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S. HRG. 111–260 

THE EFFECTS OF THE ECONOMIC CRISIS ON 

COMMUNITY BANKS AND CREDIT UNIONS IN 

RURAL COMMUNITIES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE EFFECTS OF THE ECONOMIC CRISIS ON COMMUNITY 

BANKS AND CREDIT UNIONS IN RURAL COMMUNITIES 

JULY 8, 2009 

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 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

TIM JOHNSON, South Dakota, Chairman 

MIKE CRAPO, Idaho, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

ROBERT F. BENNETT, Utah 

KAY BAILEY HUTCHISON, Texas 

JIM BUNNING, Kentucky 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

LAURA SWANSON, Subcommittee Staff Director 

GREGG RICHARD, Republican Subcommittee Staff Director 

CHARLES YI, Senior Advisor and Counsel 

JASON ROSENBERG, Legislative Assistant 

MATTHEW GREEN, FDIC Detailee 

(II)
C O N T E N T S 

WEDNESDAY, JULY 8, 2009 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Prepared statement .......................................................................................... 25 

Opening statements, comments, or prepared statements of: 

Senator Crapo 

Prepared statement ................................................................................... 25 

WITNESSES 

Jack Hopkins, President and Chief Executive Officer, CorTrust Bank National 

Association, Sioux Falls, South Dakota, on behalf of the Independent Community Bankers of America ................................................................................ 2 

Prepared statement .......................................................................................... 25 

Responses to written questions of: 

Chairman Johnson .................................................................................... 55 

Senator Kohl .............................................................................................. 55 

Senator Crapo ............................................................................................ 55 

Frank Michael, President and Chief Executive Officer, Allied Credit Union, 

Stockton, California, on behalf of the Credit Union National Association ...... 3 

Prepared statement .......................................................................................... 33 

Responses to written questions of: 

Senator Kohl .............................................................................................. 55 

Senator Crapo ............................................................................................ 57 

Arthur C. Johnson, Chairman and Chief Executive Officer, United Bank 

of Michigan, Grand Rapids, Michigan, on behalf of the American Bankers 

Association ............................................................................................................ 5 

Prepared statement .......................................................................................... 39 

Responses to written questions of: 

Chairman Johnson .................................................................................... 57 

Senator Kohl .............................................................................................. 58 

Senator Crapo ............................................................................................ 59 

Ed Templeton, President and Chief Executive Officer, SRP Federal Credit 

Union, North Augusta, South Carolina, on behalf of the National Association of Federal Credit Unions ............................................................................. 7 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Senator Kohl .............................................................................................. 60 

Senator Crapo ............................................................................................ 60 

Peter Skillern, Executive Director, Community Reinvestment Association of 

North Carolina ..................................................................................................... 9 

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

Responses to written questions of: 

Senator Crapo ............................................................................................ 61 

(III)

(1) 

THE EFFECTS OF THE ECONOMIC CRISIS ON 

COMMUNITY BANKS AND CREDIT UNIONS 

IN RURAL COMMUNITIES 

WEDNESDAY, JULY 8, 2009 

U.S. SENATE, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 2:38 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Tim Johnson (Chairman of the 

Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. We had a slight delay in timing of this, and 

I will forego my opening statement in the interest of time. I encourage the others to be brief. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Chairman. I have an 

opening statement that I can submit for the record as well, so following your lead, I will forego my opening statement and just 

thank you for holding this important hearing. 

Chairman JOHNSON. Senator Tester. 

Senator TESTER. Well, since you guys did not have opening statements, I will take three times as much time. 

[Laughter.] 

Senator TESTER. No. I will also forego my time and look forward 

to see what the panelists say, and I look forward to the questions 

and answers afterwards. Thank you all for being here. 

Chairman JOHNSON. I would like to welcome our witnesses to today’s hearing. Our first witness is Jack Hopkins on behalf of the 

Independent Community Bankers of America. 

Our second witness is Mr. Frank Michael, President and CEO of 

Allied Credit Union located in Stockton, California, on behalf of the 

Credit Union National Association. 

Our third witness is Mr. Arthur Johnson, Chairman and CEO of 

United Bank of Michigan, from Grand Rapids, Michigan, on behalf 

of the American Bankers Association. 

The next witness is Mr. Ed Templeton, President and Chief Executive Officer of SRP Federal Credit Union, in North Augusta, 

South Carolina, testifying on behalf of the National Association of 

Federal Credit Unions. 

Our last witness is Peter Skillern, Executive Director of the Community Reinvestment Association of North Carolina. 
2 

I will ask the witnesses please limit your testimony to 5 minutes. 

Your full statements and any additional materials you may have 

will be entered into the record. 

Mr. Hopkins, please begin. 

STATEMENT OF JACK HOPKINS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CORTRUST BANK NATIONAL ASSOCIATION, 

SIOUX FALLS, SOUTH DAKOTA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. HOPKINS. Chairman Johnson, Ranking Member Crapo, and 

Members of the Subcommittee, thank you very much for the opportunity to provide you with the community bank perspective on the 

impact of the credit crisis in rural areas. My name is Jack Hopkins, 

and I am President and CEO of CorTrust Bank in Sioux Falls, 

South Dakota. I am testifying on behalf of the Independent Community Bankers of America, and I serve on the ICBA’s Executive 

Committee. I am a past President of the Independent Community 

Bankers of South Dakota and have been a banker in South Dakota 

for 25 years. 

CorTrust Bank is a national bank with 24 locations in 16 South 

Dakota communities and assets of $550 million. Eleven of the communities we serve have fewer than 2,000 people. In seven of those 

communities, we are the only financial institution. The smallest 

community has a population of 122 people. Approximately 20 percent of our loan portfolio is agricultural lending to businesses that 

rely heavily on the agricultural economy. CorTrust Bank is also 

one of the leading South Dakota lenders for the USDA’s Rural 

Housing Service home loan program. 

Mr. Chairman, as we have often stated before this Committee, 

community banks played no part in causing the financial crisis 

fueled by exotic lending products, subprime loans, and complex and 

highly leveraged investments. However, rural areas have not been 

immune from rising unemployment, tightening credit markets, and 

the decline in home prices. We believe that, although the current 

financial crisis is impacting all financial institutions, most community banks are well positioned to overcome new challenges, take advantage of new opportunities, and reclaim some of the deposits lost 

to larger institutions over the last decade. 

A recent Aite study shows that even though some community 

banks are faced with new lending challenges, they are still lending, 

especially when compared to larger banks. In fact, while the largest 

banks saw a 3.23-percent decrease in 2008 net loans and leases, institutions with less than $1 billion in assets experienced a 5.53-percent growth. 

Mr. Chairman, small businesses are the lifeblood of rural communities. We believe small businesses will help lead us out of the 

recession and boost needed job growth. Therefore, it is vitally important to focus on the policy needs of the small business sector 

during this economic downturn. 

As I mentioned earlier, most of my commercial lending is to 

small businesses dependent on agriculture. The Small Business Administration programs are an important component of community 

bank lending. SBA must remain a viable and robust tool in supplying small business credit. 
3 

The frozen secondary market for small business loans continues 

to impede the flow of credit to small business. Although several 

programs have been launched to help unfreeze the frozen secondary market for pools of SBA-guaranteed loans, including the 

new Term Asset-Backed Securities Loan Facility—TALF and a new 

SBA secondary market facility, they have yet to be successful due 

to the program design flaws and unworkable fees. ICBA recommends expanding these programs to allow their full and considerable potential. 

Several of my colleagues have told us about the mixed messages 

they received from bank examiners and from policy makers regarding lending. Field examiners have created a very harsh environment that is killing lending as examiners criticize and require 

banks to write down existing loans, resulting in capital losses. Yet 

policy makers are encouraging lending from every corner. 

Some bankers are concerned that regulators will second-guess 

their desire to make additional loans, and others are under pressure from their regulators to decrease their loan-to-deposit ratios 

and increase capital levels. Generally, the bankers’ conclusions are 

that ample credit is available for creditworthy borrowers. They 

would like to make more loans, and they are concerned about the 

heavy-handedness from the regulators. 

Finally, Mr. Chairman, community bankers are looking closely at 

the regulatory reform proposals. ICBA supports the administration’s proposal to prevent too-big-to-fail banks or nonbanks from 

ever threatening the collapse of the financial system again. Community banks support the dual system of State and Federal bank 

charters to provide checks and balances which promote consumer 

choice and a diverse and competitive financial system sensitive to 

the financial institutions of various complexity and size. Washington should allow community banks to work with borrowers in 

troubled times without adding to the costs and complexity of working with customers. 

Mr. Chairman, ICBA stands ready to work with you and the Senate Banking Committee on all of the challenges facing the financial 

system and how we may correct those issues gone awry and buttress those activities that continue to fuel the economies in rural 

areas. I am pleased to answer any questions you may have. 

Chairman JOHNSON. Thanks, Jack. 

Mr. Michael. 

STATEMENT OF FRANK MICHAEL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ALLIED CREDIT UNION, STOCKTON, 

CALIFORNIA, ON BEHALF OF THE CREDIT UNION NATIONAL 

ASSOCIATION 

Mr. MICHAEL. Chairman Johnson, Ranking Member Crapo, and 

Members of the Subcommittee, thank you very much for the opportunity to testify at today’s hearing on behalf of the Credit Union 

National Association. 

My name is Frank Michael, and I am President and CEO of Allied Credit Union in Stockton, California. Allied is a small institution with $20 million in assets and approximately 2,600 member 

owners. 
4 

Credit unions—rural, urban, large, and small—did not contribute 

to the subprime meltdown or the subsequent credit market crisis. 

Credit unions are careful lenders. As not-for-profit cooperatives, 

our objective is to maximize member service. Incentives at credit 

unions are aligned in a way that ensures little or no harm is done 

to our member owners. 

Rural credit unions are unique in many respects. There are nearly 1,500 U.S. credit unions with a total of $60 billion in assets 

headquartered in rural areas. 

Rural credit unions tend to be small—even by credit union standards. Over half of the rural credit unions are staffed by five or 

fewer full-time equivalent employees. 

Even in good times, rural credit unions tend to face challenges 

in a way that larger institutions do not. Competitive pressures 

from large multistate banks and nontraditional financial services 

providers, greater regulatory burdens, growing member sophistication, and loss of sponsors loom large for most of the Nation’s small 

credit unions. 

A bad economy can make things even worse. Small credit unions 

come under tremendous pressure as they attempt to advise, consult 

with, and lend to their members. 

In addition, all credit unions have suffered as a result of the effects of the financial crisis of corporate credit unions. Despite these 

substantial hurdles, rural credit unions are posting comparatively 

strong results, and they continue to lend. Loans grew by 7 percent 

in the 12 months ending in March compared to a 3-percent decline 

at all banks. 

There are several concerns raised by small credit unions, and 

rural credit unions in particular, that deserve mention. The credit 

union movement has seen small institutions merge into larger 

credit unions at an alarming pace. And by far, the largest contributor to this consolidation is the smothering effect of the current 

regulatory environment. 

Small credit union leaders believe that the regulatory scrutiny 

they face is inconsistent with both their exemplary behavior and 

their nearly imperceptible financial exposure they represent. A 

large community of credit unions, free of unnecessary regulatory 

burden, would benefit the public at large and especially our rural 

communities. 

As the Subcommittee considers regulatory restructuring proposals, we strongly urge you to continue to keep these concerns in 

the forefront of your decision making. Moreover, we implore you to 

look for opportunities to provide exemptions from the most costly 

and time-consuming initiatives to cooperatives and other small institutions. 

As noted above, credit unions have generally continued to lend 

while many other lenders have pulled back. This is certainly true 

in the business lending arena. Currently, 26 percent of all rural 

credit unions offer member business loans to their members. These 

loans represent over 9 percent of the total loans in rural credit 

union portfolios. In contrast, member business loans account for 

less than 6 percent of all total loans in the movement as a whole. 

Total member business loans at rural credit unions grew by over 

20 percent in the year ending March 2009, with agricultural loans 
5 

increasing by over 12 percent. Agricultural loans at rural credit 

unions now account for over one-third of the total member business 

loans. This is strong evidence that rural credit unions remain ‘‘in 

the game’’ during these trying times. But more could be done. 

And more should be done. A chorus of small business owners 

complains that they cannot get access to credit. Federal Reserve 

surveys show that the Nation’s large banks tightened underwriting 

standards for the better part of the past year, and SBA research 

shows that large bank consolidation is making it more difficult for 

small businesses to obtain loans. 

The chief obstacle for credit union business lending is the statutory limits imposed by Congress in 1998 under which credit unions 

are restricted from member business lending in excess of 12.25 percent of their total assets. This arbitrary cap has no basis in either 

actual credit union business lending or safety and soundness considerations. Indeed, a report by the U.S. Treasury Department 

found that delinquencies and charge-offs for credit union business 

loans were much lower than those of banks. 

While we support strong regulatory oversight of how credit 

unions make member business loans, there is no safety and soundness rationale for the current law which restricts the amount of 

credit union business lending. There is, however, a significant economic reason to permit credit unions to lend without statutory restriction, as they were able to do prior to 1998. 

A growing list of small business and public policy groups agree 

that now is the time to eliminate the statutory credit union business lending cap. We urge Congress to eliminate the cap and provide NCUA with the authority to permit a credit union to engage 

in business lending above 20 percent of assets if safety and soundness considerations are met. If the cap were removed, credit unions 

could safely and soundly provide as much as $10 billion in new 

loans for small businesses within the first year. This is an economic stimulus that would truly help small business and not cost 

the taxpayers a dime. 

In conclusion, Chairman Johnson and Ranking Member Crapo, 

and all the Members of the Subcommittee, we appreciate your review of these issues today. 

Chairman JOHNSON. Thank you, Mr. Michael. 

Mr. Johnson. 

STATEMENT OF ARTHUR C. JOHNSON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, UNITED BANK OF MICHIGAN, GRAND 

RAPIDS, MICHIGAN, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION 

Mr. JOHNSON. Chairman Johnson, Ranking Member Crapo, and 

Members of the Subcommittee, my name is Art, and I am the 

Chairman and CEO of United Bank of Michigan, and I am the 

Chairman-Elect of the American Bankers Association. I am pleased 

to share the banking industry’s perspective on banking and the 

economy in rural America. 

Community banks continue to be one of the most important resources supporting the economic health of rural communities. Not 

surprisingly, the banks that serve our Nation’s small towns also 

tend to be small community banks. Less well known is that over 
6 

3,500 banks—41 percent of the banking industry—have fewer than 

30 employees. These banks understand fully the needs of their customers and their community. 

This is not the first recession faced by banks. Most banks have 

been in their communities for decades and intend to be there for 

many decades to come. My bank was chartered in 1903. We have 

survived the Great Depression and many other ups and downs for 

over a century. And we are not alone. Over 2,500 banks—nearly 

one-third of the industry—have been in been in business for more 

than a century. These numbers tell a dramatic story about the 

staying power of community banks and their commitment to their 

communities. We cannot be successful unless we develop and maintain long-term relationships and treat our customers fairly. 

In spite of the downturn, community banks in rural communities 

expanded lending by 7 percent since the recession began. Loans 

made by banks that focus on farmers and ranchers also increased 

by 9 percent. 

Considerable challenges remain, of course. In my home State of 

Michigan, for example, we are facing our eighth consecutive year 

of job losses. Other rural areas with manufacturing employment 

bases are also suffering similar problems. In this environment, 

businesses are reevaluating their credit needs and, as a result, loan 

demand is declining. Banks, too, are being prudent in underwriting, and our regulators demand it. Accordingly, it is unlikely 

that loan volumes will increase this year. 

With the recession, credit quality has suffered and losses have 

increased. Fortunately, community banks entered this recession 

with strong capital levels. However, it is very difficult to raise new 

capital today. Without access to capital, maintaining the flow of 

credit in rural communities will be increasingly difficult. 

We believe the Government can take action to help viable community banks weather the current downturn. The success of local 

economies depends on the success of these banks. Comparatively 

small steps now can make a huge difference to these banks, their 

customers, and their communities—keeping capital and resources 

focused where they are needed most. 

Importantly, the amount of capital required to provide an additional cushion for all community banks—which had nothing to do 

with the current crisis—is tiny compared to the $182 billion provided to AIG. In fact, the additional capital needed is less than $3 

billion for all smaller banks to be well capitalized, even under a 

baseline stress test. Simply put, capital availability means credit 

availability. 

In addition to providing avenues for new capital for community 

banks, we believe there are three key policy issues that deserve 

congressional action: one, creating a systemic regulator; two, providing a strong mechanism for resolving troubled systemically important firms; and, three, filling gaps in the regulation of the shadow banking industry. 

The critical issue in this regard is ‘‘too-big-to-fail.’’ This concept 

has profound moral hazard implications and competitive effects 

that need to be addressed. In an ideal world, no institution would 

be ‘‘too-big-to-fail,’’ and that is ABA’s goal. 
7 

While recent events have shown how difficult that is to accomplish, whatever is done on the systemic regulator and on a resolution system should narrow dramatically the range of circumstances 

that might be expected to prompt Government action. These actions would address the causes of the financial crisis and constitute 

major reform. We believe there is a broad consensus in addressing 

these issues. 

I would be happy to answer any questions that you may have. 

Chairman JOHNSON. Thank you, Mr. Johnson. 

Mr. Templeton. 

STATEMENT OF ED TEMPLETON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SRP FEDERAL CREDIT UNION, NORTH 

AUGUSTA, SOUTH CAROLINA, ON BEHALF OF THE NATIONAL 

ASSOCIATION OF FEDERAL CREDIT UNIONS 

Mr. TEMPLETON. Good afternoon, Chairman Johnson, Ranking 

Member Crapo, and Members of the Subcommittee. My name is Ed 

Templeton, and I am here testifying today on behalf of the National Association of Federal Credit Unions. I am President of SRP 

Federal Credit Union in North Augusta, South Carolina. 

NAFCU and the entire credit union community appreciate the 

opportunity to participate in this discussion regarding how the economic crisis has impacted America’s credit unions serving in rural 

communities. 

While credit unions have fared better than most financial institutions in these turbulent times, many have been impacted, through 

no fault of their own, by the current economic environment. Credit 

unions were not the cause of the current economic downturn, but 

we believe we can be an important part of the solution. Surveys of 

NAFCU member credit unions have shown that many are seeing 

increased demand for mortgage and auto loans as other lenders 

leave the markets. Credit unions have seen small businesses that 

have lost credit from other lenders turning to credit unions for the 

capital that they need. 

Credit unions are meeting those needs specifically in rural areas. 

NCUA data shows that credit unions have seen a growth in the 

percentage of the total amount of credit union farm loans for the 

last nine consecutive quarters. Additionally, the most recent 

HMDA data shows that credit union mortgage loans to Native 

Americans increased over the previous year and that credit unions 

had a higher percentage of approved loans—75.3 percent—than 

any other type of financial institution. 

Throughout the country, small credit union roundtables have 

emerged and engaged in discussions about operations with like institutions. Larger credit unions also serve as partners for the 

smaller ones and perform functions from shared branching to backoffice operations. 

Credit unions are the most regulated of all financial institutions, 

facing restrictions on who they can serve and their ability to raise 

capital, among a host of other limitations. There are small statutory steps Congress can take to enhance the ability of credit unions 

to serve their members, such as: 

First, removal of the arbitrary credit union member lending cap. 

The Credit Union Membership Access Act established an arbitrary 
8 

cap on credit union member business lending of 12.25 percent in 

1998. Many credit unions have available capital that other lenders 

do not have in this environment, but are hampered by this arbitrary limitation. We are pleased that Senator Schumer has indicated that he plans to introduce legislation to remove this arbitrary 

cap, and we urge the Subcommittee to support these efforts. 

Second, underserved areas. As the Subcommittee may be aware, 

many rural areas are also underserved. Credit unions can play an 

important role in these communities. The 1998 Credit Union Membership Access Act gave the NCUA the authority to allow Federal 

credit unions to add underserved areas to their fields of membership; however, the language was unclear as to what types of charters can add underserved areas. NCUA believes that addressing 

this issue through legislation would clear up this ambiguity, allowing all Federal credit unions to add underserved areas to their 

fields of membership. 

Before wrapping up, I would like to make a few comments on the 

issue of regulatory reform. As not-for-profit member-owned cooperatives, credit unions are unique institutions in the financial 

services arena. We believe that the NCUA should remain an independent regulator of credit unions and are pleased to see that the 

administration’s proposal would maintain the Federal credit union 

charter and an independent NCUA. 

NAFCU supports the creation of a Consumer Financial Protection Agency that would have authority over nonregulated institutions that operate in the financial services marketplace. However, 

we do not support extending that authority to federally insured 

credit unions, given that the CFPA has authority to regulate, examine—or would have authority to regulate, examine, and supervise credit unions that are already regulated by the NCUA, which 

would add an additional burden and cost to credit unions. 

Recognizing that more should be done to help consumers, we propose that each functional regulator establish or strengthen a new 

office on consumer protection. We believe that such an approach 

would strengthen consumer protection while not adding unnecessary regulatory burdens on our Nation’s credit unions. We are 

pleased to see that NCUA Board Chairman Mr. Michael Fryzel recently announced the creation of such an office at NCUA. 

In conclusion, the current economic crisis is having an impact on 

credit unions in rural areas, but we are continuing to serve our 

members well. As an illustration, we at SRP Federal Credit Union 

are actually expanding at this time into one of the most rural areas 

within our field of membership. We are about to break ground on 

a new branch in Allendale County, South Carolina. The county has 

a population of 10,477 and an unemployment rate of 22.1 percent. 

We urge the Subcommittee to support efforts to remove the credit union member business lending cap and to clarify the ability of 

credit unions of all charter types to add underserved areas. Finally, 

while there are positive aspects to consumer protection in regulatory reform, we believe that Federal credit unions continue to 

warrant an independent regulator that handles both safety and 

soundness and consumer protection matters. 
9 

I thank you for the opportunity to appear before you today on behalf of NAFCU and our country’s credit unions, and I would welcome any questions you may have. 

Chairman JOHNSON. Thank you, Mr. Templeton. 

Mr. Skillern. 

STATEMENT OF PETER SKILLERN, EXECUTIVE DIRECTOR, 

COMMUNITY REINVESTMENT ASSOCIATION OF NORTH 

CAROLINA 

Mr. SKILLERN. Thank you, Senator Johnson, for the opportunity 

to testify today on lenders, consumers, and the economy in rural 

areas. I am Peter Skillern, Executive Director of the Community 

Reinvestment Association of North Carolina. We are a nonprofit 

community advocacy and development agency. 

North Carolina has strong rural and banking sectors. Eighty-five 

of our 100 counties are rural and 50 percent of our population live 

in them. We have 106 credit unions and 106 banks, ranging from 

the largest in the country, Bank of America, down to Mount Gilead 

Savings and Loan at $9.8 million. 

The current economic stresses for our rural communities and 

small financial institutions are significant, and they are best understood in the context of two long-term trends: one is a decline in 

the rural economy, and two is the consolidation of the financial sector. And our policy recommendations focus on two issues: one is the 

financial regulatory reform to provide greater consumer protections 

and stability; and two is the investment needed in our rural communities for recovery and growth—in particular, through the 

Neighborhood Stabilization Program. 

