONFERENCE OF STATE BANK SUPERVISORS 

Mr. GEE. Good morning, Senator Crapo, and thank you for the 

opportunity to be here today. I am Gavin Gee, Director of the Idaho 

Department of Finance. I am pleased to be here today as past 

7

Chairman of the Conference of State Bank Supervisors, or CSBS. 

Thank you for inviting us to discuss strategies for reducing unnecessary regulatory burden on our Nation’s financial institutions. 

CSBS is the professional association of State officials who charter, regulate, and supervise the Nation’s approximately 6,240 

State-chartered commercial banks and savings institutions, and 

nearly 400 State-licensed foreign banking offices nationwide. 

My colleagues and I are the chartering authorities and primary 

regulators of the vast majority of our Nation’s community banks. 

Senator Crapo, we applaud your longstanding commitment to ensuring that regulation serves the public interest without imposing 

unnecessary regulatory burdens on financial institutions. 

At the State level, we are constantly balancing the need for oversight and consumer protections with the need to encourage competition and entrepreneurship. We believe that a diverse, healthy 

financial services system serves the best public interest. 

A bank’s most important tool against regulatory burden is its 

ability to make meaningful choices about its regulatory and operating structures. A bank’s ability to choose its charter encourages 

regulators to operate more efficiently and effectively, and in a more 

measured fashion. A healthy State banking system curbs potential 

Federal excesses and promotes a wide diversity of financial institutions. 

While our current regulatory structure and statutory framework 

recognize some differences between financial institutions, too often 

it demands a one-size-fits-all approach. Overarching Federal requirements are often unduly burdensome on smaller or communitybased banks. We suggest that Congress and the regulatory agencies seek creative ways to tailor regulatory requirements for institutions that focus not only on size, but also on a wider range of factors that affect consumer needs and business practices. As the 

chartering agencies for the vast majority of community banks, 

CSBS believes that a State bank regulator should have a vote on 

the Federal Financial Institutions Examination Council, or the 

FFIEC. The FFIEC’s State Liaison Committee includes State bank, 

credit union, and savings bank regulators. 

The chairman of this committee has input at FFIEC meetings, 

but is not able to vote on policy or examination procedures that affect the institutions we charter and supervise. Because improving 

coordination and communication among regulators is one of the 

most important regulatory burden initiatives, we ask that Congress 

change the State position in FFIEC from one of observer to that 

of full voting member. 

The Conference of State Bank Supervisors also endorses approaches such as in Senate Bill 1568, Communities First Act, that 

recognize and encourage the benefits of diversity within our banking system. The CFA includes several of the changes CSBS recommends to help reduce regulatory burden without undue risk to 

safety and soundness. 

The first of these is extending the examination cycle for wellmanaged banks with less than $1 billion in assets from 12 months 

to 18 months, as proposed in Section 107 of the CFA. Advances in 

off-site monitoring, combined with the help of the banking industry, make annual on-site examinations unnecessary for the vast 

8

majority of health financial institutions. Changing the safety and 

soundness examination cycle for these banks would have no effect 

on the cycles for the Community Reinvestment Act and compliance 

examinations, which are scheduled separately. 

We also see the benefits of Section 203, which would exempt certain banks from provision of the Gramm-Leach-Bliley Act that require banks to send annual privacy notices to all their customers, 

the very point that you made about Idaho banks, Senator, a very 

important regulatory burden relief issue. 

In addition, we support CFA’s provisions in Sections 102 and 

204, to allow well-capitalized and well-rated banks with assets of 

$1 billion or less to file a short-form call report every other quarter. 

In addition to these provisions, my colleagues and I ask that Congress grant the Federal Reserve the necessary flexibility to allow 

State-chartered banks to take advantage of State-authorized powers, codify the home State, host State principles and protocols for 

the supervision of multi-State, State-chartered institutions, allow 

for pass-through tax treatment for State-chartered banks that organize, as limited liability corporations, allow all banks to cross State 

lines by opening new branches, and review the growing disparity 

in the application of State laws to State and nationally chartered 

banks and their subsidiaries. 

Senator Crapo, the regulatory environment for our Nation’s 

banks has improved significantly over the past 10 years, in large 

part because of your diligence and other Members of this Committee and other Members of Congress. As you consider additional 

measures to reduce burden on our financial institutions, we urge 

you to remember that the strength of our banking system is its diversity. This diversity is the product of a consciously developed 

State-Federal system. Any initiative to relieve regulatory burden 

must recognize this system’s values. 

Again, we commend you, Senator Crapo, and the Members of the 

Committee for their efforts in this area. Thank you again for the 

opportunity to testify before you, and I look forward to answering 

any questions that you might have. 

Senator CRAPO. Thank you very much, Gavin. 

Governor Kohn. 

STATEMENT OF DONALD L. KOHN, MEMBER,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. KOHN. Thank you, Senator Crapo, for the opportunity to discuss regulatory relief. As you noted so nicely, unnecessary regulatory burdens hinder the ability of banks to meet the needs of 

their customers, operate profitably, innovate, and compete. That is 

why the Board periodically reviews its own regulations and why it 

is so important for Congress to periodically review the Federal 

banking laws to determine whether there are any provisions that 

may be streamlined or eliminated without compromising the safety 

and soundness of banking organizations, consumer protections, or 

other important objectives that Congress has established for the financial system. 

The Board, working with the other banking agencies, has been 

and will continue to be a strong and active supporter of Congress’ 

regulatory relief efforts. In that process, the Board has reviewed 

9

numerous proposals that may affect the Federal Reserve or the organizations we supervise. We now support more than 35 proposals 

that we believe would meaningfully reduce regulatory burden, improve the supervision of banking organizations, or otherwise enhance banking laws. A complete listing of the proposals supported 

by the Board is included in the appendix to my testimony. We believe these proposals provide an excellent starting point for regulatory relief legislation. The Board’s three highest regulatory relief 

priorities have remained constant over time. These items would 

allow the Federal Reserve to pay interest on balances held at Reserve Banks, provide the Board greater flexibility in setting Reserve requirements, and permit depository institutions to pay interest on demand deposits. Together these changes would allow for a 

substantial reduction in regulatory burdens on banks and small 

businesses and an increase in the efficiency of our financial system. 

My written testimony highlights some of the other legislative 

proposals we believe would provide meaningful relief to banking organizations, as well as some steps that the Board has taken on its 

own to reduce regulatory burden for community banks. Two of the 

more important amendments would: Remove outdated barriers to 

interstate branching by banks; and raise to $500 million the asset 

level at which an insured depository institution may qualify for an 

extended 18-month examination cycle. 

Interstate branching is good for consumers and the economy, as 

well as banks. The creation of new branches results in better banking services for households and small businesses, lower interest 

rates on loans, and higher interest rates on deposits. The Board’s 

proposed exam cycle amendment is unanimously supported by the 

Federal banking agencies. It would provide regulatory relief to 

small, financially strong institutions without compromising safety 

and soundness. 

Although the Board supports allowing depository institutions to 

pay interest on demand deposits and freeing banks to open interstate branches, the Board opposes amendments that would grant 

these new powers to industrial loan companies that operate outside 

the prudential and legislative framework applicable to other insured banks. 

Our position on these matters is longstanding and based on the 

broad policy issues presented by the special exemption for ILC’s. 

This special exemption allows any type of company to acquire an 

FDIC-insured bank and avoid the activity restrictions that Congress has established to keep banking and commerce separate. The 

exemption also allows a company or foreign bank to acquire an insured bank and avoid the consolidated, supervisory framework that 

applies to the corporate owners of other insured banks. Consolidated supervision provides a supervisor the tools needed to understand, monitor, and when appropriate, restrain the risks associated 

with an organization’s group-wide activities. 

ILC’s have expanded rapidly in recent years outside the prudential framework established by Congress, and beyond the intent of 

the original exemption. We believe that the important principles 

governing the Nation’s banking system should be decided by Congress after full debate and consideration, and not in the context of 

proposals that would provide needed regulatory relief to many inVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
10

stitutions, but would also expand the special status of only one 

type of institution chartered in a handful of States. Once determined, Congress’ judgment on these matters should apply to all 

banking organizations in a competitively equitable manner. 

Thank you for this opportunity. We look forward to working with 

the Committee in developing regulatory relief legislation that is 

consistent with the Nation’s public policy objectives. 

Senator CRAPO. Thank you, Governor Kohn. 

Mr. Jones. 

STATEMENT OF DOUGLAS H. JONES

ACTING GENERAL COUNSEL,

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. JONES. Thank you, Senator Crapo and Senator Hagel. I appreciate the opportunity to present the views of the FDIC on regulatory burden relief for the financial industry. The FDIC shares the 

Committee’s continuing commitment to eliminate unnecessary burden, and to streamline and modernize laws and regulations as the 

financial industry evolves. 

We would like to thank you, Senator Crapo, and your staff, as 

well as the Committee staff who have worked with us to review the 

proposals. In addition, the inclusion of consumer groups in reviewing and commenting on many burden relief proposals has provided 

a wider range of perspectives and beneficial analysis. 

The Federal bank and thrift regulatory agencies have been working together over the last few years to identify regulatory requirements that are outdated, unnecessary, or unduly burdensome in

accordance with the Economic Growth and Regulatory Paperwork 

Reduction Act of 1996, EGRPRA. The agencies have identified numerous proposals to reduce regulatory burden, and the FDIC continues to work with the other agencies in an effort to achieve further consensus and, as required by law, we will submit a final report to Congress with legislative recommendations later this year. 

The FDIC and the other regulatory agencies are committed to 

improving the quality and efficiency of financial institution regulation and to reducing administratively unnecessary regulatory burden where it is identified and where changes to current practices 

do not diminish public protections. We also are examining and revising our regulations, procedures, and industry guidance to improve how we relate to the industry and its customers. My written 

statement briefly describes a few examples of recent FDIC and 

interagency initiatives which are expected to relieve regulatory 

burden, clarify regulatory requirements, or assist financial institutions to improve their operations. 

As a result of the interagency EGRPRA effort led by former 

FDIC Vice Chairman John Reich, now Director of the OTS, a consensus among the banking agencies has been reached on 12 regulatory burden relief proposals. One of these items, reform of the 

Flood Insurance Program, has been overtaken by the devastation 

and aftermath of Hurricane Katrina. So clearly, the need for comprehensive flood insurance reform is apparent and is being addressed through separate legislative efforts. We withdraw our earlier proposal regarding flood insurance and stand ready to assist 

the Committee in their review of the program. Thus, as detailed in 

11

my written testimony, the FDIC is pleased to join with the other 

banking agencies to support 11 specific proposals. 

In addition, the FDIC respectfully recommends the consideration 

of a number of additional regulatory relief items that would help 

improve our supervisory efforts. These items also are detailed in 

my written statement. 

In conclusion, thank you for the opportunity to present the 

FDIC’s views on these issues. The FDIC supports the Committee’s 

continued efforts to reduce unnecessary burden on insured depository institutions without compromising safety and soundness or 

consumer protection. I will be happy to answer your questions on 

these matters. 

Senator CRAPO. Thank you very much, Mr. Jones. 

Ms. Williams. 

STATEMENT OF JULIE L. WILLIAMS

FIRST SENIOR DEPUTY COMPTROLLER AND CHIEF COUNSEL,

OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Ms. WILLIAMS. Mr. Chairman, Senator Hagel, on behalf of the 

OCC, I appreciate the opportunity to be here this morning to discuss unnecessary regulatory burden and its debilitating impact on 

our Nation’s banking institutions. I also want to express particular 

appreciation to you, personally, Senator Crapo, for your commitment and your dedication to tackling this very real problem. 

Senator CRAPO. Thank you. 

Ms. WILLIAMS. Unnecessary burden exacts a heavy price on 

banks, bank customers, and our economy. For our Nation’s community banks, unnecessary burden can actually imperil their competitive viability. 

My written testimony covers in detail some of the initiatives 

being pursued by the Federal banking agencies to identify and reduce burden on our Nation’s banks. One major initiative is the 

EGRPRA process that is being so ably led by OTS Director John 

Reich. This 3-year effort is drawing to a close and will result in a 

report to Congress later this year. 

My written testimony also recognizes that, in certain areas, burden relief cannot be achieved through the regulatory process alone, 

but requires action by Congress. And my testimony discusses in detail several of the OCC’s priority legislative items. 

This morning, I would like to briefly highlight just three areas. 

First, we all need to look for ways to reduce the cost and improve 

the effectiveness of consumer disclosure requirements. Today, our 

system imposes massive disclosure requirements and costs on our 

Nation’s financial institutions, but little is known about whether 

these are necessary costs that yield commensurate benefits for consumers. 

We believe that it is possible to provide the information that consumers need and want in a concise, streamlined, and understandable form, but that requires us to change how we go about establishing those disclosure requirements. The Federal banking agencies have undertaken an important initiative by employing consumer testing as an integral part of an interagency project to simplify the Gramm-Leach-Bliley Act privacy notices. Through consumer focus groups and testing, consumers have been asked about 

12

what they most want to know about the treatment of their personal 

information, and what style of disclosure is most effective in communicating useful information to them. This project has the potential to be a win-win for consumers and financial institutions, and 

also to lay a foundation for other similar initiatives in other areas. 

Second, it is important to seek out ways to ease burden on our 

community banks. Our proposed legislative amendments include 

two provisions that I would like to note briefly here. Both of these 

amendments may enhance the ability of community national banks 

to take advantage of pass-through tax treatment and eliminate 

double taxation—that is, where the same earnings are taxed both 

at the corporate level as corporate income, and at the shareholder 

level as dividends. 

One amendment would expand the availability of Subchapter S 

treatment for national banks by allowing directors of national 

banks to purchase subordinated debt instead of capital stock to satisfy the directors’ qualifying shares requirements in national banking law. This may allow more national banks to meet the Subchapter S shareholder limits. 

Another amendment would clarify the OCC’s authority to permit 

a national bank to organize in an alternative business form, such 

as a limited liability company, which may be eligible for passthrough tax treatment. 

A third item that has the potential to provide relief for a meaningful number of national banks is an increase in the asset threshold from $250 million to $1 billion to permit more national banks 

to qualify to be examined on an 18-month rather than an annual 

exam cycle. Under current law, banks that have $250 million or 

less in total assets and that satisfy other strict standards, such as 

being well-capitalized, well-managed, and having high supervisory 

ratings, may be examined on an 18-month cycle rather than on a 

12-month cycle. Increasing the asset threshold to $1 billion, but not 

changing any of the other qualifying criteria, would ease the examination burden and associated examination costs for approximately 

340 community national banks. 

While we believe that increasing the threshold to $1 billion provides relief without endangering safety and soundness, we note 

that an increase to $500 million, which has also been suggested for 

the Committee’s consideration, would still be an important and valuable step. 

In conclusion, Mr. Chairman, Senator Hagel, we very much appreciate the opportunity to work with you, other Members of the 

Committee, and staff, on the important initiatives under consideration to reduce unnecessary regulatory burden. I would be happy 

to try to answer any questions you may have. 

Thank you. 

Senator CRAPO. Thank you very much, Ms. Williams. 

Ms. Johnson. 

STATEMENT OF JoANN M. JOHNSON

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Senator Crapo, Senator Hagel, on behalf of the 

National Credit Union Administration, I am pleased to be here 

today to present our views on regulatory reform initiatives. The reVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
13

form proposals being considered by Congress will benefit consumers and the economy by enabling financial institutions and 

their regulators to better perform the role and functions required 

of them. 

In my oral statement I will briefly address some of the proposals 

that are of greatest importance to NCUA. 

Prompt corrective action capital requirements for credit unions, 

enacted in 1998, as part of the Credit Union Membership Access 

Act, are an important tool for both NCUA and credit unions in 

managing the safety and soundness of the credit union system and 

protecting the interests of the National Credit Union Share Insurance Fund. 

Our 7 years of experience with the current system, however, 

have shown there are significant flaws and need for improvement. 

PCA, in its current form, establishes a one-size-fits-all approach for 

credit unions that relies primarily on a high-leverage requirement. 

This system penalizes low-risk credit unions and makes it difficult 

to use PCA, as intended, as an incentive for credit unions to manage risk in their balance sheets. 

NCUA has developed a comprehensive proposal for PCA reform 

that addresses these concerns. Our proposal establishes a more 

reasonable leverage requirement to work in tandem with more effective risk-based requirements. Our proposal accounts for the 1 

percent method of capitalizing the Share Insurance Fund and its 

effect on the overall capital in the insurance fund and the credit 

union system. 

The result is a leverage requirement for credit unions that averages 5.7 percent under our proposal, as compared to 5 percent in 

the banking system. As you know, we have submitted our proposal 

for Congress’ consideration, and it has been included in the new 

CURIA proposed legislation in the House of Representatives. I urge 

the Senate to include our proposal in any financial reform legislation that is considered and acted upon this year. 

As I have previously testified, an important technical amendment is needed to the statutory definition of net worth for credit 

unions. FASB has indicated it supports a legislative solution, and 

that such a solution will not impact their standard-setting activities. Last year, the House unanimously passed a legislative solution to this problem, H.R. 1042, and I urge the Senate to give it 

prompt consideration. 

Federal credit unions are authorized to provide check cashing 

and money transfer services to members. To enable credit unions 

to better reach the unbanked, they should be authorized to provide 

these services to anyone eligible to become a member. This is particularly important to furthering efforts to serve those of limited 

means who are often forced to pay excessive fees. 

The current statutory limitation on member business lending by 

federally insured credit unions is 12.25 percent of assets for most 

credit unions, which is arbitrary and constraining. Credit unions 

have an historic and effective record of meeting the small business 

loan needs of their members, and this is of great importance to 

many credit unions that are serving consumers, including those in 

underserved and low-income communities. 

14

NCUA’s strict regulation of member business lending ensures 

that it is carried out in a safe and sound basis. NCUA strongly 

supports proposals to increase the member business loan limit to 

20 percent of assets, and raise the threshold for covered loans to 

a level set by the NCUA Board, not to exceed $100,000. 

NCUA continues to support other provisions in the previously 

considered regulatory relief bills, such as improved voluntary merger authority, relief from SEC registration requirements for the limited securities activities in which credit unions are involved, lifting 

certain loan restrictions regarding maturity limits, and increasing 

investments in CUSO’s. 

Also we have reviewed the other credit union provisions included 

in the previously mentioned bills and in Senator Crapo’s matrix, 

and NCUA has no safety and soundness concerns with these provisions. 

Thank you, Mr. Chairman, for the opportunity to appear before 

you today on behalf of NCUA to discuss the public benefits of regulatory efficiency for NCUA, credit unions, and 84 million credit 

union members. I am pleased to respond to any questions the Committee may have, or to be a source of any additional information 

you may require. 

Thank you. 

Senator CRAPO. Thank you very much, Ms. Johnson. 

Ms. Jekel. 

STATEMENT OF LINDA JEKEL

DIRECTOR OF CREDIT UNIONS,

WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS,

DIVISION OF CREDIT UNIONS AND CHAIRMAN,

NATIONAL ASSOCIATION OF

STATE CREDIT UNION SUPERVISORS 

Ms. JEKEL. Good morning, Senator Crapo and Senator Hagel. I 

am Linda Jekel, Director of the Credit Unions for the State of 

Washington Department of Financial Institutions. I appear today 

as the Chair of the National Association of State Credit Union Supervisors, NASCUS. 

NASCUS’ priorities for regulatory relief focus on the reforms that 

will strengthen and further enhance the safety and soundness of 

our State credit union supervision. 

State-chartered credit unions need capital reform. To begin, credit unions need an amendment to the definition of net worth, in the 

Federal Credit Union Act. Currently, net worth for credit unions is 

limited to retained earnings. 

Additionally, a change would address amendments to FASB 

Standards 141, that require the acquisition method for business 

combinations, and eliminates the pooling method. The FASB method creates a potential dilution of statutory net worth, and is an impediment to credit union mergers. Mergers are a safety and soundness tool used by both Federal and State regulators. 

The House passed H.R. 1042, legislation amending the definition 

of ‘‘net worth,’’ to include the retained earnings of a merging credit 

union with that of the surviving credit union. We understand that 

H.R. 1042 has been forwarded to this Committee for review. We ask 

for your support and passage of this bill. 

15

NASCUS supports risk-based capital. It is a system that provides 

increased capital levels for financial institutions with complex balance sheets, while reducing the burden for institutions with less 

complex assets. We further believe that credit unions should have 

access to alternative capital. NASCUS created a white paper demonstrating that alternative capital debt and equity models are viable methods for credit unions to safely build net worth. The white 

paper is attached to our NASCUS testimony. 

From a regulatory perspective, it makes economic sense for credit 

unions to access other forms of capital to improve safety and 

soundness. We request your support for capital reform. 

NASCUS believe that the Federal Credit Union Act should be 

amended to require that one National Credit Union Administration, NCUA, Board member have State credit union regulatory experience. We believe that this will result in a stronger and safer 

credit union system. About 40 percent of credit unions are State 

chartered. The majority have Federal insurance provided by the 

National Credit Union Share Insurance Fund, managed by the 

NCUA. 

NASCUS believes experience regulating State-chartered credit 

unions would provide a balanced regulatory perspective. This is not 

a new idea. A similar provision requiring State bank supervisor experience is included in the Federal Deposit Insurance Act. We ask 

for your support to make that change to the structure of the NCUA 

Board. 

Federally insured credit unions have access to Federal Home 

Loan Banks, while privately insured credit unions do not. Membership in the system should not be predicated on an institutions type 

of insurance. Permitting non-federally insured institutions to join 

the Federal Home Loan Bank System would not establish a new 

precedent. 

Finally, we would like to highlight the ongoing debate about 

State and Federal powers. I can imagine our Founding Fathers debating how to protect the powers of State. The question confronting 

our Founding Fathers back then was how to limit the central government’s power so it did not take away the people’s rights. 

Today, preventing Federal preemption of State laws and regulation continue to be a priority for State legislatures and State regulators. NASCUS believes States are in the best position to decide 

the laws and regulations for the consumers in their States. Each 

time a Federal agency acts to preempt State law, it is a chink in 

the armor of State protections that our Founding Fathers sought 

to preserve. This threatens the dual-chartering system. 

There have been preemption conflicts in the past among Federal 

regulators, State regulators, some legislators. Congress should resolve conflicts rather than delegate these fundamental issues to the 

Federal regulators to determine. One preemption issue confronting 

the credit union system is credit union conversions to mutual savings banks. NASCUS believes State law should dictate the conversion process for State-chartered credit unions. Chartering a State 

credit union is an issue determined by State law. Approval authority for conversion is determined likewise by State law. A conversion 

is a function of a credit union’s original charter, separate from insurance oversight. NASCUS asks for this Committee’s support in 

16

placing the responsibility of conversion rules within chartering authority. 

In conclusion, NASCUS appreciates the opportunity to testify 

here today. We present additional provision in the regulatory relief 

matrix and in our written testimony that protect and enhance the 

viability of the credit union dual-chartering system. We welcome 

questions from the Committee Members. 

Thank you. 

Senator CRAPO. Thank you very much, Ms. Jekel. 

We have been joined by Senator Hagel and Senator Carper, and 

before we go to questions, I would like to ask if either of the two 

of you have an opening statement you would like to make. 

Senator Hagel. 

STATEMENT OF SENATOR CHUCK HAGEL 

Senator HAGEL. Mr. Chairman, thank you. I do have an opening 

statement. I would ask that it be included in the record. Thank you 

very much. 

Senator CRAPO. Without objection. 

Senator Carper. 

STATEMENT OF SENATOR THOMAS R. CARPER 

Senator CARPER. I also have an opening statement, and rather 

than enter it in the record, I will just say it briefly. 

Thank you all for coming today and for sharing your perspectives 

with us, and for the second panel as well. 

I want to say to our Chairman, to Senator Crapo——

Senator CRAPO. I am sorry. I was talking. 

Senator CARPER. I know. I want to thank you for bringing us together and I know investing a couple of years of your life and your 

staff’s life in trying to identify the regulations. Obviously, we have 

a heavily regulated financial services industry, and we ought to, 

and we also know that it is appropriate from time to time for us 

to come back and revisit those regulations and see which ones 

make sense, which are duplicative, and which, frankly, do not add 

much to safety and soundness, or to the interest of consumers. 

So with that in mind, welcome. We have, I think, 187 or so ideas 

that have stepped forward, and looking at the size of this room and 

the number of people here, I would say there are about 187 people 

in the room, just a coincidence. 

Senator CRAPO. Each with a new idea too probably. 

[Laughter.] 

Senator CARPER. Thank you, Mr. Chairman, and to all of our witnesses. 

Senator CRAPO. Thank you very much, Senator Carper. 

I will start out the questioning. There are literally 187 plus questions I could probably ask, and do not worry, I will not go into all 

of those because we do have another big panel we need to get to. 

But one of the big issues that we have dealt with, and which a 

number of you raised in your testimony—by the way, let me stop 

and say I have reviewed the testimony of each of you, the written 

testimony, and I just want to congratulate each of you, that in addition to putting forward very well-prepared oral statements, the 

written testimony that has been provided by each of you is outVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
17

standing, and has an incredible amount of additional insights, support, and information that you were not able to go into in your 

presentations, but which will be of great help to us. So, thank you 

very much for the work that has gone into preparation for your testimony here at this hearing. 

One of the issues that a number of you raised, and which is important to me, is the filing of currency transaction reports as the 

top—in fact, that has been identified by a number of financial institutions as the top regulatory expense issue that they face. U.S. 

Treasury regulations implemented in 1994 allow certain exemptions for certain types of customers of currency transactions, and 

I understand it, these exemptions allow banks to exempt correspondent banks, Government agencies or departments, public or 

listed companies and their subsidiaries, and smaller businesses 

that meet specific criteria under FinCEN’s regulation. 

And perhaps there need to be more exemptions or clarifications 

here, but the question I have is, is there a reason why these exemptions are not widely used by the banks, and can these exemptions be better adjusted to enable banks to economically take advantage of them? I toss this out to anybody on the panel who is 

interested. Any takers? 

Director Reich. 

Mr. REICH. I will try to address the issue. I think that many 

bankers feel that the exemption process is not effective, it is labor 

intensive, it is cumbersome, and it is subject to second guessing by 

bank examination personnel. Some people have been burned by requesting exemptions, and later were admonished for doing so. I 

think the exemption process can be improved. Perhaps there is 

room for considering it in connection with the seasoned customer 

rule that has been proposed, that is, finding a process that is not 

so burdensome as the exemption process currently is. But bankers 

do not feel that the exemption process is effective. 

Senator CRAPO. Do they just feel the risk is too high? 

Mr. REICH. I think that is part of it, yes. 

Senator CRAPO. Ms. Williams. 

Ms. WILLIAMS. I guess I would just add complexity in the exemptions, in some cases the need to reprogram software systems in 

order to comply with the scope of the exemptions, and a recertification-type process that needs to occur on a periodic basis. 

Senator CRAPO. Anybody else want to jump in on this one? Let 

me expand my question just a little bit, and Director Reich addressed it a little, but what are your thoughts, if any, about the 

proposed seasoned customer rule? 

Mr. REICH. I am supportive of the seasoned customer rule so long 

as FinCEN is supportive of it. It is my understanding that they 

are. And we would be supportive of any proposal that would improve the currency transaction reporting process that FinCEN and 

law enforcement would support. 

Mr. KOHN. The Federal Reserve Board agrees with the sentiments of Director Reich. We are supportive of a process in which 

FinCEN and law enforcement come to an agreement that both relieves regulatory pressure on the banks and serves the needs of law 

enforcement. We think it is important that this process work 

through so that law enforcement is comfortable with the results. 

18

Senator CRAPO. Anybody else want to jump in there? 

Ms. Williams. 

Ms. WILLIAMS. I would just echo what Governor Kohn has said. 

It is very important that the law enforcement community have a 

seat at the table in resolving how we approach this issue. 

Senator CRAPO. All right, thank you. 

Mr. Gee. 

Mr. GEE. Senator Crapo, I would just weigh in that the State 

Bank Supervisors also support that exemption. I think one of the 

important things for any of these exemptions is that we provide 

certainty. One of the big problems in this whole area is when we 

create uncertainty, particularly for the smaller institutions, that in 

and of itself is a huge regulatory burden, and if the examiners play 

‘‘gotcha’’ or write them up for violations——

Senator CRAPO. And the penalty for guessing wrong or making 

the wrong decision is too high to risk. 

Mr. GEE. Exactly. But we would support that effort. 

Senator CRAPO. I assume your comments, Mr. Gee, would apply 

not just to the seasoned customer rule, but also to the exemption 

issue, and in fact, that is probably more directly what you are discussing? 

Mr. GEE. Yes, that is true, Mr. Chairman. 

Senator CRAPO. Let me go on. Governor Kohn, I have one question that is probably more specific to you, and so let me get that 

one out of the way here before I turn the microphone over to Senator Carper. 

One of the matrix items, actually Item No. 105.1—sounds pretty 

regulatory. 

[Laughter.] 

That matrix item increases the existing HMDA recordkeeping and reporting exemption to $250 million in assets. While I understand that this proposal is controversial, and there is actually opposition to the proposed threshold of $250 million, the footnotes in 

our matrix indicate that there is also support for a lower increase 

in the exemption level. Since the Federal Reserve collects the 

HMDA data and supports an increase in the threshold, I was just 

going to give you a chance, if you would, to discuss with us what 

threshold does the Federal Reserve believe we really should adopt 

here? 

Mr. KOHN. The Federal Reserve does not have a view as to exactly what the right threshold is to relieve this burden. Another 

portion of the matrix talks about relieving reporting requirements 

for those institutions that make fewer than 100 mortgage loans. 

We agree that there is some relief that is possible here. The HMDA 

data are very useful for tracking developments in mortgage markets, for comparing one lender to its competitors in the same market, for looking at disparities in treatment among race, ethnicity, 

gender, by loan, by institution, by geographic area that might be 

a flag for further investigation. We would be very concerned about 

doing something that would undermine the usefulness of the 

HMDA data in this regard. 

Our preference would be for the Congress to instruct the Federal 

Reserve to go through a rulemaking process so that we could weigh 

the issues, go out for public comment, find out what the pros and 

19

cons are of either raising the exemption amount from the current 

$34 million and/or exempting a minimum number of loans that institutions making those loans would not have to report. We do not 

know right now what the right balance is, but we agree that the 

balance is not correct at this point. We just do not know quite 

where to go. 

Senator CRAPO. All right, thank you. 

Would any of the other regulators like to comment on this issue? 

You do not have to, but if you want to, now is your chance? 

Mr. REICH. I have spoken in the past of recommending an in- crease in the minimum from $35 million, where it is today, to 

banks over $100 million in assets. 

Senator CRAPO. Okay. I have gone well over my time for our first 

run at this. 

Senator Carper, would you like to ask questions? 

Senator CARPER. Yes, I would. Thank you, Mr. Chairman. 

The first question I am going to ask, I am going to telegraph my 

pitch, and I am going to tell you what my second question is, because it is going to be for you, and you can be thinking about it 

while I ask my first question. But I want to ask you to, in my second question, I am going to ask you just to elaborate, if you will, 

on some of the steps that have been taken recently to encourage 

credit card issuers to increase the minimum payments on the credit 

cards. If you would be thinking about that, I would appreciate it. 

This could be really for any witness. Director Reich, you may 

have heard something about this before. Some of you may have, 

some of you may not, but I would be interested in your thoughts. 

I recently learned about something that is called, I think it is 

called a pretrial diversion for people who write board checks, and 

this is not people who bounce checks, but people who write bad 

checks, and when notified by the merchant to whom they have 

written the bounced check, they simply refuse to make good on the 

check, and they have a history of doing this thing. 

As I understand it, a for-profit group works with district attorneys from around the country in order to collect on bad checks that 

have been written to merchants when those checks exceed a certain 

dollar amount. The group provides a class, I think it is about $100 

per person, to people who have written bad checks, to teach them 

about financial and personal responsibility. I think I spoke with 

Senator Crapo about this a couple of weeks ago, and I do not know 

if it among the 187 ideas that are before the Committee, that will 

be before the Committee, but if any of you have heard about this 

idea, have any thoughts on it. 

I think in order to do anything, provide for—waited to address 

this issue across the board rather than on a piecemeal basis, Stateby-State, community-by-community, there may be a need to go in 

to take a look at the Fair Debt Collection Practices Act. 

So if anybody has a thought on this, I would welcome your 

thoughts. If you do not, I will go to my second question for Ms. Williams. Anybody at all? 

[No response.] 

All right. Ms. Williams. 

Ms. WILLIAMS. Senator, thank you for the heads-up. 

Senator CARPER. Sure. 

20

Ms. WILLIAMS. As you know, the issue of minimum payments on 

credit cards is one that all of the banking agencies, not just the 

OCC, have been looking at for several years, and one which led to 

the interagency account management guidance that was issued 

several years ago. It dealt with a package of issues ranging from 

minimum payment requirements on cards to work-out programs 

and how losses needed to be written off or otherwise dealt with. 

In response to the guidance, we at the OCC found that a number 

of our credit card issuing banks were in compliance with many of 

the requirements very quickly, but were slow to move ahead with 

implementation of the requirement to have a minimum payment 

that, together with the payment of any fees and charges, would 

have some element of reduction in the principal so that the aggregate principal would be repaid within some reasonable period of 

time. Over the course of the last 18 months, at least with the national banks that we supervise, we have gotten banks on tracks to 

fully implement that account management guidance. Some of it 

was done mid-year last year while some of the adjustments were 

concluded at the end of this past year. Because of some systems integration issues, there are some adjustments that may have just 

been finished. 

But the goal for us was to get all of the banks that we supervise 

in full compliance with that credit card account management guidance, including the minimum payment requirements. What this 

does for consumers is to provide a mechanism, in the aggregate 

minimum payment that the card issuer requires, that will cause 

their principal balance to amortize or pay down over some foreseeable period of time. It is not necessarily quick, because we are not 

requiring a gigantic minimum payment, but it does——

Senator CARPER. What are we requiring? 

Ms. WILLIAMS. It is 1 percent of the principal, plus fees and 

charges. 

Senator CARPER. So far, how do you feel about how it is going? 

Ms. WILLIAMS. I think that it has been going fairly well. What 

we found with different banks is that they have different issues depending on the makeup of their credit card portfolios, and some of 

them need to make more adjustments with their customers. We 

also have said that banks certainly should work with their customers if they need to reduce their fees or make other adjustments 

in what they are charging in order to implement this minimum 

payment requirement, and that they should be flexible in working 

with customers to accomplish that. 

Senator CARPER. Are you mindful of any institutions that have 

done a particularly good job of reaching out to their customers and 

trying to comply with this regulation in an especially admirable 

way? 

Ms. WILLIAMS. Well, I would not want to name names here, but 

there are institutions that——

Senator CARPER. Could you mention initials? 

[Laughter.] 

Ms. WILLIAMS. There are institutions that both did it promptly, 

which is good, and those that used this as an opportunity to provide better disclosure to their customers, and that is good, and also 

institutions that used it as an opportunity to actually change some 

21

of the terms in their relationship with customers in a way that is 

more favorable to customers, and that is good, as well. 

Senator CARPER. Good. Anybody else have a view on this matter 

before I relinquish the microphone? 

Ms. Johnson. 

Ms. JOHNSON. Senator, the only thing that I would add is that 

the credit unions, in their role of financial education, have made 

a concerted effort to bring credit card usage and management into 

part of their financial education program, and our understanding 

the needs, in particular of young people, of learning that management early on, and so it has become a part of the financial education programs in many credit unions across the country. 

Senator CARPER. Good, good. Thanks. 

Thanks, Mr. Chairman. 

Senator CRAPO. Thank you, Senator. 

I would like to ask a question that relates to the SEC Regulation 

B. I suspect a few of you know a little bit about that. As you know, 

in Section 201 and 202 of the Gramm-Leach-Bliley Act, we amended the definition of ‘‘broker’’ and ‘‘dealer’’ under the Securities and 

Exchange Act of 1934. And pursuant to these amendments, the 

SEC issued proposed regulations that would force many traditional 

banking activities out of the bank and into SEC, basically making 

them registered brokers. 

In March 2005, as I am sure you all know, 13 Senators from this 

Committee, including myself and Senator Carper, and frankly, Senator Enzi and Senator Hagel, who have been here today, sent a letter to Chairman Donaldson objecting, and in that letter restated 

that because we wanted to allow banks to continue to perform certain traditional banking activities involving the purchase and sale 

of securities, we replaced the exclusion with a series of statutory 

exceptions to the ‘‘broker’’ and ‘‘dealer’’ definitions. 

In doing so it was our intention, clearly expressed in the legislative history of GLBA, that these bank products and services continue to be available to bank customers, and that banks continue 

to engage in these activities without having to seek additional authorization from the Commission. Indeed, that was the very purpose of adopting the statutory exceptions. 

And I realize the SEC is not sitting at the table today but we 

know that the SEC has not proceeded on the Regulation B, but I 

guess the question I have is what is the status of this proposal and 

what efforts have any of the financial regulators made to work together to reach an accommodation on this issue? Where are we? 

Mr. KOHN. My understanding, Senator, is that there are ongoing 

conversations between the financial regulators and the SEC on this 

issue. As you know, the regulators shared the Senator’s concerns 

about how GLB was being implemented by the SEC. There have 

been some changes at the SEC. Conversations are taking place. I 

think from the Board’s perspective, it would be good to let this 

process work itself out, at least for now. 

Ms. WILLIAMS. We agree completely with that. 

Senator CRAPO. Mr. Jones. 

Mr. JONES. We do as well. We are hopeful that by working together with SEC, we can come to a resolution that works for everybody. 

22

Senator CRAPO. So we do not need legislation yet? 

Mr. KOHN. That is correct. 

Senator CRAPO. All right. I appreciate that. And I just have one 

more kind of general question that—I have a lot of questions, but 

in the interest of time, I am not going to go into them all. I just 

wanted to toss one question out that is a softball, maybe that 

would let people say whatever else you might not have gotten to 

say yet. Basically the context of this question is that, as I said in 

my opening statement, for smaller institutions, one out of every 

four dollars that they spend in operating expenses goes into the 

cost of Government regulation, and it is clear that we have a lot 

of unnecessary and outdated provisions that need to be fixed. 

I guess I am just going to toss it out there. Anybody have something that you did not get to say that you really want to toss in 

right now before we move on then and I go to Senator Carper for 

his last round of questions? 

Mr. REICH. I would like to take you up on your offer, Senator, 

to say a few more words. 

Senator CRAPO. Sure. 

Mr. REICH. When we kicked off this EGRPRA effort 3 years ago, 

roughly, in June 2003, it was kicked off by regulators actually talking about reducing regulatory burden. That was a novel idea to the 

banking industry, that regulators might be pushing this notion. We 

were pushing it, however, in response to the Congressional Act 

which mandated that we review all regulations. 

Our effort initially was greeted by the industry, when we began 

our outreach meetings, with a fair degree of skepticism, cynicism, 

and certainly, apathy. But as time went by, and we continued our 

outreach meetings, and I continued speaking about how I felt that 

community banks were threatened because of regulation, the industry began to get into the notion that maybe this is a serious effort that will, in fact, result in a serious product to reduce regulatory burden on the industry and began to be more participative 

and hopeful, less skeptical and more optimistic, and that maybe 

now something can in fact be done. 

I truly hope that this year something significant will be done, because if it is not, it will only feed the skepticism and cynicism that 

existed initially, and the next time that an EGRPRA effort begins, 

presumably 7 years from now, bankers will remember that we have 

been through this before, and there is no point in it. 

Senator CRAPO. Good comments. 

Ms. Jekel. 

Ms. JEKEL. Yes. I would like to just say that as regulatory relief 

looks at small institutions, whether they are credit unions or 

banks, the regulatory burden that they have can create some problems for them and they may have to merge. For example, in the 

State of Washington, 60 percent of my credit unions are under 

$100 million. They have less than 50 employees. An extreme example is Latvian Credit Union, which has one employee that still is 

in a house, in which the ethnic community——

Senator CRAPO. I have been in that kind of a credit union before, 

so I know what you mean. 

23

Ms. JEKEL. So it is difficult. Oftentimes when credit unions are 

getting ready to merge, we ask them for the reasons why, and it 

is oftentimes the regulatory compliance burden. 

Senator CRAPO. All right. Thank you very much. 

Mr. Gee. 

Mr. GEE. If I could just add a footnote to that, Senator. I really 

appreciate all that you are doing on this project and have for so 

long. From my perspective, we come from a small State, as you 

know, and all we have is smaller community charters, and not only 

are we seeing consolidation among those, but we also had a record 

of near record number of credit union mergers, for example, last 

year. 

What we are also seeing is that it is affecting start-ups, that just 

the regulatory cost and the burden is affecting the number of startups, at least in a small State like mine. We have hardly any credit 

unions, even very few banks that are willing to start up, and I 

think a large part because of the regulatory burden. Certainly, the 

consolidation in the industry is driven by regulatory burden and 

the lack of the ability to compete. 

Though I would echo everything that Director Reich has said, I 

think there is a real urgency. We would certainly support your 

Committee’s markup on this effort as soon as possible because 

every day we delay it costs consumers money, it costs financial 

services industry in a very significant way, and it hinders economic 

development in our communities, in our States, and in our Nation. 

Senator CRAPO. Thank you very much. 

Anybody else? 

Mr. KOHN. Senator, we agree that the burden of regulation falls 

disproportionately on smaller institutions who need to gear up to 

some regulatory reporting and regulatory compliance, and as a proportion of their total cost, that can be very high, and discouraging. 

We also think that this process that you and Director Reich have 

led has unearthed a number of changes in which exemptions can 

be raised, regulations can be simplified, without sacrificing safety 

and soundness, consumer protections or other important objectives 

that the Congress has. I would like to identify with Ms. Williams 

and her discussion of simplifying consumer reporting requirements. 

I think here is a win-win situation in which both the institution 

issuing the report and the information to the consumer, and the 

consumer, can be made better off by taking a hard look at what 

works and what does not work, and how can we simplify and make 

things as effective for the consumer as possible, and as cost effective for the institution as possible. 

Senator CRAPO. Thank you. 

Ms. Johnson. 

Ms. JOHNSON. Senator, throughout this process, over half of our 

credit unions are less than $10 million in assets, and the regulatory burden is great across the line, from the small and to the 

larger institutions as well. We felt it very important to listen to the 

institutions because they are the ones that are on the front line 

serving their members and delivering the products and services. So 

anytime the regulatory burden takes away from that, being able to 

actually provide the services, then that is burdensome. 

24

We have not been able to take all of the suggestions that we 

have heard from the industry, but we certainly have listened to all 

of those suggestions, and we have—throughout our process, we 

have used as many of those that we could without undermining 

safety and soundness, to actually put those in practice for those 

that actually deliver the services on the front line. 

Senator CRAPO. Thank you. 

Anybody else? 

[No response.] 

Before I turn the mic over to Senator Carper, let me just respond 

to this by saying I very much agree with the comments that have 

been made, and I appreciate the comments that have been made, 

and I hope that all the other Members of the Banking Committee 

hear the message, that we have a window of opportunity here, and 

we must take it. So, I certainly will be pushing for that. 

It is also very true that as we have gone through this process, 

the field was very fertile. There was a tremendous amount of potential improvement that came up. In fact, 187, the list is growing 

today while we are having this hearing. 

Senator CARPER. Let us stop it soon. 

Senator CRAPO. Yes. 

[Laughter.] 

There is going to be a cutoff point. 

Senator CARPER. Maybe we should not go to that second panel, 

Mr. Chairman. 

[Laughter.] 

Senator CRAPO. And we are going to have that markup, but I am 

confident that as soon as we have the markup and get this legislation through, that there will be probably an opportunity to continue 

working and looking at efforts to improve. So it is really a delight 

to have the regulating community, the regulators as engaged in 

this process as you all are, and we deeply appreciate that. 

Senator CARPER. Thanks. Before we do stop it, I have three questions I want to ask. Again, I am going to mention the last one first 

so you all can be thinking about it. We are going to be asked to 

look at these 187 ideas or more or less, going to be asked to look 

at them and decide which among them really do enhance the safety 

and soundness, which of them really do make sure that consumers 

get a better break, not the short end of the stick. The last question 

I am going to as you to be thinking about while I ask my first two 

questions, is just to share your wisdom with us, some things that 

we may want to keep in mind as we make those, not Solomon-like 

decisions, but as we try to make those decisions which are worth 

keeping, which are worth repealing or changing, and which we 

should keep. 

The first question though I want to ask deals with the implementation of bankruptcy reform legislation. We passed it about a year 

ago. It was implemented roughly 6 months or so ago. I would welcome hearing from you as to how you think it is going, and I presume regulations have been issued. I am not sure just what you 

all have been doing on this front, but I know there is a real rush 

for a lot of people to file for bankruptcy last year to beat the deadline, and we are not hearing a whole lot, at least to date, on what 

25

effect the new law is having. But I welcome any comments that you 

could share with us on its implementation. 

[Pause.] 

And my second question——

[Laughter.] 

Dr. Reich, go ahead. 

Mr. REICH. I was just going to say that in my outreach meetings 

with bankers, bankruptcy has not come up as an issue of concern 

as a result of what was passed last year. 

Senator CARPER. Had it ever come up before? 

Mr. REICH. Yes, it did. 

Senator CARPER. I am sure it did. 

Others, please? 

Mr. KOHN. I think in some sense, Senator, it is too soon to tell 

what the continuing effects will be. There were a huge volume of 

bankruptcies filed in anticipation of the change in the law, so a lot 

of people who would have done it later, pulled all that forward, and 

it will take some time to see what a continuing process looks like 

and how it will affect both lenders and borrowers. 

Senator CARPER. Thank you. 

Anyone else? 

Ms. Johnson. 

Ms. JOHNSON. Senator, I would just mention that, of course, we 

were supportive of the bankruptcy reform, and to a certain degree 

it was anticipated of the stepped up number of filings there would 

be. I believe that it is being handled appropriately, and ongoing, 

the numbers will be reduced. But you have to get to a stage to be 

able to get by the abuse, and I think that is where we are at. 

Senator CARPER. All right, thank you. 

Any other comments? Good, thanks. 

I have another hearing going on, and I am sure so does the 

Chairman. Secretary Chertoff from Department of Homeland Security is two flights down, and I am going to go down and rejoin him 

in just a minute. He has been saying grace over a lot of issues of 

late, as we know, and one of those is Hurricane Katrina. Several 

of us on this Committee communicated, I believe, with the regulators of financial institutions on the heels of Katrina, urging of the 

financial institutions demonstrate some forbearance and willingness to delay payments on a wide variety of things, including home 

mortgages and car payments, and even credit card bills and that 

kind of thing. 

I do not know that much more of that forbearance is still ongoing, but I would like to know if there is, what you could tell us 

about it, and do you sense that people are starting to pay their 

mortgages and their car payments down there a little better, and 

what, if anything, should our Committee be doing in this regard? 

Thank you. 

Ms. WILLIAMS. Senator, it is a very timely question because at 

least my principal is headed down to New Orleans maybe even as 

we speak. 

Senator CARPER. For Mardi Gras, wear those beads? 

[Laughter.] 

Ms. WILLIAMS. No. There is a very important interagency meeting, and I think that some people here may be headed in that diVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
26

rection, to continue the process of getting input from the citizens, 

banks, and community organizations down there on the conditions, 

what they need, the things that banks can do, and what messages 

would be helpful to come from the regulators. 

We all have continued to urge the institutions that we supervise 

to work with their customers and to try to take a reasonable approach in terms of the repayment issues. There still are lingering 

issues of institutions having trouble locating their customers, and 

we have collaborated on public service announcements to get the 

word out that you need to get in touch with your lender so that 

your lender can work with you. There are issues that pop up that 

we try to resolve. We have Q&A’s on an interagency Katrina 

website. So there is a lot going on, and we are continuing to urge 

the institutions that we supervise to work with their customers, 

and we are continuing to try to identify other things that the banks 

can do to try to help in the remediation of the situation. 

Senator CARPER. Thank you. 

Anyone else? 

Yes, sir. Director Reich. 

Mr. REICH. Senator Carper, I had an outreach meeting with 

CEO’s of all of our thrifts in the New Orleans area 2 weeks ago. 

And there continues to be a surprising disconnect between the apparent health of the institutions and the health of the New Orleans 

metropolitan area. Examinations are just beginning. A number of 

our agencies had deferred scheduled examinations until the institutions got back on their feet, and are more fully staffed, although 

staffing continues to be a problem in the institutions, as many of 

the evacuated population were employees and have not returned. 

But we do have an interagency forum taking place beginning tomorrow that Ms. Williams referred to, that several principals will 

be attending, and we hope to get more information about what the 

needs are, what the conditions are, and I think that as examinations begin to take place, that within the next 6 months we will 

have a pretty good idea, a much better idea than we do today about 

how the institutions really are faring. 

Senator CARPER. Thanks. 

Let me go to my last question now, the one you all had several 

minutes to think about. And I wanted to ask you just to share your 

wisdom and counsel with us as we try to decide what to keep and 

what not in this package. 

Ms. JEKEL. One of the areas that I would encourage you to continue to look at is capital reform for credit unions. I know that it 

will not be a simple issue to work through, but it is necessary that 

we do something for our credit unions to help them stay viable and 

competitive in this very dynamic and competitive environment. 

Senator CARPER. Thanks, Ms. Jekel. 

Ms. JOHNSON. I would echo that. PCA reform, I think, is probably our primary priority. I would like to make it number 188 on 

the matrix. 

Senator CARPER. All right. Thank you. 

Ms. Williams. 

Ms. WILLIAMS. Senator, there are proposals and suggestions at 

all levels. Some have more impact than others. I think there are 

27

literally dozens and dozens that we have indicated that we are supportive of. I would say, do them all. 

[Laughter.] 

There are also important provisions that are not so much targeted at relieving a particular regulatory burden, but have safety 

and soundness enhancement goals, and I would urge you not to 

leave those behind. There is a good package of safety and soundness enhancement provisions included in the matrix. 

Senator CARPER. Thank you, ma’am. 

Mr. Jones. 

Mr. JONES. I agree with Ms. Williams. There is no one item that 

we would identify as the most important. There are a number of 

important initiatives. I think it goes back to what Director Reich 

said. I think the most important thing is that we actually produce 

something that is enacted, showing that there is regulatory relief 

out there and that this process has led to a positive result. 

Senator CARPER. That is good advice. 

Governor. 

Mr. KOHN. We have all highlighted our high-priority items——

Senator CARPER. Again, I am not asking for you to rehighlight 

your high priority items. I am looking for some words of wisdom. 

Mr. KOHN. I think in the process of going through this, we have 

identified some very low-hanging fruit, situations in which the regulations, when implemented first had very worthy goals and maybe 

accomplished those goals, but technology changes, the size of institutions changes, the pressure and the competitive markets 

changes. In some cases, the regulations we are talking about, in 

the case of the Federal Reserve, were instituted in the 1930’s, such 

as interest on demand deposits, and they are no longer relevant 

today, and they no longer accomplish their goals. You can accomplish a lot of regulatory relief by picking off this low-hanging fruit 

that really will not impair your ability to achieve your public policy 

goals at all. 

Senator CARPER. Thank you, sir. 

Mr. Gee. 

Mr. GEE. Yes. Thanks for the question, Senator. I guess if I had 

any advice, it would be there are a number—as you look at that 

matrix, there are a number of provisions in there where most 

groups agree to. Some of them, I would put in the ‘‘no brainer’’ category. They provide immediate relief to financial institutions and 

I would hope that the Committee could act on those fairly quickly. 

Those that are more controversial, that have people on both 

sides, I would hope that that is not used as an excuse to delay regulatory burden on those that can be agreed upon. If we cannot 

strike a compromise on those, then I guess my suggestion would be 

at least move forward on the ones that people can agree on so we 

can get some form of regulatory relief out there and send the right 

message to financial institutions and their customers and this industry that we are serious about reducing regulatory burden wherever we can. 

Senator CARPER. Mr. Chairman, the thought comes to me that in 

putting this bill together, that like one section could be like lowhanging fruit. 

[Laughter.] 

28

Another section could be no brainers. 

[Laughter.] 

I am not sure what the other sections would include. The last 

word, Dr. Reich. 

Mr. REICH. Mr. Chairman, I loved Ms. Williams’ response, do 

them all. It is like asking which of my four children do I like the 

best. I like them all. But I would say that the Bank Secrecy Act 

is at the top of the list, with modification to the CTR process. Privacy notices would be at the top of my list. And then in connection 

with my new responsibilities at the Office of Thrift Supervision, in 

my testimony, there are a number of items that are related to 

thrift institutions that I would advocate. 

Senator CARPER. I do not know that in the end we will do them 

all, but hopefully we will do a lot of the ones that really need to 

be done and provide some sense of priority. 

Mr. Chairman, this is a good hearing. I apologize to our second 

panel of witnesses that are going to come forward now. I have to 

slip out, but Hillary Joplin, who is sitting right behind me, is going 

to stay and listen to every single word and give me a full report. 

Thank you very much. 

[Laughter.] 

Senator CRAPO. Thank you, Senator, and thank you to this panel. 

I know we got a late start and we have taken a little long with this 

panel, but it is a very critical issue, and again, I want to thank you 

for the work that you have put into your testimony. It is going to 

be very helpful. Thank you very much. 

We will excuse this panel and call up our second panel, and 

while the second panel is coming forward, I will introduce them to 

you. I would like to encourage everybody to move out quickly so we 

can let the second panel get up to the front here. Second panel, as 

you find your way up, please take your seats and let me introduce 

who our second panel will be. 

Mr. Bradley Rock, President and CEO of the Bank of Smithtown; 

Mr. Edmund Mierzwinski, who is the Consumer Program Director 

for the U.S. Public Interest Research Group; Mr. F. Weller Meyer, 

Chairman, President, and CEO of the Acacia Federal Savings 

Bank; Mr. Greg McClellan, President and CEO of the MAX Federal 

Credit Union; Mr. Travis Plunkett, Legislative Director for the 

Consumer Federation of America; Mr. Steve Bartlett, President 

and CEO of the Financial Services Roundtable; Mr. Joe McGee, 

President and CEO of the Legacy Community Federal Credit 

Union; Ms. Margot Saunders, of Counsel for the National Consumer Law Center; and Ms. Terry Jorde, who is President and 

CEO of CountryBank USA. 

Obviously, you can see there are a lot of you. We had to fill up 

the whole table and some of you are almost falling off the edges 

there. I apologize for that. 

I would like to remind each of you to please watch the time, and 

again, I apologize to you. It is always hard for us to fit everything 

in and especially with an issue of this size and magnitude and the 

number of people we wanted to have testify. It just becomes increasingly important for you to pay attention to the clock, and I 

think there is only one clock on that table, so try to pay attention 

up here if you cannot see the one on your table. 

29

Without anything further, we will begin with you, Mr. Rock. 

STATEMENT OF BRADLEY E. ROCK

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

BANK OF SMITHTOWN

ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION 

Mr. ROCK. Thank you, Mr. Chairman. I am Chairman, President, and CEO of Bank of Smithtown, a $900 million community bank 

founded in 1910 and located in Smithtown, New York. I am also 

Vice Chairman of the American Bankers Association. 

The cost of unnecessary regulation is a serious, long-term problem that continues to erode the ability of banks to serve our customers and support the economic growth of our communities. I 

have included a list of recommended actions with my written testimony, any one of which would provide needed regulatory relief to 

banks. Today, I would like to emphasize two in particular. 

First, under the Bank Secrecy Act, banks fill out more than 13 

million currency transaction reports, or CTR, every year. It is undisputed that a vast majority of these reports are filed by publicly 

traded companies that are well-known by the banks and the government and have nothing to do with potentially criminal activity. 

The time and resource commitment for CTR’s is huge. Even at 

FinCEN’s conservative estimate of around 25 minutes per report 

for filing and recordkeeping, it means that banks devoted 5.5 million staff hours to handling CTR’s in 2005. Based on our recent survey, the industry paid around $187 million in wages for staff time to comply with this single regulatory 

requirement. 

With three-quarters of the filings for business customers who 

have been with the bank for over a year, our industry spent around 

four million staff hours and over $140 million last year filing notices on well-established customers. While the CTR costs have 

risen, the usefulness of these 35-year-old rules has substantially diminished due to several subsequent laws, including suspicious activity reporting requirements adopted during the 1990’s, rigorous 

customer identification obligations, mandates to match government 

lists to bank accounts, and the 314(a) inquiry process implemented 

3 years ago as part of the USA PATRIOT Act. 

The best approach today would be to establish a seasoned customer exemption for business entities, as endorsed by FinCEN in 

testimony before Congress last year and supported by all the bank 

regulators. 

It is important to remember that cash transaction data will not 

be lost, but will still reside in the normal bank account data for 

each seasoned customer and will be available to law enforcement 

through a variety of the previously mentioned means. Moreover, 

seasoned customers would continue to be subject to suspicious activity monitoring and reporting. The seasoned customer exemption 

would help channel resources toward the true public interest, 

which is stopping the activities of the real crooks and terrorists. 

My second point is this. The 500 shareholder threshold to register securities with the SEC should be updated to more accurately 

reflect the current size and conditions of the investment market. 

The periodic reporting required imposes considerable costs on 

30

smaller public companies, costs that are borne by the company 

shareholders. Importantly, even with updated limits, shareholders 

would continue to have ready access to large amounts of information about the company, much of which is required under Federal 

banking law and regulation. Annual reports and quarterly call reports are two examples. 

The cost to small businesses have been staggering. Average auditing fees for smaller public companies, those with less than $1 

billion in revenue, rose by 96 percent and exceeded over $1 million 

per company in 2004, which is the most recent year for which we 

have data. 

Therefore, the 500 shareholder threshold should be updated. 

Such action is not without precedent, as the asset size parameter 

has been increased tenfold, from $1 million initially set in 1964 to 

$10 million. In contrast, the shareholder threshold has never been 

updated since it was initially adopted in 1964. 

We thank you, Mr. Chairman, and the Committee for seeking 

ways to reduce the regulatory burden on banks. 

Senator CRAPO. Thank you very much, Mr. Rock. 

Before I go to you, Mr. Mierzwinski, let me discuss with the 

panel a little problem that is starting to brew up here. In about 10 

minutes, there are going to be four stacked votes called on the floor 

of the Senate, and that is going to take about an hour of time without really much opportunity to conduct much business in between 

because the votes are stacked. So, I am going to make a suggestion, 

although it might be an inconvenience to some of you, and I do not 

want to do that. 

We could get as far as we can before they call the votes in taking 

testimony and then take a break for an hour and you could all grab 

a bite to eat. I know that some of you probably have schedules, 

though, that you were planning to meet this afternoon, flights or 

whatever else that may be, and doing so may be a significant interrupt to you, and so that could be a problem. 

The other thing we could do is go directly to questions and just 

start getting into some questions and answers with the panel for 

probably 10 or 20 minutes here, and then I would be willing to 

come back at that point after the votes for any of you who wanted 

to stick around and present your oral testimony at that time. 

I guess the question I have for the members of the panel is, are 

there any of you who could not come back at, say, one o’clock and 

spend an hour here, whose schedules would prohibit you from 

doing that? And please, do not be hesitant to say that you have 

some kind of another conflict. Everybody could come at one? 

Well, then what I propose we do is we will proceed now. Once 

the vote is called, I can probably go for another 10 minutes before 

I have to run to the vote, and then I am going to be gone for what 

will probably be about an hour. At that time, we will adjourn, and 

I will say until one o’clock, and I will try to be back here at one. 

If it is not at one, we will have somebody here who can tell you 

how soon after one it will be. I can probably be back maybe even 

a little bit before one, so we will do that at this point, then, and 

we will proceed. 

Mr. Mierzwinski. 

31

STATEMENT OF EDMUND MIERZWINSKI

CONSUMER PROGRAM DIRECTOR,

U.S. PUBLIC INTEREST RESEARCH GROUP 

Mr. MIERZWINSKI. Thank you, Senator Crapo. I am Ed 

Mierzwinski, for the record, of the U.S. Public Interest Research 

Group. Along with my colleagues Travis Plunkett of the Consumer 

Federation of America and Margot Saunders of the National Consumer Law Center, we are delivering joint shared written testimony also on behalf of some of the other leading consumer and 

community groups, including ACORN, the Center for Responsible 

Lending, Consumers Union, publishers of Consumer Reports magazine, and the National Community Reinvestment Coalition. Each of 

us will talk about some of the highlighted issues that we have 

great concerns about in the testimony and our written testimony 

goes into greater detail on some of these measures. 

There are many measures that the Congress has proposed for 

changes to the laws governing financial services. We do support 

some of them. We have no positions on others. And we have grave 

concerns regarding some others. In the testimony, we only focus on 

some of the provisions that we believe are under significant or serious consideration by the Committee, although we certainly oppose 

others and we are happy to comment on any of the others that we 

think may be moving later on. 

As the Committee evaluates which of these proposals to include 

in any bill labeled regulatory relief, we believe that it is critical 

that the consumer interests be the focal point of the process. A fair 

bill cannot be limited to provisions supported, introduced, or proposed by either the financial regulators or the financial interests 

who have 181 or 182 of the 187. I believe four or five come from 

previous testimony by any of the consumer groups. 

We believe that a fair bill must also exclude any measures that 

are unfair to consumers and that would harm consumers. So in our 

testimony, we go into details of how the Committee should measure 

the various provisions. 

I want to talk about two of the provisions that are in the bill that 

we believe are a high priority, unfortunately, and then I want to 

talk about one that should be in the bill. 

First, the rent-to-own industry continues to push something 

called S. 603. There is nothing that could possibly be construed as 

regulatory relief or eliminating regulatory burden in this proposal. 

The rent-to-own industry promises consumers dreams of ownership—furniture, televisions, and the like—and then takes those 

dreams away, snatches those dreams away with harsh, cruel, unconscionable contracts at 200 to 300 percent interest and other unfair terms. Yet the industry has succeeded in about 45 States in 

obtaining relief from strong consumer protection regulation. It is 

the other five States that continue to protect consumers that is the 

focus of the bill S. 603. The bill would preempt or override the 

strong consumer lending protections in New Jersey and other 

States. That is the reason we strongly oppose it. We see no reason 

that it could possibly be construed as a mere regulatory relief provision. 

The rent-to-own industry is part of a whole ecology of predatory 

lenders that includes the payday lenders, that includes predatory 

32

mortgage lenders, that includes auto title pawn shops. We believe 

this industry is in need of stricter, not lesser, regulation. It is preying on not only the 12 million unbanked Americans, but also on 

other Americans, as well. So we would urge, keep that out of the 

proposed bill. 

Second, on privacy notices, we oppose any proposal to exempt 

any privacy notices or change Gramm-Leach-Bliley’s Title V in this 

legislation. We believe that the regulators have two open dockets 

on privacy notices currently before them. There is the one that 

Deputy Comptroller Williams mentioned, where they are trying to 

come up with a layered or improved privacy notice. There is also 

the new privacy notice that is required by the FACT Act for certain 

sharing of information between and among the affiliates of companies for marketing purposes. We believe it is inappropriate to consider weakening our privacy laws while there are two open dockets 

that are considering these very same matters. 

Finally, I said that the consumer groups have a number of proconsumer items that we believe could be characterized as regulatory relief. I will mention one very briefly. When I use my credit 

card, I have the strong protections of the Truth in Lending Act, $50 

liability limit and also the right to ask the bank to step into my 

shoes and protect me if a merchant rips me off. I do not have those 

same protections when I use my debit card, even though it may be 

branded with a Visa or a MasterCard logo. I do have some protections with some payroll cards under the law that protects those 

with debit cards, but not with all plastic cards. So we go in detail 

in our testimony into ways that you should harmonize upward, so 

whether you are using a stored value card, a debit card, or a credit 

card, you always have the same rights. 

Thank you. 

Senator CRAPO. Thank you very much, Mr. Mierzwinski. 

Mr. Meyer. 

STATEMENT OF F. WELLER MEYER

CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER,

ACACIA FEDERAL SAVINGS BANK, FALLS CHURCH, VA

AND CHAIRMAN, BOARD OF DIRECTORS,

AMERICA’S COMMUNITY BANKERS 

Mr. MEYER. Senator Crapo, first, let me begin by thanking you 

for your efforts. I am Weller Meyer. I am Chairman, President, and 

CEO of Acacia Federal Savings Bank in Falls Church, Virginia. 

Acacia Federal is a $1.25 billion community bank with a Federal 

Savings Bank charter. I am also the Chairman of the Board of Directors of America’s Community Bankers. I am pleased to represent 

ACB at today’s hearings. 

A strong and vibrant community banking system is good for our 

country and our communities. The required complexity of the regulations and the precision required to deliver products and services 

according to the rules has grown to the point where our employees 

and our customers are drowning in minutia. We believe that the 

cumulative impact of the regulatory burden has already taken its 

toll on community banks. 

Over the past decade and a half, the assets under the control of 

the 10 largest banks in the United States has more than doubled 

33

and now stands at 53 percent of all U.S. banking assets. Along that 

pathway, many communities lost their community banks. In the 

face of the increasingly complex regulatory requirements and the 

associated costs, many community banks are seeking mergers with 

larger institutions. Community banks stand at the heart of cities 

and towns everywhere, and to lose that segment of the industry because of over-regulation would be crippling to those communities. 

On the top of every community banker’s list of regulatory burden 

concerns is the implementation of anti-money laundering and corporate governance laws. Community bankers are resolute participants in the fight against crime and terrorism and we fully support 

the goals of the Sarbanes-Oxley Act and other corporate governance laws. However, we believe that significant changes in both 

anti-money laundering and corporate governance requirements are 

urgently needed either through regulation or legislation. 

In our written statement, we have detailed several suggestions 

in two areas. ACB supports many more amendments to current 

laws that will reduce unnecessary regulation on industry banks. 

Let me mention a few. 

First, a modest increase in the business lending limit for Federal 

Savings Associations is a high priority for ACB members. Community banks operating under Federal Savings Association charters 

are experiencing increased demand for small business and agricultural loans. To meet this demand, ACB wants to eliminate the 

lending limit restrictions on small business loans and to increase 

the lending limit on other commercial loans to 20 percent. Savings 

associations could then make more loans to small businesses, farmers, and ranchers. 

Second, ACB strongly urges the elimination of the required annual privacy notices for banks that do not share information with 

nonaffiliated third parties. Community banks should provide customers with an initial notice and be allowed to provide subsequent 

notices only when the terms are modified. Redundancy under these 

circumstances does not enhance consumer protection. 

Third, ACB vigorously believes that the trust businesses of savings associations should have parity with banks under the Securities Exchange Act and the Investment Advisers Act. There is no 

substantive reason to subject savings associations to different requirements. Savings associations and banks should operate under 

the same basic regulatory requirements when engaged in identical 

trust, brokerage, and other activities. 

Fourth, ACB supports giving banking regulators more flexibility 

in scheduling safety and soundness and compliance examinations 

for well-capitalized and well-managed depository institutions. We 

also support raising from $250 million to $1 billion the threshold 

for the 18-month small institution examination cycle. These proposals will reduce the regulatory burden on low-risk institutions 

and permit the banking agencies to focus their resources on higherrisk institutions. These proposals would not alter the schedule for 

CRA examinations. 

And fifth, now that the Supreme Court has settled the question 

of diversity jurisdiction for national banks, Congress needs to give 

Federal Savings Associations access to Federal courts based on diversity jurisdiction. A written statement includes many other imVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
34

portant changes, including easing restrictions on residential development for Federal Savings Associations. 

The work you do here is important. Meaningful regulatory relief 

legislation will reduce costs for community banks and ensure their 

survival and their continued support for the communities they 

serve. We look forward to working with you and your staff and I 

will be happy to answer any questions. 

Senator CRAPO. Thank you very much, Mr. Meyer. 

We are about four minutes into the first vote, so Mr. McClellan, 

you will be the last one before we break. Please proceed. 

