U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

31–043 PDF 2006

OVERSIGHT OF THE OFFICE

OF THRIFT SUPERVISION

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 25, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–96

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

MARK R. KENNEDY, Minnesota 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

CAROLYN B. MALONEY, New York 

STEPHEN F. LYNCH, Massachusetts 

ARTUR DAVIS, Alabama 

EMANUEL CLEAVER, Missouri 

DAVID SCOTT, Georgia 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 25, 2006 ..................................................................................................... 1

Appendix: 

May 25, 2006 ..................................................................................................... 29

WITNESSES 

THURSDAY, MAY 25, 2006

Gurzynski, Theodore, Vice President and Chief Credit Officer, Pyramax Bank, 

on behalf of the Independent Community Bankers of America ....................... 20

Nolan, Michael E., Chairman, President & CEO, Fifth District Savings Bank, 

on behalf of America’s Community Bankers ...................................................... 18

Reich, Hon. John M., Director, Office of Thrift Supervision ................................ 5

Smith, Geoff, Project Director, Woodstock Institute ............................................. 22

APPENDIX 

Prepared statements: 

Gurzynski, Theodore ........................................................................................ 30

Nolan, Michael E. ............................................................................................. 37

Reich, Hon. John M. ......................................................................................... 51

Smith, Geoff ...................................................................................................... 96

(1)

OVERSIGHT OF THE OFFICE 

OF THRIFT SUPERVISION 

Thursday, May 25, 2006

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett presiding. 

Present: Representatives Garrett, McHenry, Gutierrez, Moore, 

Maloney, Davis of Alabama, Cleaver, and Scott. 

Mr. GARRETT. [presiding] Good morning. This hearing of the Subcommittee on Oversight and Investigations will now come to order. 

Good morning to everyone. And as we await some late arrivals, 

presumably people who are still partying after watching American 

Idol last night, we will get things in order. 

And I assume you realize that Sue Kelly is not with you this 

morning. Instead, Mrs. Kelly had some pressing business elsewhere, other legislative matters, and I am honored to fill in, in her 

place, to handle things this morning. 

This morning the subcommittee will take a look at the Office of 

Thrift Supervision, a very important bureau, obviously, within the 

Department of the Treasury. The OTS, as it is referred to generally, was created by an act of Congress in 1989 in response to 

the savings and loan crisis of the late 1980’s. 

The Financial Institutions Reform, Recovery, and Enforcement 

Act, FIRREA, became law in August of 1989. This legislation addressed the S&L crisis by abolishing the Federal Home Loan Bank 

Board and creating the OTS to regulate thrift institutions, and by 

giving the deposit insurance function to the FDIC. It also created 

the RTC, the Resolution Trust Corporation, to help resolve any of 

the difficulties that existed with the insolvent S&L’s. 

In general, the new regulatory framework, as we can see, has 

done an adequate and good job. We have no repetitions of the crisis 

that shook the thrift industries back in the 1980’s. And the problems that have—there have been no significant problems that have 

cropped up. Those that have come up have been dealt with, most 

likely, efficiently. 

This record of success, however, does not relieve our obligation, 

as Members of Congress on both sides of the aisle, to conduct periodic oversight and review of this—or, for that matter, any other—

Federal agency. It has been pointed out that it’s been a few years 

since this committee has looked into the OTS in this context. 

2

One of the broader issues that has occurred since the last review 

has been September 11th. And since September 11th, we have seen 

terrorists, as well as other criminals, use our financial system to 

further their own goals. And so, therefore, we are reminded of the 

importance of vigorous regulatory oversight so that we may ensure 

the stability of our financial systems, basically, to make sure that 

they are not used for illicit purposes. 

Regulatory compliance through the Bank Secrecy Act and the Office of Foreign Assets Control is an essential bulwark of the protections that we look to. We know that money is a fuel of terror and 

crime, and the goal of most criminals. 

So, therefore, this morning we will start by hearing from Director 

John Reich of the OTS. The Director will be followed by a panel 

of three witnesses, whom I will introduce as they appear. 

So, I thank Director Reich and all the other panelists we will be 

hearing shortly. And at this point, I now recognize Mr. Gutierrez, 

the subcommittee’s ranking minority member. 

Mr. GUTIERREZ. Good morning, and thank you, Mr. Garrett. I am 

grateful to the chairwoman for calling this hearing. I am sorry that 

she couldn’t be here with us today. I am particularly pleased that 

we are joined today by Geoff Smith, from the Woodstock Institute 

in Chicago. Mr. Smith will talk about the Community Reinvestment Act. 

Last year, the OTS departed from a tradition of joint CRA regulation, and established a separate but weaker standard for CRA 

compliance than other regulatory agencies. There, ‘‘small institution exemption’’ means that thrifts with $1 billion or fewer in assets are no longer required to meet the service or investment tests 

under CRA. 

Moreover, the thrifts with assets in excess of $1 billion can meet 

their CRA obligations without any service or investment requirements. 

One of the most vital services that a financial institution can provide is low cost basic banking, bringing the ‘‘unbanked’’ out of the 

lightly regulated, high-cost world of check cashers and payday 

lenders. This is particularly true for senders of remittances, many 

of whom are not native English speakers, or who come from a 

country where banks only serve the wealthy. 

Banks that offer low-cost remittance services often serve as a 

gateway to getting those ‘‘unbanked’’ into regulated financial institutions. Ever since I was elected to Congress I have worked to increase disclosure and lower the cost of remittance sending. 

Last year, with Mr. Frank and other members of this committee, 

I wrote to the regulators, all of whom agreed to grant CRA credit 

to institutions that provide low-cost remittance services. I am glad 

that the OTS joined with other regulators on this point, and included low-cost remittance services in its Q&A. 

However, since the OTS CRA regulations eliminated the service 

requirement for small thrifts, and permit large thrifts to meet their 

obligations without a service requirement, the potential for a real 

breakthrough was virtually wasted in the world of thrifts, and that 

is a shame. 

I truly hope that Director Reich will re-evaluate the OTS CRA 

regulations, and that the thrifts will continue to fulfill portions of 

3

their CRA obligations through service and investment, despite 

their current ability to avoid these valuable components of community re-investment all together. 

Director Reich’s testimony indicates concerns about certain alternative mortgage products, particularly interest only and pay option, adjustable rate mortgages that often contain negative amortization features. 

I am also troubled by the popularity of these products. Some of 

these pay option mortgages are appropriate for a very limited universe, possibly Donald Trump in his immediate pre-bankruptcy 

days, but they are being marketed widely. And they are so complex 

that it is difficult, if not impossible, for the borrower to understand 

what he is getting into. I urge you to keep this in mind as you 

work with other regulators on guidance surrounding these products. 

Finally, much of our time on the oversight subcommittee is spent 

on issues surrounding terrorists, finance, and Bank Secrecy Act, 

BSA, compliance. Your testimony indicates that this is an area posing significant compliance challenges for the OTS. 

These are not new challenges. As the Inspector General determined in September 2003, the report indicated that the OTS examiners found substantive BSA violations at 180, or 18 percent, of the 

986 thrifts examined during the audited period. These substantive 

violations included the lack of a BSA policy or systems to ensure 

compliance. OTS has issued written enforcement actions against 

only 11 thrifts. 

Some of these violations were not fully addressed, even though 

they had been identified by OTS 6 years previously. At the appropriate time, I will ask the Director to respond in writing, if he prefers. 

If BSA complies continues to be a challenge for the OTS, did the 

Agency not make significant changes in response to the Inspector 

General’s report? Thank you, and I yield back the balance of my 

time. 

Mr. GARRETT. The gentleman yields back. Mr. Scott? 

Mr. SCOTT. Thank you, Mr. Chairman, and good morning, Director. How are you this morning? 

I want to thank Chairwoman Kelly and our ranking member, Mr. 

Gutierrez, for holding this hearing to review the Office of Thrift Supervision. It’s very important. 

Director Reich mentioned in his written testimony that he was 

concerned about the increasing popularity of alternative mortgage 

products, and the future shock many homeowners will face when 

adjustable rate mortgages begin to climb. 

I, too, am concerned with what may be the result of too lax of 

underwriting standards in writing many of these loans. My district 

is in Atlanta. I represent around 13 counties surrounding the city 

of Atlanta, the fastest growing region in this Nation. And of those, 

I represent 7 of the fastest growing counties, 7 of the fastest growing counties in the top 50 counties in this country, especially when 

you recognize Cobb County, Douglas County, Gwinnett County, and 

Rockdale and Newton Counties. I am sure that everyone understands the importance of foreclosure rates. 

4

But my district and metro Atlanta is now second only to Indianapolis in foreclosure rates. In the first quarter alone, over 20,000 

homes were in foreclosure in the Atlanta area. That represents one 

out of every 70 homes in foreclosure. That is astounding. In perhaps the fastest growing region in this country, one out of every 

70 homes is in foreclosure. 

So, you can see how concerned I am about this. And I can only 

imagine what will happen to many of my constituents when their 

adjustable rate mortgages increase. 

So, I would like to hear your thoughts on ensuring that mortgage 

products are written in the best interest of the consumer. In addition, I would like to hear from you about the OTS Community Reinvestment Act rules, which are not uniform with the other banking regulators. 