Rural Economies are in long-term decline. In North Carolina, the 

unemployment rate is the fifth highest in the country, but our 

rural communities are taking it even harder. The rates in 19 counties range between 14 and 17 percent. But these rates are years 

in the making. Rural North Carolina did not recover from the 2001 

recession. From 2002 to 2008, rural counties lost more than 

100,000 jobs in the manufacturing sector of textiles, apparel, furniture, and automobiles. Changes in tobacco and the agricultural 

sector have reduced the number of small farms. Tobacco farms 

have dropped by 70 percent since 2002. Forty of our rural counties 

lost population. These long-term trends, in combination with the 

credit crisis and recession, have contributed to an estimate 31,000 

foreclosures in rural North Carolina. That is more than in the 

urban areas. 

Small banks also face challenges in the consolidation of the financial sector. During this crisis, a number of small banks across 

the Nation have failed, but far more have been lost through consolidation. Nationally, the number of banks with under $100 million in assets dropped by more than 5,000 from 1992 to 2008. In 

North Carolina, rural counties hold 50 percent of the population 

and 50 percent of bank branches, and only 16 percent of the deposit base. Nationally, approximately 4,000 small banks accounted 

for less than 2 percent of the national mortgage activity. 

By contrast, the consolidation of assets and market share of 

megabanks has increased. In 1995, the top five banks had 11 percent of the deposit share; today, they have nearly 40 percent. In 
10 

the first quarter of 2009, 56 percent of mortgage activity was conducted by just four lenders. 

Small banks are at a competitive disadvantage in terms of efficiencies, pricing products, and geographical service areas, and consolidation will continue in the foreseeable future. This is a problem. 

As a rule, small banks and credit unions avoided subprime credit 

and provided stability and diversification in the financial sector. 

Without smaller institutions, many areas would go completely 

unserved. Banking policy and regulatory oversight should 

proactively support small banks and credit unions as essential to 

the local economic ecology of credit and commerce. 

Financial reform will help consumers, lenders, and the rural 

communities. Consumers in rural and urban areas face similar 

lending abuses. Rural areas had a higher percentage of subprime 

high-cost loans than urban areas. Rural areas have a high rate of 

refund anticipation loans, and payday lenders are prevalent in the 

rural areas of the 35 States that allow this usurious type of lending. Consumers need better protections from unsound and unscrupulous lending practices, and if so provided, our economy would be 

safer as well. Our financial sector would be better. 

Our agency is supportive of President Obama’s recommendation 

for the Consumer Financial Protection Agency Act. We support the 

CRA Modernization Act, H.B. 1492. And faced with a rising tide of 

foreclosures and insufficient loan modification programs, we ask 

the Senate to reconsider and favorably pass a loan judicial modification bill. We support reforms for greater oversight and capital 

requirements to mitigate the risk of megabanks. 

Finally, please invest in our rural communities. Although the 

problems created by the financial crisis and recession are felt by 

every community and the solutions needed are national in scope, 

it would be a mistake to assume that urban and rural communities 

will shake off the recession with the same speed. The long-term 

challenges for small banks and rural communities are systemic as 

well as cyclical. Unless we invest in rebuilding these communities, 

no banks of any size will thrive. 

Please expand the Neighborhood Stabilization Program both in 

scale of funding and in scope to include rural areas. NSP funds are 

to revitalize foreclosed properties and to rebuild distressed communities. But no rural areas receive NSP funds because the needs test 

emphasizes concentration. Yet in 23 States, such as North Carolina, in the aggregate there are more foreclosures in rural area 

than urban areas. More funding is needed given the need in both 

urban and rural areas. 

The future for rural communities and banks is brighter if we recognize and act on the need for financial regulatory reform and investment in our communities. Thank you very much for your attention. 

Chairman JOHNSON. Thank you, Mr. Skillern. 

A question for Mr. Hopkins and Mr. Johnson. In May, the FDIC 

decided to place a special assessment to rebuild the Deposit Insurance Fund on assets instead of deposits, largely because of concerns 

raised by small banks that they were being unfairly affected by the 

irresponsible behavior of larger banks. 
11 

Is the FDIC’s change a good thing for your institutions? Do you 

have any concerns about this change? Mr. Hopkins. 

Mr. HOPKINS. Obviously, we were very supportive of the change. 

We have long held that it is the assets of a bank that create the 

risk, and not the deposits. And, therefore, the risks should be associated with the assets of the bank. It is giving credit for the higher 

capital levels, so from the standpoint of a community bank where 

its assets are on the books and its liabilities are primarily core deposits and not other sources of liquidity, be it commercial paper or 

other borrowings, we think it was appropriate, and it has been very 

positive for community banks. 

Chairman JOHNSON. Do you have any concerns? 

Mr. HOPKINS. Do I have any concerns? 

Chairman JOHNSON. Yes. 

Mr. HOPKINS. I would ask that they consider using that base for 

the deposit insurance premium going forward. 

Chairman JOHNSON. Mr. Johnson. 

Mr. JOHNSON. I do have some concerns. It seems to me that this 

is a change that has the potential to have a rather profound public 

policy impact going forward and should be something that is considered very carefully. And I think it should be considered in the 

context of the solutions that the Congress is seeking for the ‘‘toobig-to-fail’’ issue and the systemically important institutions, these 

systemically important institutions are—some of whom are depository institutions, and some of which are not. And as you consider 

what you are going to do with them, what is going to be the resolution for future problems with systemically important firms, both 

depositories and nondepositories, presumably there will be a consideration of how the cost of that resolution is going to be considered and solved. And I think to tackle the assessment base and the 

FDIC fund prior to dealing with the solution to the funding of resolution of systemically important firms, both depositories and nondepositories, would be premature. 

Chairman JOHNSON. Thank you. 

A question for Mr. Hopkins, Mr. Michael, Mr. Johnson, and Mr. 

Templeton. Mr. Skillern’s testimony said that in North Carolina 

there is a higher percentage of subprime mortgages in rural areas 

than urban areas although the actual volume is lower. Do you find 

that this is true in the areas your institutions serve? Are you finding that those homeowners with subprime mortgages in your areas 

are underwater? Are existing loan modification programs useful to 

you in helping these homeowners? Mr. Hopkins. 

Mr. HOPKINS. I would say that we do not have the issues with 

the subprime mortgages in South Dakota and, in general, most of 

the rural areas of the Midwest. I think it was more of a conservative lending philosophy, and we did not have a lot of the mortgage 

brokers in our areas. Those that we have had have come in to us, 

and we did not have the rapid increases in the home valuations as 

seen in some of the more urban areas of California, Nevada, Florida, Michigan, and some of those areas—Michigan, I take that 

back, has not had the rapid rise. But some of these other areas 

that have had the rapid rise, therefore, they have been easier to 

refinance into conventional mortgages when they have come in. 
12 

And we have used the loan modification program for those that 

have come in and have found it to be successful to this point. 

Chairman JOHNSON. Mr. Michael. 

Mr. MICHAEL. Well, I am from Stockton, California. Home values 

in Stockton are down 63 percent from the peak. They are down 37 

percent in the last 12 months, and they are still declining. Yes, 

subprime mortgages, 0 percent down mortgages, clearly contributed 

significantly to our problems. 

We are finding, as I work with my members, that many—the 

credit unions did not originate these loans. We did not—we always, 

as lenders, have been originating generally for our own portfolios, 

which means the ones that were really originating these loans were 

those that were originating to sell and looking for the fee income 

that came with that. Credit unions generally portfolio their own 

loans as part of the process, so I am dealing with members who are 

coming to me today trying to deal with other lenders in this process 

and other servicing companies. 

We are finding in my conversations with my particular members 

that the lenders are slow on the modification process. I am hearing 

from those that are working in the real estate industry working 

with individuals and doing modifications, and even short sales, 

that those institutions trying to process modifications are not 

geared up at this time to processes effectively, and the delays are 

substantial and the results are generally not positive. 

Chairman JOHNSON. Mr. Johnson. 

Mr. JOHNSON. In our bank, we are having some elevated levels 

of delinquency and foreclosures within our bank, but they are all 

driven by employment issues rather than by product issues. We did 

not make any subprime or high-risk mortgages. 

We have 11 offices, and eight of them are in rural communities, 

and it would be my observation that—well, the administration has 

stated that 94 percent of high-risk mortgages were made by nondepository institutions, and my rough observation of what is going 

on in our marketplace, including our rural offices, is that that percentage is even higher than that because the community banks in 

our area simply were not making those types of mortgages. 

I can tell you that in our office with our own customers, we are 

working very diligently with them to keep those families in their 

homes wherever it is remotely possible to do so and are having a 

fair amount of success with that. 

We are having our customers who opted within the last few 

years to obtain a mortgage from one of the many mortgage brokers, 

mortgage originators that are in our entire marketplace, simply to 

have a lower monthly payment, they are now coming in to us and 

seeing whether or not they can get a solution to keep themselves 

in their home. And we are successful in about 20 percent of those 

cases to be able to get them refinanced into a conventional mortgage product. Unfortunately, I do not always know what happens 

to the other 80 percent. 

Chairman JOHNSON. Mr. Templeton. 

Mr. TEMPLETON. We have seen some of the things more similar 

to what the gentleman from South Dakota was saying. We just did 

not see a big inflow into our marketplace of lenders who were offering loans that just didn’t make good sense, and I think primarily 
13 

because we didn’t see extreme home value rises over the past 2 or 

3 years in our marketplace. It was a more reasonable rise, which 

I think led to people searching for more reasonable loans. 

Now, that said, we have certainly had foreclosures. We have had 

modifications that we have done. But I am not sure that I am— 

I am not aware of any loan that specifically was a result of some 

type of egregious act, where somebody put somebody in an interestonly loan or something like that. All we have been seeing is the 

normal re-fis that people are going through because of the market 

that we are in. 

Like the gentleman from South Dakota, we did not originate the 

sales, so every loan we made through last year is currently in a 

portfolio. This year, we are originating some for sale, but they are 

what everybody would call a conforming, main-stream type of loan. 

I would go one step further to say one thing as concerns the rural 

areas. In our market, anyway, those brokers weren’t interested in 

the rural areas because those homes were not homes that they 

could sell as a package to anybody. There was no appreciation in 

values. They were—before we invented the phrase subprime mortgage, you go back 4 or 5 years ago, if you think about what you 

would call a subprime home or subprime mortgage, it was an inexpensive home on a dirt street that needed painting and that is 

what a lot of the homes in our rural communities are and we lend 

to a lot of those people. So that is what we call internally our 

subprime, because nobody else will touch a home like that, but that 

is what we do and that is what we are about. 

And consequently, we are not suffering in our community from 

a serious issue with egregious lending. Maybe some are there, I am 

just not aware of it, but I stay pretty close with the community. 

Thank you very much. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman, and I 

want to commend all of our witnesses for very capably explaining 

the important role that community banks play in our rural communities as well as throughout our economy. 

I am going to use my time today to focus on the administration’s 

Consumer Financial Protection Agency, and Mr. Johnson, I will 

focus on you, but I welcome comments or responses to my question 

from anybody else on the panel. The issue I have is that I think 

in our effort to find the right balance between protecting consumers 

from abusive products and practices while promoting responsible 

lending to spur economic growth to help get our economy moving 

again, we need to get it right with regard to consumer protection. 

And to me, at least, the case has not been adequately made that 

we should bifurcate consumer protection from safety and soundness 

regulation. 

I know there are some recent articles that have come out with 

regard to Fannie Mae and Freddie Mac with some of those who are 

very prominent in the current management of them who indicated 

that the bifurcation of consumer protection and safety and soundness regulation with our GSEs was, in fact, one of the problems 

that helped us get into trouble with regard to Fannie Mae and 

Freddie Mac. The administration’s proposal would have sole rulemaking authority for consumer financial protection statutes, as 
14 

well as the ability to fill gaps through rulemaking, placed in this 

one single new agency to be created. 

I guess the question I would like to toss out, really to the whole 

panel but start with you, Mr. Johnson, is has the case been made 

that bifurcating the protections from prudential supervision is the 

best option to protect consumers from abusive practices and products? 

Mr. JOHNSON. Well, I think that it has not been made, and at 

least in my mind, it will be very difficult to make that. I think in 

addition to the commentators about Freddie Mac and Fannie Mae, 

I believe that Sheila Bair has made similar comments that for the 

FDIC, that it would be a mistake to divide prudential regulation 

from consumer protection and compliance into more than one agency. 

It strikes me that knowing something—that there are two elements here, and for each element to do their job correctly, they 

need to know something about what is going on in the other piece 

and that would be, it strikes me, it would be very difficult to accomplish when it is two completely different agencies that have two 

completely different missions. 

It seems to me, as I mentioned before, that the fact of the matter 

is that 94 percent of the high-risk lending that has gotten us into 

much of what our current problem is occurred in nondepository institutions. Clearly, we need to focus on the 6 percent, but probably 

we don’t need to overhaul the entire system to deal with 6 percent. 

But we shouldn’t forget about dealing with the 94 percent, and that 

is what I am afraid we are doing here. 

My bank is a State-chartered nonmember bank, and what that 

means is that we are regulated by our State regulator, the Office 

of Financial and Insurance Regulation, and a Federal regulator, 

the FDIC. These are both very strong, competent regulatory agencies. Each of them takes their responsibilities for regulating us and 

all the other State banks in Michigan, regulating both our compliance, consumer protection, and our safety and soundness operations, they take it very seriously and it is a system that works 

very well. 

I think, in fact, it is a model that should be strongly considered 

when we deal with the 94 percent, a strong, competent, well-funded 

State regulator as well as a strong, competent, well-funded Federal 

regulator. And I might add that when I talk about funding in both 

of those instances, in our case in Michigan, it is our industry that 

funds that through either FDIC premiums or examination fees for 

a State regulator. 

Senator CRAPO. Thank you. Let us just start over here, if any of 

the other members of the panel want to speak. We just have a couple more minutes in my timeframe, so please try to be as succinct 

as you can. But if you would like to make a comment, please do. 

Mr. HOPKINS. Thank you. I would just echo that I would agree 

with Mr. Johnson. The one thing to keep in mind, also, is that the 

examiners are coming in from—and I have had an OCC examined 

bank and FDIC—they are very well trained. They are certified. 

They have to take a lot of testing. They take it very serious, and 

I can tell you, after 25 years of banking, when they come in, they 
15 

are very prepared to make examinations and they can be harsh if 

you don’t follow the rules to the letter of the law. 

So I would agree that that 6 percent that is unregulated needs 

to find a place to be regulated, whether that is an additional arm 

through this new agency or through the FTC. I think there is opportunity there. But I think that the banking regulators do an adequate job. 

Senator CRAPO. Mr. Michael. 

Mr. MICHAEL. I generally concur with the statements that were 

made. Clearly, there are consumers that need protection that are 

not receiving it right now and there is a need to extend protection 

to those individuals and we need to find a way to do it. But we are 

very heavily regulated as it is right now and adding an additional 

layer of regulation would be very problematic. As an example, it 

would lead to dual examinations for my credit union from both 

Consumer Protection Agency and my prudential regulator. I would 

recommend that we look at using the current prudential regulators 

to provide that type of examination and supervision. 

Senator CRAPO. Thank you. Mr. Templeton. 

Mr. TEMPLETON. Thank you, sir. Actually, our Federal regulator, 

the NCUA, has already put the first foot forward. They have already created that office internal to our regulator, so we are moving toward consumer protection within the prudential regulator. 

And as the gentleman said, I think when you are talking about federally insured depository institutions, the regulators are in place to 

take care of safety and soundness and also financial consumer protection within that. They know the businesses. It is one more element. It will be very cost effective. You are not going to have a big 

education curve. You are not going to have a training curve. But 

more importantly, you are not going to have one hand saying, do 

something, and another hand over here saying, do something different, which could very easily be in contrast with each other. The 

nondepository institutions, I think that is a whole another 

ballgame, though. Thank you. 

Senator CRAPO. Thank you. Mr. Skillern. 

Mr. SKILLERN. I would concur with the bankers that, in general, 

the small banks are well regulated by both their State and primary 

regulators. I would also disagree, though, that the Federal regulators have done their job well currently. Countrywide, Washington 

Mutual are both regulated by the OTS. Their subprime predatory 

lending harmed consumers and collapsed their banks. Wachovia, a 

national bank regulated by the OCC, crashed itself on exotic mortgage lending. The Federal Reserve has failed to enforce its rules. 

I am currently in a fight with the OCC to enforce the rules on 

Santa Barbara Bank and Trust around their refund anticipation 

loan loss. It is just not happening. 

So the Federal regulators have lost credibility on their willingness and ability to enforce the existing consumer laws. I do believe 

that a separate agency with that focus brings standardization of 

how those rules are applied, can expand it to those agencies that 

are not covered, and hopefully try to reduce the seemingly conflict 

of interest that the existing Federal regulators have of enforcing 

consumer laws. 
16 

Senator CRAPO. Thank you. My time is up. Thank you, Mr. 

Chairman. 

Chairman JOHNSON. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman. Thank you very 

much for holding this hearing. It is very timely, at least from my 

perspective, coming from Colorado, where we have had a bank failure in rural Colorado, in Weld County that I wanted to talk to you 

about a little bit. I want to thank everybody here for your testimony. I think it is a very good reminder that we need to be very 

careful about how we think about our financial institutions in this 

country because they are not all the same and not all of them contributed to the situation that we now find ourselves in. 

With respect to ‘‘too-big-to-fail,’’ which people have talked about, 

from the point of view of the people living in Northeast Colorado 

who lost what to many people would seem was a very small bank, 

that bank was too big to fail for them. It has affected the entire 

region, because commodity prices are where they are, in this case 

particularly dairy prices. It has become incredibly hard to find replacement credit for the farmers and for the ranchers that are 

there. 

I wonder—we have asked the people administering the TARP 

whether or not they are taking into account those sorts of circumstances as they think about the distribution of the TARP 

money, and I wonder if any of you have a perspective on how well 

or how poorly TARP is being administered when it comes to small 

banks, to rural banks, community banks. The application process 

is an onerous one. The requirements for deposits are tough. I am 

just curious whether you think we are getting done what we need 

to get done with respect to TARP. 

Mr. JOHNSON. Why don’t you go ahead? 

Mr. HOPKINS. Thank you. In my opinion, the TARP has helped 

to pick winners and losers. The big banks, particularly the largest 

19, have all been chosen as winners in this game, because even 

though they were technically broke, they have been bailed out. The 

smaller community banks, if you were not a one or two rated with 

a CAMELS rating in the bank, you cannot qualify for the funds, 

and that does make that kind of an unfair advantage of being to 

the large banks. 

So I do know of a couple of banks that have had some financial 

difficulties around the country because of the areas they are located in and they have applied for the funds and been denied because the credit quality in that area is difficult. And obviously raising private capital in today’s market is difficult. 

Senator BENNET. Mr. Johnson. 

Mr. JOHNSON. To some degree, we are kind of guessing about 

what the criteria are and how the process goes because it has never 

been made public exactly what the criteria is to determine at 

Treasury and at the agencies in terms of their recommendation to 

Treasury and then Treasury’s decision about who is going to be approved for CPP money under the TARP program and who isn’t. So 

that is problematic to begin with. 

But beyond that, it is our contention that there—like there are 

many, many viable homeowners that we should take action to save 

them and keep them in their homes and banks are working with 
17 

small businesses and with farmers to determine who are those viable small businesses and who are the viable farmers so that we can 

do whatever we can to keep them in business, so should the Treasury and the Federal regulators of depository institutions work very 

hard at determining who are the viable banks and make sure that 

they have access to capital so that we close no more banks than 

we need to. 

Now, clearly, there are going to be banks that fail and there will 

be others that will fail. But only the ones that deserve to fail 

should be the ones that fail, and if there are viable banks that are 

not being, through accounting treatment and through regulatory 

fiat that was designed in a different time and place and isn’t as applicable in today’s world as it should be, the regulators have the 

capability, I believe, of making management assessments and determining who are the viable banks and I believe that they should 

have access to that capital. 

Senator BENNET. Does anybody else have a comment? Mr. Michael. 

Mr. MICHAEL. Senator Bennet, just a reminder. The credit unions 

have never had access to the TARP funds, although there have 

been some credit unions that expressed a need to have access. But 

we have been locked out of that opportunity. So we can’t comment 

on the process, other than the fact that we are outside looking in. 

Senator BENNET. It would seem to me—that is an interesting 

point, Mr. Johnson, on the criteria question, because one of the 

questions that I have had for the administration is shouldn’t we 

take into account the fact that you may have a financial institution—with respect to TARP, a financial institution failing in a region and there simply not being any credit available as part of the 

way we approach this question, because there is simply no place for 

anybody to go, at least in that part of my State. 

I want to ask you about modifications. You talked earlier about 

home mortgage loan modifications. Are you seeing—these are people that are still paying on their loans but may not have the income that they had before because they are unemployed. Is that 

the issue, rather than their home value falling in these regions 

below what it once was worth? 

Mr. JOHNSON. Well, we don’t have—we have home values that 

are falling, but we never had big run-ups in values in the past. So 

that is—there are some areas of the country where perhaps if a 

loan is seasoned 5 or 7 years, it may have dropped 20 percent. But 

it probably went up more than that over that period of time. So if 

they didn’t releverage that home, they are probably in a position 

where they could refinance, and that is a problem in Michigan, because we never had that big run-up and yet we have still had the 

big run-down. 

We basically have two types of mortgages. We do originate mortgages that we sell to Freddie Mac, although we retain servicing on 

all of those mortgages, so the point of contact for our customer is 

still us. Now, we have to follow the Freddie Mac guidelines when 

we are dealing with delinquencies, nonpayment in that portfolio 

and that is precisely what we do. We are working very hard to figure out what those guidelines are and are following them and have 

done a good number of modifications that are now moving into the 
18 

second, third month of that program and I think we are going to 

be saving quite a few of those folks. 

But we also have portfolio loans, where we were making loans 

that did not, for one reason or another, fit in a box with Freddie 

Mac. And frankly, our approach on those is a rather tried and true 

one that has worked for us, for our bank, for all the time that I 

have been there, which is some 40 years, and that is if this home 

is going to be foreclosed upon, we are then going to have to go 

through a fairly expensive phase where we get an appraisal. We 

have to get the folks out of the house. They have some recourse to 

extend that period of time. But ultimately, we then get possession 

of the home. We have the problem where the folks have probably 

not been taking very good care of it for the past several months 

since they are going to leave, so the value of the home further goes 

down. We have an unoccupied home in a market that is filled with 

unoccupied homes at that point. 

So very often, the best thing for us to do is essentially sell that 

house back to the people that already live there. The house is 

worth what it is worth, and if that means that we take a loss, then 

we take a loss. We are going to take a loss if we sell it to somebody 

else, so we might just as well recognize what the value of that 

home is, and if that family can make a payment based upon that 

new valuation, then that is the way we proceed. 

Everybody wins. The value of the house is higher than it would 

have been if it had been vacant for 6 months and we keep the folks 

in the home and we keep a customer on our books. 

Senator BENNET. Thank you, Mr. Chairman. Thank you very 

much for your testimony. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and I want to thank 

all of you for very good testimony and would reiterate what everyone has said. I think having people like you here that represent the 

type of banks that most of us know well throughout the country is 

a very good thing, and again, your testimony has been outstanding. 

Mr. Johnson, I want to say that as head of the ABA, I very much 

appreciated your comments about the administration’s proposal on 

too big to fail and I certainly hope that you all will weigh in. It is 

pretty evident to me that what they have laid out is they want to 

continue business as it has been over the last year and basically 

codifying TARP so that they can decide on an ad hoc basis which 

firms will succeed and which will not, and I certainly hope you all 

will weigh in and certainly appreciate the comments you made in 

that regard. 

