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78–401 PS 2002

H.R. 3951—THE FINANCIAL SERVICES

REGULATORY RELIEF ACT OF 2002

HEARINGS

BEFORE THE

SUBCOMMITTEE ON

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MARCH 14; APRIL 25, 2002

Printed for the use of the Committee on Financial Services

Serial No. 107–62

(
(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director
(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman

MARGE ROUKEMA, New Jersey

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

SUE W. KELLY, New York

PAUL E. GILLMOR, Ohio

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

JUDY BIGGERT, Illinois

PATRICK J. TOOMEY, Pennsylvania

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR, New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

LUIS V. GUTIERREZ, Illinois

FRANK MASCARA, Pennsylvania

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

PAUL E. KANJORSKI, Pennsylvania

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BARBARA LEE, California

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

(V)

C O N T E N T S

Page

Hearings held on:

March 14, 2002 ................................................................................................. 1

April 25, 2002 ................................................................................................... 35

Appendixes:

March 14, 2002 ................................................................................................. 57

April 25, 2002 ................................................................................................... 166

WITNESSES

THURSDAY, MARCH 14, 2002

Buck, Carolyn, Chief Counsel, Office of Thrift Supervision ................................. 7

Dollar, Hon. Dennis, Chairman, National Credit Union Administration ........... 10

Kroener, William F. III, General Counsel, Federal Deposit Insurance

Corporation ........................................................................................................... 6

Little, Roger W., Deputy Commissioner, Credit Unions Office of Insurance

and Financial Services, State of Michigan, on behalf of the National Association of State Credit Union Supervisors ......................................................... 28

McCaul, Elizabeth, Superintendent of Banks, New York State Banking

Department, on behalf of the Conference of State Bank Supervisors ............. 26

Olson, Hon. Mark W., Member, Board of Governors, Federal Reserve System . 1

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

of the Comptroller of the Currency ..................................................................... 4

APPENDIX

Prepared statements:

Bachus, Hon. Spencer ...................................................................................... 58

Capito, Hon. Shelley Moore ............................................................................. 59

Gillmor, Hon. Paul E. ....................................................................................... 60

Royce, Hon. Ed .................................................................................................. 61

Buck, Carolyn ................................................................................................... 111

Dollar, Hon. Dennis .......................................................................................... 130

Kroener, William F. III .................................................................................... 91

Little, Roger W. ................................................................................................ 157

McCaul, Elizabeth ............................................................................................ 140

Olson, Hon. Mark W. ........................................................................................ 62

Williams, Julie L. (with attachment) .............................................................. 72

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Williams, Julie L.:

Information requested by Hon. Eric Cantor ................................................... 90
(VI)

WITNESSES

THURSDAY, APRIL 25, 2002

Page

Cheney, William, President/CEO, Xerox Federal Credit Union, on behalf of

the National Association of Federal Credit Unions ........................................... 42

Duke, Elizabeth A., Senior Vice President, Government Relations, South

Trust Corporation, Birmingham, AL, on behalf of the American Bankers

Association ............................................................................................................ 47

Gaither, Charlene R., Manager, Eastern Panhandle Community Federal

Credit Union, Martinsburg, WV, on behalf of the Credit Union National

Association ............................................................................................................ 40

Hage, Curtis L., Chairman and CEO, Home Federal Bank, Sioux Falls, SD,

Chairman, America’s Community Bankers, Washington, DC .......................... 46

Stone, Pierce, Chairman, President & CEO, Virginia Community Bank,

Louisa, VA, on behalf of the Independent Community Bankers of America .. 44

APPENDIX

Prepared statements:

Bachus, Hon. Spencer ...................................................................................... 168

Oxley, Hon. Michael G. .................................................................................... 167

Gillmor, Hon. Paul E. ....................................................................................... 169

Cheney, William ............................................................................................... 184

Duke, Elizabeth A. ........................................................................................... 271

Gaither, Charlene R. ........................................................................................ 170

Hage, Curtis L. ................................................................................................. 237

Stone, Pierce ..................................................................................................... 229

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Gaither, Charlene R.:

Written response to questions from Hon. Felix Grucci ................................. 183

Hage, Curtis L.:

Written response to a question from Hon. Spencer Bachus ......................... 268

Written response to a question from Hon. Melissa Hart .............................. 270

Financial Services Roundtable, prepared statement ............................................ 282
(1)

H.R. 3951—THE FINANCIAL SERVICES

REGULATORY RELIEF ACT OF 2002

THURSDAY, MARCH 14, 2002,

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, DC.

The subcommittee met, pursuant to call, at 9:56 a.m., in room

2128, Rayburn House Office Building, Hon. Spencer Bachus,

[chairman of the subcommittee], presiding.

Present: Chairman Bachus; Representatives Weldon, Castle,

Kelly, Ryun, Royce, Cantor, Grucci, Hart, Capito, Rogers, Tiberi,

Bentsen, Meeks, Kanjorski, Hooley, Lucas, J. Maloney of Connecticut, and Sherman.

Chairman BACHUS. The subcommittee, after a brief postponement, meets today for a legislative hearing on H.R. 3951, the Financial Services Regulatory Relief Act of 2002, a bill introduced

earlier this week by my colleagues on the subcommittee, Ms.

Capito of West Virginia, and Mr. Sandlin of Texas.

We are going to go right to the witnesses. We’ll start with the

first panel. We are going to dispense with opening statements because of the delay, and hopefully, that will put us right back on

time.

Our first panel is the Honorable Mark Olson, member of the

Board of Governors of the Federal Reserve System. We thank you

for your attendance and congratulate you on your appointment.

Ms. Julie L. Williams, First Senior Deputy Comptroller and Chief

Counsel, Office of the Comptroller of the Currency; Mr. William

Kroener, General Counsel for the Federal Deposit Insurance Corporation; Ms. Carolyn Buck, Chief Counsel, Office of Thrift Supervision, and Dennis Dollar, Chairman, National Credit Union Administration.

We welcome our witnesses to the subcommittee. I think there is

agreement we are going to go from left to right. We should have

probably discussed that with you, but if it is all right with the

panel, we will start with Governor Olson and then proceed with

Ms. Williams on down the line. Thank you, Governor Olson.

STATEMENT OF HON. MARK W. OLSON, MEMBER, BOARD OF

GOVERNORS, FEDERAL RESERVE SYSTEM

Mr. OLSON. Thank you very much, Mr. Chairman, and Members

of the subcommittee. We’re delighted to have the opportunity to

testify today on H.R. 3951. The Federal Reserve Board responded
2

last summer to a request by Chairman Oxley to suggest ways to

improve the banking laws and to relieve unnecessary burden.

In the context of that request, we did submit a number of options, several of which have been included in your bill. And I would

like to speak briefly to those this morning. We have a complete

statement which I will submit for the record, but I will abide by

the time constraint in the opening statement.

Chairman BACHUS. And I will say this. We are not going to, with

this panel, we are not going to enforce the 5-minute rule.

Mr. OLSON. In the spirit of the moment, I will stick with brevity

also.

Chairman BACHUS. Some of your fellow panel members may enforce a 10 or 12-minute rule.

[Laughter.]

Mr. OLSON. OK. Our first suggestion involves de novo interstate

branching. Members of the subcommittee may recall that interstate

banking legislation was achieved largely, if not totally, by the various States during the 1980s and during the 1990s as they passed

laws allowing for interstate bank ownership.

The question of interstate branching was dealt with with the Riegle-Neal Act of 1994. There are two ways that branching was allowed. One was by a bank purchasing a bank across State lines

and then converting it to a branch or branching from there, and

the other option was for de novo branching, but that would only be

allowed if the State in which the bank wanted to enter wold invite

them in, essentially an opt in provision.

There are two competitive issues involving that provision. The

first one is that Federal thrifts are allowed to branch de novo

across State lines now. So there is a current imbalance between the

competitive environment for Federal thrifts and for commercial

banks, and this supported amendment would address that issue.

The second issue involves a significant difference between the

impact on small banks and large banks. Now remember that there

are 17 States that have the opt-in provision and 33 States plus the

District of Columbia that have not adopted the opt-in, so there is

not the opportunity to enter those States by de novo branching.

The distinction is that the smaller banks, whose natural markets

would be across State lines, are at a slight disadvantage in that environment because the largest banks are able, with some ease, to

purchase a bank and then accomplish the branching, but the smallest banks would be a significant burden to do so. We think it would

level the playing field if the de novo option were to be eliminated

from the statute.

Having looked at that provision again, though, after we submitted it, there is one issue that we would like to call to the subcommittee’s attention, and that concerns industrial loan companies.

ILCs, as I think the subcommittee knows, are FDIC insured institutions whose parent ownership falls outside of the restrictions provided by the Gramm-Leach-Bliley Act. As we’ve looked at this

amendment, one unintended consequence might be to allow ILCs

to establish a nationwide presence completely outside of the parent

being under the Federal restrictions of the Gramm-Leach-Bliley

Act. That we don’t see as a minor streamlining. We see that as a

major policy issue.
3

We, Mr. Chairman, have drafted language that if it would be

helpful to the subcommittee we could submit as a further followup.

The second issue that we would like to suggest involves crossmarketing restrictions between a bank and a company in which it

has ownership in its merchant banking portfolio. When the

Gramm-Leach-Bliley Act was passed, to assure that institutions

were not avoiding the limitations of Gramm-Leach by putting an

entity into its merchant banking portfolio and then operating it as

if it were an affiliate, there were cross-marketing restrictions.

There was one exception to that, however, involving insurance companies in a financial holding company. There is a narrow limitation

for cross-marketing that insurance companies can do with institutions that the insurance company has an equity interest in their

merchant banking portfolio.

We are suggesting that banks in financial holding companies

ought to have the same opportunity.

A third issue involves the removal of the post-approval wait period. Currently in the statute under mergers and acquisitions, once

they have been approved by the regulatory authorities, there is a

mandatory 30-day wait period for the attorney general to review

the merger or acquisition for antitrust or anticompetitive implications, the 30 days now can be lowered to a 15-day period. We are

suggesting that after the approval has been made, and with the explicit approval of the Attorney General, the 30-day period be eliminated entirely.

The fourth item that we would like to talk about involves certain

unnecessary reports regarding insider loan transactions. And before I talk about the three provisions, I would like to assure the

subcommittee that the insider loan issue covered by Reg O is an

important regulatory concern. And nothing that we are suggesting

here would diminish either the bank’s responsibility or the regulator’s oversight responsibility in that area. However, there are

three small reporting requirements that in our judgment don’t contribute to safety and soundness, the recordkeeping responsibility of

the institution or the oversight role of the Fed. So we would suggest that they be eliminated. Had the reports been regulatory, we

would have dropped them. But, they are mandated by statute, and

we are suggesting that the statutory requirement be eliminated.

Two more exceptions. One involves director interlocks on small

institutions. In 1978 when the Depository Institution Management

Interlock Act was passed, there was a provision that allowed, in a

large metropolitan area—an MSA—for a small bank or financial

depository institution to be able to have a director on its board but

have that same person be a director of another small bank in that

same metropolitan area so long as they were not in the same immediate market. That was a good provision in 1978 when the dollar

figure was $20 million. We are suggesting that that dollar figure

today perhaps should be $100 million, and that’s what we’re suggesting.

The final suggestion that we have involves exceptions to attribution rules. A bank holding company is not allowed to own more

than 5 percent of the voting shares of any company, and that includes, under the current statute, shares held in trust for the com-
4

pany or its employees or shareholders. We are aware of instances

that involved pension plans or 401K plans where the institutions

are allowing their employees the ability to direct their portion of

a 401K or profit sharing so that they could purchase shares and

they could vote those shares, so the individual would make not only

the investment decision but the voting decision.

In order to monitor the 5 percent requirement, it would be a

massive recordkeeping responsibility, and it doesn’t in our judgment change the effectiveness of the rule. What we are asking for

is on a case-by-case basis, the permission to provide exception.

Mr. Chairman, that concludes my opening remarks, and I’d be

happy to answer questions.

[The prepared statement of Hon. Mark W. Olson can be found on

page 62 in the appendix.]

Chairman BACHUS. Thank you.

Ms. Williams.

STATEMENT OF JULIE L. WILLIAMS, FIRST SENIOR DEPUTY

COMPTROLLER AND CHIEF COUNSEL, OFFICE OF THE

COMPTROLLER OF THE CURRENCY

Ms. WILLIAMS. Chairman Bachus and Members of the subcommittee, I appreciate this opportunity to discuss with you ways

in which unnecessary regulatory burden on America’s banking system can be reduced, and to express the views of the Office of the

Comptroller of the Currency on the Financial Services Regulatory

Relief Act of 2002.

Let me also begin by thanking Ms. Capito and Mr. Sandlin for

sponsoring this bill, which includes sensible and appropriate regulatory burden relief for national banks and other financial institutions, as well as measures that will enhance bank regulators’ ability to maintain a safe and sound banking system. We and the other

agencies have worked with the subcommittee staff in developing

some of the provisions in the bill, and we very much appreciate the

opportunity to have done so and to continue to do so through the

process. My testimony this morning will highlight a few provisions

of the bill that we believe are especially important.

As the subcommittee knows, effective bank supervision demands

that we achieve a balance among several, sometimes competing,

but equally important, objectives. One of these objectives is to foster banks’ ability to conduct their business profitably and competitively, free from burdensome constraints that are not necessary to

further the purposes of the banking laws.

This bill contains several provisions that promote this objective

by streamlining and modernizing aspects of the corporate governance and interstate operations of national banks. The OCC strongly

supports these provisions.

For example, the bill modifies the so-called ‘‘qualifying shares’’

requirement currently in the National Bank Act, which has made

it difficult for some national banks to obtain favorable tax treatment as ‘‘Subchapter S’’ corporations. The ‘‘qualifying shares’’ provision requires every national bank director to hold a specified minimum equity interest in his or her national bank. Because of this

requirement, however, some national banks end up with more

shareholders than the law permits for a corporation wishing to
5

elect ‘‘Sub S’’ status. Community banks are most disadvantaged by

this result.

The bill solves this problem by authorizing the Comptroller to

permit the directors of banks seeking ‘‘Subchapter S’’ status to hold

subordinated debt instead of equity shares. Holding subordinated

debt does not cause a director to be counted as a shareholder for

purposes of ‘‘Subchapter S.’’ At the same time, the subordinated

debt requirement achieves the same purpose as the requirement to

hold equity shares because a director holding that sub debt can

only be repaid in full if all other claims of depositors and non-deposit general creditors of the bank are first paid in full.

A second sensible modernization in the bill that I’ll mention

eliminates a provision in current law that requires a national bank

to have cumulative voting in the election of its directors. The bill

permits a national bank to determine, at its option, reflected in its

articles of association, whether or not to permit cumulative voting.

This conforms the National Bank Act to modern corporate codes

and provides national banks with the same corporate flexibility

available to virtually all corporations and State banks.

A third provision repeals the requirement in current law that a

State must affirmatively enact legislation in order to permit national and State banks to conduct interstate expansion through de

novo branching. Governor Olson has already articulated some very

good reasons for this particular provision in the bill. The effect of

current law is to require that, in many cases, banks must structure, if they can, artificial and unnecessarily expensive transactions in order to establish a new branch across a State border.

Banks and their customers would benefit by this change, which

would permit a bank to choose which form of interstate expansion

makes the most sense for its business needs and its customer demands. Federal thrifts have enjoyed this type of flexibility for decades.

The bill also contains provisions that address a second, and fundamentally important, objective of bank supervision, and that is to

promote and maintain the safety and soundness of the banking system. For example, the bill expressly authorizes the Federal banking agencies to enforce an institution-affiliated party’s or controlling shareholder’s written commitment to provide capital to an insured depository institution. This provision would address some recent Federal court decisions which have conditioned the agencies’

ability to enforce this type of written commitment on a showing

that the party who made the commitment was somehow ‘‘unjustly

enriched.’’ By removing this impediment to our ability to hold parties to their commitments to provide capital, the new provision will

enhance safety and soundness of insured depository institutions,

and it should help to reduce losses to the Federal Deposit Insurance funds.

My written statement touches on several additional amendments

to current law that we believe would enhance the banking agencies’

safety and soundness authority, reduce risk to the deposit insurance funds, and facilitate our enforcement efforts when wrongdoing

does occur. We are working with the other banking agencies to develop these recommendations, and we hope that they can be considered in the legislative process as it continues.
6

Mr. Chairman, on behalf of the OCC, thank you, and Ms. Capito,

for your support of this legislation. I’d be happy to answer any

questions you have.

[The prepared statement of Julie L. Williams can be found on

page 72 in the appendix.]

Chairman BACHUS. Thank you.

Counsel Kroener.

STATEMENT OF WILLIAM F. KROENER, III, GENERAL

COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. KROENER. Mr. Chairman and Members of the subcommittee,

I appreciate the opportunity to present the views of the Federal Deposit Insurance Corporation on the proposed legislation to provide

regulatory burden relief.