And I would also like to learn more about the OTS’s relationship 

with the Federal home loan banking system, and if there are any 

potential areas of conflicts with the home loan bank regulators. 

It’s also important for me to hear from your Director on the issue 

of are you concerned with the impact that rising interest rates will 

have on consumers who have adjustable rate mortgages, and what 

are you doing to ensure that lending and underwriting standards 

are strong, and in the best interest of the consumer? 

I would also like to know if you’ve found problems with thrifts 

giving out predatory loans, another huge issue in my region that 

my constituents are facing. And are you concerned that consolidation of the thrifts will decrease revenue for the OTS? And do you 

expect any problems maintaining sufficient staff levels? 

So, you see, this is a very big issue for me, and I am very interested in this testimony. My constituents are very interested in this 

testimony. And also people all across the country are interested in 

this testimony. I yield back the balance of my time, and I thank 

you, Mr. Chairman. 

Mr. GARRETT. The gentleman yields back. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. To Ranking Member 

Gutierrez, I am going to have to leave. This is a very important 

issue to me, as it is to my colleague. We have a memorial service 

for Sonny Montgomery, which I am involved with, but I desperately 

wanted to be here, and I will try to get back as quickly as I can, 

because of the significance of this issue. And I would like to thank 

Chairwoman Kelly and Ranking Member Gutierrez for holding this 

meeting. 

And it seems almost oxymoronic to hold a hearing on oversight 

with a body that has the word supervision in its name. But one of 

the top priorities of the Legislative Branch, and perhaps my greatest disappointment, coming from municipal government, having 

served as mayor before arriving here, was my disappointment that 

the Legislative Branch has, for the most part, abdicated its responsibilities as an oversight branch of our government. 

And one of the top priorities for this subcommittee is oversight 

of institutions that serve the financial needs of our citizenry, and 

to ensure that through the Federal level supervisory organizations 

compliance with existing statutes and laws is being enforced and 

adhered to. 

5

When statutes and laws are ignored, or top level supervisory 

agencies fail to perform their functions, it tends to be the little guy 

who always gets hurt. And too, in a real sense, the institution itself 

suffers some damage. My role, I think, is, one, to protect the little 

guy. And in this instance, we’re trying to protect the little guy from 

predatory lenders, financial shysters, greedy bankers, unscrupulous 

captains of industry, and even people who, on the outside, look like 

respectable business people. 

And so, Mr. Reich, we appreciate you being here, and hope that 

we can find out what the OTS has done to—over the course of 

time—to improve or—the worsened financial situation for the little 

guy. 

If we fail to protect the little guy, and it seems to me that we 

are violating the need for having government, or violating the need 

to have the Office of Thrift Supervision, the little guy tends to be 

the one who gets wounded the most, people who are unable to 

stand up for themselves. And in the long run, the institution itself 

is belittled if it does not protect the little guy. 

I appreciate you being here. I will leave and come back as quickly as I can. Thank you. 

Mr. GARRETT. The gentleman yields back. Concluding opening 

statements, we now turn to our first panel and our first witness, 

Director Reich. 

Director Reich has served as Director of the Office of Thrift Supervision, the OTS, since August of last year. In that capacity, Mr. 

Reich also continues to serve as a member of the board of directors 

of the FDIC. Prior to joining the OTS, Mr. Reich served as Vice 

Chairman of the Board of Directors of the FDIC, starting in November of 2002, and has been a member of the FDIC board since 

January 2001. He also served as Acting Chairman of the FDIC 

from July to August of 2001. 

Prior to coming to Washington, D.C., Mr. Reich spent 23 years 

as a community banker in Illinois and Florida, including 10 years 

as president and CEO of the National Bank of Sarasota in Sarasota, Florida. Mr. Reich also served 12 years on the staff of U.S. 

Senator Connie Mack of Florida before joining the FDIC. 

Director Reich holds a BS degree from Southern Illinois University, and an MBA from the University of South Florida. He is also 

a graduate of Louisiana State University School of Banking of the 

South. 

I thank the Director for being with us this morning, and it was 

a pleasure meeting you earlier. We also have a copy of your testimony delivered to us already. I appreciate the detail that it goes 

into, and would appreciate your comments at this point. 

STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. REICH. Thank you very much, Acting Chairman Garrett, 

Ranking Member Gutierrez, and members of the committee. It’s a 

pleasure to be here today. It’s my pleasure to report on an agency 

that is strong, well-staffed, financially sound, and an industry that 

is profitable, growing in asset size, and evolving to meet the housing and the retail needs of America’s communities. 

6

Since 1989, OTS has developed and continually improved its supervision and oversight of the institutions and the holding companies that we regulate. We work closely with the industry to maintain the profitability, integrity, and vitality of the thrift charter. 

And the industry continues to adapt to the evolving financial service businesses and demands of its customers. 

While mortgage lending remains the dominant activity, it is no 

longer the exclusive activity of the industry, nor should it be. Overexposure to one part of the economy without diversification creates 

risks that can lead to safety and soundness challenges. A favorable 

interest rate risk environment, accompanied, by record mortgage 

originations and sales has produced strong profitability for the industry over the last 5 years. 

Equally important to this sustained period of profitability are 

good stewardship by our institutions’ managers, earnings diversification, and good asset quality. 

We continually work to provide specialized training, rigorous accreditation, professional development programs, and other supervisory tools to our staff to ensure that we are capably equipped to 

supervise a dynamic and growing industry. Our employees are of 

long tenure, and they are well seasoned, with an average of more 

than 15 years with the Office of Thrift Supervision, and more than 

23 years of overall bank regulatory experience. 

As of March 31st of this year, there were 856 OTS-regulated thrifts, holding assets of $1.5 trillion. While consolidation has reduced the number of savings institutions, industry asset growth remains strong. OTS also regulates 481 holding company structures 

with consolidated assets of approximately $7.5 trillion. 

Thrifts provide substantial services that encourage home ownership and affordable housing, and contribute to economic growth. 

Thrifts hold over $1 trillion in housing-related loans and securities, 

including $847 billion in whole single family loans, which comprise 

57 percent of thrift assets today. 

Recent earnings and profitability of the industry have been 

strong, with consecutive annual records from 2001 through 2005. 

For 2005, the industry reported record earnings of $16.4 billion, 

eclipsing the $14.0 billion of 2004. And the industry has posted 

quarterly earnings exceeding $4 billion in each of the last 5 consecutive quarters, including a record $4.3 billion in the fourth quarter of 2005. 

Asset quality also remains strong, with delinquency rates and 

troubled asset ratios at or near historical lows. Though asset quality is strong, OTS is closely monitoring thrift loan performance, 

since recently originated or unseasoned loans now comprise a significant portion of thrift loan portfolios. 

Capital measures for the industry are strong, stable, and well in 

excess of minimum requirements. As of March 30th of this year, 

over 99 percent of the industry exceeded well-capitalized standards, 

and no thrift was less than adequately capitalized. 

And problem thrifts remain low. Currently, out of 856, there are 

6 problem thrift institutions, with total assets of $1.1 billion. 

The thrift charter has unique characteristics that make it well 

suited to retail banking. These include nationwide branching under 

a single charter, a holding company structure offering a single regVerDate 0ct 09 2002 13:41 Dec 19, 2006 Jkt 031043 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\DOCS\31043.TXT HFIN PsN: TERRIE
7

ulator for the holding company and its institution, and a strong 

preemption authority. These features enable savings associations to 

follow their customer base from coast to coast, with minimal regulatory burden, and seamless supervision at all levels of an organization ensures both a comprehensive supervisory regime and minimal regulatory overlap. 

Notwithstanding these strengths and benefits, there are some 

risks that we continue to monitor in the industry. 

First and foremost is interest rate risk. Given the industry’s natural concentration in longer term mortgage loans generally funded 

with shorter term deposits and borrowings, monitoring interest 

rate risk is always critical. Clearly, the current interest rate environment is extremely challenging for all financial institutions. In 

the past 12 months, interest rates have risen considerably, and the 

yield curve was flattened. Despite this environment, OTS believes 

the thrift industry is on sound footing, from an interest rate perspective. 

Credit quality is another risk that we carefully monitor. The 

thrift industry’s sound financial condition permits it to address potential credit quality problems from a position of strength. Thrift 

industry credit risk is primarily driven by the performance of residential mortgage loans. As a result of the strength of the housing 

market in most areas of the country in recent years, single family 

residential loan delinquencies and charge-offs have remained at 

low levels. 

However, future deterioration in any of the fundamentals that affect housing strength, such as worsening unemployment rates, and 

rising interest rates, could adversely affect thrift asset quality. 

Compliance risk is another issue for the industry, and one that 

OTS closely watches. The increased volume of consumer transactions and consumer protection and other regulations governing 

these transactions necessitates an active compliance management 

function within institutions and in oversight programs within the 

banking agencies. 

Today, the importance of compliance management is elevated by 

the need to ensure the privacy and security of consumer information, as more information is shared and outsourced, and the threat 

of identity theft persists. Also, the need to guard against money 

laundering and terrorist financing activities. And finally, the need 

to stem the tide of abusive lending practices, and ensure fair and 

equal access to credit for all Americans. 