STATEMENT OF H. GREG McCLELLAN

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

MAX FEDERAL CREDIT UNION ON BEHALF OF

THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS 

Mr. MCCLELLAN. Thank you, Senator Crapo. My name is Greg 

McClellan and I am the President and CEO of MAX Federal Credit 

Union, located in Montgomery, Alabama. I am here today on behalf 

of the National Association of Federal Credit Unions to express our 

views on the need for regulatory relief. 

As with all Federal credit unions, MAX Federal Credit Union is 

a not-for-profit financial cooperative governed by a volunteer board 

of directors who are elected by our member owners. MAX Federal 

Credit Union was founded in 1955 and has 106,000 members and 

just over $650 million in assets. 

America’s credit unions have always remained true to their original mission of promoting thrift and providing a source of credit for 

provident or productive purposes, yet credit unions continue to be 

one of the most highly regulated financial depository institutions. 

I am pleased to report to you today that America’s credit unions 

are vibrant and healthy and that membership in credit unions continues to grow, now serving over 87 million members. Yet according 

to data obtained from the Federal Reserve Board, credit unions 

have the same market share today as they did in 1980, 1.4 percent 

of household financial assets, and as a consequence provide little 

competitive threat to other financial institutions. 

As the Committee prepares to move forward and craft a regulatory relief bill, we hope that you will include the credit union provisions outlined in my written testimony and included in the Financial Services Regulatory Relief Act currently pending in the 

House. We believe those provisions are a positive step for Federal 

credit unions. 

I want to highlight one provision in particular that would address what could become a problem for merging credit unions when 

FASB changes merger accounting rules from the pooling method to 

the purchase method. Language to address this issue is included in 

the House regulatory relief bill and has already passed the House 

in the form of the Net Worth Amendment for Credit Unions Act. 

We hope that the language from this bill will also be included in 

any regulatory relief package introduced in the Senate, as this is 

a timely issue that needs action before the FASB rule changes go 

into effect. 

To be clear, we are not asking you to legislate accounting rules. 

Rather, we are asking you to change a definition so that the acVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
35

quired equity of merging credit unions is properly included in total 

net worth for PCA purposes. FASB, in testimony before the House 

last year, recognized that such a change was necessary. 

We hope that you will also consider including language from the 

Credit Union Regulatory Improvement Act, or CURIA, which has 

been introduced in the House, that would modify the prompt corrective action system for federally insured credit unions to include 

risk assets as proposed by the NCUA. This would result in a more 

appropriate measurement to determine the relative risk of a credit 

union’s balance sheet and also ensure the safety and soundness of 

credit unions and our shared insurance fund. It simply does not 

make sense that the current capital system treats a 1-year, unsecured $10,000 loan the same as a 30-year mortgage that is on its 

last year of repayment. 

It is important to note that this proposal would not expand the 

authority for NCUA to authorize secondary capital accounts. Rather, we are moving from a model where one-size-fits-all to a model 

that considers the specific risk posed by each individual credit 

union. This proposal revises the standard net worth or leverage 

ratio requirements for credit unions to a level more comparable to, 

but still nearly 70 basis points greater than, what is required of 

FDIC-insured institutions. 

In conclusion, the cumulative safety and soundness of credit 

unions is unquestionable. Nevertheless, there is a need for change 

in today’s financial services marketplace. NACU urges the Committee to consider the provisions outlined in our written testimony 

for inclusion in any regulatory relief bill. Appropriately designed 

regulatory relief will ensure continued safety and soundness and 

allow us to better serve America’s 87 million credit union members. 

We would like to thank you, Senator Crapo, for your leadership 

and we are looking forward to working with the Committee on this 

important matter and welcome any comments or questions. 

Senator CRAPO. Thank you very much, Mr. McClellan. 

Again, to all the members of the panel, I apologize for this interruption and inconvenience. It is always hard to predict how fast we 

will be able to go through four votes, but I can pretty well tell you 

it is not likely to be finished before one o’clock. So what I am going 

to do is to recess until one o’clock, or as soon thereafter as I can 

get back here. I would encourage you all to be here at one. 

And again, I will say, if there are any of you who had other arrangements made or have a flight to take or whatever it may be 

that requires that you do that, I will be totally understanding. Just 

feel free to do that. If that applies to any of you who have not presented your testimony yet, I apologize for that, although the written testimony is incredibly helpful and we already have that from 

you. 

With that, what I will do then is recess this and at least maybe 

you will have a chance to get a bite to eat, although you probably 

had other better lunch plans made. This Committee will be recessed until one o’clock. 

[Recess.] 

Senator CRAPO. This hearing will come to order. 

Ladies and gentlemen, things never work out the way you want. 

We are still voting, and so at some point in the next 10 to 20 minVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
36

utes, I may get called away again. So what I want to try to do is 

at least get through the testimony before that happens and then 

we will just have to make a judgment at that point as to how we 

proceed. 

If I remember correctly, Mr. Plunkett, you were next in line, so 

please go ahead. 

STATEMENT OF TRAVIS PLUNKETT

LEGISLATIVE DIRECTOR,

CONSUMER FEDERATION OF AMERICA 

Mr. PLUNKETT. Thank you, Mr. Chairman. My name is Travis 

Plunkett. I am the Legislative Director with the Consumer Federation of America. I applaud you and the Committee for ensuring 

that a diverse array of interests, including consumers, are represented here today. 

As the Committee hears one entreaty after another from all sectors of the financial services industry, it is also absolutely essential 

that it closely examine whether major regulatory gaps exist for consumers, gaps that in some cases have been engineered by these 

same interests. I would like to mention two of these regulatory 

gaps to start with and then talk about why it is more important 

than ever that the Committee reject proposals to allow industrial 

loan corporations to expand. 

First, we were extremely disappointed that final rules issued last 

year by the Federal Reserve Board covering overdraft extensions of 

credit left the abusive features of these loans largely in place. 

These so-called ‘‘courtesy overdraft’’ programs encourage consumers 

to overdraw their accounts. They do not disclose triple-digit interest rates to these consumers. They take payment in full directly 

out of consumers’ next deposit, and they do not ask for affirmative 

consent from consumers to borrow from the bank. We urge Congress to step in and require that these loans be treated just like 

other extensions of credit under the Truth in Lending Act. This 

would require that creditors inform consumers about the true cost 

of this credit and receive affirmative consent to loan money. 

The second gap involves the growing threat to our Nation’s military readiness caused by predatory lenders that target military 

families. High interest rates, unaffordable repayment terms, and 

the risk of losing valuable assets characterize lending to the military. We urge the Committee to look at and enact legislation based 

on Senator Dole’s original amendment to the defense authorization 

bill to cap rates for loans made to military personnel. We also support S. 418 by Senator Enzi and others that would deal with abuses 

in the sales of periodic payment plans to members of the military. 

Finally, I would like to once again urge the Committee to reject 

legislation that allows industrial loan corporations to expand, either by offering business checking services or by branching into 

States without their permission. In fact, I strongly urge you to 

adopt proposals to shut down ILC’s completely. One of these proposals is listed on the Senate matrix that has been referred to. 

In a report issued last fall, the General Accounting Office became 

the latest independent authority to raise questions about this expansion and about the impact of the explosive growth of ILC’s on 

the safety and soundness of the deposit insurance system. Since 

37

Congress granted an exception to the Bank Holding Company Act 

in 1987 for small limited-purpose ILC’s in a few States, everything 

about ILC’s has expanded. According to the GAO, ILC assets grew 

by over 3,500 percent between 1987 and 2004, from $3.8 billion to 

over $140 billion. In 2004, six ILC’s were among the 180 largest 

financial institutions in the country. Moreover, some of the States 

allowed to charter ILC’s are aggressively encouraging new ILC’s to 

form, especially Utah. These States are promoting the lower level 

of oversight they offer compared to those pesky regulators at the 

Federal Reserve. 

ILC’s now constitute what is essentially a shadow banking system that puts taxpayer-backed deposits at risk and siphons commercial deposits from properly regulated bank holding companies. 

The key problem with ILC regulation is that while the Federal Reserve has the power to examine the parent of a commercial bank 

and impose capital standards, in an industrial loan company structure, only the bank can be examined and the FDIC cannot impose 

capital requirements on the parent companies. Holding company 

regulation is also essential to ensuring that financial weaknesses, 

conflicts of interest, malfeasance, or incompetent leadership at the 

parent company will not endanger taxpayer-insured deposits at the 

bank. 

Commercial firms such as GM, General Electric, Volkswagen, 

and Volvo own ILC’s, as do huge financial firms like Merrill Lynch, 

American Express, and Morgan Stanley. We have significant concerns with ILC ownership by both types of companies. The involvement of investment banking and commercial firms in recent corporate scandals has provided plenty of evidence of the need for rigorous scrutiny of these companies as they get more involved in the 

banking industry. These firms were rife with conflicts of interest 

that caused them to take actions that ultimately harmed their investors. As for ILC ownership by commercial companies, imagine 

if companies like Sunbeam, Enron, WorldCom, Tyco, and Adelphia 

had owned ILC’s. Not only would employees, investors, and the 

economy have suffered, but also taxpayers, as well. 

Finally, let me finish by mentioning the GAO’s major conclusion 

here. They concluded that proposals to expand ILC’s, ‘‘may make 

the ILC charter more attractive and encourage further growth.’’ 

This is the wrong way to go. We encourage the Committee to examine shutting down the ILC loophole to the Bank Holding Company 

Act. 

Thank you. 

Senator CRAPO. Thank you very much, Mr. Plunkett. 

Mr. Bartlett. 

STATEMENT OF STEVE BARTLETT

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

FINANCIAL SERVICES ROUNDTABLE 

Mr. BARTLETT. Thank you, Mr. Chairman. I am Steve Bartlett, 

President of the Financial Services Roundtable, which consists of 

100 of the large integrated interstate financial services companies 

in America, which we hold virtually all the charters that are under 

consideration by the Committee. Like Mr. Plunkett, I also represent the consumers of America, those 200 million-and-some-odd 

38

consumers that we call customers. I am here to ask for consumer 

relief and for relief of those customers from the effects of the regulatory burden that has been placed on them over the course of the 

last several decades, and I believe it is the role of this Committee 

and then the Senate and the Congress to relieve that burden. 

I would like to add one additional item that I think has not been 

considered by this Committee in the past and that is a matter of 

significant regulatory relief that could be enacted and should be enacted by the Congress of the United States, and that is an optional 

Federal insurance charter. The State-by-State insurance system of 

regulation is profoundly broken and it is time, indeed, it is past 

time to modernize that system so that consumers can choose to do 

their business on an interstate basis if they choose. 

Mr. Chairman, in my written testimony, I have cited about 70 

provisions of regulatory burden that should be dealt with by this 

Committee. The ones that I would cite in oral testimony would include interstate branching; the relief of defensive SAR’s, the one 

million SAR’s that we think will be filed this year in anti-money 

laundering; simplified privacy notices; diversity jurisdiction, SEC 

push-outs, and others. 

My point in the oral testimony today is to say, Mr. Chairman, 

that these items have not unanimous, perhaps, but by and large 

universal support within the Members of this Committee and by 

the Senate. Many of these items have been long agreed to. They 

have been on the table, under discussion, and generally agreed 

would help the American economy and the American consumer for 

about 6 years. There are some 70 provisions. 

It is my view that to continue these regulatory burdens harms 

the American consumer, harms small business, and harms the 

economy. The time to act on these provisions is now; if not now, 

then next Tuesday; if not next Tuesday, then by June 30, but not 

2007 and not 2010 and not 2017. The time to act is now. The 

American consumer needs relief. 

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

Senator CRAPO. Thank you very much, Mr. Bartlett, and I appreciate your yielding back that time. 

Mr. McGee. 

STATEMENT OF JOE McGEE

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

LEGACY COMMUNITY FEDERAL CREDIT UNION,

BIRMINGHAM, AL

ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION 

Mr. MCGEE. Thank you, Senator Crapo, and on behalf of the 

Credit Union National Association, I appreciate this opportunity to 

express CUNA’s views on legislation to help alleviate the regulatory burden under which all insured financial institutions operate 

today. 

I am Joe McGee, President and CEO of Legacy Community Federal Credit Union in Birmingham, Alabama. I am proud to speak 

on behalf of America’s credit unions today because we are an industry that is good for America. Credit unions are the only financial 

institutions that are run solely for the benefit of their members, 

39

not stockholders. We exist not for charity, not for profit, but for 

service. 

Credit unions are devoted to providing affordable services to all 

members, especially those of modest means. Now we are asking for 

the Senate’s help in continuing the not-for-profit, people-oriented, 

cooperative work that we do. 

One provision that Senator Sarbanes introduced would better enable us to meet that goal, and I am referring to his legislation 

S. 31, which seeks to permit credit unions to provide broader check 

cashing and remittance services. 

Perhaps the most critical issue on the horizon for credit unions 

is the need to reform prompt corrective action. Experience has 

proven this policy to be unnecessarily inflexible. CUNA strongly 

supports a rigorous safety and soundness PCA regime for credit 

unions and agrees that any credit union with a net worth ratio 

below the adequately capitalized level should be subject to firm corrective action. CUNA has been in constant communication with the 

Treasury on this very important issue. CUNA believes that the 

best way to reform PCA would be to transform the system into one 

that is explicitly based on risk measurement, as outlined by the 

NCUA proposal and embodied in the House-introduced bill 

H.R. 2317, the Credit Union Regulatory Improvement Act. 

Temporary PCA relief has also been sought after in recent legislation to assist credit unions affected by the hurricanes in 2005. 

CUNA wholeheartedly supports these efforts so that credit unions 

temporarily affected by the hurricane do not have to deal with onerous PCA requirements. 

Additionally, FASB is expected to adopt rules effective next year 

that would cause significant problems for healthy credit unions involved in mergers. CUNA believes it is essential that Congress act 

on this net worth issue immediately. Otherwise, credit unions will 

be subject to harmful, unintended consequences. 

The other issue I wish to address is the correct capital and member business lending. There was really no safety and soundness 

reason to impose these arbitrary limits on credit unions in 1998. 

In fact, the Treasury deemed these loans were even safer than 

other types of credit union loans. CUNA urges the Committee to 

include an increase in the member business loan cap from 121⁄4

percent of assets to 20 percent of assets in the regulatory relief 

measure. 

Furthermore, the NCUA should be given the authority to increase the current $50,000 threshold up to $100,000. This would be 

especially helpful to smaller credit unions as they would then be 

able to provide the smallest of these loans without the expense of 

setting up a formal program. 

Small business is the backbone of our economy and responsible 

for the vast majority of new jobs in America, yet the SBA and the 

Federal Reserve Bank of Atlanta studies reveal that small businesses are having greater difficulty in getting loans in areas where 

bank consolidation has taken hold. The 1998-passed law severely 

restricts small business access to credit and impedes economic 

growth in America. Credit union member business lending is especially important today as we all try to help rebuild the devastated 

40

Gulf Coast, where many have lost their jobs and need even more 

access to capital. 

My written testimony includes an extensive list of amendments 

to the Federal Credit Union Act, as well as other laws included in 

your matrix that CUNA urges the Committee to address this Congress. 

In conclusion, Mr. Chairman, credit unions and their 87 million 

members are grateful to the Committee for holding this important 

hearing. We strongly urge the Committee to act swiftly to provide 

meaningful regulatory relief this year, and I will be happy to address any questions you may have. Thank you. 

Senator CRAPO. Thank you very much. 

Ms. Saunders and Ms. Jorde, I am going to have to impose on 

you again. They have called another vote and there is about 31⁄2

minutes left in the vote, so I am going to recess, run over there and 

vote, and this is the last vote, and then I will be back. I think it 

will be about 10 minutes and I will be back and then we can continue with the hearing. 

So, I apologize once again, but I will be back. Thank you, and we 

are recessed. 

[Recess.] 

Senator CRAPO. The hearing will come to order, and I thank you 

all for your patience. I do not think we will be voting again for a 

while, so Ms. Saunders, would you please proceed? 

STATEMENT OF MARGOT SAUNDERS

MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER 

Ms. SAUNDERS. Thank you, Senator Crapo. I appreciate your patience and perseverance in hearing my testimony. I am here today 

on behalf of the National Consumer Law Center’s low-income clients as well as the other groups that my colleagues Ed and Travis 

have explained. 

I would like to emphasize that while you are considering all of 

these regulatory relief items, you keep in mind that this industry 

that is suffering from this ‘‘terrible regulatory burden’’ is also experiencing record profits. At the same time consumers are facing increased foreclosures and escalating debts that are more and more 

difficult for them to bear. The entire discussion here today has 

been about the impact on institutions. Ed, Travis, and I are here 

to remind you that on the other side of these regulatory issues lie 

individuals. Many of the consumer protections that are on the table 

have significant consumer impacts. Without these consumer protections people would suffer. 

It is often the removal of consumer protection regulations that 

will most likely reduce competitive advantage for responsible financial institutions because those consumer protections are there to 

ensure that appropriate competition is fostered. Institutions that 

choose to provide more balanced and consumer-friendly products 

would find themselves at a competitive disadvantage without adequate regulation. 

I want to talk about one affirmative proposal and then explain 

why a few proposals are particularly dangerous. 

As you move forward, please keep in mind there are many consumer protections that needs to be updated. One stands out even 

41

more than the rest as a glaring low-hanging fruit for updated consumer protection. The Truth in Lending Act needs to be updated. 

It was passed in 1968 and it was meant to apply to all consumer 

transactions. All it does is require uniform disclosures that are 

made on every consumer transaction in the country. However, at 

the moment, approximately half the car loans and many other personal loans are not covered by Truth in Lending or most State law. 

This is because there is a jurisdictional limit of $25,000 for nonhome-secured credit under Truth in Lending. The statutory penalties suffer from a similar lack of escalation along with inflation. 

We really encourage you to consider strongly updating this essential consumer protection as you move forward in this process. 

There are many bad provisions that you have on the table and 

I will try to very briefly address a few of them. First of all, I know 

that there will be several suggestions or have been suggestions 

that the Truth in Lending Act’s right of rescission be cut back or 

amended in some way. Let me be very clear. The Truth in Lending 

Act’s right of rescission is one of the most significant consumer protections that lawyers representing low-income consumers and victims of predatory lending use to stop foreclosures. Any cutback on 

that right of rescission without substantial new protections to stop 

predatory lending or predatory servicing will substantially hurt 

consumers and increase the number of foreclosures. 

In addition, there are four amendments to the Fair Debt Collection Practices Act that were included in the Manager’s Amendment 

in the House bill and two amendments to the Fair Debt Collection 

Practices Act that are considered on your matrix. We oppose all of 

them. The one that was mentioned by Senator Carper would check 

diversion companies from the Fair Debt Collection Practices Act. 

These are private, for-profit companies that enter into contracts 

with district attorneys to collect bounced checks for local merchants. You should please keep in mind that the Fair Debt Collection Practice Act does not prohibit these companies in any way 

from doing business. All the Fair Debt Collection Practices Act does 

is require that there be no deception, harassment, or unfairness in 

the collection of the debt. It prohibits the collection of a debt along 

with fees that are not authorized. And it requires a right of 

verification. 

In addition, there is a mortgage servicers’ amendment that would 

remove some important protections for consumers who are the subject of collection efforts from mortgage servicers I see I running out 

of time so I point you to our testimony, where we have explained, 

I hope forcefully, why that would be a dangerous proposal. 

And finally, I know you are considering a proposal that would 

preempt Arkansas’ ability to set usury limits. This provision would 

place Arkansas in a position unlike that of any other State in the 

country. Only Arkansas would be unable to pass any usury limits. 

Only Arkansas would have no control over the interest rates that 

could be charged to its consumers. It is a very dangerous provision 

and very unfair to that State. 

Thank you. 

Senator CRAPO. Thank you very much, Ms. Saunders. 

Ms. Jorde. 

42

STATEMENT OF TERRY JORDE

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

COUNTRYBANK USA, CANDO, ND AND

CHAIRMAN-ELECT,

INDEPENDENT COMMUNITY BANKERS OF AMERICA, 

WASHINGTON, DC 

Ms. JORDE. Thank you, Mr. Chairman. My name is Terry Jorde. 

I am President and CEO of CountryBank USA. I am also Chairman-Elect of the Independent Community Bankers of America. My 

bank is located in Cando, North Dakota, a town of 1,300 people 

where the motto is, ‘‘You can do better in Cando.’’ CountryBank 

has 29 full-time employees and $39 million in assets. We are a 

small but diversified organization. 

Before discussing the topic of today’s hearing, I want to thank all 

of the Members of the Committee for including deposit insurance 

reform in the recently enacted budget reconciliation bill. I want to 

extend special thanks to Senators Johnson, Allard, Enzi, and Hagel 

for their years of hard work, as well as to Chairman Shelby and 

Ranking Member Sarbanes. This new law is tremendously important in making FDIC insurance a more stable and fair system for 

community banks and for consumers. 

In previous testimony before this Committee and others, we have 

pointed to a study by two economists at the Federal Reserve Bank 

of Dallas that concluded that the competitive position and future 

viability of small banks is questionable, in large part due to the 

crushing regulatory burden we face. Larger banks have hundreds 

or thousands of employees to throw into the regulatory breach. If 

my bank is faced with a new regulation, we must train one or more 

of our current employees. Complying with a new regulation will 

take time away from customer service. 

My compliance officer not only has responsibility for overseeing 

our compliance program, but she also originates around 60 real estate loans per year for sale on the secondary market. She sits on 

our audit and technology committee. She regularly teaches homebuyer education courses at our community college, and she babysits 

for my son at times like this when I am out here begging for relief. 

Unlike larger institutions, we cannot just add a person and pass 

the costs on to our customers. 

Senator Brownback’s Communities First Act, S. 1568, grew out of 

that realization. That bill is cosponsored by a Member of this Committee, Senator Hagel, as well as Senators Roberts, Inhofe, and 

Coburn. It has put into legislative language proposals that ICBA 

made in our 2004 testimony before this Committee. These proposals are also included in your own comprehensive matrix of regulatory relief proposals. I can tell you from my meetings with community bankers throughout the country that they are very excited 

about the Communities First Act. A total of 46 State bank trade 

associations have also endorsed CFA. 

We are pleased that six provisions from the Communities First 

Act are included in the House’s broad regulatory relief bill, 

H.R. 3505. These provisions would streamline call reports, allow 

banks to file a short form call report in two of every four quarters, 

reduce the examination burden, simplify reporting for small bank 

holding companies, eliminate annual privacy notices for banks that 

43

do not share information or change their policies, and make it easier for community banks to retain qualified directors. 

There is one thing I want to emphasize as strongly as I can. The 

House bill is a modest slice of the Communities First Act. Many 

of the regulations that are forcing consolidation of our industry, especially the smaller banks, are those that involve consumer disclosures. Even if you are able to enact the proposals that are on the 

table now, the benefits will be quite modest. Banks and consumers 

themselves are drowning in required disclosures that no one reads 

and that benefit almost no one, except maybe the printing industry. 

Congress, the agencies, the industry, and consumer groups should 

begin work today on ways to reduce this burden and actually improve consumers’ ability to shop for and understand financial products. 

My written statement details provisions in the Communities 

First Act that would provide substantial benefits while we undertake this review. We strongly urge you to include them in your regulatory relief bill, along with the proposals that are already in the 

House version. 

ICBA very strongly believes that regulatory relief legislation 

must not become a vehicle to expand new activities for industrial 

loan companies and credit unions. ILC’s and credit unions already 

have unfair regulatory and tax advantages over community banks. 

Congress should promptly address these imbalances in the Nation’s 

financial system in the context of regulatory burden relief legislation. We urge you to refrain from making them worse. 

In conclusion, ICBA appreciates this Committee’s commitment to 

moving legislation that would reduce the regulatory burden of community banks. I believe the tremendous weight of over-regulation 

is crushing the banking system and is rapidly driving the consolidation of our industry. Most regulations probably had a well 

thought out purpose when they were originated, but it has been 

said that no single raindrop feels it is responsible for the resulting 

flood. Community banks in particular are awash in regulatory burden and we need substantial relief before we are washed away with 

the flood waters of regulation. 

On behalf of my community bank and the nearly 5,000 members 

of the Independent Community Bankers of America that I represent today, I ask you to remember this as you consider legislation 

and regulatory relief for our industry. Thank you. 

Senator CRAPO. Thank you very much, Ms. Jorde. 

Now, we are going to have about 15 minutes or so because I have 

to run to something else and close this meeting, so we only have 

about 15 minutes for questions and answers, and again, I apologize 

for that, but I want to also say to this panel that the quality of the 

testimony, the written testimony that has been provided, is outstanding. The points that you all have made in your oral presentations are very well supplemented by it. We will utilize that very 

well. 

I just want to start going into some questions. You do not all 

have to feel obligated to answer every question, but if you have a 

point of view on the issue, please feel free to jump in. Because we 

are limited in time and have so many people, I would appreciate 

44

if you could be as succinct as possible so we can get as far as we 

can into the questions. 

The first one I have goes back to something that I brought up 

in the first panel. In that first panel, Federal Reserve Governor 

Kohn recommended that we have a rulemaking to determine the 

appropriate HMDA exemption threshold. I was just curious as to 

what members of this panel who have an interest in that issue feel 

about that suggestion. Does anybody want to jump in on that? 

Mr. PLUNKETT. I would like to. 

Senator CRAPO. Sure. Mr. Plunkett. 

Mr. PLUNKETT. Mr. Chairman, consumer and community groups 

have opposed expanding the exception and here is why. Merely 

going from approximately $34 million to $250 million may sound 

like an insignificant exception, but it would cover approximately 25 

percent of all depository institutions and 25 percent of institutions 

that file under HMDA currently. In some States, it would cover 

even more: Over 70 percent in Alabama, Iowa, Kentucky, Louisiana, and West Virginia. It would significant complicate ongoing 

regulatory oversight to ensure that fair and nondiscriminatory 

lending occurs under statutes like the Community Reinvestment 

Act, the Equal Opportunity Credit Act, and the Fair Housing Act. 

That is our concern. 

Senator CRAPO. All right. Thank you. 

Ms. Jorde. 

Ms. JORDE. Mr. Chairman, I know those numbers sound big, but when you consider moving the limit to $250 million, that would 

only cover 6.7 percent of the industry’s assets, and so it is really 

a very small percentage of the banking industry. My bank is not 

subject to HMDA because we are in a rural area. However, we are 

very much subject to Fair Lending exams and we go through a rigorous process every time we are examined for Fair Lending. So increasing the exemptions to HMDA will not necessarily take away 

concerns about Fair Lending. 

Mr. MIERZWINSKI. Mr. Chairman, we do not have a specific position on this issue, but I must admit I was struck by the Governor’s 

comment regarding the proposed rulemaking and the idea that perhaps there were other measures that one could look at. I guess just 

as an individual banker, I was struck by the idea that numbers do 

tell you a story, and perhaps subjecting institutions that are not 

making that many mortgage loans from some level of scrutiny 

would be appropriate. 

Senator CRAPO. Any others who want to weigh in on that issue? 

Another issue I want to get to very quickly is also one that I 

raised with the first panel and that is the question about currency 

transaction reports. It is one of the items on our proposal, or on our 

matrix, and the seasoned customer currency transaction report exemption proposal. I do not think I need to explain that. I think everybody here probably knows what I mean by that. But I would be 

interested in the positions of those on the panel on that issue. 

Mr. Rock. 

Mr. ROCK. Mr. Chairman, in response to the question that you 

asked Director Reich, you asked him, why don’t banks use the existing exemption process more. 

Senator CRAPO. Right. 

45

Mr. ROCK. Really, two reasons. First of all, it is more costly, time 

consuming, and difficult to get the exemption than it is to file the 

reports, and you heard that the reports themselves took, by a conservative estimate by FinCEN, 5.5 million staff hours of time during 2005. And it is more difficult to get the exemptions, so that is 

the first reason. More costly, more time consuming. 

The second reason is that banks that have sought exemptions 

have sometimes encountered field examiners who criticize them for 

seeking exemptions with the notion that those banks that seek exemptions are not willing to do their share in identifying money 

launderers and terrorists, and no banker really wants to have himself in that position of being criticized, because in fact, bankers 

want to do their fair share. They just want to spend their time and 

money and effort in the way that is most productive for identifying 

the real crooks. 

Senator CRAPO. Thank you very much. 

Mr. Bartlett. 

Mr. BARTLETT. Mr. Chairman, this is one of the major points we 

made in our testimony. Here is an area that just cries out for Senate action and for Congressional action because it is a real problem 

for law enforcement. It is a real problem for legitimate customers 

who are having their accounts closed because of the proliferation 

of both CTR’s and its companion SAR’s, and it is a problem that 

is created by the current statutory framework. 

So our proposal is to create an automatic seasoned customer exemption. If the bank designates it and they last a year and they 

are a seasoned customer, they should be treated like a seasoned 

customer. Without that, law enforcement continues to be hampered, customers will have their accounts closed, and the costs skyrocket. 

The number that we found on the whole CTR and SAR’s, by the way, is we believe it costs the industry a total of about $7 billion 

a year to comply with anti-money laundering, and that is money 

that is not adding to law enforcement. We think, in fact, it is hampering law enforcement. So make it automatic after a year and 

then you will start to see seasoned customer exemption used a lot 

more. 

Senator CRAPO. I think the Banking Committee is going to be 

hearing from law enforcement to get their point of view on this 

issue, but it does sound like there is potentially some room there 

for us to help make an improvement. 

Does anybody else want to take a stand on this? 

Mr. MCCLELLAN. We are on a much smaller scale as a credit 

union there, but I would echo and support what everybody else has 

said here. Just on a small scale, we spend a lot of time and effort 

sending reports back and forth, making sure we get them right before we actually submit those, and it is very time consuming and, 

as a result, very costly. 

Senator CRAPO. All right. Thank you very much. 

Another one I wanted to get into is the exam cycle issue, and I 

know Mr. Mierzwinski, Mr. Plunkett, and Ms. Saunders, I know 

that you and your organizations are opposed to increasing, if I understand it, increasing the small institution exemption. But others 

have testified, and I cannot remember if it was this hearing or not, 

46

but others have made the argument that that proposed exemption 

will not actually have an impact on safety and soundness. Are you 

aware of that counter-argument that has been made to your position, any of you? I just wanted you to discuss that issue with me. 

One of you might be more briefed in it. Mr. Plunkett, it looks like 

they are going to give you the ball there. 

Mr. PLUNKETT. Yes. Well, Senator, I mean, as you know, there 

are a number of proposals on the matrix. One would allow banking 

agencies to forego or delay banking examinations that are currently 

required for banks with less than $1 million in assets. The concern 

there is that this will significantly weaken the effectiveness of the 

Community Reinvestment Act for communities in need of loans and 

investment. 

Senator CRAPO. Now, that is the point I wanted to get at, and 

I cannot remember where I have seen this argument specifically, 

but my understanding is that the regulators contend that that proposal would not have an impact on the CRA. Others can jump in. 

Mr. ROCK. The proposal was only for safety and soundness 

exams. It would not change the cycle for compliance exams. It 

would not change the cycle on compliance exams in CRA, on compliance issues. It is only on the safety and soundness portion of the 

exam. 

Senator CRAPO. So the compliance exam schedule would remain 

the same? 

Mr. ROCK. Yes. 

Mr. PLUNKETT. Our concern would mainly be with an effect on 

the CRA compliance exams. 

Senator CRAPO. Okay. So then if we made that distinction and 

the change was only on the safety and soundness exams, then your 

concern would be alleviated? 

Mr. PLUNKETT. Yes, Mr. Chairman, if we are talking about the 

CSBS proposal, yes. 

Senator CRAPO. Okay. One other comment that I would like to 

make to everybody on the panel is we have mentioned a dozen 

times here today that we have got a matrix with 187 proposals, 

and there are other proposals out there that could work their way 

into it or that have already been pushed off the matrix. As I would 

describe it, there are some proposals that it is really clear everybody agrees with. They have been described as the low-hanging 

fruit. There are some which are extremely controversial, and there 

are some that we are not quite sure whether they are controversial 

or whether there is a general consensus about them or not because 

we have not been able to get everybody to weigh in on every aspect 

of the proposal, and I am including everybody. It has been like 

pulling teeth with the regulators and the regulated and the consumer interest groups and others just to find out what everybody’s 

position is on everything. 

And the point is that there may be, out of the 187 proposals, 

there may be a whole bunch that you are just not focused on, any 

particular group or industry. As we move forward, we are trying 

to identify that level of support or opposition that is there for different proposals, and like I say, on the main ones, we know. It is 

really clear. 

47

But I would just encourage you—and you do not have to do it in 

this hearing—I would encourage you to let us know, and by the 

way, your testimony, all of your testimony has done a good job of 

a lot of this, but just to let us know of the areas where you feel 

there is high concern about a particular proposal or strong support, 

because we are going to be going through and making the final determinations as to what is going to be included in the bill, and I 

am not saying that controversial items will be kicked out necessarily, because we will look at them and make a determination 

as to whether they should be included or not. But we need to know 

if there is controversy and we need to know what the controversy 

is. 

So, I would just encourage you all, to the extent you have not already done it in your very well-prepared testimony and in your 

other communications with our offices, to let us know, particularly 

if there is something that you would strongly oppose being in the 

bill, if you have not already let us know that. 

With that, like I said to the other panel, there are lots of questions and areas that I could go into, but we are down to about five 

or six minutes left. I think what I am going to do is what Senator 

Carper and I did toward the end of the last panel, and I may get 

myself in trouble here because I am going to have to shut us all 

off in about six minutes, but is there a point that any of you on 

a particular item have not been able to make yet that you really 

would like to be sure you get a chance to say? It is your chance 

to say something. 

Mr. Bartlett, very succinctly, please. 

Mr. BARTLETT. Mr. Chairman, I have one particular item that I 

have emphasized and that is the federally regulated—we have a 

problem with SAR’s, with almost—we believe there will be a million SAR’s filed this year, up from 76,000 less than 10 years ago—

a million—and that is a problem. It is a huge problem for the economy. 

We think that part of the solution is take the guidance that the 

regulatory agencies have already issued, they have issued guidance, and make it into statute. It is informal guidance that our 

members cannot rely on because of a well-founded fear of prosecution. So if it is made into statute, then we can rely on it. 

Now, as you do that, we will have some comments about ways 

to adjust the guidance and such, but I have to tell you that as long 

as it is guidance, they may as well not have it at all. 

Senator CRAPO. Point well taken. 

Mr. Plunkett. 

Mr. PLUNKETT. Senator, you asked earlier about SEC Regulation 

B and proposals to exempt banks there. 

Senator CRAPO. Yes. 

Mr. PLUNKETT. I would just like to talk about that briefly from 

the consumer point of view. It is one thing to exempt what I would 

call traditional banking products. They are fully insured. It is another thing to exempt those products and the sales practices used 

to sell those products, products such as jumbo CD’s that banks are 

offering that are increasingly looking like traditional securities 

products. 

48

The golden rule here should be that it should not matter which 

agency enforces. If the product has certain characteristics and 

those characteristics resemble a securities product more than a traditional banking product, then it should be regulated in the same 

manner, no matter who sells it. That means that the sales of the 

product, as the SEC contemplates in Regulation B, should be regulated in the same manner. Otherwise, we would provide an incentive to some banks to offer riskier products because they can get 

around regulation of similar products on the security side. 

Senator CRAPO. Thank you. Ms. Jorde, were you trying to get in 

here? 

Ms. JORDE. I have a general comment on the matrixes. When I 

first read through all of them, I do not think it was until I got to 

about 101 where I really found something that would make a difference in my life in my community bank at home. As you read 

through the 187 amendments in there, several of them are technical in nature, and I know that the OCC’s office put forward a 

number of those and other regulatory agencies and things that 

probably needed to be changed over the years because the world 

has changed since the last time we have taken a look at that. I 

know that I served on our State banking board for a number of 

years, and every other year when our legislature met, we would 

put forward some amendments that needed to be made, and I think 

a number of these things are just items that need to be changed. 

There are also a number of them that the credit union groups referred to them as regulatory reform, and then there are probably 

a couple dozen of them that I look at as true regulatory burden relief. I would encourage you, as you go through and look at these, 

that you focus on the items that will really bring regulatory relief 

to the banking industry and to the community banking industry in 

particular because they do carry disproportionate burdens for that. 

Really, matrixes 101 to 120 are really the ones that, in my bank, 

would make a difference and might be the difference on whether 

my bank survives in the future. 

Senator CRAPO. All right. That is very helpful to note. 

Ms. Saunders. 

Ms. SAUNDERS. Senator Crapo, I would ask that you first do no 

harm and remind you all that until the early 1980’s, the practice 

of lending was a highly regulated industry. It is now not very regulated. All we have to protect consumers are disclosures. I agree 

with what Julie Williams said of the OCC, that those disclosures 

are often not as clear as they could be and there are far too many 

consumers to actually be as helpful as they should be. Nevertheless, it is all the consumers have. We would, if we had our preference, would much prefer substantive regulation. But before you 

remove disclosures, please recognize that there must be something. 

Senator CRAPO. Well taken. 

Yes, Mr. McGee. 

Mr. MCGEE. Senator, I would just like again to thank you for 

your efforts and indicate to you, since you asked, that credit unions 

are not opposed to any of the relief measures that are in the matrix 

for any financial institutions, but I think that there are some reform issues there that we feel provide regulatory relief that would 

help us better serve our members. If there were one particular that 

49

we would have an interest in, it would probably be the prompt corrective action reporting that is mentioned in my testimony. 

Senator CRAPO. All right. Thank you. 

Mr. MEYER. Mr. Chairman. 

Senator CRAPO. Mr. Meyer. 

Mr. MEYER. I think if you asked everybody at this table, do they 

think community banks are important to the communities they 

serve, they would all agree that they are. I do not think we can 

continue with the world as it is today, so I want to underscore 

what I think is the importance of your efforts and the hearings. 

In my statistics which I presented, I noted that over the last 15 

years, the assets held by the 10 largest banks in this country have 

gone from 25 percent of assets to 53 percent. Part of the reason behind that is the regulatory burden that small community banks, 

which people have commented about today, can no longer keep up 

with it. Unless something is done, we are going to continue to 

watch that slow erosion, the slow loss of community banks, and I 

happen to strongly believe communities do need community banks. 

Senator CRAPO. All right. Thank you very much. I do not see 

anybody else jumping in, but—Mr. Bartlett. 

Mr. BARTLETT. Mr. Chairman, 30 seconds for a second one. I just 

want to remind the Committee that interstate branching is a big 

deal for the American consumer. I understand that in and of itself, 

it is not controversial. It is controversial only as it relates to other 

things. I believe that the Committee can resolve the other things, 

but interstate branching is a big deal. It is long overdue and it is 

simply nonsense that we would continue to have this prohibition 

against companies opening stores where their customers want to do 

business. 

Senator CRAPO. I appreciate that input, and I hope you are right, 

that we can resolve its relationship to other things, but I think we 

can, too. 

Let me again thank you all for your patience and your understanding, and most importantly, for your outstanding testimony, 

both what you have said here today as well as what you have provided in writing, and to encourage you to continue to feel very free 

to give us your input. I cannot tell you exactly when we will have 

a mark-up, but I believe it will be soon and the bill will be coming 

out shortly before that. We want to be able to move forward as expeditiously as possible and take advantage of the window of opportunity that we have here. So the time is now and you are all doing 

this well and I encourage you to keep doing it. Again, I appreciate 

your patience and long suffering today. 

This hearing is adjourned. 

[Whereupon, at 2:04 p.m., the hearing was adjourned.] 

[Prepared statements, response to written questions, and additional material supplied for the record follow:] 

50

PREPARED STATEMENT OF SENATOR MIKE CRAPO 

An effective regulatory system appropriately balances the costs and benefits of 

public laws and regulations. All of us want to protect consumers and ensure the system’s safety and soundness; however, excessive regulation increases the costs of producing financial products, stifles productivity and innovation, and misallocates resources. Responding to the steady stream of new regulations while complying with 

exiting ones has become a challenge for all financial institutions. Rule changes, particularly for smaller institutions with limited staff, can be costly, and these changes 

are inevitably passed on to consumers. It is also important for us to understand that 

the resources that are expended working to meet government compliance and paperwork requirements are time and effort that are not available to serve customers and 

communities. 

In Idaho, one of the specific issues that I have been told that results in high costs 

for community banks and credit unions with little benefit to consumers is the mailing of annual privacy notices when the institution does not share information with 

third parties or make changes to its privacy policies. One community banker in 

Idaho told me his community bank spends an estimated $15,000 per year mailing 

approximately 50,000 privacy notices. In 2004, his bank received one customer call 

in response to his bank’s privacy notice mailing and received no customer responses 

in 2005. Another community banker in Idaho said that customers do not read the 

annual privacy notices; most end up in the garbage. This is one of the most obvious 

provisions in need of reform. 

Compliance costs for the financial services industry cost billions of dollars each 

year. For smaller institutions, $1 out of every $4 in operating expenses goes to pay 

for the costs of government regulation. While much of this is necessary to assure 

the safety and soundness of our financial system, it is obvious that there are any 

unnecessary and outdated provisions that should be eliminated to reduce the costly 

burdens imposed on financial institutions. If this burden were reduced by even 10 

to 20 percent and those funds were made available billions additional lending that 

would have a direct and positive impact on economic growth and consumers. The 

bottom line is that too much time and money is spent on outdated and unnecessary 

compliance and paperwork, leaving less time and resources for actually providing 

financial services. The House Financial Services Committee recognized this problem 

and in December 2005, passed its own regulatory relief legislation by a vote of 67 

to 0. 

In 2004, the Banking Committee held a hearing on proposals regarding regulatory 

relief for banks, thrifts, and credit unions. The hearing covered all points of view 

and was made up of three panels of witnesses: Members of Congress, regulators, 

and trade associations and consumer groups. Office of Thrift Supervision Director 

John Reich, as the leader of the interagency Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) task force, was asked to review the testimony 

presented at the hearing and prepare a matrix which listed all the recommendations 

and positions presented to the Committee. The result brought forward 136 burden 

reduction proposals. By the second hearing held in June 2005, the list of proposals 

had grown to 187 items, many of which are in the House-passed bill, H.R. 3505. This 

was a huge undertaking and I appreciative the hard work and cooperation of so 

many involved, especially OTS Director Reich for his perseverance in leading this 

effort. 

To ensure transparency in the process, the matrix of 187 items was circulated 

among the regulators, trade associations, and consumer groups, and all the various 

viewpoints have been recorded. We have heard witness testimony in two previous 

hearings, and numerous meetings have also been held with all interested parties 

throughout this process. Witnesses have thoroughly detailed the ever-increasing 

number of requirements and outdated restrictions placed on our financial institutions. Each requirement, restriction, report, and examination imposed may individually have been justified when adopted, but as time passes and markets and consumer demand changes, the necessity for imposing some of these requirements and 

restrictions becomes outdated or subsides. I think that all of us want to try and turn 

this around, and I know that the witnesses that we are going to hear from today 

will help us identify where we can trim the regulatory fat without adversely impacting regulatory oversight. 

I look forward to working with my colleagues as we quickly proceed to a markup, 

and I would encourage them to identify which proposals they support or oppose. 

Some Members have expressed interest in proposals that have both defenders and 

detractors here today, which I intend to explore with our witnesses. 

51

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI 

Thank you, Mr. Chairman. I would also like to thank Senator Crapo for his hard 

work on this issue. Providing regulatory relief for our Nation’s financial institutions, 

and the agencies who regulate them, is an important but difficult task. There are 

many stakeholders and interests to balance. At last count, the list of proposals was 

reaching 200. I am sure by the end of this process we will have even more. I look 

forward to reviewing this comprehensive legislative package once it has been introduced. 

The reason our Committee is pursuing a regulatory relief proposal is to reduce 

the paperwork and administrative burden placed on our financial institutions. And 

we must also ensure that they are operating in a safe and sound manner, with their 

customers’ best interests in mind. However, these terms can have different meanings, depending on the bank, the customer, and the context. 

A standard disclosure process used by a large national bank is sometimes not appropriate for a small community bank, but they are forced into a one-size-fits-all approach. There are thousands of examples of this all over the country, including my 

home State of Wyoming. 

Wyoming, like many rural States, has a strong system of community banks and 

credit unions. These institutions are often an anchor to our towns. They are community centers where Wyoming residents can deposit checks, get a small business loan, 

or set up a savings account to save for a child’s college tuition. And usually, the 

person sitting across the desk is a friend or neighbor. In Wyoming, banking is done 

on a personal level, and that is a great way to do business. So when we examine 

the regulatory burden these banks manage, we need to look at it in a different context. 

A large amount of money and resources are spent by banks filing transaction reports and disclosures required by their regulator. This includes currency transaction 

reports, suspicious activity reports, call reports, and many others. Often they can 

assist in investigations and prosecutions that put dangerous felons, even terrorists, 

behind bars. 

However, some of these reports contain very little information, but are filed for 

the sake of compliance. Unnecessary reporting is a drain for law enforcement and 

financial institutions alike. Banks spend important resources filing these reports, 

and law enforcement agencies spend more time trying to sort the good information 

from the bad. This is a classic symptom of the one-size-fits-all approach. And it hits 

our small banks the hardest. Community banks often cite the time and cost of filing 

these reports as their largest regulatory expense. 

We need to take a more commonsense approach to these processes. We need an 

approach that allows discretion if the customer is a long-term account holder, or if 

this particular activity is an everyday transaction for a customer with special needs. 

This would allow agencies to spend more time focusing on catching the criminals. 

It would also give banks more time and money to dedicate to their customers. 

I have been working on another important issue for an industry familiar to me—

accounting. When this Committee considered the bill that became the GrammLeach-Bliley Act of 1999, we knew it would drastically change the way our financial 

industry operated. For example, Title V of the Act enumerated the obligation of financial institutions to protect their customers’ private information, something that 

had never been done on such a large scale before. 

But for those in the accounting industry, this was old news. Certified Public Accountants are bound by privacy laws older and stricter than Gramm-Leach-Bliley. 

However, with the passage of Gramm-Leach-Bliley, CPA’s were required to disclose 

privacy notices like everyone else. 

State-licensed CPA’s in all States are prohibited from disclosing personal information unless specifically allowed by the customer. Under Gramm-Leach-Bliley, institutions can share information unless prohibited by a customer. There is a significant 

difference here, and one that makes annual privacy disclosures for CPA’s unnecessary. 

I have been working closely with Congressman Mark Kennedy from Minnesota on 

an exemption of this annual disclosure for State-licensed CPA’s who follow stricter 

privacy laws. While the cost of this annual disclosure can be annoying for larger 

firms, it can be deadly for small firms or sole proprietors. An exemption could save 

these firms valuable resources. 

I look forward to working with my Banking Committee colleagues on this issue 

and other meaningful reforms for our Nation’s small financial institutions. 

Thank you Mr. Chairman. 

52

PREPARED STATEMENT OF SENATOR CHUCK HAGEL 

Mr. Chairman, I want to thank you for holding today’s hearing. I also want to 

thank Senator Crapo for his leadership in addressing regulatory reform. Since being 

elected to the Senate, I have advocated and introduced legislation to repeal the ban 

on banks paying interest on business checking accounts. While this prohibition applies to all banks and businesses, it targets and discriminates against small banks 

and small businesses. That is why I, along with Senators Snowe and Reed, introduced the Interest On Business Checking Act (S. 1586) last year. 

Big banks can currently circumvent the prohibition and offer alternative accounts, 

called sweep accounts. These sweep accounts allow big banks to effectively provide 

their customers with interest-bearing checking accounts. These types of accounts are 

generally too expensive for both small banks and small businesses. While I support 

business innovation, I do not believe it is fair when any business gains a competitive 

edge over another due to government interference through over-regulation. 

Passage of this bill will remove one of the last vestiges of an obsolete interest rate 

control system and provide America’s small business owners, farmers, and farm cooperatives with a funds management tool that is long overdue. It will ensure America’s entrepreneurs can compete effectively with larger businesses. My experience as 

a businessman has shown me that it is extremely important for anyone trying to 

maximize profits to be able to invest funds wisely for maximum efficiencies. 

Repealing this ban has passed the Senate Banking Committee in previous Congresses. Unfortunately, there has been some disagreement as to how to address this 

legislation with respect to Industrial Loan Companies or ILC’s. Mr. Chairman, the 

bill which I introduced last year, leaves the decision to be determined by the banking regulators. 

This is a straightforward bill that will do away with an unnecessary regulation 

that burdens American business. It is an important tool to strengthen the Nation’s 

engine of job growth—the small businesses that are important customers for small 

banks. I urge the Committee to include this proposal in its legislative efforts of regulatory relief. Thank you. 

—————

PREPARED STATEMENT OF SENATOR MEL MARTINEZ 

Good morning. Thank you, Chairman Shelby for holding this hearing. I also want 

to commend Senator Crapo and his staff for their excellent and thorough work 

throughout this regulatory relief legislative process. You have shown strong leadership and command of these issues and I know the Florida Bankers appreciate your 

efforts—as do I. 

I will keep my comments brief since we have fully vetted these issues several 

times before this Committee, but I want to express for the record how important 

the provisions related to the Bank Secrecy Act are to the bankers in my State. 

When the BSA was passed in 1970, terrorism was something very different than it 

is today. It is crucial to aggressively prevent and investigate terrorist financing and 

Congress’ intention to track terrorists’ money trails by requiring financial institutions to submit Currency Transactions Reports and Suspicious Activity Reports was 

well-intended. However, we may not be obtaining the information Congress originally sought through CTR’s—or with the frequency and duplicity that they are filed. 

We have heard from previous witnesses in this Committee that CTR’s can be a 

very useful tool to identify and locate criminals and terrorists, but that many of the 

CTR’s filed by financial institutions are of little relevance in investigating financial 

crime. Because of this and the fact that compliance with the BSA tends to be the 

most expensive regulatory burden on community banks, I believe changes are needed. 

Legislative changes including increasing the threshold for filing a CTR and adjusting it for inflation, allowing banks filing fewer than 50 CTR’s a month to file 

quarterly, and allowing banks to exempt ‘‘seasoned customers’’ would all make a tremendous difference in the daily operations of Florida bankers—and I believe would 

not take away from our constant effort to deter and intercept terrorist activities. 

From the time I hit the campaign trail to the meeting I had with Florida bankers 

last month, the examples of the burdens of the BSA are alarming. One example that 

stands out is from Eagle National Bank in Miami which has been around since 1957 

and currently holds around $300 million in assets. It files approximately 30 CTR’s 

each month, the majority of which are for its largest cash customer—the Salvation 

Army. Because the Salvation Army operates on a cash basis, Eagle National Bank 

provides the necessary banking services it needs to run its Miami locations. The Salvation Army has been one of Eagle National’s customers for years, but they still 

53

have to file a CTR each time it conducts $10,000 worth of banking transactions on 

any given day. 

There is no doubt that Florida bankers are doing their part to alert law enforcement and regulators of suspicious banking activity that occurs in their banks. If we 

can help them by relieving some of the excessive regulatory burdens that we are 

finding are not producing the results Congress was seeking, this is our opportunity 

and it is our responsibility to do so. Again, I want to thank Senator Crapo for his 

dedication to this effort and I look forward to hearing from our witnesses. 

—————

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

The Committee meets today on the ‘‘Consideration of Regulatory Reform Proposals.’’ We will be hearing from a number of witnesses including regulators, industry, and consumer groups on regulatory relief proposals for banks, thrifts, and credit 

unions. Over the past 2 years, we have received input from all the stakeholders and 

have compiled a matrix of suggestions for regulatory reform. 

The financial marketplace is ever evolving because of shifts in consumer demand 

and changes in technology. These changes occur quickly and can often lead a once 

useful regulation to become obsolete and overly burdensome. 

This Committee is always mindful of the tensions that sometimes exist between 

the desire to deliver an effective product, ensure safety and soundness, and protect 

the American consumer. Accordingly, this Committee has attempted to create a 

transparent and exhaustive process in order to ensure that these concerns are not 

overlooked. Indeed, a key part of this process was instituted in 1996 when Congress 

enacted the EGRPRA Act, which directed the agencies to work together to eliminate 

outdated, unnecessary, and unduly burdensome regulations. 

The purpose of this hearing is in furtherance of this process, but our focus lies 

in addressing any areas where legislative change is required. 

Before we begin, I would like particularly to thank Senator Crapo and his staff 

for their efforts and patience in creating a fair and transparent process to review 

these proposals. 

I would like to welcome all of our witnesses this morning, and I look forward to 

hearing from each of you. 

—————

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW 

Mr. Chairman, thank you for scheduling this hearing, it certainly is timely. In the 

last few months, I have heard from a number of organizations in my State about 

regulatory relief. The message is always the same—they need our help to ensure 

that their time and money is spent on what they do best, running their businesses. 

Just this morning, I spent some time with CPA’s in my State of Michigan. Their 

most pressing issue over the last few years has been the burdensome regulations 

that have hindered their ability to focus on their business. 

As an example, CPA’s have their own strict policies through State licensing and 

regulations. The State regulations for CPA’s are stronger and the penalties are more 

severe than what is required under the Federal GLB laws. Yet, they are required 

to abide by GLB regulations even though this does not add any more protection for 

consumers. In fact, the duplicative requirements weaken both regulations and penalties for CPA’s. It just does not make sense. 

It is these types of issues that we need to address. We need to make sure that 

the regulations do what they were intended to do—protect consumers, provide intelligence, and ensure the integrity of financial transactions. Ultimately, we need to 

make sure that regulations pass the common sense test. 

I believe we can accomplish this by working with the panelists today and their 

organizations in the future to adopt a regulatory structure that is sound and successful in protecting consumers and bringing relief to banks, credit unions, and all 

other financial institutions who have faced increasing costs of regulation. 

I look forward to hearing more about seasoned customers. Specifically, I am very 

interested in hearing about improvements to our disclosure requirements that allow 

for better intelligence and consumer protection as well as mitigate any unnecessary 

information that distorts our ability to analyze transactions. 

Thank you again for being here today and working with us to improve current 

regulations for all stakeholders.

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PREPARED STATEMENT OF GAVIN GEE

DIRECTOR OF FINANCE, IDAHO DEPARTMENT OF FINANCE

ON BEHALF OF THE

CONFERENCE OF STATE BANK SUPERVISORS

MARCH 1, 2006

Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members of the 

Committee. I am Gavin Gee, Director of Finance for the Idaho Department of Finance, and I am pleased to be here today on behalf of the Conference of State Bank 

Supervisors (CSBS). Thank you for inviting CSBS to be here today to discuss strategies for reducing unnecessary regulatory burden on our Nation’s financial institutions. 

CSBS is the professional association of State officials who charter, regulate, and 

supervise the Nation’s approximately 6,240 State-chartered commercial banks and 

savings institutions, and nearly 400 State-licensed foreign banking offices nationwide. 

As past Chairman of CSBS, I am pleased to represent my colleagues in all 50 

States and the U.S. territories. 

CSBS gives State bank supervisors a national forum to coordinate, communicate, 

advocate and educate on behalf of the State banking system. We especially appreciate this opportunity to discuss our views in our capacity as the chartering authorities and primary regulators of the vast majority of our Nation’s community banks. 

Chairman Shelby and Senator Crapo, we applaud your longstanding commitment 

to ensuring that regulation serves the public interest without imposing unnecessary 

or duplicative regulatory burdens on financial institutions. At the State level, we are 

constantly balancing the need for oversight and consumer protections with the need 

to encourage competition and entrepreneurship. We believe that a diverse, healthy 

financial services system serves the public best. 

CSBS and the State banking departments have been working closely with the 

Federal banking agencies, through the Federal Financial Institutions Examination 

Council, to implement the Economic Growth and Regulatory Paperwork Reduction 

Act of 1996. While this legislation made necessary and beneficial changes, we see 

continuing opportunities for Congress to streamline and rationalize regulatory burden, especially for community banks. 

Principles for Regulatory Burden Relief 

The Conference of State Bank Supervisors has developed a set of principles to 

guide a comprehensive approach to regulatory burden relief. We ask Congress to 

consider each proposal carefully against these principles. 

First, a bank’s most important tool against regulatory burden is its ability to 

make meaningful choices about its regulatory and operating structures. The State 

charter has been and continues to be the charter of choice for community-based institutions because the State-level supervisory environment—locally oriented, relevant, responsive, meaningful, and flexible—matches the way these banks do business. 

A bank’s ability to choose its charter encourages regulators to operate more efficiently, more effectively, and in a more measured fashion. A monolithic regulatory 

regime would have no incentive for efficiency. The emergence of a nationwide financial market made it necessary to create a Federal regulatory structure, but the 

State system remains as a balance to curb potentially excessive Federal regulatory 

measures, and as a means of promoting a wide diversity of financial institutions. 

Second, while our current regulatory structure and statutory framework recognize 

some differences between financial institutions, too often it demands a ‘‘one size fits 

all’’ approach. Overarching Federal requirements designed to cover all institutions 

are often unduly burdensome on smaller or community-based banks. 

Regulatory burden always falls hardest on smaller institutions. Although 48 of the 

Nation’s 100 largest banks hold State charters, State charters make up the vast majority of the 6,100 smaller institutions. We see this impact on earnings every day 

among the institutions we supervise. Community banks represent a shrinking percentage of the assets of our Nation’s banking system, and we cannot doubt that compliance costs are in part driving mergers. These mergers do not always serve the 

best interests of our citizens. Even where laws officially exempt small, privately 

held banks, as in the case of Sarbanes-Oxley, the principles behind these laws hold 

all institutions to increasingly more expensive compliance standards. 

Congress has an urgent responsibility to review the impact that these Federal 

statutes have had on our Nation’s economy. My colleagues and I see a financial 

service industry that is bifurcated, and becoming more so. We see the emergence 

108

of a line that divides our country’s banking industry into larger and smaller institutions. This process has wide-ranging implications for the economic health of our entire country. 

The Nation’s community banking industry is the fuel for the economic engine of 

small business in the United States. Although I speak as a State bank supervisor, 

I recognize that federally chartered community banks are equally important to 

small business. 

The Small Business Administration tells us that small business in the United 

States accounts for 99 percent of all employers, produces 13 times more patents per 

employee than large firms, generates 60 to 80 percent of new jobs, and employs 50 

percent of the private sector. Small businesses must be served, and community 

banks are the primary source of that service. They are often better-positioned to 

offer customized products that meet small businesses’ unique needs. 

Unnecessary regulatory burden shifts community banks’ financial and human resources away from these activities to activities whose benefits may not justify their 

costs. Reducing this burden will allow banks to focus on their core businesses, providing the services that fuel our economy. 

We suggest that Congress and the regulatory agencies seek creative ways to tailor 

regulatory requirements for institutions that focus not only on size, but also on a 

wider range of factors that affect consumer needs and business practices. These factors might include geographic location, structure, management performance, and 

lines of business. The largest banks are pushing, understandably, for a comprehensive, national set of rules for their evolving multistate operations. We ask you to 

remember, however, that new universal Federal requirements will also cover Statechartered banks operating in States that do not already have similar rules in place, 

because these States have made individual determinations that they are unnecessary regulatory burdens. 

Third, while technology continues to be an invaluable tool of regulatory burden 

relief, it is not a panacea. 

Technology has reduced regulatory burden in countless ways. State banking departments, like their Federal counterparts, now collect information from their financial institutions electronically as well as through on-site examinations. Most State 

banking departments now accept a wide range of forms on-line, and allow institutions to pay their supervisory fees on-line. Many State banking departments allow 

institutions online access to maintain their own structural information, such as addresses, branch locations, and key officer changes. 

At least 25 State banking agencies allow banks to file data and/or applications 

electronically, through secure areas of the agencies’ websites. Nearly all of the 

States have adopted or are in the process of accepting an interagency Federal application that allows would-be bankers to apply simultaneously for a State charter and 

for Federal deposit insurance. 

Shared technology allows the State and Federal banking agencies to work together to improve the examination process, while making the process less intrusive 

for financial institutions. Technology helps examiners target their examinations 

through better analysis, makes their time in financial institutions more effective, 

and expedites the creation of examination reports. 

The fact that technology makes it so much easier to gather information, however, 

should not keep us from asking whether we should be gathering all of this information. 

Our Bankers Advisory Board members have expressed particular concern about 

Bank Secrecy Act (BSA) requirements, Currency Transaction Reports and Suspicious Activity Reports. These collection requirements have become far more extensive in the past 3 years, representing the new importance of financial information 

to our national security. Financial institutions recognize that they are in a unique 

position to gather this type of financial data, and that this information can prove 

to be invaluable. However, as both State and Federal regulators and law enforcement officials become more sophisticated about the types of financial information 

that is useful, we hope that Congress can review requirements to assure that banks 

collect only essential information. In particular, we urge Congress, FinCEN and the 

Federal banking regulators to simplify the BSA reporting forms and look carefully 

at potential changes to threshold levels. 

Likewise, CSBS has worked diligently with FinCEN and the Federal banking 

agencies to develop clear, risk-based BSA examination procedures. We hope these 

procedures will alleviate some of the financial industry’s concerns in this area. 

Recommendations for Regulatory Burden Relief 

Specifically, my colleagues and I recommend that Congress include the following 

reforms in any regulatory burden relief legislation. 

109

Federal Financial Institutions Examination Council 

Improving coordination and communication among regulators is one of the most 

important regulatory burden relief initiatives. To that end, we recommend that Congress change the State position on the Federal Financial Institutions Examination 

Council (FFIEC) from one of observer to that of full voting member. 

The FFIEC’s State Liaison Committee includes State bank, credit union, and savings bank regulators. The chairman of this Committee participates in FFIEC meetings, but is not able to vote on policy or examination procedures that affect the institutions we charter and supervise. State bank supervisors are the primary regulators 

of approximately 74 percent of the Nation’s banks, and thus are vitally concerned 

with changes in Federal regulatory policy and procedures. (Matrix number 72) 

Regulatory Flexibility for the Federal Reserve 

CSBS also believes that the Federal Reserve should have the flexibility it needs 

to allow State-chartered member banks to exercise the powers granted by their 

charters, as long as these activities pose no significant risk to the deposit insurance 

fund. 

Current law limits the activities of State-chartered, Fed member banks to those 

activities allowed for national banks. This restriction stifles innovation within the 

industry, and eliminates a key dynamic of the dual banking system. We endorse an 

amendment to remove this unnecessary limitation on State member banks, which 

has no basis in promoting safety and soundness. 

A major benefit of our dual banking system has always been the ability of each 

State to authorize new products, services and activities for its State-chartered 

banks. Congress has consistently reaffirmed this authority; the Federal Deposit Insurance Corporation Improvement Act (FDICIA), in 1991, allowed States to continue 

to authorize powers beyond those of national banks. Removing unnecessary restrictions on State member banks would be a welcome relief. (Matrix number 70) 

Coordination of State Examination Authority 

CSBS and the State banking departments have developed comprehensive protocols to coordinate the supervision of State-chartered banks that operate branches in 

more than one State. Through the CSBS Nationwide State Federal Cooperative 

Agreements, in place since 1996, a bank’s chartering State (the home State) works 

closely with either the FDIC or Federal Reserve and bank commissioners in the 

States where the bank operates branches (the host State) to provide quality, riskfocused supervision. To bolster these efforts, we strongly recommend that the Senate 

include language that reinforces these principles and protocols in any regulatory 

burden relief bill. 

CSBS believes that Congress should codify the procedures for examining Statechartered institutions with branches in more than one State. The House included 

a provision to make this change in H.R. 1375, the regulatory burden relief bill it 

passed in the 108th Congress. 

This provision, as slightly modified, would recognize the primary authority of the 

chartering or home State, while requiring all home and host State bank supervisors 

to abide by any written cooperative agreement relating to coordination of exams and 

joint participation in exams. 

The language adopted by the House also provides that, unless otherwise permitted by a cooperative agreement, only the home State supervisor may charge 

State supervisory fees on multistate banks. 

The host State supervisor could still examine the branch for compliance with host 

State consumer protection laws, with written notification to the home State supervisor. If the cooperative agreement allows it or if the bank is troubled, the host 

State supervisor could also participate in the home State’s examination of the outof-State bank, to ascertain that the bank is conducting its branch activities in a safe 

and sound manner. 

If the host State supervisor determines that a branch is violating host State consumer protection laws, the supervisor may undertake enforcement actions, with 

written notice to the home State supervisor. This provision would not limit the authority of Federal banking regulators in anyway, nor would it affect State taxation 

authority. (Matrix number 60) 

Limited Liability Corporations 

States have been the traditional source of innovations and new structures within 

our banking system, and CSBS promotes initiatives that offer new opportunities for 

banks and their customers without jeopardizing safety and soundness. 

In this tradition, CSBS strongly supports an FDIC proposal to make Federal deposit insurance available to State-chartered banks that organize as limited liability 

110

corporations (LLC’s). An LLC is a business entity that combines the limited liability 

of a corporation with the pass-through tax treatment of a partnership. 

The FDIC has determined that State banks organized as LLC’s are eligible for 

Federal deposit insurance if they meet established criteria designed to insure safety 

and soundness and limit risk to the deposit insurance fund. 

Only a handful of States now allow banks to organize as LLC’s, including Maine, 

Nevada, Texas, Vermont, and, most recently, Utah. More States may consider this 

option, however, because the structure offers the same tax advantages as Subchapter S corporations but with greater flexibility. Unlike Subchapter S corporations, LLC’s are not subject to limits on the number and type of shareholders. 

It is not clear, however, that Federal law allows pass-through taxation status for 

State banks organized as LLC’s. An Internal Revenue Service regulation currently 

blocks pass-through tax treatment for State-chartered banks. We ask the Committee 

to encourage the IRS to reconsider its interpretation of the tax treatment of Statechartered LLC’s. (Matrix number 71) 

De Novo Interstate Branching 

CSBS seeks changes to Federal law that would allow all banks to cross State lines 

by opening new branches. While the Riegle-Neal Interstate Banking and Branching 

Efficiency Act of 1994 intended to leave this decision in the hands of the States, inconsistencies in Federal law have created a patchwork of contradictory rules about 

how financial institutions can branch across State lines. 

These contradictions affect State-chartered banks disproportionately. Federally 

chartered savings institutions are not subject to de novo interstate branching restrictions. Creative interpretations from the Comptroller of the Currency have exempted most national banks, as well. 

Therefore, we ask Congress to restore competitive equity by allowing de novo

interstate branching for all federally insured depository institutions. (Matrix number 26) 

Additionally, the Conference of State Bank Supervisors endorses approaches, such 

as the Communities First Act (S. 1568, introduced by Senator Brownback of Kansas 

and cosponsored by Senator Hagel of Nebraska), that recognize and encourage the 

benefits of diversity within our banking system. CSBS supports the great majority 

of regulatory burden reductions proposed in the Communities First Act, believing 

that they will alleviate the burden on community banks without sacrificing either 

safety and soundness or community responsiveness and responsibility. Our dual 

banking system exists because one size is not appropriate for every customer, and 

one system is not appropriate for every institution. We ask that Congress include 

some type of targeted relief for community banks in any regulatory relief legislation. 

The Communities First Act (CFA) includes several of the changes CSBS recommends to help reduce regulatory burden without undue risk to safety and soundness. My colleagues and I have developed these recommendations through extensive 

discussions among ourselves and with State-chartered banks, and we ask that the 

Committee include these provisions in any legislation it approves. 

Extended Examination Cycles for Well-Managed Banks under $1 Billion 

We believe that advances in off-site monitoring techniques and technology, combined with the health of the banking industry, make annual on-site examinations 

unnecessary for the vast majority of healthy financial institutions. Section 107 of 

the CFA would extend the mandatory Federal examination cycle from 12 months 

to 18 months for healthy, well-managed banks with assets of up to $1 billion, and 

CSBS endorses this change. 

