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H.R. 1697, THE COMMUNITIES FIRST ACT 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

AND THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 16, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–85 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

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 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

JAMES B. RENACCI, Ohio, Vice Chairman 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(IV) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

November 16, 2011 ........................................................................................... 1 

Appendix: 

November 16, 2011 ........................................................................................... 53 

WITNESSES 

WEDNESDAY, NOVEMBER 16, 2011 

Becker, Fred R., Jr., President and Chief Executive Officer, National Association of Federal Credit Unions (NAFCU) ............................................................ 15 

Cheney, O. William, President and Chief Executive Officer, Credit Union 

National Association (CUNA) .............................................................................. 11 

Klebba, John A., Chairman, President, and General Counsel, Legends Bank, 

on behalf of the Missouri Bankers Association (MBA) ..................................... 13 

Levitin, Adam J., Professor of Law, Georgetown University Law Center .......... 20 

Marranca, Salvatore, Director, President, and Chief Executive Officer, 

Cattaraugus County Bank, on behalf of the Independent Community Bankers of America (ICBA) .......................................................................................... 10 

Silvers, Damon A., Director of Policy and Special Counsel, American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) ............... 18 

Wilmarth, Arthur E., Jr., Professor of Law, George Washington University 

Law School ............................................................................................................ 17 

APPENDIX 

Prepared statements: 

Becker, Fred R., Jr. .......................................................................................... 54 

Cheney, O. William .......................................................................................... 70 

Klebba, John A. ................................................................................................ 90 

Levitin, Adam J. ............................................................................................... 98 

Marranca, Salvatore ......................................................................................... 106 

Silvers, Damon A. ............................................................................................. 113 

Wilmarth, Arthur E., Jr. .................................................................................. 118 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hinojosa, Hon. Ruben: 

Community Bankers letter dated October 27, 2011 ...................................... 129 

Luetkemeyer, Hon. Blaine: 

Letter to Chairwoman Capito and Ranking Member Maloney from the 

Missouri Independent Bankers Association, dated November 14, 2011 .. 131 

Cheney, Bill: 

Response to a question posed during the hearing by Representative Stivers ................................................................................................................... 134 

Response to a question posed during the hearing by Representative Westmoreland ........................................................................................................ 135 

(1) 

H.R. 1697, THE COMMUNITIES FIRST ACT 

Wednesday, November 16, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, AND

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the Subcommittee on Financial Institutions and 

Consumer Credit] presiding. 

Members present from the Subcommittee on Financial Institutions and Consumer Credit: Representatives Capito, Renacci, 

Royce, Pearce, Westmoreland, Luetkemeyer, Huizenga, Duffy, 

Canseco, Grimm; Maloney, Watt, Hinojosa, Baca, Scott, and Carney. 

Members present from the Subcommittee on Capital Markets 

and Government Sponsored Enterprises: Representatives Garrett, 

Schweikert, Royce, Neugebauer, Pearce, Posey, Fitzpatrick, 

Hayworth, Hurt, Grimm, Stivers, Dold; Waters, Sherman, Hinojosa, Perlmutter, Donnelly, Carson, and Green. 

Ex officio present: Representative Bachus. 

Also present: Representative Fincher. 

Chairwoman CAPITO. This hearing will come to order. 

And I would like to alert Members that we are expecting a series 

of votes around 5:00. I am not certain we will be here that long, 

but it is my intent to finish the hearing before we go for votes. If 

that is not possible, we will have to resume this hearing after the 

last vote, but I think we can manage this. 

H.R. 1697 is a large bill. It has been referred to not only the Financial Services Committee but also the Ways and Means Committee and the Agriculture Committee. Today’s hearing will focus 

on the sections of the bill that are relevant to the Financial Services Committee. 

I would like to thank Chairman Garrett for co-hosting this hearing with me. He is the chairman of the Capital Markets and Government Sponsored Enterprises Subcommittee, and this bill has 

been referred to his subcommittee as well. I would also like to particularly thank Mr. Luetkemeyer for offering the bill before the 

subcommittee today. 

2 

The Communities First Act is a thoughtful attempt to reduce 

regulatory paperwork and tax burdens on small financial institutions across this country. 

Mr. Luetkemeyer has been a terrific advocate for his constituents 

with his service on the Financial Institutions and Consumer Credit 

Subcommittee. And his experience as both a banker and a bank 

regulator before becoming a Member of Congress allows him to provide critical insight into matters before the subcommittee, and I 

value his insight. I commend him on the good work he has done 

in drafting this legislation and for tackling the issue of regulatory 

relief for small financial institutions. 

Over the last 10 months, this subcommittee has heard testimony 

and anecdotal comments from community bankers from across the 

country, and one constant theme has been the increased regulatory 

burden on our community banks. The recent financial crisis did not 

emanate from small financial institutions, yet these same institutions are having to devote more and more resources to comply with 

the ever-growing regulatory burden facing small financial institutions. 

During the first hearing of the Financial Services Committee this 

year, a community banker from West Virginia raised this question: 

‘‘How can I be out in my community helping individuals improve 

their quality of life or helping small businesses grow if all I end 

up doing is dealing with the aftermath of problems that I did not 

create?’’ 

This raises an important question. In order for our community to 

get back on track, we need to have small financial institutions 

lending to small businesses in our communities. However, if small 

financial institutions are forced to devote more and more resources 

to comply—which they say they are—with Federal regulations, 

then they have fewer resources to devote to lending in their home 

communities. 

The bill before the committee today raises a number of issues 

that are facing small financial institutions across the country, and 

I look forward to hearing from our witnesses to learn more about 

their thoughts or concerns on the Communities First Act. 

At this point, I would like to recognize Mrs. Maloney, the ranking member of the Financial Institutions and Consumer Credit 

Subcommittee, for the purpose of making an opening statement. 

Mrs. MALONEY. I thank Chairwoman Capito and Chairman Garrett and also Ranking Member Waters for working on this hearing. 

And I certainly welcome all of the witnesses and look forward to 

your testimony. 

I certainly understand that small institutions are concerned 

about regulatory burden and their ability to comply with regulations while still being able to provide their customers with a wide 

range of services, most importantly lending. We know how important small bank lending is to small communities or to any community, to businesses and to helping businesses grow and create jobs. 

And there are some things in this bill that I can support. For example, the bill strikes annual privacy notices and would only require them when a bank shares consumer information. I think that 

is something we can all agree would reduce paperwork burdens on 

small banks. 

3 

However, many of the provisions in this bill are provisions that 

were enacted in the wake of financial accounting scandals such as 

Enron, and in the wake of certainly the worst economic crisis in my 

lifetime. Provisions such as the Sarbanes-Oxley 404(b) exemption 

increase, the shareholder threshold for banks that trigger SEC registration, the SEC cost-benefit analysis provision, and the Financial 

Stability Oversight Council (FSOC) review standard provision are 

all things that the Financial Services Committee is examining separately in separate bills. 

I certainly would oppose, as I have on the Floor and in this committee previously, the provision that would lower the threshold for 

the FSOC to veto a Consumer Financial Protection Bureau (CFPB) 

rule. The Consumer Financial Protection Bureau is the only regulatory entity whose rules are subject to review in this matter, and 

the threshold should be high for that review. 

I am also concerned, as is the FDIC, about Sections 205 and 206, 

both of which would have the effect of allowing smaller institutions 

to hold less capital and to delay the ability of the FDIC to work 

with these institutions before the situation becomes more difficult. 

They see this as a possible threat to their power to prevent economic downturns and to preserve the safety and soundness of our 

financial institutions. 

I believe that these provisions, in some cases, fly in the face of 

our efforts to make our markets more transparent and accountable 

to the public and to secure our financial institutions and to 

strengthen their capital reserves. Many say that we had this downturn because we did not have strong capital reserves, that we did 

not have strong transparency and oversight. I understand that both 

of these provisions are written as studies in the Senate version of 

the bill, and I think that is probably a wise direction to move in. 

I know that these two sections are top concerns for the FDIC, 

and there are a number of other provisions in the bill that I hope 

we can explore today that I am concerned with. So I also look forward to the witnesses’ testimony. 

I yield back the balance of my time and I thank you for what you 

are doing every day to help our financial institutions to get capital 

out to people who need it and to grow our economy. 

Thank you. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Chairman Garrett for 2 minutes for the 

purpose of making an opening statement. 

Chairman GARRETT. I thank the gentlelady. And I thank the 

gentlelady for her leadership on this issue, as well. 

I thank all the members of the panel that we are about to hear 

from shortly. 

I also would like to turn my attention to Congressman Luetkemeyer and thank him, as well, for his efforts on this legislation and 

for being here today. 

He has been an outstanding addition to our committee and to 

this Congress, as well. We are blessed to have him because of the 

experience that he brings in a couple of different fronts, both in the 

banking industry per se and on the regulator front, as well. So you 

might say that he is uniquely positioned, I guess, to be leading the 

charge in putting together this important legislation that we are 

4 

dealing with. And that is, as we say, dealing with perhaps the 

overregulation of our financial services industry, particularly the 

smaller, community-based institutions, those who are particularly 

ill-affected by the legislation that has come recently. 

Whenever Congress has an opportunity to review ways to reduce 

the regulatory burden on financial institutions specifically or businesses in general on Main Street, I think that is a good thing. It 

is an even better day if we are also looking at ways to facilitate 

small business capital formation, which is another way of saying, 

trying to create jobs. 

So, again, I congratulate the Congressman for his legislation, for 

this bill, and I look forward to what will probably be a lively discussion in the area of financial institution regulation. 

I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Carson for 1 minute for the purpose 

of making an opening statement. 

Mr. CARSON. Thank you, Madam Chairwoman. 

During the recess last week, I had the opportunity to meet with 

my local community bankers in Indianapolis. We discussed how 

economic conditions are still very weak, with few positive trends in 

the residential housing recovery and employment growth. While 

low interest rates and an unprecedented Federal stimulus has had 

some positive impact, it has not resulted in anticipated economy 

growth. I am interested in how H.R. 1697, the Communities First 

Act, will help community banks foster economic growth and better 

serve their communities. 

However, I believe missing from this discussion is the commercial real estate crisis on the horizon. This is an incredibly difficult 

challenge, with many negative consequences on communities, small 

businesses, and individuals. Many commercial real estate loans are 

underwater, vacancy rates are up, and rents are down, further 

driving down the value of these properties. 

If there is a collapse in the market, our community banks will 

be particularly vulnerable. As we discuss helping our community 

banks lend again, let us not forget that there are still challenges 

on the horizon that pose tremendous risks to the financial system 

and the public. 

Thank you, Madam Chairwoman. I yield back the balance of my 

time. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Westmoreland for 1 minute for the 

purpose of making an opening statement. 

Mr. WESTMORELAND. Thank you, Chairwoman Capito and Chairman Garrett. And I also want to thank Mr. Luetkemeyer for his 

efforts. 

The burden on small banks and credit unions is growing larger 

every day. The cost of complying with regulation is a thorn in the 

side of small banks. Small banks need to focus on two things: lending and deposits. Instead, they have to focus half of their time and 

money on compliance. We need to get rid of some of these wasteful 

regulations so businesses can get back to work. 

Georgia leads the Nation in bank failures, with 73. This bill 

won’t bring back those failed banks, but it will throw a lifeline to 

5 

those struggling to survive. And I urge all my colleagues to join me 

and help pass H.R. 1697. 

I yield back the balance of my time. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Scott for 3 minutes for the purpose 

of making an opening statement. 

Mr. SCOTT. Thank you, Madam Chairwoman. And I certainly 

want to congratulate you and our ranking member for holding this 

hearing. It is very important. 

Our banking community has just gone through a devastating period. I don’t think—not since the Great Depression have we had so 

many bank failures, and we have had a tremendous problem. And 

nowhere has that been greater than in my own home State of Georgia, as my colleague, Congressman Westmoreland, has just mentioned. We lead the Nation in bank failures, and a lot of this is due 

to the housing bubble and the overleveraging of the portfolios into 

real estate. 

But we can learn from this that we must move very quickly to 

address this area. Our community banks and our credit unions, 

quite honestly both of these, are at the front lines. They are the 

ground troops; they are in the pits there. They are the ones that 

we have to make sure are equipped to do the job of helping to bring 

our struggling economy around and our community banks around. 

This legislation we have under discussion today will provide regulatory relief for community banks, and we need that. The bill 

would reduce certain reporting and paperwork requirements for 

many of these smaller institutions, and we definitely need that. In 

the current economic climate, community banks have struggled. 

They have struggled to comply with very stringent regulatory and 

accounting requirements that need to be addressed, and we need 

to find relief for them. 

And as I mentioned, in my home State of Georgia we have just 

had, just this year alone, our 23rd bank was closed this year. Nationwide, 88 banks have failed this year alone, making it apparent 

that Georgia’s community banks have suffered disproportionately 

when compared to the national scale. 

It is for this reason I work with my colleague. Mr. Westmoreland 

and I have put forward House Resolution 2056, which this House 

passed, which instructs the FDIC to study this problem and make 

recommendations and find ways we can get help down to our community banks. And I take this opportunity to urge the Senate to 

move forthrightly and get this badly needed piece of legislation 

promptly passed. 

However, the legislation at hand today would provide relief for 

smaller banks, many of whom resemble the very institutions that 

have recently been forced to close under tremendous financial 

strain. I agree that Congress should act to provide targeted relief 

to small banks that will prevent further failure. And I will be interested today to find out how this measure will benefit the institutions; what effects, if any, that this legislation could have on customers, many of whom are part of the over 10 percent of the population of Georgia who are unemployed and rely on these banks, 

many businesses who rely on being able to get small loans from 

this business. 

6 

So it is a very important hearing. I look forward to it. And thank 

you very much, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Luetkemeyer for 2 minutes for the 

purpose of making an opening statement. 

Mr. LUETKEMEYER. Thank you, Chairwoman Capito, and thank 

you, Chairman Garrett, for holding this hearing and for your very 

kind remarks leading into the hearing here. 

Every day, community banks help Americans realize their 

dreams. That mission is becoming more and more difficult for our 

Nation’s smaller financial institutions. Regulatory requirements 

disproportionately burden community banks that do not have the 

resources necessary to comply. 

I introduced the Communities First Act to help community banks 

and other financial services entities foster economic growth and 

serve their communities by giving targeted relief to these institutions and their customers. Some are concerned that this legislation 

is too broad and tries to do too much. The simple truth of the matter is that the legislation must be broader in order to save our community banks. 

Across the Nation, community banks are consolidating or closing, 

not based solely on the weak assets or balance sheets, but because 

they simply cannot afford to operate in the current regulatory environment. The number of provisions put in this bill is a reflection 

of the amount of regulation that has been piled on community 

banks. 

Despite the fact that community banks were not part of the financial crisis, they have been dragged in as part of the solution. 

The regulations that have come out of Congress and this Administration are crushing small businesses, including banks. 

I am proud to have more than 50 of my colleagues on both sides 

of the aisle, 13 of whom sit on this committee, as co-sponsors of 

H.R. 1697. This legislation is supported by the Independent Community Bankers of America and the National Bankers Association. 

The bill also has the support of more than 35 State banking 

groups, including both the Missouri Bankers Association, represented here today by Mr. John Klebba, as well as the Missouri 

Independent Bankers Association. 

Madam Chairwoman, I seek unanimous consent to enter into the 

record a letter of support from the Missouri Independent Bankers 

Association. 

Chairwoman CAPITO. Without objection, it is so ordered. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

It is essential that our community banks continue to have the 

ability to attract capital, support the credit needs of their customers, and contribute to the local economies. Instead of inhibiting 

their ability to operate, it is time for Washington to work with community banks. 

Thank you, Madam Chairwoman, and I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Royce for 1 minute for the purpose 

of making an opening statement. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

7 

Recent projections, as we look forward to 2020, show that we are 

going to have half the current number of community banks. And 

I guess we would all expect some consolidation if you are going 

through a recession, if you are going through an economic downturn. But many of the problems faced by these institutions are, 

frankly, induced here in Washington, D.C., because it was Washington that gave them the hundreds of new regulations in DoddFrank; it was Washington that decided to enact price controls on 

interchange fees and limit a critical revenue source for these smaller firms; it was Washington that propped up their too-big-to-fail 

competitors, thus expanding the competitive advantage that those 

larger firms hold in the market. 

And, as a result, smaller institutions are spending more time and 

more money trying to stay afloat. I recently heard a community 

banker note that for every 1.2 employees focused on compliance, he 

has 1 focused on banking. Now, this number is only going to grow 

as the implementation of Dodd-Frank continues. One step in the 

right direction is the Communities First Act. 

I would also mention, with Mr. Cheney and Mr. Becker here, it 

is worth noting that H.R. 1418 would help in the effort of shifting 

the focus from Washington to Main Street. It would free up much 

needed capital for small businesses by raising the cap on member 

business loans for those credit unions that meet that set of criteria. 

