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BANKS IN REAL ESTATE: A REVIEW OF THE

OFFICE OF THE COMPTROLLER OF THE CURRENCY’S DECEMBER 2005 RULINGS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 27, 2006

Serial No. 109–266

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

BRAIN P. BILBRAY, California

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

BENJAMIN CHANCE, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY

TODD RUSSELL PLATTS, Pennsylvania, Chairman

VIRGINIA FOXX, North Carolina

TOM DAVIS, Virginia

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

EDOLPHUS TOWNS, New York

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

MIKE HETTINGER, Staff Director

TABETHA MUELLER, Professional Staff Member

SETH LENNON, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on September 27, 2006 ..................................................................... 1

Statement of:

Stevens, Thomas M., CRB, CRS, GRI, president, National Association

of Realtors; Edward L. Yingling, president and CEO, American Bankers Association; and Cynthia C. Shelton, CCIM, CRE, director of investment sales, Colliers Arnold .......................................................................... 35

Shelton, Cynthia C. ................................................................................... 68

Stevens, Thomas M. .................................................................................. 35

Yingling, Edward L. .................................................................................. 53

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

Office of the Comptroller of the Currency .................................................. 3

Letters, statements, etc., submitted for the record by:

Shelton, Cynthia C., CCIM, CRE, director of investment sales, Colliers

Arnold, prepared statement of ..................................................................... 70

Stevens, Thomas M., CRB, CRS, GRI, president, National Association

of Realtors, prepared statement of .............................................................. 37

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

Office of the Comptroller of the Currency, prepared statement of ........... 5

Yingling, Edward L., president and CEO, American Bankers Association,

prepared statement of ................................................................................... 55

(1)

BANKS IN REAL ESTATE: A REVIEW OF THE

OFFICE OF THE COMPTROLLER OF THE

CURRENCY’S DECEMBER 2005 RULINGS

WEDNESDAY, SEPTEMBER 27, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:30 p.m. in room

2247, Rayburn House Office Building, Hon. Todd Russell Platts

(chairman of the subcommittee) presiding.

Present: Representatives Platts, Towns, Kanjorski, and Davis of

Virginia.

Staff present: Mike Hettinger, staff director; Tabatha Mueller,

professional staff member; Seth Lennon, clerk; Adam Bordes, minority professional staff member; and Teresa Coufal, minority assistant clerk.

Mr. PLATTS. The Subcommittee on Government Management, Finance, and Accountability will come to order.

In December 2005, the Office of the Comptroller of the Currency

issued three interpretive letters allowing certain banks to invest in

real estate projects. According to the OCC, these rulings are consistent with past precedent and with the National Bank Act, which

allowed banks to invest in these types of projects as long as they

are necessary to accommodate the bank’s business activities. The

rulings, however, have sparked controversy in and around the real

estate industry, which views these actions as a significant departure from what has been previously permitted.

Without going into too much detail, the interpretive letters were

issued to PNC Bank to develop a project involving retail, office, a

hotel and 32 condominiums on property it owns next to its Pittsburgh headquarters, to Bank of America to develop a Ritz Carlton

hotel adjacent to its headquarters in Charlotte, and to Union Bank

of California to finance the development of a windmill farm and associated real estate.

At issue today is whether the OCC process that allowed for these

letters is consistent and transparent as well as whether or not the

letters themselves represent a departure from past precedent and

begin to blur the line between banking and commerce that Congress has stridently tried to maintain.

We are pleased to have to panels of distinguished witnesses with

us today. Our first panel is Ms. Julie Williams, First Senior Deputy

2

Comptroller and Chief Counsel with the OCC. Our second panel

will include Mr. Thomas Stevens, president of the National Association of Realtors, Mr. Edward Yingling, president and CEO of the

American Bankers Association, and Ms. Cynthia Shelton, a commercial real estate broker at Colliers Arnold of Orlando, FL, representing the Realtors Commercial Alliance.

We certainly thank all of our witnesses for being here today and

look forward to your testimonies. I now yield to our ranking member, the gentleman from New York, Mr. Towns, for the purposes of

an opening statement.

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

I am looking forward, first of all, to the testimony coming from

our witnesses.

Since the passage of the National Bank Act in 1963, the Federal

Government has consistently applied laws maintaining a firewall

between commercial activity and national banks. By doing so, we

have successfully insulated our banking system from past economic

recession and shocks that have caused significant losses for private

industry, particularly within the real estate sector. Recent decisions by the OCC, however, have created potential loopholes for

banks to manage and develop real estate holdings. I believe this

goes beyond what is provided for under current law, and fear that

relaxing prior standards will expose our financial system and Government insurance programs to excessive economic risk.

In response, I have co-sponsored H.R. 111, the Community

Choice in Real Estate Act, which would prohibit banks entering the

real estate brokerage or management market. I am hoping, however, that proposed legislation will get the OCC and private industry to begin a dialog that will both strengthen current limitations

and establish specific guidance for where exceptions to the rules

should be made. I hope today’s hearing will serve as a basic for

that dialog. Hopefully we will be able to ascertain some information

that will assist us in making certain that we are making the appropriate decision.

Thank you very much, Mr. Chairman, and on that note, I yield

back.

Mr. PLATTS. Thank you, Mr. Towns. We will move to our first

panel.

Ms. Williams, thank you very much for being with us. The practice of the subcommittee is to swear in all of our witnesses. So if

I could ask you to stand and raise your right hand.

[Witness sworn.]

Mr. PLATTS. Thank you, Ms. Williams. The Clerk will note that

the witness affirmed the oath.

We appreciate the written testimony, or as I call it, my homework, being provided to us in advance. We look forward to your

oral testimony. We will give you 5 minutes on the clock. If you

need to go over some, we understand that. We look forward to then

a Q&A following your testimony.

Ms. Williams, the floor is yours.

3

STATEMENT OF JULIE L. WILLIAMS, FIRST SENIOR DEPUTY

COMPTROLLER AND CHIEF COUNSEL, OFFICE OF THE

COMPTROLLER OF THE CURRENCY

Ms. WILLIAMS. Thank you very much, Chairman Platts, and

Ranking Member Towns. On behalf of the Office of the Comptroller

of the Currency, I do appreciate the opportunity to appear before

you today to discuss the three interpretive letters issued by the

OCC in December 2005.

As I described in detail in my written statement, the decisions

reflected in these letters are entirely consistent with the National

Bank Act, and they are well within the principles of existing precedent for national banks’ activities. The legal framework that is applicable in this area is narrow and it is fact-dependent. The conclusions in these letters therefore simply cannot pave the way for the

sort of expanded real estate activities that some have projected.

The conclusions in the letters are quite specific to the activities

described and they are limited in scope. They apply existing law

and precedent to situations that involve some new factors. They authorize no more than the specific proposals that they describe, and

only for the particular banks involved. Thus, the letters to not endanger the fundamental separation of banking and commerce in

this country.

The letters do not authorize national banks to engage in the real

estate development or investment business, nor do they have anything to do with merchant banking, nor do they have anything to

do with allowing national banks to conduct a real estate brokerage

business. They also were carefully evaluated by OCC supervisors

to assure that the activities would be consistent with safe and

sound operations of the banks involved. Moreover, going forward,

the OCC will continue to monitor these activities to ensure that

they are conducted in a safe and sound manner and that they are

conducted consistent with the representations made to us by each

of the banks.