Raising the threshold for eligibility for the 18-month examination cycle from $250 

million in assets to $1 billion in assets will allow for more effective allocation of examiner resources, as well as relieving unnecessary burden on well-managed institutions. 

Changing the safety-and-soundness examination cycle for these banks would have 

no effect on the cycles for Community Reinvestment Act (CRA) and compliance examinations, which are scheduled separately. (Matrix number 169) 

Privacy Notices 

We recommend that, in certain circumstances, banks be exempted from the provisions of the Gramm-Leach-Bliley Act (GLBA) that require annual privacy notices be 

sent to all customers. Section 203 of the CFA would create this exemption for banks 

that do not share customer information except as permitted by GLBA exceptions, 

do not share information with affiliates under the Fair Credit Reporting Act, and 

have not changed their privacy policy since they last mailed privacy notices to their 

customers. (Matrix number 63) 

111

Call Reports 

We support CFA’s provisions, in Sections 102 and 204, to allow well-capitalized and well-rated banks with assets of $1 billion or less to file a short form Call Report 

every other quarter. This would reduce the reporting obligations of smaller institutions while still providing the banking agencies with the information we need. In 

conjunction with this, we believe that streamlining the information currently by 

Call Reports would reduce burden without endangering safety and soundness. Much 

of the perceived burden associated with Call Reports is the ever-increasing demand 

for more information, not all of which seems essential for regulators to do their jobs. 

More broadly, we believe that banks would benefit from the type of sunset provisions on Federal legislations that many States include in their own banking statutes. Although regulators constantly review regulations for their continued relevance and usefulness, many regulations and supervisory procedures still endure 

past the time that anyone remembers their original purpose. (Matrix number 109) 

Sunset provisions require legislators and regulators to review their laws at regular intervals to determine whether they are still necessary or meaningful. The passage of the Fair Credit Reporting Act amendments showed how valuable this review 

process can be. 

Understanding that we cannot impose a sunset date on the entire Federal banking code, we urge Congress to apply this approach to as wide a range of banking 

statutes as possible. 

Challenges to Regulatory Burden Relief 

The current trend toward greater, more sweeping Federal preemption of State 

banking laws threatens all of the regulatory burden relief issues described above. 

Federal preemption can be appropriate, even necessary, when genuinely required 

for consumer protection and competitive opportunity. The extension of the Fair 

Credit Reporting Act amendments met this high standard. 

We appreciate that the largest financial services providers, creating a nationwide 

financial marketplace, want more coordinated regulation. We share these goals, but 

not at the expense of distorting our marketplace, denying our citizens the protection 

of State law and the opportunity to seek redress close to home, or eliminating the 

diversity that makes our financial system great. 

The Comptroller’s regulations may reduce burden for our largest, federally chartered institutions and their minority-owned operating subsidiaries, but they do so 

at the cost of laying a disproportionate burden on State-chartered institutions and 

even on smaller national banks. 

We ask the Committee and Congress to review the disparity in the application 

of State laws to State and nationally chartered banks and their subsidiaries. Because expansive interpretations of Federal law created this issue, a Federal solution 

is necessary in order to preserve the viability of the State banking system. 

Conclusion 

Mr. Chairman, Members of the Committee, the regulatory environment for our 

Nation’s banks has improved significantly over the past 10 years, in large part because of your diligence. 

As you consider additional measures to reduce burden on our financial institutions, we urge you to remember that the strength of our banking system is its diversity. The American banking system has a sufficient number of financial institutions, 

of different sizes and with different specialties, to meet the needs of the world’s 

most diverse economy and society. While some Federal intervention may be necessary to reduce burden, relief measures should allow for further innovation and coordination at both the State and Federal levels, and among community-based institutions as well as among the largest providers. 

Diversity in our financial system is not inevitable. Community banking is not inevitable. This diversity is the product of a consciously developed State-Federal system. Any initiative to relieve regulatory burden must recognize this system’s value. 

Vibrant, diverse local economies require a responsive and innovative State banking 

system that encourages community banking. 

History shows that State bank examiners are often the first to identify and address economic problems, including cases of consumer abuse. We are the first responders to almost any problem in the financial system, from downturns in local industry or real estate markets to the emergence of scams that prey on senior citizens 

and other consumers. We can and do respond to these problems much more quickly 

than the Federal Government, often bringing these issues to the attention of our 

Federal counterparts and acting in concert with them. 

State supervisors are sensitive to regulatory burden, and constantly look for ways 

to simplify and streamline compliance. We believe in, and strive for, smart, focused, 

112

and reasonable regulation. Your own efforts in this area, Chairman Shelby, have 

greatly reduced unnecessary regulatory burden on financial institutions regardless 

of their charter. 

The industry’s continued high earnings levels suggest that whatever regulatory 

burdens remain, they are not interfering with larger institutions’ ability to do business profitably. The growing gap between large and small institutions, however, 

suggests a trend that is not healthy for the industry or for the economy. 

The ongoing effort to streamline our regulatory process while preserving the safety and soundness of our Nation’s financial system is critical to our economic wellbeing, as well as to the health of our financial institutions. State bank supervisors 

continue to work with each other, with our legislators and with our Federal counterparts to balance the public benefits of regulatory actions against their direct and 

indirect costs. 

We commend you, Mr. Chairman, Senator Crapo, and the Members of this Committee for your efforts in this area. We thank you for this opportunity to testify, and 

look forward to any questions that you and the Members of the Committee might 

have. 

—————

PREPARED STATEMENT OF DONALD L. KOHN

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

MARCH 1, 2006

Chairman Shelby, Senator Sarbanes, and Members of the Committee, thank you 

for the opportunity to discuss the Federal Reserve’s views on regulatory relief. The 

Board commends the Committee for its continued focus and work on this important 

issue. In particular, I would like to recognize and thank Senator Crapo and his staff 

for their ongoing efforts to coordinate the many regulatory relief proposals that have 

been advanced to date by the Federal banking agencies, financial trade associations, 

and others. 

The regulatory requirements imposed on our Nation’s banking organizations have 

grown over time. Often the impact of these requirements falls hardest on our Nation’s community banks, which have fewer resources than larger organizations to 

meet the challenges posed by new or additional regulations. Although the individual 

requirements and restrictions imposed by Federal law may well have been justified 

at the time of adoption, changes in the marketplace, technology, and, indeed, in the 

Federal banking laws themselves may well have altered the balance of the cost-benefit analysis that should underlie each requirement and restriction. Unnecessary 

regulatory burdens hinder the ability of large and small banking organizations to 

meet the needs of their customers, operate profitably, innovate, and compete with 

other financial services providers. That is why the Board periodically reviews its 

own regulations and why it is so important for Congress to periodically review the 

Federal banking laws to determine whether there are any provisions that may be 

streamlined or eliminated without compromising the safety and soundness of banking organizations, consumer protections, or other important objectives that Congress 

has established for the financial system. 

The Board, working with the other banking agencies, has been, and will continue 

to be, a strong and active supporter of Congress’ regulatory relief efforts. In 2003, 

the Board provided this Committee with a number of legislative proposals for inclusion in a regulatory relief bill. Since then, in response to requests from Senator 

Crapo, the Board has reviewed numerous other regulatory relief proposals included 

in the Matrix of Financial Services Regulatory Relief Proposals (Matrix) compiled 

by Senator Crapo’s staff that may affect the Federal Reserve or the organizations 

we supervise. As a result of that process, I am pleased to report that the Board now 

supports more than 35 legislative proposals. These proposals would meaningfully reduce regulatory burden, improve the supervision of banking organizations, or otherwise enhance the Federal banking laws without compromising the fundamental 

goals of bank regulation and supervision. A complete listing and summary of the 

proposals supported by the Board is included in the appendix to my testimony. We 

believe these proposals provide an excellent starting point for any regulatory relief 

legislation, and we look forward to working with the Committee as you develop and 

perfect such legislation. 

In my remarks, I will highlight the three items that are the Board’s highest regulatory relief priorities. These proposals would allow the Federal Reserve to pay interest on balances held by depository institutions at Reserve Banks, provide the 

Board greater flexibility in setting reserve requirements, and permit depository inVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00120 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
113

stitutions to pay interest on demand deposits. These proposals may well sound familiar to you and they should. The Board has supported these amendments for 

many years because we believe each of them would improve the operation of our 

financial system. I should note that these three amendments form the core of 

S. 1586, the Interest on Business Checking Act of 2005, which was introduced last 

year by Senators Hagel, Reed and Snowe. The Board strongly supports passage of 

S. 1586, either independently or as part of a broader regulatory relief bill. 

In addition to these priority items, I will highlight a few other legislative proposals that we believe would provide meaningful regulatory relief to banking organizations as well as some steps that the Board has taken on its own to reduce regulatory burden. Finally, I will discuss several matters related to industrial loan companies (ILC’s). This topic has been raised by some regulatory relief proposals, but 

it has much broader policy implications for the structure and supervision of the 

banking industry. 

Interest on Reserves and Reserve Requirement Flexibility

(Matrix Nos. 1 and 2) 

The first two of the Board’s priority items relate to reserve requirements, which 

exist to assist the Federal Reserve conduct monetary policy. Federal law currently 

obliges the Board to establish reserve requirements on certain deposits held at depository institutions and mandates that the Board set the ratio of required reserves 

on transaction deposits above a certain threshold at between 8 and 14 percent. Because the Federal Reserve does not pay interest on the balances held at Reserve 

Banks to meet reserve requirements, depositories have an incentive to reduce their 

required reserve balances to a minimum. To do so, they engage in a variety of reserve avoidance activities, including sweep arrangements that move funds from deposits that are subject to reserve requirements to deposits and money market investments that are not. These sweep programs and similar activities absorb real resources and therefore diminish the efficiency of our banking system. 

Besides required reserve balances, depository institutions also voluntarily hold 

two other types of balances in their Reserve Bank accounts—contractual clearing 

balances and excess reserve balances. A depository institution holds contractual 

clearing balances when it needs a higher level of balances than its required reserve 

balances in order to pay checks or make wire transfers out of its account at the Federal Reserve without incurring overnight overdrafts. Currently, such clearing balances do not earn explicit interest, but they do earn implicit interest in the form 

of credits that may be used to pay for Federal Reserve services, such as check clearing. Excess reserve balances are funds held by depository institutions in their accounts at Reserve Banks in excess of their required reserve and contractual clearing 

balances. Excess reserve balances currently do not earn explicit or implicit interest. 

The Board has long supported legislation that would authorize the Federal Reserve to pay depository institutions interest on the balances they hold at Reserve 

Banks. As we previously have testified, paying interest on required reserve balances 

would remove a substantial portion of the incentive for depositories to engage in reserve avoidance measures, and the resulting improvements in efficiency should 

eventually be passed through to bank borrowers and depositors. Having the authority also to pay interest on contractual clearing and excess reserve balances as well 

as required reserves would enhance the Federal Reserve’s ability to efficiently conduct monetary policy. In addition, it would complement another of the Board’s proposed amendments, which would give the Board greater flexibility in setting reserve 

requirements for depository institutions. 

In order for the Federal Open Market Committee (FOMC) to conduct monetary 

policy effectively, it is important that a sufficient and predictable demand for balances at the Reserve Banks exist so that the Federal Reserve knows the volume of 

reserves to supply (or remove) through open market operations to achieve the 

FOMC’s target Federal funds rate. Authorizing the Federal Reserve to pay explicit 

interest on contractual clearing balances could potentially provide a demand for voluntary balances that would be stable enough for monetary policy to be implemented 

effectively through existing procedures without the need for required reserve balances. In these circumstances, the Board, if authorized, could consider reducing—

or even eliminating—reserve requirements, thereby reducing a regulatory burden 

for all depository institutions, without adversely affecting the Federal Reserve’s ability to conduct monetary policy. 

Having the authority to pay interest on excess reserves also could help mitigate 

potential volatility in overnight interest rates. If the Federal Reserve was authorized to pay interest on excess reserves, and did so, the rate paid would act as a minimum for overnight interest rates, because banks generally would not lend to other 

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serve Bank. Although the Board sees no need to pay interest on excess reserves in 

the near future, the ability to do so would be a potentially useful addition to the 

monetary policy toolkit of the Federal Reserve. 

Interest on Demand Deposits (Matrix No. 3) 

Another priority item for the Board would repeal the statutory restrictions that 

currently prohibit depository institutions from paying interest on demand deposits. 

Repealing these restrictions would improve the overall efficiency of our financial sector, assist small banks in attracting and retaining business deposits, and allow 

small businesses to earn direct interest on their checking account balances. As a 

practical matter, these restrictions currently do not impede the payment of interest 

on consumer deposits because depository institutions generally are permitted to 

offer individuals interest-bearing negotiable order of withdrawal (NOW) accounts, 

which are checkable transaction accounts similar to demand deposits. 

To compete for the liquid assets of businesses, however, banks have been compelled to set up complicated procedures to pay implicit interest on compensating balance accounts and they spend resources—and charge fees—for sweeping the excess 

demand deposits of businesses into money market investments on a nightly basis. 

Small banks often do not have the resources to develop the sweep or other programs 

that are needed to compete for the deposits of business customers. Moreover, from 

the standpoint of the overall economy, the expenses incurred by institutions of all 

sizes to implement these programs are a waste of resources and would be unnecessary if institutions were permitted to pay interest on demand deposits directly. The 

costs incurred by banks in operating these programs are passed on to their large 

and small business customers and many small businesses do not benefit from these 

programs. 

For these reasons, the Board’s proposed amendment would allow all depository institutions that have the legal authority to offer demand deposits to pay interest on 

those deposits. The amendment would eliminate the need for banks to operate, and 

business customers to pay for, sweep and compensating balance arrangements to 

pay or earn interest on demand deposits. As I will explain a little later, however, 

the Board opposes amendments that would separately authorize ILC’s that operate 

outside the supervisory and regulatory framework established for other insured 

banks to offer, for the first time, transaction accounts to business customers. 

The Board believes that, once enacted, the authorization for depository institutions to pay interest on demand deposits should become effective promptly. S. 1586 

would achieve this goal by requiring that the authority to pay interest on demand 

deposits become effective no later than 90 days after enactment. The Board, however, does not advocate the provisions of S. 1586 or other bills that would allow 

banks to offer a reservable money market deposit account (MMDA) from which 

twenty-four transfers a month could be made to other accounts of the same depositor. These provisions would permit banks to sweep balances from demand deposits 

into MMDA’s each night, pay interest on them, and then sweep them back into demand deposits the next day. This type of twenty-four-transfer MMDA likely would 

be useful only during the transition period before direct interest payments were allowed. Moreover, as the Board has explained in previous testimonies, this type of 

account would represent an inefficient, more costly and less readily available alternative to interest-bearing demand deposits. 

De Novo Interstate Branching 

The Board also strongly supports an amendment that would remove outdated barriers to de novo interstate branching by banks. Since enactment of the Riegle-Neal 

Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act), all fifty 

States have permitted banks to expand on an interstate basis through the acquisition of an existing bank in their State. Interstate banking is good for consumers and 

the economy as well as banks. The creation of new branches helps maintain the 

competitiveness and dynamism of the American banking industry and improve access to banking services in otherwise underserved markets. It results in better 

banking services for households and small businesses, lower interest rates on loans, 

and higher interest rates on deposits. Interstate branching also increases convenience for customers who live, work, and operate across State borders. 

However, the Riegle-Neal Act permitted banks to open a branch in a new State 

without acquiring another bank only if the host State enacted legislation that expressly permits entry by de novo branching (an opt-in requirement). To date, twenty-two States and the District of Columbia have enacted some form of opt-in legislation, while twenty-eight States continue to require interstate entry through the acquisition of an existing bank. 

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This limitation on de novo branching is an obstacle to interstate entry for all 

banks and also creates special problems for small banks seeking to operate across 

State lines. Moreover, it creates an unlevel playing field between banks and Federal 

savings associations, which have long been allowed to establish de novo branches 

on an interstate basis. 

The Board’s proposed amendment would remove this last obstacle to full interstate branching for banks and level the playing field between banks and thrifts by 

allowing banks to establish interstate branches on a de novo basis. The amendment 

also would remove the parallel provision that allows States to impose a minimum 

requirement on the age of banks that are acquired by an out-of-State banking organization. While the Board supports expanding the de novo branching authority of 

banks, the Board continues to believe that Congress should not grant this new 

branching authority to ILC’s unless the corporate owners of these institutions are 

subject to the same type of consolidated supervision and activities restrictions as the 

corporate owners of other full-service insured banks. 

Small Bank Examination Flexibility (Matrix No. 68) 

The Board also supports expanding the number of small institutions that may 

qualify for an extended examination cycle. Federal law currently requires that the 

appropriate Federal banking agency conduct an on-site examination of each insured 

depository institution at least once every 12 months. The statute, however, permits 

institutions that have less than $250 million in assets and that meet certain capital, 

managerial, and other criteria to be examined on an 18-month cycle. As the primary 

Federal supervisors for State-chartered banks, the Board and Federal Deposit Insurance Corporation (FDIC) may alternate responsibility for conducting these examinations with the appropriate State supervisory authority if the Board or FDIC determines that the State examination carries out the purposes of the statute. 

The $250 million asset cutoff for an 18-month examination cycle has not been 

raised since 1994. The Board’s proposed amendment would raise this asset cap from 

$250 million to $500 million. Importantly, this change would not exempt any insured depository institution from routine safety and soundness examinations, and 

would not lengthen the examination cycle for institutions experiencing financial or 

managerial difficulties. This change is unanimously supported by the Federal banking agencies and potentially would allow approximately an additional 1,200 insured 

depository institutions to qualify for an 18-month examination cycle. The Board believes this change would provide meaningful relief to small, financially strong institutions without compromising safety and soundness. 

The Board’s supervisory experience, however, indicates that institutions with assets approaching $1 billion tend to have more complex risk profiles and are more 

likely to operate business lines on a regional or national basis than institutions with 

assets of less than $500 million. For these reasons, the Board is not comfortable 

raising the asset threshold for an 18-month examination cycle to $1 billion, as items 

No. 112 and No. 169 in the Matrix would do. The Board also does not support proposals, such as item No. 42 in the Matrix, that would allow a Federal banking agency to extend the examination cycle for a potentially indefinite period of time for institutions of any size. Despite advances in off-site monitoring, the Board continues 

to believe that regular on-site examinations play a critical role in helping bank supervisors detect and correct asset, risk-management, or internal control problems at 

an institution before these problems result in claims on the deposit insurance funds. 

If an agency is experiencing shortages in its examination resources, we believe it 

would be better to address these constraints through the supplementation of the 

agency’s resources, rather than by extending the mandated frequency of safety and 

soundness examinations. 

Other Board Legislative Proposals and Actions to Reduce Regulatory

Burden 

In addition to these proposals, the Board supports a variety of other regulatory 

relief amendments included in the Matrix. These amendments, which are discussed 

more fully in the Appendix, would among other things:

• Restore the Board’s ability to determine that nonbanking activities are ‘‘closely related to banking’’ for purposes of Section 4(c)(8) of the Bank Holding Company Act 

(BHC Act) and, thus, permissible for all bank holding companies to conduct directly or through a nonbank subsidiary (Matrix No. 137(a)); 

• Streamline the process for insured banks to acquire savings associations and trust 

companies in interstate merger transactions (Matrix No. 138); 

• Modify the cross-marketing restrictions that apply to the merchant banking and 

insurance company investments of financial holding companies (Matrix No. 139); 

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• Eliminate certain reporting requirements imposed on banks and their executive 

officers and principal shareholders that do not contribute significantly to the monitoring of insider lending or the safety and soundness of insured depository institutions (Matrix No. 4); 

• Streamline the interagency consultation process for transactions under the Bank 

Merger Act (Matrix No. 5); 

• Shorten the post-approval waiting period for bank acquisitions and mergers where 

the Attorney General and the relevant Federal banking agency agree the transaction will not have a significant adverse effect on competition (Matrix No. 6); 

• Simplify the restrictions governing dividend payments by national and State 

member banks in a way that would not adversely affect the safety and soundness 

of member banks (Matrix No. 31); and 

• Facilitate the flow of information during the supervisory process by clarifying that 

depository institutions and others do not waive any privilege they may have with 

respect to information when they provide the information to a Federal, State, or 

foreign banking authority as part of the supervisory process (Matrix No. 100).

In our discussions with banking organizations about regulatory relief, one topic 

that frequently comes up is the Bank Secrecy Act (BSA). We recognize that provisions of the BSA require considerable effort by the banking industry to obtain, document and provide information to law enforcement. To further promote the uniform 

application of BSA and anti-money laundering (AML) requirements, the Federal 

banking agencies, working with the Financial Crimes Enforcement Network of the 

Treasury Department, recently issued a joint BSA/AML Examination Manual that 

is designed to promote the effective and consistent examination of BSA/AML compliance. The Board will continue to work with our fellow banking agencies and 

FinCEN to address key issues related to BSA/anti-money laundering compliance. 

With respect to currency transaction reports (CTR’s), we support the efforts of the 

Treasury Department and others to develop ways of reducing the burdens imposed 

on banks in a manner that would not adversely affect the ability of banks to manage their risk or unintentionally impede the investigative tools available to law enforcement. 

Before moving on, I would like to mention some recent changes that the Board 

itself has made to its Small Bank Holding Company Policy Statement (Policy Statement) and capital guidelines that we believe should provide significant relief to community banking organizations. The Board adopted the Policy Statement in 1980 to 

help facilitate the transfer of ownership of small, community-based banks. Currently, the Policy Statement applies to bank holding companies that have consolidated assets of less than $150 million and that meet certain qualitative criteria. 

These qualitative criteria are designed to ensure that a small bank holding company 

does not qualify for the Policy Statement if it engages in significant activities outside its supervised bank subsidiaries. Small bank holding companies that qualify 

for, and operate under, the Policy Statement also are subject to several additional 

restrictions and conditions that are designed to ensure that they do not present an 

undue risk to the safety and soundness of their subsidiary banks. 

Last week, the Board approved an amendment that increases to $500 million the 

asset size threshold for determining whether a bank holding company may qualify 

for the Policy Statement and the related exemption from the Board’s capital guidelines for bank holding companies. The Board also has proposed to make conforming 

revisions to its regulatory reporting framework, which should further lower reporting and compliance costs for small bank holding companies. The Board believes 

these actions properly balance the goals of facilitating the transfer of ownership of 

small banks, on the one hand, and ensuring capital adequacy and access to necessary supervisory information on the other hand. The Board, however, does not 

support amendments, like item No. 116 in the Matrix, that potentially would require the Board to raise the asset size threshold in the Policy Statement to $1 billion. 

Industrial Loan Companies 

As I noted earlier, the Board strongly supports amendments that would allow depository institutions to pay interest on demand deposits and allow banks to open 

de novo branches on an interstate basis. The Board, however, believes that, because 

the corporate owners of ILC’s operate outside the prudential and legislative framework applicable to the corporate owners of other types of insured banks, ILC’s 

should not be authorized to offer transaction accounts to business customers or 

branch de novo across State lines. Our position on these matters is long-standing 

and based on the broad policy issues presented by the special exemption in current 

law for ILC’s chartered in certain States. 

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ILC’s are banks; specifically, they are State-chartered FDIC-insured banks. However, due to a special exemption in the Federal BHC Act, any type of company, including a commercial or retail firm, may acquire an ILC in a handful of States—

principally Utah, California, and Nevada—and avoid the activity restrictions and 

consolidated supervisory requirements that apply to bank holding companies. 

ILC’s were first established early in the 20th century to make small loans to industrial workers. When the special exemption for ILC’s initially was granted in 

1987, ILC’s were still mostly small, local institutions that had only limited deposittaking and lending powers. For example, in 1987, most ILC’s had less than $50 million in assets and the largest ILC had assets of less than $400 million. Moreover, 

in 1987, the relevant States were not actively chartering new ILC’s. Utah, for example, had a moratorium on the chartering of new ILC’s at the time the exemption 

was enacted. 

However, as the Government Accountability Office (GAO) recently documented, 

the ILC exemption has been actively exploited in recent years, resulting in a significant change in the character, powers, and ownership of ILC’s. For example, one ILC 

operating under the exception now has more than $60 billion in assets and more 

than $52 billion in deposits, and an additional nine exempt ILC’s each have more 

than $1 billion in deposits. The aggregate amount of estimated insured deposits held 

by all ILC’s has grown by more than 500 percent since 1999, and the total assets 

of all ILC’s has grown from $3.8 billion in 1987 to $140 billion in 2004. Several 

large, internationally active commercial companies now own ILC’s under this exception and use these banks to support various aspects of their global commercial operations. 

While only a handful of States have the ability to charter exempt ILC’s, there is 

no limit on the number of exempt ILC’s these grandfathered States may charter in 

the future. In addition, due to the limited restrictions that apply under Federal law 

to the ILC’s operating under this exemption, an exempt ILC legally may engage in 

the full range of commercial, mortgage, credit card, and consumer lending activities; 

offer payment-related services, including Fedwire, automated clearing house (ACH) 

and check clearing services, to affiliated and unaffiliated persons; and accept time 

and savings deposits, including certificates of deposit (CD’s), from any type of customer. 

Why does this growth and potential further expansion of ILC’s matter? Simply 

stated, it has the potential to undermine several important policies that Congress 

has established for the banking system. Let me explain. 

Congress has established a prudential framework for banking organizations in the 

United States that is based both on the supervision of insured banks and the supervision of their corporate owners on a group-wide or consolidated basis. Consolidated 

supervision refers to the legal framework that provides a supervisor the tools it 

needs—such as reporting, examination, capital and enforcement authority—to understand, monitor and, when appropriate, restrain the risks associated with an organization’s consolidated or group-wide activities. Consolidated supervision of the 

organizations that control banks not only helps prevent bank failures, it also provides important tools for managing and resolving bank failures if and when they 

do occur. In fact, following the collapse of Bank of Commerce and Credit International (BCCI), which lacked a single supervisor capable of monitoring its diverse 

and global activities, Congress amended the BHC Act in 1991 to require that foreign 

banks demonstrate that they are subject to comprehensive supervision on a consolidated basis prior to acquiring a bank in the United States. 

For a variety of reasons, Congress also has long sought to maintain the general 

separation of banking and commerce in the United States. This position was reaffirmed by Congress in the Competitive Equality Banking Act of 1987 and again 

in the GLB Act of 1999. In fact, in each of these acts the Congress took affirmative 

action to close the main loophole then being used by commercial firms to acquire 

FDIC-insured depository institutions—the so-called ‘‘nonbank bank’’ loophole in 

1987 and the unitary thrift loophole in 1999. 

ILC’s have developed and expanded in recent years outside this framework that 

governs banking organizations generally. Because of their special exemption in Federal law, any type of company may acquire an FDIC-insured ILC that is chartered 

in certain States without regard to the activity restrictions that Congress has established to maintain the general separation of banking and commerce. The exemption 

also allows a company to acquire an FDIC-insured bank and avoid the consolidated 

supervisory framework—including consolidated capital, examination and reporting 

requirements—that applies to the corporate owners of other full-service insured 

banks under the BHC Act. In addition, the exemption allows a foreign bank to acquire a U.S. bank engaged in retail banking activities without meeting the requireVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00125 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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ment under the BHC Act that the foreign bank be subject to comprehensive supervision on a consolidated basis in its home country. 

As insured banks, each ILC is supervised by the FDIC as well as by its chartering 

State. The Board has never questioned either the need for, or the adequacy of, this 

supervision of an ILC. However, experience has led Congress to determine that supervision of a full-service insured bank is not sufficient, by itself, to protect the taxpayer and the financial system when the bank operates as part of a larger corporate 

organization. The FDIC does not have the authority to supervise the corporate owners of ILC’s and their affiliates in the same manner that bank holding companies 

and their nonbank affiliates are supervised under the BHC Act. The GAO recently 

concluded that, due to these differences in authority, exempt ILC’s may pose more 

risk to the deposit insurance funds than banks operating in a bank holding company 

structure. 

The exemption for ILC’s in the BHC Act also permits a diversified securities, insurance or financial firm to acquire an FDIC-insured bank without complying with 

the enhanced capital, managerial and Community Reinvestment Act (CRA) requirements established by Congress in the GLB Act for financial holding companies. In 

addition, although the USA PATRIOT Act requires the Board to consider the effectiveness of a company’s policies in combating money laundering prior to approving 

the company’s application to acquire a bank, this requirement does not apply to 

companies that seek to acquire an exempt ILC. 

Affirmatively granting ILC’s the ability to offer transaction accounts to business 

customers or open de novo branches nationwide would significantly expand the powers of exempt ILC’s, increase the attractiveness of the current loophole, and eliminate any vestige of a distinction between ILC’s and full-service insured banks. This 

result would be inconsistent with both the historical functions of ILC’s and the 

terms of their special exemption in current law. These proposals individually and 

collectively also would exacerbate the competitive advantage that the corporate owners of ILC’s have over other banking organizations that operate within the supervisory framework established by Congress. 

The Board believes that the important principles governing the structure of the 

Nation’s banking system—such as the separation of banking and commerce, consolidated supervision, and the supervisory criteria applicable to companies that seek to 

own or control a bank—should be decided by Congress and, once established, should 

apply to all organizations that own a bank in a competitively equitable manner. We 

are concerned that the expansion and exploitation of the ILC exemption is undermining the prudential framework that Congress has carefully crafted and developed 

for the corporate owners of insured banks. Importantly, these changes also threaten 

to remove from Congress’ hands the ability to determine the direction of our Nation’s financial system with regard to the mixing of banking and commerce. 

Congress should not permit the Nation’s policy on these important issues to be 

decided for it on a de facto basis through the expansion of a loophole that is available to only one type of institution chartered in a handful of States. Rather than 

expanding the powers of ILC’s that operate under this special exemption in a regulatory relief bill, we believe it is important for Congress separately to conduct a 

thorough review of the special exemption for ILC’s and its potential to change the 

landscape of our financial system and create an unlevel competitive playing field. 

Conclusion 

I appreciate the opportunity to discuss the Board’s legislative suggestions and priorities concerning regulatory relief. The Board looks forward to working with the 

Committee and your staffs in developing and advancing meaningful regulatory relief 

legislation that is consistent with the Nation’s public policy objectives. 

—————

PREPARED STATEMENT OF DOUGLAS H. JONES

ACTING GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION

MARCH 1, 2006

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, I 

appreciate the opportunity to present the views of the Federal Deposit Insurance 

Corporation (FDIC) on proposed legislative initiatives to provide regulatory burden 

relief to the financial services industry while insuring appropriate safety and soundness and consumer protections are retained. The FDIC shares the Committee’s continuing commitment to eliminate unnecessary burden and to streamline and modernize laws and regulations as the financial industry evolves. Also, we would like 

to thank Senator Crapo and his staff as well as the Committee staff who have 

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worked with us to review the proposals. In addition, the inclusion of consumer 

groups in reviewing and commenting on the many burden relief proposals has provided a wider range of perspectives and beneficial analysis. 

The Federal financial institution regulatory agencies (regulatory agencies) have 

been working together over the last few years to identify regulatory requirements 

that are outdated, unnecessary, or unduly burdensome, in accordance with the requirements of the Economic Growth and Regulatory Paperwork Reduction Act of 

1996 (EGRPRA). The agencies have identified numerous proposals to reduce regulatory burden. We continue to work with the other agencies in an effort to achieve 

greater consensus and, as required by law, we will submit a final report to Congress 

with legislative recommendations later this year. 

In my testimony today, I will briefly describe a few examples of burden reduction 

and operational efficiencies undertaken by the FDIC, or implemented as interagency 

initiatives, which are expected to relieve regulatory burden, clarify regulatory requirements or assist financial institutions to improve their operations. Next, I will 

identify a number of legislative burden relief proposals that are supported by all of 

the Federal regulatory agencies. Finally, I will address specific legislative provisions 

that the FDIC has proposed to improve our performance. 

Recent Interagency and FDIC Actions 

The FDIC and the other regulatory agencies are committed to improving the quality and efficiency of financial institution regulation and to reducing administratively 

unnecessary regulatory burden where it is identified and where changes to current 

practices do not diminish public protections. We are also examining and revising our 

regulations, procedures, and industry guidance to improve how we relate to the industry and its customers. Included among the changes we have made recently are 

the following items. 

HURRICANE RECOVERY

The regulatory agencies worked cooperatively with State regulatory agencies and 

other organizations to determine the status of financial institutions located in the 

areas affected by Hurricanes Katrina, Rita, and Wilma. The agencies established a 

taskforce to address policy issues that arose due to the severity of these natural disasters. The agencies quickly released regulatory relief guidance to help rebuild areas 

affected by the hurricane and encouraged bankers to work with consumers and business owners experiencing difficulties due to the storms. Exercising their authority 

under Section 2 of the Depository Institutions Disaster Relief Act of 1992 (DIDRA), 

the agencies made exceptions to statutory and regulatory requirements when the exceptions would facilitate recovery from the disaster and would be consistent with 

safety and soundness. 

CALL REPORT MODERNIZATION

The FDIC, Federal Reserve Board and Office of the Comptroller of the Currency 

implemented the Central Data Repository (CDR) designed to modernize and streamline how the agencies collect, process, and distribute bank financial data. The CDR 

system took effect beginning with the third quarter 2005 Call Report Data. Under 

this new system, institutions file their Call Report data via the internet using software that contains edits by the Federal Financial Institutions Examination Council 

(FFIEC) for validating Call Report data before submission. 

CALL REPORT REVISIONS

In September, the FDIC, Office of the Comptroller of the Currency and Federal 

Reserve Board requested comments on proposed revisions to the Call Report, representing the first set of revisions to the content since March 2002. The proposed 

changes would affect banks of all sizes and would take effect as the March 31, 2006 

report date. The proposed revisions would enhance the agencies’ on- and off-site supervision activities, which should alleviate some overall regulatory burden on banks. 

FDICCONNECT

FDICconnect is a secure website that allows FDIC-insured institutions to conduct 

business and exchange information with the FDIC. FDICconnect supports examination file exchange and electronic distribution of Special Alerts. FDICconnect reduces 

regulatory burden by providing a more efficient means for insured institutions to 

interact with the FDIC and various States. This is accomplished by improving processes to enable more efficient and effective communication and customer support. 

For example, institutions may obtain quarterly certified statement invoices for deposit insurance assessments online, thus reducing burden on institutions by eliminating the requirement that institutions sign and return corrected invoices. In 2005, 

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the number of electronic bank applications that can be filed was expanded from 

three to six. There are now 20 business transactions available through FDICconnect.

RELATIONSHIP MANAGER PROGRAM

On September 30, 2005, the Corporation implemented the Relationship Manager 

Program for all FDIC-supervised institutions. The Program, which was piloted in 

390 institutions during 2004, is designed to strengthen communication between 

bankers and the FDIC, as well as improve the coordination, continuity, and effectiveness of regulatory supervision. Each FDIC-supervised institution is assigned a 

relationship manager who will serve as a local point of contact over an extended 

period, and will often participate in or lead examinations for their assigned institution. 

EGRPRA Interagency Consensus Items 

Through the interagency EGRPRA effort led by former FDIC Vice Chairman John 

Reich, now Director of the Office of Thrift Supervision, consensus among all of the 

Federal regulatory agencies was reached on twelve regulatory burden relief proposals. One of these proposals addressing possible reforms to the flood insurance 

program has been overtaken by the devastation and aftermath of Hurricane 

Katrina. Clearly, the need for comprehensive flood insurance reform is apparent and 

is being addressed through separate legislative efforts. We withdraw our earlier proposal regarding flood insurance and stand ready to assist the Committee in their 

review of the program. 

The FDIC joins with the other Federal regulatory agencies in supporting inclusion 

of the remaining eleven interagency consensus proposals for regulatory burden relief: 

Repeal Certain Reporting Requirements Relating to Insider Lending 

These amendments repeal certain reporting requirements related to insider lending imposed on banks and savings associations, their executive officers, and their 

principal shareholders. The reports recommended for elimination are: (1) reports by 

executive officers to the board of directors whenever an executive officer obtains a 

loan from another bank in an amount more than he or she could obtain from his 

or her own bank; (2) quarterly reports from banks regarding any loans the bank has 

made to its executive officers; and (3) annual reports from bank executive officers 

and principal shareholders to the bank’s board of directors regarding their outstanding loans from a correspondent bank. 

The Federal regulatory agencies have found that these particular reports do not 

contribute significantly to the monitoring of insider lending or the prevention of insider abuse. Identifying insider lending is part of the normal examination and supervision process. The proposed amendments would not alter the restrictions on insider loans or limit the authority of the Federal regulatory agencies to take enforcement action against a bank or its insiders for violations of those restrictions. 

Streamline Depository Institution Merger Application Requirements 

This proposal streamlines merger application requirements by eliminating the requirement that each Federal regulatory agency must request a competitive factors 

report from the other three Federal regulatory agencies, in addition to requesting 

a report from the Attorney General. Instead, the agency reviewing the application 

would be required to request a report only from the Attorney General and give notice to the FDIC as insurer. 

Improve Information Sharing with Foreign Supervisors 

This proposal amends Section 15 of the International Banking Act of 1978 to add 

a provision to ensure that the Federal Reserve, OCC, FDIC, and OTS cannot be 

compelled to disclose information obtained from a foreign supervisor in certain circumstances. Disclosure could not be compelled if public disclosure of the information 

would be a violation of the applicable foreign law and the U.S. regulatory agency 

obtained the information under an information sharing arrangement or other procedure established to administer and enforce the financial institution laws. This 

amendment would reassure foreign supervisors that may otherwise be reluctant to 

enter into information sharing agreements with U.S. regulatory agencies because of 

concerns that those agencies could not keep the information confidential and public 

disclosure could subject the foreign supervisor to a violation of its home country law. 

It also would facilitate information sharing necessary to supervise institutions operating internationally, lessening duplicative data collection by individual national 

regulators. The regulatory agency, however, cannot use this provision as a basis to 

withhold information from Congress or to refuse to comply with a valid court order 

in an action brought by the United States or the agency. 

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Provide an Inflation Adjustment for the Small Depository Institution Exception

under the Depository Institution Management Interlocks Act 

This proposal increases the threshold for the small depository institution exception under the Depository Institution Management Interlocks Act. Under current 

law, a management official generally may not serve as a management official for 

another nonaffiliated depository institution or depository institution holding company if their offices are located, or they have an affiliate located, in the same metropolitan statistical area (MSA). For institutions with less than $20 million in assets, 

this MSA restriction does not apply. The proposal would increase the MSA threshold, which dates back to 1978, to $100 million. 

Call Report Streamlining 

This proposal requires the Federal regulatory agencies to review information and 

schedules required to be filed in Reports of Condition (Call Reports) every 5 years 

to determine if some of the required information and schedules can be eliminated. 

Currently, banks must report substantial amounts of financial and statistical information with their Call Report schedules that appear to many bankers to be unnecessary to assessing the financial health of the institution and determining the 

amount of insured deposits it holds. This amendment would require the agencies to 

review their real need for information routinely so as to reduce that burden. 

Enhance Examination Flexibility 

Currently, the FDI Act requires the regulatory agencies to conduct a full-scale, 

on-site examination of the insured depository institutions under their jurisdiction at 

least once every twelve months. The FDI Act provides an exception for small institutions—that is institutions with total assets of less than $250 million—that are wellcapitalized and well-managed, and meet other criteria. Examinations of these qualifying smaller institutions are required at least once every 18 months. This interagency proposal raises the total assets ceiling for small institutions to qualify for 

an 18-month examination cycle from $250 million to $500 million, thus potentially 

permitting more institutions to qualify for less frequent examinations. This would 

reduce regulatory burden on low-risk, smaller institutions and permit the regulatory 

agencies to focus their resources where the great majority of the industry’s assets 

and deposits are. 

Shorten Post-Approval Waiting Period on Bank Mergers and Acquisitions Where

There Are No Adverse Effects on Competition 

This proposal would amend the Bank Holding Company Act and the FDI Act to 

shorten the current 15-day minimum post-approval waiting period for certain bank 

acquisitions and mergers when the appropriate Federal regulatory agency and the 

Attorney General agree that the transaction would not have significant adverse effects on competition. Under those circumstances, the waiting period could be shortened to 5 days. However, these amendments would not shorten the time period for 

private parties to comment on the transaction prior to approval under the public 

notice requirements. 

Exempt Merger Transactions Between an Insured Depository Institution and One or

More of its Affiliates from Competitive Factors Review and Post-Approval Waiting

Periods 

This proposal amends the Bank Merger Act (12 U.S.C. 1828(c)) to exempt certain 

merger transactions from both the competitive factors review and post-approval 

waiting periods. It applies only to merger transactions between an insured depository institution and one or more of its affiliates, as this type of merger is generally 

considered to have no affect on competition. 

Authorize the Federal Reserve to Pay Interest on Reserves 

This proposal would give the Federal Reserve Board express authority to pay interest on balances that depository institutions are required to maintain at the Federal Reserve Banks. By law, depository institutions are required to hold funds 

against transaction accounts held by customers of those institutions. These funds 

must be held in cash or on reserve at Federal Reserve Banks. Over the years, institutions have tried to minimize their reserve requirements. Allowing the Federal Reserve Banks to pay interest on those reserves should put an end to economically 

wasteful efforts by banks to circumvent the reserve requirements. Moreover, it could 

be helpful in ensuring that the Federal Reserve will be able to continue to implement monetary policy with its existing procedures. 

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Increase Flexibility for the Federal Reserve Board to Establish Reserve Requirements 

This proposal gives the Federal Reserve Board greater discretion in setting reserve requirements for transaction accounts below the ranges established in the 

Monetary Control Act of 1980. The provision would eliminate current statutory minimum reserve requirements for transaction accounts, thereby allowing the Board to 

set lower reserve requirements, to the extent such action is consistent with the effective implementation of monetary policy. 

Authorize Member Banks to Use Pass-Through Reserve Accounts 

This proposal allows banks that are members of the Federal Reserve System to 

count as reserves their deposits in affiliated or correspondent banks that are in turn 

‘‘passed through’’ by those banks to the Federal Reserve Banks as required reserve 

balances. It extends to these member banks a privilege that was granted to nonmember institutions at the time of the Depository Institutions Deregulation and 

Monetary Control Act of 1980. 

Provisions to Increase FDIC Efficiency 

The FDIC has also developed several proposals that will help the FDIC become 

more efficient and effective in its regulation of insured institutions as described 

below. 

JUDICIAL REVIEW OF CONSERVATORSHIP AND RECEIVERSHIP APPOINTMENTS

This proposal specifies the time period during which the appointment, in certain 

circumstances, of the FDIC as conservator or receiver of a failed insured depository 

institution could be challenged. Moreover, this provision provides greater certainty 

to the receiver’s activities and to those doing business with the receiver. 

Currently, some provisions of Federal law specify a 30-day period for challenges 

after appointment of a receiver. In contrast, other provisions of the FDI Act that 

govern appointment of a conservator or receiver by the appropriate Federal regulatory agencies for a State-chartered institution under prompt corrective action provisions and the FDIC’s appointment of itself as conservator or receiver for an insured depository institution are silent on the limitations period for challenges to 

those appointments. At least one court has previously held that the Administrative 

Procedure Act applied because the National Bank Receivership Act was silent regarding the time period for challenging such an appointment. The court held that 

the national bank had 6 years from the date of appointment to challenge the action. 

The proposed legislation remedies the silence in the National Bank Receivership Act 

and in the FDI Act consistent with the parallel provisions in Section 5 of the Home 

Owners’ Loan Act and another appointments provision of the FDI Act. 

ENFORCEMENT OF AGREEMENTS AND CONDITIONS

This proposal enhances the safety and soundness of insured depository institutions and protects the deposit insurance funds from unnecessary losses. The proposed amendment provides that the Federal regulatory agencies may enforce (i) conditions imposed in writing, and (ii) written agreements in which an institution-affiliated party agreed to provide capital to the institution. The proposal similarly would 

clarify existing authority of the FDIC as receiver or conservator to enforce written 

conditions or agreements entered into between insured depository institutions and 

institution-affiliated parties and controlling shareholders. 

In addition, the proposal eliminates the requirement that an insured depository 

institution be undercapitalized at the time of a transfer of assets from an affiliate 

or controlling shareholder to the insured institution in order to prevent a claim 

against a Federal regulatory agency for the return of assets under bankruptcy law. 

Under Section 18(u) of the FDI Act, protection against a claim for the return of assets would still require that, at the time of transfer, the institution must have been 

subject to written direction from a Federal regulatory agency to increase its capital 

and, for that portion of the transfer made by a broker, dealer, or insurance firm, 

the Federal regulatory agency must have followed applicable procedures for those 

functionally regulated entities. 

AMENDMENT CLARIFYING FDIC’S CROSS GUARANTEE AUTHORITY

This proposal will correct a gap in current law regarding cross guarantee liability. 

As part of the Federal Financial Institutions Reform, Recovery, and Enforcement 

Act of 1989 (FIRREA), Congress established a system that permits the FDIC to assess liability for FDIC losses caused by the default of an insured depository institution. Cross guarantee liability, however, is currently limited to commonly controlled 

insured depository institutions as defined in the statute. Because the statutory definition does not include certain types of financial institutions such as credit card 

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banks that are controlled by nonbank holding companies, liability may not attach 

to insured institutions that are owned by the same nonbank holding company. 

Over the years, a growing number of companies have acquired, either directly or 

through an affiliate, one or more credit card banks, trust companies, industrial loan 

companies, or some combination of those types of institutions. Because these companies do not fall within the scope of depository institution holding companies for common control purposes, in the event of default, the FDIC may not be able to assess 

cross guarantee liability as envisioned in the statute. The proposal corrects language to strengthen the FDIC’s efforts to protect the deposit insurance funds when 

it is determining whether and to what extent to exercise its discretionary authority 

to assess cross guarantee liability. The assessment of liability would continue to be 

only against the insured depository institution under common control with the defaulting institution. 

AMENDMENT CLARIFYING THE FDIC’S GOLDEN PARACHUTE AUTHORITY

This proposal amends Section 18(k) of the FDIC Act to clarify that the FDIC could 

prohibit or limit a nonbank holding company’s golden parachute payment or indemnification payment. In 1990, Congress added this section to the FDI Act and authorized the FDIC to prohibit or limit prepayment of salaries or any liabilities or legal 

expenses of an institution-affiliated party by an insured depository institution or depository institution holding company. Such payments are prohibited if they are 

made in contemplation of the insolvency of such institution or holding company or 

if they prevent the proper application of assets to creditors or create a preference 

for creditors of the institution. Due to the statutory definition of depository institution holding company, it is not clear that the FDIC is authorized to prohibit these 

types of payments made by nonbank holding companies. Some examples are companies that own only credit card banks, trust companies, or industrial loan companies. 

The lack of clear authority for the FDIC to prohibit payments made by nonbank 

holding companies to institution-affiliated parties frustrates the purpose of the legislation by allowing nonbank holding companies to make golden parachute payments 

when an institution is insolvent or is in imminent danger of becoming insolvent to 

the detriment of the institution, the insurance funds, and the institution’s creditors. 

The proposed amendment strengthens the FDIC’s efforts to protect the insurance 

funds and ensure that an insured institution does not make these payments to the 

detriment of the institution. 

CHANGE IN BANK CONTROL ACT AMENDMENTS

This proposal amends the Change in Bank Control Act to address an issue that 

arises when a ‘‘stripped charter’’ institution is the subject of a change-in-control notice. A stripped charter is essentially a bank charter with insurance, but without 

any significant ongoing business operations. Such ‘‘stripped charters’’ can result 

after a purchase and assumption transaction where the assets and liabilities of an 

institution are transferred to an acquiring institution, but the charter remains and 

may have value attached to it. 

The Change in Bank Control Act provides the appropriate Federal regulatory 

agency with authority to disapprove a change-in-control notice within a set period 

of time. The availability of stripped charters for purchase in the establishment of 

new financial institution operations is sometimes used as an alternative to de novo 

charter and deposit insurance applications. Change-in-control notices are subject to 

strict time periods for disapproval and extensions of time beyond the 45 days for 

review. These time frames place significant pressures on the agencies when they are 

required to analyze novel or significant issues or complex or controversial business 

proposals. For example, issues presented by change-in-control notices proposing control by nonresident foreign nationals, or issues presented where third parties are 

proposed to have significant participation in the financial institution’s operations, 

generally require additional scrutiny to satisfy safety and soundness concerns. This 

proposal clarifies the bases for which such notices may be disapproved and expand 

the bases for extensions of time for consideration of certain notices raising novel or 

significant issues. The provision is a safety and soundness measure that would 

greatly increase the agencies’ ability to adequately consider the risks inherent in a 

proposed business plan and to use that information in determining whether to disapprove a notice of change-in-control. 

RECORDKEEPING AMENDMENT

This proposal modifies the requirement for retention of old records of a failed insured depository institution at the time a receiver is appointed. Currently, the statute requires the FDIC to preserve all records of a failed institution for 6 years from 

the date of its appointment as receiver, regardless of the age of the records at the 

time of the failure. After the end of 6 years, the FDIC can destroy any records that 

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it determines to be unnecessary, unless directed not to do so by a court or a government agency or prohibited by law. Consequently, the FDIC must preserve for 6 

years very old records that have no value to the FDIC, the public interest, or to any 

pending litigation. 

The proposed provision allows the FDIC to destroy records that are 10 or more 

years old at the time of its appointment as receiver that are not relevant to any 

pending or reasonably probable future litigation, unless directed not to do so by a 

court or a government agency or prohibited by law. This change benefits the FDIC 

and/or acquirers of failed institutions by reducing the storage costs for these outdated records. 

PRESERVATION OF RECORDS BY OPTICAL IMAGING AND OTHER MEANS

This proposal permits the FDIC to rely on records preserved electronically, such 

as optically imaged or computer scanned images, as well as the ‘‘preservation of 

records by photography’’ currently provided by the statute. 

Under present law, the FDIC is permitted to use ‘‘permanent photographic 

records’’ in place of original records for all purposes, including introduction of documents into evidence in State and Federal court. The substance of the statute has 

been unchanged since 1950. Because of the advent of electronic information systems 

and imaging technologies that do not have any photographic basis, this amendment 

would significantly aid the FDIC in preservation of documents by newer methods. 

In addition, it can be expected that the technology in this area will continue to develop. This amendment is intended to provide the FDIC with the flexibility to rely 

on appropriate new technology, while retaining the requirement that our Board of 

Directors prescribe the manner of the preservation of records to ensure their reliability, regardless of the technology used. 

CLARIFICATION OF SECTION 8(g) PROHIBITION AUTHORITY

Section 8(g) of the FDI Act provides the appropriate Federal regulatory agency 

with the authority to suspend or prohibit individuals charged with certain crimes 

from participation in the affairs of the depository institution with which they are 

affiliated. This proposal clarifies that the agency may suspend or prohibit those individuals from participation in the affairs of any depository institution and not solely 

the insured depository institution with which the institution affiliated party is or 

was associated. The provision will make clear that a Federal regulatory agency may 

use the Section 8(g) remedy even where the institution that the individuals were 

associated with ceases to exist. 

AUTHORITY TO ENFORCE CONDITIONS ON THE APPROVAL OF DEPOSIT INSURANCE

This proposal amends Section 8 of the FDI Act to provide each of the other three 

appropriate Federal regulatory agencies with express statutory authority to take enforcement action against the financial institutions they supervise based upon a violation of a condition imposed by the FDIC in writing in connection with the approval 

of an institution’s application for deposit insurance. 

The FDIC frequently imposes written conditions when approving deposit insurance to a de novo bank or thrift pursuant to Section 5 of the FDI Act (application 

for deposit insurance). Because of a drafting anomaly under current law, the other 

three appropriate Federal regulatory agencies cannot enforce violations of deposit 

insurance conditions by their supervised institutions. Currently, our only recourse—

for institutions that we do not serve as primary regulator—is to commence deposit 

insurance termination proceedings. This provision would provide express enforcement authority for the involved institution’s appropriate Federal regulatory agency. 

CLARIFICATION OF SECTION 8 ENFORCEMENT AUTHORITY THAT CHANGE-IN-CONTROL

CONDITIONS ARE ENFORCEABLE

The FDIC recommends language that clarifies the appropriate Federal regulatory 

agencies’ authority to take enforcement action against the banks they supervise 

based on a violation of a condition imposed in writing in connection with any action 

by the agency on an application, notice, or other request by an insured depository 

institution or institution-affiliated party. The agencies frequently provide conditions 

on applications, notices, or other requests, and the proposed change to Section 8 of 

the FDI Act would expressly provide that this enforcement authority applies equally 

to conditions imposed in connection with notices and to applications, notices, or 

other requests by an institution-affiliated party. 

DEPOSIT INSURANCE RELATED TO THE OPTIONAL CONVERSION OF FEDERAL SAVINGS

ASSOCIATIONS

Under a provision adopted in the Gramm-Leach-Bliley Act (Section 739), Section 

5(i)(5) of the Home Owners’ Loan Act permits Federal savings associations with 

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branches in one or more States to undergo a conversion into one or more national 

or State banks. Such conversions require the approval of the OCC and/or the appropriate State authorities. However, Section 739 does not specifically mention either 

deposit insurance or the FDIC. 

The FDIC supports an amendment to Section 739 clarifying that conversions 

under that section, which result in more than one bank, would continue to require 

deposit insurance applications from the resulting institutions, as well as review and 

approval by the appropriate Federal regulatory agency. A one-to-one conversion does 

not change the risk to the deposit insurance funds because it involves one institution simply changing charters. However, a ‘‘breakup conversion’’ presents a potential 

increase in risk to the insurance funds because two or more institutions are created 

with risk profiles that are likely to differ from the original institution. 

BANK MERGER ACT AND BANK HOLDING COMPANY ACT—CONSIDERATION OF

POTENTIAL EFFECTS ON DEPOSIT INSURANCE FUND

The FDIC supports amendments to the Bank Merger Act and Bank Holding Company Act to require consideration of the potentially adverse effects on the deposit 

insurance fund of any proposed bank merger transaction or holding company formation/acquisition. As presently written, these laws do not require that any specific 

consideration be given to a transaction’s possible impact on the deposit insurance 

fund. The omission is noteworthy and potentially damaging to the financial viability 

of the fund. 

Language specifying consideration of risks to the deposit insurance fund already 

exists for consideration of other transactions. For example, regarding change in control of insured financial institutions, the FDI Act provides authority to the appropriate Federal regulatory agency to disapprove any proposed acquisition if the agency determines that the proposed transaction would result in an adverse effect on the 

deposit insurance fund. 

In addition, Section 207 of FIRREA amended Section 6 of the FDI Act to include 

a new factor—‘‘the risk presented by such depository institution to the Bank Insurance Fund or the Savings Association Insurance Fund’’—that must be considered in 

granting deposit insurance. Additional parallels can also be found in Sections 24 

and 28 of the FDI Act. 

Given the potential insurance risks inherent in transactions involving large diversified financial services organizations, the addition of an ‘‘adverse effect on the deposit insurance fund’’ assessment factor as a requirement under the Bank Merger 

Act and Bank Holding Company Act would seem warranted. As with the other factors, each of the agencies would be required to make a separate ‘‘adverse effect on 

the deposit insurance fund’’ evaluation during its review of the proposed transaction. The intent would be to ensure that the financial integrity of the deposit insurance fund is a prime consideration in any proposed combination. As indicated, 

there is precedent in other financial institution application reviews and we believe 

a compelling case can be made for its inclusion in both the Bank Merger Act and 

the Bank Holding Company Act. 

RECEIVER’S OR CONSERVATOR’S CONSENT REQUIREMENT

This proposal would require the consent of the receiver or conservator before a 

party to a contract to which the depository institution is a party could exercise any 

right or power to terminate, accelerate, or declare a default under any contract, or 

to obtain possession of or exercise control over any property of the institution or affect any contractual rights of the institution. Currently a conservator or receiver has 

the power to seek a 45- or 90-day stay of legal actions following appointment of the 

receiver, which must be granted, by any court with jurisdiction of such action or proceeding. However, parties to contracts with the depository institution are able to 

take unilateral action based on contractual rights without the foreknowledge of the 

receiver or conservator. The proposal would require the consent of the receiver or 

conservator before a party could exercise such contract provisions. 

The FDIC also suggests including language that will:

• Provide for the FDIC in its role as receiver of failing institutions to gain access 

to individual FICO scores to improve the FDIC’s ability to evaluate assets and 

recommend transaction structures for failing banks; 

• Clarify the provision of the FDI Act relating to the resolution of deposit insurance 

disputes in the case of failed insured depository institutions; 

• Clarify that the FDIC is a ‘‘covered agency’’ for purposes of sharing confidential 

information among the Federal regulatory agencies and other ‘‘covered agencies’’ 

without losing the work-product, attorney-client, or other privileges recognized 

under Federal or State law. 

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Conclusion 

Thank you for the opportunity to present the FDIC’s views on these issues. The 

FDIC supports the Committee’s continued efforts to reduce unnecessary burden on 

insured depository institutions without compromising safety and soundness or consumer protection. We continually strive for more efficiency in the regulatory process 

and are pleased to work with the Committee in accomplishing this goal. 

—————

PREPARED STATEMENT OF JULIE L. WILLIAMS

FIRST SENIOR DEPUTY COMPTROLLER AND CHIEF COUNSEL

OFFICE OF THE COMPTROLLER OF THE CURRENCY

MARCH 1, 2006

Introduction 

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, I 

appreciate this opportunity to appear before you today on behalf of the Office of the 

Comptroller of the Currency (OCC) to further the goal of reducing unnecessary regulatory burden on America’s banks. I also want to take this opportunity to again express our appreciation to Senator Crapo for his continuing dedication to this issue. 

The OCC welcomes the opportunity to offer suggestions for reforms that would affect all depository institutions, and to discuss particular proposals affecting national 

banks and the national banking system. We appreciate your holding this hearing 

today and we welcome this initiative to pursue regulatory burden relief legislation. 

The impact of unnecessary burdens is not one-dimensional—it is not simply a 

matter of bank costs. When unnecessary regulatory burdens drive up the cost of 

doing business for banks, bank customers feel the impact in the form of higher 

prices and, in some cases, diminished product choice. Unnecessary regulatory burden also can become an issue of competitive viability, particularly for our Nation’s 

community banks. Over-regulation neither encourages greater competition nor improved allocation of resources; to the contrary, it can shackle competition and lead 

to inefficient use of resources. 

The regulatory burdens imposed on our banks arise from several sources. One 

source is regulations promulgated by the Federal banking agencies. Thus, as regulators we need to recognize that we have a responsibility to ensure that our regulations effectively protect safety and soundness, foster the integrity of bank operations, and safeguard the interests of consumers, and do not impose regulatory burdens that exceed what is necessary to achieve those goals. We should be guided by 

these principles when we adopt new rules, and when we review and revise existing 

ones. 

We also need to recognize that not all the regulatory burdens imposed on banks 

today come from regulations. Another source of regulatory burden is mandates of 

Federal legislation. Relief from some manifestations of unnecessary regulatory burden requires action by Congress. My testimony contains a number of recommendations for legislative changes to reduce unnecessary regulatory burden by adding provisions to law to provide new flexibilities, modify requirements to be less burdensome, and in some cases, eliminate certain requirements currently in the law. 

My testimony will: 

• Summarize how the Federal banking agencies are working together under the 

able leadership of Director Reich of the Office of Thrift Supervision (OTS) through 

the process required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) to identify unnecessary regulatory burdens, highlight 

several regulatory initiatives that the OCC is pursuing with the other Federal 

banking agencies to reduce burden, and summarize important regulatory burden 

implications of actions of other agencies; and 

• Summarize several of the OCC’s priority legislative items for regulatory burden 

relief, provide an overview of some other legislative items that the OCC supports, 

and note additional comments about other legislative proposals. 

Regulatory Initiatives to Address Regulatory Burden 

EGRPRA Process 

The OCC has been and continues to be an active participant in and supporter of 

the regulatory burden reduction initiative being led by OTS Director Reich. Under 

Director Reich’s capable and dedicated leadership, the Federal banking agencies 

have been working together since 2003 to complete the regulatory review required 

under Section 2222 of EGRPRA. On a 10-year cycle, Section 2222 requires the FedVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00134 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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eral Financial Institutions Examination Council and each Federal banking agency 

to identify outdated, unnecessary regulatory requirements and, in a report to Congress, to address whether such regulatory burdens can be changed through regulation or require legislative action. The agencies are required to complete the publication and review cycle by September 2006 and then will submit the report to Congress shortly thereafter. 

The Federal banking agencies—the OCC, the Board of Governors of the Federal 

Reserve System (Fed), the Federal Deposit Insurance Corporation (FDIC), and 

OTS—divided their regulations into thirteen categories for purposes of publishing 

those regulations for review as part of the EGRPRA process. In six public notices 

published between mid-2003 and the beginning of 2006, the agencies have requested 

public comment in all categories of their rules. The comment period for the last notice published in early January 2006 requesting public comment on rules pertaining 

to Prompt Corrective Action and the Disclosure and Reporting of CRA-Related 

Agreements does not close until April 4. To date, we have received over 800 comments on our notices. Every comment received will be considered in formulating the 

agencies’ recommendations for specific regulatory changes as well as legislative recommendations. 

Moreover, in addition to soliciting written comments, the Federal banking agencies, in conjunction with the Conference of State Bank Supervisors and State regulatory agencies, have held 10 banker outreach meetings in different cities and regions throughout the country to hear first-hand the bankers’ concerns and suggestions to reduce burden. In addition, the agencies have held four outreach meetings 

with consumer and community groups in different parts of the country and three 

joint outreach meetings with both bankers and consumer/community groups. 

Through the public comment process and these meetings, the agencies have made 

every effort to ensure that there is ample opportunity for consumers and the industry to participate in this process. 

Other Burden Reduction Regulatory Initiatives 

The OCC constantly reviews its regulations to identify opportunities to streamline 

regulations or regulatory processes, while ensuring that the goals of protecting safety and soundness, maintaining the integrity of bank operations, and safeguarding 

the interests of consumers are met. In the mid-1990’s, pursuant to our comprehensive ‘‘Regulation Review’’ project, we went through every regulation in our rulebook 

with that goal in mind. We have since conducted several supplemental reviews focused on particular areas where we thought further improvements could be made. 

The following are several significant regulatory projects we are pursuing to identify 

and reduce unnecessary regulatory burdens. 

Improving the Value and Reducing the Burden of Privacy Notices. The OCC, together with the other Federal banking agencies, the Federal Trade Commission, the 

SEC, and the Commodity Futures Trading Commission, has undertaken an unprecedented initiative to improve and streamline the privacy notices required under 

GLBA, consistent with current law. In an Advance Notice of Proposed Rulemaking 

in December 2003, the agencies asked for comments on whether to consider amending their respective privacy regulations to allow, or require, financial institutions to 

provide alternative types of privacy notices, such as a short-form privacy notice, that 

would be more understandable and useful for consumers and less burdensome for 

banks to provide. The agencies also asked commenters to provide sample privacy notices that they believe work well for consumers. Most significantly, the agencies 

pledged to engage in consumer testing before proposing changes to the privacy regulations. 

The OCC and a number of the other agencies then engaged experts in plain language disclosures and consumer testing to assist in conducting focus groups and 

comprehensive, in-depth consumer interviews to find out what information consumers need to understand and compare privacy practices, and the most effective 

way to disclose that information to them. The object of the testing is to assess weaknesses with current notices, suggest alternatives that correct these weaknesses, and 

test these alternatives with consumers. This project has the potential to be a winwin for consumers and financial institutions. Shorter, more focused notices will lessen the burden on banks. And such notices will enable consumers to make more informed decisions about their personal information. The agencies expect to make 

public the results of this testing soon, as well as their decision about the need for 

additional testing. The results of this testing will provide the basis for the agencies’ 

next steps in advancing the use of simplified notices. 

Reducing CRA Burden on Small Banks. Another important burden-reduction initiative recently undertaken by the OCC, Fed, and the FDIC was amendments to our 

Community Reinvestment Act (CRA) regulations. The joint final rule became effecVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00135 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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1Please refer to the appendices attached to my testimony before the Committee on June 21, 

2005 for detailed explanations of the OCC supported items. 

tive on September 1, 2005. The joint final rule made significant changes to the agencies’ regulations that will benefit community banks. Prior regulation defined a 

‘‘small bank’’ for purposes of CRA as a bank with assets of up to $250 million. 

Banks above that asset threshold were categorized as ‘‘large’’ banks for CRA purposes and were subject to a three-part test that separately assesses their lending, 

services, and investments in their assessment areas. 

For purposes of CRA, the new joint final rule creates a new class of ‘‘intermediate’’ 

small banks, namely those with assets between $250 million and $1 billion. ‘‘Intermediate’’ small banks are subject to the streamlined small bank lending test and 

a flexible new community development test that considers a mix of community development lending, investment, and services that a bank provides, particularly in 

light of the bank’s resources and capacities, and the needs of the communities it 

serves. ‘‘Intermediate’’ small banks also are no longer subject to certain data collection and reporting requirements. 

The new rule also provides additional flexibility with respect to qualifying ‘‘community development’’ activities. The new rule revises the ‘‘revitalize or stabilize’’ category of ‘‘community development’’ to provide that activities that revitalize or stabilize designated disaster areas or areas designated by the agencies as ‘‘distressed 

or underserved nonmetropolitan middle-income geographies’’ qualify as community 

development activities. Notably, banks’ qualifying revitalization and stabilization activities to provide assistance to communities in the Hurricanes Katrina and Rita 

designated disaster areas are eligible for CRA credit under the rule. This change 

benefits banks of all sizes and the communities in the disaster areas that they 

serve. 

The agencies’ joint rule carefully balances the goals of reducing unnecessary regulatory reporting burdens with achieving the goals of the CRA. The agencies expect 

to issue final questions and answers that provide additional guidance on these new 

provisions within the next several days. 

Other Burden Reduction Areas of Concern 

We also appreciate the Committee’s interest in examining all sources of regulatory 

burdens imposed on banks today, including those that do not arise from regulations 

promulgated by bank regulators. We welcome the continued interest of the Committee in issues such as regulatory implementation of the Bank Secrecy Act and 

anti-money laundering standards. This area presents particular challenges for burden reduction initiatives because the interests of law enforcement must be carefully 

weighed, and may outweigh, in some cases, the burden reduction benefits of particular proposals. 

We also welcome the Committee’s interest in ensuring that any broker rules promulgated by the Securities and Exchange Commission (SEC) to implement the socalled ‘‘push-out’’ provisions of the Gramm-Leach-Bliley Act (GLBA) are faithful to 

the law’s intent and not so burdensome as to drive well-established banking functions out of banks. 

In addition, we note that the Committee may consider ways to reduce the disproportionate burden that is being imposed on smaller banks and bank holding companies that are subject to the reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As you know, Section 404 directed the SEC to adopt rules 

requiring all registered companies to include information in their annual reports on 

management’s responsibility for internal controls over financial reporting and also 

required independent auditors to attest to, and report on, management’s assessment. 

Recently, the SEC’s Advisory Committee on Smaller Public Companies released 

a draft of its final report on its website that addresses, among other things, Section 

404’s high compliance costs for small companies. This draft of the report concludes 

that ‘‘relief is urgently needed’’ for smaller public companies so that they may cope 

with the unanticipated escalating costs of complying with Section 404 that have disproportionately affected smaller companies. 

Legislative Proposals to Address Regulatory Burden 

The OCC has supported a package of legislative amendments that we believe will 

help reduce unnecessary regulatory burden on national banks and other depository 

institutions. These items generally are included in the matrix that Senator Crapo 

was instrumental in assembling. My testimony today will highlight some of those 

items.1

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2 In addition, the law requires that an eligible institution cannot currently be the subject of 

an enforcement action or the target of a change-in-control transaction during approximately the 

last year. Moreover, the statute does not prohibit a Federal banking agency from conducting an 

examination more frequently than required if deemed necessary. 3The same rules apply to State member banks but, in the case of State member banks, the 

Federal Reserve has approval authority. 

