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S. HRG. 114–3 

REGULATORY RELIEF FOR COMMUNITY BANKS 

AND CREDIT UNIONS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE REGULATORY BURDEN ON COMMUNITY BANKS AND 

CREDIT UNIONS, INCLUDING RECOMMENDATIONS TO ALLEVIATE THE 

REGULATORY BURDEN 

FEBRUARY 10, 2015 

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

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MICHAEL CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

BETH ZORC, Senior Counsel 

JACK DUNN III, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

JEANETTE QUICK, Democratic Senior Counsel 

ERIN BARRY FUHER, Democratic Professional Staff Member 

PHIL RUDD, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, FEBRUARY 10, 2015 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

Senator Tester .................................................................................................. 4 

Senator Toomey 

Prepared statement ................................................................................... 42 

WITNESSES 

Doreen R. Eberley, Director of the Division of Risk Management Supervision, 

Federal Deposit Insurance Corporation ............................................................. 4 

Prepared statement .......................................................................................... 42 

Responses to written questions of: 

Senator Shelby ........................................................................................... 86 

Senator Brown ........................................................................................... 89 

Senator Crapo ............................................................................................ 91 

Senator Corker .......................................................................................... 93 

Senator Heller ........................................................................................... 95 

Senator Sasse ............................................................................................ 109 

Senator Moran ........................................................................................... 109 

Senator Tester ........................................................................................... 115 

Maryann F. Hunter, Deputy Director of the Division of Banking Supervision 

and Regulation, Board of Governors of the Federal Reserve System .............. 6 

Prepared statement .......................................................................................... 49 

Responses to written questions of: 

Senator Shelby ........................................................................................... 119 

Senator Crapo ............................................................................................ 121 

Senator Corker .......................................................................................... 122 

Senator Heller ........................................................................................... 125 

Senator Sasse ............................................................................................ 142 

Senator Cotton ........................................................................................... 143 

Senator Moran ........................................................................................... 144 

Senator Tester ........................................................................................... 147 

Toney Bland, Senior Deputy Comptroller for Midsize and Community Bank 

Supervision, Office of the Comptroller of the Currency .................................... 8 

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

Responses to written questions of: 

Senator Shelby ........................................................................................... 154 

Senator Brown ........................................................................................... 157 

Senator Crapo ............................................................................................ 158 

Senator Corker .......................................................................................... 159 

Senator Heller ........................................................................................... 161 

Senator Sasse ............................................................................................ 174 

Senator Moran ........................................................................................... 176 

Senator Tester ........................................................................................... 178 

(III)

Page

IV 

Larry Fazio, Director, Office of Examination and Insurance, National Credit 

Union Administration .......................................................................................... 9 

Prepared statement .......................................................................................... 59 

Candace A. Franks, Commissioner, Arkansas State Bank Department, on 

behalf of the Conference of State Bank Supervisors ......................................... 11 

Prepared statement .......................................................................................... 74 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Legislative proposals recommended by the Office of the Comptroller of the 

Currency submitted by Senator Toomey ............................................................ 184 

Response from Toney Bland submitted by Chairman Shelby .............................. 193 

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REGULATORY RELIEF FOR COMMUNITY 

BANKS AND CREDIT UNIONS 

TUESDAY, FEBRUARY 10, 2015 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10 a.m., in room SD–538, Dirksen Senate 

Office Building, Hon. Richard C. Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The hearing will come to order. 

This week, the Committee on Banking begins an examination of 

potential changes to the current regulatory structure. Today we 

will focus on regulatory relief for smaller financial institutions. In 

the near future, we will continue this examination by focusing on 

unnecessary statutory and regulatory impediments across the financial services spectrum. 

While there are some who continue to argue that current law is 

beyond reproach, there are many on both sides of the aisle that believe improvements can and should be made. Today we will hear 

from regulators on some of the lessons they have learned and how 

best to overcome some of the challenges that they have encountered. And although we may not agree on many things, I believe 

that we can all agree that community banks and credit unions play 

a vital role in our local economies. 

Six hundred and twenty-nine counties in the United States are 

served only by one single community bank. Six million U.S. residents depend on small financial institutions for their daily banking 

needs. These financial institutions use their knowledge of local 

communities to lend to small businesses, which are the engine of 

job creation in America. 

A recent survey found that community banks provide 48 percent 

of small business loans issued by U.S. banks—48 percent. That 

number is even higher in rural areas where small financial institutions account for 52 percent—yes, 52 percent—of small business 

and farm loans. These financial institutions are able to forge relationships with local consumers that enable them to develop products tailored to the specific needs of their communities. 

Unfortunately, we have heard that innovation tailored for Main 

Street is being smothered by unnecessary regulations originally designed for Wall Street. Some of the regulators before us today have 

testified in the past that small financial institutions did not—yes, 

did not—cause the financial crisis. Nevertheless, added regulations 

2 

have caused hundreds of banks and credit unions to simply stop offering certain products. They are instead forced to spend valuable 

resources on compliance staff. 

A survey by the Federal Reserve and the Conference of State 

Bank Supervisors found that compliance costs have increased for 

94 percent of community banks. I believe it is time to reverse this 

trend. Today we expect to hear recommendations from regulators 

on ways to provide regulatory relief for smaller financial institutions. Past Committee hearings on this issue have demonstrated bipartisan understanding that something must be done here. Discussion here will build upon these efforts by providing specific recommendations for both regulators and Congress to implement. 

I believe that we are long overdue for regulatory relief for small 

financial institutions, and I look forward to the hearing today. 

I will now recognize Senator Brown, our Ranking Member. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, very much. I appreciate that you have invited both Federal and State regulators to 

continue the conversation that we had last fall about regulatory relief for small banks and for credit unions. 

This hearing is timely as Federal agencies have made important 

changes recently that benefit the smallest depository institutions, 

and I thank you for those changes. 

To highlight a few, in January, the NCUA reproposed its riskbased capital rule to be responsive to concerns, legitimate concerns, 

raised by small credit unions. A few weeks ago, CFPB announced 

changes to its mortgage rule, a win for small lenders, particularly 

those in underserved rural areas. The Fed proposed to eliminate 

quarterly consolidated financial reporting requirements for certain 

bank holding companies and savings and loan holding companies 

under $1 billion. 

Since our last hearing last fall, Congress has also acted. We 

passed and the President signed into law several regulatory relief 

bills that were discussed at the September hearing and supported 

by those who will be before this 

Committee on Thursday. These bills included a bill introduced by 

Senators King, Warner, and Tester that doubled the threshold for 

the Small Bank Holding Company Policy Statement; a bill supported by Senators King, Jack Reed on this Committee, and Senator Warner to allow insurance for credit unions members’ IOLTA 

accounts; and a bipartisan bill authored by Senator Moran and me 

to permit financial institutions to offer prize-linked savings accounts. All of those are now law. 

Also as a result of congressional action, led by Senator Vitter, a 

Member of this Committee, the President has nominated a community banker to serve on the Federal Reserve Board. There are also 

regulatory relief proposals that I supported that did not cross the 

finish line last year. I am pleased that Senator Moran, and joined 

now by Senator Heitkamp, will reintroduce the Privacy Notice 

Modernization Act. That bill last year had 75 Senate sponsors. Mr. 

Chairman, this bill is ready for action, and we should move on it 

as soon as we can. 

3 

There is no question that regulators and Congress have been responsive to the concerns of small institutions. We have acted where 

legitimate problems have been identified, and members and stakeholders have come together to find compromise. 

I thank the witnesses today for helping in that process. I do not 

believe, though, that every bill intended to provide regulatory relief 

to small institutions is a good idea. Some proposals could threaten 

the safety and soundness of individual institutions; others could remove important consumer protections that all customers deserve, 

no matter the size of the lending institution, the bank. We must 

not forget that more than 400 banks with less than $1 billion in 

assets failed as a result of the crisis. The cost to the Deposit Insurance Fund exceeded $26 billion. 

Lending, of course, is an inherently risky business. We must 

make sure we do not encourage unsafe practices in our efforts to 

tailor regulations to small lenders. We need to establish a process 

to evaluate the merits of the proposals being suggested today and 

those we will hear about on Thursday. 

We will not be successful this Congress in providing regulatory 

relief if our proposals do not have broad bipartisan agreement and 

are attached to unrelated must-pass legislation. Our prospects are 

even less likely if we try to pair regulatory relief with attempts to 

roll back Wall Street reform. 

I am open to solving real problems affecting community institutions, as evidenced by our actions over the last couple of years. We 

can find common ground if our goal is to provide meaningful relief 

to the Nation’s smallest institutions while not compromising safety 

and soundness or consumer protections. 

Today’s witnesses can help us evaluate programs. They have 

done significant research to better understand the characteristics of 

community banks and small credit unions. They also understand, 

our panelists also understand why and how small institutions fail. 

This can help us target regulatory relief to the smallest institutions. 

For example, in Ohio, 80 percent of the community banks in my 

State are under $500 million in total assets. These are the types 

of institutions that feel the impact of burdensome regulations the 

most, whether it is providing another report to their regulatory or 

needing to hire another employee for compliance. 

Last, Mr. Chairman, I look forward to hearing more about the 

EGRPRA review currently underway. The Fed, the OCC, and the 

FDIC are required by law to review regulations and identify those 

which are duplicative, outdated, or unnecessary. The NCUA, State 

regulatory agencies, and the CFPB participate in this exercise voluntarily, in addition to the three that are required. This review 

supplements a significant analysis of impacts that the agencies also 

do while writing a rule. 

I appreciate that you have already held meetings in Los Angeles 

and Dallas and plan to hold meetings in Boston, Chicago, Washington, and rural areas later in the year. I would encourage you to 

consider a meeting in Ohio as well. This review will be completed 

next year. Any actions we take in Congress should complement, not 

complicate, the process currently underway by the agencies. 

Mr. Chairman, I thank you. 

4 

Chairman SHELBY. All Members’ opening statements will be 

made part of the record. I understand that Senator Tester has another Committee hearing. He wanted to say—— 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. I do, and I want to thank the Chairman and 

Ranking Member for their statements and for holding this hearing. 

In a rural State like Montana, community banks and credit unions 

are the lifeblood for capital for businesses and personal families. 

And I would just like to say this is a State where personal relationships still matter, and Wall Street did behave—some on Wall 

Street behaved badly a few years back. And I think community 

banks and credit unions have felt the pain of their behavior when 

they did nothing wrong. 

I would just ask that this Committee and the regulators match 

the risks with the regulation. That is really where it needs to be. 

And I think that if we do that, we will have succeeded in making 

capital accessible for folks that live in rural America and across 

this country. 

Chairman SHELBY. Thank you. 

Our witnesses today are Doreen Eberley, the Director of the Division of Risk Management Supervision for the Federal Deposit Insurance Corporation. 

Maryann Hunter is the Deputy Director of the Division of Banking Supervision and Regulation for the Board of Governors of the 

Federal Reserve System. 

Mr. Toney Bland is the Senior Deputy Comptroller for Midsize 

and Community Bank Supervision for the Office of the Comptroller 

of the Currency. 

Larry Fazio is the Director of the Office of Examination and Insurance at the National Credit Union Administration. 

And Candace Franks is the Commissioner of the Arkansas State 

Bank Department. She also serves as chairman of the Conference 

of State Bank Supervisors. 

I would like to ask all the witnesses—all the witnesses’ written 

testimony will be made part of the hearing record, and if you could 

sum up your oral testimony in about 5 minutes, it will give us a 

chance to have a dialog with you. 

We will start with Ms. Eberley. 

STATEMENT OF DOREEN R. EBERLEY, DIRECTOR OF THE DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. EBERLEY. Thank you. Chairman Shelby, Ranking Member 

Brown, and Members of the Committee, I appreciate the opportunity to testify on behalf of the FDIC on regulatory relief for community banks. As the primary Federal regulator for the majority 

of community banks, the FDIC has a particular interest in understanding the challenges and opportunities they face. 

Community banks provide traditional, relationship-based banking services to their communities. Although they hold just 14 percent of all banking assets, community banks account for about 45 

percent of all of the small loans to businesses and farms made by 

insured institutions. 

5 

While more than 400 community banks failed during the recent 

financial crisis, the vast majority did not. Institutions that stuck to 

their core expertise weathered the crisis and are now performing 

well. The highest rates of failure were observed among noncommunity banks and among community banks that departed from the 

traditional model and tried to grow rapidly with risky assets often 

funded by volatile brokered deposits. 

The FDIC is keenly aware of the impact that its regulatory requirements can have on smaller institutions, which operate with 

fewer staff and other resources than their larger counterparts. 

Therefore, the FDIC pays particular attention to the impact its regulations may have on smaller and rural institutions that serve 

areas that otherwise would not have access to banking services. 

The FDIC and the other regulators are actively seeking input 

from the industry and the public on ways to reduce regulatory burden through the Economic Growth and Regulatory Paperwork Reduction Act process, which requires the Federal financial regulators 

to review their regulations at least once every 10 years, to identify 

any regulations that are outdated, unnecessary, or unduly burdensome. As part of this process, the agencies are jointly requesting 

public comment on our regulations. We are also conducting regional outreach meetings involving the public, the industry, and 

other interested parties. 

In response to what we have heard in the first round of comments, the FDIC has already acted on regulatory relief suggestions 

where we could achieve rapid change. In November, we issued two 

Financial Institution Letters responding to suggestions we received 

from bankers. 

The first Financial Institution Letter, or FIL, released questions 

and answers about the deposit insurance application process. Commenters had told us that a clarification of the FDIC’s existing policies would be helpful. 

The second FIL addressed new procedures that eliminate or reduce the need to file applications by institutions wishing to conduct 

permissible activities through certain bank subsidiaries organized 

as limited liability companies, subject to some limited documentation standards. This will significantly reduce application filings in 

the years ahead. 

The FDIC takes a risk-based approach to supervision which recognizes that community banks are different than large banks and 

should not be treated the same. Every FDIC examiner is initially 

trained as a community bank examiner through a rigorous 4-year 

program. As a result, each examiner gains a thorough understanding of community banks before becoming a commissioned examiners. These examiners live and work in the same communities 

served by the banks they examine, ensuring that they are knowledgeable and experienced in local issues important to those banks. 

Institutions with lower risk profiles, such as most community 

banks, are subject to less supervisory attention than those with elevated risk profiles. For example, well-managed banks engaged in 

traditional, noncomplex activities receive periodic, point-in-time 

safety and soundness and consumer protection examinations that 

are carried out over a few weeks. In contrast, the very largest 

FDIC-supervised institutions receive continuous safety and soundVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
6 

ness supervision and ongoing examination carried out through targeted reviews during the course of an examination cycle. 

The FDIC also considers the size, complexity, and risk profile of 

institutions during rulemaking and supervisory guidance development processes and on an ongoing basis through the feedback we 

receive from community bankers and other stakeholders. Where 

possible, we scale our regulations and policies according to these 

factors. 

As we strive to minimize the regulatory burden on community 

banks, we look for changes that can be made without affecting safety and soundness. For example, we believe that the current $500 

million threshold for the expanded 18-month examination period 

could be raised. In addition, we would support Congress’ efforts to 

reduce the privacy notice reporting burden. 

We also think it would be worthwhile to review various longstanding statutory and regulatory thresholds to see if they should 

be changed. 

In conclusion, the FDIC will continue to pursue regulatory burden reduction which achieves the fundamental goals of safety and 

soundness and consumer protection in ways that are appropriately 

tailored for community banks. We look forward to working with the 

Committee in pursuing these efforts. 

Chairman SHELBY. Ms. Hunter. 

STATEMENT OF MARYANN F. HUNTER, DEPUTY DIRECTOR OF 

THE DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Ms. HUNTER. Thank you. Chairman Shelby, Ranking Member 

Brown, and other Members of the Committee, I appreciate the opportunity to testify on the important topic of community banks and 

our efforts to reduce regulatory burden on these institutions. 

Having begun my career more than 30 years ago as a community 

bank examiner at the Federal Reserve Bank of Kansas City and 

eventually becoming the officer in charge of supervision at the Reserve Bank, I have seen firsthand how critical it is that we balance 

effective regulation and supervision to ensure the safety and soundness of community banks while also ensuring that undue burden 

does not constrain the capacity of these institutions to lend to the 

communities they serve. 

I last testified before this Committee in September of 2014, and 

at that time I testified that, in the wake of the financial crisis, the 

Federal Reserve has spent the past several years revising our community bank supervisory programs to make them more efficient 

and less burdensome for well-run institutions. 

For example, we have continued to build upon our longstanding 

risk-focused approach to supervision, reviewing field procedures, 

refining training programs, and developing automated tools for examiners to focus their attention on areas of higher risk, reducing 

some of the work at low-risk, well-managed community banks. 

Furthermore, we developed programs to conduct more examination work off-site, such as the loan review, to reduce the time the 

examiners spend physically in the bank. 

7 

We also have an initiative underway to use forward-looking risk 

analytics to better identify high-risk areas within community and 

regional banks which would allow examiners to focus their examination time on the areas of highest risk and reduce burden on the 

low-risk institutions. 

In January of this year, the Federal Reserve responded to legislation passed by Congress in December of 2014 related to the scope 

of the Federal Reserve’s Small Bank Holding Company Policy 

Statement. Specifically, the Federal Reserve Board issued an interim final rule and a proposed rule to implement Public Law 113– 

250. Effective immediately, the interim rule adopted by the Board 

excludes small savings and loan holding companies with less than 

$500 million in consolidated assets, which also meet certain qualitative requirements, from the Board’s consolidated regulatory capital requirements, thus putting them on par with similarly situated 

bank holding companies. 

The Federal Reserve Board also issued a Notice of Proposed 

Rulemaking that would raise the asset threshold from $500 million 

to $1 billion for determining applicability of the Small Holding 

Company Policy Statement and expanded its scope to also include 

savings and loan holding companies. 

The policy statement facilitates the transfer of ownership for 

community banks by allowing their holding companies to operate 

with higher levels of debt and, thus, lower levels of consolidated 

capital than would otherwise be allowed. 

Additionally, the Federal Reserve Board took immediate steps 

beyond what was required in the legislation to relieve regulatory 

reporting burden for bank holding companies and savings and loan 

holding companies that have less than $1 billion in total consolidated assets and also meet the qualitative requirements of the policy statement. 

The Board has proposed to eliminate quarterly consolidated financial requirements in the FR Y–9C report for those institutions 

and instead require semiannual parent-only financial statements. 

The Federal Reserve immediately notified the affected institutions 

so they would not continue to invest in system changes to report 

regulatory capital data for only a short period of time. 

The changes in the threshold for the Small Holding Company 

Policy Statement and the related reductions in reporting have significantly reduced consolidated capital requirements and reporting 

burden for more than 700 small institutions. More than 40 percent 

of the institutions that were required to file the 60-page consolidated financial statements every quarter now will file only an 8- 

page report twice a year, resulting in a significant reduction in burden. 

A second key development since September is the beginning of 

the interagency review of regulations in accordance with the Economic Growth and Regulatory Paperwork Reduction Act, or as it is 

also known, the EGRPRA process. We are working closely with our 

counterparts at the OCC, FDIC, and State supervisors to seek public comment and hold outreach meetings to get feedback directly 

from bankers and from community groups about ways to reduce 

burden related to our rules and examination practices. To date, the 

8 

meetings held in Los Angeles and Dallas have yielded some useful 

and specific suggestions for consideration and review. 

Let me conclude by emphasizing that we are committed to listening and considering ideas for reducing burden through the 

EGRPRA process. We want to ensure that our regulations and examination activities are appropriately tailored to the level of risk 

inherent in community banks. We strive to balance our safety and 

soundness objectives with the need to reduce unnecessary burden 

to ensure that small institutions can continue to meet credit needs 

in their local communities. 

Thank you for inviting me to share our views on these matters, 

and I look forward to answering any questions you may have. 

Chairman SHELBY. Mr. Bland. 

STATEMENT OF TONEY BLAND, SENIOR DEPUTY COMPTROLLER FOR MIDSIZE AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. BLAND. Chairman Shelby, Ranking Member Brown, and 

Members of the Committee, thank you for the opportunity to appear before you today to discuss the challenges facing community 

banks and Federal savings associations and the actions the OCC 

is taking to help these institutions address regulatory burdens. 

I have been a bank examiner for more than 30 years, and I have 

seen firsthand the vital role community banks play in meeting the 

credit needs of consumers and small businesses across the Nation. 

At the OCC we are committed to supervisory practices that are 

fair and reasonable and to fostering a climate that allows wellmanaged community banks to grow and thrive. We tailor our supervision to each bank’s individual situation. We take into account 

the products and services it offers as well as its risk profile and 

management team. 

Given the wide array of institutions we oversee, the OCC understands that a one-size-fits-all approach to regulation does not work. 

Therefore, to the extent that the law allows, we factor these differences into the rules we write and the guidance we issue. 

My written statement provides several examples of the commonsense adjustments we have made to recent regulations to accommodate community bank concerns. Guiding our consideration of every 

proposal to reduce burden on community banks is the need to ensure that fundamental safety and soundness and consumer protection safeguards are not compromised. 

Within this framework, to date we have developed three regulatory relief proposals that we hope Congress will consider favorably. We are also undertaking several efforts to identify and mitigate other regulatory burdens through a regulatory review process. 

The first proposal we submitted to Congress would exempt some 

6,000 community banks from the Volcker rule. As the vast majority 

of banks under $10 billion in assets do not engage in the proprietary trading or covered funds activities that the statute sought to 

prohibit, we do not believe that they should have to commit resources to determine if any compliance obligations of the rules 

would apply. We do not believe this burden is justified by the nominal risk that these institutions could pose to the financial system. 

9 

We also support changing current law to allow more well-managed community banks to qualify for a longer—18 months—examination cycle. Raising the threshold from $500 million to $750 million for banks that would qualify for this treatment would cover an 

additional 300 community banks. 

We also support providing flexibility for Federal thrifts so that 

those thrifts that wish to expand their business model and offer a 

broader range of services in their communities may do so without 

the burden and expense of a charter conversion. Under our proposal, Federal thrifts could retain their current governance structure without unnecessarily limiting the evolution of their business 

plan. As the supervisor of both national banks and Federal thrifts, 

we are well positioned to administer this new framework without 

requiring a costly and time-consuming administrative process. 

I am also hopeful that the ongoing efforts to review current regulations to reduce or eliminate burden will bear fruit. I just returned 

from the second public EGRPRA meeting in Dallas where regulators heard ideas to reduce burden from a number of interested 

stakeholders. The agencies are currently evaluating the comments 

received from these meetings and from the public comment process. 

While this process will unfold over a period of time, the OCC will 

not wait until it has completed the implemented changes where a 

good case is made for relief or to submit legislative ideas identified 

through this process to Congress. 

Separately, the OCC is in the midst of a comprehensive, multiphase review of our own regulations and those of the former OTS 

to reduce duplication, promote fairness in supervision, and create 

efficiencies for national banks and Federal savings associations. We 

are currently reviewing comments received on the first phase of our 

review focusing on corporate activities and applications. 

Finally, we are continually looking for innovation ways to reduce 

burden. Last month, the OCC published a paper that focused on 

possibilities for community banks to collaborate to manage regulatory requirements, trim costs, and better serve their customers. 

We believe there are opportunities for community banks to work together to address the challenges of limited resources and acquiring 

the necessary expertise. 

In closing, the OCC will continue to carefully assess the potential 

effect that current and future policies and regulations may have on 

community banks, and we will be happy to work with the industry 

and the Committee on additional ideas or proposed legislative initiatives. 

Again, thank you for the opportunity to appear today. I would be 

happy to respond to questions. 

Chairman SHELBY. Thank you. 

Mr. Fazio. 

STATEMENT OF LARRY FAZIO, DIRECTOR, OFFICE OF EXAMINATION AND INSURANCE, NATIONAL CREDIT UNION ADMINISTRATION 

Mr. FAZIO. Good morning, Chairman Shelby, Ranking Member 

Brown, and Members of the Committee. Thank you for the invitation to discuss regulatory relief for credit unions. 

10 

While NCUA regulates 6,350 credit unions with $1.1 trillion in 

assets, over three-quarters of these federally insured credit unions 

have less than $100 million in assets. Because these credit unions 

have fewer resources available to respond to marketplace, technological, legislative, and regulatory changes, NCUA is acutely aware 

of the need to calibrate our rules and our examinations to remove 

any unnecessary burden on these smaller credit unions. 

As a result, NCUA scales our regulatory and supervisory expectations when it is sensible and within the agency’s authority to do 

so. 

Where regulation is needed to protect the safety and soundness 

of credit unions, the savings of members, and the Share Insurance 

Fund, NCUA uses a variety of targeting strategies. These strategies include fully exempting small credit unions from rules, using 

graduated requirements as size and complexity increase for other 

rules, and incorporating practical compliance approaches into agency guidance. Thus, we work to balance maintaining prudential 

standards with minimizing regulatory burden. 

Since 1987, NCUA has undertaken a rolling 3-year review of all 

of our rules and regulations, and although not required by law, 

NCUA is again voluntarily participating in the current EGRPRA 

review. These reviews conduct retrospective analysis with an eye 

toward streamlining, modernizing, or even repealing regulations 

that are not necessary. 

Over the past 3 years, NCUA has also taken 15 actions through 

the agency’s Regulatory Modernization Initiative to cut red tape 

and provide lasting benefits to credit unions. These actions include: 

easing eight regulations, including modernizing the definition of a 

small credit union, to prudently exempt thousands of credit unions 

from several complex rules; streamlining three processes, facilitating more than 1,000 low-income designations, and increasing 

blanket waivers; and issuing four legal opinions, allowing more 

flexibility in credit union operations. 

Next week, the NCUA Board will consider a proposal to increase 

the asset threshold for defining ‘‘small entity’’ under the Regulatory 

Flexibility Act. If approved, this change would provide transparent 

consideration of regulatory relief for a greater number of credit 

unions in future rulemakings. 

Going forward, NCUA Board Chairman Debbie Matz has announced plans to consider streamlining the member business lending rule, finalize regulatory relief on holding fixed assets, and simplify the process for adding some types of associational groups to 

credit unions’ fields of membership. 

NCUA is also revising our examination process to provide relief. 

Through our small credit union examination program, NCUA 

spends less time on average now in small, well-managed credit 

unions. NCUA is further working to reduce the time spent on-site 

conducting exams and to improve their consistency in this process. 

Concerning legislation, NCUA appreciates the Committee’s recent efforts to enact laws to provide share insurance coverage for 

lawyers’ trust accounts and enable federally insured financial institutions to offer prize-linked savings accounts. 

NCUA would advise Congress to provide regulators with flexibility in writing rules to implement new laws. Such flexibility 

11 

would allow us to scale rules based on size and complexity to effectively limit additional regulatory burdens on smaller institutions. 

NCUA also supports several targeted regulatory relief bills for 

credit unions. These bills include: legislation to allow healthy and 

well-managed credit unions to issue supplemental capital that will 

count as net worth; permit all Federal credit unions to grow by 

adding underserved areas; raise the cap on member business lending to support small businesses; and exempt one- to four-unit nonowner-occupied residential loans from the member business lending 

cap. 

Finally, parallel to the powers of the FDIC, OCC, and Federal 

Reserve, NCUA asks for the authority to examine and enforce corrective actions where needed at third-party vendors. NCUA’s draft 

legislation would provide regulatory relief for credit unions and 

close a growing gap in NCUA’s authority to work directly with key 

infrastructure vendors, like those with a cybersecurity aspect. This 

would allow us to obtain necessary information to assess risks and 

deal with any problems at the source. 

In closing, NCUA remains committed to providing regulatory relief and streamlining examinations. We also stand ready to work 

with Congress on related legislative proposals. I look forward to 

your questions. 

Chairman SHELBY. Ms. Franks. 

STATEMENT OF CANDACE A. FRANKS, COMMISSIONER, ARKANSAS STATE BANK DEPARTMENT, ON BEHALF OF THE 

CONFERENCE OF STATE BANK SUPERVISORS 

Ms. FRANKS. Good morning, Chairman Shelby, Ranking Member 

Brown, and distinguished Members of the Committee. My name is 

Candace Franks, and I serve as bank commissioner of the Arkansas State Bank Department. I am also chairman of the Conference 

of State Bank Supervisors. It is my pleasure to testify today on behalf of CSBS. 

I would like to thank Congress and this Committee for your focus 

on community banks. In my 35 years as a State regulator, I have 

seen firsthand the positive local impact of community banks. These 

banks are critical to providing access to credit in urban as well as 

rural areas, and they are important to building and maintaining 

consumer confidence in our financial system. 

One out of every five U.S. counties has no physical banking offices except those operated by community banks. In my home State 

of Arkansas, a very rural State, there are 96 towns that have only 

one physical banking location. For these small rural towns, the 

community banking system is the banking system. 

Community banks excel at relationship lending, making them a 

vital source of credit for small businesses. In fact, community 

banks play an outsized role in lending to small businesses, holding 

46 percent of loans to small businesses and farms. 

Regulators must constantly improve the way we conduct supervision to ensure a balanced approach. This allows banks to contribute to the stability and resiliency of the economy and strengthens the diversity that exists in the banking system. As State regulators have examined various approaches to right-sizing community 

bank regulation, we have found that community banks cannot be 

12 

defined by simple line drawing based on asset thresholds. While 

asset size is relevant, there are other factors. Factors like market 

areas, funding sources, and relationship lending are characteristics 

I as a bank regulator understand and witness on a daily basis. We 

need a process that identifies the relevant factors and provides 

flexibility in how those factors are weighed and considered. 

This new definitional approach sets a foundation for other measures to tailor regulation and supervision to the community bank 

business model, for example, providing that application decisions 

affecting community institutions do not set precedent for other 

types of institutions or conferring QM status onto all mortgages 

held in portfolio by community banks. 

While much needs to be done to right-size community bank regulation, I want to recognize some significant steps already taken. 

The CFPB’s proposed changes to its mortgage rules would give 

more banks flexibility to make loans to their customers. CSBS commends Congress for passing a bipartisan provision requiring that 

at least one member of the Federal Reserve Board have experience 

either as a supervisor of community banks or a community banker. 

This new requirement reaffirms that community banks are an integral part of the financial system. 

Similarly, we ask Congress to reaffirm the existing legal requirement that the FDIC Board includes an individual with State regulatory experience. A seat at the table will not automatically result 

in a right-sized regulatory framework. Additionally, we must truly 

understand the state of community banking and the issues they 

face. This is why CSBS has partnered with the Federal Reserve to 

attract new research on community banking. This research will 

help us develop a system of supervision that provides for a strong, 

enduring future for the dual banking system. 

Work from the Community Bank Research Conferences held by 

CSBS and the Federal Reserve has demonstrated there is real 

value in the relationship lending model used by community banks. 

One study presented at the 2013 conference found that proximity 

to a community bank enhances the chance for survival of startup 

companies. Our hope is this research will inform legislative and 

regulatory proposals and appropriate supervisory practices and will 

move us closer to a right-sized regulatory framework. 

There are significant operational and strategic differences among 

our Nation’s banks. These differences reflect the admirable diversity of our financial system. Our regulatory approach must also reflect this diversity. 

Thank you for the opportunity to testify today, and I look forward to your questions. 

Chairman SHELBY. Thank you. 

I will direct my first question to Ms. Eberley. According to the 

FDIC, only two de novo Federal banking charters—two—have been 

approved since 2009. Since 1990, we have lost more than 3,000 

banks, including 85 percent of banks with assets under $100 million. Equally concerning to a lot of us is that no new banks are 

being created because of barriers of entry. 

Is the FDIC concerned about the lack of new banks? And what 

specific step is your agency taking to address the issue, if you are? 

And what legislative solutions might resolve some barriers to entry 

13 

but keep the safety and soundness of the system intact, which we 

all want to do? Ms. Eberley. 

Ms. EBERLEY. Thank you. I think the issue is one of where we 

are in the economic cycle versus one of legislative barriers or even 

regulatory barriers. 

As I mentioned, in the EGRPRA process we were asked to clarify 

the application process for deposit insurance, and we have done 

that. Our policy has not changed. It remains the same. We had one 

application in 2014. That application remains in process. It came 

toward the end of the year. 

But I think the numbers of de novo’s do not reflect the interest 

actually in community banking. If you instead look at the dollar 

amount of capital that has flowed into the community bank industry since 2008, it is $43 billion. That indicates that there is investor interest in supporting community banks and belief in the viability of the community bank model. And I believe that capital at 

some point will shift into de novo institutions as the economy continues to improve and as the inventory of small troubled banks continues to decline. 

Chairman SHELBY. Do you see any legislative proposals, or do 

you have any of your own? 

Ms. EBERLEY. No. 

Chairman SHELBY. Do you like what the regulations call for now? 

Ms. EBERLEY. The regulations that govern applications for deposit insurance—and there are two pieces to it, so there is the 

charter as well, which we do not grant. The charter would either 

come from the State authority or the Office of the Comptroller of 

the Currency in the case of a national bank. But the guiding principles for us are the statutory factors for deposit insurance in the 

FDI Act, and we think they are relevant today. 

Chairman SHELBY. I understand that the FDIC, the Federal Reserve, and the OCC are currently undertaking a regulatory review 

under the Economic Growth and Regulatory Paperwork Reduction 

Act. This act requires, among other things, a review of all regulations prescribed by your agencies. But buried in a footnote in the 

related Federal Register notice, you have indicated that you will 

not review certain rules. 

Who decided to exclude regulations from this review and based 

on what authority? You do not need to tell us why they did it. We 

just want to know who made the decision. Was it made at the very 

top? We will start again with you, Ms. Eberley, and then go to the 

OCC and the Fed. 

Ms. EBERLEY. We work on this through the Federal Financial Institution Examination Council with the benefit of our Legal Advisory Group. The regulations that were excluded are regulations 

that are new, so recently enacted, and that is the basis, as I understand it, for excluding them. 

Chairman SHELBY. OK. Ms. Hunter, do you have any comment? 

Ms. HUNTER. Yes, that is my understanding as well. It is just the 

newer regulations require more time to get experience with exactly 

how they are operating and where the burden might be. So that 

was really the basis for that. 

Chairman SHELBY. Mr. Bland, do you have any—— 

14 

Mr. BLAND. Chairman Shelby, I would just add that while the 

footnote says that, I have attended both the Los Angeles and the 

Dallas one, and in the spirit of just hearing from the bankers and 

other stakeholders, we have been open to any and all proposals or 

thoughts they have had. And so part of the process is to just be 

as open and hear as candid from them on regs that are of interest 

to them. 

Chairman SHELBY. Who made that decision? Was it the Chairman of the Federal Reserve? 

Mr. BLAND. I am not aware of that. 

Chairman SHELBY. Was it the Comptroller of the Currency? Was 

it the Chairman of the FDIC? Somebody made the decision. We 

just want to know who. 

Mr. BLAND. We can find out for you, Chairman. 

Chairman SHELBY. Will you furnish that for the record? 

Mr. BLAND. We will find out who made that decision. 

Chairman SHELBY. OK. 

This leads me to the cost-benefit analysis for regulatory review. 

I am a believer in empirical analysis when it comes to regulations. 

If a regulation’s costs outweigh its benefits, I believe it should be 

thrown out. Does anyone disagree? And if so, why? In other words, 

if a regulation’s cost, you weigh that, outweigh its benefits, should 

we keep it? Mr. Bland, if a regulation’s costs outweigh its benefits, 

should it be thrown out? 

Mr. BLAND. Chairman Shelby, the issue of cost-benefit, if it 

should be thrown out, you know, also when you enact legislation, 

it needs time to see what the effectiveness is. And so—— 

Chairman SHELBY. But ultimately if you had time to analyze it 

and if its costs to the banking system outweigh its benefits to the 

public, should we have it? In other words, it would be weighed in 

the balance, and should it be gone? 

Mr. BLAND. Chairman Shelby, in the strictest sense, I understand your point. But one of the things that is important—— 

Chairman SHELBY. Do you disagree with me? 

Mr. BLAND. No. I was going to make this point. 

Chairman SHELBY. OK. 

Mr. BLAND. There are safety and soundness and consumer protections safeguards—— 

Chairman SHELBY. Oh, absolutely. 

Mr. BLAND. And so that has to be weighed in addition to 

that—— 

Chairman SHELBY. Absolutely. That would be one of the costs— 

or benefit to the public, benefit versus cost. 

What about you, Ms. Hunter? What is your thought? 

Ms. HUNTER. Well, I would add to Mr. Bland’s comment that the 

challenge is that it is easy to measure the costs because they fall 

to specific institutions. It is much harder to measure the benefits 

because they really accrue to a very broad population, things like 

safety and soundness of the banking system or confidence in the 

payment system. So that is really the challenge in assessing costs 

and benefits. I do think that it is worth doing that analysis, and 

I know when we propose rules, we look first at what was the benefit that the statute was intending to try to achieve. You know, 

what was that goal? And then try to fashion rules that minimize 

15 

the cost of achieving that goal as best we can. And, obviously it 

takes time to understand exactly how it gets implemented in the 

industry. 

Chairman SHELBY. But that is part of the process, is it not, to 

weigh the costs versus the benefits. That is part of your job as a 

regulator, is it not? 

Ms. HUNTER. It is, and it is part of the process we go through 

when we develop rules responding to statutory mandates—— 

Chairman SHELBY. What about the FDIC? 

Ms. EBERLEY. I would add to what Ms. Hunter said, the challenge is quantifying the benefits of a safe and sound banking environment and the lack of failures, the lack of economic loss, that is 

the challenge. 

Chairman SHELBY. It is. 

Ms. EBERLEY. And it is a difficult thing to quantify when you are 

going with a cost-benefit analysis. 

Chairman SHELBY. I do not disagree with you, but you would 

weigh the costs versus the benefits. If the benefits outweigh the 

costs, keep the regulation. If it does not, it ought to fall. But that 

is a big debate we have going, because we are talking about overregulating smaller banks and so forth, the costs to them versus the 

benefit to the public, I guess. 

OK. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. Thank you all for 

joining us, the four of you that were at our September 16th hearing, the four Federal regulators. Thank you for being here, Ms. 

Franks. Thank you for joining us on this one. 

Ms. Hunter, a question for you. Over the weekend, the major 

story broke in U.S. and European media outlets, including ‘‘60 Minutes’’, about a trove of HSBC account holder data that reveals the 

HSBC Swiss banking arm collaborated in efforts by some of its account holders to engage in tax evasion. I understand European tax 

officials recovered huge amounts of back taxes from and imposed 

large penalties on some of these account holders. I understand that 

the IRS received this information in 2010, 5 years ago. Would they 

normally share that information immediately with the Fed? 

Ms. HUNTER. Well, in response to your question, I will first say 

I did not personally see the piece that was on ‘‘60 Minutes’’, but 

I can say that—we really cannot comment on specific investigations. 

Senator BROWN. That is why I asked would you normally get 

that kind of information. 

Ms. HUNTER. In a general sense, when there is an investigation, 

yes, we do share information when requested by the law enforcement authorities. 

Senator BROWN. ‘‘Share’’ meaning you give to them. Do they normally give this kind of information to you? 

Ms. HUNTER. It would depend on the case. There would be a dialog about—certainly if they are limited in their ability to share 

with us, they would not do that. But we provide information upon 

request. We generally may be aware that there is an investigation 

going on. 

Senator BROWN. OK. I want to ask you something. I take that 

to mean there is a good chance that you have had this, that the 

16 

Fed has had this information for quite some time. I gather investigations of some individual U.S. account holders identified by 

these leaks have been undertaken by IRS. 

My question is this: HSBC has a recent history of major U.S. 

sanctions and money-laundering violations. They now face these 

new charges of facilitating tax evasion. Summarize, if you will, for 

the Committee what the Fed has done with respect to HSBC to 

pursue these tax evasion allegations, what conclusions you may 

have reached regarding HSBC’s responsibility for these activities, 

and what steps you are taking with other Federal officials to pursue these matters. 

Ms. HUNTER. OK. Well, first of all, again, I cannot really speak 

to the specific matter that is under investigation, but I can tell you 

that, with respect to HSBC—we have entered into three formal enforcement actions, consent, cease, and desist orders, and those relate to Bank Secrecy Act and AML compliance. There is one related 

to mortgage servicing activities and one related to compliance risk 

management in general. So we have been obviously working on 

issues with the firm related to compliance generally. 

I will say that in any situation where there is an investigation, 

if we have evidence or we are provided with evidence that there is 

a violation of law or breach of safety and soundness based on activities, and especially those that might involve tax evasion, we 

take that very seriously. We would favor certainly moving forward, 

and I am firmly committed to taking any appropriate sanctions or 

penalties that would accrue from the outcome of that work. 

Senator BROWN. These are, as you know, very serious accusations and in some cases more than accusations, as we found. And 

this Committee, a lot of us, will be watching the Fed’s actions on 

this, so we will be in touch about that. 

Ms. HUNTER. We agree they are very serious accusations. 

Senator BROWN. A question for the four Federal regulators, one 

question. Each of your agencies must comply with a slew of requirements when writing rules. This is a bit of a follow-on to 

Chairman Shelby’s question. The Administrative Procedures Act, 

the Regulatory Flexibility Act, the Paperwork Reduction Act—these 

require you to publish rules for public comment, review rules for 

impacts on small businesses, consider less burdensome alternatives, reduce the paperwork burden. You are also currently undertaking the EGRPRA review process to identify burdensome and 

outdated regulations. 

The question is this—a couple of questions, and if you would just 

start with Ms. Eberley and work your way down. Do you think 

your agency adequately takes into account the costs and benefits 

of the rules you write? What impact would additional analysis requirements have on your ability to implement new rules? Might 

some of these proposals actually stop rulemaking in its tracks or 

slow it down so the burden is too great to move forward? Ms. 

Eberley, we will begin with you, please. 

Ms. EBERLEY. OK. Well, we certainly do try to carry out the costbenefit analysis. Under our policy on rulemakings, we consider the 

costs, the benefits, and alternatives based on available data. We 

ask a lot of questions during the rulemaking process to garner the 

impact on institutions, and we are particularly interested in the 

17 

feedback we get from community banks about the costs of the regulation or the ways that it would impact the institution. And we 

make changes based on the information that we hear. 

As to your second question, which was about whether additional 

requirements would impact that process, I think it would. Anytime 

you add additional requirements, it makes the process of conducting the analysis more difficult and also would open it up to additional legal challenges. 

And your final question was what kind of impact could that have 

on the process. I think it could certainly slow the process and certainly would make it more cumbersome and limit our flexibility. 

Senator BROWN. Thank you. 

Ms. Hunter. 

Ms. HUNTER. I am not sure I have much more to add to that very 

complete response. I do agree that it would add complexity to the 

process, certainly adding extra steps, and those would tend to slow 

down development of rules. And that can be problematic in the 

sense that on some occasions the lack of clarity between the time 

a law is passed and the rule is developed can impose burdens on 

banks as well, because they are not sure exactly how various requirements might be implemented. 

Senator BROWN. Mr. Bland. 

Mr. BLAND. The OCC has a very robust economic analysis impact 

that looks at the quantitative and qualitative factors and to appropriateness of a rule. We also have this process consistent with the 

OMB guidance, which has been assessed. 

And to your last point, the only thing to add is the proposed 

rules could halt or slow down implementation of rules. 

Senator BROWN. And, Mr. Fazio, last. 

Mr. FAZIO. I would just echo the comments of my colleagues and 

indicate that NCUA does take account of all the costs and benefits 

that we can reasonably catalogue and quantify in our rulemaking 

process and try to speak to that in the preambles to our rules. 

We also take very seriously and find very useful the comments 

we receive during the rulemaking process. The agency responds to 

those comments in our preambles to our final rules. We find stakeholder comments very helpful in fine-tuning and calibrating the 

rules so that we target the rule and keep it as efficient as possible 

while also providing alternatives, practical alternatives, for credit 

unions to comply. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. I have just a few 

questions. 

First, if I could—and I would like to address this to Ms. Hunter—one issue that represents a particular regulatory burden on 

small banks involves new rules for appraisals. Kansas Fed President Esther George observed at a 2014 conference that market values in smaller rural communities may not have an objective comparison. However, new appraisal rules do not provide requisite 

flexibility for small businesses and individuals in rural and other 

small community markets. 

Now, while the Fed did not promulgate the appraisal rules, it 

has to examine them. How are you addressing the small banks’ 

18 

concerns about appraisals in rural communities? And what recommendations would you have to rectify the problem? 

Ms. HUNTER. Well, Senator, you raise an excellent point and one 

that we have certainly heard in our outreach and discussions with 

community banks, and particularly those in rural areas. The difficulty in getting appraisers who know the community and are able 

to do the work that is required has been a real challenge, and so 

this is actually one area where, through the EGRPRA meetings 

that we have had in Dallas and in Los Angeles, we have actually 

heard comments about some suggestions that might help alleviate 

some of the issues in rural areas but also burden more broadly for 

community banks. And one of the suggestions was to take a look 

at the threshold for when these appraisals are actually required 

and for what kinds of deals. 

The threshold was last set in 1994, I believe. It is an interagency rule. But it was set in 1994, and it is at $250,000, and there is a 

higher threshold for some business loans. 

In hearing that in the meetings, came back—and speaking for 

the Federal Reserve, we certainly think it merits a good look at 

just what that threshold should be, how many deals was it capturing in 1994 versus what the right level might be today; and if 

we were to raise that threshold, it could achieve the burden reduction and particularly alleviate the problem in rural areas. 

Senator ROUNDS. Does anyone else care to comment on that as 

well? If not, I do have another question, and that would be for, in 

this case, Ms. Eberley. Kansas Fed President Esther George, once 

again, said at the same 2014 conference that community banks 

were considered well capitalized and that their risks understood 

before Basel III. Yet in spite of that, now community banks must 

adopt the more complicated capital rules with finer degrees of risk 

weights and capital buffers. The risk-weighted asset schedule of 

the Call Report has 57 rows and 89 pages of instructions, even 

though no additional capital was required for the majority of the 

community banks. Are 57 rows and 89 pages of instructions simply 

too much for most community banks? Are they necessary? 

Ms. EBERLEY. You know, one of the lessons coming out of the crisis was that the industry as a whole needed higher levels of capital 

and higher-quality capital, and that is what our interagency capital 

rules were designed to do. I think it is fair to ask if we can make 

it more simple for community banks, and then I think that that is 

something we are open to continuing to look at. 

Senator ROUNDS. OK. One more question, and this is for Ms. 

Franks. There are several legislative proposals to consider as a 

qualified mortgage all residential mortgage loans made, as long as 

the loan is included in the lender’s portfolio. Can you explain how 

this would benefit or impact consumers? 

Ms. FRANKS. The State bank supervisors believe that that would 

certainly benefit consumers to have QM loans held in portfolio 

qualify. We feel like that would be beneficial to a consumer because 

the local bank knows their customer and they have an inherent interest in ensuring that those banks can repay those loans when 

they make those loans in the first place. So we think that that 

would be a great benefit to our consumers. 

Senator ROUNDS. Thank you. 

19 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

I think we all share common beliefs here that community banks 

are critically important. They play an outsized role both in relationship lending and particularly lending for small business. 

One of the things the Chairman mentioned in his opening comments—and I have heard similar numbers—is that compliance 

costs have gone up north of 90 percent. I find, though, that when 

I press my community bankers to specifically enumerate where 

those costs come from and document them, I get not a lot of specificity. 