I want to change tracks just a little bit, because I think our fellow colleagues here have asked some wonderful questions and you 

all have highlighted numbers of things. We have not had a hearing 

here on Fannie and Freddie in a year. It is pretty amazing, actually. One of the organizations doesn’t have a CEO. The trillions of 

dollars of assets, I mean, it is just an amazing thing that this 

Banking Committee has not had a hearing there. 

The former Treasury Secretary had some thoughts about what 

ought to happen to Fannie and Freddie, and again in this regulation proposal, Fannie and Freddie aren’t even addressed, OK. 

There are some people in the country that would like to see Fannie 
19 

and Freddie go away and think for the Federal Government to be 

in this kind of business is not a good thing. 

I see that you guys have these core deposits that are very important to you, and yet the residential industry is basically almost off 

limits because we have these huge GSEs that basically everybody 

funnels 30-year mortgages into. I am wondering, in your own communities, and I will ask Mr. Hopkins first, what would be—if these 

entities did not exist, how would community bankers feel about 

that? Would that be a huge opportunity for you, instead of having 

to go to commercial loans for profit making purposes that are very 

cyclical? Would that be an opportunity or would that be detrimental to you? 

Mr. HOPKINS. For our institution, it would be very detrimental 

because we originate approximately—this year, we are on track, 

with all the mortgage brokers that have gone out of business, to 

originate $250 million worth of mortgage loans, and I don’t know 

how we could sustain that on a going-forward basis with the capital that we have and being only a $550 million bank as it is. So 

it is important for us to have access to secondary market funds. It 

is critical that we have that access because the housing market is 

a very concentrated industry, and without it, we could not compete 

with the Bank of Americas and the Wells Fargos and those and I 

think the market would become a lot more concentrated. 

We do service those mortgages. Those customers, for all intents 

and purposes, don’t know that we don’t hold the dollars on our 

books because everything comes out in our name. We are the point 

of contact. 

Senator CORKER. So the fee income in originating those is far 

more important to you than holding portfolio loans like you do with 

the commercial real estate? 

Mr. HOPKINS. It gets down to the interest risk that you would be 

taking on by putting on 30-year mortgages versus short-term deposits. 

Senator CORKER. And is there a way—and I figured that might 

be your response, so is there a way for the Federal Government to 

be involved in hedging that risk for you and yet not taking ownership through these GSEs of the portfolios themselves? Is there a 

solution there that might make sense without us taking on the risk 

of credit in the portfolios itself? 

Mr. HOPKINS. Well, again, I think it becomes an allocation of capital. We are required to have certain levels of capital and we would 

eat up our capital very quick. If we were to do 2 years’ worth of 

mortgages, we might be done because our capital ratios would be 

required, particularly your leverage ratio. 

Senator CORKER. And I see, Mr. Hopkins, you are shaking your 

head in agreement with what he is—— 

Mr. HOPKINS. Yes. It is really very true. It is one of the few 

points of access to the capital markets that community banks have, 

the securitization of residential mortgages, and we get paid—you 

mentioned fee income, and it is important to note that actually our 

up-front fee for selling a loan with servicing retained, which is 

what our bank does and what I understand yours is doing, as well, 

is really much lower than if we sold the loan with servicing released, which means some other servicer would be doing it. 
20 

So because we are in the relationship business, we want to maintain that contact with our customers and are willing to take, frankly, a lower up-front fee for doing that in terms of what we get paid 

when we sell the loan. But it gives us tremendous access to the 

capital markets that we wouldn’t have otherwise and we are still 

able to maintain that relationship but have it off our balance 

sheets. 

Senator CORKER. So in seeking a solution to the Fannie-Freddie 

dilemma that all of us find ourselves in, because if it were actually 

truly shown on our country’s balance sheet, we would have some 

tough issues to deal with here, we need to figure out a way to deal 

still, though, with creating liquidity for you to keep this constant 

access to capital. 

Mr. JOHNSON. I think you have hit the nail on the head, is whose 

balance sheet is it going to be on, and it really can’t be on ours, 

either, because of the capital concerns. 

Senator CORKER. So let me go back to the community bankers— 

and thank you for those answers—back to the community bankers. 

What relationship change has occurred at all over the last year 

with correspondent banks, the folks that you deal with that are 

sort of one tier up that are your correspondent lenders? Has there 

been much of a change there? 

Mr. HOPKINS. Yes, there has. Access to the secondary market, 

selling to them, has dried up. In most cases, they have canceled 

contracts, et cetera. So Fannie Mae and Freddie Mac right now are 

about the only game in town if you are a community bank trying 

to get access to the secondary markets. 

Senator CORKER. So the regionals upstream from you that typically would have provided liquidity—and I could name names, but 

I won’t—those folks who we are up here constantly talking to about 

making loans and they are constantly telling us that they are making more loans than they made in the past, those folks, as far as 

their correspondent relationship, from your perspective, that has 

gone away for you? 

Mr. HOPKINS. Well, that has gone away in that respect and also 

in the second respect, is I really don’t want to turn my best customers over to them and give them the primary relationship. If I 

send the mortgage to one of the large banks, I have lost that relationship because the only way I can do it is selling that service released, which means they have the contact with the customer. 

Senator CORKER. Since you represent all of these folks, do you 

have any comments there? 

Mr. JOHNSON. Well, I guess the only experience I have is really 

within my own bank directly that I can speak with a great deal of 

authority on. We continue to have a Fed funds line, which is an 

overnight borrowing facility which we have for liquidity purposes, 

but we very, very rarely use. We used to have those lines with two 

correspondent banks and now we have them with one. 

Senator CORKER. On a scale of one to ten, I mean, is that a major 

issue with each of you individually or is that a minor issue? Is that 

an issue for us to pay attention to here or is that an issue that 

there are bigger fish to fry? 

Mr. JOHNSON. Well, to be perfectly honest, most banks fail in an 

immediate sense because of liquidity rather than because of asset 
21 

quality problems. Maybe I am getting a little far afield here, but 

liquidity is always a very important discussion when we have our 

regulators into our banks, but it is even more so in a time of stress 

to the industry like this. The availability of—you really have to 

deal with on-balance sheet liquidity and off-balance sheet liquidity 

and lines from other banks are a critical component of that off-balance sheet liquidity. It is deserving of some attention. 

Senator CORKER. Mr. Chairman, I thank you. My time is up. I 

apologize to the other witnesses. There are a number of things— 

I would like to just reiterate what I think Mr. Hopkins said earlier, 

and that is I think the regulators—and we have had them into our 

office numbers of times—I think they are helping, as they always 

do, create self-fulfilling prophecy by virtue of the way they are 

dealing with our institutions. We have talked to them. I know that 

you all have probably talked to them. But I just hope that all of 

us will keep in mind that I think what Mr. Hopkins said was—the 

regulators are clamping down and helping make this recession 

more severe than it otherwise would have been. But anyway, thank 

you very much. I wish I had more time. I appreciate it. 

Chairman JOHNSON. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. 

I would agree with that assessment, Senator Corker. I think the 

regulators are a bit paranoid at this point in time and they don’t 

want to have any failure on their watch. I think that is probably 

human nature, but I think we need to put pressure on them to 

make sure they use common sense in their regulation. 

A couple of questions. I will just start with you, Mr. Hopkins. It 

deals with agriculture. It deals with agriculture operating loans 

specifically, on the ground. What has been the impact of the economic downturn on your availability of dollars for ag-operating 

loans? 

Mr. HOPKINS. We have adequate dollars available for ag-operating loans, and for the most part, most of our ag producers have 

done quite well. We are in a heavy crop area and the corn and soybean prices have been quite good. 

The problem we are seeing with some of our operators is the 

input costs over the last 12 to 24 months have increased dramatically. We feel at some point the commodity prices will come down 

more. We are seeing some real pressure on our livestock producers. 

Those are the people that I think we are seeing some real pressure 

on right now and I think it will be more so going forward over the 

next 12 to 24 months. 

Senator TESTER. Do you have much dairy in your region? 

Mr. HOPKINS. We don’t have a lot of dairy in our region anymore. 

We did at one time, but we do not have a lot in our area. 

Senator TESTER. OK. How about land acquisition? I don’t know 

if you give any loans out for land purchase or not, but how are the 

dollars for that? 

Mr. HOPKINS. We have adequate dollars available for lending for 

land acquisition also. Probably the concern there is that we have 

had a rapid spike in land prices over the last 5 years—— 

Senator TESTER. Yes. 

Mr. HOPKINS. ——and so that does concern us. 
22 

Senator TESTER. OK. Commercial real estate, and I am sorry I 

missed your testimony. I got called to the floor, so I apologize for 

that. I wish I could have heard it all. So I will just kind of go by 

your titles about what I think you know, and if somebody wants 

to jump in, they can. 

This is for Mr. Johnson. I really heard from many of the bankers 

back in Montana that there is a concern about the commercial real 

estate sector and actually heard some of it back here, too. They are 

predicting that may be the next domino in the credit crisis and 

could impact the Rocky Mountain West in a very negative way. Do 

you have any perspective or thoughts on that, on the commercial 

markets and where they are at and where they are headed? 

Mr. JOHNSON. Yes. I think it is probably a fair observation. Exactly how bad it gets and how long it lasts is sort of the unknown 

there. My perspective from Michigan is, you know, the one thing 

about high unemployment is that its effects are fairly predictable 

and its effects are very, very broad and very deep. We are, to some 

degree, a fairly active commercial real estate lender. We show up 

on the radar screen of our regulators for additional scrutiny in that 

regard, which we have so far successfully satisfied them. 

But when people don’t have jobs anymore or they don’t have as 

much income in the family as they had before and they are not 

shopping as much, that begins to affect retail and the impact, you 

know, you go by shopping centers and once the vacancy rate starts 

getting above 10 percent, you know that there is going to be stress 

on the value of those properties. 

Really, you have to approach that from a bank perspective—first 

of all, you have to hope that you are well capitalized, and if, in fact, 

you are well capitalized, then you are going to be able to work with 

those businesses and essentially keep those commercial real estate 

enterprises open the same way that you would work with a homeowner or a small business person. Just sort of dig your nails into 

the ledge and hold on as long as you can. 

Senator TESTER. And this is directed to both of you, Mr. Johnson 

and Mr. Michael. From your perspective, is the economic downturn 

as it applies to commercial or even private residences, homeowners, 

are rural areas being more impacted than urban areas, or is it 

about the same, or is it being less impacted? 

Mr. MICHAEL. Well, I would probably comment that probably the 

areas that are most heavily impacted are those that sit between 

rural and urban, the exurbs, and that is what I would define Stockton as being, and that is the area—the one that sits on the fringe 

is the one that is really getting trashed right now. 

Senator TESTER. OK. Regulators—and I don’t want to spend a lot 

of time on this. Senator Corker talked about it a little bit. There 

has been some talk about combining OCC and OTS and FDIC and 

portions of the Fed and maybe coming up with a regulator that is 

more inclusive, less gaps. What are your thoughts on that? I will 

just ask Mr. Hopkins for your perspective on that, if we were to 

do something like that. 

Mr. HOPKINS. We believe in a strong dual banking system, so we 

do believe that the competition amongst the regulators, just as it 

does with competition amongst banks, does make for stronger 

banks and stronger regulators. 
23 

Senator TESTER. We are going to maintain the dual charters? 

Mr. HOPKINS. Maintain the dual charters. 

Senator TESTER. But we will combine the ones at the Fed level? 

Mr. HOPKINS. If they combine the ones at the Fed level, we ask 

that they consider keeping a separate division to help with the 

OTS, because those institutions do focus on home lending and that 

is still their charter and mission. 

Senator TESTER. OK. And this can go to either one. There was 

a point in time not too many years ago—I know for a fact two-anda-half years ago—interest-only loans were very, very common. Low 

down payments, no down payments, were reasonably common. Has 

that changed? 

Mr. HOPKINS. From the banking perspective, I am not sure they 

were available. That really came from the unregulated financial institutions that were selling into the secondary market. 

Senator TESTER. Well—— 

Mr. HOPKINS. So that has changed because those lenders are no 

longer around. 

Senator TESTER. OK. I actually was, in fact, from a bank offered 

an interest only, no down loan to buy a house in Washington, DC. 

Could I still get that loan? 

Mr. JOHNSON. Not from my bank. 

Mr. HOPKINS. Not from my bank. 

Senator TESTER. You know my balance sheet. 

[Laughter.] 

Senator TESTER. What about down payments? Down payments, 

have they gone up, and by how much have they gone up? I am talking about a requirement. It used to be, it seems like, in the good 

old days—if they were, in fact, good old days—a down payment was 

pretty substantial on a home. Where is it at now? 

Mr. JOHNSON. Well, generally speaking, in our bank, it hasn’t 

changed all that much—— 

Senator TESTER. What were your requirements? 

Mr. JOHNSON. Generally 20 percent. We had some programs that 

we participated in that were very, very focused that were able to 

have lower down payments, but it did not combine everything. It 

wasn’t a low down payment and a negative amortization and this 

and that. 

Senator TESTER. All right. 

Mr. HOPKINS. We have—the programs typically are the 20 percent down, but we do have the FHA programs which are 3.5 percent down, but they are very strictly underwritten—— 

Senator TESTER. OK. 

Mr. HOPKINS. ——as to income and credit. 

Senator TESTER. One last question and then I will go, and thank 

you, Mr. Chairman, for the latitude. Oftentimes, particularly young 

couples that went in, they have been looking to buy their first 

home. This is a few years back—3, 4, 5 years back—and they needed, $100,000, $150,000. We are talking Montana here, so you know 

what I mean. It is probably similar to where you are at, Mr. Hopkins, where that is a decent home. And they would come in for the 

loan and the bank would say, you are eligible for $200,000. Is that 

still going on, or did it ever go on in your neck of the woods? 
24 

Mr. HOPKINS. Not to my knowledge. It didn’t happen at our 

bank. 

Senator TESTER. OK. 

Mr. JOHNSON. It didn’t happen at our bank, but that did happen 

in our market from nondepositories, and those are some of the 

loans that we are—I mean, those people are now coming in and 

talking to us and we are not able to save all of them. 

Senator TESTER. Yes. Well, I certainly appreciate your perspective on the programs. I am sorry I didn’t ask a whole bunch of 

questions to the other witnesses. It doesn’t mean you are not very, 

very important. 

I once again apologize for not being here for the testimony, because this is very important. You guys are critically important, and 

I will tell you what I tell my community bankers. You need to be 

regulated, but you are not the ones that caused the problem. The 

same thing with the credit unions, too, I might add. You are not 

the ones that caused the problem. The Wall Street people were the 

ones, and quite honestly, the ‘‘too-big-to-fail’’ is something that I 

personally have a great disdain for, whether it is in banking or 

whether it is in agriculture or whether it is in energy or whether 

it is in food, whatever. We need to rethink some of these operating 

systems we have in this country. Thank you for the work you do. 

Chairman JOHNSON. I want to thank the witnesses once again 

for traveling so far to be here today. 

I look forward to working with the Members of the Banking 

Committee in the coming weeks as we continue to consider measures to capitalize the banking sector and our economy as a whole. 

This hearing is now adjourned. 

[Whereupon, at 3:49 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
25 

PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON 

It is no exaggeration to say that our economy is currently experiencing extraordinary stress and volatility. As Congress and the Administration look at corrective 

policy changes, I am pleased to hold this hearing today to take a closer look at the 

role smaller financial institutions, specifically community banks and credit unions, 

play in our economy, especially in many rural communities. Throughout our Nation’s economic crisis there has often been too little distinction made between troubled banks and the many banks that have been responsible lenders. 

There are many community banks and credit unions that did not contribute to 

the current crisis—many rural housing markets that didn’t experience the boom 

that other parts of the country did, and community lending institutions didn’t sell 

as many exotic loan products as other lenders sold. Nonetheless, small lending institutions in rural communities and their customers are feeling the effects of the 

subprime mortgage crisis and the subsequent crisis in credit markets. Jobs are disappearing, ag loans are being called, small businesses can’t get the lines of credit 

they need to continue operation, and homeowners are struggling to refinance. 

Smaller banks play a crucial role in our economy and in communities throughout 

our Nation; we need to be mindful that some institutions are now paying the price 

for the risky strategies employed by some larger financial institutions. 

In coming weeks, the Banking Committee will continue its review of the current 

structure of our financial system and develop legislation to create the kind of transparency, accountability, and consumer protection that is now lacking. As this process moves forward, it will be important to consider the unique needs of smaller financial institutions and to preserve their viability as we come up with good, effective regulations that balance consumer protection and allow for sustainable economic growth. 

I would like to welcome our panel of witnesses, and thank them for their time 

and for their thoughtful testimony on how small lending institutions in rural communities have been affected by our troubled economy. I would also like to thank 

Senator Kohl for his interest in today’s hearing topic. I will now turn to Senator 

Crapo, the Subcommittee’s Ranking Member, for his opening statement. 

PREPARED STATEMENT OF SENATOR MIKE CRAPO 

Many community banks and credit unions have tried to fill the lending gap in 

rural communities caused by the credit crisis. Even with these efforts, it is apparent 

that many consumers and businesses are not receiving the lending they need to refinance their home loan, extend their business line of credit, or receive capital for new 

business opportunities. Today’s hearing will assist us in identifying these obstacles. 

As we began to explore options to modernize our financial regulatory structure, 

we need to make sure our new structure allows financial institutions to play an essential role in the U.S. economy by providing a means for consumers and businesses 

to save for the future, to protect and hedge against risk, and promote lending opportunities. These institutions and the markets in which they act support economic activity through the intermediation of funds between providers and users of capital. 

One of the more difficult challenges will be to find the right balance between protecting consumers from abusive products and practices while promoting responsible 

lending to spur economic growth and help get our economy moving again. Although 

it is clear that more must be done to protect consumers, it is not clear that bifurcating consumer protection from the safety and soundness oversight is the best option. If that is not the best option, what is and why? It is my intention to explore 

this topic in more detail with our witnesses. Again, I thank the Chairman for holding this hearing and I look forward to working with him on these and other issues. 

PREPARED STATEMENT OF JACK HOPKINS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

CORTRUST BANK NATIONAL ASSOCIATION, SIOUX FALLS, SOUTH DAKOTA, 

ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

JULY 8, 2009 

Introduction 

Mr. Chairman and Members of the Subcommittee, thank you very much for the 

opportunity to testify today on the state of community banks in rural America. 
26 

1 ICBA represents 5,000 community banks throughout the country. Community banks are 

typically independently owned and operated and are characterized by personal attention to customer service and are proud to support their local communities and the Nation’s economic 

growth by supplying capital to farmers and ranchers, small businesses, and consumers. 2 Impact of the Financial Crisis on U.S. Community Banks, New Opportunities in Difficult 

Times, March 2009, Christine Barry and Judy Fishman, Aite Group LLC, Boston, MA. 773 community banks were surveyed in February, 2009, for this study. 

My name is Jack Hopkins and I am the President and CEO of CorTrust National 

Bank Association in Sioux Falls, SD. I am testifying on behalf of the Independent 

Community Bankers of America (ICBA) and I serve on ICBA’s 1 Executive Committee. I am a past President of the Independent Community Bankers of South Dakota and have been a banker in South Dakota for 25 years. I am pleased to present 

ICBA’s views on the state of credit conditions in rural America. 

CorTrust is a National Bank with 24 locations in 16 South Dakota Communities 

and assets of $550 million. Eleven of the communities have less than 2,000 people. 

In seven of those communities, we are the only financial institution. The smallest 

community has a population of 122 people. CorTrust Bank is currently one of six 

authorized servicers in the State of South Dakota for the first-time homebuyers program and one of the leading South Dakota lenders for the U.S. Department of Agriculture (USDA) Rural Housing Service home loan program. 

Today’s testimony will briefly provide the community bank perspective on credit 

conditions in rural America and offer recommendations for the Members of this Subcommittee to consider to ensure the availability of vital credit to our rural communities. 

The Financial Crisis 

As the financial crisis spread and deepened last fall many people wondered what 

the impact of the worst economic recession since the Great Depression would be on 

rural America. At the outset, it is important to note, community banks played no 

part in causing the financial crisis and have watched as taxpayer dollars have been 

used to bail out Wall Street investment firms and our Nation’s largest banks considered ‘‘too-big-to-fail.’’ During this same time period, dozens of community banks 

have been allowed to fail while the largest and most interconnected banks have 

been spared the same fate due to government intervention. 

Mr. Chairman, community banks did not cause the current financial crisis, fueled 

by exotic lending products, subprime loans, and complex and highly leveraged investments. The sharp decline in the U.S. housing markets and the distressed credit 

markets triggered a ripple effect throughout the entire economy and that continues 

to strain households and businesses. 

Community Banks’ Role in the Rural Economy 

Community banks play an important role in the Nation’s economy. There are approximately 8,000 community banks in the U.S. and the vast majority of these are 

located in communities of 50,000 or fewer residents. Thousands of community banks 

are in small rural communities. 

According to the SBA Office of Advocacy, insured institutions with less than $1 

billion in assets make 31.3 percent of the total dollar amount of small business 

loans of less than $1 million, even though they hold only 11.5 percent of industry 

assets. This is important since small businesses represent 99 percent of all employer 

firms and employ one-half of the private sector workforce. Small businesses are significant in rural America since many farmers and/or their spouses have off-farm 

jobs. In addition, the more than 26 million small businesses in the U.S. have created 

70 percent of the net new jobs over the past decade. Community banks are small 

businesses themselves and specialize in small business relationship lending. 

Commercial banks extend approximately 53 percent of non-real-estate loans to the 

farm sector and 38 percent of the real estate credit. Community banks under $1 billion in assets make over 60 percent of all agricultural loans extended by the commercial banking sector. Worthy of note, community banks under $500 million in assets extend over 50 percent of all agricultural credit from the banking sector. 

Aite Study 

The Aite Group LLC released a study, 2 conducted with the assistance of the 

ICBA, in March 2009, on the impact of the financial crisis on community banks. The 

study drew several conclusions regarding the ability of community banks to continue 

serving their customers during the financial crisis. 

Although the current financial crisis is impacting all financial institutions, most 

community banks are well-positioned to overcome new challenges, take advantage 
27 

of new opportunities, and reclaim some of the deposits lost to larger institutions 

over the last decade. 

Despite most community banks’ lack of participation in subprime lending, the implications of larger bank activities have had an impact. Of the 773 community banks 

surveyed, 73 percent stated they have seen an increase in their traditionally low 

loan delinquencies and charge-offs since the start of the crisis. The significant 

growth in quarterly net charge-offs for the industry is being driven primarily by the 

largest banks. 

Fifty-five percent of bankers stated they have seen an increase in deposits as a 

result of new customer acquisition. Only 17 percent are challenged by customers 

withdrawing deposits from their institutions. 

Community banks are still lending and 40 percent have seen an increase in loan 

origination volumes over the last year, while 11 percent believe the financial crisis 

has ‘‘significantly curtailed’’ their lending ability. In several cases, decreases in community bank lending activity, when it has occurred, is not the result of a lack of 

funds or financial instability, but rather part of a reaction to mixed messages coming from the U.S. government. While these banks are told by policy makers to lend 

money, they also feel the agencies are dissuading them from lending by putting 

them through overzealous regulatory exams. Moreover, an economic contraction, by 

definition, means fewer loans will be originated. 

Even though some community banks are faced with new lending challenges, they 

are still lending, especially when compared to larger banks. In fact, while the largest banks saw a 3.23 percent decrease in 2008 net loans and leases, institutions 

with less than $1 billion in assets experienced a 5.53 percent growth. 