I yield back, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

I would like to recognize the chairman of the full committee, 

Chairman Bachus, for 1 minute for the purpose of making an opening statement. 

Chairman BACHUS. Thank you. 

I thank Chairwoman Capito and Chairman Garrett for holding 

this hearing. And I commend Blaine Luetkemeyer, our colleague 

from Missouri, for bringing forth what I consider to be a very reasonable approach to reducing regulatory paperwork and tax burdens on small banks and credit unions. This bill has gained the 

support of nearly 50 co-sponsors to date, and I am proud to be one 

of them. 

So many small financial institutions have shared their concerns 

with us about the enormous cost of complying with the complicated 

regulations, especially the hundreds of new rules resulting from 

Dodd-Frank, which—we are 30 percent through that process, and 

it fills two Bankers Boxes. 

While job creation is at a near standstill, the Bureau of Labor 

Statistics reports that there will be employment growth from financial examiners and compliance officers due to increased financial 

regulations. That is not the kind of jobs we are interested in creating. 

How can we expect small financial institutions to absorb those 

increased compliance costs? The reality is they have to pass them 

on to their customers. 

Mr. Luetkemeyer’s bill addresses many of the concerns by cutting 

paperwork and reporting requirements and ensuring that accounting principles are appropriate for small banks. As we hear the testimony today from a number of community lenders, I am eager to 

learn from them how this bill will help community banks and credVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
8 

it unions to create jobs, foster economic growth, and serve their 

communities. 

Again, I am pleased to support this legislation, and be a co-sponsor, and I commend Mr. Luetkemeyer and my colleagues on both 

sides of the aisle for tackling these issues. 

Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Dold is recognized for 2 minutes for the purpose of making 

an opening statement. 

Mr. DOLD. I certainly want to thank Chairwoman Capito and 

Chairman Garrett for holding this important joint hearing. 

And I want to thank our witnesses for your time and testimony 

today. 

This is an important hearing because functional and healthy 

credit markets are essential for job creation, for business growth, 

and for economic prosperity. Certainly, our credit markets and financial institutions must be regulated, but those regulations must 

be sensible and balanced and must account for meaningful differences amongst our broad and diverse array of financial institutions. 

Unfortunately, in many respects, our regulatory environment 

doesn’t currently meet these reasonable standards. Instead, our 

current regulatory environment is actually hurting the 

functionality and health of our credit markets and, by extension, 

also hurting job creation, business growth, and economic prosperity. 

The regulatory burden is particularly acute for our small financial institutions because they must necessarily devote a far larger 

percentage of their resources to the enormous costs of reviewing, 

analyzing, and complying with an avalanche of regulatory burdens. 

Meanwhile, small financial institutions are essential to financing 

our small businesses, which are responsible for over two-thirds of 

net new jobs in our country but which are also struggling in this 

economy. 

Especially with our current economic challenges, all of us in Congress are obligated, in my opinion, to create a legal and regulatory 

environment that strongly promotes job creation, business growth, 

and general economic prosperity. And a very important step in creating that kind of improved regulatory environment is helping our 

small financial institutions get some relief from overly burdensome 

regulations. 

The Communities First Act moves us toward that objective of improving the regulatory environment for small financial institutions. 

And we can make these positive changes without diminishing safety and soundness and without diminishing depositor and investor 

protections. For these reasons, I am happy to co-sponsor this legislation, along with many of my Republican and Democratic colleagues. The American people expect and deserve these kinds of 

smart, bipartisan solutions to our job-creation challenges. 

I would like to thank my colleague from Missouri, Mr. Luetkemeyer, for introducing this helpful legislation, and I look forward 

to continuing to work on this legislation with him and my colleagues on both sides of the aisle after we hear from our witnesses 

today. 

9 

I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Ms. Waters for 1 minute for the purpose 

of making an opening statement. 

Ms. WATERS. Thank you very much, Madam Chairwoman, for 

convening today’s hearing. As I have said consistently, community 

banks are vital to bolstering America’s neighborhoods because 

these banks provide credit in communities throughout the Nation, 

create jobs, and encourage individual and family savings. 

The practices of our community banks had little to do with causing our financial crisis. Therefore, while I believe that we should 

take a smart approach toward the regulation of small banks in 

order to spur economic activity and produce jobs, I believe the regulation is necessary to ensure that consumers and banks are protected from harmful practices. 

While I am open to looking at the regulatory challenges facing 

small banks, I do not want to see their compliance challenges used 

as an excuse to weaken regulation or weaken Dodd-Frank legislation reforms intended for large banks. To this end, I am concerned 

about provisions that amend the Dodd-Frank Act to restore bank 

reliance on external credit ratings. We know that reliance on external credit ratings was a key contributor to our current economic 

troubles. 

I know that I have just a few seconds here. 

We cannot solve the problems of today with the failed approaches 

of yesterday. I am also concerned about changes to the SarbanesOxley accounting requirements for community banks. I hope that 

today’s hearing will begin a constructive dialogue that leads us to 

the approach that is most appropriate for accelerating economic recovery. 

To all of the witnesses today, thank you for taking time out of 

your busy schedules to appear before us. I look forward to hearing 

your testimony. 

Thank you. And I yield back the balance of my time. 

Chairwoman CAPITO. Thank you. 

And for a final 1-minute opening statement, Mr. Canseco. 

Mr. CANSECO. Thank you, Madam Chairwoman, Chairman Garrett, and my colleague, Mr. Luetkemeyer, for bringing this very important Communities First Act to a hearing today. 

I represent the 23rd District of Texas, which is home to many 

small towns which are engaged in farming and ranching. Community banks are sometimes the only source of capital available to 

these rural areas. In the past year, ranchers and farmers and small 

businesses and families in my district have had to deal with 

wildfires and a record drought, and the economic impact has been 

devastating. 

Compounding the problem is the tremendous burden community 

banks are now facing in serving these affected communities. A 

great amount of uncertainty and overregulation in the wake of 

Dodd-Frank has frozen credit in a number of small towns, and the 

consequences are palpable as you speak with residents and business owners in these areas. 

The provisions of the Communities First Act go a long way towards lifting the burden off the shoulders of America’s community 

10 

banks, and I look forward to hearing from our witnesses on this 

very important topic. 

And, again, my thanks to the chairman of this committee, and 

also Mr. Luetkemeyer for bringing this bill. 

Chairwoman CAPITO. Thank you. 

I think that concludes our opening statements, so I would like to 

now introduce our panel of witnesses for the purpose of giving a 

5-minute opening statement. 

Our first witness is Mr. Salvatore Marranca, president and chief 

executive officer, Cattaraugus County Bank, on behalf of the Independent Community Bankers of America. 

Welcome. 

STATEMENT OF SALVATORE MARRANCA, DIRECTOR, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, CATTARAUGUS 

COUNTY BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA) 

Mr. MARRANCA. Thank you, Chairwoman Capito, Chairman Garrett, Ranking Member Maloney, Ranking Member Waters, and 

members of the subcommittees. 

I am Sal Marranca, director, president, and CEO of Cattaraugus County Bank, a $180 million community bank in Little Valley, New 

York. I am pleased to be here today to represent the nearly 5,000 

members of the Independent Community Bankers of America. 

Thank you for convening this hearing on the Communities First 

Act, or CFA. This legislation is a top priority for ICBA and community banks nationwide. We are grateful to Congressman Luetkemeyer for introducing CFA and to the more than 50 Members from 

both parties who have co-sponsored it. Thirty-seven State banking 

associations have also endorsed the bill. 

CFA would provide carefully crafted regulatory and tax relief 

that would allow community banks to do what we do best: lend locally in our communities and help boost the economy. I would also 

note that credit unions would benefit from a number of CFA provisions. 

Rather than a top-down approach, CFA was crafted from the bottom up, with input from community bankers who know what will 

work on Main Street. Most community banks are closely held institutions whose viability is directly tied to the economic life of the 

communities we serve. Our business is built on long-term relationships with customers who are also our neighbors. 

My bank, like many community banks, has been in business for 

over a century and survived the Great Depression. Our longevity 

is a testament to conservative risk management. Because we are 

low-risk institutions, our regulations should be distinct from that 

of large complex banks and Wall Street firms. CFA provides appropriate tiering of regulation and relief for smaller, low-risk institutions so we can better serve our communities. 

The steady accretion of regulation over many decades has become 

a serious and growing threat to community banks. While some of 

these regulations are sensible and necessary, others are overly prescriptive, redundant, and unduly burdensome. To community banks 

like mine, regulation is a disproportionate expense, burden, and a 

real opportunity cost. My compliance staff is half as large as my 

11 

lending staff. This is out of proportion to our primary business: 

lending in our communities to support the local economy. 

CFA contains 26 provisions. It is broad and diverse because there 

are some 7,000 community banks of different charter types, ownership, and lending specializations. While no one provision of CFA is 

a silver bullet, combined they will have a real impact for community banks and their customers. I would like to highlight just a 

few. 

For example, highly capitalized and well-rated community banks 

would be permitted to file a short-form call report in two quarters 

a year. This change would allow regulators to focus on high-risk institutions and would reduce the burden on qualified community 

banks without compromising safety and soundness. 

Another provision would exempt certain mortgages held in portfolio by community banks from escrow requirements. Many rural 

community banks don’t have the resources to establish escrow accounts in-house, and outsourcing is a significant expense. Lenders 

have every incentive to protect the collateral of loans held in portfolio. This provision would help keep community banks in the business of making commonsense mortgages. 

Another provision would amend the annual privacy notice requirement. I always want to ensure that my customers are informed of my privacy policies. That said, when no change in policy 

has occurred, the annual notice provides no useful information to 

customers and is an unproductive expense for my bank. 

To summarize, the increasing burden of regulation will lead to 

further industry consolidation. The sensible regulatory reforms embodied in the CFA will help preserve the community banking business model and the diverse financial system that supports our Nation’s economy. 

I encourage you to reach out to the community bankers in your 

district. Ask them whether the reforms of the CFA would help 

them to serve your communities. I am confident they will say yes. 

Thank you again for the opportunity to testify today and to offer 

ICBA’s perspective on the important reforms of the Communities 

First Act. 

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

106 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. O. William Cheney, president and chief 

executive officer of the Credit Union National Association. 

Welcome. 

STATEMENT OF O. WILLIAM CHENEY, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION (CUNA) 

Mr. CHENEY. Thank you. 

Chairmen Capito and Garrett, Ranking Members Maloney and 

Waters, thank you very much for the opportunity to testify on behalf of America’s 7,400 not-for-profit credit unions, which now serve 

94 million Americans. 

These credit unions and community banks operate side-by-side to 

meet the financial services needs of consumers and small businesses. In recent months, there has been a resurgence in consumer 

12 

interest in local financial institutions. Community banks and credit 

unions have welcomed the opportunity to serve those frustrated by 

the ever-increasing fees charged by the largest banks. 

One example took place in Santa Cruz, California, where in the 

lead-up to the recent Bank Transfer Day, credit unions and community banks worked together to make sure consumers in their 

area knew they had choices other than the largest banks. This represents credit unions and community banks at their best. 

Another area where credit unions and community banks should 

agree and work together is in the pursuit of regulatory relief legislation. Community-based institutions need to be able to spend more 

time and resources serving their members or customers and less 

time complying with burdensome regulations brought about by the 

financial crisis. 

We did not cause the crisis, but the regulatory response has imposed disproportionate burdens on smaller institutions. The Communities First Act would provide significant regulatory relief to 

America’s community banks. Several of the provisions of this bill 

would also apply to credit unions. Our analysis of the provisions 

relevant to credit unions is included in my written testimony. 

While we support several provisions of this bill, I would like to 

make two points. 

First, this legislation would significantly expand the shareholder 

threshold for Subchapter S banks. We do not oppose this change, 

but note the irony of the banks’ lobbying to expand the Subchapter 

S tax preference while aggressively lobbying to impose additional 

taxes on credit unions. They argue that the credit union tax status 

provides a competitive advantage and that imposing additional 

taxes on credit unions would level the playing field, but this is not 

the case. The market share data show that credit unions only have 

6 percent of the combined assets and only 5 percent of the small 

business loans at depository institutions. 

If, indeed, the credit union tax status was such an advantage, we 

would see Subchapter S banks using their tax preference to reduce 

fees and rates to benefit consumers. This is simply not happening. 

Our analysis of bank call report data over the last 18 months indicates that, compared to similarly sized C-Corp banks, Subchapter 

S banks charge higher fees to consumers, have higher return on assets, and pay higher dividends to share their shareholders. In other 

words, these banks do not use their preferential tax treatment to 

better compete with credit unions. 

Second, we strongly believe that the legislation providing regulatory relief should be balanced. Credit unions and community 

banks should both see benefits in terms of their ability to serve 

members or their customers. As part of well-balanced relief legislation, credit unions would expect the inclusion of language, as Representatives Royce and McCarthy have proposed, to raise the statutory member business lending cap for well-capitalized credit unions 

with ample business lending experience that are operating near the 

cap. 

Additional business lending helps everyone in the community— 

small businesses, credit unions, and banks. Allowing qualifying 

credit unions to lend more to small businesses would provide muchneeded assistance and relief to the struggling small business secVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
13 

tor. It would help create 140,000 jobs in the first year, at no cost 

to taxpayers. 

The combination of these two bills should be embraced by all who 

serve businesses on Main Street. Unfortunately, we know what the 

bankers think about credit union regulatory relief. They oppose it 

every time we propose it. The banks’ opposition to credit union legislation has meant that hundreds of thousands of jobs that could 

have been created through additional credit union business lending 

have gone uncreated. 

Their opposition in Congress and in courts to permitting more 

credit unions to serve underserved areas has meant that potentially millions of Americans have gone with without access to convenient and affordable financial services. Their opposition to legislation modernizing credit union capital standards has restricted 

credit unions’ ability to grow and better serve their members. 

When banks oppose credit union legislation, their shareholders 

may win, but consumers and small businesses lose. 

Credit unions support regulatory relief for all financial institutions, but it must be balanced. In its current form, H.R. 1697 is 

not. To achieve balance, we urge Congress to combine this legislation with H.R. 1418, the Small Business Lending Enhancement 

Act, and include the other modifications we have urged in our written testimony. 

Credit unions across the country firmly believe that this legislation, or the provisions contained therein, must not move through 

Congress without similarly effective regulatory relief legislation for 

credit unions. This is a key issue for America’s credit unions. 

Thank you for the opportunity to testify at today’s hearing. 

[The prepared statement of Mr. Cheney can be found on page 70 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. John A. Klebba, president and chief executive officer, Legends Bank, on behalf of the Missouri Bankers 

Association. 

Welcome. 

STATEMENT OF JOHN A. KLEBBA, CHAIRMAN, PRESIDENT, 

AND GENERAL COUNSEL, LEGENDS BANK, ON BEHALF OF 

THE MISSOURI BANKERS ASSOCIATION (MBA) 

Mr. KLEBBA. Thank you. 

Chairwoman Capito and Chairman Garrett, Ranking Member 

Maloney and Ranking Member Waters, and members of the subcommittees, my name is John Klebba, and I am the chairman, 

president, and general counsel of Legends Bank in Linn, Missouri. 

I also occasionally sweep the floors and shovel the snow whenever 

that is necessary. 

Thank you for the opportunity to testify today. I would also like 

to thank my Congressman, Congressman Luetkemeyer, a fellow 

Missourian, for his work on this bill. 

The title of the bill pretty much says it all, the ‘‘Communities 

First Act.’’ Legends Bank is a small community bank by any national standard, with 10 locations and 83 employees, serving rural 

Missouri. Our headquarters is in a town of 1,450 people, and we 

14 

have locations in towns as small as 300, which is not much bigger 

than this room, probably, right now. 

We are proud of the fact that we have been in business for almost 100 years. When I was a boy, I listened to my grandfather, 

one of the bank’s co-founders, tell stories of the hardships of taking 

the bank through the Great Depression. We were, in fact, one of 

the few banks in our county to survive. 

One of the things about Legends Bank that has not changed from 

the time of his leadership to my dad’s leadership to my own is that 

our bread and butter is our commitment to the communities we 

serve. To put it simply, if our communities and our customers are 

not successful, then our bank is not successful. Thus, our fates are 

inextricably linked. 

We know from experience that there is a cost and increased expense to the bank when we have to deal with more regulations. 

And when there is an increased cost to us, there is an increased 

cost to our customers. The more expense for the bank, the less that 

is available to loan to our primary customer base, which is small 

businesses, farmers, and folks who are just trying to get by in 

these difficult economic times. 

Several provisions of this legislation will provide the kind of regulatory relief my bank and other small banks need to continue to 

serve our communities. For example, Section 201 deals with escrow 

accounts for mortgage loans. This section would require the Federal Reserve Board to exempt all banks with assets of $10 billion 

or less from the escrow account requirement. 