An area posing significant compliance challenges for our institutions is the Bank Secrecy Act. During the 15 months from January 

1, 2005, through March 31, 2006, OTS conducted 900 BSA examinations. During those reviews, 222 institutions were cited for 500 

BSA-related violations. Most of these violations were remedied during the examination process, but we did initiate 27 formal and informal enforcement actions during this time. 

The safety and confidentiality of personal information has also 

taken on great importance in the regulatory environment. Data security has long been a significant part of the supervision and examination process that OTS has performed at thrifts and their thirdparty technology service providers. 

8

OTS regularly evaluates institution data security programs. This 

includes supervision and examination work at industry service providers. Business convergence and continued consolidation in the financial services industry have created an increasingly competitive 

environment. This stimulates thrift managers to focus on strategies 

to improve efficiencies and the delivery of financial products and 

services, customized product offerings to meet their customers’ 

needs, and ensure quality customer service. 

The thrift industry has grown and diversified over the past several years, while reporting excellent financial results. 

Mr. GARRETT. If the gentleman can—your allotted time of 5 minutes has expired. 

Mr. REICH. All right. 

Mr. GARRETT. And I am just watching your pages there, to see 

if you were coming close to the last page. 

Mr. REICH. I was— 

Mr. GARRETT. You can continue your last thought, and bring it 

to a conclusion. 

Mr. REICH. Thrifts continue to play a vital role in providing 

mortgage funding and other retail products. At OTS, we will continue to evaluate our policies, our staffing, and our infrastructure, 

to ensure that the Agency is well prepared to handle new and 

emerging risk. 

I appreciate the opportunity to be here today, and I am happy 

to address your questions. 

[The prepared statement of Mr. Reich can be found on page 51 

of the appendix.] 

Mr. GARRETT. Thank you, Director Reich. And as I begin, I may 

take up somewhere near where you ended, and also along the line 

that was raised by Mr. Scott, and that is the—along the lines of 

the question of consolidation. 

You gave the exact number, I think, of 856. I thought it was just 

a little over 800, but 856 is where we’re at, at this point in time. 

If you can, give us a little bit more of the big picture on—both the 

big picture and down into the weeds a little bit on how that all affects you. 

There has been a recent purchase by Wachovia of Golden West 

Financial Corp., and its thrift, World Savings Bank. Things of that 

sort and the overall consolidation, I would assume, would eat into 

the financial base of the OTS. So when that occurs, how are you 

able to maintain what you have, expand, if you need to, for your 

past activities? 

And another question I will get into in a moment, with regard 

to terrorists and other crime aspects, as far as the needs in those 

areas, as well. So, does that hamper or create problems for you? 

I realize your agency is also able to enact civil penalties for when 

they are appropriate. Do those civil penalties then turn around 

and, if there is a gap in funding—which is the answer to the first 

question or not—if there is any gaps or shortages to the funding 

now or in the future, do those civil penalties work in a way to fill 

those gaps? 

And then following that question, along those lines, is how are 

you able to do a budgeting appropriately, now and in the future, 

based upon, A, the continued consolidation, B, the use of civil penVerDate 0ct 09 2002 13:41 Dec 19, 2006 Jkt 031043 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 F:\DOCS\31043.TXT HFIN PsN: TERRIE
9

alties, whatever, to fill those gaps for now and into the future as 

well? 

Mr. REICH. Well, let me first address the subject of industry consolidation. The entire banking industry is consolidating, which affects all charters: State charters, national charters, and thrift charters. Twenty years ago, in 1977, there were over 18,000 financial 

institutions. Today, at the end of December of last year, there were 

8,860 financial institutions. And the reduction in institutions has 

affected the entire financial services industry. 

With respect to the growth of the thrift industry, even though 

there has been a decline in the number of institutions, there has 

been an increase in overall thrift assets over the years, which has 

had a positive impact on the budget of OTS. Our budget 5 years 

ago was approximately $150 million. Today it’s approximately $215 

million. So, in spite of a consolidation and a reduction in the number of institutions, we have been able to experience a moderate 

growth each year in our revenue stream. 

Budgeting is a very important activity at OTS. We spend many 

months a year projecting what our needs are going to be for the 

forthcoming year, taking into consideration the size of the industry, 

the number of institutions that we regulate, and our anticipated 

revenue stream. 

With respect to the announcement of Wachovia’s purchase of 

Golden West, the owner of World Savings, it’s a significant customer of OTS. It represents about a little less than 5 percent of the 

revenue of OTS, but it is not a number that is going to have a material effect on our operations. We don’t know, ultimately, whether 

or not Wachovia will retain the thrift charter or not. Preliminary 

indications are that they will. But in the long term, that will remain to be seen. 

Mr. GARRETT. I think the other question was along those lines— 

Mr. REICH. You asked about— 

Mr. GARRETT. Civil penalty. 

Mr. REICH.—whether or not civil penalties were a source of revenue for the OTS, and the answer to that question is no. Those 

funds usually, I believe, go to either the Justice Department or the 

Treasury Department. They do not go into the coffers of the Office 

of Thrift Supervision. 

Mr. GARRETT. One final question, and then—with regard to terrorism on the risk finance—terrorism financing and the like, an 

issue that Sue Kelly has handled extensively in this committee, I 

note that your bank examination procedures date back to 1999, 

well before the terrorist attack of 2001. 

Is there any need to readdress them, in light of the changing circumstances since 9/11? 

Mr. REICH. Well, last year, in July and August of last year, after 

several months of collaboration, all of the Federal banking agencies—the Fed, the FDIC, the OTS, and the OCC—published a new 

examination guideline manual for Bank Secrecy Act and antimoney laundering activities. All of the agencies are now on the 

same page, following the same examination procedures in each of 

our institutions. 

We held a number of outreach sessions with the industry, to let 

bankers know what they could expect in the examination process. 

10

We got some feedback from them that assisted us before we adopted final procedures. And I think that we have given recent attention to the evolving landscape, with respect to BSA and anti-money 

laundering activities. 

And I really think that there is relatively good news to report, 

in the sense that we have seen that financial institutions of all 

charters have taken BSA seriously. They have adopted programs. 

The number of violations are beginning to decline that are being 

found in our institutions, as we see that they have improved their 

programs and made them stronger. 

Mr. GARRETT. I thank you. Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you. Mr. Reich, would you consider revising your predecessor’s CRA regulations to reemphasize the service 

component and investment component for banks in excess of $1 billion? Will you consider conforming your regulations for small 

thrifts with that of other regulators? 

Mr. REICH. The short answer to that, Congressman, is yes. I was 

a—I have been at OTS since last August. Prior to that, I was with 

the FDIC in an active capacity for several years. And I was, in a 

behind-the-scenes capacity, a participant in the development of the 

CRA rule that was adopted by the other three agencies. 

When I came to OTS, I came to OTS with a predilection to conforming OTS’s CRA rule with that of the other agencies. I have 

asked the staff of OTS to justify to me why OTS deserves to have 

a different CRA rule than the other three agencies. 

Essentially, there is a case. It would be up to one’s own opinion 

as to how strong the case is. OTS is required by law—our institutions are required by law—to have—to abide by the qualified thrift 

lender test, which requires that approximately 65 percent of their 

assets are invested in housing-related assets. That restriction, or 

that stipulation, does not apply to any other Federal banking agency. National bank charters, State bank charters are totally unrestricted as to how their assets may be apportioned. 

Secondly, the capabilities of thrift institutions to invest in commercial loans or small business loans or consumer loans is rather 

limited. Again, there are no limits for the other three Federal 

banking agencies. Most thrift institution executives feel that they 

meet their community needs every day, that that’s why they’re in 

business, they are retail banking charters, they make housing 

loans and home loans in their communities, and how they survive 

and how they thrive. 

Having said that, philosophically it has been my view for some 

time that on major policy issues, the four Federal agencies ought 

to be on the same page. And so, although we have not changed our 

rule, it is on the table for consideration, and we may move in that 

direction. 

Mr. GUTIERREZ. I thank you for that consideration. I have always 

said that if this is what they do, it should be relatively simple and 

easy, then, to pass any CRA test. I mean, so it seems that the redundancy—we don’t need you to ask us to do it, because it’s what 

we do— 

Mr. REICH. Right. 

11

Mr. GUTIERREZ. So it should be the easiest part of the test. They 

should have the forms already filled out for you and say, ‘‘Here, we 

pass, give us an A-plus, it’s what we do.’’ 

And I can see the difference because of the housing rule. And 

housing isn’t the exclusive one, but it is one of the major components that we see for it. Let me ask you—thank you very much for 

that answer, and I look forward to— 

Mr. REICH. Can I add one more comment? 

Mr. GUTIERREZ. Sure, absolutely. 

Mr. REICH. Twenty years ago, when CRA was adopted in 1977, 

there were over 18,000 financial institutions, and there were 

16,000 of which, approximately, had assets of under $1 billion. 

They represented 46 percent, approximately, of the assets of the 

entire industry. Banks under $1 billion 20 years ago, when CRA 

was adopted, represented about 46 percent of total assets. Today, there are about 1,000—1,200—institutions under $1 billion in assets—that’s not the right number—there are 8,000 institutions under $1 billion, and they represent about 12.5 percent of 

the total assets in the industry. 