The financial crisis and new documentation requirements are also causing some 

banks to change processes and reexamine their credit evaluation practices. While 

most community banks have not strayed from traditional prudent lending and underwriting practices, 81 percent have tightened their credit standards since the 

start of the crisis. Of banks surveyed, 20 percent described this tightening as significant. Banks with more than $100 million in assets have been the most likely to 

tighten their credit standards, while only 15 percent of banks with less than $100 

million in assets have done so. In most cases, tighter standards often means focusing greater attention on risk management and requiring more borrower information 

prior to making lending decisions. 

Small Business Lending 

The prolonged recession, turmoil in the financial markets, and procyclical bank 

regulatory policies continue to jeopardize credit availability for many small businesses in urban and rural areas. Community banks are well-positioned and willing 

to lend to small businesses especially during these challenging economic circumstances. ICBA strongly supports President Obama’s and Congress’ recent initiatives to bolster small businesses loan programs included in the American Recovery 

and Reinvestment Act of 2009. Small businesses will help lead us out of the recession and boost needed job growth. Therefore, it is important to focus on the policy 

needs of the small business sector during this economic slowdown. SBA lending 

must remain a viable and robust tool in supplying small business credit. 

The frozen secondary market for small business loans continues to impede the 

flow of credit to small business. Several programs have been launched to help 

unfreeze the frozen secondary market for pools of Small Business Administration 

(SBA) guaranteed loans, including the Term Asset-Backed Securities Loan Facility 

(TALF) and a new SBA secondary market facility. The TALF, implemented by the 

Federal Reserve and U.S. Treasury, was intended to extend billions in nonrecourse 

loans to holders of high-quality asset-backed securities (ABS) backed by consumer 

and small business loans in a bid to free up the frozen ABS market. 

Specifically, the TALF program for SBA secondary market loan pools is very close 

to success. Unfortunately, one program obstacle requiring third-party direct competitor primary dealers to be middlemen has completely stalled the program. SBA loan 

poolers will not turn over their customers to their direct competitors nor have the 

primary dealers engaged in the program to date. ICBA recommends either eliminating the primary dealer middlemen in the process or allowing the Federal Reserve 

Bank of New York to work as the intermediary with the existing SBA loan poolers. 

Similarly, the new SBA secondary market program is close to success but the debate over potential additional fees to operate the program has stalled its launch. 

ICBA recommends using the enacted substantial funded budget authority to run the 

program in combination with user fees so as not to undermine the program with 

unworkable double fees. 

ICBA believes with these minor adjustments, these targeted SBA secondary market programs will keep money flowing to consumers and small businesses providing 
28 

3 Jason Henderson, Federal Reserve Bank of Kansas City before the Subcommittee on General 

Farm Commodities and Risk Management, April 1, 2009, page 2. 

the intended value and results. In addition, government sponsored enterprises and 

U.S. government loan programs should not reject a loan for the sole reason the property is in a declining market. 

The Agricultural Sector—Farm Income 

Many rural lenders have been quite concerned that a global recession would lead 

to fewer exports of U.S. agricultural products, thereby reducing markets and income 

for American farmers, and causing a ripple effect up and down Main Street. The 

agricultural sector was fortunate that at the outset of this severe recession, in which 

unemployment figures continue to march toward double digit levels, U.S. net farm 

income had reached a record high of nearly $90 billion for 2008. 

This followed the $87 billion level reached in 2007 and a 10-year average (1999– 

2008) of $65 billion. However, production expenses also increased dramatically during the past 2 years, and although expenses are projected to be approximately 9 percent lower this year, net cash income is also projected to fall to $71 billion. While 

still above the 10-year average, 2009 net farm income will be 18 percent less than 

last year’s record level, according to USDA’s Economic Research Service. 

Perspective on Agricultural Credit 

ICBA agrees with various economists who have noted there is an ample amount 

of credit available to the agricultural sector for credit worthy borrowers. However, 

there are several problem areas of concern that warrant continued monitoring. For 

example, the dairy industry has been hard hit by lower prices and high feed costs 

which have also impacted the livestock sector. In addition, there are several States 

where farmers have been impacted by drought conditions that will threaten yields 

and farm income. 

In recent testimony before the House Agriculture Committee, the Federal Reserve 

Bank of Kansas City stated that despite some increasing risks in agriculture, ample 

credit appears available at historically low interest rates. 3 In addition, recent data 

from the FDIC indicates farm loans (non-real-estate) and farm real estate loans increased collectively by $8 billion for the period ending March 31, 2009, compared 

to March 31, 2008. 

ICBA’s Agriculture-Rural America Committee Input 

ICBA conducted a conference call last month with its Agriculture-Rural America 

Committee to further assess credit conditions. This committee consists of 25 agricultural bankers from every region of the U.S. representing virtually every agricultural 

commodity grown in the country. 

A number of these bankers stated they had no classified agricultural loans. This 

is in part due to several areas of the country having excellent crops during the past 

2 years, allowing farmers to increase their cash reserves or pay down their lines 

of credit. Some bankers have seen a significant increase in agricultural loans and 

have seen little deterioration in their agricultural portfolios but are concerned higher input costs will reduce farm income. Some community banks have picked up agricultural loans as larger banks have cut back their lines of credit. Land values have 

remained steady for highly productive farm land although sales have slowed considerably. 

Land values for less productive farmland have fallen 5 to 10 percent in some 

areas. Some banks have tightened underwriting standards, including taking a 

stronger collateral position, slightly shortening loan maturities, or requiring greater 

documentation from borrowers. The dairy, cattle feeding, and cow-calf sectors are 

areas experiencing stress. 

Several bankers stated they are concerned with the potential for their regulators 

to second-guess their desire to make additional loans and some bankers are under 

pressure from their regulators to decrease their loan-to-deposit ratios. In addition, 

several bankers stated their regulators do not want them to use Federal Home Loan 

Bank (FHLB) advances as a means of funding their loans. The regulators are suggesting FHLB advances are not as ‘‘stable’’ as core deposits. Bankers disagree, noting it is quite easy for depositors to withdraw funds in search of higher yields in 

the stock market, which has risen rapidly in recent months, or in shopping for higher rate Certificates of Deposit (CD) at other institutions. 

The real issue, bankers believe, is that regulators do not want to be in a secondary security position behind the FHLB if there are widespread bank failures. 

FHLB advances have become an important source of funding for community banks 

that must be allowed to continue. 
29 

4The cost of TARP funds includes a 5 percent dividend payment for the first 5 years increasing to 9 percent after 5 years. On an after tax basis, ICBA estimates the cost would be 7.5 percent the first 5 years and 13.5 percent after the first 5 years. 5The Kansas City region, the Tenth Federal Reserve District, includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri. 

A number of bankers also complain about a very harsh examination environment 

from field examiners and believe there is a ‘‘disconnect’’ between the public statements from policy makers in Washington and the treatment of local banks during 

examinations. This bolsters the findings of the Aite study. 

At least one banker relayed to other committee members when he called the regulator to inquire about receiving TARP funds he was questioned as to why he needed 

the money. When he explained he wanted to supplement his capital position and 

also make more loans, the regulator told him the agency didn’t want banks making 

more loans in this environment. This attitude has led many community banks to 

conclude there is reluctance to extending TARP money to community banks and 

that the program was primarily designed to assist large, troubled banks. Community banks in danger of failing would not be eligible for TARP funds. 

In addition, many banks have concluded TARP funds are an expensive source of 

capital both in terms of the dividend cost as well as the administrative costs. 4 There 

is also the risk requirements will be changed after banks receive funding and new 

conditions will be imposed. 

Generally, the bankers’ conclusions are that ample credit is available for creditworthy borrowers; they would like to make more loans; and they’re concerned about 

heavy-handedness from their regulators going forward. It is important to repeat: 

community banks remain very well-capitalized and are in a good position to assist 

with new borrowing needs as the economy strengthens. While, there are some sectors of agriculture that are struggling; the agricultural portfolios at many rural 

banks strongly contribute to each bank’s overall income and stability. 

One limiting issue is that regulators recently required community banks to increase their capital levels. Previously, regulators increased community bank capital 

levels from 8 percent to 10 percent. Now the regulator requires a 12 percent capital 

level for all banks that have commercial real estate loan volumes three times their 

level of capital (e.g., $30 million in commercial loans and $10 million of capital). Obviously, the regulators believe commercial real estate loans are more vulnerable in 

the current economic climate. For example, many banks in northern Colorado exceed this threshold due to the region’s fast growth in recent years. However, since 

capital is leveraged approximately 10 times for new lending, a $2 million increase 

in capital reduces the amount of lending the bank is able to provide by $20 million. 

Many rural bankers believe this new requirement is unnecessarily restrictive. 

Federal Reserve Bank Agricultural Surveys 

Several of the Federal Reserve District banks (Kansas City, Dallas, Chicago, Minnesota, and Richmond) conduct quarterly agricultural surveys of bankers in their regions. A summary of these surveys follows. 

The Federal Reserve Bank of Kansas City 5 notes the average return on assets 

(ROA) and equity (ROE) at agricultural banks steadily declined in 2008. ROE at ag 

banks last September declined to 7.6 percent and ROA declined to 0.8 percent. Yet, 

these returns were much stronger than returns at other commercial banks. Contributing to the decline in ag bank profits were lower interest rates which have dropped 

significantly below 2006 levels. At smaller banks, delinquency rates on agricultural 

loans actually declined. Delinquency rates and net charge-offs on agricultural loans 

remain well below other types of loans and help explain the relative strength of agricultural banks. The delinquency rate on all types of loans and leases in the third 

quarter of 2008 was almost triple the rate of agricultural loans. Ag banks report 

ample funds for operating loans. 

Banks have tightened lending standards to preserve capital and manage risk arising from the economic downturn. Collateral requirements rose almost 20 percent 

above year-ago levels but this increase does not appear to have severely restricted 

loan activity as farm real estate accounted for approximately 17 percent of the collateral used for the Nation’s farm operating loans. Bankers report deteriorating loan 

quality as livestock profits were elusive and margins declined for the crop sector. 

Carry-over debt appears to be rising as more ag banks report an increase in operating loan renewals and extensions during the fourth quarter. In response to rising 

risks, banks reduced the length of operating loans to approximately 12 months. 

Rising job losses from the recession pose a risk to deposit growth because people 

could lose their income stream and tap savings for household needs. Ag banks are 
30 

6The Minneapolis Federal Reserve serves the six States of the Ninth District: Minnesota, 

Montana, North and South Dakota, 26 counties in northwestern Wisconsin, and the Upper Peninsula of Michigan. 7The Federal Reserve Bank of Dallas covers the Eleventh Federal Reserve District, which includes Texas, northern Louisiana, and southern New Mexico. 8The Chicago Fed serves the Seventh Federal Reserve District, a region that includes all of 

Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. 9The Federal Reserve Bank of Richmond, (Fifth district) comprises Maryland, the District of 

Columbia, Virginia, North Carolina, South Carolina, and most of West Virginia. 10This survey can be accessed at: http://www.agrisk.umn.edu/Library/Display.aspx?RecID=3971. 

increasing their use of USDA guaranteed farm loans. Continued deterioration in the 

agricultural economy could further erode the creditworthiness of borrowers. Farmland values edged down in the fourth quarter. 

The Federal Reserve Bank of Minneapolis 6 reports farm income, capital expenditures, and household spending decreased in the first quarter. Loan demand was flat 

and collateral requirements increased. Banks reported no shortage of funds and interest rates decreased from the fourth quarter of 2008. Survey respondents expect 

decreases in income and capital expenditures during the second quarter. Dairy producers are hard hit as the price of milk has fallen to below breakeven levels. Most 

respondents from Wisconsin report below average income for their borrowers. One 

quarter of Minnesota respondents reported above average income, but 49 percent reported below average income. Producers are responding to lower spending by reducing capital equipment spending. Approximately 25 percent of respondents reported 

lower levels of loan repayments and 19 percent reported higher levels. Twenty-five 

percent saw higher renewals or extensions and only 8 percent saw lower levels. 

The Federal Reserve Bank of Dallas 7 includes the States of Texas and portions 

of New Mexico and Louisiana, a region impacted by a severe drought. Many ranchers are unable to reach a breakeven point, forcing livestock liquidations. The dairy 

industry is suffering from large losses. The outlook for crop production, due to the 

lack of moisture, remains bleak. Eighty-four percent of bankers report loan demand 

remains unchanged or has decreased compared to last quarter. 

The Federal Reserve Bank of Chicago 8 reports sale of farms were below the levels 

of the prior year. Bankers anticipate declines in land values during the second quarter. For the second quarter of 2009, respondents expect higher loan demand for operating loans and USDA guaranteed loans. As of April 1, District interest rates had 

reached historically low levels with the level for operating loans at the lowest since 

the early 1970s. The average loan-to deposit ratio was 76 percent, or 4 percent 

below the desired level. As land values have stalled, cash rental rates for farmland 

increased 7 percent for 2009. Twenty-one percent of bankers reported more funds 

for lending were available than a year ago and 9 percent reported fewer funds were 

available. 

Bankers expect the volume of non-real-estate farm loans to grow during the second quarter compared to year ago levels and expect higher FSA guaranteed loan demand. They expect farm machinery, grain storage construction, feeder cattle, and 

dairy loan volumes to decrease. 

The Federal Reserve Bank of Richmond’s 9 fourth quarter 2008 survey reported 

the demand for farm loans was little changed from its sharp drop off in the third 

quarter, which bankers attributed to variations in commodity prices and production 

costs. Lenders expressed concern about escalated feed costs which had reduced profits for livestock production. Requests for loan renewals or extensions increased at 

a quicker pace. Agricultural lenders reported that farm loan availability turned positive, and collateral requirements eased slightly from third quarter levels. Reports 

also indicated interest rates for agricultural loans moved lower across all categories. 

Compared to third quarter levels, rates for intermediate-term loans decreased 34 

basis points and rates for operating loans moved down 28 basis points. In other categories, interest rates for long-term real estate loans fell 19 basis points (bp), and 

interest rates for feeder cattle loans dropped 10 bp. 

In the fourth quarter, 75 percent of lenders reported that they had actively sought 

new farm loans, up slightly from last quarter’s reading of 73 percent. Fourth quarter land prices were slightly below the previous quarter and considerably lower than 

year ago levels. Bankers expected farm loan volumes in the first quarter of 2009 

to continue a downward trend led by further weakness in the demand for dairy and 

feeder cattle loans. 

National Agriculture Risk Education Library Survey 

In an effort to better understand what is happening in the agricultural economy, 

a survey 10 was conducted in January 2009 by the Extension Risk Management 
31 

Education Regional Centers and the Center for Farm Financial Management at the 

University of Minnesota, funded through the USDA CSREES Risk Management 

Education Program. Twenty-three hundred agricultural professionals responded to 

the survey, whose respondents represented various agricultural disciplines: Lenders: 

21 percent; educators: 43 percent; crop insurance representatives: 7 percent; consultants: 6 percent—elevators, cooperatives, marketing brokers, and nonprofits: 22.5 

percent. 

Currently, 63 percent of respondents stated that 10 percent or less of the producers they work with are experiencing financial stress, with 15 percent indicating 

that less than 2 percent of the producers they work with are currently experiencing 

financial stress. 

In the next 3 years, however, more than 28 percent of respondents expect at least 

30 percent of their agricultural clients will experience financial stress. Seventy-five 

percent of respondents expect 11 percent or more of producers will experience financial stress in the next 3 years. 

Twenty-six percent of lenders think the probability is very high that producers 

will experience financial stress in the next 3 years. Fifty-four percent of lenders expect the probability of financial stress to be ‘‘high.’’ 

It is particularly interesting to note the reasons stated for expected financial 

stress in agriculture over the next 3 years. The first five reasons given were: Price/ 

input cost margins; price volatility; negative cash flows; inadequate business planning; and lack of financial planning skills. Tightening credit availability was sixth 

on the list of thirteen reasons and was cited as having ‘‘moderate’’ impact. The lowest rated factors expected to have an impact on farm financial stress were rising 

interest rates and declining land values. 

Farm Credit System Considerations 

The Farm Credit System (FCS) is a government sponsored enterprise (GSE) that, 

unlike other GSEs, competes with private sector lenders at the retail level. The financial crisis has proven that not only do GSEs have the implicit backing of the 

Federal Government; they also have the explicit backing of the Federal Government. 

Just like the Nation’s largest banks, they would not be allowed to fail in times of 

financial difficulty. The FCS, as a competitor with community banks, also has 

unique advantages—it can typically raise funds cheaply in the government debt 

markets and FCS institutions have numerous tax advantages enabling them to offer 

lower rates than commercial banks. 

This has led to FCS entities ‘‘cherry picking’’ prime farm loans from community 

banks as FCS institutions seek the very best customers from bank portfolios. Allowing this practice, unintended by Congress, can discourage community bank involvement in the agricultural sector, reducing the amount of resources and institutions 

available to farmers. 

The performance numbers of the FCS indicates this as well. Compared to commercial ag banks’ ROE of 7.6 percent and ROA of 0.8 percent for September 2008, FCS 

associations’ ROE for the same time period was 10.85 percent and associations’ ROA 

was 1.70 percent. 

Community banks serving agriculture should receive the same tax benefits as 

FCS associations. In this century, it no longer makes sense to provide billion-dollar 

and multibillion dollar FCS institutions tax advantages over much smaller commercial lenders to compete for the same customers. The benefit of equalizing the playing 

field will accrue to the end-user—the farmers and ranchers. 

Administration’s Regulatory Reform Proposals 

ICBA supports the administration’s goals of making the overall financial system 

more resilient and less vulnerable to ‘‘too-big-to-fail’’ institutions that were a key 

factor in the recent financial turmoil. The administration’s proposal offers community banks both constructive measures ICBA will support and those ICBA will oppose. 

The proposal addresses a longtime ICBA priority by dealing with the risks created 

by ‘‘too-big-to-fail’’ institutions. It is a good, strong step in the right direction but 

Congress needs to go further. ICBA is pleased the administration decided to maintain the dual banking system. This will allow the maintenance of Federal and State 

bank charters and allow the concerns of community banks to be heard, rather than 

to be drowned out by the larger and more complex financial institutions. 

ICBA Recommendations to Congress 

While it is difficult to predict accurately what will happen in the economy in the 

next two or three quarters, we believe Congress can have a positive influence by 

making a number of key policy choices. ICBA recommends: 
32 

1. Provide additional funding for USDA direct and guaranteed farm loans. Prior 

to the July congressional recess, Congress passed and the President signed the 

supplemental appropriations bill which added $400 million of direct operating 

loans, $360 million in direct ownership loans and $50 million in guaranteed operating loans. There may be a need even more for guaranteed operating loans 

and Congress should closely monitor loan demand in these important programs. These programs assist borrowers who cannot obtain credit elsewhere 

and are an important backstop for farmers who need temporary assistance 

until they are able to graduate to commercial credit. 

2. Enhance USDA’s Business and Industry (B & I) loan program. Congress added 

significant new money for USDA’s rural development efforts as part of the recently enacted economic stimulus package (P.L. 111–5). The new funding would 

allow an additional $3 billion of business and industry loans in addition to $1 

billion of loans provided as part of USDA’s regular budget. However, the funds 

to provide $3 billion in new B & I loans will expire October 1, 2010. It will 

be important for USDA to aggressively market the program to lenders and provide adequate information in order to utilize these new funds. 

Even more importantly, the B & I program needs to be enhanced (at least for 

the new funding) by: (A) implementing no more than a one percent origination 

fee; (B) increasing guarantees on loans under $5 million from the current 80 

percent level to 90 percent—perhaps even 95 percent on smaller loans; and (C) 

not eliminating the low document application as USDA appears to be on the 

verge of doing for smaller loans. These changes would help ensure the program 

is attractive for lenders and their customers and will ensure Main Street rural 

America has the resources necessary to ride out any storms on the horizon that 

could result from stress in the agricultural sector. 

3. Ensure that the FCA does not proceed with its Rural Community Investments 

Proposal. This proposal poses significant new risks to the FCS and its borrowers and should not be adopted. The proposal appears to be illegal and was 

never considered or authorized by Congress. It allows FCS to extend credit, 

mislabeled ‘‘investments,’’ for a vast array of purposes never intended by Congress. These purposes include extending credit for nonfarm business financing, 

apartment complexes, construction projects and virtually any other purpose. 

This wide nonfarm reach of FCS institutions will move FCS lenders further 

away from serving farmers and ranchers—the specific reason it was created 

and granted GSE tax and funding privileges. 

4. Ensure the regulators not unduly restrict lending by community banks. Regulators can have a major impact on the ability of lenders to extend credit particularly if they engage in unduly harsh examinations at the local level. Many 

community banks believe this is occurring. Members of Congress should interact with regulatory agencies and stress the need to allow the banking sector 

to work with rural customers during difficult financial times that may lie 

ahead. Such regulatory flexibility allowed many farmers and small businesses 

to survive the turbulent times of the 1980s farm crisis but was the result of 

clear and strong messages sent by Congress. 

5. Avoid unintended consequences resulting from imposing new requirements on 

the banking sector. In recent months there have been various proposals aimed 

at bank recipients of TARP funds that would impose unnecessary costs and 

regulatory burdens on banks. Such proposals have included requiring commercial banks to write down principal and interest on troubled loans as the first 

option to consider when restructuring loans. Bankers already work with their 

customers and utilize a wide variety of options to keep customers in business. 

Washington should allow community banks to work with borrowers in troubled 

times without adding to the costs and complexity of working with customers. 

6. Support the Administration’s proposals on systemic risk and dual banking 

charters. It is important to prevent ‘‘too-big-too-fail’’ banks or nonbanks from 

ever threatening the collapse of the financial system again. Community banks 

support the dual system of State and Federal bank charters to provide checks 

and balances, which promote consumer choice, and a diverse and competitive 

financial system that is sensitive to financial institutions of various complexity 

and size 

Conclusion 

Thank you, Mr. Chairman, for the opportunity to testify today. As stated several 

times in the written testimony, community banks continued conservative and prudent lending practices during the last several years and have worked with borrowers and even increased lending during this latest period of economic contraction. 
33 

1Financial data is as of March 2009. Credit union data is from the NCUA, bank data is from 

the FDIC. 

In addition, thousands of community banks are providing loans to farmers, ranchers, and small businesses at historically low interest rates. ICBA urges the Banking 

Committee to consider the recommendations provided in the testimony to enable the 

community banking sector to do even more to serve our rural communities. ICBA 

looks forward to working with the Senate Banking Committee as these proposals 

move through Congress. 

PREPARED STATEMENT OF FRANK MICHAEL 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

ALLIED CREDIT UNION, STOCKTON, CALIFORNIA, 

ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION

JULY 8, 2009 

Chairman Johnson, Ranking Member Crapo, and Members of the Financial Institutions Subcommittee, thank you very much for the opportunity to testify at today’s 

hearing on ‘‘The Effects of the Economic Crisis on Community Banks and Credit 

Unions in Rural Communities’’ on behalf of the Credit Union National Association 

(CUNA). CUNA is the Nation’s largest credit union advocacy organization, representing over 90 percent of our Nation’s approximately 8,000 State and Federal 

credit unions, their State credit union leagues, and their 92 million members. 

My name is Frank Michael, and I am President and CEO of Allied Credit Union in Stockton, California. Allied Credit Union is a small institution with $20 million 

in assets and approximately 2,600 member-owners. 

Originally my credit union’s field of membership was limited to Greyhound bus 

drivers but it has grown to include employees served by a variety of labor union 

locals, those who live, work, worship, or attend school in the incorporated and unincorporated areas of Stockton, California, and employees of a number of companies 

outside of Stockton proper. 