In the small towns we serve, many customers don’t want escrow 

accounts, and, in fact, we have served our customers quite well for 

over 97 years without offering them. Our customers are used to 

paying their insurance and tax bills directly to the insurance companies and county collectors. Think about how much easier it is to 

change insurance companies or change coverages without the involvement of a third party, in this case the bank. 

Requiring a service our customers don’t want doesn’t make any 

sense. It only adds a significant cost to the bank and increases the 

cost to our customers in the form of higher fees or less attractive 

interest rates. Many of these loans are small loans. For example, 

on a mobile home loan, the monthly escrow account payment can 

be very small, in some cases less than $20 per month. 

Another area of the bill I would like to highlight is tax relief for 

banks, which will allow us to exclude from gross income the interest on loans secured by agricultural real property. This mirrors the 

exclusion already available to one of our competitors, the Farm 

Credit Services. 

When I was in law school, one of the courses I took dealt with 

tax policy and whether, in setting tax policy, it was either fair or 

just for the government in a free-market society to be picking winners and losers. Community banks are having a harder and harder 

time competing with tax-advantaged entities such as farm credit 

systems and credit unions. When the government picks winners 

and losers at the expense of other industries, in this case community banks, our communities suffer the consequences. 

Many of the rural areas in this country are struggling. Demographically, their population is getting older, especially with reVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
15 

spect to individuals who own and operate family farms. In my experience, one of the main reasons for this is the fact that it is very 

difficult for younger people to be able to afford the land and equipment necessary to get them started as farmers. Their proposed tax 

relief for qualified ag lenders would certainly help level the playing 

field that we operate on and give a boost to our ag borrowers. 

I am concerned about the long-term viability of community banking, and unjust tax policy is one of the main reasons. 

Thank you for the opportunity to present my views on behalf of 

the Missouri Bankers Association. And after this is over, I would 

be happy to answer any questions you might have, especially with 

respect to Subchapter S status. 

[The prepared statement of Mr. Klebba can be found on page 90 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. Fred Becker, Jr., president and chief executive officer, National Association of Federal Credit Unions. 

Welcome. 

STATEMENT OF FRED R. BECKER, JR., PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF FEDERAL 

CREDIT UNIONS (NAFCU) 

Mr. BECKER. Thank you, Madam Chairwoman. 

Good afternoon, Chairmen Capito and Garrett, Ranking Members Maloney and Waters, and members of the subcommittees. My 

name is Fred Becker. I am testifying today on behalf of NAFCU, 

where I have served as the president and CEO since January of 

2000. I very much appreciate the opportunity to share our views 

on H.R. 1697 and the need for regulatory relief for all community 

financial institutions. 

While credit unions did not create the financial crisis, credit 

unions have nevertheless been adversely impacted by the ongoing 

economic upheaval and ensuing legislation and regulation. Credit 

union failures have, however, been relatively minimal as compared 

to other financial depository institutions. 

We recognize the leadership and effort of Representative Luetkemeyer to bring relief to community-based financial institutions. 

Many of the provisions in the Communities First Act provide regulatory and tax relief to community banks. 

In particular, we would like to note our support of Section 107, 

which includes language that will lower the threshold needed for 

the Financial Stability Oversight Council to override rules issued 

by the Consumer Financial Protection Bureau. We are pleased that 

such a provision has already passed the House. 

We also believe that Section 201 of the bill, which would amend 

the Dodd-Frank Act to provide loans held in portfolio by banks 

under $10 billion in assets, is, in principle, a good idea. Such an 

exemption should, however, be made for all credit unions. In addition, we are disappointed that the legislation continues to adopt a 

$10 billion dividing line in many of its provisions. 

While the Communities First Act focuses on relief to community 

banks, credit unions remain among the most heavily regulated of 

all financial institutions, with a number of outdated statutory limits on their abilities and powers. Passage of new financial reforms 

16 

in recent years has only increased the regulatory burden on credit 

unions. Every additional dollar spent on compliance, whether stemming from a new law or an outdated regulation, is a dollar that 

could have been used to reduce costs or provide additional services 

to a member. 

With that in mind, there are a number of areas where we would 

like to see relief—relief that would enhance credit unions’ service 

to their 94 million members. These include: raising the arbitrary 

member business lending cap; allowing credit unions access to supplemental capital; providing the ability for all types of credit unions 

to add underserved areas; allowing credit unions that convert to 

community charters to retain their employee groups; permitting 

voluntary mergers of multiple group credit unions without limitation; and allowing NCUA to establish longer maturities for certain 

credit union loans. 

Combining these provisions with those sought by community 

banks would strengthen the legislation and provide relief to both, 

in addition to helping create jobs and aiding in the economic recovery. 

Many of these credit union proposals have already received broad 

bipartisan support. For example, the Small Business Lending Enhancement Act, introduced by Representatives Royce and McCarthy, has over 100 bipartisan co-sponsors. We believe this legislation 

to raise the member business lending cap would help spur over $13 

billion in small business lending and create over 100,000 new jobs 

in the first year alone. The demand is out there from small business, and credit unions are ready to meet it. 

In conclusion, with the recent influx of new laws and regulations, 

our community financial institutions, and in particular credit 

unions, are in need of regulatory relief. As our Nation continues to 

strive to recover from the ‘‘Great Recession,’’ we believe it is imperative that every effort be made to strengthen the access and improve the availability of low-cost financial services to all Americans. 

In keeping with that spirit and intent, we believe that the Communities First Act can be strengthened by adding the provisions to 

provide regulatory relief to credit unions, as outlined earlier in my 

testimony. Such an approach would create a comprehensive reform 

bill that would create more jobs, help communities, and garner further bipartisan support. 

We thank you for your time and for the opportunity to testify before you here today on these important issues to credit unions and 

to our Nation’s economy. I would welcome any questions that you 

may have. 

[The prepared statement of Mr. Becker can be found on page 54 

of the appendix.] 

Chairwoman CAPITO. Thank you, Mr. Becker. 

Our next witness is Mr. Arthur E. Wilmarth, Jr., professor of 

law, George Washington University, executive director, Center for 

Law, Economics, and Finance. 

Welcome, Professor. 

17 

STATEMENT OF ARTHUR E. WILMARTH, JR., PROFESSOR OF 

LAW, GEORGE WASHINGTON UNIVERSITY LAW SCHOOL 

Mr. WILMARTH. Thank you, and good afternoon. Chairwoman 

Capito, Chairman Garrett, Ranking Member Maloney, Ranking 

Member Waters, and members of the subcommittee, thank you for 

allowing me to participate in this hearing. 

Community banks play a crucial role in providing credit and 

other financial services to consumers and small and medium-sized 

enterprises, which I will refer to as SMEs. Community banks have 

long served as a leading source of outside credit for SMEs. By 

doing so, community banks promote economic growth in the United 

States. SMEs produce half of the total private sector output, employ a majority of the private sector workforce, and account for 

two-thirds of net new jobs and more than a third of all private sector innovations. 

However, the revival of the community banking sector and its 

ability to continue serving the needs of consumers and SMEs cannot be taken for granted. Many community banks disappeared in 

the thousands of bank mergers that occurred between 1990 and 

2005. During that time period, the percentage of banking assets 

held by the 10 largest U.S. banks rose from 25 percent to 55 percent. 

This consolidation trend intensified during the financial crisis, as 

regulators arranged several emergency mergers between very large 

banks that produced even bigger banks. As a result of those megamergers, the 4 largest U.S. banks controlled 56 percent of domestic 

banking assets at the end of 2009, up from only 35 percent in 2000, 

and the 10 largest banks controlled 75 percent of such assets. 

Community banks suffered disproportionate harm during the 

current financial crisis, in large part because of the preferential 

treatment given by the Federal Government to too-big-to-fail megabanks. The Federal Government provided massive amounts of financial assistance to mega-banks during the financial crisis but 

gave very limited help to smaller banks. 

The 19 largest U.S. banks, each with more than $100 billion of 

assets, received $220 billion of capital assistance from TARP, and 

those banks issued $235 billion of FDIC-guaranteed debt. In contrast, smaller banks received only $40 billion of TARP assistance 

and issued only $10 billion of FDIC-guaranteed debt. 

The Federal Reserve provided $1.2 trillion of emergency credit 

assistance, mostly to large domestic and foreign banks. More than 

half of this assistance went to the 10 largest U.S. commercial and 

investment banks. 

Most importantly, the Federal Government explicitly guaranteed 

that none of the 19 largest banks would be allowed to fail. When 

the stress tests were announced in early 2009, regulators declared 

that the Treasury Department would provide any additional capital 

needed to ensure the survival of the top 19 banks. They also said 

that they would not impose any regulatory sanctions on the top 19 

banks under the ‘‘prompt corrective action’’ regime established in 

1991. In stark contrast, Federal regulators imposed PCA orders 

and other public enforcement sanctions on hundreds of community 

banks and allowed more than 300 of those institutions to fail. 

18 

In view of the massive too-big-to-fail bailout that the Federal 

Government provided to our largest banks, it is not surprising that 

those banks enjoy a decisive advantage in funding costs over smaller banks. FDIC Chairman Sheila Bair recently pointed out that in 

the fourth quarter of 2010, the average funding costs for banks 

with more than $100 billion of assets was about half the average 

funding costs for community banks with less than $1 billion in assets. 

The past 2 decades have also made clear that community banks 

and mega-banks follow very different business models. Community 

banks provide high-touch, relationship-based lending and cash 

management services to SMEs, as well as personalized banking 

services, including wealth management, to consumers. In contrast, 

mega-banks provide impersonal, highly automated lending and deposit programs to SMEs and consumers, and mega-banks also focus 

on complex, higher-risk transactions in the capital markets. Congress should reject a one-size-fits-all regulatory policy and instead, 

Congress should adopt a tailored policy that gives due attention to 

the special requirements of community banks. 

At the present time, community banks face particularly difficult 

challenges in raising new capital and dealing with troubled commercial real estate loans. Several provisions of H.R. 1697 have the 

potential to help community banks in these areas. I would be 

pleased to answer your questions about those provisions, which are 

discussed in my written testimony. 

Thank you again for allowing me to participate. 

[The prepared statement of Professor Wilmarth can be found on 

page 118 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Mr. Damon Silvers, director of policy and 

special counsel for the AFL-CIO. 

Welcome, Mr. Silvers. 

STATEMENT OF DAMON A. SILVERS, DIRECTOR OF POLICY 

AND SPECIAL COUNSEL, AMERICAN FEDERATION OF LABOR 

AND CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO) 

Mr. SILVERS. Thank you. Good afternoon, Chairwoman Capito 

and Chairman Garrett, and Ranking Members Maloney and 

Waters. 

In addition to the introduction I just received, I should note that 

I served as Deputy Chair of the Congressional Oversight Panel for 

TARP. I am testifying today both on behalf of both the AFL-CIO 

and the Americans for Financial Reform, a coalition of more than 

250 organizations representing more than 50 million Americans. 

In listening to the testimony of my fellow witnesses, I am reminded of our experience in the Congressional Oversight Panel 

holding field hearings with community bankers in Atlanta, in Milwaukee, in Phoenix, and in northeast Colorado, where we focused 

on agricultural lending, looking at small business lending in particular and at the problems of commercial real estate, particularly 

in the State of Georgia. 

As a result of the things we learned through that experience, the 

Congressional Oversight Panel warned on multiple occasions that 

if steps were not taken to both address weaknesses in large banks 

19 

and to aid smaller banks more aggressively, the United States was 

in serious danger of repeating the Japanese experience of the 

1990s, where a financial system dominated by weak, large banks 

protected by regulatory and accounting forbearance simply failed to 

function in the most basic way. In other words, our financial system was in danger of failing to provide credit to operating businesses. 

Today, we appear to be living in that world—a world of weak, 

large banks, constrained credit to small and medium-sized enterprises, overleveraged households, persistent high unemployment, 

mass foreclosures, and growth so sluggish that there is no sign of 

job creation on the horizon. 

This situation cries out for aggressive policy responses: to end 

the double standard in bank regulatory policy; to recapitalize weak, 

large banks; to rebuild business lending; and to restructure home 

mortgage loans so households are no longer trapped in a downward 

spiral. 

Instead, however, we are at a hearing addressing a bill, H.R. 

1697, that has many, many provisions in it, which, as a whole, seek 

to extend the bad practices of regulatory forbearance from the big 

banks that Mr. Wilmarth just described to the small banks, rather 

than asking big banks to live up to the same standards we rightfully ask small banks to live by. 

Now, that is not to say that there are not ways in which the 

bank regulatory system could be intelligently and wisely crafted to 

address the differences in business models Mr. Wilmarth addressed, which I absolutely concur with. And the testimony that we 

heard from Mr. Marranca listed a series of provisions embedded 

within this bill that seem to me to be quite commonsensical. 

But that is not all this bill does. This bill allows banks to hide 

the very real losses that accompany foreclosing on American families, effectively creating a regulatory subsidy for throwing people 

out of their homes and driving down housing prices. 

The bill undoes the fundamental principle that has underpinned 

our financial accounting system since the 1930s, the principle of 

the independence of the Financial Accounting Standards Board, by 

effectively requiring the SEC to only approve financial accounting 

rules that report good news about small banks rather than having 

rules that tell the truth about small banks. 

The bill exempts banks with assets up to $1 billion from the internal controls requirements of the Sarbanes-Oxley Act, effectively 

increasing the risk that such banks would pose to the FDIC and 

overturning the basic proposition that has been in place since the 

beginning of Federal bank regulation in the 1870s: that banks 

must have accurate internal controls that are at least adequate to 

ensure the accuracy of their financial statements. 

Most troublingly, H.R. 1697 broadly, for all banks: weakens consumer privacy protections for all banking customers; undermines 

the integrity of real estate appraisals—and, certainly, we should 

have learned something about this by now—;seeks to suborn the 

protection of the American public to the interests of the banks by 

broadly weakening the authority of the Consumer Financial Protection Bureau; fundamentally undermines the securities laws by allowing public offerings to up to 2,000 people without requiring 

20 

basic disclosures through registration with the Securities and Exchange Commission; and, most bizarrely puzzling, seeks to make 

banks more reliant on credit rating agencies. 

Over time, I have been impressed with the capacity of some 

Members of Congress to name bills in ways that are fundamentally 

dishonest. Now, this grab bag of regulatory subsidies gratuitously 

appended to the commonsense provisions that my fellow witnesses 

rightfully seek for their small banks, many of which are, in fact, 

for the benefit of big banks, no more deserves the name of the 

‘‘Communities First Act’’ than did TARP itself. 

I have tried to think of a more accurate name for this bill and 

thought the ‘‘Potemkin Village Act’’ or the ‘‘Let’s Make Believe Act’’ 

sounded pretty good. But as I thought about how much of this Act 

is really about helping big banks, about helping Wall Street, I concluded that the best title for it, in its current form, would be the 

‘‘Help the 1 Percent and Hurt the 99 Percent Act of 2011.’’ 

Thank you. 

[The prepared statement of Mr. Silvers can be found on page 113 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our final witness is Mr. Adam J. Levitin—whom we have had 

before the panel before—associate professor of law, Georgetown 

University Law Center. 

Thank you. 

STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Good afternoon, Chairmen Capito and Garrett, 

Ranking Members Maloney and Waters, and members of the subcommittees. My name is Adam Levitin and I am a professor of law 

at Georgetown University. 

As you have heard from the testimony of the other witnesses, 

there is a palpable sense that the way U.S. financial regulation has 

proceeded over the past few years is fundamentally unfair. Large 

financial institutions, many of which behaved irresponsibly during 

the housing bubble, were bailed out. Small institutions, on the 

other hand, which were generally much more prudent lenders, 

were left to sink or swim on their own. 

Moreover, increased regulation in the wake of the financial crisis 

imposes a relatively heavier burden on small institutions because 

they lack the economies of scale of the large institutions. In short, 

small banks and credit unions are paying for the problems that 

large banks created. Small banks and credit unions have really become second-class citizens in the financial world. Unfortunately, 

the Communities First Act is the wrong solution to this problem. 

The bill contains some provisions that are quite reasonable. For 

example, little is accomplished by Gramm-Leach-Bliley privacy notices in general. They don’t tell consumers much of anything. They 

tell them that you don’t have any privacy. But even less is accomplished by requiring their annual reissuance when privacy policies 

have not changed. Reducing this regulatory burden is quite sensible. 

The problem here is that there are several extremely troubling 

provisions buried in the bill that do much more harm to commuVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
21 

nities and the economy than they do to help community banks and 

credit unions. First, Sections 205 and 206 of the bill would change 

the accounting treatment for loss recognition in foreclosure and of 

impaired real estate loans. The bill would enable banks to delay 

loss recognition and carry impaired loans at inflated values. Not 

only do these provisions encourage voodoo accounting, they encourage foreclosures at the expense of loan modifications. 