Two of the letters concern situations where national banks seen

to enhance the use of property they already own in connection with

operational needs of their own banking business. Each letter permitted only a single building. In each case, we found that the bank

demonstrated that the proposed building was being developed in

good faith to address legitimate operational needs of the bank’s

own banking business. This connection to a bank’s own operational

needs is essential to its legal authority to conduct these activities,

and this linkage prevents national banks from conducting a real estate investment or development business.

In one case, the building in question would be a mixed-use building with offices, hotel space and upper floor space that would be

sold off, sold off in the form of condominiums. In that case, the

bank would occupy a portion of the offices and committed to use

a percentage of the hotel rooms for bank officials and bank visitors.

In the second case, the building would be used entirely as a

hotel. The bank represented that visiting bank officials, board

members, customers and prospective customers and service providers would occupy over 37 percent of the rooms which constituted

over 50 percent of the projected occupied rooms.

4

The third letter concluded that a bank could provide financing to

a wind energy project in the form of payment for an equity interest

in a limited liability company, in order for the bank to be eligible

for Federal tax credits and thereby lower the cost of funding for the

project. It was important to us in reaching our conclusion that facilitating such financing is precisely Congress’ purpose in creating

such tax credits.

A number of specific restrictions and limitations were included in

the letter to make clear that our approval was based on the bank’s

interest being structured to preserve its economic substance as a

loan rather than a speculative investment.

This approach was based on decades of judicial and OCC precedent which looked to the economic substance of the transaction

rather than only its form, to determine whether it is permissible.

Leasing arrangements, found to be permissible because they are

functionally interchangeable with a secured loan, are a long-recognized example of this approach. Let me again stress that by statute, national banks have only limited authority to make real estate

and equity investments. This limited authority precludes national

banks from engaging in the real estate development business or the

type of equity investment activity that would breach the separation

between banking and commerce.

However, this same authority does enable national banks to take

different types of direct and indirect interest in real estate in connection with conducting their own banking business. Over the past

century, both the courts and the OCC have interpreted this limited

authority to permit or prohibit particular types of activities based

on particular facts. This limited authority helps to maintain the

fundamental separation of banking and commerce that distinguishes our Nation’s banking system.

Please be assured that the OCC fully recognizes these limits of

national banks’ authority with respect to real estate activities and

will abide by and apply those standards consistently to all national

banks.

I thank you for the opportunity to appear before you today and

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

[The prepared statement of Ms. Williams follows:]

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Mr. PLATTS. Thank you, Ms. Williams. We appreciate your statement.

We are pleased to have been joined by the full committee Chair,

Chairman Davis. We will now move to questions, and in deference

to my chairman, would you like me to go first or would you like

to kick it off?

Chairman Davis is recognized for the purposes of questioning.

Chairman TOM DAVIS. Thank you. Is there a formula that OCC

uses to determine the cost of real estate assessment?

Ms. WILLIAMS. We have a standard that we apply. It is not a formula, it is a standard, it is a uniform standard that is derived from

Section 29 of the National Bank Act that refers to real estate that

is necessary in the bank’s accommodation in the transaction of its

business. Generally that standard has been articulated by the

courts to look to property that is acquired in good faith to serve legitimate operational needs of a bank’s own banking business. And

one of the factors that we look to in determining whether the property is acquired or developed in a way that meets that test will be

the extent of the bank’s own use of that property. So we’ll look at

the percentage of office space or the percentage of lodging space or

the percentage of the facility that is going to be used by the bank.

Chairman TOM DAVIS. Have there been any instances that banks

have violated its good faith agreement?

Ms. WILLIAMS. In the history that I am aware of, there are occasional situations where through the supervisory process we become

aware that a bank’s use is not what had been represented to us,

or the use appears not to be consistent with holding that property

for legitimate use for bank operations. In those circumstances, we

have standards in our regulations that treat that property as what

is called OREO, Other Real Estate Owned. That is required to be

divested within 5 years with the potential for another 5 year extension. So when that holding is non-conforming, it will be required

to be divested.

Chairman TOM DAVIS. Did the process that was used to issue the

December 2005 letter differ from the normal OCC process?

Ms. WILLIAMS. No. No, sir, it did not.

Chairman TOM DAVIS. Also, I read your testimony, you note a

key factor in allowing the financing of the windmill was so the

bank could take advantage of energy tax credits. Are banks the

only ones that can take advantage of that, or is that open to everybody?

Ms. WILLIAMS. The tax credits are available where a particular

entity holds an equity interest in a project. So in order for the bank

to provide the financing at a lower cost for the project, the bank

needed to be able to take advantage of the tax credits. So those tax

credits are not unique to banks.

Chairman TOM DAVIS. Let me just ask, because I am trying to

understand, the simple fact that a letter was issued, does that

mean that it goes beyond the previous precedent that had been established, or is that basically status quo? What does the letter

mean versus no letter?

Ms. WILLIAMS. We have several standards that we apply in determining whether we publish a letter as an interpretive letter.

One of those standards is where we are applying pre-existing analVerDate 11-MAY-2000 11:08 Dec 18, 2008 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\45711.TXT KATIE PsN: KATIE
19

ysis and precedent, but to a different set of facts, a new set of facts.

So it doesn’t mean that this is a new precedent. In this case we

determined to publish these letters because we were applying existing standards and existing precedent, but the facts that were being

addressed were just different, yes, sir.

Chairman TOM DAVIS. When interpretation of a letter is made,

do you have a notification process that you follow after that?

Ms. WILLIAMS. What we do when we issue an interpretive letter,

those are published, we have a monthly publication and they are

posted on our Web site.

Chairman TOM DAVIS. Thank you.

Mr. PLATTS. Let me followup on one of the questions on the issue

of good faith, which clearly is referred to repeatedly in these cases.

You said if there is followup and there is a finding of, in essence,

bad faith, they are not doing what they agreed to, the penalty is

that they have 5 years and perhaps 10 years to divest that property?

Ms. WILLIAMS. That is what is provided for in our regulations,

yes, Mr. Chairman.

Mr. PLATTS. So is there any financial penalty to the bank for not

doing what it said it would do?

Ms. WILLIAMS. The other possibility is, of course, if we find that

the holding and the circumstances they represented, true bad faith,

we can take the position that the holding and the conduct of the

bank represented a violation of law and we have the ability to take

a variety of enforcement actions against the bank based on that,

yes, sir.

Mr. PLATTS. How is that different than saying it is not what they

said it would be, and in 5 years, it is something more egregious?

Ms. WILLIAMS. You could have a variety of circumstances which

perhaps are not necessarily reflective of bad faith, but would cause

a property not to be used in the way that it was initially projected

to be used, and therefore not to qualify any more as bank premises.

When it stops qualifying for bank premises, that is when at the

very least divestiture requirements begin to kick in.

Mr. PLATTS. Maybe I will back up to kind of get a broader approach. I may come back to that same issue. But a couple of key

issues that are definitions or terms here, one of which is bank

premises. Is that defined anywhere in the statute or regulation, or

is it more a case by case decision by the OCC?