I also serve as Chair of CUNA’s Small Credit Union Committee—which is charged 

with monitoring issues affecting small credit unions that operate in both urban and 

rural settings. 

I am honored to be here to speak to you about the present state of small credit 

unions in rural communities, the obstacles these institutions are encountering, and 

the effects of recent legislation on these institutions. 

Credit Unions Stand Apart From Other Financial Institutions 

I would like to emphasize that while I am here to represent the views of ‘‘small’’ 

credit unions, credit unions are generally very small by banking industry standards: 

The average credit union has roughly $110 million in total assets whereas the average banking institution is 15 times larger with $1.7 billion in total assets. 1 (The 

median size credit union has just $15 million in total assets and the median size 

bank is about 10 times larger with $146 million in total assets). 

It is also important to stress that credit unions—rural, urban, large, and small— 

did not contribute to the subprime meltdown or the subsequent credit market crisis. 

Credit unions are careful lenders. And, as not-for-profit membership cooperatives 

the overriding operating objective at credit unions is to maximize member service. 

Incentives at credit unions are aligned in a way that ensures little or no harm is 

done to the member-owners. As we have seen, the incentives outside of the credit 

union sector are aligned in a way that can (and often does) cause harm to consumers. In the case of toxic mortgages such as subprime mortgages, entities operating outside of the cooperative sector focused on maximizing loan originations (specifically fee income from those originations) even though many of the loans originated were not in the borrower’s best interest. 

Further, credit unions hold most of their loans in portfolio. In recent years, 70 

percent of credit union mortgage originations have been held in portfolio—only 30 

percent have been sold into the secondary market. In the broader credit union loan 

portfolio the percentage held is even higher. The maintenance of this ownership interest means that credit unions care deeply about what ultimately happens to the 

loans they originate—they care if the loans are paid back. The subprime crisis, in 

contrast, has been closely linked to lenders who adopted the originate-to-sell model. 

These lenders cared little about repayments because the quality of the loans they 

sold became someone else’s problem. 
34 

2 High credit union asset quality is doubly impressive given the exemplary record of credit 

union success in serving those of modest means. For example, credit union mortgage loan delinquency and chargeoff rates are very low compared to other lenders. At the same time Home 

Mortgage Disclosure Act (HMDA) statistics consistently show that lower income and minority 

borrowers in the market for mortgages are substantially more likely to be approved for a loan 

at a credit union. HMDA data also shows that compared to other lenders, a greater percentage 

of total credit union home loans are granted to low/moderate income consumers. 3This estimate does not include the procompetitive effects credit union pricing has on banking 

institutions. Several recent studies indicate that the credit union presence causes other institutions to price in a more consumer-friendly fashion, saving consumers several billions of dollars 

annually. See Feinberg (2004) and Tokel (2005). 

In the end these structural and operational differences translated into high asset 

quality at credit unions. 2 Annualized first quarter 2009 net charge-offs at credit 

unions were equal to 1.11 percent of average loans outstanding. In the same period, 

banking industry net charge-offs were 1.94 percent. 

Delinquency rates—a forward-looking indicator of credit quality also highlights 

the credit union difference. As of March 2009, 60+ day dollar delinquency rates on 

credit union loans were 1.44 percent. In contrast the banking industry’s 90+ day 

dollar delinquency rate was 3.88 percent—over two-and-one-half times higher than 

the credit union norm despite an additional 30 days of collection efforts. High asset 

quality helped to keep credit union capital ratios near record levels. At the end of 

March 2009 the aggregate credit union net worth ratio was 10 percent—substantially higher than the 7 percent regulatory standard that institutions need to be considered ‘‘well capitalized.’’ 

Strong asset quality and high capital kept most credit unions ‘‘in the game’’ while 

the other lenders pulled back and significantly tightened loan underwriting standards. Overall, loan growth rates at credit unions have remained comparatively high. 

In the year ending March 2009, credit union loans grew by 6 percent—a rate of increase that is well above the 2 percent to 3 percent growth credit unions usually 

see in consumer-led recessions and a stark contrast to the 3 percent decline in bank 

loans over the same timeframe. 

Real estate loans at credit unions grew by nearly 9 percent in the year ending 

March 2009, while banking industry real estate loans declined by approximately 2 

percent. Business loans at credit unions grew by nearly 16 percent in the year ending March 2009, whereas commercial loans at banking institutions declined by 3 

percent. 

Importantly, credit union pricing continues to reflect a strong, long-standing consumer-friendly orientation. According to Datatrac, a national financial institution 

market research company, credit union average loan rates have remained far lower 

than those in the banking arena and credit union average yields on savings accounts have remained far higher than those in the banking arena. The pricing advantage to credit union members is evident on nearly every account that Datatrac 

measures. In the aggregate, CUNA economists estimate that the credit union pricing advantage saved credit union members $9.25 billion in 2008 alone. 3 This makes 

a significant difference to tens of millions of financially stressed consumers throughout the Nation. 

While credit unions have generally fared well, they are not immune from the effects of the financial crisis. Of course, the ‘‘too-big-to-fail’’ issue roils many small 

credit unions, including those operating in rural areas. In addition, there are some 

natural person credit unions, especially in States such as California, Florida, Arizona, Nevada, and Michigan that are experiencing serious financial stresses, including net worth strains, primarily as a result of the collateral effects of their local economic environments. 

Within the credit union system, the corporate credit union network has been particularly hard hit as credit market dislocations saddled several of these institutions 

with accounting losses on mortgage-backed and asset-backed securities. 

There are currently 28 corporate credit unions, which are owned by their natural 

person credit union members. Corporate credit unions are wholesale financial institutions that provide settlement, payment, liquidity, and investment services to their 

members. The powers of corporate credit unions differ from natural person credit 

unions. For example, the mortgage backed and asset backed securities that are permissible investments for corporate credit unions and not generally permissible for 

natural person credit unions. 

For the most part, the problematic securities were tripled-A rated at the time the 

corporate credit unions purchased them. However, as a result of the impact of the 

economy on the securities, and the mortgages and other assets underlying the securities, the National Credit Union Administration (NCUA) has projected substantial 

credit losses relating to these securities. 
35 

4For purposes of this analysis ‘‘rural’’ areas are defined as non-MSA counties, consistent with 

OMB definitions. This definition includes 64 percent of U.S. counties and 16 percent of the total 

U.S. population. Of course, many credit unions that are headquartered in urban areas have 

branches in rural areas. These institutions are not included in our analysis because financial 

results are not available at the branch level. 

The recently enacted, ‘‘Helping Families Save Their Homes Act of 2009’’ gave 

NCUA additional tools with which to assist credit unions in dealing with costs related to Corporate Credit Union stabilization actions. We applaud the Banking Committee’s leadership on that issue, and thank Congress for acting expeditiously to address these concerns. These stabilization efforts permit credit unions to continue to 

provide high levels of membership service while reducing the immediate financial 

impact on credit unions and ensuring the maintenance of a safe and strong Nation 

Credit Union Share Insurance Fund. 

Rural Credit Unions Are Playing a Vital Role in the Economic Recovery 

Rural credit unions are unique in many respects. 4 There are nearly 1,500 U.S. credit unions with a total of $60 billion in assets headquartered in rural areas. 

These institutions represent 19 percent of total credit unions and 7 percent of total 

U.S. credit union assets. 

Rural credit unions tend to be small—even by credit union standards. On average, rural credit unions have just $39 million in total assets (making them about onethird the size of the average U.S. credit union and one-fortieth the size of the average U.S. banking institution.) 

In addition, nearly one-quarter (23 percent) of rural credit unions operate with 

one or fewer full-time equivalent employee. Over half (54 percent) of rural credit 

unions are staffed by five or fewer full-time equivalent employees. 

These differences mean that even in good times, rural credit unions tend to face 

challenges in a way that larger credit unions do not. Pressures on the leaders of 

these small credit unions are great because they must be intimately involved in all 

aspects of credit union operations. Their small size, without the benefits of economies of scale, magnifies the challenges they face. Competitive pressures from large 

multistate banks and nontraditional financial services providers each increasingly 

provide substantial challenges. Greater regulatory burdens, growing member sophistication, loss of sponsors, and difficulties in obtaining training and education also 

loom large for most of the Nation’s small credit unions. 

A bad economy can make things even worse. Small credit unions have very close 

relationships with their members. And member needs increase dramatically during 

recessions: They experience more personal financial difficulty; job losses mount; retirement funds dwindle; debt loads balloon; divorce rates rise. Small institutions 

come under tremendous pressure as they attempt to advise, consult with, and lend 

to these members. 

Despite these substantial hurdles rural credit unions are posting comparatively 

strong results: Their loan and savings growth rates are nearly identical to the national credit union norms. Their delinquency rates are nearly identical to the national average and their net chargeoff rates are about one-half the national credit 

union norm. They posted earnings declines, but also reflected stronger earnings results and report higher net worth ratios than the national credit union averages. 

Rural Credit Unions Face Growing Concerns 

Although small, rural credit unions are relatively healthy and continue to play a 

vital role in the Nation’s economic recovery, that role is being threatened. There are 

several concerns raised by small credit unions—and rural credit unions in particular—that deserve mention. 

Regulatory Burden and Reregulation. 

The credit union movement is losing small institutions at a furious pace—about 

one per day. Many of these are rural credit unions. The rate of decline does not 

seem to be slowing and most observers expect the pace to accelerate. The declines 

do NOT reflect failures but arise from voluntary mergers of small institutions into 

larger institutions. If you ask small institutions, they will tell you that one of the 

larger contributors to this consolidation is the smothering effect of the current regulatory environment. 

Small credit union operators believe that the regulatory scrutiny they face is inconsistent with both their exemplary behavior in the marketplace and with the 

nearly imperceptible financial exposure they represent. A large community of small 

credit unions, free of unnecessary regulatory burden, benefits the credit union movement, the public at large and especially our rural communities. As the Subcommittee considers regulatory restructuring proposals, we strongly urge you to con-
36 

5 Remarks of Senator Dodd during consideration of S. Amdt. 1058 to H.R. 627. Congressional 

Record. May 11, 2009, S5314. 6http://files.ots.gslsolutions.com/25308.pdf. 

tinue to keep these concerns in the forefront of your decision making. Moreover, we 

implore you to look for opportunities to provide exemptions from the most costly and 

time-consuming initiatives to cooperatives and other small institutions. 

Both the volume of rules and regulations as well as the rate of change in those 

rules and regulations are overwhelming—especially so at small institutions with 

limited staff resources. Additionally, rural credit unions, like all credit unions, play 

‘‘by the rules.’’ Yet, they correctly worry that they will be forced to pay for the sins 

of others and that they will be saddled with heavy additional burdens as efforts to 

reregulate intensify. 

Nevertheless, while others in the financial services community call for the Administration to back down on plans to create a separate Consumer Financial Protection 

Agency (CFPA), CUNA President and CEO Dan Mica met with Treasury Secretary 

Geithner last week to discuss the administration’s financial regulatory overhaul legislation. In that meeting, Mr. Mica signaled our willingness to work with the administration and Congress, to maintain a seat at the table and to continue the conversation to obtain workable solutions. Credit union member-ownership translates to a 

strong proconsumer stance but that stance must be delicately balanced with the 

need keep our member-owned institutions an effective alternative in the marketplace. 

Of course, any new legislation and regulation comes with possibility of unintended 

consequences, and credit unions are particularly sensitive to the unintended consequences of otherwise well-intentioned legislation, especially given an issue that 

has arisen with respect to the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). 

Credit Card Accountability, Responsibility and Disclosure Act 

CUNA supports the intent of the CARD Act to eliminate predatory credit card 

practices. Although it will require some adjustments in credit card programs in the 

next 6 weeks to provide a change-in-terms notice 45 days in advance and to require 

periodic statements to be mailed at least 21 days in advance before a late charge 

can be assessed, CUNA supports these provisions and credit unions are diligently 

working with their data processors to effectuate these changes by the August 20, 

2009, effective date. 

However, Section 106 of the CARD Act also requires, effective August 20, 2009, 

that the periodic statements for all open-end loans—not just credit card accounts— 

be provided at least 21 days before a late charge can be assessed. This means that 

a creditor must provide periodic statements at least 21 days in advance of the payment due date in order to charge a late fee. Open-end loans include not only credit 

cards, but also lines of credit tied to share/checking accounts, signature loans, home 

equity lines of credit, and other types of loans where open-end disclosures are permitted under Regulation Z, the implementing regulations for the Truth in Lending 

Act. We believe extending the requirements of this provision beyond credit cards 

was unintended, and ask Congress to encourage the Federal Reserve Board to postpone the effective date of this provision. 

If this provision is not postponed and considered further, the implementation of 

this provision will impose a tremendous hardship on credit unions. Simply put, we 

do not think credit unions can dismantle and restructure open-end lending programs they have used for decades in order to meet the August 20th deadline. 

By way of background, this provision appeared for the first time in the Senate 

manager’s amendment to H.R. 627. The House-passed bill only applied the 21-day 

requirement to credit cards and was to be effective in 2010. During the Senate’s consideration of this issue, the 21-day requirement was described as applying only to 

credit cards. 5 In the weeks since enactment, many began to notice that the provision was not limited to credit card accounts and wondered if it was a drafting error. 

The confusion over this provision continues, as evidenced by the fact that as recently as June 25, the Office of Thrift Supervision released a summary of the CARD 

Act which states that the 21-day rule only applies to credit cards. 6

There is a great deal of uncertainty about this particular provision, which makes 

it quite understandable that creditors may not even know about the ramifications 

of this new provision and the changes they need to have in place in 6 weeks. 

This provision creates unique issues for credit unions because of their membership structure; as you know, credit unions serve people within their fields of membership who choose to become members. Because of this membership relationship, 

most credit unions provide monthly membership statements which combine informa-
37 

7Small Business Administration. The Effects of Mergers and Acquisitions on Small Business 

Lending by Large Banks. March 2005. 

tion on a member’s savings, checking and loan accounts other than for credit cards. 

For almost 40 years—since the implementation of Regulation Z—credit unions have 

been authorized to use multifeatured open-end lending programs that allow credit 

unions to combine an array of loan products and provide open-end disclosures for 

compliance purposes. Today, almost half of the Nation’s credit unions—about 3,500 

credit unions—use these types of open-end programs, which can include as open-end 

lending products loans secured by automobiles, boats, etc. 

CUNA is still trying to determine the full impact of the new law if credit unions 

will have to provide a 21-day period before the payment due date of all open-end 

loan products. Here are some preliminary compliance problems we have identified: 

1. Credit unions will need to consider discontinuing the use of consolidated statements, something they cannot possibly do in the next 6 weeks, because different loans on the statements often have different due dates. 

2. In order to comply with the 21-day mailing period, credit union members will 

no longer be able to select what day of the month they want designate as their 

due date for their automobile payments, a practice often allowed by credit 

unions, and no longer may be able to have biweekly payments to match repayments with biweekly pay checks, which helps members to budget. 

3. Credit unions may have to discontinue many existing automated payment 

plans that will fail to comply with the 21-day requirement and work with members to individually work out new plans in order to comply with the law. 

4. The 21-day requirement as it applies to home equity lines of credit (HELOCs) 

may raise contractual problems that cannot be easily resolved. 

These complicated changes simply cannot be executed within the next 6 weeks, 

and CUNA requests that Congress urge Federal Reserve Board to limit the August 

20 effective date to the two credit card provisions in Section 106, at least for credit 

unions. 

Credit Union Lending to Small Businesses 

As noted above, credit unions have been able to ‘‘stay in the game’’ while other 

lenders have pulled back. The credit crisis that many small businesses face is exacerbated by the fact that credit unions are subject to a statutory cap on the amount 

of business lending they can do. This cap—which is effectively 12.25 percent of a 

credit union’s total assets—was imposed in 1998, after 90 years of credit unions offering these types of loans to their members will no significant safety and soundness 

issues. CUNA believes that the greater the number of available sources of credit to 

small business, the more likely a small business can secure funding and contribute 

to the Nation’s economic livelihood. 

Currently, 26 percent of all rural credit unions offer member business loans to 

their members. These loans represent over 9 percent of total loans in rural credit 

union portfolios. In contrast member business loans account for less than 6 percent 

of total loans in the movement as a whole. Total member business loans at rural 

credit unions grew by over 20 percent in the year ending March 2009, with agricultural MBLs increasing by over 12 percent and Non-Ag MBLs increasing 26 percent 

in the 12 month period. This is strong evidence that rural credit unions remain ‘‘in 

the game’’ during these trying times. But more could be done. 

And more should be done. A chorus of small business owners complains that they 

can’t get access to credit. Federal Reserve surveys show that the Nation’s large 

banks tightened underwriting standards for the better part of the past year. In 

2005, an SBA research publication noted that large bank consolidation is making 

it more difficult for small businesses to obtain loans. 7 Given the fact that the average size of a credit union member business loan is approximately $216,000 this is 

a market that credit unions are well suited to serve. And this is a market that credit unions are eager to serve. 

Chairman Johnson, you undoubtedly hear a lot of rhetoric surrounding credit 

union member business lending. However, please allow me to paint a more complete 

picture of the member business loan (MBL) activity of credit unions. 

Member business loans that credit unions provide their members are relatively 

small loans. Nationally, credit union business lending represents just over one percent (1.06 percent) of the depository institution business lending market; credit 

unions have about $33 billion in outstanding business loans, compared to $3.1 tril-
38 

8 All financial data is March 2009. Credit union data is from NCUA; Bank data is from FDIC. 

9 United States Department of Treasury, ‘‘Credit Union Member Business Lending.’’ January 

2001. 

lion for banking institutions. 8 In general, credit unions are not financing skyscrapers or sports arenas; credit unions are making loans to credit union members 

who own and operate small businesses. 

Despite the financial crisis, the chief obstacle for credit union business lending is 

not the availability of capital—credit unions are, in general, well capitalized. Rather, the chief obstacle for credit unions is the arbitrary statutory limits imposed by 

Congress in 1998. Under current law, credit unions are restricted from member 

business lending in excess of 12.25 percent of their total assets. This arbitrary cap 

has no basis in either actual credit union business lending or safety and soundness 

considerations. Indeed, a subsequent report by the U.S. Treasury Department found 

that business lending credit unions were more regulated than other financial institutions, and that delinquencies and charge-offs for credit union business loans were 

‘‘much lower’’ than that for either banks or thrift institutions. 9

The statutory cap on credit union member business lending restricts the ability 

of credit unions offering MBLs from helping their members even more, and discourages other credit unions from engaging in business lending. The cap is a real barrier 

to some credit unions establishing an MBL program at all because it is costly to 

create an MBL program and it is easy to reach the cap in fairly short order—this 

is especially true for small rural institutions. The cap effectively limits entry into 

the business lending arena on the part of small- and medium-sized credit unions 

because the startup costs and requirements, including the need to hire and retain 

staff with business lending experience, exceed the ability of many credit unions with 

small portfolios to cover these costs. For example, the average rural credit union 

that does not now engage in business lending has $17 million in average assets. At 

the institution level, that translates to roughly $2 million in MBL authority which, 

in turn translates to an average of only nine loans. 

The cap is overly restrictive and undermines public policy to support America’s 

small businesses. It severely restricts the ability of credit unions to provide loans 

to small businesses at a time when small businesses are finding it increasingly difficult to obtain credit from other types of financial institutions, especially larger 

banks. 

Today, only one in four credit unions have MBL programs and aggregate credit 

union member business loans represent only a fraction of the commercial loan market. Eliminating or expanding the limit on credit union member business lending 

would allow more credit unions to generate the level of income needed to support 

compliance with NCUA’s regulatory requirements and would expand business lending access to many credit union members, thus helping local communities and the 

economy. 

While we support strong regulatory oversight of how credit unions make member 

business loans, there is no safety and soundness rationale for the current law which 

restricts the amount of credit union business lending. There is, however, a significant economic reason to permit credit unions to lend without statutory restriction, 

as they were able to do prior to 1998: America’s small businesses need the access 

to credit. As the financial crisis has worsened, it has become more difficult for small 

businesses to get loans from banks, or maintain the lines of credit they have had 

with their bank for many years. 

A growing list of small business and public policy groups agree that now is the 

time to eliminate the statutory credit union business lending cap, including the 

Americans for Tax Reform, the Competitive Enterprise Institute, the Ford Motor 

Minority Dealer Association, the League of United Latin American Citizens, the 

Manufactured Housing Institute, the National Association for the Self Employed, 

the National Association of Mortgage Brokers, the National Cooperative Business 

Association, the National Cooperative Grocers Association, the National Farmers 

Union, the National Small Business Association, the NCB Capital Impact, and the 

National Association of Professional Insurance Agents. 

We hope that Congress will eliminate the statutory business lending cap entirely, 

and provide NCUA with authority to permit a CU to engage in business lending 

above 20 percent of assets if safety and soundness considerations are met. We estimate that if the cap on credit union business lending were removed, credit unions 

could—safely and soundly—provide as much as $10 billion in new loans for small 

businesses within the first year. This is economic stimulus that would not cost the 

taxpayers a dime, and would not increase the size of government. 
39 

1Metropolitan statistical areas are defined as areas that have at least one town over 50,000 

inhabitants. 

Conclusion 

In closing, Chairman Johnson, Ranking Member Crapo, and all the Members of 

this Subcommittee, we appreciate your review of these issues today. Every day, 

credit unions reinforce their commitment to workers, small business owners, and a 

host of others in rural communities seeking to better their quality of life by providing loans on terms they can afford and savings rates that are favorable. We look 

forward to working with you to ensure the credit union system continues to be an 

important bulwark for the 92 million individuals and small businesses that look to 

their credit union for financial strength and support. 

PREPARED STATEMENT OF ARTHUR C. JOHNSON 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 

UNITED BANK OF MICHIGAN, GRAND RAPIDS, MICHIGAN, 

ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

JULY 8, 2009 

Chairman Johnson, Ranking Member Crapo, and Members of the Subcommittee, 

my name is Arthur C. Johnson. I am Chairman and Chief Executive Officer of 

United Bank of Michigan, headquartered in Grand Rapids, Michigan. I serve as 

Chairman-Elect of the American Bankers Association (ABA), and I chair the ABA 

Community Bank Solutions Task Force, a committee dedicated to finding ways to 

address problems most acutely affecting community banking during this economic 

downturn. I am pleased to be here today representing ABA. ABA brings together 

banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the Nation’s banking industry and strengthen America’s economy 

and communities. Its members—the majority of which are banks with less than 

$125 million in assets—represent over 95 percent of the industry’s $13.5 trillion in 

assets and employ over 2 million men and women. 

We are pleased to share the banking industry’s perspective on the current economic situation in rural America and the effects the recession is having on rural 

community banks. We strongly believe that community banks are one of the most 

important resources supporting the economic health of rural communities. Not surprisingly, the banks that serve our Nation’s small towns also tend to be small community banks. Less well known is that over 3,500 banks—41 percent of the banking 

industry—have fewer than 30 employees. 

This is not the first recession faced by banks; they have been in their communities 

for decades and intend to be there for many decades to come. My bank, United Bank 

of Michigan, was chartered in 1903. We have survived the Great Depression and 

all the other ups and downs for over a century. We are not alone, however. In fact, 

there are 2,556 other banks—31 percent of the banking industry—that have been 

in business for more than a century; 62 percent (5,090) of banks have been in existence for more than half a century. These numbers tell a dramatic story about the 

staying power of community banks and their commitment to the communities they 

serve. My bank’s focus, and those of my fellow bankers throughout the country, is 

on developing and maintaining long-term relationships with customers. We cannot 

be successful without such a philosophy and without treating our customers fairly. 