If there is one point you take away from my testimony, this is 

it: The Communities First Act will result in families being thrown 

out of their homes. This bill encourages foreclosures, it affirmatively hurts American families and communities, and it will result 

in your constituents losing their homes. If you are going to pass 

this bill, you need to take out Sections 205 and 206. 

Second, Section 105 of the bill would require the SEC to conduct 

a cost-benefit analysis of any changes to accounting rules proposed 

by the independent Financial Accounting Standards Board. This 

provision would cover not just small banks but also large ones, and 

indeed all public companies, banks and nonbanks. The requirement 

would functionally destroy GAAP accounting by petrifying accounting standards. It will scare away capital from U.S. markets and 

render American firms less competitive in obtaining financing. 

Cost-benefit analysis in general is one of the wishiest-washiest 

pseudo-scientific things ever. There is no way to scientifically calculate the cost and benefits from the change in accounting treatment of, say, variable interest entities or the treatment of financial 

leases. These things just aren’t quantifiable, and therefore you 

can’t do a cost-benefit analysis. Accounting rules provide their benefits not on a one-off basis, but as a complete information ecosystem, by making information transparent to markets. You can’t 

pick and choose on financial transparency. Destroying GAAP accounting by imposing cost-benefit analysis doesn’t reduce the costs 

of auditing for banks. It just raises their costs of capital. And what 

does that mean? It means less lending to small and medium-sized 

businesses and higher rates for those loans that are made. 

Finally, Section 107 of the bill would lower the standard needed 

for the Financial Stability Oversight Council to veto rulemakings 

by the Consumer Financial Protection Bureau. Let’s call this provision for what it is—an attack on the American family. The CFPB 

was created to be a bulwark to protect American families from unfair, deceptive, and abusive financial practices. We certainly have 

seen enough of those over the last few years. 

The FSOC veto was designed to be a rarely if ever used provision 

to avoid unintended systemic risk consequences from CFPB action. 

The standard proposed by the Communities First Act, however, 

would enable the FSOC to veto CFPB rulemakings whenever they 

harm the safety and soundness of a subset of banks. 

Let’s be clear about what safety and soundness means. It is a 

phrase that means bank profitability. It is axiomatic that a bank 

that is not profitable is not safe and sound. We need our banks to 

be profitable, but there is absolutely no public policy interest in the 

level of bank profitability. But that is what the bill would do. It 

would elevate bank profitability over the protection of the American family. Community banks and credit unions have become second-class citizens in U.S. financial regulation, and that is wrong. 

22 

They are important institutions that provide real value to our financial system, but the Communities First Act is not the solution. 

It bundles some small-bore, reasonable regulatory changes with 

some seriously disruptive provisions. It will not fix the problem of 

small banks being treated as second-class citizens. 

I urge the committee that if it wants to fix the problem of twotiered bank regulation to tackle that problem directly rather than 

approach it through a misnamed bill like the Communities First 

Act that puts banks’ interests ahead of communities. Thank you. 

[The prepared statement of Professor Levitin can be found on 

page 98 of the appendix.] 

Chairwoman CAPITO. Thank you. 

That concludes testimony from the panel, and I am going to 

begin with the questions. 

I would like to ask Mr. Marranca and Mr. Klebba on one of the 

areas of the bill that talks about appraisal values particularly for— 

I think it is for commercial real estate, and it talks about—we are 

having a lot of problems with this, certainly this is a problem in 

Georgia and across the country that has been hardest hit on how 

do you reasonably appraise properties when nothing has sold in the 

region, there are no comps. And the suggestion here is that you do 

an appraisal value over 5 years where you drop out the high, you 

drop out the low, and then you get an average, which gives you the 

average—would give you an appraisal value for that piece of property. Do you have any opinion on that, Mr. Marranca? 

Mr. MARRANCA. I do. Again, the proposal as stated is a 5-year 

rolling average, and the purpose of that, of course, is to eliminate 

the immediate up or the immediate down that troubles so many 

banks when the regulators come in and then force, if you will, a 

writedown which does affect your capital and does affect your business plan, it does affect your ability to serve your community. 

When an appraisal is written down immediately, it is taken off 

the books as far as the value on your asset. Those loan losses affect 

your capital. In other words, that directly affects your ability, 

again, to lend in your community. I don’t see a safety and soundness issue there. Again, this is for regulatory purposes only. This 

is something that we are willing to work with, willing to discuss. 

It is an issue with many, many community banks, especially in 

very specific parts of the country. 

Chairwoman CAPITO. Have you had an issue with this in your 

bank in New York? 

Mr. MARRANCA. In rural western New York where my bank operates out of three counties, we have never had any type of real estate boom, we did not have a bust, so appraisals are not at issue. 

Chairwoman CAPITO. That is my entire State. Mr. Klebba, do you 

have an opinion on that? 

Mr. KLEBBA. In terms of appraisals, there are some issues, I 

know, out there. We haven’t had a lot in our area because, like Sal, 

we are luckily in an area where we haven’t had booms and busts, 

but an appraisal is one person’s opinion, on one particular day, of 

what the value of a piece of property is. And I think the overall 

objective should be that we are coming up with values in terms of 

long-term values. I think the real issue is when we go through a 

real estate bubble and a real estate decline like we have now, what 

23 

is the real value of that property? Is it what it was worth last year, 

is it what it is worth today, or is it what we project it to be worth 

a year from now? 

So I think it has been in some situations very unfair for banks 

to be writing down. I know if you look at our securities portfolio, 

if we have large gains in our portfolio and we have those particular 

securities on a hold to maturity, we don’t write those up. I think 

there is an argument that the same should be held, should be put 

forth in terms of real estate. If you are holding these real estate 

loans to maturity and everything else is looking pretty good on 

them, is it really fair to the bank to write those down immediately 

or should you have some sort of standardized or normalized, I 

should say, real estate values for your particular area? 

Chairwoman CAPITO. Thank you. 

Mr. Wilmarth, you touched on a subject that I am extremely interested in. You said that the largest banks are now holding 75 

percent of assets, and that is up from what? 

Mr. WILMARTH. Historically, it was 25 percent in 1990, 55 percent in 2005, and at least by one report, 75 percent in 2009. There 

may have been a little bit of runoff since 2009 since there have 

been minor divestitures, but I think it is certainly north of 70 percent. 

Chairwoman CAPITO. The reason I want to focus in on this, and 

I think Mr. Marranca mentioned consolidation, bank consolidation. 

We have just been through ‘‘too-big-to-fail,’’ and our bigger banks 

are getting bigger. We could argue, and we have argued ostensibly 

as to whether ‘‘too-big-to-fail’’ has been ended. I personally don’t 

think so, but we will leave that for another day. 

My concern here is that we look at regulatory burdens that are 

being heaped by Dodd-Frank and others without scraping out the 

old regulations that may not be useful anymore, that are no longer 

serving their purposes, which is not being done. Even Secretary 

Geithner testified to that in this committee when I asked him. 

Is further consolidation going to occur because of this inability of 

the smaller institutions to really cope with what they are going to 

have to cope with in the regulatory environment? I would like to 

have your opinion on that. 

Mr. WILMARTH. I think you have a problem of funding costs and 

you have a problem of operating costs, and the funding costs I 

think are driven by the perceived too-big-to-fail subsidy, that people will put more of their money in the largest banks at lower rates 

if they think that the government absolutely will not let those 

banks fail. At least in my opinion, if you look at the bailout of 

Dexia in Europe recently, and you also look at the Federal regulators approving the transfer of derivatives portfolio from Merrill 

Lynch to Bank of America, those are signals indicating that on 

both sides of the Atlantic, big banks are going to be supported at 

all costs, so that drives the funding cost disparity I mentioned 

where essentially the large banks have about half the funding costs 

of small banks under $1 billion. 

The other side is operating costs. So I think certainly it would 

be appropriate for Congress to urge regulators to actually start 

adopting a two-tiered regulatory approach. I understand that Governor Tarullo of the Federal Reserve Board recently mentioned that 

24 

the Fed was interested in doing that. I think what you are hearing 

from the witnesses is that it hasn’t much happened so far, but that 

would be certainly a good initiative to start. 

Chairwoman CAPITO. Thank you. I overstayed my time there. 

Mrs. Maloney for 5 minutes. 

Mrs. MALONEY. First of all, I want to thank all of you for your 

excellent testimony. And I was struck when you talked, Mr. 

Klebba, about how your bank stayed open during the Great Depression when most of them closed, and all the stories I heard for all 

the banks that were closed. How did your bank survive? Did you 

have more capital? How did you survive when so many closed during that period—or your father’s bank, I guess? 

Mr. KLEBBA. They were very, very conservative. No, they were 

very, very, very, very conservative. Good old German Catholics. 

They did have a lot of capital, and they were very careful. It was 

a family-owned bank, and it was their money that they were lending out; it wasn’t somebody else’s money. And so, I think there was 

a self-interest in that. I remember him talking about going around 

on Sundays with his loan list in his pocket and calling on these 

families and just seeing how they were doing, and so it wasn’t just 

a banking relationship, it was a personal relationship. 

I remember him saying how people would come in with basically 

the deeds to their farm saying, ‘‘I can’t do this anymore,’’ and he 

would say, ‘‘No, you need to stay on that farm because you can feed 

your family. And as long as you can eke out enough to pay a little 

bit of interest, we can stay with you. But once you move off, then 

what are you going to do?’’ So it was really compelling stories that 

he had. He was really an interesting guy. I could go on for hours 

telling you about his background. 

Mrs. MALONEY. Thank you for sharing that. 

And, really, when we did Dodd-Frank, one of the things we tried 

to do was go back to traditional banking, that you have skin in the 

game, that you are accountable, that you hand out loans and you 

make sure those people can pay them back, and that you work with 

them in the traditional way that your father did. 

In your statement of trying to help people keep their farms, one 

of the things we are concerned about is helping people keep their 

homes. The loan amortization and loan appraisal sections, I want 

to really ask Mr. Wilmarth, and I think you gave a beautiful description of the role that community banks played during this period. They were really the rock on which most communities turned 

during this ‘‘Great Recession.’’ The stories I hear from across my 

State, really across the country, are that the only place anyone 

could get any help or response was from community banks. So one 

of the criticisms of this section has been that being able to amortize 

these over a long period of time could incentivize banks to pursue 

foreclosure rather than modification. 

Obviously, there is a social policy to want modification, and I 

would like to ask you, since you spoke on it and others, do you 

agree or disagree with that statement? Mr. Silvers, I believe you 

also spoke on this, as did you, Mr. Levitin, and from the great 

State of New York, if you could comment on that particular section. 

Mr. WILMARTH. Yes, thank you. I suggested that these two provisions, 205 and 206, could be viewed in the context of the forbearVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
25 

ance program that was established for agriculture and energy 

banks in the late 1980s, and that was only extended to well-managed, prudently managed banks. It was carefully overseen by regulators. About four-fifths of the banks that entered that program either survived or emerged without assistance, so it was a successful 

program. 

Certainly, you could build safeguards into 205, you could limit it 

to well-managed banks, you could certainly give regulators discretion as to whether the appraisal or amortization process was being 

abused. I think that you could exclude residential real estate if you 

think that residential real estate is particularly threatened by this. 

I certainly think that 206 should probably be limited to smaller 

banks because I don’t think that larger banks have the same need 

for this, and many of their properties are in larger areas where 

there are more opportunities for refinancing. I think 205 and 206 

should be viewed as provisions that are needed in smaller, frozen 

markets where there simply is no new credit coming in to refinance 

properties, and this would give community banks a chance to work 

with their customers in the way that Mr. Klebba has explained. I 

think you could build in safeguards to prevent abuses. 

Mrs. MALONEY. But others have said that it might mask, really, 

the difficulty for regulators to see the challenges there and to come 

in and work with trying to address it. Would anyone else like to 

comment on this? 

Mr. MARRANCA. If I may? 

Mrs. MALONEY. Yes. 

Mr. MARRANCA. As a community banker for over 30 years, I categorically deny that it would in any way encourage foreclosures. 

That is not the business we are in. It would, in fact, do the opposite. It allows time for me as a banker, without regulatory pressure, to work with that borrower and find a solution to their financial problem or the economic problem in our area, and this was 

proven, again, in the agricultural crisis in the 1980s. Again, I need 

to point out or would respectfully point out that this only affects 

regulatory capital. This does not affect the books of the bank, it 

does not affect my investors looking at the bank, it does not affect 

my call reports and so forth, and it only applies to highly rated 

banks. So we are in no way justifying or jeopardizing safety and 

soundness. It helps out the consumer who needs the help at that 

time, and it helps the bank who needs the help at that time. We 

are in it for the long run. My bank celebrates its 110th anniversary 

in January. We need long-term solutions. We don’t look for the 

next quarter or the next two quarters. 

Chairwoman CAPITO. The gentlelady’s time has expired. Mr. Garrett? 

Chairman GARRETT. I thank the Chair. So let’s start off at that 

point. I had some other questions, but let’s go back to Sections 205 

and 206 and where the testimony was that section is in the bill to 

allow for, to facilitate for the banks to, as they put it, throw people 

out of their homes. So in the situation where a bank or credit union 

has someone who is not paying, is not up to date, what is better 

for that bank or credit union to do? To try to facilitate a workout 

with them or is it better to go through the foreclosure process from 

a bottom-line perspective? 

26 

Mr. MARRANCA. Chairman Garrett, the last thing in the world— 

again, my main office is in a town of 800 people. I live with these 

people, they are my neighbors. I am not in the business of taking 

people out of their homes. The last thing in the world I want to 

do is take somebody’s car or take somebody’s house, and that is 

why we have clear, commonsense underwriting standards so that 

we never get to that point. But if there is an issue, whether it be 

medical, divorce, or economic, the first thing we do is sit down and 

talk with that person or family and try to find a solution. In my 

State of New York, unfortunately, it takes almost 16 to 18 months 

to foreclose on somebody. A lot of things happen. The last thing I 

want is somebody’s house. We would do anything to stop that. 

Chairman GARRETT. And actually, doesn’t that cause other community problems when a number of homes in a community are in 

foreclosure or moving through foreclosure, that period of time for 

the uncertainty in the marketplace, not only uncertainty for the 

marketplace but also for the community itself to have that number 

of homes in foreclosure and not take a final decision? 

Mr. MARRANCA. There is no question, nobody wants a home that 

is abandoned, and that is the case in most cases. When there is a 

situation and we do end up foreclosing—and I am talking about 2 

to 3 loans in the last 2 to 3 years, I am not talking significant numbers—that house is abandoned, it has problems, it is a blight on 

the community. 

Chairman GARRETT. Going to another point. Overall, what we 

are trying to do with this legislation, I think, is trying to get rid 

of outdated regulation and try to improve on that. That is the same 

thing, come to think of it, that Secretary Geithner was talking 

about, that he said he wanted to do through FSOC and what have 

you. 

Mr. Klebba, maybe through your association, have you engaged 

there? Do you see this as something, are you optimistic—and 

maybe it is hard for you to say this—that this is actually going to 

occur through FSOC and the Secretary as far as getting rid of outdated, unnecessary, unduly burdensome regulations? 

Mr. KLEBBA. In terms of through the Consumer Financial Protection Bureau or— 

Chairman GARRETT. Through FSOC. 

Mr. KLEBBA. Through FSOC? 

Chairman GARRETT. Yes. 

Mr. KLEBBA. Am I optimistic? No. 

Chairman GARRETT. You are not on the record here. 

Mr. KLEBBA. I am trying to be realistic about this. Basically, 

what I found coming out of Washington, at least in the 20 years 

I have been in the banking business, is more regulation, not less. 

I would hope that it would happen, but— 

Chairman GARRETT. Okay, thank you. 

And going to the FASB aspect, this one I may disagree with you 

all, but let me ask you the question on it. So if FASB was sitting 

here, they would say we are just creating the rules to have a uniform system of accounting here, and if there is a problem for financial institutions with the interpretation of those rules or if there is 

a problem for the financial institutions as to how the regulators 

apply the rules, that is a problem that we should be taking up with 

27 

the regulators and not having an impediment for FASB, as it does 

in the bill, to have to go through the SEC, and SEC, hey, don’t give 

us any bad accounting standards under FASB. So isn’t the really 

appropriate response to this not to put a constraint on FASB but 

to look to how it is interpreted and also how the regulator applies 

those rules? 

Mr. KLEBBA. I think that uniformity for uniformity’s sake is a 

nonplus. That is not where we should be. We should be where you 

have rules that make sense and are just and actually are reflective 

of reality, and I think that is where— 

Chairman GARRETT. That is what they would argue that they are 

trying to do here with their regulations, and that the reality for the 

big is the same as for the small, but that how the regulators—for 

example, how this may impact upon your capital requirements for 

your institution may be onerous; but then that is up to the banking, your particular type of banking regulator to step in and say, 

well, we are going to apply this particular accounting standard to 

you, and as far as how we are going to maybe change your capital 

requirements because of that. But as far as an investor is concerned to your institution, they can still open your books and say 

the standards are the same, but this is how the regulator is going 

to apply it to your institutions. Does that make sense? 