The FDIC shares the subcommittee’s continuing commitment to

eliminate unnecessary burden and to streamline and modernize

laws and regulations as the financial industry evolves. The FDIC

itself is engaged in a number of initiatives to address the issue of

regulatory burden. Chairman Powell recently formed a regulatory

burden task force within the FDIC to study ways to reduce the regulatory burden. The task force will review the FDIC’s operating

principles, processes and practices, study ways to make the FDIC

more sensitive to the burden issue, and make recommendations to

the Chairman on burden reduction.

The FDIC recently initiated a comprehensive review of internal

processes and operating procedures related to the supervision of

State-chartered non-member banks. We are identifying ways to

better allocate resources in the areas that present the greatest risk

to our insurance funds: problem banks, larger financial institutions, technological change, high risk subprime lending, internal

control procedures, and fraud.

We have already implemented several improvements such as

making the report of examination format more user-friendly, designating Applications Subject Matter Experts as centralized resources for bankers, and contacting banks between examinations to

discuss issues so that we can do a more focused and efficient examination.

We are currently also reviewing the examination process to

achieve maximum efficiencies in the examination of small, well

rated banks, and hope to reduce total examination hours in these

institutions by up to 20 percent.

We also are revising our compliance examination approach to

place a greater emphasis on an institution’s administration of its

compliance responsibilities. Examiners will evaluate—in depth—an

institution’s compliance program. Based on this review, examiners

will then determine where there may be a significant risk of regulatory violations and appropriately tailor their transactional testing.

The FDIC continues to work with the other banking regulators

in implementing more efficient regulations and processes such as

the new ‘‘Interagency Charter and Federal Deposit Insurance Application’’ and the new standardized requests for electronic loan information.
7

The FDIC also supports statutory changes to reduce regulatory

burden in a number of areas, including those in the bill that, first,

clarify that an agency may suspend or prohibit individuals convicted of certain crimes from participation in the affairs of any depository institution. Second, those that modify the requirement for

retention of old records of a failed insured depository institution at

the time a receiver is appointed, and third, those that permit the

FDIC to rely on records preserved electronically, such as optically

imaged or computer scanned documents.

The FDIC also supports a number of provisions which were requested by our fellow regulators and included in the proposal, such

as those that streamline merger application requirements and that

grant Federal banking agencies the authority to enforce conditions

imposed in certain written agreements relating to additional capital contributions.

We are working with staff at the OCC to perfect language in Section 604 of the bill expanding the prohibition of persons convicted

of certain crimes from participating in the affairs of uninsured financial depository institutions.

Finally, the FDIC recommends that the subcommittee include

four additional regulatory relief items in the bill. These additions

relate to:

First, authority for supervisory agencies to enforce conditions on

the approval of deposit insurance;

Second, clarification that conversions which result in more than

one bank would continue to require deposit insurance applications

from the resulting institutions, as well as review and approval by

the appropriate Federal banking agency;

Third, amendments to the Bank Merger Act and Bank Holding

Company Act that would require consideration of the potentially

adverse effects on the insurance funds of any proposed bank merger transaction or holding company formation acquisition; and

Fourth, language that would make clear that pre-receivership

liens for failure to pay property taxes are extinguished when the

property is acquired by the Federal receiver.

I have included relevant language as an appendix to my written

statement on these four items.

Thank you for the opportunity to present the FDIC’s views on

these issues. The FDIC supports the subcommittee’s continued efforts to reduce unnecessary burden on insured depository institutions without compromising safety and soundness or consumer protection.

We are pleased to work with the subcommittee in accomplishing

this goal. Thank you.

[The prepared statement of William F. Kroener III can be found

on page 91 in the appendix.]

Chairman BACHUS. Thank you.

Chief Counsel Buck.

STATEMENT OF CAROLYN BUCK, CHIEF COUNSEL, OFFICE OF

THRIFT SUPERVISION

Ms. BUCK. Mr. Chairman and Members of the subcommittee,

thank you for the opportunity to present OTS’s views on your initiatives to reduce regulatory burden on our depository institutions.
8

During periods of economic challenge, it is particularly important

that we make every effort to remove unnecessary regulatory obstacles that hinder profitability, innovation and competition in our financial services industry.

In my written testimony I discuss a number of important proposals that we believe would significantly reduce existing burdens

on the thrift industry, and I ask that the full text of that statement

be included in the record.

In my oral statement, I’ll highlight three areas where reforms

would provide significant relief to the thrift industry. These are deposit insurance reform, parity with the banks under the securities

laws, and mortgage simplification.

Perhaps the most straightforward and effective means to provide

regulatory relief to our insured depository institutions is to reform

the deposit insurance system under which they now operate. It is

long past time to merge the bank insurance fund and the savings

association insurance fund. There is no disagreement on this.

Merger will promote efficiency in administering the funds and result in a more stable insurance system. Therefore, we strongly support fund merger.

We also believe that the free rider problem should be addressed

in fairness to those who have paid into the funds over many years.

And finally, the FDIC board should have sufficient flexibility in

setting the designated reserve ratio and deciding when to increase

the assessment rate to assure the continued stability of the insurance fund. Providing certainty about the process for determining

the amount of deposit insurance assessments is a very important

regulatory burden initiative.

Another area woefully in need of reform is the mortgage process.

OTS applauds HUD Secretary Martinez’s initiatives in this area.

Last fall, Secretary Martinez spoke about making the home buyer’s

experience less complicated, the paperwork requirements less demanding, and the mortgage process itself less expensive. This is no

simple task, but everyone involved in making the American homeownership dream a reality shares his goals, and we pledge to do

our part to help achieve this objective. Simplifying the mortgage

process will reduce regulatory burden on thrifts and on all housing

lenders and assist consumers. The importance of this cannot be

overstated.

Turning to the bill before this subcommittee, the most important

feature to thrifts and the communities they serve concerns parity

with banks under the Federal securities laws. OTS strongly supports the amendments to extend the thrifts the same exemptions

as banks from investment advisor and broker-dealer registration

requirements. Thrifts fill an important niche in the financial services arena by focusing their activities primarily on residential, community, small business and consumer lending. The Homeowners

Loan Act allows thrifts to provide trust and custody services on the

same basis as national banks, and investment advisor and thirdparty brokerage in the same manner as banks.

Not only are the authorized activities the same, but OTS examines those activities in the same manner as the banking agencies.

Some may suggest that this is a charter issue; that this SEC registration disparity is an intended advantage of the bank operating
9

structure. However, as I have noted, thrifts have had the ability for

some time to conduct these activities, these investment advisor and

broker-dealer activities, under their existing charter authority.

This is not a powers issue, then, but a cost issue. The consequence

of the disparity is the extra costs the thrifts must incur to exercise

the same powers as banks. This is regulatory burden in its purest

form.

We firmly believe that charter choice should be based on which

charter is the best fit for an institution’s business, not which carries the least regulatory burdens associated with the authorized

business activities. The proposed parity amendments to the Federal

securities laws remove distinctions that have caused thrifts to engage in regulatory arbitrage by changing charters to reduce costs

even though the thrift charter is the best fit for them.

Although the details of the current situation are complex, the key

points are that banks, but not thrifts, are exempt from investment

advisory registration requirements under the Investment Advisors

Act of 1940. In addition banks, but not thrifts, enjoy an exemption

from broker-dealer registration requirements under the 1934 Act

for certain activities specified under the Gramm-Leach-Bliley Act.

For purposes of broker-dealer requirements, the SEC has exercised its exemptive authority to treat thrifts the same as banks, at

least for now. But it has been reluctant to extend the same parity

to the investment advisor requirements. Treating thrifts and banks

the same under the Federal securities laws makes sense for a number of reasons, but I think it’s best stated in the SEC’s own words

from the preamble to their May 2001 interim final rule that did extend broker-dealer parity to thrifts. They stated, and I quote: ‘‘Insured savings associations are subject to a similar regulatory structure and examination standards as banks. Extending the exemption for banks to savings associations and savings banks is necessary or appropriate in the public interest and is consistent with

the protection of investors.’’

Congress has already spoken on the banks’ exemption. Perhaps

the best way to put this matter to rest for thrifts is for Congress

to affirm the SEC’s extending the broker-dealer exemption to

thrifts, plus have Congress extend the investment advisor exemption. This would also have the beneficial effect of avoiding the need

for a series of SEC administrative exemptions, another potential

regulatory burden, if additional differences come to light later.

OTS is committed to reducing burden whenever it has the ability

to do so, consistent with safety and soundness and compliance with

law. The proposed legislation advances this objective, and we appreciate that many of the reforms we’ve long desired are included

in the bill. I especially thank you, Mr. Chairman, Congresswoman

Capito, and all those who have shown leadership on this issue and

look forward to working with the subcommittee on this legislation.

Thank you.

[The prepared statement of Carolyn Buck can be found on page

111 in the appendix.]

Chairman BACHUS. Chairman Dollar.
10

STATEMENT OF HON. DENNIS DOLLAR, CHAIRMAN, NATIONAL

CREDIT UNION ADMINISTRATION

Mr. DOLLAR. I am pleased to present the subcommittee with the

following suggestions. I am going to highlight, for the sake of time,

the key points of my written testimony that I have presented to the

Members of the subcommittee that attempt to address the issues

of regulatory relief and productivity improvements for Federal

credit unions.

We feel that these proposals are consistent with the mission of

credit unions and the principles foremost of safety and soundness.

They address statutory restrictions that now act to frustrate the

delivery of financial services because of either technological advances, current public policy priorities or practical market considerations.

First of all, the Federal Credit Union Act authorizes Federal

credit unions to provide check cashing and money transfer services

to members. To reach out to the unbanked, Congress should consider authorizing Federal credit unions to provide these services to

anyone eligible to become a member. This is particularly important

to the overwhelming majority of Federal credit unions whose field

of membership includes individuals of limited income or means.

These individuals often do not have mainstream financial services

available to them and often pay excessive fees for check cashing,

wire transfer and other services.

Allowing Federal credit unions to provide these limited services

to anyone in their field of membership would provide a lower fee

alternative for these individuals while at the same time encouraging them to trust conventional financial organizations. If credit

unions are to be, as we feel that they are and must remain, a part

of the solution to the predatory lending problem in this country,

their potential members need to know the types and value of services that they can receive from a credit union they are eligible to

join. I am pleased to note that a provision as it relates to this is

included in the Capito-Sandlin bill, and we appreciate that consideration.

Also, Federal credit unions are authorized to make loans to members of other credit unions and to credit union organizations. The

Federal Credit Union Act imposes various restrictions on these authorities, including a 12-year maturity limit that is subject to only

very limited exceptions. This one-size-fits-all maturity limit should,

we feel, be eliminated or at least increased. It is outdated and unnecessarily restricts Federal credit union lending authority. As in

the case with other federally-chartered financial institutions, we

believe appropriate rulemaking authority should be granted by

statute for NCUA to establish competitive maturity limits within

the bounds of safety and soundness. And again, we appreciate the

inclusion of a provision related to this in the bill.

The Federal Credit Union Act authorizes Federal credit unions

to invest in organizations providing services to credit unions and

credit union members. An individual Federal credit union, however, may invest in aggregate no more than 1 percent of its shares

and undivided earnings in these organizations which are commonly

known as credit union service organizations or CUSOs. CUSOs provide important services such as data processing, check clearing for
11

credit unions, financial retirement planning among others. When

these services are provided through a CUSO, financial risks are

isolated from the credit union. So we find that the relatively low

statutory 1 percent aggregate limit often forces credit unions to either bring services in house, thus potentially increasing risk to the

credit union and the insurance fund, or to turn those over to outside providers and lose institutional control. We feel that the statutory 1 percent limit should be increased or eliminated and the

NCUA board be allowed to set by regulation a limit that is appropriate for safety and soundness purposes. And we appreciate again

the fact that the proposed legislation does include a provision to

address this in some manner.

The Credit Union Membership Access Act enacted in 1998 expressly authorized multiple common bond credit unions. The Access

Act, however, provided that a Federal credit union may add a new

group to its field of membership only within very strict proximity

guidelines. This in effect often requires a credit union to establish

a costly physical presence that could potentially if unchecked

present long-term safety and soundness concerns. This brick-andmortar limitation on Federal credit union services is not we feel

sound policy in today’s clicks and Windows financial marketplace

where most services can be provided electronically and should, we

feel, be reviewed by Congress for possible regulatory relief.

The Federal Credit Union Act also limits the investment authority of Federal credit unions to loans, Government securities and deposits in other financial institutions and certain other very limited

investments. This limited investment authority restricts the ability

of Federal credit unions to remain competitive in the rapidly

changing Federal financial marketplace. In our view, the Act

should be considered for amendment to provide such additional

conservative investment authority as is approved for other federally regulated financial institutions and in accordance with the regulation of the NCUA board. Again, we appreciate the fact that this

provision has been addressed by the legislation.

Last, the Federal Credit Union Act, as amended by the Credit

Union Membership Act in 1998, allows voluntary mergers of

healthy Federal credit unions but requires that NCUA consider a

spinoff of any group of over 3,000 members in the merging credit

union, or, if they convert to a community-based charter, to spinoff

any groups they presently serve outside the community. When two

healthy multiple common bond Federal credit unions wish to merge

and thus combine their financial strength and improve their safety

and soundness position, as well as service to their members, or a

credit union chooses to convert to a community charter to serve an

entire community, we feel that it is good public policy and they

should be allowed to do so without unnecessary regulatory impediments.

Again, we appreciate the fact that the proposed legislation does

attempt to address this concern in some way. Again, I know that

there are other issues that are in the legislation that we have mentioned in my written statement, but I wanted to touch on these

highlights, Mr. Chairman, and to thank you today again for the opportunity to provide this input on this important bill before your

subcommittee.
12

We want to continue to work with you and offer our staff as a

resource in any way as you continue to move toward what I know

is your goal as is ours, which is removing unnecessary regulatory

burden while maintaining our first and foremost commitment to

safety and soundness and the necessary regulation that is required

to protect the American public. Thank you very much, Mr. Chairman. I’d be glad to answer any questions.

[The prepared statement of Hon. Dennis Dollar can be found on

page 130 in the appendix.]

Chairman BACHUS. Thank you.

I thank the panel. Our primary purpose here is to free up resources of the institutions so they can actually use more of their

resources to lend to consumers. So we’ve looked at any regulation

that we think unduly costs them resources that are unnecessary— that are not necessary for safety and soundness, are outdated, or,

as Counsel Buck said, where you have one requirement for thrifts

and one for banks, equal protection, or equal treatment argument.

Governor Olson, you mentioned the cross-marketing restrictions.

One reason that we’ve moved on that—I think we had a hearing

last year about whether financial holding companies could crossmarket products with companies they had made investments in.

And there are restrictions now and I think the Federal Reserve in

their regulations had recommended then relaxing those restrictions. And there was general consensus at that hearing that that

could be done without, you now, that there was not a privacy concern. Some people confused at first blush that there was a privacy

concern there. But what we’re talking about is cross-marketing

products and services, which would not violate their customers’ privacy.

And there is already a provision that you can do that with insurance companies. So I think what you said today I heartily agree

with is an equal treatment. And also the fact that it doesn’t diminish a customer’s protections. And it certainly I think was meant by

Gramm-Leach-Bliley. That is in the bill. In fact, several of the

things that you have discussed in your testimony are in the bill.

And Deputy Williams, you mentioned the fact that we’ve been

working closely before we dropped this bill. This was not something

that we just decided on some things. We have been in close discussion with all your agencies looking for things where there was consensus, where there was an agreement between the parties that it

could be done. Now sometimes there may not be agreement between two of the regulators to do something for the thrifts or to do

something for the banks. But other than those minor differences of

opinion, we tried to go with non-controversial things.

The only thing in the testimony that I would, Chairman Dollar,

those close proximity restrictions on credit unions, there was quite

a lot of focus on that, quite a lot of discussion on that. And it is

still a very controversial thing, and if for no other reason, it wasn’t

included in this legislation, and that there’s so much opposition to

that from the banks. I do sympathize as with technology and what

you’re saying, that it does become a problem. But having it in the

bill would be a problem for us.

We have and will continue to work with all the agencies to refine

this bill. I’m sure you will continue maybe to find things as we
13

move forward. Anything in the bill you object to, we want to hear

about it. Anything that you think ought to be in the bill that isn’t

in the bill, we want to hear about it. We will continue to work

closely with you, because you are the ultimate experts and authority on what regulations need to be in place for safety and soundness, as opposed to regulations that don’t add anything, simply

take resources from what could be available to consumers.

Mr. Grucci is not here, so Mr. Cantor, we are going in order of— actually, Ms. Capito. Well, actually, I’m sorry, Mr. Lucas. Counsel

Carter pointed out to me that I had not looked to my right. Which

I always look to my right first. I didn’t know I didn’t.

[Laughter.]

Chairman BACHUS. Mr. Lucas from Kentucky.

Mr. LUCAS. I find this testimony very interesting, sir, but I have

no questions. Thank you.

Chairman BACHUS. Thank you. Always efficient.

[Laughter.]

Chairman BACHUS. Thank you. Ms. Capito? And if you would

like to make an opening statement, a comment, I think the Members, as you are the sponsor of this bill, you will certainly not be

held to the 5-minute limit.

Ms. CAPITO. Thank you, Mr. Chairman.

Chairman BACHUS. And I commend you for the work you’ve done

on this.