Ms. WILLIAMS. It is a legal term, it is referred to in our regulation. But it is a legal term that is used to capture a type of property holding that is permitted under Section 29 of the National

Bank Act. And in general, as interpreted by the courts and by the

OCC, a bank premises constitute property that is acquired or that

is developed to serve legitimate operational needs of the bank’s own

banking business.

Mr. PLATTS. As it applies to specifically the case in Charlotte

with the hotel, it was decided that the hotel was connected sufficiently to the bank because of using what was referred to originally

as 50 percent of the rooms for bank visitors, staff, that would be

considered bank premises because of that use of the hotel?

20

Ms. WILLIAMS. Because of the level of projected committed use of

the hotel by bank officials, bank visitors, current and prospective

customers.

Mr. PLATTS. One specific question, in the chart you provided in

that cases, it references 371⁄2 percent versus 50.

Ms. WILLIAMS. Yes, sir.

Mr. PLATTS. Why the discrepancy?

Ms. WILLIAMS. One is based on the projections of what the likely

rate of occupancy would be. The projections were not that every

single room in the hotel would be filled every night. So based on

what the projected occupancy rate was, the bank’s projection was

that they would have bank business customers occupying 50 percent of the occupied rooms.

Mr. PLATTS. Versus 37 percent of all rooms?

Ms. WILLIAMS. That is correct.

Mr. PLATTS. OK. In that chart it seems that the percentage of

use, whether it be rooms or office space, runs as low as 5 percent

in one of the cases referenced, a 1987 case. Is there a formula that

gets to, 5 percent is a pretty small fraction versus 50 percent of the

rooms or even 25, 40 percent?

Ms. WILLIAMS. Five percent would be unusual, and I think there

is a situation where it might get that low. Usually, and this is just

a rule of thumb, where the projected use gets below 20 percent,

that is going to get a very close look from us. But it is a very factspecific sort of analysis in each case.

Mr. PLATTS. I want to maybe walk through the process in this

case again with the hotel. The bank comes and says, we want to

build a hotel right adjacent to our headquarters, and I think I am

safe in saying the proposal was to build that hotel in another State,

is it safe to say that would not——

Ms. WILLIAMS. I think that would not have made it off the

ground, yes, Mr. Chairman.

Mr. PLATTS. In this case, it was adjacent. And in the belief that

half the occupied rooms would be used by banks, it was decided it

is bank premises and consistent with the bank’s operation. My understanding is in some of the statutes and regulations that the language is that temporary lodging of employees, customers, bank officers, where suitable commercial lodging is not readily available, is

a key factor here.

Ms. WILLIAMS. That is a standard that is set out in our rules as

an example that we put in the regulations of a situation that would

be acceptable bank premises. But the regulation is not exclusive.

And the regulation lists the types of uses in the rule as bank premises includes this sort of thing. But we were clear when we promulgated the regulation that was not intended to be an exclusive list

or to eliminate situations where we would look at proposed uses on

a case by cases basis.

Mr. PLATTS. So if a bank is looking at a hotel, then, they do not

have to, there could be a hotel across the street that is two-thirds

empty and that is not factored into, they don’t have to take that

into consideration whether they can justify then building a new

hotel of their own?

Ms. WILLIAMS. I think we look at all of the facts and circumstances that are presented in the representations about how

21

the bank is going to use, in the case of the hotel, use that hotel

for the particular use of their bank visitors. In this case there were

representations about in some cases, difficulties about finding sufficient accommodations of the types that they were looking for for

their visitors available proximate to the corporate headquarters.

Mr. PLATTS. What level of detail is required, documentation, as

far as occupancy rates, of other hotels, proximity, is that required

or is that just what they choose to submit?

Ms. WILLIAMS. The process in these cases involves, once the issue

is identified, a very robust back and forth between both the legal

staff and our supervisory staff and personnel of the banks involved

to understand exactly what they are proposing to do and to make

sure that we have thorough support for the rationale that they are

advancing. We have seen marketing studies and marketing analyses and things like that.

Mr. PLATTS. I have a list of more questions, but I want to give

the ranking member a chance to jump in here and we will come

back after he is done. Mr. Towns.

Mr. TOWNS. Thank you, Mr. Chairman.

Let me begin by, can you explain more about the factors that

were included in the decision to allow the development of 32 condominiums, as stated in your interpretive letter 144, is it true the

bank will not be using these condos for any corporate use?

Ms. WILLIAMS. Those floors or portions of floors are proposed to

be sold off. And here I think it is important to recognize what the

bank was seeking to do. The bank needed office space in the footprint of its corporate headquarters. There was property there, currently occupied by some dilapidated buildings and stores. In order

to have an economically viable building with offices for the bank,

there was a need to build a certain number of offices.

Market studies indicate that there were limits on the likely occupancy of those offices. Additional space for hotel lodging was a critical element of the overall economic viability of the building. And

then the, I think 30 some condominiums were to be sold off and

the returns from that were also a critical piece to the economics of

the transaction, why it made rational, economic sense for the building in the first place, in order to provide the office that the bank

was seeking.

Mr. TOWNS. That wouldn’t be considered speculation?

Ms. WILLIAMS. No, sir.

Mr. TOWNS. Why not?

Ms. WILLIAMS. Because what the bank is doing there is developing, creating a building where the bank is going to be using a substantial portion of the offices and has committed to use a percentage of the hotel space. This gets to the test of looking at what is

the motive of the bank here. The motive of the bank is to have facilities that the bank can use. The sale of the condominium space

was an element of the overall economics of the transaction. It was

something that was represented to us as being an important factor

in some of the local tax incentives and encouragement that was received from the city of Pittsburgh in support of the project.

Mr. TOWNS. I just find it hard not to see how that is not speculation, but maybe I just need more time with you to go in and talk

22

about it. But it really appears to be, I want you to know that, anyway.

Aside from the OCC ruling in December on the wind farm, are

there broader circumstances in which ownership of energy projects

should be permitted? Doesn’t this ruling give banks a reason to become creative with their financing and lending schemes for projects

that are just too risky? Wasn’t the energy firm able to make a loan

payment to structure other finances? Would you help me with this?

Ms. WILLIAMS. Certainly. The key here is the availability of the

particular tax credit, which is keyed to the beneficiary or the immediate beneficiary of the tax credit having an equity type interest

in the project. With the tax credit, the bank was able to lower the

cost of the financing that it provided to the alternative energy

project. The bank could have made a loan. It would have cost the

alternative energy project more. The purpose behind these tax

credits is to encourage financing and development of these alternative energy projects. So this was a key consideration for us in

looking at the overall structure of the transaction.

We also absolutely insisted that the structure of the financing be

designed so that it was in all material respects economically identical for the bank as if it were making a loan.

Mr. TOWNS. Thank you, Mr. Chairman. My time is expired. I

hope we will have another round? Thank you.

Mr. PLATTS. The gentleman from Pennsylvania, Mr. Kanjorski, is

recognized.

Mr. KANJORSKI. How are you, Ms. Williams?

Ms. WILLIAMS. Fine, thank you, Congressman.

Mr. KANJORSKI. I am so happy that we have the opportunity to

examine this issue, because I am one of those individuals that has

the pleasure of serving on this committee and also the Financial

Services Committee. I participated in the original drafting of H.R.