Mr. KLEBBA. Yes, I understand where you are coming from there, 

and again this is not a reflection on what you are publicly reporting. All banks, even those of us who are privately held, are obviously public reporting on a quarterly basis, but it has to do with 

how the regulators are dealing with you and dealing with your capital. 

Chairman GARRETT. I see my time is up. Thanks. 

Chairwoman CAPITO. The gentlewoman from California, Ms. 

Waters. 

Ms. WATERS. Thank you very much. To our presenters here 

today, I am very pleased that you are here, and I want very badly 

to cooperate with the opposite side of the aisle to do something for 

small community banks and credit unions. And I think we may be 

almost on the right track here. 

I hope Mr. Posey will talk a little bit about capital requirements. 

I am supporting his legislation. But I want to make sure that we 

are not inadvertently somehow doing something that is going to 

protect the too-big-to-fail banks, and I want to make sure that we 

are working strictly on behalf of our credit unions and our community banks. So let me ask just a few questions. 

I know that many community banks are having challenges raising capital. Now, the Treasury Department had, was supposed to 

support lending at financial institutions that have trouble meeting 

capital requirements. Did any of your members, were you able to 

use this program before it closed? From the Treasury Department? 

Mr. KLEBBA. We did not. We are sitting on about 15 percent capital. We have more capital. 

Ms. WATERS. I can’t hear you. 

Mr. KLEBBA. We are sitting on about 15 percent capital, so we 

have more capital than we know what to do with right now, so that 

was not a program that was— 

28 

Ms. WATERS. So that is not a problem at this time. I understand 

that currently, for Mr. Becker, there are restrictions on member 

business lending for credit unions, and I am very much involved in 

this issue. How will this—specifically, how will this relax the cap 

and help to increase loans to businesses? 

Mr. BECKER. It will relax the cap by raising the cap under a very 

well-crafted piece of legislation that doesn’t allow credit unions to 

immediately go wild in member business lending, but slowly increase it. There are requirements such as they have to be doing it 

for 5 years; there are requirements that they have to be well-capitalized, etc.; there are studies that show that credit unions would 

be able to increase their member business lending as a result of 

that cap increase. In addition, there are credit unions that are constrained from or worried about getting into the business because of 

their size and the existence of the cap. 

Ms. WATERS. I understand. I just want to know if the community 

banks and the credit unions have worked this out and you are together on how this is to happen. 

Mr. MARRANCA. We have not worked this out. 

Mr. BECKER. No. 

Ms. WATERS. No, it is not happening. 

Mr. MARRANCA. If I may add, I think we are talking about two 

different things here. In my opinion, we are talking about apples 

and oranges. 

Ms. WATERS. It would be great if you could mix the apples and 

oranges and come out with some good fruit so that we could all be 

behind what you are trying to do. We get caught up in this disagreement between the community banks and the credit unions. 

We support both of you, but I am not going to say anymore. I just 

hope that as you work on this, you can work something out. 

Quickly, I need you, Mr. Silvers, to elaborate on how exempting 

banks from the internal controls requirements of the SarbanesOxley Act will increase FDIC risk. 

Mr. SILVERS. Section 404 of the Sarbanes-Oxley Act requires that 

public companies attest that they have adequate internal controls 

and that independent auditors find that to be a true statement. 

Adequate internal controls ensure that the financial statements are 

actually what they purport to be and that everything from line employees walking out the door with depositors’ cash, to chief financial officers rewriting the books to make them as they wish them 

to be. 

Ms. WATERS. Okay, I get that. Let me ask the community banks: 

If you were exempted, how would you ensure that there are internal controls? Who would like to answer that? 

Mr. MARRANCA. If I may, we strongly support internal controls 

for banks. We strongly oppose internal controls attestation for 

small banks. We are already regulated by the FDIC. 

Ms. WATERS. Just tell me how you do it. What is your system? 

Mr. MARRANCA. What is my system? 

Ms. WATERS. For internal controls. That is the real issue. 

Mr. MARRANCA. Let me start at the top with the board of directors who have a fiduciary responsibility. Then it comes down to me, 

the CEO, who has a fiduciary responsibility for internal controls. 

We have an internal control auditor, we have an independent CPA 

29 

third party, unqualified audit, we have a full safety and soundness 

audit by the FDIC with already— 

Ms. WATERS. Okay, I hear you, I hear you. I don’t want to cut 

you off, but that is a problem that needs to be worked out. 

Mr. Levitin, you note that Section 205 of this bill, which permits 

banks to stretch out losses, will lead families to be kicked out of 

their homes. Can you explain how the bill would hurt homeowners? 

Mr. LEVITIN. Sure. If you look at Section 205, Section 205(a)(2) 

covers loan modifications. It would allow, if a bank chooses to do 

a principal writedown, that writedown could be amortized over 

time. That is a good thing. But Section 205(a)(1) refers to OREO, 

other real estate owned. Those are foreclosure properties and nothing else. So it is allowing losses on foreclosures to be amortized 

over time. If you take out Section 206 (a)(1), Section 205 is fine, 

it is actually a good thing. With 205(a)(1) in there, it encourages 

foreclosures. 

Ms. WATERS. You are talking about the REOs? 

Mr. LEVITIN. Yes, when loss recognition, when the property becomes REO after a foreclosure sale, that is a loss recognition event. 

At that point, normal accounting rules say the bank has to recognize the entire loss at that point. What 205(a)(1) would do would 

let the bank stretch that out over 10 years. That makes the foreclosure less painful. 

Ms. WATERS. Thank you very much, Madam Chairwoman, for 

this hearing. Again, I would like to say to our friends in community 

banks and credit unions, I think we are onto something here, but 

I think we need to work out a few things. I hope that we can, because I want to make sure that community banks are able to operate and provide the services, and I am tired of what we have gone 

through with the too-big-to-fail banks. So please work all of this 

out. Thank you. 

Chairwoman CAPITO. Thank you. Mr. Renacci for 5 minutes for 

questions. 

Mr. RENACCI. Thank you, Madam Chairwoman. 

I also believe our community banks and credit unions are really 

the lifeblood for entrepreneurs and business owners who will create 

a majority of our jobs, so we need to make sure that they are able 

to get loans out. And in saying that, I have listened to all the witnesses and all the sections here, it appears that some of you all 

agree there are some sections. I think there is only one witness 

who said he pretty much doesn’t agree with any of these sections. 

Otherwise, even—Mr. Levitin, you are shaking your head, but I 

think you did agree with a couple. I think Mr. Silvers did as well. 

Mr. LEVITIN. I very much agree with many of the provisions. 

Mr. SILVERS. I agree with several. 

Mr. RENACCI. That is good to hear. What I am trying to get at 

is there are a couple provisions that I am trying to get my hands 

around, and a couple of my colleagues have already touched on, 

first Mr. Garrett, when he talked about 104 and 105. When you do 

have an outside entity who is bringing a standard to the table, why 

would we want somebody else to interject into that standard? I am 

confused as to why you would even want that. It confuses. You now 

have another party. Keeping everything uniform is good to be able 

to evaluate things. 

30 

So I would like to hear from the bank, well, anyone on this side, 

who can tell me why you would not want uniformity. 

Mr. MARRANCA. If I may, regarding Section 104, what comes to 

my mind is mark-to-market issues, and mark-to-market issues for 

a small community bank are just a different business model than 

mark-to-market issues for a trillion-dollar Citibank or whoever it 

may be. Community banks such as mine and thousands of others 

hold our securities to maturity for the most part. We hold our 

mortgages to maturity. It would be very, very difficult to mark-tomarket on the asset side of my ledger, my loan portfolio. How do 

you mark-to-market a one-to-four-family home in rural western 

New York? How do you mark-to-market— 

Mr. RENACCI. Not to interrupt you, because I only have so much 

time, but isn’t that up to an explanation of how you would judge 

market value versus—you are saying that your bank would be different because you hold your assets for a longer period of time, and 

there probably isn’t a good market comparison, so I am concerned 

about saying that is something other than uniformity. That is what 

is confusing here. 

Mr. MARRANCA. What I don’t want to happen is what is forced 

on a megabank that is a trillion dollars in size is forced on my 

bank; that is, it doesn’t work the same way. 

Mr. CHENEY. If I might offer a perspective? 

Mr. RENACCI. Sure. 

Mr. CHENEY. Credit unions are fundamentally different than any 

bank because of their ownership structure. Credit unions are notfor-profit cooperatives, as you know. They are owned by their members; they have no shareholders. For a not-for-profit credit union to 

follow the same principle, one-size-fits-all across-the-board, actually 

makes it more difficult for a credit union member to understand 

the financial condition of the credit union. 

For example, for a performing loan to have to be mark-to-market, 

as has been proposed in the past, it doesn’t make it easier. It 

makes it more difficult. If that loan is performing and it is going 

to pay to maturity, it makes no sense to write it down partway 

through the process. Certainly not at a cooperative. And, quite 

frankly, I do agree that it doesn’t make sense to apply the same 

rules to smaller institutions in all cases as it does to larger institutions. 

Mr. RENACCI. But you would agree it does take the consistency 

out of it when you are comparing from one bank to, one asset to— 

Mr. CHENEY. I agree with that. But when they are different 

types of entities, I think one-size-fits-all creates more difficulties 

than it solves, in my opinion. 

Mr. RENACCI. I want to move on to Section 102, also, because I 

do have a little bit of a problem with this section, and I want your 

help to try and help me out with it. I am a big believer in internal 

controls, I am a CPA, I have audited banks, I understand that internal controls are important no matter what size your bank is. 

So the question is, the internal control problem you have today 

is that the costs are too high. And when the costs are too high in 

getting these internal control procedures taken care of—that is my 

assumption; you would like to eliminate those maybe up to the $1 

billion mark that is in this piece of legislation. My question would 

31 

be: If it is the cost that is the issue, maybe we should have a 

tiering mechanism, because just to pick a random number of $1 billion, you could have internal control problems less than a billion 

dollars that could be very damaging to the safety and soundness 

of those—the investors or the owners of the bank. Wouldn’t you 

agree with that? 

Mr. KLEBBA. I would agree with that. I think in terms of banking, though, one of the things you need to understand is that no 

one gets looked at more than we do. I don’t think there is any industry—in the sense that we have the FDIC and our State regulator and then, of course, we have our own internal auditors and 

we have outside auditors, so we have lots and lots of people who 

are looking. 

Mr. RENACCI. I don’t mean to interrupt you, and I do understand 

that. But internal controls are something that as an auditor, I can 

tell you that many times I would rather see an internal control 

audit than a full audit, because if I can make sure your internal 

controls are in place, the audit is not as important to me. So it is 

really coming from my perspective, but thank you. Thank you all 

for your testimony. 

Chairwoman CAPITO. Thank you. Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Chairwoman Capito. I ask unanimous 

consent to submit into today’s hearing record a letter from the 

State Community Banks Association expressing their strong support for the Communities First Act. 

Chairwoman CAPITO. Without objection, it is so ordered. 

Mr. HINOJOSA. Thank you. I want to thank all of you on the 

panel for your testimony on the Communities First Act. The bill’s 

stated goal is laudable. It is time to enhance the ability of community banks to foster economic growth and serve their communities 

to boost small businesses and increase individual savings. My understanding is that this legislation is not intended to give community banks an advantage over other financial institutions. It simply 

increases the ceiling on the asset size for community banks to be 

exempt from various provisions of existing laws and regulations. 

Recently, we held a congressional hearing on legislation to increase commercial lending limit for credit unions. Arguments were 

made that the current limits are too low, that credit unions are approaching those ceilings quickly and many soon will surpass their 

levels or those levels. I was not convinced by the testimony I read 

and the responses received after questioning the interested parties 

on the legislation. I want all those present to know that I remain 

committed to requiring credit unions to be subject to Federal taxation if they want to increase their commercial lending limit. Seeking an increase without providing data proving it is merited is not 

good public policy in my opinion. 

I recognize the important role credit unions play in our financial 

services sector. The credit unions are doing a good job at what they 

do best, and also helped out considerably during the economic crisis, providing added liquidity to that provided by the community 

banks, and it was an excellent synergy. However, I am not certain 

that the performance of credit unions suggests they will be able to 

manage an increase in commercial loans or even close to surpassing the 121⁄2 percent threshold. 

32 

So with that, I want to ask my first question of Mr. Salvatore 

Marranca. How will this legislation, H.R. 1697, benefit my constituents economically, and will it increase jobs? 

Mr. MARRANCA. The answer is ‘‘yes’’ to both. You mentioned 

about the business lending proposed legislation. That is an expansion of powers legislation. CFA, or Communities First Act, is a regulatory burden relief act. It will allow me and thousands of community banks to do our job better. 

We have had a snowflake effect of regulations. I have been in the 

bank over 30 years. Prior to that, I was a bank examiner for 10 

years. The snowflake of regulations has never stopped in 4 decades. 

It is a cumulative effect, and it is about ready to cave in that roof 

with the cumulative snowfall. 

Over 10 percent of my budget right now is on compliance issues. 

That could be allocated toward serving my customers better, 

whether it be a deposit product or whether it be a loan product. 

I mentioned I have one-half of my staff on compliance that I have 

on lending, to meet all the current regulations. There is an opportunity cost to this, there is a real cost to this. Let us do our business. We know how to lend in community banks. We know how to 

lend conservatively, and we know how to lend to our people that 

we trust and we know. 

So it will create jobs. We are there to serve the small businesses; 

100 percent of my commercial loan portfolio is to small businesses, 

meaning mothers, fathers, family, and so forth. Not one loan do I 

have to a stock-owned operation, publicly owned and so forth. 

Small business is my bread and butter. Let me do my job, and we 

will grow jobs. 

Mr. CHENEY. Mr. Hinojosa, might I comment as well? 

Before I started working at a trade association, I worked for 10 

years at a credit union in south Texas, so I am familiar certainly 

with your district, and I think there is some misunderstanding 

about how H.R. 1418 can help small businesses, including small 

businesses in south Texas. 

People like to say that somehow credit unions making small business loans is different than our original mission, but the earliest 

credit unions in this country in the early 1900s made business 

loans. When the Federal Credit Union Act was passed in the 1930s, 

credit unions were tasked with promoting thrift and making loans 

for provident purposes. I can’t think of anything more provident 

than a business loan. The restrictions were not placed on credit 

unions until 1998, and it is constraining credit union business lending, and it is costing jobs all over this country, including south 

Texas. So I respect your opinion by all means, but I just ask you 

to think about how we might be able to help create jobs in south 

Texas as well. Thank you. 

Mr. HINOJOSA. My time has expired, and I yield back. 

Chairwoman CAPITO. Thank you. Mr. Schweikert, for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Madam Chairwoman. 

First, I wanted to ask, and this is for whomever has an expertise 

on this: My understanding with Dodd-Frank is that when certain 

things happen, you have to actually set up a budget mortgage, is 

what we used to call them—I don’t know if anyone still calls them 

that—but set up the impound accounts. Can anyone on the panel 

33 

educate me on what happens to cause that? Because I think it was 

actually— 

Mr. MARRANCA. I am not familiar with that, sir. 

Mr. KLEBBA. I am not sure I understand your question. 

Mr. SCHWEIKERT. Current law requires creditors to establish escrow accounts for the collection of taxes and insurance in connection with higher-priced mortgage loans. 

Mr. KLEBBA. Correct. 

Mr. SCHWEIKERT. That would be a budget mortgage from the old 

way we understood it where you have collection. 

Mr. KLEBBA. Under Dodd-Frank, there is now what is called a 

higher-priced mortgage, and if you fall into the higher-priced mortgage, then certain requirements come into effect, one of which is 

that you must escrow for that particular account. 

Mr. SCHWEIKERT. What is the mechanic to decide it is a higherpriced mortgage? 

Mr. KLEBBA. Basically rate. 

Mr. SCHWEIKERT. Creditworthiness? 

Mr. MARRANCA. No, sir. 

Mr. KLEBBA. It is just rate. 

Mr. MARRANCA. I may be wrong on this, but I believe it is 1 to 

11⁄2 percent over the current Fannie Mae and Freddie Mac rates, 

so the ‘‘high-priced mortgage’’ in today’s environment would be 

under 6 percent. 

Mr. SCHWEIKERT. Okay. So if I had a 6 percent loan, in that particular case you would not allow me to pay my own insurance, my 

own taxes? 

Mr. KLEBBA. We would not have the option to do that, no; we 

would have to do it ourselves. 

Mr. SCHWEIKERT. And are credit unions and small community 

banks set up to provide that type of impound service? Are you contracting it out? How do you do that? 