Ms. CAPITO. Thank you. I appreciate your holding this hearing

today, and I appreciate the testimony of our distinguished witnesses. I particularly want to congratulate Mr. Dollar on his last

name. What a great name for your business.

Mr. DOLLAR. I can’t say I don’t have a dollar to my name.

[Laughter.]

Ms. CAPITO. I think it’s interesting to point out that we spend

a lot of time in this subcommittee room creating new laws, and I

think that periodically it serves us well to look at provisions in our

present laws to see which ones are dilapidated and old and unused

and overlapping and repetitive. And so I am pleased to be a part

of this effort today with this bill to relieve certain regulatory burdens certainly on the regulatory agencies, but also on the banking

and financial institutions that have to go forward with these.

I think this type of review will make substantial changes and it

will bring us in greater compliance with the Gramm-Leach-Bliley

Act and also the recently enacted Patriot Act. I know as the result

of some of the Patriot Act regulations that were put in place, we

caused more regulation burden our institutions, our financial institutions, and certainly on you all in terms of oversight, and I think

it is very timely that we are updating these provisions as we move

through the day today.

I think you pointed out quite appropriately, Mr. Chairman, this

is certainly not the final bill, and I fully expect after this hearing

we will have many changes, adjustments that we will be making

as we move through this process. And I look forward to working

with you all to see where those changes might occur.

I would like to ask a couple of questions right now if that is appropriate to begin asking questions? Yes. Governor, Olson you addressed the situation of interstate banking. In Section 401, it would
14

preempt State law and allow banks to offer branch banks, branch

offices in other States without first having to have an existing presence. I represent the State of West Virginia, which I believe currently allows this type of branching. And you mentioned 33 States

do not offer that as an option.

I was wondering—I’m a former member of a State legislature

who was very sensitive to Federal preemption, so I was wondering

if there is any opposition from any of these States to this provision.

Mr. OLSON. Congresswoman, we are not aware of opposition.

There might be, but it has not come to our attention at this point.

Ms. CAPITO. Thank you. The other question for you, sir, is—and

you brought it up in your opening statement. I’m glad that you did.

Because when we had the press conference yesterday sort of as a

preview of this bill with Chairman Oxley, this was the first question out of the box, and it dealt with the insider trading provisions

and insider lending. And people have expressed concerns with respect to the reporting requirements. And I think you covered in

your opening statement that this would in no way diminish any requirements or regulations for oversight. But if you could just sort

of restate what that insider lending provision does and how the

protections are still in place.

Mr. OLSON. That’s a very important point. Insider lending is covered under Reg O, and there are very specific reporting requirements and very specific limitations on lending money to their officers and directors and insiders, and also with respect to loans from

their upstream correspondents. None of those regulations is altered

at all with this amendment.

There are three specific reports, however, that we suggest could

be eliminated, two of them having to do with loans from outside

banks and one having to do with loans that occur between call report periods that report incrementally the new loans that had been

made. In our judgment, those three reports don’t contribute to our

oversight responsibility or to the record maintenance responsibility

of the institutions and therefore marginally add burden without

contributing to the oversight. But nothing we’re saying here diminishes the importance of monitoring insider lending.

Ms. CAPITO. Thank you. I have a couple of more questions, and

this one is just sort of a toss-up, so anybody can take it. In Section

605, it deals with destruction of records. And in this day and age,

destroying records is not something that we want to go about frivolously or without a great deal of thought. I realize that a judge

under this provision can require that records be kept for longer

than 10 years. Does anyone feel that this section allows, in the destruction of records, raise any concerns in anybody’s mind on our

panel?

Mr. KROENER. Let me take that question, if I may. It’s a provision of great interest to the FDIC. And we are sensitive to the

records problem. And indeed, as Chairman Powell indicated in a

recent speech, we are looking at accountants’ records and whether

the FDIC should require preservation in certain circumstances

where we have the authority to do so and we haven’t done so in

the past.

But that having been said, this provision is simply designed as

a cost and burden reduction. When an institution fails, the FDIC
15

will come in as receiver or conservator and will inherit all the

records that institution happens to have. In some instances, the

records can go back more than 100 years. And we are currently required to preserve those records, and there is a cost involved—

there is a storage cost. And so this will actually save us money,

save our receiverships money and enable us to pay higher dividends—to more quickly recover for our insured claims and hopefully pay higher dividends to any uninsured creditors in the receivership. And so we think it’s a positive, cost saving thing, and we

do not see risks in the provision as drafted. We’ve worked with the

subcommittee to get the provision as refined as we can on that.

Ms. CAPITO. OK. Thank you. Can I keep going? Although not included in the reg relief bill, we have been asked to consider a provision that would give the Federal Reserve more flexibility to allow

State member banks to engage in investment activities authorized

by their chartering State and approved by the FDIC as posing no

significant risk to the deposit insurance fund. Currently, State

member banks are limited to the activities granted to national

banks, and yet State non-member banks are allowed to exercise expanded powers within the confines of safety and soundness. What

are your views on that? Governor Olson? Yes?

Ms. WILLIAMS. May I take a crack at that? I think it’s important

to understand what the provision that would be repealed by what

you described does. It’s not an arcane provision; it is a safety and

soundness-driven provision. And, it was very recently addressed in

the Gramm-Leach-Bliley Act after painstaking negotiations.

The primary effect of the change that you’ve described would be

to undo prudential standards and safeguards that were enacted

just over 2 years ago as part of the Gramm-Leach-Bliley Act. The

essence of the statutory change that you’ve been asked to consider

would be to eliminate a standard currently in Federal law that applies parallel prudential and safety and soundness standards to financial subsidiaries of national banks and financial subsidiaries of

State member banks. It would reopen a set of issues concerning

what types of safeguards and prudential standards need to be in

place in connection with allowing expanded activities to be conducted in subsidiaries of those types of banks.

You, of course, can decide that those prudential standards and

safeguards are no longer appropriate, but there is no basis to distinguish whether they are appropriate solely for national banks or

State member banks. If you think that eliminating those safeguards for State member banks is the way to go, then you should

eliminate them for national banks as well. There’s no basis for a

distinction.

Chairman BACHUS. I thank the Member.

Mr. Kanjorski. And what we had done is we’d given—Ms. Capito

is sponsor of the bill. We waived her opening statement and she

took 10 minutes.

Mr. KANJORSKI. That is certainly agreeable.

Chairman BACHUS. But we welcome your membership.

Mr. KANJORSKI. Thank you, Mr. Chairman. My questions are

really directed to Chairman Dollar. As you know, I have, for some

time, raised concerns about the value of the Federal charter. We
16

want to ensure that our Nation’s system of dual chartering remains

vibrant and effective.

One provision in this legislation, however, would allow privately

insured, State-chartered credit unions to gain access to the Federal

Home Loan Bank System. Because this section of the bill raises serious concerns about safety and soundness, I think that we should

consider removing it unless we can adequately address these concerns.

Additionally, at a time when many in the credit union movement

have raised concerns about the continued value of the Federal

charter, I wonder why we are working in Congress to increase the

value of the State charters. To help the subcommittee better understand this issue, would you please outline for us some of the recent

trends in charter conversions from Federal charters to State credit

union charters or mutual savings bank charters?

Mr. DOLLAR. Congressman Kanjorski, there has been some trend

in recent years of conversion to the State charter from the Federal

charter. Quite frankly, most of it has been driven by field of membership issues as some of the States under State law have been

able to provide a more liberal field of membership than is allowed

under Federal law.

We have not attempted to in any way preempt the States, for we

like you believe in a dual chartering system that enables a credit

union to have a viable choice of a productive business opportunity

within either the Federal charter or the State charter. How we

have tried to address that has been through implementing the

Credit Union Membership Access Act as effectively as possible. We

think that we have done so. We have given opportunities for Federal credit unions to be able to grow within the Federal Credit

Union Act. There are some areas, as we mentioned a moment ago

on the proximity issue, where we would like to see some relief that

would enable us to be even more flexible, I think, in that regard.

But I think we’ve done a good job. I think we’ve done a good job

in enabling them to have the powers that are necessary to be able

to meet the needs of their members.

However, each State has the right to pass their own laws as well.

We recognize that and we respect that. One of the reasons we are

here today, and we appreciate the opportunity by the subcommittee

to be a part of regulatory relief legislation, is because we do believe

there are perhaps some regulatory impediments that are imposed

at the Federal level through Federal statute that are not imposed

at the State level that would enable us to have an even more viable

Federal charter. That’s what we want to see, and we appreciate the

opportunity to have a seat at the table here to do that.

Mr. KANJORSKI. Thank you. You perhaps were not there, but in

June of 2000, I asked former Chairman D’Amours for an update

from NCUA regarding the relationship of the Federal and the State

charter. I will send you a formal request to get a further update

on this issue.

Mr. DOLLAR. And we will give you the most recent figures on

that. It has continued. And one of the concerns that we have, of

course, is that as the charter conversions continue that we ever get

to a point where we’re out of balance between a viable Federal

charter and a viable State charter. And we think that one of the
17

ways to respond to that is to try to make the Federal charter as

viable as possible for credit unions who want to grow and prosper

as federally-chartered credit unions, but still staying within the

confines of the Federal Credit Union Act.

Mr. KANJORSKI. Additionally, many of the provisions in the bill

would help Federal credit unions to grow and expand. One provision, for example, would allow credit unions to cash checks for anyone eligible to join a credit union. In Northeastern Pennsylvania,

entities like Choice One Federal Credit Union are working to expand access to our Nation’s financial system in underserved communities. This provision would certainly help credit unions to offer

the unbanked public affordable services. What are your thoughts

on this issue? And should we expand the provision in the bill to include wire transfer services, too?

Mr. DOLLAR. Congressman Kanjorski, in my statement a moment

ago I did state that it is the position of the NCUA board that in

order to facilitate what we are trying to do in our Access Across

America initiative, which is to enable credit unions to adopt underserved areas and extend credit union services into many unbanked

communities that it’s important that the residents of those communities know the value and the types of services that they can receive by joining a credit union.

Among those is the ability to get a check cashed at less than

what many times are predatory rates. Credit unions can provide

that service, but today they can only provide it to a member. And

we have long believed that some of those basic services perhaps

could be provided by a credit union not just to their members but

to anyone who is eligible to join the credit union, not anyone who

would not be eligible, but those who are eligible to join the credit

union in order to help them to understand the value of joining the

credit union, the type of services that they can receive, and we

think it could be a part of providing a much more viable low-cost

alternative to some of the check cashing outlets, the payday loan

outlets and the like that are prevalent in many of these communities. We think credit unions can be a part of the answer to the

predatory lending issue in this country, and we want to facilitate

that.

Yes, in answer to the second part of your question, we believe

that it should also be extended to wire transfers. Because particularly as it relates to international remittances, many American citizens with ties to a homeland are having to pay 28 and 30 and 32

percent of the amount of an international remittance to be able to

send it back, whereas most credit unions would be willing to do it

for a flat low cost rate.

Chairman BACHUS. Thank you.

Mr. Kanjorski, you have one more question.

Mr. KANJORSKI. One more question. Mr. Dollar, would you comment on how we might change the field of membership statutory

guidelines to ensure that we do not place Federal credit unions at

a competitive disadvantage? Should we, for example, consider

amending the legislation to allow State-chartered credit unions

that convert to a Federal charter to keep their entire membership

base after conversion?
18

Mr. DOLLAR. As I said a moment ago, the reason for many of the

conversions to Federal to State charter has been because of field

of membership restrictions. We do not think that the answer to

that, again, as I stated earlier, is to preempt State law. But we do

feel like that we need some greater flexibility should a credit union

decide that they wanted to convert from State to Federal for us to

be able to accommodate a field of membership that they may have.

In my earlier remarks, I talked about not having to spin off

groups when a credit union converts its charter to a community

charter. What we want is a credit union that is already serving a

community, making a difference in the lives of that community on

a daily basis, or in the lives of the members of employer groups

within its field of membership, to be able to choose which credit

union charter would best benefit their long-term viability and safety and soundness and make that choice without being driven by

whether or not they’re going to lose some of those groups or some

of those members.

Safety and soundness is what drives a great deal of our concern,

but yet field of membership restrictions sometimes make credit

unions make decisions that we would like to see them to have

greater options to make otherwise.

Chairman BACHUS. Thank you.

Mr. KANJORSKI. Thank you very much, Mr. Dollar. Thank you,

Mr. Chairman.

Chairman BACHUS. Congressman Cantor.

Mr. CANTOR. Thank you, Mr. Chairman.

Ms. Williams, if I could just ask you, you pointed out in your testimony that you strongly support relieving the restrictions in current law of institutions operating as Subchapter S organizations,

which I think everyone is in agreement or should be in agreement

with. But do you know what the percentage of institutions that operate with that status is?

Ms. WILLIAMS. I don’t know the figure off the top of my head, but

I’d be very happy to get back to you with that information.

Mr. CANTOR. Thank you very much.

[The information referred to can be found on page 90 in the

appendix.]

Ms. Buck, if I could direct the next question to you. You said the

OTS supports parity for thrifts under the Investment Advisors Act

of 1940. You pointed out in your testimony that some individuals

have objected to this change because it would give thrifts a competitive advantage over registered investment advisors. You further

stated that this change will have a relatively minor impact on the

investment advisor industry because banks are already exempt.

Could you just explain that a little further?

Ms. BUCK. Yes. What we’ve experienced is as our institutions

have increasingly been using trust powers, when they find that

they are subject to registration themselves under the Investment

Advisor Act, and sometimes, depending on which State they’re located in, the individuals who do that work within the institution

may have to register, that they sometimes are choosing to move to

a bank charter where they don’t have to engage in those registration requirements. And so if the effect here from the investment

advisor community is to believe that somehow preventing thrifts
19

from getting this parity with banks would give them an advantage

over investment advisors, we’ve got probably at least a dozen

thrifts that we know of that have converted to banks to be able to

escape the SEC registration requirements.

When you’re talking about parity here, we should be talking

about parity as among financial institutions. OTS has the same

regulatory structure as banks. We exercise the same trust powers

as banks have. We have the same structure for examination. In

fact, we just changed our handbook procedures last year to make

them more comprehensive and more in line in terms of examination procedures with the banks, and we are about to issue a revised

regulation dealing with trust powers, again to make it more consistent with those that apply to the banking industry.

So we think that the comparison here should be thrifts with

banks, and not with the investment advisor community.

Mr. CANTOR. Thank you very much.

Mr. Chairman, I just have one additional question for Chairman

Dollar. You state that the Administration should be authorized to

establish any maturity limits on loans made by Federal credit

unions in accordance with conventional marketplace maturities.

Could you just describe what the current limits are on the ability

for a credit union to make a loan and the lending terms, and then

the higher maturity limits that you recommend?

Mr. DOLLAR. Basically, a credit union, Congressman, cannot

make a loan for a longer term than 12 years with the exception of

a mortgage loan. There are certain other types of lending, such as

recreational vehicles, sometimes certain types of loans as relates to

second homes and the like that the marketplace carries beyond the

12 year, but do not classify strictly as a mortgage loan. We don’t

see this as being an area where there is a tremendous amount of

market that credit unions cannot meet, but there is some. And the

bill as it is proposed extends that from 12 to 15 years. And frankly,

that would very likely cover any situation that would arise. If the

subcommittee and the Congress were to elect to go from 12 to 15,

it would help the situation tremendously.

We always try to recommend away from those one-size-fits-all

types of caps, because we could set through regulation a 15 year

cap and be able to go beyond that if the market changes in the future. We would prefer that approach. But as the bill provides, to

go from 12 to 15 would cover almost any situation that we would

foresee at this time.

Mr. CANTOR. Thank you, Mr. Chairman. Mr. Chairman, I yield

back.

Chairman BACHUS. Thank you.

Mr. Meeks.

Mr. MEEKS. Thank you, Mr. Chairman. I just have three quick

questions in three different areas. And I guess the first question I’ll

address to Mr. Olson. Just in considering the elimination of the

State opt-in program of a de novo branching, has there been any

concern—what have you heard from the States? Have the States

made any comments in regards to that? What are their opinions or

has there been any comment at all from the States in regards to

the elimination of the opt-out?
20

Mr. OLSON. Congressman, that question was asked earlier. I believe you had just stepped out for a minute. To the best of our

knowledge, we have not had any concerns expressed by the State,

at least to this point.

Mr. MEEKS. Thank you.

Chairman BACHUS. And, Mr. Meeks, we’ll hear from the New

York regulators in the second panel too and you may want to also

address those questions to them in addition.

Mr. MEEKS. Thank you, Mr. Chairman. I hope there’s not other

questions that I’ve missed. What about in regards to, and again,

Mr. Olson, to the post-approval waiting period for bank acquisitions and mergers? Have there been any adverse effects to the 15-

day waiting period? And do you see any adverse effects in eliminating the waiting period?

Mr. OLSON. Congressman, there have not been. The presumption

here is that the regulators have already approved and that the Attorney General has already reviewed the circumstances and the

facts and have found that there are no anticompetitive effects of

the merger. At that point, right now the wait period can go from

30 days to 15 days. It would seem logical that it could go from 30

days to waiving it entirely. But the underlying presumption is that

the regulators have already approved and the Department of Justice, the Attorney General, has looked at it as well.