10, which we thought had put the issue to bed.

But listening to your responses to my colleagues, it seems to me

that OCC is determined to use these mechanisms and create other

mechanisms to foster investment in energy and do other things

that can be justified or structured in such a way as to meet the

interpretive letters that were issued, or to allow for further interpretive letters without further consideration or statutory law

change on the subject. Is that correct?

Ms. WILLIAMS. Congressman, I respectfully disagree. These are

letters that are very fact-specific, that deal with a very narrow set

of circumstances, and a very narrow type of authority that national

banks have to hold certain interests.

Mr. KANJORSKI. Why do you think that what is being suggested

in Pittsburgh could only be done by the bank? Why couldn’t a developer or real estate firm or some other entity do that?

Ms. WILLIAMS. The situation in Pittsburgh involved property that

the bank already owned. It was in the footprint of its corporate

headquarters.

Mr. KANJORSKI. Could they sell the property and then become a

tenant?

Ms. WILLIAMS. That is a theoretical possibility. But it has been

recognized by the courts, going back over a century——

23

Mr. KANJORSKI. They have a right to develop an office building.

I grant that.

Ms. WILLIAMS [continuing]. In a way that is——

Mr. KANJORSKI. They are putting condos in, and a hotel, and because they have visitors or users of the bank, they need hotel facilities or employees, that is used as a justification. Well, I found out

the other day that somebody is coming into town to use that hotel,

and they left their car in Orlando, FL. So they needed to rent a

car. So I have a rental company that wants the bank to rent cars

to the employees. Why isn’t that an acceptable practice?

Ms. WILLIAMS. The authority that we look to in connection with

the bank premises letters that we issue is very specific to bank

premises real property used in connection with the bank’s own

business operations. Not a car rental business.

Mr. KANJORSKI. The prohibitions that we included in H.R. 10,

didn’t it strike you that they were there for a purpose, and that before a regulator starts making interpretive letters that they may

have a need to address the intent of Congress, maybe talk to some

of us that were in that conference that put that language together?

You are aware of the fact that there was a great fight over mixing

commerce and banking, and that there were a lot of suggestions,

I think it was 20–10, 10–5, or 10–90, all kinds of different, and it

came out of that conference, there was going to be no mixing of

commerce and business. If you were in banking, you were 100 percent banking. If you wanted to get into business, get into business,

but don’t do it through a bank.

When did you think that idea of the Congress and their intent

of legislating changed?

Ms. WILLIAMS. Congressman, we never thought that changed.

What we have said is that the National Bank Act has very limited

provisions in it that allows national banks to hold real estate in

connection with their own banking business operations.

Mr. KANJORSKI. Do you think a hotel and apartments, construction of apartments is part of the banking business?

Ms. WILLIAMS. What we concluded was a mixed use building that

had a substantial percentage of office buildings with a percentage

of those that would be occupied by the bank for offices. A hotel and

the sale of the sort of excess space, the condominiums, where the

bank would no longer have any interest in that particular portion

of the building, that package was needed in order for the building

project to be economically viable. And that the bank demonstrated

legitimate business need for those offices and the hotel space.

Mr. KANJORSKI. The hotel space? I just, is the hotel space going

to be sold off to someone else, or is the bank going to operate those?

Ms. WILLIAMS. Neither. The hotel space, what was represented

to us is the hotel space will be operated by an independent thirdparty management.

Mr. KANJORSKI. But owned by the bank?

Ms. WILLIAMS. The building is owned by the bank, yes, sir.

Mr. KANJORSKI. So the hotel will be owned by the bank, is that

correct?

Ms. WILLIAMS. The hotel premises, the physical building, all of

that, except what is sold off, will be owned by the bank. But the

bank is not going to be operating the hotel.

24

Mr. KANJORSKI. That’s a definition of extension of banking business.

Ms. WILLIAMS. The bank is not going to be operating the hotel.

Mr. KANJORSKI. Anybody who owns a hotel know that you can

hire an operator. You are still in the hotel business. You have just

contracted out the operations, that is all. You are in the hotel business, you are in a property that is a hotel. It is not an office building, it is not a bank. And suddenly you now have extended this interpretive language to allow that to happen.

How about if they want to put a Hard Rock Cafe in there, they

have 40,000 square feet? Is that OK?

Ms. WILLIAMS. Congressman, I think what you see in many,

many situations in many cities around the country is that banks

do lease out to other companies that operate restaurants and coffee

shops, their first floor space.

Mr. KANJORSKI. In their buildings that they justifiably have a

right to build because they have a need for their banking business.

And I don’t want to be so restrictive as to stop that. I just interpreted this and the windmill project as going way over the edge,

that the regulator had found what they considered in interpretive

letters a right to start encouraging the banking institutions to get

into the real estate investment business. And that is what they are

in.

Now, the bank, if it wants to do that, all it has to do is give back

their Federal charter and become a private bank, and you can build

all the hotels you want to, directly. Why should we be underwriting

to the full faith and credit of the United States the deposit insurance for that bank who is going out and not only building office

space that they immediately need but building condos and hotel

space that isn’t for their business purpose? Why should we subject

the liability of the American taxpayer to that type of a business

venture?

Ms. WILLIAMS. Let me reaffirm that we very much recognize the

fundamental separation between banking and commerce in this

country, and that we recognize the limits, the substantial limits

that apply to the ability of banks to hold interest in real estate. We

absolutely will abide by those limits in the way that we apply them

to all national banks. There was no intent and no design for these

letters to constitute or to signal that banks are going to be getting

into the real estate development or real estate investment business.

Mr. KANJORSKI. We in Congress wouldn’t even have known of

these private interpretive letters except, and I can’t even tell you

how it came to my attention, but it came to my attention by

chance. Other than that I would have never know that a bank is

going to build a windmill farm and build a hotel. And let me tell

you, I am very sympathetic to this particular bank. It is in my

home State of Pennsylvania. So if anyone would want to, and certainly Pittsburgh, and I know Pittsburgh needs the redevelopment,

I am not opposed to redevelopment, I am not opposed to the bank

getting involved and lending money to developers to build property.

What I don’t like about the idea is I think the OCC has now

found, through interpretive letters, the ability to expand the intent

of Congress without coming back to Congress to find out whether

they are acting in accordance with their mandate under the statVerDate 11-MAY-2000 11:08 Dec 18, 2008 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\45711.TXT KATIE PsN: KATIE
25

ute. And it just seems to me that the Comptroller had the duty

that when this question needing an interpretive letter comes up,

that could merge banking and commerce in some way that was not

desirable under H.R. 10, that somebody down there should have

said, you know, maybe we should pass this through the proper authorities in Congress who passed this law and give us this statutory right to exist instead of what I consider amending the law,

and doing it in quite a secret manner, which is very disappointing.

I can’t imagine what other interpretive letters must be down there,

but I will be they are dingers.

Ms. WILLIAMS. If I could address both of those just briefly. The

interpretive letters are published, they are published monthly in a

compilation of interpretive letters, and they are also posted on our

Web site. We have absolutely no desire or interest in being secretive about this. In fact, we probably bend over backward to

publish——

Mr. KANJORSKI. If I may interrupt you, there were several interpretive letters in the 1990’s that were not published on your Web

site and were only published after we raised this question. Those

letters, no one outside your agency knew of their existence, except

the principal parties involved.