Mr. CHENEY. Escrow accounts are a compliance burden, and I 

think, again, one-size-fits-all does sometimes create unintended 

consequences. And this is another area where I agree that having 

flexibility would help smaller institutions and ultimately would 

allow more resources to be devoted to serving the community 

versus complying with regulations. 

Mr. LEVITIN. Congressman, I think it is important to note that 

currently Dodd-Frank allows the Federal Reserve to make exemptions to the escrow rule. What is being proposed here would be to 

require an exemption. 

Mr. SCHWEIKERT. Professor, do you know if any of the exemptions have been— 

Mr. LEVITIN. I am not aware of the Federal Reserve having even 

done a rule. 

Mr. KLEBBA. I don’t think they have issued those rules yet, but 

under the restrictions it is going to be a minute number of institutions and loans that are going to be subject to that exemption. 

Mr. SCHWEIKERT. One of my reasons is that I used to be a large 

county treasurer, and when you have a million-and-a-half taxpayers, just the clutter of collecting the bills electronically, what if 

you are on multiple parcels? You would be amazed how often we 

would have trouble with small lenders where you have a loan, credVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
34 

it lines, other things, but there are multiple parcels, and you are 

paying all the taxes on, except for one, and a couple of years later, 

I am as obligated to the county treasurer selling tax liens on it, 

who ends up carrying the liability? It is that old shifting of responsibility and often has an unintended consequence, and I don’t 

know, does it truly make the loan that much safer and better? 

Mr. KLEBBA. I can tell you, as I testified, we went 97 years and 

never had escrows, never provided escrows even to those few individuals who may have expressed an interest in them, and our foreclosure rates were virtually zero. 

Mr. SCHWEIKERT. Okay, I spent twice as much time on that one 

as I wanted to. Can I throw a quick scenario at you, and you tell 

me if my friend who is involved in a community bank in Arizona 

is completely—if this scenario makes sense. He is telling me he has 

a client that they have had a loan with for a very long time. It is 

a small strip center that has quite creditworthy tenants, and they 

are paying—has a terrific cap rate, and they have a very consistent 

payment history. But a strip center almost across the street went 

through foreclosure and sold at a fairly dramatic discount, and he 

apparently has had to do a capital call to the owners of the performing strip center, even though they are creditworthy tenants, 

have never missed a payment, have a great payment history, but 

the regulator is saying no, because of our market example across 

the street. Rational scenario? Is that something you are finding 

from the regulators? 

Mr. MARRANCA. I am hearing this across the country in various 

scenarios, and I would not—it has never happened to my bank and 

I would not want it to happen to my bank. If I have a relationship 

with an individual for many, many years, I understand the property, the cash flow, and it is before me. Why do I need to write that 

down? That is a forced writedown that does not accomplish anything, either investment-wise or safety- and soundness-wise. 

Mr. SCHWEIKERT. In my last 6 seconds, how often were you working with your regulators and they were looking at that mark-tomarket, the value of that piece of real estate, they are either looking at the creditworthiness of the tenancy or the cap rate and using 

a cap rate mechanic to ultimately say, here is the true value of this 

piece of property the way it is performing? 

Mr. KLEBBA. How often is that happening? It depends on how 

healthy your bank is and how big your bank is as to how often they 

are in. It can be anywhere from 18 months at the outside to—if you 

are a troubled bank, they can virtually be living with you. And on 

these commercial real estate loans, because that is such a huge 

problem around the country, they are going to look at anything of 

any size every time they are in. 

Mr. SCHWEIKERT. I am over my time. Thank you for your tolerance, Madam Chairwoman. 

Chairwoman CAPITO. I am going to go to Mr. Green for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. Mr. Schweikert, if 

you need an additional moment, I will give you an additional 

minute. 

Mr. SCHWEIKERT. I am fine. 

Mr. GREEN. You are fine? Okay. 

35 

Thank you, witnesses, for appearing. Mr. Schweikert was engaged in something that I found quite interesting. Let me ask you 

about these escrow accounts. Do you agree that there are some people who benefit from the escrow accounts and that they genuinely—I hate to use the term ‘‘need,’’ but they benefit to the extent 

that they find themselves in better shape at the end of the year 

than they would be if they did not have the escrow account? Do you 

agree that there are some people who benefit? 

Mr. KLEBBA. I would agree with that assertion, but the question 

here is whether we are required to provide escrows. And under the 

Dodd-Frank Act, now we are. If it is a higher-priced mortgage, we 

are required to provide that. But, yes, I think that there are some 

individuals who have a hard time budgeting. Basically, though, if 

you are in a one-to-four-family house and you are having a hard 

time budgeting, that becomes an underwriting issue. Are those people qualified to get into a home if they can’t even budget enough 

for their insurance and their taxes? But, no, I think that I do agree 

with you that there are some people who really do need escrows. 

Mr. GREEN. If we adhere to the request and change the rule, 

would you have available escrow systems or an escrow system for 

those who would opt to have you do it? 

Mr. MARRANCA. Congressman— 

Mr. KLEBBA. Go ahead. 

Mr. MARRANCA. Congressman, if it was an, I will use the word 

‘‘option’’ for a bank, not a requirement, and keeping in mind this 

is only for the high-priced loans, I think many banks would perhaps evolve to that. It would be a choice. It would be a management choice, a board-driven choice, an internal control choice. But 

setting up an escrow account is not easy. It is expensive, it is difficult, and you need expertise. I cannot go to a bank tomorrow and 

say, ‘‘I want to set one up.’’ You need the right people, and it is 

expensive. It has to fit your business model. It should be a decision 

for the individual bank. 

Mr. GREEN. How would you help your client who says, ‘‘I really 

do need the escrow account, and I don’t have the system to do it 

myself?’’ How would you help the client if you are a bank that has 

opted not to do this? 

Mr. MARRANCA. It is simple, and I have done it before. You simply say, let’s put an automatic deduction from ‘‘X,’’ from a deposit, 

an automatic deduction every month into a savings account, into a 

checking account. That money will be there, then, and we are going 

to make sure that money is there for when that tax bill comes due. 

So we can work with the borrower on an individual level and customize that mortgage for that borrower. 

Also, if I may, keep in mind that this loan is being held in my 

portfolio. It is in my best interests, I have skin in the game, I want 

that loan to work. 

Mr. GREEN. Do you find this system of having the automatic deduction less difficult, is that what you are saying, than if you have 

a system for escrow accounts? 

Mr. MARRANCA. Again, it would depend upon the size of the 

bank. We have community banks in our association that would 

make two mortgages a month. We have small banks, community 

banks in very rural parts that just don’t have the volume to set up 

36 

an escrow account. They will work with the individuals, and I am 

going to use the word again, ‘‘customize’’ it to make sure that we 

can fulfill the dream of that person to get into their house and not 

in any way hurt them in the future. 

Mr. GREEN. Would you be amenable to something being written 

into the law that would provide for the person who falls into the 

circumstance that we have just discussed, something that would 

encourage the bank to work with the person? I believe you are 

right, I believe the bank will work with people; but there are times 

when some people find it difficult to get things done, so if the bank 

would have some means by which you could have what seems to 

be an informal escrow account that you are setting up, would that 

help? 

Mr. MARRANCA. I am sure any banker would work with Congress 

for the right written procedures. I just only hesitate when you say 

another piece of legislation. 

Mr. GREEN. Yes, I would like to not have any legislation at all. 

Unfortunately, that might lead back to something that we just 

went through, so legislation is not a bad thing. We are trying to 

do as best as we can and balance this. And in balancing it, we want 

to do what is good for the consumer as well as the banks. 

I tend to have a lot of consumers who visit with me, and they 

make a difference, too, you know. So let’s try to look at this from 

both points of view. 

Thank you very much, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. Mr. Luetkemeyer for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman, and I 

thank all of you for your great testimony today. You are doing a 

good job. 

Very quickly, there were some statements made a while ago, or 

made something to the effect that the legislation jeopardizes the 

safety and soundness of our banking institutions. Gentlemen, 

would you like to address that just for a second? Do you feel that 

it does or does not? 

Mr. MARRANCA. Totally disagree, sir. 

Mr. LUETKEMEYER. Totally disagree. 

6 here Mr. KLEBBA. Totally disagree. 

Mr. LUETKEMEYER. Totally disagree. They made some remark to 

the effect that it jeopardizes our ability to service our customers, 

and customers are in danger of being foreclosed on more often. Do 

you believe that is the case with what is going on here? 

Mr. MARRANCA. Totally disagree, sir. 

Mr. KLEBBA. I think quite to the contrary. I think that it permits 

us to work with our customers even more so than we have in the 

past. 

Mr. LUETKEMEYER. I think that leads into a couple of the different discussions we have had already with regards to loan amortization as well as loan appraisals. I think sometimes that we are 

getting some of the context of accounting versus regulatory stuff 

mixed up here. There is a big, big difference here, and from the 

standpoint of the regulators, I would certainly like your input on 

this from the standpoint of when they come in and they analyze 

your loans and they look at your files, if they only have—the apVerDate Nov 24 2008 12:15 Jun 18, 2012 Jkt 072626 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\72626.TXT TERRIE
37 

praisals, for instance, on the 5-year rolling average on Section 206, 

if that is all they have to look at is the current market, which is 

in the doldrums here, there are no recent sales, all you have is the 

foreclosed homes, how does that impact your loan portfolio? 

Mr. KLEBBA. First of all, the FDIC fund is fully funded by banks, 

and so for those of us who are surviving, the last thing we want 

to do is see a dead bank continue to go on, because the losses just 

continue to appreciate, and we have to pay that bill. But what we 

don’t want are banks that are viable banks that get closed prematurely, and I think that can happen sometimes when markets 

temporarily decline if you have to, ‘‘mark-to-market’’ on some of 

those loans or you have to write down loans to appraised value at 

that time. 

Mr. LUETKEMEYER. At the same time, these appraisals that they 

look at and they look at the loan and all the other things that are 

in there, it is a very arbitrary, very subjective way of looking at 

something. I am sure you don’t agree with everything the examiners look at when they analyze your bank, you don’t agree with 

everything they come up with, I am sure. 

Mr. KLEBBA. I haven’t had an experience yet where I have 

agreed 100 percent with anything they say. 

Mr. LUETKEMEYER. So obviously, if it is arbitrary, then I think 

the case can be made that for a 5-year rolling average, it gives a 

more fair assessment of what the risk would really be in that particular line that you are looking at. Would you agree with that 

statement? 

Mr. KLEBBA. Yes. I think we need to get back to normalized values, not the deflated values that we are seeing today, because I believe— 

Mr. LUETKEMEYER. If you look at the cyclical nature of real estate, it goes up and down like this, and with a provision like this, 

it sort of takes the highs and lows off of it, so I think it puts a little 

more consistency in there. Would you think that would be a good 

thing to help stabilize things for you and your bank? 

Mr. MARRANCA. I think it will, sir. 

Mr. KLEBBA. Yes. 

Mr. LEVITIN. Congressman, there is an important point that 

needs to be made about this, which is this provision, Section 206, 

applies to impaired loans. Impaired loans may not be held to maturity. They may be liquidated within a year, and in a depressed 

market, using a 5-year average that includes the heights of the 

bubble in 2006 right now, means that we are going to have banks 

that are carrying assets at grossly inflated values as a result. It is 

arbitrary— 

Mr. LUETKEMEYER. Reclaiming my time here, with regards to 

that, I would remind you that this still is an arbitrary figure that 

is discussed between the banker and the FDIC or the Fed or the 

Comptroller, or whoever is doing the examination, as to what the 

true loss is that is involved in this. So I think that there is still 

some discussion, some arbitrary decisions to be made here. And 

that is the point I am trying to get at is that this isn’t a finite, definite way of looking at things. It is very arbitrary, and I think we 

need to recognize that fact. 

38 

With regards to—I know Mr. Renacci had a couple of questions 

with regards to the attestation. It is interesting that we are looking 

here at a billion dollars of assets whenever the Dodd-Frank bill has 

a capitalization of $75 million for all companies. And, again, we are 

comparing apples to apples. We are looking at the assets versus the 

capitalization, which the average bank in this case with 75, it may 

be a 71⁄2, it may be a billion-dollar bank, capitalized 71⁄2 percent, 

so I really don’t see quite the concern there. Do you guys see something that I am missing in that? No? Good. 

I think also—well, I see my time is up, so I will yield back. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. Mr. Scott? 

Mr. SCOTT. Thank you, Madam Chairwoman. 

As I mentioned in my opening statements, I represent Georgia. 

Our primary concern there is how we can help these struggling 

banks and how we can try to prevent bank failures. Let me just 

ask, I guess, the banking individuals, do you feel this legislation 

will be effective in any way in aiding struggling small banks and 

preventing banks from closing? 

Mr. KLEBBA. I think there are a lot of provisions in here, most 

provisions if not all, that would assist small banks, especially those 

that are struggling from failure. 

Mr. SCOTT. Could you tell me how, please? 

Mr. KLEBBA. First of all, you would have less regulatory costs, 

and the regulatory costs are overwhelming in our industry right 

now. We have had to hire additional personnel. And worse, I think, 

than hiring additional personnel on that is the fact that virtually 

everyone in our bank now is involved to some extent or another in 

complying with regulations, and so it has taken away from their 

ability and their resources to both work with our existing customers and also to go out and solicit new customers, helping other 

people get businesses off the ground. So the compliance burden is 

huge, and I think that this bill would significantly reduce it. 

And then, secondly, as I testified before, the tax burden on us 

relative to several of our competitors and farm credit services and 

credit unions is a huge burden for us and makes it very difficult 

for us to compete, especially with respect to very attractive loans, 

that we just can’t compete on the rate side because our cost structure is different. 

Mr. SCOTT. That is very good to have established that it will help 

and be effective in aiding struggling small banks and preventing 

them from closure. 

The other point is, will it help the banks be able to lend? That 

is another problem, getting the banks to lend the money to small 

businesses. Will it help in that area? 

Mr. KLEBBA. I can tell you both from our perspective and from 

the perspective of virtually every bank in Missouri—I am the immediate past chairman of the Missouri Bankers Association, and I 

had an opportunity in the past 12 months, from last June, to travel 

throughout the State and talk to many banks. And other than 

those few who are very troubled and are having capital issues and 

so need to shrink, every bank has excess liquidity right now that 

they are trying to lend. And it is not a question of turning down 

39 

loans. It is a question of getting both consumer and business appetite for taking on new loans. 

Mr. SCOTT. So in the two critical areas, then, we can safely say 

that this legislation will help prevent struggling banks from closing, and it will also help them to be able to lend to small businesses. 

Now, let me ask, let’s see, the representatives of the credit 

unions, I believe that is Mr. Becker and Mr. Cheney. How will this 

legislation affect credit unions? 

Mr. BECKER. Primarily, it will not affect credit unions. There are 

a few small provisions that will affect credit unions, and we think 

a more balanced approach would be to add other items that we— 

Mr. SCOTT. So you basically are a supporter of this legislation; 

is that correct? 

Mr. BECKER. What we would like to do is see an all-encompassing bill that would help not only banks but credit unions as 

well. 

If I might, too, my colleague John here next to me, I would invite 

him to join the two other banks that converted to credit unions, if 

he would like to do so. And I would be glad to help him, and I am 

sure Bill Cheney would be glad to join me in helping them. 

Mr. SCOTT. But you are not actively opposing this legislation; is 

that correct? 

Mr. BECKER. Again, Congressman, we would like to see regulatory relief added for credit unions. I believe Congressman Luetkemeyer said the purpose of this, if I might say, is to help all Americans realize their dreams; that they weren’t part of the problem, 

but part of the solution. That sounded like credit unions to me, sir, 

as well. 

Mr. SCOTT. Okay, I will take that for a sort of you are okay with 

the legislation. 

Mr. CHENEY. If I might comment briefly, too, there has been a 

lot of discussion at this hearing and others about demand, and a 

lot of talk about that there is not demand. That may be true in 

some communities, but we have seen demand for credit unions, 

small business lending, we have seen credit unions make loans 

that banks either haven’t made or aren’t able to make. 

I am aware of one small community—I was in the Northwest not 

long ago—where there are four community banks and one credit 

union in the market. One of the community banks is in the process 

of being acquired and is not currently making business loans. The 

other three are under regulatory restrictions and are not able to 

make business loans. The credit union is approaching its cap. 

How do we tell the small businesses in that community that it 

is good policy not to the raise the cap when they are about to run 

out of any capital to operate their small businesses from local financial institutions? 

There is demand, maybe not in every community. Recessions do 

limit the demand, but the only way out of the recession is to create 

jobs. And this is a way to create jobs, H.R. 1418, without costing 

the taxpayers. 

So we would like to see a balanced approach, as Mr. Becker said, 

to aid community banks and credit unions. 

Mr. KLEBBA. I don’t know if you have time, but— 

40 

Chairwoman CAPITO. Thank you. 