So, I am concerned, I do have concerns that a shrinking part of 

our banking population in the United States is bearing a great deal 

of scrutiny about its CRA when it is representing such a small percentage of banking assets in the country. 

Mr. GUTIERREZ. Thank you. The other question I wanted to ask 

you was do you believe that the exotic mortgage products are too 

widely used? And would you support a ban on negative amortization products? The more I see these products, it’s so easy, it seems. 

They’re making it easier and easier. 

And so, I’m becoming concerned, especially about negative amortization. How do you see this trend, and what do you see the role 

of the OTS in this? 

Mr. REICH. Well, we have institutions that have been making adjustable rate mortgages for 30 years, payment option mortgages for 

20 years, payment option mortgages with negative amortization for 

20 to 25 years, and they have been successful, and have been conservatively operated, and have done very well. 

I am concerned about what has taken place in recent years, with 

the proliferation of these types of instruments in institutions that 

have just recently begun to offer them in the past 2 or 3 years. 

I am concerned about the quality of disclosures to consumers. I 

am concerned that they may be being sold, offered to consumers 

who don’t have a full understanding of the potential risks that take 

place when the interest rates are reset. 

So, I think that the activity that is taking place today with the 

four Federal banking agencies, with the proposed guidance on alternative mortgages, and on commercial real estate guidance, is an 

activity that will hopefully result in better disclosures in the industry and more selective offerings of these products in the market. 

I would not support an outright ban on negative amortization. 

Most negative amortization products have caps as to the amount 

of the negative amortization. So it’s not as though negative amortization can grow to an unlimited level. Many institutions have a cap 

of 110 percent of the original loan amount which, in a rising housing market environment, is not an unreasonable policy to pursue. 

12

Mr. GARRETT. Thank you, thank you. Mr. Scott? 

Mr. SCOTT. Thank you, Mr. Chairman. Let me—let’s start out 

with Atlanta. And if you can share with us, what is going on in 

the Atlanta market that is making it a situation where 1 out of 

every 70 homes are in foreclosure? 

And I particularly raise that, because I believe that you have an 

office in Atlanta. Is that correct? 

Mr. REICH. We do. 

Mr. SCOTT. Have you all taken a look at this? And what are the 

factors involved? Now, from my experience and knowledge about 

this, I know that unemployment plays a role in foreclosures. 

However, Atlanta has a relatively low unemployment rate. We’re 

very fortunate, because we have such a diversified economy—one 

industry goes down, we’re able to make up for it in another area—

so can we walk through for a moment, and share with me what’s 

going on with the Atlanta market that is making it where 1 out 

of every 70 homes are in foreclosure? 

Mr. REICH. Well, quite frankly, I’m surprised by that statistic, 

Congressman. I was unaware that the foreclosure rate in Atlanta 

was at the level that you quoted. 

Mr. SCOTT. Let me just mention to you, so you will know where 

this information comes from, one of our most highly respected 

newspapers, the Atlanta Business Chronicle, stated that Atlanta 

had the second highest foreclosure rate among the Nation’s largest 

metropolitan areas. And it goes on to say that, let’s see, that this 

high rate accounts for 1 out of every 70 homes. And this appeared 

in, I believe, Tuesday’s—2 days ago—Atlanta Business Chronicle. 

Mr. REICH. Well, again, I was unaware of that number. I have 

been aware for several years that the Atlanta market has been an 

extremely hot market, in addition to other markets in the Sunbelt 

States. The Atlanta region has been growing tremendously; there 

has been a great deal of commercial real estate activity in the Atlanta market. 

And there have been concerns. The Atlanta market was, I think, 

one of the reasons that precipitated studies of commercial real estate activities, generally, around the country, which led to the recently issued guidance on commercial real estate by the four Federal banking agencies—proposed guidance. 

Congressman, I am at a loss to give you an informed answer as 

to the explanation for the high—relatively high—level of foreclosures in the Atlanta market. I will be happy to get back to you 

and submit a written response to you on this subject. 

Mr. SCOTT. I would appreciate that, and I look forward to working with you. Maybe there are some things we can do in the market, and maybe there are some activities that we can begin to get 

engaged to. I would certainly like to address that. 

I am the author of our Financial Literacy Act that we are moving 

through this Congress. We are very much concerned with that. 

Also added to that, of course, Atlanta is a very prime market for 

predatory lending. And some of this could be a lack of financial 

education, but it would be very, very helpful to me if you would—

and maybe your operation in Atlanta could take a concentrated 

look at that, and we could come out of this with something that 

could benefit the rest of the country. 

13

Let me ask you another question, if I may, in terms of the adjustable rate mortgages and the rising interest rates with those. 

How impactful would—do you think that—what impact do you 

think that would have on consumers, adjustable rate mortgage, and 

the impact that rising interest rates would have? 

Mr. REICH. Well, it’s conceivable, for certain types of adjustable 

rate mortgages, that payments could double. It would be a real 

payment shock, and that could have, depending on the extent to 

which interest rates rise, it could have serious ramifications for the 

thrift industry and for all mortgage lenders. 

Mr. GARRETT. Thank you. The gentleman’s time has concluded. 

Mr. McHenry, do you have a— 

Mr. MCHENRY. Thank you, Mr. Chairman. I certainly appreciate 

and I thank you, Mr. Reich, for being here today and representing 

OTS. 

In your testimony you said thrifts compete effectively with other 

financial service providers to deliver a wide range of products and 

services to American consumers. A very positive statement. 

Some would say, or some have said before this committee, that 

thrifts typically—thrift members typically—experience higher loan 

rates, lower savings rates, and additional fees. Is that a true statement, or a misrepresentation? 

Mr. REICH. I would say it’s an inaccurate statement. Higher loan 

rates? 

Mr. MCHENRY. ‘‘Experience higher loan rates, lower savings 

rates, and additional fees.’’ 

Mr. REICH. I would say that’s a misrepresentation, and that is 

it not accurate. 

Mr. MCHENRY. All right. Also, OTS I know, with this ongoing executive compensation that the ranking Democrat of the full committee has a large focus on these days—he doesn’t talk about the 

high compensation of supporters such as trial lawyers of their side 

of the aisle, but nonetheless, I digress—could you address with us 

today your policies, OTS’s policies, on executive compensation and/

or stock option plans, and that sort? 

Mr. REICH. Are you speaking— 

Mr. MCHENRY. During a conversion process, for instance, in particular. 

Mr. REICH. During a conversion process to a—from a credit union 

to a mutual form of organization? 

Mr. MCHENRY. Well, actually, the conversion process which you 

regulate. I wouldn’t ask—I would not subject you to that, your Deputy Director did an admirable job before the committee. But I 

wanted to ask that of you, to address executive compensation and 

stock options, for instance, that you, OTS, oversee, and the conversion process which you oversee. 

Mr. REICH. Well, addressing stock options first, they are not permitted until some period of time after a conversion has been completed, a stock option plan cannot be implemented with a conversion. There is a period of time that has to take place before a stock 

option plan may be approved. 

And in the case of a mutual—a stock institution, the shareholders would have to approve such a plan before it could be approved. It could not occur without shareholder approval. 

14

Mr. MCHENRY. Okay. So, would it be—in the conversion process 

which you oversee, would it be a fair characterization to say, ‘‘Executives of the institution profit by obtaining stock far in excess of 

that available to the institution’s members?’’ 

Mr. REICH. I think that is—again, that is an inaccurate statement, and a misrepresentation. There are limits on the stock that 

executives of an institution may receive, and there are—there is a 

prohibition on executives gaining control of an institution, or a 

group of executives gaining sufficient shares to have control of an 

institution. 

Mr. MCHENRY. So it would be a misrepresentation? 

Mr. REICH. Yes. 

Mr. MCHENRY. So does OTS have regulations on the books dealing with executive benefits, compensation, and stock options? 

Mr. REICH. We make certain that executive compensation is reasonable, compared with similar-sized institutions. 

Mr. MCHENRY. So, it would be an unfair characterization to say 

that executives profit by obtaining stock far in excess of that available to the institution’s members? 

Mr. REICH. I think that’s correct. Management can purchase 

stock only to the same extent that any other member may purchase 

it. 

Mr. MCHENRY. Okay. In terms of regulations that you have on 

the books, I know that OTS frequently reviews regulations that you 

put in place, to ensure that they are doing what they are intended 

to do. And I know that’s an ongoing fashion. 

In terms of the conversion process, which I think the chairman 

mentioned earlier, in terms of the potential with thrifts that are 

purchased and ongoing conversions in the marketplace, how long 

have you had the regulations on the books? 

Mr. REICH. Since the late 1970’s. 

Mr. MCHENRY. And have they been changed recently? 

Mr. REICH. Within the past 7 years. 

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you for your 

testimony, Mr. Reich. 

Mr. GARRETT. Mrs. Maloney? 

Mrs. MALONEY. Welcome. And I am glad to see that you support 

the committee action on CTR’s. An amendment of mine had been 

accepted in the regulatory relief, and yet it was cut out in the Senate. And I support Chairman Bachus’s efforts to address this issue. 

But I want to look at the OTS enforcement of the Bank Secrecy 

Act, and to hear what you are doing to make sure that we don’t 

have another savings and loan scandal of mismanagement. I would 

like to hear steps that you have taken in that respect. 