Ms. WILLIAMS. Congressman, respectfully, they were available in

Lexis-Nexis which is a computer research data base.

Mr. KANJORSKI. Well, I check it every night after dinner. I mean,

I wouldn’t go to sleep if I didn’t examine every interpretive letter

that may be on Nexis. [Laughter.]

Ms. WILLIAMS. I think it is very important for me to be very clear

here that there was absolutely one, no intention of doing anything

with any secrecy. We published the letters, it was our intention to

be entirely transparent. And we did not view the positions that we

took in the letters to be a breach in the separation of banking and

commerce.

Mr. KANJORSKI. One more question, Mr. Chairman?

Mr. PLATTS. One more. As my senior member of my State delegation, of course. [Laughter.]

Mr. KANJORSKI. Would you be amenable to requesting a hearing

before the Financial Services Committee to take this particular

issue up and have a full hearing on this whole issue?

Ms. WILLIAMS. Congressman, I am really not in a position to take

a position for my agency on that question.

Mr. KANJORSKI. Can you tell me what you would recommend to

the Comptroller?

Ms. WILLIAMS. I would want to talk to the Comptroller on it. I

am not in a position to state a position on that.

Mr. KANJORSKI. We are having a hard time getting that hearing.

We have been requesting it for a number of years over there. I can

assure you one thing, come November 7th, if there is a change,

there will be a hearing.

Mr. PLATTS. Mr. Kanjorski, thanks for your questions. As this

hearing shows, you will have to wait until November 7th. We are

glad to have the hearing today.

I do want to followup on one of the issues though about the publication letters, that they are public. But they are public once they

are a done deal. They are public that here is the decision, and it

26

has already been resolved, that there is no publication of it while

it is an ongoing matter for the public or Members of Congress to

have a role in input to that, is that a fair statement?

Ms. WILLIAMS. Mr. Chairman, the process that we follow, it is

the same process that the Federal Reserve, the FDIC, the OTS, follows with respect to requests for interpretations of existing law.

That is that the income requests are not published, but the answers, and in our case, if they make new precedent, if it is a new

precedent or if it applies existing precedent to new facts, they absolutely are published at that point.

Mr. PLATTS. Is there a prohibition from publishing the income requests?

Ms. WILLIAMS. There may be issues in connection with some of

the material that we receive, that it may be confidential business

proprietary information. There may be issues under, for example,

the Trade Secrets Act about our ability to make them publish.

Mr. PLATTS. I very much respect parts of it certainly would be

proprietary. But given that it is an action that is going to in essence rule on what the law means, it seems that we would be better to err on the side of public disclosure that there is this question

of interpretation out there and anyone who would want to have

input it would seem wise to allow the public to have that input.

But I want to get to a number of other questions, because of the

time that we have. In talking about the Pittsburgh case, you talked

about the motive of the bank is what you look at. It seems like that

is ignoring the motive of the bank is appropriate within the requirements of the law, in other words, to Mr. Kanjorski’s point that

separation of commerce and banking, the bank could have great

motives, this is really about us having this facility, but the impact

may be on commerce, whether their motive is sincere or not.

I think it is fair to say, using the condominiums, the fact that

there is going to be 32 condominiums for sale on the market, that

is going to impact commerce, other condominiums on the market

in downtown Pittsburgh. Is that a fair statement?

Ms. WILLIAMS. Mr. Chairman, I don’t know that I could speak to

the impact on the condominium markets in Pittsburgh.

Mr. PLATTS. You just, you can’t tell me whether putting 32

condos for sale here will impact the price of 32 across the street

or down the block? I mean, that is a rhetorical question almost,

really. I think it is a given that those condos are going to impact

the market in that community.

Ms. WILLIAMS. The key with respect to the condominium piece of

this particular building was that the ability to sell those condominiums to, in this case——

Mr. PLATTS. To reduce the cost of the whole structure?

Ms. WILLIAMS [continuing]. Of the overall structure, to get the

bank out of a role where you might argue that it was even more

involved in commerce, if it were in charge of leasing those out.

Mr. PLATTS. But the fact that they are building and then selling

them certainly is going to impact that market. I will answer my

question, and say yes, which I will say kind of argues that it is

commerce. But the premise for allowing it, if I understand it, was

to, it was an element of the overall economics of the project, to

bring down the total cost of the project?

27

Ms. WILLIAMS. That is correct.

Mr. PLATTS. So do you look at the profit margin of the project

in reviewing the merits of what all is included in the project?

Ms. WILLIAMS. We look at the representations that the bank provides us and their studies and their marketing materials about

what were the components needed to have a viable project in this

case. And we had information about the levels of office use, occupancy, the levels of hotel room occupancy and looking sort of cumulatively at the potential uses of the building, the overall economics

of the building, when you cumulate those uses.

Mr. PLATTS. So as part of the review, it was that in reviewing

the merits of the project, you look at, here is the package they are

putting together they think is viable. The alternative is what they

really want is office space, 20 percent or so, and then some hotel

rooms, right? You look at what would it cost the bank to just build

an office building or lease office space and to just rent hotel rooms

to make that comparison? Because that really, if you don’t do that,

it is hard to know the economics, to assess the economics of the

project.

Ms. WILLIAMS. What we look at is here the bank has a piece of

property that it already owns. And it is looking at how it can use

that property to get the uses that it needs. And the facts in this

particular case were that in order to get the uses that the bank

wanted to get out of that particular property, that the project needed to be this multi-use type of building.

Mr. PLATTS. That is assuming that in taking this property, another option was to sell it to somebody to develop the office buildings and hotel, and then they lease back. Is that part of the analysis of them getting what they need out of that property?

Ms. WILLIAMS. When we look at a situation like that, one of the

things that guides us is the way that the courts have construed the

ability of national banks to hold and develop property that they

own. The bank here didn’t go out and buy this yesterday. They

have held it.

Mr. PLATTS. So if they had gone out and bought it yesterday,

that would have made it different?

Ms. WILLIAMS. We would have, again, looked at the facts and circumstances there and evaluated. But here they have property. And

the question is, or the standard is that they are allowed to use it

as a rational owner of property would use property in order to

achieve the desired and permissible use.

Mr. PLATTS. For the bank, for its bank operations?

Ms. WILLIAMS. Correct.

Mr. PLATTS. But it kind of comes back to where I was earlier, in

your 1996 rule that talks about real estate, owning real estate, and

the reference about the temporary lodging with the hotel, in Charlotte, where suitable commercial lodging is not readily available. If

I back up prior in that regulation, it says a national bank may invest in real estate that is necessary for the transaction of its business.

So the first question before you can get into what type of real estate it is, is this necessary. That is where I think we are trying to

get to the issue of is it necessary to build your own building that

requires hotel and condos to be part of it to justify the economics

28

of it, or is it OK to just lease space? Once you cross that threshold

and say, yes, you have to build your own building, I think then you

get to the danger of the statutory prohibition against commerce. I

think that is what we are really going after.