Mr. MEEKS. Thank you. My last question, maybe I’ll address this

to Ms. Williams, that we live in the post-Enron scandal days. And

just in looking and talking about the elimination of certain reports

and things of that nature, are you concerned or do you see any concern about the elimination of these reports that bank officers may

be receiving from other banks? And if possible, are there any conflicts of interest that they may have as a result thereof?

Ms. WILLIAMS. Congressman, I’ll defer to Governor Olson on

that. We do support the provisions that are in this bill on that subject.

Mr. OLSON. I think it’s important to note that none of the requirements are being eliminated regarding the reporting of loans

to the bank and the bank’s requirements for monitoring any loans

that are covered under Reg O. So all of those provisions remain.

There are three reports, reports that they are required to file, with

respect to those loans that we are saying are not necessary for either our enforcement or our regulatory process or for the bank’s

own responsibility for those loans. On the margin we’re looking to

streamline the process, and we think that those reports are not

central to the process either the bank’s or the Fed’s responsibilities.

But the underlying issue of insider lending is a very important

one and one that all of the regulators at the table take very seriously.

Mr. MEEKS. Thank you. And I would yield back, Mr. Chairman.

Chairman BACHUS. Yes. And Mr. Meeks, I want to say to you

just for the record, at the earlier hearing on FDIC, you had expressed some concerns about the restrictions on New York thrifts

in accepting municipal deposits. And I wanted to say for the record

that we are working together on that issue to address your concerns. And I know that New York is actually the only State that

makes that distinction between banks and thrifts. So we are aware
21

of that. We are aware of your concerns. And I did want to put that

in the record at this hearing.

Mr. MEEKS. We appreciate it, Mr. Chairman, and we are working

together on that. Thank you very much.

Chairman BACHUS. Mr. Royce. And I want to commend you. You

have a provision in this bill or two.

Mr. ROYCE. Thank you, Mr. Chairman. Yes. And on that same

vein, I wanted to ask Mr. Dollar, because as the Chairman said,

Mr. Dollar, a portion of this bill deals with a piece of legislation

I introduced, which was the Faith Based Lending Protection Act,

and specifically deals with member business loans made by credit

unions to non-profit religious organizations. And the reason this is

important to us is because these are the types of loans that go for

the construction of hospices or that go for soup kitchens or shelters

or churches. And there is a problem with availability of credit.

Under the current law, credit unions are prevented from loaning,

as you know, more than twelve and a quarter percent of their total

assets to business, and credit unions engaged primarily in faithbased lending, they’re the ones that are exempted from the cap.

But there aren’t many engaged in that line of work, and these

faith-based institutions obtain their liquidity, then, by selling these

loans to other credit unions who are not exempt from the cap. And

as a result, the lending needs of small non-profit organizations are

frankly being crimped, and I think part of the problem is that

these institutions are often ignored by larger banks and thrifts for

a rational reason. I mean, they have very slim profitability margins.

But the result has been over time that as a number of credit

unions approach their overall business loan caps, these local enterprises, especially hospices, are seeing their access to capital steadily decline. And we can fix this problem. And in this particular bill

for regulatory relief, we have included provisions from H.R. 760,

which was the Faith Based Lending Protection Act, exempting

loans made by credit unions to non-profit religious organizations

from the member business loan cap. And my question to you was

going to be what is the position of the National Credit Union Association’s stand on H.R. 760 and on incorporating that into this regulatory relief bill?

Mr. DOLLAR. Congressman Royce, as I said in my original statement and in answer to one of the questions a moment ago, anytime

that a statutorily one-size-fits-all approach is applied, you’re going

to miss something. And when Congress in 1998 applied that 12.25

percent, one-size-fits-all member business loan cap, it did miss

something. And among the very serious areas that was missed was

those credit unions who do make loans to faith-based organizations.

I want to commend you for introducing the legislation that you

did last year to try to correct that. The National Credit Union Administration at that time stated its support for that legislation and

has analyzed it and finds no safety and soundness concerns whatsoever to be able to either pass your legislation or as is a part of

this legislation, to have it included as a part of a regulatory relief

initiative. We certainly would support that.

Mr. ROYCE. Well, let me ask you another question then, and that

goes to the performance of these loans for the record in the past,
22

for the Members. How have these loans to religious organizations,

these loans that go for either churches or shelters or soup kitchens

or hospices, how have they performed over time? And how would

you expect them to perform during these rather more difficult economic times? Have you got data going back and can you share that

with us?

Mr. DOLLAR. For the record, very little of credit union lending is

member business lending to begin with. It’s less than a percent and

a half of credit union lending. So it is a very small part of what

credit unions do, because it is not traditional commercial lending

as the banks do. It is member business lending. However, we do

monitor this very closely, because it is an area, of course, that we

feel is worthy of our very close supervision.

We have found that the delinquency rates on all member business lending in credit unions is lower than the delinquency rates

on personal loans. And among faith-based institutions in particular

is the best delinquency rate in virtually any area of member business lending. There are, as you stated correctly earlier, credit

unions allowed to do faith-based lending today. Those that are

chartered primarily for that purpose or exempted from the Act, and

those that are below the 12.25 percent cap are able to make some.

We are able to track those loans. We are tracking the loans. The

payment history and the performance of those loans, are very, very

solid.

Mr. ROYCE. It’s in the lowest category of delinquency?

Mr. DOLLAR. Yes.

Mr. ROYCE. As you look at your portfolio?

Mr. DOLLAR. Yes.

Mr. ROYCE. Thank you very much, Mr. Chairman.

Chairman BACHUS. Thank you.

The gentlelady from Oregon.

Ms. HOOLEY. Thank you, Mr. Chair. I’m sorry I missed your testimony. I was in another Committee meeting. I just have one question. Any one of you can answer it. When we talk about streamlining bank mergers, are you concerned—do you think we’ll see a

lot more mergers if this passes? Is that what the expectation is,

that we’ll see additional mergers or more than what’s currently

happening? Anyone want to take a shot at that?

Mr. OLSON. Congresswoman, I think this bill will be neutral on

that issue, because I think what we’ve done here is consistent with

the whole idea of reg reduction. We have looked at the reg burden

and identified the issues that appear not to contribute to supervisory oversight and their elimination would help achieve an appropriate regulatory environment for the banking industry and the

thrifts industry.

And so it would be my judgment off the top of my head that this

bill would be neutral in that regard.

Ms. HOOLEY. OK. Thank you.

Ms. Buck, when it talks about Federal thrifts investing in small

business investment companies, do you see that as a conflict of interest? Do you see—tell me what you think about that whole area.

Ms. BUCK. This particular provision was really just moving authority from the Small Business Act over into the Homeowners
23

Loan Act. It really does not change our authority at all. It was really a technical change.

Ms. HOOLEY. OK. Thank you.

Mr. Dollar, when you look at credit unions and you have a

change here that goes from, it says an individual Federal credit

union may invest right now 1 percent of its shares in organizations.

This amendment raises the limit to 3 percent. Talk to me about

that.

Mr. DOLLAR. Credit unions are authorized under the statute to

invest up to 1 percent in credit union service organizations. These

are organizations that are formed by credit unions, either an individual credit union or a group of credit unions, to offer services to

credit unions and credit union members. It is usually an economy

of scale type of organization that is formed by, particularly, small

credit unions who may need to come together to offer a particular

type of service.

Ms. HOOLEY. Give me a couple of examples.

Mr. DOLLAR. There are some that have been formed by individual credit unions that do such things as check clearing for

smaller credit unions, groups of credit unions who come together

who may not do that on their own. Perhaps even to come together

to have a financial planning initiative, a retirement planning initiative that a single credit union might have a difficult time providing but by combining together and investing in a credit union

service organization, which is a separate entity, separate from the

credit union itself, they are able to provide these services.

The 1 percent limit, particularly for smaller credit unions, somewhat limits their ability to achieve these economies of scale. And

so instead of being able to form a credit union service organization

and keeping it within the credit union community, if you will, they

end up having to outsource that to some other third party, thus losing institutional control.

We feel like that an increase such as the one proposed in the legislation at least from 1 to 3 percent, if not higher, would at least

enable those credit unions to have more opportunities to be able to

invest in credit union service organizations where appropriate.

Ms. HOOLEY. Does that knock out the small person that maybe

has a niche market that you currently use? Does that knock them

out of business?

Mr. DOLLAR. Usually what it does is provide an alternative to

what would probably be a larger nationwide organization that is

providing that service and enables them to have that local niche.

Ms. HOOLEY. Thank you. Thank you, Mr. Chair.

Chairman BACHUS. Thank you.

The gentlelady from Pennsylvania, Ms. Hart.

Ms. HART. Thank you, Mr. Chairman. I’m sorry I did miss the

testimony. But thanks to the Chairman and a lot of his information, I do have one question and it actually has to do with credit

unions’ parity sort of with thrifts and banks. I guess, unfortunately, I’m going back to Mr. Dollar as well. You’re working hard

this morning. What are the reasons to support parity for credit

unions with banks and thrifts under the SEC Act and the Investment Act of 1940? This has been a really controversial issue for

quite a long time, and I’ve never really had a chance to get it sort
24

of direct from somebody who might be able to give me an answer

that isn’t as bent as some of the ones I’ve gotten.

Mr. DOLLAR. We’ll see if we can give you a straight up answer.

Federal credit unions are authorized to engage in certain brokerdealer activities such as third party brokerage arrangements,

sweep accounts, and to purchase and sell municipal securities for

their own accounts. That is an allowable investment. And to the extent—and it is a very limited extent, admittedly, but to the extent

that credit unions engage in these activities or some other authorized activity in the future, we feel that they should be afforded the

same treatment as banks and thrifts, and the thrifts are included

in this legislation, with respect to the registration under the

broker-dealer statute. It is very limited, admittedly, as many of the

things that credit unions provide that the other institutions provide

on a much broader scale. But even in the small areas where they

are provided, we think that the credit unions should have that parity.

Ms. HART. And once again, the question always arises is if they

have that parity, then obviously under this bill, they’re not given

more responsibility as far as disclosure?

Mr. DOLLAR. Absolutely not. There is nothing in this bill that

would enable a credit union to engage in any type of broker-dealer

authority that it does not already have. It just says that if a credit

union were to, for example, want to buy municipal securities for its

own investment account, that there would be no question but that

they would not have to register as a broker-dealer to be able to do

that. A credit union is not a broker-dealer, but they do have certain

limited authority in this regard. This does not expand that authority.

Ms. HART. OK. Is there a concern by any other member of the

panel about the situation as it exists today regarding the opportunity for credit unions to participate as well as other institutions?

General question. Mr. Olson?

Mr. OLSON. We don’t have an opinion on that this morning.

Ms. HART. OK. Ms. Williams.

Ms. WILLIAMS. We don’t have a position either.

Ms. HART. Wow. OK.

Mr. KROENER. Nor does the FDIC, Congresswoman.

Ms. HART. Ms. Buck.

Ms. BUCK. I haven’t discussed it with our new director yet.

Ms. HART. OK.

Ms. BUCK. So we don’t have one as yet.

Ms. HART. Thank you. Thanks, Mr. Dollar. Thank you, Mr.

Chairman.

Chairman BACHUS. You ought to go back to law school.

[Laughter.]

Chairman BACHUS. You’re like those lawyers in Alabama that

just have one short question.

[Laughter.]

Chairman BACHUS. Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman. I just have one question.

Ms. Williams, Section 401 of the bill easing restrictions on interstate branching and mergers, am I right in understanding this
25

would overturn Riegle-Neal and preempt existing State law for de

novo interstate mergers?

Ms. WILLIAMS. It would modify provisions in Riegle-Neal dealing

with de novo branching, not mergers.

Mr. BENTSEN. So if a State had not opted in under Riegle-Neal,

and I’m trying to think of a couple of States that that might apply

to, then if this were to become enacted, then that would be meaningless and any, you know, Acme Bank national association based

in Wisconsin would be able to branch, say, in Texas de novo or

whatever?

Ms. WILLIAMS. This is a change that would apply to both Statechartered and national banks to permit de novo branching.

Mr. BENTSEN. And how many States have not opted in?

Ms. WILLIAMS. Governor Olson had that number.

Mr. OLSON. Congressman, 33 States have not. Seventeen States

have and 33 States, plus the District of Columbia, have not opted

in.

Mr. BENTSEN. Is there—and I know you have a second panel

coming up. This would strike me as a somewhat substantial item

in this bill, given the fact that since Riegle-Neal passed in what,

1993 or 1994, that the States have had some time. I’m thinking.

I don’t think my State has opted in, if I recall correctly, the State

of Texas. And I know there have been a number of cases between

the Comptroller of the Currency and the Texas Department of

Banking over questions of whether or not some banks have violated

that. Do you have any indication, or anybody on the panel, that the

States are more complacent to this idea at this point in time? Or

do you think this is something that they would have a problem

with?

Mr. OLSON. We have not heard, but I guess as you said earlier,

that’s a great question for the next panel. And they probably have

more input on that issue. In our judgement, this is in every sense

the epilogue on this issue. Because the issue of interstate ownership was long since determined by the State legislatures. The issue,

as you correctly pointed out, the issue of interstate branching was

dealt with in Riegle-Neal. And what we have now is a certain competitive imbalance caused by the opt-in option with respect to the

competition between banks and Federal thrifts and large banks

versus small banks.

And in our judgment, it’s a level playing field, particularly with

respect to smaller banks whose natural markets are right along the

State line.

The issue that you talked about of a Wisconsin bank branching

into Texas is not a major issue for a large organization. And the

fact that they could purchase an organization and then branch

from there isn’t a problem. A smaller bank in an environment

where the State line impedes their natural market would have a

more significant issue. And that’s what we’re saying.

Mr. BENTSEN. So the argument in favor of this would not be that

there’s a competitive imbalance for a money center bank? They’ll

get some benefit out of this because they won’t have to set up individual charters in each State in order to conduct their branching

where that State has not opted in. You’re saying this is a measure for smaller, non-money center banks, you know, $10 billion or less?
26

Mr. OLSON. Well, I have to change your premise just slightly. A

larger bank could purchase a bank in the State in which it wanted

to enter, and a $50 billion bank could purchase a $20 million bank

or a charter of that size with relative ease, where a community

bank that would try to branch into that State and would first have

to make a purchase, which is the other option, as opposed to de

novo, would find the purchase to be a major obligation. And yet,

the competitive issue probably would be more important for the

smaller institution.

Mr. BENTSEN. So this is for the smaller banks, not for the larger

banks, is the intent?

Mr. OLSON. That’s correct.

Mr. BENTSEN. Let me ask one other question. Would this have

the effect of preempting State banking laws in those States that

have not opted in for purposes of regulation? If I understand correctly, for a State that has not opted in right now and someone

wants to come in with a new bank, they can acquire, they can set

up a separate charter, there can be symmetry between the outside

bank and the current bank, but the bank inside the non-opt-in

State still is under State law as it relates to consumer protection

and whatever else. To what extent would repeal of Riegle-Neal’s

opt-in provision preempt State law in any respect in addition to

just the branching itself?

Ms. WILLIAMS. Congressman, I don’t think it would at all to the

extent that the State laws were applicable. There are various provisions in Riegle-Neal and in some amendments that were made to

Riegle-Neal a couple of years later that deal with the applicability

of State laws to interstate branches. This doesn’t affect that.

Mr. BENTSEN. So the parity issues and all that are all the same?

Ms. WILLIAMS. I think that’s correct.

Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.

Chairman BACHUS. I thank the gentleman from Texas for those

thoughtful questions. At this time, unless the sponsor of the bill

has a follow-up question, we will discharge the first panel. And actually you’ll note that you are being discharged early.

[Laughter.]

Chairman BACHUS. We certainly appreciate your testimony. We

also appreciate your willingness prior to this hearing to work with

the subcommittee and to suggest changes even to us before we

started preparing these bills for some reform of the regulations. So

we appreciate your testimony and your professionalism here this

morning.

Mr. CANTOR. [Acting Chairman.] Thank you.

STATEMENT OF ELIZABETH McCAUL, SUPERINTENDENT OF

BANKS, NEW YORK STATE BANKING DEPARTMENT, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS

Ms. MCCAUL. Good morning Chairman Bachus and Members of

the subcommittee. I am Elizabeth McCaul, Superintendent of

Banks for the State of New York, and Chairman of the Conference

of State Bank Supervisors. Thank you for asking us to be here

today to share the views of CSBS on regulatory burden reduction

and the Financial Services Regulatory Relief Act of 2002.
27

CSBS is the professional association of State officials who charter, regulate and supervise the Nation’s over 6,000 State-chartered

commercial and savings banks, and more than 400 State-licensed

foreign banking offices nationwide.

We applaud your commitment and efforts to reduce the burdens

imposed by unnecessary or duplicative regulations that do not advance the safety and soundness of our Nation’s financial institutions. This subcommittee deserves special recognition for its efforts

to remove these Federal regulatory burdens, allowing our banks to

compete with other financial entities at home and around the word.

This competition encourages efficiency and innovation, benefiting

the economy and consumers alike.

However, the most important contribution toward reducing regulatory burden may be empowering the State banking system. State

banks and the State chartering system have created the vast majority of innovations in banking products, services and business

structures. For this reason, we are very disappointed that a provision to allow State-chartered member banks to utilize the powers

of their charter was withdrawn from the bill just prior to its introduction.