But I have here a report on—from FinCEN and others on the 

BSA enforcement. And in it, it says that in some cases where the 

OTS issued written enforcement actions in response to the Bank 

Secrecy Act violations, the IG found—and I’m quoting—‘‘in five instances, Bank Secrecy violations continued for years, or BSA compliance actually worsened.’’ 

And it talks about the report from the Inspector General, and it 

notes that they found BSA violations at 180 of the 986 thrifts examined during that period. And of the 180 thrifts with substantive 

violations, OTS had issued written enforcement actions against 11. 

15

And the OIG reviewed a sample of 68 of the thrifts for detailed 

review, and reported that, ‘‘In all 68 cases, we found OTS relied on 

moral persuasion and thrift management assurances to comply 

with the BSA. And in 21 of the cases, thrift management was not 

responsive, and did not correct its BSA violations.’’ So, what are 

your comments on that, if any? 

Mr. REICH. Well, my first comment is a question. Was that a 

2003 IG report? 

Mrs. MALONEY. Yes, it was. September 23, 2003. 

Mr. REICH. Okay. I think we have addressed the issues that were 

raised in that report. And as I mentioned a few minutes ago, in 

July and August of last year we worked with the other Federal 

banking agencies to produce a new BSA anti-money laundering examination manual that all examiners of all the agencies are following. 

And I think that the procedures that we are using are thorough; 

they are detailed. And I mentioned a few moments ago that in the 

last 12, 14 months, we have done 900 BSA examinations. We have 

found 500 violations, and issued a number of formal and informal 

enforcement actions. 

So, I think the quality of our program is strong, is good, and the 

quality of the institution compliance is steadily increasing. 

Mrs. MALONEY. How many formal actions have you initiated? 

Mr. REICH. There were 27 formal and informal. I don’t have the 

exact number of formal actions. 

Mrs. MALONEY. If you could, get back to us and— 

Mr. REICH. I would be happy to do that. 

Mrs. MALONEY. I look forward to the next IG’s report, and hope 

that it is better than the 2003 report. What steps have you taken 

for safety and soundness? 

Mr. REICH. Could you be more specific? 

Mrs. MALONEY. Safety and soundness, making sure they are 

well-regulated, well-run, serving the communities like they should. 

I think they perform a tremendous service of community banking, 

but I am still troubled by the S&L scandals. What have you done 

to make sure we don’t have those again? 

Mr. REICH. Safety and soundness is the most important part of 

our mission, to make certain that thrift institutions remain 

healthy. 

The training and education of our examiners is a continuing 

process, and we strive to keep our examiners up-to-date with 

changes that are taking place in the financial services environment, with continuing programs. 

We have recently employed a new Assistant Managing Director 

of Supervision for Compliance Consumer Protection. We had previously disseminated that position, distributed that position out to 

the field. We have centralized it, and we will be giving increased 

importance to compliance, CRA, consumer protection, as well as 

safety and soundness, which is our highest priority. 

Mr. GARRETT. I thank you very much, and the gentlelady’s time 

has expired. 

Mrs. MALONEY. Thank you very much. It should be your highest 

priority. I am glad to hear that it is. Thank you. 

Mr. GARRETT. Mr. Davis? 

16

Mr. DAVIS. Thank you, Mr. Chairman. I may not take the 5 minutes. I wanted to explore one topic that apparently has not come 

up today, and it deals with the question of preemption. 

As you know, in the context of conventional banks, and in the 

context of savings institutions that you regulate, this committee 

has been extremely interested in the question of whether or not 

State laws operate, and are allowed to operate, in areas regarding 

alleged predatory lending. 

Obviously, you are aware of the March 7th decision with the 

chief counsel issue which has caused some consternation, and I 

think you’re aware of the parallel controversy involving the OCC 

and a preemption order that it issued several years ago—or preemption interpretation it issued several years ago. 

I don’t want to necessarily get bogged down with the specifics of 

the Montgomery County, Maryland, code, but I do want to raise a 

general question, and get your reaction to it. 

A lot of us, obviously, in a theoretical world, would be perfectly 

happy to have one regulator for mortgage lending, one regulator for 

the banks, and savings and loans institutions. A lot of us, in an 

ideal world, would be happy to see a strong regulator take on that 

purpose. We don’t live in an ideal world. We live in a world where, 

obviously, States’ attorneys general have been very active and very 

vigilant, and are, frankly, often taking on the brunt of the enforcement structure. 

So, let me ask you—and I don’t want too long-winded an answer—but can you give me some sense of what it is that OTS does 

right now to detect and to police predatory lending practices? 

Mr. REICH. It’s a part of every examination that we do, Congressman, and every institution and every safety and soundness examination. 

We have consolidated our safety and soundness and compliance 

function. It is one examination that takes place. We have crosstrained our safety and soundness examiners in with the compliance 

function. And ferreting out predatory loans is part of every examination that we do. 

Mr. DAVIS. How often do you find bad actors? How often do you 

find savings institutions engaging in predatory practices? 

Mr. REICH. Frankly, not very often. It is my view that most of 

the predatory lending activity that takes place takes place in an—

by unregulated entities, rather than the Federal banking agencies. 

It’s a high priority for all of us. I think it’s important for me to say 

that we— 

Mr. DAVIS. When you say—just to clarify, when you say unregulated entities, you mean the mortgage industry, mortgage brokers, 

that kind of thing? 

Mr. REICH. Right, correct. 

Mr. DAVIS. Let me actually draw on that for one second, because 

you make an important point. And I know you don’t mean to wade 

into too many policy arguments here, but you make a point. 

We do have a species of entities who, obviously, engage in selling 

homes and credit to individuals to buy homes that are not terribly 

regulated. Does your experience, which I assume you believe has 

been a successful one, lead you to think that we should have 

17

stronger regulations in place, with respect to those unregulated entities? 

Mr. REICH. Absolutely. At the State level. 

Mr. DAVIS. And I think I cut you off as you were making— 

Mr. REICH. No, all I wanted to say was that we seek opportunities, and are absolutely ready, willing, and able to meet with State 

supervisors and local jurisdictions to address consumer complaints. 

Mr. DAVIS. Now, let me draw back to your previous observation. 

You say that you think there is a strong case to be made for greater regulation of the mortgage industry at the State level, the conventional mortgage industry at the State level. Is it your sense that 

States are often very well equipped to do that kind of regulation, 

because of their existing enforcement powers? 

Mr. REICH. Well, I think that varies from State to State. Some 

States have greater financial resources than others to devote to 

that. 

Mr. DAVIS. Is it possible that the two can co-exist, that we could 

have a strong Federal regulatory structure, and a strong State regulatory structure existing in tandem? 

Mr. REICH. I believe it is. 

Mr. DAVIS. And I would just simply close on that note, Mr. Garrett, because I think it’s an important point. A number of us agree 

with Mr. Reich, that it is possible, in the context of the conventional mortgage industry, to have a strong State regulator, and to 

have a strong Federal regulator, that the two can coexist; they can 

work in tandem. 

Mr. Reich, I would just close with this observation. I have not examined the statistics as closely in the context of what you regulate, 

the savings institutions. I have looked at them closely with respect 

to the conventional mortgage industry and the banking industry, 

and I happen to represent a city that ranks near the top of every 

category, in terms of disparities in the subprime lending market, 

and the disparities across income levels, racial disparities that still 

exist across income levels. 

I close by saying that it’s a real and significant question for this 

committee, and I look forward to continuing discussion on the 

issue, and I thank you. 

Mr. GARRETT. And the gentleman yields back. And Director 

Reich, again, I appreciate your complete testimony, I appreciate 

also the testimony that you submitted, and coming to the hearing 

today and answering the questions. 

I noticed a couple of questions were submitted to you in addition, 

as far as answers that they would like to receive back, and we appreciate those, as well. Thank you, Director. 

Mr. REICH. Thank you. 

Mr. GARRETT. I would note while we—as the second panel finds 

its way here, we have been notified that we are looking at approximately a 12:00 voting schedule on the Floor. 

Thank you, gentlemen. We are joined, in this second panel, by 

three gentlemen. 

Michael ‘‘Mike’’ Nolan, serves as chairman, president, and CEO 

of the Fifth District Savings Bank of New Orleans, Louisiana. He 

is also a member of the board of America’s Community Bankers, 

and Louisiana Bankers Association. He is, by the way, a native of 

18

New Orleans, and earned his JD degree from Loyola University in 

1969. 

He is also joined by Ted Gurzynski, who is vice president and 

chief credit officer for Pyramax Bank, FSB. He has been a banker 

for 39 years, both in the international and commercial fields. He 

is a graduate of the University of Wisconsin, with a BA in languages, and also holds a graduate degree in international finance 

from the Thunderbird Graduate School of International Management in Glendale, Arizona. 

Finally, we are joined by Geoff Smith. Mr. Smith is a project director at Woodstock Institute. He has conducted research and written policy of housing and community development topics, including 

mortgage lending policy, bank branching, housing market trends, 

small business finance, financial institution regulation, access to 

banking services, and general community reinvestment policy. 

He has also authored and coauthored numerous publications, and 

coauthored research publications published in numerous academic 

journals, as well. Mr. Smith has a BA in geography from the University of Illinois at Urbana-Champaign, and an MS in geography 

from the University of Wisconsin, Madison. 