Let me give you an example of where would the limit be. Under

my understanding of the regulations and the law is, it could be not

just for temporary lodging, but it could be housing for bank officers,

that if a bank wants to build a home for the bank president, that

would be permitted under the regulations?

Ms. WILLIAMS. I doubt that would be the case, but we would

have to look at the particular situation, if there was a reason why

there was a banking business need to do that.

Mr. PLATTS. If the banks says, well, we want to provide all of our

senior management free housing, and so we are going to build

these four homes, how is that different than saying, we want to

provide temporary housing for our employees or our visitors when

they come? I would think you could make that argument, so if I

can build a hotel, I can build the houses. Now if I build the houses,

to make it commercially viable to build these four, I am actually

going to develop 20 homes in this development and sell 16 of them,

why does that analogy not work?

Ms. WILLIAMS. I think because it is missing the kind of linkage

that we had here to the operational business need of the bank to

have the particular facility. The bank can compensate its executives in such a way that they can go out and buy nice, nice homes.

Mr. PLATTS. They can reimburse their employees to go rent

rooms in hotels not owned by the bank. How is that different?

Ms. WILLIAMS. Well, again, here we had a situation where the

bank had property——

Mr. PLATTS. But the issue of having property I don’t think is the

first question. The question is, is there another alternative to hotel

space then buying or building our own?

Ms. WILLIAMS. And the question that we answer first, guided by

the way the courts have looked at this statutory standard, is not,

could they do it another way. But it is whether the bank is proposing in good faith a type of development that is consistent with the

bank’s legitimate business needs.

Mr. PLATTS. But shouldn’t the question be, can they do it another

way? If I am reading the 1996 rule correctly, it says investment in

real estate necessary for the transaction of business. A national

bank may invest in real estate that is necessary for the transaction

of its business. I think the key question is, what is necessary. So

that should be the first question, not how are they going to do it,

but is it necessary to do it.

Ms. WILLIAMS. I have been avoiding trying to sound too much

like a lawyer here and getting into the history of certain terminology under the National Bank Act.

Mr. PLATTS. That is probably one of the challenges. We are all

looking at the language differently.

Ms. WILLIAMS. The word necessary has a fairly substantial history of how it has been construed and used in the National Bank

Act context. It has not been construed as meaning essential or indispensable. It has been construed as being useful, convenient, useful for the conduct of the bank’s business. And so we are not, when

29

we look at that word necessary, for us as OCC lawyers, we are

reading it against the backdrop of that case law.

Mr. PLATTS. If I look up the word necessary in the dictionary, off

the top of my head I would think it would be imperative, critical,

I don’t have a dictionary here, but it is pretty plain English, isn’t

it? To interpret it that it can be subjective in a pretty broad sense

is contrary to what it says.

Ms. WILLIAMS. This is a situation where that is not our interpretation. It is the interpretation that has been developed by the Federal courts over the years.

Mr. PLATTS. Since 1996, since that ruling?

Ms. WILLIAMS. Prior to.

Mr. PLATTS. But this is a ruling in 1996, a new rule, right?

Ms. WILLIAMS. But when we use that term, in the banking context, in the context of the National Bank Act, it has a meaning the

way the courts have construed it in the past.

Mr. PLATTS. It has been a while since I was in law school, and

I haven’t practiced in a while. But using one word in a new setting

doesn’t necessarily automatically mean the courts will look at that

word. Because here it is pretty straightforward, it is necessary for

the transaction of its business. That seems like pretty straightforward English to me.

But we could probably go back and forth and I appreciate, you

have been very kind, helping us try and get to the bottom of what

you believe but how we interpret it.

Ms. WILLIAMS. And if I could just add one other thing concerning

the particular regulation. The regulation is not designed to be an

exclusive list of permissible bank premises. It speaks in terms of

our examples, including those——

Mr. PLATTS. Yes, but that first part, that it is necessary for the

transaction of business, is a mandate. That seems to me the way

it reads. But I have one more example, and I want to allow my colleagues to have their second opportunity. Maybe the house was an

extreme example. Let’s talk about a new branch of the bank. We

want to be right here in the hub of all the action in the community.

So we propose, we want to build a new mall with the center of the

mall being our bank. Are we allowed then to develop that mall, because the center of the mall we are going to make sure is ours and

we are going to sell off the rest of the mall once we develop it? Is

that within the premise of banking premises?

Ms. WILLIAMS. I think not, because the way that we would look

at that situation, the way you have described it, we would look at

the relative use of the footprint of the whole property that you are

describing, how much of that is bank branch, how much of that is

other.

Mr. PLATTS. What if it is just five stores, bank and four stores,

so percentage, it is 20 percent as in the hotels, or 5 percent? If it

is not 1 percent, but it is our branch and four other similar size

stores, not big department stores, but are we allowed to develop the

property? I think that is what goes to this whole issue, is our interest in, what is or what is not allowed, and when do you get to that

commerce?

So I would see that very much as commerce, developing a shopping center, even a small shopping center. And I don’t know how

30

you separate that from 20 percent of hotel rooms we are going to

use or 37 percent of hotel rooms. I don’t know how you separate

that. I think that is a concern here. It seems like there is no defining line of commerce yes or no, but it is a very, very dull shade

of gray of what is allowed or not allowed.

Ms. WILLIAMS. It is, in many, many respects, as I said, these are

very fact-specific determinations. In the situation that you describe,

we would look at the percentage of the property that is going to be

used for the bank branch. We would ask, did you have to buy all

of it, if it is an acquisition?

Mr. PLATTS. Final question, I promise, before my colleagues here,

but wouldn’t again the first question be, well, can’t you lease that

space from a developer that owns and buys the land and develops

it and you lease it? Because that is clearly then, somebody is taking the risk of the development and getting into the commerce of

which you are getting the use of that commerce through your

lease? It seems like that should be the first question, given that the

Congress has said no commerce. It seems like we are skipping that

question to say, well, let’s look at percentages, not, is it commerce

or not, which should be up front.

Ms. WILLIAMS. And I think the scenario you are posing, where

the bank is acquiring the property and asking that question, really

does highlight how fact-dependent these situations need to be and

because of that, how narrow this sort of authority is. It is just not

a general authority for banks to go out and do real estate investment and development.

Mr. PLATTS. I agree it is not an authority, but it certainly provides a pretty strong precedent, whether it is called that or not,

that if you didn’t allow others to do it they would say, you are

treating us unfairly and that is unequal treatment under the law.

I guess, Mr. Towns, did you have other questions?

Mr. TOWNS. Yes. It appears to be that you are involved in commercial development and paying for your headquarters at the same

time. That is what it appears to be. So maybe, Mr. Chairman, if

we could just get a summary of the case law, just these three decisions, maybe that would help us some. I would like to make a request.

Mr. PLATTS. Ms. Williams, if you could provide that to us in writing.

Ms. WILLIAMS. Certainly.

Mr. PLATTS. We will keep the record open, the case law that OCC

looked at in reviewing these requests, that is what you are asking

for, Mr. Towns?

Ms. WILLIAMS. Absolutely. We would be happy to do that.

Mr. PLATTS. Thank you.

Mr. Kanjorski.

Mr. KANJORSKI. Thank you, Mr. Chairman. You didn’t quite answer one question for me. The relationship between the hotel and

the bank, is that a management contract with some entity to manage the hotel?