National Bank Operations 

Expanding the Eligibility for the 18-Month Examination Cycle. The OCC supports 

amending the Federal Deposit Insurance Act (FDIA) to increase the small bank 

threshold from $250 million to $1 billion so that more small banks may qualify to 

be examined on an 18-month rather than an annual cycle. Under current law, insured depository institutions with total assets of $250 million or less that are well 

capitalized, and, as of the most recent examination, are well managed and have a 

composite condition of ‘‘1’’ or ‘‘2’’ under the banking agencies’ uniform rating system 

may be examined on an 18-month, rather than an annual cycle in a full-scope, onsite examination.2 The proposal would change only the asset threshold and would 

not change any of the other requirements in the law. For national banks, increasing this threshold to $1 billion would mean that approximately 340 more national banks may qualify for the 18-month cycle. Today, approximately 58 percent of all national banks are eligible for the 18-month cycle but, 

if the law were amended to raise the threshold to $1 billion, approximately 76 percent of all national banks could qualify. This change would ease the examination 

burden and associated costs for a meaningful number of qualifying national banks 

without raising safety and soundness concerns. Only the top-rated banks would be 

eligible for the extended cycle, and we would continue our active off-site monitoring 

oversight of these banks, as well as accelerating the timing of an on-site examination whenever developments warranted. 

Repealing State Opt-In Requirements for De Novo Branching. Repeal of the State 

opt-in requirement that applies to national banks that choose to expand interstate 

by establishing branches de novo would remove a significant unnecessary burden 

imposed on national banks that seek to establish new interstate branch facilities to 

enhance service to customers. Under the Riegle-Neal Banking and Branching Efficiency Act of 1994 (Riegle-Neal), interstate expansion through bank mergers generally is subject to a State ‘‘opt-out’’ that had to be in place by June 1, 1997. Interstate bank mergers are now permissible in all 50 States. De novo branching, however, is permissible only in those approximately 23 States that have affirmatively 

opted-in to allow the establishment of new branches in the State. Approximately 17 

of these 23 States impose a reciprocity requirement. 

In many cases, in order to serve customers in multistate metropolitan areas or 

regional markets, national banks must structure artificial and unnecessarily expensive transactions in order to establish a new branch across a State border. The OCC 

supports an amendment that would relieve these unnecessary and costly burdens. 

Providing Relief for Subchapter S National Banks. Another priority item supported by the OCC is an amendment that would allow directors of national banks 

that are organized as Subchapter S corporations to purchase subordinated debt instead of capital stock to satisfy the directors’ qualifying shares requirements in national banking law. As a result, the directors purchasing such debt would not be 

counted as shareholders for purposes of the 100-shareholder limit that applies to 

Subchapter S corporations. This relief would make it possible for more community 

banks with national bank charters to organize in Subchapter S form while still requiring that such national bank directors retain their personal stake in the financial 

soundness of these banks. 

Simplifying Dividend Calculations for National Banks. Under current law, the 

formula for calculating the amount that a national bank may pay in dividends is 

complex, antiquated, and unnecessary for purposes of safety and soundness. The 

amendment supported by the OCC would make it easier for national banks to perform this calculation, while retaining safeguards in the current law that provide 

that national banks need the approval of the Comptroller to pay a dividend that exceeds the current year’s net income combined with any retained net income for the 

preceding 2 years.3 The amendment would ensure that the OCC would continue to 

have the opportunity to deny any dividend request that may deplete the net income 

of a national bank that may be moving toward troubled condition. Other safeguards, 

such as Prompt Corrective Action, which prohibit any insured depository institution 

from paying any dividend if, after that payment, the institution would be undercapitalized (see 12 U.S.C. § 1831o(d)(1)) would remain in place. 

Modernizing Corporate Governance. The OCC also supports an amendment that 

would eliminate a requirement that precludes a national bank from prescribing, in 

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4This provision was included in H.R. 1224, the Business Checking Freedom Act of 2005, as 

passed by the House on May 24, 2005. 

its articles of association, the method for election of directors that best suits its business goals and needs. Unlike most other companies and State banks, national banks 

cannot choose whether or not to permit cumulative voting in the election of their 

directors. Instead, current law requires a national bank to permit its shareholders 

to vote their shares cumulatively. Providing a national bank with the authority to 

decide for itself whether to permit cumulative voting in its articles of association 

would conform the National Bank Act to modern corporate codes and provide a national bank with the same corporate flexibility available to most corporations and 

State banks. 

Modernizing Corporate Structure Options. Another amendment supported by the 

OCC is an amendment to national banking law clarifying that the OCC may permit 

a national bank to organize in any business form, in addition to a ‘‘body corporate.’’ 

An example of an alternative form of organization that may be permissible would 

be a limited liability national association, comparable to a limited liability company. 

The provision also would clarify that the OCC by regulation may provide the organizational characteristics of a national bank operating in an alternative form, consistent with safety and soundness. Except as provided by these organizational characteristics, all national banks, notwithstanding their form of organization, would 

have the same rights and privileges and be subject to the same restrictions, responsibilities, and enforcement authority. 

Organization as a limited liability national association may be a particularly attractive option for community banks. Subject to applicable Federal and State tax 

rules, the bank may be able to take advantage of pass-through tax treatment for 

entities organized as limited liability companies (LLC’s) under certain tax laws and 

eliminate double taxation under which the same earnings are taxed both at the corporate level as corporate income and at the shareholder level as dividends. Some 

States currently permit State banks to be organized as unincorporated LLC’s, and 

the FDIC adopted a rule allowing certain State bank LLC’s to qualify for Federal 

deposit insurance. This amendment would clarify that the OCC can permit national 

banks to organize in an alternative business form, such as an LLC, in the same 

manner. Paying Interest on Demand Deposits. The OCC supports amendments to the banking laws to repeal the statutory prohibition that prevents banks from paying interest on demand deposits.4 The prohibition on paying interest on demand deposits 

was enacted approximately 70 years ago for the purpose of deterring large banks 

from attracting deposits away from community banks. The rationale for this provision is no longer applicable today and financial product innovations, such as sweep 

services, allow banks and their customers to avoid the statutory restrictions. Repealing this prohibition would reduce costs associated with establishing such additional 

accounts to avoid the restrictions. 

Giving National Banks More Flexibility in Main Office Relocations. The OCC supports two amendments to national banking law that will give national banks more 

flexibility in making main office relocation business decisions. The amendment will 

reduce unnecessary burdens on a national bank seeking (1) to relocate its main office as part of a merger or consolidation transaction with another bank or banks 

in the same State, or (2) to relocate its main office to a branch location in the same 

State. These amendments are consistent with current law and would not permit a 

national bank to establish or retain a branch at any location within a State where 

it could not do so today. 

The first such amendment would provide that a national bank that is merging or 

consolidating with another bank in the same State pursuant to national banking law 

(rather than Riegle-Neal which applies only to interstate mergers and consolidations), has the same opportunity to retain certain offices that it would have if the 

merger or consolidation were an interstate merger subject to Riegle-Neal. The 

amendment would allow a national bank, with the Comptroller’s approval, to retain 

and operate as its main office any main office or branch of any bank involved in 

the transaction. This is the same result that Congress authorized for interstate

mergers in Riegle-Neal, over 10 years ago. 

Under the second amendment, national banking law would be amended to give 

any national bank more flexibility when relocating its main office to an already existing branch location within the same State. However, the amendment would permit the former main office to be operated as a branch only if a branch at the same 

location could be established and operated under 12 U.S.C. § 36(c). Under 12 U.S.C. 

§ 36, a national bank would be able to retain branches or operate a former main 

office as a branch when engaging in transactions or relocations covered by these 

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5Such legislation, however, should specifically provide that the privilege cannot be asserted 

against the banking regulator to whom the information is provided, in order to allow the regulator to use the information as necessary to carry out its supervisory responsibilities. 

amendments only if a State bank could establish and operate a branch at the same 

location. Thus, the amendments would not override State ‘‘home office protection’’ 

types of laws that restrict branch locations. 

Enhancing National Banks’ Community Development Investments. The OCC supports an amendment that would increase the maximum amount of a national bank’s 

investments that are designed to promote the public welfare either directly or by 

purchasing interests in an entity engaged in making these qualifying investments, 

such as a community development corporation (CDC). We recommend increasing the 

maximum permissible amount of such investments from 10 percent to 15 percent 

of the bank’s capital and surplus. The maximum limit only applies if the bank is 

adequately capitalized and only if the OCC determines that this higher limit will 

not pose a significant risk to the deposit insurance fund. 

Today, more than 90 percent of national banks’ utilization of this authority is in 

investments in community development entities engaged in low-income housing development projects. Losses associated with such projects have been very low. Benefits, in terms of provision of affordable housing stock and economic revitalization, 

have been significant. Allowing certain adequately capitalized national banks to 

modestly increase their community development investments subject to the requirements of the statute will enable them to expand investments that have been profitable, low-risk, and beneficial to their communities. 

The OCC evaluates all investments made under this authority, whether made by 

the bank directly or indirectly through its CDC, on a case-by-case basis to determine 

if the investment has a primary public welfare purpose. In practice, we ‘‘look 

through’’ the CDC to apply the same primary public welfare test as if the bank were 

making the investment directly. This approach ensures that the increased investment authority is focused on investments that promote the public welfare purpose 

of the statute. 

Repealing the Geographic Limits on Bank Service Companies. The OCC supports 

removing the geographic restrictions on bank service companies (BSC). In light of 

the advent of interstate banking and branching under Riegle-Neal, it no longer 

makes sense to restrict the general operations of BSC’s to the State where the BSC’s 

bank shareholders or members are located and to require that all insured bank 

shareholders or members must be located in the same State. We support amending 

the statute to permit bank service companies to perform any services at any location 

where its bank shareholders or members could perform the same services. Our proposal, however, does not change the requirement in current law that a BSC may 

conduct activities that are not otherwise authorized and that are closely related to 

banking under the Bank Holding Company Act only with Fed approval. 

OCC Operations 

Improving Ability to Obtain Information from Regulated Entities. The OCC supports efforts to improve our ability to obtain information from regulated entities. In 

particular, we would like to call your attention to two specific amendments that we 

believe would significantly enhance the free flow of information between the OCC 

and the institutions that we supervise. 

First, the OCC strongly supports an amendment that would ensure that no applicable privilege is waived when a person provides information to a Federal, State, 

or foreign banking regulator as part of the regulator’s supervisory process.5 There 

are conflicting court decisions on this issue that may impede a regulator’s access to 

important supervisory information about a regulated banking institution. An 

amendment would be enormously beneficial to resolve the uncertainty so as to ensure that banks may freely provide information to regulators without fear that any 

applicable privilege may be waived. Amendments such as this one that enhance the 

dialogue between banks and regulators improve the supervisory process with added 

safety and soundness benefits. 

Second, the OCC supports an amendment that would permit all of the Federal 

banking agencies—the OCC, FDIC, OTS, and the Fed—to establish and use advisory committees in the same manner. Under current law, only the Fed is exempt 

from the disclosure requirements under the Federal Advisory Committee Act 

(FACA). Yet, all types of insured institutions and their regulators have a need to 

share information and to conduct open and frank discussions that may involve nonpublic information about the impact of supervisory or policy issues. Because of the 

potentially sensitive nature of this type of information, the public meeting and disclosure requirements under FACA may inhibit the supervised institutions from proVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00139 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
132

viding the agencies their candid views. Importantly, this is information that any one 

bank could provide to its regulator and discuss on a confidential basis. It is only 

when several banks simultaneously do so in a collective discussion and offer suggestions to regulators that issues are raised under FACA. An amendment would cure 

this anomaly. 

Safety and Soundness 

The OCC also supports a number of amendments that would promote and maintain safety and soundness and facilitate the ability of regulators to address and resolve troubled bank situations. 

Enforcing Written Agreements and Commitments. The OCC supports an amendment that would expressly authorize the Federal banking agencies to enforce written agreements and conditions imposed in writing in connection with an application 

or when the agency imposes conditions as part of its decision not to disapprove a 

notice, for example, a Change in Bank Control Act (CBCA) notice. 

This amendment would rectify the results of certain Federal court decisions that 

conditioned the agencies’ authority to enforce such conditions or agreements with 

respect to a nonbank party to the agreement, such as a controlling company, on a 

showing that the nonbank party was ‘‘unjustly enriched.’’ We believe that this 

amendment will enhance the safety and soundness of depository institutions and 

protect the deposit insurance funds from unnecessary losses. 

Barring Convicted Felons From Participating in the Affairs of Depository Institutions. The OCC also supports an amendment to the banking laws that would give 

the Federal banking agencies the authority to prohibit a person convicted of a crime 

involving dishonesty, breach of trust, or money laundering from participating in the 

affairs of an uninsured national or State bank or uninsured branch or agency of a 

foreign bank without the consent of the agency. Under current law, the ability to 

keep these ‘‘bad actors’’ out of depository institutions applies only to insured depository institutions. Thus, for example, it would be harder to prevent an individual convicted of such crimes from serving as an official of an uninsured trust bank whose 

operations are subject to the highest fiduciary standards, than to keep that individual from an administrative position at an insured bank. 

Strengthening the Supervision of ‘‘Stripped-Charter’’ Institutions. The OCC supports an amendment to the CBCA to address issues that have arisen when a 

stripped-charter institution (that is, an insured bank that has no ongoing business 

operations because, for example, all of the business operations have been transferred to another institution) is the subject of a change-in-control notice. The agencies’ primary concern with such CBCA notices is that the CBCA is sometimes used 

as a route to acquire a bank with deposit insurance without submitting an application for a de novo charter and an application for deposit insurance, even though the 

risks presented by the two transactions may be substantively identical. In general, 

the scope of review of a de novo charter application or deposit insurance application 

is more comprehensive than the current statutory grounds for denial of a notice 

under the CBCA. There also are significant differences between the application and 

notice procedures. In the case of an application, the banking agency must affirmatively approve the request before a transaction can be consummated. Under the 

CBCA, if the Federal banking agency does not act to disapprove a notice within certain time frames, the acquiring person may consummate the transaction. To address 

these concerns, the OCC supports an amendment that (1) would expand the criteria 

in the CBCA that allow a Federal banking agency to extend the time period to consider a CBCA notice so that the agency may consider business plan information, and 

(2) would allow the agency to use that information in determining whether to disapprove the notice. 

Federal Branches and Agencies of Foreign Banks 

The OCC also licenses and supervises Federal branches and agencies of foreign 

banks. Federal branches and agencies generally are subject to the same rights and 

privileges, as well as the same duties, restrictions, penalties, liabilities, conditions, 

and limitations and laws that apply to national banks. Branches and agencies of foreign banks, however, also are subject to other requirements under the International 

Banking Act of 1978 (IBA) that are unique to their organizational structure and operations in the United States as an office of a foreign bank. In this regard, the OCC 

is recommending amendments to reduce certain unnecessary burdens on Federal 

branches and agencies while preserving national treatment with national banks. 

Implementing Risk-Based Requirements for Federal Branches and Agencies. The 

OCC supports an amendment to the IBA to allow the OCC to set the capital equivalency deposit (CED) for Federal branches and agencies to reflect their risk profile. 

We prefer an amendment that would allow the OCC, after consultation with the 

133

6Some of the amendments to the FRA discussed above were included in H.R. 1224, the Business Checking Freedom Act of 2005, as passed by the House on May 24, 2005. 7 12 U.S.C. § 335 states:

‘‘State member banks shall be subject to the same limitations and conditions with respect to 

the purchasing, selling, underwriting, and holding of investment securities and stock as are applicable in the case of national banks under paragraph ‘Seventh’ of Section 5136 of the Revised 

Statutes, as amended [12 U.S.C. § 24(Seventh)]. This paragraph shall not apply to an interest 

held by a State member bank in accordance with Section 5136A of the Revised Statutes of the 

United States [12 U.S.C. § 24a] and subject to the same conditions and limitations provided in 

such section.’’

Federal Financial Institutions Examination Council, to adopt regulations setting the 

CED on a risk-based institution-by-institution basis. This approach would closely resemble the risk-based capital framework that applies to both national and State 

banks. 

Other Recommendations from the EGRPRA Process 

As a result of the dialogue between the Federal banking agencies—the OCC, the 

Fed, the FDIC, and the OTS—and the banking industry as part of the EGRPRA 

process and other discussions over the last several years on regulatory burden relief 

legislation, it has become apparent that we all support amendments that would:

• Authorize the Fed to pay interest on reserve accounts under the Federal Reserve 

Act (FRA); 6

• Provide that member banks may satisfy the reserve requirements under the FRA 

through pass-through deposits; 

• Provide the Fed with more flexibility to set reserve requirements under the FRA; 

• Repeal certain reporting requirements relating to insider lending under the FRA; 

• Streamline depository institutions’ requirements under the Bank Merger Act 

(BMA) to eliminate the requirement that the agency acting on the application 

must request competitive factor reports from all of the other Federal banking 

agencies; 

• Shorten the post-approval waiting period under the BMA in cases where there is 

no adverse effect on competition; 

• Exempt mergers between depository institutions and affiliates from the competitive factors review and post-approval waiting periods under the BMA; 

• Improve information sharing with foreign supervisors under the IBA; 

• Provide an inflation adjustment for the small depository institution exception 

under the Depository Institution Management Interlocks Act; and 

• Provide that the Federal banking agencies will review the requirements for banks’ 

reports of condition under the FDIA every 5 years and reduce or eliminate any 

requirements that are no longer necessary or appropriate. 

Other Comments 

We would like to take this opportunity to also make you aware of our views on 

another legislative proposal that may be under consideration. 

Maintaining Parity Between Permissible Securities and Stock Investments of National Banks and State Member Banks. One amendment that has been suggested 

to the Committee would be to repeal 12 U.S.C. § 335.7 While the amendment has 

been described as removing limitations on the powers of State member banks, it 

would, in fact, liberalize the authority of State member banks to invest in stock and 

other investment securities. Repealing 12 U.S.C. § 335 would result in permitting 

State member banks to invest in stock and investment securities that are impermissible for national banks. 

This change would undo the long-standing parity that similarly limits national 

banks’ and State member banks’ permissible investments in stock and investment 

securities—a parity framework that dates back to the 1933 Glass-Steagall Act and 

was carefully maintained when GLBA was enacted in 1999. Portions of § 335 were 

enacted in 1999 as part of the GLBA compromise relating to financial subsidiary 

activities. Consistent with the parity framework, this key language in § 335 provides 

that State member banks’ financial subsidiaries are subject to the same limitations 

and prudential safeguards that apply to national banks’ financial subsidiaries. This 

sentence was the result of a carefully crafted compromise to ensure that parallel 

firewalls, safeguards, and rules were applied to financial subsidiaries of national 

and State member banks. 

Conclusion 

Mr. Chairman, on behalf of the OCC, I thank you for your leadership in holding 

these hearings. The OCC strongly supports initiatives that will reduce unnecessary 

134

burden on the industry in a responsible, safe and sound manner. We are pleased 

to continue to work with you and your staff to make that goal a reality. 

I would be happy to answer any questions you may have. 

—————

PREPARED STATEMENT OF JoANN M. JOHNSON

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION

MARCH 1, 2006

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee on 

behalf of the National Credit Union Administration (NCUA) I am pleased to be here 

today to present our agency’s views on regulatory relief initiatives being considered 

by Congress. NCUA’s longstanding view on this issue is that enactment will provide 

a tangible benefit to America’s consumers by giving them access to more modern, 

up to date, and efficient financial institutions. An equally important benefit will be 

an overall improvement in regulatory efficiency by removing outmoded, duplicative, 

and unnecessary regulations while maintaining a focus on the primary safety and 

soundness responsibility that Congress has conferred on the Agency. 

Regulatory Relief and Efficiency 

In June 2005, I testified before this Committee and presented several legislative 

proposals NCUA recommended for your consideration. NCUA continues to recommend these provisions as desirable components of regulatory reform:

• Permit Federal credit unions to cash checks and money transfer services for individuals in their field of membership but not yet members. This is particularly important to Federal credit unions in furthering their efforts to serve those of limited income or means in their field of membership. These individuals, in many instances, do not have mainstream financial services available to them and are 

often forced to pay excessive fees for check cashing, wire transfer and other services. The House of Representatives has taken this up as H.R. 749, amended it to 

include international remittances and passed the bill. Section 3 of S. 31, introduced by Senator Sarbanes and other Members of the Committee includes a similar provision; • Increase the allowable maturity on Federal credit union loans from 12 to 15 years. 

Federal credit unions should be able to make loans for second homes, recreational 

vehicles and other purposes in accordance with conventional maturities that are 

commonly accepted in the market today; • Increase the investment limit in credit union service organizations (CUSO’s) from 

1 percent to 3 percent. The 1 percent aggregate investment limit is unrealistically 

low and forces credit unions to either bring services in-house, thus potentially increasing risk to the credit union and the NCUSIF, or turn to outside providers 

and lose control; • Safely increase options for credit unions to invest their funds by expanding authority beyond loans, government securities, deposits in other financial institutions and certain other very limited investments. The recommendation is to permit additional investments in corporate debt securities (as opposed to equity) and 

further establish specific percentage limitations and investment grade standards; 

• Alleviate NCUA from the process now required that it consider a spin-off of any 

group of over 3,000 members in the merging credit union when two credit unions 

merge voluntarily. A spin-off would most likely undermine financial services to 

the affected group and may create safety and soundness concerns; 

• Provide relief for credit unions from a requirement that they register with the 

SEC as broker-dealers when engaging in certain de minimums securities activities. The principle established by the present bank exemption, and a similar exemption sought by thrifts, is that securities activities of an incidental nature to 

the financial institutions do not have to be placed into a separate affiliate; 

• Make needed technical corrections to the Federal Credit Union Act.

These NCUA recommendations are more fully described on the following pages. 

Additionally, NCUA encourages this Committee to consider changes to the current 

credit union member business lending regimen that would improve the ability of 

credit unions to provide a source of needed credit to small businesses. 

NCUA has also reviewed the following additional credit union provisions included 

in the matrix circulated by Senator Crapo in anticipation of this hearing. We have 

carefully examined each and have determined that these provisions present no safety and soundness concerns for the credit unions we regulate and/or insure: Leases 

of land on Federal facilities for credit unions; exclusion of member business loans 

135

1Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, requiring the acquisition method for business combinations and effectively eliminating the pooling 

method. The pooling method has typically been used by credit unions to account for credit union 

mergers. The standards became effective for combinations initiated after June 30, 2001. Paragraph 60 of the standard deferred the effective date for mutual enterprises (that is, credit 

unions) until the FASB could develop purchase method procedures for those combinations. In 

the interim, credit unions have continued to account for mergers as poolings (simple combination of financial statement components). 

to nonprofit religious organizations; criteria for continued membership of certain 

member groups in community charter conversions; credit union governance provisions; providing NCUA with greater flexibility to adjust the Federal usury ceiling 

for Federal credit unions; and an exemption from the premerger notification requirements of the Clayton Act. 

Preserving the Net Worth of Credit Unions in Mergers 

NCUA is aware that the Financial Accounting Standards Board (FASB) has extended its expected date to publish a final rule requiring the acquisition method of 

accounting for mergers of credit unions to 2007. This new rule would eliminate the 

‘‘pooling’’ method and require the ‘‘acquisition’’ or ‘‘purchase’’ method to be used.1

When this change to accounting rules is implemented it will require that, in a merger, the net assets on a fair value basis of the merging credit union as a whole be 

carried over as ‘‘acquired equity.’’ The Federal Credit Union Act does not recognize 

‘‘acquired equity’’ as part of capital rather defining capital in terms of ‘‘retained 

earnings.’’ Retained earnings does not include acquired equity. This FASB policy 

has been in place since mid-2001 for most business combinations and the delay by 

FASB in implementing it for credit unions, as well as other cooperative organizations, has allowed all of us to explore how credit unions could conform to the new 

financial reporting standards. 

Without the changes to the Federal Credit Union Act, only ‘‘retained earnings’’ of 

the continuing credit union will count as net worth after a merger. This result 

would seriously reduce the post-merger net worth ratio of a federally insured credit 

union, because this ratio is the retained earnings of only the continuing credit union 

stated as a percentage of the combined assets of the two institutions. Not only 

would this inaccurately depict the actual net worth of the new, merged credit union, 

a lower net worth ratio also has adverse implications under the statutory ‘‘prompt 

corrective action’’ (PCA) regulation. This result will discourage voluntary mergers 

and on occasion make NCUA assisted mergers more difficult and costly to the National Credit Union Share Insurance Fund (NCUSIF). Absent a legislative remedy, 

an important NCUA tool for reducing costs and efficiently managing the fund will 

be unavailable. NCUA encourages this Committee to include language in legislation 

to allow NCUA to redefine ‘‘net worth’’ to include the premerger retained earnings 

of the merging credit union for purposes of regulatory capital calculation and 

prompt corrective action. Credit unions would continue to be required to prepare financial reports consistent with generally accepted accounting principles including 

FAS 141. 

A solution was passed unanimously by the House last June, H.R. 1042, the ‘‘Net 

Worth for Credit Unions Act,’’ and I strongly encourage this Committee to include 

that bill language in any regulatory relief legislation that you introduce. 

Reform of Prompt Corrective Action System for Federally Insured Credit

Unions 

The Credit Union Membership Access Act of 1998 mandated a system of Prompt 

Corrective Action (PCA) for credit unions designed to ensure problems in federally 

insured credit unions are resolved at the least long-term cost to the NCUSIF. PCA, 

and the focus it creates on active management of capital levels, has proven very valuable to NCUA’s management of the National Credit Union Share Insurance Fund 

(NCUSIF) and the overall health of the credit union system. NCUA continues to 

strongly support a robust, statutorily mandated PCA system that fosters healthy 

capitalization levels and effective capital management in federally insured credit 

unions. 

However, the current statutory requirements for credit unions are too inflexible 

and establish a structure based primarily on a ‘‘one-size-fits-all’’ approach, relying 

largely on a high leverage requirement of net worth to total assets. This creates inequities for credit unions with low-risk balance sheets, limits NCUA’s ability to have 

a risk-based requirement that governs more often, without requiring unduly high 

capital levels, and fosters accumulation of capital levels well in excess of what is 

needed for most credit unions’ safety and soundness and strategic needs. 

136

Credit unions enjoy very strong capital levels, with 98 percent of credit unions 

categorized as well-capitalized under PCA. Credit unions’ conservative nature and 

limited ability to manage compliance with capital standards has resulted in their 

accumulating a cushion of capital well in excess of PCA requirements, with the aggregate level of capital at 11.24 percent of total assets. Though high capital levels 

afford the insurance fund with additional protection and the institution with various 

benefits, it does not come without a cost. Consider that 85 percent of credit unions 

maintain a leverage ratio (net worth to total assets) in excess of 9 percent. As the 

table below illustrates, this results in net worth in the credit union system of $15.2 

billion above this level. If credit unions had more flexibility to manage their compliance with PCA, they could still maintain a good cushion above regulatory requirements while safely returning more earnings to the members and expanding member 

services and other outreach programs.

Further, as the Federal bank and thrift regulators are in the process of implementing changes to the capital standards their regulated institutions operate under, 

it becomes even more important that capital standards for credit unions are able 

to be updated to remain comparable and incorporate relevant improvements in approaches to measuring risk and allocating capital. Thus, reform of PCA standards 

for federally insured credit union remains a vital issue. 

NCUA’s purposes in seeking PCA reform is to achieve greater comparability with 

other federally insured financial institutions, provide a good balance between sound 

protection for the insurance fund and reasonable constraints on insured institutions, 

and to make our capital requirements more risk-sensitive. We recognize that some 

credit unions will be provided with greater flexibility in managing capital levels as 

a result, which is largely a function of their relatively low risk profiles and strong 

capital levels. On the whole we believe reforms to our system can strike an effective 

balance between maintaining robust standards while providing additional flexibility 

where warranted. Also, we very much appreciate that there are inherent limitations 

in risk-based capital techniques, and thus the leverage ratio plays an important part 

in a good regulatory capital system given. It is important to have the right interaction between the leverage and risk-based requirements to ensure the risk-based 

requirement is effective in influencing risk management decisions of institutions 

and more closely relates required capital levels to institution specific risk profiles. 

In March 2005, NCUA published specific PCA reform recommendations designed 

to achieve these goals. The reform proposal is intended to provide enough details 

to enable a thoughtful consideration of the impact of any such reform, as well as 

to establish a basis for specific statutory language that would be needed to accomplish our reform objectives. In order to achieve greater comparability and a more 

risk-based system, we have proposed some reduction in the standard net worth (that 

is, leverage) ratio requirement for credit unions. Adjustment of the leverage ratio 

for credit unions will enable it to effectively complement the risk-based requirement, 

not overshadow it. Credit unions will have to more actively manage the risk they 

take in relation to their capital levels. It will reduce any competitive disadvantage 

that results from being held to a higher capital standard than other federally insured institutions when the higher standard is not warranted. 

NCUA recognizes that there are some differences between the types of federally 

insured financial institutions that need to be taken into account, and we will continue to consult with the Department of the Treasury on comparability issues. For 


mar1-53.eps
137

example, credit unions do have limitations on their ability to raise capital. However, 

they also have a relatively low risk profile given greater restrictions on powers compared to other financial institutions, as evidenced by their low loss history. We recognize the need to account for the 1 percent deposit method of capitalizing the 

NCUSIF given its effect on the overall capital in the share insurance fund and the 

credit union system. Thus, our reform proposal incorporates a revised method for 

calculating the net worth ratio for PCA purposes by adjusting for the deposit credit 

unions maintain in the share insurance fund. Our proposed treatment of the 

NCUSIF deposit for purposes of regulatory capital standards in no way alters its 

treatment as an asset under generally accepted accounting principles, or NCUA’s 

steadfast support of the mutual, deposit-based nature of the NCUSIF. 

This reform proposal also outlines improvements we believe are needed to make 

our risk-based net worth requirement more risk-sensitive and relevant. We intend 

to have a well designed risk-based system that maintains comparability with FDIC’s 

risk-based capital requirements for non-BASEL II insured institutions. For potential 

impact analysis purposes, we designed a risk-based model using elements of BASEL 

I and the standard approach of BASEL II. However, since we issued our proposal, 

there have been further developments related to risk-based capital standards for 

other federally insured financial institutions. We continue to closely monitor developments in risk-based capital standards for other insured financial institutions and 

will modify our risk-based requirement model and impact analysis as needed. 

As there are limitations in any regulatory capital scheme, NCUA’s reform proposal also includes recommendations to address these other forms of risk under the 

second pillar of the supervisory framework, a robust supervisory review process. 

Through our examination and supervision process, NCUA will continue to analyze 

each credit union’s capital position in relation to the overall risk of the institution, 

which will at times reflect a need for capital levels higher than regulatory minimums. Enabling NCUA to adopt a PCA system that remains relevant and up-to-date 

with emerging trends in credit unions and the marketplace provides safety, efficiency, and benefits to the credit union consumer. I believe our reform proposal 

achieves a much needed balance between enabling credit unions to utilize capital 

efficiently to better serve their members while maintaining safety and soundness 

and protecting the share insurance fund. A well-designed risk based system would 

alleviate regulatory concerns by not penalizing low risk activities and by providing 

credit union management with the ability to manage their compliance through adjustments to their assets and activities. A PCA system that is more fully risk-based 

would better achieve the objectives of PCA and is consistent with sound risk management principles. 

Reform of Credit Union Member Business Lending 

NCUA recommends improvements in the current credit union member business 

lending regimen that would provide an enhanced ability to make those loans while 

maintaining a strong focus on safety and soundness. 

Specifically, NCUA would support legislative changes that would:

• Remove the limit on assets a credit union can place in member business loans, 

currently calculated at 1.75 times actual net worth, and substitute a flat rate of 

20 percent of the credit union’s total assets. 

• Eliminate the current $50,000 threshold for defining a loan as a MBL, and grant 

NCUA authority to exclude member business loans under $100,000.

Given the extensive regulations under which credit union member business lending is done, NCUA believes that both the 12.25 percent cap and the $50,000 limit 

present an unnecessary barrier to a type of lending that experience has shown to 

be exceptionally safe and sound. 

Explanation of NCUA Recommended Provisions for Consideration by the

Committee on Banking, Housing, and Urban Affairs 

CHECK CASHING AND MONEY TRANSFER SERVICES OFFERED WITHIN THE FIELD OF

MEMBERSHIP OF THE CREDIT UNION

Current Law 

Section 107 of the Federal Credit Union Act authorizes Federal credit unions to 

provide check cashing and money transfer services to members. 

Proposed Amendment 

This amendment permits Federal credit unions to offer these same services to persons eligible to be members of the credit union, defined as those that fall within 

the field of membership of the credit union. 

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Reasons for Change 

• Congress and the Administration are asking financial institutions to do more to 

reach the ‘‘unbanked.’’

• Credit unions are constrained from extending the most basic financial transaction 

(check cashing) to those who have avoided traditional financial institutions. 

• Expanding check cashing, wire transfer, and similar services to nonmembers 

within a credit union’s field of membership would provide an introduction to reliable low-cost financial services which can provide a viable alternative to less savory practices while at the same time increase confidence in traditional financial 

organizations. 

• With more and more credit unions adopting underserved areas, these services become especially important in reaching out to the underserved. 

ELIMINATE THE 12-YEAR LIMIT ON TERM OF FEDERAL CREDIT UNION LOANS

Current Law 

The Federal Credit Union Act imposes a 12-year loan maturity limit on most credit union loans. Principal residence loans have maturities up to 30 years, and principal mobile home loans have maturities of 15 years. 

Proposed Amendment 

The proposed amendment permits the NCUA Board to provide for maturity limits 

up to 15 years, or longer, as the NCUA Board may allow by regulation. 

Reasons for Change 

• The current restriction placed on Federal credit unions is outdated and unnecessarily restricts a credit union’s lending terms to its members. 

• Members of Federal credit unions should be able to obtain loans for second homes, 

recreational vehicles, and other purposes in accordance with conventional maturities that are commonly accepted in the market today. 

INCREASE IN 1 PERCENT INVESTMENT LIMIT IN CUSO’S

Current Law 

The Federal Credit Union Act permits Federal credit unions to invest in Credit 

Union Service Organizations (CUSO’s)—organizations providing services to credit 

unions and credit union members. An individual credit union, however, may invest 

in aggregate no more than 1 percent of its shares and undivided earning in these 

organizations. 

Proposed Amendment 

The provision increases the permissible credit union investment in CUSO’s from 

1 percent to 3 percent of its shares and undivided earnings. 

Reasons for Change 

• CUSO’s are frequently established by several credit unions to provide important 

services to credit unions, such as check clearing and data processing, which can 

be done more efficiently for a group. 

• When these services are provided through a CUSO, any financial risks are isolated from the credit union while allowing the credit unions to retain quality control over the services offered and the prices paid by the credit unions or their 

members. 

• An increase in the CUSO investment to 3 percent allows the CUSO to continue 

servicing its credit union members without having to bring services back in-house 

or engage outside providers. This controls risk and expense to the credit union. 

• The 1 percent limit has not been updated since its inception in 1977. 

INVESTMENTS IN SECURITIES BY FEDERAL CREDIT UNIONS

Current Law 

The Federal Credit Union Act authorizes Federal credit unions to invest in loans, 

obligations of the United States, or securities fully guaranteed as to principal and 

interest by the U.S. Government, deposits in other financial institutions, and certain 

other limited investments, such as obligations of Federal Home Loan Banks, wholly 

owned government corporations, or in obligations, participations or other instruments issued by, or fully guaranteed by FNMA, GNMA, or FHLMC. 

Proposed Amendment 

This amendment would provide authority for Federal credit unions to purchase 

and hold for their own account ‘‘investment securities’’ if they are in one of the four 

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highest investment rating categories—subject to further definition and qualification 

by NCUA rulemaking. 

The amendment limits Federal credit unions’ investments in investment securities 

in two ways. First, a statutory ‘‘single obligor’’ percentage limitation is established, 

such that the total amount of investment securities of any single obligor or maker 

held by the Federal credit union for the credit union’s own account cannot exceed 

10 percent of the net worth of the credit union. Second, the aggregate amount of 

investments held by the Federal credit union for its own account cannot exceed 10 

percent of the assets of the credit union. 

Reasons for Change 

• A number of private debt instruments such as highly rated commercial paper, corporate notes, and asset-backed securities would be appropriate investments for 

Federal credit unions. 

• Other federally regulated and State regulated financial institutions have a proven 

track record with these limited investments. 

• Allowing such investments would give credit unions more asset liability management options. 

• NCUA implementing regulations will further address appropriate investment 

gradings, possible minimum credit union net worth requirements, and other safety and soundness requirements. 

• With a percentage limitation of 10 percent of net worth per single obligor, this 

modest increase in investment flexibility will not subject credit unions to undue 

risk. 

• The 10 percent limitation language parallels the limitation applicable to national 

banks when applied to the ‘‘net worth’’ measurement for credit unions. 

• The prohibition against investment in equity securities is maintained. 

VOLUNTARY MERGER AUTHORITY

Current Law 

Section 109 of the Federal Credit Union Act requires NCUA to engage in an analysis of every voluntary merger of healthy Federal credit unions to determine whether a spin-off of any select employee group (SEG) of over 3,000 members in the merging credit union can be effectively accomplished. 

Proposed Amendment 

The recommendation is to eliminate the requirement that NCUA engage in an 

analysis of every voluntary merger to determine whether a select employee group 

over 3,000 can be spun-off into a separate credit union. 

Reasons for Change 

• Requiring NCUA to engage in an analysis of every voluntary merger of healthy 

Federal credit unions to consider a spin-off from the merging credit union of any 

select employee group (SEG) of over 3,000 is cumbersome and provides little practical benefit or purpose. There are about 300 a year. 

• When two healthy multiple bond credit unions pursue a merger, it increases their 

financial strength and member service is enhanced, as well as their long-term 

safety and soundness. 

• Member employee (or other) groups over 3,000 are already included in a multiple 

group credit union in accordance with statutory standards. 

TREATMENT OF CREDIT UNIONS AS DEPOSITORY INSTITUTIONS UNDER SECURITIES

LAWS

Current Law 

Section 201 and 202 of the Gramm-Leach-Bliley Act, enacted in 1999, created specific exemptions from broker-dealer registration requirements of the Bank Exchange 

Act of 1934 for certain bank securities activities. Banks are also exempt from the 

registration and other requirements of the Investment Advisers Act of 1940. The 

principle established in these laws is that securities activities of an incidental nature to the bank do not have to be placed into a separate affiliate and functionally 

regulated. 

Proposed Amendment 

This provision would provide a statutory exemption for credit unions similar to 

that already provided banks and allow credit unions, like banks, to avoid complicated filings with the Securities and Exchange Commission for incidental activities. 

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Reasons for Change 

• Federal credit unions are empowered to engage in specific activities enumerated 

in the FCUA and any other activities incidental to the enumerated activities. 

Among the specific broker-related activities currently authorized are third-party 

brokerage arrangements, sweep accounts, safekeeping, and custodial activities. 

Among the dealer-related activities are the purchase and sale of particular securities, including but not limited to municipal securities and ‘‘Identified Banking 

Products’’ for the credit union’s own account. 

• These incidental activities might trigger SEC registration if not exempted by law. 

• This important regulatory relief and efficiency provision would reduce the cost 

and complication to credit unions having to approach the SEC on a case-by-case 

basis or through regulation—the only avenues now available to them for relief. 

• While a Federal or State-chartered credit union might be granted authority to engage in otherwise lawful activities, the credit union might have to abandon the 

activity or outsource it to a third party at increased expense if this exemption is 

not provided. 

• This exemption would not expand the types of securities activities that credit 

unions are authorized to engage in. It simply serves to provide parity with banks 

and thrifts regarding an exemption from SEC registration for the limited securities activities credit unions are authorized to engage in. 

TECHNICAL CORRECTIONS TO THE FEDERAL CREDIT UNION ACT

Explanation of Proposed Amendment 

Twenty-eight purely technical and clerical corrections to the Federal Credit Union 

Act have been identified as needed. 

Reasons for Change 

To make the Federal Credit Union Act accurate and correct. 

NCUA’S VIEWPOINT REGARDING OTHER ITEMS UNDER CONSIDERATION

NCUA has reviewed additional items in order to determine whether it would also 

be advisable to maintain parallel treatment under the Federal Credit Union Act 

with our fellow financial regulators should the Committee include any of these suggestions in a legislative proposal. The proposals where NCUA would seek parallel 

treatment, and language to achieve that, follows. 

ITEM 144. TECHNICAL AMENDMENT TO SECTION 8(i) OF THE FDI ACT

This item clarifies that a Federal banking agency may take enforcement action 

against a person for conduct that occurred during his or her affiliation with a banking organization even if the person resigns from the organization, regardless of 

whether the enforcement action is initiated through a notice or an order. 

Section 206(k)(3) of the FCU Act parallels § 8(i) of the FDI Act. If § 8(i) is amended, we recommend the same amendment to the FCU Act.

Suggested Language: 

Section 206(k)(3) of the Federal Credit Union Act (12 U.S.C. 1786(k)(3)) is amended by inserting ‘‘or order’’ after ‘‘notice’’ each place such term appears. 

ITEM 147. CLARIFICATION THAT CHANGE IN CONTROL CONDITIONS ARE ENFORCEABLE

This item amends section 8 of the FDI Act (12 U.S.C. 1818) to clarify the appropriate Federal banking agencies’ authority to take enforcement action against the 

institutions they supervise based on violations of conditions imposed in writing in 

connection with any action by the agency on an application, notice, or other request 

by an insured depository institution or institution-affiliated party (IAP). 

Section 206 of the FCU Act has parallel sections to the portions of § 8 of the FDI 

Act this amendment changes. If the FDI Act is amended in this way, we recommend 

the same amendment to the FCU Act.

Suggested language: 

Section 206 of the Federal Credit Union Act (12 U.S.C. 1786) is amended—

(a) in subsection (b) (1), in the first sentence, by striking ‘‘the granting of any application or other request by the credit union’’ and inserting ‘‘any action on any application, notice, or other request by the credit union or institution-affiliated party,’’; 

(b) in subsection (g)(1)(A)(i)(III), by striking ‘‘the grant of any application or other 

request by such credit union’’ and inserting ‘‘any action on any application, notice, 

or request by such credit union or institution-affiliated party’’; and 

(c) in subsection (k)(2)(A)(iii), by striking ‘‘the grant of any application or other 

request by such credit union’’ and inserting ‘‘any action on any application, notice, 

or other request by the credit union or institution-affiliated party.’’

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ITEM 153. PARITY IN STANDARDS FOR INSTITUTION-AFFILIATED PARTIES

This item deletes the phrase ‘‘knowingly or recklessly’’ from the definition of ‘‘institution-affiliated party’’ in the Federal Deposit Insurance Act (12 U.S.C. 

1813(u)(4)). The FCU Act has an identical definition section, which should be similarly amended.

Suggested language: 

Section 206(r)(3) of the Federal Credit Union Act (12 U.S.C. 1786(r)(3)) is amended 

by striking ‘‘knowingly or recklessly.’’

ITEM 155. RECEIVER’S OR CONSERVATOR’S CONSENT REQUIREMENT

This item would require the consent of the receiver or conservator before a party 

to a contract to which the depository institution is a party could exercise any right 

or power to terminate, accelerate, or declare a default under any contract, or to obtain possession of or exercise control over any property of the institution or affect 

any contractual rights of the institution. 

Section 207(c)(12) of the FCU Act (12 U.S.C. 1787(c)(12)) parallels the section of 

the FDI Act this amendment changes. If the FDI Act is amended in this way, we 

recommend similar changes to the FCU Act.

Suggested language: 

Section 207(c)(12) of the Federal Credit Union Act (12 U.S.C. 1787(c)(12)) is 

amended by adding the following new subparagraph—

‘‘(C) Consent Requirement.—

(i) In general.—

Except as otherwise provided by this section, no person may exercise any right or 

power to terminate, accelerate, or declare a default under any contract to which the 

credit union is a party, or to obtain possession of or exercise control over any property 

of the credit union or affect any contractual rights of the credit union, without the 

consent of the conservator or liquidating agent, as appropriate, for a period of 45 

days from the date of the appointment of the conservator, or for a period of 90 days 

from the date of the appointment of the liquidating agent. 

(ii) Certain exceptions.—

No provision of this subparagraph shall apply to a director’s or officer’s liability 

insurance contract or a credit union bond, or to the rights of parties to certain qualified financial contracts pursuant to subsection (c)(8), or shall be construed as permitting the conservator or liquidating agent to fail to comply with otherwise enforceable 

provisions of such contract. 

(iii) Rule of Construction.—

Nothing in this subparagraph shall be construed to limit or otherwise affect the 

applicability of title 11 of the United States Code.’’. 

ITEM 156. ACQUISITION OF FICO SCORES

This item would amend the FCRA to define an FDIC request for FICO scores as 

part of its preparation for a resolution as a permissible purpose, enabling the FDIC 

to obtain FICO scores of bank borrowers by contacting credit reporting agencies and 

to obtain current consumer credit reports. The explanation states that this power 

is necessary so that FDIC can gain access to information that is helpful in evaluating the asset portfolios of troubled institutions. 

Although this has not yet been an issue for NCUA, we believe it would be helpful 

to include NCUA in this amendment.

Suggested language: (additions to FDIC language bolded) 

Section 604(a) of the Fair Credit Reporting Act (15 U.S.C. 1681b(a)) is amended 

by adding a new paragraph after paragraph (5) as follows: 

‘‘(6) To the Federal Deposit Insurance Corporation or the National Credit Union 

Administration as part of its preparation for its appointment or as part of its exercise 

of powers as conservator, [or] receiver or liquidating agent for an insured depository 

institution or insured credit union under the Federal Deposit Insurance Act or the 

Federal Credit Union Act or other applicable Federal or State law or in connection 

with the resolution or liquidation of a failed or failing insured depository institution 

or insured credit union.’’. 

ITEM 157. ELIMINATION OF CRIMINAL INDICTMENTS AGAINST RECEIVERSHIPS

This item would amend the Federal Deposit Insurance Act to require that any 

criminal indictment against a bank be dismissed, if the FDIC is appointed receiver 

of that bank. 

This has not yet been an issue for NCUA but it would be prudent to have a similar amendment to the FCU Act. The FCU Act does not have a parallel section to 

the section of the FDI Act being amended in this item, but we suggest adding similar language to the end of § 206.

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Suggested language: 

Section 206 of the Federal Credit Union Act (12 U.S.C. 1786) is amended by adding the following new subsection after subsection (v): 

‘‘(w) The Administration shall be exempt from all prosecution by the United States, 

any State, county, municipality, or local authority for any criminal offense arising 

under Federal, State, county, municipal, or local law, which was allegedly committed 

by a credit union, or persons acting on behalf of a credit union, prior to the appointment of the administration as liquidating agent.’’. 

ITEM 158. RESOLUTION OF DEPOSIT INSURANCE DISPUTES

This item would amend § 11(f) of the FDI Act to clarify that the APA standard 

of review, the 60-day limitation period, and U.S. District Court jurisdiction apply 

to the FDIC’s final determination of insurance coverage whether made pursuant to 

procedural regulations or not. The explanation states that the current version of the 

statute creates uncertainty about whether the statute of limitations applies in the 

absence of FDIC regulations and whether appellate or district courts have original 

jurisdiction to review FDIC’s decisions about insurance coverage. 

Section 207(f) of the FCU Act (12 U.S.C. 1787(f)) parallels § 11(f) of the FDI Act. 

If § 11(f) is amended, we recommend a similar amendment to the FCU Act.

Suggested language: 

Paragraphs (3), (4), and (5) of section 207(f) of the Federal Credit Union Act (12 

U.S.C. 1787(f)(3)) are amended to read as follows: 

‘‘(3) RESOLUTION OF DISPUTES.—The Administration’s determination regarding any claim for insurance coverage shall be treated as a final determination for 

purposes of this section. In its discretion, the Board may promulgate regulations prescribing procedures for resolving any disputed claim relating to any insured deposit 

or any determination of insurance coverage with respect to any deposit. 

(4) REVIEW OF BOARD’S DETERMINATION.—A final determination made by 

the Board shall be a final agency action reviewable in accordance with chapter 7 of 

title 5, United States Code, by the United States district court for the Federal judicial 

district where the principal place of business of the credit union is located. 

(5) STATUTE OF LIMITATIONS.—Any request for review of a final determination by the Board shall be filed with the appropriate United States district court not 

later than 60 days after such determination is issued.’’. 

ITEM 160. RECORDKEEPING AMENDMENT

This item would permit the FDIC to destroy records that are 10 or more years 

old at the time of its appointment as receiver, unless directed not to do so by a court 

or a government agency or prohibited by law. 

This provision amends section 11(d)(15)(D) of the FDI Act, which parallels section 

207(b)(15)(D) of the FCU Act. If the FDI Act is amended in this way, we recommend 

similar changes to the FCU Act.

Suggested language: 

Section 207(b)(15)(D) of the Federal Credit Union Act (12 U.S.C. 1787(b)(15)(D)) 

is amended—

(1) by striking ‘‘Recordkeeping requirement.—After the end of the 6-year period’’ 

and inserting 

‘‘(i) In general.—Except as provided in clause (ii), after the end of the 6-year period’; and 

(2) by adding at the end the following new clause: 

‘‘(ii) Old records.—-In the case of records of an insured credit union which are at 

least 10 years old as of the date the Board is appointed as liquidating agent of such 

credit union, the Board may destroy such records in accordance with clause (i) any 

time after such appointment is final without regard to the 6-year period of limitation 

contained in such clause.’’. 

ITEM 161. PRESERVATION OF RECORDS BY OPTICAL IMAGING AND OTHER MEANS

(§ 605 OF H.R. 1375) 

This item would allow FDIC to rely upon records preserved electronically, such 

as optically imaged or computer scanned images. 

This has not yet been an issue, but if FDIC has this option, we recommend explicitly granting this option to NCUA as well in case electronic imaging becomes more 

cost-effective. The provision of the FDI Act being amended does not have an exact 

parallel in the FCU Act. Our suggested language adds the new provision to section 

206(s) of the FCU Act. 

Suggested language: 

Section 206(s) of the Federal Credit Union Act (12 U.S.C. 1786(s)) is amended by 

inserting at the end the following new paragraph: 

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‘‘(9) Preservation of Records.—

‘‘(A) In general.—The Board my cause any and all records, papers, or documents 

kept by the administration or in the possession or custody of the administration to 

be—

‘‘(i) photographed or micrographed or otherwise reproduced upon film; or 

‘‘(ii) preserved in any electronic medium or format which is capable of 

‘‘(a) being read or scanned by computer; and 

‘‘(b) being reproduced from such electronic medium or format by printing or any 

other form of reproduction of electronically stored data. 

‘‘(B) Treatment as original records.—Any photographs, micrographs, or photographic film or copies thereof described in clause (A)(i) or reproduction of electronically stored data described in clause (A)(ii) shall be deemed to be an original record 

for all purposes, including introduction in evidence in all State and Federal courts 

or administrative agencies and shall be admissible to prove any act, transaction, occurrence, or event therein recorded. 

‘‘(C) Authority of the administration.—Any photographs, microphotographs, or photographic film or copies thereof described in paragraph (9)(A) or reproduction of electronically stored data described in paragraph (9)(B) shall be preserved in such manner as the administration shall prescribe and the original records, papers, or documents may be destroyed or otherwise disposed of as the administration may direct.’’. 

ITEM 164. ISSUE OF MORE THAN ONE NCUA BOARD MEMBER WITH CREDIT UNION

EXPERIENCE

This not strictly a regulatory matter in that it does not involve specific functions 

of the NCUA as they relate to credit union supervision or insurance. NCUA does 

note, however, that it is the only Federal financial regulator with this restriction 

on board members with industry experience. This could be interpreted as a negative 

assessment of the ability of an individual with credit union experience to perform 

the duties of an NCUA board member in a fair and impartial manner. 

Conclusion 

Thank you for the opportunity to appear before you today on behalf of NCUA to 

discuss these important and needed regulatory enhancements efficiency for NCUA, 

credit unions and 85 million credit union members across America. I am pleased to 

respond to any questions the Committee may have or to be a source of any additional information that may assist you in this worthwhile endeavor. 

—————

PREPARED STATEMENT OF LINDA JEKEL

DIRECTOR OF CREDIT UNIONS

WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS

DIVISION OF CREDIT UNIONS AND

CHAIRMAN, NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS

MARCH 1, 2006

NASCUS History and Purpose 

Good morning, Chairman Shelby, and distinguished Members of the Committee 

on Banking, Housing, and Urban Affairs. I am Linda Jekel, Director of Credit 

Unions for the Washington Department of Financial Institutions and the Chair of 

the National Association of State Credit Union Supervisors (NASCUS). I appear 

today on behalf of NASCUS, which represents the 48 State and territorial credit 

union agencies that charter and supervise the Nation’s more than 3,600 State-chartered credit unions. NASCUS is advised by the NASCUS Credit Union Advisory 

Council, composed of more than 500 State-chartered credit union chief executive officers dedicated to defending the dual chartering system for credit unions. 

Since its inception in 1965, the mission of NASCUS has been to enhance State 

credit union supervision and regulation and to promote policies that ensure a safe 

and sound State credit union system. NASCUS is the sole organization dedicated 

to the promotion of the dual chartering system and to advancing the autonomy and 

expertise of State credit union regulatory agencies. We achieve these goals by serving as an advocate for a dual chartering system that recognizes the traditional and 

essential role that State government plays in the national system of depository financial institutions. 

NASCUS appreciates this Committee’s commitment to regulatory relief for financial institutions. We believe it is an important part of ensuring a safe and sound 

environment for credit unions and the consumers they serve. 

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We have provided input for the financial services regulatory relief matrix, started 

during the 108th Congress. We are pleased to have this additional opportunity to 

share our priorities for regulatory relief. When drafting regulatory relief legislation, 

we encourage Committee Members to consider the provisions we present. 

NASCUS Priorities for Regulatory Relief 

The financial services regulatory relief matrix details regulatory relief provisions 

that further the safety and soundness of credit unions. NASCUS priorities for regulatory relief focus on reforms that will strengthen the State system of credit union 

supervision and enhance the capabilities of State-chartered credit unions. The ultimate goal is to meet the financial needs of consumer members while assuring that 

the State system is operating in a safe and sound manner. 

In this testimony, I address regulatory relief provisions that are vital to the future 

growth and safety and soundness of State-chartered credit unions. They are as follows:

• Reforming credit union capital. 

• Providing for representation on the NCUA Board by an individual with State 

credit union regulatory experience. 

• Allowing non-federally insured credit unions to join the Federal Home Loan 

Banks (FHLB’s). 

• Expanding member business lending provisions to 20 percent of total assets of a 

credit union, furthering the goal to provide loans for consumer members. 

• Amending the definition of a member business loan (MBL) from $50,000 to at 

least $100,000. 

• Providing Securities and Exchange Commission (SEC) regulatory modernization 

for credit union parity with other financial institutions; 

• Preserving the dual chartering system and protecting against the preemption of 

State laws. 

• Converting a State-chartered credit union to another financial institution charter 

is a matter that should be determined by State law and regulation, not dictated 

in Federal legislation. 

Credit Union Capital Reform 

Credit unions need capital reform in three distinct areas. First, the definition of 

net worth in the Federal Credit Union Act (FCUA) should be changed to include 

more than just retained earnings; second, credit unions need access to risk-based 

capital; and third, credit unions should have access to alternative capital. From a 

State regulatory perspective, capital reform that addresses these three issues makes 

logical sense for the safety and soundness of credit unions and the members they 

serve. 

Amending the Definition of Net Worth in the FCUA 

To begin, credit unions need an amendment to the Prompt Corrective Action 

(PCA) provision of the FCUA. This amendment would obligate federally insured 

credit unions to include all forms of capital when calculating the required net worth 

ratio. Under the current Federal statute, credit union net worth is defined as and 

limited to retained earnings. 

The exclusive reliance on retained earnings limits a credit union’s ability to implement new programs or expand services to meet the changing needs of American consumers within its membership. The failure to authorize these credit unions to include all forms of capital in their PCA net worth calculation distorts the credit 

union’s actual financial position. NASCUS believes this change has been necessary 

since 1998, when the current PCA standards for credit unions were established in 

Federal statute. We have consistently noted this important provision in prior testimony, as well as in the financial services regulatory relief matrix. 

NASCUS is encouraged by the May 2005 American Institute of Certified Public 

Accountants (AICPA) letter to the NCUA acknowledging the disparity in regulatory 

reporting among insured institutions. AICPA correctly recognizes that credit unions 

may use only retained earnings when calculating net worth. Further, it noted that 

all other Federal agencies recognize total equity as determined in accordance with 

GAAP, as a basis for calculating regulatory capital. In addition, the AICPA further 

states that retained earnings are only one component of GAAP equity. 

NASCUS supports this position and firmly believes that the equity section of a 

credit union’s balance sheet should include more than just retained earnings. 

NASCUS asks for this Committee’s support in amending the definition of net worth 

in the FCUA to include more than retained earnings. This would provide consistency in capital standards with the other federally insured depository institutions. 

In addition, it would allow credit unions to better serve their members. 

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Addressing the Unintended Consequences of FASB Standard No. 141

Another benefit to amending the definition of net worth is that it will cure the 

unintended consequences for credit unions of the Financial Accounting Standards 

Board (FASB) amendments to business combination accounting rules. FASB’s Financial Accounting Standard No. 141 would require the acquisition method for business combinations and effectively eliminate the pooling method for the combinations 

of mutual enterprises. 

In brief, the acquisition accounting method would require the valuation of the target credit union at fair value, the recognition of identifiable intangibles, when relevant (that is, core deposit intangibles and/or goodwill), and the application of a 

market-based acquisition model to a nonbargained transaction. The retained earnings of the merging institution would no longer be combined with those of the continuing credit union. This creates a potentially significant dilution of statutory net 

worth and an unintended impediment to credit union mergers. Mergers are a safety 

and soundness tool both Federal and State regulators use to protect funds deposited 

by American consumers and to preserve the National Credit Union Share Insurance 

Fund (NCUSIF). 

NASCUS is pleased by the introduction of H.R. 1042, and its passage in the House 

of Representatives. The legislation amends the definition of net worth to include the 

net retained earnings of a merging credit union with that of the surviving credit 

union. We understand that H.R. 1042 has been forwarded to the Senate Committee 

on Banking, Housing, and Urban Affairs for review. Similar language is also included in provision number 24 in the regulatory matrix. 

There are important reasons to address the consequences of FASB Standard 

No. 141. As a regulator, it concerns me that credit unions cannot be merged due to 

PCA concerns caused by the inability to add the capital of a merged credit union. 

This may cause credit unions in a weakened condition to face liquidation. There 

may also be more requests for NCUA to provide financial assistance in merger 

transactions. An increase in liquidations may cause greater reputation risk, severe 

loss of confidence for the credit union industry, greater losses to the NCUSIF, and 

increased costs to the industry and ultimately to consumers. It eliminates an important tool for regulators when we have to determine the most appropriate method 

to handle a troubled credit union; a method that has the least impact on American 

consumers. 

The entire credit union community agrees on the importance of this provision. It 

is also included in Section 104 in H.R. 2317 and in Section 314 of H.R. 3505. We respectfully request this Committee introduce similar provisions in the regulatory relief bill that is currently being drafted. Hopefully, the consequences of FASB 141 

will soon be resolved. 

Risk-Based Capital 

NASCUS has a long-standing policy supporting risk-based capital for credit 

unions. Risk-weighted capital reform should be flexible. NASCUS believes that any 

new regulations should be progressive and not designed to regulate to the lowest 

common denominator. 

We believe risk-based capital is a sound and logical approach to capital reform 

for credit unions. Today, every insured depository institution, with the exception of 

credit unions, uses risk-based capital to successfully build and monitor capital levels. In fact, after more than 15 years of successfully applying risk-based capital, the 

financial community is devising methods to make risk-based capital an even better 

tool. Risk-based capital enables financial institutions to measure capital adequacy 

and to avoid additional risk on their balance sheets. It is a system that acknowledges diversity of complexity in financial institutions. It provides for increased capital levels for financial institutions that choose to maintain a more complex balance 

sheet, while reducing the burden of capital requirements for institutions with less 

complex assets. 

NASCUS supports a risk-based capital plan. We believe additional enhancements 

that work in tandem with risk-based capital would be prudent and provide even 

greater safety and soundness for credit unions. NASCUS’ support of risk-based capital is reflected in the financial services regulatory relief matrix. 

Alternative Capital for Credit Unions 

We support capital reform beyond risk-weighted capital and a FASB merger fix. 

NASCUS believes that an important part of capital reform is providing credit 

unions access to alternative capital. We believe that alternative capital authority 

and a risk-based system are complementary capital reforms. The combination of current PCA requirements and a potentially changing economic landscape create a regulatory dilemma for many State-chartered credit unions. As noted above, the FCUA 

146

defines credit union net worth as retained earnings. The NCUA has determined that 

it lacks the regulatory authority to broaden the net worth definition to include other 

forms of capital as a part of PCA calculations. Thus, credit unions require an 

amendment to the FCUA to rectify this statutory deficiency. 

NASCUS has long supported the concept of alternative capital for credit unions. 

After study, NASCUS created a white paper illustrating both equity and debt models for alternative capital. NASCUS believes that alternative capital is a viable 

method for credit unions to build net worth. The white paper demonstrates this belief. (Please find a copy of the white paper at the end of the NASCUS testimony.) 

Additional Reasoning for Alternative Capital 

Some State-chartered credit unions have indicated that alternative capital is necessary for them to continue meeting the financial needs of their members in a 

changing financial environment. This is especially true for credit unions striving to 

understand and meet specific member needs. These needs can include financing for 

homeownership, financial education, and even credit counseling, each an important 

component of managing one’s personal finances. 

We believe that even with the lower leverage ratio and risk-based capital proposed in H.R. 2317, some State-chartered credit unions may not be able to rely solely on retained earnings to meet the capital base required by PCA standards. As 

credit unions expand and serve the needs of more consumers, their assets grow. 

When assets grow, credit unions experience reduced net worth ratios as earnings 

retention lags growth in assets. 

From a regulatory perspective, it makes sound economic sense for credit unions 

to access other forms of capital to improve their safety and soundness. We need to 

take prudent steps to strengthen the capital base of this Nation’s credit union system. NASCUS requests your support in providing credit unions with access to alternative capital. Alternative capital for credit unions should be included in regulatory 

relief legislation proposed by this Committee. 

Strong capital reform requires that State and Federal regulators work together. 

In 1998, the Credit Union Membership Access Act (CUMAA), H.R. 1151, provided 

that NCUA consult and cooperate with State regulators when constructing PCA and 

member business lending (MBL) regulations, as required by the FCUA. NASCUS 

always stands ready to discuss and assist in the implementation of new regulations 

affecting State-chartered credit unions. We firmly believe that cooperation results 

in better regulation and a stronger and safer credit union system. 

Representation on the NCUA Board 

NASCUS included a provision in the financial services regulatory relief matrix 

that would amend the FCUA to require that one NCUA Board member shall have 

State credit union regulatory experience. 

We believe this will result in better regulation and a stronger and safer credit 

union system. About forty percent of credit unions are State-chartered. The majority 

of them have Federal insurance provided by the NCUSIF. This fund is managed by 

the NCUA. We believe that comprehensive experience in regulating State-chartered 

credit unions would provide a more balanced perspective when overseeing the 

NCUSIF. In addition, as the NCUA promulgates regulations to further safety and 

soundness, a person with State-chartered credit union supervisory experience will 

greater understand how proposed regulations will impact State-chartered, federally 

insured credit unions. 

This is not a new idea. A similar provision requiring State bank supervisory experience is included in Section 1000 of the Federal Deposit Insurance Act. 

We believe a person with State regulatory experience will create an even stronger 

and safer credit union system, and we would appreciate your support for this provision. 

Privately Insured Credit Unions Should Be Eligible to Join Federal Home

Loan Banks 

As NASCUS has noted since the creation of the financial services regulatory relief 

matrix, not all credit unions operate with access to the same benefits. Federally insured credit unions have access to the Federal Home Loan Banks (FHLB’s), while 

privately insured credit unions do not. NASCUS supports non-federally insured 

credit unions being eligible to join the FHLB’s. This provision is included in 

H.R. 2317. 

Today, there are approximately 200 credit unions that are non-federally insured. 

These credit unions are regulated and examined by State regulatory agencies to ensure they are operating in a safe and sound manner. Regulatory functions are a primary determinant of the safety and soundness of the credit union system. The function of the credit union regulator is to assure consumers that their deposits are safe 

147

and sound. This is accomplished through regulatory action, the examination process 

and by taking enforcement actions, when necessary. 

Nine State legislatures have made private insurance available to their State-chartered credit unions. NASCUS promotes the rights of State legislators to determine 

what is in the best interest for State-chartered credit unions in their State. 

If a State determines that State-chartered credit unions should have access to private insurance, NASCUS supports its decision. NASCUS does not advocate for private insurance; however, we do believe in the rights of State legislators to determine 

if State-chartered credit unions in their State should have access to private insurance. 

These credit unions should be allowed access to the same privileges as their federally insured counterparts (the competition down the street with Federal insurance). 

Both Federal and private share insurance systems have been established to protect credit union shareholders. To manage and price insurance risk, each share insurer relies significantly on the examination reports of the institution’s primary regulator. Nearly all State credit union agencies use the NCUA Automated Integrated 

Regulatory Examination Software (AIRES) examination platform when they examine State-chartered credit unions for safety and soundness purposes. NASCUS agencies participate in the development and testing of NCUA’s AIRES examination program and procedures. In short, there is an excellent working relationship between 

NASCUS agencies and the NCUA, as well as substantially similar examination 

standards for both Federally and State-chartered credit unions. 

In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 

(FDICIA) established a series of safety and soundness requirements for both entities 

that offer private deposit insurance to credit unions and for credit unions which 

would opt for private deposit insurance. 

FDICIA also dictates the manner and extent to which institutions opting for private deposit insurance disclose fully that their deposits are privately insured. Therefore, there should be no concern that these credit unions are not operated in a safe 

and sound manner. 

Permitting non-federally insured institutions to join the FHLB System would not 

establish a new precedent. When the Federal Home Loan Bank Act of 1932 was 

passed, insurance companies were allowed access to the system. At the time, they 

were a means to mortgage lending. Insurance companies continue to have access to 

FHLB system. Insurance companies have never been federally insured; they are 

State chartered and regulated by State governments without Federal oversight or 

insurance. 

As of December 31, 2005, 111 insurance companies enjoyed access to the FHLB 

system. There are no federally insured insurance companies, negating the argument 

that insurance status is the reason institutions may or may not have access to the 

FHLB system. 

Access to the FHLB system brings many safety and soundness benefits, including 

the ability to borrow funds and better manage assets and liabilities. And, providing 

access to State-chartered privately insured credit unions does not inflict any new 

or unusual exposure on the FHLB system. 

Moreover, it provides an additional layer of financial analysis and market discipline for privately insured credit unions. The FHLB system performs ongoing credit analysis of members, particularly for those who borrow. Each FHLB has a sophisticated credit screening system to assure that any borrower, Federally insured or 

not, is credit worthy. In addition, every advance is secured by marketable collateral. 

Indeed, even during the savings and loan debacle, we understand that no FHLB suffered a loss on advances extended to their members. 

NASCUS believes that credit unions in States that allow private insurance should 

not be disadvantaged by a lack of access to the FHLB System and the benefits it 

provides. A credit union’s choice of insurance should not determine its access to a 

wholesale lending system that would allow it to best serve its members. 

In the past, Congress has expanded the membership eligibility for the FHLB system to help local financial institutions meet the housing and homeownership needs 

of their communities. Enabling State-chartered, privately insured credit unions to 

be eligible to join the FHLB System, is merely one more step in making homeownership a reality to credit union members. We urge the Committee to include this provision to help achieve our Nation’s housing and homeownership goals. 