Mr. KLEBBA. —do I have time to respond to any of that? 

Chairwoman CAPITO. I think we need to go to the next questioner, because we are pushing up against votes here. 

Mr. Canseco? 

Mr. CANSECO. Thank you, Madam Chairwoman. 

Mr. Marranca, you mentioned something in your testimony that 

caught my eye. You state that ‘‘rural borrowers, in particular, 

would be hurt by industry consolidation because large banks don’t 

comprehensively serve rural areas.’’ 

Now, I represent a large portion of west Texas, and, as I said in 

my opening statement, a lot of small towns in my district depend 

heavily on local community banks. 

Could you provide us a little more color on the effect of consolidation on rural communities, given the conversations you have had 

with some of these bankers? 

Mr. MARRANCA. Yes, sir. Both personally and in my role as chairman of the ICBA this year, I have said over and over and over 

again, when you are gone, you are gone. Whether it is regulatory 

effect, the cumulative effect of the regulations, the accounting effect, or the economy, when you are gone, you are gone. 

My 110-year-old bank serves three counties, including a large 

Amish population. I actually have a branch on a Seneca Indian reservation. This is not a—the population density of my county is 67 

people per square mile. This is not an area that Bank of America 

is interested in. 

If I ever had to sell or merge or consolidate my bank, my customers lose, because of the personal service, the relationships, and 

the ability that we have had, for 110 years, to meet the credit 

needs of our community. 

It is very important across Main Street and across America that 

Main Street community banks continue to do what they have done 

for generations. We are the only country in the world that has a 

foundation of 7,000 community banks. There is no other country in 

the world that has that. And we can’t lose that, sir. 

Mr. CANSECO. Thank you, sir. 

Mr. Klebba? 

Mr. WILMARTH. Congressman, may I add something to that? 

On page 2 of my written testimony, I point out how different 

Canada and the United Kingdom are from the United States in 

terms of their banking systems. And there is abundant evidence 

that in those countries, which are dominated by very large banks 

and have very few community banks, consumers and SMEs are not 

well served. 

The Vickers report that just came out from the Independent 

Commission on Banking in England in September advocated a 

more aggressive breakup of the big banks because they concluded 

that the big banks are not providing adequate services for local 

communities, consumers, and small businesses in England. 

Mr. CANSECO. Thank you. 

Mr. Klebba, if you were to prioritize some of the provisions of the 

Communities First Act, which ones do you feel are the most important to community banks and should take precedence? 

Mr. KLEBBA. I can’t choose one. I would choose two, and I— 

41 

Mr. CANSECO. Go ahead, give us the two. 

Mr. KLEBBA. The first is, I think, the tax provisions to try and 

put us back on a level playing field with respect to—or a more level 

playing field; it doesn’t get us anywhere near to being all the way 

there—but with respect to both Farm Credit Services and having 

the same exemptions from income from taxability on farm loans, 

certain farm loans, and residential loans in very small communities, I think, is very, very important to us. It also allows us to 

get a little bit closer to credit unions, in terms of taxability. 

A family of four, an average family of four in this country pays 

more in Federal taxes than a credit union does. So, their tax burden in that respect is zero. Ours is significant. We paid close to a 

million dollars in total taxes last year. So it is a significant cost differential for us. 

And the second is the regulatory burden and the fact that this 

would recognize that for smaller banks like ours who are in smaller 

communities, the fact that we live with our customers, we go to 

church with our customers, we see those people on a day-to-day 

basis. And I don’t think there is near the regulatory concern, or 

should not be, for our size banks as there are for other banks. And 

it is just getting to be a tremendous and overwhelming cost for us. 

Mr. CANSECO. Mr. Marranca, do you want to add anything to 

that? 

Mr. MARRANCA. Congressman, I think if you asked a thousand 

bankers, you would probably get a thousand different answers of 

priority. But the overregulation, yes. The tax provisions make a 

real difference to my bottom line. In the last, I believe it is 9 years, 

I have paid over $2 million in Federal and State taxes, and I could 

have put that money to capital and to lending. So the tax provision 

is important. 

The small business, I am going to call it, potential new regulation, the small business reporting is a concern of mine for another 

regulation that would burden my bank and my people. 

And then you get into things that are just, in fact, a waste of energy and time: the privacy notice; the four-times-a-year call report. 

So, if I may, sir, I want them all. 

Mr. CANSECO. Let me just add this, because I have 15 seconds 

left. I hear the same, same priorities from every single one of my 

community banks. And I represent a huge district of Texas, from 

San Antonio to El Paso, and you are voicing from Missouri to— 

New York? 

Mr. MARRANCA. New York, sir. 

Mr. CANSECO. New York. You are voicing the same thing that I 

hear in my district. I thank you very much and I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Perlmutter? 

Mr. PERLMUTTER. Thanks, Madam Chairwoman. 

I appreciate everybody’s testimony today. 

And I will state that I have a bias in this. We passed a bill out 

of the House into the Senate last year which allowed for amortizing 

losses so that you didn’t have to have an immediate capital infusion, which some banks couldn’t come up with, which then led to 

their closure. And in Colorado, we have had a number of banks 

close. 

42 

And so I have to look at some basic principles: more competition, 

not less, that is what I want to see; help the innocent or the less 

guilty, less culpable; I guess I am more for workouts, not liquidations or foreclosures if they can be avoided; and hold for the long 

term, not just the short term. So, based on those principles, there 

is a lot I like in the sponsor’s bill. There are some things that are 

problematic, from my point of view. 

So, having said that, Mr. Levitin, I would—and you and Mr. Silvers were sort of the most aggressive against the bill. Mr. 

Wilmarth, I will have some questions for you, too. 

But let’s take that shopette that Mr. Schweikert was talking 

about. So one shopette is paying as agreed. The other shopette 

across the street is in foreclosure. They had lousy management, 

who knows what it was. Now we have an accounting issue. Do you 

mark that down to the foreclosure price across the street, or do you 

allow the income to establish what the market price is? 

Mr. Luetkemeyer’s bill has an accounting component to it. And, 

Mr. Silvers, you were—sort of, the mark-to-market piece of this— 

you were concerned about that. That is number one. Okay, maybe 

I am misspeaking. 

The other piece is, let’s say I write that shopette down. My feeling is that the small banks, the credit unions didn’t cause the mess 

that we are facing today. Okay? So I want to give them a chance 

to work their way out of this thing, along with their customers. My 

people in Colorado say, nobody’s lending, not enough anyway. 

So, if you have a reaction, first Professor Levitin and then Professor Wilmarth and then Mr. Silvers? 

Mr. LEVITIN. Currently as drafted, Section 206 applies to all real 

estate. It is not just a commercial-real-estate provision. If you narrowed it to commercial real estate, I think it is much less problematic. And if you narrowed it to commercial real estate, it really kind 

of brings some focus to what the CRE problem is. 

Commercial real estate and the CRE values aren’t going to come 

back until consumer spending comes back. There is really no way 

to fix the commercial real estate problem and asset prices there 

without fixing consumer spending. And that brings you, then, to 

consumer mortgages. 

Mr. PERLMUTTER. The need for jobs. We need to have jobs. 

Mr. LEVITIN. It is jobs, but it is also de-leveraging consumers. 

Mr. PERLMUTTER. Okay. 

Mr. LEVITIN. You need to get rid of the $700 billion in negative 

equity that roughly 11 million consumers have. 

Mr. PERLMUTTER. Okay. 

Professor Wilmarth? 

Mr. WILMARTH. I agree. As I mentioned in my written testimony, 

Section 206 is most applicable to commercial real estate. I think 

you could also limit it to smaller banks, not the huge ones. And I 

think you could include some regulatory safeguards in Section 206, 

for example, by limiting that section to well-managed banks. I 

think you could look back at the 1980s forbearance program for agricultural banks and get some pointers from that experience. 

I agree that the goal should be what you have identified, that 

where markets are frozen and there really is no reliable market 

value available but the properties are still performing, can support 

43 

the loans, it doesn’t make sense to force a drastic write-down in 

those situations. 

Mr. PERLMUTTER. Or, if you do, to at least give the bank a 

chance, or a credit union. I think these things apply across the financial strata there. It doesn’t have to be the big banks. We already infused capital. We did it the other way. We didn’t let them 

have time to work it out; we gave them the money. Work it out. 

They did, thank goodness. They obviously have a major role to play 

here. But now, what about the little guys? And I want that competition. 

Mr. Silvers, what is your reaction? 

Mr. SILVERS. An observation about mark-to-market—generally, 

historically, we have asked firms and all kinds of institutions to 

mark assets to market when they are readily tradeable, there is a 

price you can get, and there is some possibility that they might be 

sold, right? 

Mr. PERLMUTTER. Right. 

Mr. SILVERS. And this has been important in relation to banking 

because banks, big or small, have demand deposits so that there 

is a possibility that people could want their money back, right? 

Mr. PERLMUTTER. Right. 

Mr. SILVERS. And so, there has been something of a bias around 

banking toward marking to market. 

Now, it is interesting, the extent of folks’ unhappiness with that 

regime in banking, because pension funds, who don’t have demand 

deposits, with fixed obligations, very long-term fixed obligations, 

have been asked to mark everything to market now, and particularly have been asked by some of your colleagues on the other side 

of the aisle to mark everything to market. 

Mr. PERLMUTTER. Okay, but I am going to stop you then. I know 

my time has expired. 

Mr. SILVERS. Sir, can I just—in response to your question— 

Mr. CARNEY. I will yield— 

Chairwoman CAPITO. Hold on just a minute. 

Mr. SILVERS. Sorry. 

Chairwoman CAPITO. Mr. Carney has generously offered to yield 

you time, Mr. Perlmutter. 

Mr. CARNEY. I will yield the gentleman time, whatever time he 

needs. 

Chairwoman CAPITO. All right. Go ahead. 

Mr. SILVERS. In response to your question, what troubles me particularly about the provisions in this bill in relation to mark-tomarket is not realizing the loss that occurs in a foreclosure when 

the loan has turned into a bad asset, not just a bad loan but a 

piece of property. 

Mr. PERLMUTTER. Thanks, Madam Chairwoman. 

Chairwoman CAPITO. Sure. 

Mr. Stivers? 

Mr. STIVERS. Thank you, Madam Chairwoman. 

I appreciate all the witnesses’ testimony. And I certainly sympathize with the plight of our community banks and credit unions 

who are trying to comply with laws that were intended to fix the 

crisis that you guys had nothing to do with. And I know it is increasing your costs. 

44 

There have been a couple of bogus claims I want to address and 

ask some questions about, and then I do have a couple of concerns 

I would like to dig into a little bit. 

My first question is for Mr. Marranca and Mr. Cheney and Mr. 

Klebba. Is there any way for a bank or a credit union to profit from 

foreclosures? Just a ‘‘yes’’ or ‘‘no.’’ 

Mr. MARRANCA. I would love to find a way, sir. No. No. It hurts 

the community, it hurts the banker, both— 

Mr. STIVERS. I am just talking—don’t talk about the community. 

I am asking, this is a ‘‘yes or no’’ question. 

Mr. MARRANCA. No. 

Mr. STIVERS. Thank you. 

Mr. CHENEY. No. We agree. 

Mr. STIVERS. Thank you. 

And can you tell me, on average, about how much, each of you 

again, foreclosures cost you for each foreclosure? I know it is a 

range, but on your average mortgage. 

Mr. MARRANCA. Average size of my mortgage—and, again, I am 

in a very rural, poor market—average size mortgage in my market 

is approximately $75,000. When it gets down to foreclosure, we 

probably write down at least two-thirds of that, so let’s bring it 

down to approximately a $25,000 loss. We have had approximately 

6 foreclosures in the last 2 years—relatively small. 

Mr. STIVERS. Okay. 

Mr. CHENEY. I don’t have the numbers with me for credit unions, 

but we can certainly get that for you. 

Mr. STIVERS. No, that is fine. 

Mr. KLEBBA. I would have to answer two ways. One, for commercial foreclosures, it is all over the place, depending on how— 

Mr. STIVERS. Let’s talk about residences. The claim was that people were going to be thrown out of their homes into the streets, so 

let’s talk about residences. 

Mr. KLEBBA. I think we have had two or three residential foreclosures in the last couple of years. 

Mr. STIVERS. And they have cost about how much, in round numbers? 

Mr. KLEBBA. Probably $5,000 to $10,000 apiece. 

Mr. STIVERS. Great. Okay. So if these small banks that we are 

talking about, and credit unions, can amortize that loss over 5 

years, won’t it really result in those banks having more money to 

lend, and won’t it also result in keeping them, as Mr. Perlmutter 

said, from having to raise capital at exactly the worst time? 

Mr. MARRANCA. Yes, sir. 

Mr. CHENEY. I agree. 

Mr. STIVERS. Great. Thank you. 

And I do want to get to appraisals, but before I do—because I 

did have a question for Mr. Levitin because he talked about the 

cost-benefit analysis. 

Mr. Levitin, do you have a Ph.D. in economics? 

Mr. LEVITIN. I am not. 

Mr. STIVERS. Do you have an accounting Ph.D., maybe, or statistics or mathematics? 

Mr. LEVITIN. I do not, but I do— 

Mr. STIVERS. Do you have a background— 

45 

Mr. LEVITIN. I do, however— 

Mr. STIVERS. Do you have a background as a business analyst? 

Mr. LEVITIN. I do not. 

Mr. STIVERS. So I understand why you can’t do the cost-benefit 

analysis, but I guess—so have you consulted with economists, accountants, statisticians, mathematicians, or business analysts 

about whether they can do these cost-benefit analyses? 

Mr. LEVITIN. In fact, I have. And I can speak to you, actually, 

about specifically what the people at the SEC, who have J.D.s and 

Ph.D.s in economics think about the difficulties in doing cost-benefit analyses, and I am happy to have that conversation with you. 

I do want to point out there is something about foreclosures 

which I think you have misunderstood. The issue is not whether 

banks lose money on foreclosures. Of course they do. The problem 

is that banks have a choice. They make a choice between trying to 

restructure the loan and foreclosure. And it is which choice is more 

attractive to them, where are they going to lose less money. It is 

not where they profit; it is where they lose less. 

By allowing the loss amortization over 10 years, you are making 

foreclosure the relatively more attractive option. I don’t need an economics Ph.D. to understand that. 

Mr. STIVERS. Yes, but do you feel like these community banks 

just make every decision on the bottom-line dollar and they don’t 

ever look at the community, the lender, the relationship with the 

borrower? Is that what you are saying? 

Mr. LEVITIN. The relationship is part of the bottom line. However, they do owe a duty to their shareholders to try and maximize 

the value. And if that means kicking someone out of their house, 

that is what they should do for their shareholders. 

Mr. MARRANCA. Sir, that is not true. 

Mr. STIVERS. So, Mr. Levitin, do you understand that DoddFrank already requires cost-benefit analysis? 

Mr. LEVITIN. I am sorry, for? 

Mr. STIVERS. A lot of things, including dealing with any rulemaking. 

Mr. LEVITIN. I understand that—and it is not just Dodd-Frank. 

Cost-benefit analysis— 

Mr. STIVERS. Great. I need to move on to another subject. 

Mr. LEVITIN. —is a general problem. This is not just banking; 

this is— 

Mr. STIVERS. Thank you. I am reclaiming my time. Thank you 

so much. 

I do want to quickly deal with appraisals. Have any of your—I 

know that that subject has come up already, but I have heard from 

a lot of Ohio banks that they have been forced to not just make 

a capital call but actually write down their loans based on appraisals of performing loans, and that results in them having less money 

to lend. 

Have any of the bankers heard of that? And I am out of time. 

Mr. MARRANCA. I have heard of that consistently across the country, yes. 

Mr. KLEBBA. And I have heard a number of stories to the same 

effect. 

Chairwoman CAPITO. Thank you. 

46 

We have a vote coming at about 4:15. I want to ask Mr. Carney, 

do you want your other 4 minutes, your remaining 4 minutes, for 

questions? 

Mr. CARNEY. Sure. 

Chairwoman CAPITO. Mr. Carney, for 4 minutes. 

Mr. CARNEY. Thank you very much, Chairwoman Capito. I appreciate very much you having this hearing today. 

Like others on the panel today, I am sympathetic about some of 

your concerns with respect to the cumulative effect of regulations. 

We have heard that often—outdated regulations. So this represents 

a compilation of those regulations that are troublesome for community bankers, is that fair to say? 

Mr. MARRANCA. It is a start, sir. 

Mr. CARNEY. It is a start. Are there others? 

Mr. MARRANCA. Given time, I am sure there are many, many, 

many others. 

Mr. CARNEY. The reason I ask is because I ask this question of 

small business people, mostly in my State of Delaware, all the 

time, not as much of banks, because it is something I hear all the 

time, complaints about regulations that get in the way, whether environmental or otherwise. And often, they are caught not being 

able to respond directly, and they will say, ‘‘Let me get back to you 

on this.’’ 