For all of you, very briefly—because I have got one another follow-up—would you estimate—could you give an estimate of how 

much compliance costs have gone up since Dodd-Frank for community banks? And is there kind of an enumeration of top three 

things that you are hearing as you do these sessions around the 

country? Just go on down the line. 

Ms. EBERLEY. We attempted an empirical study in 2012, and the 

difficulty with doing that is that institutions are not—as you noted, 

they are not maintaining the kind of information that you could actually just do the math. They do not keep their books in a way that 

would allow you to gather the data that is necessary. And, in fact, 

they told us that gathering that data would in and of itself be burdensome. So there is that issue. 

But on the EGRPRA front, the comments that we are receiving, 

the general themes have been mentioned previously, looking at the 

various thresholds and rules and regulations, some of which have 

been outstanding for decades, and whether or not those thresholds 

are still reasonable based on changes in the industry. That is the 

number one theme through the EGRPRA process. 

Senator WARNER. Ms. Hunter. 

Ms. HUNTER. Yes, and I would add to that as well, the things we 

hear most are the lack of specificity is an issue. It is really the 

time, and it is accumulation of small changes. So at least what I 

hear from the banks—and we have been hearing in the EGRPRA 

process sometimes it is a one-time change; it is getting used to a 

new way of doing things. It might even introduce system changes 

that they might not have wanted to do at exactly that point in 

time. So there is an accumulation of burden or an up-front investment of time, and then going forward it is this 5 minutes to review 

a policy, 10 minutes with the board. 

So it is hard to quantify, but that is the kind of thing we are 

looking for in the EGRPRA process to try to see how we might 

streamline that. 

Senator WARNER. But do you think it is—the 90 percent number 

that is thrown around, do you think that is an accurate reflection? 

Ms. HUNTER. 90 percent increase—— 

Senator WARNER. In terms of increased compliance cost. 

Ms. HUNTER. I do not have the information to be able to evaluate 

that. 

Senator WARNER. Could we finish down the—— 

Mr. BLAND. Senator Warner, it is a very complex issue, but I 

have heard in my visits with bankers, it manifests itself in addiVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
20 

tional resources you have to hire, particularly as it gets more complex, they have to hire folks with a certain specialty, but also diverting their attention away from lending and interacting with 

their customer base. The impact on staff, though, varies with the 

size of the institution and the activities they are involved in, but 

it is real based on what we hear from bankers. 

But similar to what was said before, some of the changes are 

looking at different threshold, but also our collaborative paper that 

we put out is in recognition of the challenges that institutions 

have, and by sharing and working together, they can help them 

manage their costs, but also acquire the experience they need, because the banking business is going through a substantial change. 

When you overlay technology but also nonbank competition, different products and services, and so that realization of the change, 

and to be able to offset that with sharing of resources, building expertise, is critical. 

Senator WARNER. Very briefly, because I have got one other 

question. 

Mr. FAZIO. I would just echo that. I think it is a case of there 

is just a lot of change going on now. Part is regulatory; part is marketplace and technological. And it is a lot for the institutions, especially smaller ones, to deal with. It remains to be seen if we will 

reach a state of equilibrium that, you know, allows them to feel 

like that is something that they can manage going forward. 

We try to help where we can. A lot of the rules that credit unions 

complain about are not within NCUA’s direct authority, and so 

there is not much we can do, but we do try where we can to help 

them in complying, have practical approaches, guidance, our Office 

of Small Credit Union Initiatives, to help them with their planning 

and with consulting. And so we do what we can. 

Ms. FRANKS. Yes, Senator, my institutions generally tell me that 

the costs are incurred through hiring additional staff and also in 

implementing and spending the manual time and effort in trying 

to understand the new regulations and to implement them, and 

particularly this is difficult in more rural areas and more rural 

banks where you do not have a large group to choose new—— 

Senator WARNER. Let me just add, I mean, I think there are certain things, like Senator Rounds mentioned, in terms of forms, I 

think the thresholds issue. I do think the more we can get some 

specificity around the kind of pressing our community banks for 

what the changes are. 

I guess the comment I would like to make, Mr. Chairman, is 

that—and I do not know how you grapple with this. Clearly, with 

400 banks failing, we still have to deal with safety and soundness. 

But my belief is that enhanced prudential standards for the larger 

institutions, even though we try to bifurcate them toward smaller, 

have kind of seeped down into the examiners at the smaller banks. 

And I do not know how you grapple with that best practices standard, but I would love to come back and revisit that. 

Chairman SHELBY. Thank you. 

Senator Heller. 

Senator HELLER. Mr. Chairman, thank you. And it is my wish to 

follow up on some of your questions, Senator Warner’s questions, 

and Senator Brown’s questions as I use up my 5 minutes. But I 

21 

want to thank everybody for being here. Thanks for taking the time 

and spending time with us. It is very, very helpful. I am bouncing 

back between a couple of committees here, and I know a couple of 

us here are doing the exact same thing. So I just want to make 

sure I ask the right committees the right questions. 

Having said that, and I think the theme here is that the number 

of financial institutions in this country has shrunk to its lowest 

level since the Great Depression. I know some of these statistics 

have already been discussed, but we once in this country had 

18,000 banks, and today we have less than 7,000. 

In my home State of Nevada, there are about a dozen community 

banks left, and that is less than half of what there were 5 years 

ago. The last bank closure occurred June of 2013. There are only 

19 credit unions left in the State, serving nearly 340,000 members. 

Thirty-one percent of Nevadans are unbanked or underbanked, 

which is the highest in the country. So I guess for the FDIC, is this 

a concern or a statistic? 

Ms. EBERLEY. It is a concern, and it is one of the reasons we conducted a study on consolidation in the banking industry to really 

look at what are the underlying reasons for consolidation and see 

what we could learn from that. 

What we saw over the period that you talked about, with the decline of institutions from 18,000 down to less than 7,000, is that 

about 20 percent of the consolidation that occurred over that period 

was from failures that were really isolated into two significant crises primarily. And so to the extent that we can avoid financial crises in the future through strong supervision and good regulation, 

that will go a long way toward protecting institutions. 

The other 80 percent of consolidation we considered voluntary, 

and it was a mix of institutions that were merging with unrelated 

companies and institutions that were consolidating with related 

companies. The biggest single wave of that activity that really accounted for a substantial part of the voluntary consolidation occurred after the relaxations on interstate branching through Riegle-Neal and other State initiatives in the mid- to late 1990s. So 

that was the single biggest period. That can only happen once. So, 

you know, we do not expect to see large waves like that again. 

What is missing from the equation is de novo’s. We do expect 

that, as the economy continues to improve, we will see some de 

novo activity again, and we are looking at it that way. 

The other point I might make—— 

Senator HELLER. Ms. Eberley, I do not have a lot of time, so—— 

Ms. EBERLEY. I am sorry. 

Senator HELLER. And I hate to cut you off, but I do have to get 

to my questions. This was brought up, and, again, I want to follow 

up on the Chairman’s comments about this application process. I 

do not know if the Community Bank of Pennsylvania has been 

brought up in this hearing. It is the first new federally approved 

bank since 2010. In the process of applying, the Pennsylvania bank 

raised $17 million from investors but had to spend nearly $1 million just in application fees, and the attorneys said that it was 8 

to 16 inches of application pages in order to get it chartered. 

22 

I guess the question is, quickly: If you have to spend $1 million 

to open up a bank in America today, how many more banks do you 

anticipate are going to pay that price? 

Ms. EBERLEY. We do not charge any application fees for applications for deposit insurance. There is no fee associated with that. Institutions do have startup costs as they go through the process—— 

Senator HELLER. But you understand what I am saying. We are 

talking about the cost of putting together 16 inches of paperwork, 

lawyers and accountants and everybody else that you have to put 

together. It cost them $1 million. Is this what we can expect in the 

future from the FDIC as costs? The question is: Are you going to 

open a bank today if you have those kind of costs? 

Ms. EBERLEY. That sounds like a large figure based on my experience. 

Senator HELLER. Let me just go to Senator Warner’s comments 

about costs and how they are not getting answers from small community banks in his State. I tell you, I am getting answers from 

the small community banks, and, Mr. Bland, I think you touched 

on it, and that is, personnel costs. We have small banks in Nevada 

that are being audited by the Feds. There are no exceptions, clean 

books, but then being required—required—to hire another compliance officer. And they are saying, ‘‘Where are we going to come up 

with $120,000 to $150,000 to pay for another compliance officer, 

even though we have no exceptions?’’ That is part of the problem 

of what is going on. 

So I want to ask—do I have a minute, Chairman? On EGRPRA, 

I just want to ask one quick question on EGRPRA. 

Senator TOOMEY. [Presiding.] OK. 

Senator HELLER. Will you consider Dodd-Frank’s regulations during the EGRPRA process? 

Mr. BLAND. I will take a stab. 

Senator HELLER. OK. 

Mr. BLAND. Given that the EGRPRA process is looking at rules, 

established rules that are outdated, overly burdensome, and unnecessary, most of the Dodd-Frank rules that the OCC is responsible 

for have not been implemented yet or have taken effect. And so it 

is not, we feel, appropriate to look at those rules at this time. 

Senator HELLER. But isn’t it true, though, we will not have another EGRPRA study for another 10 years? 

Mr. BLAND. That is true. 

Senator HELLER. And so if we do not include Dodd-Frank—— 

Mr. BLAND. But I would say that the OCC, as part of our normal 

practice, looks at whether rules are appropriate in terms of relevance, and we will make changes without waiting for the next 

EGRPRA process. 

Senator HELLER. OK. To all of you, thank you very much for 

being here. 

Mr. Chairman, thank you. 

Senator TOOMEY. Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

I think you are getting a theme here that this is not a partisan 

issue, this is not something that there is a lot of disagreement on 

this Committee about. We are deeply concerned about the status of 

community banks in this country, deeply concerned about what we 

23 

hear back home in terms of overregulation, compliance burden, 

extra paperwork, what needs to happen. And I look at this in kind 

of two different ways. 

First, you have got the obligation to make sure that your rules 

make sense, to make sure that you are doing the lookback; when 

you are enacting these rules, you are actually sensitive to some of 

the issues like appraisals, some of the issues like extra compliance 

and burden. These banks did not create the problem, but yet they 

feel like they have the lion’s share of the burden because they do 

not have the economies of scale. And so what was too small—you 

know, too big to succeed—or too big to fail has now become to small 

to succeed. So it has then allowed new entrants into the market 

that are competing without the burden of regulation, but also has 

really made—not just look at shutting down banks or closing down 

banks but removing lines of credit, especially in the mortgage area. 

And so I want to kind of get to two points. It would be very informative to know what reactions you have had to what you have 

already heard in the Dodd-Frank arena, what reactions you have 

had to what you have already heard about the need for accommodation and retreat on some of the regulation. 

On the other hand, Mr. Bland, you said to the extent the law allows, and I think that is the other challenge we have here, is trying 

to figure out where we are going to put the burden on you to solve 

this problem and where we need to be a partner. And so I am curious, as you have been going through the EGRPRA process, as you 

have met with the community bankers in your meetings, what are 

you hearing about Dodd-Frank that would be impossible for you to 

fix without legislative action? 

Mr. BLAND. Our primary focus has not been on Dodd-Frank in 

the EGRPRA process, but, what we—— 

Senator HEITKAMP. I would imagine they do not hesitate to tell 

you about it, though. 

Mr. BLAND. In a kinda-sorta way, they get at it. 

[Laughter.] 

Mr. BLAND. But I think those themes that you touched on are 

the important ones in terms of the impact relative to the institution. And I think part of the discussion we had earlier about what 

is a community bank I think is an important one because where 

it used to be traditional services in a defined market, it is really 

being stretched in terms of definition when you overlay the competition. But banks are really challenged by what is the right business model and making sure that the rules and regs and our policies and practices mirror what those institutions are—— 

Senator HEITKAMP. But I think our point is, as they are trying 

to meet those challenges, whether it is technology and competing 

with online banking, competing with folks who do not have these 

regulations as their challenge, we do not want to add additional 

unnecessary burden on that challenge. And so I think one of the 

things that would be extraordinarily helpful for me, as you kind of 

go back and look, is to take a look at what you have already done 

in response to concerns that have been raised, and not looking at 

EGRPRA but looking at Dodd-Frank, and then taking a look at 

where you are sympathetic to the concerns that community banks 

or smaller institutions have and what we need to do to fix those 

24 

concerns, because the viability of financial institutions going forward is dependent on its diversity. And I could tell you stories 

about community bankers who did not use QM, but yet were able 

to do 200 mortgages on an Indian reservation that they would not 

have gotten otherwise. That is relationship banking, and none of us 

here want to preside over a Federal policy that eliminates the need 

for relationship banking. 

And so I just would appreciate any information that you could 

get to me about what accommodations you have already made and 

then what needs to happen, in your judgment, beyond that to accommodate the concerns that you are hearing. And, you know, we 

all have a role to play. I think that you guys have heard and are 

starting to react, but this idea—and I think the Chairman talked 

about cost-benefit and so did Mark. How do you evaluate costs? It 

is not good enough to say, ‘‘I do not know.’’ We have got to get to 

the point where we do know so that we can evaluate the risk-benefits of what we are doing in this arena, especially as it relates to 

small institutions. 

Senator TOOMEY. Senator Vitter. 

Senator VITTER. Thank you. I want to start by thanking the 

Chair for calling this hearing and certainly echoing his introductory comments. I think there is great opportunity on a bipartisan 

basis to move forward with some regulatory relief for smaller institutions. And as one piece of evidence of that, Senator Brown and 

I have a bill. The discussion of it has dominated on the section 

which requires higher capital standards or megabanks, but it also 

have a very important separate section offering some significant 

regulatory relief for community banks. And I think that is one example of bipartisan work in that direction. I hope this Committee 

will produce that sort of movement. 

Let me ask all of our guests, in general, what do you think or 

what have you measured as the increase in compliance costs burden in the last few years on community banks specifically? 

Ms. EBERLEY. As I mentioned, we did try to do an empirical 

study in 2012, and the data is just not there to complete the study. 

I can share some anecdotal information that would suggest that 

some of Dodd-Frank’s provisions that were designed to eliminate 

too big to fail may, in fact, be leveling the playing field. 

One of the things that we have seen is loan growth in community 

banks compared to the industry. Last year we started putting out 

our quarterly banking profile with a separate section dedicated to 

community banks and just their financial information. That shows 

that community bank loans grew year over year and quarter over 

quarter at a greater pace than the industry, and it was about 2:1. 

Senator VITTER. OK. What about my question, which was compliance costs? 

Ms. EBERLEY. I mentioned we had attempted to do an empirical 

study, and we cannot—— 

Senator VITTER. OK. So you do not know. Does anyone else have 

any general perceptions or studies regarding compliance costs of 

community banks in the last few years? 

Ms. HUNTER. I would only add that the Federal Reserve cosponsors a research conference with the Conference of State Bank Supervisors. We have had two of those conferences. There have been 

25 

some papers presented at those conferences, getting at this very 

issue. Not having the details in front of me on exactly what each 

study said or did, I would not want to quote them directly, but I 

do recall, for example, one paper looked at the very smallest institutions and found that having to hire one more compliance staff 

member made the difference between profitability and nonprofitability. 

So those kinds of studies are really helpful in that we take that 

information and when we think about the impact of new requirements and as we are implementing them, try to take the least burdensome path to achieving the result that was intended in the law. 

Mr. BLAND. Senator Vitter, we do not have any assessments like 

that. 

Senator VITTER. OK. Anybody else have any? 

Ms. FRANKS. I would just echo what Ms. Hunter said as far as 

the Community Bank Research Conference, because we have had 

some papers presented that do address some of those issues, particularly on small banks, and we will be glad to get that information to you, Senator. 

Senator VITTER. OK. Well, I would really commend this issue to 

all of you. It is pretty darn important. Compliance costs have 

mushroomed. That impacts every financial institution, but it disproportionately impacts smaller ones for the reasons Ms. Hunter 

suggested. You know, if you increase compliance costs 100 percent, 

Citi is in a much better position to deal with that than a small 

community bank for whom it can literally put them under or cause 

them to have to sell out—a trend which is clearly accelerating. So 

I really commend that to you. It is awfully important, and certainly 

my perception, talking to community banks every week, is that the 

burden is enormous. For the most part, they are dealing with 

things, solutions for things they had—problems they had nothing 

to do with, and yet the burden on them is far bigger proportionally 

than it is on larger institutions. 

Another theme I hear all the time from smaller banks is real 

concern that Dodd-Frank and other recent regulation is pushing toward a one-size-fits-all, very standardized model for products. And 

they really think that is taking away their whole reason for existence in essence, their whole niche in the market. And in that context, the qualified mortgage issue comes up a lot. 

Do you hear that from community banks? And what is your reaction? 

Ms. EBERLEY. We have heard a lot from community banks about 

the concerns with the ability to repay and QM rules, primarily relating to the definitions of rural and small bank. We have shared 

those concerns with CFPB as we have heard them, and CFPB has 

recently put forth a Notice of Proposed Rulemaking to respond to 

the concerns that they have heard from community banks and offering some expanded designations. 

Senator TOOMEY. Thank you. 

Senator VITTER. OK. 

Senator TOOMEY. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair. 

The feedback that I get from my community banks around costs, 

around the general topic we are discussing, are overlapping audits, 

26 

visits from different regulatory bodies, uncoordinated—too many 

staff coming in, overwhelming the local institution, the costs of preparing for that. 

You mentioned, Ms. Eberley, the 2012 study. In that study, the 

community banking study, was there an effort to step into the 

mind-set of a community bank and look at it from their point of 

view in terms of how many regulators are coming, how often, in 

what kinds of numbers, and whether there is a way to coordinate 

that whole set of activities in order to diminish the burden on community banks while achieving the core purposes of the regulatory 

visits? 

Ms. EBERLEY. At the same time that we completed the data 

study, we embarked on an outreach initiative that started with a 

symposium of community banks that we held in Washington, followed by outreach sessions around the country in each of our regional offices, hosted by our Chairmen, and we specifically asked 

institutions, you know, what were the things that created burden 

for them. They talked about new regulations, they talked about 

communication, and they talked about the examination process and 

ways that we could make it better. We took actions back in 2012 

and 2013 on the feedback that we received from institutions and 

the feedback that we continue to receive. In particular, we streamlined our pre-exam planning process, the information that we ask 

institutions for before we go in, to make the examination process 

smoother once we get there. So we try to do as much work off-site 

as possible before we even show up, so that we go in with informed 

examiners ready to hit the ground running and limit the examination process. 

We did not get specific feedback during that process that I recall 

about coordination with other regulators, but we do work on that 

at a local level with our State counterparts through our field supervisors as they go through examination planning. We have cooperative examination agreements that define who will examine the institution when. 

Senator MERKLEY. Thank you. I am going to cut you off there. 

I think you have gotten to the core of the type of feedback loop that 

is so important. I am not sure, based on the feedback from my community banks, that it cannot be further improved on, but I gather 

you are continuing to hold the regional roundtables to try to get to 

the heart of this. And I appreciate that. 

Another piece of the commentary is that rules that were designed 

really for big banks engaged in market making, banks that are engaged in wealth management and investments in wealth management funds, banks that have trading going on in the derivative 

markets, these rules become part of an examination process that 

just is a burden and misappropriately applied. 

Is that a problem? And is it getting addressed? Yes, as the primary regulator of small community banks. 

Ms. EBERLEY. Absolutely. I would say first that all of our examiners are trained as community bank examiners, so they are aware 

of the rules that apply to community banks. We have a number of 

controls in place to prevent any kind of trickle-down, if the concern 

is that the rules that are meant for the largest banks are being applied to smaller banks. 

27 

First is just the good education of our staff. We have a very professional and experienced examination staff. 

Second, every report of examination goes through at least one 

level of review by a case manager in our regional office, who, again, 

is trained in all of our rules and regulations and what applies to 

which institutions. 

Third, we audit our regional office adherence to policy on a regular basis to ensure that we are being consistent across the country. And we stress communication at all levels that if institutions 

have any concerns, that they bring them up early in the examination process so that we can resolve them. 

Senator MERKLEY. Thank you. In short, you are saying that that 

really is not an issue for the things you are doing, and I am sure 

that will lead to further discussion of that. 

Then, finally, the feedback is—and this was referred to, I believe, 

by Senator Warner—that even when formal requirements do not 

exist, the regulators in the examinations are often saying, ‘‘Well, 

you must do X.’’ And it is, like, ‘‘Well, why is that?’’ ‘‘Well, it is a 

best practice, and so you really do not legally have to do it, but we 

expect you to do it.’’ And that trickle of best practices from large 

institutions down is creating challenges and problems that may be, 

again, inappropriately suited to small community banks. Is that an 

area you feel like you have adequately addressed? 

Mr. BLAND. Senator, I can jump in here. Absolutely, this whole 

notion of best practices is something that we have to guard against, 

because some of the intentions are good, but the net effect, as you 

say, could be bad in terms of the institutions. And so one of the 

things we do is make sure we emphasize a matter requiring attention, which is an identified issue that the banks need to address, 

versus a best practice or a recommendation. Most recently, we updated our guidance to be very clear about what our examiners communicate, the things that have to be done because they are impacting the bank versus those things that are nice-to-do’s. And so that 

is one of the things that we really have to focus on. 

But one of the keys that is really at this is explaining the why 

to bankers. Why are we asking them to do this? And then what 

will be the tangible benefit of acting on whatever our recommendation is? 

Senator MERKLEY. Thank you. My time is up, but I appreciate 

the feedback. Thanks. 

Senator TOOMEY. Thank you, and I will claim my time at this 

point. 

I would like to submit for the record a letter that I received from 

Comptroller Curry that contained a number of suggested reforms 

that I appreciate very much. Hearing no objection, I will submit 

that to the record. 

Second, I want to make a brief editorial comment, if I could. I 

just want to underscore how frequently we had sometimes several 

hundred new bank charters issued in a given year across this country, not at all unusual to have 100, 200 new charters in a year. To 

go for 6 years with only two new charters, I have to say I find it 

wildly implausible to think that that is a reflection of a business 

cycle. In my view, it is very clearly a combination of a zero interest 

rate environment that has been engineered by the Fed and massive 

28 

regulation that makes it impossible for people to see how they can 

have a surviving community bank. I say this as a person who 

helped launch a community bank in 2005. I was shocked by the 

amount of regulation that that bank was subject to then, and that 

was before Dodd-Frank. It has clearly gotten much, much worse, 

and it is impossible to believe that this is not related to the just 

virtually complete halt in a very, very important source of capital 

for small businesses and consumers. 

Having said that, what I think is very good news today is what 

I really want to talk about, and that is that the OCC has, in my 

mind, quite constructively, suggested several significant reforms, 

and I would like to pursue a discussion about that, especially with 

Mr. Bland, because this is exactly the conversation I think we 

should have. What are the specific things we can do that will help 

the existing community banks and more community banks serve 

the credit needs of their community? 

So, Mr. Bland, as you know and you mentioned in your testimony, one of the proposals you have suggested is to exempt community banks with assets of less than $10 billion from the Volcker 

rule, and I want to discuss that a little bit. But let me first start 

by—is it your sense, is it generally true that banks of $10 billion 

and less engage in virtually none or a de minimis amount of the 

activities meant to be precluded by the Volcker rule? 

Mr. BLAND. Senator Toomey, that is correct. Our assessment 

around this area has shown that a lot of the activities that most 

community banks engage in is not under the purpose of the proposed rule. And, therefore, to require the compliance effort to make 

that determination seems costly compared to the actual activities 

that they have. And so that is where our view is on that. 

And then even if institutions were involved in activities that 

would follow the rule, the extent of those activities are not significant relative to larger institutions. And so the realization of looking 

at institutions around the $10 billion and under mark did not seem 

to be the intent of the legislation. So that is pretty much the bedrock of our proposal. 

Senator TOOMEY. And the reality is that these small banks have 

to spend a fair amount of time and energy and resources simply 

proving that they do not do what they have never done. Is that 

fair? 

Mr. BLAND. That is correct. And, Senator Toomey, our thought 

is we can use the supervisory process to make assessments of 

whether or not those types of activities pose risks that we need to 

address. 

Senator TOOMEY. So I would like to ask Ms. Eberley and Ms. 

Hunter just briefly, are you open to pursuing a reform such as 

what has been proposed by the OCC? 

Ms. HUNTER. Well, speaking for the Federal Reserve, I know 

Governor Tarullo, in testimony and in speeches, has voiced support 

for the proposal for exactly the reasons that Mr. Bland identified. 

Community banks do have some activities that are covered by the 

Volcker rule, but the risks are not nearly as great as for the largest 

institutions and it can be managed in the supervisory process. 

Senator TOOMEY. Thank you. 

Ms. Eberley. 

29 

Ms. EBERLEY. We would estimate that very few of the banks, if 

any, that we supervise are engaged in activities covered by Volcker, 

but we have not taken an agency position. 

Senator TOOMEY. Well, I would encourage you to consider this seriously. I think it is a very constructive proposal. 

The last point I would make is, Mr. Bland, would you agree that 

there is nothing magical about the $10 billion figure? In other 

words, there is nothing intrinsic about one incremental dollar 

above that that suddenly gives rise to the activities? 

Mr. BLAND. I would agree with that. 

Senator TOOMEY. OK. The second thing I want to touch on was 

you have also suggested that banks with up to $750 million in assets be examined every 18 months rather than every 12 months. 

Now, isn’t it true that the size of the banks is not the only criteria 

that would determine whether they get that little bit of relief from 

the frequency of these reviews? 

Mr. BLAND. Yes, the primary driver is well managed, and the 

ability of these banks in terms of the risks, but their proven performance. And really one of the major emphases here is for us to 

divert our attention to less well managed institutions, so it is a 

matter of devoting our resources, but also to lessen the burden on 

those banks that are performing well and that are managing themselves properly. 

Senator TOOMEY. I think that is a very constructive approach. 

Again, Ms. Eberley and Ms. Hunter, just briefly, because I am 

out of time, have you considered this? And are you open to this 

type of reform as well? 

Ms. EBERLEY. We indicated our support in our opening statement. 

Senator TOOMEY. OK. 

Ms. HUNTER. Yes, and I think this is also a suggestion that OCC 

are looking at. One point I would make is we also hear proposals 

about cutting back on Call Report reporting, and that combined 

with extending of frequency or somehow reducing— on-site presence, there is a tradeoff there. We could use the reported information to monitor risks, which would allow us to feel comfortable extending exam frequency for certain institutions. 

Senator TOOMEY. Thank you. My time has expired. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman 

Our community banks and credit unions play a unique and critical role in the market for financial services, and we must ensure 

that they can continue to do that in the years ahead. These small 

institutions clearly do not pose the same kinds of risks as the biggest banks, and our regulation and supervision of these institutions 

should reflect that. 

The good news is that Dodd-Frank does reflect that basic principle. It exempts community banks and credit unions from many of 

its rules, and for the others it almost always gives regulators the 

discretion to tailor their approach based on the size and business 

model of the institution. 

So when Members of Congress start talking about rolling back 

regulations in the name of community banks, I want to be sure 

30 

that it is really about helping community banks and not about 

helping their much larger competitors. 

I want to start with this: Ms. Hunter, in your testimony you note 

that the Fed defines ‘‘community banking organizations’’ as those 

with under $10 billion in assets. Is that right? 

Ms. HUNTER. Yes, that is true. 

Senator WARREN. Good. And, Mr. Bland, I us that the OCC’s definition of community banks looks at a few factors in addition to 

asset size, but under the OCC’s definition, what percentage of community banks have under $10 billion in assets? 

Mr. BLAND. Senator Warren, we have about 85 percent of our banks are less than $10 billion. 

Senator WARREN. OK. And about what percent are under $1 billion in assets? 

Mr. BLAND. Boy, that is a good test for me. We have 1,400 banks 

under $1 billion. We supervise a total of 1,600, so that is really in 

the higher 80s. 

Senator WARREN. So it is going to be in the higher 80s. So nearly 

all of the banks that you are supervising, community banks are 

going to be under $1 billion, much less under $10 billion. 

Mr. BLAND. That is correct. 

Senator WARREN. And, finally, Ms. Eberley, I know that the 

FDIC also defines community banks by examining a few different 

factors in addition to size, but I have the same question for you. 

Under FDIC definition, what percentage of community banks are 

under about $10 billion? 

Ms. EBERLEY. Using our definition, 94 percent of the banks under $10 billion meet our definition. A couple over $10 billion 

meet it. 

Senator WARREN. OK. So the banks—you have got a few that are 

under $10 billion that do not meet the definition of community 

banks. 

Ms. EBERLEY. That is correct. 

Senator WARREN. But your community banks, the ones that do 

meet the definition, are nearly all concentrated under $100 billion. 

You said all but a few, I think. 

Ms. EBERLEY. Yes, yes. 

Senator WARREN. And how many under $1 billion, that is, way under $10 billion? 

Ms. EBERLEY. That is 90 percent of institutions. 

Senator WARREN. OK. Thank you. So it sounds to me like the 

consensus from our Federal regulators is that, out of the several 

thousand community banks out there, nearly every single one has 

under $10 billion in assets and most are under $1 billion in assets. 

There are a lot of bills out there that are being promoted as helping community banks, but I want to look just a little bit closer at 

who they will actually help, and here is an example. 

Under current law, banks with less than $10 billion in assets are 

completely exempted from the examination and reporting requirements of the Consumer Financial Protection Bureau. A bill introduced in the last Congress would have raised that exemption 

threshold from $10 billion to $50 billion. By raising that exemption 

threshold, would that bill benefit any of the 99 percent of community banks that are under $10 billion in assets? Anyone? 

31 

[Witnesses shaking heads.] 

Senator WARREN. No? OK. I will take that as a no. 

In fact, given that the banks between $10 billion and $50 billion 

in assets directly compete with the community banks in many communities, would not a bill that raises the Consumer Financial Protection Bureau threshold to $50 billion actually hurt community 

banks by helping their competitors? Anyone? In other words, it just 

adds more competition against what we define as community 

banks. 

So I just think that 6 years ago—we need to focus on the fact 

that 6 years ago we suffered through the worst financial crisis in 

generations, one that caused millions of families to lose their 

homes, their jobs, their retirement savings, and that forced taxpayers to bail out the biggest banks. We put in new rules to try 

to rein in the biggest financial institutions. It is important that our 

community banks and credit unions thrive, but rolling back important protections to help the biggest banks just puts community 

banks at a greater disadvantage. 

The big banks are going to keep using the small banks as cover 

for their special rollbacks. That is what they did before the crisis, 

and that is what they have been doing after the crisis. We should 

not fall for that trick. 

Thank you, Mr. Chairman. 

Chairman SHELBY. [Presiding.] Senator Moran. 

Senator MORAN. Mr. Chairman, good morning. Thank you all— 

way over here. I have a profile view of you this year. Thank you 

all for being back. I was speculating with my staff about the number of times we have had hearings in this room. Many of you have 

participated before. We are guessing three or four times a year we 

have examined the issue of the regulation of community banks. 

My question initially is: What has changed? I have been a Member of this Committee, now I am beginning my fifth year. My position at the end of the table does not demonstrate that, but I have 

been here for 5 years. 

[Laughter.] 

Senator MORAN. What have we eliminated, what have we improved in the issue of community banks? And somewhat in response to the Senator from Massachusetts, I am not particularly 

interested in the banks. I am interested in the people they lend 

money to. And while we talk about $1 billion deposit banks, what 

I am thinking about is banks that are less than $100 million. That 

dominates our State. I have made the case, and perhaps this 

sounds a bit back home, but economic development can be whether 

or not there is a grocery store in many of the communities I represent, and that translates in today’s hearing in my world is if 

there is not a community bank that cares about the community, 

that is willing to take a risk because it matters to that community 

that there is a grocery store, and taking that risk they believe they 

are going to get a return on their investment, if they are wrong, 

it does not create a systemic problem for the country’s financial circumstances. 

What are we doing to take care of those folks who are willing to 

have relationship banking because they are so connected to their 

community? My question about the hearings is: Has anything 

32 

changed in the 5 years that we have had 20 hearings on this topic? 

Have we made any progress? Or are my bankers just folks who like 

to complain and come to my town hall meetings and tell me stories 

that really they should not worry about? 

I asked this question in a previous hearing. What have you ever 

heard in one of these hearings that you have taken back and there 

has been a consequence to what you heard at a hearing and said, 

‘‘Let us solve this problem’’? 

Ms. HUNTER. Well, I will go ahead and start off. 

Senator MORAN. Thank you. 

Ms. HUNTER. Especially since I spent a considerable amount of 

time in your State earlier in my career. 

So some things have changed and some have not. I would think 

that one thing that has changed, certainly we have been through 

a very significant economic cycle. That always changes the environment with which examiners in particular are looking at banks and 

assessing the risks that they have. So that will change from year 

to year, the intensity of examination activity or discussions. 

I think to some of the earlier discussion, some of the more recent 

regulatory changes, there have been some new requirements for 

community banks, but by far the vast majority, the most significant 

changes are falling on the larger institutions. That is hard to absorb, though, when they are struggling to absorb additional compliance activities or adapt to new rules. 

One thing I would say is that when we come to these hearings, 

we do take it very seriously. I know at the Federal Reserve—and 

I am confident my counterparts would say the same thing—we look 

very carefully at our procedures, at our examinations, and the messages that we give to our examiners, we review across districts, 

across examination offices to see are we being consistent, are we 

responding to concerns that we hear from bankers. And sometimes 

we will find, yes, we are asking for things that are beyond what 

we had initially envisioned might be necessary and we will invest 

more in training to deal with that through changing our supervisory process. 

Senator MORAN. How much of the problems that a banker or a 

bank faces in the regulatory environment comes from decisions 

made by the local office, the local examiner? Is that an issue in 

which the applications are applied in a different manner in a particular region or community versus what decisions you make and 

what guidelines you put in place for those exams? 

Ms. HUNTER. Well, I will start again. The way our process works 

is we delegate supervision and responsibility to the Reserve Banks, 

which means if there is an examination or supervision of a wellmanaged institution, the decisions are made locally. Where we 

have more involvement from Washington is when I would think the 

industry would want us to have greater consistency, decisions 

around issues about if we are restricting capital distributions or 

some other kind of important factor that might come up through 

the supervisory process. Here being consistent across districts is 

quite important, and that is when we will try to bring those issues 

to Washington. 

Senator MORAN. I remember the last time we had this conversation, you played the Kansas card with me. It always works. 

33 

[Laughter.] 

Senator MORAN. It is difficult to chastise anybody who spent time 

in our State. 

Just a couple of other observations, and I will conclude. I do not 

know that there is a question here, but my point in this part of the 

conversation is I want these hearings to make a difference, and in 

part we need to know what it is legislatively by law needs to be 

changed. But I hope that this is not just something that has become a routine in hearing us espouse the challenge we face. 

One of those challenges—and it is going to change again, I do not 

know whether for the good or the bad, on August 1st in regard to 

real estate mortgages. I have had at least a dozen community 

bankers tell me they no longer make real estate loans to people 

who want to buy a home in a town of 2,000 people. What an amazing development. And the only reason they say they do not do it 

is the nature of the regulations, the uncertainty of whether they 

are complying, and the consequences if they are not. And to live in 

a community of 2,000 or 3,000 people and have your hometown 

bank say, ‘‘I am sorry, I cannot make you a loan because I am fearful that I might not cross the ‘t’ and dot the ‘I,’ ’’ that is a pretty 

damning thing, in my view, for the future of rural America. 

I just was going to point out that Senator Tester and I will once 

again package—we are drafting a small lending credit union/bank 

piece of legislation, and I am hoping that in this new Congress it 

has the opportunity to be heard in this Committee and action 

taken and be considered on the Senate floor, and I look forward to 

working with you to see that we get the right framework in place. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Brown. 

Senator BROWN. Thank you for one more question, Mr. Chairman, on the second round. 

I want to first say I agree with Senator Warren and Senator 

Moran on the whole idea of what we should do to help the smallest 

banks. As I said earlier, in my State, in Ohio, a State of almost 12 

million people, 80 percent of the community banks are very small, 

under $500 million in total assets. So we know who we are aiming 

at here. 

This is a question for the four of you. Sorry again to leave you 

out, Ms. Franks. At the hearing last fall, I asked you to describe 

and define community banks and small credit unions. Your answers were helpful as we thought about regulatory relief and generally identified the smallest institutions serving local areas with 

a very simple business model. One banker told me that banking 

should be boring, and he has been very successful at growing a 

very small bank into a several-billion-dollar community bank. 

As we consider proposals to provide regulatory relief to these 

smaller institutions, I am reminded of an exchange I had within 

then-Chairman Bernanke a couple years ago. He indicated that 

regulators should do whatever we need to do to make sure the financial system—‘‘that our financial system is safe.’’ I agree with 

that sentiment. I want to ensure that any steps taken by you all 

or by us to provide regulatory relief first and foremost keep the 

system safe. I know your comments play into that. I know you believe that it is very important. 

34 

So this question is for the entire panel. I will start this time with 

you, Mr. Fazio, and work to your right, to my left. Is there a particular size of institution that you believe would benefit the most 

from regulatory relief? What should we know about the causes and 

failures of small institutions as we consider these regulatory relief 

proposals? What analysis are you doing on Congress’ regulatory relief proposals to ensure that the relief is targeted to those institutions that need it most and that those proposals do not threaten 

safety and soundness or do not strip away consumer protections, 

regardless of the size of the banks. 

So, Mr. Fazio, if you would take that sort of mix of four questions 

and just give us thoughts as specific as you can, each of you. 

Mr. FAZIO. Well, I would start with the fact that under the Regulatory Flexibility Act analysis, we have historically defined small as 

$50 million or less. We had increased that several-fold in January 

of 2013 when the NCUA Board raised that definition to $50 million. The board next week is going to take up that new definition 

and potentially raise it to as high as $100 million. Eighty percent 

of all credit unions are $100 million or less in assets, so that would 

exempt—or that would provide special analysis that we would do 

in considering exempting or scaling expectations for safety and 

soundness and other regulatory provisions in the rules we make. 

So I think that is mainly how we think about a smaller entity in 

our context. 

What we try to do, as I had indicated, is scale and target our regulations at the institutions that have the most risk and that have 

the size and complexity to deal with it. We do take every opportunity to tailor our processes and to understand the costs and the 

benefits as it relates to credit unions when we need to do safety 

and soundness-based regulations to support that. And so we have 

done a lot of things to try to help along those areas. A big part of 

it—and we have heard about it today a lot at the hearing—is the 

exam process itself and the supervision process, and we have made 

significant strides in recent years to tailor our exam process to help 

small entities, to reduce the burden on them, to support them. We 

have an office that is dedicated to supporting small credit unions. 

It is called the Office of Small Credit Union Initiatives. We provide 

a lot of training and consulting, partnership opportunities. So we 

are doing a lot of that. 

We would be mindful of any legislation going forward that would 

preserve the ability for us to continue to flexibly approach cost-benefit analyses in the way we approach targeting and scaling our regulations, so that would be our thought process, at least in terms 

of potential future legislation. 

Senator BROWN. Thank you. 

Mr. Bland. 

Mr. BLAND. Senator Brown, when you look at the community 

banks the OCC supervises, 1,400 of our 1,600 are less than $1 billion. So that is what our primary focus is around. 

But I would also caution all of us, though, when you look at what 

is happening in the industry today, with technology in particular, 

it is changing the size. But also we have to be careful of prescribing 

certain limits that also then prescribes what a bank can do under 

those limits, because we run the risk of threatening innovation in 

35 

the industry. And so at the OCC we do use asset size as a pointer, 

but then we try to delve deeper into what activities and complexity 

that those institutions are involved in. Coming out of the last crisis, we had institutions that were very small doing very complicated things that required them to have the requisite systems. 

For the most part, the institutions that we supervise are less than $1 billion. But we are also trying to challenge ourselves as we 

contemplate rules around what they do, not so much what their 

size is. 

Senator BROWN. Thank you. 

Ms. Hunter. 

Ms. HUNTER. Your question is who would benefit most and kind 

of linking it back to causes of failure. For small banks the cause 

of failure is generally bad loans and not enough capital to absorb 

the losses, and that is something we have seen over decades. So 

when you think about small banks, making sure the safety and 

soundness elements, the capital, is sufficient, that is obviously important. 

In terms of who would benefit, I am very interested to hear what 

the bankers have to tell us when we do the EGRPRA outreach session focused on rural institutions. I think those banks are different 

from even the suburban community banks that might be just under 

$10 billion, and so I am hoping that we will hear something that 

might be useful and how we can address their particular needs. 

Senator BROWN. Thank you. 

Ms. Eberley. 

Ms. EBERLEY. The definition we use is also not asset based. We 

look at the activities of the institution, relationship-based lending 

funded by core deposits in a relatively tight geographic market. So 

they have local knowledge and local experience and face-to-face 

work with their customers. 

In terms of the lessons learned from the crisis that we should 

keep in mind as we think about regulatory relief, I will draw back 

a little bit from the last crisis as well. You know, there is no substitute for an on-site examination of an institution—the time that 

we spend face-to-face with management and understanding the 

bank’s activities and risks and what they are doing. To Toney’s 

point about understanding the risk profile of the institution, you 

can be a very small institution engaged in very risky activities. 

Quality and quantity of capital are important; as is recognizing loss 

timely. A lot of institutions at the beginning of the crisis did not, 

and that prevented them from being able to raise capital. 

Concentrations have to be managed. Early supervisory intervention makes a difference. Institutions where there was early supervisory intervention and they heeded the recommendations fared 

better than those who did not. And rapid growth funded by noncore 

deposits creates a situation where there is really no franchise value 

and institutions struggle to find investors when they need capital 

down the road because they have not created a franchise. 

So those are some of the key lessons that we would look at when 

we are looking at regulatory relief proposals and also just looking 

back to what was the original reason for the rule and do any of 

these things still play today. 

Senator BROWN. Thank you. Thank you all. 

36 

Chairman SHELBY. Thank you, Senator Brown. 

A 2012 study found that of 192 Dodd-Frank rulemakings done 

through 2012, 74 percent contain no cost-benefit analysis or no 

quantitative analysis. This means that as of 2012 we had no idea 

how much three-fourths of Dodd-Frank rules would cost to comply 

with. 

Assuming this is true—and I think the study showed it—does 

this concern you, Ms. Eberley? 

Ms. EBERLEY. It would not be in conformance with the way that 

we approach rulemaking, which is we certainly do work to do costbenefit analysis and consider the costs, benefits, and alternatives. 

Chairman SHELBY. Sure. Does that concern you, does it concern 

the Federal Reserve? 

Ms. HUNTER. I would add to Ms. Eberley’s comment, in making 

rules we do consider costs and benefits and do quantitative impact 

studies on a number of issues related to rulemaking. So I know 

that that analysis underlies the development of the rule. 

Chairman SHELBY. Mr. Bland. 

Mr. BLAND. Chairman Shelby—— 

Chairman SHELBY. Is that important? Is cost-benefit analysis important? 

Mr. BLAND. It is important. 

Chairman SHELBY. OK. 

Mr. BLAND. And, you know, with the regulations under DoddFrank that the OCC is responsible for, as I mentioned earlier, we 

do an economic impact analysis, and that is part of our process, 

and it is really embedded in our rulemaking process. 

Chairman SHELBY. Mr. Fazio, is cost-benefit analysis important 

to the viability of the credit unions, too many regulations not 

thought out? 

Mr. FAZIO. Yes, sir, that is important, and we, again, try to articulate those costs and analyze those costs where we can. 

Chairman SHELBY. Sure. Ms. Franks. 

Ms. FRANKS. We believe a cost-benefit analysis is beneficial. We 

do that in Arkansas, so that is something that we certainly take 

in mind. 

Chairman SHELBY. Ms. Hunter, you said earlier that it is easy 

to calculate the cost of regulations but not the benefits. That might 

be true. I do not know. But maybe more work needs to be done. 

In 2011, the General Accounting Office found that Federal financial regulators’ economic analysis for Dodd-Frank ‘‘falls short’’ of 

what could be done. How do you respond to that? Do you think that 

you need to do more? A lot of us think you need to do more—— 

Ms. HUNTER. Well, if I said it was easy, I would try to qualify 

that by saying it is easier when it is focused in on specific institutions. 

Chairman SHELBY. ‘‘Easy’’ or ‘‘easier’’? 

Ms. HUNTER. Easier to identify costs that affect particular institutions. And so along those lines, I would add that, yes, we very 

much value information about costs. When we put rules out for 

comment, the most valuable ones are when institutions tell us, 

‘‘Here is a real impact. Here is a cost I am going to have to have. 

Here is the impact on perhaps my need to change computer systems in order to implement what you propose.’’ We respond to 

37 

those and incorporate those into the final rules, and I think our 

capital rules are a good example where we took the feedback from 

the banks about the cost of implementation and made adjustments. 

So we do recognize that more information on cost is valuable. I 

hope that as we go through the EGRPRA process we will hear more 

about it, but certainly in any comment period, the more specific information we get from the institutions, the better. 

Chairman SHELBY. A lot of us that advocate cost-benefit analysis 

for all regulations, not just for banks, but I have been pushing that 

for years, it defies logic not to do it. But we are not saying to you 

as bank regulators loosen the regulations and do not worry about 

safety and soundness. We do worry about that. You have got to do 

that. But do the whole thing and do it right, because I know from 

being up here on this Committee 29 years, I can tell you that a lot 

of those regulations make no sense and they ought to be weighed 

in the balance. 

Senator Cotton. 

Senator COTTON. Thank you. 

Chairman SHELBY. We have one of your Arkansans here. 

Senator COTTON. I know that. Very proud and excited. I apologize for being a little late. I was presiding over the Senate, which 

I think is the Senate’s version of paying your dues, right? 

Thank you all very much for your time. I want to touch on the 

mortgage servicing business, a specific concern I have about the 

mortgage servicing business being driven into a largely unregulated shadow nonbank system. Some reports I have seen suggest 

that you have seen at least a doubling if not a tripling of nonbank 

companies moving into the mortgage servicing business. A lot of 

banks are divesting of this business. And I wanted to ask, first, 

why you think this is, and maybe we can start with Ms. Eberley. 

Ms. EBERLEY. Not a lot of the banks that we supervise have significant amounts of mortgage servicing businesses. By and large, 

community banks do very small amounts, and they are keeping it. 

Senator COTTON. Ms. Hunter. 

Ms. HUNTER. The mortgage servicing industry certainly has undergone significant changes in recent years, so we are noting that 

there is some shift away from the larger banking organizations, but 

at this point I do not know that I could add any more insight on 

that. 

Mr. BLAND. Senator Cotton, I would share what has been said 

also, but I also would say that continuing innovation and speed of 

delivery and technology is making a big difference in who can provide the services at a more effective cost, and that has been a big 

driver as well. 

Mr. FAZIO. Most credit unions portfolio their mortgages, and they 

service them. Not many credit unions hold mortgage servicing assets on their books. A few do. It is a very small percentage, and 

we have not seen any real trends to move those outside of the credit union portfolio. 

Ms. FRANKS. We feel the capital requirements that are causing 

these mortgage servicing rights to be taken to other sources will 

cause relationship lending to be dampened, and we would like to 

see our banks be able to continue to service those mortgages that 

they produce. State regulators, many State regulators—I do not, 

38 

but many State regulators do regulate those mortgage service companies, and I know that they are looking at prudential standards 

for those companies. 