Through innovation, coordination and the dynamic use of technology, States have made great strides in reducing regulatory burden for the institutions we supervise. My submitted testimony describes these efforts in more detail.

The Financial Services Regulatory Relief Act of 2002 can be a

valuable Federal complement to these efforts. With respect to interstate branching requirements, as you may know, current Federal

law has taken an inconsistent view toward how banks may branch

across State lines. While Riegle-Neal gave the appearance that

States could control how banks could enter and branch within their

borders, this has not always been the reality.

Perhaps because it was believed that the Federal thrift charter

would be eliminated at the time Riegle-Neal was adopted, the law

was not applied to federally-chartered thrifts. The result is that a

Federal thrift can branch without regard to State law and rules of

entry.

Since the passage of Riegle-Neal, the OCC has promulgated creative interpretations of the National Bank Act that effectively circumvent the application of Riegle-Neal to branch-like operations.

The result is that State-chartered institutions, particularly community banks who wish to branch interstate, are at a competitive disadvantage to those institutions that can use Federal options to

branch without restrictions.

While 17 States now allow de novo branching, please recognize

in your review of Federal law that the majority of States have not

passed de novo branching laws. Whatever the outcome, we urge

Congress to eliminate the disadvantage it has created for State

banks because of inconsistent application of Federal law.

CSBS also hopes that the subcommittee will rethink including

the State member bank powers amendment. The provision would

simply give the Federal Reserve more flexibility to allow State

member banks to engage in investment activities where authorized

by their chartering State and approved by the FDIC as posing no

significant risk to the deposit insurance fund.
28

State-chartered non-member banks have always been allowed to

exercise expanded powers within the confines of safety and soundness. Therefore, eliminating this prejudicial and unnecessary distinction between State-chartered member banks and non-member

banks is appropriate regulatory relief.

We also ask the subcommittee and the Congress to address the

implementation and implications of regulatory preemption by the

OCC and the OTS. CSBS believes this request for review of preemption and applicable law is appropriately a regulatory burden

reduction matter as well.

Our banking system is a complex and evolving web of State and

Federal law, particularly for the State-chartered institutions.

Greater sunshine on OCC and OTS interpretations of applicable

law for the institutions they charter would also help to clarify applicable law for our Nation’s more than 6,000 State-chartered

banks, representing nearly 70 percent of all insured depositories.

The quest to streamline the regulatory process while preserving

the safety and soundness of our Nation’s financial system is critical

to our economic well being and to the health of our Nation’s financial institutions. We commend this subcommittee for its efforts in

this area and thank you, Congresswoman Capito, for sponsoring

this legislation.

Thank you for the opportunity to testify on this very important

subject. We look forward to any questions you and any of the Members may have.

[The prepared statement of Elizabeth McCaul can be found on

page 140 in the appendix.]

Mr. CANTOR. Thank you, again, Ms. McCaul.

Now I would like to again recognize Mr. Roger Little. He is Deputy Commissioner, Credit Union Division, Financial Institutions

Bureau, State of Michigan, on behalf of the National Association of

State Credit Union Supervisors. Again, welcome.

STATEMENT OF ROGER W. LITTLE, DEPUTY COMMISSIONER,

CREDIT UNIONS, OFFICE OF INSURANCE AND FINANCIAL

SERVICES, ON BEHALF OF THE NATIONAL ASSOCIATION OF

STATE CREDIT UNION SUPERVISORS

Mr. LITTLE. Thank you very much, Mr. Chairman. By way of introduction, NASCUS represents credit union supervisors across the

country who collectively regulate more than 4,300 State-chartered

credit unions. Like our counterparts in State government across

the country, the Michigan Office of Financial and Insurance Services is committed to carrying out its mission through effective, efficient chartering, regulation and supervision of our State-chartered

financial institutions.

NASCUS supports your efforts to reduce the regulatory burden

on all depository institutions and appreciates this opportunity to

present the State regulators’ perspective and views on those aspects of the regulatory relief bill that most directly impact Statechartered credit unions.

We would also like to address the broader issue of the overall

safety and soundness of the State-chartered credit union system.

NASCUS strongly supports the provisions contained in the regulatory relief legislation that would authorize State-chartered, pri-
29

vately insured credit unions to be eligible for membership in the

Federal Home Loan Bank System.

All State-chartered credit unions, regardless of their insurer, are

regulated and examined by agencies of State governments to ensure that they are operating in a safe manner. To properly manage

and price insurance risk, deposit insurers rely significantly on the

examination reports of the institution’s primary regulator. Most

State credit union agencies use the same examination product, policy and procedures as the NCUA, who regulates Federal credit

unions and insures all federally insured credit unions.

State agency examiners get the same training NCUA examiners

do, plus any additional training the State agency may require.

NASCUS agencies participate in the development and testing of

NCUA’s examination program and procedures. In short, there is excellent cooperation between NCUA and the State regulators and

substantially similar examination standards for both federally and

State-chartered credit unions.

Regarding privately insured credit unions, it’s important to note

that the Federal Deposit Insurance Corporation Improvement Act

of 1991 specifically addressed the issue of private insurance for

credit unions, establishing a series of safety and soundness requirements both for entities that would offer private deposit insurance

to credit unions and for credit union that choose to have private deposit insurance.

It’s also important to note that permitting non-federally-insured

institutions to join the Home Loan Bank System would not establish a new membership principle for the system. More than 50 insurance companies chartered and regulated by State governments

are now members of the Federal Home Loan Bank System. Opening membership to all credit unions as well would not inflict any

new or unusual exposure on the Federal Home Loan Bank System.

We also need to recognize that allowing membership only provides access to the system. Each Federal Home Loan Bank has a

very sophisticated credit screening system to assure that any borrower, federally insured or otherwise, is creditworthy. Arguably, access to the Federal Home Loan Bank System provides an additional level of scrutiny for credit unions and introduces additional

market discipline into the system.

We would appreciate your support for including this proposal in

the regulatory relief legislation and urge the subcommittee to approve this provision which will help achieve our Nation’s housing

and homeownership goals.

I’d also like to touch briefly on the SEC exemption issue which

was discussed earlier and note that NASCUS supports extending

parity to all credit unions from the exemption that would give

State institutions an exemption from SEC registration requirements, the same exemption that banks were provided by the

Gramm-Leach-Bliley Act. NASCUS requests that State-chartered

credit unions be accorded parity of treatment in this area and

therefore relief from those same requirements for basically the

same reasons as articulated by Chairman Dollar earlier.

NASCUS also wants to address concerns about a perceived lack

of parity in the credit union dual chartering system. We are aware

of some complaints that State-chartered credit unions have grown
30

faster than their Federal counterparts in some States in recent

years. As a result, it has been suggested that the powers of Statechartered credit unions might be rolled back by the U.S. Congress

to restore parity of growth in the dual chartering system.

In recent years, a number of federally-chartered credit unions

have switched to State charters, because that charter offers a better fit with the business plan of those institutions. Perhaps there

were specific consumer financial services that a particular State

law or regulation permitted, or there was a better field of membership provision enabling that credit union to better meet its members’ needs. In other cases, there have been conversions from State

to Federal charters. That simply demonstrates yet again the benefits of having a strong dual chartering system to provide that freedom of choice.

But it’s important also to consider some facts to put this issue

in perspective. Today there are still fewer State-chartered credit

unions than federally-chartered credit unions—4,400 versus 6,200.

Statistics on the data for these various institutions are included

with our written testimony.

Also the total assets of State-chartered credit unions are signifi- cantly lower than those of Federal credit unions, $231 billion

versus $271 billion. Some have even suggested that the rapid recent growth of the State system is the result of regulatory laxity

by State regulatory agencies. We vigorously challenge that contention and would like to take this opportunity to refute it.

We have attached to our testimony a brief comparison of key financial performance characteristics of both federally and Statechartered credit unions. Current data indicates that in every essential safety and soundness category, the financial performance of

State-chartered credit unions is every bit as sound as that of federally-chartered institutions.

The recent expansion of fields of membership opportunities for

both Federal and State-chartered credit unions has diversified geographical risks for these institutions, enhancing their safety and

soundness. In fact, the State-chartered credit union system which

began in the early 1900s, was in the forefront of diversing credit

union fields of membership. Encouraging diverse employee groups

and making a broader range of community groups eligible for membership helps ensure the economic viability of credit unions.

There have also been major improvements in both the State and

Federal systems of regulation and supervision for depository institutions since the savings and loan crisis of the 1980s and early

1990s. In fact, since 1998, all credit unions have been subject to

prompt corrective action requirements that actually exceed those of

commercial banks and savings institutions.

We would submit that any public policy prescription to roll back

by Federal law the statues and regulations of the States to punish

State-chartered credit unions for their financial success in this new

era of intensified State supervision would be a disastrous public

policy approach. Ebbs and flows in Federal and State charter activity are one of the benefits of the dual chartering system. It happens

in the commercial banking industry and likewise occurs in the

credit union industry. That ebb and flow is a desirable public policy

objective, not a cause for Congressional concern.
31

Attempting to roll back the powers of State credit unions would

be extremely damaging to the dual chartering system, to millions

of credit union members across the country, and to the health and

viability of the credit union system and the financial system in general. We urge this subcommittee to protect and enhance the viability of the dual chartering system for both credit unions and for

banks and to approve the provisions we have discussed in our testimony.

Thank you very much for the opportunity to present our position

on these issues, and I’ll be happy to address any questions that you

may have.

[The prepared statement of Roger W. Little can be found on page

157 in the appendix.]

Mr. CANTOR. Thank you, Mr. Little.

I’d like to direct a question to you, Ms. McCaul. You’ve asked us

to reconsider a provision that would give the Federal Reserve more

flexibility to allow State member banks to engage in investment activities authorized by their chartering States and approved by the

FDIC. Behind that request, your position that there is no significant risk to the deposit insurance fund. Currently, State member

banks are limited to activities granted to national banks, and yet

State non-member banks are allowed to exercise expanded powers

within the confines of safety and soundness. One, why do you support this provision? Two, how do you respond to the OCC’s view

that this would undo the prudential standards in the GrammLeach-Bliley Act?

Ms. MCCAUL. First I would point out that this section, this ability of State-chartered banks in general has been a bedrock of the

dual banking system. Our country’s successful financial system has

had at its very core the concept of innovation that has begun at the

State level. The States in effect have been the laboratories for

change and new possibilities, new products, new services tested at

the State level have become nationwide products and services that

have benefited our country.

And so this innovation has been part of our law, part of system

since really the inception of the dual banking system. In fact, in

1991, in FDICIA the Congress reiterated that this innovation

would remain even at the height of the banking crisis. It preserved

the rights of State non-member banks to continue to innovate.

If I could, I would like to point out that there has been a very

strong record of that innovation within safe and sound standards

that has been operable with regard to the non-member banks for

a very long time. And in the FDIC’s submitted testimony, they are

pointing out, if you would allow me to read the following: ‘‘Indeed,

Section 24 of the FDI Act states that an insured State bank may

not engage as principal in any type of activity that is not permissible for a national bank unless the FDIC has determined that the

activity poses no significant risk to the funds and the State bank

is and continues to be in compliance with applicable capital standards prescribed by the appropriate Federal banking agency.’’

That statute makes no distinction between State member banks

and State non-member banks. So the concept of being able to craft

innovation within a State-chartered bank is an activity that currently exists for non-member banks and is subject to oversight not
32

only by the State regulator but also by the FDIC. Including this

provision would merely allow another regulator to have the same

authority with regard to State member banks. And the concept of

innovation that has been at the heart of our country’s dual banking

system would be preserved.

Mr. CANTOR. Thank you, Ms. McCaul.

I would now like to call upon the bill’s sponsor, Ms. Capito, for

comments and questions.

Ms. CAPITO. Thank you, Mr. Chair.

I’d like to ask a question of Ms. McCaul. We talked about this

in the last panel, and I’d like just a clarification. You touched on

it in your statement, and I appreciate that, the fact that 33 States

do not have the de novo statutes in place and I mentioned that I

was a former State legislator who is leery of preemption by the

Federal laws. We were wondering if there was any opposition that

you would foresee in terms of States across the Nation.

Ms. MCCAUL. The CSBS has adopted a policy that encourages

the States to consider adopting de novo branching laws. And at the

same time, CSBS also has a policy that Federal law or regulation

should not put a State-chartered institution at a disadvantage. And

so we have had 17 States that have adopted de novo branching

laws, and a number of States have not moved in that direction at

this time.

The result is that the provisions in law that exist have created

a competitive disadvantage for the State-chartered where they are

not able to branch as easily as thrifts or nationally-chartered

banks.

Ms. CAPITO. OK. Thank you. I have no further questions. I yield

back.

Mr. CANTOR. Thank you.

The Chair now recognizes Mr. Ney for comments or questions.

Mr. NEY. Thank you, Mr. Chairman. I want to thank Representative Capito and also you for the inclusion of the Federal Home

Loan Bank Membership Act, which I introduced earlier in this session as Section 301 of the regulatory relief legislation. I think it’s

going to be good news to firefighters and police, postal workers,

teachers, State employees, credit unions have written to me and

other Members of the subcommittee asking for the relief so they

can provide home financing to their members.

Also, as you know, Mr. Chairman, State-chartered privately insured credit unions cannot apply to become members of a Federal

Home Loan Bank even though nearly 11,000 federally insured

credit unions already are permitted to do so. The legislation I have

corrects this problem. It would give State-chartered, privately insured credit unions the same permission available to all other credit unions to apply to a Federal Home Loan Bank for membership.

After they apply, they would of course still have to meet all the

Federal Home Loan Bank safety and soundness requirements on

top of their existing State regulations as well as the Federal requirements, which are part of FDICIA, the bill supported by the

Credit Union National Association, National Association of Credit

Union Supervisors as well as a number of State credit union

leagues.
33

I understand some Members of the subcommittee obviously may

have concerns about the regulation of privately insured credit

unions, so I’m working with my good friend Congressman Kanjorski, and I want to address those concerns.

I do have a couple of questions for Mr. Little. Mr. Little, I know

some Members of the subcommittee are perhaps not aware of the

private deposit insurance option for credit unions because it is only

available in certain States, but that option was specifically sanctioned by the Congress in Federal law. Isn’t that correct?

Mr. LITTLE. That’s correct, sir, in the FDICIA Act of 1991.

Mr. NEY. And also, could you tell us why a credit union would

want to apply for membership with a Federal Home Loan Bank

and how many federally insured credit unions are already members

of a Federal Home Loan Bank?

Mr. LITTLE. As I understand it, about 650 credit unions nationwide are currently members. The principal advantage of membership is an additional source of longer term credit for those institutions to use for the purpose of financing mortgage loans for their

members in much the same way that banks and other businesses

use the Federal Home Loan Bank now.

It’s to the benefit of those credit union members to be able to receive that financing. It’s to the benefit of the credit union’s safety

and soundness to be able to have an additional financing vehicle

to use for interest rate risk management purposes. And as I stated

earlier, in our view, it’s beneficial to have yet another set of eyes,

if you will, looking at those credit unions as they borrow from the

Federal Home Loan Bank.

Mr. NEY. So another layer of Federal safety and soundness is

what you’re saying?

Mr. LITTLE. Yes, sir.

Mr. NEY. And I appreciate it. And I’m sorry I didn’t make all

your testimony, but I’ll especially look at the part where you talk

about the additional layer.

Mr. LITTLE. Thank you.

Mr. NEY. Thank you, Mr. Chairman.

Mr. CANTOR. Thank you. And if there are no further questions,

I have none. I’d just like to thank the panel again and the audience’s patience with the subcommittee, and the hearing is now adjourned.

[Whereupon, at 11:58 a.m. the hearing was adjourned.]

(35)

H.R. 3951—THE FINANCIAL SERVICES

REGULATORY RELIEF ACT OF 2002

THURSDAY, APRIL 25, 2002

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C.

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

2128, Rayburn House Office Building, Hon. Spencer Bachus,

[chairman of the subcommittee], presiding.

Present: Chairman Bachus; Representatives Weldon, Roukema,

Baker, Cantor, Grucci, Hart, Capito, Tiberi, Waters, Bentsen, and

Hinojosa.

Chairman BACHUS. The hearing will come to order. The Chair

recognizes himself for the purpose of making an opening statement.

And what we do, for witnesses who have not been here before, we

have brief opening statements; they will be brief. And then some

of the Members wanted to introduce the witnesses who are from

their home States. We will do that. The Ranking Member will

speak after I speak. And then we will go right into your testimony.

We have—I don’t know if any of you were told—we have a 5-

minute rule. But we will waive that as long as you don’t go 10 or

15 or 20 minutes. But don’t—we are not going to be—some of the

audience is shaking their head don’t waive the 5-minute rule. But

we will not be very strict on that.

The subcommittee meets today for its second hearing on H.R.

3951, the Financial Services Regulatory Relief Act of 2002. We just

call that ‘‘reg relief.’’ This bipartisan legislation was introduced last

month by two of my colleagues on the subcommittee, Mrs. Capito

and Mr. Sandlin.