Expanding Member Business Lending Authority 

Regulatory relief is important for credit unions in the area of member business 

lending. NASCUS has a vision of providing well-thought-out member business lending regulations to best position credit unions to serve their members. The financial 

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service regulatory relief matrix includes the following provisions, which are also included in H.R. 2317. 

Title II of H.R. 2317 provides an opportunity for economic growth for credit unions 

through member business lending. Credit unions should be given greater authority 

to meet their member business lending needs; this better positions them to service 

consumers. Raising the statutory limit on credit union MBL’s to 20 percent of total 

assets, as proposed in Section 201 of H.R. 2317, facilitates member business lending 

without jeopardizing safety and soundness at participating credit unions. 

Further, we support Section 202 of H.R. 2317, which amends the current definition of an MBL by granting NCUA the authority to exempt loans $100,000 or less. 

This increases the definition of business loans subject to the current amount of 

$50,000 to $100,000. We urge that the statutory definition of a credit union MBL 

be changed from the current $50,000 limit contained in the FCUA. In fact, we support redefining credit union MBL’s to the Fannie/Freddie conforming loan limit of 

$417,000, increased in January 2006. We believe this is a safe and sound, well established and readily understandable index that has served lenders and the public 

interest well for many years. 

Both of these provisions provide credit unions with regulatory relief as it concerns 

member business lending. We request that these provisions be included in regulatory relief bill drafted by this Committee. Additionally, you will find these provisions in the financial services regulatory relief matrix. 

Regulatory Modernization 

It is time to update regulations to reflect parity of treatment between credit 

unions and other financial institutions. It makes sound business sense and provides 

for equitable competition. NASCUS supports the following provisions, as included in 

the financial services regulatory relief matrix. 

NASCUS believes that all federally insured credit unions should have the same 

exemptions as banks and thrift institutions from Federal Trade Commission 

premerger notification requirements and fees, a requirement of the Clayton Act. In 

fact, we believe this provision should be expanded to include all State-chartered 

credit unions. This provision is in Section 311 of H.R. 2317 and in Section 312 of 

H.R. 3505. 

Additionally, NASCUS supports providing federally insured credit unions parity 

treatment with commercial banks with regard to exemptions from SEC registration 

requirements. Banks were provided these exemptions in the Gramm-Leach-Bliley 

Act. NASCUS is pleased this provision is included in Section 312 of H.R. 2317 and 

in Section 313 of H.R. 3505. 

If State-chartered credit unions are not accorded the same SEC treatment as commercial banks and savings institutions, we believe the powers granted to credit 

unions by State legislatures and State regulators might be unnecessarily preempted 

by SEC regulation. Unless appropriate regulatory relief is provided, credit unions 

offering these services may be subject to redundant and costly examination. We urge 

that credit unions be accorded similar regulatory treatment as other financial institutions. 

Federal Preemption of State Regulation 

The debate about State and Federal powers is not a new discussion. I can imagine 

our Founding Fathers in 1787 at the Constitutional Convention participating in 

many healthy debates about how to protect the powers of the States. The question 

confronting our Founding Fathers was how to limit the central government’s power 

so it could not take away from people’s rights. 

Today, we are confronted by this same issue. In fact, preventing Federal preemption of State laws and regulations continues to be a priority for State legislatures 

and State regulators. Federal preemption overrides States’ rights in several fundamental ways. It preempts State legislatures from creating laws for the citizens of 

a State. Potentially, laws that override State laws and regulations affecting the consumers in a State could be decided by individuals not elected by the citizens of a 

State. Preemption does not stop here; it has the potential to stop a State’s Governor, 

a State’s Attorney General and a State’s financial regulators from making decisions 

for their State. NASCUS believes States are in the best position to decide the laws 

and regulations for consumers in their States. 

NASCUS is uncomfortable with Federal rulemaking that preempts State authority or the trend of Federal banking authorities to preempt State consumer protection. Such initiatives have been touted as establishing exclusive national standards 

for regulating almost all aspects of consumer lending practices. We believe it overrides State law and provides less protection for consumers. NASCUS is concerned 

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that there may be a contagion impact on the credit union dual chartering system 

as the powers of the State banking regulators are curtailed. 

Each time a Federal agency acts to preempt State law, it is a chink in the armor 

of State protections that our Founding Fathers sought to preserve. It threatens the 

dual chartering system as we know it. Congress should resolve the conflicts rather 

than delegate these fundamental issues to the Federal financial institution regulators to determine. 

When I think of dual chartering of financial institutions, I think of strong communities. I think of economic enhancements and job creation. Dual chartering and the 

State supervision that comes with it have been essential elements of the credit 

union system since its beginning. State credit union regulatory agencies have been 

instrumental in making new rules and regulations that have influenced even the 

Federal credit union system. States have rightfully been called the laboratories for 

innovation. Federal preemption takes away innovations created by the State system. 

One current issue confronting the credit union system is credit union conversions 

to mutual savings banks. NASCUS believes that State law should dictate the conversion process for State-chartered credit unions, as well as the terms and conditions that allow State-chartered credit unions to terminate Federal insurance. 

The chartering of a State credit union is an issue determined by State law. Approval authority for a conversion is determined, likewise, by State law, which typically authorizes the State chartering authority to determine if a credit union may 

convert and the processes for a conversion. A conversion is a function of a credit 

union’s original charter, separate from insurance oversight. As we have learned 

from recent events, NCUA regulations dictate disclosures and approval authority for 

State-chartered credit union conversions. 

NASCUS asks for this Committee’s support in changing conversion rules that 

would place the responsibility on the chartering authority. The authority for Federal 

credit unions resides with the Federal regulator; likewise, the authority for Statechartered credit unions should reside with State regulators. 

Conclusion 

In conclusion, NASCUS strongly supports the following issues for regulatory relief: 

• NASCUS supports amending the definition of net worth in the FCUA to include 

more than just retained earnings. • NASCUS supports amending the definition of net worth to include the retained 

earnings of a merging credit union with that of a surviving credit union, as included in both H.R. 1042, Section 104 of H.R. 2317 and in Section 314 of 

H.R. 3505. • NASCUS supports a risk-based capital regime for credit unions. • NASCUS believes credit unions should be permitted to issue alternative capital. 

NASCUS proposes three alternative capital models in its white paper that preserve the not-for-profit structure of credit unions. • NASCUS supports representation on the NCUA Board by an individual with 

State credit union regulatory experience. • NASCUS believes non-federally insured credit unions should be eligible to join the 

FHLB’s. • NASCUS supports expanding member business lending provisions to 20 percent 

of total assets of a credit union, furthering the goal to provide loans for consumer 

members. This is also included in Section 201 of H.R. 2317. • NASCUS supports amending the definition of a member business loan from 

$50,000 to at least $100,000, as included in Section 202 of H.R. 2317. • NASCUS supports that all federally insured credit unions should have the same 

exemptions as banks and thrift institutions from FTC premerger notification requirements and fees. Additionally, we support expanding this provision to include 

all State-chartered credit unions. This provision is in Section 311 of H.R. 2317 and 

in Section 312 of H.R. 3505. • NASCUS supports amending the definition of bank in the SEC Act of 1934 to provide federally insured credit unions with the same registration exemptions as 

those provided to commercial banks. This provision is included in Section 312 of 

H.R. 2317 and in Section 313 of H.R. 3505. • NASCUS encourages Congress to intervene and block the continuing preemption 

of State laws. 

• NASCUS believes that the process for converting a State-chartered credit union 

to another financial institution charter is a matter that should be determined by 

State law and regulation, not dictated by Federal legislation.

NASCUS appreciates the opportunity to testify today and share our priorities for 

regulatory relief. The provisions discussed are outlined further in the financial servVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00157 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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* Held in Committee files. 

ices regulatory relief matrix. In addition, we attached a copy of the NASCUS white 

paper about alternative capital at the end of our testimony.* 

We urge this Committee to protect and enhance the viability of the dual chartering system for credit unions by acting favorably on the provisions we have presented in our testimony. We welcome questions from Committee Members. 

Thank you. 

—————

PREPARED STATEMENT OF BRADLEY E. ROCK

PRESIDENT AND CEO, BANK OF SMITHTOWN

ON BEHALF OF THE

AMERICAN BANKERS ASSOCIATION

MARCH 1, 2006

Mr. Chairman and Members of the Committee, my name is Bradley Rock. I am 

Chairman, President, and CEO of Bank of Smithtown, an $900 million community 

bank located in Smithtown, New York, founded in 1910. I am also the Vice Chairman of the American Bankers Association (ABA). ABA, on behalf of the more than 

two million men and women who work in the Nation’s banks, brings together all 

categories of banking institutions to best represent the interests of this rapidly 

changing industry. Its membership—which includes community, regional, and 

money center banks and holding companies, as well as savings associations, trust 

companies and savings banks—makes ABA the largest banking trade association in 

the country. 

I am glad to be here today to present the views of the ABA on the need to eliminate unnecessary, redundant, or inefficient regulatory burdens that increase costs 

for banks and reduce the amount of credit available to our communities. By now, 

it should not come as news that banks are struggling under the weight of increasing 

levels of regulatory burdens, many of which do not serve the objective of making 

the Nation’s banks operate more soundly or to provide meaningful protections to 

consumers. These regulatory burdens raise the cost to banks and, consequently, 

place an unnecessary strain upon banks’ abilities to efficiently serve their customers. 

The USA PATRIOT Act, the Sarbanes-Oxley Act, and the Gramm-Leach-Bliley 

Act are all valuable pieces of legislation that strive to serve the public interest. 

However, overly complex or redundant compliance requirements render these laws 

far less effective than they would be otherwise. Banks, particularly community 

banks, are strained to the breaking point under the weight of thousands of pages 

of regulation, guidance, and other mandates. When the cumbersome layering of additional requirements, issued by the Securities and Exchange Commission (SEC), 

the Financial Accounting Standards Board (FASB), the Public Company Accounting 

Oversight Board (PCAOB), the American Institute of Certified Public Accountants 

(AICPA), and the Internal Revenue Service (IRS) are also taken into account, it is 

abundantly clear that bank resources are being stretched too thin. 

The ABA would like to take this opportunity to thank the many Members of the 

Senate Banking Committee that signed a joint letter to then-SEC Chairman Donaldson, expressing serious concerns with the SEC’s proposed regulations implementing the ‘‘push-out’’ provisions of Title II of the Gramm-Leach-Bliley Act and 

urging the SEC not to finalize those regulations. As the Committee is aware, the 

proposal would create costly and unnecessary regulatory burdens on banks that 

offer traditional banking products and services. To date, the SEC has not issued 

final regulations and we, in the banking industry, are hopeful that the SEC will follow the guidance outlined by Members of this Committee to work with the bank regulators to propose a new regulation for public comment that is consistent with Congressional intent and that does not ‘‘impose burdensome and wholly unjustifiable 

compliance costs on the entire banking industry.’’

In addition, ABA has submitted comments to regulators on a wide range of regulatory relief priorities, which would make a real difference in the vitality of our Nation’s banks. We are pleased the regulators have acted on some of our recommendations and that our message is apparently being heard. For example, I am particularly pleased with regulators’ support for changes that involve the Bank Secrecy Act 

(BSA), including discontinuing cash transaction report (CTR) requirements for seasoned customers—changes that would not only provide relief to banks and our regVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00158 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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1 ‘‘Survey of Regulatory Burden,’’ ABA, June 1992; Elliehausen, ‘‘The Cost of Banking Regulation: A Review of the Evidence,’’ Staff Study, Board of Governors of the Federal Reserve System, 

April 1998. 

ular customers, but also increase the security of our banking system by identifying 

criminal activity with greater precision. More can, and needs to be done, however. 

In my testimony, I would like to make three key points:

• Excessive regulatory burden has a significant impact on bank customers and local 

economies. • The regulatory burden is significant for banks of all sizes, but pound for pound, 

small banks carry the heaviest regulatory load. The community bank is in great 

danger of being regulated right out of business. • There are many important regulatory issues that Congress should address this 

year, but several are especially pressing to maintain the competitive vitality of my 

industry. These include eliminating unnecessary CTR’s, increasing the 500-shareholder threshold which triggers periodic reporting requirements that impose considerable financial and opportunity costs on smaller public companies; and preventing credit union capital erosion and widening credit union authority in

higher-risk lending. 

Excessive Bank Regulation Harms Consumers, Communities’ Economies 

Outdated laws and regulations divert scarce resources of banks that could otherwise be used to provide financial services demanded by our customers. New laws, 

however well-intentioned, have added yet more layers of responsibilities on businesses like mine. While no single regulation by itself is overwhelming, the cumulative weight of all the requirements is overwhelming. 

The burden of regulation has a significant impact on bank customers and local 

economies. Every new law, regulation or rule added means two things: More expensive bank credit and less of it. This is true for large and small businesses—likely 

hurting small businesses the most, as they need low-cast financing but cannot go 

directly to the capital markets. The result is slower economic growth. 

During the past 25 years, the compliance burden has grown so large and is so 

pervasive throughout all levels of bank management that it is extremely difficult to 

measure. Research done by the ABA and the Federal Reserve 1 indicates that the 

total cost of compliance today for banks—excluding compliance costs due to legislation enacted in the last 5 years, such as the USA PATRIOT Act and SarbanesOxley—would range from $36 billion to $44 billion per year. Compliance costs are 

expected to grow at an even faster pace in the coming years. 

Certainly, some of the regulatory cost is appropriate for safety and soundness reasons. But consider the direct impact on bank lending and economic growth if this 

burden could be reduced by 20 percent and redirected to bank capital; it would support additional bank lending of $72 billion to $88 billion. This would clearly have 

a big impact on our economies. In fact, it represents nearly 10 percent of all consumer loans or 11 percent of all small business loans. 

Community Banks Hit Especially Hard 

Regulatory costs are significant for banks of all sizes, but small banks carry the 

heaviest regulatory load. For the typical small bank, about $1 out of every $4 of operating expense goes to pay the costs of government regulation. For large banks as 

a group, total compliance costs run into the billions of dollars annually. 

The cumulative effect of new rules and regulations is already leading many community banks to look for merger partners to help spread the costs; some will go out 

of business altogether or consolidate with larger banks, as some have already done. 

Our members routinely mention regulatory burden as the first or second critical factor threatening the viability of their community banks. I can tell you, Mr. Chairman, the pressures to comply with all the regulations and still meet the demands 

of our customers are enormous. We feel that we must grow the bank rapidly to generate more revenues simply to pay for the ever-increasing regulatory cost. The sad 

part is that too much time and effort is now devoted to compliance and not to serving our customers. 

Bankers at all levels, from bank directors and CEO’s to compliance managers and 

tellers, spend endless hours on compliance paperwork. Because of the complexities 

involved, my bank pays more than $100,000 each year to outside firms to help us 

with the big compliance issues. On top of this, one person on my staff has a fulltime job just to coordinate all the activities throughout the bank related to regulatory compliance. I personally spend about one-and-a-half days per week just on 

compliance issues. Some CEO’s tell me that they are now spending nearly half of 

their time on regulatory issues. In addition, banks spend billions annually on comVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00159 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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2 Crain, ‘‘Impact of Regulatory Costs for Small Firms,’’ Small Business Administration, 2005. 

pliance training, outside compliance support (including accounting firms, consultants and attorneys), compliance related hardware and software, printing, postage, 

and telephone connections.

Banks that can least afford increasing compliance costs are hit the hardest. There 

are more than 2,491 banks and thrifts with fewer than 20 employees; nearly 900 

banks and thrifts have fewer than 10 employees. In order to fulfill their compliance 

obligations, banks of this size often are forced to hire an additional full-time employee just to complete government-mandated reports. According to the Small Business Administration’s Office of Advocacy, the total cost of regulation is 45 percent 

higher per employee for firms with fewer than 20 employees compared to firms with 

more than 500 employees due to the fixed costs associated with regulations.2 The 

cost versus benefit analysis fails to make the case for many of the rules and regulations banks must follow and the reports that we generate. 

The bottom line is that too much time and too many resources are consumed by 

compliance paperwork, leaving too little time and resources for providing actual 

banking services. I am sure I speak for all bankers when I say that I would much 

rather spend my time talking with our customers about their financial needs and 

how my bank might fulfill them than poring over piles of government regulations. 

The losers in this scenario are bank customers and the communities that banks 

serve. 

CTR’s, Shareholder Thresholds for Reporting Requirements, and Credit

Union Expansions 

In the appendix to this testimony is a list of recommended actions, every one of 

which would provide meaningful and much needed regulatory relief to banks. There 

are three issues in particular that I would like to emphasize. 

ELIMINATE CTR FILINGS FOR SEASONED CUSTOMERS [MATRIX 176] 

ABA and its members strongly believe that the current cash transaction reporting 

program has been rendered virtually obsolete by several developments: Enhanced 

customer identification programs, more robust suspicious activity reporting, and the 

use of the more focused and intensive 314(a) inquiry/response process. We believe 

that the current CTR screen at the current level generates too many reports that 

capture extensive immaterial activity wasting law enforcement time and resources 

that could be spent more effectively on detection and investigation of criminal and 

terrorist activity. 

In fact, as published in the U.S. Money Laundering Threat Assessment released 

earlier this year, the number of CTR’s filed on an annual basis now tops 13.1 million with no signs of abating. Even at FinCEN’s conservative estimate of around 25 

minutes per report for filing and recordkeeping, it means that the banking industry 

as a whole devoted around 51⁄2 million staff hours of work to handling CTR’s in 

2005. Based on our recent survey, the industry paid around $187 million in wages 

for this staff time. 

Based on that same survey, three-quarters of the filings were for business customers who had been with the bank for over a year. That means that the industry 

spent around four million staff hours and over $140 million last year filing notices 

on well-established customers! 

A typical bank with $2 billion of assets filed 1,400 CTR’s in 2005. The filings took 

583 staff-hours. And 438 of the staff-hours were simply to report on long-standing 

customers. 


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153

This trend is only likely to accelerate and demand more and more staff to report 

on more and more transactions further burying the real needles of money laundering under an exponentially growing mound of the hay of legitimate business 

transactions mindlessly recorded at great expense and increasing opportunity cost. 

CTR’s have been Superseded by SAR’s and 314(a) Inquiries 

When establishing the BSA regulatory regime, Congress sought to require reports 

or records when they have ‘‘a high degree of usefulness’’ for the prosecution and investigation of criminal activity, money laundering, counter-intelligence, and international terrorism. ABA and its members strongly believe that the current CTR reporting standards have long departed from this standard of achieving a high degree 

of usefulness. 

To continue to require CTR filings for business customers whose identity has been 

verified under a bank’s Customer Identification Program (CIP) and tested under a 

period of experience with the bank and that remain subject to risk-based suspicious 

activity reporting is an inefficient use of resources by bankers and law enforcement. 

It also diverts scarce examiner resources by focusing on compliance with technical

reporting standards, rather than evaluating bank internal controls for detecting 

transactions that possess a likelihood of involving money laundering and terrorist 

financing. 

Exempt Seasoned Customers from CTR’s 

Accordingly, we believe that the best way to improve the utility of cash transaction 

reporting is to eliminate the routine reports being filed on legitimate American businessmen and businesswomen. This can be achieved by establishing a seasoned customer exemption for business entities, including sole proprietorships, as endorsed by 

FinCEN last year in testimony before Congress. 

It is important to remember that cash transaction data will not be lost, but rather 

will continue to reside in the normal bank account data for each seasoned customer. 

It will, therefore, be available to law enforcement whenever sought in connection 

with an inquiry from government enforcement entities. In particular, by using the 

USA PATRIOT Act 314(a) inquiry process, law enforcement will be able to obtain 

information in far greater detail on the accounts of suspects. Of course, all seasoned 

business customers would continue to be subject to suspicious activity monitoring 

and reporting, thereby alerting law enforcement to the kind of conduct that has 

been investigated and affirmatively considered as having a heightened potential for 

being illegal. 

Eliminating CTR filings for seasoned customers would have the following benefits:

• The vast majority of the over 13 million CTR’s filed annually would stop, saving 

many hours a year in filling out forms and law enforcement resources devoted to 

processing them. • There would be an improvement in the quality of SAR’s, eliminating those that 

are filed on routine, legitimate cash transactions that approach but do not reach 

current CTR levels. Banks would be able to focus their energies on detecting 

genuinely suspicious handling of currency regardless of artificial thresholds. 

• We would make an enormous stride forward in focusing our anti-money laundering efforts—by both law enforcement and the banking industry—on the real 

crooks and terrorists with far greater likelihood of detecting and stopping their 

activities.

The redundancy of CTR filings for seasoned customers with transaction accounts 

and the need to eliminate this inefficient use of resources by bankers and law enforcement was echoed by the Financial Crimes Enforcement Network (FinCEN) and 

all the bank regulators in Congressional testimony over the last year. 

Simplifying the CTR Exemption Process Falls Short 

ABA has worked cooperatively with FinCEN and the Federal banking regulators 

to encourage institutions to make better use of statutory exemptions when they 

were changed in the late 1990’s. Our Association did extensive outreach to our members, and while many institutions adjusted their CTR filing policies and utilized the 

two-tier exemption process, the general response was lukewarm at best. 

Unfortunately, the compliance technicalities for, and examiner second-guessing of, 

banker use of the exemption and the renewal processes have discouraged many institutions from utilizing the tier-two exemptions. ABA has even received reports 

from members that examiners have threatened penalties and other formal criticisms 

for simple late filing of biennial renewal forms, a regulatory climate that demands 

overhaul. We do not believe that improvements to this process will make a significant dent in the overwhelming number of CTR’s filed each year that do little more 

than record the legal transactions of law-abiding citizens, thereby drawing attention 

154

and resources away from the effort to catch and stop criminal activity. Consequently, in adopting a seasoned customer exemption, we must ensure that the 

regulatory process and requirements that follow do not frustrate the goal of reducing unnecessary CTR filing. 

INCREASE SHAREHOLDER THRESHOLD FOR REGISTRATION

Currently, Section 12(g) of the Securities Exchange Act of 1934 requires a company with $10 million in assets and 500 shareholders to register its securities with 

the SEC. Once registered with the SEC, a company comes under a significant 

weight of Federal securities regulation, including requirements to file with the SEC 

annual and quarterly reports, and insider and beneficial owner reports, and to comply with the SEC’s proxy and information statement rules. The 500 shareholder 

threshold has never been updated since it was initially set in 1964; in contrast the 

asset requirement has been updated incrementally from $1 million to $10 million 

since 1964. 

These periodic reporting requirements impose considerable financial and opportunity costs on smaller public companies—costs that are ultimately borne by the 

company’s shareholders and the Nation as a whole as the job and economic creativity of small businesses are unnecessarily burdened. For example:

• Average auditing fees for smaller public companies, defined as companies with 

less than $1 billion in revenue, rose from $532,000 in 2003 to $1,044,000 in 2004, 

a 96 percent increase. Large public companies also face very large increases in 

auditing fees—58 percent from $3,631,000 to $5,734,000. 

• Three-fourths of community banks surveyed by Grant Thornton last year indicated that director and officer liability insurance had increased significantly in 

2003. 

• The legal costs of public companies have increased dramatically, disproportionately impacting smaller public companies that do not have the requisite legal staff 

to draft committee charters, corporate governance principles, codes of ethics, director independence surveys, and board of director and committee assessments. 

• Significant opportunity costs have dampened the growth of business as capital 

that is currently used to fund unnecessary compliance programs is not available 

to fund expansion, including the opening of bank branches. In addition, lost productivity as a result of complying with these reporting requirements is estimated 

at $1 million per year for companies with revenues of less than $1 billion.

To reduce these costs and burdens, the 500-shareholder threshold should be increased to more accurately reflect the current size and conditions of the investment 

market. As noted above, updating the benchmarks for SEC registration is not without precedent as the asset size parameter has been increased to $10 million from 

$1 million initially set in 1964. Good public policy suggests that the shareholder 

threshold should be correspondingly increased. According to SNL Financial data, 

raising the threshold to 3,000 would exempt about 6 percent of the banking industry 

in terms of assets, or six hundred and eighteen bank holding companies. Even updating the threshold to 1,500 shareholders would exempt about 5 percent of the 

banking industry in terms of assets, or about five hundred bank holding companies. 

The SEC regulations also provide that a company cannot seek to de-register until 

the number of shareholders of record is below 300. Sections 12(g)(4) and 15(d) of 

the Securities Exchange Act of 1934 should be similarly updated to place the threshold for de-registration within the range of 900 to 1,800 shareholders of record. 

REJECT EFFORTS TO EXPAND CREDIT UNION BUSINESS LENDING AUTHORITY

ABA strongly opposes the use of regulatory relief legislation to expand the commercial lending authority and/or prudent regulation of capital levels of credit 

unions. Such changes would reduce the safe and sound supervision of credit unions 

while fueling even more rapid extension of the government subsidies for an everincreasing segment of the credit union industry, especially when the industry has 

failed to demonstrate that it is using its subsidies to benefit the underserved. 

A fundamental change has occurred within the credit union industry that has divided the industry into two distinct groups—diversified conglomerate credit unions 

that act like and advertise themselves as commercial banks, and traditional credit 

unions that are more likely to embody credit unions’ mission to serve people of modest means. Today, more than 100 credit unions surpass $1 billion in assets. These 

credit unions are much larger than the typical community bank in their local market, which has a median asset size of $106 million as of September 2005. The current government subsidies for these diversified credit unions and lack of equivalent 

regulation have created huge competitive inequities in the local marketplace and 

represents an ever-increasing abuse of the credit union tax subsidy. Moreover, largeVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00162 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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scale business lending is inconsistent with Congress’s original charge that credit 

unions serve ‘‘people of small means’’ and should not be encouraged further. 

Conclusion 

In conclusion, the cost of unnecessary paperwork and red tape is a serious longterm problem that will continue to erode the ability of banks to serve our customers 

and support the economic growth of our communities. We thank you for continuing 

to look for ways to reduce the regulatory burden on banks and thrifts, and to restore 

balance to the regulatory process. Mr. Chairman, the ABA is committed to working 

with you and the Members of this Committee to achieve this goal.

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PREPARED STATEMENT OF F. WELLER MEYER

CHAIRMAN, PRESIDENT, AND CEO,

ACACIA FEDERAL SAVINGS BANK, FALLS CHURCH, VA AND

CHAIRMAN, BOARD OF DIRECTORS,

AMERICA’S COMMUNITY BANKERS, WASHINGTON, DC

MARCH 1, 2006

Chairman Shelby, Senator Sarbanes, and Members of the Committee, I am F. 

Weller Meyer, Chairman, President and CEO of Acacia Federal Savings Bank, Falls 

Church, Virginia. Acacia Federal Savings Bank has more than $1.25 billion in assets. Acacia Federal is a member of the UNIFI Group of companies, which are a 

diversified group of insurance and financial services businesses. 

I am here this morning representing America’s Community Bankers. I am the 

Chairman of ACB’s Board of Directors. I want to thank Chairman Shelby for calling 

this hearing. We appreciate the leadership of Senator Crapo in crafting legislation 

to address the impact of outdated and unnecessary regulations on community banks 

and the communities they serve. 

ACB is pleased to have this opportunity to discuss recommendations to reduce the 

regulatory burden placed on community banks. When unnecessary and costly regulations are eliminated or simplified, community banks will be able to better serve 

consumers and small businesses in their local markets. ACB has a long-standing position in support of a meaningful reduction of regulatory burden. 

The need to adopt regulatory relief legislation is urgent. In 1990, the 10 largest 

U.S. banks held 25 percent of U.S. banking assets. But by the end of 2004, the 10 

largest U.S. banks held 53 percent of banking assets. We believe that increased regulatory burden has played a significant role in the sharp decrease in banking assets 

controlled by community banks. All banks operate under a regulatory scheme that 

becomes more and more burdensome every year. But, community banks bear a 

greater relative burden of regulatory costs compared to large banks. In the face of 

the increasingly complex regulatory requirements, many community banks have 

chosen to give up their separate charters and seek mergers with larger institutions. 

Community banks stand at the heart of cities and towns everywhere, and to lose 

that segment of the industry because of over regulation would be debilitating to 

those communities. 

Community banks today are subject to a host of laws, some over a half-century 

old that originally were enacted to address concerns that no longer exist. These laws 

stifle innovation in the banking industry and put up needless roadblocks to competition without contributing to the safety and soundness of the banking system. Further, every new law that impacts community banks brings with it additional requirements and burdens. This results in layer upon layer of regulation promulgated 

by the agencies frequently without regard to the requirements already in existence. 

The burden of these laws results in lost business opportunities for community 

banks. But, consumers and businesses also suffer because their choices among financial institutions and financial products are more limited as a result of these 

laws, and, in the end, less competition means consumers and businesses pay more 

for these services. 

Community banks must also comply with an array of consumer compliance regulations. As a community banker, I understand the importance of reasonable consumer protection regulations. As a community banker, I also see how much it costs, 

both financially and in numbers of staff hours to comply with the often-unreasonable application of these laws. As a community banker, I see projects that will not 

be funded, products not offered, and consumers not served because I have had to 

make a large resource commitment to comply with the same regulations with which 

banks hundreds of times larger must comply. 

ACB has a number of recommendations to reduce regulations applicable to community banks that will help make doing business easier and less costly, further enabling community banks to help their communities prosper and create jobs. 

Priorities for Regulatory Relief 

ANTI-MONEY LAUNDERING AND CORPORATE GOVERNANCE

Two areas of regulatory compliance that cause the greatest concern for all community bankers are the implementation of anti-money laundering laws and implementation of corporate governance requirements. ACB believes that significant changes 

in these two areas are warranted either through regulatory or legislative action. 

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Anti-Money Laundering 

Community bankers fully support the goals of the anti-money laundering laws, 

and we are prepared to do our part to fight crime and terrorism. Community banks 

are committed to ensuring our Nation’s physical security and the integrity of our 

financial system. However, we are concerned about the unintended consequences 

caused by existing statutory and regulatory requirements. 

First, community banks are concerned that law enforcement does not review or 

use much of the information that depository institutions must report to the Federal 

Government regarding customers’ financial transactions. FinCEN and law enforcement report that the Cash Transaction Report (CTR) database is littered with 

unhelpful CTR’s. 

Therefore, ACB suggests increasing the dollar value threshold that triggers CTR 

reporting. The current $10,000 threshold was established in 1970. When adjusted 

for inflation, $10,000 in 1970 is equivalent to more than $52,000 today. We understand that when the regulations were first implemented, there was very little activity over the $10,000 threshold. Today, however, such transactions are routine, particularly for cash intensive businesses. Raising the threshold does not mean that institutions will be relieved from monitoring account activity for suspicious transactions below the CTR reporting requirement. Increasing the threshold would enable financial institutions to alert law enforcement about activity that is truly suspicious or indicative of money laundering, as opposed to bogging down the data mining process by filing reports on routine business transactions. 

Raising the CTR reporting threshold would provide benefits beyond regulatory relief for depository institutions. Increasing the threshold would help meet a 1994 

Congressional mandate to reduce CTR filings by 30 percent and would provide law 

enforcement a cleaner, more efficient database. 

Based upon data that FinCEN provided to the Bank Secrecy Act Advisory Group’s 

(BSAAG) CTR Subcommittee, increasing the reporting threshold to $20,000 would 

decrease CTR filings by 57 percent and increasing the threshold to $30,000 would 

decrease filings by 74 percent. The impact of raising the dollar value is even more 

astonishing for community banks. An informal survey of ACB members conducted 

in June 2004 indicates that increasing the dollar amount to $20,000 would reduce 

community bank CTR filings by approximately 80 percent. Even with the dramatic 

change in the value of $10,000 over the past 30 years, ACB acknowledges that a 

$10,000 cash transaction is still a substantial amount of cash for an individual customer to deposit or withdraw from an institution. However, businesses of all sizes 

routinely conduct transactions over $10,000. 

We also suggest that improvements be made to the exemption system that relieves financial institutions from filing CTR’s on the cash transactions of certain entities, provided certain requirements are met. The exemption system was intended 

to reduce regulatory burden associated with BSA compliance, but many community 

banks report that the cost of using the exemptions outweighs any associated benefits. Many institutions have elected to automate the CTR reporting process and file 

on every transaction over $10,000. This compliance method is cost effective and exposes institutions to minimal compliance risk. But it also results in thousands, if 

not millions of CTR’s being filed unnecessarily each year. 

While many community banks do not use the exemption process, those that do 

would like to exempt customers more quickly than currently permitted by law. Before an institution can exempt a customer as a nonlisted business or payroll customer, the customer must have maintained a transaction account with the bank for 

at least 12 months. The 12-month rule was adopted to ensure that an institution 

is familiar with a customer’s currency transactions. ACB suggests that banks and 

savings associations be allowed more flexibility in exempting business customers 

from CTR requirements by modifying or eliminating the current 12-month waiting 

period for new customer exemptions. ACB also supports the proposal adopted by the 

House Financial Services Committee in Title VII of the Financial Services Regulatory Relief Act of 2005 (H.R. 3505) to provide banks more flexibility in reporting 

of the cash transactions of their seasoned business customers. 

Community banks are also concerned about the opportunity costs that result from 

the current statutory and regulatory regime. For example, new compliance software 

often costs more than $30,000 (and sometimes hundreds of thousands of dollars depending on the product) upfront and $5,000 each month thereafter. For many small 

community banks, this is a substantial investment. This is money that a bank could 

use to hire multiple tellers, hire a new loan officer to reach out to the community’s 

small businesses, develop and market a new product or design special programs to 

reach unbanked persons. 

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Corporate Governance 

The Sarbanes-Oxley Act contained much needed reforms, restoring investor confidence in the financial markets that were in turmoil as a result of the major corporate scandals at the beginning of this decade. Community bankers support that 

Act and other laws, like the Federal Deposit Insurance Corporation Improvement 

Act (FDICIA), that improve corporate governance, enhance investor protection, and 

promote the safety and soundness of the banking system. However, the implementation of the Sarbanes-Oxley Act by the Securities and Exchange Commission (SEC) 

and the Public Company Accounting Oversight Board (PCAOB) and the interpretation of those regulatory requirements by accounting firms have resulted in costly 

and burdensome, unintended consequences for community banks, including, even, 

privately held stock and mutual institutions. 

For example, the implementation of Section 404 of the Sarbanes-Oxley Act (Section 404) has created significant burdens for community banks. Section 404, which 

was modeled on internal control requirements in FDICIA, requires a statement in 

annual reports of management’s assessment of the effectiveness of internal controls 

over financial reporting. Section 404 requires a company’s independent auditors to 

attest to and report on management’s assessment of the internal controls. However, 

in implementing Section 404, the SEC approved PCAOB Accounting Standard 2, 

which requires the external auditor to audit the internal controls of a company and 

opine directly on the effectiveness of the internal controls. Under FDICIA, the banking agencies generally permitted the external auditor to audit the CEO’s attestation 

with respect to the internal controls—a much less costly auditing function. ACB believes that this change in practice is a significant cause of a dramatic increase in 

bank audit fees. Many publicly traded banks are reporting an increase in audit fees 

of 75 percent over prior years. Some banks are reporting audit fees equal to 20 percent of net income. Privately held and mutual banks also are experiencing significant increases in auditing fees because the external auditors are applying the same 

PCAOB standards to these nonpublic banks. 

ACB has provided concrete suggestions to the banking regulators, the SEC, and 

the PCAOB on ways to reduce the cost of compliance with internal controls and 

other requirements, while still achieving the important goal of improved corporate 

governance and transparency. We are pleased that the FDIC raised the FDICIA 

threshold from $500 million to $1 billion for the internal control reporting and related audit requirements, which was a reform advocated by ACB. The change should 

significantly reduce costs for mutual and privately held stock banks under the $1 

billion cap. 

ACB urged the SEC and PCAOB to evaluate the significant audit costs involved 

with the implementation of Section 404 of Sarbanes-Oxley. ACB recommended that 

it is appropriate to provide relief from Section 404 to community banks that are already subject to heavy regulation and routine bank examinations. 

The SEC’s Advisory Committee on Smaller Public Companies will soon release for 

public comment recommendations that the SEC give exemptive relief from Section 

404 to micro-cap and small-cap public companies that comply with enhanced corporate governance provisions. ACB supports the efforts of the panel to recommend 

a differentiated Section 404 regime based on the size of a public company’s market 

capitalization and annual revenue. The proposals recognize that larger companies 

pose a proportionally greater risk to the investing public than smaller public companies, including community banks. ACB believes that through the Advisory Committee’s efforts an appropriate balance can be struck between the goals of providing 

adequate regulation of internal controls and reducing unnecessary compliance costs 

for smaller companies. 

INCREASING THE CAPACITY OF FEDERAL SAVINGS ASSOCIATION TO ENGAGE IN

SMALL BUSINESS AND AGRICULTURAL LENDING (MATRIX NO. 53) 

Today, savings associations are increasingly important providers of small business 

and agricultural credit in communities throughout the country. A high priority for 

ACB is a modest increase in the business-lending limit for savings associations. In 

1996, Congress liberalized the commercial lending authority for federally chartered 

savings associations by adding a 10 percent ‘‘bucket’’ for small business loans to the 

10 percent limit on commercial loans. The Office of Thrift Supervision permits some 

limited commercial lending through a service corporation. 

Even with this small accommodation, the ‘‘10 plus 10’’ limit poses a significant 

constraint for an ever-increasing number of institutions. Expanded authority would 

enable savings associations to make more loans to small- and medium-sized businesses, thereby enhancing their role as community-based lenders. To accommodate 

this need, ACB supports eliminating the lending limit restriction on small business 

loans while increasing the aggregate lending limit on other commercial loans to 20 

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percent. Under ACB’s proposal, these changes would be made without altering the 

requirement that 65 percent of an association’s assets be maintained in assets required by the qualified thrift lender test. 

Increasing commercial lending authority would also greatly benefit rural communities, where the number of financial institutions is limited, by increasing the number of financial institutions that are actively engaged in lending to farmers, ranchers and small businesses. To successfully engage in agricultural lending, a savings 

association must employ personnel with expertise in agricultural lending. The current limits on commercial lending authority is a deterrent to the investment of resources needed for agricultural lending. 

UNNECESSARY AND REDUNDANT PRIVACY NOTICES (MATRIX NO. 63) 

ACB strongly urges the elimination of required annual privacy notices for banks 

that do not share information with nonaffiliated third parties. Banks with limited 

information sharing practices should be allowed to provide customers with an initial 

notice, and provide subsequent notices only when terms are modified. We do agree 

a notice should be sent, but it becomes an expensive burden to send it multiple 

times when once will more than suffice. Moreover, redundancy in this case does not 

enhance consumer protection; rather it serves to numb our customers with volume. 

PARITY UNDER THE SECURITIES EXCHANGE ACT AND INVESTMENT ADVISERS ACT

(MATRIX NO. 52) 

ACB vigorously supports providing parity for savings associations with banks 

under the Securities Exchange Act and Investment Advisers Act. Statutory parity 

will ensure that savings associations and banks are under the same basic regulatory 

requirements when they are engaged in identical trust, brokerage, and other activities that are permitted by law. As more savings associations engage in trust activities, there is no substantive reason to subject them to different requirements. They 

should be subject to the same regulatory conditions as banks engaged in the same 

services. 

In proposed regulations, the SEC has offered to remove some aspects of the disparity in treatment for broker-dealer registration and the IAA, but still has not offered full parity. Dual regulation by the OTS, the SEC, and the States makes savings associations subject to significant additional cost and regulatory burden. Eliminating this regulatory burden could free up tremendous resources for local communities. ACB supports a legislative change. Such a change will ensure that savings 

associations will have the same flexibility as banks to develop future products and 

offer services that meet customers’ needs. 

ENHANCING EXAMINATION FLEXIBILITY (MATIRX NOS. 42 AND 169) 

Current law requires the Federal banking agencies to conduct a full-scale, on-site 

examination of the depository institutions under their jurisdiction at least every 12 

months. There is an exception for small institutions that have total assets of less 

than $250 million and are well-capitalized and well-managed and meet other criteria. Examination of these small institutions are required at least every 18 months. 

A large majority of banks and savings associations are well-run institutions that 

do not require full-scale, on-site safety-and-soundness and compliance examinations 

every 12 months. ACB supports providing the Federal banking agencies flexibility 

in establishing examination schedules in order to allocate examination resources to 

higher risk institutions. Section 601 of the Financial Services Regulatory Relief Act 

of 2005, H.R. 3505, provides this flexibility. ACB also supports increasing the cap 

for the small institution examination cycle from $250 million to $1 billion, as provided in Section 607 of H.R. 3505. The proposal will reduce regulatory burden on 

low-risk, small institutions and permit the banking agencies to focus their resources. 

These two proposals would not alter the examination schedule for Community Reinvestment Act compliance. 

REDUCING IMPEDIMENTS TO RESIDENTIAL DEVELOPMENT LENDING (MATRIX NO. 88) 

Current law provides special authority to savings associations to lend the lesser 

of $30 million or 30 percent of capital to a single residential developer. However, 

the law limits this authority by artificially capping the per unit sales price in a development at $500,000—making this special authority unavailable in high-cost 

areas. The overall limit of $30 million or 30 percent of capital is sufficient to prevent 

concentrated lending to one residential developer. ACB supports eliminating the 

$500,000-per-unit limit as an unnecessary regulatory detail that creates an artificial 

market limit in high-cost areas. 

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HOME OFFICE CITIZENSHIP (MATRIX NO. 58) 

ACB recommends that Congress amend the Home Owners’ Loan Act to provide 

that for purposes of jurisdiction in Federal courts, a Federal savings association is 

deemed to be a citizen of the State in which it has its home office. For purposes 

of obtaining diversity jurisdiction in Federal court, the courts have found that a 

Federal savings association is considered a citizen of the State in which it is located 

only if the association’s business is localized in one State. If a Federal savings association has interstate operations, a court may find that the federally chartered corporation is not a citizen of any State, and therefore no diversity of citizenship can 

exist. Now that the Supreme Court has settled the question of diversity jurisdiction 

for national banks, Federal savings associations are the only financial institutions 

that can be denied access to Federal courts based on diversity jurisdiction. The 

change benefits consumers as well as Federal savings associations by providing both 

sides clear authority to access Federal courts. 

EASING RESTRICTIONS ON INTERSTATE BANKING AND BRANCHING (MATRIX NO. 26) 

ACB strongly supports removing unnecessary restrictions on the ability of national and State banks to engage in interstate branching. Currently, national and 

State banks may only engage in de novo interstate branching if State law expressly 

permits. ACB recommends eliminating this restriction. The law also should clearly 

provide that State-chartered Federal Reserve member banks might establish de 

novo interstate branches under the same terms and conditions applicable to national banks. ACB recommends that Congress eliminate States’ authority to prohibit 

an out-of-State bank or bank holding company from acquiring an in-State bank that 

has not existed for at least 5 years. The new branching rights should not be available to industrial loan companies with commercial parents (those that derive more 

than 15 percent of revenues from nonfinancial activities). 

RESTRICTIONS ON AUTO LOAN INVESTMENTS (MATRIX NO. 82) 

Federal savings associations are currently limited in making auto loans to 35 percent of total assets. However, the law places no limit on the unsecured consumer 

credit card debt held by a Federal savings association. A better policy is also to permit unlimited secured auto lending, which is a less risky activity than unsecured 

credit card lending. Removing this limitation will expand consumer choice by allowing savings associations to allocate additional capacity to this important segment of 

the lending market. 

STREAMLINED CRA EXAMINATIONS (MATRIX NO. 78) 

ACB strongly supports amending the Community Reinvestment Act to define 

banks with less than $1 billion in assets as small banks and therefore permit them 

to be examined with the streamlined small institution examination. According to a 

report by the Congressional Research Service, a community bank participating in 

the streamlined CRA exam can save 40 percent in compliance costs. Expanding the 

small institution exam program will free up capital and other resources for almost 

1,700 community banks across our Nation that are in the $250 million to $1 billion 

asset-size range, allowing them to invest even more into their local communities. 

BANK SERVICE COMPANY INVESTMENTS (MATRIX NO. 94) 

Present Federal law stands as a barrier to a savings association customer of a 

Bank Service Company from becoming an investor in that BSC. A savings association cannot participate in the BSC on an equal footing with banks who are both customers and owners of the BSC. Likewise, present law blocks a bank customer of a 

savings association’s service corporation from investing in the savings association 

service corporation. 

ACB proposes legislation that would provide parallel investment ability for banks 

and savings associations to participate in both BSC’s and savings association service 

corporations. ACB’s proposal preserves existing activity limits and maximum investment rules and makes no change in the roles of the Federal regulatory agencies 

with respect to subsidiary activities of the institutions under their primary jurisdiction. Federal savings associations thus would need to apply only to OTS to invest. 

Other Important Issues 

INTEREST ON BUSINESS CHECKING (MATRIX NO. 3) 

Prohibiting banks from paying interest on business checking accounts is long outdated, unnecessary, and anticompetitive. Restrictions on these accounts make community banks less competitive in their ability to serve the financial needs of many 

business customers. Permitting banks and savings institutions to pay interest directly on demand accounts would be simpler. Institutions would benefit by not havVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00206 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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ing to spend time and resources trying to get around the existing prohibition. This 

would benefit many community depository institutions that cannot currently afford 

to set up complex sweep operations for their—mostly small—business customers. 

This new authority should not be available to industrial loan companies with commercial parents (those that derive more than 15 percent of revenues from nonfinancial activities). 

ELIMINATING UNNECESSARY BRANCH APPLICATIONS (MATRIX NO. 62) 

A logical counterpart to proposals to streamline branching and merger procedures 

would be to eliminate unnecessary paperwork for well-capitalized banks seeking to 

open new branches. National banks, State-chartered banks, and savings associations 

are each required to apply and await regulatory approval before opening new 

branches. This process unnecessarily delays institutions’ plans to increase competitive options and increase services to consumers, while serving no important public 

policy goal. In fact, these requirements are an outdated holdover from the times 

when regulatory agencies spent unnecessary time and effort to determine whether 

a new branch would serve the ‘‘convenience and needs’’ of the community. 

COORDINATION OF STATE EXAMINATION AUTHORITY (MATRIX NO. 70) 

ACB supports the adoption of legislation clarifying the examination authority over 

State-chartered banks operating on an interstate basis. ACB recommends that Congress clarify home- and host-State authority for State-chartered banks operating on 

an interstate basis. This would reduce the regulatory burden on those banks by 

making clear that a chartering State bank supervisor is the principal State point 

of contact for safety and soundness supervision and how supervisory fees may be 

assessed. These reforms will reduce regulatory costs for smaller institutions. 

LIMITS ON COMMERCIAL REAL ESTATE LOANS (MATRIX NO. 87) 

ACB recommends increasing the limit on commercial real estate loans, which applies to savings associations, from 400 to 500 percent of capital, and giving the OTS 

flexibility to increase that limit. Institutions with expertise in commercial real property lending and which have the ability to operate in a safe and sound manner 

should be granted increased flexibility. Congress could direct the OTS to establish 

practical guidelines for commercial real property lending that exceeds 500 percent 

of capital. 

INTERSTATE ACQUISITIONS (MATRIX NO. 89) 

ACB supports the adoption of legislation to permit multiple savings and loan holding companies to acquire associations in other States under the same rules that 

apply to bank holding companies under the Riegle-Neal Interstate Banking and 

Branching Efficiency Act of 1994. This would eliminate restrictions in current law 

that prohibit (with certain exceptions) a savings and loan holding company from acquiring a savings association if that would cause the holding company to become 

a multiple savings and loan holding company controlling savings associations in 

more than one State. 

APPLICATION OF QTL TO MULTI-STATE OPERATIONS (MATRIX NO. 54) 

ACB supports legislation to eliminate State-by-State application of the QTL test. 

This better reflects the business operations of savings associations operating in more 

than one State. 

APPLYING INTERNATIONAL LENDING SUPERVISION ACT TO OTS (MATRIX NO. 66) 

ACB recommends that the ILSA be amended to clarify that the ILSA covers savings associations. Such a provision would benefit OTS-regulated savings associations 

operating in foreign countries by assisting the OTS in becoming recognized as a consolidated supervisor, and it would promote consistency among the Federal banking 

regulators in supervising the foreign activities of insured depository institutions. 

OTS REPRESENTATION ON BASEL COMMITTEE ON BANKING SUPERVISION

(MATRIX NO. 67) 

ACB recommends another amendment to the ILSA that would add OTS to the 

multiagency committee that represents the United States before the Basel Committee on Banking Supervision. Savings associations and other housing lenders 

would benefit by having the perspective of the OTS represented during the Basel 

Committee’s deliberation. 

PARITY FOR SAVINGS ASSOCIATIONS ACTING AS AGENTS FOR AFFILIATED

DEPOSITORY INSTITUTIONS (MATRIX NO. 90) 

ACB recommends that the Federal Deposit Insurance Act be amended to give savings associations parity with banks to act as agents for affiliated depository instituVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00207 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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tions. This change will allow more consumers to access banking services when they 

are away from home. 

INFLATION ADJUSTMENT UNDER THE DEPOSITORY INSTITUTION MANAGEMENT

INTERLOCKS ACT (MATRIX NO. 49) 

ACB supports increasing the exemption for small depository institutions under the DIMA from $20 million to $100 million. This will make it easier for smaller institutions to recruit high quality directors. The original $20 million level was set a 

number of years ago and is overdue for an adjustment. 

MORTGAGE SERVICING CLARIFICATION (MATRIX NO. 79) 

The FDCPA requires a debt collector to issue a ‘‘mini-Miranda’’ warning (that the 

debt collector is attempting to collect a debt and any information obtained will be 

used for that purpose) when the debt collector begins to attempt to collect a debt. 

This alerts the borrower that his debt has been turned over to a debt collector. However, the requirement also applies in cases where a mortgage servicer purchases a 

pool of mortgages that include delinquent loans. While the mini-Miranda warnings 

are clearly appropriate for true third party debt collection activities, they are not 

appropriate for mortgage servicers who will have an ongoing relationship with the 

borrower. 

ACB urges the adoption of legislation to exempt mortgage servicers from the miniMiranda requirements. The proposed exemption (based the Mortgage Servicing 

Clarification Act) is narrowly drawn and would apply only to first lien mortgages 

acquired by a mortgage servicer for whom the collection of delinquent debts is incidental to its primary function of servicing current mortgages. The exemption is narrower than one recommended by the FTC for mortgage servicers. The amendment 

would not exempt mortgage servicers from any other requirement of the FDCPA. 

REPEALING OVERLAPPING RULES FOR PURCHASED MORTGAGE SERVICING RIGHTS

(MATRIX NO. 92) 

ACB supports eliminating the 90-percent-of-fair-value cap on valuation of purchased mortgage servicing rights. ACB’s proposal would permit insured depository 

institutions to value purchased mortgage servicing rights, for purposes of certain 

capital and leverage requirements, at more than 90 percent of fair market value—

up to 100 percent—if the Federal banking agencies jointly find that doing so would 

not have an adverse effect on the insurance funds or the safety and soundness of 

insured institutions. 

LOANS TO EXECUTIVE OFFICERS (MATRIX NO. 93) 

ACB recommends legislation that eliminates the special regulatory $100,000 lending limit on loans to executive officers. The limit applies only to executive officers 

for ‘‘other purpose’’ loans, that is, those other than housing, education, and certain 

secured loans. This would conform the law to the current requirement for all other 

officers, that is, directors and principal shareholders, who are simply subject to the 

loans-to-one-borrower limit. ACB believes that this limit is sufficient to maintain 

safety and soundness. 

DECRIMINALIZING RESPA (MATRIX NO. 80) 

ACB recommends striking the imprisonment sanction for violations of RESPA. It 

is highly unusual for consumer protection statutes of this type to carry the possibility of imprisonment. Under the ACB’s proposal, the possibility of a $10,000 fine 

would remain in the law, which would provide adequate deterrence. 

ELIMINATING SAVINGS ASSOCIATION SERVICE COMPANY GEOGRAPHIC RESTRICTIONS

(MATRIX NO. 89) 

Currently, savings associations may only invest in savings association service 

companies in their home State. ACB supports legislation that would permit savings 

associations to invest in those companies without regard to the current geographic 

restrictions. 

STREAMLINING SUBSIDIARY NOTIFICATIONS (MATRIX NO. 95) 

ACB recommends that Congress eliminate the unnecessary requirement that a 

savings association notify the FDIC before establishing or acquiring a subsidiary or 

engaging in a new activity through a subsidiary. Under ACB’s proposal, a savings 

association would still be required to notify the OTS, providing sufficient regulatory 

oversight. No similar provision applies to national banks. 

AUTHORIZING ADDITIONAL COMMUNITY DEVELOPMENT ACTIVITIES (MATRIX NO. 96) 

Federal savings associations cannot now invest directly in community development corporations, and must do so through a service corporation. National banks 

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and State member banks are permitted to make these investments directly. Because 

many savings associations do not have a service corporation and choose for other 

business reasons not to establish one, they are not able to invest in CDC’s. ACB 

supports legislation to extend CDC investment authority to Federal savings associations under the same terms as currently apply to national banks. 

ELIMINATING DIVIDEND NOTICE REQUIREMENT (MATRIX NO. 81) 

Current law requires a savings association subsidiary of a savings and loan holding company to give the OTS 30 days’ advance notice of the declaration of any dividend. ACB supports the elimination of the requirement for well-capitalized associations that would remain well capitalized after they pay the dividend. Under this approach, these institutions could conduct routine business without regularly conferring with the OTS. Those institutions that are not well capitalized would be required to prenotify the OTS of dividend payments. 

REIMBURSEMENT FOR THE PRODUCTION OF RECORDS (MATRIX NO. 97) 

ACB’s members have long supported the ability of law enforcement officials to obtain bank records for legitimate law enforcement purposes. In the Right to Financial 

Privacy Act of 1978, Congress recognized that it is appropriate for the government 

to reimburse financial institutions for the cost of producing those records. However, 

the Act provided for reimbursement only for producing records of individuals and 

partnerships of five or fewer individuals. Given the increased demand for corporate 

records, such as records of organizations that are allegedly fronts for terrorist financing, ACB recommends that Congress broaden the RFPA reimbursement language to cover corporate and other organization records. 

ACB also recommends that Congress clarify that the RFPA reimbursement system applies to records provided under the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (Title III of the USA PATRIOT Act). 

Because financial institutions will be providing additional records under the authority of this new act, it is important to clarify this issue. 

EXTENDING DIVESTITURE PERIOD (MATRIX NO. 98) 

ACB recommends that unitary savings and loan holding companies that become 

multiple savings and loan holding companies be provided 10 years to divest nonconforming activities, rather than the current 2-year period. This would be consistent 

with the time granted to new financial services holding companies for similar divestiture under the Gramm-Leach-Bliley Act. The longer time gives these companies 

time to conform to the law without forcing a firesale divestiture. 

CREDIT CARD SAVINGS ASSOCIATIONS (MATRIX NO. 100) 

Under current law, a savings and loan holding company cannot own a credit card 

savings association and still be exempt from the activity restrictions imposed on 

companies that control multiple savings associations. However, a savings and loan 

holding company could charter a credit card institution as a national or State bank 

and still be exempt from the activity restrictions imposed on multiple savings and 

loan holding companies. ACB proposes that the Home Owners’ Loan Act be amended to permit a savings and loan holding company to charter a credit card savings 

association and still maintain its exempt status. Under this proposal, a company 

could take advantage of the efficiencies of having its regulator be the same as the 

credit card institution’s regulator. 

PROTECTION OF INFORMATION PROVIDED TO BANKING AGENCIES (MATRIX NO. 100) 

Court decisions have created ambiguity about the privileged status of information 

provided by depository institutions to bank supervisors. ACB recommends the adoption of legislation that makes clear that when a depository institution submits information to a bank regulator as part of the supervisory process, the depository institution has not waived any privilege it may claim with respect to that information. 

Such legislation would facilitate the free flow of information between banking regulators and depository institutions that is needed to maintain the safety and soundness of our banking system. 

TECHNICAL AMENDMENTS

ACB supports two additional technical amendments to Federal banking laws. The 

first would give Federal savings associations the same authority as national banks 

to invest in corporate debt securities that are the equivalent of commercial loans. 

The second would afford a Federal savings association the same treatment that a 

national bank has with regard to the execution of State and local court judgments 

against the association. 

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Conclusion 

I wish to again express ACB’s appreciation for your invitation to testify on the 

importance of reducing regulatory burdens and costs for community banks. We 

strongly support the Committee’s efforts in providing regulatory relief, and look forward to working with you and your staff in crafting legislation to accomplish this 

goal. 

—————

PREPARED STATEMENT OF H. GREG McCLELLAN

PRESIDENT AND CEO, MAX FEDERAL CREDIT UNION

ON BEHALF OF

THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

MARCH 1, 2006

Introduction 

The National Association of Federal Credit Unions (NAFCU) and the entire credit 

union community appreciate this opportunity to participate in this discussion regarding regulatory relief for America’s financial institutions. We would like to thank 

Chairman Shelby, Ranking Member Sarbanes, Senator Crapo, and Members of the 

Committee for having us here today. NAFCU is the only national organization exclusively representing the interests of the Nation’s federally chartered credit unions. 

NAFCU is comprised of over 800 Federal credit unions—member owned financial 

institutions across the Nation—representing over 27 million individual credit union 

members. NAFCU-member credit unions collectively account for approximately twothirds of the assets of all Federal credit unions in the United States. 

I am Greg McClellan and I currently serve as the President and CEO of MAX 

Federal Credit Union headquartered in Montgomery, Alabama. Prior to taking over 

as CEO, I spent over 20 years as the Executive Vice President and Chief Operations 

Officer at the credit union. MAX FCU is a community credit union with over 

106,000 members and more than $650 million in assets. I have been involved in the 

credit union movement for more than 20 years, and I have more than 30 years experience in the financial services industry. 

I am a member of the Millbrook Chamber of Commerce and a board member of 

the Boys & Girls Club of South Central Alabama. I currently serve as the President 

of the Montgomery Chapter of the Alabama Credit Union League, Vice Chair of the 

Alabama Credit Union Executive Society Council and Vice Chair of the Credit 

Union Coalition of Alabama, in addition to serving on NAFCU’s NAFCU/PAC Committee. 

Historically, credit unions have served a unique function in the delivery of necessary financial services to all Americans. Established by an act of Congress in 

1934, the Federal credit union system was created and has been recognized as a 

way to promote thrift and to make financial services available to all Americans, 

many of whom would otherwise have limited access to necessary financial services. 

Congress established credit unions as an alternative to banks and to fill a precise 

public need—a niche that credit unions fill today for over 87 million Americans. 

Every credit union is a cooperative institution organized ‘‘for the purpose of promoting thrift among its members and creating a source of credit for provident or 

productive purposes.’’ (12 U.S.C. 1752(1)). While over 70 years have passed since the 

Federal Credit Union Act (FCUA) was signed into law, two fundamental principles 

regarding the operation of credit unions remain every bit as important today as in 

1934:

• Credit unions remain totally committed to providing their members with efficient, 

low cost personal service; and, • Credit unions continue to emphasize traditional cooperative values such as democracy and volunteerism.

Credit unions are not banks. The Nation’s 8,695 federally insured credit unions 

serve a different purpose and have a fundamentally different structure, existing 

solely for the purpose of providing financial services to their members. In the 8 

years since Congress passed the Credit Union Membership Access Act (CUMAA—

P.L. 105–219) Federal credit unions have added over 1,400 underserved areas, resulting in low-cost financial services being made available to over 100 million Americans. As owners of cooperative financial institutions, united by a common bond, all 

credit union members have an equal say in the operation of their credit union—‘‘one 

member, one vote’’—regardless of the dollar amount they have on account. These 

singular rights extend all the way from making basic operating decisions to electing 

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the board of directors—something unheard of among for-profit, stock-owned banks. 

Unlike their counterparts at banks and thrifts, Federal credit union directors serve 

without remuneration—a fact epitomizing the true ‘‘volunteer spirit’’ permeating the 

credit union community. In fact, while the average bank director is paid approximately $14,000 per year, the average credit union board member is paid $0. 

Credit unions have an unparalleled safety and soundness record. Unlike banks 

and thrifts, credit unions have never cost the American taxpayer a single dime. 

While the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings 

and Loans Insurance Corporation (FSLIC) were both started with seed money from 

the U.S. Treasury, every dollar that has gone into the National Credit Union Share 

Insurance Fund (NCUSIF) has come from the credit unions it insures. Furthermore, 

unlike the thrift insurance fund that unfortunately cost hundreds of billions of dollars, credit unions have never needed a Federal bailout. 

Looking Beyond CUMAA 

Credit unions have been the target of criticism by some in the banking industry 

for more than two decades. Over the past few years, the banker attacks have intensified. The Supreme Court’s decision in 1998 in the AT&T Family Federal Credit 

Union field of membership case followed by Congress’ prompt passage of CUMAA 

in the summer of 1998, which was seen by many as a significant victory for credit 

unions, brought the issue to the forefront. CUMAA overturned in 8 short months 

a decision that had encompassed 8 years of costly litigation initiated by the banks. 

CUMAA was an important and necessary piece of legislation for credit unions at 

the time of its enactment because it codified a number of fundamental credit union 

concepts embraced by both Federal and State-chartered credit unions. These include:

• The multiple-group policy that NCUA initiated in 1984; 

• The ‘‘once a member, always a member’’ principle followed by virtually every credit union in the country; and 

• The ‘‘family member’’ concept followed by many credit unions.

Yet CUMAA came with some provisions that were added and not widely supported by the credit union community. These include:

• Arbitrary limitations on member business loans; 

• Imposition of a bank-like Prompt Corrective Action (PCA) requirement that, given 

the structure of credit unions, serves in many respects as an overly restrictive 

constraint on growth; and 

• Various other artificial and arbitrary limitations on growth.

In the wake of CUMAA, NAFCU and its membership concluded the following:

• NCUA should work to eliminate unnecessary regulations and work with Congress 

to repeal laws which are only serving to drive small financial institutions out of 

business. 

• Mergers seem to be a practical and necessary way of creating financially viable 

credit unions that can survive in today’s financial services marketplace. 

• It is important that the regulatory environment allow for credit union growth and 

not impair the ability of credit unions to remain competitive.

As a result of these meetings, it became clear that both regulatory and legislative 

action was needed in the post-CUMAA environment. 

The Current Situation 

NAFCU is pleased to report to the Committee that credit unions today are vibrant 

and healthy. Membership in credit unions continues to grow with credit unions serving over 87 million Americans—more than at any time in history. At the same time, 

it is important to note that over the past 25 years, the credit union market share, 

as a percentage of financial assets, has not changed and, as a consequence, credit 

unions provide little competitive threat to other financial institutions. According to 

data obtained from the Federal Reserve Board, during the 25 year period from 1980 

to September 2005, the percentage of total financial assets held by credit unions remained constant at only 1.4 percent.

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The above chart only tells part of the story. Credit unions remain small financial institutions. As of last September, the average credit union has $78 million in assets, while the ‘‘average’’ bank and thrift has over $1.2 billion in assets. 

Furthermore, a number of individual banks have total assets greater than the entire credit union community combined. As shown in the chart below, the annual 

asset growth of the commercial bank sector for the last full year available (2004) 

exceeded the size of the entire credit union community, that is total assets—with 

banks growing in just 1 year by a magnitude that it took credit unions nearly a century to achieve.

As is the case with the banks and thrifts, there has been consolidation within the 

credit union community in recent years. The number of credit unions has declined 

by more than 63 percent over the course of the past 36 years, from an all-time high 

of 23,866 in 1969 to 8,880 this past December. Similar to the experience of all credit 

unions, the number of Federal credit unions has declined by just about 58 percent 

over that same period, from a high of 12,921 in 1969 to 5,393 today. 

NAFCU Efforts to Enhance the Federal Charter 

Over the past 5 years NAFCU has been working closely with former NCUA Board 

Chairman Dennis Dollar, current NCUA Board Chairman JoAnn Johnson, Board 

Vice Chairman Rodney Hood, and Board Member Gigi Hyland, along with other 

Board Members and their respective staffs in an effort to improve the regulatory 

environment for Federal credit unions. We are pleased to see that these efforts have 

been productive in several respects. 

On the legislative front, NAFCU has been meeting with legislators on both sides 

of the aisle to compile a package of initiatives to help credit unions better serve 

their members in today’s sophisticated financial marketplace. An important part of 

that effort has involved identifying areas in which we believe Congress should provide what is now overdue regulatory relief. NAFCU has suggested a series of recommendations designed to enhance the Federal charter, several of which were contained either in whole or in part, in previous regulatory relief measures passed by 

the House. Credit unions exist in a dynamic environment where the laws and regulations dealing with credit union issues are currently in need of review and refinement in order to ensure credit unions can continue to respond to changing market 

conditions. 


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NAFCU has been pleased to work with Senator Crapo and the Members of the 

Committee in crafting the Matrix of Regulatory Relief Proposals and we applaud the 

Senator and his staff for their efforts. We look forward to regulatory relief legislation being introduced and hope that the Committee will turn to the next step of 

marking-up legislation. 

The House Bill—A Good First Step 

NAFCU urges the Committee, when drafting a regulatory relief bill, to start with 

the credit union proposals found of Title III of the House bill, The Financial Services 

Regulatory Relief Act (H.R. 3505) and included in the Matrix as outlined below: 

Leases of Land on Federal Facilities for Credit Unions (Matrix #16) 

NAFCU supports the effort to give credit unions the opportunity to negotiate land 

leases on Federal property under the same terms and conditions as credit unions 

now able to lease space in Federal buildings under the Federal Credit Union Act

(FCUA). The credit unions that will be impacted by this change are predominantly 

defense (military) credit unions that have tried to expand their service to our men 

and women in uniform by building (and paying for) their own member service centers on military facilities. Many credit unions that have expanded their services by 

building their own facilities to serve military personnel have had their leases go 

from a nominal fee (for example $1.00 a year) to a ‘‘fair market value’’ rate of over 

$2,000 a month. For not-for-profit cooperative credit unions, this increase in leasing 

costs will inevitably lead to higher fees and/or fewer services for their members—

the men and women that serve our country. 

Investments in Securities by Federal Credit Unions (Matrix #12) 

NAFCU supports this effort to increase investment options for Federal credit 

unions by allowing certain limited investments in securities. The current limitations 

in the Federal Credit Union Act unduly restrict Federal credit unions in today’s dynamic financial marketplace and have the potential of adversely impacting both 

safety and soundness. The track record of safe and sound performance by credit 

unions warrants expanded investment authority in accordance with regulations promulgated by the NCUA Board. 

Increase in General 12-Year Limitation of Term of Federal Credit Union Loans

(Matrix #10) 

NAFCU supports this provision that would increase the general 12-year limit on 

Federal credit union loans to 15 years or longer as permitted by the NCUA Board. 

The current 12-year limit is outdated and does not conform to maturities that are 

commonly accepted in the market today. It is also important that the NCUA Board 

have the discretionary authority to extend this limitation beyond 15 years when necessary in order to appropriately address marketplace conditions. 

Increase in 1 Percent Investment Limit in Credit Union Service Organizations

(Matrix #11, #131) 

NAFCU supports this provision to increase the 1 percent investment limit in credit union service organizations (CUSO’s). However, in lieu of just raising the limit 

to 3 percent, as found in the last version of regulatory relief passed by the House, 

NAFCU recommends that Congress give the NCUA Board authority to establish an 

appropriate investment limit recognizing that as time goes on, that limit may warrant further adjustment. 

Member Business Loan Exclusion for Loans to Nonprofit Religious Organizations

(Matrix #17) 

NAFCU supports this effort to exclude loans or loan participations by federally 

insured credit unions to nonprofit religious organizations from the member business 

loan limit. 