Senator COTTON. And, Ms. Franks, you are talking about the regulations implementing the Basel III capital requirements? 

Ms. FRANKS. Right. 

Senator COTTON. I have to say that I tend to agree with your assessment, Ms. Franks, and that is not just chauvinism for Arkansas. But this is, you know, what I have heard and what I have seen 

in other studies. So, you know, one question that I would like to 

ask is: Was there any study in particular on the assets that the 

regulations implementing the capital requirements have on the 

mortgage servicing business, not the general study on capital requirements but specifically the impact it could have on the mortgage servicing business, especially of small and midsize banks? 

Ms. EBERLEY. We absolutely looked at it for community institutions in response to the comments we received as part of the capital rulemaking. And as I noted, there are very few community institutions that are engaged in mortgage servicing to a level that 

would have been impacted by the new capital rules. 

Senator COTTON. Ms. Hunter. 

Ms. HUNTER. Yes, I would only add the goal of the capital rules 

was to make the capital regime more resilient, and as I understand 

it, in going through the comment process, we looked at various 

classes of assets. Those assets that proved to be less liquid in the 

financial crisis and when institutions needed more liquidity in 

those assets, those tended not to get the more relaxed treatment 

than some of the other assets perhaps received in the final rule. 

Senator COTTON. Well, I mean, I appreciate the goal. I just feel 

that this may be another instance in Dodd-Frank and its implementation and the overall regulatory environment we have seen 

over the last few years where we have actually been aiming at one 

goal and maybe having the opposite result, driving activity out of 

the regulated banking and credit union sphere and into nonbank 

businesses. To me it seems like this is a problem for at least two 

reasons. One, for community banks in particular, especially in a 

State like Arkansas—and I know States like Alabama and Tennessee and other States represented here—that is a good business, 

provides a good margin, has relatively safe assets; but, two, it is 

also very bad for the people we serve, the consumers of those 

banks. You know, rather than dealing with a small bank in a place 

like Yell County, Arkansas, or, for that matter, in Pulaski County, 

Arkansas, which is small by Washington standards, you know, they 

may end up now dealing with esoteric and obscure nonbank entities that are far away, where they have less recourse and less protections than they would if they were dealing with their community 

banks and their credit unions. 

My time has expired. I want to thank you all for your time, and, 

Ms. Franks, thank you in particular for increasing the number of 

Arkansans we have in Washington today. 

Chairman SHELBY. Senator Corker. 

Senator CORKER. Well, thank you, Mr. Chairman. I apologize for 

being in a closed session for the last 21⁄2 hours regarding Iran, and 

I know that the key questions that I had hoped to ask have been 

39 

asked by others. I just came to say to you I appreciate you having 

this hearing and for these distinguished witnesses being here. 

I think it is really evident that while Dodd-Frank was put in 

place to attempt to deal with financial stability and some of the 

risks that especially the larger institutions in America posed and 

to try to cause them to not be such a threat, if you will, to our Nation’s economy, there is no question that what has happened in the 

process is that our community banks have been tremendously affected. We are losing community banks left and right. The asset 

base that they have to deal with relative to compliance is causing 

them to be noncompetitive. And I look forward to working with you 

to alleviate some of the restrictions that have been put in place, 

unintentionally I think, on them that are causing them to not be 

able to serve the purpose that they serve in the communities that 

we know thrive from having active community bankers doing what 

they are doing. 

So I thank you. I look forward to working with you. I do have 

some detailed questions that I will send through QFRs, and I look 

forward to additional hearings covering this same topic. 

Chairman SHELBY. Thank you. Thank you, Senator Corker. 

I want to follow up on Senator Moran, and others here alluded 

to this today, but Senator Moran was specific. A small bank, you 

know, we have millions—as all of you know, millions and millions 

of people living in small communities in this country. And he was 

talking about a small bank’s inability to make a ‘‘plain vanilla’’ 

blue-chip loan on a piece of real estate because of regulations. Do 

you all understand that? Nobody wants a failing institution or, you 

know, a troubled institution. But should not banks have clarity on 

what they can do to make it work? Because, you know, we have 

a banking system because we have a free market economy. We 

want to keep it that way. We want to have access to capital. We 

want those debts paid back. We understand all that. But isn’t there 

some way for regulators to solve some of those problems, at least 

try to? Is it a question of capital? Is it a question of management? 

Or is it a problem of overregulation? I do not know. 

Ms. EBERLEY. We have shared the concerns that we have heard 

from community bankers, especially those that are in what they 

think are rural communities but maybe did not meet the definition 

of rural under the CFPB’s rules. I think the CFPB has tried to be 

responsive to that. They have put out a Notice of Proposed Rulemaking expanding the definition of rural and small bank. The expanded rural definition picks up about 1,700 more institutions, 

bringing the total to a little over 4,000, I believe. And the small 

bank exemption expansion will pick up about 700 additional institutions. 

We do think that with those proposals it will make it easier for 

banks in rural communities to comply with the ability-to-repay 

rules and make mortgages. 

Chairman SHELBY. The Federal Reserve, do you have—— 

Ms. HUNTER. Yes, I would add to that I think some of the issues 

we are hearing around the appraisal threshold and some of the appraisal issues, that may also be helpful for the kind of situation 

that you are describing. So we will continue to work on that as we 

move through the EGRPRA process. 

40 

Mr. BLAND. Chairman Shelby, I was going to say the areas you 

listed, I would say all of the above, and for different reasons. I 

think the new and the amount of regulations have had impact on 

institutions, and so to the extent there is relief, we need to give 

them that relief. And one of the things we are doing at the OCC 

is doing that assessment of laws and rules that are not necessary 

or should be modified. 

For example, when the OTS was combined in the OCC, we are 

undertaking and still undertaking a review of all the regulations 

to make sure they are fair and balanced and consistent. 

The other part about management, though, that you mentioned 

is very critical. With the complexity of the industry, you know, 

making sure you have the right skill sets, not only at the board 

level but at the management level, is key. But if they cannot acquire that, particularly rural banks, that is why our collaboration 

paper was emphasizing sharing of resources, which is for some institutions hard to do when they have been solely focused on going 

their own way. But it is important to look for opportunities to manage those costs, offload those costs, but also get the expertise you 

need so rural, urban—we are really stressing that as a good opportunity for institutions. 

Chairman SHELBY. The credit unions? 

Mr. FAZIO. In addition to what my colleagues have mentioned, I 

would say that one of the challenges, we have been in, again, a tremendous period of change, and one of the additional challenges is 

the uncertainty there, the market uncertainty. How will, for example, QM and non-QM loans price? How liquid will they be? What 

is the legal uncertainty? Do we have any court precedents yet, for 

example, on how that will be interpreted? So I think that lack of 

certainty creates challenges for our financial institutions in terms 

of the lending process, and we understand that. What we can do 

about it as regulators and what we try to do at NCUA is to provide, when it is within our authority to do so, clarity about how we 

will view it in the exam process and the supervision process. And 

we have published a lot of guidance on that to try to help credit 

unions understand the rules, the new rules, and how we will examine for them. 

We also do a lot of training and outreach within institutions, especially the smaller ones who are serving in these rural communities, to help them understand those areas and to get training and 

to share best practices. 

Chairman SHELBY. Ms. Franks, do you want to comment on behalf of the small banks? 

Ms. FRANKS. I do, Senator. While we do recognize that the CFPB 

has made some improvements in these areas, we would like to see, 

as far as the State supervisors are concerned, that qualified mortgage—any mortgage loan that is held in portfolio would qualify 

under the QM rules, because when you have made a loan that you 

are holding in portfolio, you have already done the ability-to-repay 

analysis. So we would really like that to be something that is initiated. We feel like that would be an improvement in those areas. 

Chairman SHELBY. Thank you. 

On behalf of the Committee, I want to thank all of the witnesses 

today. We will be following up with each of your agencies as we 

41 

begin consideration of regulatory relief here, and we want your 

input. 

The record will remain open for the next 7 days for additional 

questions, statements, and other materials that any Member may 

wish to submit. 

So thank you very much for your appearance today. The Committee is adjourned. 

[Whereupon, at 12:07 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

42 

PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY 

Mr. Chairman, I not only want to thank you for holding this hearing but I also 

want to take the opportunity to thank the panel of regulators for agreeing to appear 

before the Committee. The topic of regulatory relief for our community financial institutions is not new to the Members of this Committee. Our offices are frequented 

by small banks and credit unions who are struggling under a regulatory regime that 

hasn’t been ‘‘right-sized’’ for them. 

Opening an account or obtaining a loan at your local community bank is often the 

first exposure people have to the financial system. That experience used to be 

marked by exceptional service, personalized products, and an ongoing relationship 

that proved beneficial to both the customer and the banker. It really was like going 

to see George at Bailey Building and Loan for your first mortgage or a loan for your 

local business. 

But over the years, as Washington attempted to deal with problems that were 

much bigger and which emanated from different parts of the financial system, our 

community financial institutions found themselves trying to navigate longer and 

longer regulations and a seemingly endless amount of red tape. While their larger 

brethren, for whom the regulations were targeted, at least had the advantage of 

scale economies to shoulder the cost, small banks not only had to comply with requirements that didn’t suit them, but they also had little ability to pay for additional compliance. 

While I am very frustrated with the current regulatory framework for our community financial institutions, I am encouraged by our regulators’ willingness to appear 

today and address some of these issues head-on. I also want to commend Comptroller Tom Curry, and the staff at the Office of the Comptroller of the Currency, 

for attempting to be proactive in giving the right regulatory touch to our community 

banks. On December 5, 2014, Comptroller Curry sent me a letter and attached three 

legislative proposals that he recommend Congress act on to provide some relief to 

the institutions regulated by the OCC. Mr. Chairman, I’d like to submit that letter 

and those proposals for the record. 

In short the OCC has proposed exempting banks with less than $10 billion in assets from the Volcker Rule, allowing banks with less than $750 million in assets 

be examined every 18 months as opposed to annually, and providing thrifts some 

additional flexibility in their charter in order to remain competitive in the marketplace. I look forward to exploring these proposals with the witnesses later in the 

hearing. 

Our regulators have a tough job to do in promoting a safe and sound financial 

system. As Congress looks to better align the regulatory touch community financial 

institutions receive with the risks they pose to the greater financial system, I ask 

our regulators to be constructive partners in helping us identify those regulations 

that need to be revised and for them to implement the statutory changes Congress 

makes in a manner that is consistent with our intent. 

I look forward to the panel’s testimony and a robust discussion. 

PREPARED STATEMENT OF DOREEN R. EBERLEY 

DIRECTOR OF THE DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT

INSURANCE CORPORATION

FEBRUARY 10, 2015 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) on regulatory relief for community banks. As the primary Federal 

regulator for the majority of community banks, the FDIC has a particular interest 

in understanding the challenges and opportunities they face. 

My testimony will highlight the profile and key performance information for community banks. I then will discuss the current interagency review to identify outdated, unnecessary, or unduly burdensome regulations. Next, I will describe how the 

FDIC strives on an ongoing basis to implement regulations and our supervision program in a way that reflects differences in risk profile among the industry participants, while achieving our supervisory goals of a safe-and-sound banking system. 

Finally, I will touch on our continued work under our Community Bank Initiative 

to respond to requests we have received from community banks for technical assistance. 

43 

1Our research is based on a definition of community banks that goes beyond asset size alone 

to account for each institution’s lending and deposit gathering activities, as well as the limited 

geographic scope of operations that is characteristic of community banks. 2 Community bank is defined as FDIC-insured commercial banks and savings institutions 

meeting the criteria for community banks that were developed for the FDIC’s Community Banking Study, published in December, 2012: http://fdic.gov/regulations/resources/cbi/report/cbifull.pdf. 3Public Law 104-208 (1996), codified at 12 U.S.C. §3311. 4The FFIEC is comprised of the Board of Governors of the Federal Reserve System (FRB), 

the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation 

(FDIC), the National Credit Union Administration (NCUA), the Consumer Financial Protection 

Bureau (CFPB) and the State Liaison Committee (SLC), which is comprised of representatives 

from the Conference of State Bank Supervisors (CSBS), the American Council of State Savings 

Supervisors (ACSSS), and the National Association of State Credit Union Supervisors 

(NASCUS). 5http://www.fdic.gov/EGRPRA/ 

Community Bank Profile 

Community banks provide traditional, relationship-based banking services to their 

communities, including many small towns and rural areas that would otherwise not 

have access to any physical banking services. Community banks (as defined in FDIC 

research 1) make up 93 percent of all banks in the U.S.—a higher percentage than 

at any time going back to at least 1984. While they hold just 14 percent of all banking assets, community banks account for about 45 percent of all of the small loans 

to businesses and farms made by insured institutions. Although 448 community 

banks failed during the recent financial crisis, the vast majority did not. Institutions 

that stuck to their core expertise weathered the crisis and are now performing well. 

The highest rates of failure were observed among noncommunity banks and among 

community banks that departed from the traditional model and tried to grow rapidly with risky assets often funded by volatile noncore and often nonlocal brokered 

deposits. 

The latest available community bank data, 2 as of September 30, 2014, showed 

continued improvement in the overall financial condition of community banks and 

the industry as a whole. Further, the profitability gap between community banks 

and larger, noncommunity banks has narrowed in recent quarters. In the third 

quarter of 2014, community bank return on assets (ROA) rose to 0.97 percent—the 

highest in more than 7 years, and just 6 basis points less than the ROA of noncommunity banks. 

Community banks earned $4.9 billion during the quarter, an increase of 11 percent from a year ago. Higher net interest income, increased noninterest income, and 

lower provision expenses were the primary drivers of stronger earnings at community banks. A steepening of the Treasury yield curve in the year ending in September helped to lift the average community bank net interest margin (NIM) by 2 

basis points from a year ago, even as the industry NIM was falling by 12 basis 

points. Close to 33 percent of the industry’s annual growth in net interest income 

(up $3.2 billion) came from community banks. Meanwhile, community bank loan 

balances rose by 8 percent over the past year compared to 4.6 percent for the industry. Community banks reported growth in all major loan categories, including residential mortgages and loans to small businesses, and asset quality showed continued improvement with noncurrent loans down 20.3 percent from the third quarter 

of 2013. 

EGRPRA Review and Progress to Date 

The FDIC and other regulators are actively seeking input from the industry and 

the public on ways to reduce regulatory burden. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 3 (EGRPRA) requires the Federal Financial 

Institutions Examination Council (FFIEC) 4 , the FDIC, the Federal Reserve Board 

(FRB), and the Office of the Comptroller of the Currency (OCC) to review their regulations at least once every 10 years to identify any regulations that are outdated, 

unnecessary, or unduly burdensome. EGRPRA also requires the agencies to eliminate unnecessary regulations to the extent such action is appropriate. The second 

decennial EGRPRA review is in process with a required report due to Congress in 

2016. The FDIC has developed a comprehensive plan for conducting its EGRPRA 

review that includes coordination with the other Federal banking agencies. 5

As the primary Federal regulator for the majority of community banks, the FDIC 

is keenly aware of the impact that its regulatory requirements can have on smaller 

institutions, which operate with fewer staff and other resources than their larger 

counterparts. Therefore, the FDICs pays particular attention to the impact its regulations may have on smaller and rural institutions that serve areas that otherwise 

44 

would not have access to banking services, and the input community bankers provide regarding those impacts. 

On June 4, 2014, the Federal banking agencies jointly published in the Federal 

Register the first of a series of requests for public comment on regulations. The first 

request for comment covered applications and reporting, powers and activities, and 

international operations. The comment period for this request closed on September 

2, 2014, and 40 comments were received and are being reviewed. The Agencies also 

are in the process of adopting for comment a second Federal Register notice, which 

was approved by the FDIC Board 3 weeks ago, addressing the banking operations, 

capital, and Community Reinvestment Act categories of regulations. 

To date, the agencies also have held two regional outreach meetings in Los Angeles and in Dallas to get direct input as part of the EGRPRA review process. Presenters included bankers, community groups, and consumer groups, and the events 

have been attended by agency principals and senior agency staff. Additional meetings are currently scheduled for Boston on May 4, 2015; Chicago on October 19, 

2015; and Washington, DC, on December 2, 2015. The agencies also plan to hold 

an outreach meeting focused on rural banks. 

In response to what we heard in the first round of comments, the FDIC already 

has acted on regulatory relief suggestions where we could achieve rapid change. In 

November, we issued two Financial Institution Letters (FILs), our primary communication tool for policy and guidance to bankers. 

The first FIL released questions and answers (Q&As) about the deposit insurance 

application process to aid applicants in developing proposals for Federal deposit insurance and to enhance the transparency of the application process. Some EGRPRA 

commenters—and others—indicated that there was some confusion about the 

FDIC’s existing policies and suggested that a clarification of existing policies would 

be helpful. The Q&As address four distinct topics: the purpose and benefits of prefiling meetings, processing timelines, initial capitalization requirements, and business plan requirements. 

The second FIL addressed new procedures that eliminate or reduce the need to 

file applications by institutions wishing to conduct permissible activities through 

certain bank subsidiaries organized as limited liability companies, or LLCs, subject 

to some limited documentation standards. The prior procedures dated back to the 

time when the LLC structure was first permitted for bank subsidiaries. In the past 

10 years, the FDIC processed over 2,200 applications relating to bank activities; the 

vast majority of these applications involved subsidiaries organized as LLCs. Commenters remarked, and we agreed, that an LLC is no longer a novel structure and 

does not create particular safety-and-soundness concerns. We are confident that the 

new procedures will result in a more streamlined process for the institutions we supervise—especially our community institutions—without compromising the FDIC’s 

safety and soundness standards. 

Several themes are emerging through the EGRPRA process that could affect community bankers, such as looking at whether laws and regulations based on longstanding thresholds should be changed—for example, dollar thresholds requiring an 

appraisal or a currency transaction report. Along these same lines, commenters 

have expressed an interest in decreasing the frequency of examinations set forth in 

statute, increasing the size of the institutions eligible for longer examination intervals, or both. Commenters also have asked that we ensure that supervisory expectations intended for large banks are not applied to community banks and that we 

have open and regular lines of communication with community bankers. We look 

forward to continuing to receive comments during the EGRPRA process and through 

the outreach sessions and we intend to carefully consider comments received. It is 

our intention to continue looking for ways to reduce or eliminate outdated or unnecessary requirements as we move forward with this review, rather than wait until 

the end of the EGRPRA process. 

Tailored Supervisory Approach for Community Banks 

The FDIC’s supervision program promotes the safety-and-soundness of FDIC-supervised institutions, protects consumers’ rights, and promotes community investment initiatives by FDIC-supervised institutions. The FDIC has long tailored its supervisory approach to the size, complexity, and risk profile of each institution. This 

approach is embedded throughout our supervisory program, which includes issuing 

rulemakings and guidance, and maintaining a highly trained and professional examiner cadre to conduct periodic, on-site examinations and ongoing monitoring. 

Rulemakings and Guidance 

The FDIC considers the size, complexity, and risk profile of institutions during 

the rulemaking and supervisory guidance development processes and on an ongoing 

45 

basis through feedback we receive from community bankers and other stakeholders. 

Where possible, we scale our regulations and policies according to these factors. The 

FDIC’s policy statement on the development and review of regulations includes a 

goal of minimizing regulatory burdens on the public and the banking industry. Additionally, all of our FILs have a prominent community bank applicability statement 

so community bankers can immediately determine whether the FIL is relevant to 

them. 

A number of recent FDIC rulemakings implemented provisions of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that were designed to benefit community institutions. For example, the assessment base for deposit insurance was changed from domestic deposits to average total assets minus 

average tangible equity, which shifted more of the deposit insurance assessment 

burden from smaller to larger institutions. As a result, aggregate premiums paid by 

institutions with less than $10 billion in assets declined by approximately one-third 

in the second quarter of 2011, primarily due to the assessment base change. Under 

the Dodd-Frank Act, the deposit insurance coverage limit was permanently increased to $250,000, which particularly benefits small businesses and other depositors of community institutions. The Dodd-Frank Act also increased the minimum reserve ratio for the Deposit Insurance Fund (DIF) from 1.15 percent to 1.35 percent, 

with the increase in the minimum target to be funded entirely by larger banks. 

In addition to issuing rules to implement the Dodd-Frank Act provisions that benefit community banks, the FDIC also has taken into account the unique characteristics of community banks in its rulemaking to implement other important reforms 

to the financial system. For example, in adopting the implementing regulations for 

the Volcker Rule, the agencies recognized that, while the requirements of the implementing statute apply to all banking entities regardless of size, the activities covered are generally conducted by larger, more complex banks. Accordingly, the agencies designed the Volcker Rule to reduce the burden placed on banks that do not 

engage in proprietary trading activities or have only limited exposure to fund investments. 

Under the Volcker Rule, a bank is exempt from all of the compliance program requirements, and all of the associated costs, if it limits its covered activities to those 

that are excluded from the definition of proprietary trading. This exemption applies 

to the vast majority of community banks. For community banks that are less than 

$10 billion in assets but do engage in activities covered by the Volcker Rule, compliance program requirements can be met by simply including references to the relevant portions of the rule within the banks’ existing policies and procedures. This 

should significantly reduce the compliance burden on smaller banks that may engage in a limited amount of covered activities. 

The FDIC and other bank regulators also considered the burden on community 

banks in adopting regulatory capital rules. The FDIC recognizes that a number of 

the more complex requirements of our capital rules are not necessary or suitable 

for community banks. As such, many aspects of the revised capital rules do not 

apply to community banks. For example, the new capital rules introduce a number 

of provisions aimed only at the large, internationally active banks. These provisions 

include the supplementary leverage ratio, the countercyclical capital buffer, and capital requirements for credit valuation adjustments and operational risk, to name a 

few. In addition, the revised capital rules contain large sections that do not apply 

to community banks. Most notably, the advanced approaches framework only applies to internationally active banks and the market risk rule only applies to banks 

with material trading operations. 

Several areas of the proposed rule attracted significant comment and concerns 

from community bankers, namely, proposed changes to risk weightings for 1-to-4 

family mortgages; the treatment of accumulated other comprehensive income 

(AOCI), trust preferred securities (TruPS) and mortgage servicing assets; and the 

applicability of the conservation buffer to banking organizations organized under 

Subchapter S of the Internal Revenue Service Tax Code. After considering those 

comments and taking into account other safety and soundness factors, the banking 

agencies did not adopt certain of the proposed changes that caused concerns for 

community banks in the final rule, namely mortgage risk weightings and the treatment of AOCI and TruPS. 

Notwithstanding our belief that the applicability of the conservation buffer to all 

financial institutions was important to achieving the safety-and-soundness goal of 

higher capital, last July we issued a FIL to FDIC-supervised institutions describing 

how we would treat certain requests from S corporation institutions under the new 

capital rules. Many community banks are S corporation banks, and we issued this 

guidance because of feedback we heard from concerned S corporation banks and 

their shareholders. The FIL describes how the FDIC will consider requests from 

46 

FDIC-supervised S corporation banks to pay dividends to their shareholders to cover 

taxes on their pass-through share of bank earnings when those dividends are otherwise not permitted under the new capital rules. We informed FDIC-supervised 

banks that we would generally approve those requests for well-rated banks, barring 

any significant safety and soundness issues. 

To assist bankers in complying with the revised capital rules, the FDIC conducted 

outreach and technical assistance designed specifically for community banks. In addition to the publication of a community bank guide and an informational video on 

the revised capital rules, FDIC staff conducted face-to-face informational sessions 

with bankers in each of the FDIC’s six supervisory regions to discuss the revised 

capital rules most applicable to community banks. 

Examination Program 

The foundation of the FDIC’s examination program is a highly trained and professional examiner cadre. Every FDIC examiner is initially trained as a community 

bank examiner through a rigorous 4-year program that teaches examination concepts, policies, and procedures. As a result, on the way to becoming commissioned 

examiners, they gain a thorough understanding of community banks. The vast majority of our field examiners in our 83 field offices nationwide are community bank 

examiners. These examiners live and work in the same communities served by the 

community banks they examine, ensuring that they are knowledgeable and experienced in local issues of importance to community bankers and can serve as a first 

line resource to bankers regarding supervisory expectations. 

Our examiners conduct bank examinations using a risk-focused examination program, which tailors the supervisory approach to the size, complexity, and risk profile of each institution. Risk-focused examinations are based on core principles of 

safety and soundness, including risk identification and mitigation. Institutions with 

lower risk profiles, such as most community banks, are subject to less supervisory 

attention than those with elevated risk profiles. For example, well-managed banks 

engaged in traditional, noncomplex activities receive periodic, point-in-time safety 

and soundness and consumer protection examinations that are carried out over a 

few weeks, while the very largest FDIC-supervised institutions are subject to continuous safety-and-soundness supervision and ongoing examination carried out through 

targeted reviews during the course of an examination cycle. 

Our examination cycle is also tailored to the size and risk posed by a bank. The 

Federal Deposit Insurance Act requires regular safety-and-soundness examinations 

of State nonmember banks at least once during each 12-month period. However, examination intervals can be extended to 18 months for well-run and well-rated institutions with total assets of less than $500 million. Most FDIC institutions have total 

assets less than $500 million. This longer cycle permits the FDIC to focus its resources on those segments of the industry that present the most immediate supervisory concern, while concomitantly reducing the regulatory burden on smaller, wellrun institutions that do not pose an equivalent level of supervisory concern. 

FDIC policy guides consumer compliance examination schedules, which also vary 

based on the institution’s size, prior examination rating and risk profile. Community 

Reinvestment Act (CRA) examination schedules conform to the requirements of the 

Gramm-Leach-Bliley Act, which established the CRA examination cycle for most 

small institutions. The FDIC also uses different CRA examination procedures based 

upon the asset size of institutions. Those meeting the small and intermediate small 

asset-size threshold are not subject to the reporting requirements applicable to large 

banks and savings associations. 

The FDIC utilizes off-site monitoring programs to supplement and guide the onsite examination process. Off-site monitoring programs can provide an early indication that an institution’s risk profile may be changing. The FDIC has developed a 

number of off-site monitoring tools using key data from banks’ quarterly Reports of 

Condition and Income, or Call Reports, to identify institutions that are experiencing 

rapid loan growth or reporting unusual levels or trends in problem loans, investment activities, funding strategies, earnings structure or capital levels that merit 

further review. Off-site monitoring also allows the FDIC to expand the examination 

cycle for certain lower-risk institutions, as described above. 

Community Banking Initiative and Technical Assistance 

FDIC Community Banking Study 

Since late 2011, the FDIC has been engaged in a data-driven effort to identify and 

explore issues and questions about community banks. Initial findings were presented in a comprehensive FDIC Community Banking Study, published in December 2012. Our subsequent research has studied community bank consolidation, longterm developments in branch banking, the effects of rural depopulation on commuVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00050 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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6Technical Assistance Video Program: https://www.fdic.gov/regulations/resources/director/ 

video.html. 7Deposit Insurance Coverage: Free Nationwide Seminars for Bank Officers and Employees 

(FIL-17-2014), dated April 18, 2014. 8See http://www.fdic.gov/regulations/resources/cbi/infopackage.html. 

nity banks, and the efforts of minority-owned and operated depository institutions 

to serve their communities. The FDIC’s community bank research agenda remains 

active, and in 2015, we will be studying the challenges that face small, closely held 

banks, such as raising external capital and ensuring management succession. 

New Community Bank Quarterly Banking Profile 

Last year, the FDIC introduced a community bank section in the FDIC’s Quarterly Banking Profile. The QBP, as it is commonly known, is a long-standing tool 

that the industry, regulators, policymakers, investors, analysts, consumers, and 

other stakeholders use as a report card on the banking industry. We launched the 

Community Bank QBP to ensure that community bank performance was not obscured in the overall industry picture because of their small size. The most recent 

analysis of that data was presented earlier in this testimony. 

Community Bank Outreach and Technical Assistance 

In 2009, the FDIC established its Advisory Committee on Community Banking to 

provide advice and guidance on a broad range of policy issues impacting small community banks and the local communities they serve. In February 2012, the FDIC 

sponsored a national conference to examine the unique role of community banks in 

our Nation’s economy. Later in 2012, roundtable discussions were conducted in each 

of the FDIC’s regions that focused on the financial and operational challenges and 

opportunities facing community banks, and the regulatory interaction process. Additional roundtable discussions were held in each region in 2013 and 2014. 

In discussions with community bankers in these venues and through our routine 

outreach efforts, it became clear that community banks were concerned about keeping up with changing regulations and policy issues and were interested in assistance 

from us to stay informed. As a result, in 2013, the FDIC created a regulatory calendar that alerts stakeholders to critical information as well as comment and compliance deadlines relating to new or amended Federal banking laws, regulations and 

supervisory guidance. The calendar includes notices of proposed, interim and final 

rulemakings, and provides information about banker teleconferences and other important events related to changes in laws, regulations, and supervisory guidance. 

In addition, in 2013, and based on community banker feedback, the FDIC restructured our preexamination process to better tailor examination activities to the 

unique risk profile of the individual institution. As part of this process, we developed and implemented an electronic preexamination planning tool to ensure consistency nationwide and to ensure that only those items that are necessary for the examination process are requested from each institution to minimize burden. 

We also instituted a number of outreach and technical assistance efforts, including more than 20 training videos on complex topics of interest to community bankers. For example, in spring 2013, we issued six videos designed to provide new bank 

directors with information to prepare them for their fiduciary role in overseeing the 

bank. This was followed by the release of a virtual version of the FDIC’s Directors’ 

College Program that regional offices deliver throughout the year. We also have 

issued a series of videos, primarily targeted to bank officers and employees, providing more in-depth coverage of important supervisory topics with a focus on bank 

management’s responsibilities. 6 We issued the latest technical assistance video (on 

the Consumer Finance Protection Bureau’s loan originator compensation rule) just 

last month. 

We also hosted banker call-ins on topics such as proposed new accounting rules, 

new mortgage rules, and Call Report changes. The FDIC offers a series of Deposit 

Insurance Coverage seminars for banking officers and employees. 7 These free seminars, which are offered nationwide, particularly benefit smaller institutions, which 

have limited training resources. 

In June 2014, the FDIC mailed an Information Packet 8 to the chief executive officers (CEOs) of FDIC-supervised community banks containing resources and products developed as part of the FDIC’s Community Banking Initiative, as well as documents describing our examination processes. In addition to an introductory letter to 

CEOs, the packet contained brochures highlighting the content of key resources and 

programs and a copy of the FDIC’s Cyber Challenge simulation exercise. Cyber 

Challenge was designed to encourage community banks to discuss operational risk 

issues and the potential impact of information technology disruptions. The exercise 

48 

9See https://www.fdic.gov/regulations/resources/director/. 10 Causes and Consequences of Recent Bank Failures (January 2013), GAO-13-71 and Comprehensive Study on the Impact of the Failure of Insured Depository Institutions (January 

2013), EVAL-13-002. 

contained four videos that depict various operational disruptions and materials to 

facilitate discussion about how the bank would respond. Lists of reference materials 

where banks could obtain additional information were also included. All of these resources can be found on the Directors’ Resource Center, available through the FDIC’s 

Web site. 9

At the local level, we have enhanced communication efforts by having our community bank examiners contact supervised institutions between examinations to discuss and clarify supervisory and regulatory changes and the overall risk profile of 

the institutions. 

Going forward the FDIC intends to continue to be a resource for community banks 

regarding developing industry issues. One recent example involves Call Reports. We 

have received comments from institutions and others about the cost and burden of 

preparing Call Reports, and we have also heard comments about the benefits of Call 

Reports, including their aforementioned use in extending examination cycles and 

the transparency they bring to the industry for investors, bankers, consumers, analysts, and other stakeholders. Working through the Federal Financial Institutions 

Examination Council or FFIEC, we have engaged the industry in a dialogue about 

ways to improve Call Reports and the reporting process, and we will pursue several 

actions in the near term. For example, we have already conducted banker training 

calls regarding certain Call Report changes and plan to conduct additional calls 

going forward as needed. Additionally, we plan to propose certain burden-reducing 

changes in 2015 and implement a more robust process for bank agency users to justify retaining or adding items to the Call Report. 

Another example is actions taken by the FDIC to raise awareness of cyber risks 

and to work with community banks to encourage practices to protect against 

cyberthreats. During 2014, the FDIC issued a list of free resources from which community banks could obtain cyberthreat information and assisted financial institutions in identifying and shutting down ‘‘phishing’’ Web sites that attempt to fraudulently obtain and use an individual’s confidential personal or financial institution, 

This year, the FDIC will add additional videos to the Cyber Challenge simulation 

exercise and work as a member of the FFIEC to implement actions to enhance the 

effectiveness of cybersecurity-related supervisory programs, guidance, and examiner 

training. The FDIC will continue to work with community banks to address this and 

other emerging threats. 

Conclusion 

The FDIC will continue to pursue regulatory burden reduction for community 

banks, while preserving safety and soundness goals. Strong risk management practices and a strong capital base are fundamental to the long-term health of community banks and their ability to serve their local communities. Most community banks 

know how to manage the risks in their loan portfolios and have strong capital positions. And of course, community banks have a strong interest in retaining customers 

by treating them fairly. Serving the credit needs of their local communities, while 

managing the attendant credit risks, truly is the core expertise of many community 

banks. 

Reports by the General Accounting Office and the FDIC’s Office of Inspector General (OIG), 10 and our own Community Banking Study have shown that banks—even 

those with concentrated asset portfolios—with sound risk management practices 

and strong capital have been able to weather crises and remain strong. Institutions 

that did not survive, according to these reports, were those with weaker or more 

aggressive risk management approaches, including imprudent loan underwriting 

and rapid growth often financed by wholesale funds or brokered deposits. One of our 

IG reports also found that banks that heeded supervisory directives regarding risk 

management practices were more likely to survive. 

We believe the evidence strongly supports the idea that the best way to preserve 

the long term health and vibrancy of community banks, and their ability to serve 

their local communities, is to ensure their core strength is preserved: strong capital, 

strong risk management and fair and appropriate dealings with their customers. We 

also believe our own supervision plays an important role in obtaining corrective action to address problems where this is needed, and that this also promotes the longterm health of community banks. This being said, we remain alert to the importance 

of achieving the fundamental objectives of safety-and-soundness and consumer protection in ways that do not involve needless complexity or expense. Going forward, 

49 

1For supervisory purposes, the Federal Reserve uses the term ‘‘community banking organization’’ to describe a State member bank and/or holding company with $10 billion or less in total 

consolidated assets. 2See Federal Deposit Insurance Corporation, Quarterly Banking Profile, Third Quarter 2014, 

www2.fdic.gov/qbp/2014sep/qbp.pdf. 3http://federalreserve.gov/newsevents/press/bcreg/20130702a.htm 

we continue to look for ways to improve our supervisory processes and reduce regulatory burden on the industry. We also stand ready to provide technical assistance 

regarding proposals that seek to achieve the fundamental goals of safety-and-soundness and consumer protection in ways that are appropriately tailored for community 

banks. 

PREPARED STATEMENT OF MARYANN F. HUNTER 

DEPUTY DIRECTOR OF THE DIVISION OF BANKING SUPERVISION AND REGULATION, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEBRUARY 10, 2015 

Introduction 

Chairman Shelby, Ranking Member Brown, and other Members of the Committee, 

I appreciate the opportunity to testify on the important topic of community banks 

and the effects of regulatory burden on these institutions. Community banks are a 

critical component of our financial system and economy. Their deep ties to their 

local communities give them firsthand perspectives on the local economic landscape; 

they focus on customer relationships and often look beyond traditional credit factors 

to consider unique borrower characteristics when making credit decisions. Having 

begun my career more than 30 years ago as a community bank examiner at the Federal Reserve Bank of Kansas City and eventually becoming the officer in charge of 

bank supervision at the Reserve Bank, I have seen first hand how critical it is that 

we balance effective regulation and supervision to ensure safety and soundness of 

community banks, while also ensuring that undue burden does not constrain the capacity of these institutions to lend to the communities they serve. In my testimony, 

I will discuss measures taken by the Federal Reserve to ensure that regulations, 

policies, and supervisory activities do not place an undue burden on community 

banks. 

The Federal Reserve supervises approximately 850 State-chartered community 

banks, the majority of which are small community banks with total assets of $1 billion or less, and which are members of the Federal Reserve System (referred to as 

State member banks). 1 In addition, the Federal Reserve supervises more than 4,400 

bank holding companies and more than 300 savings and loan holding companies, 

most of which operate small community banks and thrifts. 

The overall condition of community banks has improved significantly in the wake 

of the financial crisis. The number of banks on the Federal Deposit Insurance Corporation’s ‘‘Problem List’’ fell from a peak of 888 at the end of first quarter 2011, 

to 329 at the end of third quarter 2014. 2 Despite that significant decline, the number of problem banks compares unfavorably with historical numbers of less than 

100, on average, in the years prior to the crisis. Moreover, small community banks 

continue to experience considerable earnings pressure based on historically low net 

interest margins, and many report concerns about their prospects for continued 

growth and profitability. 

Soliciting Views From Community Banks on Regulatory Burden 

The Federal Reserve uses multiple channels to solicit the views of community 

banks on banking and economic topics, including regulatory burden. For instance, 

when a proposed rule or policy is issued to the public for comment, we gather information from banking organizations that assists us in assessing implementation complexity or cost, especially for the smallest institutions. The feedback received has 

been instrumental in helping us scale rules and policies to appropriately reflect the 

risks at these institutions without subjecting them to unnecessary burden. This was 

evident in the final capital guidelines that were issued in July 2013. 3 The Federal 

banking agencies’ final rules reflected several changes to respond to comments and 

reduce the regulatory burden on community banks. As a result, many of the requirements that apply to larger banking organizations do not apply to community banks. 

Also, in 2010, the Federal Reserve Board (the Board) formed the Community Depository Institutions Advisory Council (CDIAC) to provide input to the Board of 

Governors on the economy, lending conditions, and other issues of interest to comVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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4http://federalreserve.gov/aboutthefed/cdiac.htm 

5 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation 

(FDIC), and Office of the Comptroller of the Currency (OCC), ‘‘Federal Bank Regulatory Agencies Seek Comment on Interagency Effort To Reduce Regulatory Burden’’, press release, June 

4, 2014, www.federalreserve.gov/newsevents/press/bcreg/20140604a.htm. 6See the Federal Financial Institutions Examination Council’s (FFIEC) EGRPRA Web site at 

http://egrpra.ffiec.gov/ for more information. 7http://federalreserve.gov/aboutthefed/bios/board/default.htm 

8 Board of Governors of the Federal Reserve System, FDIC, and OCC, ‘‘Agencies Clarify Supervisory Expectations for Stress Testing by Community Banks’’, press release, May 14, 2012, 

www.federalreserve.gov/newsevents/press/bcreg/20120514b.htm. 

munity depository institutions. 4 CDIAC members are selected from representatives 

of banks, thrift institutions, and credit unions serving on local advisory councils at 

the 12 Federal Reserve Banks. One member of each of the Reserve Bank councils 

is selected to serve on the national CDIAC, which meets twice a year with the Board 

of Governors in Washington, DC, to discuss topics of interest to community depository institutions. 

Additionally, in accordance with the Economic Growth and Regulatory Paperwork 

Reduction Act of 1996 (EGRPRA), the Federal banking agencies have launched a review to identify banking regulations that are outdated, unnecessary, or unduly burdensome. 5 The comment period for the EGRPRA review for the first set of regulations ended early in September 2014, and the agencies plan to publish three additional Federal Register notices seeking comment over the next year and a half. The 

Federal Reserve and the other agencies have begun a series of outreach meetings 

with bankers, consumer groups, and other interested parties as part of the EGRPRA 

review. 6 The Federal Reserve and the other agencies conducted two outreach meetings, the second of which took place in Dallas last week. Additional outreach meetings are scheduled for the coming months, including one scheduled for this August 

focused on issues affecting rural institutions. The comments from the industry, consumer groups, and others have been very informative and will help the agencies in 

assessing regulatory burden. 

A recurring theme from the EGRPRA outreach meetings thus far has been the 

question of whether the agencies could reevaluate the various thresholds and limits 

imposed in regulations that may constrain community banks and their lending activities. For example, bankers have asked the agencies to consider increasing the 

dollar threshold in the appraisal regulations for transactions below which an appraisal would not be required. Community bankers in rural areas have noted that 

it can be difficult to find an appraiser with knowledge about the local market at 

a reasonable fee, and raising the threshold would allow bankers to use a less-formal 

valuation of collateral for more loans. Some bankers at the EGRPRA meetings have 

suggested reviewing the statutorily mandated examination frequency for banks of 

various sizes and condition as a way to ease burden from frequent examinations. 

Other banks have commented on the requirements of some longstanding interagency guidance and suggested that some may now be outdated and warrant a fresh 

look and revision. 

In order to better understand and respond to concerns raised by these institutions 

through the various channels, the Board has established a community and regional 

bank subcommittee of its Committee on Bank Supervision. 7 The governors on this 

subcommittee help the Board as a whole to weigh the costs associated with regulation against the safety-and-soundness benefits of new supervisory policies for smaller institutions. The subcommittee also meets with Federal Reserve staff to hear 

about key supervisory initiatives at community banks and ongoing research in the 

community banking area. 

Tailoring Regulations and Policies for Community Banks 

At the Federal Reserve, we weigh the burden on banks to implement new regulatory requirements against the need for requirements to safeguard the safety and 

soundness of the financial system. We recognize that the cost of compliance can be 

disproportionally greater on smaller banks versus larger institutions, as they have 

fewer staff available to help comply with additional regulations. To address this, we 

work within the constraints of the relevant statutory mandate to draft rules so as 

not to subject community banks to requirements that would be unnecessary or unduly burdensome to implement. 

Many recently established rules have been applied only to the largest, most complex banking organizations. For example, the Federal Reserve and the other Federal 

banking agencies have not applied large-bank stress testing requirements to community banks. To clarify stress testing expectations for community banks, the Federal banking agencies issued a policy statement in May 2012. 8 While the stress testVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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9 Board of Governors of the Federal Reserve System, ‘‘Federal Reserve Board Invites Public 

Comment on Proposed Rule To Expand the Applicability of Board’s Small Bank Holding Company Policy Statement’’, press release, January 29, 2015, www.federalreserve.gov/newsevents/ 

press/bcreg/20150129b.htm. 10 Board of Governors of the Federal Reserve System, FDIC, and OCC, ‘‘New Capital Rule: 

Community Bank Guide’’, July, 9, 2013, www.federalreserve.gov/bankinforeg/basel/files/capitallrulelcommunitylbanklguidel20130709.pdf; and Board of Governors of the Federal Reserve System, FDIC, and OCC, ‘‘The Volcker Rule: Community Bank Applicability’’, December 

10, 2013, www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf. 11 Consumer Compliance Outlook is available at www.philadelphiafed.org/bank-resources/ 

publications/consumercompliance-outlook/, and Outlook Live is available at 

www.philadelphiafed.org/bankresources/publications/consumer-compliance-outlook/outlooklive/. 12FedLinks is available at www.cbcfrs.org/fedlinks. Also see another Federal Reserve publication, Community Banking Connections, which is available at www.cbcfrs.org/. 

ing policy statement reiterated the Federal Reserve’s view that all banking organizations, regardless of size, should have the capacity to analyze the potential impact 

of adverse outcomes on financial conditions, the agencies also made clear that community banks were exempt from the more stringent requirements for the largest 

banks, such as Dodd-Frank Wall Street Reform and Consumer Protection Act stress 

testing and the Federal Reserve’s Comprehensive Capital Analysis and Review. The 

Federal Reserve has reminded examiners that while community banks should anticipate how future events and adverse trends might affect the institution’s financial 

condition and viability, examiners should not apply complex large-bank stress testing expectations to community banks. 

Most recently, the Board issued an interim final rule and proposed rule to implement Public Law 113-250, which was signed into law by the President in December 

2014. 9 Effective immediately, the interim rule adopted by the Board excludes small 

savings and loan holding companies with less than $500 million in total consolidated assets that meet certain qualitative requirements from the Board’s regulatory 

capital requirements (Regulation Q). This effectively places these savings and loan 

holding companies on equal footing with similarly sized bank holding companies 

that are subject to the Board’s Small Bank Holding Company Policy Statement (policy statement). 

The Board also issued a notice of proposed rulemaking that would raise the asset 

size threshold from $500 million to $1 billion for determining applicability of the 

policy statement, and expand its scope to include savings and loan holding companies. The policy statement facilitates the transfer of ownership of small community 

banks by allowing their holding companies to operate with higher levels of debt 

than would otherwise be permitted. Institutions subject to the policy statement are 

not subject to the Board’s regulatory capital requirements. 

While consolidated capital requirements do not apply to firms covered by the policy statement, regulatory capital requirements will continue to apply at the depository institution level. 

The Federal Reserve has made a concerted effort to communicate clearly to both 

community bankers and examiners about new requirements that are applicable to 

which community banks. We provide a statement at the top of each Supervision and 

Regulation letter and each Consumer Affairs letter that clearly indicates which 

banking entity types are subject to the guidance. These letters are the primary 

means by which the Federal Reserve issues supervisory and consumer compliance 

guidance to bankers and examiners, and this additional clarity allows community 

bankers to focus efforts only on the supervisory policies that are applicable to their 

banks. Also, to assist community banks in understanding how new complex rules 

could possibly affect their business operations, the Federal banking agencies have 

issued supplemental guides that focus on which rule requirements are most applicable to community banks. For example, the Federal banking agencies issued supplemental guides for the capital requirements issued in July 2013, as well as the 

Volcker rule issued in December 2013. 10 Moreover, it is important to note that we 

work closely with our colleagues at the State banking agencies and the other Federal regulatory agencies to ensure that our supervisory approaches and methodologies are applied as consistently as possible to all community banks. 

We also have developed several platforms to improve our communication with 

community bankers and to enhance our industry training efforts. For example, we 

have developed two programs—‘‘Ask the Fed’’ and ‘‘Outlook Live’’ 11—as well as periodic newsletters and other communication tools such as FedLinks. 12 These platforms highlight information about new requirements and examiner expectations to 

52 

13See the Board’s Consumer Affairs Letter CA 13-19 (November 18, 2013), ‘‘Community Bank 

Risk-Focused Consumer Compliance Supervision Program’’ at www.federalreserve.gov/ 

bankinforeg/caletters/caltr1319.htm and Consumer Affairs Letter CA 13-20 (November 18, 

2013), ‘‘Consumer Compliance and Community Reinvestment Act (CRA) Examination Frequency 

Policy’’ at www.federalreserve.gov/bankinforeg/caletters/caltr1320.htm. 

address issues that community banks currently face and provide resources on key 

supervisory policies. 

Changes in Regulatory Reporting Requirements 

In an action related to changes in the policy statement, the Board took immediate 

steps beyond what was required in the legislation to relieve regulatory reporting 

burden for bank holding companies and savings and loan holding companies that 

have less than $1 billion in total consolidated assets and meet the qualitative requirements of the policy statement. Specifically, the Board eliminated quarterly and 

more complex consolidated financial reporting requirements (FR Y–9C) for these institutions, and instead required parent-only financial statements (FR Y–9SP) semiannually. The Board also eliminated regulatory capital reporting for savings and 

loan holding companies with less than $500 million in total consolidated assets from 

the FR Y–9SP. The Board filed an emergency request with the Office of Management and Budget and received approval to make these changes effective on March 

31, 2015, while it completes the notice and comment process on the related 

rulemakings. The Board took this action and immediately notified the affected institutions so they would not continue to invest in system changes to report revised regulatory capital data for only a short period of time. Also, the Board took this action 

in response to feedback from members of the banking community who indicated that 

reducing the reporting frequency of financial data could save institutions time, especially time spent on internal audit and review processes associated with senior officials’ attestations. 