In spite of the severe recession, community banks located in rural communities 

have expanded lending. In fact, during 2008—the first year of the recession—loans 

from banks headquartered outside of metropolitan statistical areas 1 increased by 

$17 billion, or 7 percent. Loan growth last year was also reflected in a smaller subset of community banks: farm banks. Lending for these banks expanded by $4.7 billion, or 9.2 percent, in 2008. 

Considerable challenges remain, of course and these trends are not likely to be 

sustained. While many areas of our country have benefited from strong exports 

which have helped agricultural exports in particular, other rural areas of the country have not been as lucky. The downturn has continued to impose hardships on 

small businesses and manufacturers. In my home State of Michigan, we are facing 

our eighth consecutive year of job losses. The necessary—but painful—restructuring 

of the auto industry will likely cause this job erosion to continue for some time, leading to a long recovery in these areas. Other rural areas with a manufacturing employment base are also suffering similar problems. 
40 

In this environment, it is only natural for businesses and individuals to be more 

cautious. Individuals are saving more and borrowing less. Businesses are reevaluating their credit needs and, as a result, loan demand is also declining. Banks, too, 

are being prudent in underwriting, and our regulators demand it. Accordingly, it is 

unlikely that loan volumes will increase this year, and in fact, the total loans in 

rural areas declined slightly in the first quarter. 

With the economic downturn, credit quality has suffered and losses have increased for banks. Fortunately, community banks entered this recession with strong 

capital levels. As this Committee is aware, however, it is extremely difficult to raise 

new capital in this financial climate. Without access to capital, maintaining the flow 

of credit in rural communities will be increasingly difficult. 

We believe there are actions the government can take to assist viable community 

banks to weather the current downturn. The success of many local economies—and, 

by extension, the success of the broader national economy—depends in large part 

on the success of these banks. Comparatively small steps taken by the government 

now can make a huge difference to these banks, their customers, and their communities—keeping capital and resources focused where they are needed most. 

Importantly, the amount of capital required to provide an additional cushion for 

all community banks—which had nothing to do with the current crisis—is tiny compared to the $182 billion provided to AIG. In fact, it takes only about $500 million 

in new capital today to bring all banks under $10 billion in assets above the wellcapitalized levels for Tier 1 capital. Even under a baseline stress test, the additional 

capital needed is less than $3 billion for all these smaller banks to be well-capitalized. Without new capital, banks under $10 billion in assets would have to shed 

nearly $9 billion in loans to achieve the same capital-to-assets ratio. Simply put, 

capital availability means credit availability. A small investment in community 

banks is likely to save billions of dollars of loans in local communities. 

Before discussing these points in more detail, I did want to thank Members of the 

Subcommittee for their tireless support of S. 896, the Helping Families Save Their 

Homes Act of 2009, legislation that expanded the insurance limits for deposits to 

$250,000 for 4 years and expanded FDIC’s line of credit with the Treasury from $30 

billion to $100 billion. Expanding the deposit insurance limit provided additional 

protection to small businesses, retirees, and other bank depositors that need to protect their payrolls or life-savings. Expanding the FDIC’s line of credit helped to reduce banks’ expenses, thus preserving resources in communities across this Nation. 

Without this expanded line, the FDIC would have imposed a special assessment on 

the banking industry totaling more than $15 billion dollars. By enacting this expanded line of credit, the FDIC has an additional cushion to rely upon—particularly 

for working capital purposes necessary to resolve bank failures quickly and to ensure that depositors have immediate access to their money. This increase in borrowing authority enabled the FDIC to make good on its promise to cut the special 

assessment in half. 

The original special assessment would have devastated the earnings of banks, 

particularly community banks, just at the time funds are needed most in their communities. Of course, the industry still bears a considerable financial burden from 

both the regular quarterly premiums and the final special assessment. The vast majority of banks that will bear this cost are well capitalized and had nothing to do 

with the subprime mortgages that led to our financial and economic problems. Yet 

these banks bear much of the costs of cleaning up the problems created. We will 

continue to work with you to find ways to reduce the costs imposed on healthy 

banks and to build a strong base to support new lending as our economy emerges 

from this recession. 

In my statement, I would like to focus on the following points: 

• Banks in rural communities continue to lend in this difficult economic environment, but the broadening economic problems will make this more difficult in 

the future. 

• New and expanded programs directed at community banks can help rural 

America cope with the current downturn, including broadening capital programs to enable participation by a broader cross section of viable but struggling 

banks. Moreover, regulators should ensure that their regulatory and supervisory responses are commensurate to the risks they are seeing in banks, and 

that they avoid inappropriate, procyclical responses that make bad situations 

worse. 

• ABA believes that it is critical for this Subcommittee and Congress to focus on 

creating a systemic regulator, providing a strong mechanism for resolving troubled systemically important firms and filling gaps in the regulation of the shadow banking industry. Such significant legislation would address the principal 
41 

causes of the financial crisis and constitute major reform. We believe there is 

a broad consensus in the need to address these issues. 

I will address each of these points in turn. 

I. Banks in rural communities continue to lend in this difficult economic 

environment, but the broadening economic problems will make this 

more difficult in the future. 

Rural America has been bolstered in recent years by an agriculture sector that 

experienced one of the longest periods of financial prosperity in history. In 2007 and 

2008, American farmers and ranchers in the aggregate enjoyed some of their most 

profitable years ever. The balance sheet for U.S. agriculture at the end of 2008 (according to USDA) was the strongest it has ever been, with a debt to asset ratio of 

less than 10 percent. USDA projects that, at year end 2009, farm and ranch net 

worth will be $2.171 trillion. This unprecedented high net worth is due in part to 

a robust increase in farm asset values (mainly farm real estate)—values which have 

not suffered the dramatic fluctuation as in some sectors during this time of crisis— 

but the high net worth is equally due to solid earned net worth as farmers used 

their excess cash profits to retire debt. 

However, while the past 10 years may be looked back upon by historians as an 

era of farm prosperity, not all sectors of the farm economy are doing well in 2009. 

Pressured by increases in the price of grain, the livestock sector is under considerable financial pressure. Dairy prices have dropped to below break-even levels for 

many producers, as demand has declined and dairy production continues to increase. The cattle feeding business has lost money for over 24 months. Poultry producers have been hurt by lower prices and by the collapse of the largest poultry integrator in the country in 2008. The hog industry, which was poised to recover from 

low prices in 2008, has been badly hurt by misguided fears of the H1N1 virus and 

the subsequent closure of some key export markets. 

Fortunately, rural America was well positioned at the beginning of 2009 to face 

the trying times they have encountered as a result of the economic crisis and other 

world events. In this environment, we sometimes hear that banks are not lending 

money. This is simply not true. As the charts on the next page show, bank lending 

in rural America has risen steadily over the last half-dozen years, and even during 

the first year of the recession, bank lending in rural areas has increased. As noted 

above, maintaining an expanding volume of credit will be a considerable challenge 

this year as the economy continues to weaken. 

While overall banks have continued to lend throughout this recession, that does 

not mean much to an individual borrower having difficulty obtaining financing. In 

many of these individual cases, however, upon further investigation, it appears that 

the primary reason for not receiving funding was either that the borrower’s financial 

condition was vulnerable (perhaps weakened by local economic conditions), or the 

borrower expected to borrow money at prerecession terms when the risk of lending 

was considerably lower and funds available for lending were more accessible. Of 

course, every loan application is unique and must be evaluated that way. One thing 

that has clearly appened is that banks are looking carefully at the risk of a loan 

and reevaluating the proper pricing of that risk. This is a prudent business practice 

and one expected by our bank regulators. 

Against the backdrop of a very weak economy and in light of the troubles in the 

agricultural sector, it is only reasonable and prudent that all businesses—including 

banks and farms—exercise caution in taking on new financial obligations. In fact, 

farmers and ranchers have been very conscious of this financial cycle, and wisely 

used their excess cash profits to retire debt and to acquire new plant and equipment 

during the boom years. Both banks and their regulators are understandably more 

cautious in today’s environment. Bankers are asking more questions of their borrowers, and regulators are asking more questions of the banks they examine. This 

means that some higher-risk projects that might have been funded when the economy was stronger may not find funding today. 
42 
43 

II. New and expanded programs directed at community banks can help 

rural America cope with the current downturn. 

The vast majority of community banks had absolutely nothing to do with the current crisis, yet as their communities have suffered, so have they. In spite of the 

strong agricultural economy which has helped to shield many parts of this Nation 

from the recession, the economic decline—and its global impact—will surely be felt 

over the course of the next several years. There has never been a more important 

time to put in place solutions that will help all community banks as they manage 

through this downturn. 

The many programs that have been initiated to calm the markets and provide 

capital for lending have helped to stabilize financial markets. As an example, the 

announcement of the Capital Purchase Program on October 14 caused risk spreads 

to decline from their pinnacle of 457 basis points on October 10 to 249 basis points 

on October 22, a drop of 45 percent. Clearly, the program to inject capital in healthy 

banks had a dramatic and immediate impact, and the trends begun then continue 

to narrow margins even further—back nearly to precrisis spreads. (See the charts 

on the following page.) 

However, the focus of the CPP and other stimulus programs has been on the largest banks and was only slowly made available to smaller banks. The changing nature of this program and the restrictive selection process has meant that banks that 

could have benefited from the program were unable to do so. As a result, to maintain reasonable capital levels, these banks have been forced to limit, or even reduce, 

their lending. 

As I emphasized at the outset, the amount of capital required to provide an additional cushion for all community banks is small. To reiterate, it takes only about 

$500 million in new capital today to bring all banks under $10 billion in assets 

above the well-capitalized levels for Tier 1 capital. Even under a baseline stress test 

to assess future needs, the additional capital needed is less than $3 billion for all 

banks to be well-capitalized. Without new capital, banks under $10 billion in assets 

would have to shed nearly $9 billion in loans to achieve the same capital-to-assets 

ratio. Thus, a small injection of capital goes a long way to keeping credit flowing 

in rural communities. 

Given the continued weakness in this economy and the challenges we will face 

in the next 18 months, it is a critical time to focus on strategies for helping community banks. ABA recommends that new programs be developed—and existing programs be expanded—to help banks in rural America. Several key changes that are 

needed include: 

• Broadening capital programs to enable participation by a broader cross section 

of banks. 

• Revising the risk-based capital rules to more accurately reflect the risks presented by these investments. 
44 

• Avoiding appraising banks into insolvency by using inappropriately conservative asset valuations and underwriting standards. 

Broaden capital programs to enable participation by a broader cross section of banks 

The Capital Purchase Program (CPP) has been implemented in a way that ignores 

community banks that are viable but that are experiencing significant—yet temporary—problems. The Capital Assistance Program has not yet been implemented 

for community banks, but reportedly will apply the same eligibility criteria that 

have been used with the CPP. The Legacy Loans Program has the potential to help, 

but the FDIC recently announced a delay in implementing the Legacy Loans Program that calls into serious question its viability outside the possible use in failed 

bank situations. The Legacy Securities Program is still struggling to get off the 

ground as well. Program after program either has failed to meet the needs of viable 

community banks or has languished. 

ABA believes that this problem can be solved through several modifications: 

1. Permit banks with up to $1 billion in total assets to participate in the expanded CPP. 

2. Publish the eligibility criteria for participating in the CPP and CAP. 

3. Provide funding to viable banks that have significant—yet manageable—issues. 

4. Revive the Legacy Loans Program and implement the Legacy Securities programs in a way that expands the universe of eligible assets to include trust 

preferred securities, ‘‘real estate owned,’’ and other real estate-related loans. 

The programs also should be implemented in a way that avoids effectively 

shutting small banks out (for example, minimum sizes on asset pools that no 

community bank could meet). 

The comparatively small sums of money that would be invested in these struggling but viable banks would pay big returns for the communities they serve. 

Revise the risk-based capital rules to more accurately reflect the risks presented by 

banks’ investments 

Congress should use its oversight powers to assure that the regulators have rules 

and regulations that accurately reflect the risks that banks face. For example, 

banks’ investment in mortgage backed securities and collateralized debt obligations 

are being severely downgraded by ratings agencies, largely due to liquidity issues 

(not credit or repayment risk). When the investments are downgraded below investment grade, an inappropriately conservative capital charge applies that can cause 

a risk weighting to go from 100 percent to 1,250 percent, regardless of the performance of the security and regardless of the amount of subordinate positions that will 

absorb loss before a given bank’s position. Mortgage-backed securities (MBSs) and 

collateralized debt obligations (CDOs) are securities whose performance depends on 

multiple obligors; the default by one borrower is not likely to impact the performance of other borrowers whose debt has been bundled in the security. Despite this— 

because ratings are based primarily on the probability of loss of the first dollar— 

any loss in an MBS or CDO adversely affects the rating of the security. This, in 

turn, can trigger higher capital requirements for banks, regardless of the likelihood 

that a holder of an interest in the security may be repaid at 100 cents on the dollar. 

Moreover, the current application of the Uniform Agreement on the Classification 

of Assets and Appraisal of Securities causes the entire face amount of a debt security with some degree of impairment to be classified, rather than requiring classification only of the portion of the security that reflects potential loss to the banking 

organization. 

ABA believes that two changes will help this situation considerably: 

1. Revise the risk-based capital rules to more accurately reflect the risks presented by these investments. 

2. Classify only that portion of the security that represents the credit risk-related 

expected loss on the exposures underlying the security, adjusted for any credit 

enhancements and further adjusted for recoveries and expected loss severity. 

An additional problem related to bank capital is that the risk weighting of debt 

issued by Fannie Mae and Freddie Mac is too high. Prior to those institutions being 

placed into conservatorship, the debt was risk-weighted at 20 percent. Given the 

stated intent of the United States government to support these GSEs, a lower risk 

weight is appropriate and would help offset to a small degree the adverse impact 

that the conservatorships had on those banks that invested in Fannie and Freddie 

stock. The risk weight of GSE debt should be reduced to below 20 percent. The 
45 

2 Remarks by John C. Dugan, Comptroller of the Currency, Before the Institute for International Bankers, March 2, 2009. 

agencies proposed to lower the risk weight of Fannie and Freddie debt to 10 percent, 

but this rulemaking has been pending since October of last year. 

A third issue related to capital concerns is the extent to which a bank’s allowance 

for loan and lease losses (ALLL) is included in the bank’s capital. The agencies’ capital rules permit a bank’s ALLL to count as Tier 2 capital, but only up to 1.25 percent of a bank’s risk-weighted assets. This fails to adequately recognize the loss-absorbing abilities of the entire allowance and creates a disincentive to banks reserving more. Both the ALLL and ‘‘core’’ capital are available to absorb losses. The 

Comptroller of the Currency recently acknowledged this, stating, ‘‘loan loss reserves 

are a front line of defense for absorbing credit losses before capital must do so. . . . 

Given their primary, capital-like loss-absorbing function, loan loss reserves should 

get greater recognition in regulatory capital rules, a result that would help remove 

disincentives for banks to hold higher levels of reserves.’’ 2

These changes suggested in response to these three issues would result in a more 

accurate reflection of the health of institutions. ABA fully supports the system of 

risk-based regulation and supervision, but when the rules no longer reflect risk, the 

system breaks down. Our suggestions are intended to address instances where a 

bank’s risk of loss is not fairly reflected in the rules. In the case of downgraded debt 

securities, the rules can, in extreme cases, threaten the viability of institutions that 

are directed to raise significant additional capital in a short period of time. It is bad 

policy to require a bank to raise capital to address the appearance of a shortfall but 

not the reality of one. When a rule requires more capital than the actual risk to 

the bank would suggest, the rule should be changed. 

Avoid appraising banks into insolvency by using inappropriately conservative asset 

valuations and underwriting standards 

In my role as Chairman-Elect and as chairman of the ABA Community Bank Solutions Task Force, I have heard numerous stories from bankers about issues that 

are coming up in exams. Banks are being told to write down the value of assets 

based on the sales prices of assets being dumped on the market at distressed prices. 

Appraisals of property that are based on comparable sales are particularly problematic when the sales do not involve a willing buyer and a willing seller. Valuations 

by a banker acting reasonably and in good faith are likely to be more accurate than 

appraisals in those situations. ABA frequently hears that examiners either are not 

using FASB-compliant valuation methods or are using ‘‘personal formulas’’ to downgrade or reevaluate portfolio values, even when stated values are supported by timely appraisals. We also hear that examiners are applying new, unpublished, and 

seemingly arbitrary ‘‘rules of thumb’’ for how much a bank must put in its allowance 

for loan and lease losses (ALLL). For example, in some cases examiners require 25 

percent of every substandard asset; 75 percent of nonperforming assets; etc. 

ABA believes there are several steps that the regulators should be taking to remedy this situation and we urge this Subcommittee to use its oversight authority to 

encourage them: 

1. Issue written guidance affirming that banks should not use distressed sales 

values when analyzing ‘‘comparables.’’ Guidance should address proper appraisal documentation, particularly where foreclosures or auction sales comprise a majority of the comparable transactions. Moreover, this guidance 

should state that banks may rely, in appropriate situations, on bank management’s judgment about the value of a property. 

2. Allow institutions that have rented properties at market rates to exclude them 

from ‘‘nonperforming loans.’’ 

3. Apply clear and consistent standards to the maintenance of the ALLL that reflect a realistic assessment of the assets’ likely performance. 

These changes are necessary to confront the natural inclination of examiners to 

be conservative in order to avoid the inevitable second-guessing that would arise if 

a bank were to fail on their watch. We are not suggesting that examiners use forbearance or otherwise relax their examination standards; rather, we are suggesting 

that the examiners not be harder on banks than circumstances warrant. The regulators can make things worse in their efforts to make things better. Insisting upon 

punitive, procyclical steps at a time when a bank is working through issues can 

push an otherwise viable bank over the edge. 

There are many more actions that could be taken to help banks throughout this 

period. ABA would be happy to discuss this further with the Committee. 
46 

3 Ben Bernanke, speech to the Council on Foreign Relations, Washington, DC, March 10, 

2009. 

III. Creating a systemic risk regulator, providing a mechanism for resolving troubled systemically important institutions, and filling gaps in the 

regulation of the shadow banking industry should be the focus of Congressional action. 

One of the most critical needs today is a regulator with explicit systemic risk responsibility. ABA strongly supports having such a regulator. There are many aspects to consider related to the authority of this regulator, including the ability to 

mitigate risk-taking from systemically important institutions, authority over how 

accounting rules are developed and applied, and the protections needed to maintain 

the integrity of the payments system. 

ABA believes that systemic risk oversight should utilize existing regulatory structures to the maximum extent possible and involve a limited number of market participants, both bank and nonbank. Safety and soundness implications, financial risk, 

consumer protection, and other relevant issues need to be considered together by the 

regulator of each institution. 

To be effective, the systemic risk regulator must have some authority over the development and implementation of accounting rules. No systemic risk regulator can 

do its job if it cannot have some input into accounting standards—standards that 

have the potential to undermine any action taken by a systemic regulator. Thus, a 

new system for the establishment of accounting rules—one that considers the realworld effects of accounting rules—needs to be created in recognition of the critical 

importance of accounting rules to systemic risk and economic activity. 

Moreover, there must be a mechanism for the orderly resolution of systemically 

important nonbank firms. Our regulatory bodies should never again be in the position of making up a solution on the fly to a Bear Stearns or AIG, of not being able 

to solve a Lehman Brothers. The inability to deal with those situations in a predetermined way greatly exacerbated the crisis. 

A critical issue in this regard is ‘‘too-big-to-fail.’’ Whatever is done on the systemic 

regulator and on a resolution system will set the parameters of ‘‘too-big-to-fail.’’ In 

an ideal world, no institution would be ‘‘too-big-to-fail,’’ and that is ABA’s goal; but 

we all know how difficult that is to accomplish, particularly with the events of the 

last few months. This ‘‘too-big-to-fail’’ concept has profound moral hazard implications and competitive effects that are very important to address. We note Chairman 

Bernanke’s statement: ‘‘Improved resolution procedures . . . would help reduce the 

‘‘too-big-to-fail’’ problem by narrowing the range of circumstances that might be expected to prompt government action. . . . ’’ 3

Finally, a major cause of our current problems is the regulatory gaps that allowed 

some entities to completely escape effective regulation. It is now apparent to everyone that a critical gap occurred with respect to the lack of regulation of independent 

mortgage brokers. Questions are also being raised with respect to credit derivatives, 

hedge funds, and others. 

As these gaps are being addressed, Congress should be careful not to impose new, 

unnecessary regulations on the traditional banking sector, which was not the source 

of the crisis and continues to provide credit. Thousands of banks of all sizes, in communities across the country, are scared to death that their already-crushing regulatory burdens will be increased dramatically by regulations aimed primarily at 

their less-regulated or unregulated competitors. Even worse, the new regulations 

will be lightly applied to nonbanks while they will be rigorously applied—down to 

the last comma—to banks. 

Conclusion 

I want to thank you, Mr. Chairman, for the opportunity to present the views of 

the ABA on the challenges ahead for rural communities and the banks that serve 

them. These are difficult times and the challenges are significant. In the face of a 

severe recession, however, bankers are working hard every day to assure that the 

credit needs of our communities are met. As you contemplate major changes in regulation—and change is needed—ABA would urge you to ask this simple question: 

how will this change impact those thousands of banks that make the loans needed 

to get our economy moving again? Addressing these issues will provide the most 

constructive avenue to assure that rural communities throughout this Nation will 

continue to have access to credit by local financial institutions. We look forward to 

working with Congress to address needed changes in a timely fashion, while maintaining the critical role of our Nation’s banks. 
47 

PREPARED STATEMENT OF ED TEMPLETON 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

SRP FEDERAL CREDIT UNION, NORTH AUGUSTA, SOUTH CAROLINA, 

ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

JULY 8, 2009 

Introduction 

Good afternoon, Chairman Johnson, Ranking Member Crapo, and Members of the 

Subcommittee. My name is Ed Templeton and I am testifying today on behalf of the 

National Association of Federal Credit Unions (NAFCU). I serve as the President 

and CEO of SRP Federal Credit Union, headquartered in North Augusta, South 

Carolina. I have been President and CEO of SRP FCU for the last 22 years. SRP 

FCU is a community credit union serving over 92,000 members in several counties 

in South Carolina along the Georgia border. Our membership includes Allendale 

and Barnwell counties which are some of the most rural in South Carolina. They 

are also some of the poorest, with over 20 percent of the population in Barnwell and 

over 35 percent of the population in Allendale living below the poverty level. SRP 

FCU has a strong presence in these counties, with over 20 percent of the adult population in Allendale and over 50 percent of the adult population in Barnwell being 

members of SRP FCU. 

I currently serve as the Secretary of NAFCU’s Board of Directors. I formerly 

served on the NAFCU Education Committee and was President of the Columbia 

Chapter of Credit Unions. I received my BBA from Augusta College, graduated from 

the Georgia School of Banking and the BAI School of Bank Administration at the 

University of Wisconsin. 

NAFCU is the only national organization exclusively representing the interests of 

the Nation’s federally chartered credit unions. NAFCU-member credit unions collectively account for approximately 63.9 percent of the assets of all federally chartered 

credit unions. NAFCU and the entire credit union community appreciate the opportunity to participate in this discussion regarding how the current economic crisis 

has impacted America’s credit unions serving those in rural communities. 

Historically, credit unions have served a unique function in the delivery of necessary financial services to 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 financial services. Congress established credit unions as an alternative to banks and to meet a precise public need— 

a niche that credit unions fill today for nearly 90 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 USC 1752(1)). While over 75 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 financial service; and, 

• credit unions continue to emphasize traditional cooperative values such as democracy and volunteerism. 