I am an original co-sponsor, as is the Chairman of the Full Committee, Mr. Oxley of Ohio.

So I commend you, Mrs. Capito, for your hard work on this.

And at our first meeting on H.R. 3951 last month, the subcommittee heard testimony from a wide range of Federal and State

banking regulatory agencies whose technical assistance and expertise has been invaluable to the subcommittee in the development

of this legislation.

Having heard from the regulators, today we hear from the regulated, those institutions that must contend with the reams of bureaucratic red tape that issues forth from this city every year.

Testifying will be five of the leading financial services trade associations, representing large banks, small community banks, savings
36

institutions and credit unions, in no particular order. I could read

that the other way around.

As Chairman Oxley and other Members pointed out at our first

hearing, the regulatory burden shouldered by depository institutions increased significantly last year with the enactment of the

anti-money laundering provisions of the U.S.A. PATRIOT Act.

Just this week, the Treasury Department issued new regulations

implementing a key provision of that act requiring financial institutions to have in place programs designed to detect money laundering and terrorist financing.

In testimony before this subcommittee, and I think this is very

good news for you all as representatives of you all’s organizations,

the FBI and other Government agencies have praised—and lavishly praised—the financial services industry for its cooperation

with law enforcement in the post-September 11 investigations of al

Qaeda and other terrorist organizations operating in the country.

The cooperation of the institutions you represent couldn’t have

been better, and they have led to successful seizures.

It has often been said that banks and other financial institutions

are our Nation’s first line of defense in the financial war on terrorism that the Bush Administration is waging so effectively.

Last week’s governmental warning that terrorists might be planning attacks against U.S. financial institutions in the Northeast

brought home the banking industry’s front line role in the fight

against terrorism in stark terms.

So as we consider this important legislation to give financial institutions and their customers much needed regulatory relief, we

should also take a moment to recognize the very real contributions

to homeland security made by vigilant bank tellers and other financial services professionals across the country.

I now recognize the Ranking Minority Member, Ms. Waters, for

an opening statement.

Ms. WATERS. Thank you very much, Mr. Chairman.

I would like to thank you for holding this hearing today. I would

like to say that this hearing is certainly necessary. But, we have

to remember that the name of the subcommittee is Financial Institutions and Consumer Credit. I worry that we tend to focus too

much of our time on the financial institution part of the subcommittee’s jurisdiction, and not enough time on issues that are

very, very vital to consumers.

I am certainly not opposed to the principle of reasonable regulatory burden relief, and I will even concede that consumers could

possibly experience some minor cost savings as a result of regulatory relief, but I think some of the provisions may go too far.

In particular, I am concerned about Section 301 of the bill, which

would permit privately insured credit unions to become members

of the Federal Home Loan Bank system. Membership in the Federal Home Loan Banks is desirable to credit unions, but is currently only open to those with Federal insurance. Unfortunately, in

the past, there have been failures of private and State insurance

funds.

In addition, this change could cause a number of credit unions

to abandon their Federal charters and create a potential race to the

bottom by State regulators to attract credit unions to their State.
37

We recently completed Federal deposit insurance reform legislation in this subcommittee, and while we may have had our differences on some issues, we all shared the goal of maintaining a

strong and safe deposit insurance system. I can’t imagine that we

want to turn around and create incentives for credit unions to

switch from safer Federal insurance to riskier private insurance.

H.R. 3951 needs to be a bit more balanced. There is nothing here

for customers, and there are some very critical matters that need

attention in that arena. For example, the numerical provisions in

the Truth in Lending Act are so hopelessly outdated that many

automobile loans fall outside of the act’s capped amounts, which

must be raised to have any meaning.

In addition, basic protections for credit card consumers are solely

needed, and it is virtually an unregulated industry except for a few

basic disclosures. These cards are used to entice people to take on

debt that they can ill afford without giving them the tools they

need to make an educated decision.

In order to meet relief from regulatory burden, there should be

some regulations in place to begin with. Over the last quarter century, entire industries sprung into being largely outside of the

boundaries of Federal regulation. I am talking about the check

cashiers, the payday lenders, the mortgage services, and the

subprime lenders who fly below radar in many of their activities.

So, Mr. Chairman, I hope that this bill develops a little bit more

balance as it moves forward, because at this point, again, I am not

so sure that I could point to very much for our consumers. However, I do look forward to hearing the witnesses today, and I must

reiterate that I am supportive of getting rid of unnecessary burdens for our regulatory agencies. But, I would hope to have some

initiation of discussion on some of those areas that I have pointed

to, at some point in the work of this subcommittee.

Thank you very much.

Chairman BACHUS. I thank the Ranking Member.

Mrs. Capito, sponsor of the bill, we want to recognize you.

Mrs. CAPITO. Yes, thank you, Mr. Chairman. I appreciate you

holding another day of hearings on this regulatory relief bill, and

I want to thank our panel for taking the time to travel to Washington to appear before us today. I want to extend an especially

warm welcome to Charlene Gaither, who comes to us today from

my beautiful home State of West Virginia, and I look forward to

providing the subcommittee with a more formal introduction in a

few moments.

Mr. Chairman, as my colleagues will recall from our last hearing

on this issue, Chairman Oxley, Mr. Sandlin and I introduced this

bill in an effort to help reduce the substantial regulatory burdens

imposed on the financial services industry.

While the Federal regulations play an important role in protecting consumers, instilling confidence and ensuring a level playing field, overregulation can depress innovation, stifle competition,

and actually retard our economy’s ability to grow.

Periodically reviewing and questioning the regulations put in

place over time will ensure that as industries and technologies

change, so too will the rules that govern them.
38

As I mentioned in our last hearing, I believe we have put together a good and balanced bill that will benefit both consumers

and business. But this legislation is by no means a final draft.

These hearings are designed to flush out any potential problems

that may exist, be they mistakes of omission, simple drafting errors

or unintended consequences of what at first glance appear to be

merely technical changes. I hope that today’s witnesses will feel

free to provide us with their expert opinions. I look forward to

working with the Chairman as we move closer to the markup, and

I thank the Chair again. Thank you.

Chairman BACHUS. Thank you.

At this time, Mrs. Roukema, do you have an opening statement?

Mrs. ROUKEMA. No.

Chairman BACHUS. We welcome you to the subcommittee.

Are there any other opening statements? Well, at this time we

are going to allow Members to introduce the witnesses that are

from their home States. And at this time I recognize the Ranking

Member, Ms. Waters.

Ms. WATERS. Thank you very much. Mr. Chairman and Members, I would like you to join with me in welcoming Mr. Bill Cheney, who is the president and CEO of the Xerox Federal Credit

Union in El Segundo, one of the small cities adjacent to my district.

Mr. Bill Cheney, who is the President and CEO of Xerox Federal

Credit Union has a broad background in financial services, including more than 15 years working in the credit union industry.

Bill joined Xerox Federal Credit Union, which by the way had more than $590 million in assets in 1997, after more than 10 years

with Security Service Federal Credit Union in Texas. This credit

union serves employees from Xerox Corporation and related companies nationwide through 18 credit union offices in nine States, including California, New York, Illinois and Texas. In addition, the

credit union owns 39 percent of Xerox Credit Union Corporation,

a brokerage and insurance company serving multiple credit unions

and their members throughout offices in 15 States.

Welcome, Mr. Cheney.

Chairman BACHUS. Thank you. Mr. Cantor.

Mr. CANTOR. Thank you, Mr. Chairman.

I have the distinct pleasure to welcome two fellow Virginians

today. Always, hopefully inspiring to be the Virginia gentleman

that Mr. Stone is, I will go to the lady first.

It is my pleasure to introduce Ms. Elizabeth, or Betsy, Duke. She

is a lifelong resident of the Commonwealth and began her career

in banking in 1975. She started as a drive-in teller and worked her

way to President and CEO of the Bank of Tidewater by 1991.

She has also served as an instructor on the banking industry in

numerous locations and is a past member of the Board of the Richmond Federal Reserve. She currently serves on the board of the

American Bankers Association and is Chairman of the ABA’s Government Relations Council. She is also President of SouthTrust

Bank, Virginia Beach. I consider Betsy a friend, a valuable resource on banking industry resources and look forward to her testimony. Again welcome.

I would also like now to welcome, Mr. Chairman, a constituent

of mine, always an honor, and he is a true Virginia gentleman, Mr.
39

Pierce Stone. Pierce is the Chairman, President, CEO of the Virginia Community Bank in Louisa, Virginia. He is also the Chairman of the Independent Community Bankers of America.

He earned his Bachelor of Science Degree in Business Administration from the University of South Carolina and is a graduate of

the School of Banking of the South. He also served as a Director

of the Federal Reserve Bank of Richmond from 1990 to 1992. He

was appointed by the Governor of Virginia to serve as a Director

on the Virginia Real Estate Appraisers Board.

Long active in the ICBA, Mr. Stone has served as Chairman of

the Long-Term Planning and Marketing Committee and is an

ICBA State Director. He serves on the board of the ICBA Credit

Life Company. He is a member of the Virginia Association of Community Banks, and is past President of this organization.

He helped organize and was Chairman of Community Bankers

Bank of Virginia. Other businesses and activities include many,

Mr. Chairman. He is Director of a weekly newspaper company, a

radio station, as well as Rockingham Group, which is a property

and casualty mutual company. He is the former treasurer and

board member of the Lions Club in Louisa, and most importantly,

he is married and has two children.

I would say, Mr. Chairman, it is a real honor for me to welcome

Pierce. He is a leader in our community, and I am proud that he

is here today and look forward to his testimony. I yield back.

Chairman BACHUS. I will say this, Mr. Stone. You have been before the subcommittee before. And, Mr. Hage, you are no stranger

to the subcommittee. So normally we only introduce folks that are

coming before the subcommittee for the first time. But this time,

in this case Mr. Cantor, since he was introducing Ms. Duke, he was

afraid not to reintroduce you. And, Mr. Stone, so that you know,

that is probably very diplomatic to do.

Mr. Hage, I want to commend you on your recent appointment

to the President’s Task Force on Retirement Savings. And, as he

knows, he was appointed by Speaker of the House Denny Hastert.

I think that is quite a recognition of your accomplishments and

professionalism. So I commend you on that. You have important

work ahead of you.

Are there further opening statements? I am sorry. Mrs. Capito.

You have not introduced the gentlelady from West Virginia, have

you?

Mrs. CAPITO. No, not in full.

Chairman BACHUS. All right. Thank you.

Mrs. CAPITO. Thank you. Mr. Chairman, I want to welcome

Charlene Gaither to Washington and to thank her for taking her

time to provide the subcommittee with her expertise on the regulatory burden facing our Nation’s credit unions. I had the opportunity yesterday to spend some time with Charlene, and I was very

impressed with her dedication, not only to her members but with

her extensive knowledge of the industry.

As one of seven full-time employees, Charlene currently serves as

the manager of Eastern Panhandle Community Federal Credit

Union in Martinsburg, West Virginia. The Community Federal

Credit Union is a $14 million credit union that serves more than

2,000 members. Charlene has handled the duties of Chief Financial
40

Officer and Chief Marketing Officer during her tenure, and is a volunteer board member of the West Virginia Credit Union League.

Charlene’s 17 years of experience gives her, I think, a unique

perspective on how the regulatory relief bill will help both consumers and business. I am pleased to have her here, my fellow

West Virginian, and I look forward to her testimony.

Chairman BACHUS. Thank you. And we will start, Ms. Gaither

with your testimony. And you can maybe explain to us starting out

how Martinsburg has a 5-story FAA building. But if you don’t want

to you don’t have to.

STATEMENT OF CHARLENE R. GAITHER, MANAGER, EASTERN

PANHANDLE COMMUNITY FEDERAL CREDIT UNION, MARTINSBURG, WV, ON BEHALF OF CREDIT UNION NATIONAL

ASSOCIATION

Ms. GAITHER. Chairman Bachus, Ranking Member Waters and

Members of the subcommittee, especially my own Member, Representative Capito, thank you for the opportunity to provide comments on H.R. 3951 and your efforts to design legislation to lessen

the regulatory burden on insured depository institutions.

I am Charlene Gaither, Manager of the Eastern Panhandle Com- munity Federal Credit Union, a $14 million credit Union in Martinsburg, West Virginia. I appear before you today on behalf of the

Credit Union National Association.

We congratulate Representative Capito for introducing this bill

and including the legitimate needs of credit unions for regulatory

relief. I would like to emphasize that my testimony today will focus

on the provisions in the bill which pertain to credit unions as well

as those we would like the subcommittee to include in any final

bill.

We understand that the ABA and other bank trade associations

oppose all or parts of this bill because of the credit union provisions. We will not lower ourselves to their level and attack provisions pertaining to them.

While my written statement includes a thorough analysis of each

of the credit union provisions, I will only touch on a few of them

in my oral statement this morning.

CUNA strongly supports Section 301 of the bill, which permits

State-chartered, privately insured credit unions to become members of the Federal Home Loan Bank. This provision was originally

introduced as H.R. 2796, the Federal Home Loan Bank Membership Act of 2001, by Representative Bob Ney.

As incorporated into H.R. 3951, it would provide a needed funding source for home ownership for many credit union members as

well as strengthen the dual chartering system of credit unions.

These 216 institutions with 1.3 million members are regulated by

the States in which they were chartered. They are subject to safety

and soundness requirements from the State regulator as well as

the private insurer.

We also want to commend Representative Capito for including

Section 306 in the bill, which incorporates legislation previously introduced by Representative Ed Royce, H.R. 760, the Faith Based

Lending Protection Act. This amendment, which we strongly support, is designed to exclude loans made by Federal credit unions to
41

non-profit religious organizations from the statutory member business loan limit of 12.25 percent of the credit union’s total assets.

According to the recent testimony of NCUA Chairman Dennis Dollar, these are the safest of all loans made by credit unions.

Another very important part of the bill is Section 307, which allows Federal credit unions to cash and sell certain checks to nonmembers of the credit union as long as they are eligible to join or

are within the field of membership of the credit union. Many of

these individuals live from paycheck to paycheck and do not have

established accounts for a variety of reasons, including the fact

that they do not have extra money to keep on deposit.

Finally, Section 308 would clarify the Federal Credit Union Act

by allowing voluntary mergers of healthy credit unions and conversions involving multiple common bond credit unions without numerical limitations. The amendment is a big step forward in facilitating voluntary mergers as other financial institutions are permitted to do.

At this point, I will turn to the additional provisions we would

like to see included in a final bill. Again, my written statement

fully covers what we believe are some of the worst examples of

statutory micromanagement that have placed unreasonable constraints on the ability of credit unions and their boards to function

efficiently and in the best interests of their members. Given time

constraints, however, I will focus only on two of these items.

First, recall that H.R. 3951, as drafted, permits credit unions to

cash checks for individuals within their field of membership, even

if they are not members. Our original request also asked for the

ability to provide wire transfer services to non-members within the

field of membership.

Such an amendment would help credit unions reach the

unbanked and underserved and provide an affordable and financially sound alternative to high cost payday lenders. Those who do

not have access to a credit union or other financial institution must

use wire services that charge outrageously high fees, up to 28 percent of the amount transferred in some cases, to execute the transaction.

Perhaps one of the most important provisions we are asking to

be included in a final version of H.R. 3951 is one that would permit

credit unions to issue some form of additional or alternative capital.

As the Chairman of the subcommittee notes, this issue was first

raised in this subcommittee during the markup of the Deposit Insurance Reform bill. An amendment was introduced, discussed,

then withdrawn. While some consideration was given to reintroducing the amendment at the full committee markup, out of deference to the Chairman it was not.

The purpose of allowing some form of alternative capital would

permit credit unions to augment the only current source of capital

that they have, retained earnings. Alternative capital would allow

a credit union that needs to do so to quickly build its capital.

Advantages of alternative capital are that it would provide additional stability, allow growth, permit product and service enhancements and could meet a portion of statutory and regulatory capital

requirements, And, frankly, although CUNA has a strong position
42

regarding the concept of allowing some form of alternative capital

for credit unions, our position regarding how to achieve that is

evolving.

We are currently in discussion with various Members and staff

of the subcommittee and are seeking a consensus on how to best

achieve this goal while maintaining certain guiding principles.

Foremost of these guiding principles is that any form of alternative

capital must not compromise the cooperative nature of credit

unions.

This capital must not give its holder any voting or control rights.

Additionally, this capital must not be insured and it must therefore

be at risk to the investor. We continue to work on an appropriate

approach that will accomplish these purposes and seek advice and

guidance from Members of the subcommittee.

In conclusion, CUNA is grateful and pleased that H.R. 3951 includes several provisions that will significantly increase the effectiveness of credit unions in serving their members. And while we

strongly support this bill, we urge the subcommittee to support our

efforts to include the additional provisions we described in this testimony.

Thank you again for the opportunity to present CUNA’s views on

this very important legislation, Mr. Chairman, and I would be glad

to answer any questions of the subcommittee. Thank you.

[The prepared statement of Charlene R. Gaither can be found on

page 170 in the appendix.]

Chairman BACHUS. Thank you, Ms. Gaither.

Mr. Cheney.

STATEMENT OF WILLIAM CHENEY, PRESIDENT AND CEO,

XEROX FCU, EL SEGUNDO, CA, ON BEHALF OF NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

Mr. CHENEY. Thank you, Mr. Chairman.