A number of community banks have suggested reducing burden from required 

quarterly reporting of the Consolidated Reports of Condition and of Income (the Call 

Report). Working through the Federal Financial Institutions Examination Council, 

the Federal Reserve is considering a number of ways to be responsive to industry 

concerns about Call Report filing requirements and assess the potential impact of 

collecting less data from banks. Later this month, the Federal banking agencies will 

host a teleconference with bankers to provide additional guidance on the reporting 

of revised regulatory capital information on the Call Report. 

Risk-Focused Supervision Examination Process 

Consistent with the Federal Reserve’s approach to development of supervisory policy, our longstanding risk-focused approach to consolidated supervision provides 

that examination and inspection procedures should be tailored to each organization’s 

size, complexity, risk, profile, and condition. There are distinct differences between 

the supervision program of a large, complex bank and a small, noncomplex bank. 

For one, large banks generally have a dedicated supervisory team that may be resident at the bank, unlike small banks, which may only meet with an examination 

team every 12 to 18 months. Furthermore, if a bank is engaging in nontraditional 

or higher-risk activities, our supervision program typically requires greater scrutiny 

and a higher level of review of specific transactions. Conversely, if a well-managed 

bank’s activities are lower risk, we adjust our expectations for examiners to a lower 

level of review. In this way, we alleviate examination burden on community banks 

with histories of sound performance and modest risk profiles. 

We are continually working to calibrate examination expectations so that they are 

commensurate with the level of risk at banking organizations. For example, the 

Federal Reserve has an initiative currently underway to use forward-looking risk 

analytics to identify high-risk community and regional banks, which would allow us 

to focus our supervisory response on the areas of highest risk and reduce the regulatory burden on low-risk community and regional banks. 

The Federal Reserve also adopted a new consumer compliance examination framework for community banks in January 2014. 13 While we have traditionally applied 

a risk-focused approach to consumer compliance examinations, the new program 

more explicitly bases examination intensity on the individual community bank’s risk 

profile, weighed against the effectiveness of the bank’s compliance controls. As a result, we expect that examiners will spend less time on low-risk compliance issues 

at community banks, increasing the efficiency of our supervision and reducing regulatory burden on many community banks. In addition, we revised our consumer 

compliance examination frequency policy to lengthen the time frame between on-site 

53 

14The report can be found at www.federalreserve.gov/bankinforeg/semiannual-report-onbanking-applications-20141124.pdf. 

consumer compliance and Community Reinvestment Act examinations for many 

community banks with less than $1 billion in total consolidated assets. 

In addition to our efforts to refine our risk-focused approach to supervision, we 

have been investigating ways that would allow for more supervisory activities to be 

conducted off-site, which can improve efficiency and reduce burden on community 

banks. For example, we can conduct some aspects of the loan review process off-site 

for banks that maintain electronic loan records and have invested in technologies 

that would allow us to do so. While off-site loan review has benefits for both bankers 

and examiners, some bankers have expressed concerns that increasing off-site supervisory activities could potentially reduce the ability of banks to have face-to-face 

discussions with examiners regarding asset quality or risk-management issues. In 

that regard, we will continue to work with community banks that may prefer their 

loan reviews to be conducted on-site. In short, the Federal Reserve is trying to strike 

an appropriate balance of off-site and on-site supervisory activities to ensure that 

resources are used more efficiently while maintaining high-quality supervision of 

community banking organizations. 

The Federal Reserve has invested significant resources in developing various technological tools for examiners to improve the efficiency of both off-site and on-site supervisory activities, while ensuring the quality of supervision is not compromised. 

For instance, the Federal Reserve has automated various parts of the community 

bank examination process, including a set of tools used among all Reserve Banks 

to assist in the preexamination planning and scoping. This automation can save examiners and bank management time, as a bank can submit requested 

preexamination information electronically rather than mailing paper copies to the 

Federal Reserve Bank. These tools also assist examiners in the continuous, off-site 

monitoring of community banks, enabling examiners to determine whether a particular community bank’s financial condition has deteriorated and warrants supervisory attention between on-site examinations. 

As we develop supervisory policies and examination practices, we are mindful of 

community bankers’ concerns that new requirements for large banks could become 

viewed as ‘‘best practices’’ that trickle down to community banks in a way that is 

inappropriate. To address this concern, the Federal Reserve is enhancing communications with and training for examinations staff about expectations for community 

banks versus large banks to ensure that expectations are calibrated appropriately. 

Specifically, we are modernizing our longstanding examiner commissioning training 

program for community bank examiners, and a key part of this effort is reviewing 

the curriculum to ensure that supervisory expectations for larger banks do not make 

their way into the community bank examination curriculum. In addition, when new 

supervisory policies are issued, we typically arrange a teleconference to explain the 

new policy to examiners, including whether and to what extent the policy is applicable to community banks. By effectively training our examination staff and providing 

channels to keep them informed of newly issued policies in a timely manner, examiners are better equipped to understand the supervisory goals of regulations and 

guidance for community banks and to provide appropriate guidance to community 

banks. 

Additional Opportunities To Reduce Burden 

In addition to the steps taken to reduce regulatory burden that were already discussed, the Federal Reserve recently issued the first semiannual public report on 

applications activity. 14 The report aims to increase transparency about applications 

filings, while providing useful information to bankers to help them gain efficiency. 

In addition, Federal Reserve System staff are working to identify opportunities to 

change examination practices and rules to increase efficiency of the examination 

process and thereby reduce the time community bankers spend to prepare and work 

with examiners. We are in the process of conducting a review of community bank 

examination scoping procedures to make sure they are aligned with current banking 

practices and risks, and reflect key lessons from the crisis. Overall, these adjustments should enhance our supervisory efficiency by targeting more intensive examination work at bank activities that proved to be higher risk and reducing some examination testing at community banks that performed well throughout the crisis. 

Although none of the actions that we are currently taking require legislative 

changes, some of the relief that bankers have asked for and suggestions developed 

through the EGRPRA process may require legislative action. We will work with the 

other Federal banking agencies as appropriate to consider and assess the impact of 

potential changes identified through the EGRPRA review process. 

54 

Statement Required by 12 U.S.C. §250: The views expressed herein are those of the Office 

of the Comptroller of the Currency and do not necessarily represent the views of the President. 

Conclusion 

We understand that one size does not fit all in supervision and regulation and 

that supervisory expectations for the largest, most complex firms are often inappropriate for community banks. We are committed to making sure that regulations, 

policies, and activities are appropriately tailored to the level of risk inherent in 

these institutions and that we respond to ideas for reducing burden that come 

through the EGRPRA process. The Federal Reserve is committed to taking a balanced approach that fosters safe and sound community banks and fair treatment 

of consumers, and encourages the flow of credit to consumers and businesses. 

Thank you for inviting me to share the Federal Reserve’s views on the effect of 

regulatory burden on community banks. I would be pleased to answer any questions 

you may have. 

PREPARED STATEMENT OF TONEY BLAND 

SENIOR DEPUTY COMPTROLLER FOR MIDSIZE AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY

FEBRUARY 10, 2015 

Introduction 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, 

thank you for the opportunity to appear before you today. Consistent with the Committee’s invitation letter, my testimony focuses on the challenges facing small national banks and Federal savings associations (hereafter referred to as community 

banks) and the work of the Office of the Comptroller of the Currency (OCC) to help 

these institutions remain a vibrant part of our Nation’s financial system. I also discuss specific steps we are taking to address regulatory burden on community banks, 

OCC recommendations for congressional action in furtherance of this goal, and our 

progress on the Economic Growth and Regulatory Paperwork Reduction Act of 1996 

(EGRPRA) regulatory review. 

Before describing these initiatives, I would like to share the OCC’s perspective on 

community banks. The OCC supervises approximately 1,400 institutions with assets 

under $1 billion. These community banks provide many of the essential financial 

services and much of the credit necessary for our Nation’s economic growth. 

Throughout the country, these banks help small businesses thrive by offering personalized service and credit products tailored to their customers’ needs. In addition, 

these banks and their employees strengthen our cities and towns by helping to meet 

municipal finance needs and actively participating in civic life. 

Overseeing the safety and soundness of community banks is central to the mission 

of the OCC. Approximately two-thirds of our examination staff is dedicated to the 

supervision of these institutions. In my role as Senior Deputy Comptroller for 

Midsize and Community Banks, I regularly meet with community bankers to hear 

first-hand about their successes, their challenges, and their frustrations. I have seen 

how well-managed community banks weathered the financial crisis and provided a 

steady source of credit to their communities. But I’ve also heard their concerns 

about the long-term viability of their business models. And I’ve heard their frustration with the time and resources they spend trying to track and comply with regulatory requirements—time and resources they contend could be better spent responding to the needs of their customers and communities. 

We take these concerns seriously. My testimony describes steps that we are taking to help community bankers meet these challenges, navigate the changing regulatory landscape, and ensure that the OCC’s supervisory policies and regulations are 

appropriately tailored to community banks. I also provide the OCC’s perspective on 

legislative proposals and regulatory opportunities for reducing regulatory burden on 

these important institutions. 

The OCC’s Approach to Community Bank Supervision 

The OCC is committed to fostering a regulatory climate that allows well-managed 

community banks to grow and thrive. We have built our supervision of community 

banks around local field offices where the local Assistant Deputy Comptroller (ADC) 

has responsibility for the supervision of a portfolio of community banks. Each ADC 

reports to a District Deputy Comptroller who, in turn, reports to me. We have based 

our community bank examiners in over 60 locations throughout the United States, 

close to the banks they supervise. 

55 

Through this supervisory structure, community banks receive the benefits of highly trained bank examiners with local knowledge and experience, supplemented by 

the resources and specialized expertise that a nationwide organization can provide. 

Our bank supervision policies and procedures establish a common framework and 

set of expectations. Each bank’s portfolio manager tailors the supervision of each 

community bank to its individual risk profile, business model, and management 

strategies. We give our ADCs considerable decision-making authority, reflecting 

their experience, expertise, and first-hand knowledge of the institutions they supervise. 

We also seek to ensure that we apply our supervisory policies, procedures, and 

expectations in a consistent and balanced manner. For example, a key element of 

the OCC’s supervisory philosophy is open and frequent communication with the 

banks we supervise. In this regard, my management team and I encourage any 

banker who has concerns about a particular examination finding to raise these concerns with his or her examination team and with the district management team 

that oversees the bank. Our ADCs and Deputy Comptrollers expect and encourage 

such inquiries. 

If a banker does not want to pursue these avenues of communication, our Ombudsman provides a venue for bankers to discuss their concerns, either informally 

or formally by requesting an appeal of examination findings. The OCC’s Ombudsman is fully independent of the supervisory process, and he reports directly to the 

Comptroller. In addition to hearing formal appeals, his office provides bankers with 

an impartial ear to hear complaints and a mechanism to facilitate the resolution of 

disputes with our examination staff. 

Tailored Supervision 

The OCC understands that a one-size-fits-all approach to supervision is not always appropriate, especially for community banks. We recognize that community 

banks have different business models and more limited resources than larger banks. 

Therefore, where we have the flexibility under the law, we seek to tailor our supervision to a bank’s size and complexity, and we factor these differences into the rules 

we write and the guidance we issue. 

The OCC seeks to minimize burden on community banks through various means. 

Examples of ways in which we tailor our regulations to accommodate community 

banks, while remaining faithful to statutory requirements and legislative intent, include explaining and organizing our rulemakings so these institutions can better understand their scope and application, providing alternative ways to satisfy regulatory requirements, and using regulatory exemptions or transition periods. 

For example, the OCC, Federal Deposit Insurance Corporation (FDIC), and Board 

of Governors of the Federal Reserve System (Board) jointly drafted the final riskbased regulatory capital rule to reflect the nature and complexity of the different 

institutions we regulate. Although some provisions in the rule apply broadly, many 

requirements, including the supplementary leverage ratio and the countercyclical 

capital buffer, apply only to the largest banking organizations that engage in complex or risky activities. We also adjusted the final rule to address significant concerns raised by community bankers by retaining the current capital treatment for 

residential mortgage exposures and allowing community banks to elect to treat certain accumulated other comprehensive income (AOCI) components in a manner consistent with the general risk-based capital rules. This treatment of AOCI helps community banks avoid introducing substantial volatility into their regulatory capital 

calculations. And we continue to explore additional ways to tailor the capital rules 

to respond to community bank concerns and proposals, consistent with our objective 

of ensuring appropriate levels and quality of capital. 

The OCC also responded to community bank concerns when we finalized our revised lending limits rule, issued in accordance with section 610 of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), to include 

counterparty credit exposure arising from derivatives and securities financing transactions. Specifically, the rule exempts from the lending limit calculations certain securities financing transactions most commonly used by community banks. It also 

permits small institutions to adopt compliance alternatives commensurate with 

their size and risk profile by providing flexible options for measuring covered 

counterparty credit exposures, including an easy-to-use lookup table. 

Our final rule implementing the Volcker Rule provisions of the Dodd-Frank Act 

is another example of how we seek to adapt statutory requirements to activities at 

different sized institutions, where possible. The statute applies to all banking entities, regardless of size; however, not all banking entities engage in activities covered 

by the prohibitions in the statute. One of the OCC’s priorities in the interagency 

Volcker rulemaking was to make sure that the final regulations imposed compliance 

56 

1http://www.ffiec.gov/press/PDF/FFIEClCybersecuritylAssessmentlObservations.pdf 

obligations on banking entities in proportion to their involvement in covered activities and investments. The rule, however, does not exempt community banks from 

the burden of needing to assess and determine whether their activities may be covered by the rule. As noted later in my testimony, we have submitted a legislative 

proposal that would exempt small banks from this rule. 

The OCC is constantly seeking to improve how we communicate information to 

community banks and to provide them with tools and resources to assist them in 

identifying and managing their risks. We have designed the bulletins announcing 

the issuance of each new regulation or supervisory guidance so that these banks can 

quickly assess whether the issuance applies to them, and we include a ‘‘highlights’’ 

section that identifies the key components of the rule or guidance. We also provide 

plain language descriptions of complex requirements to assist community bankers 

in understanding newly issued rules. For example, we provided community banks 

with a quick reference guide to the mortgage rules issued by the Consumer Financial Protection Bureau last year. We also produced a streamlined, 2-page summary 

of the final domestic capital rule, highlighting aspects of the rule and key transition 

dates applicable to community banks. We supplemented this summary with an online regulatory capital estimator tool for banks, which we developed with the other 

Federal banking agencies. The agencies plan to augment the estimator tool with a 

supplemental tool that banks may use to help calculate regulatory capital requirements for securitization exposures. 

In addition, the OCC is interested in providing community banks with tools to assist them in determining whether they are adequately prepared to address 

cyberthreats. This has been a particular focus of the Federal Financial Institutions 

Examination Council (FFIEC), which the Comptroller currently chairs. During the 

summer of 2014, members of the FFIEC, including the OCC, piloted a cybersecurity 

assessment at more than 500 community institutions to evaluate their preparedness 

to mitigate cybersecurity risks. The assessment supplemented regularly scheduled 

exams and built upon key supervisory expectations contained within existing FFIEC 

information technology handbooks and other regulatory guidance. The agencies subsequently published FFIEC Cybersecurity Assessment General Observations, 1 which 

includes questions for bank management to consider when assessing their institutions’ cybersecurity preparedness. We understand that community banks have found 

this information helpful in assessing their own strengths and weaknesses in this important area. In addition, the FFIEC is in the process of updating and expanding 

its cybersecurity guidance and expects to make an announcement on this soon. 

Through our secure BankNet Web site, the OCC provides other tools targeted to 

community banks. These include a portfolio-level stress test tool designed to provide 

bankers with a simple method to perform portfolio stress testing on income producing commercial real estate loans. OCC examiners developed this optional tool in 

response to requests from community bankers seeking additional guidance on how 

to stress test their loan portfolios. Another popular tool allows bankers to develop 

customized peer reports that they can use to compare their bank’s balance sheet and 

financial performance ratios to those of other banks. 

The OCC’s Semiannual Risk Perspective reports provide bankers with an analysis 

of current market and risk trends that may affect their institutions. Because we recognize that community banks may face different challenges than larger banks, the 

report discusses risks from both a large and small bank perspective. We supplement 

this semiannual report with periodic webinars, generally targeted to community 

banks, on emerging risk topics. For example, last year, the FFIEC conducted a 

webinar for community banks on ‘‘Executive Leadership of Cybersecurity’’. More 

than 5,000 Chief Executive Officers of community institutions registered for this 

event. The goal of this and similar webinars is to provide community bankers with 

practical information to help them mitigate emerging risks and to understand and 

comply with supervisory expectations. 

Other Burden Reduction Opportunities 

When considering proposals to reduce burden on community banks, the OCC 

seeks to ensure that the proposals do not compromise fundamental safety and 

soundness or consumer protection safeguards. Within this framework, the OCC is 

committed to exploring additional ways to reduce unnecessary regulatory burden on 

community banks. To this end, we are undertaking several regulatory review 

projects designed to reduce burden, particularly on community banks, and are considering other innovative approaches to address this issue. Late last year, we drafted and submitted three legislative proposals that, if enacted, would provide a statutory basis to revise our regulations and reduce burden on covered institutions. These 

57 

proposals, which I describe below, are the product of both our on-going dialogue 

with smaller institutions and our supervisory expertise with both large and small 

banks and savings associations. We recently resubmitted these proposals to this 

committee for consideration. In addition, the OCC would be pleased to share our experience and expertise with the Committee as it considers other legislative options 

to address regulatory burden. 

Legislative Proposals 

Amendments to the Scope of the Volcker Rule. The risks to the financial system 

of proprietary trading and owning or sponsoring private equity and hedge funds are 

far more significant when larger institutions engage in these activities than when 

community banks do so, to the extent they even engage in such activities. Yet, the 

Volcker Rule contains no exemption for community banks. Accordingly, community 

banks need to ascertain whether their activities are covered by the Volcker Rule in 

order to understand whether they have any compliance obligations. Making this determination may require them to expend money and resources—for example, by hiring attorneys and consultants. This regulatory burden is not justified by the risk 

these institutions present. 

In response to concerns raised by community institutions, and issues that have 

arisen during our ongoing Volcker Rule implementation efforts, the OCC drafted a 

legislative proposal to exempt from the Volcker Rule banks with total consolidated 

assets of $10 billion or less. This proposal would eliminate unnecessary burden for 

small banks while ensuring that we address the risks the Volcker Rule sought to 

eliminate. Where a community bank engages in activities covered by the current 

Volcker Rule, the OCC could address any concerns as part of its normal safety and 

soundness supervisory process. Based on our analysis, we estimate that this amendment could exempt more than 6,000 small banks, including small banks regulated 

by the OCC, from the requirement to comply with the regulations implementing the 

Volcker Rule. 

Revisions to the Examination Schedule. The OCC generally examines national 

banks and Federal savings associations with total assets greater than $500 million 

on a 12-month cycle. We believe, however, that there are additional healthy, wellmanaged community banks that should qualify for the 18-month examination cycle. 

Accordingly, the OCC drafted a legislative proposal to increase from $500 million 

to $750 million the asset-size threshold that determines whether a community bank 

can qualify for an examination every 18 months, rather than every 12 months. The 

OCC would continue to use off-site monitoring tools to identify potential problems 

in these low risk institutions and, if warranted, could examine the institution more 

frequently. 

This is consistent with the incremental approach that Congress has taken when 

increasing the threshold amount of assets that permit small institutions to qualify 

for the 18-month examination cycle. Furthermore, it would allow the OCC to more 

appropriately align our supervisory resources with risk, while simultaneously reducing the regulatory burden on small, well-capitalized, and well-managed institutions. 

We estimate that this amendment would affect more than 300 banks, including 

banks regulated by the OCC. 

Changes to Permissible Activities for Federal Savings Associations. Currently, the 

powers of Federal savings associations are set out in the Home Owners’ Loan Act 

(HOLA), which establishes lending and investment limits for these institutions. Federal savings associations have told us that they would like to engage in additional 

activities to serve their communities but are unable to do so because of the HOLA 

limits. Under existing law, their only option is to convert to a bank charter, a process that can impose costs and burden that we believe can be alleviated. 

To address these concerns, the OCC drafted legislation that would give a Federal 

savings association a choice: continue to operate as a traditional thrift or file a notice to be treated as a ‘‘covered savings association.’’ Generally, a covered savings 

association would have the powers of and be subject to the same restrictions as a 

national bank. In practice, this means that a Federal savings association that becomes a covered savings association would gain national bank powers but would 

have to discontinue activities not permissible for a national bank, subject to rules 

governing nonconforming assets and subsidiaries. This option would provide a Federal savings association with the flexibility to retain its current corporate form and 

governance structure without unnecessarily limiting the evolution of its business 

plan. If a Federal savings association’s business plan changed after it became a covered savings association, it generally would be permitted to reverse its election and 

regain its traditional thrift status after an appropriate period. This proposal would 

allow these institutions to adapt to changing economic and business environments 

and to better meet the needs of their communities. As the supervisor of both naVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00061 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
58 

2The EGRPRA Web site can be accessed at http://egrpra.ffiec.gov. 

tional banks and Federal savings associations, we are well-positioned to administer 

this type of framework given our familiarity with the individual institutions and 

their governing statutes. 

Current Initiatives 

While the OCC calibrates individual regulations to account for differences in the 

size and complexity of institutions as they are developed, we recognize the need to 

periodically assess how existing rules can be modified to ease regulatory burden on 

banks. The OCC has several projects underway, and it is considering other approaches to achieve this goal. 

Integration of National Bank and Savings Association Rules. The Dodd-Frank Act 

transferred to the OCC all functions of the Office of Thrift Supervision (OTS) relating to the examination, supervision, and regulation of Federal savings associations. 

Following the transfer of OTS rulemaking functions to the OCC, we began a comprehensive, multiphase review of our regulations and those of the former OTS to 

reduce burden and duplication, promote fairness in supervision, and create efficiencies for national banks and Federal savings associations. Last spring, we issued 

a proposal to integrate our bank and saving association rules relating to corporate 

activities and transactions into a single set of rules, where possible. Many of the 

changes included in the proposal would reduce burden for all institutions, including 

community banks. We are working on a final rule to implement these changes and 

hope to issue it in the near future. 

EGRPRA. The OCC, FDIC, Board, and FFIEC are currently engaged in a review 

of their regulations imposed on insured depository institutions, as required by 

EGRPRA. Specifically, the statute requires that, at least once every 10 years, the 

agencies seek public comment on rules that are outdated or otherwise unnecessary. 

This provides both the agencies and the public with an opportunity to consider how 

to reduce burden. The OCC, as chair of the FFIEC, is currently coordinating this 

joint regulatory review. 

To conduct the EGRPRA review, the agencies published a Federal Register notice 

this past June asking for comment on three categories of rules. We plan to issue 

a second Federal Register notice this month seeking comment on three additional 

categories, followed by two additional notices on the remaining rules during the next 

year. In each notice, we specifically ask the public to identify ways to reduce unnecessary burden associated with our regulations, with a particular focus on community banks. 

The agencies received over 40 comments on the first Federal Register notice, many 

of which suggested specific rule changes. We are carefully reviewing all of the comments to identify where changes would be appropriate. In addition, we are undertaking our own review of these rules, and the statutes they implement. This project 

is very important to the Comptroller, and we are hopeful that it will yield positive 

results, particularly for community banks. 

In addition, the agencies are holding a series of EGRPRA outreach meetings to 

give members of the public an opportunity to present their views in person. The outreach meetings feature panel presentations by industry participants and consumer 

and community groups. To date, we have held outreach meetings in Los Angeles 

and Dallas, and I have participated in each of these meetings to hear first-hand the 

views and recommendations offered by the many participants. We have additional 

meetings scheduled in Boston, Chicago, and Washington, DC. We have also scheduled an outreach meeting in Kansas City that will focus specifically on rural banking issues. Recognizing that travel costs may restrict the ability of interested parties 

to attend in person, we live-stream each outreach meeting, where possible, and provide a video archive of the proceedings to increase the public’s opportunity to view 

the meetings. These resources are easily accessible on the agencies’ EGRPRA Web 

site, along with the Federal Register notices, all comments we have received, and 

additional EGRPRA information. 2

While the EGRPRA process will unfold over a period of time, the OCC will not 

wait until it is over to implement changes where a good case is made for regulatory 

relief. Where it is clear that a regulation is outdated, unnecessary, or unduly burdensome, we will act where we have the authority to do so. For example, we are 

actively reviewing suggestions to eliminate board of director approvals in certain circumstances and to broaden the use of electronic submissions for filing forms. In addition, many of the changes that we included in the integration rulemaking discussed above are consistent with comments we received in the EGRPRA review. Finally, the EGRPRA review may help us identify burdensome regulatory requireVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00062 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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3 ‘‘An Opportunity for Community Banks: Working Together Collaboratively’’, Jan. 13, 2015. 

1 NCUA’s primary mission is to provide, through regulation and supervision, a safe and sound 

credit union system. NCUA performs this important public function by: 

Examining all Federal credit unions; 

Participating in the supervision of federally insured, State-chartered credit unions in coordination with State regulators; and 

Insuring accounts up to $250,000 at federally insured credit unions. 

As required by the Federal Credit Union Act, NCUA also serves as the administrator of the 

$12 billion National Credit Union Share Insurance Fund. In this role, NCUA provides oversight 

and supervision to 6,350 federally insured credit unions. Of these credit unions, NCUA directly 

supervises 3,981 Federal credit unions chartered by the agency. 

ments that derive from statutory provisions. When we identify these provisions, we 

look forward to sharing our insights and experience with Congress. 

Call Report Simplification. The OCC and other Federal banking agencies, under 

the auspices of the FFIEC, are considering ways that we can further tailor reporting 

requirements for community banks. Recently, we have received proposals to reduce 

the burden associated with the preparation of the Consolidated Reports of Condition 

and Income (Call Reports), including the feasibility of allowing certain banks to file 

a short-form Call Report for two quarters of a year. The OCC has discussed the Call 

Report issue in numerous meetings with bankers, and we are committed to carefully 

considering their concerns. 

As part of this effort, the OCC and other Federal banking agencies have agreed 

to undertake a comprehensive review of all Call Report items and schedules and to 

review every line item of every schedule in the Call Report to try to determine what 

truly needs to be collected and if there is any other way to get such information. 

The OCC’s standard is that Call Report data should directly support long-term supervisory needs to ensure the safety and soundness of banks and that a strong business case that discusses the relative benefits, costs, and alternatives must support 

any additions. At the request of members of the FFIEC, its Task Force on Reports 

is developing a set of guiding principles as the basis for evaluating potential additions or deletions of data items to and from the Call Report. 

Collaboration. While we expect that the above-referenced projects will reduce burden for many community banks, the OCC is also studying other, less conventional 

approaches to help community banks thrive in the modern financial world. One especially promising approach involves collaboration between community banks and is 

the subject of an important paper the OCC published last month. 3 The principle behind this approach, which grew out of productive and ongoing discussions between 

the OCC and our community banks, is that by pooling resources, community banks 

can manage regulatory requirements, trim costs and serve customers who might 

otherwise lie beyond their reach. We have already seen examples of successful collaboration, such as community banks forming an alliance to bid on larger loan 

projects and banks pooling resources to finance community development activities. 

There are many other opportunities of this nature, which can increase efficiencies 

and save money. As noted in our paper, these include collaboration on accounting, 

clerical support, data processing, employee benefit planning, and health insurance— 

to name just a few. Our innovative community banks can undoubtedly find other 

ways to share resources in a safe and sound manner. 

Conclusion 

Community banks are essential to our Nation’s communities and small businesses. The OCC is committed to minimizing unnecessary regulatory burden for 

these institutions. We will continue to carefully consider the potential effect that 

current and future policies and regulations may have on community banks and will 

be happy to work with the Committee on any proposed legislative initiatives. 

PREPARED STATEMENT OF LARRY FAZIO 

DIRECTOR, OFFICE OF EXAMINATION AND INSURANCE, NATIONAL CREDIT UNION

ADMINISTRATION

FEBRUARY 10, 2015 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, the 

National Credit Union Administration appreciates the invitation to testify about 

regulatory relief. 1 I am Larry Fazio, Director of NCUA’s Office of Examination and 

Insurance. 

60 

2The term ‘‘credit union’’ is used throughout this testimony to refer to federally insured credit 

unions. NCUA does not oversee approximately 132 State-chartered, privately insured credit 

unions. As of September 30, 2014, federally insured credit unions represent 98 percent of all 

credit unions in the United States and serve 98.7 million credit union members. 

As a policy matter, in 2007 NCUA issued a report to Congress concluding that the Federal 

Government should be the sole provider of primary deposit insurance. Federal deposit insurance 

has played an important role in maintaining confidence in the financial system and the stability 

of our economy, and the lessons learned from failures of private deposit insurance schemes 

should not be forgotten. See http://www.ncua.gov/Legal/Documents/ 

DepositInsuranceStudyReporttoCongress-Ver6-4.pdf for more details. 3 Congress established the National Credit Union Share Insurance Fund in 1970 as part of 

the Federal Credit Union Act (P.L. 91-468) and amended the Share Insurance Fund’s operations 

in 1984 (P.L. 98–369). The fund operates as a revolving fund in the U.S. Treasury under the 

administration of the NCUA Board for the purpose of insuring member share deposits in all 

Federal credit unions and in qualifying State-chartered credit unions that request Federal insurance. Funded by federally insured credit unions, the Share Insurance Fund is backed by the 

full faith and credit of the United States. 4The Regulatory Flexibility Act provides NCUA with the opportunity to define which credit 

unions fall under the law’s coverage. 5 U.S.C. 601(4). 

Today, three-quarters of credit unions have less than $100 million in assets and the median asset size of a credit union is $24 million. 2 Smaller credit unions in particular have fewer resources available to respond to marketplace, technological, legislative, and regulatory changes. NCUA, therefore, is acutely aware of the need to 

calibrate our rules and examinations to remove any unnecessary burden on these 

smaller credit unions. 

NCUA scales our regulatory and supervisory expectations for smaller credit 

unions. NCUA also seeks to provide broader regulatory relief when it is sensible and 

within the agency’s authority to do so. Over the past 3 years, we have taken many 

actions to cut red tape and provide lasting benefits to credit unions. This includes 

relaxing eight regulations and streamlining three processes. 

Where regulation is necessary to protect the safety and soundness of credit unions 

and the National Credit Union Share Insurance Fund, NCUA employs a variety of 

strategies to ensure our regulations are effectively targeted. 3 These strategies include fully exempting small credit unions from certain rules, using graduated requirements as size and complexity increase for others, and incorporating practical 

compliance approaches in agency guidance. In short, we work to balance maintaining prudential standards with minimizing regulatory burden. 

My testimony will discuss elements of NCUA’s current rulemaking process, including recent and prospective efforts to tailor regulation and supervision based on 

credit unions’ size and complexity. I will also comment on NCUA’s efforts to reduce 

examination burdens. Finally, I will offer legislative recommendations related to 

regulatory relief. 

Regulatory Flexibility Act 

Under the Regulatory Flexibility Act, NCUA must publish an analysis in the Federal Register and give special consideration to the regulatory burden and alternatives for small credit unions whenever a proposed or final rule would impose a 

significant economic burden on a substantial number of small credit unions. 4

In recognition of the operational and financial challenges faced by smaller credit 

unions, the NCUA Board in January 2013 reviewed the threshold used to identify 

which credit unions qualify as small entities under the Regulatory Flexibility Act. 

Based on credit union system percentages carried forward from the last update in 

2003 and corresponding risks to the Share Insurance Fund, the Board determined 

credit unions with less than $50 million in assets, up from the prior $10 million 

threshold, were small entities for purposes of the Regulatory Flexibility Act. 

At the time of the 2013 adjustment, the number of credit unions classified as 

small for purposes of the Regulatory Flexibility Act nearly doubled. Today, 4,124 institutions representing 65 percent of all credit unions are covered by the small credit union definition. 

At the same time it revised the small credit union definition, the NCUA Board 

provided immediate regulatory relief by exempting credit unions under $50 million 

from several regulatory requirements. First, the Board increased from $10 million 

to $50 million the threshold that defines which credit unions are complex, narrowing the category of credit unions that could be subject to risk-based net worth 

requirements and the associated prompt corrective action mandates. Second, the 

Board increased from $10 million to $50 million the threshold used to exempt credit 

unions from our interest rate risk rule. 

In a coordinated policy change, the Board nearly doubled the number of credit 

unions eligible to apply for NCUA’s Office of Small Credit Union Initiatives’ individVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00064 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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5 Created in 2004, NCUA’s Office of Small Credit Union Initiatives fosters credit union development and the effective delivery of financial services for small, new, and low-income credit 

unions, as well as minority depository institutions. The office provides individualized consulting, 

loan and grant opportunities, targeted training, and valuable partnership and outreach services 

to help viable small credit unions thrive. 6This triennial review of the small credit union definition under the Regulatory Flexibility 

Act is in addition to NCUA’s rolling 3-year review of all regulations. 7 Credit unions with less than $100 million in assets hold 11 percent of the system’s assets. 

8See http://www.ncua.gov/Legal/Regs/Pages/Regulations.aspx. 9 12 U.S.C. 3311. 

ualized consulting services by increasing the eligibility threshold to $50 million. 5

Subsequently, the NCUA Board extended relief at the same level in new rules requiring certain liquidity contingencies and creditor notices in voluntary liquidations. 

In January 2013, the NCUA Board also committed the agency to revisit the Regulatory Flexibility Act threshold in 2015 and every 3 years thereafter. 6 The Board 

took this action to ensure the definition of a small credit union would keep pace 

with changes in the marketplace. 

As a result, next week the Board will consider a proposed rule to include hundreds of additional credit unions under the definition of a small entity. Increasing 

the threshold from $50 million to $100 million would provide special consideration 

for regulatory relief for an additional 745 credit unions in future rulemakings. 

Should the Board adopt a $100 million threshold, 77 percent of all credit unions 

would be covered in future considerations of regulatory relief. 7 Taking this action 

also would recognize the challenges encountered by credit unions below $100 million 

in assets, which have slower deposit growth rates, slower membership growth rates, 

and higher operating costs than peer credit unions above the threshold. 

Regulatory Review Efforts 

NCUA is ever mindful of the impact of regulations on credit unions, especially 

smaller ones. We are proactive in our efforts to identify outdated, ineffective, or excessively burdensome regulations. We also continually review and take appropriate 

steps to eliminate or ease burdens, whenever possible, without compromising safety 

and soundness. 

Rolling Regulatory Review 

Since 1987, NCUA has followed a well-delineated and deliberate process to continually review its regulations and seek comment from stakeholders, such as credit 

unions and trade associations. Through this agency-initiated process, NCUA conducts a rolling review of one-third of its regulations each year, meaning that we review all of our regulations at least once every 3 years. 

This long-standing regulatory review policy helps to ensure NCUA’s regulations: 

• Impose only the minimum required burdens on credit unions, their members, 

and the public. 

• Are appropriate for the size of the credit unions regulated by NCUA. 

• Are issued only after full public participation in the rulemaking process. 

• Are clear and understandable. 

This rolling review is fully transparent. NCUA publishes on our Web site a list 

of the applicable regulations up for review each year and invites public comment 

on any or all of the regulations. 8

Economic Growth and Regulatory Paperwork Reduction Act 

Further, NCUA is voluntarily participating in the interagency review process created by the Economic Growth and Regulatory Paperwork Reduction Act of 1996. 9

EGRPRA requires the Federal Financial Institutions Examination Council and its 

member Federal banking agencies to review their regulations at least once every 10 

years to identify any rules that might be outdated, ineffective, unnecessary, insufficient, or excessively burdensome. NCUA is not required to participate in this process, but the agency has elected once again to do so. 

Under the EGRPRA review, each agency is issuing several categories of rules for 

public comment at regular intervals over 2 years—with an eye towards streamlining, modernizing, or even repealing regulations when appropriate. The categories 

are: 

• Agency Programs, 

• Applications and Reporting, 

• Capital, 

62 

10See Appendix I for a complete list of these actions. 11 A low-income credit union is one in which a majority of its membership (50.01 percent) 

qualifies as low-income members. Low-income members are those members who earn 80 percent 

or less than the median family income for the metropolitan area where they live, or the national 

metropolitan area, whichever is greater. In nonmetropolitan areas, the qualification threshold 

is a median family income at or below 80 percent of the State median family income for nonmetropolitan areas, or, if greater, the national median family income for nonmetropolitan areas. 

Under the Federal Credit Union Act, the low-income designation offers certain benefits and regulatory relief, such as an exemption from the cap on member business lending, eligibility for 

Community Development Revolving Loan Fund grants and low-interest loans, ability to accept 

deposits from nonmembers, and authorization to obtain supplemental capital. 12 NCUA has a number of regulations that address issues other than safety and soundness, 

such as those rules related to field of membership, the Community Development Revolving Loan 

Fund, payday alternative loans, the organization of Federal credit unions, agency procedures, 

and examiner postemployment restrictions, among others. 

• Consumer Protection, 

• Corporate Credit Unions, 

• Directors, 

• Officers and Employees, 

• Money Laundering, 

• Powers and Activities, 

• Rules of Procedure, and 

• Safety and Soundness. 

In May 2014, 33 NCUA regulations in the Applications and Reporting and Powers 

and Activities categories were released for review. In a second notice in December 

2014, NCUA opened 17 rules for comment in three additional categories: Agency 

Programs, Capital, and Consumer Protection. 

As part of NCUA’s voluntary participation in the latest EGRPRA review, NCUA 

will evaluate the burden on credit unions for those regulations within NCUA’s control. NCUA, however, has no authority to provide relief from requirements imposed 

by other regulators. 

Regulatory Modernization Initiative 

In 2011, NCUA Board Chairman Debbie Matz launched the agency’s Regulatory 

Modernization Initiative. The initiative balances two principles: 

• Safety and soundness—strengthening regulations necessary to protect credit 

union members and the Share Insurance Fund. 

• Regulatory relief—revising and removing regulations that limit flexibility and 

growth, without jeopardizing safety and soundness. 

In implementing this initiative, NCUA also has held regular in-person and online 

town hall meetings to solicit feedback from stakeholders. These events have identified regulatory relief issues on which the agency has since acted. 

Ultimately, NCUA under the initiative has taken 15 actions to cut red tape and 

provide lasting benefits to credit unions. 10 Specifically, NCUA during the last 3 

years has worked to ease eight regulations, providing regulatory relief to thousands 

of credit unions. NCUA has also streamlined three processes—facilitating more than 

a thousand new low-income credit union designations, increasing blanket waivers 

for member business loans, and establishing an expedited process for examinations 

at smaller credit unions. 11 NCUA has additionally issued four legal opinions, allowing more flexibility in credit union operations. 

Rulemaking Process 

In developing any regulation, NCUA strives to ensure the agency’s rulemakings 

are reasonable and cost-effective. NCUA additionally conducts an analysis to inform 

the agency’s decisions in advance of regulatory actions. The analysis also ensures 

that regulatory choices are made after appropriate consideration of the likely consequences. 

NCUA’s safety and soundness regulations protect credit unions and the members 

who own them, as well as strengthen the credit union system the agency supervises 

and insures. 12 The benefit of these regulations is that they reduce the likelihood 

of credit union failures and, in doing so, promote stability and protect the Share Insurance Fund. 

Any loss to the Share Insurance Fund is ultimately borne by surviving credit 

unions, which may be required to pay increased premiums. As member-owned cooperatives, this means the members, who are the owners and consumers of the credVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00066 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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13The collapse of five corporate credit unions during the 2007–2009 financial crisis best illustrates this point. To date, credit unions have paid $4.8 billion in assessments and experienced 

$5.6 billion in losses in the form of contributed capital. These costs incurred during the financial 

crisis reduced credit union earnings and assets and, as a result, during that time may have decreased interest paid on share deposits, increased loan rates, and constrained credit union services for their members. 14See Appendix II for a more complete listing of efforts to scale regulations, calibrate examinations, and provide assistance designed to address the unique circumstances of smaller credit 

unions. 15 As of September 30, 2014, real estate loans at credit unions with more than $50 million 

in assets accounted for 33.2 percent of total assets, compared to 15.8 percent at credit unions 

below this threshold. 16 As of September 30, 2014, credit unions with $50 million or less in assets maintained cash 

and short-term investment balances at 22.9 percent of total assets, compared to 12.5 percent 

for credit unions above this threshold. 

it unions, may ultimately have to repay these costs. As the developments of the last 

decade have demonstrated, the cost of regulatory inaction can result in failures that 

impose a greater cost to credit unions and society than the cost of action. 13

Through the public comment process, the NCUA Board gains insights on potential 

costs, unintended consequences, and alternative strategies directly from the credit 

unions the agency supervises and insures, as well as other interested stakeholders. 

The Board then uses this information to make adjustments before issuing a final 

rule. A good example of this process in action is NCUA’s October 2013 final rule 

on emergency liquidity and contingency funding. 

The proposed liquidity rule applied to all federally insured credit unions with 

more than $50 million in assets, but the public comment period yielded a number 

of important observations about the compliance requirements associated with establishing emergency lines of credit. Based on this information, the NCUA Board reconsidered the balance between costs and benefits specifically for credit unions between 

$50 million and $250 million in assets. The final rule exempted credit unions with 

assets up to $250 million from establishing emergency lines of credit with the Federal Reserve’s Discount Window, or NCUA’s Central Liquidity Facility, or both. Instead, the Board only required credit unions of this size to develop contingency funding plans that clearly set out strategies for meeting emergency liquidity needs. 

Examples of Scaled Regulation 

In addition to calibrating the liquidity and contingency funding rule, NCUA has 

recently scaled other regulations based on the asset size of the credit union. Examples of such tailored regulations include the agency’s 2012 interest rate risk rule 

and the revised proposed risk-based capital rule issued last month. 14

Interest Rate Risk Rule 

NCUA’s focus on interest rate risk management has been constant and pronounced for more than 15 years, as evidenced by a steady issuance of guidance to 

examiners and credit unions on asset-liability management. Since 2010, interest 

rate risk management has been a heightened focus for NCUA, and it is a primary 

supervisory focus for the agency again in 2015. 

NCUA’s focus on interest rate risk exposure has increased due to the extraordinary low level of interest rates and the overall lengthening of asset durations in 

the credit union system. NCUA is mindful that a period of rapidly rising rates could 

be a particularly challenging scenario for some credit unions. To stay ahead of the 

curve and maintain stable earnings, credit unions need to have policies in place to 

survive adverse rate environments. 

These concerns led the NCUA Board to issue a final rule 3 years ago aimed at 

managing interest rate risk. Generally, the rule categorizes credit unions based on 

size, which is correlated to risk exposure, to determine the need to adopt a written 

policy on interest rate risk. Consistent with the Board’s policy to exempt small credit unions from regulations when prudent, the size and exposure criteria in the interest rate risk rule exempt credit unions with less than $50 million in assets, while 

protecting the Share Insurance Fund by covering most of the system’s assets. 

The NCUA Board exempted smaller credit unions because they customarily have 

very low interest rate risk profiles as they are not as active in residential mortgage 

lending or long-term investing. 15 Also, smaller credit unions typically have much 

higher capital levels and hold relatively more cash and short-term investments on 

their balance sheets. 16

64 

17Data as of December 31, 2013. 18Same as above. 19The reformulated risk-based capital proposal would downgrade the capital status of just 19 

of 1,455 covered credit unions, based on data as of December 31, 2013. For more information 

about the revised risk-based based capital proposed rule, see http://www.ncua.gov/Resources/ 

Pages/risk-based-capital-resources.aspx. 

Revised Proposed Risk-Based Capital Rule 

After reviewing 2,056 comments on the original risk-based capital proposal, last 

month the NCUA Board issued a revised proposed rule. NCUA’s primary goals for 

the revised proposed risk-based capital rule remain the same: 

• To prevent or mitigate losses to the Share Insurance Fund by having a better 

calibrated, meaningful, and more forward-looking capital requirement to ensure 

credit unions can continue to serve members during economic downturns without relying on Government intervention or assistance, and 

• To modernize the risk-based capital calculations and framework, in accordance 

with the Federal Credit Union Act’s directives. 

The new proposal significantly narrowed the proposed rule’s scope by redefining 

‘‘complex’’ credit unions. Under this rulemaking, the NCUA Board has proposed to 

limit the risk-based capital requirement to credit unions with more than $100 million in assets, rather than the $50 million threshold contained in the current rule 

and the earlier proposal. 

By increasing the asset threshold, the revised proposed rule exempts over threequarters of credit unions. Through this targeted improvement, the revised proposed 

rule covers 1,455 credit unions that hold 89 percent of the system’s assets. 17 In comparison, the original proposal covered 2,237 credit unions representing 94 percent 

of the system’s assets. 18 The revised proposal also would result in the downgrade 

of fewer credit unions. 19

As requested by stakeholders, including several members of the Senate Banking 

Committee, the revised proposed rule includes significant changes to the risk 

weights for investments, real estate loans, member business loans, corporate credit 

unions, and credit union service organizations. The risk weights contained in the 

new proposal are generally comparable to or more favorable than the risk weights 

applied to banks by Federal banking agencies. 

Finally, the revised proposed rule extends the implementation date to January 1, 

2019. This date aligns with the risk-based capital rule implementation deadline for 

banks. It also allows credit unions covered under the rule ample time to prepare 

for the change. 

Other Regulatory Relief Proposals Under Consideration 

Going forward, NCUA is already working to provide additional regulatory relief 

for credit unions. For example, NCUA is drafting a proposal to modernize our member business lending rule. The primary changes being considered involve removing 

prescriptive underwriting criteria and other outdated restrictions, thereby eliminating the need for credit unions to request waivers from NCUA to conduct business. 

In April 2014, the NCUA Board also issued a proposed rule to define more clearly 

which associational groups do and do not qualify for membership in a Federal credit 

union. The proposed rule would provide automatic approval for seven types of associations. To facilitate greater access to credit union membership, commenters suggested several more categories of well-established associational groups that should 

also be considered for automatic approval. The Board is now carefully reviewing 

these suggested regulatory improvements. 

NCUA is additionally working to fine-tune a proposed rule on asset securitization. 

Approved in June 2014, this proposal would allow qualified Federal credit unions 

to securitize loans they have originated under certain conditions. Once finalized, 

this rule would provide these Federal credit unions with greater flexibility to manage interest rate and liquidity risks. 

Finally, the NCUA Board in July 2014 proposed to streamline the agency’s fixedassets rule. This proposal would eliminate the current requirement to obtain a waiver from NCUA for a Federal credit union with assets of $1 million or more that 

wants to make investments in fixed assets exceeding 5 percent of shares and retained earnings. The proposed rule also would make it easier for Federal credit 

unions to acquire property to accommodate plans for future expansions. 