Ms. WILLIAMS. I believe it is, sir.

Mr. KANJORSKI. Does that entity have a lease on that space for

a term of years? Does it pay an agreed-upon amount to the bank?

31

Ms. WILLIAMS. Congressman, I would have to back to you on the

specifics of that.

Mr. KANJORSKI. Well, wouldn’t you think that would be important as to who has the risk? We are talking about commerce and

separating it from banking. And commerce is the risk side of business. Banking is supposed to be the conservative, safe side. But it

seems to me that if you went through all these machinations, if you

really wanted to follow the intent of the law, you would have said,

well, you have to enter into a lease for a term of years with the

operating company so that we are assured so much money will return and that won’t risk our depositors.

If you don’t have a lease, they are at-will, able under the contract

to be dismissed and another one hired, so you can be very speculative there for profit purposes. That is commerce. That is not banking. Didn’t that come to your attention?

Ms. WILLIAMS. One of the challenges here, when you are talking

about how the particular type of facility that is being proposed

could be owned and the interests the different parties might have

in it or the contracts——

Mr. KANJORSKI. They own the building. They are also in the

hotel business unless they lease out that to someone who has a set

term with a set amount and they are assured of that repayment,

they are not involved in the business, they are not going to get the

upside or the downside, they’re just going to draw the lease payment.

Ms. WILLIAMS. Depending upon the party that enters into the

lease with the bank under the hypothetical that you are proposing,

and depending upon what arrangement that party might have with

the management company, the risk to the bank as the building

owner is not necessarily going to be less with the variations on how

this operation might be structured with the different contractual

relations.

Mr. KANJORSKI. Would you agree that the bank should be allowed to lease it out to the president’s brother-in-law, who is penniless?

Ms. WILLIAMS. Not the president’s brother-in-law, probably. But

there are different ways that this could be structured.

Mr. KANJORSKI. The fact of the matter is, the examiners here

have to make an examination as to the soundness of this deal,

don’t they? So they would have to do due diligence, they would

have to search out who this operator is, what their experience is,

what kind of assets they have in support of the situation, and what

are the vital terms of the contract? Is it profit sharing with the

bank? Do you know whether it is profit sharing?

Ms. WILLIAMS. I would again want to get back to you to make

sure that I gave you a completely accurate answer. But the examiners did look at the materials that the bank had.

Mr. KANJORSKI. I assume they did. And that raises the next

question that I have. Have you put a new drive on to hire expertise, entrepreneurs over the OCC? I have never met a bank examiner that would be able to tell me what the likelihood of success

in a windmill farm would be and what the profits could be anticipated or expected and what all the foibles are to entering into that

energy business. It is a highly speculative business.

32

Ms. WILLIAMS. What I noted in my written statement is that the

particular financing in question has a substantial resemblance to

certain oil and gas production loans. Also, that one of the fundamentals of our issuing the interpretive letter was that the financing had to be structured so that it was economically functionally equivalent to the situation had the bank extended a loan. So

yes, we do have examiners that are quite knowledgeable in this

type of financing.

Mr. KANJORSKI. Why didn’t they just extend a loan to the windmill operation?

Ms. WILLIAMS. The desire here was to be able to lower the cost

of financing to the alternative energy project. And——

Mr. KANJORSKI. They have a right to charge a lower rate.

Ms. WILLIAMS. In order to lower the rate from what would be

their ordinary charge for that type of commercial credit——

Mr. KANJORSKI. They are looking at the profit to justify a lower

rate, isn’t that a fact?

Ms. WILLIAMS. They are looking at their hurdle rate for their use

of capital.

Mr. KANJORSKI. You don’t see that they are getting that upside

of profit in these deals and that is why they can reduce the interest

rates, etc? Because they are participants in the business, in the

commerce.

Ms. WILLIAMS. They are getting payments that are structured to

resemble payments on a loan.

Mr. KANJORSKI. Well, maybe you should examine some of your

loans on other regards, I don’t know.

Mr. PLATTS. Mr. Kanjorski, could I just followup right on that to

make sure we understand?

Mr. KANJORSKI. Yes.

Mr. PLATTS. The reason that the windmill was structured the

way it was was to get the tax credits. But is it fair to say that the

bank is saying, well, because we are going to get these tax credits,

we can therefore offer less expensive, which in essence the tax

credits became in place of profits from the windmill project, right?

So we were getting profits over here, i.e., tax credits, and therefore

we can charge less?

Ms. WILLIAMS. It was in place of a higher financing cost on a

loan.

Mr. PLATTS. But the reason they could charge less is because

they were getting the tax credits. I think that is Mr. Kanjorski’s

point, is they are getting a profit above the loan, the tax credits

from the Federal Government, really, is where the profit is coming

from. That is what allowed the lower rate to be charged. I think

that is what you are getting at.

Mr. KANJORSKI. Absolutely.

Mr. PLATTS. Isn’t it——

Ms. WILLIAMS. I guess I would describe it a little bit differently,

that the bank is looking for a particular rate of return on the financing that it extends. When it puts the tax credit benefit into the

mix, it can get a lower rate of return from the particular project.

But yet overall get the rate of return that it is looking for as an

economic matter.

33

Mr. KANJORSKI. And one other element. They own the property.

So if it appreciates, they get the profit on appreciation.

Ms. WILLIAMS. No, sir, the bank owns an interest in a limited liability company. It will have no upside or downside in the value

of the underlying real estate. We made that very clear in the second legal opinion that we issued to make sure that everybody understood that very clearly.

Mr. PLATTS. Perhaps one or two. We need to get to our second

panel here.

Mr. KANJORSKI. You have examiners that have all the expertise

to get into these commercial examinations and do it with the expertise of investment houses, is that correct?

Mr. PLATTS. We have examiners that understand this type of financing arrangement, and that are quit expert in it, yes, sir.

Mr. KANJORSKI. You have, there are three interpretive letters

here. And just to be sure, until we get an opportunity to get back

to this at some point, can you give me assurances that these three

letters will not be used as precedents for any other requests that

are made for widening this hole or this crack between banking and

commerce? Or is that something you can’t confirm?

Ms. WILLIAMS. I don’t think the letters themselves will be used

as precedent. We look to the underlying limited statute.

Mr. KANJORSKI. Can I be assured that neither the Office of the

Comptroller of the Currency will recognize that three other instances certain permissions were given and therefore, if another request that those instances would be cited has been justified as

being within banking necessity?

Ms. WILLIAMS. Congressman, I can’t tell you that we will never

put these in a footnote someplace in a legal opinion. What I can

tell you is that the underlying conclusions that we reached go back

to the statute.

Mr. KANJORSKI. So what you are telling me is in your opinion,

as you have acted and the way you have acted and the way you

have interpreted, that is the way you are going to go and continue

unless the Congress of the United States calls a section up and rewrites it, is that correct?

Ms. WILLIAMS. No, sir, and I am sorry if I gave that impression.

If we have any subsequent requests, and I must tell you that we

have not received anything like this since these letters were issued,

so they have not served as a catalyst for any sort of tidal wave of

requests to the OCC to take advantage of these positions. We will

apply the standards in a narrow and careful fashion and we will

be very, very sensitive to the issue of maintaining the separation

of banking and commerce.