Good morning, Mr. Chairman, Ranking Member Waters and

Members of the subcommittee. My name is Bill Cheney. I am the

President and CEO of Xerox Federal Credit Union, located in El

Segundo, California. I am here today on behalf of the National Association of Federal Credit Unions to express our views on the Financial Services Regulatory Relief Act of 2002.

Xerox Federal Credit Union was chartered in 1964 and currently

serves over 72,000 members through 18 offices in nine States, and

is the only credit union chartered to serve Xerox employees in the

United States.

Credit Unions represent a significant cross-section of all of America’s consumers. The Nation’s 10,000-plus credit unions serve a different purpose than other financial institutions and have a fundamentally different structure, existing solely for the purpose of

providing financial services to our members.

All members of a credit union have an equal say in the operation

of the credit union. One member, one vote, regardless of the dollars

in their accounts. Credit unions are second to none in providing

their members with quality personal service at the lowest possible

cost. According to the 2001 American Banker/Gallup Consumer

Survey, credit unions had the highest rated service quality of surveyed financial institutions.
43

Despite their very limited market share, credit unions have been

under assault by the banking industry for nearly 2 decades. The

1998 Supreme Court decision in the field of membership case

brought these issues to a head. Congress’ prompt passage of the

Credit Union Membership Access Act, or CUMAA, in 1998 was

seen as a significant victory for credit unions.

Recognizing a growing trend of credit union conversions from

Federal to State charter, totaling $33 billion over the past 5 years,

and accounting for over 10 percent of all assets in the Federal credit union system, NAFCU has singled out the erosion and the perceived value of the Federal charter as an important issue.

Starting with a task force convened to work on ways to enhance

the Federal charter, we have identified a number of provisions in

both law and regulations which, if changed, would improve the way

Federal credit unions serve their members.

NAFCU believes that H.R. 3951 is a positive step in addressing

many of the regulatory burdens and restrictions on Federal credit

unions that have caused a number of Federal credit unions to either consider or to convert to State charter.

NAFCU applauds Representatives Capito and Sandlin for their

leadership in introducing this bill and strongly supports many of

the provisions in the legislation, including the sections dealing with

expanded investment authority, clarification of the ability for credit

unions to merge voluntarily, easing the limitation on loan terms,

credit union service organization investments, check cashing services, member business lending to religious non-profit organizations,

and land leasing.

We believe H.R. 3951 takes a balanced approach to regulatory relief. Nevertheless, I would like to call the subcommittee’s attention

to some additional issues.

First, credit unions should be exempted from the pre-merger notification requirements of the Hart-Scott-Rodino Act to the same

extent as other regulated financial institutions.

Second, the usury ceiling for credit unions should be adjusted. As

the Members of the subcommittee realize, Federal credit unions are

the only type of insured depository institution subject to Federal

usury limits on consumer loans.

Third, Congress should remove the word ‘‘local’’ from the definition of community charters. Today’s dynamic financial marketplace

characterized by cyber-banking technology rather than bricks and

mortar makes the word ‘‘local’’ an extraneous limitation.

Fourth, eliminate the preference imposed by CUMAA for the formation of new credit unions over the addition of groups to an existing credit union. Oftentimes an existing credit union is better suited to meet the needs of a group and offer them better services than

a new credit union.

Fifth, relax the reasonable proximity requirement on credit

unions seeking to add additional groups to its field membership.

This requirement is an undue burden requiring them to have a

physical presence within a reasonable proximity of the group that

the credit union wants to add to its field of membership. With the

increase in internet and remote banking, this requirement is unnecessary.
44

Sixth, relax the current member business loan restriction imposed by CUMAA and restore the member business lending rules

that were in effect prior to the passage of CUMAA.

Seventh, NAFCU supports allowing all insured credit unions, not

just corporate credit unions and those designated as low income, to

include secondary capital accounts when calculating net worth

under regulations promulgated by NCUA.

Finally, the Federal Credit Union Act contains many antiquated

credit union governance provisions that may have been appropriate

in 1934, but today are outdated. NAFCU supports including language in H.R. 3951 that would give the NCUA board greater authority in establishing appropriate governance procedures.

I would like to conclude by noting that the state of the credit

union community today is strong and the safety and soundness of

credit unions is unquestionable. NAFCU would, however, urge the

subcommittee to carefully assess the trend of conversions from Federal to State charter. We believe that H.R. 3951 is an excellent first

step.

Mr. Chairman, I appreciate the opportunity to appear before you

today, and I will be happy to answer any questions.

[The prepared statement of William Cheney can be found on

page 184 in the appendix.]

Chairman BACHUS. Appreciate that.

Mr. Stone.

STATEMENT OF PIERCE STONE, CHAIRMAN, PRESIDENT AND

CEO, VIRGINIA COMMUNITY BANK, LOUISA, VA, ON BEHALF

OF INDEPENDENT COMMUNITY BANKERS OF AMERICA

Mr. STONE. Good morning, Chairman Bachus, Ranking Member

Waters and Members of the subcommittee. My name is Pierce

Stone. I am a community banker from Louisa, Virginia. I also serve

as Chairman of the Independent Community Bankers of America.

Chairman Bachus, I want to thank you and congratulate you for

the ongoing efforts on behalf of community banking, especially your

leadership in advancing the important deposit insurance reform

bill. Community bankers across the Nation are truly indebted to

you. I also want to thank the subcommittee staff for the outstanding work that they did on this bill.

I have been asked to testify on H.R. 3951, the Financial Services

Regulatory Relief Act of 2002. ICBA supports a bank regulatory

structure that fosters the safety and soundness of our Nation’s

banking system and recognizes the fact that community banks pose

a very different risk to the banking system than larger banks.

We urge Congress and the agencies to continue to adopt policies

that recognize this important distinction.

In the interest of time, I will limit my remarks to just a few sections of the bill. Let me first address the provision in the bill that

is very important for community banks, Section 101, dealing with

Subchapter S corporations.

This section removes a restriction in current law that makes it

difficult for community banks to qualify for Subchapter S status.

Subchapter S is very important to community bankers, because it

allows them to escape double taxation by paying income tax only

at the shareholder level.
45

Unfortunately, many small banks are having trouble qualifying

for Subchapter S under the current law and cannot benefit from

Congress’ intended tax relief. Section 101 addresses the director/

shareholder restriction in the law by making it easier for banks to

comply with the requirement that directors be shareholders.

ICBA supports reducing the frequency of safety and soundness

exams for small, healthy banks and supports minimally intrusive

examinations. Section 601 gives the Federal banking agencies the

discretion to adjust the exam cycle of insured depository institutions to ensure that examiner resources are utilized in the most efficient manner. ICBA strongly supports this position.

ICBA recommends the subcommittee include a provision in the

bill to amend the Securities Investor Protection Corporation statute

to provide community banks with the same protection afforded

other investors and other depository institutions for their brokerage account assets when a broker dealer fails.

SIPC does not protect against market risk or fraud. It allows investors to get back their stock, bonds and cash held by a broker

dealer in the event of a brokerage firm collapse. Unfortunately,

banks are specifically excluded from SIPC coverage when acting on

their own behalf. Thrifts and credit unions are not excluded from

SIPC coverage. The change we seek in the statute simply affords

banks the same SIPC protections as credit unions and thrifts.

Mr. Chairman, I would now like to address a few provisions in

the bill that cause ICBA some concerns. One issue is the provision

that repeals the prohibition on national and State banks to expand

into another State through de novo branching. We believe that the

individual States should decide whether an out-of-State national or

State bank should de novo branch into their State. We believe

States should be free to make this decision, because they know best

what the banking structure in their State should be. Congress

should not preempt this basic State right.

Chairman Bachus, there are also several credit union provisions

in this bill which ICBA opposes. Our specific concerns are outlined

in our written statement. Let me just say generally that Congress

should tread carefully in granting credit unions new powers in

areas where they do not have the experience or expertise to assure

safe and sound operations.

Credit unions and community banks both serve the community

and offer many of the same products and services. However, there

is one major difference. Credit unions generally do not pay taxes

and are not subject to CRA, giving them an enormous advantage

over taxpaying and highly regulated banks and thrifts. We believe

the expanded powers granted to credit unions in this bill goes

against the spirit of the Credit Union Membership Act of 1998, as

well as their basic charter.

Chairman Bachus, thank you for the opportunity to testify before

you today on H.R. 3951, and thank you again for your stellar work

on deposit insurance reform. I will be happy to answer any questions from the subcommittee.

[The prepared statement of Pierce Stone can be found on page

229 in the appendix.]

Chairman BACHUS. Thank you.

Mr. Hage.
46

STATEMENT OF CURTIS L. HAGE, CHAIRMAN AND CEO, HOME

FEDERAL BANK, SIOUX FALLS, SD; CHAIRMAN, AMERICA’S

COMMUNITY BANKERS

Mr. HAGE. Mr. Chairman, Ranking Member Waters and Members of the subcommittee. I am Curt Hage, Chairman and CEO of

Home Federal Bank in Sioux Falls, South Dakota. I am testifying

today as Chairman of America’s Community Bankers.

Thank you for this opportunity to testify on H.R. 3951. I would

like to commend the bill’s primary sponsor, Representative Shelly

Moore Capito, as well as Representative Max Sandlin. In addition,

I would like to thank Chairman Oxley and the committee staff for

working with ACB in developing this legislation.

ACB strongly supports many of the provisions contained in H.R.

3951. By eliminating unnecessary and costly regulations, these provisions will make it easier for financial institutions to better serve

our customers and communities.

I would like to touch on some key provisions. A more detailed

analysis of the bill can be found in my written testimony.

ACB vigorously supports Section 201, which would correct the

existing statutory disparity in the way trust and fiduciary activities

of savings associations are treated vis-a-vis those of banks.

Currently, savings associations do not enjoy the same exemption

that banks do from the Investment Advisors Act and the Securities

Exchange Act for trust and fiduciary activities. As a result, only

savings associations face dual supervision and regulation when

serving the trust and fiduciary needs of their customers. We are

pleased that Section 201 provides a much needed fix for this problem.

ACB also supports Sections 401 and 105 of the bill. Section 401

would remove unnecessary restrictions on branching by national

and State banks. Section 105 would eliminate the unnecessary requirement that a national bank meet the same capital requirements imposed by States on their banks. We commend the bill’s

sponsors for including those provisions in H.R. 3951.

ACB also recommends that the subcommittee include additional

provisions in H.R. 3951. First, we strongly urge the subcommittee

to consider adding a provision that would modestly increase the

business lending limit for savings associations. Currently Federal

savings associations are subject to a 10 percent limit on commercial

lending authority and a 10 percent bucket for small business loans.

With more and more small businesses depending on smaller associations as community credit providers, those limits pose an ever

increasing constraint on credit availability for small businesses.

This is particularly true in smaller communities where there are

fewer credit providers.

Congress should repeal the lending limit restrictions on small

business loans and increase the aggregate lending limit on other

commercial loans to 25 percent. By doing so, Congress can accommodate the credit needs of small business without altering the

basic asset requirements of the statutory qualified thrift lender

test.

Let me emphasize this last point. We are not asking for a change

in the QTL test. We are only asking that redundant caps on business lending be lifted, particularly for small business loans.
47

In addition, ACB urges the subcommittee to consider including

in H.R. 3951 the following proposals detailed in my written testimony: Repealing the $500,000 per unit limit in the residential

housing development exception in the Homeowners Loan Act; increasing the limit on commercial real estate loans from 400 percent

to 500 percent of capital; and permitting reimbursement for the

production of corporate and organizational records under the Right

to Financial Privacy Act.

Finally, Mr. Chairman, we would like to raise our strong concerns about Section 301, which would permit privately insured

credit unions to join the Federal Home Loan Bank System. Unlike

these institutions, every depository institution that is currently a

member of the Federal Home Loan Bank must be, and is, federallyinsured and regulated.

This provides a substantial layer of security for the Federal

Home Loan Bank System. Permitting privately insured credit

unions that undergo no Federal regulatory scrutiny to borrow from

the system would undermine the careful balance Congress achieved

in the Gramm-Leach-Bliley Act.

ACB also opposes the lending limit increase in Section 304, check

cashing for non-members in Section 307, and the undermining of

the common bond in Section 308. These sections would allow taxexempt credit unions to assume new bank-like authorities without

having to pay taxes or meet community reinvestment requirements. ACB strongly urges the subcommittee to strike those provisions.

Again, Mr. Chairman, thank you for holding today’s hearing. I

look forward to addressing any questions that Members of the subcommittee might have.

[The prepared statement of Curtis L. Hage can be found on page

237 in the appendix.]

Chairman BACHUS. Thank you.

Ms. Duke.

STATEMENT OF ELIZABETH DUKE, SENIOR VICE PRESIDENT,

GOVERNMENT RELATIONS, SOUTHTRUST CORPORATION,

VIRGINIA BEACH, VA, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

Ms. DUKE. Mr. Chairman, Ranking Member Waters and Members of the subcommittee, I too want to thank you for holding this

hearing. I would also personally like to thank Mr. Cantor for the

introduction, therefore I don’t have to use my 5 minutes explaining

who I am.

Regulatory relief is critically important for banks. We appreciate

the bipartisan effort in this and previous Congresses to preserve

safety and soundness while reducing unnecessary regulations. I

would especially like to recognize the contributions made over the

years by Mrs. Roukema.

Regulation costs banks and our communities billions of dollars

every year. It also puts a huge strain on manpower.

SouthTrust is a large banking firm with $48 billion in assets. We

have 65 full-time employees devoted to compliance.

Small banks simply do not have this luxury. There are 3,800

banks with fewer than 25 employees and a thousand banks with
48

less than 10 employees. As a former CEO of a community bank, I

know that these banks don’t have the manpower to both run the

bank and to read, understand and implement thousands of pages

of regulations, directives and reporting modifications that they receive each year.

Simply put, too much time and too many resources are consumed

by compliance paperwork, leaving too little time to provide actual

banking services. H.R. 3951 contains many important improvements that genuinely reduce unnecessary regulatory burdens.

Unfortunately, the bill also contains provisions that are not directed at reducing regulatory red tape, but to enhance the competitive position of credit unions over taxpaying banks.

Let me mention a few of the key provisions that we support. The

ABA strongly endorses Section 201, which provides thrift parity for

trust activities and would eliminate an additional and unnecessary

layer of examination.

We also support Section 501, which would allow all financial

holding companies engaged in merchant banking to cross-market

products and services. These provisions have the strong support of

our industry and the Federal Reserve.

Section 502 would help banks preserve benefit plans for our employees, such as 401(k)s, without worrying about triggering aggregation rules for ownership of any one company.

We also support provisions, including Section 601, which allow

discretion for regulators to adjust the exam cycle to more effectively allocate examination staff; Section 101, which enables banks

to choose Subchapter S status to retain qualified directors; and Section 202, which makes the community development authority of

savings institutions parallel to that of banks.

The ABA has major concerns with provisions that expand credit

union powers and promotes further consolidation of the credit

union industry. These provisions enhance the competitive position

of credit unions over taxed financial competitors and expand the

credit union tax subsidy.

Section 305 expands the authority of credit unions to invest in

credit union service organizations. These CUSOs can engage in activities beyond those authorized for the credit unions themselves.

Furthermore, since most CUSOs are formed as limited liability

corporations, they are taxed at the credit union’s marginal tax rate

of zero. Thus, any expansion of CUSOs is an expansion of the credit union tax subsidy.

Section 308 also would permit mergers at any time among credit

unions. This would further the trend of large credit unions buying

up small credit unions and is in direct conflict with legislation enacted just a few years ago. Specifically, Congress directed NCUA

to promote the creation of independent credit unions and to limit

the merger of credit unions with over 3,000 members to situations

involving a troubled credit union.

We also oppose Section 306, which would exempt from the legal

lending limits loans to non-profit religious organizations. We do appreciate the intent of the provision’s author. However, we are first

concerned with eliminating any categories of business loans from

the business cap. There are already exceptions to the business

lending cap. We oppose the addition of yet another.
49

Second, the provision is so broad that businesses with only a remote connection to a religious organization could qualify. Moreover,

many religious organizations operate significant business enterprises, therefore allowing for a substantial increase in business

lending.

There are two provisions related to credit unions that could reasonably be considered to eliminate burdens without expanding powers or enhancing competitive position. The first authorizes a 15-

year maturity limit for loans, and the second provides additional

investment authority for credit unions.

In conclusion, Mr. Chairman, reducing unnecessary paperwork is

a serious long-term goal. The ABA is committed to working with

you and the Members of this subcommittee to achieve this objective.

Thank you, Mr. Chairman.

[The prepared statement of Elizabeth Duke can be found on page

271 in the appendix.]

Mr. BACHUS. Thank you. That was interesting testimony. That

was actually more exciting and entertaining than I thought it

would be.

Were any of you all home-schooled? None of you? You all went

to public school, right? Have you ever been in a food fight? You

know, food fights get you in trouble when you are in school. They

usually are not that constructive.

Our aim here is to have win-win situations. It is to take regulations, things the regulators are doing, things that cost you money

that you don’t have available to loan out, and try to eliminate those

regulations that make no sense, or barriers that make no sense.