The NCUA Board is expected to consider a final fixed-assets rule by the end of 

the second quarter. This rule would allow Federal credit unions to make business 

65 

20The CAMEL rating system is based upon an evaluation of five critical elements of a credit 

union’s operations: Capital adequacy, Asset quality, Management, Earnings and Liquidity. The 

CAMEL rating system is designed to take into account and reflect all significant financial, operational and management factors that examiners assess in their evaluation of a credit union’s 

performance and risk profile. CAMEL ratings range from 1 to 5, with 1 being the highest rating. 21For larger, more complex credit unions, NCUA will continue to perform risk-focused exams. 22 Examiners use documents of resolution to outline plans and agreements reached with credit 

union officials to reduce areas of unacceptable risk. An area of unacceptable risk is one for 

which management does not have the proper structure for identifying, measuring, monitoring, 

controlling, and reporting risk. 

decisions on upgrading technology, updating facilities, or making other purchases 

without filing waivers. 

Improvements in the Examination Program 

Beyond providing targeted relief by issuing regulatory exemptions and adopting 

tailored rules, NCUA is providing regulatory relief through revisions to our examination process. 

Small Credit Union Examination Program 

Since 2002, NCUA has followed a risk-focused exam program. This approach is 

designed to efficiently allocate agency resources to credit unions and areas of operations that exhibit the greatest potential risk exposure to the Share Insurance 

Fund. The program relies on examiner judgment to determine the areas that need 

review. Over time, NCUA has adjusted this approach by adding minimum scope requirements and establishing the National Supervision Policy Manual to ensure consistency of supervisory actions across all regions of the country. 

While the risk-based examination program has generally worked well, in 2011 we 

determined that the resources used to complete examinations were not in balance 

with the credit union system’s risks. NCUA was spending more exam hours on the 

smallest credit unions rather than the largest credit unions that have the greatest 

concentration of the system’s assets and the greatest potential risk exposure to the 

Share Insurance Fund. 

NCUA has since moved to concentrate supervision on credit union activities that 

pose the most risk. In recognition that larger, more complex credit unions require 

more attention, NCUA began streamlining exams for the smallest credit unions and 

deploying examiners where their work will be most effective in protecting the Share 

Insurance Fund. 

NCUA now has in place a streamlined examination program for financially and 

operationally sound credit unions with less than $30 million in assets. Through the 

Small Credit Union Examination Program, NCUA spends less time on average in 

small, well-managed credit unions. This decreased examination burden reflects a reduced overall scope but is more precisely focused on the most pertinent areas of risk 

in small credit unions—lending, record keeping, and internal control functions. 

NCUA is now expanding the Small Credit Union Examination Program to include 

Federal credit unions with up to $50 million in total assets that received a composite CAMEL rating of 1, 2, or 3 at their last examination. 20 After completing 

training, NCUA anticipates fully implementing the new procedures by the end of 

the first quarter of 2015. 21

Broader Examination Reforms 

NCUA is further working to streamline the examination process for all credit 

unions by harnessing technology. Improvements in computers, software, and security are allowing NCUA to design a new Automated Integrated Regulatory Examination System and revise our Call Report system to improve off-site monitoring capabilities and thereby potentially reduce the overall time NCUA spends on-site inside credit unions conducting examinations. 

To improve consistency in the way field staff develop and use documents of resolution, NCUA also revised our policy and procedures in 2013. 22 NCUA clarified how 

and when documents of resolutions should be used. The new policy states that documents of resolution should be used to address issues significant enough that a credit 

union’s failure to correct the problem would necessitate the examiner recommending 

an informal or formal enforcement action. In addition, examiners must cite the appropriate law, regulation, or authoritative NCUA policy when including an issue as 

a finding or document of resolution in the examination report. 

The result has been clearer expectations for credit unions and NCUA field staff, 

and greater consistency in the examination process. Credit unions generally have 

supported the change. As a result of these changes and an improved economy, the 

66 

23P.L. 113-252 and P.L. 113-251, respectively. 24See Appendix III for a breakdown of credit union performance by asset class over time. 25 12 U.S.C. 1751 and what follows. 26Located within the U.S. Department of the Treasury, the Community Development Financial Institutions Fund’s mission is to expand the capacity of financial institutions to provide 

credit, capital, and financial services to underserved populations and communities in the United 

States. 27The Federal Credit Union Act presently requires an area to be underserved by other depository institutions, based on data collected by NCUA or Federal banking agencies. NCUA has implemented this provision by requiring a facilities test to determine the relative availability of 

insured depository institutions within a certain area. Congress could instead allow NCUA to use 

alternative methods to evaluate whether an area is underserved to show although a financial 

agency has additionally experienced a decline in the number of documents of resolution issued. 

Regulatory Relief Legislation 

Finally, the Committee has asked NCUA to identify ways to ease credit union regulatory burdens through legislation. 

NCUA is very appreciative of the Senate’s efforts last December to enact into law 

the Credit Union Share Insurance Fund Parity Act and the American Savings Promotion Act. 23 The first law allows federally insured credit unions to offer the same 

level of insurance on deposits as banks and thrifts for lawyers’ trust accounts. The 

second law permits federally insured financial institutions to offer prize-linked accounts to promote saving. 

Looking ahead, NCUA has several proposals to share with the Committee related 

to regulatory flexibility, field of membership requirements, member business lending, supplemental capital, and vendor authority. 

Regulatory Flexibility 

Today, there is considerable diversity in scale and business models among financial institutions. As noted earlier, many credit unions are very small and operate 

on extremely thin margins. 24 They are challenged by unregulated or less-regulated 

competitors, as well as limited economies of scale. They often provide services to 

their members out of a commitment to offer a specific product or service, rather 

than a focus on any incremental financial gain. 

The Federal Credit Union Act contains a number of hard-coded provisions that 

limit NCUA’s ability to revise regulations and provide relief to such credit unions. 

Examples include limitations on the eligibility for credit unions to obtain supplemental capital, field of membership restrictions, curbs on investments in assetbacked securities, and the 15-year loan maturity limit, among others. 25

To that end, NCUA would encourage Congress to consider providing regulators 

like NCUA with flexibility to write rules to address such situations, rather than imposing rigid requirements. Such flexibility would allow the agency to effectively 

limit additional regulatory burdens, consistent with safety and soundness. As previously noted, NCUA continues to modernize existing regulations with an eye toward balancing requirements appropriately with the relatively lower levels of risk 

smaller credit unions pose to the credit union system. By allowing NCUA discretion 

on scale and timing to implement new laws, we could more flexibly mitigate the cost 

and administrative burdens of these smaller institutions while balancing consumer 

and prudential priorities. 

Field of Membership Requirements 

The Federal Credit Union Act currently only permits Federal credit unions with 

multiple common-bond charters to add underserved areas to their fields of membership. We recommend that Congress act to modify the Federal Credit Union Act to 

give NCUA the authority to streamline field of membership changes and permit all 

Federal credit unions to grow their membership by adding underserved areas. 

Allowing Federal credit unions that have a community or single common-bond 

charter the opportunity to add underserved areas would open up access for many 

more unbanked and underbanked households to credit union membership. This legislative change could also eventually enable more credit unions to participate in the 

programs offered through the congressionally established Community Development 

Financial Institutions Fund, thus increasing the availability of credit and savings 

options in distressed areas. 26

Congress also may want to consider other field of membership statutory reforms. 

For example, Congress could allow Federal credit unions to serve underserved areas 

without also requiring those areas to be local communities. Congress may also want 

to simplify the ‘‘facilities’’ test for determining if an area is underserved. 27 NCUA 

67 

institution may have a presence in a community, it is not qualitatively meeting the needs of 

an economically distressed population. 28 12 U.S.C. 1757a. 

stands ready to work with the Committee on these ideas, as well as other options 

for adjusting field of membership requirements. 

Outside of the legislative process, Chairman Matz recently established a working 

group to discuss existing regulatory field of membership constraints and options for 

ensuring the Federal credit union charter remains relevant in today’s marketplace. 

This group is requesting candid feedback from stakeholders to help the agency identify potential regulatory or procedural changes to enable Federal credit unions to 

more readily promote access to populations with limited alternatives for financial 

services. 

Member Business Lending 

NCUA reiterates the agency’s support for legislation to adjust the member business lending cap, such as the Small Business Lending Enhancement Act from the 

113th Congress. This bill contains appropriate safeguards to ensure NCUA can protect safety and soundness as qualified credit unions gradually increase member 

business lending. 

For federally insured credit unions, the Federal Credit Union Act limits member 

business loans to the lesser of 12.25 percent of assets or 1.75 times net worth, unless the credit union qualifies for a statutory exemption. 28 For smaller credit unions 

with the membership demand and the desire to serve the business segments of their 

fields of membership, the restriction makes it very difficult or impossible to successfully build a sound member business lending program. As a result, many credit 

unions are unable to deliver commercial lending services cost effectively, which denies small businesses in their communities access to an affordable source of credit 

and working capital. 

These credit unions miss an opportunity to support the small business community 

and to provide a service alternative to the small business borrower. Small businesses are an important contributor to the local economy as providers of employment and as users and producers of goods and services. NCUA believes members 

that are small business owners should have full access to financial resources in the 

community, including credit unions, but this is often inhibited by the statutory cap 

on member business loans. 

NCUA additionally supports the Credit Union Residential Loan Parity Act introduced in the House during the 113th Congress. This legislation addresses a statutory disparity in the treatment of certain residential loans made by banks and credit 

unions. 

When a bank makes a loan to purchase a 1- to 4-unit, non-owner-occupied residential dwelling, the loan is classified as a residential real estate loan. If a credit 

union were to make the same loan, it is classified as a member business loan and 

therefore subject to the member business lending cap. To provide policy parity between banks and credit unions for this product, this bill would exclude such loans 

from the cap. The legislation also contains appropriate safeguards to ensure NCUA 

will apply strict underwriting and servicing standards for these loans. 

Supplemental Capital 

NCUA supports legislation to allow healthy and well-managed credit unions to 

issue supplemental capital that will count as net worth. This legislation would help 

protect the Share Insurance Fund by adding a new layer of capital, in addition to 

retained earnings, to absorb losses at credit unions. 

Most Federal credit unions only have one way to raise capital—through retained 

earnings. Without access to other ways to raise capital, credit unions are exposed 

to risk when the economy falters. Financially strong and well-capitalized credit 

unions also may be discouraged from allowing healthy growth out of concern it will 

dilute their net worth ratios and trigger prompt corrective action-related supervisory 

actions. 

A credit union’s inability to raise capital outside of retained earnings limits its 

ability to expand into fields of membership more effectively and to offer greater options to eligible consumers. Consequently, NCUA has previously encouraged Congress to authorize healthy and well-managed credit unions, as determined by the 

NCUA Board, to issue supplemental capital that will count as net worth. If reintroduced in the 114th Congress, NCUA would again be supportive of the Capital Access for Small Businesses and Jobs Act. 

68 

29 NCUA has two other legislative priorities. The first priority would enhance access to emergency liquidity for the credit union system by making targeted changes to the Central Liquidity 

Facility and expanding the agency’s access to the U.S. Treasury. The second priority would permit NCUA to charge risk-based premiums for the Share Insurance Fund much like the Federal 

Deposit Insurance Corporation charges for the Deposit Insurance Fund. Risk-based premiums 

would lessen the funding burden on small credit unions, which generally pose less risk to the 

Share Insurance Fund. 

Vendor Authority 

Finally, and most critically, NCUA requests that the Senate Banking Committee 

consider legislation to provide the agency with examination and enforcement authority over third-party vendors—including credit union service organizations, or 

CUSOs for short. Obtaining this authority is the agency’s top legislative priority. 29

While providing important services and helping smaller credit unions achieve 

economies of scale, there are inherent risks in some CUSOs. Since 2008, NCUA estimates that nine CUSOs have caused more than $300 million in direct losses to the 

Share Insurance Fund and led to the failures of credit unions with more than $2 

billion in aggregate assets. In one such example, one CUSO caused losses in 24 

credit unions, some of which failed. 

CUSOs provide products and services that can significantly affect financial wellbeing, and, in the case of technology service providers, the security of credit unions 

and the members they serve. During the third quarter of 2014, credit unions using 

the services of a CUSO accounted for $974 billion in assets or 88 percent of system 

assets. This figure is up from 79 percent of assets at year-end 2009. 

The Government Accountability Office has noted that NCUA has a limited ability 

to assess the risks third-party vendors, including CUSOs, pose for credit unions and, 

ultimately the Share Insurance Fund, and to respond to any problems. NCUA may 

only examine vendors with their permission and cannot enforce any corrective actions. NCUA can merely make recommendations and present findings to each vendor’s credit union clients. This lack of authority stands in contrast to Federal banking agencies and most State regulators. 

NCUA’s inability to oversee third-party vendors also poses a regulatory burden for 

credit unions, as the agency must rely on credit unions to report certain information 

on the vendors with which they do business. Additionally, NCUA must work 

through each credit union that uses third-party vendors or CUSOs to obtain material about the vendor or CUSO. This duplication of efforts creates a burden on all 

credit unions, particularly smaller credit unions that rely more heavily on vendors 

for many products and services. 

A legislative fix would close a growing gap in NCUA’s authority and provide some 

regulatory relief for credit unions. Specifically, NCUA would be able to work directly 

with key infrastructure vendors, including those with a cybersecurity dimension, to 

obtain necessary information to assess risks and deal with any problems at the 

source. 

The need for NCUA to have vendor authority is best illustrated by the growth 

of cybersecurity threats, which are a major concern for the agency. The complexity 

of online communications is growing, as is the number and sophistication of hackers, thieves, and terrorists seeking to exploit vulnerabilities in the system. Moreover, credit unions are increasingly using third-party vendors to provide technological services, including security, and there is a greater interconnectedness among 

vendors. 

Today, the top five technology service providers serve more than half of all federally insured credit unions representing 75 percent of the credit union system’s assets. Thus, a failure of even one vendor represents potential risk to the Share Insurance Fund. 

These vendors also provide an array of products and services to credit unions, and 

credit unions, like other small and community institutions, rely heavily on third 

parties to deliver services and manage technology in providing services. Credit 

unions often use common third-party services designed specifically for small cooperative institutions. Vendors perform functions that include online banking, transaction processing, fund transfers, and loan underwriting. Member data are being 

stored on these vendors’ servers. 

NCUA therefore needs the same authority as the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Board of Governors 

of the Federal Reserve System to examine third-party vendors. To achieve this objective, NCUA has developed a legislative proposal which we believe would afford 

the agency the appropriate statutory authority. NCUA stands ready to work with 

the Committee on legislation to effectuate the necessary changes so that all credit 

69 

unions can responsibly and effectively utilize the services of CUSOs and technology 

service providers. 

Thank you again for the invitation to testify. I am happy to answer any questions. 

70 

71 

72 

73 

74 

1 Also see: Vice, C. ‘‘Examining the State of Small Depository Institutions’’. Committee on 

Banking, Housing, and Urban Affairs. United States Senate. September 16, 2014. Available at: 

http://www.banking.senate.gov/public/ 

index.cfm?FuseAction=Files.View&FileStorelid=6e89b188-c24a-40d5-99e9-754868914674. 

PREPARED STATEMENT OF CANDACE A. FRANKS 

COMMISSIONER, ARKANSAS STATE BANK DEPARTMENT, ON BEHALF OF THE

CONFERENCE OF STATE BANK SUPERVISORS

FEBRUARY 10, 2015 

Introduction 

Good morning, Chairman Shelby, Ranking Member Brown, and distinguished 

Members of the Committee. My name is Candace Franks. I serve as the Bank Commissioner for the State of Arkansas and I am the current Chairman of the Conference of State Bank Supervisors (CSBS). It is my pleasure to testify before you 

today on behalf of CSBS. 

CSBS is the nationwide organization of banking regulators from all 50 States, the 

District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. State banking 

regulators charter and supervise more than 5,000 insured depository institutions. 

Additionally, most State banking departments also regulate a variety of nonbank financial service providers, including mortgage lenders, mortgage servicers, and 

money services businesses. For more than a century, CSBS has given State supervisors a national forum to coordinate supervision of their regulated entities and to 

develop regulatory policy. CSBS also provides training to State banking and financial regulators and represents its members before Congress and the Federal financial regulatory agencies. 

In my 35 years with the Arkansas State Bank Department, it has become abundantly clear that community banks are vital to economic development, job creation, 

and financial stability. I know this Committee shares my convictions, and I appreciate your efforts to examine the State of our country’s community banks and regulatory approaches to smaller institutions. 

State regulators have a long history of innovating to improve our regulatory and 

supervisory processes to better meet the needs of community banks, their customers, and our States. Because of our roles and where we fit in the broader regulatory framework, State banking departments are able to pilot programs at the local 

level based on our particular needs, especially in the area of bank supervision. This 

often leads to innovative practices bubbling up from individual States and expanding into other States. At the same time, each State has the authority to choose what 

works best in their local context. 

This regulatory flexibility is a strength of the State banking system. After all, 

community banks in Arkansas might face local issues that my department should 

address in one manner, while another State’s banking regulator might have a different set of supervisory challenges to address. The Appendix to my testimony highlights a few cases in which State regulators have proven to be particularly adept 

at developing and implementing flexible practices to better serve our smaller institutions. 1

My testimony today will highlight the importance of community banks and their 

relationship-based business model, the shortcomings of our current community bank 

regulatory approach, and State regulators’ vision for a new framework for community bank regulation. I will also discuss specific ways in which Congress and the 

Federal banking agencies can adopt right-sized policy solutions for community 

banks and highlight State regulators’ current outreach initiatives with community 

banks. Finally, my testimony will discuss the States’ efforts to produce new and enhanced research to promote a better understanding among policymakers about the 

role of community banks and the impact they have upon our local, State, and national economies and communities. 

Community Banks and Relationship Lending Are Essential 

The U.S. banking system is incredibly diverse, ranging from small community 

banks to global financial conglomerates. This diversity is not a mistake, but rather 

a product of our unique dual banking system. The dual banking system, consisting 

of State and national banks chartered by State and Federal regulators, has encouraged financial innovation and institutional diversity for more than 150 years. 

Community banks are essential to the U.S. financial system and economy. The 

Federal Deposit Insurance Corporation (FDIC) classifies nearly 93 percent of all 

U.S. banks as community banks, meaning there are 6,107 community banks embedVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00078 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
75 

2 ‘‘Quarterly Banking Profile: Third Quarter 2014’’. FDIC. Available at: https:// 

www2.fdic.gov/qbp/2014sep/qbp.pdf. 3 ‘‘FDIC Community Banking Study’’. FDIC, pp. 3–4 (December 2012). Available at: http:// 

www.fdic.gov/regulations/resources/cbi/study.html. 4 Ibid. 

5 Ibid. 

ded in local communities throughout the country. 2 The defining characteristic of a 

community bank is its relationship-based business model—a business model that relies on the bank’s knowledge of its local market, citizens, and economic conditions. 

Community banks are able to leverage this personal, soft data in a way that large, 

model-driven banks cannot. This is why community banks have an outsized role in 

lending to America’s small businesses, holding 46 percent of the banking industry’s 

small loans to farms and businesses while only making up 14 percent of the banking 

industry’s assets. 3 A community banker knows the entrepreneur opening a new 

business around the corner. A community banker also knows the local real estate 

market and the homebuyer seeking a mortgage loan. These relationships allow community bankers to offer personalized solutions designed to meet the specific financial needs of the borrower. 

Community banks engage in relationship lending in the largest U.S. cities and the 

smallest rural markets. Their role in providing credit and banking services is just 

as vital as the largest financial institutions. In fact, many consumers, businesses, 

and farms are not served particularly well by standardized, model-driven lending. 

This is especially the case in rural areas, where the FDIC has found that community banks are three times more likely to operate a banking office outside of a metro 

area than their large bank counterparts. 4

There are more than 600 counties—or one out of every five U.S. counties—that 

have no physical banking offices except those operated by community banks. 5 In my 

home State of Arkansas, there are 96 towns served by only one physical banking 

location, be it a bank’s main office or branch. In fact, 66 of these communities have 

populations with less than 1,000 people. Community banks are the financial lifeblood of these small Arkansas communities. To these parts of the country, citizens 

do not differentiate between community banks, regional banks, or the largest banks 

in the world. For these small or rural towns, the community banking system is the 

banking system. 

Simply put, community banks are a vital part of a very diverse financial services 

marketplace and help ensure credit flows throughout the Nation’s diverse markets. 

They provide credit and banking services in a flexible, innovative, and problem-solving manner, characteristics that are inherent in the community bank relationshipbased business model. 

The Shortcomings of Our Community Bank Regulatory Framework 

State regulators believe that policymakers in Congress, the Federal banking agencies, and State banking agencies must rethink how we all approach regulating and 

supervising community banks. The statistics are clear—most banks are community 

banks that operate in local markets: 

• Ninety percent of today’s 6,589 banks have less than $1 billion in total assets. 

• The 5,908 banks with less than $1 billion in assets hold less than 9 percent of 

the banking industry’s total assets. 

• The average community bank has $225 million in total assets, and employs 54 

people on average. 

On the other end of the industry spectrum, we find a very different type of bank: 

• There are four U.S. banks that exceed $1 trillion in total assets, and two of 

these have more than $2 trillion in total assets. 

• Four banks hold around 41 percent of the banking industry’s total assets. 

• These four institutions each average 188,100 employees. 

The community bank and megabank business model are also radically different. 

Community banks serve local economies by tailoring their loans and financial services around the customers within their geographically limited markets. Conversely, 

the largest banks leverage economies of scale in order to offer standardized mortgage and consumer products across a diversity of U.S. and global markets, provide 

financial services to multinational corporations, and engage in extensive capital 

markets activity. 

76 

These are vastly different businesses, and policymakers must regulate and supervise these financial institutions differently based on their size, complexity, overall 

risk profile, and risk to the financial system. 

Recent regulatory reform efforts have rightfully centered on addressing the problems posed by the largest, most systemically important banks. However, there is 

also widespread concern among policymakers and the banking industry that many 

of these new rules, in addition to existing regulatory requirements, pose an undue 

burden for community banks. To be sure, Congress and Federal regulators have undertaken measures to provide community institutions with relief. While these regulatory relief efforts are positive, there remains a need for a more comprehensive approach based on a common and consistent definition of community banks. A quick 

sampling of various asset thresholds for community bank regulatory relief purposes 

illustrates this point: 

• Federal Reserve Small Bank Holding Company (BHC) Policy Statement—Exempts BHCs with assets less than $1 billion from the consolidated BHC capital 

guidelines and grants them simplified reporting requirements. 

• Consumer Financial Protection Bureau (CFPB) Jurisdiction—The CFPB does 

not have direct supervisory authority over institutions that fall below $10 billion in assets. 

• CFPB Small Creditor Definition—Residential mortgage loans are granted 

Qualified Mortgage status if the bank has less than $2 billion in total assets. 

• CFPB Balloon Loan Qualified Mortgages—Residential mortgage loans are 

granted Qualified Mortgage status if the bank has less than $2 billion in total 

assets and the institution originates 50 percent or less of its mortgages in rural 

or underserved areas. 

• CFPB Escrow Exemptions—Banks are exempt from escrow requirements if the 

bank has less than $2 billion in total assets and the institution originates 50 

percent or less of its mortgages in rural or underserved areas. 

• Treatment of Trust Preferred Securities (TruPS) Under the Collins Amendment—Grandfathers TruPS issued before May 19, 2010, into regulatory capital 

for BHCs with less than $15 billion in assets. 

• Home Mortgage Disclosure Act (HMDA) Reporting Criteria—Banks with less 

than $44 million in assets are exempt from reporting HMDA data as required 

under Regulation C. 

State regulators are concerned that an approach to regulatory relief that relies 

solely or primarily on asset thresholds falls short in granting small community 

banks real relief from regulations designed for their larger competitors. True regulatory right-sizing for community banks will require a holistic approach. 

These are vastly different businesses, and policymakers 

State Regulators Support a Definitional Approach for Right-Sizing Community Bank Regulation and Supervision 

Regulatory right-sizing requires a process for determining how safety and soundness and consumer protection requirements can better reflect the community banking business model. To start this process, policymakers and regulators need to know 

which institutions should be the focus of our regulatory right-sizing efforts. To date, 

a consensus definition has eluded policymakers. CSBS is confident that regulators 

and policymakers can more accurately define the universe of community banks and 

tailor laws, regulations, and supervision for these institutions. 

A definitional approach would provide the necessary foundation for a more appropriate regulatory framework for community banks. The definitional approach could 

be used as a basis for a broad range of regulatory right-sizing initiatives. Instead 

of crafting specific exemptions in law or leaning on boilerplate statements like ‘‘appropriate for the size and complexity of the institution,’’ there would be a clear process for defining a community bank. With a new process in place to identify community banks, Congress and regulators could then move forward in a holistic manner 

to provide regulatory and supervisory right-sizing for these institutions. 

After all, the more than 6,100 institutions identified as community banks are not 

simply a number, but rather institutions that State regulators know, license, supervise, and work with on a regular and extensive basis. My banking department staff 

spends innumerable hours with community bankers in Arkansas, supervising them 

and helping them address today’s banking challenges. This is the case for every regulatory agency at this table—we all know which institutions are in fact community 

banks, and we must begin to provide these institutions with real regulatory relief 

in a comprehensive, holistic manner. 

77 

6Moore, R., and M. Seamans. ‘‘Capital Regulation at Community Banks: Lessons From 400 

Failures’’. Available at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/ 

CapitallRegulationlatlCommunitylBanks.pdf. 

Community banks are best identified by a set of principles that can be applied 

on a case-by-case basis, not by simple line drawing. CSBS is committed to getting 

this right, and my colleagues and I would be glad to work with Congress to create 

a process for community bank identification that is not solely based on asset thresholds, but takes qualitative criteria into account. For example, State regulators believe characteristics such as the following can help identify community banks: 

• Operating primarily in local markets; 

• Deriving funding primarily from a local market, specifically through deposits of 

members of the community in which it operates; 

• Its primary business is lending out the deposits it collects to the community in 

which it predominately operates; 

• The lending model is based on relationships and detailed knowledge of the community and its members, not volume-driven or automated; 

• Focusing on providing high-quality and comprehensive banking services; and 

• Locally based corporate governance. 

Based on criteria such as these, I am confident we can identify the universe of 

community banks. This will provide the necessary framework for policymakers to 

move forward in a purposeful manner, designing statutes and regulations that are 

consistent with and foster a diverse economy and financial system. 

Specific Areas for Community Bank Regulatory Relief 

As the effort to address regulatory burden has evolved over the last several years, 

State regulators have worked to identify specific recommendations that we believe 

would be meaningful for community banks. While these areas help to illustrate the 

inappropriate application of regulation and negative effect on community banks, the 

definitional approach presented earlier in this testimony would provide a foundation 

to address many of these issues. For State regulators, the objective is not necessarily less regulation, it is regulation and supervision that reflects and appreciates 

the community banking business model. The following represent specific actions 

that Congress and the Federal banking agencies can undertake to promote rightsized regulations for community banks. 

Study Risk-Based Capital for Smaller Institutions 

The Basel Committee on Banking Supervision designed risk-based capital standards for internationally active banks. These standards are overly complex and inappropriate for community banks and their business model. Indeed, research presented at the Community Bank Research Conference has shown that a simple leverage requirement would be equally, if not more, effective than risk-based capital requirements for community banks, and would be much less burdensome. 6

Congress should mandate the U.S. Government Accountability Office (GAO) investigate the value and utility of risk-based capital for smaller institutions. The resulting GAO study should seek to understand how risk weights drive behavior in the 

volume and type of credit a bank originates, as well as the burden of providing the 

necessary data for calculating capital ratios. 

Mortgage Rules Should Better Reflect the Realities of Community Bank Portfolio 

Lending 

Community banks that hold the full risk of default of a loan are fully incented 

to determine the borrower’s repayment ability. Laws and regulations regarding 

mortgage lending should reflect this reality. 

Qualified Mortgage Status for Mortgages Held in Portfolio 

When a community bank makes a mortgage and holds that loan in portfolio, the 

interests of the bank and the borrower are inherently aligned, furthering the objective of safe and sound business practices that protect consumers. Yet, a national 

community bank survey and community bank town hall meetings conducted in conjunction with the 2014 Community Banking in the 21st Century research conference 

point to a problem: while many community banks’ existing mortgage businesses are 

consistent with the Ability-to-Repay (ATR) and Qualified Mortgage (QM) requirements, complying with the regulations is not only creating an outsized regulatory 

burden but also curtailing lending. One solution that would tailor the requirement 

to the nature of community bank mortgage lending is to grant the QM liability safe 

78 

harbor to all mortgage loans held in portfolio by a community bank. Congress explored this issue through hearings and CSBS-supported legislation during the 113th 

Congress. We encourage this Congress to pursue similar legislation to promote portfolio lending by community banks. 

Improving the CFPB’s Rural Designation Process 

The Dodd-Frank Act’s ATR requirement’s restrictions on balloon loans and the 

CFPB’s efforts to provide limited relief for balloon loans made by smaller institutions in rural areas illustrate the need for regulatory right-sizing and for a conscious 

effort to understand and adapt regulation to the community bank business model. 

When used responsibly, balloon loans are a useful source of credit for borrowers in 

all areas. Properly underwritten balloon loans are tailored to the needs and circumstances of the borrower, including situations where the borrower or property is 

otherwise ineligible for standard mortgage products. Because banks can restructure 

the terms of a balloon loan more easily than an adjustable rate mortgage, they are 

able to offer the borrower more options for affordable monthly payments, especially 

in a rising interest rate environment. 

As a regulator, I prefer that lenders and borrowers in my State have flexibility 

and options when selecting consumer products and mortgages. Since the mortgage 

is held in portfolio, community banks must work to ensure that the product is tailored to take into consideration all risks associated with the credit in order to avoid 

default. 

Community banks retain balloon mortgages in portfolio as a means of offering 

credit to individuals that do not fit a standard product but nonetheless can meet 

the monthly mortgage obligation. That is the logic behind the Dodd-Frank Act provision providing balloon loans with QM status if those loans are originated in rural 

or underserved areas by a small creditor. However, the CFPB’s original approach 

to identifying such areas relied solely on the Department of Agriculture’s Urban Influence Codes, producing many illogical and problematic outcomes for community 

banks. 

CSBS raised this concern shortly after the original rule was proposed, and we 

worked with Congress to develop a petition process for interested parties to seek 

rural designation. We applaud Congress for its focus on this issue, and we appreciate the CFPB’s recent efforts to improve its rural and underserved designation 

framework by adding rural census blocks as defined by the U.S. Census Bureau. 

More fundamentally, portfolio lending is not a ‘‘rural’’ issue or an ‘‘underserved’’ 

issue; it is a relationship-based lending issue for all community banks. Eliminating 

the rural or underserved balloon loan limitations for qualified mortgages would go 

a long way in expanding the CFPB’s Small Creditor QM framework to include all 

loans held in portfolio by community banks. Similarly, removing the rural or underserved requirements from the exception to mandatory escrow requirements for higher-priced loans would make right-sized regulations business model focused, not geographically focused. 

Tailor Appraiser Qualifications for 1–4 Family Loans Held in Portfolio 

Current appraisal regulations can curtail mortgage lending in markets that lack 

qualified appraisers or comparable sales. Congress should require regulations to accommodate portfolio loans for owner-occupied 1–4 family loans, recognizing the lender’s proximity to the market and the inherent challenge in securing an accurate appraisal by a qualified appraiser. 

Community Bank Fair Lending Supervision Must Acknowledge the Business Model 

and Be Applied Consistently 

State regulators take the difficulties that many underserved borrowers have had 

in obtaining access to fair credit very seriously, especially in regards to mortgage 

lending and home ownership. State regulators are committed to enforcing institutions’ compliance with the letter and spirit of our fair lending laws, but we are concerned about regulators’ overreliance on opaque statistical models that use small 

samples to judge fair lending performance and inconsistencies in Federal regulators’ 

approach to fair lending supervision. Many times it is not the statute that creates 

the problem, but the interpretation, guidance, and the examination techniques utilized. Federal agency leadership must commit to a more pragmatic and transparent 

approach to fair lending supervision. 

Federal regulators should not use one-size-fits-all techniques and tools on community banks in fair lending examinations. A smaller institution makes case-by-case 

lending decisions based on local knowledge and local relationships. While statistical 

analysis plays a role in fair lending supervision, it is not the beginning and end of 

the analysis. Supervisors must utilize their flexibility to look beyond statistical models to take a more holistic view of the lending decision. 

79 

7 ‘‘FDIC Annual Report 2013’’. FDIC. Available at: https://www.fdic.gov/about/strategic/report/2013annualreport/AR13section1.pdf. 8 12 U.S.C. §1812(a)(1)(C). 9 ‘‘The Composition of the Federal Reserve Board of Governors’’. CSBS. Available at: http:// 

www.csbs.org/news/csbswhitepapers/Documents/Final CSBS White Paper on Federal Reserve 

Board Composition (Oct 23 2013).pdf. 10 Available at: http://goo.gl/eCKVrS. 

Despite assurances of consistent approaches from ‘‘headquarters’’ to ‘‘the field’’ 

and of continued collaboration to ensure consistency, State regulators have observed 

meaningful differences in how the three Federal banking agencies treat community 

banks on fair lending issues and as well as a disconnect within the individual agencies. Federal agency leadership has the responsibility to make sure this is not the 

case, and they must be accountable for ensuring transparency and consistency. 

The current approach to fair lending for community banks is having a chilling effect on credit availability, as banks, frustrated by the examination process, are curtailing or exiting consumer credit products. From a public policy perspective, we 

should want community banks doing this business. If there were only 66 banks that 

had compliance or Community Reinvestment Act problems in 2013, 7 and referrals 

to the Department of Justice are minimal, why are banks experiencing such indepth and extensive reviews? 

The Application Process for Community Banks Must Reflect the Business Model 

Community bank applications submitted to Federal banking agencies for transactions such as mergers and capital investments can take an extended time to process because the agencies have to ensure the decision will not establish a precedent 

that could be exploited by larger institutions. The approval of a merger, acquisition, 

or expansion of activities should be related to the overall size and complexity of the 

transaction, and community banks should not be unnecessarily penalized for the potential action of larger financial institutions. Federal law, an agency rule, or a 

clause in an approval letter could provide the necessary protection by stating that 

application decisions for community banks do not establish a precedent for systemically important financial institutions. 

To further address the length of time the agencies take to review community bank 

applications, the application review and approval process for a defined subset of 

community institutions should be decentralized with more final decision-making authority given to FDIC Regional Offices and the regional Federal Reserve Banks. 

Federal Regulatory Agency Leadership and State Supervisory Representation 

A key to the success of the dual banking system is robust coordination among regulators. Meaningful coordination in regulation and supervision means diversity at 

the highest governance levels at the Federal regulatory agencies. The current FDIC 

Board does not include an individual with State regulatory experience as required 

by law. 8 The Federal Deposit Insurance (FDI) Act and congressional intent clearly 

require that the FDIC Board must include an individual who has worked as a State 

official responsible for bank supervision. As the chartering authority for more than 

76 percent of all banks in the United States, State regulators bring an important 

regulatory perspective that reflects the realities of local economies and credit markets. State regulators were pleased to see bipartisan legislation introduced last Congress in the Senate and the House that refined the language of the FDI Act to ensure that Congress’ intent is met and that the FDIC Board includes an individual 

who has worked in State government as a banking regulator. We hope to see this 

proposal reintroduced this Congress. 

We thank Congress for its efforts to require community bank or community bank 

supervisory representation on the Federal Reserve Board of Governors (the Board) 

through the Terrorism Risk Insurance Program Reauthorization Act of 2014. In 

2013, CSBS released a white paper 9 on the composition of the Board of Governors 

and an infographic 10 that illustrates the background and experience of the members 

of the Board of Governors throughout the Board’s history. The white paper highlights two key trends: Congress’ continuing efforts to ensure the Board’s composition 

is representative of the country’s economic diversity, and the Board’s expanding supervisory role. The infographic illustrates the growing trend of naming academics 

to the Board. Passage of Senator Vitter’s provision reinforces Congress’ consistent 

intent to bring together a range of perspectives on the Board, and reaffirms the important role of community banks in the financial marketplace. 

Practical Privacy Policy Notice Requirements 

State regulators firmly believe that financial institutions have an affirmative and 

continuing obligation to respect customer privacy. However, there are commonsense 

80 

11 12 U.S.C. §3311. 

practices for communicating privacy policies. If a bank’s privacy policy does not 

change, the bank should not be required to repeatedly inform customers of the policy. Redundant notifications are costly and limit the effectiveness of important privacy communications with customers. Accordingly, CSBS supports any commonsense fix to the Gramm-Leach-Bliley Act that exempts financial institutions from 

mandatory annual privacy policy mailings if the institution’s privacy policy does not 

change. 

State Regulators Are Engaging Community Banks 

State regulators regularly and actively engage with community banks to try to reduce regulatory burden and to help meet the pressing needs these institutions face. 

State regulators are currently working to facilitate the Economic Growth and Regulatory Paperwork Reduction Act process. We are providing guidance to and conducting outreach with community banks to help them navigate cybersecurity 

threats. 

Economic Growth and Regulatory Paperwork Reduction Act 

The Federal Financial Institutions Examination Council (FFIEC) allows State regulators and our Federal counterparts to better coordinate bank supervision, which 

helps reduce the supervisory burden for community institutions. State regulators 

are involved in the FFIEC through the State Liaison Committee, which is currently 

chaired by Massachusetts Banking Commissioner David Cotney. 

One of the FFIEC’s current major projects is the review of banking regulations 

mandated by the Economic Growth and Regulatory Paperwork Reduction Act 

(EGRPRA). 11 State regulators, through our presence on the FFIEC, are committed 

to using this review as an opportunity to pinpoint regulations that may not be properly suited to the business model of community banks. We are excited to participate 

in this process through the FFIEC with our Federal colleagues at the FDIC, Federal 

Reserve Board, and the Office of the Comptroller of the Currency. 

State regulators are attending and participating in the regional outreach events. 

I am particularly pleased that there will be an event later this year focused on rural 

banks. Additionally, the feedback received during the outreach events and through 

the ongoing comment process will provide important input to the State Liaison Committee and State regulators as a whole as we continue to seek ways to minimize 

duplicative regulation and to make supervision of State-chartered banks more efficient. 

The FFIEC and Federal regulatory agencies are contributing significant time and 

resources to ensure the EGRPRA process is a fruitful endeavor. The Federal regulators’ commitment to this effort is evidenced by the attendance of Comptroller 

Curry, Federal Reserve Governor Powell, and FDIC Chairman Gruenberg at 

EGRPRA outreach meetings throughout the country. Their commitment shows that 

this will not merely be a check-the-box exercise, but a meaningful process of reducing regulatory burden. 

While the comment process and outreach events have just begun, they are already 

yielding meaningful areas for us to consider changes, including burdens associated 

with the quarterly call report, other regulatory filings, and Bank Secrecy Act compliance. The industry is also building a reasonable case for extending the examination 

cycle for certain institutions. We also greatly appreciate Comptroller Curry’s comments that there are changes we can start making now before we complete the 

EGRPRA process. 

Executive Leadership of Cybersecurity 

We appreciate Congress’ ongoing efforts to address cybersecurity challenges. Cybersecurity is a national priority, and State regulators are fully engaging community banks on this vital issue. The persistent threat of cyber attacks is a widespread 

problem facing all industries, especially the financial services industry. Through 

regular dialogue with our State-chartered financial institutions, State regulators 

have learned that the issue of cybersecurity can be daunting for small bank executives who often have limited resources and assets to dedicate to cybersecurity. 

State regulators have heard from small bank executives that while they understand the harm cyber attacks can cause to their financial institutions, the abundance of information available on cybersecurity is overwhelming and largely technical, making many bankers uncertain as to what information applies to their particular institution. This feedback from State-chartered banks prompted State regulators, through CSBS, to launch the Executive Leadership of Cybersecurity (ELOC) 

81 

12 ‘‘Executive Leadership of Cybersecurity’’. CSBS. Available at: http://www.csbs.org/cybersecurity. 13 ‘‘Community Banking in the 21st Century’’. Federal Reserve System/CSBS. Available at: 

https://www.stlouisfed.org/banking/community-banking-conference-2014/. 

initiative in 2014. 12 The ELOC program seeks to raise awareness among bank 

CEOs that managing an institution’s cybersecurity risks is not just a ‘‘back office’’ 

issue, but also an executive and board level issue. ELOC is part of a larger State 

and Federal effort to help combat the threat of cyber attacks in the financial services sector. 

With the launch of the ELOC initiative, CSBS established a cybersecurity resources Web page that, for over a period of 9 weeks, served as a key resource for 

bank executives to receive comprehensive, nontechnical, and easy-to-read information on cybersecurity tailored to community bank CEOs. By the conclusion of the 

Web campaign, more than 500 community bankers had signed up to receive CSBS’s 

exclusive ‘‘Cyber 101: A Resource Guide for Bank Executives’’, a resource guide that 

compiles recognized industry standards for cybersecurity and financial services industry best practices into one document. The ELOC Web campaign and resource 

guide provided community bank executives with the knowledge and necessary tools 

to better understand cyberthreats at their institutions, better prepare for and protect against cyberthreats, and to better understand their role as bank executives in 

managing cybersecurity risks at their banks. 

The high level of community banker interest in the ELOC initiative sent a strong 

message to State regulators that community banks are looking for more leadership 

and clear guidance on how to address cybersecurity risks at their institutions. To 

that end, CSBS has made cybersecurity one of its highest priorities. In addition to 

the ELOC Web site and the cyber resource guide, CSBS will be working with State 

banking departments to host a series of cybersecurity industry outreach events 

throughout 2015. My department will take part in hosting one of these events in 

Arkansas this year. 

These examples demonstrate the willingness of State regulators to seek innovative solutions and methods to provide comprehensive and effective supervision, 

while tailoring our efforts to the business models of banks. Banks should be in the 

business of supporting their communities. We are working to enact supervision that 

ensures safety and soundness and consumer protection, while allowing State-chartered banks to serve their customers most effectively and contribute to the success 

of our local communities, our States, and our Nation. 

The Need for Robust Community Bank Research 

State regulators recognize that designing a right-sized regulatory framework requires us to truly understand the state of community banking, the issues community banks face, and the nuances within the community banking industry. Datadriven and independently developed research on community banks is sorely lacking 

when compared to the breadth of research dedicated to the largest financial institutions. To address the need for research focused on community banks, State regulators, through CSBS, have partnered with the Federal Reserve to conduct the annual Community Banking in the 21st Century research conference. 13 Bringing together State and Federal regulators, industry experts, community bankers, and academics, the research conference provides valuable data, statistics, and analysis 

about community banking. Our hope is that community bank research will inform 

legislative and regulatory proposals and appropriate supervisory practices, and will 

add a new dimension to the dialogue between the industry and regulators. 

The research conference represents an innovative approach to research. The industry informs many of the themes studied, providing their perspective on issues 

through a national survey and local town hall meetings. At the same time, academics explore issues raised by the industry in a neutral, empirical manner, while 

also contributing their own independent research topics. This approach ensures that 

three research elements—quantitative survey data, qualitative town hall findings, 

and independent academic research—all enhance and refine one another, year after 

year. The research conference’s early success underscores the interest and need for 

community bank research: in 2014, more than 1,000 community bankers participated in the national survey, more than 1,300 bankers attended local town hall 

meetings, and more than 37 research papers were submitted by academics for consideration, a considerable increase from the number of papers submitted for the inaugural 2013 conference. 

I would like to share some of the findings we have gathered through our community bank research conferences from academic research, the national survey of community banks, and our town hall meetings with community banks. I would also like 

82 

14Kandrac, J. ‘‘Bank Failure, Relationship Lending, and Local Economic Performance’’. Available at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/ 

KandraclBankFailurelCBRC2013.pdf. 15Lee, Y., and S. Williams. ‘‘Do Community Banks Play a Role in New Firms’ Access to Credit?’’ Available at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/ 

LeelWilliams.pdf. 16DeYoung, R., et al. ‘‘Small Business Lending and Social Capital: Are Rural Relationship 

Different?’’ Available at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC2013/DGNSl2012lSBAllending.pdf. 17Peirce, H., I. Robinson, and T. Stratmann. ‘‘How Are Small Banks Faring Under DoddFrank?’’ Available at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/ 

SESSION3lPeircelRobinsonlStratmann.pdf. 18 Hill, J. ‘‘When Bank Examiners Get It Wrong: Financial Institution Appeals of Material Supervisory Determinations’’. Available at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/SESSION2lAndersonHill.pdf. 19 Bassett, W., and W. Marsh. ‘‘Assessing Targeted Macroprudential Financial Regulation: 

The Case of the 2006 Commercial Real Estate Guidance for Banks’’. Available at: https:// 

www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/ 

SESSION2lBassettlMarsh.pdf. 20The survey data is available at: https://www.stlouisfed.org/bank-supervision/2014-community-banking-conference/2014-survey-data. 

to illustrate how our holistic approach to research can lead to better policy outcomes 

for community banks. 

Academic Research on Community Banks 

While there have only been two community bank research conferences thus far, 

we have already benefited from valuable data and research findings that show the 

importance of community banks and the centrality of their relationship-based lending model. For example, we now know that community bank failures lead to measurable economic underperformance in local markets. 14 Research also shows that the 

closer a business customer is to a community bank, the more likely the start-up borrower is to receive a loan. 15 Community banks also have a key advantage through 

‘‘social capital,’’ which supports well-informed financial transactions. This so called 

‘‘social capital’’ is the basis for relationship lending and exists because community 

bankers live and work in the same communities that their banks do business. The 

success of the community bank is tied directly to the success of consumers and businesses in those communities. This is especially true in rural areas, where the community bank relationship-based lending model results in lower default rates on U.S. 

Small Business Administration loans than their urban counterparts. 16

We are also discovering the extent to which governmental policies can impact 

community banks. For example, research shows that more than 80 percent of community banks have reported a greater than 5 percent increase in compliance costs 

since the passage of the Dodd-Frank Act. 17 Research has also informed us that the 

Federal banking agencies’ appeals processes are seldom used, inconsistent across 

agencies, and at times dysfunctional. 18 We can also see that macroprudential regulation can have a meaningful impact on bank behavior, but that it may also cause 

unintended consequences. 19 We hope that findings like these will inform policymakers’ work designing a right-sized policy framework for community banks. 

National Survey of Community Banks 

The community banker survey we conducted as part of the research conference 

provides us with crucial information straight from the industry. 20 For example, 

bankers have been very vocal about the compliance burdens associated with the new 

Ability-to-Repay and Qualified Mortgage rules. Our research finds that community 

banks continue to see residential mortgage lending as a meaningful business opportunity, but have a mixed view of making non-QM loans, with 26 percent of respondents indicating that they would not originate non-QM loans and an additional 33 

percent only originating non-QM on an exception basis. Assessing the new ATR and 

QM mortgage standards against existing loans, 67 percent of bankers identified a 

low level of nonconformance, suggesting the two rules generally align with existing 

bank practices. 

Community banks have long voiced concerns about increasing regulatory compliance costs, but these costs have been difficult to quantify historically. To encourage 

additional data and research in this area, the national survey sought to identify how 

increased compliance costs are realized in community banks’ operations. Survey 

data show that rising compliance costs primarily take the shape of spending additional time on compliance, hiring additional compliance personnel, and increasing 

reliance on third-party vendors. 