Without objection, your written statements, what you have, will 

be made part of the record. 

And now, you will each be given—recognized for 5 minutes for 

a summary of your testimony. Gentlemen? Mr. Nolan? 

STATEMENT OF MICHAEL E. NOLAN, CHAIRMAN, PRESIDENT 

& CEO, FIFTH DISTRICT SAVINGS BANK, ON BEHALF OF 

AMERICA’S COMMUNITY BANKERS 

Mr. NOLAN. Good morning, Chairman Garrett, Ranking Member 

Gutierrez, and members of the committee. I am Michael Nolan, 

chairman, president and CEO of Fifth District Savings Bank in 

New Orleans. We are a mutual savings bank, with approximately 

$400 million in assets and 6 offices in the New Orleans area. We 

have been an OTS-regulated institution since 1989. 

Last year, we converted our charter from a Louisiana savings association to an OTS charter, because we believe the OTS has a 

strong commitment to mutual institutions. 

I am testifying today on behalf of America’s Community Bankers. 

I am a member of the board of directors of America’s Community 

Bankers. Two-thirds of ACB members are OTS-regulated savings 

associations. ACB strongly supports the continued operation of 

OTS as an independent regulator. The efficiency and professional 

regulatory oversight that OTS provides is critical to the continued 

vibrancy of financial institutions that have a special focus on home 

lending, retail banking, and a commitment to the communities. 

In the years since its creation, OTS has undergone a successful 

evolution that mirrors that changes in the industry it regulates. 

The Agency supervises a wide range of institutions with different 

operating strategies, business needs, sizes, and charters. Over the 

years, the industry has become more complex and diverse, and the 

OTS has kept pace with the change. 

OTS has developed a strong expertise in the business conducted 

by savings associations, mutual institutions, and their holding comVerDate 0ct 09 2002 13:41 Dec 19, 2006 Jkt 031043 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 F:\DOCS\31043.TXT HFIN PsN: TERRIE
19

panies. OTS has developed a more risk-focused way of looking at 

supervision, rather than the prescriptive regulations of the past. 

For example, OTS uses its examination force efficiently to examine savings associations simultaneously for safety and soundness 

and compliance. Although every institution is unique and every examination is different, many institutions appreciate having examiners in-house at one time, rather than having multiple examinations. 

In addition to implementing stringent safety and soundness operational flexibility and relief for community banks from our increasing regulatory burden—and the Agency has taken a leadership role 

in that regard—we commend Director Reich for his efforts in this 

area, and we urge Congress to pass meaningful regulatory relief 

legislation this year. 

Finally, let me add a brief personal note. As a New Orleans 

banker, I want to acknowledge the OTS’s response and assistance 

to the industry after Hurricanes Katrina and Rita. Both Washington and in our region, the OTS provided valuable assistance to 

me and to my colleagues and our competitors. 

My written testimony provides the details, but it’s important to 

note that within 24 to 36 hours after the flooding began in New 

Orleans, the OTS Midwest regional office in Dallas was in touch 

with me, personally. For a period of time after that, I was in almost daily contact with the OTS officials in Dallas and in Washington. OTS Director Reich has journeyed to New Orleans several 

times since Katrina, to speak with bankers, and to gain firsthand 

knowledge of the destruction. 

One of the biggest challenges facing financial institutions in the 

hurricane zone was a quality of the pre-hurricane assets. OTS 

worked with each institution, allowing us to use our own judgement in helping to determine the quality of these assets. 

OTS also recognized that compliance with many regulations, 

when our institutions were under severe stress, would be almost 

impossible. And without flexibility, we would not have been able to 

help our customers when they needed our help the most. The lesson that we take away from this disaster is simply this. When 

banks are relieved of unnecessary regulatory burdens, they are better able to serve the needs of their customers. 

Mr. GARRETT. You just want to briefly close? 

Mr. NOLAN. Sure. ACB commends the OTS for balancing strong 

safety and soundness oversight with an understanding and appreciation of the businesses and the institution it supervises. 

Thank you, sir, and I will be happy to try to answer your questions. 

[The prepared statement of Mr. Nolan can be found on page 37 

of the appendix.] 

Mr. GARRETT. Thank you, Mr. Nolan. And I realize I failed to do 

something that Ms. Kelly always does when she is here running 

the meetings, and that is for the witnesses to always indicate that 

they are to push the little button for speaking, that the little green 

light comes on when you’re okay to speak, the yellow is a 1-minute 

warning, and then the red light is the conclusion. 

She always does that; I apologize for not leading off with that. 

Thank you, Mr. Nolan. Mr. Gurzynski? 

20

STATEMENT OF THEODORE GURZYNSKI, VICE PRESIDENT 

AND CHIEF CREDIT OFFICER, PYRAMAX BANK, ON BEHALF 

OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. GURZYNSKI. Mr. Chairman, Ranking Member Gutierrez, and 

members of the subcommittee, my name is Ted Gurzynski, and I 

am vice president and chief credit officer of Pyramax Bank, a Federal savings bank located in Greenfield, Wisconsin. It is my pleasure to speak to you today about the OTS on behalf of the Independent Community Bankers of America, which represent approximately 5,000 community banks across the Nation, many of whom, 

like Pyramax, are Federal or State savings associations or thrifts, 

regulated by the OTS. 

Established by Congress as a bureau of the Department of the 

Treasury in August of 1989, the OTS charters, examines, supervises, and regulates Federal savings associations, thrifts insured by 

the FDIC. 

With a skilled staff of 900 employees, most of whom work in 4 

regional offices, the OTS has done an excellent job of supervising 

and examining thrifts under HOLA. The ICBA notes that, just recently, the OTS announced plans to hire 60 new examiners, bolstering its exam staff by 11.5 percent. In addition, OTS has stated 

that it will reestablish at its Washington headquarters a centralized direction for compliance, Community Reinvestment Act, and 

consumer protection, a function that was formerly delegated to the 

regional offices. 

ICBA commends the OTS for taking these actions to improve its 

ability to supervise the Nation’s savings associations. 

The thrift industry has never been healthier. You have already 

heard the statistics from Director Reich; I need not repeat them. 

ICBA believes that the excellent health of the thrift industry and 

its remarkable recovery since the enactment of FIRREA can be attributed to the supervision and regulation of the OTS, as well as 

to the vitality of the thrift charter. 

OTS has fulfilled its mission well, as the Nation’s primary regulator of thrift institutions, and has the expertise in supervising institutions whose business focus is housing finance. 

The ICBA opposes eliminating the OTS and merging or shifting 

its duties to another agency. The OTS has done an excellent job in 

supervising the industry and assisting it through some very difficult times. As long as the institutions it regulates prefer a separate regulator, and support the OTS through assessments, the OTS 

should remain a separate regulator. 

Furthermore, having a separate regulator for thrifts can help 

focus that industry on the Nation’s housing market and housing finance. The ICBA commends OTS Director Reich for his efforts to 

reduce unnecessary regulatory burden on banks and thrifts, and 

the leadership that he has assumed under the Economic Growth 

and Regulatory Paperwork Reduction Act. 

Director Reich’s competent leadership of the project, and his passionate belief that unnecessary regulation must be reduced were 

critical to achieving the goals of EGRPRA project of identifying outdated, unnecessary, or unduly burdensome regulatory requirements. The ICBA recommends the OTS, and commends them and 

21

that—the other banking industries, for their support of a comprehensive regulatory relief bill. 

Agency support for H.R. 3505, the Financial Services Regulatory 

Relief Act of 2005, was critical to successful passage of that legislation in the House by an overwhelming majority. Similarly, Agency 

support for the Financial Service Regulatory Relief Act of 2006, 

Senate Bill 2856, will be critical for the success of that bill in the 

Senate. Both bills include provisions from the ICBA-backed communities bank serving their communities first, or Communities 

First Act. 

ICBA supports the savings association provisions in the regulatory relief bills, H.R. 3505 and title 4, Senate Bill 2856. These include updating the statutory limits on the ability of Federal savings associations to make small business and other commercial 

loans, and two, providing parity for thrifts with banks under the 

Securities Exchange Act of 1934, and the Investment Advisors Act. 

All of these provisions would provide thrifts with greater flexibility to promote safety and soundness through diversification, 

more opportunities to counter the cyclical nature of the mortgage 

market, and additional resources to manage their operations safely 

and soundly. 

ICBA recommends the leadership role taken by the OTS in helping to reduce examination burden under the Community Reinvestment Act rules. Prior to the OTS taking action on the CRA rules, 

extended discussions among the agencies about increasing the 

asset size limit, for eligibility, for streamlined small banks, CRA 

examinations did not result in consensus. With the OTS’s action—

in part due to their definitive action, the other Federal banking 

agencies were able to reach consensus, and also increase the asset 

limit for streamlined examination. 

Recently, the OTS has been asked to support a proposal to 

amend statutory and regulatory requirements applicable to mutual 

holding companies, or MHC’s. We understand that a request was 

made of the OTS to alter the corporate governance rules for MHC’s, 

in order to promote minority shareholders of savings associations 

to override the interest of a controlling majority. This would provide minority shareholders in an MHC structure greater control 

over the underlying depository institution, more than the majority 

and the controlling MHC. 