Credit unions are not banks. The Nation’s approximately 7,800 federally insured 

credit unions serve a different purpose and have a fundamentally different structure 

than banks. Credit unions exist solely for the purpose of providing financial services 

to their members, while banks aim to make a profit for a limited number of shareholders. 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 the board of directors—something unheard of among for-profit, stock-owned 

banks. Unlike their counterparts at banks and thrifts, Federal credit union directors 

generally serve without remuneration—a fact epitomizing the true ‘‘volunteer spirit’’ 

permeating the credit union community. 

Credit unions have grown steadily in membership and assets, but in relative 

terms, they make up a small portion of the financial services marketplace. Federally 

insured credit unions have approximately $856.4 billion in assets as of March 2009. 

By contrast, Federal Deposit Insurance Corporation (FDIC) insured institutions 

have $13.6 trillion in assets. The average size of a Federal credit union is $97.6 million compared to $1.647 billion for banks. Almost 3,200 credit unions have less than 
48 

$10 million in assets. The credit union share of total household financial assets is 

also relatively small, at only 1.5 percent as of March 2009. 

Size has no bearing on a credit union’s structure or adherence to the credit union 

philosophy of service to members and the community. While credit unions may have 

grown, their relative size is still small compared with banks. Even the world’s largest credit union, with $38.7 billion in assets, is dwarfed by the Nation’s biggest 

banks who hold trillions of dollars 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.’’ In fact, Congress acknowledged this point when it adopted the Credit Union 

Membership Access Act (CUMAA—P.L. 105–219) a decade ago. In the ‘‘findings’’ 

section of that law, Congress declared that, ‘‘The American credit union movement 

began as a cooperative effort to serve the productive and provident credit needs of 

individuals of modest means . . . [and it] continue[s] to fulfill this public purpose.’’ 

Credit unions continue to play a very important role in the lives of millions of 

Americans from all walks of life. As consolidation of the commercial banking sector 

has progressed, with the resulting depersonalization in the delivery of financial 

services by banks, the emphasis in consumers’ minds has begun to shift not only 

to services provided but also—more importantly—to quality and cost. Credit unions 

are second to none in providing their members with quality personal financial service at the lowest possible cost. 

While the lending practices of many other financial institutions led to the Nation’s 

subprime mortgage debacle, data collected under the Home Mortgage Disclosure Act 

(HMDA) illustrates the value of credit unions to their communities. The difference 

between credit unions and banks is highlighted when one examines the 2007 HMDA 

data for loans to minority applicants with household incomes under $40,000. According to the 2007 HMDA data, banks have a significantly higher percentage of mortgage purchase loans (20.8 percent), charging at least 3 percent higher than the comparable Treasury yield for minority applicants with household income under 

$40,000. Credit unions, on the other hand, had only 4.4 percent of their loans in 

that category. 

Credit Unions in the Current Economic Environment 

While credit unions have fared better than most financial institutions in these 

turbulent economic times, many have been impacted, through no fault of their own, 

by the current economic environment. Many credit unions, including smaller ones, 

have seen an increase in delinquencies and charge-offs in recent quarters. Some of 

this impact has been regional, depending on local economic conditions. 

In particular, the corporate credit union system has felt the biggest impact, and 

the National Credit Union Administration (NCUA) placed the two largest corporate 

credit unions, U.S. Central Federal Credit Union and Western Corporate Federal 

Credit Union, into receivership earlier this year. The passage and enactment of S. 

896, The Helping Families Save Their Homes Act of 2009, and the temporary corporate credit union stabilization fund that it created provided important relief to 

natural-person credit unions in these challenging times. We thank you for work on 

this matter. 

It is also widely recognized by leaders on Capitol Hill and in the Administration 

that credit unions were not cause of the current economic downturn, but we believe 

we can be an important part of the solution. As credit unions have fared well in 

the current environment, there are many that have capital available. Surveys of 

NAFCU member credit unions have shown that many are seeing increased demand 

for mortgage loans and auto loans as other lenders leave the market. A number of 

credit unions are also seeing local small businesses, who have lost lines of credit 

from other lenders, turn to them for the capital they need. 

Credit unions are helping meet those needs in rural areas. Despite the economic 

downtown, an analysis of NCUA Form 5300 Call Report data shows that credit 

unions have seen a growth in the percentage of total amount of credit union farm 

loans to members for the last nine consecutive quarters during the current recession. Additionally, on examination of 2007 HMDA data (the last year that is available) shows that credit union mortgage loans to American Indians grew at an annual rate of 9.23 percent over the previous year and that credit unions had a higher 

percentage of approved loans to American Indians (75.31 percent) than other types 

of financial institutions. 

The NCUA has been working to assist small credit unions as well. In April, the 

NCUA Board finalized actions to centralize NCUA’s chartering within the Headquarters’ Office of Small Credit Union Initiatives (OSCUI), thereby creating a national chartering program to reduce regulatory burden on credit union charter applicants. The revisions delegate OSCUI authority to approve and reject new charters, 
49 

and require OSCUI’s concurrence to revoke new charters. This new process should 

assist individuals in understanding the process of chartering a new institution and 

help keep new growth in the credit union industry. 

Additionally, many smaller credit unions rely on other credit unions for support 

and to provide effective service to their respective memberships. Throughout the 

country small credit union roundtables have emerged for credit unions to discuss 

operational concerns with like institutions. Larger credit unions also serve as partners for smaller institutions, and perform functions ranging from shared branching 

to back office operations. 

We at SRP FCU are actually expanding at this time in some of the most rural 

areas of our field of membership, and we are about to break ground on a new credit 

union branch in Allendale County. 

Current Challenges 

Credit unions are the most highly regulated of all financial institutions, facing restrictions on who they can serve and their ability to raise capital, among a host of 

other limitations. There are other statutory limitations on credit unions that hamper their ability to serve their members, including those in rural areas. These include: 

Credit Union Member Business Lending Cap. The Credit Union Membership Access Act (CUMAA) established an arbitrary cap on credit union member business 

lending of 12.25 percent of assets in 1998. CUMAA 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.’’ That same study also 

found that over 50 percent of credit union loans were made to businesses with assets under $100,000, and 45 percent of credit union business loans go to individuals 

with household incomes of less than $50,000. The current economic crisis has demonstrated the need to have capital available to help our Nation’s small businesses, 

especially in troubling times. Many credit unions have the capital that other lenders 

do not in this environment, but are hamstrung by such an arbitrary limitation. We 

are pleased that Senator Schumer has indicated that he plans to introduce legislation to remove this arbitrary cap, and we urge the Subcommittee to support and 

advance those efforts. 

Underserved Areas. As the Subcommittee is aware, many rural areas are also underserved. Credit unions play an important role in helping those on whom other financial institutions have turned their backs and left behind. The 1998 Credit Union 

Membership Access Act (CUMAA) gave the NCUA the authority to allow Federal 

credit unions to add underserved areas to their field of membership; however, the 

language was unclear as to what types of charters were permitted to add underserved areas. For an area to be ‘‘underserved,’’ CUMAA requires the NCUA Board 

to determine that a local community, neighborhood or rural district is an ‘‘investment area’’ as defined in the Community Development Banking and Financial Institutions Act of 1994, and also that it is ‘‘underserved by other depository institutions.’’ 2 U.S.C. 1759(c)(2)(A). 

NAFCU supports making a necessary clarification to the CUMAA that credit 

unions are able to add underserved areas to their fields of membership, regardless 

of charter type. In 2005, the American Bankers Association brought litigation 

against NCUA, arguing that under the plain language of CUMAA (American Bankers Association, et al., v. NCUA, No. 2:05-cv-000904 (D. Utah, filed Nov. 1, 2006)), 

only multiple-common-bond credit unions could add underserved areas to their fields 

of membership. Up to that point, NCUA had permitted all types of credit unions 

to add underserved areas to their field of membership. Even though there was legislative history supporting the NCUA interpretation, the case settled out of court, and 

as a result, NCUA modified its rules to prohibit community and single-sponsor Federal credit unions from adding underserved areas to their field of membership. 

NAFCU and the credit union community believe that addressing this issue through 

legislation would clear up the ambiguity surrounding the ability of Federal credit 

unions to add underserved areas to their fields of membership. 

NCUA’s current rules do not address how a rural district should be defined for 

the purposes of adding underserved areas. Recognizing that there was a need to 

streamline the process for credit unions in rural areas to add underserved areas to 

their fields of membership, NCUA proposed an amendment to their Chartering and 

Field of Membership Manual in 2008. NAFCU provided feedback from many of our 

rural members during the notice and comment period, and we look forward to Congress clarifying this issue and seeing NCUA continue its work to provide streamlined guidelines. 
50 

Regulatory Reform 

While credit unions have generally performed well in the current economic crisis, 

we remain concerned that well-intentioned efforts at regulatory reform could ultimately have a negative impact on credit unions and their members. As not-for-profit 

member-owned cooperatives, credit unions are unique institutions in the financial 

services arena. We believe that the NCUA should remain an independent regulator 

of credit unions and are pleased to see that the Administration’s proposal would 

maintain the Federal credit union charter and an independent National Credit 

Union Administration (NCUA). 

NAFCU does support the creation of a Consumer Financial Protection Agency 

(CFPA), which would have authority over nonregulated institutions that operate in 

the financial services marketplace. However, we do not believe such an agency 

should have authority over regulated federally insured depository institutions, and 

do not support extending that authority to federally insured credit unions. Giving 

the CFPA such authority to regulate, examine and supervise credit unions that already are regulated by the NCUA would add an additional regulatory burden and 

cost. Additionally, it could lead to situations in which institutions regulated by one 

agency for safety and soundness find their guidance in conflict with their regulator 

for consumer issues. Such a conflict and burden will surely increase compliance 

costs to credit unions, leading to diminished services to their members. Credit 

unions already fund the budget for NCUA. Under the Administration’s proposal for 

the CFPA, it also appears that the agency would be funded by the industry, meaning an additional cost burden to credit unions and their 90 million members. 

Recognizing that more should be done to help consumers, we would propose that, 

rather than extending the CFPA to federally insured depository institutions, each 

functional regulator of federally insured depository institutions strengthen or establish a new office on consumer affairs. Such an office should report directly to the 

Presidential appointees at the regulator and be responsible for ensuring that the 

regulator is looking out for consumer concerns in writing rules, supervising and examining institutional compliance, and administratively enforcing violations. Consumer protection offices at the functional regulators will ensure that those regulating consumer issues at financial institutions have knowledge of the institutions 

they are examining and can provide expertise and guidance on consumer protection. 

This is particularly important to credit unions, as they are regulated and structured 

differently than others in financial services. We believe that it is imperative that 

any regulator examining credit unions should understand their unique nature. This 

approach would strengthen consumer protection while not adding unnecessary regulatory burdens on our Nation’s financial institutions. We are pleased to see that 

NCUA Board Chairman Michael Fryzel recently announced the creation of such an 

office at NCUA. 

Finally, some have advocated expanding the Community Reinvestment Act (CRA) 

as part of the regulatory reform effort. NAFCU opposes extending CRA to Federal 

credit unions. Federal credit unions are already examples of CRA in action. Furthermore, analysis of 2007 HMDA data shows that despite banks and thrifts being subject to CRA requirements, credit unions regularly outperform them in terms of lending to low-income and minority populations. Adding a CRA requirement to Federal 

credit unions would be a solution in search of a problem. 

Conclusion 

In conclusion, the current economic crisis is having an impact on credit unions 

in rural areas, but many are continuing the serve their members well. The enactment of legislation earlier this year, such as S. 896 and the temporary corporate 

credit union stabilization fund it created, are providing relief, but additional statutory challenges remain. We urge the Subcommittee to support efforts to remove the 

credit union member business lending cap and to clarify that ability of credit unions 

of all charter types to add underserved areas. Finally, while there are positive aspects to consumer protection in regulatory reform, we believe that Federal credit 

unions continue to warrant an independent regulator that handles both safety and 

soundness and consumer protection matters. 

I thank you for the opportunity to appear before you today on behalf of NAFCU 

and would welcome any questions that you may have. 
51 

1For a fuller description, please visit www.cra-nc.org. 2 North Carolina Rural Center Data Center, http://www.ncruralcenter.org/databank/. 3FDIC Institutional Data http://www2.fdic.gov/idasp/main.asp. 4 United States Department of Labor, http://www.bls.gov/web/laumstrk.htm. 5 Bureau of Labor Statistics, http://data.bls.gov/PDQ/outside.jsp?survey=la. 6 North Carolina Rural Center, http://www.ncruralcenter.org/databank/trendpage—Employment.asp. 7 North Carolina Rural Center, http://www.ncruralcenter.org/databank/trendpage—Agriculture.asp. 8 North Carolina Rural Center, http://www.ncruralcenter.org/databank/trendpage—Income.asp. 9 U.S. Census 2000, Units in Structure, Summary File 3, Table H30. 

10 It Takes More Than a Village: The Decline of the Community Bank, Celent, http://reports.celent.com/PressReleases/200901293/VillageBank.asp. 

PREPARED STATEMENT OF PETER SKILLERN 

EXECUTIVE DIRECTOR, 

COMMUNITY REINVESTMENT ASSOCIATION OF NORTH CAROLINA

JULY 8, 2009 

Thank you, Senator Johnson, for the opportunity to testify today on lenders, consumers, and the economy in rural areas. I am Peter Skillern, Executive Director of 

the Community Reinvestment Association of North Carolina, a nonprofit community 

advocacy and development agency. 1

North Carolina has strong rural and banking sectors. Eighty-five of our one hundred counties are rural and 50 percent of the population lives there. 2 North Carolina has 106 credit unions and 106 banks ranging from the largest bank in the country, Bank of America at $2.4 trillion in assets, to Mount Gilead Savings and Loan 

at $9.8 million. 3

The current economic stresses for our rural communities and small financial institutions are significant. They are best understood in the context of two long-term 

trends: (1) a decline in the rural economy, and (2) the consolidation of the financial 

sector. Our policy recommendations are (1) to reform the broader regulatory financial system for stability, and (2) to invest in rural communities for recovery and 

growth. 

Rural Economies Are in Long-Term Decline 

The economic crisis facing the Nation impacts North Carolina hard, with the fifth 

highest unemployment rate in the country at 11.4 percent. 4 It hurts our rural counties harder with 19 counties—such as Scotland, McDowell, and Edgecombe—experiencing unemployment from 14 percent–17 percent. 5 These unemployment rates are 

years in the making. 

Rural North Carolina did not recover from the 2001 recession. Between 2002 and 

2005 the manufacturing sectors of textile, apparel and furniture lost more than 

88,000 jobs. In the past year more than 22,000 factory jobs were lost, particularly 

in the factories producing parts for the auto industry. 6 North Carolina still produces 

more tobacco than any other State, but changes for tobacco and the agricultural sector are dramatically reducing the number of small family farmers. 7 While rural 

counties in the scenic mountains and coast and the exurbs of our cities have enjoyed 

net in-migration, 40 rural counties lost population in the past decade. The North 

Carolina rural population is more likely to be older, poorer and have lower educational attainment. Median rural household incomes are 25 percent lower than in 

urban areas and poverty rates are 36 percent higher. 8 Due to low wages, rural residents face a housing affordability gap even though home prices on average are 

lower. As a result, 24 percent of the housing stock in rural areas is manufactured 

homes compared to 8 percent in urban areas. 9 New home construction often consists 

of second homes for retirees in the Blue Ridge Mountains and Outer Banks. The 

foreclosure rate for rural areas has jumped correspondingly with the credit crisis 

and the increase in unemployment. This recession intensifies a long-term restructuring of the economy in rural communities. 

Small Financial Institutions Are Declining as the Financial Sector Consolidates 

During the economic crisis a number of small banks across the Nation have 

failed—two in North Carolina in 2009—but far more have been lost through consolidation over time. Nationally, the number of banks with under $100 million in assets 

dropped by 5,410 from 1992 to 2008. 10 In North Carolina, rural counties hold 50 

percent of the population and 50 percent of bank branches. Yet rural bank branches 
52 

11FDIC Institutional Data http://www2.fdic.gov/idasp/main.asp. 12FFIEC, HMDA Analysis by CRA–NC. 13 It Takes More Than a Village: The Decline of the Community Bank, Celent, http://reports.celent.com/PressReleases/200901293/VillageBank.asp. 14Mortgage Daily, http://www.mortgagedaily.com/PressRelease051109.asp. 15Finpro, USA Branches, Bank Branch Ownership 03/16/2009 www.finpronj.com. 16 Carsey Institute, Policy Brief Number 4, Fall 2006. http://www.carseyinstitute.unh.edu/ 

publications/PB—predatorylending.pdf. 17Developed by the Woodstock Institute, California Reinvestment Coalition, Neighborhood 

Economic Development Advocacy Project, Community Reinvestment Association of North Carolina. 

hold only 15.7 percent of deposit assets (down from 27 percent in 1996.) 11 Nationally, approximately 4,000 small banks made 100 or fewer mortgages in 2007. 12 In 

all, these smaller lenders account for 1.8 percent of all national mortgage activity. 

North Carolina CDFI credit unions are facing declining deposits, higher delinquencies and adverse regulatory pressure to curtail lending. The result could be closures. Small banks are at a competitive disadvantage in terms of pricing, products 

and geographical service area. Small banks in rural communities are facing a longterm restructuring in the economy and a correspondingly declining share of deposit 

assets and lending activities. 

By contrast, the consolidation of assets and market share of megabanks has increased. In 1995, the top 5 banks had 11 percent deposit share; today, they have 

nearly 40 percent. 13 In the first quarter, 56 percent of mortgage activity was conducted by four lenders. 14 The consolidation of Country Wide and Merrill Lynch into 

Bank of America, Washington Mutual into JPMorgan Chase, and Wachovia Bank 

into Wells Fargo has further consolidated the financial services sector, making institutions that are ‘‘too-big-to-fail’’ even bigger. Ironically, these institutions contributed in part to the credit crisis through unethical, irresponsible business and lending practices. 

The collapse of North Carolina’s homegrown Wachovia Bank through exotic mortgage lending and the troubles of Bank of America in Wall Street deals contrast 

sharply with the stability small banks have provided. As a rule, small banks and 

credit unions avoided subprime credit and managed their resources well. These local 

institutions provide stability and diversification in the financial sector. They offer 

leadership to local civic engagements and credit to small businesses for job creation, 

mortgages for homeownership, small farm loans for agriculture, affordable deposit 

and checking services to consumers. The attached map compares bank branch coverage by the seven largest banks compared to all bank branches. 15 Without smaller 

institutions, many areas would go unserved. By definition these financial institutions are small, but are fundamental economic building blocks to our rural economy. 

Banking policy and regulatory oversight should support small banks and credit 

unions as essential to the local ecology of credit and commerce. 

Financial Reform Will Help Consumers, Lenders, and Rural Communities 

Consumers in rural and urban areas face similar lending abuses. Rural areas had 

a higher percentage of subprime high-cost loans than urban areas (17.4 percent 

compared to 15.5 percent in 2004), although the actual volume is significantly 

lower. 16 Rural areas have a high rate of Refund Anticipation Loans, which correspond to higher levels of poverty and uptake of the Federal Earned Income Tax 

Credit. Payday lenders are prevalent in the rural areas of the 35 States that allow 

this usurious lending. Consumers need better protections from unsound and unscrupulous lending practices. 

Harmed by the lack of financial regulatory oversight of other lending institutions, 

small banks and rural communities will benefit from the needed financial regulatory 

reform of our system as a whole. Attached to my written testimony are full descriptions of five principles for reform: responsibility, accountability, transparency, equal 

access and avoidance of conflict of interest. Also included is a discussion of how 

these six principles apply both to lenders and to the regulatory system. 17 Based on 

the principles, the Community Reinvestment Association of North Carolina in particular is supportive of the CRA Modernization Act HB 1492 and President Obama’s 

recommendation for the Financial Product Safety Commission as part of broader reform initiatives. Faced with a rising tide of foreclosures and insufficient loan modification programs, we ask the United States Senate to pass judicial loan modification to manage foreclosure losses for lenders, borrowers, and taxpayers. 

Although the problems created by the financial crisis and recession are felt by 

every community and the solutions needed are national in scope, it would be a mistake to assume that urban and rural communities will shake off the recession with 

equal speed. The data in my testimony indicates that long-term challenges for small 
53 

18 CRA–NC analysis of Table 1: Foreclosure Needs Scores within States by CDBG Jurisdiction—October 28, 2008, Source: Analysis by the Local Initiative Support Corporation provided 

by the Foreclosure Response project. 

banks and rural communities are systemic as well as cyclical. North Carolina’s economic recovery of the 2001 recession through technology, commerce, and finance 

masked the lack of recovery in the rural areas. Unless we invest in rebuilding these 

communities, no banks of any size will thrive. 

Invest in Rural Communities 

My concluding recommendation to Congress is to expand the Neighborhood Stabilization Program (NSP) both in scale of funding and in scope to include rural 

areas. NSP funds are to help deal with the consequences of the foreclosure crisis 

in revitalizing abandoned and foreclosed properties and rebuilding distressed communities. Six billion dollars was committed to NSP for communities. By comparison, 

$700 billion was authorized for TARP funding for banks. Please increase the amount 

of funding for NSP. 

NSP rules favor urban areas and exclude rural needs. Nationally 70 percent of 

foreclosures are in urban areas and 30 percent in rural. In North Carolina no rural 

area met the NSP needs test due to a lack of concentration. Yet in the aggregate, 

there are more foreclosures in rural counties than urban counties. This pattern is 

found in 23 other States such as Georgia, Indiana, New Hampshire, New Mexico. 18

Increased funding and rural inclusion will allow banks to move REOs off their balance sheets in partnership with nonprofits and local governments to rehabilitate the 

housing stock and rebuild their communities. The future for rural communities and 

banks is brighter if we recognize and act on the need for financial regulatory reform 

and investment in our communities through initiatives such as the Neighborhood 

Stabilization Program. 

Thank you very much for your attention. 
54 

Principles for Financial and Regulatory Reform 

1. Responsibility: Financial Institutions must offer financial products and services 

that are appropriate and suitable to the needs and abilities of the consumers. Regulators must regulate financial institutions so as to ensure that they are providing 

access to responsible and fair credit and loans. 

2. Accountability: Financial institutions must refrain from, and be held accountable for, offering harmful financial products and services and engaging in practices 

that harm individuals and communities. Regulators must be held to high standards 

for their regulation and oversight of financial institutions and accurately report to 

the public on a regular basis. Laws and regulations must provide strong enforcement mechanisms to ensure accountability and provide meaningful redress to those 

harmed by irresponsible actions of financial instructions. Regulators must vigorously enforce these laws and rules. Federal regulations must establish a minimum 

floor for consumer protections that may be exceeded by States and localities. 

3. Transparency: Financial institutions must fully, fairly, and clearly disclose all 

costs, terms and risks of financial products and services and avoid or disclose any 

conflicts of interests with other financial institutions, actors, or regulators. Regulators must demand transparency from regulated institutions and be transparent 

about their role in regulating financial institutions. 

4. Avoid conflicts of interest: Financial institutions must avoid all conflicts of interest with other financial players and regulators. Where potential conflicts are allowed, financial institutions must fully, fairly and clearly disclose the conflict to consumers and regulators. Regulators must be objective in their regulation and oversight of financial institutions, act in the public interest (not the interest of the financial institutions they regulate), and prohibit financial institutions from engaging in 

conflicts of interest. Regulatory policies and financial practices that create an inherent conflict of interest that could harm consumers or the economy must be prohibited or, at a minimum, closely regulated. 