The survey also showed us that less than a quarter of respondents plan to add 

new products and services in the next 3 years. We must take this as an important 

83 

red flag. Any industry that is not in a position to innovate while the world around 

it is innovating has questionable long-term viability. 

Community Banker Town Hall Meetings 

Community bankers in the town hall meetings were quite clear: the ATR and QM 

mortgage rules have required banks to make significant operational changes in 

order to comply. These changes have increased the cost of origination, the cost to 

the consumer, and have reduced the number of loans a bank can make. 

Bankers also indicated that compliance burdens and security concerns are significant headwinds to launching new products and innovation. Similarly, bankers expressed that new regulations have changed how they approach serving their customers, shifting their mentality away from creating flexible products for customers 

and towards what regulations allow them to do. 

Holistic Research Can Lead to Better Policy Outcomes 

Looking at these research conference findings together should cause policymakers 

to ask serious questions about our approach to regulating community banks. In the 

context of the ATR and QM mortgage rules, if new requirements are generally consistent with most community banks’ practices, should implementation of these rules 

result in increased costs and a reduction in credit availability? When we think about 

community banking products, should regulatory compliance burdens inhibit community banks from offering innovative products to their customers? These are not outcomes any policymaker should want, and we must be responsive to what the industry and empirical research are both telling us. 

More importantly, this information can lead policymakers to better policy outcomes, if we let it. We are seeing more clearly the role and value that community 

banks play in our economies. This should inform and inspire us to not establish 

broad asset thresholds out of political pressure, but to craft a meaningful regulatory 

framework for a community banking business model that provides real value and 

presents limited risk to the financial system. 

The 2015 Community Banking in the 21st Century research conference will be 

held this fall at the Federal Reserve Bank of St. Louis. We are pleased that Chair 

Yellen is planning on attending and addressing the conference. We have already 

issued a call for research papers and are planning our national survey and town 

hall events. State regulators have been encouraged by the overwhelming demand for 

this conference. We have been pleased at the growing response to the call for papers 

over the past 2 years and expect the response and interest in the conference to continue to grow. 

Moving Forward 

Congress, Federal regulators, and State regulators must focus on establishing a 

new policymaking approach for community banks. We must do so by moving away 

from an inconsistent, piecemeal regulatory relief strategy that uses hard asset 

thresholds. We will need a new definitional framework based upon the easily identifiable attributes of a community bank. Only then will we be able to provide community banks with a regulatory framework that effectively complements and supervises their unique relationship-based lending model. 

Policymakers are capable of right-sizing regulations for these indispensable institutions, but we must act now to ensure their long-term viability. CSBS remains prepared to work with members of Congress and our Federal counterparts to build a 

new right-sized framework for community banks that promotes our common goals 

of safety and soundness and consumer protection. 

Thank you again for the opportunity to testify today, and I look forward to answering any questions you have. 

Appendix 

This Appendix highlights just a few cases in which State regulators have proven 

to be particularly adept at developing and implementing flexible practices to better 

serve our smaller institutions. Some of these examples are broad, historic initiatives 

that have significantly shaped the trajectory of U.S. banking regulation and supervision, such as the joint and coordinated bank examination framework. Other examples provide local snapshots highlighting the flexibility that individual States exercise on a regular basis. The significance that these are State-based solutions cannot 

be understated. States have the dexterity to experiment with supervisory processes 

in ways that the Federal Government cannot without applying sweeping changes to 

the entire industry. This is by design and a trademark of our dual banking system. 

As States develop these practices, CSBS has developed several vehicles for States 

to share techniques and best practices with one another, allowing for the speedy deployment of successful models nationwide and maximizing regulatory efficiency. 

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21 Nationwide Cooperative Agreement (Revised 1997). Available at: http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/nationwidelcooplagrmnt.pdf. 22 Nationwide State/Federal Supervisory Agreement (1996). Available at: http:// 

www.csbs.org/regulatory/Cooperative-Agreements/Documents/nationwidelstatelfedlsupervisorylagrmnt.pdf. 

Joint Examinations of Multicharter Holding Companies 

Joint bank examinations trace their roots back more than two decades, when due 

to interstate branching restrictions, bank holding companies would often own independently chartered banks in different States. To improve regulatory efficiency, 

State banking agencies began conducting joint examinations of multicharter holding 

companies with other State regulators. 

Before the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 

(Riegle-Neal), States like Iowa and Indiana were already coordinating with other 

State banking regulators to conduct joint State examinations for multicharter holding companies. This approach eliminated regulatory duplication, reduced the regulatory burden on the individual banks and the holding company, and helped the regulators develop a holistic view of the entire holding company. Once Riegle-Neal was 

passed, States built upon their existing practices in order to coordinate with Federal 

supervisors, crafting examination plans across State and agency lines. In 1996, the 

States formalized cooperative and coordination agreements, the Nationwide Cooperative Agreement 21 and Nationwide State–Federal Supervisory Agreement, 22 to facilitate the supervision of multistate banks and to define the nature of State–Federal supervision. These agreements set up a model centered on the examination 

team of the holding company or lead institution and, while close to 20 years old, 

still form the basis for State–Federal supervisory interaction. These agreements foster effective coordination and communication among regulators and have led to a 

supervisory model that reduces burden and enhances responsiveness to local needs 

and interests in an interstate banking and branching environment. 

This process ultimately leads to a more consistent examination experience for 

these community institutions. Rather than the holding company having to handle 

numerous examinations throughout the year, regulators conduct coordinated examinations of all the holding company’s institutions at the same time, satisfying State 

and Federal supervisory requirements in a streamlined manner. 

This is just one of many illustrations of how State regulatory agencies have shown 

great flexibility and willingness to reduce burden for their State-chartered institutions, all while maintaining the same level of effective oversight. 

Arkansas Self-Examination Program 

A State-specific example of regulatory innovation can be found in my own department. The Arkansas Self-Examination Program serves both as an off-site monitoring 

program and an effective loan review report for bank management. Since its introduction in 1986, the program has created significant regulatory efficiencies and benefits to participating community banks. 

When an Arkansas bank volunteers to participate in the Self-Examination Program, it provides the Arkansas State Bank Department with roughly three pages 

of financial information each month. We use this information to spot problem areas 

and trends that may threaten the bank’s safety and soundness. In exchange for this 

data, we provide participating institutions with reports that reflect the bank’s 

month-by-month performance, a performance comparison with peer institutions, and 

early warnings that flag issues of concern. Both the information provided by the 

banks and reports generated by my staff remain confidential. While the program is 

not a replacement for examinations, it is an excellent supplement that benefits our 

agency and the bank. 

Although the program is optional, the participation rate of Arkansas banks typically exceeds 90 percent. By creating a simple, direct, and valuable tool for community banks, we can better protect consumers and the marketplace and ensure the 

continuing success of our State’s financial institutions. 

Central Point of Contact 

Many State banking departments follow the practice of assigning a single individual as a central point of contact to specific institutions to conduct ongoing offsite surveillance and monitoring. The off-site portion of this process promotes efficient and effective State supervision, allowing examiners to carry out their work 

away from the bank, freeing up bankers’ time and office space. At the same time, 

central points of contact also provide banks with a single person to turn to when 

they have supervisory questions and issues, ensuring a more direct, faster response 

to their needs. 

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23 Available at: http://www.csbs.org/regulatory/resources/Pages/JobAids.aspx. 

CSBS Loan Scoping Job Aid 

In addition to coordination with the industry to make supervision more efficient, 

State regulators are increasingly turning to technology to enhance and streamline 

supervision. In 2012, CSBS published a Loan Scoping Job Aid (job aid) for examiners that encourages State regulators to consider institution-specific criteria that 

may lead to a smaller, yet more effective, loan review methodology. 23 Loan review 

is the cornerstone of safety and soundness examinations, providing examiners the 

best avenue for determining a bank’s health. The CSBS job aid provides methods 

for examiners to improve their loan scope by reviewing a different sample of loans 

than would otherwise be the case. This more thoughtful, risk-focused, yet surgical 

approach will help regulators identify new risks and provide community banks with 

more meaningful and useful examination results. 

86 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM DOREEN R. EBERLEY 

Q.1. According to the OCC, the Federal banking agencies have 

agreed to undertake a comprehensive review of all Call Report 

items and schedules. When will this review be completed? Who 

from your agency is in charge of this review? Will this review result in a formal, publicly available report? 

A.1. At the December 2014 meeting of the Federal Financial Institutions Examination Council, Council members directed the Council’s Task Force on Reports to undertake certain actions to address 

concerns raised by bankers about the burden of preparing the Consolidated Reports of Condition and Income (Call Report). This formal initiative is intended to identify potential opportunities to reduce burden associated with the Call Report requirements for community banks. The comprehensive review of all Call Report items 

and schedules is one of the actions under this initiative. 

Section 604 of the Financial Services Regulatory Relief Act of 

2006 requires the Federal banking agencies to ‘‘review the information and schedules that are required to be filed by an insured depository institution’’ in the Call Report. The deadline for the next 

statutorily mandated review is the fourth quarter of 2017. The 

Task Force on Reports and the agencies have accelerated the start 

of this review of the existing Call Report items and schedules to 

2015. This review is planned for completion by the fourth quarter 

2017 statutory deadline. 

In conducting the comprehensive review, the Task Force on Reports and the agencies will require Call Report users at the Council’s member entities to provide more robust justifications for Call 

Report items than in previous reviews. Users would need to explain 

how they use each data item, the frequency with which it is needed, and the population of institutions from which it is needed. Data 

items or schedules for which users provide insufficient justification 

for continued collection from some or all institutions in all four 

quarters would be candidates for elimination, less frequent collection, or the creation of a new or an upward revision of an existing 

reporting threshold, which can be size and/or activity-based. Call 

Report schedules would be prioritized for review over the next 2 

years based on their perceived burden. 

Mr. Robert Storch, Chief Accountant, Division of Risk Management Supervision, is in charge of the review for the FDIC. A formal, publicly available report on the results of the comprehensive 

review of the Call Report is not currently planned. However, the 

Federal banking agencies will publicly propose to implement burden-reducing Call Report changes identified as a result of this review in joint Federal Register notices that will be issued for comment in accordance with the Paperwork Reduction Act. Burden-reducing Call Report changes identified as a result of this review 

would be proposed on a flow basis annually as they are identified 

rather than waiting until the completion of the entire comprehensive review. 

Q.2. Kansas Fed President, Esther George, said at a 2014 conference that the community bank ‘‘business model is one in which 

the incentives of banks are aligned with outcomes that benefit their 

87 

customers and the economy. When incentives are aligned in this 

way, the need for an ‘ability to repay rule,’ for example, seems unnecessary.’’ 

Do you agree that banks that hold mortgages on portfolio have 

a vested interest to perform an analysis of a customer’s ability to 

repay irrespective of whether such mortgage meets the requirements of a ‘‘Qualified Mortgage’’? 

A.2. Analyzing a borrower’s ability to repay a loan is a longstanding, fundamental tenet of safe and sound underwriting that 

also is in the best interest of the borrower. This is true in residential, commercial, consumer, and other lending. The Ability-toRepay/Qualified Mortgage rule (ATR/QM) is consistent with this 

important principle. When originating mortgages, FDIC-supervised 

institutions have traditionally established borrowers’ ability to 

repay loans, and we are finding that they are continuing to meet 

this standard in the normal course of their business. 

Meeting the requirements of the current regulation is consistent 

with how community banks do business. Indeed, we are hearing 

anecdotally that most of our institutions are meeting the QM 

standard as well. As you may know, the CFPB recently proposed 

to expand the definition of small and rural creditors. This will 

make it easier for a larger number of lenders to meet the more 

flexible standards that apply to these creditors and loans. Indeed, 

if finalized as proposed, the new rule would allow most FDIC-supervised institutions to originate mortgages consistent with QM 

standards nearly without limit, as long as those mortgages are held 

in portfolio. 

Q.3. Do you agree that mortgages held on portfolio should be afforded a ‘‘Qualified Mortgage’’ status? If not, why not? 

A.3. QM status involves important safeguards for lenders, borrowers, and the financial system, including product requirements 

that encompass basic underwriting standards and protections 

against products that proved to be particularly risky in the crisis, 

such as option ARMs, negatively amortizing loans, and certain balloon loans. Extending safe harbor status to such risky products 

that performed so poorly in recent years, even if they were held in 

a bank’s portfolio, would raise significant policy concerns. 

Most community banks meet the current definition of ‘‘small 

creditor,’’ so they can take advantage of an exception that allows 

them to make balloon loans, as long as they meet the other product 

requirements and hold the loan in their portfolios. This exception 

is particularly important to small and rural banks that are more 

likely than larger banks to originate balloon loans, and the recent 

proposal to expand the universe of small and rural creditors could 

result in even more lenders taking advantage of the balloon loan 

exception. 

Q.4. The OCC acknowledged in its testimony that the Volcker Rule 

contains no exemption for community bank, and that the regulatory burden is not justified by the risk these institutions present. 

The OCC has drafted a legislative proposal to exempt from the 

Volcker Rule banks with total consolidated assets of $10 billion or 

less. 

88 

Do you support exempting from the Volcker Rule banks with 

total consolidated assets of $10 billion or less? Do you support 

OCC’s proposal? If not, why not? 

If you believe that the $10 billion threshold for an exemption 

from the Volcker rule is not appropriate, what threshold or other 

criteria would be more appropriate to use as the basis for the exemption? 

A.4. The idea underlying the Volcker Rule is that the Federal 

banking safety net should not, as a general rule, be used to support 

proprietary trading activities and investments in hedge funds and 

private equity. As a practical matter, community banks generally 

do not engage in proprietary trading, although a few community 

banks hold exposures to covered funds that would be prohibited by 

the Volcker Rule. Safety and soundness considerations would support the idea that community banks should remain disengaged 

from the practice of proprietary trading and that the few that do 

hold covered funds dispose of these high-risk exposures by the end 

of the Volcker Rule conformance period, including any extensions 

of the conformance period that may be granted by the Federal Reserve Board under their authority provided by the Volcker Rule. 

In adopting the implementing regulations for the Volcker Rule, 

the FDIC along with the other agencies recognized that while the 

requirements of the implementing statute apply to all banking entities regardless of size, larger banks generally conduct the covered 

activities. Accordingly, the agencies designed the Volcker Rule to 

reduce the burden placed on banks that do not engage in proprietary trading activities or only have limited exposure to fund investments. 

Under the Volcker Rule, a bank is exempt from all of the compliance program requirements and all of the associated costs, if it limits its covered activities to those that are excluded from the definition of proprietary trading. This exemption applies to the vast majority of community banks. For community banks that have less 

than $10 billion in assets but do engage in activities covered by the 

Volcker Rule, compliance program requirements can be met by simply including references to the relevant portions of the rule within 

the banks’ existing policies and procedures. This should significantly reduce the compliance burden on smaller banks that may 

engage in a limited amount of covered activities. 

If the agencies’ experience in implementing the Volcker Rule 

shows that there is undue burden placed on community banks by 

even the minimal compliance requirements under the implementing regulations, we believe there is authority under the current statute to modify the regulation as appropriate. 

Q.5. The OCC also recommended increasing the asset-size threshold from $500 million to $750 million to determine whether a community bank can qualify for an examination every 18 months. 

Do you support increasing the asset-size threshold from $500 

million to $750 million to determine whether a community bank 

can qualify for an examination every 18 months? Do you support 

OCC’s proposal? If not, why not? 

A.5. In general, it is our experience that most banks within the 

$500 million to $750 million fit the community bank model—conVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00092 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
89 

ducting noncomplex, traditional activities within their community. 

The FDIC is open to considering an increase in the asset size 

threshold for institutions to be subject to an 18-month examination 

interval. 

Currently, about 80 percent of banks (5,150) have total assets of $500 million or less, and most of these are well-capitalized and 

well-managed and would qualify for the extended examination interval. Another approximately 380 banks would qualify if the assetsize threshold was raised to $750 million. 

However, it is important to continue a program of regular on-site 

examinations because unfortunately, community banks do fail. Of 

the 500 plus banks that failed since 2008, the median size was just 

$242 million. There is no substitute for regular, on-site examinations to address specific problems at individual institutions. Call 

Reports and other financial reporting can give a snapshot of the 

bank’s financial position, but the only way to truly assess the quality of capital and assets is to examine them on-site. Moreover, 

there is no effective way for examiners to evaluate the quality of 

management and management’s risk management practices without a regular program of on-site examination. No amount of capital 

will be able to save poorly managed banks with significant and increasing levels of risky and problem assets. 

Q.6. If you believe that the $750-million threshold is not appropriate, what threshold or other criteria would be more appropriate 

to use as the basis for this change? 

A.6. The FDIC is open to considering an increase in the institution 

asset size threshold to $750 million for an 18-month examination 

interval. 

Q.7. Would you support allowing any institution to petition to qualify for an exam every 18 months? 

A.7. Section 10 of the Federal Deposit Insurance Act and Part 337 

of the FDIC Rules and Regulations specify institutions that are 

well-managed and well-capitalized and with total assets of less 

than $500 million may qualify for an examination interval of 18 

months. While we are open to raising the thresholds, the FDIC prefers to maintain a threshold to ensure a consistent examination 

schedule for institutions rather than conducting case-by-case analyses of petitions, which could result in inconsistent regulatory 

treatment. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DOREEN R. EBERLEY 

Q.1. Your agency put out an interagency statement on your approach to QM loans just over a year ago. In the statement, you 

stated that financial institutions should continue to originate QM 

and non-QM loans and that you would not criticize loans based 

solely on their QM status. 

How have you made sure this message is heard by all of your examiners at all financial institutions, particularly small ones? 

A.1. On December 13, 2013, the FDIC, FRB, NCUA, and the OCC 

jointly issued an interagency statement on the supervisory approach for residential mortgage loans. The FDIC recognizes that 

90 

many institutions are assessing how to implement the Ability-toRepay (ATR) and Qualified Mortgage (QM) Standards Rule issued 

by the CFPB and will not subject a residential mortgage loan to 

regulatory criticism based solely on the loan’s status as QM or a 

non-QM. 

As the FDIC supervises many small community banks, we have 

made it a top priority to develop a deeper understanding and sensitivity to the challenges and opportunities facing community banks. 

In order to ensure that all FDIC examiners are aware of the new 

rules, the FDIC has (1) provided comprehensive training to all examiners prior to the effective date of the mortgage rules; (2) incorporated training on new rules into the curricula used in connection 

with our schools for new examiners; (3) provided regular alerts on 

up-to-date changes to all examiners through our internal distribution channels; and (4) held quarterly meetings with field examination supervisors in the regional offices. 

The FDIC provides a substantial amount of technical assistance 

to help our supervised banks and their staff keep current on the 

latest consumer compliance issues and changes, including those associated with the new mortgage rules, through a variety of channels. Examples include a Technical Assistance Video Program that 

covers a wide variety of topics (e.g., CRA, Flood Insurance, Fair 

Lending, Mortgage Rules, etc.) and nationwide banker teleconferences, designed to maintain open lines of communication with financial institution staff on important regulatory and emerging 

issues. 

Q.2. What impact has the rule had on small banks making nonQM loans? 

A.2. Preliminary observations by FDIC examiners suggest that the 

extent to which FDIC-supervised banks are originating non-QMs 

varies from institution to institution; a number of FDIC-supervised 

banks are originating non-QM loans while others are focusing their 

lending on QM loans. While it is still early in the implementation 

process, and we do not have concrete data about loan originations 

outside of the QM safe harbor, we have heard feedback from some 

community bankers that they have long been documenting borrowers’ ability to repay and, as a result, their underwriting and 

lending has been relatively unchanged since the new ATR/QM rule 

became effective. 

We note recent data showing that the growth in residential lending among community banks since the rule became effective has actually outpaced the industrywide rate of growth. While the data 

does not tell us why that happened, of course, it may be that this 

reflects the sound lending practices of community banks such that 

the mortgage rules did not require significant changes to their 

business practices. 

Q.3. Is the QM standard the only standard that a lender can use 

to establish a borrower’s ability-to-repay their mortgage at the time 

of origination? 

A.3. No, it is not. The ATR can be established outside of the QM 

framework. The ATR Rule sets forth eight basic requirements as 

to what must be considered and verified in determining ability to 

repay for non-QM loans. They include assessing current or reasonVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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1For similar reasons, during our first EGRPRA review that was completed in 2006, the FBAs 

excluded recently issued regulations implementing the Community Reinvestment Act (CRA) and 

several capital rulemaking initiatives. See 71 Fed. Reg. 287, 289 (Jan. 4, 2006). 

ably expected income or assets, among other things. It is important 

to note that while these common sense underwriting standards 

must be considered generally, the rule does not mandate any specific target ratios or other metrics around these underwriting 

standards. Lenders are free to develop their own specific underwriting metrics and processes as long as they are consistent with 

the ATR/QM Rule. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM DOREEN R. EBERLEY 

Q.1. The first Economic Growth and Regulatory Paperwork Act 

(EGRPRA) review submitted to Congress in 2007 states: ‘‘Besides 

reviewing all of our existing regulations in an effort to eliminate 

unnecessary burdens, the Federal banking agencies worked together to minimize burdens resulting from new regulations and 

current policy statements as they were being adopted.’’ The report 

submitted to Congress specifically discussed consumer financial 

regulations, anti-money laundering regulations, and recently adopted rules. However, included in the Federal Register for this 10-year 

review are two footnotes that suggest that CFPB rules, anti-money 

laundering rules, and new regulations that have recently gone into 

effect will not be included in the review. 

Rather than predetermine which rules should or should not be 

reviewed, shouldn’t the agencies review all existing regulations and 

eliminate or recommend statutory changes that are needed to 

eliminate any regulatory requirements that are outdated, unnecessary, or unduly burdensome? 

A.1. In carrying out the statutory mandate to conduct a comprehensive regulatory review pursuant to section 2222 of EGRPRA, 

the FDIC, OCC, and FRB (collectively, the Federal banking agencies or FBAs) are required to categorize their regulations by type 

and publish, at regular intervals, one or more categories of regulations for public comment, asking commenters to identify any outdated, unnecessary, or unduly burdensome regulatory requirements. 

However, commenters are free to comment on any regulations 

and, to the extent the FBAs receive comments on regulations outside of their respective jurisdictions (such as the CFPB’s consumer 

protection rules or the anti-money laundering rules promulgated by 

the Department of the Treasury’s Financial Crimes Enforcement 

Network), the FBAs will share those comments with the appropriate agencies. Generally, comments that pertain to regulations 

promulgated by agencies other than the FBAs are most effectively 

addressed by the agencies that have authority to amend or eliminate those rules, as appropriate. 

In accordance with EGRPRA, the FBAs initially decided to exclude new FBA regulations that had only recently gone into effect 

or rules that have yet to be fully implemented. 1 In a March 6, 

2015, letter to Chairman Shelby, however, the FBAs committed to 

expand the scope of the EGRPRA review to include newly issued 

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2The FFIEC currently is comprised of the Office of Comptroller of the Currency (OCC), the 

Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Consumer Financial 

Protection Bureau (CFPB), and the State Liaison Committee. 

FBA regulations. Specifically, the FBAs indicated their intention to 

solicit comment on regulations that have been finalized before we 

complete the EGRPRA review. To that end, the FBAs indicated 

that future Federal Register notices soliciting public comment 

under the EGRPRA review, including the next notice expected to 

be issued in May 2015, will no longer exclude new regulations. 

Q.2. Does Congress need to update the EGRPRA statute to include 

the CFPB to ensure the review is comparable in scope to what was 

reviewed last time? 

A.2. Section 2222 of EGRPRA requires the FFIEC and each appropriate FBA to conduct a review of their regulations. 2

The FDIC notes that, in a regulatory review process separate 

from the EGRPRA process, the Consumer Financial Protection Bureau (CFPB) is required to review its significant rules and to publish a report of its review no later than 5 years after the rules take 

effect. See 12 U.S.C. 5512(d). The agencies participating in the 

EGRPRA review process have publicly committed to share any 

comments with the CFPB (or other appropriate agency) if the reviewing agencies receive a comment about a regulation that is 

within the other appropriate agency’s jurisdiction. 

Should Congress determine that it would be beneficial to include 

the CFPB as a participating agency in future EGRPRA reviews, we 

will collaborate with the CFPB as we have with the other banking 

agencies participating in the current EGRPRA process. 

Q.3. If not, what specific steps will be taken to ensure that the review will include all existing regulations, including consumer financial regulations, anti-money laundering rules, and new regulations? 

A.3. As noted above, the FBAs have committed to solicit comment 

on our regulations that have been finalized before we complete the 

EGRPRA review. To that end, future Federal Register notices soliciting public comment under the EGRPRA review, including the 

next notice expected to be issued in May 2015, will no longer exclude new regulations. In addition, the FBAs will accept comments 

on our regulations at the remaining public outreach meetings. The 

agencies participating in the EGRPRA review process also have 

publicly committed to share any comments with the CFPB (or other 

appropriate agency) if the reviewing agencies receive a comment 

about a regulation that is within the other appropriate agency’s jurisdiction. 

Q.4. A main criticism of the last review was that the banking regulators subsequently repealed or eliminated only a few substantive 

regulations. To ensure that the current review has a more successful outcome, will your agencies set up a Government Web site that 

posts the feedback and list the 10 most burdensome regulations 

identified? 

A.4. The FBAs have established a publicly accessible, interagency 

EGRPRA Web site at http://egrpra.ffiec.gov/ similar to the 

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ess. On that Web site, the FBAs post all of the Federal Register notices seeking public comment on the regulations subject to 

EGRPRA review and, in an effort to promote transparency, also 

post every comment letter received in response to our requests for 

public comment. The EGRPRA Web site also includes an archive 

of Web casts and transcripts from every outreach meeting. In addition, the FDIC has its own publicly accessible EGRPRA Web page 

that provides related information and a link to the interagency 

EGRPRA Web site. 

Although the FBAs consider each comment received during the 

EGRPRA process regardless of when it is received, the FBAs have 

divided their regulations into groups and are seeking comments on 

the various groups of regulations through a series of Federal Register notices. Because the comment process is still ongoing, it would 

be premature to identify the most burdensome regulations identified by the commenters. To the extent there are significant issues 

raised by commenters, however, the FFIEC will identify those in 

the Report to Congress that is required to be submitted pursuant 

to section 2222 of EGRPRA. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM DOREEN R. EBERLEY 

Q.1. Last Congress, legislation was introduced in the House (H.R. 

2673, 113th Congress) that would provide financial institutions 

protection from the liability associated with Section 1411 of the 

Dodd-Frank Act, so long as the loan appears on the institution’s 

balance sheet. I understand that the CFPB partially addressed this 

issue for some institutions through its Notice of Proposed Rulemaking. Please answer the following questions related to the proposed legislation: 

Do you believe the proposed legislation would have a material 

impact on the safety and soundness of covered financial institutions? 

A.1. QM status involves important safeguards for lenders, borrowers, and the financial system, including product requirements 

that encompass basic underwriting standards and protections 

against products and features that proved to be particularly risky 

in the crisis, such as option ARMs, negatively amortizing loans, not 

underwriting to the fully indexed rate, and certain balloon loans. 

Extending safe harbor status to such risky products and features 

that performed so poorly in recent years, even if they were held in 

a bank’s portfolio would raise significant policy concerns. 

Additionally, it is important to note that most community banks 

meet the current definition of ‘‘small creditor,’’ so they can take advantage of an exception that allows them to make balloon loans, so 

long as they meet the other product requirements and hold the 

loans in their portfolios. This exception is particularly important to 

small and rural banks, which are more likely than larger banks to 

originate balloon loans; and the recent proposal to expand the universe of small and rural creditors could result in even more lenders 

taking advantage of the balloon loan exception. 

94 

Q.2. If so, do you believe the current supervisory process and capital requirements are sufficient to address any perceived risks that 

may come from this change? 

A.2. The recent crisis reflects that the financial industry is vulnerable to significant losses if large numbers of borrowers receive 

loans they cannot afford to repay. While the supervisory process 

and capital requirements mitigate against potential losses, there is 

no substitute for the prudent underwriting of loans. 

Q.3. Do you have additional comments, concerns, or proposed 

changes to the legislation? 

A.3. The evidence so far is that the existing balance of regulation 

and flexibility with respect to QM is working. Recent data showing 

that the growth in residential lending among community banks 

since the rule became effective has actually outpaced the industrywide rate of growth. While the data do not tell why that happened, 

it may be that this reflects the preexisting sound lending practices 

of community banks such that the mortgage rules did not require 

significant changes to their business practices. Until and unless 

there is sound data to the contrary, we believe that it would be premature to make any portfolio loan—regardless of actual underwriting or product design—presumptively one that meets an ability-to-repay standard. 

Q.4. The Bipartisan Policy Center recently suggested creating a 

pilot program for a ‘‘consolidated examination force’’ for the institutions subject to supervision by all three of the Federal prudential 

regulators. Such a program would force coordination between the 

agencies and minimize the costs associated with examinations for 

banks. It appears that the Federal Financial Institutions Examination Council (FFIEC) could provide the vehicle to run the pilot program. Do you believe your agencies currently have the statutory 

authority to undertake such a joint pilot program through FFIEC? 

If so, why haven’t the agencies taken steps to initiate such a pilot 

program? 

A.4. Coordinated Examinations. The agencies already coordinate 

their examination programs when their supervisory oversight overlaps. 

Examination Activities. For FDIC-supervised institutions, we coordinate primarily with the relevant State authority. Since 1992, 

we have had working agreements with the Conference of State 

Bank Supervisors (CSBS) that cover such topics as the frequency 

of examinations, the types of examinations on banks of supervisory 

concern, preexamination procedures, the responsibilities of each 

agency for processing reports of examination and for conducting 

specialty examinations, the coordination of enforcement actions, the 

processing of joint applications, and the sharing of supervisory information. 

The FDIC has entered into agreements for conducting alternate 

examinations with the State banking regulators to avoid duplication of efforts. The FDIC is constantly looking for ways to reduce 

burden and streamline supervisory processes and has received 

some constructive comments on how to do this in the EGRPRA outreach, including raising thresholds for extended exam cycles and 

95 

continuing to improve communication between bankers and examiners. 

The FDIC also coordinates with the Federal Reserve when there 

is a holding company, with the depth of coordination being driven 

by the extent of nonbank entities under the holding company and 

the size of the institution. In 1995, the FDIC, the Federal Reserve, 

and the CSBS formed a State–Federal working group to streamline 

and improve the coordination of the examination and supervision 

of State-chartered institutions operating in an interstate environment. 

The Shared National Credit (SNC) Program is an interagency 

initiative administered jointly by the Federal Deposit Insurance 

Corporation, the Federal Reserve Board, and the Office of the 

Comptroller of the Currency. The program was founded in 1977 for 

the purpose of ensuring consistency among the three Federal banking regulators in the classification of large syndicated credits. 

Technology service provider (TSP) examinations are examinations authorized by the Bank Service Company Act (12 U.S.C. 

§1867(c)). Because many TSPs provide services to more than one 

class of banking charter, the Federal banking regulators typically 

conduct examinations of TSPs on a joint basis, with rotating responsibility for serving as agency-in-charge. For the largest TSPs, 

the Federal banking regulators coordinate the examinations at the 

national level through the Federal Financial Institution Examination Council (FFIEC) IT Subcommittee. Regional TSPs are coordinated by each agency’s regional office. 

Backup Authority. The FDIC’s statutory authority gives it a degree of supervisory responsibility, in its role as insurer, for insured 

depository institutions (IDIs) for which it is not the primary Federal supervisor. The FDIC’s examiners have the authority to make 

recommendations and take enforcement action against such IDIs. 

The FDIC also has staff in each of its regional offices that regularly 

review examination reports and other available information from 

the primary Federal regulators for those institutions. The FDIC 

also performs off-site monitoring of those institutions on an ongoing 

basis, particularly for institutions with more than $10 billion in assets. 

Under a 2010 agreement with the OCC and the Federal Reserve, 

the FDIC has the other regulators’ ongoing consent to participate 

in examinations of large, complex IDIs, as defined in the document. 

Pursuant to this agreement, the FDIC has dedicated examiners 

participating with the OCC and the Federal Reserve in continuous 

examination activities at every IDI that has more than $100 billion 

in total assets. The FDIC collaborates with the OCC and the Federal Reserve in their development of supervisory strategies. The 

FDIC also participates in a variety of other periodic supervisory activities at these institutions, including capital and liquidity stress 

tests. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM DOREEN R. EBERLEY 

Q.1. During the hearing, Mr. Toney Bland stated, ‘‘But I would say 

that the OCC, as part of our normal practice, we look at on an onVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00099 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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going basis whether rules are appropriate in terms of still relevant, 

and we will make changes, if they need to, without waiting for the 

next EGRPRA process.’’ Within your respective agency’s jurisdiction, please provide the number and a list of regulations you’re 

your agency eliminated or changed due to irrelevance or undue 

burden since 2006 along with a brief description of each. 

A.1. See Appendix A attached. 

Q.2. Within your respective agency’s jurisdiction, please provide 

the total number and a list of new rules and regulations that have 

been adopted since the last EGRPRA review along with a brief description of each. 

A.2. See Appendix B attached. 

Q.3. During the last EGRPRA review, Federal banking agencies 

hosted a total of 16 outreach sessions around the country. To date 

only six outreach sessions have been announced. During this current EGRPRA review, how many total outreach meetings will be 

held and will there be at least 16 meetings as before? 

A.3. The Federal banking agencies have scheduled a total of six 

outreach meetings in centrally located cities around the Nation and 

may consider additional forms of outreach. During the last 

EGRPRA review, the Federal banking agencies conducted a total of 

16 outreach sessions that hosted approximately 500 people in total. 

As part of the current EGRPRA review, the Federal banking agencies have conducted two outreach meetings to date that have already hosted over 200 people in total. In addition, the current 

EGRPRA outreach sessions will provide a live-stream and transcript of every outreach meeting via the EGRPRA Web site, which 

was not available during the previous EGRPRA review. 

Q.4. To date only one EGRPRA outreach meeting, focusing on rural 

banking issues, has been scheduled in Kansas City. How many 

more rural banking outreach meetings do you plan on scheduling? 

Given the diversity of rural banking needs around the country, in 

what other geographic regions would those meetings take place? 

A.4. We believe that rural banking plays a critical role in providing 

consumers and businesses across the Nation with essential financial services and access to credit. To ensure that rural bankers 

have an opportunity to address their concerns directly to regulators, the Federal banking agencies have scheduled an outreach 

meeting in Kansas City, which will focus specifically on rural banking issues. The FFIEC’s EGRPRA Web site will provide a livestream Web cast and a transcript of the entire meeting to ensure 

all interested parties from other geographic regions have access to 

the meeting. In order to make the live-stream more interactive, the 

Federal banking agencies are looking to make phone participation 

available, if possible, to people who may wish to participate in the 

rural outreach session via Web cast. 

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99 

100 

101 

102 

103 

104 

105 

106 

107 

108 

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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM DOREEN R. EBERLEY 

Q.1. Some are very concerned that implementing certain Basel III 

capital requirements relating to mortgage servicing could substantially alter business models adopted by banks in Nebraska and 

elsewhere designed to complete certain mortgage services on their 

own behalf and for other banks. 

Have you completed or otherwise reviewed analyses that show 

whether the adoption of these requirements would affect mortgage 

servicing operations? 

If so, have these analyses shown that smaller institutions would 

limit mortgage servicing operations as a result? 

What entities are likely to perform the mortgage servicing operations instead? 

A.1. In adopting the revised Basel III regulatory capital rule, the 

FDIC took careful action to ensure the rule appropriately reflects 

the risks inherent in banking organizations’ business models. The 

FDIC believes the rule’s treatment of mortgage servicing assets 

(MSA) contributes to the safety and soundness of banking organizations by mitigating against MSA market value fluctuations that 

may adversely affect banking organizations’ regulatory capital 

base. The FDIC, together with the other Federal banking agencies, 

have long limited the inclusion of MS As and other intangible assets in regulatory capital due to the high level of uncertainty regarding the ability of banking organizations to realize value from 

these assets, especially under adverse financial conditions. Moreover, the financial crisis demonstrated that the liquidity—in the 

form of sales, exchanges, or transfers—of MSAs may become unreliable at a time when banking organizations are especially in need 

of reliable liquidity. Furthermore, the FDIC, as receiver of failed 

insured depository institutions, has generally found MSAs to be unmarketable during periods of adverse economic and financial conditions. 

Prior to issuing the revised rule, the agencies conducted a pro 

forma impact analysis that suggested the vast majority of banking 

organizations would meet the revised risk-based capital requirements after incorporating the treatment for MSAs, without having 

to make any changes to their business models. The rule also provides a lengthy transition period to allow banking organizations 

sufficient time to modify their capital structure or adjust business 

models, as appropriate. Based on these considerations, the FDIC 

believes the rule’s treatment of MSAs is appropriate and strengthens the quality and required level of capital. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM DOREEN R. EBERLEY 

Q.1. One of the most consistent things I hear from Kansas banks 

and credit unions is that they are continually being required to 

comply with new regulations that were never intended to affect 

them. I am in the process of drafting a small lending regulatory relief package along with Sen. Tester that seeks to address some of 

these problems by clarifying that small lenders are very different 

than the regulations’ intended targets. Do you believe that some of 

110 

the rules intended for our most complex financial institutions have 

trickled down to community banks? If so, what specific portions of 

the law under your individual area of jurisdiction have you identified as problematic for small lenders? 

A.1. As a general rule, FDIC examinations adhere to statutory and 

regulatory thresholds and do not encompass a review of guidance 

or regulations that are not applicable to an organization. Our communications to examiners and bankers on supervisory matters 

clearly identify to whom the guidance or regulations applies. Additionally, we continually encourage bankers to contact our regional 

offices to discuss any questions they may have regarding our regulations and guidance, including issues of applicability. 

Q.2. The burden of regulation does not necessarily come from a single regulation, but the aggregate burden of regulations, guidance, 

and size-inappropriate best practices. The burden grows when 

small lenders are required to comply with several new rules concurrently. In isolation, the impact of one regulation may appear 

small, but when added to the growing list of compliance requirements, the cost is skyrocketing. What is your agency doing to identify and reduce aggregate burden? 

A.2. As the primary Federal regulator for the majority of smaller, 

community institutions, the FDIC is keenly aware of the challenges 

facing community banks and already tailors its supervisory approach to consider the size, complexity, and risk profile of the institutions it oversees. The FDIC has taken a number of actions to 

identify and reduce aggregate burden. 

Examination Process 

• Since 2011, FDIC letters to the industry (Financial Institution 

Letters or FILs) include a Statement of Applicability to institutions with less than $1 billion in total assets. If an industry 

letter is targeted to larger, more complex institutions, we let 

community institutions know that upon issuance. 

• The FDIC tailors certain examination and reporting requirements to consider institution size. For example, our programs 

for periodic on-site examinations of risk management and compliance with the Community Reinvestment Act (CRA) follow 

extended frequency cycles for smaller, well-managed institutions. Similarly, certain annual audit reporting requirements 

either exempt smaller institutions or reduce their reporting 

scope. For certain well-managed, well-capitalized institutions 

with less than $500 million in total assets, the FDIC is able 

to extend the cycle (reduce the frequency) of statutorily mandated risk management examinations from 12 months to 18 

months. 

• In 2013, in response to concerns about pre- and post-examination processes, the FDIC developed a Web-based tool (e-Prep) 

that generates a preexamination document and information request list tailored to a specific institution’s operations and 

business lines. 

• Examination and enforcement procedures related to the Home 

Mortgage Disclosure Act (HMDA) have been the subject of significant attention by the FDIC over the past several years as 

111 

we have sought to refine our processes to best achieve our key 

supervisory objective of the accurate reporting of loan-level 

mortgage data by the 60 percent of FDIC-supervised institutions subject to HMDA reporting thresholds. Key changes include: (1) revising sampling techniques for small reporters (less 

than 100 reportable transactions) to avoid triggering additional 

file review for minor errors; and (2) limiting imposition of civil 

money penalties to situations where an institution’s level of errors is significantly above the threshold for resubmission and 

the violations are deemed egregious. 

Application/Deposit Assessment Process 

• In response to what we heard in the first round of comments 

from the EGRPRA review, the FDIC has already acted on regulatory relief suggestions where we could achieve rapid 

change. In November, we issued two Financial Institution Letters (FILs) responding to suggestions we received from bankers. 

• The first FIL released questions and answers about the deposit insurance application process at https://www.fdic.gov/ 

news/news/financial/2014/fill4056.html after commenters 

told us a clarification of the FDIC’s existing policies would 

be helpful. 

• The second FIL addressed new procedures that eliminate or 

reduce the need to file applications by institutions wishing to 

conduct permissible activities through certain bank subsidiaries organized as limited liability companies, subject to 

some limited documentation standards. This will significantly reduce application filings in the years ahead. See at 

https://www.fdic.gov/news/news/financial/2014/ 

fil14054.html. 

• In 2011, the deposit insurance assessment base was changed 

from using adjusted domestic deposits to average consolidated 

total assets minus average tangible equity. This change resulted in larger, more complex institutions paying a higher 

proportion of total assessments. In addition, the assessment 

system for larger institutions also results in higher assessment 

rates for banks with high-risk asset concentrations, less stable 

balance sheet liquidity, or potentially higher loss severity in 

the event of failure. 

Technical Assistance 

• The Directors’ Resource Center, available through the FDIC’s 

Web site, is dedicated to providing useful information and resources for directors and officers of FDIC-insured institutions. 

• The FDIC has issued a series of educational videos: New Director Education Series, Virtual Directors’ College Program, Virtual Technical Assistance Program, and Proposed Rulemaking 

Videos. These efforts are ongoing, and most recently, the FDIC 

has issued several technical assistance videos on the new mortgage rules issued by the Consumer Finance Protection Bureau 

(CFPB) pursuant to the Dodd-Frank Act. The video series is 

designed to assist bankers in familiarizing themselves with the 

112 

new rules and meeting the regulatory requirements. The first 

video, released in November 2014, covered the Ability to Repay 

and Qualified Mortgage Standards Rule. The second video, released in January 2015, covered the Loan Originator Compensation Rule, and the third video, released in February 2015, 

covers the Servicing Rule. 

• The Regulatory Calendar, which is updated on an ongoing 

basis, alerts stakeholders to critical information, as well as 

comment and compliance deadlines relating to changes in Federal banking laws and regulations. It includes notices of proposed interim and final rulemakings, guidance affecting insured financial institutions, and notices for training opportunities such as banker conference calls. 

Other Activities 

• In February 2012, the FDIC sponsored a national conference to 

examine the unique role of community banks in our Nation’s 

economy and the challenges and opportunities they face. Later 

in 2012, roundtable discussions were conducted in each of the 

FDIC’s six supervisory regions that focused on the financial 

and operational challenges and opportunities facing community 

banks and the regulatory interaction process. The FDIC has 

held subsequent roundtables each year since 2012. 

• In December 2012, the FDIC released its Community Banking 

Study, a data-driven review that explored issues and questions 

about community banks. Subsequent studies in this series 

have addressed banking industry consolidation, the effect of 

rural depopulation on community banks, the performance and 

social impact of minority depository institutions, and the evolution of branch office structures. In 2014, the FDIC added a 

permanent section in its flagship Quarterly Banking Profile report dedicated to tracking trends in the community banking 

sector. 

• In 2009, the FDIC established its Advisory Committee on Community Banking to provide advice and guidance on a broad 

range of policy issues impacting small community banks—and 

the local communities they serve—with a focus on rural areas. 

The Advisory Committee has provided valuable input on examination policies and procedures, lending practices, deposit insurance assessments, insurance coverage issues, regulatory 

compliance matters, and obstacles to the continued growth and 

ability to extend financial services in their local markets. 

Tailored Rules 

• The Dodd-Frank Act reforms were designed to improve the 

competitive balance between small and large banks by restoring market discipline and oversight of large systemically important institutions. For example, enhanced prudential standards, resolution planning, and stress testing provisions apply 

only to banks over $10 billion, and incentive compensation provisions exempt institutions with less than $1 billion in total assets. 

113 

• The Volcker Rule provides that a bank with consolidated assets of $10 billion or less may satisfy the compliance program 

requirements of the Volcker Rule by including in its existing 

compliance policies and procedures appropriate references to 

the requirements of section 13 of the BHC Act and adjustments as appropriate given the activities, size, scope, and complexity of the banking entity, rather than a full Volcker Rule 

compliance program. 

• The full Liquidity Coverage Ratio applies only to large internationally active banking organizations at the consolidated 

level and their IDI subsidiaries with assets of at least $10 billion. Banking organizations that are at least $50 billion, but 

which are not considered internationally active, are subject to 

a less stringent Modified Liquidity Coverage Ratio only at the 

holding company level. 

• In connection with the promulgation of the new capital rules 

in 2013, the FDIC issued a 14-page Community Bank Guide, 

designed to assist community bankers in their understanding 

of the new capital rules. In the final capital rule, the Federal 

banking agencies retained the existing treatment of residential 

mortgage exposures and Accumulated Other Comprehensive 

Income, and also grandfathered certain Trust Preferred Stock 

for small bank holding companies, all in response to the concerns of community banks. 

• Additionally, in July 2014 we issued a FIL to FDIC-supervised 

institutions describing how the FDIC will consider requests 

from FDIC-supervised S corporation banks to pay dividends to 

their shareholders to cover taxes on their pass-through share 

of bank earnings when those dividends are otherwise not permitted under the new capital rules. We informed 

FDICsupervised banks that we would generally approve those 

requests for well-rated banks, barring any significant safety 

and soundness issues. Many community banks are S corporation banks, and we issued this guidance because of feedback 

from concerned S corporation banks and their shareholders. 

Q.3. The EGRPRA process was brought about to identify redundant or excessively burdensome regulation. I think the EGRPRA 

process has the potential to be an important tool to begin rebuilding some semblance of trust between Federal regulators and the financial institutions they oversee. However, the first iteration revealed little agency will to utilize the process. Resulting reductions 

in regulatory burden were, in a word, insignificant. Various 

EGRPRA listening sessions have been conducted across the country. What is the most consistent message you are hearing from participants? What are you doing differently in the current EGRPRA 

review, and what actual, tangible relief can our smallest lenders 

expect? 

A.3. The EGRPRA review is still ongoing, and the Federal banking 

agencies (FBAs) continue to solicit input from the public via Federal Register notices and outreach meetings on various categories 

of regulations. Several commenters have indicated it is not so much 

a single regulation, but the total impact of all financial institution 

regulations that concerns regulated entities. This message is most 

114 

frequently received from community banks. The FBAs are keenly 

aware of the role that community banks play in providing consumers and businesses across the Nation with essential financial 

services and access to credit, and will carefully consider comments 

that provide insight on ways to provide regulatory relief to such institutions. To address these comments, the FDIC has implemented 

some burden-reduction measures during the EGRPRA review process, rather than at the conclusion of the process. For example, on 

November 19, 2014, the FDIC announced in Financial Institution 

Letter 54-2014 the elimination of certain filing requirements for 

State bank subsidiaries engaged in activities that are permissible 

for a national bank subsidiary when the State bank subsidiary is 

organized as a limited liability company. 