Mr. GARRETT. I’m sorry, sir, if you can just come to a conclusion? 

Mr. GURZYNSKI. Contrary to prevailing law regarding the rights 

of minority shareholders, vis a vis majority shareholders in public 

companies. 

When it comes to—we also applaud the OTS for recent testimony 

as it relates to credit union conversions. 

And at this point, I would just like to say that we believe and 

support the Deputy Director’s comments when he said, ‘‘Minimize 

regulatory obstacles, reduce burden, and facilitate legitimate business decisions regarding charter choice made by institutions we 

regulate.’’ 

And the credit unions should not be allowed to allow their members not to switch. Thank you for the opportunity to testify. 

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

30 of the appendix.] 

22

Mr. GARRETT. And I thank you, sir, for your testimony. 

Mr. Smith? 

STATEMENT OF GEOFF SMITH, PROJECT DIRECTOR, 

WOODSTOCK INSTITUTE 

Mr. SMITH. Good morning, and thank you for the invitation to 

testify at today’s hearing. My name is Geoff Smith, and I am 

project director at the Woodstock Institute. The Woodstock Institute is a Chicago-based nonprofit research and policy organization 

that, for over 30 years, has worked locally and nationally to promote reinvestment and economic development in lower income and 

minority communities. 

Woodstock Institute also convenes the Chicago CRA Coalition, a 

group of nearly 70 community organizations with a mutual interest 

in increasing access to bank and thrift lending, investments, and 

services in underserved areas in the Chicago region and across the 

State of Illinois. The Woodstock Institute is also a member of the 

National Community Reinvestment Coalition. 

My testimony today largely echoes Congressman Gutierrez’s 

pointed and very insightful questions on the Office of Thrift Supervision, and the Agency’s recent actions to potentially weaken its 

regulation of the Community Reinvestment Act. 

CRA was born in 1977 out of grass roots organizing efforts that 

brought to light the devastating impact of redlining on inner city 

urban neighborhoods, and it requires the depository financial institutions, monitored for their ability to meet the credit needs of the 

communities in which they do business, including low and moderate-income neighborhoods and households. 

In its early years, CRA had limited effectiveness, despite some 

significant advocacy efforts. And it wasn’t until the CRA regulation 

was made more rigorous in the late 1980’s, particularly in the 

1990’s, that CRA became truly effective in meeting its legislative 

intent. 

One of the most critical changes was instituting a three-part 

exam for banks and thrifts with assets over $250 billion. This examination evaluated large institutions’ CRA performance through 

separate tests that systematically assessed an institution’s lending, 

services, and investments to low- and moderate-income markets. 

These changes served to standardize the way large banks were examined under CRA, and added transparency that made both financial institutions and regulators publicly accountable for community 

reinvestment performance. 

Evidence of the effectiveness of CRA can be seen in increased 

mortgage loan levels and CRA-regulated institutions to low and 

moderate-income mortgage markets; the development of flexible 

and affordable deposit accounts for underbanked markets; and increased investments in affordable housing, small business development, and financial literacy training. 

Despite the effectiveness of CRA in encouraging banks and 

thrifts to have a presence in lower income communities, there recently have been a number of regulatory actions that have weakened CRA, put forward under the banner of reducing regulatory 

burden for financial institutions. 

23

The Office of Thrift Supervision was the lead agency in enacting 

the most extreme of these proposals. In many instances, the OTS 

acted unilaterally, breaking away from the traditional unity of the 

bank regulatory agencies, and making decisions in the face of very 

strong public opposition. In the summer of 2004, the Office of 

Thrift Supervision broke away from other regulatory agencies, and 

unilaterally raised the asset limit for institutions it considered 

small under CRA to $1 billion. 

This action created an uneven regulatory playing field, and significantly reduced the number of thrifts covered by a comprehensive, large institution CRA exams who were, therefore, subject to 

review of their provision of community development lending, services, and investments, and threatened significant development resources in low and moderate income markets everywhere, but most 

significantly in rural communities and small cities, who are predominantly served by mid-sized institutions. 

The three other regulatory agencies, after extensive review and 

public comment, adopted a more modest revision of the CRA regulation, which created an intermediate small bank category for institutions between $250 million and $1 billion in assets. Unlike 

thrifts of similar size, intermediate small banks are examined 

under a streamlined two-part CRA exam, which includes a community development test that continues to assess an institution’s provision of community development lending, services, and investments. 

In 2005, OTS acted unilaterally again, and against overwhelming 

public opposition, by adopting a proposal that dramatically weakened CRA by changing the way that large thrifts’ CRA ratings are 

assessed. Other bank regulatory agencies continue to require large 

banks are regularly reviewed for their provision of lending, investments, and services. The OTS altered this framework by allowing 

large thrifts to opt out of providing services and investments to low 

and moderate-income markets. 

The OTS regulations set up a circumstance where a large thrift 

could have a large branch network with few or no branches in low 

and moderate-income communities, offer no flexible or affordable 

services or products, make no investment in affordable housing or 

business development, or refuse to make grants or investments to 

organizations who promote economic development in lower-income 

communities. The thrift could make few or no direct loans to low 

and moderate-income communities or borrowers, but purchase 

these loans from third parties. 

Yet, a thrift could still receive an outstanding rating or satisfactory rating on a CRA evaluation with virtually no direct presence 

in a low or moderate-income community. In fact, an analysis of results of recent OTS large bank exams show examples of institutions receiving outstanding CRA ratings with no consideration of 

their provision of services to low and moderate-income consumers. 

It was good to hear from Director Reich that the OTS is considering changing its CRA regulation to conform with other regulatory 

agencies, and we look forward to working with the OTS in this regard. Thank you. 

[The prepared statement of Mr. Smith can be found on page 96 

of the appendix.] 

24

Mr. GARRETT. Thank you very much. And again, I appreciate all 

of your testimony. I just have initial opening questions for anyone 

who wishes to address them. 

It would appear that the general consensus from the industry 

perspective is that OTS is—has performed in an admiral fashion, 

an adequate fashion. And taking into consideration the comments 

that you have made in the testimony today, are there any other 

weak areas that we should be, as a committee, looking at OTS and 

its overall structure? 

One of the comments was made as to how it responds from works 

here, and then back out into the region, and I guess it’s something 

of a hub and spoke sort of arrangement. Your testimony seems to 

be that it seems to be working, but is that hub and spoke regional 

aspect with the four regions that it has, is that the best mechanization or methodology for setting it up? And if there is any changes 

in that structure, should we be looking at it? 

And just one last question, and then you can go into these, is 

would it be helpful to establish an advisory—an OTS advisory 

group, similar to the financial crimes enforcement network, for the 

OTS? 

Mr. NOLAN. The experience of our institution is that the existing 

structure of the OTS is effective. And I use, again, the example of 

Hurricane Katrina to point that out most emphatically. 

Institutions deal directly with their regional offices, and very indirectly with the Washington office. In a circumstance that we 

found ourselves in, in an unprecedented disaster such as that, the 

communication level was open, and positive, and swift, and responsive from not only the regional but also the national, the Washington, level. 

So, my estimation is that the structure works. The lines of communication are accurate and are open. And I see no difficulty with 

its current structure. 

Mr. GURZYNSKI. I would concur with that. I live by the principle 

that if it isn’t broke, don’t fix it. And our experience with the OTS, 

management-wise, has been excellent. 

As far as weaknesses, I wouldn’t call this a weakness, but certainly—and they are working at this—and that is that as the thrift 

industry moves more towards other types of lending, commercial 

lending in particular—and they are doing that, strengthening their 

staff as it relates to commercial lending, and they have already 

done that. 

Mr. NOLAN. If I may, just to add an additional comment, that the 

OTS does establish outreach meetings regularly in their regions, 

and so we feel the communication issue and the connectivity is 

very positive. 

I don’t think any banker enjoys dealing with regulators. But we 

have a very open and honest dialogue, and they are very interested 

in what is happening with us, and are open to the realities that 

we deal with, and we appreciate that. 

Mr. GARRETT. Mr. Smith? 

Mr. SMITH. I don’t know that I can really add anything on that. 

Mr. GARRETT. Then I will start with you on the next question in 

the minute I have left—and you have commented on this a little 

bit—with regard to the changing of the—through—without formal 

25

rulemaking, changing from the $250 million to $1 billion for capitalization that was done in that matter—I think I know—if you 

want to elaborate on that, and your opinion on that, and then I 

would like also the industry’s perspective, if that is the best procedure to be going through. 

Is it good public policy to move in that direction, or is it better 

to have these changes be made in a formal rulemaking process so 

outside voices can be heard? 

Mr. SMITH. In that particular instance, and in many of the actions around—at least around CRA that the OTS has taken—or 

has been limited consideration of public comments, during public 

comment periods, the action to raise—to change the way large institutions are assessed under the OTS’s CRA exam received overwhelming public opposition, in fact. Yet the action was taken, regardless. 

So, I think the formal rulemaking perhaps would be a more effective way to vet that. 

Mr. GARRETT. Thank you. Mr. Gurzynski? 

Mr. GURZYNSKI. We have two branches in areas that heavily 

serve this area, both of them Hispanic areas. And I am going to 

tell you, from my perspective, who determines whether we are 

doing the job as it relates to meeting the needs of our community 

in those areas, and that is the customer. 