The reason I ask is because this is the forum for doing that. And 

so, I appreciate you bringing this forward. We have heard—do the 

credit union organizations have a similar list that we ought to be 

considering, as well? 

Mr. BECKER. It is in my written statement, sir. 

Mr. CARNEY. Okay. I will take a look at that. 

We have heard a lot of differences of opinion—I want to go to 

that—on the amortization question, Sections 205 and 206, and I 

think Section 102, as well, with respect to accounting standards. 

Like my good friend from Ohio, Mr. Renacci, I am a stickler for 

standards, as well. And I guess I need to understand how a change 

there is really important to the business that you do. 

So, the three folks at the end here who come with a little bit 

more objective, I guess, point of view here, could you explain to me 

your objection to Sections 205 and 206, expand on the conversations that we have had with Mr. Perlmutter and Mr. Stivers and 

others? 

Mr. LEVITIN. If I may, Congressman— 

Mr. CARNEY. Yours, I think, is more with respect to residential. 

Mr. LEVITIN. In particular. I think that is where it is the most 

problematic. There are two problems with it. 

One is simply a general accounting principles problem. Congress 

should not be encouraging voodoo accounting. 

Mr. CARNEY. Right. I agree with that. 

Mr. LEVITIN. And that is what this is doing. It is trying to have 

exceptions to accounting rules— 

Mr. CARNEY. Is it really voodoo accounting or is it really trying 

to find a way to address a particular kind of business model here 

on the banking side? 

Does anybody have—Mr. Wilmarth is shaking his head. Do you 

have a different view of that? 

47 

Mr. WILMARTH. That is why I suggested that this approach could 

be tailored to the kind of commercial real estate situations we have 

been hearing about. 

Mr. CARNEY. So I guess that is the question: Is it tailored 

enough? 

Mr. WILMARTH. I would have— 

Mr. CARNEY. Mr. Silvers is shaking his head ‘‘no.’’ 

Mr. Silvers, could you explain why you don’t think it is tailored 

enough? 

Mr. SILVERS. I think you have—let me just again reiterate Professor Levitin’s comments. This is really focused on residential 

real— 

Mr. CARNEY. Right. 

Mr. SILVERS. This isn’t meant for residential real estate. There 

are some— 

Mr. CARNEY. So you don’t have similar concerns, serious concerns 

with the commercial application, is that accurate? 

Mr. SILVERS. I have less serious concerns. And I think there are 

still problems that relate to, sort of, the basic integrity of the accounting system. 

Mr. CARNEY. Gotcha. 

Mr. SILVERS. But when it comes down to what kind of behavior 

we are going to be incentivizing and what the implications of that 

for our economy are going to be, it is more in the residential area 

that the concerns lie. 

Now, how might one tailor it? As Professor Levitin has pointed 

out, if you confined the loan amortization provisions to an impaired 

loan and to losses that might result from that, it creates less of an 

incentive issue. It also does less violence to the accounting regime, 

because an impaired loan is not a realization event in the way that 

a foreclosure is. Those types of considerations could get you to 

something more reasonable. 

There is something else, also— 

Mr. CARNEY. I only have 5 seconds left, so let me ask one more 

question. 

Do you three agree with the other provisions of the bill? Do you 

think that they are reasonable changes? 

Mr. SILVERS. If I might just quickly say that there are a number 

of provisions in the bill. The three that were listed in the oral testimony of Mr. Marranca are reasonable provisions. But the bill is 

laced with extremely dangerous things. And an effort could be 

made to separate— 

Mr. CARNEY. Is that in your statement? Because my time is up. 

Chairwoman CAPITO. Yes, I am going to have to call it, because 

we have been called for votes and I have a few more folks. 

Mr. Posey? 

Mr. POSEY. Thank you very much, Madam Chairwoman. 

Mr. Silvers, do you think there is any such thing as overregulation? 

Mr. SILVERS. Oh, sure, there is. As I just said in response to Mr. 

Carney’s question, I think the three items that Mr. Marranca emphasized in his opening testimony are items which, on the surface, 

would appear to be reasonable changes that Congress should take 

a look at— 

48 

Mr. POSEY. But do you think there is such a thing as overregulation? Just kind of a ‘‘yes or no’’ would save us both a lot of time, 

and I am running out of time. 

Mr. SILVERS. I think I just said ‘‘yes.’’ 

Mr. POSEY. Well, ‘‘yes’’ sounds a whole lot better than, ‘‘I think 

I just said ‘yes’,’’ but thank you very much. 

Mr. Levitin, do you think there is such a thing as overregulation? 

Mr. LEVITIN. Yes, but I think the critical thing is not the amount 

of regulation; it is whether they are good regulations or bad regulations. 

Mr. POSEY. Give me an example of bad overregulation. 

Mr. LEVITIN. It is not bad overregulation, it is bad regulation. 

The question is not the number of regulations, it is whether they 

are smart regulations. 

Mr. POSEY. So you don’t think there is such a thing as bad overregulation? 

Mr. LEVITIN. There is bad regulation, and if you have too much 

of that, that is bad overregulation. 

Mr. POSEY. So that is a ‘‘yes.’’ 

Mr. LEVITIN. If I understand the—for what I think you are asking me—I am not trying to play with semantics here. I am really 

trying to actually make a point that the problem is whether these 

are good regulations or not, not the sheer number of regulations— 

Mr. POSEY. Reclaiming my time, I just want to qualify your comments. We have had people come in here to talk about overregulation and never acknowledged in their written or oral testimony 

that there was such a thing as overregulation. They always just 

talked about what happens if there is underregulation. But I think 

every member of this committee has been convinced over the past 

couple of years of testimony that there is significant overregulation. 

And I can assure you, despite your inference to the contrary, 

there is not a single Member on either side of this aisle in this 

committee, ever, who wants to harm American families. I think 

every Member here wants the same thing. They want the American 

dream to be available for everybody in this country. We do have 

differences over how to get there occasionally, but nobody is trying 

to harm the American family, I can assure you. 

As to handling— 

Mr. LEVITIN. I am glad to hear that, but— 

Mr. POSEY. It is my time. 

Mr. LEVITIN. —that is what this bill will do. 

Mr. POSEY. Excuse me. Excuse me. You are out of order. 

As to the handling of loans, my local community banker, where 

I bank, had to fail to renew a loan for a businessman because regulators said, if you renew this loan, modify this loan, it automatically goes on non-accrual. So he couldn’t do that, which would 

cause his bank significant losses. So of course, the guy became delinquent in his home loan, and just came in and put the keys on 

the bank president’s desk and said, ‘‘It is yours. I can’t do it.’’ And 

the bank president said, ‘‘No, no, no. No, you don’t. No.’’ They 

didn’t want a house back that is empty. They didn’t want to ruin 

the neighborhood values. He hung in there with the guy until he 

got a REALTOR® to sell it for him and did the best possible thing 

in that instance. 

49 

And I beg to differ with some of the other opinions expressed 

that big banks have a greater ability to do this. They are less willing to do it. The community banks, obviously, are much more inclined to give that personal attention to individual homeowners or 

individual businesspeople. 

With the exception of the Veterans Administration, which has a 

loss ratio of about 21⁄2 percent, enviable for any lender anywhere— 

and I understand that is attributable to the fact that they qualify 

their people. And when there are problems—and people are inevitably going to have some problems—they spend the time to work 

it out with them. They are not handicapped by a bunch of monolithic bureaucrats or bureaucratic written regulations, and that 

gives the VA the ability to have such a low loss ratio. 

So, I see my time is running out. I would ask any of the other 

members, the other four that I haven’t asked questions to you yet, 

you have 36 seconds if any of you want to weigh in or comment 

on that. 

Mr. MARRANCA. Congressman, I would invite the academics at 

the other end of the table to come to my bank, and I will show 

them overregulation. 

Chairwoman CAPITO. If we could, I am going to go to to Mr. 

Sherman for 3 minutes, and then Mr. Westmoreland for 3 minutes, 

and then, I think that will conclude the hearing. 

I am going to go vote. Thank you all very much. 

Mr. SHERMAN. I will stipulate for the gentleman that there is 

such a thing as overregulation. There is also underregulation. 

There is smart regulation. There is dumb regulation. And, hopefully, government will get it right someday. 

When I talk to everybody in my district, they want jobs, small 

businesses want capital. If any of you have some extra loans to 

make to small businesses in the San Fernando Valley, see me. I 

will miss votes to talk to you. 

Now, I want to support this bill so that small banks and community banks in my district will have the capital to make loans. And, 

at the same time, there are credit unions that aren’t able to make 

loans because we prohibit them, in effect, or limit what they do. 

Mr. Klebba, the credit union witnesses have suggested that we 

go with this bill but also allow member business lending from credit unions. 

Is there a reason why I should tell people in my district, ‘‘Well, 

try to get a loan from a community bank, and if they say no, don’t 

go to a credit union because Congress is going to prevent them 

from making the loan?’’ Or should we be trying to help both kinds 

of institutions make small business loans? 

Mr. KLEBBA. A couple of facts—99.5 percent of the credit unions 

in this country are nowhere near their business lending cap. So— 

Mr. SHERMAN. Many of them haven’t gone into business lending 

because they can’t gear up to do it. Their small business lending 

cap might be a million dollars, and so they go with zero because 

they can’t hire a loan officer to make a million dollars’ worth of 

small business loans. 

We want to have all credit unions making small business loans 

in the San Fernando Valley. But is there some reason why we 

should just help you and not help them? 

50 

Mr. KLEBBA. What I am saying, I guess, is that there is a relatively easy way for them to make as many business loans as they 

want: Convert to a bank. It is not that hard. And then, they become a tax-paying entity. 

Mr. SHERMAN. I am waiting for my Republican colleagues to convert to Democrats. It is not that hard. 

And, Mr. Marranca, small banks would like to be able to be Subchapter S and have preferred stock. I see your need for new kinds 

of capital. Would you oppose having alternative capital for credit 

unions along with that? 

Mr. MARRANCA. Sir, first, the issue of Subchapter S, I just have 

to clarify that a little bit. Subchapter S banks, their stockholders 

pay taxes. They pay it at a 35 percent level. So it is a piece of misinformation that Subchapter S do not pay taxes. 

Mr. SHERMAN. I didn’t say anything about that. I understand 

Subchapter S rather well. 

Mr. MARRANCA. Okay. I would be open to discuss— 

Mr. SHERMAN. You want to be able to have more flexibility for 

your members to raise capital. The guy next to you wants more 

flexibility for his members to raise capital. Can you join hands, the 

way I joined hands with my Republican colleagues? 

Mr. MARRANCA. Capital is important for both credit unions and 

small banks, and we certainly are not opposed to any ways to find 

more capital to go into those banks. 

Mr. SHERMAN. That is a great answer. Thank you. 

Chairman GARRETT [presiding]. If the gentleman yields back? 

Mr. SHERMAN. Yes. 

Chairman GARRETT. Mr. Westmoreland is recognized for 3 minutes. 

Mr. WESTMORELAND. Thank you, sir. 

Mr. Silvers, quick question. This is a math question. You say you 

represent 250 organizations representing more than 50 million people. 

Mr. SILVERS. Yes. 

Mr. WESTMORELAND. That is one-sixth of the American population. That is an average of 200,000 people per organization. Are 

those numbers correct? 

Mr. SILVERS. I think they are mathematically correct, but they 

are not very—they don’t really explain the—it is not 250 organizations each with a couple hundred thousand members. Some have 

small numbers; some have big numbers. Organizations like the 

AARP have lots of members. 

Mr. WESTMORELAND. Okay. But you represent—one-sixth of the 

American people are represented by you. That is a pretty big job. 

Mr. Levitin, in your statement, you said, ‘‘The Communities First 

Act will actually destroy communities by encouraging mortgage 

foreclosures that hurt families, neighboring property owners, and 

local government.’’ 

You were part—or served as Special Counsel to the TARP program; is that correct? 

Mr. LEVITIN. To the Congressional Oversight Panel supervising 

the TARP. 

51 

Mr. WESTMORELAND. Okay. Now, let me explain to you what 

TARP did. It destroyed communities, it cut neighboring property 

owners, and it really hurt local governments. 

So let me tell you how it did it. When you gave the money to the 

big banks, or whoever did—or you were the oversight—let me tell 

you what happened. They started holding companies, and then 

they straightened out the books of these big banks, and then they 

came into our communities and they had absolute auctions on 

these houses—absolute auctions. Somebody may have bought a 

house a month before, 2 months before, 3 months before, and then 

you had a builder building next-door, and all of a sudden he can’t 

sell his stuff for 40 cents on the dollar because the government 

didn’t give him any money. 

Now, because of these goofy mark-to-market accounting principles that you try to uphold, these community banks had to write 

down some of these loans, even some loans that were performing, 

because of these fire sales that TARP enabled people to do. So now, 

you have this first round of banks that have to close, not really because they don’t have the money, but for paper losses. 

Next, they go in, these loss-share-agreement acquiring banks 

come in, destroying neighborhoods, lowering the value, because you 

know what? They don’t have any incentive to work out these loans, 

because when they do, they come out from under the loss-share 

agreement. So there is no incentive. 

So what do they do? They foreclose, they fire-sale the property. 

And then what happens? More community banks close because of 

the mark-to-market. They have plenty of liquidity, but they can’t 

raise capital and they can’t get rid of 20 percent of their real estate 

portfolio in the market it is. 

And so, if you want to talk about destroying neighborhoods and 

you want to talk about something that sucks the wealth out of a 

community, you let a community bank close. 

And these community banks are being closed, and they have no 

legal recourse against the FDIC to try to find out why they were 

closed when they were paper losses and they had liquidity. Now, 

to me, that is just not right. 

And so I guess, that is more than a question, I have a statement. 

And my statement is that some of this stuff in here, if you were 

associated with TARP, you took part in destroying some of these 

communities. As a result, probably unintended consequences—I am 

sure you didn’t mean to do it— 

Mr. LEVITIN. I need to interrupt because I think it is actually 

critical that you understand. The Congressional Oversight Panel 

did not create TARP, it did not administer TARP, it was incredibly 

critical of TARP from the get-go— 

Mr. WESTMORELAND. Okay. That is great. 

Mr. LEVITIN. —and that I am in no way responsible for TARP 

and— 

Mr. WESTMORELAND. Okay. That is what TARP did. And, as a result of the mark-to-market—you did defend the accounting. 

Mr. LEVITIN. Mark-to-market accounting should be defended. 

That is a different issue than TARP. 

Mr. WESTMORELAND. I understand, but— 

Mr. LEVITIN. That is market transparency. 

52 

Mr. WESTMORELAND. But, as a result, that accounting practice 

put a lot of these businesses out. 

And, Mr. Cheney, you said that some of the communities—that 

credit unions go into underserved communities. 

Mr. CHENEY. Yes. 

Mr. WESTMORELAND. What is your definition of an underserved 

community? One that doesn’t have a bank? 

Mr. CHENEY. I don’t have a statutory definition with me. There 

is, within statute, rules— 

Mr. WESTMORELAND. Could you get that to me? 

Mr. CHENEY. —for underserved communities. But, yes, sir, I will. 

Mr. WESTMORELAND. All right. 

And then, Mr. Becker, you said that 13 million people, I think, 

are needing to get commercial loans. Why can’t the banks loan 

them money? 

Mr. BECKER. I think the demand fluctuates back and forth. And 

at various times in various regions of the— 

Mr. WESTMORELAND. But why can’t a bank make those people 

loans? 

Mr. BECKER. I think they won’t. In fact, there is a report— 

Mr. WESTMORELAND. Won’t or can’t? 

Mr. BECKER. I would say ‘‘c: all of the above’’ is the answer to 

that question, depending on the particular circumstances. There is 

a report by the SBA that I would be willing to share with you that 

goes into this in quite some detail. 

Mr. WESTMORELAND. I would like to see it, because underserved 

credit unions—and, look, I used to be a member of a credit union, 

some of my family are members of a credit union. But when you 

go to a corner, and you have four corners and you have a bank on 

three of them and a credit union on the fourth one, that is not really underserved. Is that not true? 

Mr. BECKER. There is a statutory definition we will get you— 

Mr. WESTMORELAND. Okay. And I would love to see that. 

And, with that, Mr. Chairman, I will yield back, and thank you 

for the extra time. 

Chairman GARRETT. The gentleman yields back. Thank you for 

yielding back. 

And, with that, I thank the panel. 

The Chair notes that some Members may have additional questions for these witnesses—despite all the questions they have already had—which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for Members to submit written questions to these witnesses and to place 

their responses in the record. 

With that, I again thank the panel. This hearing is adjourned. 

[Whereupon, at 4:35 p.m., the hearing was adjourned.] 

(53) 

A P P E N D I X 

November 16, 2011 

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