Q.4. Major changes to mortgage disclosures and timing requirements are set to go into effect on August 1st of this year. These 

regulatory changes will impact every participant in the mortgage 

lending process and every consumer mortgage transaction. The financial institutions that are still engaged in residential mortgage 

lending are making every effort to be ready by the August deadline. I am concerned that, if poorly crafted or hastily implemented, 

these additional rules will result in fewer borrowing options in 

communities I represent as small lenders exit the business altogether. Are your respective examiners already being trained on 

how to assess these changes over the course of their reviews? 

A.4. As you know, the need for greater harmony between the two 

major mortgage disclosure laws—RESPA and Truth in Lending— 

has long been recognized and sought. The new disclosures were developed through testing that involved both consumers and industry 

representatives. It does, of course, represent a substantial change 

to make the initial switch, which is why there was substantial lead 

time and industry outreach built into the implementation process. 

We are sensitive to the implementation challenges for community 

banks. We are in the process of preparing extensive training for 

our examiners and intend to have them trained before the new requirements take effect. We also are working on an interagency 

basis to develop examination procedures for examiners to use as 

they examine institutions for compliance with the regulation. In 

addition, the CFPB is doing outreach to the industry, and also has 

a number of resources available to help community banks with the 

new rule [http://www.consumerfinance.gov/regulatory-implementation/tila-respa/]. The FDIC will monitor the impact of this rule on 

community banks. 

Q.5. Is your agency prepared to be flexible in implementing these 

new rules while small institutions struggle to implement these 

changes effectively? 

A.5. The FDIC, like other bank regulatory agencies, appreciates 

the magnitude of this initial change in disclosures. As with the 

rules that became effective in 2014, our initial examination will 

look at whether the institution has developed a plan and timeline 

for implementation, including training to assure that the appropriate personnel are familiar with the rule’s requirements. FDIC 

examiners will consider the overall compliance efforts of an instituVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00118 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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tion and take into account progress the institution has made in implementing its plan. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM DOREEN R. EBERLEY 

Q.1. I remain concerned about consolidation in the industry. In a 

State like Montana we had 65 community banks before the crisis, 

and as of yesterday we had 54. That means a sixth of our institutions have either gone out of businesses or consolidated with some 

of the larger institutions. I’m concerned that if consolidation continues the whole nature of small institutions being able to serve, 

particularly rural communities, is going to disappear. 

Can you tell me what trends you’ve seen with respect to community bank consolidation since the crisis and how this rate compares 

to before the crisis? 

A.1. Consolidation is a long-term banking industry trend that dates 

back to the mid-1980s. Two waves of bank failures have removed 

more than 2,700 banking charters from the industry since 1985. 

But community banks were a little less likely than non-community 

banks to fail during the recent crisis. Just 5 percent of community 

banks operating at the end of 2004 failed through 2014, compared 

to 6 percent of non-community banks. 

Voluntary mergers and consolidations have been responsible for 

the disappearance of more than 13,000 banking charters since 

1985. As documented in FDIC research published last year, the 

most rapid period of voluntary consolidation was between 1993 and 

2001, immediately following the relaxation of geographic restrictions on banking. 

In all, community banks have seen much lower rates of charter 

consolidation than non-community banks in recent years. Our 2014 

research shows that the total rate of charter attrition for community banks between 2003 and 2013 (29 percent) was less than half 

the rate for non-community banks (61 percent). Moreover, when 

community banks were acquired as a result of failure or merger, 

in 65 percent of the cases the acquirer was another community 

bank. 

So while consolidation appears likely to continue as a long-term 

trend for the banking industry, it does not appear to pose a threat 

to the viability of the community banking model. At year-end 2014, 

some 93 percent of FDIC-insured institutions met the FDIC’s community bank definition, an increase from 87 percent back in 1984. 

Q.2. Why do you think we are seeing this in the industry? 

A.2. The long-term trend of consolidation in banking has particularly affected the smallest institutions. At the end of 1984, there 

were over 6,000 federally insured banks and thrifts with assets less 

than $25 million. But by the end of 2014, there were just 180 institutions with assets less than $25 million. This trend speaks to the 

presence of economies of scale that operate among the smallest institutions. 

The 2012 FDIC Community Banking Study identified declining 

average cost with greater asset size for some community bank lending specialties, but found that most of these economies of scale 

116 

were realized by the time an institution reached a size of around 

$100 million. This is consistent with trends that have been observed in the size distribution of community banks over time. 

While the median community bank held $36 million in assets in 

1984, by 2014 the median community bank held total assets of 

$167 million. 

In all, the long-term trend of banking industry consolidation has 

resulted in fewer independent charters and increases over time in 

the median and average size of community banks and, especially, 

non-community banks. But this trend has not resulted in any decline over time in the percent of institutions that operate as community banks according to the FDIC’s research definition. 

Q.3. Are you seeing a difference in consolidation in urban areas vs. 

rural areas? 

A.3. The FDIC has not specifically compared the rate of consolidation between institutions headquartered in urban vs. rural areas. 

However, results published in the 2012 FDIC Community Banking 

Study show that community banks are more likely to be 

headquartered in a non-metro county than non-community banks 

(47 percent to 17 percent in 2011). Moreover, the share of community banks headquartered in metro counties actually increased 

slightly from 46 percent in 1987 to 47 percent in 2011, while the 

share of total community bank offices located in non-metro counties 

increased from 34 percent to 38 percent. These figures do not point 

to a disproportionate decline in the community bank presence in 

non-metro counties during the long-term trend of banking industry 

consolidation. 

Q.4. And specifically, what impact does this consolidation have on 

rural parts of the country? 

A.4. As indicated above, community banks are an integral part of 

local economies in non-metro U.S. counties. In 2014, the FDIC published a study of the long-term trend of rural depopulation and the 

effect that it has had on the community banking sector. Over one 

half of U.S. rural counties lost population between 1980 and 2010, 

and the overall trend toward depopulation appears to be accelerating. Notwithstanding this long-term demographic trend, community banks operating in rural areas have performed relatively 

well in recent years, owing to a strong farm economy and relative 

stability in rural housing markets compared to those in some major 

metropolitan areas. Still, depopulation does create certain challenges for rural community banks, as it tends to limit their opportunities for growth and also can make it difficult to attract and 

maintain managerial talent. 

Q.5. Community Institution Viability—What do you consider to be 

the biggest threat to small institutions livelihood and what are you 

all doing to address those risks? 

A.5. Currently, the prolonged low interest rate environment and 

slow economic recovery are pressuring margins, have contributed to 

increased interest rate risk, and can limit a community bank’s options for revenue growth. Additionally, emerging trends and risks 

will continue to challenge community banks’ ability to plan for the 

117 

future, such as the increasing volume and sophistication of 

cyberthreats and attacks. 

The FDIC has responded to the low interest rate environment by 

enhancing its review of institutions’ sensitivity to interest rate risk 

and has provided a technical assistance video for community bankers regarding interest rate risk. Moreover, we have dedicated an 

entire issue of our Supervisory Insights journal to interest rate risk 

issues. 

Regarding cybersecurity, the FDIC issued a list of free resources 

from which community banks can obtain cyberthreat information 

and has assisted financial institutions in identifying and shutting 

down ‘‘phishing’’ Web sites that attempt to fraudulently obtain and 

use an individual’s confidential personal or financial information. 

This year, the FDIC will add additional videos to our existing 

Cyber Challenge simulation exercise and work as a member of the 

FFIEC to implement actions to enhance the effectiveness of cybersecurity-related supervisory programs, guidance, and examiner 

training. The FDIC will continue to work with community banks 

to address these and other emerging threats. 

Q.6. Review of Existing Regulation—Can you elaborate on how 

your review is going and share with us the major areas of consensus the agencies and the industry have found so far? 

A.6. The EGRPRA review is still ongoing, and the Federal banking 

agencies (FBAs) continue to solicit input from the public via Federal Register notices and outreach meetings on various categories 

of regulations. Both the FDIC and the FFIEC have posted copies 

of relevant Federal Register notices on their respective Web sites. 

In addition, the FFIEC has posted video recordings and transcripts 

of outreach meetings, as well as copies of public comments received 

by the FBAs on their respective Web sites. The FDIC and the other 

Federal banking agencies participating in the EGRPRA review 

process have begun a thorough review of all comments received, 

whether they were provided by participants in EGRPRA outreach 

sessions or through the more traditional public comment process. 

Although the EGRPRA review process has not concluded, we have 

heard from commenters, especially community banks, that it is the 

cumulative effect of all regulations that concerns regulated entities, 

and not just a single regulation. 

Q.7. Can you share anything about your future plans as this review moves forward? 

A.7. The Federal banking agencies will continue to solicit public 

input to identify outdated or otherwise unnecessary regulations 

that impact insured depository institutions. To accomplish that, the 

FBAs will publish additional Federal Register notices seeking comment on various categories of rules. In addition, the FBAs plan to 

hold four more outreach meetings this year, with one meeting focusing on rural banks. Comments related to the EGRPRA review 

process will be posted electronically on the FFIEC’s and FDIC’s 

Web sites. Once the EGRPRA review is complete, the FFIEC will 

provide Congress with a joint report that summarizes any significant issues raised in the public comments received by the FFIEC 

and the participating EGRPRA agencies along with the relative 

merits of such issues. The report will include an analysis of whethVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00121 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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er the FBAs will be able to address the regulatory burdens associated with such issues or whether these burdens must be addressed 

by legislative action. In the meantime, the FDIC has implemented 

some burden-reduction measures during the EGRPRA review process, rather than at the conclusion of the process. For example, on 

November 19, 2014, the FDIC announced in Financial Institution 

Letter 54-2014 the elimination of certain filing requirements for 

State bank subsidiaries engaged in activities that are permissible 

for a national bank subsidiary when the State bank subsidiary is 

organized as a limited liability company. 

Q.8. Appraisal—In Montana, I continue to hear concerns from our 

community banks about appraisals. On several occasions I’ve heard 

stories about appraisers having to travel across the State or come 

from neighboring States. And when you live in a State like mine, 

you often find multimillion ranches next to your average middleclass family farm. If you aren’t from the area, things like 

comparables become very tricky if you aren’t from the area. Can 

you share any thoughts you have about ways to make the appraisal 

process more effective and less time consuming? Especially for institutions that keep mortgages in portfolio, considering they keep 

the risk on their books. 

A.8. The Federal financial institution regulatory agencies’ appraisal regulations require an appraisal for a federally related 

transaction unless an exemption applies. The primary exemption 

permits using an evaluation for transactions of $250,000 or less 

with the exception of certain higher-priced mortgage loans. Industry data reflects the median home price was $199,600 as of January 2015, indicating an evaluation was permitted for the vast majority of residential mortgage loans. We recognize that individuals 

performing evaluations and appraisals in rural areas may face 

challenges in identifying and locating comparable sales. However, 

exempting all real estate loans in rural areas from valuation requirements (appraisal or evaluation) could raise both safety and 

soundness and consumer protection concerns. 

The Interagency Appraisal and Evaluation Guidelines provide a 

caveat for small or rural institutions or branches of large institutions that recognizes that it is not always practical to separate the 

collateral valuation program from the loan production process, as 

follows: 

For a small or rural institution or branch it may not always be possible or practical to separate the collateral 

valuation program from the loan production process. If absolute lines of independence cannot be achieved, an institution should be able to demonstrate clearly that it has 

prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process. In such cases, another loan officer, other officer, or director of the institution may be the only person 

qualified to analyze the real estate collateral. To ensure 

their independence, such lending officials, officers, or directors must abstain from any vote or approval involving 

loans on which they ordered, performed, or reviewed the 

appraisal or evaluation. 

119 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM MARYANN F. HUNTER 

Q.1. According to the OCC, the Federal banking agencies have 

agreed to undertake a comprehensive review of all Call Report 

items and schedules. When will this review be completed? Who 

from your agency is in charge of this review? Will this review result in a formal, publicly available report? 

A.1. In December of 2014, the Federal Financial Institutions Examination Council (FFIEC) agreed to undertake a comprehensive review of the Consolidated Reports of Condition and Income (Call Report) to identify potential opportunities to reduce burden associated 

with the Call Report requirements for community banks. This review is planned for completion by the fourth quarter of 2017. The 

review is being conducted under the direction of the Board’s Chief 

Accountant Supervision in the Division of Banking Supervision and 

Regulation. A formal, comprehensive report on the results of the 

review is not currently planned for release to the public. However, 

the Federal Reserve and the other Federal banking agencies will 

publicly propose changes to the Call Report that we agree upon as 

a result of this review in joint Federal Register notices which will 

be issued for public comment in accordance with the Paperwork Reduction Act. 

Q.2. Kansas Fed President, Esther George, said at a 2014 conference that the community bank ‘‘business model is one in which 

the incentives of banks are aligned with outcomes that benefit their 

customers and the economy. When incentives are aligned in this 

way, the need for an ‘ability to repay rule,’ for example, seems unnecessary.’’ 

Do you agree that banks that hold mortgages on portfolio have 

a vested interest to perform an analysis of a customer’s ability to 

repay irrespective of whether such mortgage meets the requirements of a ‘‘Qualified Mortgage’’? 

Do you agree that mortgages held on portfolio should be afforded 

a ‘‘Qualified Mortgage’’ status? If not, why not? 

A.2. As provided in a December 2013 interagency statement, the 

Federal Reserve expects institutions to underwrite residential 

mortgage loans in a prudent fashion and address key risk areas in 

their residential mortgage lending, including loan terms, borrower 

qualification standards, loan-to-value limits, and documentation requirements, regardless of whether loan is a qualified mortgage or 

nonqualified mortgage. 

The Federal Reserve continues to expect institutions to underwrite all residential mortgage loans in a prudent fashion. It is not 

sufficient that mortgages only be held in portfolio in order to be 

designated as qualified mortgages (QM). However, if mortgages 

that are held in portfolio meet the specific QM requirements, as defined in Consumer Financial Protection Bureau regulations, including preclusion of certain features, such as negative amortization, 

interest-only payments, or certain balloon structures, and must 

meet limits on points and fees and other underwriting requirements, then the QM designation may be appropriate. 

Q.3. The OCC acknowledged in its testimony that the Volcker Rule 

contains no exemption for community banks, and that the reguVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00123 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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1See ‘‘The Volcker Rule: Community Bank Applicability’’ (Dec. 10, 2013), available at: http:// 

www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf. 

latory burden is not justified by the risk these institutions present. 

The OCC has drafted a legislative proposal to exempt from the 

Volcker Rule banks with total consolidated assets of $10 billion or 

less. 

Do you support exempting from the Volcker Rule banks with total consolidated assets of $10 billion or less? Do you support 

OCC’s proposal? If not, why not? If you believe that the $10 billion threshold for an exemption 

from the Volcker rule is not appropriate, what threshold or other 

criteria would be more appropriate to use as the basis for the exemption? 

A.3. Section 619 of the Dodd-Frank Act, which added a new section 

13 to the Bank Holding Company Act of 1956 (BHC Act), also 

known as the Volcker Rule, generally prohibits any banking entity, 

regardless of size, from engaging in proprietary trading, and from 

acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exemptions. Under the terms of the statute, section 13 applies to any 

banking entity regardless of its size. As a result, section 13 and the 

final rules apply to community banks. 

With respect to the Volcker Rule, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the 

Comptroller of the Currency (OCC) (the Agencies) are charged with 

implementing that statutory provision endeavored to minimize the 

compliance burden on banking entities. As part of the implementing rules, the Agencies reduced the compliance program and 

reporting requirements applicable to banking entities with $10 billion or less in total consolidated assets. This was based in part on 

information that indicated that banking entities of this size generally have little or no involvement in prohibited proprietary trading or investment activities in covered funds. 1 Exempting community banks from section 13 would provide relief for thousands of 

community banks that face ongoing compliance costs incurred simply to confirm that their activities and investments are indeed exempt from the statute. At the same time, an exemption at this 

level would not be likely to increase risk to the financial system. 

The vast majority of activity and investment that section 13 of the 

BHC Act is intended to address takes place at the largest and most 

complex financial firms whose failure would have a significant effect on the stability of the financial system. Moreover, even with 

an exemption, the Federal banking agencies could continue to use 

existing prudential authority to address unsafe and unsound practices at a community bank that engaged in imprudent investment 

activities. 

Q.4. The OCC also recommended increasing the asset-size threshold from $500 million to $750 million to determine whether a community bank can qualify for an examination every 18 months. 

Do you support increasing the asset-size threshold from $500 

million to $750 million to determine whether a community bank 

can qualify for an examination every 18 months? Do you support 

OCC’s proposal? If not, why not? 

121 

If you believe that the $750 million threshold is not appropriate, 

what threshold or other criteria would be more appropriate to use 

as the basis for this change? 

Would you support allowing any institution to petition to qualify 

for an exam every 18 months? 

A.4. We are open to discussing with our colleagues at the other 

agencies the potential impact of revising the current asset threshold for the 18-month examination cycle. Any revisions to the 

threshold need to consider the trade-offs of a less frequent onsite 

examination cycle against the availability of data to monitor a 

bank’s condition between onsite examinations. Therefore, an increase in the asset-size threshold for the examination cycle would 

have to be weighed against any proposals to lessen the regulatory 

reporting requirements for community banking organizations, including the reporting frequency and data collected, that could limit 

examiners’ ability to monitor a bank offsite. Further, Federal bank 

supervisors still need the ability to conduct more frequent onsite 

examination for safety and soundness purposes. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MARYANN F. HUNTER 

Q.1. The first Economic Growth and Regulatory Paperwork Act 

(EGRPRA) review submitted to Congress in 2007 states: ‘‘Besides 

reviewing all of our existing regulations in an effort to eliminate 

unnecessary burdens, the Federal banking agencies worked together to minimize burdens resulting from new regulations and 

current policy statements as they were being adopted.’’ The report 

submitted to Congress specifically discussed consumer financial 

regulations, anti-money laundering regulations, and recently adopted rules. However, included in the Federal Register for this 10-year 

review are two footnotes that suggests that CFPB rules, antimoney laundering rules, and new regulations that have recently 

gone into effect will not be included in the review. 

Rather than predetermine which rules should or should not be 

reviewed, shouldn’t the agencies review all existing regulations and 

eliminate or recommend statutory changes that are needed to 

eliminate any regulatory requirements that are outdated, unnecessary, or unduly burdensome? 

A.1. The Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the Agencies) have included in the Economic Growth and Regulatory Paperwork Act (EGRPRA) review all regulations over which we have 

rulemaking authority. Since the publication of the first request for 

comment, the Agencies have decided to expand the scope of the 

EGRPRA review to cover all regulations, including those that were 

enacted relatively recently. Future Federal Register notices and 

public outreach meetings will make it clear that the Agencies are 

accepting comment on all regulations adopted by the Agencies. The 

final request for comment, expected to be published by year end, 

will ask for comment on all regulations that have been adopted in 

final form by the time of the issuance of that request, even if the 

regulation was adopted only shortly before such request. As was 

stated in the Federal Register notice, comments that the Agencies 

122 

receive during this EGRPRA review on rules that are administered 

by other agencies, such as the Consumer Financial Protection Bureau (CFPB) and the Financial Crimes Enforcement Network, will 

be provided to those agencies for their consideration. 

Q.2. Does Congress need to update the EGRPRA statute to include 

the CFPB to ensure the review is comparable in scope to what was 

reviewed last time? 

A.2. Under 12 U.S.C. §5512(d)(2), the CFPB is required to conduct 

a review of its significant rules every 5 years after their effective 

dates. Accordingly, the Federal Reserve believes that any consumer 

protection regulations transferred from the banking agencies to the 

CFPB under the Dodd-Frank Wall Street Reform and Consumer 

Protection Act will be reviewed in accordance with that requirement. In addition, the Agencies will send to the CFPB any comments received on regulations administered by the CFPB. 

Q.3. If not, what specific steps will be taken to ensure that the review will include all existing regulations, including consumer financial regulations, anti-money laundering rules, and new regulations? 

A.3. As noted above, we will provide other appropriate agencies 

with copies of comments received on regulations under their purview. The CFPB itself has its own statutorily mandated review 

process of its regulations. In addition to providing the appropriate 

regulator with any comments the Agencies receive during the 

EGRPRA review for which they are the functional regulator, the 

Agencies have expanded the scope of this EGRPRA review to include all new regulations that will be issued in final by the Agencies prior to the publication of the last Federal Register notice for 

the EGRPRA review. We believe this will enable the Agencies to 

conduct a thorough review of relevant regulations. 

Q.4. A main criticism of the last review was that the banking regulators subsequently repealed or eliminated only a few substantive 

regulations. To ensure that the current review has a more successful outcome, will your agencies set up a Government Web site that 

posts the feedback and list the 10 most burdensome regulations 

identified? 

A.4. The Agencies intend to publish a report to Congress at the end 

of this EGRPRA review. As was done in the report on the last 

EGRPRA review, the Agencies will summarize the comments provided and our responses to them. The report will summarize the 

significant issues arising from the review and the Agencies’ responses thereto, in order to identify the feedback we received and 

the most burdensome regulations identified. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM MARYANN F. HUNTER 

Q.1. Last Congress, legislation was introduced in the House (H.R. 

2673, 113th Congress) that would provide financial institutions 

protection from the liability associated with Section 1411 of the 

Dodd-Frank Act, so long as the loan appears on the institution’s 

balance sheet. I understand that the CFPB partially addressed this 

issue for some institutions through its Notice of Proposed RuleVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00126 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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1 Interagency Statement on Supervisory Approach for Qualified and Nonqualified Mortgage 

Loans (December 13, 2013). 

making. Please answer the following questions related to the proposed legislation: 

Do you believe the proposed legislation would have a material 

impact on the safety and soundness of covered financial institutions? 

A.1. It is not readily apparent how the draft legislation would work 

with the existing qualified mortgage requirements provided in the 

Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay 

rule. If the loans held on balance sheet do not meet the qualified 

mortgage criteria as set forth in the CFPB’s rule, the legislation 

could create an incentive for banking organizations to originate 

mortgage loans that include features that were problematic during 

the crisis, such as negative amortization. Regardless of whether a 

mortgage loan is a qualified mortgage or nonqualified mortgage, 

the Federal Reserve continues to expect banking organizations to 

underwrite residential mortgage loans in a prudent fashion and address key risk areas in their residential mortgage lending, including loan terms, borrower qualification standards, loan-to-value limits, and documentation requirements. 1

Finally, the qualified mortgage definition would not affect the 

regulatory capital treatment for residential mortgage exposures. 

Under the revised regulatory capital rules, mortgage exposures secured by a first-lien on an owner-occupied or rented one-to-four 

family residential property that meet prudential underwriting 

standards, are not 90 days or more past due or carried on nonaccrual status, and are not restructured or modified, receive a 50 

percent risk weight. A banking organization must assign a 100 percent risk weight to all other residential mortgage exposures even 

if designated as a qualified mortgage. 

Q.2. If so, do you believe the current supervisory process and capital requirements are sufficient to address any perceived risks that 

may come from this change? 

A.2. See response to Question 1. 

Q.3. Do you have additional comments, concerns, or proposed 

changes to the legislation? 

A.3. We do not have any at this time. 

Q.4. Mr. Bland and the OCC have suggested that banks under $10 

billion could be exempt from the Volcker rule. With respect to 

Volcker compliance, Governor Tarullo stated that he believes ‘‘both 

community banks and supervisors would benefit from not having to 

focus on formal compliance with regulation of matters that are unlikely to pose problems at smaller banks.’’ Do you believe the $10 

billion threshold proposed by the OCC is appropriate? 

A.4. Section 619 of the Dodd-Frank Act, which added a new section 

13 to the Bank Holding Company Act of 1956 (BHC Act), also 

known as the Volcker Rule, generally prohibits any banking entity, 

regardless of size, from engaging in proprietary trading, and from 

acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00127 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
124 

2See The Volcker Rule: Community Bank Applicability (Dec. 10, 2013), available at: http:// 

www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf. 

emptions. Under the terms of the statute, section 13 applies to any 

banking entity regardless of its size. As a result, section 13 and the 

final rules apply to community banks. 

With respect to the Volcker Rule, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the 

Comptroller of the Currency (OCC) (the Agencies) are charged with 

implementing that statutory provision endeavored to minimize the 

compliance burden on banking entities. As part of the implementing rules, the Agencies reduced the compliance program and 

reporting requirements applicable to banking entities with $10 billion or less in total consolidated assets. This was based in part on 

information that indicated that banking entities of this size generally have little or no involvement in prohibited proprietary trading or investment activities in covered funds. 2 Exempting community banks from section 13 would provide relief for thousands of 

community banks that face ongoing compliance costs incurred simply to confirm that their activities and investments are indeed exempt from the statute. At the same time, an exemption at this 

level would not be likely to increase risk to the financial system. 

The vast majority of activity and investment that section 13 of the 

BHC Act is intended to address takes place at the largest and most 

complex financial firms whose failure would have a significant effect on the stability of the financial system. Moreover, even with 

an exemption, the Federal banking agencies could continue to use 

existing prudential authority to address unsafe and unsound practices at a community bank that engaged in imprudent investment 

activities. 

Q.5. The Bipartisan Policy Center recently suggested creating a 

pilot program for a ‘‘consolidated examination force’’ for the institutions subject to supervision by all three of the Federal prudential 

regulators. Such a program would force coordination between the 

agencies and minimize the costs associated with examinations for 

banks. It appears that the Federal Financial Institutions Examination Council (FFIEC) could provide the vehicle to run the pilot program. Do you believe your agencies currently have the statutory 

authority to undertake such a joint pilot program through FFIEC? 

If so, why haven’t the agencies taken steps to initiate such a pilot 

program? 

A.5. The three Federal banking agencies regularly coordinate joint 

examination work in an effort to minimize the burden on an institution. Further, to avoid duplication of efforts and to share expertise, the staffs of the agencies regularly meet to discuss supervisory 

activities and findings and rely on long standing interagency agreements to conduct joint examinations and to share supervisory information. The decision to conduct a joint examination considers each 

agency’s supervisory authority over a particular institution and the 

need to share information to support our various supervisory mandates. For instance, on the resolution of a problem bank or thrift, 

the FDIC, as the insurer of depository institutions, has backup examination authority and coordinates with the primary Federal 

bank regulator (either the Federal Reserve for state member banks 

125 

3 Refer to the interagency press release announcing the 2014 SNC review results on the Federal Reserve’s public Web site at: www.federalreserve.gov/newsevents/press/bcreg/ 

20141107a.htm. 

and the OCC for national banks and Federal thrifts) and as applicable, the state banking department, on participation on an examination. As the supervisor for holding companies, the Federal Reserve coordinates its examination activities with OCC and FDIC 

when the holding company and the bank or thrift subsidiary share 

risk functions. 

Since 1977, the Agencies have coordinated the Shared National 

Credits (SNC) review program that is designed to provide a uniform review and credit quality assessment of many of the largest 

and most complex credits in the banking system. The SNC review 

program provides an efficient and consistent review of any loan or 

formal loan commitment extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates 

$20 million or more and is shared by three or more unaffiliated supervised institutions. In 2014, the agencies reviewed $975 billion of 

the $3.39 trillion credit commitments in the SNC portfolio. 3

The Federal Reserve and the FDIC also coordinate the examination of State banks with the responsible State banking department. 

To foster consistency in the examination of State community banks, 

the Federal Reserve, the FDIC, and the FFIEC State Liaison Committee have adopted common examination procedures (referred to 

as the Examination Documentation (ED) Modules) and have an ongoing, interagency process for the review and updating of the ED 

modules to reflect current regulatory and policy mandates. 

In addition, the agencies use the FFIEC to foster common examination approaches among the agencies. Through the work of the 

various FFIEC task forces and subcommittees, staffs of the agencies come together to discuss the implementation of supervisory 

guidance and to develop common reports and examination tools. 

For example, the FFIEC member agencies are coordinating various 

work streams on cybersecurity to improve collaboration with law 

enforcement and intelligence agencies and to communicate the importance of cybersecurity awareness and best practices among the 

financial industry and regulators. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM MARYANN F. HUNTER 

Q.1. During the hearing, Mr. Toney Bland, ‘‘But I would say that 

the OCC, as part of our normal practice, we look at on an ongoing 

basis whether rules are appropriate in terms of still relevant, and 

we will make changes, if they need to, without waiting for the next 

EGRPRA process.’’ Within your respective agency’s jurisdiction, 

please provide the number and a list of regulations your agency 

eliminated or changed due to irrelevance or undue burden since 

2006 along with a brief description of each. 

A.1. Per your request, attached please find a list of regulations the 

Federal Reserve has eliminated or changed since the last Economic 

Growth and Regulatory Paperwork Reduction Act review (due to irrelevance or undue burden) along with a brief description of each 

(Appendix to Question 1). 

126 

127 

128 

Q.2. Within your respective agency’s jurisdiction, please provide 

the total number and a list of new rules and regulations that have 

been adopted since the last EGRPRA review along with a brief description of each. 

A.2. Per your request, attached please find a list of new regulations 

the Federal Reserve has promulgated since January 1, 2007, along 

with a brief description of each (Appendix to Question 2). 

129 

130 

131 

132 

133 

134 

135 

136 

137 

138 

139 

140 

141 

142 

Q.3. During the last EGRPRA review, Federal banking agencies 

hosted a total of 16 outreach sessions around the country. To date 

only six outreach sessions have been announced. During this current EGRPRA review, how many total outreach meetings will be 

held and will there be at least 16 meetings as before? 

A.3. At this time, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the Agencies) have held or scheduled six outreach meetings. All meetings have been and will continue to be streamed live 

for public viewing over the Internet. The reaction from the public 

to being able to watch the meetings in real time has been very 

positive. It has also allowed the outreach meetings to reach a larger audience than was available during the last Economic Growth 

and Regulatory Paperwork Reduction Act review. In addition, the 

Agencies have scheduled one meeting that will focus specifically on 

the interests and concerns of rural depository institutions. This 

meeting, to be held at the Federal Reserve Bank of Kansas City, 

on Tuesday, August 4, will again be streamed live to allow viewing 

by anyone who does not participate in person. Online participants 

may provide oral comments during the meeting, subject to time 

constraints. In addition, online participants may elect to use the 

text chat feature to provide comments that will be saved as part 

of the record of the meeting. A toll free telephone number will also 

be provided for interested persons that wish to listen to the meeting but do not have computer access. The Agencies will monitor the 

need for additional meetings in response to industry interest. 

Q.4. To date only one EGRPRA outreach meeting, focusing on rural 

banking issues, has been scheduled in Kansas City. How many 

more rural banking outreach meetings do you plan on scheduling? 

Given the diversity of rural banking needs around the country, in 

what other geographic regions would those meetings take place? 

A.4. At this time, the Agencies are awaiting feedback from the industry and the results of the participation at the Kansas City outreach meeting in order to gauge the need for additional rural outreach meetings. Given the livestreaming of the meeting and the 

ability for persons from around the country to participate, we anticipate that there will be opportunities for all issues of interest to 

be aired or made part of the record. We remain open to additional 

meetings should industry response indicate there is a need for additional outreach meetings focusing on rural issues. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM MARYANN F. HUNTER 

Q.1. Some are very concerned that implementing certain Basel III 

capital requirements relating to mortgage servicing could substantially alter business models adopted by banks in Nebraska and 

elsewhere designed to complete certain mortgage services on their 

own behalf and for other banks. 

Have you completed or otherwise reviewed analyses that show 

whether the adoption of these requirements would affect mortgage 

servicing operations? 

143 

A.1. The Federal Reserve Board, the Office ofthe Comptroller of the 

Currency, and the Federal Deposit Insurance Corporation (Agencies) took careful action to ensure the revised regulatory capital 

rule appropriately reflects the risks inherent in banking organizations’ business models. Prior to issuing the rule, the Agencies conducted a pro forma impact analysis that showed that the vast majority of community and midsized banking organizations (those 

with less than $10 billion in total assets) would meet the rule’s 

minimum common equity tier 1 capital requirement of 4.5 percent 

plus the 2.5 percent capital conservation buffer on a fully phasedin basis (including the treatment of Mortgage Servicing Assets 

(MSAs)). The Agencies have long limited the inclusion of MSAs and 

other intangible assets in regulatory capital and believe the rule’s 

treatment of MSAs contributes to the safety and soundness of 

banking organizations by mitigating against MSA market value 

fluctuations that may adversely affect banking organizations’ regulatory capital base during periods of economic stress. 

Q.2. If so, have these analyses shown that smaller institutions 

would limit mortgage servicing operations as a result? 

A.2. Please see response for Question 1. 

Q.3. What entities are likely to perform the mortgage servicing operations instead? 

A.3. It is important to note that the revised regulatory capital rule 

does not prohibit mortgage servicing activity. The decision to engage in such activity is, in part, a function of a firm’s preferred 

business model. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM MARYANN F. HUNTER 

Q.1. Has the Federal Reserve ever studied, or does it intend to 

study, the appropriate capital requirements for mortgage servicing 

assets held by nonsystemic banking institutions, separate from a 

generalized study of the impacts of the Basel III capital regime? 

A.1. The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the Agencies) took careful action to ensure the revised regulatory capital 

rule appropriately reflects the risks inherent in banking organizations’ business models. Prior to issuing the rule, the Agencies conducted a pro forma impact analysis that showed that the vast majority of community and midsized banking organizations (those 

with less than $10 billion in total assets) would meet the rule’s 

minimum common equity tier 1 capital requirement of 41⁄2 percent 

plus the 21⁄2 percent capital conservation buffer on a fully phasedin basis (including the treatment of mortgage service assets). The 

Agencies have long limited the inclusion of mortgage service assets 

(MSAs) and other intangible assets in regulatory capital and believe the rule’s treatment of MSAs contributes to the safety and 

soundness of banking organizations by mitigating against MSA 

market value fluctuations that may adversely affect banking organizations’ regulatory capital base during periods of economic stress. 

144 

1The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the 

Comptroller of the Currency (OCC), ‘‘New Capital Rule: Community Bank Guide’’, July, 9, 2013, 

www.federalreserve.gov/bankinforeg/basel/files/capitallrulelcommunitylbanklguidel20130709.pdf; and the Federal Reserve, FDIC, and OCC, 

‘‘The Volcker Rule: Community Bank Applicability’’, December 10, 2013, www.federalreserve.gov/ 

newsevents/press/bcreg/bcreg20131210a4.pdf. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM MARYANN F. HUNTER 

Q.1. One of the most consistent things I hear from Kansas banks 

and credit unions is that they are continually being required to 

comply with new regulations that were never intended to affect 

them. I am in the process of drafting a small lending regulatory relief package along with Sen. Tester that seeks to address some of 

these problems by clarifying that small lenders are very different 

than the regulations’ intended targets. Do you believe that some of 

the rules intended for our most complex financial institutions have 

trickled down to community banks? If so, what specific portions of 

the law under your individual area of jurisdiction have you identified as problematic for small lenders? 

A.1. As we develop supervisory regulations and policies and examination practices, we are mindful of community bankers’ concerns 

that new rules intended for complex financial institutions could be 

applied to community banks in a way that is inappropriate. For 

that reason, our supervision examination process continues to be 

tailored to each organization’s size, complexity, risk, profile, and 

condition. Further, to promote appropriate implementation of new 

regulations and supervisory policies, the Federal Reserve continues 

to devote significant resources and time to training our examiners 

and communicating with examiners about the goals of a new regulation or guidance for community banking organizations. 

In developing a new regulation or policy, the Federal Reserve 

weighs the burden on banks to implement new requirements 

against the need to safeguard the safety and soundness of the financial system in context of the statutory requirements. We recognize that the cost of compliance can be disproportionally greater on 

smaller banks versus larger institutions, as they have fewer staff 

available to help comply with additional regulations. Therefore, 

working within the requirements of the law, we attempt to develop 

regulations that impose requirements that are appropriate for community banks and that do not impose unnecessary or unduly burdensome requirements to implement. This is evident in many of 

the Federal Reserve regulations implementing the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, where the most 

stringent requirements only apply to the largest and most complex 

banking organizations and not to community banks. 

To assist community banks in understanding how a new rule 

could possibly affect their business operations, the Federal banking 

agencies have issued supplemental guides that focus on which rule 

requirements are most applicable to community banks. For example, the Federal banking agencies issued supplemental guides for 

the capital requirements issued in July 2013, as well as the 

Volcker rule issued in December 2013. 1

Q.2. The burden of regulation does not necessarily come from a single regulation, but the aggregate burden of regulations, guidance, 

145 

and size-inappropriate best practices. The burden grows when 

small lenders are required to comply with several new rules concurrently. In isolation, the impact of one regulation may appear 

small, but when added to the growing list of compliance requirements, the cost is skyrocketing. What are you doing to identify and 

reduce aggregate burden? 

A.2. Besides the regulatory review mandated by Economic Growth 

and Regulatory Paperwork Reduction Act (EGRPRA), the Federal 

Reserve periodically reviews existing supervisory guidance to assess whether the guidance is still relevant and effective. For instance, the Federal Reserve conducted a policy review of the supervision programs for community and regional banking organizations 

to make sure the programs and related supervisory guidance are 

appropriately aligned with current banking practices and risks. 

The project entailed an assessment of all existing supervisory guidance that apply to community and regional banking organizations 

to determine whether the guidance is still appropriate. As a result 

of this review, we are likely to eliminate some guidance that is no 

longer relevant and update other guidance for appropriateness to 

current supervisory and banking industry practices and relevance 

to the risks to these institutions. 

Q.3. The EGRPRA process was brought about to identify redundant or excessively burdensome regulation. I think the EGRPRA 

process has the potential to be an important tool to begin rebuilding some semblance of trust between Federal regulators and the financial institutions they oversee. However, the first iteration revealed little agency will to utilize the process. Resulting reductions 

in regulatory burden were, in a word, insignificant. Various 

EGRPRA listening sessions have been conducted across the country. What is the most consistent message you are hearing from participants? What are you doing differently in the current EGRPRA 

review, and what actual, tangible relief can our smallest lenders 

expect? 

A.3. The most consistent message provided by commenters in this 

EGRPRA review is that the Federal Reserve, OCC, and the FDIC 

(the Agencies) must consider the impact our regulations have on 

our institutions, especially on community banks; that the Agencies 

should coordinate as much as possible to minimize the effect of 

overlapping regulations; and that the agencies should reduce regulatory burden as much as is possible. 

The Agencies are conducting the current EGRPRA review with a 

focus on the effect of regulatory burden on insured community depository institutions. In each of the outreach meetings held to date, 

the Agencies invited representatives of smaller banking organizations to present their views directly to participating agency principals and staff. The institutions represented a variety of charters, 

geographic locations, and size. In addition, the Agencies have 

scheduled a public meeting at the Federal Reserve Bank of Kansas 

City that is specifically targeted to the concerns of banks in rural 

markets. This meeting will provide conferencing capability and 

two-way live stream capability from some of the other offices of the 

Kansas City Reserve Bank to enable management of depository institutions that are not located near the Reserve Bank to have the 

146 

opportunity to participate in the meeting. The Agencies also continue to invite the public to provide written comments through the 

EGRPRA Web site, http://egrpra.ffiec.gov/, on any regulations 

that they believe are outdated, unnecessary or unduly burdensome. 

The Federal Reserve is reviewing regulations as a result of the 

comments received and, where possible, taking measures to alleviate burden on insured community depository institutions. For example, the Federal Reserve recently issued a final rule on April 9, 

2015, to expand the applicability of its Small Bank Holding Company Policy Statement and also apply it to certain savings and loan 

holding companies. The policy statement facilitates the transfer of 

ownership of small community banks and savings associations by 

allowing their holding companies to operate with higher levels of 

debt than would normally be permitted. Although holding companies that qualify for the policy statement are excluded from consolidated capital requirements, their depository institution subsidiaries 

would continue to be subject to minimum capital requirements. The 

final rule raises the asset threshold of the policy statement from 

$500 million to $1 billion in total consolidated assets and also expands the application of the policy statement to savings and loan 

holding companies. The final rule implements a law passed by the 

Congress in December 2014, and became effective on May 15, 2015. 

Q.4. Major changes to mortgage disclosures and timing requirements are set to go into effect on August 1st of this year. These 

regulatory changes will impact every participant in the mortgage 

lending process and every consumer mortgage transaction. The financial institutions that are still engaged in residential mortgage 

lending are making every effort to be ready by the August deadline. I am concerned that, if poorly crafted or hastily implemented, 

these additional rules will result in fewer borrowing options in 

communities I represent as small lenders exit the business altogether. Are your respective examiners already being trained on 

how to assess these changes over the course of their reviews. Are 

your agencies prepared to be flexible in implementing these new 

rules while small institutions struggle to implement these changes 

effectively? 

A.4. While the mandatory compliance date for the new Truth in 

Lending—Real Estate Settlement Procedures Act integrated disclosure rules was set by the Consumer Financial Protection Bureau 

(CFPB), we understand that the new rules are significant and complex. For that reason, we have conducted outreach to ensure the institutions we supervise are aware of and understand the new rules. 

Among other things, we have partnered with the CFPB on a series 

of instructive webinars through our Outlook Live platform. Outlook 

Live is an ongoing webinar series on consumer compliance issues, 

available to the public and our examiners. We also finalized and released interagency examination procedures on April 15, 2015, that 

our examiners will use and that are publicly available, and we are 

developing additional examiner training. 

We expect our examiners to take into account the size and complexity of an institution and its products when deciding on the 

scope of and performing an examination. If mortgages are within 

scope, examiners will initially evaluate how an institution manages 

147 

1Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation. Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, DC. 2 A community bank is defined as an insured commercial bank with less than $10 billion in 

assets. 3The decline includes both failed banks and acquired banks. 

4The pre-crisis years comprise 12/31/1999–12/31/2007, while the post-crisis years comprise 12/ 

31/2008–12/31/2014. 

regulatory changes and overall efforts to come into compliance with 

the new mortgage rules. Among other things, examiners will consider the institution’s implementation plan and actions taken to 

update the institution’s policies, procedures, and processes. Reviews of individual loans covered by the new rules will not begin 

immediately after the effective date, as examiners generally review 

files that predate the examination. As with any new regulation, our 

goal is to work with the institutions we supervise to ensure they 

are on the right path. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM MARYANN F. HUNTER 

Q.1. I remain concerned about consolidation in the industry. In a 

State like Montana we had 65 community banks before the crisis, 

and as of yesterday we had 54. That means a sixth of our institutions have either gone out of businesses or consolidated with some 

of the larger institutions. I’m concerned that if consolidation continues the whole nature of small institutions being able to serve, 

particularly rural communities, is going to disappear. 

Can you tell me what trends you’ve seen with respect to community bank consolidation since the crisis and how this rate compares 

to before the crisis? 

A.1. As stated in my testimony, community banks have deep ties 

to their local communities, which give them firsthand perspectives 

on the local economic landscape; they focus on customer relationships and often look beyond traditional credit factors to consider 

unique borrower characteristics when making credit decisions. To 

that end, community banks are a critical component of our financial system and economy. The Federal Reserve recognizes the important role of community banks and seeks to supervise them in 

a way that fosters their safe and sound operation without constraining their capacity to support the financial needs of their communities. 1

According to data, the number of community banks declined 37 

percent from 12/31/1999 to 12/31/2014. 2 Further, the annual rate 

of decline appears to have increased since the financial crisis. Figure 1 displays the annual percent decline in the number of community banks year over year. 3 As the chart illustrates, the percent decline by year has increased since the crisis, and does not show a 

clear sign of returning to pre-crisis levels. Prior to the crisis, the 

number of community banks declined an average of 2.3 percent per 

year; while since the crisis, the number of community banks has 

declined an average of 3.9 percent per year. 4

148 

5 Analysis excludes failed banks. 

This increase in post-crisis community bank consolidation may be 

driven, in part, by banks acquiring less profitable community 

banks. The return on average assets (ROAA) is a standard measure 

of bank profitability. ROAA is a bank’s net income divided by its 

average assets. As shown in Figure 2 below, community banks that 

were acquired in the years following the crisis tended to have lower 

ROAA than banks that were not acquired during the same years. 

This has not always been the case. As Figure 2 also illustrates, in 

the 4 years immediately preceding the crisis, the average ROAA of 

community banks that were acquired actually exceeded that for 

banks that were not acquired. 5 This may suggest that, post-crisis, 

profitable banks continue to find opportunities to expand, but are 

currently focused on acquiring less profitable banks. 

149 

This trend, however, does not extend to rural banks. Rather, the 

pre- and post-crisis differences in community bank consolidation 

appear to be driven by banks outside rural areas. For purposes of 

this response, rural is defined using the USDA’s Rural-Urban Continuum codes, also known as Beale codes. 

According to the Beale codes, a rural area is defined as either: 

1. Non-metro—Completely rural or less than 2,500 urban population, adjacent to a metro area 

2. Non-metro–Completely rural or less than 2,500 urban population, not adjacent to a metro area 

As shown in Figure 3, pre- and post-crisis consolidation since 12/ 

31/1999 is very similar for rural banks, while the average annual 

rate of consolidation for urban community banks was much higher 

post-crisis than pre-crisis. In fact, at rural community banks, the 

average annual rate of post-crisis consolidation was lower than the 

pre-crisis rate. 

150 

The Beale definition of rural counties is fairly restrictive, only 11 

percent of community banks were located in rural counties. However, if we expand that definition to also include counties with 

small urban populations (2,500–19,999) that are not adjacent to a 

metropolitan area, which then encompasses 23 percent of community banks as of 12/31/2014, we find a similar pattern (see Figure 

4). 

151 

To summarize, community bank consolidation has increased 

somewhat since the financial crisis and banks appear to be acquiring less profitable banks. This post-crisis increase in consolidation 

does not appear to have impacted rural banks, however. The average annual rate of consolidation for rural community banks remains just over 2.5 percent, well below the post-crisis rate of nonrural community bank consolidation. 

Q.2. Why do you think we are seeing this in the industry? 

A.2. Please see the response to Question 1. 

Q.3. Are you seeing a difference in consolidation in urban areas vs. 

rural areas? And specifically, what impact does this consolidation 

have on rural parts of the country? 

A.3. Please see the response to Question 1. 

Q.4. What do you consider to be the biggest threat to small institutions livelihood and what are you all doing to address those risks? 

A.4. The Federal Reserve understands that the cost of compliance 

can be disproportionately greater on smaller banks when compared 

to larger institutions, as they have fewer staff available to help 

comply with additional regulations. As such, the Federal Reserve 

continues to make clear distinctions between requirements applicable to community banks and those applicable to larger institutions, 

especially those resulting from the passage of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act). Efforts to communicate these distinctions and clarify supervisory expectations for community banks include adding a statement of applicability to community banks on newly issued guidance and 

152 

6To date, the Board of Governors of the Federal Reserve System, FDIC, and OCC have issued 

two notices as announced in joint press releases on June 4, 2014, (www.federalreserve.gov/ 

newsevents/press/bcreg/20140604a.htm) and February 20, 2015, (www.federalreserve.gov/ 

newsevents/press/bcreg/20150220a.htm). 

issuance of supplemental guidance for to clarify expectations related to stress testing and implementation of the Volcker Rule and 

Basel III. Most important, new guidance aimed at community 

banks is issued only when necessary to support significant safety 

and soundness objectives. The Federal Reserve also continues to refine its supervisory program for community banks by enhancing its 

ability to risk focus community bank examinations. By placing community banks into one of three risk categories—low, medium, or 

high—based on risk information gleaned from financial reports, a 

greater proportion of resources and activities can be redirected 

from the smaller, lower risk institutions to those engaging in higher risk activities. Additionally, staff throughout the Federal Reserve System are conducting more examination work offsite, which 

can relieve some of the burden associated with the onsite examination process. 