5. Avoid systemic risk: Financial institutions must not engage in practices that 

create unreasonable risk to the financial system. Regulators must provide comprehensive and effective regulation and oversight of financial institutions and activities that create systemic risk to individuals, communities and the economy. Policymakers and regulators must implement changes in their oversight policies based on 

the reality that financial institutions that are ‘‘too-big-to-fail’’ are too big to exist. 

6. Equal access: Financial institutions must offer appropriate and suitable financial products and services to all persons and communities without regard to race, 

color, national origin, religion, gender, familial status, disability, or sexual orientation. Regulators must monitor whether all persons and communities have equal access to mainstream financial products and services and hold financial institutions 

accountable by vigorously enforcing nondiscrimination laws and rules. 
55 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM JACK HOPKINS 

Q.1. Mr. Hopkins and Mr. Johnson, both of your institutions are 

members of the Federal Home Loan Bank system. How do you use 

the Federal Home Loan Bank to support your bank’s lending in 

your market? Has the current economic crisis and the liquidity crisis affected your use of the Federal Home Loan Banks? Last year, 

HERA expanded the number of community banks that can use collateral to borrow from the FHLBanks. Has your institution’s ability 

to pledge this collateral been helpful? 

A.1. Answer not received by time of publication. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM JACK HOPKINS 

Q.1. Many of my constituents in Wisconsin are expressing frustration in getting a loan from their bank. The complaints have the 

same theme: they have been banking with the institution for a long 

time, and they have good credit and financial standing. Yet they 

still cannot refinance their loan or get a new line of credit. Can you 

please explain to the committee how the ICBA is working with 

their member banks to remedy this problem? 

Every weekend the FDIC is closing the doors of banks across the 

country at a record pace. I am concerned about the failure of small 

rural banks in areas where there is not another bank. The customers in the area might be left unbanked if a larger institution 

buys the deposits without opening a branch in the community. 

What are the options for these customers, and how are your members working to keep rural customers connected to the banking system? 

A.1. Answer not received by time of publication. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JACK HOPKINS 

Q.1. Some have suggested that the Federal Reserve Board’s unfair 

and deceptive practices (UDAP) authority is very broad and could 

be used to successfully protect consumers. The problem is that this 

authority has not been used in a material fashion prior to the credit card rule. Rather than bifurcating consumer protection from 

safety and soundness, should Congress consider ways to improve 

the UDAP authority? If so, what options do you recommend? 

A.1. Answer not received by time of publication. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM FRANK MICHAEL 

Q.1. I have heard from many small businesses struggling to find 

lines of credit and keep their doors open. How has the member 

business lending cap affected the ability of credit unions to make 

small business loans to their members? Does your organization 

have any data showing that more small businesses would be served 

if the member business lending cap was increased by loan size and 

volume? In the current credit crisis, do you believe that credit 
56 

unions are able to provide more loans to small businesses and 

should the cap be raised? 

A.1. The member business lending cap has affected the ability of 

credit unions to make small business loans to their members in two 

ways. First, many of the roughly one quarter of credit unions that 

offer business loans are getting sufficiently close to the cap for it 

to affect their behavior. Long before a credit union actually reaches 

the arbitrary 12.25 percent cap it must begin to moderate its business lending in order to stay below the cap. Considering the vast 

majority of credit unions that were not originally grandfathered 

from the cap, fully 38 percent of credit union business loans outstanding are in credit unions with more than 10 percent of assets 

in business loans. That means that almost 40 percent of the market is essentially frozen. Another 21 percent of the business loans 

outstanding in credit unions that are not grandfathered is in credit 

unions with business loans between 7.5 percent and 10 percent of 

assets. These credit unions are approaching the territory at which 

they will need to moderate business lending growth. A total of almost 60 percent of nongrandfathered credit union business loans is 

in credit unions at or near the cap. 

Second, the cap not only restricts the credit unions that are engaging in business lending and approaching their limit, but also 

discourages credit unions who would like to enter the business 

lending market. The cap effectively limits entry into the business 

lending arena on the part of small- and medium-sized credit 

unions—the vast majority of all credit unions—because the startup 

costs and requirements, including the need to hire and retain staff 

with business lending experience, exceed the ability of many credit 

unions with small portfolios to cover these costs. Today, only one 

in four credit unions have MBL programs and aggregate credit 

union member business loans represent only a fraction of the commercial loan market. Eliminating or expanding the limit on credit 

union member business lending would allow more credit unions to 

generate the level of income needed to support compliance with 

NCUA’s regulatory requirements and would expand business lending access to many credit union members, thus helping local communities and the economy. 

CUNA has produced an estimate of how much additional business lending could be provided by credit unions if the cap were 

raised to 25 percent of assets. We assume that all current business 

lending credit unions will hold business loans in the same proportion to the new cap that they currently do to the existing cap, and 

that they will use one half of the new authority in the first year. 

Further, we assume that on average credit unions that currently 

make no business loans will as a group add business loans equal 

to 1 percent of their assets. Applying these assumptions to second 

quarter NCUA Call Report data indicates an additional $12.5 billion in business loans for America’s small businesses. Based on this 

analysis, we conservatively project that credit unions could provide 

up to an additional $10 billion of business loans in the first year 

after the raising of the cap. 
57 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM FRANK MICHAEL 

Q.1. Some have suggested that the Federal Reserve Board’s unfair 

and deceptive practices (UDAP) authority is very broad and could 

be used to successfully protect consumers. The problem is that this 

authority has not been used in a material fashion prior to the credit card rule. Rather than bifurcating consumer protection from 

safety and soundness, should Congress consider ways to improve 

the UDAP authority? If so, what options do you recommend? 

A.1. While credit unions want to minimize their regulatory burdens, they are also very concerned that consumers are not adequately protected in the financial marketplace. As the question indicates, authority to regulate unfair and deceptive practices is quite 

broad, but some contend that the consistent failure to use that authority in the past is a major impetus now for the proposed Consumer Financial Protection Agency. 

Regarding the separation of the regulation of consumer protection from safety and soundness supervision, CUNA recognizes that 

there are legitimate concerns. These include financial intuitions 

being subjected to dual examinations for safety ands soundness and 

for compliance with consumer protection laws. However, we believe 

those concerns can be addressed by allowing prudential credit 

union regulators to enforce and examine credit unions for compliance with consumer protection laws, as well as for safety and 

soundness. The new agency would have rulemaking authority over 

consumer protection issues. We also believe there should be meaningful coordination among the financial regulatory agencies and the 

CFPA. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM ARTHUR C. JOHNSON 

Q.1. Mr. Hopkins and Mr. Johnson, both of your institutions are 

members of the Federal Home Loan Bank system. How do you use 

the Federal Home Loan Bank to support your bank’s lending in 

your market? Has the current economic crisis and the liquidity crisis affected your use of the Federal Home Loan Banks? Last year, 

HERA expanded the number of community banks that can use collateral to borrow from the FHLBanks. Has your institution’s ability 

to pledge this collateral been helpful? 

A.1. The FHLBanks have delivered innovation and service to the 

U.S. housing market for 76 years, and currently have more than 

8,100 members in all 50 States and the District of Columbia, American Samoa, Guam, Puerto Rico, and the Northern Mariana and 

U.S. Virgin Islands. The Federal Home Loan Bank System 

(FHLBanks) remains viable and strong, despite losses at a number 

of the Home Loan Banks similar to those incurred by most of the 

financial services industry due to the economic downturn. 

Indeed, without the ability by banks and other lenders to borrow 

from the Federal Home Loan Banks, the credit crisis of the last 

year would have been significantly worse. From the outset of the 

credit crisis, the Federal Home Loan Banks have engaged to ensure 

liquidity to the financial system. Advances to FHLB Member 

Banks increased from $640,681 billon at year end 2006 to $928,638 
58 

billion at year end 2008. This increase of nearly $300 billion in liquidity went, in large part, to community bank members of the 

Federal Home Loan Banks. Many small banks rely on the System 

for term advances to meet day to day liquidity demands. Because 

the System is a cooperative, members have a vested interest in the 

prudent lending and operations of the Banks. The result is a liquidity source which is transparent and self monitored. Additionally, 

the recent GSE reform legislation which combined the regulation 

of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks 

has led to a more sophisticated, detailed and experienced regulatory regime for the System and its members. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM ARTHUR C. JOHNSON 

Q.1. Every weekend the FDIC is closing the doors of banks across 

the country at a record pace. I am concerned about the failure of 

small rural banks in areas where there is not another bank. The 

customers in the area might be left unbanked if a larger institution 

buys the deposits without opening a branch in the community. 

What are the options for these customers, and how are your members working to keep rural customers connected to the banking system? 

A.1. I share your concerns about the consequences of bank failures, 

regardless of location, but particularly in rural areas. Typically, the 

failures involve a healthy bank acquiring the deposits and many of 

the assets of the failed bank. In those situations, the healthy bank 

is looking to maintain a relationship with the customers—in fact, 

this is what is attractive to the acquiring bank and the basis for 

the premium paid to the FDIC for the right to acquire the bank. 

This financial incentive helps ensure that customers of the failed 

bank have a stable relationship with the new bank. Moreover, it 

is typically the case that when branches are closed following an acquisition it is because there is another branch of the acquiring 

bank nearby that will serve those customers. 

In situations where there are fewer branches available to serve 

customers, advances in technology have significantly helped make 

this transition smooth. Remote deposit capture, for example, is 

something that more and more banks are offering to their small 

business and farm customers. This option has proven especially 

popular in rural America. Small business customers are able to immediately deposit checks in their accounts from their places of 

business. As improvements in the technology have driven down 

costs, banks are able to offer it to smaller and smaller businesses 

and farms. Of course, there is also the availability of Internet 

banking which has been widely adopted by rural banks. Finally, 

electronic filing of financial statements by small businesses and 

farms is another way that banks can perform financial analysis for 

loan making purposes over great distances. 

ABA works closely with many State and Federal agencies to ensure that credit is available in rural areas, including the United 

States Department of Agriculture, the Small Business Administration, the Bureau of Indian Affairs, government sponsored enterprises, and all State-sponsored agricultural and rural credit mak-
59 

ing agencies to encourage outreach to our members and their customers. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM ARTHUR C. JOHNSON 

Q.1. Some have suggested that the Federal Reserve Board’s unfair 

and deceptive practices (UDAP) authority is very broad and could 

be used to successfully protect consumers. The problem is that this 

authority has not been used in a material fashion prior to the credit card rule. Rather than bifurcating consumer protection from 

safety and soundness, should Congress consider ways to improve 

the UDAP authority? If so, what options do you recommend? 

A.1. Yes, we believe that there are other, more direct ways to improve the consumer protection for financial customers rather than 

by splitting consumer protection from safety and soundness and 

creating separate agencies. We support enhancing the consumer 

protection mission of the current banking agencies, and providing 

UDAP rulemaking authority which would be jointly exercised. Better enforcement of existing consumer protection laws in the 

nonbank sector and greater accountability for consumer protection 

in the mission of all functional regulators is the most effective path 

to a level playing field and should be pursued before any consideration of new powers is undertaken as part of regulatory restructuring. 

If UDAP rulemaking authority is going to be an effective part of 

consumer protection reform, we need to ensure that its application 

reaches across all financial institutions uniformly—and, indeed, 

across all providers of financial products, banks and nonbanks. We 

recommend the following two steps: 

1. First, we support vesting all of the Federal banking agencies 

with UDAP rulewriting authority to be exercised jointly. Only 

by a grant of joint authority can we maintain uniformity in 

any formal regulatory action to impose specific UDAP standards on the different components of the banking system. 

2. Second, to avoid inconsistent treatment of consumers by financial institutions outside the jurisdiction of the FFIEC 

agencies, ABA proposes that the banking agencies’ joint 

UDAP rulemaking be made effective for all nonbank entities 

providing financial products and services, just as TILA rules 

reach all nonbank creditors. Also as with TILA, nonbank functional regulators would possess the authority to enforce these 

rules against those in their respective jurisdictions. 

Banks are the cornerstone of reputable financial product and 

service delivery in their communities. Accordingly, uniformity of 

regulation and supervision should be based on extending the regulatory standards and supervisory regime covering banks to the 

underregulated and largely unsupervised nonbank sector. 
60 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL 

FROM ED TEMPLETON 

Q.1. I have heard from many small businesses struggling to find 

lines of credit and keep their doors open. How has the member 

business lending cap affected the ability of credit unions to make 

small business loans to their members? Does your organization 

have any data showing that more small businesses would be served 

if the member business lending cap was increased by loan size and 

volume? In the current credit crisis, do you believe that credit 

unions are able to provide more loans to small businesses and 

should the cap be raised? 

A.1. When Congress passed the Credit Union Membership Access 

Act (CUMAA) (P.L. 105–219) in 1998, they put in place restrictions 

on the ability of credit unions to offer member business loans. Congress codified the definition of a member business loan and limited 

a credit union’s member business lending to the lesser of either 

1.75 times the net worth or 12.25 percent of total assets. Also pursuant to section 203 of CUMAA Congress mandated that the Treasury Department study the issue of credit unions and member business lending. 

In January 2001, the Treasury Department released the study, 

‘‘Credit Union Member Business Lending’’ that found, among other 

things: 

Overall, credit unions are not a threat to the viability and profitability of other 

insured depository institutions. In certain instances, however, credit unions that 

engage in member business lending may be an important source of competition 

for small banks and thrifts operation in the same geographic areas. 

Congress has not revisited this issue since the study came out. 

The arbitrary member business lending cap placed on credit unions 

is a detriment to credit unions ability to serve their members and 

America’s small businesses. A number of credit unions are at or 

near the MBL cap, and a significant number shy away from business lending programs altogether because of the arbitrary cap and 

the restrictions it places on the ability to operate a business loan 

program. 

Additionally, the definition of a member business loan has not 

been updated for inflation in over a decade, meaning the $50,000 

minimum level set in 1998 needs to be updated. Credit union 

economists have estimated that removing the member business 

lending cap could help credit unions provide $10 billion in new 

small business loans in the first year alone. Removing the credit 

union member business lending cap would help provide economic 

stimulus without costing the taxpayer a dime. 

Senator Schumer has indicated his interest in introducing legislation to remove this cap and we would urge the Committee to support him in these efforts. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM ED TEMPLETON 

Q.1. Some have suggested that the Federal Reserve Board’s unfair 

and deceptive practices (UDAP) authority is very broad and could 

be used to successfully protect consumers. The problem is that this 
61 

authority has not been used in a material fashion prior to the credit card rule. Rather than bifurcating consumer protection from 

safety and soundness, should Congress consider ways to improve 

UDAP authority? If so, what options do you recommend? 

A.1. We have concerns about bifurcating consumer protection from 

safety and soundness as has been proposed with the new Consumer 

Financial Protection Agency (CFPA). We believe consumer protection can be enhanced in the current system by strengthening 

UDAP authority and creating consumer protection offices at the 

functional regulators. One way UDAP could be improved would be 

to give the FTC more efficient rulemaking authority over nonfederal entities, as their process is currently inefficient and hampers their rulemaking. 

We would support a CFPA that would have authority over nonregulated institutions that operate in the financial services marketplace, including supplanting the FTC on these matters. However, 

we do not believe such an agency should have authority over regulated federally insured depository institutions and would oppose extending that authority to Federal credit unions. Giving the CFPA 

such authority to regulate, examine and supervise credit unions 

that already are regulated by the NCUA would add an additional 

regulatory burden and cost to credit unions. Additionally, it could 

lead to situations where institutions regulated by one agency for 

safety and soundness find their guidance in conflict with their regulator for consumer issues. Such a conflict and burden will surely 

increase compliance costs to credit unions, leading to diminished 

services to their members. 

Recognizing that more should be done to help consumers, we 

would propose that, rather than extending the CFPA to Federal depository institutions, each functional regulator of Federal depository institutions have a new or strengthened office on consumer affairs established. We are pleased that NCUA Chairman Michael 

Fryzel has proposed such an office for NCUA. 

This is particularly important to credit unions, as they are regulated and structured differently than others in financial services, 

and we believe that it is important that any regulator examining 

credit unions should understand their unique nature. We believe 

that such approach would strengthen consumer protection while 

not adding unnecessary regulatory burdens on our Nation’s financial institutions. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM PETER SKILLERN 

Q.1. Some have suggested that the Federal Reserve Board’s unfair 

and deceptive practices (UDAP) authority is very broad and could 

be used to successfully protect consumers. The problem is that this 

authority has not been used in a material fashion prior to the credit card rule. Rather than bifurcating consumer protection from 

safety and soundness, should Congress consider ways to improve 

the UDAP authority? If so, what options do you recommend? 

A.1. As the question states, ‘‘the Federal Reserve Board’s unfair 

and deceptive practices (UDAP) authority is very broad and could 

be used to successfully protect consumers.’’ And ‘‘this authority has 
62 

not been used in a material fashion prior to the credit card rule.’’ 

The problem is that the Federal Reserve failed to utilize its authority to issue rules or to enforce existing ones to protect consumers. 

Changing the UDAP authority will not improve consumer protections as it does not address the underlying and fundamental problem of the Federal Reserve’s regulatory failure to protect consumers. 

The Federal Reserve should have greater accountability to Congress and the public in its financial accounting, its policies and programs and the enforcement of consumer protections. Changing the 

UDAP will not address these needs. Governor Duke suggested in 

Congressional testimony that the Federal Reserve be required to 

give a biannual update on consumer protections to Congress. This 

is a selfdisclosure approach that does not hold the agency accountable. Reform of the UDAP will not resolve the problem of the Federal Reserve failure of will to protect consumers. 

The Community Reinvestment Association of North Carolina 

strongly supports the creation of the Consumer Financial Protection Agency (CFPA) to address the deficiencies of the current regulatory structure in protecting consumers. 

A Single Agency Is More Effective Than Current Fragmented System 

There are currently 12 Federal agencies responsible for consumer 

protections in the financial sector. The patchwork of regulatory coverage of differing financial institutions and different types of authority and differing agency objectives and capacity make the current system inefficient and ineffective. Among Federal institutions 

that charter banks, financial institutions may change regulator if 

they believe another regulator has a lower enforcement threshold. 

Because Federal charter agencies receive payment from the firms 

they regulate, agencies lose revenue if firms switch regulators. Regulators have a disincentive to enforce regulations at the risk of revenue loss. A single agency that has a single purpose with the authority of rule writing and enforcement across all financial institutions and products is a significant improvement of the current 

structure that has multiple enforcement agencies that regulate by 

the type of lender not the product. 

Bifurcation Places Consumer Protections on Equal Basis With Safety and Soundness 

The two objectives of consumer protection and safety and soundness are complimentary and supportive of each other, but that does 

not mean that under the current system they are treated equally. 

Current regulators evaluate products based on safety and soundness, i.e., profitability before evaluation of products for consumer 

protections. Enforcement actions by the OCC and the FDIC on 

banks providing payday loans in partnership with payday lenders 

were conducted based on the lack of oversight of the agents of the 

bank, not on any ruling that the product at 400 percent interest 

rate and repeat transactions on a debt trap were harmful to consumers. Regulators have repeatedly stated that safety and soundness is their primary responsibility and has demonstrated that by 

a lack of material enforcement actions protecting consumers. 
63 

An example of this is the Office of the Comptroller’s lack of enforcement action against Pacific Capital Bank despite the bank’s 

violation of the OCC’s publicized guidelines on its supervised bank 

agencies that conduct refund anticipation loans. Jackson Hewitt 

prepares taxes and makes refund anticipation loans with Santa 

Barbara Bank and Trust (SBBT), Pacific Capital’s subsidiary. Jackson Hewitt was found guilty of tax fraud through a number of its 

franchises. Refund Anticipation Loans made by SBBT were used to 

facilitate the fraud. Recently, another bank partner Liberty Tax 

Services was found guilty in a jury trial of violations of the Federal 

Trade Act, Truth in Lending Act and Cross Debt Collection practices in marketing and originating Refund Anticipation Loans. Yet 

the OCC has not issued any regulatory actions regarding the 

bank’s operations. Instead, the Office of the Comptroller of the Currency recommended the bank for TARP funding and the bank received $180.6 million dollars which was used as capitalization for 

its operations including Refund Anticipation Loans. Unfortunately, 

Pacific Capital Bank stock has fallen by 90 percent and lost $7.70 

a share including one-time writedowns in the last quarter. This is 

one example of how Federal regulators have lost credibility that 

they have the will to protect consumers. This is an example of regulators subordinating profitability over both consumer protection 

and safety and soundness. 

The Community Reinvestment Association of North Carolina 

asks that the United States Banking, Housing, and Urban Affairs 

Committee investigate the oversight of Pacific Capital Bank by the 

OCC and the use of TARP funds to make Refund Anticipation 

Loans. 

By bifurcating consumer protection and safety and soundness, 

agencies can better achieve both objectives that have been at cross 

purposes under the current regulatory structure. 

The Consumer Financial Protection Agency Will Strengthen Dual 

Agency Enforcement 

The current regulatory system has Federal and State regulatory 

components. Historically Federal agencies did not enforce unfair 

and deceptive trade practices or provide consumer protections as 

this was a primarily a State prerogative through the State attorney 

general of financial regulator. Federal preemption of State regulations through national bank powers allowed institutions operating 

in States with few consumer protections to operate under jurisdiction of that State rather than the State the borrower lived in. This 

effectively removed many State consumer protections without putting into place Federal consumer protections or enforcement mechanisms. As an example, North Carolina’s usury cap of 36 percent 

interest rate loans is preempted by any national bank operating in 

a State with a higher cap, or State chartered banks operating 

under parity. Thus refund anticipation lenders can make triple 

digit interest rate loans by partnering with Out-of-State banks. 

The CFPA will create national standards that create a baseline 

of Federal consumer protections. The legislation also allows State 

agencies to regulate financial institutions acting within their borders. State laws that are stronger are not preempted. Consumer 
64 

enforcement capacity is increased by enabling State regulators to 

enforce Federal standards. 

This is a vast improvement over the current turf battle in which 

Federal regulators prevent State regulators from enforcement of either State or Federal laws, yet which they do not enforce themselves. The OCC sued the New York Attorney General to stop his 

enforcement of State fair lending laws against national banks. This 

action was overruled by the recent Supreme Court decision in 

Cuomo v. The ClearingHouse Association. The OCC claims to support fair housing laws, but can not demonstrate that it has enforced fair housing laws against national banks in any public action. The OCC most public action is the lawsuit to stop State enforcement of fair lending laws. The creation of the CFPA will allow 

for Federal preemption of State law, but not will empower enforcement of consumer protections. 

Fair Lending Laws Will Be Better Served by Consumer Financial 

Protection Agency 

The GAO July 2009 report Fair Lending Data Limitations and 

the Fragmented U.S. Financial Regulatory Structure Challenge 

Federal Oversight and Enforcement Efforts documents that the 

fragmented system of multiple agencies, lack of trained staff, and 

poor data collection have stymied fair lending enforcement. Only 

eight fair lending cases by Federal regulators have occurred since 

2005. Again existing Federal agencies have failed consumers. The 

CFPA will have trained dedicated staff, systemic data collection 

and single purpose to be more effective. 

Conclusion—Support the Consumer Financial Protection Agency 

The Community Reinvestment Association of North Carolina 

supports the creation of the Consumer Financial Protection Agency 

and rejects the argument that amending the Federal Reserve’s authority under the unfair and deceptive trade practices will improve 

consumer protection.