Check-Cashing and Money-Transfer Services Offered to Those Within the Credit

Union’s Field of Membership (Matrix #9) 

NAFCU supports efforts to allow Federal credit unions to offer check-cashing and 

money-transfer services to anyone within the credit union’s field of membership. We 

believe this new authority, which would be discretionary and not mandatory, will 

allow credit unions to help combat abuses by nontraditional financial institutions 

that prey on our Nation’s immigrants and others who live and work in underserved 

communities. The House passed stand-alone legislation to this effect (H.R. 749) on 

April 26, 2005. 

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Voluntary Mergers Involving Certain Credit Unions (Matrix #13) 

NAFCU supports this clarifying amendment since there is no sound reason for imposing a numerical limitation of 3,000 on the size of a group that can go forward 

with a credit union merger before considering spinning off the group and requiring 

it to form a separate credit union. In addition, the retroactive effective date of August 7, 1998 (the date of enactment of CUMAA), is an important part of this section 

and must be maintained. 

Conversion of Certain Credit Unions to Community Charter (Matrix #18) 

NAFCU supports efforts that give NCUA the authority to allow credit unions to 

continue to serve and add members from their select employee groups (SEG’s) after 

a credit union converts to a community charter. In addition, a credit union that converts to (or merges into) a community charter should be allowed to retain all employee groups in its field of membership at the time of conversion. Current law does 

not allow this, penalizing not only the credit union, but also those in its field of 

membership. We urge that the language from Section 307 of the Credit Union Regulatory Improvements Act (CURIA), H.R. 2317, be included for this section. 

Credit Union Governance (Matrix #19, #132) 

The Federal Credit Union Act contains many antiquated ‘‘governance’’ provisions 

that, while perhaps appropriate in 1934, are outdated, unnecessary, and inappropriate restrictions on the day-to-day operations of modern Federal credit unions. We 

support changes that would remove many of these provisions from the Federal Credit Union Act and instead allow the NCUA to use its regulatory authority to oversee 

these governance issues. For example, one antiquated provision prohibits credit 

unions from expelling disruptive or threatening members without a two-thirds vote 

of the membership; we believe the regulator and the credit union board should have 

some discretion in such cases. Additionally, NAFCU supports the following credit 

union governance proposals which would:

• Allow credit unions to reimburse volunteers on the board of directors for wages 

they would otherwise forfeit by participating in credit union-related activities; • Allow the NCUA Board to set the amount at which the credit union board of directors must approve a loan to, or guaranteed by, a director or member of the 

credit union supervisory committee (currently set by statute at $20,000); and, • Allow the NCUA Board to determine policies for review of approved pending applications for membership to the credit union (currently required monthly). 

Provide NCUA with Greater Flexibility in Responding to Market Conditions

(Matrix #20) 

NAFCU supports the proposal to give NCUA the authority to adjust interest rates 

depending on market conditions. Under current law, Federal credit unions are the 

only type of insured institution subject to Federal usury limits on consumer loans. 

This provision would still keep that limit, but give NCUA greater flexibility to make 

adjustments based on market conditions. 

Exemption from Premerger Notification Requirement of the Clayton Act

(Matrix #21) 

NAFCU supports the inclusion of this language which would exempt credit 

unions, just as banks and thrifts are already exempt, from the premerger notification requirements of the Hart-Scott-Rodino Act. Credit unions, like other depository 

institutions, are already exempt from the other provisions of the Act. The extensive 

review of the merger process by NCUA, makes this an extraneous burden faced by 

credit unions that other financial depository institutions do not share. 

Treatment of Credit Unions as Depository Institutions under Securities

Laws (Matrix #14) 

Gramm-Leach-Bliley provided banks with registration relief from certain enumerated activities. NAFCU supports providing credit unions regulatory relief along 

those same lines, eliminating the requirement that credit unions register with the 

Securities and Exchange Commission (SEC) as broker/dealers when engaging in certain activities. 

Modify the Statutory Definition of ‘‘Net Worth’’ to Include the Retained Earnings

from other Institutions that have Merged with the Surviving Credit Union

(Matrix #167) 

Currently, credit union mergers are accounted for by using the ‘‘pooling method,’’ 

meaning that the net worth of each merging credit union is combined to form the 

net worth of the surviving credit union: $2M (net worth of credit union A) + $2M 

(net worth of credit union B) = $4M (net worth of credit union AB). However, the 

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Financial Accounting Standards Board (FASB) has proposed eliminating pooling and 

imposing the ‘‘purchase method’’ of accounting on credit union mergers. Using this 

method and the current definition of net worth which is ‘‘retained earnings’’ as required by PCA, the net worth of the surviving credit union is only $2M ($2M [net 

worth of credit union A] + $2M [net worth of credit union B] = $2M [net worth of 

credit union AB]). Therefore, under the purchase method of accounting, only the 

surviving credit union’s retained earnings count as net worth for PCA purposes. 

Consequently, the surviving credit union may have trouble meeting PCA requirements, unless credit union net worth is redefined. 

It is important to note that this amendment does not legislate accounting practices; credit unions will be required to use the ‘‘purchase method’’ of accounting for 

mergers in order to receive a clean audit. This amendment does not grant credit 

unions that currently lack the authority to offer alternative capital accounts the authority to do so, nor does it confer upon NCUA the regulatory authority or discretion 

to authorize such accounts now or in the future. This amendment is intended to address a narrow and technical accounting issue and in the process simply maintain 

the status quo so that, in the case of merging credit unions, 2 + 2 can continue to 

equal 4. The House has also passed this NAFCU-supported language as stand-alone 

legislation, H.R. 1042, to address this same issue. 

At a House Subcommittee on Financial Institutions and Consumer Credit hearing 

on H.R. 1042 last April, the Subcommittee heard support for the legislation from 

NCUA and the National Association of State Credit Union Supervisors (NASCUS). 

Additionally, Mr. Robert Herz, the Chairman of FASB, testified at the hearing that 

the legislation does not pose an issue to FASB’s standard setting activities. The 

House passed H.R. 1042 under suspension of the rules on June 13, 2005. We would 

urge the Committee to include the language from H.R. 1042 in any regulatory relief 

bill. 

Additional Regulatory Relief Proposals 

Additionally, NAFCU supports including items #1 and #2 from the Matrix—the 

language from The Business Checking Freedom Act, H.R. 1224, which was passed by 

the House on May 24, 2005 by a vote of 424–1. Among other things, this language 

would allow the Federal Reserve to pay interest on balances held by depository institutions, including credit unions, at a Federal Reserve Bank. 

There are additional provisions in House’s Credit Union Regulatory Improvements 

Act (CURIA), H.R. 2317, which are not presently included in the Financial Services 

Regulatory Relief Act, H.R. 3505, that we believe should be included in any regulatory relief bill that the Senate Banking Committee may act on. NAFCU encourages the Committee to review CURIA, which includes updated legislative language 

on these proposals and include the following provisions: 

Risk-Based Capital/PCA Reform (Matrix #8) 

NAFCU supports this effort to modernize credit union capital requirements by redefining the net worth ratio to include risk assets. This would result in a new, more 

appropriate measurement to determine the relative risk of a credit union’s assets 

and improve the safety and soundness of credit unions and the NCUSIF. It simply 

does not make sense that the current capital system treats a new 1 year unsecured 

$10,000 loan the same as a 30-year mortgage that is on its last year of repayment. 

We urge inclusion of the proposal put forth by the NCUA and included as Title I 

of the House CURIA bill in any regulatory relief legislation. 

The American Bankers Association (ABA) expressed three concerns regarding 

risk-based capital in a letter to NCUA dated November 18, 2004. We believe that 

these concerns have been addressed in the actual proposal transmitted to Capitol 

Hill and incorporated into Title I of CURIA. Specifically, the ABA said that:

• CU’s need a meaningful leverage ratio; 

• There should be no substantive difference between bank and CU leverage ratio 

standards; and, 

• Secondary capital would undermine the unique character of credit unions.

Neither the NCUA proposal nor Title I of CURIA would expand the authority for 

NCUA to authorize secondary capital accounts. As far as leverage ratios are concerned, NCUA’s proposal:

• Advocates a system involving complementary leverage and risk-based standards 

working in tandem; 

• For the leverage requirement, NCUA advocates a reduction in the standard net 

worth (that is, leverage) ratio requirements for credit unions to a level comparable 

to what is required of FDIC-insured institutions. In order to achieve comparability 

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between the Federal insurance funds, it is necessary to factor in the NCUSIF’s 

mutual deposit-based funding mechanism; and, 

• The risk-based proposal tailors the risk-asset categories and weights of BASEL II, 

as well as related aspects of the FDIC’s PCA system, to the operation of credit 

unions. This approach is consistent with BASEL II and the FDIC’s PCA system, 

addressing credit and operational risks under the risk-based requirement and acknowledging other forms of risk, such as interest rate risk.

The ABA’s letter of November 18, 2004, also reiterates the recommendation contained in its April 18, 2000, comment letter to NCUA that said:

NCUA should adopt a more bank-like risk-weighted capital system and then 

work with the banking agencies within the umbrella of the Federal Financial 

Institutions Examination Council to improve the current risk-based capital adequacy standard to better recognize credit quality and the use of internal risk 

models to manage financial institution risk.

What NCUA has transmitted to policymakers on Capitol Hill (which is included 

in Title I of CURIA), in fact, closely resembles the bank-like risk-weighted capital 

system and was developed with ample input from the Treasury Department. One 

difference, however, is that NCUA’s proposal does not consider any credit union ‘‘internal risk models.’’ While NCUA may in the future make that part of the risk mitigation credit, we have no assurance that this will be the case, so one could objectively conclude that the proposed risk-based capital system for credit unions is, in 

fact, more stringent than that currently applicable to banks and thrifts. 

As you may recall, during the Senate Banking Committee’s 2004 hearing on regulatory relief, the panel of industry witnesses discussed the issue of risk-based capital 

for credit unions and at the conclusion of that discussion a bank witness noted his 

understanding that the credit union industry ‘‘would like to see the leverage ratio 

eliminated and have only risk-based capital. . . . [while banks] have several capital 

ratios that we have to comply with, three to be certain, and that includes a leverage 

ratio. So if they [credit unions] want equality that does not amount to eliminating 

the leverage ratio. They can have the risk-based capital ratio too, I suppose, and 

that might be wise, but we are not eliminating the other ratio.’’ To which NAFCU 

witness Bill Cheney responded: ‘‘. . . we are not asking to eliminate it.’’ (Hearing 

Transcript at page 151). NAFCU continues to support the complimentary leverage 

and risk-based standards proposed by the NCUA. 

Limits on Member Business Loans (Matrix #74, #84, #85, #86) 

NAFCU supports revision of the current asset limit on member business loans. 

The current limit restricts member business lending at a credit union from the lesser of 1.75 times actual net worth or 1.75 times net worth required for a well-capitalized credit union. We support the language found in Title II of the House CURIA 

bill and the Matrix that would revise this restriction, replacing the formula with a 

flat rate of 20 percent of the total assets of a credit union, as proposed in Title II 

of the House CURIA bill. NAFCU believes this provision would facilitate member 

business lending without jeopardizing the safety and soundness of participating 

credit unions. While the current cap was first imposed on credit unions as part of 

CUMAA in 1998, the law also directed the Treasury Department to study the need 

for such a cap. In 2001, the Treasury Department released its study entitled ‘‘Credit 

Union Member Business Lending’’ in which it concluded that ‘‘credit unions’ business lending currently has no effect on the viability and profitability of other insured depository institutions.’’ We would urge the Committee to review this study 

and give it the weight it deserves when considering these provisions. NAFCU also 

supports revising the current definition of a member business loan by giving the 

NCUA the authority to exclude loans of $100,000 or less as de minimus, rather than 

preserving the current threshold of $50,000. 

Leasing Space in Buildings with Credit Union Offices in Underserved Areas

(Matrix #121) 

NAFCU supports the provision in CURIA that enhances the ability of credit 

unions to assist distressed communities with economic revitalization efforts. This 

provision would allow a credit union to lease space in a building or on property in 

an underserved area in which it maintains a physical presence to other parties on 

a more permanent basis. It would permit a Federal credit union to acquire, construct, or refurbish a building in an underserved community, and lease out excess 

space in that building. 

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Credit Union Conversion Voting Requirements (Matrix #83) 

NAFCU does not object to a credit union’s right to convert to a mutual savings 

bank charter, however, we believe transparency and disclosure are paramount in 

the conversion process, and that the decision to convert should require the approval 

of a larger percentage of members than is currently the case. With that in mind, 

NAFCU supports language to require that a minimum of 20 percent of a credit 

union’s members eligible to vote should cast a ballot in the vote taken to convert 

and a majority of those credit union members must vote in favor of the conversion. 

In addition to the above provisions from the House CURIA bill, NAFCU also supports the inclusion of Matrix Items #168 (Eliminate or Modify the Limitation on 

Credit Union Experience for NCUA Board Members) and #176 (Seasoned Customer 

CTR Exemption—Provided that this would be made to apply to credit unions as 

well). 

Furthermore, we support granting the NCUA parity in the following Matrix 

items:

• (#157) Elimination of Criminal Indictments Against Receiverships; • (#160) Recordkeeping Amendment; and, • (#161) Preservation of Records by Optical Imaging and Other Means.

We should note that we do not support inclusion in any regulatory relief bill of 

provisions #25 (NCUA Vendor Examinations) and #168(b) (NASCUS—NCUA Board 

Member have State regulatory experience). 

Conclusion 

NAFCU believes that the state of the credit union community is strong and the 

safety and soundness of credit unions is unquestionable. Nevertheless, there is a 

clear need for easing the regulatory burden on credit unions as we move forward 

into the 21st century financial services marketplace. Providing credit unions some 

relief from the regulatory burdens that they face will allow credit unions to better 

serve their members and meet their needs in a dynamic marketplace. We urge the 

Committee to consider the important provisions we outlined in this testimony for 

inclusion in any Senate regulatory relief bill. We understand that this legislation 

is a work in progress and we urge you to undertake careful examination of any 

other measures that fall within the scope of this legislation. We would like to once 

again thank Chairman Shelby, Ranking Member Sarbanes, Senator Crapo, and the 

Members of the Senate Banking Committee for this opportunity to testify before you 

today. We look forward to working with you on this important matter and would 

welcome your comments or questions. 

—————

PREPARED STATEMENT OF STEVE BARTLETT

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

FINANCIAL SERVICES ROUNDTABLE

MARCH 1, 2006

Introduction 

Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members of the 

Committee. My name is Steve Bartlett and I am President & CEO of The Financial 

Services Roundtable. 

The Financial Services Roundtable represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and 

services to the American consumer. Member companies participate through the 

Chief Executive Officer and other senior executives nominated by the CEO. Roundtable member companies provide fuel for America’s economic engine, accounting directly for $40.7 trillion in managed assets, $960 billion in revenue, and 2.3 million 

jobs. 

The Roundtable appreciates the opportunity to share its views on the topic of regulatory relief for financial services firms. We strongly support efforts to eliminate 

outdated regulations and streamline the regulatory compliance process. Useless 

laws and regulations impose significant, and unnecessary, burdens on financial 

services firms, which make our firms less efficient. 

We often discuss regulatory reduction in the context of costs to big business, but 

the real burden is placed on small businesses and consumers through an increase 

in costs of financial services products. Many of the issues before us today have been 

under consideration for nearly 6 years and 2006 is a good time to address these concerns facing institutions of all sizes. I also want to take this time to mention the 

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* Held in Committee files. 

important issue of an optional Federal charter for insurers and producers. While a 

regulatory relief bill might not be the appropriate vehicle, the Senate Banking Committee is the right place to address this issue through oversight hearings, legislation, and a mark-up. I strongly believe that an optional Federal charter will bring 

advantages to insurers, producers, and most importantly consumers—and I look forward to continuing this dialogue with your Committee. 

I fully appreciate to some extent that I am ‘‘preaching to the choir’’ when I cite 

the burdens of regulation on financial services firms. Your Committee in particular, 

Mr. Chairman and Senator Crapo has led the effort to eliminate unnecessary and 

overly burdensome laws and regulations applicable to financial services firms. The 

Roundtable appreciates these efforts, and hopes that they will be fully realized with 

the enactment of a regulatory burden relief bill in this Congress. 

For over a year now, the Roundtable has undertaken its own initiative aimed at 

regulatory burden relief. We are engaged in an ongoing dialogue with the appropriate Federal financial regulatory agencies about several problems, and, in some 

instances, have recommended specific remedies. Based on direction from our senior 

executives, there are four major regulatory problems in need of reform. I will begin 

by addressing these four key issues. I also have highlighted a number of other regulatory reforms sought by the Roundtable, many of which were incorporated in 

H.R. 3505, ‘‘the Financial Services Regulatory Relief Act of 2005’’, which was approved by the House Financial Services Committee last year. Please find attached 

to my testimony an addendum of additional regulatory relief proposals offered for 

consideration by The Financial Services Roundtable.* 

The Roundtable’s Regulatory Oversight Coalition 

The Roundtable continues its own effort to reduce excessive regulation. This effort 

is focused on four regulatory problem areas:

• Suspicious Activity Report (SAR) filing requirements; 

• SEC enforcement policies and practices; 

• Attorney Client Privilege (the confidentiality of information that is shared with 

Federal financial regulators); and 

• Compliance with Section 404 of the Sarbanes-Oxley Act. 

SAR’s 

Roundtable member companies strongly support the government’s efforts to combat money laundering and terrorist financing. However, we believe that the current 

system of reporting suspicious activities is not working properly. The best evidence 

of this is the dramatic increase in SAR filings in recent years. For example, since 

1996, national SAR reporting has increased 453 percent. Similarly, FinCEN reported 81,197 filings in 1997 versus 288,343 filings in 2003. In 2004, depository institutions had filed a total of 689, 419 SAR’s, and the total number of SAR filings 

is projected to be around 900,000 for 2005. 

There are several reasons for this dramatic increase in SAR filings. First, the failure to file SAR’s has become a criminal issue. The U.S. Justice Department has aggressively pursued actions against financial institutions for failing to file SAR’s. 

This criminalization of the filing process has created a huge reputational risk for 

financial institutions, and has caused institutions to file an increasing number of 

SAR’s in order to avoid any potential for prosecution. Second, there are no clear 

standards for when SAR’s should be filed. Although guidelines are in place, examiners neither clearly nor consistently apply them. In addition, financial institutions 

do not receive feedback from law enforcement on the type of information that should 

be included in the SAR. Third, Roundtable member companies have encountered a 

‘‘zero tolerance’’ policy among the Federal financial regulatory agencies. Under this 

policy, institutions are held accountable for every single transaction. 

Finally, there is a lack of coordination among the various agencies and examiners 

responsible for SAR filings. This lack of coordination often results in duplicate requests and multiple filings. 

To address these problems, The Roundtable has urged the Federal financial regulatory agencies to take the following actions:

• Amend existing SAR regulations to incorporate the good faith guidance recently 

issued, but without the exception for ‘‘significant’’ nonfilings; 

• Draft regulations and/or guidelines that focus on an institution’s anti-money laundering program and policies, not individual transactions; 

• Coordinate with each other on all examination procedures, and provide consistent 

interpretations of the Bank Secrecy Act; 

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• Consider raising the Currency Transaction Report (CTR) threshold above the current $10,000.00 level; and • Provide additional guidance on Customer Identification Programs, including tailoring the regulations to individual businesses versus a one-size-fits-all approach. 

SEC Enforcement 

Roundtable member companies are increasingly concerned about the enforcement 

policies and practices of the Securities and Exchange Commission (SEC). Just as the 

Roundtable supports compliance with Federal anti-money laundering laws and regulations, the Roundtable supports compliance with our Nation’s securities laws. 

Moreover, we continue to work in a collaborative fashion with the SEC. That said, 

we believe that compliance is being hindered by certain SEC enforcement policies 

and practices. 

Specifically, the Roundtable believes that the Office of Compliance, Inspection, 

and Examination (OCIE) should be returned back to the operating divisions. This 

would align the SEC’s examination and inspection procedures with the policy making functions at the SEC. The Roundtable believes that with OCIE folded back into 

the operating divisions institutions would have a chance to more freely discuss compliance issues and other practices outside of a potential enforcement context. This 

is the model that has been successfully followed by the Federal banking agencies, 

and we believe that it would enhance, not reduce, compliance with securities laws. 

Second, we believe that the SEC should provide a notice to institutions when an 

investigation is complete. Currently, no such notices are provided, and this practice 

can have an unnecessary chilling effect on business operations. 

Third, we believe that there should be Commission approval prior to sweep examinations, and there should be written notification to the Commission prior to inspections. Moreover, the Roundtable supports legislation, such as H.R. 4618, sponsored 

by Congressman Vito Fossella. 

Fourth, as discussed further below, we believe the SEC should drop its policy of 

‘‘forcing’’ companies to waive attorney-client privilege in the course of an investigation. This policy is impairing the attorney-client privilege, and it threatens to undermine internal discussion and investigations. We note with interest that the SEC in 

recent days reversed course and halted its subpoenas of journalists’ notes. The SEC 

should show similar restraint in the attorney-client privilege arena and drop its policy of seeking waivers of the privilege.’’ Finally, we believe the SEC should give financial institutions adequate time to respond to broad document requests. 

The SEC has said that it will not tolerate unreasonable delays in response to inquiries. The Roundtable does not endorse unreasonable delays, but has found that 

the SEC’s definition of what constitutes an unreasonable delay is often very limited. 

This has created problems for institutions that are trying to determine what information is relevant and what is protected by the attorney-client privilege. 

Confidentiality of Information Shared with Regulators 

Financial institutions are required to share an increasing amount of information 

with Federal financial regulators. Reporting and filing requirements imposed by 

Federal law and regulators are a major source of this burden. For example, since 

the enactment of the Financial Institutions Reform, Recovery and Enforcement Act 

(FIRREA) in 1989, Federal banking and thrift regulators have promulgated over 801 

final rules, most of which impose various types of reporting and filing requirements. 

Additionally, financial institutions are asked to provide a wide-range of documents 

and information to regulators in the course of examinations and investigations. 

Unfortunately, this information sharing is threatened by two developments. First, 

there is the potential for confidential information that is shared with a Federal financial regulator to become accessible by third parties. Needless to say, this potential can have significant chilling effects on the nature and type of information an 

institution is willing to share with its regulator. 

Second, the Justice Department, the SEC, and the other Federal financial regulators have adopted policies that effectively undermine the attorney-client privilege. 

Under these policies, the wavier of the attorney-client privilege is a condition for 

being deemed ‘‘cooperative’’ with the agency, and the failure to waive the privilege 

can adversely affect the nature of the charges that may be brought in an enforcement case or the size of any civil money penalty that may be assessed against an 

institution. Such policies can have significant unintended consequences:

• They have a chilling effect on the communications between management, boards 

of directors, and their attorneys because of the uncertainty over what conversations and work-product is protected: 

• They discourage internal investigations. The current regulatory environment, including reforms brought about by the Sarbanes-Oxley Act, encourages companies 

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1 H.R. 1408, Financial Services Antifraud Network Act of 2001, U.S. House of Representatives, 

107th Congress (November 7, 2001). 2 H.R. 2179, Securities Fraud Deterrence and Investor Restitution Act, U.S. House of Representatives, 108th Congress (May 21, 2003). 

to conduct thorough internal investigations and, to the extent necessary, communicate the results of those investigations to the appropriate Federal regulators. 

Yet, the likelihood that such communications will result in a waiver of the attorney-client privilege creates a disincentive to conducting investigations. Thus, the 

current waiver policy is directly counter to the goals of Sarbanes-Oxley and similar regulatory reforms. 

• Furthermore, the policies place employees in a difficult position during the course 

of investigations. If employees cooperate in an investigation, their statements may 

have to be provided to the investigation agency. If an employee decided not to cooperate and withholds information, the employee risks termination or other action 

against them.

To protect the confidentiality of information given to a Federal financial regulator, 

the Roundtable urges the enactment of legislation similar to The Financial Services 

Antifraud Network Act of 2001 (also known as the Bank Examination Report Privilege Act or BERPA), which was proposed in the 107th Congress,1 and the Securities 

Fraud Deterrence and Investor Restitution Act, which was proposed in the 108th 

Congress.2 These proposals would protect the integrity and effectiveness of the information shared with Federal financial regulators. For example, BERPA would 

clarify that information voluntarily disclosed to an examining agency continues to 

be protected by the institution’s own privileges. BERPA also would codify and 

strengthen the bank supervisory privilege by defining confidential supervisory information, affirming that such information is the property of the agency that created 

or requested it, and protecting this information from unwarranted disclosure to 

third parties. Furthermore, BERPA would reaffirm the agencies’ powers to establish 

procedures governing the production of confidential supervisory information to third 

parties. 

The Roundtable also recommends that such legislation be expanded to cover information shared with an institution’s auditors. The Sarbanes-Oxley Act protects privileged documents provided to the Public Company Accounting Oversight Board 

(PCAOB) in connection with the inspections and investigations of registered audit 

firms. 

This protection, however, does not extend to information obtained by the auditors 

themselves. Ensuring that information shared with auditors can remain subject to 

confidentiality will help to ensure the flow of information between an institution 

and its auditors. 

With respect to the governmental policies that have the effect of undermining the 

attorney-client privilege, The Roundtable recommends that Congress make it clear 

to the Justice Department and the Federal financial regulators that the waiver of 

the privilege should not be a matter of policy in all investigations. 

Section 404 of the Sarbanes-Oxley Act 

Section 404 of the Sarbanes-Oxley Act requires SEC-reporting firms to conduct 

annual assessments of the effectiveness of their internal controls, and to have their 

auditors independently attest to and report on this assessment. The Roundtable 

supports the goals of this section. Strong corporate governance and transparency of 

management structure and internal controls are important. Nonetheless, the Roundtable has identified a certain substantial concern with the implementation of Section 404. 

Most notably, Section 404 has changed the role of auditors. It has made auditors 

hesitant to provide advice to clients, caused auditors to impose excessive testing and 

documentation requirements on clients, and significantly increased the cost of outside audits. 

Additionally, Section 404 has imposed significant initial and on-going costs on 

companies. A recent survey by Financial Executives International found that the 

total cost of compliance per company is approximately $4.36 million. These costs include large increases in external costs for consulting, software and other vendors, 

additional personnel, and, as noted above, additional fees by external auditors. 

Furthermore, Roundtable members have encountered confusion over the standards in Section 404. For example, we find a need for clarity on the meaning of terms 

such as ‘‘material weakness’’ and ‘‘significant controls.’’

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Other Needed Regulatory Reforms 

There are a number of other needed regulatory reforms that the Roundtable urges 

the Committee to consider as it crafts regulatory relief legislation. I will start by 

highlighting provisions from H.R. 3505, and then list some other recommended 

changes to Federal law. 

Interstate Banking 

Over 10 years ago, Congress enacted the landmark Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Since then, the public benefits anticipated 

by that Act have been realized. 

The creation of new bank branches has helped to maintain the competitiveness 

of our financial services industry, and has improved access to financial products in 

otherwise underserved markets. Branch entry into new markets has enhanced competition in many markets, and this, in turn, has resulted not only in a better array 

of financial products and services for households and small businesses, but also in 

competitive prices for such products and services. There is, however, one remaining 

legal barrier to interstate branching, which should be eliminated. 

Under the Riegle-Neal Act, a bank cannot establish a new or so-called ‘‘de novo’’ 

interstate branch without the affirmative approval of a host State. Since 1994, only 

17 States have given that approval; 33 States have not. The time has come to remove this barrier to interstate branching. The Roundtable urges the Committee to 

do so by incorporating Section 401 from H.R. 3505 in its version of regulatory relief 

legislation. 

Section 401 eliminates the provision in the Riegle-Neal Act that requires State approval for de novo branching. In other words, the enactment of Section 401 would 

allow a bank to establish new branches in any State, without limitations. 

Section 401 is supported by the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors. These Federal and State regulators recognize the public benefits associated with expanding access to banking offices. They also realize that current law has created some competitive disparities between different types of institutions. 

Section 401 also makes other useful modifications to interstate operations. It removes a minimum requirement on the age of a bank that is acquired by an outof-State bank. It allows State bank supervisors to permit State banks to engage in 

interstate trust activities similar to the trust activities permissible for national 

banks. It facilitates mergers and consolidations between insured banks and uninsured banks with different home States. All of these changes facilitate the provision 

of banking products and services to consumers. 

Coordination of State Exams 

A second provision related to interstate banking that we would urge the Committee to incorporate in its version of regulatory relief legislation is Section 619 of 

H.R. 3505. Section 619 of H.R. 3505 clarifies the authority of State banking supervisors over interstate branches of State-chartered banks. It provides that the banking supervisor of the State in which a bank is chartered (a ‘‘home’’ State supervisor) 

is responsible for the examination and supervision of branches located in other 

States, and that only a home State supervisor may impose supervisory fees on interstate branches. Section 619 also encourages State banking supervisors to enter into 

cooperative supervisory agreements related to the examination and supervision of 

State banks with interstate operations. Such an agreement could provide for joint 

examinations, and even the assessment of joint supervisory fees. Furthermore, Section 619 acknowledges the authority of a ‘‘host’’ State banking supervisor to examine 

the interstate branches of State banks for compliance with host State law. 

The addition of this provision will help to avoid needless confusion, and potential 

conflict, over the examination and supervision of the interstate branches of State 

banks. 

Regulation of Thrift Institutions 

While the Roundtable supports all of the thrift provisions in H.R.3505, I would 

highlight four of those provisions, which are particularly important to our members. 

Diversity Jurisdiction 

Under the law, citizens of two different States may avail themselves of the Federal courts if certain jurisdictional thresholds are met. Every corporation is deemed 

to be a citizen of two States: (1) the State of incorporation; and (2) the State in 

which it has its principal place of business, if different. Thus a company with offices 

in every State will still be able to use the Federal courts, as long as the other party 

is not a citizen of the company’s ‘‘home’’ State. 

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3The scope of this exemption was narrowed in the Gramm-Leach-Bliley Act. 

4 In 1999, Congress did amend the Investment Company Act to treat thrifts the same as 

banks. 

Federal savings associations are treated differently. For Federal savings associations, there is no provision governing their citizenship, and this issue has been litigated over and over. 

We urge the Committee to amend the law to clarify that a Federal savings association is a citizen of the State in which the institution’s main or home office is located. This would put Federal thrift associations under the same rules that apply 

to every other corporation in America. 

Parity for Thrifts Under the Federal Securities Laws 

Section 201 of H.R. 3505 would establish regulatory parity between the securities 

activities of banks and thrifts. For years, the brokerage and investment activities 

of commercial banks have enjoyed exemptions under Federal securities laws.3 As a 

result, the securities activities of banks have been subject to regulation by banking 

regulators, not the Securities and Exchange Commission. Thrift institutions, on the 

other hand, have not enjoyed similar exemptions under the Exchange Act or the Investment Advisers Act, even though Congress has, over time, permitted thrifts to 

engage in the same brokerage and investment activities as commercial banks.4 As 

a result, the securities activities of thrifts have been subject to regulation by both 

the Securities and Exchange Commission (SEC) and the Office of Thrift Supervision 

(OTS). 

Using its rulemaking powers, the SEC has attempted to address this regulatory 

disparity, first by granting thrifts a regulatory exemption under the Exchange Act, 

and, most recently, by proposing a limited exemption for thrifts under the Investment Advisers Act. Unfortunately, those actions by the SEC do not fully resolve the 

disparity between the regulation of banks and thrifts. Therefore, we urge the Committee to include Section 201 in its version of regulatory relief legislation. 

Section 201 would establish an explicit exemption for thrifts in the Exchange Act 

that is comparable to the exemption for commercial banks. This statutory change 

would remove any doubt about the permanence of the existing regulatory exemption 

adopted by the SEC. 

Section 201 also would make the exemption for thrifts under the Investment Advisers Act parallel to the current exemption for banks. The regulation recently proposed by the SEC grants thrifts an exemption from SEC regulation only when they 

are engaged in investment advisory activities in connection with trust activities. It 

would not apply to other investment advisory services, such as retail planning services. Section 201 draws no such distinction. It would give thrifts the same exemption 

as commercial banks. 

The OTS examines the securities-related activities of thrifts, just as the OCC and 

other banking agencies examine the securities-related activities of commercial 

banks. Thus, the exemptions proposed in Section 201 do not leave a regulatory void. 

They simply place thrifts on regulatory par with commercial banks, by eliminating 

the costs associated with registration with the SEC. 

Auto Loans 

The Roundtable urges the Committee to incorporate Section 208 of H.R. 3505 in 

its version of regulatory relief legislation. Current law limits the amount of automobile loans by a thrift to no more than 35 percent of the institution’s assets. Section 208 would remove this ceiling. Congress has previously determined that credit 

card loans and education loans by thrifts should not be subject to any asset limitation. Automobile loans should be placed in this same category. Doing so will allow 

thrifts to further diversify their portfolios and enhance their balance sheets. Also, 

this provision would increase competition in the auto loan business, to the benefit 

of consumers. 

Dividends 

The Roundtable supports Section 204 of H.R. 3505. Section 204 would replace a 

mandatory dividend notice requirement for thrifts owned by savings and loan holding companies with an optional requirement under the control of the Director of 

OTS. The existing mandatory requirement is no longer necessary. Other existing 

Federal statutes and regulations give the OTS the authority to ensure that thrifts 

held by holding companies pay dividends only in appropriate circumstances. Moreover, the current mandatory requirement applies only to thrifts owned by savings 

and loan holding companies, not to those owned by other companies or banks. Thus, 

Section 204 removes a regulatory disparity that need not exist. 

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Cross Marketing 

Presently, an insurance affiliate of a financial holding company may engage in 

cross-marketing with a company in which the insurance affiliate has made an investment if (1) the cross-marketing takes place only through statement inserts and 

Internet websites; (2) the cross-marketing activity is conducted in accordance with 

the antitying restrictions of the Bank Holding Company Act (BHCA); and (3) the 

Board determines that the proposed arrangement is in the public interest, does not 

undermine the separation of banking and commerce, and is consistent with the safety and soundness of depository institutions. Under current law, however, a merchant banking affiliate of a financial holding company may not engage in such limited cross-marketing activities with the companies in which it makes investments. 

The Roundtable urges the Committee to amend the BHCA and establish parity of 

treatment between financial holding companies that own insurance affiliates and 

those that own merchant banking affiliates. 

We also urge the Committee to permit a depository institution subsidiary of a financial holding company to engage in cross-marketing activities with a nonfinancial 

company held by a merchant banking affiliate if the nonfinancial company is not 

controlled by the financial holding company. When a financial holding company does 

not control a portfolio company, cross-marketing activities are unlikely to materially 

undermine the separation between banking and commerce. 

In these noncontrol situations, the separation of banking and commerce is maintained by the other restrictions contained in the BHCA that limit the holding period 

of the investment and restrictions that limit the financial holding company’s ability 

to manage and operate the portfolio company. 

These proposed modifications to the BHCA were incorporated in Section 501 of 

H.R. 3505. 

SEC Regulation of Broker-Dealers 

Sections 201 and 202 of the Gramm-Leach-Bliley Act were intended to provide for 

SEC regulation of certain new securities activities, but permit banks to continue to 

engage directly in traditional trust and accommodation activities, that have long 

been regulated by the banking agencies. The Gramm-Leach-Bliley Act never envisioned that banks would be forced to ‘‘push out’’ traditional trust activities into SEC 

regulated companies. Despite this clear Congressional intent, the SEC has issued 

proposed regulations that would do exactly that—it would force banks to divest historic business lines and push them out to registered broker-dealers. The Federal Reserve and the OCC have objected to these proposed regulations, and their comment 

letter to the SEC emphasizes the importance of issuing a regulation that conforms 

to Congressional intent. 

Nevertheless, the SEC appears adamant in going forward with a far-reaching regulation that would effectively require banks to cease engaging in many traditional 

banking activities. The Committee should amend the Gramm-Leach-Bliley Act to 

strike Sections 201 and 202 to ensure that banks may continue to engage in traditional banking functions without the threat of having to push these activities out 

into a nonbanking company. 

Anti-Tying 

We urge the Committee to repeal the price variance feature of the existing 

antitying rule so that a banking institution can give a price break to commercial 

customers if that commercial customer decides to purchase other products and services from the institution. Banks should have the ability to offer a commercial customer a price break on a product or service if the commercial customer decides to 

buy another product or service. This change would not encourage antitrust activities. Unlike the classic tying case, the customer could not be forced into buying a 

product. If the customer thinks the price break is good enough, he or she can buy 

the product. If the customer does not think the price break is good enough, he or 

she is under no obligation to buy the product. Furthermore, our proposed change 

would apply only to commercial customers, not individuals or small businesses. 

Simplified Privacy Notice 

Like many consumers, the Roundtable member companies have found that the 

privacy notice required by the GLBA is overly confusing, and largely ignored by 

many consumers. 

Accordingly, we recommend that the Committee use this opportunity to simplify 

the form of the notice required by GLBA. 

There is extensive research in support of simple notices. That research indicates 

that consumers have difficulty processing notices that contain more than seven elements and require the reader to translate vocabulary used in the notice into conVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00223 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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cepts they understand. Consumer surveys also indicate that over 60 percent of consumers would prefer a shorter notice than the lengthy privacy policy mandated by 

GLBA. 

Recognizing the problem created by the existing GLBA privacy notice, the Federal 

banking agencies, the FTC, NCUA, CFTC, and SEC recently requested comment on 

alternative notices that would be more readable and useful to consumers. These 

Federal agencies, however, lack the authority to make a simplified notice truly consumer-friendly because they cannot address conflicting and overlapping State privacy laws. Section 507 of GLBA permits individual States to adopt privacy protections that are ‘‘greater’’ than those established by GLBA. This provision allows 

States to adopt their own privacy notices, and this simply adds to consumer confusion and frustration. 

We strongly recommend that the Committee include a provision in its version of 

regulatory relief legislation that directs the relevant Federal agencies to finalize a 

simplified privacy notice for purposes of GLBA, and provides that such a notice supersede State privacy notices. As the research has indicated, consumers will be better served if they are given a simple, uniform explanation of an institution’s privacy 

policy and their privacy rights. 

Real Estate Brokerage 

The Financial Services Roundtable strongly supports the authorization of financial services holding companies to engage in real estate brokerage activities. We believe that the Gramm-Leach-Bliley Act of 1999 clearly contemplated that this would 

be a permissible ‘‘financial activity’’ for financial services holding companies, and 

thus can be authorized by a joint rulemaking of the Treasury Department and the 

Federal Reserve Board. We also strongly support legislation, such as H.R. 2660 

sponsored by Chairman Oxley and Ranking Member Frank in the House, that 

would define this activity as ‘‘financial’’ without the need for a rulemaking proceeding. 

Conclusion 

In conclusion, the Roundtable appreciates the efforts of the Committee to eliminate laws and regulations that impose significant, and unnecessary, burdens on financial services firms and the American consumer. The costs savings that will result from this regulatory relief legislation will benefit the consumers of financial 

products and services. We look forward to working with the Committee on this important legislation. 

—————

PREPARED STATEMENT OF JOE McGEE

PRESIDENT & CEO, LEGACY COMMUNITY FEDERAL CREDIT UNION

BIRMINGHAM, AL ON BEHALF OF THE

CREDIT UNION NATIONAL ASSOCIATION

MARCH 1, 2006

Chairman Shelby, Ranking Member Sarbanes, Senator Crapo, and other Members 

of the Committee, I am Joe McGee, President and CEO of the Legacy Community 

Federal Credit Union in Birmingham, Alabama. I appreciate the opportunity to represent the Credit Union National Association (CUNA) at this hearing to address legislation to help alleviate the regulatory burden under which all federally insured depository institutions operate today. CUNA is the largest credit union advocacy organization, representing over 90 percent of our Nation’s approximately 8,800 State and 

Federal credit unions and their 87 million members. 

Legacy Community Federal Credit Union, originally University FCU serving 

UAB, has recently converted to a community charter, serving 7 counties in Alabama. At Legacy Community Federal Credit Union, our motto is ‘‘Your Life, Your 

Legacy.’’ We aim to treat all of our members with respect and dignity and we offer 

honest, fair deals to all members at all times. We deliver a wide range of low cost 

products and services to the diverse economic and social make-up of our members 

and potential members and always look out for better ways to reach out to the 

under served within our field of membership. 

At Legacy, we put forth every effort to enable our members to become financially 

self-sufficient and successful. We place a high priority on consumer education and 

the teaching of financial thrift as demonstrated through our homebuyer and financial planning seminars, free financial planning services, website, consumer education library, consumer credit counseling programs as well as programs in which 

217

we advocate for the elderly, such as our Gate Keeper Program. Our multilingual 

staff work with our members to provide free checking accounts, experienced-based 

lending, a special educational loan program to promote continued learning, as well 

as a student loan program with reduced payments and interest rates. 

I am extremely proud to speak on behalf of the Nation’s credit unions today because credit unions benefit America. We are the only financial institutions that are 

run solely for the benefit of the people who use their services—not for the benefit 

of stockholders, or the board of directors, or the institution itself. We operate without paying a dime to most of our boards of directors, and without providing stock 

options to our senior management. We do this because of the devoted efforts of tens 

of thousands of selfless volunteers for whom credit unions are not just a business, 

but a cause. We do this ‘‘not for charity, not for profit, but for service.’’ That attitude 

makes us unique. Now we are asking for Congress’s help in continuing the not-forprofit, people-oriented, cooperative work we do. 

Credit Unions are Unique Depository Institutions 

CUNA is pleased that the Senate Banking Committee is moving forward with this 

initiative to provide America’s financial institutions with well needed regulatory relief of costly and outdated burdens. Some might mistakenly believe that the Credit 

Union Membership Access of 1998 (CUMAA, Pub. L. No. 105–219)) was the credit 

union version of regulatory relief. While that law did provide relief from an onerous 

1998 U.S. Supreme Court decision severely restricting fields of membership of Federal credit unions, it also imposed several new, stringent regulations on credit 

unions, which are most severely regulated group of all insured financial institutions. 

Congress in CUMAA directed the U.S. Department of the Treasury to evaluate 

the differences between credit unions and other types of Federally insured financial 

institutions, including any differences in the regulation of credit unions and banks. 

The 2001 Treasury study, ‘‘Comparing Credit Unions with Other Depository Institutions,’’ found that while ‘‘credit unions have certain characteristics in common with 

banks and thrifts, (for example, the intermediation function), they are clearly distinguishable from these other depository institutions in their structure and operational 

characteristics.’’

When Congress amended the Federal Credit Union Act with the passage of 

CUMAA in 1998, it included a preamble which enumerated the characteristics that 

differentiate credit unions from other depository institutions and from the foundation on which the Federal tax exemption for credit unions rests. The preamble 

states:

‘‘Credit unions, unlike many other participants in the financial services market, 

are exempt from Federal and most State taxes because they are:

• member-owned, • democratically operated, • not-for profit organizations, • generally managed by volunteer boards of directors, and • because they have the specified mission of meeting the credit and savings needs 

of consumers, especially persons of modest means.’’

Other 1998 Congressional findings in CUMAA also emphasize the unique nature 

of credit unions:

(1) ‘‘The American credit union movement began as a cooperative effort to serve 

the productive and provident credit needs of individuals of modest means.’’

(2) ‘‘Credit unions continue to fulfill this public purpose and current members and 

membership groups should not face divestiture from the financial services institution of their choice as a result of recent court action.’’

Recognition and appreciation of these fundamental attributes are critical to understanding credit unions. As Treasury stated in its study, ‘‘Many banks or thrifts 

exhibit one or more of . . . (these) characteristics, but only credit unions exhibit all 

five together.’’

As unique institutions, credit unions today stand distinctly in need of regulatory 

relief. 

Credit Unions’ Regulatory Burden is Real and Relief is Imperative 

Regulatory burden is an issue for all financial institutions in general, and for 

credit unions in particular. Indeed, credit unions are the most heavily regulated of 

all financial institutions. Credit unions are, for instance, subject to the same consumer protection laws as other financial institutions (such as Truth-Lending, Equal 

Credit Opportunity, Fair Credit Reporting Act, Home Mortgage Disclosure, Real Estate Settlement Procedures Act, Truth-in-Savings, and the Expedited Funds Availability Act), the ever-increasing requirements of the Bank Secrecy Act, and a broad 

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array of safety and soundness rules. In addition, credit unions have an extensive 

list of unique operating restrictions, including the following:

• Credit unions are the only type of financial institution that have field of membership restrictions on whom they may serve. 

• Credit unions may not raise capital in the marketplace but must rely on retained 

earnings to build equity. 

• Credit unions are the only group of financial institutions that must meet statutory

net worth requirements under the prompt corrective action (PCA) provisions. 

• Credit unions face severe limitations on member business lending. 

• Federal credit unions have a Federal usury ceiling, limitations on loan maturities, 

and stringent limitations on their investment options. 

• Federal credit unions’ governance practices are inflexible because many aspects 

are fixed in statute.

As discussed in detail below, there are two major areas of concern that CUNA 

asks be addressed by this Committee in regulatory relief legislation: The prompt 

corrective action (PCA) provisions in Section 216 of the Federal Credit Union Act 

(12 U.S.C. § 1790d); and the member business loan cap in Section 107A (12 U.S.C. 

§ 1757a) of the Act. These provisions were added to the law in 1998 as part of the 

CUMAA legislation. 

The unnecessarily inflexible PCA requirements were imposed on federally insured 

credit unions in 1998, not because of any problems with credit unions, but simply 

because PCA had been imposed on banks and thrift institutions several years earlier and some in Congress and the Treasury Department felt credit unions and its 

regulator should be subject to similar standards. However, as formulated in 1998, 

the credit union PCA standards are not, in fact and application, similar. The statutory net worth requirements direct federally insured credit unions to maintain a 

minimum of 6 percent net worth to total assets in order to meet the definition of 

an adequately capitalized credit union. Well-capitalized credit unions must meet a 

7 percent net worth ratio. ‘‘[T]his exceeds the 4 percent Tier 1 level ratio applicable 

for banks and thrifts (and is statutory as opposed to regulatory),’’ Treasury noted 

in its 2001 study. ‘‘Complex’’ credit unions have additional net worth requirements. 

The member business loan cap imposed in 1998 is also unnecessarily restrictive 

and arbitrary in nature. Treasury’s 2001 analysis pointed to the fact that ‘‘Federal 

credit unions have more limited powers than national banks and Federal saving associations. Most notably, Federal credit unions face stricter limitations on their 

(member business) . . . lending and securities activities.’’

A federally insured credit union’s member business loan (MBL) aggregate portfolio 

may not exceed the lesser of 1.75 times its net worth or 12.25 percent of total assets, 

unless the credit union is chartered to make such loans, has a history of making 

such loans or has been designated as a community development credit union. By 

comparison, banks have no specific limits on commercial lending, and thrifts may 

place up to 20 percent of their assets in a combination of small business loans and 

other commercial loans. There are other limitations on credit unions’ member business lending that do not apply to commercial banks. For instance, a Federal credit 

union’s member business loan is generally limited to a 12-year maturity and can 

only be made to members. 

Unlike banks, credit unions have not received new statutory powers for many 

years. In 2003, the Filene Research Institute published a study by Professor William 

E. Jackson III of the University of North Carolina at Chapel Hill, which looked at 

the efforts of Congress over the last two decades to provide regulatory relief for traditional depository institutions and whether more relief for credit unions is reasonable and appropriate. 

The study reviewed sources of funding, investments, and the ownership structure 

of banks, thrifts, and credit unions and found that the operational differences 

among these types of institutions are ‘‘distinctive.’’ It observed that since 1980, Congress has enacted a number of statutory provisions that have noticeably changed 

the regulatory environment in which banks and thrifts conduct business, such as 

by deregulating liabilities, removing restrictions on interstate branching, and expanding the list of activities permissible for financial holding companies. 

Most recently, the Gramm-Leach-Bliley Act of 1999 expanded the statutory definition of the kinds of products and services in which banks may engage. Under the 

Act, banking institutions may engage in activities that are merely ‘‘financial in nature’’ as opposed to those that are ‘‘closely related to banking.’’ The bank regulators 

have the authority to determine what is permissible as ‘‘financial in nature.’’ Credit 

unions were not included in any sweeping, statutory expansion of powers, but they 

were included in the substantial requirements under the Act regarding privacy, inVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00226 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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cluding requirements to communicate their member privacy protection policies to 

members on an annual basis. 

The credit union study noted, ‘‘Credit unions face stricter limitations on their 

lending and investing activities’’ than other institutions bear. ‘‘In general, credit 

unions have received less deregulation than either banks or thrifts,’’ the study concluded. 

CUNA endorsed the regulatory relief legislation that was passed by the House of 

Representatives in 2004, and supports H.R. 3505, the Financial Services Regulatory 

Relief Act, which has been approved by both the House Financial Services Committee and the House Judiciary Committee. This bill contains a number of amendments to the Federal Credit Union Act advocated by CUNA. However, the legislation does not include two key provisions that we urge this Committee to make a 

high priority for inclusion in its regulatory relief bill, provisions found in H.R. 2317, 

the Credit Union Regulatory Improvements Act (CURIA), which has garnered notable bi-partisan support in the House. 

Prompt Corrective Action Reform 

CUNA strongly supports amending the system of prompt corrective action for 

credit unions by establishing a dual ratio requirement: A pure leverage ratio and 

a net worth to risk-asset ratio. The resulting system would be comparable to the 

system of PCA in effect for FDIC-insured institutions while taking into account the 

unique operating characteristics of cooperative credit unions. 

History of the PCA Provisions 

Net worth requirements were not the original purpose of the CUMAA. The genesis of the 1998 Act was the Supreme Court’s field of membership decision that prohibited NCUA from approving Federal credit union fields of membership comprising 

more than one group. Since its adoption 8 years ago, NCUA and credit unions have 

had sufficient time to experience PCA requirements. Therefore, it is not surprising 

that there should be a need for some modifications to PCA now that the NCUA and 

the credit union movement have been operating under PCA for several years. 

The PCA section of CUMAA established for the first time ‘‘capital’’ or ‘‘net worth’’ 

requirements for credit unions. Prior to that time, credit unions were subject to a 

requirement to add to their regular reserves, depending on the ratio of those reserves to ‘‘risk-assets’’ (then defined as loans and long-term investments). The purpose of PCA section of the Act (Section 1790d) is ‘‘to resolve the problems of insured 

credit unions at the least possible long-term loss to the Fund.’’ The CUMAA instructs the NCUA to implement regulations that establish a system of PCA for credit unions that is consistent with the PCA regime for banks and thrifts under the 

1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA) but that 

takes into account the unique cooperative nature of credit unions. 

There are, however, a number of ways that credit union PCA under CUMAA differs from PCA as it applies to banks and thrifts under FDICIA. Key differences are:

• The net worth levels that determine a credit union’s net worth classification are 

specified in the Act rather than being established by regulation as is the case for 

banks and thrifts. 

• The levels of the net worth ratio for a credit union to be classified ‘‘well’’ or ‘‘adequately’’ capitalized are 2 percentage points (200 basis points) above those currently in place for banks and thrifts, even though credit unions’ activities are far 

more circumscribed than those of banks. 

• The system of risk-based net worth requirements for credit unions is structured 

very differently from the Basel-based system in place for banks and thrifts. For 

example, the Basel system is credit-risk based while credit union risk-based net 

worth requirements explicitly account for the difficult-to-quantify interest rate 

risk. In PCA as implemented under FDICIA, interest rate risk at banks and 

thrifts is instead dealt with through examination and supervision. 

The Need for PCA Reform 

There are two basic problems with the current credit union PCA system:

• There are unnecessarily high basic credit union capital requirements. Credit 

unions have significantly higher capital requirements than do banks, even though 

the National Credit Union Share Insurance Fund (NCUSIF) has an enviable 

record compared to other Federal deposit insurance funds. Indeed, because credit 

unions’ cooperative structure creates a systemic incentive against excessive risk 

taking, it has been argued that credit unions actually require less capital to meet 

potential losses than do other depository institutions. 

• The current risk-based PCA system is imprecise. The current system of risk-based 

net worth requirements for credit unions provides an imprecise treatment of risk. 

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It is only when a portfolio reaches a relatively high concentration of assets that 

it signals greater risk and the need for additional net worth. This system weakens 

the measurement of the NCUSIF’s exposure to risk, and provides blurred incentives to credit unions on how to manage their balance sheets so as to minimize 

risk. A Basel-type method of applying different weights to different types of assets 

based on the asset’s risk profile would permit a more precise accounting for risk 

than does the current credit union PCA system, thus improving the flow of actionable information regarding net worth adequacy to both regulators and credit 

unions.

Taken together, these problems have created an unnecessary constraint on 

healthy, well-managed credit unions. Credit unions agree that any credit union with 

a net worth ratio well below those required to be adequately capitalized should be 

subject to prompt and stringent corrective action. There is no desire to shield such 

credit unions from PCA—they are indeed the appropriate targets of PCA. Because 

credit unions themselves fund the NCUSIF, they are keenly aware that they are the 

ones that pay when a credit union fails. Therefore, CUNA strongly supports a rigorous safety and soundness regulatory regime for credit unions that is anchored by 

meaningful and appropriate net worth requirements which drive the credit union system’s PCA requirements.

Under the current system of PCA, however, there are many credit unions that 

have more than enough capital to operate in a safe and sound manner but feel constrained in serving their members because potential reductions in their net worth 

category can result from growth in member deposits, even when not induced by the 

credit union. The current law stipulates that a credit union with a 6 percent net 

worth ratio is ‘‘adequately’’ capitalized. Considering the risk exposure of the vast 

majority of credit unions and the history of their Federal share insurance fund, 6 

percent is more than adequate net worth. 

As a result of the effect of potential growth on a credit union’s net worth ratio 

under the present system of PCA, a very well run, very healthy, very safe and sound 

credit union feels regulatory constraints operating with a 6 percent net worth ratio. 

Without access to external capital markets, credit unions may only rely on retained 

earnings to build net worth. Thus, a spurt of growth brought on by members’ desire 

to save more at their credit union can quickly lower a credit union’s net worth ratio, 

even if the credit union maintains a healthy net income rate. 

Any credit union can be hit with sharp and unexpected increases in member deposits, which are the primary source of asset growth for credit unions. This can happen whenever credit union members face rising concerns either about their own economic or employment outlook (as in a recession) or about the safety of other financial investments they may hold (as when the stock market falls). A recent example 

is the influx of funds by members of certain Gulf Coast credit unions who deposited 

insurance payments as a result of Hurricane Katrina. The resulting deposit building 

translates into large swings in deposit inflows without any additional effort by the 

credit union to attract deposits. As an example, total credit union savings growth 

rose from 6 percent in 2000 to over 15 percent in 2001 despite the fact that credit 

unions lowered their savings dividend rates sharply throughout the year. The year 

2001 produced both a recession and falling stock market, and was topped off with 

the consumer confidence weakening effects of the September terrorist attacks. 

Credit union concern about the impact of growth triggered by external factors on 

net worth ratios goes far beyond those credit unions that are close to the 6 percent 

cutoff for being considered adequately capitalized. Because of the conservative management style that is the product of their cooperative, volunteer-run structure, most 

credit unions seek always to be classified as ‘‘well’’ rather than ‘‘adequately’’ capitalized. In order to do that, they must maintain a significant cushion above the 7 percent level required to be ‘‘well’’ capitalized so as not to fall below 7 percent after 

a period of rapid growth. A typical target is to have a 200 basis point cushion above 

the 7 percent standard. Thus, in effect, the PCA regulation, which was intended to 

ensure that credit unions maintain a 6 percent adequately capitalized ratio, has created powerful incentives to induce credit unions to hold net worth ratios roughly 50 

percent higher than that level, far in excess of the risk in their portfolios. The PCA 

regulation in its present form thus drives credit unions to operate at ‘‘overcapitalized’’ levels, reducing their ability to provide benefits to their members, and forcing 

them instead to earn unnecessarily high levels of net income to build and maintain 

net worth. 

There are two ways to resolve the problems with the current system of PCA. One 

would be to permit credit unions to issue some form of secondary capital in a way 

that both provides additional protection to the NCUSIF and does not upset the 

unique cooperative ownership structure of credit unions. Although CUNA believes 

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that credit unions should have greater access to such secondary capital, this is not 

something CUNA is advocating as part of regulatory relief legislation. 

The preferable solution is to amend the PCA requirements. PCA reform should 

have two primary goals. First, CUNA believes any reform should preserve the requirement that regulators must take prompt and forceful supervisory actions 

against credit unions that become seriously undercapitalized, maintaining the very 

strong incentives for credit unions to avoid becoming undercapitalized. This is essential to achieving the purpose of minimizing losses to the NCUSIF. Second, PCA 

requirements should not force well-capitalized credit unions to feel the need to establish a large buffer over minimum net worth requirements so that they become 

overcapitalized. 

CUNA advocates reforming PCA in a manner consistent with these two requirements by transforming the system into one with net worth requirements comparable 

to those in effect for FDIC-insured institutions, and that is much more explicitly 

based on risk measurement by incorporating a Basel-type risk structure. 

Specific PCA Amendments 

CUNA strongly urges amendments to the Federal Credit Union Act so that a credit union’s PCA capitalization classification would be determined on the basis of two 

ratios: The net worth ratio and the ratio of net worth to risk assets. The net worth 

ratio would be defined as net worth less the credit union’s deposit in the NCUSIF, 

divided by total assets less the NCUSIF deposit. The ratio of net worth to risk assets would be defined as net worth minus the NCUSIF deposit divided by risk assets, where risk assets would be designed in a manner comparable to the Basel system in effect for banks of similar size to credit unions. 

Specifically, CUNA urges the Committee to include in regulatory relief legislation 

provisions to change the PCA requirements for credit unions (Section 216 of the 

Federal Credit Union Act, 12 U.S.C. § 1790d) as follows: 

1. Amend the net worth categories: The Federal Credit Union Act specifies net 

worth ratios that, along with a risk-based net worth requirement, determine a credit 

union’s net worth category. The Act should continue to specify net worth requirements, but at levels more appropriate for credit unions and comparable to those currently in effect for banks and thrift institutions. See the chart below for the proposed categories for net worth ratios. 

2. Amend the risk-based net worth categories: Currently, federally insured credit 

unions that are considered ‘‘complex’’ must meet a risk-based net worth requirement. The Act should require all credit unions to meet a risk-based net worth requirement and should direct the NCUA Board to design the risk-based requirement 

appropriate to credit unions in a manner more comparable to risk standards for 

FDIC-insured institutions. The right column in the chart below provides information 

on appropriate ratios of net worth to risk assets. 

3. Provide NCUA with the flexibility to address other risk criteria: Current riskbased net worth requirements for credit unions incorporate measures of interestrate risk as well as credit risk. The comparable standards for risk-based capital requirements for FDIC-insured institutions deal only with credit risk. The NCUA 

Board should have the authority to delegate to NCUA’s regional directors the authority to lower by one level a credit union’s net worth category for reasons of interest rate risk only that is not captured in the risk-based ratios. 

4. Amend the definitions relating to net worth: Net worth, for purposes of PCA, 

is currently defined as a credit union’s retained earnings balance under generally 

accepted accounting principles. The Financial Accounting Standards Board (FASB) 

is finalizing guidance, expected to be effective in 2007, on the accounting treatment 

of mergers of cooperatives that would create a new component of net worth, in addition to retained earnings, after a credit union merger. The unintended effect of the 

FASB rule will be to no longer permit a continuing credit union to include the merging credit union’s net worth in its PCA calculations. FASB’s application of its proposal to credit unions will mean that a credit union’s PCA net worth would typically 

be understated by the amount of the fair value of the merging credit union’s retained earnings, that is, part of GAAP net worth would be excluded from regulatory 

net worth. This anomaly must be addressed by including a definition of net worth 

for purposes of PCA to include the new component for post-merger credit unions. 

Without an amendment to the PCA definition, the FASB pronouncement will have 

the unintended consequence of discouraging, if not eliminating, voluntary mergers 

that, absent FASB’s policy, would be advantageous to credit union members involved. In addition, FASB’s application of its proposal to credit unions will mean 

that a credit union’s net worth would typically be understated by the amount of the 

fair value of the merging credit union’s retained earnings. This result is not in the 

public interest. That is why CUNA, along with the NCUA and others, supports a 

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technical correction that would amend the Federal Credit Union Act to make it clear 

that net worth equity, including acquired earnings of a merged credit union as determined under GAAP, and as authorized by the NCUA Board, would be acceptable 

for calculating PCA ratios. 

Senior legal staff at FASB has indicated support for a legislative approach, and 

we urge the Committee to address this problem, well in advance of the effective 

date, so credit unions will have certainty regarding the accounting treatment of 

mergers. The House of Representatives approved by voice vote on June 13, 2005 a 

bill specifically solving this problem, H.R. 1042, the ‘‘Net Worth Amendment of 

Credit Unions Act.’’

Several other changes in the PCA-related definitions are needed. The definition 

of secondary capital for low-income credit unions needs to address certain limitations on its use by those credit unions. The definition of the net worth ratio also 

needs to be modified to exclude a credit union’s National Credit Union Share Insurance Fund (NCUSIF) deposit from the numerator and denominator of the ratio; the 

ratio of net worth to risk-assets must also exclude a credit union’s NCUSIF deposit 

from the numerator. 

5. Amend the net worth restoration plan requirements: The NCUA Board should 

have the authority to permit a marginally undercapitalized credit union to operate 

without a net worth restoration plan if the Board determines that the situation is 

growth-related and likely to be short term. The law should also authorize the Board 

to issue an order to a critically undercapitalized credit union and possibly shorten 

the timing of the period before appointment of a liquidating agent. CUNA would 

also like to see an amendment clarifying the coordination requirement with State 

officials in the case of State-chartered credit unions. 

How the PCA Amendments Would Work 

The table below shows the ratio cutoff points for the various net worth classifications CUNA advocates. A credit union would have to meet both ratio classifications, 

and if different, the lower of the two classifications would apply. For example, a 

credit union classified as ‘‘well-capitalized’’ by its net worth ratio, but ‘‘undercapitalized’’ by its ratio of net worth to risk assets, would be considered undercapitalized.

The proposed net worth cutoff points are substantially similar to those currently 

in effect for FDIC-insured institutions. Nevertheless, the ratios would have the effect of being more stringent on credit unions for two reasons. First, not all of an 

individual credit union’s net worth would be included in the numerator of the 

ratio—the NCUSIF deposit would first be subtracted. Second, a portion of banks’ net 

worth can be met by secondary or Tier II capital. All but low-income credit unions 

have no access to secondary capital, so all credit union net worth is equivalent to 

banks’ Tier I capital, which has more characteristics of pure capital than does Tier 

II. 

In the PCA reforms CUNA envisions, NCUA would have to design a risk-based 

net worth requirement based on comparable standards applied to FDIC-insured institutions. The outlook for those standards as they will apply to banks is currently 

under review by the Federal banking regulators. Federal banking regulators have 

indicated that if Basel II takes affect for the very largest U.S. banks (approximately 

25 banks and thrifts), some modifications to Basel I for all other U.S. banks will 

be implemented. 

The exact nature of the changes to Basel I for the vast bulk of U.S. banks and 

thrifts is as yet unclear, although U.S. banking regulators have stated they do not 

intend to permit smaller U.S. banks to be disadvantaged compared to the largest 

banks if Basel II lowers net worth requirements for the very large institutions. 

Thus, it is likely that any modified version of Basel I in place for smaller banks 


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would be the standard under which NCUA would construct a risk-weighting system 

for credit unions. Since it would be Basel-based, it would focus on credit risk, leaving the treatment of interest rate risk to the supervisory process (our third recommendation). This kind of reformed credit union risk-based system would provide 

a much more precise measure of balance sheet risk than the current risk-based net 

worth requirement. 

The PCA reform plan will improve the risk-based components of PCA and place 

greater emphasis on the risk-based measures, while lowering to the same level in 

effect for banks the pure net worth ratio requirements for a credit union to be classified as adequately capitalized. CUNA believes that in addition to relying on improved risk measurements, a reduction of the pure net worth levels to be classified 

as well- or adequately capitalized is justified for the following reasons:

• We proposed subtracting out the 1 percent NCUSIF deposit in calculating the net 

worth ratio. One of the original justifications for higher credit union PCA net 

worth requirements (higher than for banks) was the 1 percent NCUSIF deposit. 

While FASB and NCUA have both affirmed that the 1 percent NCUSIF deposit 

is an asset and thus part of net worth, as a result of the unique credit union funding mechanism of the NCUSIF, the 1 percent deposit appears on the books of both 

the NCUSIF and insured credit unions. We propose to address this issue by defining the net worth ratio as ‘‘net worth less the 1 percent NCUSIF deposit divided 

by assets less the 1 percent deposit.’’ Thus, to be adequately capitalized, a credit 

union must hold net worth equal to about 5.7 percent (on average) of its assets 

to meet the 5 percent net worth requirement. This means that the discretionary 

and mandatory supervisory actions of PCA will be applied when a credit union 

is at higher level of individual capital than for a similarly situated bank or thrift. 

• Although credit unions cannot access capital markets, banks experiencing problems 

are unlikely to have ready access to capital markets. Another reason given for 

credit unions’ higher-than-banks net worth requirements is their lack of access to 

capital markets. Credit unions’ only source of building net worth is through the 

retention of earnings, which is a time-consuming process. Since credit unions cannot access capital markets, drafters of the PCA requirements thought credit 

unions should hold more capital to begin with so that they have it available in 

time of need. There is some merit to this notion, but a problem with this logic 

is that is suggests that a poorly capitalized bank can easily access the capital 

markets. However, if a bank’s capital ratio falls substantially due to losses, investors are likely to be wary of providing additional capital to it. Other institutions 

similarly have limited access to capital markets when they have experienced substantial losses. Thus, the lack of effective access to outside capital in times of financial stress might not really distinguish credit unions from banks or other depository institutions as much as it might appear. 

• Credit unions have some control over growth by the dividends paid on savings. A 

credit union’s net worth ratio might fall due to rapid asset growth, but this should 

not require higher net worth requirements for credit unions. Asset growth, which 

comes from savings deposits, can often be substantially influenced by a credit 

union’s dividend policies. Under the current PCA system, lowering dividend rates 

creates the dual effects of retarding growth and boosting net income, both of 

which raise net worth ratios. Our plan would permit a credit union to protect a 

reasonable net worth ratio with appropriate dividend rate cutting rather than 

being required to hold additional net worth. 

• There is substantial evidence that credit unions actually require less net worth 

than do for-profit financial institutions in order to provide protection to the deposit 

insurance system. Credit unions, because of their very cooperative nature, take on 

less risk than do for-profit financial institutions. Because credit union boards and 

management are not enticed to act by stock ownership and options, the moral 

hazard problem of deposit insurance has much less room for play in credit unions 

than in other insured depository institutions. Evidence of the effects of this conservative financial management by credit unions is found in the fact that average 

credit union ratios for net worth, net income, and credit quality have shown dramatically less volatility over that past two decades than comparable statistics for 

banks and thrifts. Similarly, the equity ratio of the NCUSIF has been remarkably 

stable, between 1.2 percent and 1.3 percent, of insured shares while other Federal 

deposit funds have seen huge swings, and even insolvency. This is hardly evidence 

supporting the need of more capital in credit unions than in banks and thrifts.

Reforming PCA as outlined by our testimony would preserve and strengthen the 

essential share-insurance fund protection of PCA and would more closely tie a credit 

union’s net worth requirements to its exposure to risk—the reason for holding net 

worth in the first place. It would also permit adequately and well-capitalized credit 

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unions to operate in a manner devoted more to member service and less to the unnecessary accumulation of net worth. 

Changes in Member Business Loan Statutory Requirements 

Some mistakenly believe that credit unions first obtained authority to lend to 

businesses with the passage of the Credit Union Membership Access Act in 1998. 