Through interaction with the Community Depository Institutions 

Advisory Council, comprised of representatives from various segments of the national banking industry, Board members receive 

regular firsthand input on matters of importance to community 

banks. These matters will continue to be explored and addressed 

under the direction of a special subcommittee of the Board, which 

focuses on reviewing the effects of regulatory actions on community 

and regional banks because community banks continue to be an 

important part of our financial system. 

Q.5. Can you elaborate on how your review is going and share with 

us the major areas of consensus the agencies and the industry have 

found so far? 

A.5. In accordance with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA), the Federal Reserve, the other 

Federal banking agencies, and the Federal Financial Institutions 

Examination Council are conducting a review of regulations to 

identify outdated or otherwise unnecessary regulatory requirements imposed on insured depository institutions. The major categories of regulations covered in the review include: applications 

and reporting; powers and activities; international operations; 

banking operations; capital; the Community Reinvestment Act; consumer protection; directors, officers, and employees; money laundering; rules of procedure; safety and soundness; and securities. 

The agencies are soliciting comments on their regulations through 

notices in the Federal Register. 6 As explained in the March 6, 

2015, interagency letter to Senator Shelby, the agencies have decided to expand the scope of the EGRPRA review in order to be as 

inclusive as possible. Accordingly, the agencies will solicit comment 

on all of our regulations issued in final form up to the date that 

we publish our last EGRPRA notice for public comment. 

As part of the EGRPRA review process, the agencies are holding 

several outreach meetings with bankers, consumer groups, and 

other interested parties to engage individuals in a public discussion 

about the agencies’ regulations. 

153 

The agencies have conducted two outreach meetings to date in 

Los Angeles and Dallas. Additional outreach meetings are scheduled for the coming months, including: Boston on May 4, 2015; 

Kansas City on August 4, 2015; Chicago on October 19, 2015; and 

Washington, DC, on December 2, 2015. The Kansas City outreach 

meeting will focus more specifically on issues affecting rural institutions. 

Several themes have arisen so far from discussions at the outreach meetings. A recurring theme has been the question of whether the agencies could reevaluate the various thresholds and limits 

imposed in regulations that may constrain community banks and 

their lending activities. For example, community bankers in rural 

areas have noted that it can be difficult to find an appraiser with 

knowledge about the local market at a reasonable fee. Bankers 

have asked the agencies to consider increasing the dollar threshold 

in the appraisal regulations for transactions below which an appraisal would not be required, which could allow them to use a 

less-formal valuation of collateral for a larger number of loans. 

A number of community banks have also suggested reducing burden from the required quarterly filing of the Consolidated Reports 

of Condition and of Income, commonly called the Call Report. 

Working through the Federal Financial Institutions Examination 

Council, the Federal Reserve is considering ways the agencies could 

respond to industry concerns about Call Report filing requirements 

and assess the potential impact of collecting less data from banks. 

Bankers have also asked whether the agencies could review the 

statutorily mandated examination frequency for banks, which varies based on a bank’s asset size and condition, as a way to ease 

burden from frequent onsite examinations. Other bankers have 

commented that some longstanding interagency guidance may now 

be outdated and warrant a fresh look and revision. The agencies 

are still weighing these comments and will consider all the feedback received in the assessment of their regulations. 

Q.6. Can you share anything about your future plans as this review moves forward? 

A.6. We are considering the comments received through the 

EGRPRA process, as well as information obtained from the supervisory process, to undertake certain initiatives. In this regard, we 

are taking steps to tailor and improve our examination processes 

to be more efficient and effective and less burdensome on lowerrisk community banks. For instance, we are equipping our Federal 

Reserve examiners with technological tools that enable them to 

conduct more work offsite and to focus their attention on the areas 

of highest risk. With these new tools, examiners are able to conduct 

some aspects of the loan review process offsite for banks that maintain electronic loan records and have the technical capability. We 

are also seeking ways to utilize the financial information collected 

from banks to tailor the examination process for institutions with 

lower risk profiles. 

In addition to the EGRPRA review, the Federal Reserve periodically reviews its existing supervisory guidance to assess whether 

the guidance is still relevant and effective. For instance, the Federal Reserve recently completed a policy review of the supervision 

154 

programs for community and regional banking organizations to 

make sure the programs and related supervisory guidance are appropriately aligned with current banking practices and risks. The 

project entailed an assessment of all existing supervisory guidance 

that apply to community and regional banking organizations to determine whether the guidance is still appropriate. As a result of 

this review, we are likely to eliminate some guidance that is no 

longer relevant and to update other guidance for appropriateness 

to current supervisory and banking industry practices and relevance to the risks to these institutions. 

Recently, the Board issued an interim final rule and proposed 

rule to implement Public Law 113–250, which was enacted by the 

Congress and signed into law by the President in December 2014. 

Effective immediately, the interim final rule adopted by the Board 

excludes small savings and loan holding companies with less than 

$500 million in total consolidated assets that meet certain qualitative requirements from the Board’s regulatory capital requirements. This effectively places these savings and loan holding companies on equal footing with comparably sized bank holding companies that are subject to the Board’s Small Bank Holding Company 

Policy Statement (policy statement), which fosters local ownership 

of small community banks by allowing their holding companies to 

operate with higher levels of debt than would otherwise be permitted. 

On April 9, the Board issued a final rule to raise the asset size 

threshold from $500 million to $1 billion for determining applicability of the policy statement, and expand its scope to include savings and loan holding companies. Holding companies subject to the 

policy statement are not subject to the Board’s regulatory capital 

requirements, although regulatory capital requirements will continue to apply at the depository institution level. 

In an action related to the expansion of the policy statement’s 

scope, the Board took steps to relieve regulatory reporting burden 

for bank holding companies and savings and loan holding companies that have less than $1 billion in total consolidated assets and 

meet the qualitative requirements of the policy statement. Specifically, the Board eliminated quarterly and more complex consolidated financial reporting requirements (FR Y-9C) for these institutions, and instead required parent-only financial statements (FR Y9SP) semiannually. The Board also eliminated all regulatory capital data items that were to be reported on the FR Y-9SP for savings and loan holding companies with less than $500 million in 

total consolidated assets. The Board made these changes effective 

on March 31, 2015, and immediately notified the affected institutions, so they would not continue to invest in system changes to report revised regulatory capital data for only a short period of time. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM TONEY BLAND 

Q.1. According to the OCC, the Federal banking agencies have 

agreed to undertake a comprehensive review of all Call Report 

items and schedules. When will this review be completed? Who 

155 

from your agency is in charge of this review? Will this review result in a formal, publicly available report? 

A.1. At the December 2014 meeting of the Federal Financial Institutions Examination Council (FFIEC), Council members directed 

the Council’s Task Force on Reports (Task Force) to undertake the 

Task Force’s recommendations to address concerns raised by bankers about the burden of preparing the Consolidated Reports of Condition and Income (Call Report). This formal initiative is intended 

to identify potential opportunities to reduce burden associated with 

the Call Report requirements for community banks. 

The comprehensive review of all Call Report items and schedules 

is one of the actions under this initiative. Section 604 of the Financial Services Regulatory Relief Act of 2006 requires the Federal 

banking agencies to ‘‘review the information and schedules that are 

required to be filed by an insured depository institution’’ in the Call 

Report. The deadline for the next statutorily mandated review is 

the fourth quarter of 2017. The Task Force and the agencies have 

accelerated the start of this review of the existing Call Report 

items and schedules to 2015. This review is planned for completion 

by the fourth quarter 2017 statutory deadline. 

In conducting the comprehensive review, the Task Force and the 

agencies will require Call Report users at the agencies to provide 

more robust justifications than in previous reviews. Users would 

need to explain how they use each data item, the frequency with 

which it is needed, and the population of institutions from which 

it is needed. Data items or schedules for which users provide insufficient justification for continued collection from some or all institutions in all four quarters would be candidates for elimination, less 

frequent collection, or the creation of a new, or an upward revision 

of an existing, reporting threshold, which can be size-and/or activity-based. Call Report schedules would be prioritized for review 

over the next 2 years based on their perceived burden. Burden-reducing Call Report changes identified as a result of this review 

would be proposed on a flow basis annually as they are identified 

rather than waiting until the completion of the entire comprehensive review. 

Another action under this initiative, at the request of the Council, is that the Task Force will develop a set of guiding principles 

as the basis for evaluating potential additions or deletions of data 

items to and from the Call Report. 

The Office of the Chief Accountant is in charge of the review for 

the OCC. The agencies will publicly propose to implement burdenreducing Call Report changes identified as a result of this review 

in joint Federal Register notices that will be issued for comment in 

accordance with the Paperwork Reduction Act. 

Q.2. Kansas Fed President, Esther George, said at a 2014 conference that the community bank ‘‘business model is one in which 

the incentives of banks are aligned with outcomes that benefit their 

customers and the economy. When incentives are aligned in this 

way, the need for an ‘ability to repay rule.’ for example, seems unnecessary.’’ 

Do you agree that banks that hold mortgages on portfolio have 

a vested interest to perform an analysis of a customer’s ability to 

156 

repay irrespective of whether such mortgage meets the requirements of a ‘‘Qualified Mortgage’’? 

Do you agree that mortgages held on portfolio should be afforded 

a ‘‘Qualified Mortgage’’ status? If not, why not? 

A.2. Regardless of whether a residential mortgage loan is a Qualified Mortgage (QM) or non-QM, and whether or not it is held in 

a bank’s portfolio, the OCC expects institutions to underwrite residential mortgage loans in a prudent fashion and address key risk 

areas in their residential mortgage lending, including loan terms, 

borrower qualification standards, loan-to-value limits, and documentation requirements. Institutions also should apply appropriate 

portfolio and risk management practices. Our expectations are outlined in the OCC’s Comptroller’s Handbook booklet, ‘‘Mortgage 

Banking’’. 

Q.3. In your testimony you acknowledged that the Volcker Rule 

contains no exemption for community banks, and that the regulatory burden is not justified by the risk these institutions present. 

The OCC has drafted a legislative proposal to exempt from the 

Volcker Rule banks with total consolidated assets of $10 billion or 

less. What is the basis for the $10-billion threshold? Would a different threshold or criteria be more appropriate? 

A.3. The risks to the financial system of proprietary trading and 

owning or sponsoring private equity and hedge funds addressed by 

the Volcker Rule are far more significant when larger institutions 

engage in these activities than they are if community banks with 

assets of $10 billion or less do so. However, the Volcker Rule contains no exemption for community banks. Accordingly, community 

banks need to ascertain whether their activities are covered by the 

Volcker Rule in order to understand whether they have any compliance obligations. Making this determination may require them to 

expend money and resources—for example, by hiring attorneys and 

consultants. 

The OCC’s proposed exemption applies to community banks with 

$10 billion or less in assets that do not have a holding company, 

as well as community banks that are part of a small holding company of $10 billion or less in assets. Small banks that are part of 

a larger holding company are not eligible for the exemption to ensure that large banking organizations are not able to take advantage of this exclusion by moving activities covered by the Volcker 

Rule to a small bank controlled by the organization. Exempting 

community banks from the Volcker Rule would relieve them of this 

regulatory burden and would allow the Federal bank regulatory 

agencies to more appropriately focus examination resources where 

the supervisory concern is greatest. The $10 billion threshold in the 

OCC’s proposed exemption is consistent with the thresholds for 

small-size banks in the Dodd-Frank Act. Applying this method, we 

estimate that the amendment would exempt more than 6,000 small 

banks from the requirement to comply with the regulations implementing the Volcker Rule. 

Q.4. The OCC also recommended increasing the asset-size threshold from $500 million to $750 million to determine whether a community bank can qualify for an examination every 18 months. 

What is the basis for the $750-million threshold? Would a different 

157 

threshold or criteria be more appropriate? Would you support allowing any institution to petition to qualify for an exam every 18 

months? 

A.4. The $750 million asset-size threshold will allow the Federal 

banking agencies to focus their supervisory resources on those 

small depository institutions that may present capital, managerial, 

or other issues of supervisory concern, while simultaneously reducing the regulatory burden on small, well-capitalized and well-managed institutions. Under current law, asset size is not the only criterion for an institution to qualify for an 18-month examination 

cycle. The Federal banking agencies must also consider whether 

the institution is well-capitalized and well-managed, the composite 

rating of the institution, whether the institution is subject to an enforcement proceeding or order, and whether the institution has recently undergone a change in control. Setting the threshold at $750 

million would allow more than 400 additional institutions to qualify for an 18-month on-site examination cycle if they meet these additional statutory criteria. The OCC’s proposal is consistent with 

the incremental approach that Congress has taken over the years 

when increasing the threshold amount of assets that would permit 

a small depository institution to qualify for the 18-month examination cycle. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM TONEY BLAND 

Q.1. The NCUA’s testimony recommended a legislative change to 

provide the agency with examination and enforcement authority of 

third party vendors. In April 2013, the OCC testified that it would 

recommend a legislative change that would facilitate the OCC’s 

ability to examine an independent contractor that does significant 

work for a bank and to take enforcement actions directly against 

independent contractors that engage in wrongdoing. Does OCC still 

support this type of legislative change? 

A.1. Yes, the OCC continues to support the legislative changes that 

we recommended in April 2013, and that we subsequently shared 

with the Senate Banking Committee and the House Financial Services Committee in July 2013. 

The language we drafted allows a Federal banking agency (FBA) 

to take enforcement action against an independent contractor that 

participates in the conduct of the affairs of, or conducts the business of, an insured depository institution, if the FBA can establish 

grounds to take such action under section 8 of the Federal Deposit 

Insurance Act (FDIA), 12 U.S.C. 1818. It also clarifies that an independent contractor participates in the conduct of the affairs of, or 

conducts the business of, an insured depository institution by performing services for the institution. Finally, the amendment clarifies that ‘‘unsafe or unsound practice’’ means ‘‘any action, or lack 

of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, 

would be abnormal risk or loss or damage to an institution, its 

shareholders, or the Deposit Insurance Fund.’’ 

The amendment would be useful in cases where an insured depository institution has outsourced significant activities to an indeVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00161 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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pendent contractor that engages in unsafe or unsound practices in 

providing services to the institution. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM TONEY BLAND 

Q.1. The first Economic Growth and Regulatory Paperwork Act 

(EGRPRA) review submitted to Congress in 2007 States: ‘‘Besides 

reviewing all of our existing regulations in an effort to eliminate 

unnecessary burdens. the Federal banking agencies worked together to minimize burdens resulting from new regulations and 

current policy statements as they were being adopted.’’ The report 

submitted to Congress specifically discussed consumer financial 

regulations, anti-money laundering regulations, and recently adopted rules. However, included in the Federal Register for this 10-year 

review are two footnotes that suggest that CFPB rules, anti-money 

laundering rules, and new regulations that have recently gone into 

effect will not be included in the review. 

Rather than predetermine which rules should or should not be 

reviewed, shouldn’t the agencies review all existing regulations and 

eliminate or recommend statutory changes that are needed to 

eliminate any regulatory requirements that are outdated. unnecessary, or unduly burdensome? 

A.1. The EGRPRA statute (12 U.S.C. 3311) requires the agencies 

to divide their regulations into categories and issue notices soliciting comment on those categories at regular intervals. Consistent 

with the purposes of the EGRPRA review, the agencies initially excluded newly issued regulations, those that had not yet taken effect, and those that had yet to be fully implemented. However, in 

order to be as inclusive as possible, the agencies intend to solicit 

comment on any of their regulations that have been finalized up 

to the date that we publish our last notice for public comment and 

to report back to Congress on all regulations. 

Q.2. Does Congress need to update the EGRPRA statute to include 

the CFPB to ensure the review is comparable in scope to what was 

reviewed last time? 

A.2. When Congress established the CFPB and transferred authority to issue rules under the enumerated consumer laws, it required 

the CFPB to undertake a review of its regulations at least once 

every 5 years. Currently, the agencies participating in the 

EGRPRA review will continue to forward any comments on CFPB 

rules received during the EGRPRA review to the CFPB for its consideration. 

Q.3. If not, what specific steps will be taken to ensure that the review will include all existing regulations, including consumer financial regulations, anti-money laundering rules, and new regulations? 

A.3. Congress transferred the authority to issue many consumer financial regulations to the CFPB, which is not required to undertake the EGRPRA review. Anti-money laundering rules are issued 

by the Financial Crimes Enforcement Network, which is also not 

required to undertake the EGRPRA review. During this decennial 

EGRPRA review, the Federal banking agencies will continue to forVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00162 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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ward comments on rules not issued by the Federal banking agencies to the appropriate agencies for their consideration. 

Q.4. A main criticism of the last review was that the banking regulators subsequently repealed or eliminated only a few substantive 

regulations. To ensure that the current review has a more successful outcome, will your agencies set up a Government Web site that 

posts the feedback and list the 10 most burdensome regulations 

identified? 

A.4. At the beginning of the EGRPRA review process, the Federal 

banking agencies established a dedicated Web site for the EGRPRA 

review, http://egrpra.ffiec.gov, which allows members of the public 

to submit comments and view all comments received during the 

EGRPRA process. In addition to the Web site, the agencies are 

Iive-streaming the EGRPRA outreach meetings to allow members 

of the public to hear and view comments made at those meetings. 

The agencies also intend to make public the report to Congress required by the EGRPRA statute that will identify unduly burdensome regulations. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM TONEY BLAND 

Q.1. Last Congress, legislation was introduced in the House (H.R. 

2673, 113th Congress) that would provide financial institutions 

protection from the liability associated with Section 1411 of the 

Dodd-Frank Act, so long as the loan appears on the institution’s 

balance sheet. I understand that the CFPB partially addressed this 

issue for some institutions through its Notice of Proposed Rulemaking. Please answer the following questions related to the proposed legislation: 

Do you believe the proposed legislation would have a material 

impact on the safety and soundness of covered financial institutions? 

If so, do you believe the current supervisory process and capital 

requirements are sufficient to address any perceived risks that may 

come from this change? 

Do you have additional comments, concerns, or proposed changes 

to the legislation? 

A.1. Sections 1411 and 1412 of the Dodd-Frank Act created new 

section 129C of the Truth in Lending Act (TILA), which requires 

lenders to assess consumers’ ability to repay home loans before extending credit. Borrowers may be able to recover actual and special 

statutory damages for violations of section 129C and in foreclosure 

actions, may assert such violations as a matter of defense by 

recoupment or setoff. However, Section 129C also provides creditors a safe harbor and a presumption of compliance with the ability-to-repay requirement for a ‘‘qualified mortgage’’ (QM). The 

CFPB has implemented section 129C through amendments to Regulation Z, codified at 12 CFR Part 1026.43. 

H.R. 2673, the Portfolio Lending and Mortgage Access Act, from 

the 113th Congress would amend TILA to provide that a QM includes all covered mortgage loans that a creditor holds in portfolio. 

160 

Regardless of whether a residential mortgage loan is a QM or 

non-QM, the OCC expects institutions to underwrite residential 

mortgage loans in a prudent fashion and address key risk areas in 

their residential mortgage lending, including loan terms, borrower 

qualification standards, loan-to-value limits, and documentation requirements. Institutions also should apply appropriate portfolio 

and risk management practices. Our expectations are outlined in 

the OCC’s Comptroller’s Handbook booklet, ‘‘Mortgage Banking’’. 

Q.4. The Bipartisan Policy Center recently suggested creating a 

pilot program for a ‘‘consolidated examination force’’ for the institutions subject to supervision by all three of the Federal prudential 

regulators. Such a program would force coordination between the 

agencies and minimize the costs associated with examinations for 

banks. It appears that the Federal Financial Institutions Examination Council (FFIEC) could provide the vehicle to run the pilot program. Do you believe your agencies currently have the statutory 

authority to undertake such a joint pilot program through FFIEC? 

If so, why haven’t the agencies taken steps to initiate such a pilot 

program? 

A.4. The OCC is committed to fostering strong collaborative relationships with not only the other two Federal prudential regulators, the Federal Deposit Insurance Corporation (FDIC) and the 

Federal Reserve System (FRB), but also with the Consumer Financial Protection Bureau (CFPB) and international supervisors. This 

commitment to collaboration and coordination is reflected in the 

strategic initiatives that Comptroller Curry set forth for the agency 

and has been incorporated into the OCC’s strategic plan and the 

business plans and performance goals for our supervisory lines of 

business and their managers. Our goal in such collaborative efforts 

is not only to minimize costs and burden on supervised institutions 

but also to enhance the effectiveness and efficiency of our supervision programs, ensure clear and consistent communication to 

banks’ boards of directors and senior management, and avoid any 

supervisory gaps. 

The Federal banking agencies have a long history of collaboration on key rulemakings and policy guidance. Indeed, most significant regulatory rules are promulgated on a joint, interagency basis. 

There is also strong collaboration at the local field level among our 

agencies’ examiners and district offices. To further interagency coordination where we have shared jurisdiction, we have developed 

and implemented processes to share our supervisory strategies 

with the FDIC and FRB and collaborate with these agencies on 

safety and soundness examination programs for banks in our large 

and midsize bank programs. 

These steps include sharing supervisory strategies and discussing key supervisory priorities with the FDIC and FRB for their 

input and feedback, meeting with local FRB and FDIC teams to 

discuss our supervisory plans to identify opportunities to leverage 

each other’s planned work. As part of these efforts, we encourage 

and support efforts to collaborate on specific exams. Such collaboration can run the gamut from providing input to the scope of an examination to jointly conducting examinations. One prominent example of where we have coordinated specific examination work is 

161 

the collective work programs we have developed to assess large 

banking organizations’ compliance with the advanced approaches 

standards for the new capital rules. We likewise share relevant supervisory work products, such as Reports of Examination and Supervisory Letters, and access to our electronic record retention systems. We also consult on Matters Requiring Attention and other 

enforcement actions that affect organization structure, strategic direction, executive personnel, or have a material impact on the entity under the supervision of the other agency. Similar coordination 

efforts take place with the CFPB on consumer compliance related 

examination work. 

We believe the processes we have implemented and that we continue to refine allow us to achieve the benefits of coordination and 

collaboration envisioned by the Bipartisan Policy Center, without 

the costs that a more structured, centralized process administered 

through the FFIEC would entail. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM TONEY BLAND 

Q.1. During the hearing, you stated, ‘‘But I would say that the 

OCC, as part of our normal practice, we look at on an ongoing basis 

whether rules are appropriate in terms of still relevant, and we 

will make changes, if they need to, without waiting for the next 

EGRPRA process.’’ Within your respective agency’s jurisdiction, 

please provide the number and a list of regulations your agency 

eliminated or changed due to irrelevance or undue burden since 

2006 along with a brief description of each. 

A.1. The following is a listing of regulations that the OCC has 

eliminated or modified to mitigate burden. 

162 

163 

Q.2. Within your respective agency’s jurisdiction, please provide 

the total number and a list of new rules and regulations that have 

been adopted since the last EGRPRA review along with a brief description of each. 

A.2. A listing of the rules finalized by the OCC from Jan. 1, 2007, 

is attached (see Attachment 1). Some of these regulations implemented changes as a result of the last EGRPRA review process. 

Some were strictly ministerial such as the annual inflation adjustment for CRA determinations. 

164 

165 

166 

167 

168 

169 

170 

171 

172 

173 

174 

Q.3. During the last EGRPRA review, Federal banking agencies 

hosted a total of 16 outreach sessions around the country. To date 

only 6 outreach sessions have been announced. During this current 

EGRPRA review, how many total outreach meetings will be held 

and will there be at least 16 meetings as before? 

A.3. To date, we have planned a total of six outreach meetings. 

Three have already taken place in Los Angeles on December 2, 

2014, Dallas on February 4, 2015, and Boston on May 4. Our next 

outreach meetings are scheduled for Kansas City on August 4, Chicago on October 19, and Washington, DC, on December 2. These 

outreach meetings have, and will include a larger number of participants then during the last EGRPRA review. The previous outreach meetings were planned as smaller gatherings and included 

50 or so bankers or consumer and community groups. The current 

outreach meetings are open to as many as 200 participants. In addition, the agencies are leveraging technology to broaden their 

reach to interested parties. For example, the current outreach 

meetings are all live-streamed on the EGRPRA.gov Web site, so 

that individuals throughout the country may watch and listen to 

the proceedings at no cost. Additionally, at our rural outreach 

meeting in Kansas City, bankers and consumer and community 

groups will have the opportunity to participate and provide comments via a two-way audio link. This technology was not available 

during the last EGRPRA process. 

Q.4. To date only one EGRPRA outreach meeting, focusing on rural 

banking issues, has been scheduled in Kansas City. How many 

more rural banking outreach meetings do you plan on scheduling? 

Given the diversity of rural banking needs around the country, in 

what other geographic regions would those meetings take place? 

A.4. We have scheduled one outreach meeting focused on rural 

banking issues in Kansas City on August 4, 2015. However, in addition to the in-person program and the live-stream on 

EGRPRA.gov, this meeting will support bankers’ and consumer and 

community groups’ participation and comments via a two-way 

audio link. The agencies believe that this will allow rural bankers 

and other interested parties from around the country to provide 

their input in the most cost-effective manner. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM TONEY BLAND 

Q.1. Some are very concerned that implementing certain Basel III 

capital requirements relating to mortgage servicing could substantially alter business models adopted by banks in Nebraska and 

elsewhere designed to complete certain mortgage services on their 

own behalf and for other banks. 

Have you completed or otherwise reviewed analyses that show 

whether the adoption of these requirements would affect mortgage 

servicing operations? 

If so, have these analyses shown that smaller institutions would 

limit mortgage servicing operations as a result? 

What entities are likely to perform the mortgage servicing operations instead? 

175 

A.1. The OCC, the FRB, and the FDIC (together, the agencies) took 

careful action to ensure the new capital rules appropriately reflects 

the risks inherent in banking organizations’ business models. Consistent with the treatment of intangible assets generally, the inclusion of Mortgage Servicing Assets (MSAs) in regulatory capital has 

long been subject to strict limitations in the United States because 

of the high level of uncertainty regarding the ability of banking organizations to realize value from these assets, especially under adverse financial conditions. The agencies believe that the rules’ 

treatment of MSAs contributes to the safety and soundness of 

banking organizations by mitigating against MSA market value 

fluctuations that may adversely affect banking organizations’ regulatory capital bases. 

As part of the rulemaking process, the agencies considered the 

potential impact of the regulatory capital rules on banking organizations subject to the requirements. The impact analysis was performed using regulatory reporting data, supplemented by certain 

assumptions and estimates if data needed for certain calculations 

were not available. 

While the agencies conducted analyses that incorporated a range 

of assumptions, the general conclusion of each agency was that the 

vast majority of banking organizations, including community banking organizations, already have capital sufficient to meet the minimum requirements of the regulatory capital rules on a fully 

phased-in basis. They also have capital sufficient to exceed the 

fully phased-in capital conservation buffer, such that they would 

not face restrictions on distributions and certain discretionary 

bonus payments under the rule. With respect to the small number 

of banking organizations that currently have concentrations in 

MSAs that exceed the limits in the capital rules, we note the capital rules provide lengthy transition periods that should allow these 

firms sufficient time to modify their capital structure or adjust 

their business models to conform to the capital rules. The capital 

rules also maintain the risk-weighting from the prior risk-based 

capital rule for MSAs that are not deducted from regulatory capital 

during the transition period. Additionally, in response to comments, the agencies removed the proposed 90 percent fair value 

limitation on MSAs that were included in regulatory capital. Previously, the general risk-based capital rules included that treatment in conformance with section 475 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). However, 

FDICIA permits the agencies to remove that limitation if the agencies make a joint determination that its removal would not have an 

adverse effect on the deposit insurance fund or the safety and 

soundness of insured depository institutions. 

Finally, to the extent some banking organizations pare back their 

mortgage servicing operations, such business would likely shift to 

other mortgage servicing firms that have the capacity to absorb the 

additional processes. 

176 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM TONEY BLAND 

Q.1. One of the most consistent things I hear from Kansas banks 

and credit unions is that they are continually being required to 

comply with new regulations that were never intended to affect 

them. I am in the process of drafting a small lending regulatory relief package along with Sen. Tester that seeks to address some of 

these problems by clarifying that small lenders are very different 

than the regulations’ intended targets. Do you believe that some of 

the rules intended for our most complex financial institutions have 

trickled down to community banks? If so, what specific portions of 

the law under your individual area of jurisdiction have you identified as problematic for small lenders? 

The burden of regulation does not necessarily come from a single 

regulation, but the aggregate burden of regulations, guidance, and 

size-inappropriate best practices. The burden grows when small 

lenders are required to comply with several new rules concurrently. 

In isolation, the impact of one regulation may appear small, but 

when added to the growing list of compliance requirements, the 

cost is skyrocketing. What are you doing to identify and reduce aggregate burden? 

A.1. As I noted in my written testimony, the OCC recognizes that 

community banks have different business models and more limited 

resources than larger banks. Therefore, where we have the legal 

flexibility, we factor these differences into the rules and guidance 

we issue, and we tailor our supervision to each bank’s size and 

complexity. This allows us to avoid having the rules and provisions 

intended for the most complex banks trickle down to community 

banks. 

The OCC has sought to minimize burden for community banks 

when developing regulations. For example, in revising the regulatory minimum capital rules we limited the application of many 

new provisions, including the supplementary leverage ratio and the 

countercyclical capital buffer, to the largest banking organizations 

that engage in complex or risky activities. In addition, to address 

the significant concerns expressed by community bankers, the 

agencies’ final rules retained the previously existing capital treatment for residential mortgage exposures. Similarly, while all banks 

need to maintain adequate liquidity, community banks do not need 

the structured, explicit standards for liquid assets required for the 

largest banks. Therefore, we excluded community banks from our 

liquidity coverage rule. More recently, the agencies’ risk retention 

rule allows all qualifying mortgages (QM) under the CFPB’s mortgage rules to qualify as qualified residential mortgages (QRM), 

which should minimize the rule’s impact on community banks that 

engage in securitization activities. 

We also take steps to help community banks transition to new 

regulatory requirements. For example, the new capital standards 

are phased-in to give community banks more time to come into full 

compliance with the new rules. We also offer webinars and easyto-understand, quick reference guides on new rules that may affect 

a significant number of community banks. Our recent guides have 

covered the banking agencies’ new capital rules and the CFPB’s 

new residential mortgage rules. 

177 

Q.2. The EGRPRA process was brought about to identify redundant or excessively burdensome regulation. I think the EGRPRA 

process has the potential to be an important tool to begin rebuilding some semblance of trust between Federal regulators and the financial institutions they oversee. However, the first iteration revealed little agency will to utilize the process. Resulting reductions 

in regulatory burden were, in a word, insignificant. Various 

EGRPRA listening sessions have been conducted across the country. What is the most consistent message you are hearing from participants? What are you doing differently in the current EGRPRA 

review, and what actual, tangible relief can our smallest lenders 

expect? 

A.2. We take the EGRPRA mandate very seriously, as demonstrated by the attendance of the principals and senior staff from 

all three Federal banking agencies at the EGRPRA outreach meetings. We are committed to providing regulatory relief where possible, consistent with the safe and sound operation of the institutions we regulate. 

The most consistent message we have heard so far in both written comment letters and at the outreach meetings is that community banks are finding it difficult to compete in this regulatory and 

economic environment. With respect to specific issues, community 

banks have noted, for example, that Call Reports should be simplified and revised to reduce duplicative reporting requirements; 

asset-size thresholds in our rules should be raised to account for inflation; and the asset-size threshold for the small bank examination 

cycle should be raised. Unlike the last EGRPRA review, we will not 

wait until the EGRPRA process is complete to implement changes 

at the OCC where a good case is made for regulatory relief. We will 

review all of the recommendations we receive, and where it is clear 

that a regulation is outdated, unnecessary, or unduly burdensome, 

we will act where we have the authority to do so. 

Q.3. Major changes to mortgage disclosures and timing requirements are set to go into effect on August 1st of this year. These 

regulatory changes will impact every participant in the mortgage 

lending process and every consumer mortgage transaction. The financial institutions that are still engaged in residential mortgage 

lending are making every effort to be ready by the August deadline. I am concerned that, if poorly crafted or hastily implemented, 

these additional rules will result in fewer borrowing options in 

communities I represent as small lenders exit the business altogether. Are your respective examiners already being trained on 

how to assess these changes over the course of their reviews. Is 

your agency prepared to be flexible in implementing these new 

rules while small institutions struggle to implement these changes 

effectively? 

A.3. The OCC works with other members of the FFIEC toward the 

development of uniform principles, standards, and guidance to 

achieve consistency in the supervision of financial institutions. To 

that end, the FFIEC’s Task Force on Consumer Compliance has approved interagency examination procedures to reflect the DoddFrank Act amendments to the TILA and Real Estate Settlement 

Procedures Act (RESPA). In addition, the task force members colVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00181 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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laborate on examination tools and training. The OCC is responsible 

for supervising the compliance of national banks and Federal savings associations with total assets of $10 billion or less with the 

TILA and RESPA. When the CFPB’s mortgage rules became effective, OCC examiners focused their efforts on discussing the changes 

with bank management teams and reviewing the new policies and 

procedures institutions implemented to comply with these new regulatory requirements. When the OCC assesses compliance with the 

new rules, we will take a reasonable approach with respect to our 

supervisory response and take into consideration a bank’s progress 

in implementing the rules. The OCC continues to update and enhance our training for examiners on the interagency examination 

procedures developed by the Task Force on Consumer Compliance 

of the FFIEC, as well as the other regulations that implement the 

Dodd-Frank Act amendments to the TILA and RESPA. The OCC 

also intends to work collaboratively with the other prudential regulators and the CFPB to devise and share training resources. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM TONEY BLAND 

Q.1. I remain concerned about consolidation in the industry. In a 

State like Montana we had 65 community banks before the crisis, 

and as of yesterday we had 54. That means a sixth of our institutions have either gone out of businesses or consolidated with some 

of the larger institutions. I’m concerned that if consolidation continues the whole nature of small institutions being able to serve, 

particularly rural communities, is going to disappear. 

Can you tell me what trends you’ve seen with respect to community bank consolidation since the crisis and how this rate compares 

to before the crisis? 

A.1. Before describing recent consolidation activity, we note that 

consolidation in the banking industry has been steadily occurring 

since the mid-1980s, thus reflecting a long-term trend. That is, the 

number of banks and banking organizations, including smaller 

ones, has been steadily declining for the last 30 years. 

Three different types of events account for most of the net 

change in the number of banks over time. One is mergers. The second is failures. The third is de novo entry or the opening of newly 

chartered institutions. The change in the number of community 

banks over time will also be affected by the migration of surviving 

institutions into the larger non-community bank group. 

For purposes of the analysis below, the OCC looked at trends at the bank (rather than the holding company level) and used a $1 

billion size threshold (in 2009 dollars) to define community banks. 

We also chose year-end 2007 to demarcate two time intervals, since 

recession-related bank failures did not start to increase until 2008. 

The 7 years ending on year-end 2007 (2001–2007) constitute the 

pre-crisis period. The following 7 years (2008–2014) are the postcrisis period. 

Consolidation During the Pre-Crisis Period 

Examining the three most important types of structural change 

individually is useful because they have differing causes and their 

179 

contribution to the overall pace of consolidation can vary over time. 

At the start of the pre-crisis period, a total of 9,904 banks and 

thrifts existed in the United States. Of this total, 9,282 or 93.7 percent of all banks met the community bank definition used in this 

analysis. The asset share of community banks was 16.2 percent of 

total bank assets at that time. 

As has been the case in the years prior to 2001, mergers accounted for much of the consolidation immediately prior to the crisis. For the 7-year period ending in 2007, 2,312 banks merged out 

of existence and 2012 (87.0 percent) were community banks. Relatively good economic conditions kept failures relatively low during 

the pre-crisis interval. A total of 21 banks failed and 18 of these 

were community institutions. Community bank numbers were supplemented by the 1,034 new banks that began operations in the 

pre-crisis period. Of the surviving 7,186 banks meeting the community bank definition at the start of the pre-crisis period, 302 exceeded the size threshold in 2007 and so were no longer counted 

as part of the community bank group. 

By the end of the pre-crisis period, the number of banks fell to 

8,534 (a 7-year change of -1,370). The number of community banks 

declined to 7,856 (a 7-year change of -1,426). Community banks 

still accounted for 92.1 percent of all banks at year-end 2007. The 

asset share of community banks also declined by about 5 percentage points over the pre-crisis period, from 16.2 to 11.4 percent. 

Consolidation in the Post-Crisis Period 

During the post-crisis period the number of all banks and community banks continued to fall. The number of all banks declined 

by 2,025 (-23.7 percent) from 2007–2014 while the number of community banks fell by 1,987 (-25.3 percent). Still in 2014, community 

institutions represented 90.2 percent of all banks at that time. The 

asset share of community banks decreased from 11.4 percent to 9.5 

percent over the post-crisis period. But this decline of 1.8 percentage points is roughly half the asset share decline over the pre-crisis 

period (-4.8 percentage points). 

Mergers continued to be the most prominent driver of consolidation. A total of 1,577 institutions merged during the post-crisis period and 1,417 of these were community banks. Not surprisingly, 

failures were considerably higher after 2007 than they were in the 

pre-crisis period. There were 506 bank failures from 2008–2014 

and 442 were community banks. Approximately 145 new banks 

were chartered in the post-crisis period so there was much less of 

an offset to the decline in community banks stemming from mergers and failures. An additional 207 banks that met the community 

bank definition used for this analysis in 2007 survived until 2014 

but had assets above the $1 billion threshold at the end of the postcrisis period and so contribute to the measured decrease in community banks. 

Q.2. Why do you think we are seeing this in the industry? 

A.2. A number of different factors have contributed to the banking 

consolidation and community bank decline evident since 2000. The 

elimination of geographic barriers to bank expansion, especially 

interstate expansion, in the mid-90s fueled merger activity. Banks 

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merged to diversify geographically and reduce risk, to become larger and so lower costs through the realization of size-related economies, and to enter attractive new markets through the purchase of 

an existing franchise instead of the more expensive route of starting from scratch. Multibank holding companies also merged subsidiary banks that they already owned to lower costs. The removal 

of these geographic barriers also exposed banks to increased competition from more efficient organizations pressuring relatively inefficient ones to sell out. Changes in information processing and 

telecommunications technology also allowed out-of-market banks 

and nonbank firms to compete in local markets without having a 

significant brick-and-mortar presence. Attractive merger offers also 

induced some bankers to sell out to realize value for their shareholders. Bankers in rural markets also might be motivated to sell 

out due to slower rates of population and economic growth in nonurban areas. 

The surge in failures during the post-crisis period contributed to 

consolidation after 2007. The severe recession, commercial real estate exposures and the large number of relatively vulnerable immature banks opened in the pre-crisis period contributed to the failure 

wave. The marked decline in new bank charters in the post-crisis 

period also promoted consolidation over the 2008–2014 period. Profit expectations of potential new bank organizers were undoubtedly 

adversely affected by the deep lengthy recession. 

Q.3. Are you seeing a difference in consolidation in urban areas vs. 

rural areas? 

And specifically, what impact does this consolidation have on 

rural parts of the country? 

A.3. Consolidation is also evident in rural markets over both the 

pre- and post-crisis periods but the data show that community 

banks continue to play an important role in these markets in 2014. 

In the analysis below a rural market is defined as a county that 

is not part of either a metropolitan or micropolitan statistical area. 

There are more than 1,300 such markets in the United States. On 

their financial reports, banks report consolidated data only for 

their headquarters location and so a bank is considered rural if its 

headquarters is located in a rural county. 

Consolidation in Rural Markets During the Pre-Crisis Period 

Virtually all of the banks in rural markets meet the community 

bank definition used here and so all of the discussion will focus exclusively on community bank consolidation. At the end of 2000, 

2,541 community banks, accounting for $192.4 billion in total assets, were headquartered in 1,057 different rural markets. These 

community banks represented 27.4 percent of all community banks 

existing at this time and held 15.9 percent of total community bank 

assets. 

During the pre-crisis period, 401 rural community banks disappeared through mergers and just five failed. Only five new banks 

were chartered in rural markets from 2001–2007 out of the industry total of 1,034. Thirteen of the 2,000 cohort of community banks 

survived in 2007 but exceeded the $1 billion asset threshold and 

so drop out of the community bank group. At the end of 2007, 2,097 

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community banks were headquartered in rural markets and accounted for roughly the same percentages of the total number and 

total assets of community banks that they did in 2000. 

Consolidation in Rural Markets During the Post-Crisis Period 

During the post-crisis period, 274 rural community banks 

merged. A total of 45 rural community banks failed in the 7 years 

after 2007. Given that 2,097 rural community banks existed in 

2007, this implies a failure rate of 2.1 percent. The comparable failure rate for all community banks over this period is 5.6 percent 

(442 failures divided by 7,856 community banks existing in 2007) 

which indicates that urban community bank failure rates were 

higher than they were for rural community banks. As in the precrisis periods only a handful (six) of new banks were chartered in 

rural markets accounting for 4 percent of all new banks opened 

after 2007. A total of 17 of the 2007 cohort of community banks 

survived until 2014 but grew out of the community bank group. 

At the end of 2014, 1,725 rural community banks continued to exist with total assets of $273 billion. These numbers represented 

29.4 percent of all community banks and 18.4 percent of all community bank assets in 2014, which were both slightly higher than 

the comparable figures in 2007. Community banks are 

headquartered in 880 different rural markets in 2014. The number 

of community banks in rural markets fell by 372 during the postcrisis period. 

One disadvantage in using data from bank financial reports to 

analyze changes in consolidation at the local level is that the information does not reveal the extent of bank operations in all of the 

geographic markets where they operate. This lack of detail is important because most banks operate in more than a single geographic area and it is not unusual that significant percentages of 

assets and income come from offices outside the locality they are 

headquartered. There is another data source called the Summary 

of Deposits (SOD) produced annually by the FDIC which can provide additional insight on consolidation in local markets. This data 

shows the geographic location of each bank and thrift office in the 

United States on June 30 of each year along with the deposits in 

that office. In particular, SOD data can show the percentage of deposits in local markets controlled by institutions that are not local 

community banks. One reason observers are concerned about the 

impact of consolidation on community banks is the possibility that 

such institutions will be acquired or replaced in local markets by 

larger banks that are headquartered elsewhere. The presumption 

is that these larger institutions will be unwilling or unable to serve 

customers in rural markets. 

With SOD data it is possible to measure the extent to which 

bank affiliates of holding companies headquartered out-of-State 

control deposits in rural (or non-rural) markets in each year and 

track how this indicator changes over time. SOD data for the year 

2000, shows at least one out-of-State holding company had an office 

in 685 of the 1,339 rural markets at that time. The average aggregate deposit market share of these companies was 18.1 percent and 

the median market share was just 2.5 percent. In 2007, this type 

of institution had at least one office in 734 of the 1,334 rural marVerDate Nov 24 2008 13:26 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00185 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\02-10 REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT
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kets. The average deposit share was slightly higher at 18.7 percent 

and the median share had risen to 6.9 percent. Using the most recent 2014 report, out of State holding companies had offices in 715 

rural markets (out of 1,313 total), and both their average (17.7 percent) and median (5.4 percent) deposit share were lower in 2014 

than they were in 2007. This finding is consistent with recent 

trends in office closures and sales by larger banking organizations 

outside the urban markets where most of their offices are concentrated. So this evidence supports the conclusion that community 

banks are still able to compete effectively against larger, nonlocal 

competitors in rural markets. 

Q.4. Community Institution Viability—What do you consider to be 

the biggest threat to small institutions livelihood and what are you 

doing to address those risks? 

A.4. Strategic risk remains the top risk for midsize and community 

banks. Banks continue to face difficult choices to meet earnings 

targets and keep pace with competition. We have communicated to 

OCC examiners the need to assess banks’ strategic decision making 

and execution processes to determine if plans are well researched, 

realistic, and supported by appropriate expertise and risk management infrastructures. We have also discussed this strategic risk in 

our semi-annual risk perspective report that is publicly available to 

banks. We communicated that banks’ boards of directors and senior 

managers should ensure that strategic planning and product approval processes appropriately consider expertise, management information systems, and risk controls for the banks’ business lines 

and activities. Banks also should incorporate management succession and retention of key personnel into their strategic planning 

process. Compliance programs should keep pace with the volume 

and complexity of regulatory changes, as well as the changing nature of bank customers and transactions. 

Q.5. Growth and Regulatory Paperwork Reduction Act Review— Can you elaborate on how your review is going and share with us 

the major areas of consensus the agencies and the industry have 

found so far? 

A.5. We believe the EGRPRA review process is providing us with 

helpful information about our regulations. The outreach meetings 

have offered the agencies an opportunity to hear directly about how 

our regulations affect community banks. As part of these efforts, 

community banks have told us that they are finding it difficult to 

compete in this regulatory environment and that regulations 

should be tailored to fit the size and complexity of the institution. 

To the extent that we have significant flexibility to amend existing 

regulations, and draft new ones, in ways to reduce the regulatory 

burdens on community institutions without compromising the safety and soundness of these institutions, we will do so. 

With respect to specific issues, many community banks have told 

us that our Call Reports should be simplified and revised to reduce 

duplicative reporting requirements. The OCC understands these 

concerns and, along with the other Federal banking agencies and 

under the auspices of the FFIEC, is undertaking a comprehensive 

review of all Call Report items and schedules. This project includes 

a review of every line item of every schedule in the Call Report to 

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identify information that is essential for the agencies and must be 

collected. 

Q.6. Can you share anything about your future plans as this review moves forward? 

A.6. Through 2015, we plan to issue additional Federal Register notices requesting public comments on our remaining regulations. We 

also will hold three additional outreach meetings where financial 

institutions and consumer and community groups can provide their 

comments directly to agency principals and senior agency staff. Our 

next outreach meetings are scheduled for Kansas City on August 

4, Chicago on October 19, and Washington, DC, on December 2. We 

note that the agencies recently have expanded the scope of the 

EGRPRA review to include all of our regulations issued in final 

form up to the date that we publish our last EGRPRA notice for 

public comment. We will include these additional regulations in a 

future Federal Register notice requesting EGRPRA-related comments, and accept comments on these rules at our remaining outreach meetings. 

As this EGRPRA process continues, we will review comments received to date to determine whether there are changes to our rules 

that we can propose prior to the end of the EGRPRA review process. We also will review these comments for additional legislative 

changes that we can provide to Congress prior to the statutorily 

mandated EGRPRA report, so that Congress can incorporate these 

proposals sooner rather than later. (We note that we already have 

indicated support for legislative proposals authorizing a small bank 

exception to the Volcker rule, raising the asset-size threshold for 

institutions to qualify for the 18-month small bank examination 

cycle, and simplifying the legal requirements for Federal savings 

associations to alter their business models.) Lastly, we continue to 

seek ways to calibrate our rulemakings (outside of the EGRPRA 

process) to account for differences in the size and complexity of institutions in order to minimize unnecessary regulatory burden on 

community banks. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LEGISLATIVE PROPOSALS RECOMMENDED BY THE OFFICE OF THE 

COMPTROLLER OF THE CURRENCY SUBMITTED BY SENATOR 

TOOMEY 

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RESPONSE FROM TONEY BLAND SUBMITTED BY CHAIRMAN SHELBY 

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