And if we’re not providing the services that they want, and the 

mortgages, and at the pricing they can afford, then they don’t bank 

with us. And that’s our main market there, and we try to do the 

best job we can. 

So, I think that structure as proposed, from our standpoint, 

makes a lot of sense. We are already doing that. Now, I realize that 

there was a comment made by one of the members here that, 

‘‘Well, if you are meeting those rules, then you wouldn’t mind the 

regulations.’’ If we are following the rules, then why do we need to 

be regulated to the extent that we have been? 

So, I think we’re doing the job. If we’re doing the job, I think 

these new proposed size limitations should not affect negatively the 

markets we serve. 

Mr. GARRETT. And if you could just briefly answer that, Mr. 

Nolan. 

Mr. NOLAN. Thank you for that. I think ACB’s position, and certainly that of our own institution, would be to recognize and support the existing structure of $1 billion and below having a small 

bank test to be the appropriate level. 

I think the real issue here is that CRA recognizes that there is 

some exemption level, if you will, and I don’t mean that in the 

sense that you don’t abide by CRA; you do, you’re subject to it. But 

at certain asset levels, there are different tests for a reason. And 

the reason is the amount of assets and the amount of resources 

that institutions have to devote to the activity. 

The three areas of testing, which are lending, service, and development, are all very valid and important areas. However, if an institution can focus its resources and pick one of those areas—perhaps they’re very strong in lending—then it seems unreasonable 

for a smaller institution to divert resources away from that which 

they are very good at meeting the community needs into other 

26

areas where they don’t have any expertise at that moment in meeting those needs. 

So, it’s really a concentration of the resources, and having regulation recognize that if the resources and the business plan of the institution is good in certain areas, that should be sufficient enough 

for CRA evaluation. 

Mr. GARRETT. Thank you. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. Mr. Gurzynski, can we 

go back to the regulation issue that you touched on just a moment 

ago? 

Do you think that the thrifts are adequately regulated? Do you 

think that the—or do you think they are under-regulated? 

Mr. GURZYNSKI. We certainly are not under-regulated. 

Mr. CLEAVER. Yes, I didn’t think you were going to go there. 

[Laughter] 

Mr. CLEAVER. Well, do you think that you are over-regulated? 

Mr. GURZYNSKI. I actually believe that we are over-regulated, because our business is to be in, to be active in, and to provide services to the community. If we weren’t doing what the community 

needs are, we wouldn’t be in that community, and our customers 

would tell us that we weren’t meeting their needs by walking away. 

Mr. CLEAVER. The—with all of the issues that poor people face, 

and you’re suggesting, I think, that you would do those things even 

if you were not regulated. 

Mr. GURZYNSKI. We would certainly do them—to the extent, I 

don’t know what we would—but we certainly would, because, in reality, a community bank exists to provide services that the local 

community that it serves is in. 

We’re not a multi-national bank. We are there to meet the needs 

of its community, just as have—for example, if I might digress—

in our two branches in the Hispanic area, we offer products there 

that we don’t offer in other markets, because the needs were 

brought forth by the community, and we provided those products 

to meet those needs. 

Mr. CLEAVER. Is there a particular segment of the population to 

whom thrifts direct their service, or from which population do you 

hope to get the greatest response? 

Mr. GURZYNSKI. We try to get, in our marketplace, and I can only 

speak for ours, we try to really relate to the customers who live locally around where our branches are, and who wants to build a relationship with an organization that gets to know them, and then 

provides the products to meet their needs. 

We don’t mass market, we only go to our local community needs. 

Because, in all honesty, the larger organizations really don’t meet 

those needs on a very selective basis. We have developed programs 

in mortgage lending that go way beyond what even the CRA would 

ask us to do, to meet the particular needs in a particular location. 

Mr. CLEAVER. Of course, you know, the large banks would disagree with you. They come into my office, and I’m sure in all of our 

offices, to express their disagreement. 

Mr. GURZYNSKI. And I can only tell you, sir, what we do in our 

organization. 

27

Mr. CLEAVER. Well, and I tend to be a little closer to where you 

are. But I am just, you know, it—you’re dealing with people in reality that most of the big banks would turn down, anyway. 

Mr. GURZYNSKI. In many cases, that is correct. 

Mr. CLEAVER. And so—but I am—I mean, how do you market? 

Who do you go after? 

Mr. GURZYNSKI. Well, it depends on our marketplace. But let’s 

say, for example—what we go after is we go after the local individuals—on a lesser extent, the small businesses—but basically the 

individuals, the homeowners, those who want to be homeowners, 

those who want to get loans for their children to go to school, via 

home equity loans, or what have you it is. 

And what we do is we hold meetings locally and ask the people 

in the community, ‘‘What kind of products do you want from a financial institution? How do you want things structured?’’ And 

then, based on the regulations, we try to meet those needs as best 

we can, and at the same time, not to get the OTS’s wrath, because 

maybe we have done some things that are beyond policy. 

Mr. CLEAVER. One final question, and I will go to Mr. Nolan. But 

being down in New Orleans, you are, I mean, at the epicenter, I 

think, for the needs. 

First of all, can you share—if you can do it briefly—the problems 

that you see right now? I don’t want to get into insurance, but 

what are the major problems right now in New Orleans, with regard to what—I mean, I’m not speaking about the universe, I’m 

speaking more specifically about thrifts. 

Mr. NOLAN. Thank you for that. We—that’s a topic we could 

speak a lot about. In narrowing it perhaps to our bank and thrifts, 

some of the major issues we are dealing with is a community that 

is anxious about its future, people who are uncertain about the stability of the levee system that is under the supervision of the 

United States Corps of Engineers. 

They are uncertain about the speed with which the city can recover—70 percent of it was flooded. And as far as banks, I think 

banks are—simply reflect the vision of the community. We can do 

no greater and no less than the citizens wish to do. 

And while our asset quality is fine, I know the insurance issues 

are very important issues in the future, as to whether we will have 

adequate insurance availability for homeowners, as well as businesses. So our challenges are bringing our small businesses up and 

running, and keeping our citizens housed and employed, so that 

the recovery can take place in a reasonable way. 

Mr. CLEAVER. One final—if—I don’t think anybody knows it at 

this moment, exactly what kind of insurance will be put in place 

for people who live actually in the flood plain. Do you foresee difficulty financing or refinancing any of the families in those areas, 

if we cannot come up with a level of coverage that would make 

lenders at least somewhat comfortable? 

Mr. NOLAN. I think you are speaking, Congressman, I believe, 

about the Federal Flood Insurance Program. 

Mr. CLEAVER. Yes. 

Mr. NOLAN. Yes, the level of insurance is important. It’s capped 

at $250,000, is my understanding, at the moment. Certainly, many 

28

homes exceed that. Even though New Orleans is not a very wealthy 

community, many homes exceed that. 

That’s a very important issue for flood insurance. Equally as important, it has to be affordable homeowners and casualty coverage 

for businesses, as well as homes. And the current circumstance 

seems to indicate the premiums will be extremely high, the coverage will be limited, and I do anticipate that will have a negative 

effect on the ability of people to finance the type of mortgage that 

they would like to have for the type of home they would like to live 

in, because it’s simply a matter of economics. How much can you 

afford, then, if the insurance has increased to a significant amount? 

Mr. CLEAVER. You gave the answer I was hoping you would give, 

but unfortunately I would like for the world to have heard your response. Thank you. 

Mr. NOLAN. Thank you, sir. 

Mr. GARRETT. And of course, his response is in the record, so you 

can disseminate. 

Again, I would like to thank the members of the panel—Mr. 

Nolan, Mr. Gurzynski, and Mr. Smith—for your testimony and 

your time today. The record will remain open for another 30 days, 

for members to submit questions to the panels and place their response on the record. 

Again, I thank you, and the meeting is adjourned. 

[Whereupon, at 11:50 a.m., the subcommittee was adjourned.] 

(29)

A P P E N D I X

May 25, 2006

30


31043.001
31


31043.002
32


31043.003
33


31043.004
34


31043.005
35


31043.006
36


31043.007
37


31043.008
38


31043.009
39


31043.010
40


31043.011
41


31043.012
42


31043.013
43


31043.014
44


31043.015
45


31043.016
46


31043.017
47


31043.018
48


31043.019
49


31043.020
50


31043.021
51


31043.022
52


31043.023
53


31043.024
54


31043.025
55


31043.026
56


31043.027
57


31043.028
58


31043.029
59


31043.030
60


31043.031
61


31043.032
62


31043.033
63


31043.034
64


31043.035
65


31043.036
66


31043.037
67


31043.038
68


31043.039
69


31043.040
70


31043.041
71


31043.042
72


31043.043
73


31043.044
74


31043.045
75


31043.046
76


31043.047
77


31043.048
78


31043.049
79


31043.050
80


31043.051
81


31043.052
82


31043.053
83


31043.054
84


31043.055
85


31043.056
86


31043.057
87


31043.058
88


31043.059
89


31043.060
90


31043.061
91


31043.062
92


31043.063
93


31043.064
94


31043.065
95


31043.066
96


31043.067
97


31043.068
98


31043.069
99


31043.070
100


31043.071
101


31043.072