On the contrary, CUMAA imposed statutory limits on credit union member business 

lending for the first time; until then, NCUA addressed business lending activities 

of credit unions through supervision and regulation. The CUMAA-imposed limits 

are expressed as a 1.75 multiple of net worth, but only net worth up to the amount 

required to be classified as well capitalized (that is, 7 percent) can be counted. 

Therefore, the limit is (1.75 x 7) or 12.25 percent of assets for most federally insured 

credit unions. 

Credit unions are not major players in business lending, although there are some 

credit unions which feel they have a field of membership and expertise that would 

allow them to provide more businesses with more competitive options that currently 

permitted by the Federal Credit Union Act. At mid-year 2005, the dollar amount 

of credit union member business loans was less than 1 percent of the total commercial loans held by all U.S. depository institutions. Credit union MBL’s represent just 

3.8 percent of the total of credit union loans outstanding, and only one in five U.S. 

credit unions offer MBL’s. The average size of credit union MBL’s granted in the 

first 6 months of 2005 was $166,506. 

Looking at Alabama credit union statistics, 34 credit unions out of a total of 159 

in Alabama offer MBL’s to their members. The average size of an Alabama MBL 

is $144,283. The total amount of business lending by credit unions in Alabama is 

$105.3 million, while banking institutions in Alabama make $76.3 billion in business loans. In Alabama, credit unions represent 0.14 percent of the market share 

for business lending, while banking institutions represent 99.86 percent; and, while 

credit union business loans represent only 0.98 percent of credit union assets, banking institutions’ business loans represent 35.52 percent of bank assets. 

Need for Reform of Credit Union Member Business Loan (MBL) Limits 

Small businesses are the engine of economic growth, accounting for about one-half 

of private nonfarm economic activity in the United States annually. Their ability to 

access capital is paramount. Their access is seriously constrained by the doublewhammy of banking industry consolidation and the CUMAA-imposed limitations on 

credit union MBL’s. FDIC statistics show that the largest 100 banking institutions 

now control over 70 percent of banking industry assets nationally—in 1992, the 100 

largest banks held about 45 percent of total banking industry assets. 

Recent research published by the Small Business Administration reveals that 

small businesses receive less credit on average in regions with a large share of deposits are held by the largest banks. The findings reveal ‘‘credit access has been significantly reduced by banking consolidation . . . we believe this suggests that small 

businesses, especially those to which relationship lending is important, have a lower 

likelihood of using banks as a source of credit.’’ CUMAA’s member business restrictions on credit unions severely restrict small business access to credit outside the 

banking industry at a time when small firms are finding it increasingly difficult to 

obtain credit from the banking industry. 

Basic problems with the current MBL limit include the following:

• The limit is arbitrary and unnecessarily restrictive. Insured commercial banks 

have no comparable business lending portfolio concentration limitations. Thrift institutions have portfolio concentration limitations, but those limitations are substantially less restrictive than the limits placed on credit unions in CUMAA. 

There is no safety and soundness reason that net worth above 7 percent cannot 

also support business lending. If all net worth could be counted, the actual limit 

would average between 18 percent and 19 percent of total assets rather than 

12.25 percent of total assets. 

• The 12.25 percent cap discourages credit unions from entering into business lending. Even though very few credit unions are approaching the 12.25 percent ceiling, 

the very existence of that limitation discourages credit unions from opening business lending departments. Credit unions must meet strict regulatory requirements before implementing an MBL program, including the addition of experienced staff. Many are concerned that the costs of meeting these requirements cannot be recovered with a limit of only 12.25 percent of assets. For example, in today’s market, a typical experienced mid-level commercial loan officer would receive total compensation of approximately $100,000. The substantial costs associated with hiring an experienced lender, combined with funding costs and overhead 

and startup costs such as a data processing system to support this type of lending, 

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present a serious barrier at most credit unions given the current 12.25 percent 

limitation. 

• The MBL threshold definition creates a disincentive that hurts small businesses.

The current $50,000 threshold for defining an MBL is too low and creates a disincentive for credit unions to make loans to smaller businesses. Permitting the 

threshold to rise to $100,000 would open up a significant source of credit to small 

businesses. The NCUA Board was on the verge of revising its regulations to move 

the threshold to $100,000 when Congress incorporated the then $50,000 regulatory definition into the 1998 law. Even business purpose loans up to $100,000 

are so small as to be unattractive to many larger commercial lenders. A simple 

inflation adjustment of the $50,000 threshold, which was initially established by 

regulation in 1993, would result in a threshold figure of $65,000.

Since their inception, credit unions have offered business-related loans to their 

members. Moreover, credit union member business lending shows a record of safety. 

According to a 2001 U.S. Treasury Department study entitled ‘‘Credit Union Member Business Lending,’’ credit union business lending is more regulated than commercial lending at other financial institutions. In addition, in comparing delinquencies on business loans, Treasury found credit union delinquencies (business 

loans more than 60 days past due) were lower than those of banks and thrifts (business loans more than 90 days past due). Not surprisingly, the Treasury also concluded that member business lending ‘‘does not pose material risk’’ to the National 

Credit Union Share Insurance Fund. The trends continue today, and MBL’s have 

even lower loss rates than other types of credit union lending, which themselves 

have relatively low loss experience. 

CUNA’s Regulatory Relief Recommendations for Economic Growth 

In reforming credit union MBL limits in Section 107A of the Federal Credit Union 

Act (12 U.S.C. § 1757a), Congress will help to ensure a greater number of available 

sources of credit to small businesses throughout the country. This will make it easier for small businesses to secure credit at lower prices, in turn making it easier for 

them to survive and thrive. 

CUNA urges that the following provisions be included in the Committee’s regulatory relief bill:

1. Increase the limit on member business loans: Congress should eliminate the current asset limit on MBL’s at a credit union (the lesser of 1.75 times actual net worth 

or 1.75 times net worth required for a well-capitalized credit union, or 12.25 percent) and replaces it with a flat rate of 20 percent of the total assets of a credit 

union. This provision would facilitate member business lending without jeopardizing 

safety and soundness at participating credit unions. 

2. Increase the threshold of which business purpose loans are defined as member 

business loans: Congress should amend the current definition of a MBL to give 

NCUA the authority to exclude loans of $100,000 or less as de minimus, rather than 

the current limit of $50,000. Loans below the threshold do not apply against the 

cap, but more importantly, credit unions that are not in a position to open business 

lending departments that have to comply with NCUA’s extensive MBL regulations 

can still help small businesses with smaller dollar loans. 

3. Provide NCUA with the authority to address member business lending by undercapitalized credit unions: The Federal Credit Union Act currently prohibits a credit 

union from making any new MBL’s if its net worth falls below 6 percent. NCUA 

should have the authority to determine how to address business lending by any 

undercapitalized credit union. 

4. Exclude from the definition of member business loans to nonprofit religious organizations: The law currently provides exceptions to the MBL caps for credit 

unions with a history of primarily making such loans. Credit unions serving religious organizations were instrumental in persuading Congress to include this exception in the 1998 law. We believe that, when passing CUMAA, Congress simply overlooked the situation that other credit unions purchase parts of these loans (participate in them). We propose that the Act be amended to exclude from the MBL limit 

loans to or loan participations involving nonprofit religious organizations. While 

these types of loans would not be subject to the limit, such loans would still be subject to other regulatory requirements, such as those relating to safety and soundness. 

5. Authorize Federal credit unions to lease space in credit union offices located in 

underserved areas: While not directly related to business lending, CUNA also supports an amendment to Section 107 of the Federal Credit Union Act (12 U.S.C. 

§ 1757), but adding new authority which would enhance the ability of credit unions 

to assist distressed communities with their economic revitalization efforts. A Federal 

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credit union maintaining a presence in an underserved area should be allowed to 

lease space in its building or on its property to third parties on a more permanent 

basis. This change would allow a Federal credit union to acquire, construct, or refurbish a building in an underserved community, then lease out excess space in that 

building which should assist in community development. 

CUNA urges the Committee to include amendments to the member business lending provisions in the Federal Credit Union Act in its regulatory relief bill. 

Other Amendments to the Federal Credit Unions Act 

In addition to seeking amendments to the Federal Credit Union Act relating to 

prompt corrective action and member business loans, there are a number of other 

amendments to the Act that CUNA urges the Committee to include in its regulatory 

relief legislation. These are: 

Leases of Land on Federal Facilities for Credit Unions 

We support an amendment to Section 124 of the Federal Credit Union Act (12 

U.S.C. § 70) which would permit military and civilian authorities responsible for 

buildings on Federal property the discretion to extend real estate leases at minimal 

charge to credit unions that finance the construction of credit union facilities on 

Federal land. Credit unions provide important financial benefits to military and civilian personnel, including those who live or work on Federal property. This amendment would authorize an affected credit union, with the approval of the appropriate 

authorities, to structure low cost lease arrangements which would enable the credit 

union to channel more funds into lending programs and favorable savings rates for 

its members. 

Investments in Securities by Federal Credit Unions 

The Federal Credit Union Act’s limitations on the investment authority of Federal 

credit unions are anachronistic. CUNA supports an amendment to Section 107 of 

the Federal Credit Union Act (12 U.S.C. § 57) to provide additional investment authority for credit unions to purchase for their own accounts certain investment securities. The NCUA Board should have the authority to define appropriate investments under this provision, thus ensuring that new investment vehicles would meet 

high standards of safety and soundness and be consistent with credit union activities. The total amount of the investment securities of any one obligor or maker 

should not exceed 10 percent of the credit union’s unimpaired capital and surplus 

Increase in the General 12-Year Maturity Limit Applicable to Federal

Credit Union Loans 

Currently, Federal credit unions are authorized to make loans to members, to 

other credit unions, and to credit union service organizations. The Federal Credit 

Union Act imposes various restrictions on these authorities, including a 12-year maturity limit that is subject to exceptions for certain types of loans, such as mortgage 

loans. The Federal Credit Union Act (Section 107(5), 12 U.S.C. § 1757(5)) should 

allow loan maturities up to 15 years, or longer terms as permitted by the NCUA 

Board. While we would prefer that loan maturities be completely removed from the 

statute, leaving NCUA with the authority to determine the maturity on loans consistent with safety and soundness, a 15-year maturity is preferable to the current 

limit. Such an increase in the loan limit would help lower monthly payments for 

credit union borrowers. 

Increase in the 1 Percent Investment Limit in Credit Union Service Organizations 

The Federal Credit Union Act authorizes Federal credit unions to invest in organizations providing services to credit unions and credit union members. An individual Federal credit union, however, may invest in the aggregate no more than 1 

percent of its total paid-in and unimpaired capital and surplus in these organizations, commonly known as credit union service organizations (CUSO’s). CUNA asks 

the Committee to include an amendment to raise the limit in Section 107(7)(I) (12 

U.S.C. § 1757(7)(I)) to 3 percent. 

CUSO’s provide a range of services to credit unions and their members. Some 

services directly support credit union operations such as data processing, record retention and debt collection. Other services directly benefit members such as financial planning, retirement planning and shared branching. Utilizing services provided 

through a CUSO reduces risk to a credit union and allows it to take advantage of 

economies of scale and other efficiencies that help contain costs to the credit union’s 

members. Further, a Federal credit union’s participation in CUSO’s is regulated by 

NCUA, and the agency has access to the books and records of the CUSO. 

The current limit on CUSO investments by Federal credit unions is out-dated and 

limits the ability of credit unions to support CUSO’s to meet the range of members’ 

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needs for financial services. This limit results in Federal credit unions having to either forego certain opportunities that would benefit members or use outside vendors 

in which the credit union has no ownership stake. While CUNA would prefer to see 

the 1 percent limit eliminated or set by NCUA through the regulatory process, an 

increase to 3 percent in the statute would provide credit unions more options to investment in CUSO’s to enhance their ability to serve their members. 

CUNA also would support raising the 1 percent borrowing limitation (Section 

107(5)(D), 12 U.S.C. § 1757(5)(D)) that currently restricts loans from credit unions 

to CUSO’s. We believe the limit should be on par with the investment limit, which 

we hope the Committee will support raising to 3 percent. 

Check-Cashing and Money-Transfer Services Offered Within the Field of Membership 

Federal credit unions are currently authorized to provide check-cashing services 

only to members and have very limited authority to provide wire transfer services 

to individuals in the field of membership under certain conditions. CUNA urges the 

Committee to support an amendment to Section 107(12) of the Federal Credit Union 

Act (12 U.S.C. § 1757(12)) to allow a Federal credit union to provide check-cashing 

services and money transfer services to anyone eligible to become a member of the 

credit union. Such services would include the authority to sell travelers checks and 

money orders, and send and receive international and domestic funds transfers. 

This proposed amendment is fully consistent with the initiatives of President 

Bush and Congress to reach out to underserved communities in this country. Many 

of these individuals live from pay check to pay check and do not have established 

accounts for a variety of reasons, including the fact that they do not have extra 

money to keep on deposit. We know of members who join 1 day, deposit their necessary share balance and come in the very next day and withdraw because they 

need the money. This is not financial mismanagement on their part. They just do 

not have another source of funds. 

If Federal credit unions are permitted to cash checks, sell negotiable checks, and 

facilitate transfers of funds, we could accomplish two things: Save our staff time and 

effort opening new accounts for short term cash purposes which are soon closed; and 

gain the loyalty and respect of potential members so that when they are financially 

capable of establishing an account, they will look to the credit union, which can also 

provide financial education and other support services. 

Legislation that includes similar provisions is pending in both the House and Senate on this issue: The International Consumer Protection Act, introduced in the 

House (H.R. 928) by Representative Gutierrez and in the Senate (S. 31) by Senator 

Sarbanes. Additionally, the Expanded Access to Financial Services Act (H.R. 749), 

introduced by Representatives Gerlach and Sherman, contains identical language to 

this provision, and passed the House of Representatives on April 26, 2005 by voice 

vote. CUNA strongly supports all legislative efforts to enact this provision and is 

grateful to Ranking Member Sarbanes for the introduction of his bill. 

Voluntary Mergers Involving Multiple Common Bond Credit Unions 

In voluntary mergers of multiple bond credit unions, NCUA has determined that 

the Federal Credit Union Act requires it to consider whether any employee group 

of over 3,000 in the merging credit union could sustain a separate credit union. This 

provision is unreasonable and could occasionally limit the ability of two healthy 

multiple common bond Federal credit unions from efficiently combining their financial resources to serve their members better. CUNA urges that Section 109(d)(2) of 

the Federal Credit Union Act (12 U.S.C. § 1759(d)(2)) be amended to eliminate this 

requirement for voluntary mergers. 

Conversions Involving Common Bond Credit Unions 

CUNA supports an amendment to Section 109(g) of the Federal Credit Union Act 

(12 U.S.C. § 1959(g)) to allow a multiple common bond Federal credit union converting to or merging with a community Federal credit union to retain all groups 

in its membership field prior to becoming a community credit union. Currently, 

when a multiple group credit union converts to or merges with a community charter, a limited number of groups previously served may be outside of the boundaries 

set for the community credit union. Thus, new members within those groups would 

be ineligible for service from that Federal credit union. The amendment would allow 

the community credit union to provide service to all members of groups previously 

served by the multiple group credit unions. 

Credit Union Governance 

CUNA strongly believes that credit union boards should have more authority in 

making their own decisions. We are proposing three specific amendments for the 

Committee’s consideration for inclusion in its regulatory relief bill. First, Federal 

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credit union boards must be given flexibility to expel a member who is disruptive 

to the operations of the credit union, including harassing personnel and creating 

safety concerns, without the need for a two-thirds vote of the membership present 

at a special meeting as required by current law (Section 118(b) of the Act, 12 U.S.C. 

§ 1764(b)). Second, Federal credit unions should have the ability in their by laws to 

limit the length of service of individual members of their boards of directors (amending Section 111(a) of the Act, 12 U.S.C. § 1761(a)). Third, Federal credit unions 

should have the ability, if they choose to do so, to reimburse volunteers for wages 

they would otherwise forfeit by participating in credit union affairs (Section 111(c) 

of the Act, 12 U.S.C. § 1761(c)). 

Some Federal credit unions have occasionally faced situations where there was a 

need to expeditiously expel a member for just cause, particularly for instances of 

harassing or threatening—credit union staff. The boards of these credit unions 

should have the ability to quickly act, without having to call a special membership 

meeting. 

Federal credit unions should have the right to limit the length of service of their 

boards of directors, which should help to assure broader representation from the 

membership. This would be a permissive, not mandatory, authority. Providing credit 

unions with this right does not raise supervisory concerns and should not, therefore, 

be determined by the Federal Government. 

Credit unions are directed by committed volunteers. Given the pressures of today’s economy on many workers and the legal liability when holding governing positions at credit unions, it is increasingly difficult to attract and maintain such individuals. Rather than needlessly discouraging volunteer participation through artificial constraints, the Federal Credit Union Act should encourage such involvement 

by allowing volunteers serving on the Federal credit union’s board or any of its committees to recoup wages they would otherwise forfeit by participating in credit union 

affairs. The decision on whether to reimburse for lost wages should be left to individual credit unions, not a mandatory requirement. 

Providing NCUA with Greater Flexibility in Responding to Market Conditions 

Section 107(5)(A)(vi) of the Federal Credit Union Act (12 U.S.C. § 1757(5)(A)(vi)) 

provides the authority for the NCUA Board to establish a Federal usury ceiling 

above 15 percent under certain circumstances up a period not to exceed 18 months. 

CUNA feels that it is important that NCUA be given greater flexibility in evaluating the marketplace by looking at interest rates in the preceding 6 months or 

(rather than the current ‘‘and’’) whether prevailing interest rate levels threaten the 

safety and soundness of individual credit unions. 

Exemption from the Premerger Notification Requirement of the Clayton Act 

CUNA believes that it is very important to give federally insured credit unions 

the same exemption that banks and thrift institutions already have from premerger 

notification requirements and fees of the Federal Trade Commission. Therefore we 

request that the Committee include in its regulatory relief bill an amendment to 

Section 7A(c)(7) of the Clayton Act (15 U.S.C. § 18a(c)(7)). 

Treatment of Credit Unions as Depository Institutions under Securities Laws 

CUNA requests that Section 3(a)(6) of the Securities and Exchange Act of 1934 

(15 U.S.C. § 78c(a)(6)) and Section 202(a)(2) of the Investment Advisers Act of 1940 

(12 U.S.C. § 80b–2(a)(2)) be amended to give federally insured credit unions exceptions, similar to those provided to banks, from broker-dealer and investment adviser 

registration requirements. 

Privately Insured Credit Unions Authorized to become FHLB Members 

Currently, only federally insured credit unions may become members of the Federal Home Loan Bank System. A privately insured credit union should be permitted 

to apply to become a member of a Federal Home Loan Bank. The State regulator 

of a privately insured credit union applying for membership could certify that the 

credit union meets the eligibility requirements for Federal deposit insurance in 

order to qualify for membership in the Federal Home Loan Bank system. 

Eliminate the Requirement that only one NCUA Board Member can have Credit

Union Experience 

CUMAA added a provision to the Federal Credit Union Act (Section 102(b)(2)(B), 

12 U.S.C. § 1752a(b)(2)(B)) stating that only one member of the NCUA Board may 

have recent credit union experience. A similar experience limit does not apply to any 

other Federal regulatory agency. And the restriction denies the NCUA Board and 

credit unions the expertise that can greatly enhance their regulatory and supervisory systems. This restriction should be stricken from the stature. The law should 

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be changed to State at least one person on the NCUA Board should have recent 

credit union experience. 

Amendments to Other Federal Laws that CUNA Urges the Committee

Include in Regulatory Relief Legislation 

The ‘‘Matrix of Financial Services Regulatory Relief Proposals’’ prepared by Senator Crapo’s staff is certainly a comprehensive listing of regulatory relief provisions 

across a broad array of banking and consumer disclosure regulations. CUNA’s support for a number of amendments to laws other than the Federal Credit Union Act 

is noted in the Matrix. We would like to highlight several provisions that we urge 

the Committee to include in its regulatory relief bill. Where appropriate, we note 

by number where the proposal is found in the Matrix.

• Monetary reserve requirements: CUNA hopes that any regulatory relief passed by 

Congress includes authority for the Federal Reserve Board to pay interest on the 

reserves that credit unions have to maintain in compliance with the Fed’s Regulation D (#1). While we support the provision recommended by the Fed (#2 of the 

Matrix), which would give the Fed greater flexibility to set the transaction account reserve level as low as 0 percent, we think that it is important that the 

Committee make the basic inquiry to the Fed on whether monetary reserves are 

even needed in 2006 for carrying out the Nation’s monetary policy. 

The current six transfers a month restrictions on savings accounts is a tremendous regulatory burden on depository institutions. The requirement is impossible to logically explain to consumers, is challenging to support by data processing systems, and we really question if monetary reserves help the Fed carrying out it monetary policy today. The banking industry seeks (#113) to expand 

the number of permissible transfers from savings deposits from 6 to 24 per 

months, which would maintain a line, albeit a thin line, between savings and 

transaction accounts. We support #113 if this is the only change possible, but 

we urge the Committee to review the need for monetary reserves in this modern 

electronic age. We certainly want the Committee to understand that there is a 

major operational burden in having to count transfers per month and warn consumers about the consequences of exceeding the arbitrary number of transfers. 

• Annual privacy notices: CUNA supports the elimination of the annual privacy notice provision in the Gramm-Leach-Bliley Act (#63 and others). Financial institutions that do not share personal financial information or have not changed their 

policy should not have to send out these notices every year. A credit union should 

be required to give new members its privacy notice, provide all members with a 

revised privacy notice when its privacy policy has changed, post its privacy notice 

on its website if it maintains a website, and make a copy of its privacy notice 

available upon request. This approach would be more useful to consumers than 

annually sending out another piece of paper that goes unread. 

• Bank Secrecy Act and the requirements of the Office of Foreign Assets Control 

(OFAC): Compliance with the Bank Secrecy Act is taking up a tremendous 

amount of time and resources for credit unions as well as banks and thrift institutions right now, as the agencies and regulated financial institutions work through 

new compliance expectations. Any further guidance on suspicious activity monitoring would be especially welcomed, as suggested in #180. We certainly support 

the ideas offered by the Independent Community Bankers of America in #106 

about reviewing the currency transaction reporting thresholds, and reporting, retention and exemption procedures. 

We saw nowhere mentioned in the Matrix a related burden, the various OFAC 

compliance requirements. Simply put, OFAC has certain requirements, with potentially high penalties, that are impossible to comply with—unless we want to 

bring the Nation’s payments system to a screeching halt. We ask the Committee 

will help identify the appropriate place to review the regulatory burdens and 

concerns created by certain OFAC requirements. 

Conclusion 

In summary, Mr. Chairman, we are grateful to the Committee for holding this 

hearing. Credit unions’ ability to continue serving the financial needs of our current 

members and our potential members who need access to our services in Alabama 

and across the country will be significantly reduced without the regulatory relief 

this Committee is addressing. We strongly urge the Committee to act on this very 

important issue this year. And, we strongly urge the Committee to include the many 

amendments we have suggested to the Federal Credit Union Act, particularly on 

prompt corrective action reform and member business lending restrictions, and the 

provisions we cite in other Federal laws that are unnecessarily burdensome. 

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1The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the Nation, and is dedicated exclusively to representing the interests of the community banking industry. ICBA aggregates the power of its 

members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community 

banks compete in an ever-changing marketplace. For more information, visit ICBA’s website at 

www.icba.org. 2Testimony of David Hayes, President/CEO, Security Bank, Dyersburg, TN, and Chairman of 

the Independent Community Bankers of America, June 21, 2005. 3Gunther and Moore, ‘‘Small Banks’ Competitors Loom Large,’’ Southwest Economy, Federal 

Reserve Bank of Dallas, Jan./Feb. 2004. 

I thank you for the opportunity to present these proposals on behalf of CUNA, 

and I look forward to your questions. 

—————

PREPARED STATEMENT OF TERRY JORDE

PRESIDENT/CEO, COUNTRYBANK USA, CANDO, ND

AND CHAIRMAN-ELECT

INDEPENDENT COMMUNITY BANKERS OF AMERICA, WASHINGTON, DC

MARCH 1, 2006

Mr. Chairman, Ranking Member Sarbanes, and Members of the Committee, my 

name is Terry Jorde, President and CEO of CountryBank USA. I am also Chairman-Elect of the Independent Community Bankers of America.1 My bank is located 

in Cando, North Dakota, a town of 1,300 people where the motto is, ‘‘You Can Do 

Better in Cando.’’ CountryBank has 29 full time employees and $39 million in assets. We are a small, but diversified organization with 10 of my employees working 

in our insurance agency, two employees devoted to retail sales of nondeposit investment products, and the remaining 16 devoted to traditional banking products and 

services. I split my time between two locations. 

ICBA appreciates the opportunity to testify on the need to reduce the regulatory 

burden on banks, thrifts and credit unions, a topic this Committee has been studying for some time. Community banks hope that Congress will complete action this 

year on legislation that will truly lift some of the extraordinary burden. We commend Senator Mike Crapo for taking the leadership role on this issue, working 

closely with Chairman Shelby. We have appreciated the opportunity to work with 

him on the many proposals that we and others have asked to be included in regulatory relief legislation. 

Before discussing the topic of today’s hearing, I want to take a moment to thank 

all the Members of this Committee for including deposit insurance reform in the recently enacted budget reconciliation bill. I want to extend special thanks to Senators 

Tim Johnson, Wayne Allard, Michael Enzi, and Chuck Hagel for their years of hard 

work in pushing deposit insurance reform in the Senate as well as to Chairman 

Shelby and Ranking Member Sarbanes for moving this bill to enactment this year. 

This new law is tremendously important in making FDIC insurance a more stable 

and fair system for community banks and for consumers. Importantly, the legislation will encourage depositors to keep their money in local banks where it can be 

lent out to build and support local communities. 

Community Bankers Need Regulatory Relief 

Last year, ICBA testified before this Committee about community banks’ need for 

relief from the severe regulatory burden that we face.2 Our testimony detailed the 

loss of market share suffered by community banks and pointed to a study by two 

economists at the Federal Reserve Bank of Dallas that concluded that the competitive 

position and future viability of small banks is questionable in large part due to the 

crushing regulatory burden we face.3

While larger banks have hundreds or thousands of employees to throw into the 

regulatory breach, a community bank with $100 million in assets typically has just 

30 full time employees, a $200 million bank about 60 employees. If my bank is faced 

with a new regulation, we must train one or more of our current employees, and 

complying with the new regulation will take time away from customer service. My 

compliance officer not only has responsibility for overseeing our compliance program, but she also originates around 60 real estate loans per year for sale on the 

secondary market, she sits on our audit and technology committee, she regularly 

teaches homebuyer education courses at our community college, and she baby sits 

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4Testimony of Dale Leighty, President and Chairman, First National Bank of Las Animas, 

Las Animas, CO, and Chairman of the Independent Community Bankers of America, June 22, 

2004. 5 In response to a request from the FDIC for Senator Crapo, who is working on a regulatory 

relief bill in the Senate, several bank industry trade associations including ICBA identified a 

list of 78 recommendations—made by various witnesses in testimony to the Senate Banking 

Committee—that the associations all support. While individual associations may also support 

additional recommendations not on this consensus list, virtually all of the regulatory provisions 

of the Communities First Act are on the list (items 101–120). 

my son at times like this when I am begging for relief. Unlike larger institutions, 

we cannot just add a new person and pass the costs on to our customers. 

This disproportionate regulatory impact makes it difficult for community bankers 

to fulfill their central mission, to finance and support their local communities. Community bankers provide tremendous leadership in their communities, which is critical to economic development and community revitalization. 

For example, in a typical week I may spend six hours in a hospital board meeting, 

four hours in an economic development corporation meeting, and another four hours 

working with other local community bankers to develop a financial incentive package for a potential new business in our community. You could argue that this is not 

an efficient and cost-effective way to spend my time, but like most community 

banks, the very survival of my bank and the economic vitality of my community depend on these activities. I have a very real incentive to work to assure the success 

of Cando. Branches of large megabanks do not provide this same commitment to the 

local community. 

Legislation is Necessary 

ICBA strongly supports the bank regulatory reduction project mandated by the 

Economic Growth and Paperwork Reduction Act of 1996 (EGRPRA). We commend 

the interagency EGRPRA task force, spearheaded by now-Office of Thrift Supervision Director John Reich, for the excellent job it has done to identify those banking regulations that are outdated, unnecessary, or unduly burdensome. While the 

bank regulators have been working hard to identify burdens they can reduce on their 

own, they report to us that there are severe limits on what they can do without help 

from Congress. Many burdensome and outdated regulatory requirements are hardwired into Federal statute.

Communities First Act Provides Regulatory Relief 

Senator Brownback’s Communities First Act (S. 1568) grew out of that realization. 

Many of the provisions of the Communities First Act build on the concept of a tiered 

regulatory and supervision system recommended by Director Reich by targeting relief 

to institutions based on their size. Other CFA provisions would apply to all banks, 

regardless of size. All would go a long way toward improving community banks’ ability to compete and serve local communities. 

It is our commitment to our communities that led ICBA to work with Senator 

Brownback on the Communities First Act. That bill is cosponsored by a Member of 

this Committee, Senator Chuck Hagel, as well Senators Roberts, Inhofe, and 

Coburn. It has put into legislative language proposals that ICBA made in our 2004 

testimony before this Committee.4 These proposals are also included in Senator 

Crapo’s comprehensive matrix of relief proposals.5

I can tell you from my meetings with community bankers throughout the country 

that they are very excited by the Communities First Act. A total of 46 State banking 

trade associations have also endorsed CFA. (List of endorsing associations attached.) 

It is a positive agenda for our members and their communities. We also recognize 

it is an ambitious agenda that will not be enacted all at once. Indeed, we are 

pleased that six of the fifteen provisions from the House companion bill (H.R. 2061) 

are included in the House’s broad regulatory relief bill (H.R. 3505). 

ICBA urges this Committee to include as many provisions from the Communities 

First Act as possible in any new bill it drafts. 

The following provisions from CFA are included in the House bill:

• Streamlining Call Reports (H.R. 3505, Sec. 606; CFA, Sec. 204). Calls on the agencies to reduce or eliminate the information required for reports of condition if the 

information is ‘‘no longer necessary or appropriate.’’ • Flexible Exam Schedule for Community Banks (H.R. 3505, Sec. 607; CFA, Sec. 107). Expands the eligibility for the 18-month exam cycle from banks under $250 

million in assets to banks up to $1 billion. • Short Form for Call Reports (H.R. 3505, Sec. 608; CFA, Sec. 102). Permits highly rated, well-capitalized banks with assets of $1 billion or less to file a short form 

quarterly Call Report in two of every four quarters. 

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6 It is important to note that this examination interval is a separate issue from the question 

of examination procedures for banks under $1 billion in assets. The regulatory agencies have 

already adopted, or have proposed adopting those streamlined procedures. 

• Changes to Small BHC Policy Statement (H.R. 3505, Sec. 616; CFA, Sec. 104). Requires the Federal Reserve to revise the Small Bank Holding Company Policy 

Statement on Assessment of Financial and Managerial Factors so that the policy 

applies to BHC’s with assets of less than $1 billion that are not engaged in any 

nonbanking activities involving significant leverage and do not have a significant 

amount of outstanding debt. (The current policy applies to BHC’s with assets 

under $150 million. Subsequent to introduction of CFA, the Federal Reserve proposed to increase the level to $500 million.) 

• Exception to Annual Privacy Notice (H.R. 3505, Sec. 617; CFA, Sec. 203). Exempts 

a bank from the annual privacy notice requirement if the bank does not share 

customer information other than as permitted by one of the exceptions in the 

Gramm-Leach-Bliley Act, does not share information with affiliates under the 

Fair Credit Reporting Act, and has not changed its policies. 

• Management Interlocks (H.R. 3505, Sec. 404; CFA, Sec. 105): Increases the size of 

the small depository institution exception under the Depository Institution Management Interlocks Act. (H.R. 3505, $100 million; CFA, $500 million).

The following section explains these provisions and the other bank regulatory provisions of the Communities First Act in more detail. 

Reports of Condition (Call Reports) & BHC Policy Statement 

Section 102 of the Communities First Act would permit highly rated, well-capitalized banks with assets of $1 billion or less to file a short quarterly call report form 

in two quarters of each year. This would reduce the reporting burden for these 

banks, while still providing the banking agencies with the data they need. 

Section 204 would benefit all banks by directing the agencies to reduce or eliminate 

filings that are not outweighed by the benefits to safety and soundness or the ability 

of the FDIC and other regulators to accurately determine the financial condition and 

operations of the reporting institutions. ICBA believes that this Congressional directive would help reverse the repeated increases in the reporting burden imposed 

when agency economists and financial analysts seek to add ‘‘just one or two more’’ 

items to the call reports. While many of these items provide interesting information, 

we question whether private companies—banks—should have to provide nonessential information under threat of government sanction. 

The current call report instructions and schedules consist of 458 pages. While extensive and time consuming to produce, the detail required in the quarterly filings 

by community banks are not essential to the agencies. The fact is that in most community banks, the world just does not change that dramatically between March 31 

and June 30 of each year. The FDIC will not lose track of us if every other time 

we file a short-form call report instead of the extensive report. And, the Federal Reserve will still be able to conduct monetary policy without our real time data. On 

the other hand, this would significantly reduce the reporting burden for banks like 

mine, while still providing the banking agencies with the data they need. 

Section 104 of the Communities First Act would direct the Federal Reserve to make 

bank holding companies with assets up to $1 billion eligible for the Small Bank 

Holding Company Policy Statement on Assessment of Financial and Managerial Factors. To qualify, the holding company must also (1) not be engaged in any nonbanking activities involving significant leverage, and (2) not have a significant 

amount of outstanding debt that is held by the general public. This change would 

reduce the paperwork burden on these small, noncomplex, holding companies, while 

maintaining the Federal Reserve’s ability to obtain holding company information for 

larger institutions. (As indicated above, the Federal Reserve could soon increase this 

level to $500 million.) 

The banking industry has included each of these recommendations as consensus 

items on the list for Senator Crapo. 

EXAMINATION SCHEDULES

Section 107 of the Communities First Act would give Federal regulators flexibility 

to determine the examination interval for well-rated, well-capitalized banks with up 

to $1 billion in assets. This would replace the current 18-month exam schedule for 

banks with less than $250 million in assets. The banking industry supported this 

as a consensus recommendation. 

Section 110 would increase CRA examination intervals for banks up to $1 billion.6

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7 Executive officers would remain subject to the same limit on directors and principal shareholders, the loans-to-one-borrower limit, and to the requirement that loans to insiders not be 

on preferential terms. 

Both of these changes would help strong, well-run community banks focus on 

service to their communities rather than responding to unnecessarily frequent examinations. 

Let me explain how this would bring about regulatory relief for a typical community bank. In the past, the burden of a bank examination consisted primarily of 

bank examiners being in the bank for 2–3 weeks asking bank employees questions 

throughout the day and sifting through credit files. However, most bankers will tell 

you that the burden begins long before the examiners come on site. When I first 

started in banking, examiners would just show up 1 day unannounced. Today, most 

banks receive notice of a bank examination at least 2 months in advance of the examiner walking through the door. This is because of the massive amount of information and documentation that they want mailed to them before the exam. 

In my bank it takes five or six of us nearly a month to prepare and send the information to the examiners. That means that a bank on a 12-month exam cycle is 

spending 40 weeks in a 10-year period just getting ready for the exam and another 

20–30 weeks in the actual examination. If we could extend the exam interval just 

6 months for a well-capitalized bank, that would literally save the typical bank 23 

weeks every 10 years. If you multiply that by the 8,500 banks in our country, we 

are talking about 195,500 weeks! The cost savings and economic implications are 

enormous. 

Privacy Notices 

One of the most wasteful provisions of the Gramm-Leach-Bliley Act has been the 

requirement that financial institutions send annual privacy notices to their customers. The law requires them to be written in impossible-to-understand legalese. 

The industry and agencies have been working on ways to simplify this language, 

but the task is daunting. However, Section 203 of the Communities First Act offers 

a measure that would greatly reduce the number of these notices that must be 

mailed. It simply says that if an institution does not share information (except for 

narrow purposes, such as providing information to an outside data processing firm) 

and has not changed its policies, it need not send out the annual notices. While any 

size institution could take advantage of this provision, community bankers are especially interested in having this option. I can tell you that my customers and their 

trash collectors would also be grateful. 

Like virtually all of the regulatory provisions of the Communities First Act, this 

section is a banking industry consensus item. 

DIRECTOR INTERLOCKS AND LOANS TO OFFICERS

Section 105 of the Communities First Act increases the size of banks eligible for 

an exemption from interlocking director prohibitions from $20 million to $500 million. It has always been a challenge for the smallest institutions to find qualified 

directors. Now that directors’ responsibilities have increased under the SarbanesOxley Act and other requirements, this has become a challenge even for larger community banks. 

Section 108 of the Communities First Act allows banks with less than $1 billion 

in total assets to make loans to executive officers, in the aggregate, up to two times 

capital. The current asset size limit is $100 million in deposits. This is not a tenfold 

increase, because a bank with $1 billion in assets could have considerably less than 

that in deposit liabilities. 

Section 205 would help all banks by increasing the special regulatory lending limit 

on loans to executive officers for loans other than those for housing, education, and 

certain secured loans to $250,000.7 This limit has not been adjusted in over a decade, so this amendment simply makes an appropriate adjustment for inflation. 

These adjustments are all included in the banking industry’s consensus recommendations to Senator Crapo. 

Protection for Community Banks under SIPC 

The Securities Investor Protection Act does not provide immediate protection to 

community banks that suffer losses when a securities firm fails. Current law exempts commercial banks from SIPC coverage and assumes that all commercial 

banks are in a position to fend for themselves in such cases. This may be true for 

large commercial banks, but it is less so for community banks. 

Section 106 of the Communities First Act would provide banks with assets up to 

$5 billion the same protection afforded other investors and other depository instituVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00241 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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8The FDIC recently increased the exemption level from $500 million to $1 billion to reduce 

the regulatory burden. 9The $34 million began as a $10 million exemption, but has been increased by statute and 

by the Federal Reserve using an inflation-based index. 

tions (thrift institutions and credit unions) for their brokerage account assets under 

the SIPA. 

This is included in the banking industry’s consensus recommendations to Senator 

Crapo. 

Impact of New Regulations on Community Banks 

Neither we—nor you—can anticipate all of the potential new burdens that future 

laws and regulations may impose on community banks. Therefore, Section 109 of the 

Communities First Act directs the banking agencies to take into account the effect 

any new regulation, requirement, or guideline would have on community banks. This 

sends a clear message from Congress to the agencies that the public policy of the 

United States is firmly committed to maintaining a strong, vibrant, community 

bank sector for our economy. 

Sarbanes-Oxley Act, Section 404

Section 404 of Sarbanes-Oxley imposes tremendous unexpected costs on virtually 

all companies. A recent ICBA survey showed that—including outside audit fees, consulting fees, software costs, and vendor costs—the average community bank will 

spend more than $200,000 and devote over 2,000 internal staff hours to comply with 

the internal control attestation requirements of Section 404. 

Section 103 of the Communities First Act recognizes that these added costs are unnecessary for community banks. First, unlike other companies, banks have been 

under similar requirements for years, though with an exemption for community 

banks.8 Congress imposed these requirements on banks after the crises of the 

1980’s. So, Section 404 is redundant when imposed on the banking sector. Second, 

unlike other companies, banks are closely supervised and examined by Federal officials on a regular basis. The adequacy of their internal controls is assessed by bank 

examiners as part of the safety and soundness exams. Companies like Enron and 

WorldCom were not regulated the same way. Not only is this burden redundant and 

unnecessary for community banks, but it is also a key factor in undermining their 

ability to remain independent. 

The banking industry has also agreed that this proposal is a consensus item on 

the list for Senator Crapo. 

Truth in Lending Right of Rescission 

Section 201 of the Communities First Act calls for several changes that would expedite consumers’ access to their funds without undermining the protection that the 3-

day right of rescission provides. They would apply without regard to the size of the 

institution involved. 

Subsection (a) directs the Federal Reserve to provide exemptions when the lender 

is a federally insured depository institution. The right of rescission was imposed to 

protect consumers against high-pressure loan sellers often connected with illicit 

home improvement operations or similar schemes. The loan programs of federally 

insured institutions are, obviously, run on a far different basis and are subject to 

regular scrutiny by banking regulators. Our customers know exactly what they have 

applied for and are receiving. They are frequently puzzled and annoyed when they 

hear they have to wait an additional 3 days for their funds. 

Subsection (b) addresses another source of annoyance for consumers, the fact that 

borrowers have to wait 3 days to get the benefit of a refinancing transaction even 

if they are not taking any cash out of the deal. It makes no sense to insist that 

a consumer wait to begin taking advantage of a lower interest rate or different 

term, which are the typical purposes of these kinds of transactions. 

Finally, subsection (c) eliminates the right of rescission when a borrower is opening up an open-ended line of credit. The very design of the product grants consumers a perpetual right of rescission if that is what they want. The consumer can 

simply refrain from drawing on the account for 3 days or longer. On the other hand, 

consumers who need immediate access to their line of credit should have it. 

The banking industry has included the provisions of Section 201 in its consensus 

recommendations. 

Home Mortgage Disclosure Act 

The Communities First Act would make several changes to the Home Mortgage 

Disclosure Act. Section 101 would increase two reporting exemption levels from $30 

million and $34 million 9 in assets to $250 million. While this may appear to be a 

235

substantial increase, the vast majority of industry assets would remain covered. In 

fact, the FDIC reports that as of March 31, 2004, banks and thrifts with $250 million or less in assets held only 6.7 percent of industry assets. The amendment would 

index the $250 million level using the existing procedure in HMDA. 

Title II of H.R. 2061 makes several additional changes in HMDA that could apply 

to a bank of any size, depending on its activity or location. Section 202 would exempt 

banks with fewer than 100 reportable loan applications per year per category. This 

would lift the burden from banks for which mortgage lending is not a major business 

line.

Banks that operate outside Metropolitan Statistical Areas are exempt from 

HMDA. Section 202 would also allow the Federal Reserve to develop a definition of 

Metropolitan Statistical Area for HMDA purposes, instead of using Census Bureau 

definition created for entirely different reasons. Current law requires the use of the 

Census Bureau definition, so certain areas that are truly rural are often included 

in metropolitan statistical areas. This may serve the purposes of the Census Bureau, but the Federal Reserve should have the flexibility to modify these definitions 

when determining which areas must be covered by HMDA. This would avoid unnecessarily covering certain rural banks that are relatively close to metropolitan areas. 

Finally, Section 202 would benefit all banks that must continue to report HMDA 

data by requiring the Federal Reserve to review and streamline the data collection 

and reporting requirements every 5 years.

It is important to note that the banking industry has included each of these 

HMDA provisions on its list of consensus items for inclusion in a regulatory relief 

bill in its response to Senator Crapo. 

Bank Secrecy Act Compliance 

The Nation’s community banks are committed to supporting the Federal Government’s efforts to prevent our institutions from being used for money laundering, terrorist financing, and other fraudulent activities. However, ICBA also believes that it 

is critical that resources be focused where the risks are greatest. Over the years, 

there has been a tendency to require reports that have little value for law enforcement but that clog the system and obscure the truly suspicious activities. In addition, bankers across the country continue to identify the Bank Secrecy Act as one 

of the most burdensome areas of compliance. 

ICBA appreciates the efforts by Congress to bring greater focus to the many reports required under the Bank Secrecy Act. Elements of Title VII of H.R. 3505 are 

a helpful step in the right direction and we look forward to continuing to work with 

Congress, the Treasury, and the banking agencies to achieve an effective compliance 

regime that directs resources of banks, regulators, and law enforcement agencies 

where it can do the most good. 

ICBA supports Section 701 of H.R. 3505 that would allow banks to exempt seasoned customers from currency transaction reports without being required to renew 

the exemption annually. Past efforts to increase the use of the current exemption 

process have not succeeded, despite years of efforts by interested parties, including 

industry representatives, regulators, and law enforcement. In fact, ICBA is represented on a Treasury committee that has been seeking solutions to this problem. 

Therefore, ICBA supports Congress taking this step since it has the potential to 

eliminate many unnecessary reports. However, for this provision to succeed, it will 

be important that Treasury establish an appropriate definition for qualified customers, and ICBA looks forward to working with Treasury on this definition. 

Fundamentally, ICBA believes that a simple across-the-board increase in the dollar 

threshold for currency transaction reports—a level that has not changed since the 

Bank Secrecy Act was first adopted over 35 years ago—would be easier to apply.

However, we also recognize that law enforcement agencies are concerned that such 

a change might eliminate valuable information for detecting and prosecuting criminal activities. However, it would be helpful if banks and other financial institutions 

had better information from law enforcement. Under Section 314 of the USA PATRIOT Act, Congress adopted a provision designed to encourage law enforcement 

agencies to enhance their communications efforts with financial institutions to help 

them focus resources on those risks that present the greatest threats of money laundering and terrorist financing. ICBA encourages Congress to continue to take steps 

to ensure that this information is provided by law enforcement agencies. If law enforcement agencies provide regular reports to the industry, it will help us focus resources where they are most appropriate. 

ICBA supports several other provisions in H.R. 3505 that would help alleviate the 

regulatory burden facing community banks. Section 702 would require the banking 

agencies and Treasury to develop uniform BSA regulations and examination requirements. In the fall of 2004, the banking agencies and Treasury entered into a MemoVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00243 Fmt 6621 Sfmt 6621 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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randum of Understanding that was, in part, designed to achieve such a goal. Last 

June, after unprecedented interagency cooperation, the agencies issued a single 

Bank Secrecy Act/Anti-Money Laundering Examination Manual. ICBA strongly applauds these efforts, and appreciates the opportunity to have played a part. Section 

702 would codify the steps that have already been taken and therefore ICBA supports it. Section 702 would also require the development of ‘‘a clear policy statement 

on appropriate processes for resolving examiner-institution disagreements.’’ Again, 

this is a step that ICBA strongly supports. 

Inconsistencies between agencies or differing interpretations about the same regulatory requirement increase regulatory burden. Section 702 would require the Secretary of the Treasury to assess potential inconsistencies or redundancies among the 

various BSA regulations. Since eliminating these inconsistencies can help reduce 

regulatory burden, ICBA also supports this provision. 

In recent years, there has been confusion about what and how much information 

should be reported to bank boards of directors about the suspicious activity reports 

that banks file with the Federal Government. Section 703 would require the Treasury to review these requirements and make appropriate recommendations. ICBA 

has been working closely with a subcommittee of Treasury’s Bank Secrecy Act Advisory Group on this issue and ICBA believes this provision would enhance its work. 

ICBA also supports provisions in H.R. 3505 that would require Treasury to assess 

and eliminate unnecessary customer identification requirements for the purchase of 

monetary instruments, assess ways to eliminate recurring suspicious activity reports, 

and improve the current system for electronic filing of BSA reports. ICBA also supports language that would express the sense of Congress that encourage banks to 

provide financial services to money services businesses and require Treasury to provide banks with information about money laundering and terrorist financing in 

other markets. ICBA encourages Congress to continue to monitor progress in all 

these areas. 

In closing, ICBA wants to congratulate the former Director of Treasury’s Financial 

Crimes Enforcement Network, Bill Fox, for his excellent outreach efforts to the 

banking industry, especially the Nation’s community banks. Bill’s tireless efforts 

helped bring about many improvements in the current BSA compliance regime. We 

look forward to working with the new Director of FinCEN, Bob Werner, to continue 

the successful collaboration between community banks, banking regulators, and law 

enforcement to develop an effective and efficient BSA system. 

ICBA OPPOSES EXPANSION OF ACTIVITIES FOR INDUSTRIAL LOAN COMPANIES AND

CREDIT UNIONS

ICBA strongly believes that ‘‘regulatory relief’’ legislation must not become a vehicle to expand new activities for industrial loan companies and credit unions. We 

urge that the Committee reject proposals that would provide broad interstate 

branching powers and new business checking powers for ILC’s. We also urge you 

to reject proposals to increase the tax-exempt credit unions’ business lending powers 

and reduce their capital requirements. 

Both ILC’s and credit unions already have unfair regulatory and tax advantages 

over community banks. Commercial companies may own ILC’s and ILC holding 

companies are not subject to consolidated supervision by the Federal Reserve. Credit 

union profits are exempt from taxation and credit unions are not subject to the 

Community Reinvestment Act. 

In addition, ILC’s pose unique safety and soundness risks, as well as conflicts of 

interest by mixing banking with commerce. Both Federal Reserve Chairmen Greenspan and Bernanke have highlighted these risks and have urged Congress to close 

the ILC loophole. 

In a particularly strange twist, credit union groups in California and Utah have 

applied to acquire or establish ILC’s. These combinations would allow credit unions 

to expand their reach beyond any conceivable common bond restriction. 

Congress should promptly redress these imbalances in the Nation’s financial system. In the context of regulatory burden relief legislation, we urge you to—at a minimum—refrain from exacerbating them. 

Banks Not Positioned to Prevent Internet Gambling 

At the same time that this Committee is carefully considering proposals to reduce 

unnecessary regulatory burden, some in Congress are seriously considering ones to 

increase that burden. These are bills that would make illegal some forms of gambling on the Internet. As a key enforcement mechanism, they would require banks 

and others to attempt to prevent payments to gambling companies on behalf of bank 

customers. While we share concerns about Internet gambling, it is highly doubtful 

that such legislation, if passed, would have any meaningful effect on the amount of 

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gambling on the Internet. Credit card issuers have already raised substantial roadblocks that prevent payments directly to gambling sites. In response, these sites 

have devised effective ways to get around these roadblocks. In most cases a gambler 

will establish an account with a nonbank payment company, which will make payments to gambling companies on behalf of the gambler. In such cases, the gambler 

may actually provide funds to the payment company from his checking or credit 

card account before doing any gambling at all. 

So, while the pending legislation would likely be ineffective, it would impose an 

additional burden on community banks. They would have to adopt formal procedures to attempt to comply with the new requirements. Even if they actually failed 

to block any transactions, community banks would have to bear training and monitoring costs. These banks already bear a considerable burden in complying with attempts to prevent money laundering and terrorist financing. These efforts should 

not be diverted by ineffectual attempts to block gambling. 

ICBA urges Congress to reject proposals to use the banking system to restrict Internet gambling unless they have some reasonable chance of being effective and will not 

add to the tremendous burden on community banks. The proposals that we have 

seen so far do not come close to meeting this test. Congress should not pass legislation that claims to ‘‘do good’’ without effectively (and efficiently) restricting bad behavior or encouraging positive action. 

Conclusion 

ICBA appreciates this Committee’s commitment to moving legislation that would 

reduce the regulatory burden on community banks. I believe that the tremendous 

weight of over-regulation is crushing the banking system and is rapidly driving the 

consolidation of our industry. 

Most regulations probably had a well thought out purpose when they were originated, but it’s been said, ‘‘no single raindrop feels it is responsible for the resulting 

flood.’’ Community banks in particular face a disproportionate impact and we need 

substantial relief before we are washed away. On behalf of my community bank and 

the nearly 5,000 members of the Independent Community Bankers of America that 

I represent today, I ask you to remember this as you consider legislation and regulatory relief for our industry. Thank you. 

238

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SANTORUM

FROM JOHN M. REICH 

Q.1. Under current regulations of mutual holding companies, public shareholders have a right to approve the compensation package 

of executives and provide direction to a foundation, which might be 

created by the Initial Public Offering (IPO). Should they also have 

a say in determining the Board? Why or why not?

A.1. Typically, minority public shareholders of a depository institution in a mutual holding company (MHC) structure have dual interests in the MHC structure—as mutual members of the MHC 

and as shareholders of the institution. As minority public shareholders of the depository institution in a MHC structure, they have 

the same rights as any public shareholder to nominate directors 

and to vote in the election of directors of the underlying stock depository institution. 

It is important to clarify that under current regulations, while 

minority shareholders of stock subsidiaries of MHC’s have the right 

to vote on the establishment of management stock benefit plans, 

minority shareholders do not have the ability to vote on the compensation package of executives. Similarly, while minority shareholders have the ability to vote regarding the establishment of a 

foundation, they do not have the ability to provide direction to a 

charitable foundation established by the MHC. Minority shareholders are informed of these rights and restrictions via offering 

materials provided to them prior to their purchase of stock in the 

subsidiary stock institution. 

While minority public shareholders do not typically have preferential voting rights vis-a ́-vis a majority and controlling shareholder (such as a MHC), OTS established certain separate voting 

rights for minority shareholders in the MHC context. Specifically, 

minority shareholders have separate voting rights in connection 

with stock benefit plans and foundations because both types of 

transactions may dilute the percentage of stock held by existing minority shareholders. That is, in the case of both the implementation 

of employee plans and the establishment of charitable foundations, 

the company may issue additional stock. Such issuances of stock 

would have a direct dilutive effect on minority interests, thus, separate voting rights are extended to minority shareholders to protect 

their existing percentage interest in an institution subsidiary of a 

MHC. Other corporate actions, including the election of members 

of the board of directors, do not dilute the minority stockholders’ 

interest, and therefore do not merit the extension of separate voting rights to minority stockholders. 

Again, while minority shareholders are unable to control the 

election of directors to the institution’s board of directors, minority 

shareholders do have a role in determining the board. Like a minority shareholder of any publicly traded company, minority shareholders in a MHC structure have the right to nominate directors 

and the right to vote in the ejection of directors.

Q.2. Because shareholders are prohibited from challenging the 

Board slate, it is my understanding that they are therefore effectively blocked from firing the management of an under-performing 

239

mutual holding company. Could this structure increase the risk 

that OTS may have more troubled mutual holding companies?

A.2. Rather than increasing the risks to the institution, there is 

considerable factual and anecdotal evidence suggesting that mutuality insulates a depository institution from the types of shareholder and market pressures than can sometimes cause a stock institution to take unsound business risks. 

In any MHC structure, the top-tier entity is a MHC that has no 

shareholders. The subsidiary savings association’s depositors are 

the voting members of the MHC. The corporate governance provisions for Federal MHC’s are similar to the corporate governance 

provisions regarding Federal mutual savings associations. OTS has 

found the mutual form of organization to be at least as conducive 

to safe and sound operations as the stock form of organization for 

savings associations. Similarly, OTS examinations of MHC’s suggest that such entities are less likely to be troubled than stock 

holding companies.

Q.3. In a recent speech to the Exchequer Club in mid-February, 

you noted that OTS has petitioned Congress for a number of statutory changes for the thrift charter including ‘‘parity for savings 

banks’’ on the issues of investor adviser and broker-dealer activities, saying there should be ‘‘equal footing.’’ It is my understanding 

that while asking for these changes to put thrifts on ‘‘equal footing’’ 

in these areas, OTS staff maintains that shareholdings in mutual 

savings banks and mutual holding companies should not have the 

same rights on governance and operations issues as do shareholders in other financial institutions. Could you explain these two 

seemingly divergent positions?

A.3. Minority shareholders in MHC structures already have the 

same rights as minority shareholders in other stock corporations. 

They may present issues for shareholder votes, nominate directors, 

and vote on all appropriate matters. As with any minority shareholder in a corporation where a single shareholder controls the majority of the voting shares, minority shareholders in a MHC structure cannot control the outcome of the vote unless they are able to 

convince the MHC majority shareholder that their recommendation 

should be adopted. 

It is also important to note that the interests of depositors in a 

MHC or mutual thrift are not comparable to the interests of stockholders in a stock form depository institution or holding company. 

Due to the confidentiality of the deposit relationship and the privacy rights of member depositors, depositor lists cannot be provided 

in the same manner that stock institutions can provide shareholder 

lists. MHC’s and stock form depository institutions or holding companies are different forms of ownership. Based on the differences 

in mutual and stock form of organization, it follows that their corporate governance structures will be different. However, the form 

of ownership should not be confused with the separate and unrelated issue of providing for a fair and competitive marketplace 

among financial institutions in the offering of investment, advisory, 

and broker dealer services to consumers.

Q.4. Recently, in a response to a letter from a Member of this Committee, OTS responded that it believes increasing shareholders’ 

240

rights would ‘‘significantly disadvantage the rights and interests of 

the depositors of a mutual savings bank that reorganizes into a 

mutual holding company structure.’’ OTS further stated that minority shareholders in a mutual holding company structure are 

aware of the lack of corporate governance at the outset and to try 

to give these members ‘‘greater rights’’ than the majority would undermine the ‘‘basic principles of sound corporate governance and 

corporate ownership rights.’’ Do you agree with this opinion? If so, 

please explain why.

A.4. It is important to correct a mischaracterization of OTS’ response suggested by the question. OTS made no statement in the 

letter referenced in the question regarding a ‘‘lack of corporate governance’’ with respect to minority shareholders in a MHC structure 

or otherwise; nor has the agency suggested in any other context 

that there is a lack of corporate governance with MHC structures. 

The point that was made in the letter was that providing minority 

shareholders with the ability to control a depository institution in 

a MHC structure would undermine basic principles of sound corporate governance and corporate ownership rights. Sound corporate 

governance requires that shareholders’ interests and rights be reflective of the interpretative ownership interests and rights. 

The letter stated that investors in minority stock in a MHC 

structure are aware at the outset that minority shareholders receive a minority interest. They should also understand that the 

MHC, as the majority shareholder, controls the institution and 

makes the business decisions regarding it. Corporate governance 

principles regarding any stock entity enable the majority shareholder (in the case of MHC structures, the MHC) to control the operations of the entity. 

We maintain that the proposal to which OTS’s previous letter responded would significantly disadvantage the rights and interests 

of the depositors of a mutual savings bank that reorganizes into a 

MHC structure. That letter proposed to provide the minority shareholders with the sole voting rights in the depository institution controlled by the MHC. In our view, this proposal would cause the mutual accountholders of the MHC to lose their rights in the underlying institution, without the protections provided under the OTS 

mutual-to-stock conversion regulations. Such an action would also 

provide an inappropriate windfall to minority shareholders, given 

that they would have control in excess of the amount of their capital contribution to the subsidiary depository institution. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM JOHN M. REICH 

Q.1. The agencies have devoted considerable time and resources to 

developing the matrix and have sought input from consumer 

groups as well as industry representatives. As regulators you bring 

a unique perspective to the process. Based on that perspective, why 

do you feel regulatory relief is necessary now?

A.1. The Federal banking agencies have promulgated more than 

850 regulations and modifications since the passage in 1989 of the 

Financial Institutions Reform, Recovery, and Enforcement Act. 

While regulatory requirements add up, little is done to eliminate 

outdated, no longer necessary, or unduly onerous provisions. 

241

The vast majority of existing laws and regulations are appropriate and beneficial to a strong and effective Federal regulatory 

oversight system, but over time some provisions lose their utility. 

Five Federal agencies (including the NCUA) have reviewed the 187 

regulatory-relief proposals and determined that the vast majority of 

the provisions no longer serve a useful purpose or can be modified 

to be less burdensome. 

When Congress passed the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) in 1996, Federal banking regulators were given a mandate to review their regulations to reduce 

the regulatory burden imposed on financial institutions. We have 

taken this mandate seriously. Over the past 3 years, the agencies 

have opened more than 125 regulations for comment, received more 

than 1,000 comment letters, and held 16 banker and consumer 

group outreach meetings around the country. 

All institutions bear regulatory burden, but the impact on smaller ones is disproportionate. The future of many of our Nation’s 

smaller community banks, and the thousands of communities they 

serve, depends on Congress enacting meaningful regulatory relief 

legislation. This is the best opportunity we have had in many years 

to achieve this goal.

Q.2. We have received several proposals designed to give regulators 

additional flexibility in conducting examinations (#42, 68, 112, and 

169). Do these types of proposals pose a safety and soundness concern?

A.2. Current law requires the Federal banking agencies (FBA’s) to 

conduct a full-scope, on-site examination for the depository institutions under their jurisdiction at least every 12 months. There is an 

exception for small institutions that are well-capitalized and managed and have total assets of less than $250 million, and meet 

other criteria. Examinations of these small institutions are required at least every 18 months. 

When originally enacted in 1991, the small institution examination exception was available to institutions with assets less than 

$100 million (assuming the other statutory criteria were satisfied). 

This statutory threshold was raised to $250 million in 1994 for institutions in outstanding condition and meeting the other statutory 

criteria. In 1996, the FBA’s were authorized to extend the $250 

million threshold to institutions in good condition. Given the fact 

that the current threshold has been in place for almost 10 years, 

OTS believes it is appropriate to consider whether the $250 million 

cap should be raised. OTS supports increasing the small institution 

threshold to $1 billion for well-capitalized, well-managed institutions. We believe this provision would reduce regulatory burden on 

low-risk, small institutions and permit the FBA’s to more effectively focus their resources on the highest risk institutions. 

With respect to matrix number 112, OTS is unable to take a position on this proposal without reviewing the legislative language.

Q.3. Prior to the Gramm-Leach-Bliley Act, banks engaging in traditional banking services such as trust and fiduciary activities were 

exempt from the definitions of broker and dealer under the Securities Exchange Act of 1934. What protections were in place prior to 

the Gramm-Leach-Bliley Act to ensure that these activities were 

242

conducted in an appropriate manner? Is there any evidence that 

banks were abusing this exemption or that these activities posed 

a risk to the system? The SEC has attempted to implement the 

amendments made to the definitions of broker and dealer by 

issuing its Regulation B. What is the status of Regulation B?

A.3. While it is true that banks engaging in traditional banking 

services prior to the enactment of the Gramm-Leach-Bliley Act 

(GLB Act) were exempt from the definitions of broker and dealer 

under the Securities Exchange Act of 1934 (Exchange Act)—savings associations do not now, and have never had, a similar statutory exemption. 

The Exchange Act requires any broker or dealer to register with 

the Securities and Exchange Commission (SEC) if it uses the mail 

or any instrumentality of interstate commerce to effect transactions 

in, or induce the purchase or sale of, any security (Section 15(a)(1)). 

Section 201 and 202 of the GLB Act amended Section 3(a)(4)(B) 

and 3(a)(5)(C) of the Exchange Act to conditionally exempt banks 

from registration as a broker or dealer if they engaged in certain 

banking activities. The definition of ‘‘bank’’ in the Exchange Act 

(Section 3(a)(6)) has been interpreted by the SEC to include Statechartered banks and national banks, but never savings associations. The GLB Act did not change the definition of bank in the Exchange Act. The SEC, utilizing its broad exemptive authority in 

Section 36 of the Exchange Act, has provided a temporary exemption from the definitions of ‘‘broker’’ for savings associations on the 

same terms and under the same conditions that banks are excepted 

(17 CFR 242.733). This exemption is in effect until September 30, 

2006. 

The legislative history of the Exchange Act indicates that banks 

were excluded from the definition of ‘‘broker’’ and ‘‘dealer’’ because 

Congress recognized at that time (1934) that banks engaging in securities transactions were already subject to the scrutiny of bank 

regulators. Banks have provided securities services for many years, 

largely through their trust departments, with few problems. Trust 

department services are subject to strict and well-developed mandates of State trust and fiduciary law. Trust services also receive 

strict scrutiny by bank supervisors and examiners that specialize 

in these activities. 

Savings associations engage in the same securities transactions, 

largely through their trust departments. The authority for savings 

associations to engage in trust activities has been in place since 

1980. Since then, savings associations have been providing the 

same trust department services to their customers as banks. Savings associations engaging in securities transactions through their 

trust department are subject to the same State trust and fiduciary 

laws as banks and receive similar Federal regulatory oversight by 

trained supervisors and examiners. 

Other securities services have long been provided by banks and 

savings associations as an integral part of their normal banking 

functions without generating any significant securities-related concerns. Custodial and safekeeping activities, which may involve certain securities transactions, are core banking functions. These activities are provided as an accommodation to customers or offered 

to particular customers such as employee benefit 401(k) plans or 

243

bank-offered custodial IRA’s. Other ‘‘broker’’ or ‘‘dealer’’ securities 

transactions that occur in the course of providing customers common bank and savings association products and services, such as 

networking (depository institution customers purchasing securities 

products through a third party brokerage arrangement) or sweeps 

of deposit funds into certain money market funds, are common 

banking practices. 

The history of banks and savings associations engaging in these 

activities without any significant concerns is true of all of the securities transactions detailed in Section 201 and 202 of the GLB Act. 

All of these activities receive constant scrutiny by bank supervisors 

and examiners. These protections were in place prior to the enactment of the GLB Act and will remain in place in the future. The 

exceptions provided to banks in the GLB Act, and to savings associations through the SEC’s temporary exemption, meet the exemption test in Sections 15 and 36 of the Exchange Act in that they 

are in the interest of the public and consistent with the protection 

of investors. 

The SEC issued interim final broker-dealer rules on May 11, 

2001 to implement Sections 201 and 202 of the GLB Act. As part 

of these rules, the Commission exercised its authority to include 

savings associations within the bank exceptions. This treated savings associations the same as banks for the first time for purposes 

of broker-dealer registration. In the interim broker-dealer rule, the 

SEC recognized it would be wrong to continue disparate, anomalous treatment between savings associations and banks. The SEC 

postponed the effective date of the interim rule several times. On 

June 30, 2004, the SEC published in the Federal Register a new 

proposed broker rule (Regulation B). Unlike the interim final rules, 

savings associations are not treated the same as banks in all respects. 

Savings associations are treated the same as banks for the 11 

statutory activities they may engage in without registering as a 

broker with the SEC, as provided by the GLB Act. However, three 

nonstatutory exemptions provided banks would not be extended to 

savings associations. The SEC describes the three nonstatutory exemptions as targeted exemptions that recognize the existing business practices of some banks. We understand that the SEC does 

not believe savings associations are engaged in the exempted securities activities and will only extend relief for savings associations 

to the securities activities they are currently performing. A separate analysis conducted by OTS indicates that savings associations 

engage in all of the securities activities covered by the three additional exemptions. Pursuant to its request, this information was 

forwarded to the SEC in October 2004. 

Since the publication of the proposed Regulation B rules, OTS 

met with several SEC Commissioners, filed a comment letter on 

September 1, 2004 objecting to the unequal treatment of savings 

associations, and held conversations with staff from the Division of 

Market Regulation. The SEC has not indicated that it is willing to 

reverse its position with regard to the inequitable treatment of savings associations. A temporary exemption for savings associations 

from having to register as a broker is in place until September 30, 

2006. 

244

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM DONALD L. KOHN 

Q.1. The agencies have devoted considerable time and resources to 

developing the matrix and have sought input from consumer 

groups as well as industry representatives. As regulators, you bring 

a unique perspective to the process. Based on that perspective, why 

do you feel regulatory relief is necessary now?

A.1. The number of regulatory requirements imposed on banking 

organizations has increased substantially over time. Some of these 

regulatory requirements, however, may no longer provide public 

benefits commensurate with their costs. For example, changes in 

the marketplace, technology, supervisory or risk management practices, or the Federal banking laws themselves may well have reduced the need for certain regulatory requirements or restrictions 

adopted in the past. 

Unnecessary regulatory burdens hinder the ability of large and 

small banking organizations to meet the needs of their customers, 

operate profitably, innovate, and compete with other financial services providers. Compliance can weigh especially heavily on community banks because of the smaller scale of their operations over 

which to spread the costs. 

For these reasons, the Board strives to review each of its regulations at least once every 5 years to identify those provisions that 

are out of date or no longer warranted. The Board also has been 

an active participant in the ongoing regulatory review process 

being conducted by the Federal banking agencies pursuant to the 

Economic Growth and Regulatory Paperwork Reduction Act 

(EGRPRA). 

Many proposals to reduce regulatory burden, however, require 

Congressional action to implement. For this reason, the Board has 

proposed or supported a variety of legislative proposals that we believe would provide meaningful relief to banking organizations supervised by the Federal Reserve. These proposals are highlighted 

and discussed in my written testimony. The Board strongly supports the Committee’s efforts to develop a regulatory relief bill that 

is consistent with the Nation’s public policy objectives, and the 

Board and its staff look forward to working with the Committee 

and its staff as the regulatory relief process moves forward.