Now, one of the ones that has been discussed here is this Section

301 of the bill, privately insured credit unions authorized to become

members of the Federal Home Loan Bank Board. I know the banks

are all opposed to this. One of the things is they are not banks. Or

insurance companies participate in the Federal Home Loan Bank

Board. Insurance companies can go to them, and really something

that I am not sure that every banker knows, but those that are federally insured go to the Federal Home Loan Bank Board. So there

are already credit unions participating in the Federal Home Loan

Bank Board system.

The statement was made that credit unions should not participate. They already participate. So it is just a distinction on whether they are privately insured or federally insured.

We have every provision and belief that those that are privately

insured through the right regulatory scheme will, the taxpayers

will be fully protected. That is one thing.

Another thing that I really know the bankers are sensitive to,

and I would be sensitive to it, too, if credit unions were taking over

large amounts of bank business, just a tremendous amount of market share, and there is actually a belief out there that that is in

fact happening. One of my best friends who is a banker told me

that the credit unions have basically tripled their business while

we have lost business. That is anecdotal evidence.

First of all, his bank has tripled in size in the past 10 years. I

found no credit union in his home county that has grown anywhere

near that amount. But then I came back to Washington, this was
50

probably 4 years ago, and I asked are credit unions eating into

bank share? I don’t know whether you all can answer that. Are you

aware of what the answer to that is? The answer is no. The credit

unions are not. As a total share of assets under deposit, it has gone

from, financial assets, I think it has gone from 1.4 to 1.7 in 23 or

24 years.

We do not want to do anything in this bill that will give a credit

union an unfair advantage over a bank, an unfair advantage. What

we want to concentrate on is, as I said, win-win. Here are provisions that will help us.

Section 301 was not something that this Chairman actually put

in the bill. It was put in there by the Full Committee Chairman,

which is even more significant, if you have been around this place.

When he did that, my red flag went up, because I am sensitive to

bankers in my area that tell me that the credit unions have an unfair advantage. But, a lot of what has been said about it, I would

have to agree with the credit unions. The arguments simply, when

you look at them, they do not have as much substance as they

should.

I am not sure we will get a bill. If we continue to argue about

whether credit unions get something—and the last two bills did not

have anything for credit unions—but, we want everybody treated

fairly, and there are some of the proposals that, for instance, we

do not want anything added anymore for the credit unions. They

have proposals to let them sell money orders to their membership,

or to be able to kick off a board member. That is their ability to

manage their own organization. I cannot understand how that is

unacceptable.

Let me tell you, I am not motivated about helping one group or

the other. I believe we can get a bill that helps all the organizations.

But, I want to encourage all sides, if you could demonstrate that

it is unfair and it ought not happen, that is one thing. But if you

already have credit unions participating in the Federal Home Loan

Bank Board, and some already do, I am not sure that the argument

is going to fly.

I would use your dynamite and your political might in looking at

things that will benefit your institutions and the consumers you

serve in eliminating barriers.

A good example which the credit unions have come with is doing

a money order, I think it is a wire transfer. Why should they not

be able to offer that to their members? I can’t see any reason why

they should not. I was one of 7 people that voted against the credit

unions on the floor of the House in that famous bill, so I do not

think I can be accused of carrying a lot of water for the credit

unions. Four of the people that voted with the banks on that bill

were not running for reelection. So I am not afraid to stand up for

the side I think is best.

If we are to get a bill out, then there is going to have to be some

of this. You are going to have to pay more attention to what would

benefit your institutions and your association and their members

than say seeing that somebody else gets something that they do not

have now.

Ms. Waters.
51

Ms. WATERS. Thank you very much, Mr. Chairman. I think you

did a good job of basically representing how many of us are feeling

about this legislation. It appears that there is going to be some relief that you will all benefit from. There is a little competition going

on here. We understand that.

At the same time, we are often made to believe that all of you

laissez-faire capitalists believe in competition, and that we should

support that, and Government should get its hands out of the business of protecting one industry over the other. So, I think that I

am going to lean to the right a little bit and join with my colleague

in just saying to you that it is in the best interests of our citizens

and all of us to have you operating in ways that will service the

citizens of this country to the best of your ability.

Now, I want to tell you, I like the idea that credit unions will

be able to provide products that they have not been able to provide

to the credit union members. I do not like freestanding check

cashers who do not provide any other services but to cash checks

and take a percentage of those earnings from hard-working people.

I don’t like freestanding payday loan folks who simply tie people

up for the rest of their lives lending over and over again with

checks that are kind of signed in advance. I like institutions that

provide multiple services, and all of you do that. You provide multiple services. And, to the degree that you do that, I think that we

provide better products for our taxpayers out there.

As our Chairman has said, this bill is attempting to do the right

thing for everybody and not really take sides. I think there are

some legitimate questions on Section 301, but I think that you guys

can work that out. The Chairman makes a good point: If you already have credit unions that are in the Federal Home Loan Bank

system, it is hard to make an argument to say that somehow there

are some that should be kept out.

We do want to just remind you that the numerical provisions in

the Truth in Lending Act are kind of outdated, and I hope that we

have an opportunity to look at that, particularly as it relates to

automobile loans. The limits have failed to keep pace with inflation, and many of those loans are not covered by the limits of the

act. So, we may be looking at an amendment to bring TILA up to

date and index the numerical provisions for inflation so we do not

have that problem.

For those of you who represent credit unions who want to lend

more money to the churches, I think you need to talk to some of

us. I am told that there are all these ministers who want this. I

have not heard from any of them, and I do not know what that

means. I do not know if that means that a disproportionate share

of your resources are going to end up proliferating more and more

churches, or take away from some of your business loans. I do not

know what it means. So, I think I would like to hear from the advocates of eliminating that from the caps in the credit unions.

With that, let me just say we have an opportunity to tighten up

this legislation a bit and have everybody in support of it, and I

would hope that we would all use those opportunities prior to our

votes on markup to do that. I yield back my time.

Mr. WELDON. [Presiding.] The Chair will announce it is his intention to recognize Mrs. Capito for 5 minutes of questioning, and
52

then recess for 20 minutes so that Members will have an opportunity to go to the floor and vote and then come back for further

questions.

The gentlewoman from West Virginia, I believe the co-author of

the legislation under consideration, is recognized for 5 minutes.

Mrs. CAPITO. Thank you, Mr. Chairman. Thank you all for your

testimony. I think I mentioned in my opening statement that it is

a work in progress, and I think all of your testimony shows that

there is some work that you all would like to see from every angle,

and I think that is a good thing. That is why hearings such as this

are of great benefit to us as Members.

I would like to ask Ms. Gaither about a conversation we had in

my office yesterday when we talked about the fact that credit

unions cannot expel members or remove members from their membership roles. I would just like for you to maybe tell a little bit

about that story and a personal situation that you had in your office.

Ms. GAITHER. Thank you. Yes, yesterday we were talking, I had

explained to Representative Capito that we had actually had a

member come into our office who was dissatisfied for one reason or

another and actually told one of my tellers that if he ever saw her

outside the credit union, he was going to punch her. We had no

means at that point to be able to expel this member other than

calling a full membership meeting.

Mrs. CAPITO. Does this bill in the present form give you that

power? It will give you that power?

Ms. GAITHER. Yes, we would be able to expel for just cause.

Mrs. CAPITO. I would like, and anybody can answer this question

from your different perspectives, to ask, in terms of more access for

consumers to all of your institutions, it would seem to me—you

mentioned, Ms. Duke, that you have what, 75 regulators that— compliance officers in your bank. I would imagine that having to

deal with fewer regulations, less duplicative regulations, would not

only maybe give you some relief in terms of staffing issues, but also

would provide greater access along with insurance protection to the

consumer that we would like to see.

Do you envision this bill in any way, because of the fewer time

and the fewer details in some instances that you are going to have

to work on, that it will go to the benefit of an individual consumer

using one of your institutions?

Ms. DUKE. Yes. As I stated, any time that you can spend less of

your resources actually working on regulations and the implementation of regulations gives you more time to serve the customer and

it also—frankly, many of these regulations that are designed to

protect the consumer are often more confusing to the consumer

than the original issue.

The other thing, when I talk about manpower, and this goes to

my experience as a community banker, is as these regulations come

out, you do not have the people who are trained to actually read

them, so the CEO and the upper level management of the organization are the ones that end up having to spend time with those.

When FDICIA was passed, I believe it spawned 64 separate regulations. At that time I had 65 employees. So if I had assigned one

regulation to each employee and given the courier the time off, that
53

is what it would have taken for us to actually go through and look

at each one of those regulations.

Mr. CHENEY. Thank you, Congresswoman. Given the memberowned nature of credit unions’ expenses, I think it is safe to say

if we could reduce our expenses associated with regulation and

compliance, that those funds within the credit union would either

go toward expanded services for our members, or to capital to make

the credit union stronger and support our growth.

Mr. STONE. I have 62 employees in my bank, and what is really

expensive is when we have to seek outside counsel to interpret regulations, from CPAs to attorneys. That really is very, very expensive when some of them can bill $200 and $300 an hour. You get

regulation, and we must comply and want to comply, and we get

help from the regulators we have, but we still have to get outside

help so many times from an outside organization.

Mrs. CAPITO. Mr. Chairman, I yield back. I would like to say that

the Financial Services Roundtable has testimony they would like to

submit for the record.

Mr. WELDON. Without objection.

[The information can be found on page 282 in the appendix.]

Mr. WELDON. The Chair announces a recess for 20 minutes.

[Recess.]

Mr. WELDON. You are a great group. I did not have to bang the

gavel and you came to order.

The Chair recognizes the gentleman from Texas for 5 minutes.

Mr. BENTSEN. Thank you, Mr. Chairman. I thank our panel for

being here.

I want to say, Mr. Chairman, at the outset, I know that the

Chairman of the subcommittee talked about the food fight aspect,

but I do want to say it is somewhat of an historic moment to see

that the testimony of the American Bankers Association praising

the community bankers, the savings & loan industry, in such great

detail, and wanting to give them more rights. It is something I may

get framed just to hold on to, and actually expanding their charter

to some extent as opposed to eviscerating or eliminating their charter.

I have a couple of questions. I will say on that point, with respect

to the broker-dealer, I have some history in that, and I do hope

that, assuming that we pass this bill and we give equal treatment

for broker-dealer trust operations with thrifts, that as I hope the

SEC is doing working with the Comptroller and the Fed, that the

rules are equivalent to those required of broker-dealers which are

under the auspices of the Securities and Exchange Commission. I

am one that felt that it ought to just be the same regulation. I

know the banks have felt differently about that. But at least, if

nothing else, you ought to do the series 6 and 7 and all of the others and have similar requirements.

I have two issues I am interested in in this bill. One has to do

with cross-marketing restrictions from Gramm-Leach-Bliley, and

the other has to do with Riegle-Neal. I think I will talk about Riegle-Neal very quickly to the independent bankers.

We had the regulators before the committee a month or so ago,

and I asked about the provision that would preempt Riegle-Neal’s

interstate banking preemption. That is an issue that obviously has
54

been very important in my State and other States. The argument

was made by the Fed that in fact this was a small bank issue, that

the intention here was to help smaller banks, particularly those

who want to branch across the border to another bank. But since

you represent the smaller banks, obviously that is not the way you

all see it?

Mr. STONE. We think it is a States’ Rights issue. The States

know better what their market situation is. In Virginia—we were

just discussing that at the break—that I think in Virginia we have

reciprocal agreements with all of our, off the top of my head, all

of our States, and we do branch back and forth across those lines.

But, you know, if you have a State that has a neighbor that is not

so gracious to do that, it seems like to me that would be their

choice.

Mr. BENTSEN. Let me go to the cross-marketing restrictions. Perhaps you all can refresh my memory. When we did the GrammLeach-Bliley, we allowed certain types of cross-marketing to occur

within a financial services holding company. We put restrictions on

third parties and the like because of concerns about privacy and

others.

I guess at the end of the day when we allowed for the merchant

capital subsidiary or affiliate under the holding company, we decided, for some reason, to impose cross-marketing restrictions, at

least as it applied to securities firms as opposed to insurance firms.

I am not sure exactly why we did that at the time and, I do not

know, maybe the ABA, since you are a proponent of this provision

of the bill, you may want to refresh my memory as to why we did

that and why we should not.

I see again that the ICBA is opposed to that and would like to

keep the current law as it is. I would like to have some discussion

from you all on that.

Ms. DUKE. I am afraid I cannot tell you why you did it for the

insurance affiliates rather than the securities affiliates, because

that is exactly our point. We do not see the difference between an

investment bank by an insurance underwriting affiliate versus a

securities writing affiliate, and we think they ought to have the

same cross-marketing provisions.

The cross-marketing provisions, as I understand them, include

statement stuffers and internet websites, and the restrictions on

merchant banking in those investments are fairly narrow in order

to avoid the merger of banking and commerce. There are anti-tying

restrictions. The Board must determine that the affiliation is within the public interest and does not undermine separation of banking and commerce and is consistent with safety and soundness. We

feel within those regulations there is certainly no reason that the

securities affiliates should not have the same powers as the insurance affiliates.

Mr. BENTSEN. Mr. Chairman, with your indulgence, if I could get

Mr. Stone’s comment, because I do not understand if what is good

for the goose is not good for the gander, why wouldn’t we do that?

Mr. STONE. Well, here again, we strongly believe in the separation of the financial services industry and commerce. Wal-Mart

would be a good example of someone that we do not think should

be in the banking business. I believe the Japanese and the Ger-
55

mans as well have had some unfortunate experiences, and I do not

know all the details on that, other just what I read, that the mixing of commerce and the financial institution business has not

worked that well, and some of the banks have suffered in Japan,

particularly for that.

Mr. BENTSEN. If I can have your indulgence, Mr. Chairman, on

this. State Farm owns a bank. It may be operated as a holding

company, I am not quite sure, but at the same time, why should

they have a broader use if they establish a merchant capital subsidiary than Bank of Virginia or Chase or your bank if you choose

to go down that route?

Mr. STONE. I would answer by saying I do not think they should

have that right. I do not think they should be allowed in commerce.

But the law is there and we would not have supported that at that

time, either, when it was passed.

Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.

Mr. WELDON. The Chair recognizes himself for a question.

Mr. Hage, you recommended exempting savings associations

from the Securities and Exchange Act and the Investment Advisors

Act. Would this affect consumer or investor protections?

Mr. HAGE. Our request is to be put on the same parity that bank

trust departments already are. It would be my opinion that consumers’ protection would not be weakened or put in jeopardy by including savings associations in that law.

Mr. WELDON. You have also asked for an increase in business

lending authority for Federal savings institutions. How will this increase the authority and affect your ability to serve your communities? Can you comment on that, please?

Mr. HAGE. Yes, I can. The increase in this authority would enhance the thrift charter as a continuing charter that can serve communities better. I can tell you in my own bank institutional case,

we are in Sioux Falls, South Dakota. We are a bank that is $700

million in size. In the last 10 years we have consciously established

a strategy to offer small business loans as well as our core housing

lending. Today our balance sheet is pushing the limit of the statutory limit on commercial lending. We are serving more customers.

We are being asked to serve even more customers and are going

to have to face a choice about how we either turn off that lending

or change our charter.

There are many advantages to the thrift charter that we think

we would like to preserve. So to have relief on this limitation,

which seems artificial and certainly seems to restrain and constrain the credit available to communities, does not seem to make

sense.

I would add that changing the formula as we proposed would not

threaten the QTL test which is a core test to establish the thrift

charter definition. So we think it makes sense to do this. It would

allow us to offer more loans to more small businesses to more consumers.

Mr. WELDON. I assume you maintain your support for home and

consumer loans if that moves forward?

Mr. HAGE. I would tell you that our portfolio has grown many

times over in the last 10 years as we have continued to add services. What we found is that many of the small business people will
56

then bring all of their business to us, including their home lending

business, and we also get access to new employees that they are

bringing into the community so we can provide home lending and

consumer lending to these folks as well.

Mr. WELDON. Thank you very much. I want to thank all of the

witnesses for their testimony.

Mr. BENTSEN. Could I ask a follow-up question to this?

Mr. WELDON. Sure. Go ahead.

Mr. BENTSEN. I understand what you are saying is that at some

point you are going to get the ABA back going against you, because

at some point they are going to say why don’t you convert to a

bank charter? You are going to go to 25 percent commercial lending

and then more.

But let me ask you, because you raised the thrift provisions, in

your testimony you raised concern about the ability to branch,

interstate branch thrifts. I thought federally chartered thrifts had

national interstate branching authority already. Unless I misread

your testimony, why would that need to be corrected in some way?

Mr. HAGE. We are not asking for a correction on the thrift

branching. We are supporting the ABA request to have comparable

branching for commercial banks.

Mr. BENTSEN. So it is a mutual appreciation issue. OK.

Thank you, Mr. Chairman.

Mr. WELDON. Again, I thank all of the witnesses for their testimony. The subcommittee will keep the record open for 5 additional

days for further questions for the witnesses and further statements.

The hearing is now adjourned.

[Whereupon, the hearing was adjourned.]
(57)

A P P E N D I X

March 14, 2002
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