Q.2. We have received several proposals designed to give regulators 

additional flexibility in conducting examinations (#42, 68, 112, and 

169). Do these types of proposals pose a safety and soundness concern?

A.2. Of the four examination-related amendments you mention, the 

Board supports only proposal No. 68. We believe this amendment 

would provide meaningful relief to small insured depository institutions without adversely affecting safety and soundness. 

Federal law currently requires that the appropriate Federal 

banking agency conduct a full scope, on-site safety and soundness 

examination of each insured depository institution at least once 

every 12 months. The statute, however, permits institutions that 

have less than $250 million in assets to be examined on an 18-

month cycle if the institution is well-capitalized, well-managed, and 

245

1See 12 U.S.C. § 1820(d). The Board and the Federal Deposit Insurance Corporation (FDIC) 

may alternate responsibility for conducting the required examinations of State-chartered banks 

with the bank’s appropriate State supervisor if the Board or FDIC determines that the State 

examination fulfills the purposes of the Federal mandate. 

meets certain other criteria.1 The $250 million asset cutoff for an 

institution to qualify for an 18-month examination cycle has not 

been adjusted since 1994. 

The Board supports an amendment (proposal No. 68) that would 

raise this asset threshold from $250 million to $500 million. Doing 

so would potentially allow approximately an additional 1,200 insured depository institutions to qualify for an 18-month examination cycle. Importantly, this change would not exempt any insured 

depository institution from routine safety and soundness examinations, nor would it lengthen the examination cycle for institutions 

experiencing financial or managerial difficulties. 

The Board does not support proposals No. 112 and No. 169, 

which would raise the asset threshold for an 18-month examination 

cycle to $1 billion. Institutions that have assets approaching $1 billion tend to have more complex risk profiles and are more likely 

to operate business lines on a regional or national basis than institutions with assets of less than $500 million. For these reasons, the 

Board believes that institutions with assets of $500 million or more 

should continue to be subject to a 12-month safety and soundness 

exam cycle. We also believe it would be preferable to gain experience with a $500 million cutoff before deciding whether it would be 

appropriate to raise the threshold further. 

The Board also does not support proposal No. 42. This amendment would allow a Federal banking agency to extend the 12 or 18-

month safety and soundness examination cycle for an institution of 

any size, and for a potentially indefinite period of time, in order to 

allocate and conserve the agency’s examination resources. Despite 

advances in off-site monitoring, the Board continues to believe that 

regular on-site examinations play a critical role in helping bank supervisors detect and correct asset, risk-management, or internal 

control problems at an institution before these problems result in 

claims on the deposit insurance funds. These lessons were learned 

during the thrift and banking crises of the 1980’s and were the reason Congress established the mandatory exam cycles in 1991. 

These mandatory on-site examination cycles impose important discipline on the Federal banking agencies, ensure that insured depository institutions do not go unexamined for extended periods, and 

have contributed significantly to the safety and soundness of insured depository institutions. If an agency is experiencing shortages in its examination resources, we believe it would be better to 

address these constraints through the supplementation of the agency’s resources, rather than by extending the mandated frequency of 

safety and soundness examinations.

Q.3.a. Prior to the Gramm-Leach-Bliley Act, banks engaging in traditional banking services such as trust and fiduciary activities were 

exempt from the definitions of broker and dealer under the Securities Exchange Act of 1934. What protections were in place prior to 

the Gramm-Leach-Bliley Act to ensure that these activities were 

conducted in an appropriate manner?

246

2See, e.g., Uniform Trust Code (2000); Uniform Prudent Investor Act (1994); Employee Retirement Income Security Act of 1974, Section 401 et.seq. (29 U.S.C. §§ 1101 et. seq.); 12 CFR Part 

9 (OCC fiduciary regulations); Restatement (Second) of Trusts §§ 169 to 185 (1959). 

A.3.a. Banks have provided their customers a wide range of securities transaction services for many years as an integral part of their 

trust, fiduciary, custodial, and other normal bank functions. Banks 

have provided these securities-related services under the effective 

and comprehensive supervision and regulation of the Board, the Office of the Comptroller of the Currency (OCC), and the FDIC (the 

Banking Agencies). We believe this framework of supervision and 

regulation has provided, and continues to provide, sufficient protections to consumers that obtain securities-related services from a 

bank. 

In the trust and fiduciary area, for example, bank customers are 

protected by well-established and comprehensive trust and fiduciary laws and principles that arise from a variety of Federal, 

State, and common law sources separate and apart from the Federal securities laws.2 The Banking Agencies regularly examine the 

trust and fiduciary activities of banks to help ensure that banks 

comply with their fiduciary obligations to customers. As part of 

these examinations, our examiners review, among other things, the 

discretionary investments made by banks on behalf of their trust 

and fiduciary accounts to ensure that the investments are prudent 

and consistent with applicable law and the underlying account documents; the bank’s trading activities for trust and fiduciary customers to ensure best execution on securities transactions and the 

fair and equitable allocation of securities purchases and sales 

among accounts; the effectiveness of the bank’s policies for preventing self-dealing and conflicts of interest; and the fees received 

by the bank to ensure that they are consistent with the bank’s fiduciary obligations and properly disclosed to the customer. 

Likewise, the Banking Agencies’ supervision and examination 

process provides important protections to customers that obtain 

custodial services (including related securities order-taking services) from a bank. As part of the examination of a bank’s custodial 

activities, bank examiners review the banks’ account acceptance 

process, settlement of custodial securities transactions handled by 

the bank, and safekeeping of customers’ securities; the experience, 

training, and qualifications of staff engaged in custodial activities; 

and the policies and procedures that banks have in place to help 

ensure that beneficial owners of securities are provided proxy material and other corporate communications in a timely manner in 

accordance with applicable shareholder communication rules. 

The Banking Agencies also adopted guidelines governing the referral of retail customers to affiliated or unaffiliated broker-dealers. 

These guidelines provide that bank employees should receive only 

a ‘‘nominal’’ one-time fee for the referral of a retail customer, and 

provide that the payment of any referral fee should not depend on 

whether the referral results in a securities transaction. In addition, 

these guidelines provide for banks to make certain disclosures concerning the nature of nondeposit investment products to protect retail customers from confusion about the risks of these investments. 

The Banking Agencies also have adopted regulations that require 

banks to maintain adequate records and issue customer confirmaVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00254 Fmt 6602 Sfmt 6602 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
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3See 12 CFR Part 12 (OCC); Part 208 (Board); and Part 344 (FDIC). 4See, e.g., Board, Commercial Bank Examination Manual; OCC, Comptroller’s Handbooks for 

Asset Management, Conflicts of Interest, Investment Management Services, Personal Fiduciary 

Services and Custody Services; FDIC, Trust Examination Manual and Risk Management Manual of Examination Policies. 5See S. Rep. No. 106–44 at 10 (1999) (‘‘Banks have historically provided securities services 

largely through their trust departments, or as an accommodation to certain customers. Banks 

are uniquely qualified to provide these services and have done so without any problems for 

years. Banks provided trust services under the strict mandates of State trust and fiduciary law 

without problems long before Glass-Steagall was enacted; there is no compelling policy reason 

for changing Federal regulation of bank trust departments, solely because Glass-Steagall is 

being modified.’’)

tions for all securities transactions and establish policies and procedures governing the supervision of securities transactions and the 

reporting of personal transactions by bank employees.3 Moreover, 

despite their exceptions from the definitions of ‘‘broker’’ and ‘‘dealer,’’ banks always have been subject to the antifraud provisions of 

the Federal securities law, including Section 10(b) of the Securities 

Exchange Act of 1934 (1934 Act). In examining a bank’s compliance 

with these and other applicable laws, regulations, guidance, and 

principles, Banking Agency examiners are guided by extensive and 

detailed training and examination manuals, as well as supplemental advisory or supervisory letters, bulletins, and other examiner guidance.4

In light of these strong existing protections, and the lack of any 

significant securities-related concerns arising from the securities 

activities conducted by banks, Congress drafted the exceptions for 

bank activities in Title II of the Gramm-Leach-Bliley Act (GLB Act) 

broadly in order to allow banks to continue to provide securities 

services in connection with their normal bank functions without 

disruption.

Q.3.b. Is there any evidence that banks were abusing this exemption or that these activities posed a risk to the system?

A.3.b. The Board is not aware of any evidence indicating that 

banks abused their exceptions from the definitions of ‘‘broker’’ and 

‘‘dealer’’ prior to the GLB Act. As discussed above, banks have provided securities transaction services for many years as an integral 

part of their traditional bank functions. These activities were conducted under the effective supervision and regulation of the Banking Agencies and did not generate significant securities-related concerns or create undue risks to the safety and soundness of banks. 

Congress recognized this fact when it adopted the GLB Act 5 and, 

for this reason, crafted the new exceptions in Title II in a broad 

way so that they would cover the securities activities that banks 

had been providing for many years in connection with their normal 

bank functions. We note, moreover, that numerous banking organizations have operated and continue to operate separate, nonbank 

registered broker-dealer affiliates to conduct general retail brokerage activities or other securities activities, such as underwriting 

corporate debt or equity securities, that are outside the normal and 

traditional functions protected by Title II. 

Q.3.c. The SEC has attempted to implement the amendments 

made to the definitions of broker and dealer by issuing its Regulation B. What is the status of Regulation B?

248

A.3.c. In June 2004, the Securities and Exchange Commission 

(SEC) requested comment on proposed Regulation B, which would 

implement the ‘‘broker’’ exceptions for banks adopted by Congress 

in Title II of the GLB Act. These exceptions include the important 

statutory exceptions designed to allow banks to continue to effect 

securities transactions as part of their trust, fiduciary, custodial, 

and networking activities. In September 2005, the SEC announced 

that it was continuing to review the comments submitted on Regulation B and adopted an order extending the blanket exemption 

that banks have from the definition of ‘‘broker’’ under the 1934 Act 

until September 30, 2006. This process continues and the SEC has 

not yet finalized proposed Regulation B. 

In October 2004, the Board, OCC, and FDIC submitted a joint 

comment letter to the SEC on proposed Regulation B that sets 

forth in detail the Banking Agencies’ concerns with the proposed 

regulation. The comment letter notes that, if Regulation B as proposed were to be adopted in final, it would significantly disrupt the 

normal functions and customer relationships of banks that the 

GLB Act was intended to protect and preserve. The proposed regulation also would impose substantial and unnecessary costs on 

banks and their customers and limit customer choice by preventing 

or discouraging banks from providing traditional services to customers. The Board believes these results would not occur if the 

statutory ‘‘broker’’ exceptions for banks in the GLB Act are implemented in a manner consistent with the statute’s language and 

purpose. 

Since filing this comment letter, Board members and staff have 

been discussing the Banking Agencies’ concerns with the SEC and 

its staff. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM DOUGLAS H. JONES 

Q.1. The agencies have devoted considerable time and resources to 

developing the matrix and have sought input from consumer 

groups as well as industry representatives. As regulators you bring 

a unique perspective to the process. Based on that perspective, why 

do you feel regulatory relief is necessary now?

A.1. Over the years, Congress has enacted many laws and the 

banking agencies have adopted many regulations that have protected consumers, strengthened financial institution safety and 

soundness, and improved crime detection. Individually, few of these 

laws impose a significant burden on financial institutions; however, 

cumulatively, they have created a complex regulatory framework 

that raises costs for banks and savings institutions. The FDIC is 

committed to relieving regulatory burden while maintaining the 

benefits and protections established for consumers and financial institutions. 

It is a good idea for agencies to systematically review their regulations, written policies, and underlying statutes to improve efficiency, reduce unnecessary costs, and eliminate inconsistencies and 

outmoded and duplicative requirements. As you know, the latest 

attempt at reviewing our regulations and statutes is in accordance 

with the requirements of the Economic Growth and Regulatory Paperwork Reduction Act of 1996. This is not the first time, however, 

249

and will not be the last. The Federal regulatory agencies have become more sensitive to regulatory costs, especially those incurred 

by small community institutions, and will continue to strive toward 

more efficient regulation and procedures and also continue to keep 

Congress informed of statutory changes that we believe will help 

us toward this goal. At this point, the agencies have endeavored 

over the past several years to work with the industry, consumer 

groups, and Congress to come up with worthwhile provisions in the 

law that could use updating. Now would be a good time for Congress to consider these suggestions, especially since it has been almost 10 years since burden reduction legislation has been adopted.

Q.2. We have received several proposals designed to give regulators 

additional flexibility in conducting examinations (#42, 68, 112, and 

169). Do these types of proposals pose a safety and soundness concern?

A.2. Section 10(d) of the Federal Deposit Insurance Act requires 

Federal banking agencies to conduct full-scope, on-site examinations of insured depository institutions within their jurisdiction at 

least every 12 months. Small institutions (currently defined as institutions with total assets of less than $250 million) that are wellcapitalized, well-managed, and meet certain other criteria are required to be examined at least every 18 months. Nearly 60 percent 

of insured institutions currently qualify for the 18-month examination cycle based on their size, capitalization level, and examination 

rating. 

Proposals to increase flexibility in conducting examinations do 

not necessarily pose safety and soundness concerns unless examination intervals are unduly lengthened or regulatory discretion is 

given without set criteria or parameters. The FDIC’s analysis of 

the banking crisis of the 1980’s and early 1990’s indicates that 

safety and soundness concerns arise when the examination frequency extends beyond 2 years. Off-site monitoring tools based on 

Call Report data become more unreliable after such an extended 

period. The examination cycle should not be extended without set 

criteria or parameters designed to prevent situations that exacerbated the last banking crisis. Proposal 42 may pose safety and 

soundness risks because it eliminates the specific examination frequency requirements from Section 10(d). 

The examination frequency intervals set forth in Section 10(d) 

have been very effective in promoting the safety and soundness of 

the banking industry by requiring the Federal banking agencies to 

give appropriate and timely attention to all of the institutions they 

supervise. However, the FDIC agrees that the $250 million small 

bank threshold, which has been in effect for a decade, could be 

raised without compromising safety and soundness. Of the various 

proposals on examination flexibility, the FDIC prefers Proposal 68, 

which increases the small bank threshold to $500 million, but 

leaves the maximum interval between examinations at 18 months. 

It is estimated that an additional 1,000 insured institutions would 

be eligible for the 18-month examination cycle if this proposal were 

to be adopted. For these institutions, the extra 6 months between 

full-scope examinations would represent a significant reduction in 

250

regulatory burden with little additional risk to the Deposit Insurance Fund.

Q.3.a. Prior to the Gramm-Leach-Bliley Act, banks engaging in traditional banking services such as trust and fiduciary activities were 

exempt from the definition of broker and dealer under the Securities Exchange Act of 1934. What protections were in place prior to 

the Gramm-Leach-Bliley Act to ensure that these activities were 

conducted in an appropriate manner?

A.3.a. Prior to the enactment of the Gramm-Leach-Bliley Act 

(GLBA) customers of banks engaged in securities-related activities 

were protected by:

• Federal banking regulations governing recordkeeping and confirmation requirements for securities transactions (for example 

the FDIC’s regulations at 12 CFR Part 344 and substantially 

identical regulations promulgated by the other Federal bank regulatory agencies), • an interagency statement of policy governing retail sales by 

banks of nondeposit investment products (NDIP SOP), and • periodic examinations by the Federal regulatory agencies of the 

trust and fiduciary services activities conducted by banks.

Each of these protections remains in place and continues to be 

in effect. 

The FDIC’s recordkeeping and confirmation regulations at 12 

CFR Part 344 require that banks maintain detailed customer and 

account records of their customers for whom the banks effect securities transactions. In addition, these regulations require customer 

confirmations by banks for securities transactions and specify the 

content and timing of such confirmations. In particular, banks are 

required to disclose details concerning the amount and the source 

of remuneration received by the bank for effecting a securities 

transaction, as well as the remuneration received by other parties 

to the transaction. These regulations also require the settlement of 

securities transactions and mandate the development and implementation of securities trading policies and procedures, including 

the fair and equitable allocation of securities and prices to customer accounts and the crossing of buy and sell orders on a fair 

and equitable basis. Further, these regulations require the reporting of personal securities trading by bank officers and employees. 

Compliance with these recordkeeping and confirmation requirements is reviewed at each trust examination for those banks that 

execute securities transactions for customers. 

The NDIP SOP was adopted by the Federal banking agencies on 

February 15, 1994, in response to the increased involvement of 

banks in the sale of retail nondeposit investment products to bank 

customers. The NDIP SOP is designed to ensure bank customers 

are clearly and fully informed of the character and risks associated 

with nondeposit investment products. The NDIP SOP requires 

banks to implement policies and procedures governing compliance 

with applicable laws and regulations, the supervision of personnel 

selling nondeposit investment products, the types of investment 

products sold, the permissible use of customer information, appropriate and inappropriate referral activities, and a description of the 

training requirements and compensation arrangements for perVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00258 Fmt 6602 Sfmt 6602 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
251

sonnel involved in selling nondeposit investment products. The 

NDIP SOP contains guidelines for the securities activities of banks, 

including disclosures and advertising, qualifications and training of 

personnel, suitability and sales practices, compensation, and compliance with applicable laws, regulations, and internal policies. 

Compliance with the NDIP SOP is reviewed at each trust examination for those banks engaged in the sale of nondeposit investment 

products. 

Banks that conduct securities activities in conjunction with the 

provision of trust and fiduciary services are subject to regular examinations by the appropriate Federal banking agency of their 

trust and fiduciary services activities. These trust examinations are 

designed to evaluate the institution’s performance as a trustee, fiduciary, or custodian for the benefit of bank customers and account 

beneficiaries. Under these trust examination procedures, individual 

ratings are assigned to the trust department’s: (1) management; (2) 

the adequacy of its operations, internal controls, and auditing programs; (3) the department’s earnings; (4) the institution’s policies, 

procedures, and performance under the applicable Federal and 

State laws and regulations, general fiduciary standards and practices, written account documents and agreements, and internal 

bank policies and procedures; and (5) the policies, procedures, and 

performance of the bank’s asset management functions. Based on 

these five individual factors, an overall rating, based on a scale of 

1 to 5, is assigned to the bank’s trust and fiduciary services departments. Banks rated ‘‘3 or lower’’ are considered unsatisfactory in 

one or more areas and are subject to more frequent and extensive 

examinations until the underlying deficiencies are corrected. 

As part of the evaluation of a bank’s trust or fiduciary services 

department, trust examiners review the following trading and brokerage activities conducted in the trust or fiduciary services department:

• efforts to obtain ‘‘best execution’’ on securities trades; 

• suitability of investments in agency accounts when the bank exercises investment discretion; 

• appropriate due diligence for brokers placed on approved list, 

broker allocation guidelines, and the establishment of trading 

limits; 

• satisfactory maintenance of all trading-related records, including 

order tickets, confirmations, etc.; 

• fair allocation of securities and prices when securities are bought 

or sold in blocks, or when buy and sell orders are crossed between accounts; • timely resolution of failed trades and customer complaints; • prohibitions or limitations on personal trading by bank personnel, including procedures designed to prevent or detect inappropriate trading practices such as front running fiduciary account trades; • appropriate separation of trading activity from back room functions; and appropriate audit coverage of trading activities conducted in fiduciary accounts.

In addition, other activities, such as securities lending and the 

operation of common and collective investment funds are reviewed 

252

at each examination. At each examination, examiners identify actual and potential conflicts of interest and evaluate the bank’s 

management of such conflicts. Actual and potential conflicts involving the sale or use of proprietary products and services, such as 

proprietary mutual funds or affiliated brokerage firms, are subject 

to close scrutiny at each examination. Other specialized lines of 

business, such as employee benefit plan services or corporate trust 

services are subject to review based on both compliance with general fiduciary standards and with Federal and State laws and regulations governing those activities. 

Each Federal banking agency maintains groups of trained examination specialists in their regional offices dedicated to conducting 

reviews of trust and fiduciary services. In addition, each agency 

also maintains an examination policy manual to provide specific 

subject matter guidance to examiners.

Q.3.b. Is there any evidence that banks were abusing this exemption or that these activities posed a risk to the system?

A.3.b. The FDIC’s trust examination experience indicates that the 

securities related activities conducted by banks, including activities 

carried out within the trust or fiduciary services departments, do 

not pose a significant risk to bank customers or to the system as 

a whole. To date, examinations do not indicate any systematic 

abuse of the exemption on the part of banks. Noncompliance by 

banks with Federal and State trust laws, regulations, and fiduciary 

standards have been minor and sporadic in nature.

Q.3.c. The SEC has attempted to implement the amendments 

made to the definitions of broker and dealer by issuing its Regulation B. What is the status of Regulation B?

A.3.c. The SEC has extended the temporary exemption of banks 

from its interpretation of the definition of ‘‘broker’’ under the Securities Exchange Act of 1934, as amended by GLBA, until September 30, 2006. (Exchange Act Release No. 34–52405 (September 

9, 2005)) In this order, the SEC stated that the ‘‘Commission believes that extending the exemption from the definition of ‘‘broker’’ 

until September 30, 2006, will prevent banks and other financial 

institutions from unnecessarily incurring costs to comply with the 

statutory scheme based on the current Interim Rules . . . .’’ (id. at 

3) The SEC is considering the many comments it received from the 

banking industry, banking regulators, and Members of Congress in 

response to its Regulation B Proposal prior to any action on a final 

rule. In the interim, Federal banking agency principals and staff 

continue to discuss the issues with the SEC and its staff. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM JULIE L. WILLIAMS 

Q.1. The agencies have devoted considerable time and resources to 

developing the matrix and have sought input from consumer 

groups as well as industry representatives. As regulators you bring 

a unique perspective to the process. Based on that perspective, why 

do you feel regulatory relief is necessary now?

A.1. Unnecessary regulatory burdens increase bank costs. Bank 

customers feel the impact of these increased costs in the form of 

higher prices. In addition, bank customers may, in certain cases, 

253

1Matrix #112 also is described as proposing an increase from $250 million to $1 billion. The 

OCC does not have legislative text for #112 but the OCC also would support #112 if the language is the same as #169. 2 In addition, the law requires that an eligible institution must have a composite rating of ‘‘1’’ 

(or at least ‘‘2’’ if it is a smaller institution) and cannot currently be the subject of an enforcement action or the target of a change-in-control transaction during approximately the last year. 

feel the impact of unnecessary regulatory burdens in other ways, 

such as diminished product choices. Unnecessary burdens also can 

become an issue of competitive viability, particularly for our Nation’s community banks, and can lead to the inefficient use of 

banks’ resources. 

My testimony highlighted a number of legislative changes for 

Congress to consider to reduce unnecessary burdens on our Nation’s depository institutions. Congressional action is necessary now 

so that the impact of these unnecessary burdens can be eased for 

banks and their customers as expeditiously as possible. The more 

quickly Congress acts, the more quickly the banks and their customers can realize the benefits of eliminating unnecessary burdens.

Q.2. We have received several proposals designed to give regulators 

additional flexibility in conducting examinations (#42, 68, 112, and 

169). Do these types of proposals pose a safety and soundness concern?

A.2. The matrix items that you have listed approach this issue in 

different ways. The OCC supports matrix #169 that would amend 

the Federal Deposit Insurance Act to increase the small bank 

threshold from $250 million to $1 billion so that more small banks 

may qualify to be examined on an 18-month rather than an annual 

cycle.1 Under current law, insured depository institutions with total assets of $250 million or less that are well-capitalized, and, 

as of the most recent examination, are well-managed may be examined on an 18-month cycle, rather than an annual cycle, in a fullscope, on-site examination.2 Matrix #169 would change only the 

asset threshold and would not change any of the other requirements in the law. 

For national banks, increasing this threshold to $1 billion would 

mean that approximately 340 more national banks may qualify for 

the 18-month cycle. Today, approximately 58 percent of all national 

banks are eligible for the 18-month cycle but, if the law were 

amended to raise the threshold to $1 billion, approximately 76 percent of all national banks could qualify. This change would ease the 

examination burden and associated costs for a meaningful number 

of qualifying national banks. 

Matrix #169 does not raise safety and soundness concerns for national banks. Only the top-rated banks would be eligible for the extended cycle, and the Federal banking agencies would continue 

their active off-site monitoring oversight of these banks, as well as 

retaining their authority to accelerate the timing of an on-site examination if warranted. The 12- and 18-month examination cycles 

are maximum time periods during which an on-site examination 

must be conducted but there is nothing that limits a Federal banking agency’s discretion to conduct an examination more frequently 

if necessary.

Q.3.a. Prior to the Gramm-Leach-Bliley Act, banks engaging in traditional banking services such as trust and fiduciary activities were 

254

3See comment letters to the SEC from the Board of Governors of the Federal Reserve System, 

Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, dated 

June 29, 2001 and October 8, 2004. 

exempt from the definitions of broker and dealer under the Securities Exchange Act of 1934. What protections were in place prior to 

the Gramm-Leach-Bliley Act to ensure that these activities were 

conducted in an appropriate manner?

A.3.a. Trust and fiduciary services are core banking functions and 

ones that banks were authorized to conduct well before the enactment of the Gramm-Leach-Bliley Act (GLB Act) and even well before the enactment of the Securities Exchange Act of 1934. Banks 

provide securities transaction services as an integral part of their 

trust, fiduciary, custodial, and other bank functions and have done 

so throughout the years without raising significant investor protection-related concerns. The trust and fiduciary services that banks 

provide their customers are governed by well-developed principles 

of trust and fiduciary laws. In addition, these activities are supervised by the appropriate banking authorities. Together, the existing 

laws and principles, and regular banking agency examinations 

have effectively protected trust and fiduciary customers of banks 

from abusive practices for the considerable period prior to passage 

of the GLB Act, and the 6 years since its passage. Attached is a 

more complete description of the OCC’s supervision of national 

banks’ trust, fiduciary, custodial, and safekeeping activities.

Q.3.b. Is there any evidence that banks were abusing this exemption or that these activities posed a risk to the system?

A.3.b. The OCC is not aware of any evidence of significant abuses 

by the banking industry in its long history of providing securities 

services under the pre-GLB Act brokerage exemption. Similarly, we 

are not aware of evidence that banks conducted their securities-related services for their customers under the brokerage exemption 

in a manner that posed a risk to the banking system. Banks have 

provided the services covered by the exemption for decades prior to 

the enactment of the GLB Act, and for the 6 years since its passage, under the effective supervision of bank regulators and without creating any significant securities-related concerns.

Q.3.c. The SEC has attempted to implement the amendments 

made to the definitions of broker and dealer by issuing its Regulation B. What is the status of this regulation?

A.3.c. The SEC has adopted rules implementing the definition of 

‘‘dealer’’ under the GLB Act and these rules became effective on October 1, 2003. The SEC also has twice proposed rules to implement 

the definition of ‘‘broker’’ under the GLB Act. The OCC, the Board 

of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation provided the SEC with detailed comments each time.3 We urged the SEC to take a fundamentally different approach to make its rules comport with the language and 

purpose of the ‘‘broker’’ exceptions adopted by Congress in the GLB 

Act. The agencies contended that the new definition of ‘‘broker’’ 

should not result in disrupting recognized banking activities that 

banks have successfully provided to their customers for decades. 

Proper implementation of the GLB Act’s ‘‘broker’’ exceptions is 

255

critically important to ensuring that banks may continue to provide 

their customers with traditional banking services. The banking 

agencies remain committed to working with the SEC to successfully implement the important ‘‘broker’’ exceptions for banks and 

are engaged in discussions with the SEC to try to identify new approaches. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM JoANN M. JOHNSON 

Q.1. The Agencies have devoted considerable time and resources to 

developing the matrix and have sought input from consumer 

groups as well as industry representatives. As regulators you bring 

a unique perspective to the process. Based on that perspective, why 

do you feel regulatory relief is necessary now?

A.1. The National Credit Union Administration (NCUA) charters 

and supervises Federal credit unions and insures savings in Federal and most State-chartered credit unions across the country 

through the National Credit Union Share Insurance Fund 

(NCUSIF). It is the responsibility of NCUA to ensure the safety 

and soundness of federally insured credit unions. As a regulator, it 

is essential that we are able to recognize and adapt to the everchanging financial marketplace in which our regulated institutions 

operate. 

The credit union industry is a closely regulated sector of the financial services industry. Capital ratios have remained consistently high and the institutions are conservatively run in a not-forprofit manner. These factors, combined with the fact that many of 

the statutory provisions currently in effect for credit unions were 

part of the original 1934 Federal Credit Union Act, strongly suggest that legislation eliminating or updating elements of that statute is entirely appropriate. NCUA supports legislative changes that 

would create a more practical and flexible system for prompt corrective action, allow credit unions to better serve small businesses, 

and update rules regarding healthy credit union mergers, and modernize investment powers and operational authorities that credit 

unions exercise. 

Regulatory relief measures being considered by the House and 

Senate would provide a tangible benefit to America’s consumers by 

giving them access to more modern, up-to-date, and efficient financial institutions. Equally important, an overall improvement in regulatory efficiency would be achieved by removing outmoded, duplicative, and unnecessary regulations while maintaining a focus on 

the primary safety and soundness responsibility that Congress has 

conferred on the NCUA. By implementing regulatory relief measures that promote safety and soundness and provide consumer protection, regulatory relief will empower NCUA to ensure that America’s credit unions operate efficiently, effectively, and competitively 

in the interest of all consumers.

Q.2. We have received several proposals designed to give regulators 

additional flexibility in conducting examinations (#42, 68, 112, and 

169). Do these types of proposals pose a safety and soundness concern?

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A.2. NCUA currently operates under a policy similar to Proposal 

#42 for the Federal banking agencies, therefore the aforementioned 

proposals do not apply to NCUA. Accordingly, NCUA has no formal 

position regarding any of these proposals. 

NCUA’s flexible examination and supervision scheduling program was implemented in January 2002 to coincide with a major 

revision to the agency’s examination program that focuses on risk 

rather than standardized parameters. NCUA also implemented 

quarterly Call Reports for all credit unions to enhance our remote 

monitoring capabilities. 

NCUA refers to its flexible scheduling program as risk-based 

scheduling because we schedule examinations of Federal credit 

unions based on an annual risk assessment. Institutions deemed 

low risk are eligible for having an examination completed on an interval spanning from 12 to 24 months with a target completion frequency of 18 months. Institutions not eligible for the program are 

examined annually. The examination cycle for federally insured 

State-chartered credit unions is determined by the individual State 

regulators. 

The following criteria are used to determine if a Federal credit 

union is eligible for risk-based scheduling:

• Has been assigned a composite CAMEL Code 1 or 2 in the two 

most recent examinations; 

• Has been in operations for at least 10 years; 

• Is classified as ‘‘well-capitalized’’ under Prompt Corrective Action 

(PCA); 

• Has a positive return on average assets; 

• Is not operating under an informal or formal enforcement action—for example: Preliminary warning letter, letter of understanding and agreement, cease and desist order, and PCA directives; and 

• Has no material compliance or safety and soundness weaknesses.

NCUA is committed to the concept of focusing resources based on 

risk. Since the start of our risk-based scheduling program, we have 

implemented many changes to our examination and supervision 

program to ensure its long-term success. An example of the benefits of our risk-based scheduling program was the ability to quickly 

free resources to address the affects of Hurricane Katrina. By shifting the examination dates for low-risk institutions scheduled for 

examination in the fall of 2005, NCUA made resources available to 

address the affects of the storm without exposing the NCUSIF to 

additional risk.

Q.3.a. Prior to the Gramm-Leach-Bliley Act, banks engaging in traditional banking services such as trust and fiduciary activities were 

exempt from the definitions of broker and dealer under the Securities Exchange Act of 1934. What protections were in place prior to 

the Gramm-Leach-Bliley Act to ensure that these activities were 

conducted in an appropriate manner?

A.3.a. As you know, the definition of broker and dealer did not 

apply to banks prior to the passage of the Gramm-Leach-Bliley Act 

(GLBA) due to a blanket exemption for ‘‘banks’’ from the Securities 

Exchange Act (SEA) of 1934. The GLBA replaced the blanket exVerDate 0ct 09 2002 20:07 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00264 Fmt 6602 Sfmt 6602 S:\DOCS\37514.TXT SBANK4 PsN: KEVIN
257

emption with certain functional exemptions based on traditional 

banking services, including an exemption for trust activities. 

The Security Exchange Commission (SEC) does not consider 

credit unions or mutual savings banks (thrifts) to fall within the 

definition of ‘‘bank’’ for purposes of the banking exemptions to the 

Securities and Exchange Act of 1934. Therefore previous to GLBA 

credit unions were not exempt from the SEA of 1934. Even if the 

pre-GLBA blanket exemption had been available to credit unions, 

Federal credit unions do not have general trust powers and could 

not have taken advantage of the exemption for that purpose. 

In 2001, subsequent to the passage of GLBA and the creation of 

functional exemptions for certain specified banking activities, the 

SEC issued an interim final rule granting thrifts the same functional exemptions available to banks. In the preamble to its rule, 

the SEC asked if these exemptions ‘‘should be extended to any 

other entities.’’ The NCUA informed the SEC that credit unions 

should have the same functional exemptions from the SEA (and the 

associated SEC regulation and oversight) as banks and thrifts. The 

NCUA gave several reasons, including:

• In credit unions, the members are both the owners and the customers. This structure aligns the interests of the credit union 

management with those of the members and so reduces the potential for securities fraud and abuse of members and the associated need for SEC oversight. 

• NCUA and State regulators provide intensive supervision of 

credit union activities and therefore add an additional layer of 

protection for the members.

Q.3.b. Is there any evidence that banks were abusing this exemption or that these activities posed a risk to the system?

A.3.b. The NCUA is not aware of any evidence of banks abusing 

the exemption to the Security Exchange Act of 1934.

Q.3.c. The SEC has attempted to implement the amendments 

made to the definitions of broker and dealer by issuing its Regulation B. What is the status of Regulation B?

A.3.c. In June 2004, the Security Exchange Commission (SEC) 

issued the proposal for Regulation B. The proposal would exempt 

credit unions from the definition of ‘‘broker’’ for third party networking arrangements and sweep account arrangements and the 

definition of ‘‘dealer’’ for certain investment, trustee, and fiduciary 

arrangements. NCUA is not aware of when the SEC will issue the 

final version of Regulation B. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM LINDA JEKEL 

Q.1. Why is regulatory relief necessary now?

A.1. Regulatory relief for State-chartered credit unions and their 

regulators will ensure the continued safety and soundness of the 

State credit union system. It allows State credit unions to survive 

and prosper in today’s ever-changing financial marketplace. State 

credit unions provide consumers’ access to a viable alternative financial services provider. 

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Capital Reform 

As we expressed in our testimony, capital reform is necessary in 

three primary areas to ensure the continued safety and soundness 

of State credit unions. Without reform, credit union regulators lose 

an important tool to address troubled credit unions. I am specifically referring to the unintended consequences of the FASB Standard No. 141. These amendments to business combination accounting rules make mergers unattractive for credit unions, even when 

a State credit union regulator believes a merger would be the best 

option to protect members’ funds. 

In addition, NASCUS supports providing credit unions access to 

risk-based capital. Risk-based capital enables financial institutions 

to measure capital adequacy and to avoid additional risk on their 

balance sheets. The system recognizes a one-size-fits-all capital system does not work. A risk-based capital system acknowledges the 

diversity and complexity in a financial institution’s balance sheet. 

Credit unions are the only insured depository institution not allowed access to risk-based capital. 

Further, NASCUS believes credit unions should have access to 

alternative capital. This is especially true for credit unions striving 

to meet members’ changing needs. The NASCUS White Paper, provided with our written testimony, details why alternative capital 

makes business sense and provides enhanced safety and soundness 

for our Nation’s credit union system. 

Additional Reforms 

Additional reforms other than capital are necessary to further 

safety and soundness among State credit unions. NASCUS believes 

the National Credit Union Administration (NCUA). the Federal 

regulator and Federal credit union insurer, should include a Board 

Member with State credit union regulatory experience. We also believe privately insured credit unions should have access to the Federal Home Loan Bank (FHLB) system. Moreover, credit unions 

would be better equipped to serve their members needs if regulatory relief was provided to expand member business lending. 

Improving Marketplace Viability 

Regulatory relief would enhance the capabilities of State-chartered credit unions. Reform enables State credit unions to maintain 

viability in an increasingly competitive marketplace. It also allows 

them to provide expanded product and service offerings to better 

serve consumer members in their field of membership. Additionally, some regulatory relief proposals protect the credit union dualchartering system, supporting the importance of charter choice and 

the ability of State and Federal regulators to innovate and promote 

efficiency. This provides for a continued, robust dual-chartering 

system. 

As a regulator, I believe we should have reform that allows for 

stronger and safer State credit unions. The regulatory relief provisions for State credit unions that I mention above are logical and 

prudent from a regulatory perspective and allows for increased 

safety and soundness. These provisions are outlined in the regulatory relief matrix and were presented in our testimony.

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Q.2. We have received several proposals designed to give regulators 

additional flexibility in conducting examinations (#42, 68, 112, and 

169). Do these types of proposals pose a safety and soundness concern?

A.2. These provisions do not impact State credit union regulators; 

therefore, NASCUS has no position.

Q.3. Prior to the Gramm-Leach-Bliley Act, banks engaging in traditional banking services such as trust and fiduciary activities were 

exempt from the definitions of broker and dealer under the Securities Exchange Act of 1934. What protections were in place prior to 

the Gramm-Leach-Bliley Act to ensure that these activities were 

conducted in an appropriate in manner? Is there any evidence that 

banks were abusing this exemption or that these activities posed 

a risk to the system? The SEC has attempted to implement the 

amendments made to the definitions of broker and dealer by 

issuing its Regulation B. What is the status of Regulation B?

A.3. NASCUS has no opinion about Parts A and B because they 

are not applicable to State-chartered credit union regulators. We 

support the exemptions that Regulation B provides to State-chartered credit unions engaging in limited securities activities that are 

conducted under the terms applicable to certain bank exceptions 

from the definitions of ‘‘broker’’ and ‘‘dealer.’’ This provides federally insured credit unions parity treatment with commercial banks 

of registration exemptions granted from the Securities and Exchange Commission (SEC). 

In September 2005, the SEC postponed a Regulation B compliance date for banks on broker registration until September 30, 

2006. The Commission released a statement that it did not expect 

banks to comply until it implemented systems to ensure compliance 

with the new statutory requirements concerning the definition 

‘‘broker.’’ NASCUS believes regulatory relief is necessary with regard to SEC broker/dealer registration. The proposed regulation 

contains an exemption for credit unions from the definition of dealer. It permits credit unions to buy and sell securities for investment purposes for themselves, or for accounts for which they act 

as trustee or fiduciary under the terms of the bank exception in 

Exchange Act Section 3(a)(5)(C)(ii). This exemption is also not effective until the SEC issues its final rulemaking on Regulation B. 

Thank you for asking NASCUS to provide additional comments 

on regulatory relief. I am always available to further explain why 

regulatory relief is necessary for State credit union regulators and 

to answer questions the Committee may have. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM BRADLEY E. ROCK 

Q.1. It has been nearly 2 years since we first held a hearing on regulatory relief. In this time, has the overall regulatory environment 

changed for banks, thrifts, and credit unions? If so, have these 

changes increased the need for regulatory relief?

A.1. Yes, the overall regulatory burden for banks has increased in 

the last few years and there is an immediate need for Congress to 

enact regulatory relief legislation. 

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Regulatory Burdens Have Increased 

Banks are struggling under the weight of increasing levels of regulatory burdens, many of which do not serve the objective of making the Nation’s banks operate more soundly or to provide meaningful protections to consumers. These regulatory burdens raise the 

cost to banks and, consequently, place an unnecessary strain upon 

banks’ abilities to efficiently serve their customers. 

It is clear that legislation enacted within the last few years has 

significantly increased the regulatory burden on the financial services industry. For example, the USA PATRIOT Act, the SarbanesOxley Act, and the Gramm-Leach-Bliley Act are all valuable pieces 

of legislation that strive to serve the public interest. However, overly complex or redundant compliance requirements render these 

laws far less effective than they would be otherwise. 

Banks, particularly community banks, are strained to the breaking point under the weight of thousands of pages of regulation, 

guidance, and other mandates. When the cumbersome layering of 

additional requirements, issued by the Securities and Exchange 

Commission (SEC), the Financial Accounting Standards Board 

(FASB), the Public Company Accounting Oversight Board 

(PCAOB), the American Institute of Certified Public Accountants 

(AICPA), and the Internal Revenue Service (IRS) are also taken 

into account, it is abundantly clear that bank resources are being 

stretched too thin. 

For the typical small bank, about $1 out of every $4 of operating 

expense goes to pay the costs of government regulation. For large 

banks as a group, total compliance costs run into the billions of dollars annually. 

The cumulative effect of new rules and regulations is already 

leading many community banks to look for merger partners to help 

spread the costs. Some community banks will go out of business altogether or consolidate with larger banks—a trend that it already 

underway. Our members routinely mention regulatory burden as 

the first or second critical factor threatening the viability of their 

community banks. The pressures to comply with all the regulations 

and still meet the demands of our customers are enormous. We feel 

that we must grow the bank rapidly to generate more revenues 

simply to pay for the ever-increasing regulatory cost. The sad part 

is that too much time and effort is now devoted to compliance and 

not to serving our customers. Bankers at all levels, from bank directors and CEO’s to compliance managers and tellers, spend endless hours on compliance paperwork. Because of the complexities 

involved, my bank pays more than $100,000 each year to outside 

firms to help us with the big compliance issues. On top of this, one 

person on my staff has a full-time job just to coordinate all the activities throughout the bank related to regulatory compliance. I 

personally spend about one-and-a-half days per week just on compliance issues. Some CEO’s tell me that they are now spending 

nearly half of their time on regulatory issues. In addition, banks 

spend billions annually on compliance training, outside compliance 

support (including accounting firms, consultants, and attorneys), 

compliance related hardware and software, printing, postage, and 

telephone connections. 

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Eliminating CTR’s for ‘‘Seasoned Customers’’ Will Help 

You asked if changes over the years have increased the need for 

regulatory relief. The answer from the banking industry is an unequivocal ‘‘Yes!’’ In my written testimony, I mentioned several 

things that the Committee could include in regulatory relief legislation that would provide real, cost-savings benefits to banks across 

the Nation. However, in this response I would like to focus on the 

provision eliminating needless Currency Transaction Reports 

(CTR’s) for ‘‘seasoned customers’’ that was included in regulatory 

relief legislation (H.R. 3505) passed by the House on March 8 that 

received very strong bi-partisan support. 

ABA and its members strongly believe that the current cash 

transaction reporting program has been rendered virtually obsolete 

by several developments: Enhanced customer identification programs, more robust suspicious activity reporting, and the use of the 

more focused and intensive 314(a) inquiry/response process. We believe that the current CTR screen at the current level generates too 

many reports that capture extensive immaterial activity wasting 

law enforcement time and resources that could be spent more effectively on detection and investigation of criminal and terrorist activity. 

In fact, as published in the U.S. Money Laundering Threat Assessment released earlier this year, the number of CTR’s filed on 

an annual basis now tops 13.1 million with no signs of abating. 

Even at FinCEN’s conservative estimate of around 25 minutes per 

report for filing and recordkeeping, it means that the banking industry as a whole devoted around 51⁄2 million staff hours of work 

to handling CTR’s in 2005. Based on our recent survey, the industry paid around $187 million in wages for this staff time. 

Based on that same survey, three-quarters of the filings were for 

business customers who had been with the bank for over a year. 

That means that the industry spent around four million staff hours 

and over $140 million last year filing notices on well-established 

customers! 

A typical bank with $2 billion of assets filed 1,400 CTR’s in 2005. 

The filings took 583 staff-hours. And 438 of the staff-hours were 

simply to report on long-standing customers. This trend is only 

likely to accelerate and demand more and more staff to report on 

more and more transactions further burying the real needles of 

money laundering under an exponentially growing mound of the 

hay of legitimate business transactions mindlessly recorded at 

great expense and increasing opportunity cost. 

To continue to require CTR filings for business customers whose 

identity has been verified under a bank’s Customer Identification 

Program (CIP) and tested under a period of experience with the 

bank and that remain subject to risk-based suspicious activity reporting is an inefficient use of resources by bankers and law enforcement. It also diverts scarce examiner resources by focusing on 

compliance with technical reporting standards, rather than evaluating bank internal controls for detecting transactions that possess 

a likelihood of involving money laundering and terrorist financing. 

Accordingly, we believe that the best way to improve the utility of 

cash transaction reporting is to eliminate the routine reports being 

filed on legitimate American businessmen and businesswomen. This 

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can be achieved by establishing a seasoned customer exemption for 

business entities, including sole proprietorships, as endorsed by 

FinCEN last year in testimony before Congress. 

It is important to remember that cash transaction data will not 

be lost, but rather will continue to reside in the normal bank account data for each seasoned customer. It will, therefore, be available to law enforcement whenever sought in connection with an inquiry from government enforcement entities. In particular, by 

using the USA PATRIOT Act 314(a) inquiry process, law enforcement will be able to obtain information in far greater detail on the 

accounts of suspects. Of course, all seasoned business customers 

would continue to be subject to suspicious activity monitoring and 

reporting, thereby alerting law enforcement to the kind of conduct 

that has been investigated and affirmatively considered as having 

a heightened potential for being illegal. 

Eliminating CTR filings for seasoned customers would have the 

following benefits:

• The vast majority of the over 13 million CTR’s filed annually 

would stop, saving many hours a year in filling out forms and 

law enforcement resources devoted to processing them. 

• There would be an improvement in the quality of SAR’s, eliminating those that are filed on routine, legitimate cash transactions that approach but do not reach current CTR levels. 

Banks would be able to focus their energies on detecting genuinely suspicious handling of currency regardless of artificial 

thresholds. 

• We would make an enormous stride forward in focusing our antimoney laundering efforts—by both law enforcement and the 

banking industry—on the real crooks and terrorists with far 

greater likelihood of detecting and stopping their activities.

The redundancy of CTR filings for seasoned customers with 

transaction accounts and the need to eliminate this inefficient use 

of resources by bankers and law enforcement was echoed by the Financial Crimes Enforcement Network (FinCEN) and all the bank 

regulators in Congressional testimony over the last year. 

ABA has worked cooperatively with FinCEN and the Federal 

banking regulators to encourage institutions to make better use of 

statutory exemptions when they were changed in the late 1990’s. 

Our Association did extensive outreach to our members, and while 

many institutions adjusted their CTR filing policies and utilized 

the two-tier exemption process, the general response was lukewarm 

at best. 

Unfortunately, the compliance technicalities for, and examiner 

second-guessing of, banker use of the exemption and the renewal 

processes have discouraged many institutions from utilizing the 

tier-two exemptions. ABA has even received reports from members 

that examiners have threatened penalties and other formal criticisms for simple late filing of biennial renewal forms, a regulatory 

climate that demands overhaul. We do not believe that improvements to this process will make a significant dent in the overwhelming number of CTR’s filed each year that do little more than 

record the legal transactions of law-abiding citizens, thereby drawing attention and resources away from the effort to catch and stop 

263

criminal activity. Consequently, in adopting a seasoned customer 

exemption, we must ensure that the regulatory process and requirements that follow do not frustrate the goal of reducing unnecessary CTR filing. 

We commend Chairman Shelby for his commitment to regulatory 

relief and we strongly urge that every thing possible be done to report a strong regulatory relief package out of the Committee as soon 

as possible so that it can be passed by the Senate and enacted into 

law this year.

Q.2. The Federal Reserve recently announced it would increase the 

threshold from $150 to $500 million for its Small Bank Holding 

Company Policy Statement. This would allow more entities to qualify as small bank holding companies which, in turn, would permit 

them to use higher levels of debt to finance acquisitions. The Federal Reserve has specifically rejected raising the threshold to $1 

billion. Is the Federal Reserve’s threshold appropriate?

A.2. The ABA supports raising the threshold to $1 billion in assets. 

The ABA welcomed the Federal Reserve Board’s decision to raise 

the limit to $500 million, but there are strong arguments for it to 

go further and it would not have been inappropriate for the Board 

to have raised the limit to $1 billion. Moreover, the Board added 

several restrictions that could lessen the positive impact of raising 

the threshold. 

The Board, the Office of the Comptroller of the Currency (OCC), 

the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation (FDIC) generally set the dividing line between 

supervision of large, complex institutions and small institutions at 

$1 billion. For example, the Board, OCC, OTS, and FDIC recently 

increased the definition of a small bank to $1 billion in assets 

under CRA. The OCC divides bank supervision into two groups: 

Community banks and large banks. A community bank is a national bank with total assets less than $1 billion or a national bank 

that is part of a multibank holding company where none of the national banks within the system has assets of $1 billion or more. 

Clearly, it would not have been inappropriate for the Board to follow-suit and raise the threshold for eligibility for the Small Bank 

Holding Company Policy Statement to $1 billion. 

Moreover, the ABA is very concerned about the additional restrictions that the Board added to determine eligibility for the 

Small BHC Policy Statement. As we wrote in our comment letter, 

the Board’s new restrictions are that the BHC:

• is not engaged in significant nonbanking activities, either directly or through a nonbank subsidiary; 

• does not conduct significant off-balance sheet activities, including 

securitizations or managing or administering assets for third 

parties, either directly or through a nonbank subsidiary; or 

• does not have a material amount of debt or equity securities 

(other than trust preferred securities) outstanding that are registered with the Securities and Exchange Commission.

Additionally, the Board proposes to require that trust preferred 

securities be treated as debt under most of the requirements of the 

Policy Statement. 

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ABA believes that two of these restrictions are unnecessarily applied to activities that should NOT preclude use of the Small BHC 

Policy Statement. The first restriction on not being engaged in significant nonbanking activities appears to prevent small BHC’s with 

insurance agency subsidiaries from qualifying. We strongly believe 

that this is unnecessary. As we said in our comment letter:

We have heard from several members that they are concerned that the bank’s affiliated insurance agency, a purely agency activity, may generate significant revenue 

to the holding company that could be interpreted by the Board’s staff as a ‘‘significant nonbanking activity.’’ We believe that the Board should provide that purely 

agency nonbanking activities should not be deemed to be a disqualifying significant 

activity.

The Board writes that the reason for these changes is the increased authority for 

bank holding companies to engage in new activities that may pose significant operational risk, even though the activity is not significantly leveraged. . . . While we 

understand and agree with the Board’s intentions, we believe that the actual formulation of the condition will disqualify some community BHC’s that in fact have significant nonbanking activities but which activities do not pose significant operational 

risks, such as with an insurance agency.

ABA notes that by law a State nonmember bank may not engage in any activity 

not allowed for a national bank unless the Federal Deposit Insurance Corporation 

(FDIC) has determined that the activity does not pose a significant risk to the insurance funds. The FDIC has regulations imposing these limits on activities of State 

banks (Part 362 of the FDIC’s regulations), but the FDIC exempts activities conducted by the bank as agent. ABA urges the Board to make a similar exception in 

its conditions for such agency activities. At a minimum, ABA urges the Board to except purely insurance agency activity from being considered a significant activity 

that would bar use of the Policy Statement. 

[Emphasis added.]

The second restriction also unnecessarily prevents some small 

BHC’s from qualifying for the Policy Statement by the way it applies to trust assets. As we said in our comment letter:

ABA members have asked whether this would include assets of the bank’s trust 

department, a traditional banking activity. ABA staff have consulted with Board 

staff and have been told that assets under management in a trust department of 

the bank would not be directly managed by the BHC and would, since in the bank’s 

trust department, not be through a nonbank subsidiary. . . . However, ABA is still 

concerned that a small BHC might own a separately chartered trust company that 

does not take deposits. Under the Bank Holding Company Act, a ‘‘bank’’ does not 

include such an institution that functions solely in a trust or fiduciary capacity. 

Such a trust company might hold sufficient assets so as to be a significant off-balance sheet activity, yet it could pose no significant operational risk. The Board apparently does not provide for any mechanism for a small BHC to request that it be 

allowed to use the Policy Statement if it can show that, while it does not meet the 

conditions of the Policy Statement, nonetheless, the significant nonbank activities 

it conducts do not pose any significant operational risk. ABA recommends that the 

Board add a provision allowing a BHC to request such a determination from the 

appropriate Federal Reserve District Bank. If the Federal Reserve District Bank’s 

supervisory determination is that the nonbank activity did not pose significant operational risk, then the BHC would qualify for use of the Policy Statement.

Unfortunately, the Board’s final revision to the Policy Statement 

adopted neither of these recommendations, although the Board did 

state that: ‘‘In the Board’s view, differing levels of risk in varying 

business lines and practices among institutions precludes the use 

of fixed measurable parameters of significance or materiality across 

all institutions. For this reason, the rule provides the Federal Reserve with supervisory flexibility in determining, on a case-by-case 

basis, the significance or materiality of activities or securities outstanding such that the BHC should be excluded from the Policy 

Statement and subject to the Capital Guidelines.’’ This suggests 

that purely agency or separate trust company activities will have 

265

a higher threshold before the Board will treat them as so ‘‘significant’’ as to disqualify a small BHC from using the Policy Statement. However, ABA believes that it would be better if the Board 

explicitly excluded these activities from consideration toward the 

‘‘significant’’ threshold. 

We note that the House passed regulatory relief legislation 

(H.R. 3505) by a strong 415–2 vote on March 3, 2006. Section 616 

of the House bill raises eligibility for the Small Bank Holding Company Policy Statement to $1 billion in assets. For the above reasons, the ABA urges the Committee to include a similar provision 

in its regulatory relief legislation.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM H. GREG McCLELLAN 

Q.1. It has been nearly 2 years since we first held a hearing on regulatory relief. In this time, has the overall regulatory environment 

changed for banks, thrifts, and credit unions? If so, have these 

changes increased the need for regulatory relief?

A.1. Yes, the environment has changed for credit unions, creating 

an even greater need for regulatory relief. We now have nearly 8 

years of experience under the prompt corrective action (PCA) system Congress established under the Credit Union Membership Access Act in 1998, and both credit unions and the regulator, NCUA, 

recognize that the current system does not work, because it does 

not take into account the risk assets of a credit union. It simply 

does not make sense that the current capital system treats a new 

1 year unsecured $10,000 loan the same as a 30-year mortgage 

that is on its last year of repayment. 

Additionally, as described in my testimony, the Financial Accounting Standards Board (FASB) has now moved forward with 

changing how mergers of mutual institutions (such as credit 

unions) are accounted for—from the ‘‘pooling method’’ to the ‘‘purchase method.’’ This necessitates a change in the definition of ‘‘net 

worth’’ for PCA purposes for credit unions, otherwise those institutions that merge after the FASB rule change will potentially face 

unintended consequences. Even FASB itself has noted the need for 

such a change to the Federal Credit Union Act.

Credit unions must also provide their members with annual privacy notices, even if their privacy policy has not changed. Furthermore, credit unions have seen an increased regulatory burden from 

Bank Secrecy Act and USA PATRIOT Act compliance in recent 

years as they tackle their role in the war on terror and in making 

this country safer.

Q.2. The Federal Reserve recently announced it would increase the 

threshold from $150 million to $500 million for its Small Bank 

Holding Company Policy Statement. This would allow more entities 

to qualify as small bank holding companies which, in turn, would 

permit them to use higher levels of debt to finance acquisitions. 

The Federal Reserve has specifically rejected raising the threshold 

to $1 billion. Is the Federal Reserve’s threshold appropriate?

A.2. NAFCU does not have position on the threshold at this time 

and will reserve our comments on this matter. 

266

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM STEVE BARTLETT 

Q.1. It has been nearly 2 years since we first held a hearing on regulatory relief In this time, has the overall regulatory environment 

changed for banks, thrifts, and credit unions? If so, have these 

changes increased the need for regulatory relief?

A.1. On question number one, there has been a change in the overall regulatory environment and these changes have increased the 

need for regulatory relief, the time to enact regulatory relief is now. 

We should recognize that Congressional action in this area is needed to help streamline the regulatory burden on U.S. companies for 

the following reasons: 

During this 2-year period the regulatory landscape changed for 

the worse; moreover, many Roundtable companies believe that the 

current regulatory and enforcement environment is having a negative impact on the economy. For example, financial institutions are 

currently inundated with reporting requirements and compliance 

burdens associated with the USA PATRIOT Act, Sarbanes-Oxley 

Act, Home Mortgage Disclosure Act, the privacy provisions of the 

Gramm-Leach-Bliley Act, and State insurance laws. Additionally, 

the new Basel II Capital Accord will place additional stress on compliance departments and risk mangers. 

The costs associated with these regulations are staggering. A 

July 2004 survey by Financial Executives International showed 

that complying with Section 404 will cost public companies 62 percent more than previously estimated. The cost of compliance is estimated at $3.14 million per company with a total estimated cost of 

$5.8 billion in 2005. This could have an adverse impact on the 

economy, including forcing companies to go private to avoid compliance burdens or companies passing on these costs to the consumer. 

In addition to reporting requirements, regulatory supervision and 

enforcement of the regulations have become more vigorous and created unreasonable expectations for depository institutions. The actions being brought against companies by the SEC, State attorneys 

general, and U.S. Department of Justice, have amounted to regulation by enforcement. 

Also, many disturbing trends have arisen surrounding the enforcement of the Bank Secrecy Act and other Anti-Money Laundering (AML) laws. The best evidence of this is the dramatic increase in Suspicious Activity Reports (SAR) filings in recent years. 

For example, since 1996, national SAR reporting has increased 453 

percent. Similarly, FinCEN reported 81,197 filings in 1997 versus 

288,343 filings in 2003. In 2004, depository institutions had filed 

a total of 689,419 SAR’s, and the total number of SAR filings is 

projected to be around 900,000 for 2005. 

There are several reasons for this dramatic increase in SAR filings. First, the failure to file SAR’s has become a criminal issue; 

second, there are no clear standards for when SAR’s should be 

filed; and third, Roundtable member companies have encountered 

a ‘‘zero tolerance’’ policy among the Federal financial regulatory 

agencies. Under this policy, institutions are held accountable for 

every single transaction. Finally, there is a lack of coordination 

among the various agencies and examiners responsible for SAR filings. 

267

1 12 CFR § 7.4007 (deposit taking), 7.4008 (non-mortgage lending), 7.4009 (business of banking 

generally), 34.3 (mortgage lending), 34.4 (mortgage lending), see 69 Fed. Reg. 1904 (Jan. 13, 

2004). 2This preemption of State laws applicable to national banks follows a similar preemption by 

the Office of Thrift Supervision for thrifts, albeit with more legal justification than OCC’s. 12 

CFR § 560.2. 

The Roundtable has a solution to the defensive SAR issue: The 

Senate, where appropriate, should review the AML guidelines and 

include the good faith guidance as a provision in its legislation. The 

guidance has already been approved by the banking regulators, but 

it is not enforceable (because it has not been codified into a formal 

regulation); should include in the Senate legislation the House provision providing an exemption for financial institutions’ to file a 

Currency Transaction Report (CTR) for seasoned customers. Another solution is to help law enforcement receive more useful information, by reducing CTR filings, is to make the exemption automatic after an institution designates the customer to be ‘‘seasoned.’’

Q.2. The Federal Reserve recently announced it would increase the threshold from $150 million to $500 million for its Small Bank 

Holding Company Policy Statement. This would allow more entities 

to qualify as small bank holding companies which, in turn, would 

permit them to use higher levels of debt to finance acquisitions. 

The Federal Reserve has specifically rejected raising the threshold 

to $1 billion. Is the Federal Reserve’s threshold appropriate?

A.2. With respect to question number two, as you know, the Fed- eral Reserve recently raised the proposed threshold to $500 million 

and the issue now is whether the request to increase the threshold 

again to $1 billion is appropriate? The Roundtable supports raising 

the proposed threshold for Small Bank Holding Company for the 

following reasons. The new threshold increase would allow smaller 

institutions to take on more debt through acquisition because of an 

increase in the debt-to-equity ratio for Bank Holding Companies 

(BHC). There may be merit in the argument that smaller institutions have less access to the capital markets, so they need support 

of this proacquisition provision. Moreover, under BHC rules this 

new provision may provide a more streamline way of disclosing financial information which is truly a regulatory reduction burden. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM MARGOT SAUNDERS 

Q.1. It has been nearly 2 years since we first held a hearing on regulatory relief. In this time, has the overall regulatory environment 

changed for banks, thrifts, and credit unions? If so, have these 

changes increased the need for regulatory relief?

A.1. In the past 2 years, there has been an ongoing reduction in 

the consumer protections applicable to transactions with banks, 

thrifts, and credit unions. In 2004, the OCC adopted four broad 

regulations that purport to preempt State laws in the areas of deposit-taking, non-mortgage lending, mortgage lending and generally, the business of banking.1 Essentially the agency stated that 

no State law applies to national banks, unless the particular State 

law has only an ‘‘incidental’’ effect on the business of banking.2

The unwarranted preemption of State consumer protections for 

transactions with national banks, and their operating subsidiaries 

268

3For a long list of cases brought against national banks and their operation subsidiaries regarding predatory lending activities, see Comments: To the Office of the Comptroller of the Currency regarding Banking Activities and Operations; Real Estate Lending and Appraisals, Docket 

No. 03–16, October 2003, http://www.consumerlaw.org/actionlagenda/preemption/10l6l occ.shtml.

has significantly exacerbated efforts to address predatory lending. 

State laws have traditionally provided the most effective remedies 

against overreaching, and all too often, national banks and their 

operating subsidiaries are involved in predatory lending activities.3

There are fewer consumer protection laws applicable to banks 

and thrifts, and consumers are suffering as a result. Now is not the 

time to further reduce consumer protections through regulatory relief.

Q.2. The Federal Reserve recently announced it would increase the threshold from $150 million to $500 million for its Small Bank 

Holding Company Policy Statement. This would allow more entities 

to qualify as small bank holding companies which, in turn, would 

permit them to use higher levels of debt to finance acquisitions. 

The Federal Reserve has specifically rejected raising the threshold 

to $1 billion. Is the Federal Reserve’s threshold appropriate?

A.2. This is not an issue with which we are familiar. We defer to 

our colleagues at the Consumer Federation of America on these 

issues. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM TERRY JORDE 

Q.1. It has been nearly 2 years since we first held a hearing on regulatory relief. In this time, has the overall regulatory environment 

changed for banks, thrifts, and credit unions? If so, have these 

changes increased the need for regulatory relief?

A.1. The overall regulatory climate for banks has become increasingly burdensome since the Banking Committee began considering 

regulatory burden relief 2 years ago. For example, compliance with 

the Bank Secrecy Act has become even more stringent, especially 

since the Riggs Bank and other high profile violations came to public attention. In addition, compliance with the Sarbanes-Oxley Act 

has substantially increased the regulatory burden on community 

banks. A survey of our members last year showed that the typical 

community bank would have to spend over $200,000 and devote 

over 2,000 internal staff hours to comply with Section 404 of the 

Act. 

Other areas of increased burden over the past 2 years can be 

found in the FACT Act (all of the rules and regulations still have 

not been written), data protection policies and procedures, increased internal audit scrutiny, IT examination procedures, training requirements and more. We even have a directive now from the 

regulators ‘‘encouraging’’ us to develop policies and procedures for 

pandemic preparedness. I sit on my local hospital board and they 

have not received any directive regarding bird flu. 

There have been a few areas of improvement. The regulatory 

agencies have adopted a streamlined examination procedure for 

‘‘intermediate small banks’’ (between $250 million and $1 billion in 

assets). In addition the Federal Reserve has recently increased the 

asset size to $500 million for holding companies eligible for the 

269

Small Bank Holding Company Policy Statement. The FDIC has 

also raised the asset size threshold from $500 million to $1 billion 

for internal control assessments by management and external auditors of privately held banks. However, it is too early to evaluate 

how important these changes will be. 

I also note that there are several items in the regulatory and legislative pipeline that would increase the regulatory burden on community banks. For example, the agencies have proposed new commercial real estate lending guidance that could significantly reduce 

community banks’ ability to serve the small business community. 

And, Congress is considering imposing significant new burdens on 

banks by requiring them to block payments for Internet gambling 

transactions. As I said in my prepared testimony on March 1, these 

proposals could pose a substantial new burden, without having any 

meaningful effect on the amount of Internet gambling. 

I am also concerned that the current legislative process is leading to confusion between technical amendments and proposals to 

provide true regulatory burden relief. In my opinion the proposals 

in the Committee’s matrix are 85 percent technical and noncontroversial. (Others, like the credit union proposals are not regulatory relief, they are charter enhancement.) Only about 15 percent 

of the matrix items will make a difference in the resources and 

time my bank’s staff must devote to paperwork and compliance and 

will ultimately result in our ability to provide better service to my 

customers and community. 

This all suggests to me that Congress should consider regulatory 

burden relief bills on a regular basis, looking at the risk reward 

tradeoff between increased regulatory burden and the projected 

benefit. As I mentioned in my oral remarks before the Committee, 

the disclosure burden is top of the list. The current requirements 

are not providing a meaningful benefit to consumers. 

In addition to these ongoing problems, changes in technology and 

industry practices are so frequent that the regulators and Congress 

need to adjust regulations and laws frequently. We hope these adjustments will generally reduce the regulatory burden. However, 

we recognize that new problems and concerns are certain to come 

up in the marketplace, giving rise to proposed reforms. While these 

proposals might have merit, they could also increase the burden on 

community banks. Therefore, Congress should have a mechanism 

to consider regulatory burden relief regularly to offset any new burdens. This has worked well in my State of North Dakota. Every 2 

years, our legislature considers a banking bill that takes into account changes in the industry, technology, and consumer needs—

making relatively noncontroversial changes in law to reduce regulatory burden and improve our ability to serve our customers and 

communities.

Q.2. The Federal Reserve recently announced it would increase the 

threshold from $150 million to $500 million for its Small Bank 

Holding Company Policy Statement. This would allow more entities 

to qualify as small bank holding companies which, in turn, would 

permit them to use higher levels of debt to finance acquisitions. 

The Federal Reserve has specifically rejected raising the threshold 

to $1 billion. Is the Federal Reserve’s threshold appropriate?

270

A.2. As indicated in my response to question 1, ICBA is pleased that the Federal Reserve has increased the threshold from $150 

million to $500 million for its Small Bank Holding Company Policy 

Statement. The Federal Reserve adopted the Policy Statement to 

permit the formation and expansion of small BHC’s with debt levels that are higher than what would be permitted for larger BHC’s. 

ICBA agrees with the Federal Reserve that since 1980 when the 

Policy Statement was first issued, inflation, industry consolidation, 

and the normal asset growth of BHC’s have caused the $150 million threshold to lose much of its relevance. However, in order to 

truly represent the asset size of a small BHC today, ICBA believes 

that the exemption should be raised to $1 billion. The lack of indexing for the $150 million over the past 25 years has hindered the 

ability of small banks to facilitate the transfer of ownership and remain independent, rather than selling out to a larger regional 

BHC. Increasing the exemption to $1 billion would improve the 

ability of small local institutions to sell their stock locally, keeping 

the financial decisions affecting the community in the local area. Furthermore, we believe it is not until a BHC reaches the $1 billion asset level that it has the necessary access to equity markets 

to enable it to finance an acquisition with a lower proportion of 

debt-to-equity. BHC’s with assets of between $500 million and $1 

billion are usually not followed closely by securities analysts and 

have only a limited market for their stock and a limited ability to 

raise equity in the capital markets. The issuance of trust preferred 

securities, for instance, is generally their best and sometimes their 

only method of raising capital. The ICBA-backed ‘‘Community 

Banks Serving Their Communities First Act’’ (S. 1568) introduced 

by Sen. Sam Brownback (R–Kansas) provides for raising the asset 

threshold under the Policy Statement to $1 billion.

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