Mr. KANJORSKI. Do you consider this narrow, this interpretation,

narrow?

Ms. WILLIAMS. We do.

Mr. KANJORSKI. Wasn’t there a request by J.P. Morgan Chase of

a similar nature that was pulled after this disturbance?

Ms. WILLIAMS. We had a request for an interpretation that dealt

with something that is referred to as volumetric production payments. And it doesn’t have anything to do with land. It pertained

to intangible interests in certain royalty payments and a financing

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connected to those interests. And that is a type of financing that,

for example, is allowed in bank holding companies.

Mr. KANJORSKI. But that was pulled?

Ms. WILLIAMS. They chose not to go ahead with it, yes.

Mr. PLATTS. Mr. Kanjorski, thank you. We are going to need to

move on. Ms. Williams, we appreciate the interaction. I think as

you saw from all of us, there certainly seems to be a lot of uncertainty of what is or isn’t. I understand that it is very fact specific.

But I think the law that Mr. Kanjorski certainly played a critical

role in is pretty clear, fact specific notwithstanding, as in no commerce. I hope that OCC will look at that as a starting point, that

to me, what the law requires or actually prohibits regarding commerce as a starting point, not the motive of the bank. You start

with, is this allowed under the issue of commerce/no commerce.

And I think the example of these all raise some questions about

that.

But the bottom line is there is certainly a lot of uncertainty out

there. And I think even the order of the decisions being made, two

on the same day and the third, but the bank, hotel, office space

being first and selling condos, then a freestanding hotel and then

a windmill project is kind of like we are going further and further

down the line.

So we appreciate your interaction with us and your service at the

OCC and the information that was requested regarding the lease

arrangements, the location as well as the case law, you and your

staff following up with us, we will keep the record open for that.

Ms. WILLIAMS. Thank you. And let me just reaffirm our sensitivity to this issue and appreciation of your concerns and our intent

that the letters in question were very narrow in focus and scope

and intended to be very narrow in their impact.

Mr. PLATTS. Thank you, Ms. Williams. We will break for about

2 minutes, just as we reset our second panel, and then we will continue with the hearing. Thank you.

[Recess.]

Mr. PLATTS. We will reconvene the hearing with our second

panel. Before we do introductions, if I could ask you to rise and we

will swear you in together and then proceed to introductions.

[Witnesses sworn.]

Mr. PLATTS. Thank you. You may be seated. The Clerk will note

that all witnesses affirmed the oath.

We are pleased to have with us three distinguished witnesses:

Mr. Ed Yingling, President and CEO of the American Bankers Association; and Ms. Cynthia Shelton, Commercial Real Estate

Broker with Colliers Arnold of Orlando, FL. And for our third witness, I am going to turn to the chairman of the full committee, Mr.

Davis, for an introduction.

Chairman TOM DAVIS. I am proud to have a friend and neighbor

of long standing here, and that is Tom Stevens, who lives in the

11th District in the town of Vienna with his wife, Lindy. He is the

President of the National Association of Realtors, which is America’s largest trade association, representing more than a million

members. He has been a realtor since 1972. He is currently, as I

said, the president.

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He is an active member of our community. He has been involved

in charitable organizations like the Cerebral Palsy campaign of the

National Capital Area, the American Cancer Society, and numerous others. He has been helping our local and State Government

to improve on transportation. We dealt with him early on, when I

was chairman of the board, on a number of issues affecting realtors. He is active in the chamber out there in Fairfax. I am just

very proud to have you here today.

Mr. PLATTS. Thank you, Mr. Chairman. We are going to move to

your testimonies. Again, we are going to give you 5 minutes on the

clock, if you need to go over a little bit.

What we are going to do, we expect to have to leave probably in

about 35 minutes for votes. The vote may come up earlier and we

would have to go over. What we would like to do is get your testimonies in and at least have a good dialog with you, Q&A before

that, so hopefully we don’t have to have you stay while we are over

there voting.

So with that, Mr. Stevens, we will begin with you.

STATEMENTS OF THOMAS M. STEVENS, CRB, CRS, GRI, PRESIDENT, NATIONAL ASSOCIATION OF REALTORS; EDWARD L.

YINGLING, PRESIDENT AND CEO, AMERICAN BANKERS ASSOCIATION; AND CYNTHIA C. SHELTON, CCIM, CRE, DIRECTOR OF INVESTMENT SALES, COLLIERS ARNOLD

STATEMENT OF THOMAS M. STEVENS

Mr. STEVENS. Thank you, Mr. Chairman. Good afternoon, and

thank you for having us testify. Thank you to Ranking Member

Towns and Chairman Davis for that introduction. I appreciate it.

My name is Tom Stevens, and I am the former president and

owner of Coldwell Banker Stevens, now known as Coldwell Banker

Residential Brokerage Mid-Atlantic. I am the 2006 President of the

National Association of Realtors. I appreciate the opportunity to

present the views of our 1.3 million realtor members on the Office

of the Comptroller Decision to expand national bank authority to

engage in real estate development, ownership and commercial

banking.

Last December, the OCC expanded the authority of the banks to

engage in commercial real estate activities through three separate

rulings. The first decision allows PNC Bank to develop a project involving retail space, offices, a hotel and 32 speculative condominiums. The second decision approves Bank of America’s request to

develop a Ritz Carlton hotel in which less than half of the rooms

will be used for its own business purpose. And the third decision

authorizes Union Bank of California to own 70 percent of the equity interest in a windmill farm.

Why have NAR and other industry participants urged Congress

to hold today’s oversight hearing? NAR and others are concerned

that the OCC has inappropriately expanded congressionally established bank powers. In essence, they have created new law without

public participation and without publication in the Federal Register.

Furthermore, NAR believes the OCC’s represent a far departure

from what is permitted by the National Bank Act, which elevates

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our concern that the rulings will inevitably lead to an irreparable

breach in the laws separating banking and commerce. The OCC

has repeatedly claimed that the three rulings have nothing to do

with real estate brokerage. Contrary to what you may have heard

from the OCC officials and banks, NAR has never said that the rulings permit national banks to engage in real estate brokerage.

What we have stated and still firmly believe is that the OCC’s actions set in motion a process that will result in their authorizing

national banks to engage in real estate brokerage, which is currently prohibited. Such expansion will dramatically increase the

risk and exposure of national banks and threaten safety and the

soundness of the Nation’s banking system.

The OCC gave Bank of America the green light for a Ritz

Carlton hotel project based on their banks premises rule, which allows a bank to invest in real estate if the property is used for temporary lodging and areas where suitable commercial lodging is not

readily available. We believe the OCC unreasonably stretched its

own rule when approving the Ritz Carlton project, because our own

scan of the immediate area reveals a 365 room Omni Hotel already

in the Bank of America plaza, and a 434 room Marriott directly

across the street from the bank’s headquarters. We would like to

know why Omni and Marriott, both a stone’s throw from the bank’s

front door, are not suitable.

The PNC Bank approval included another creative interpretation

by the OCC, specifically the bank’s proposal to build and sell residential condominiums which were in no way related to the business of the bank. PNC asked for this condo ruling to make the

mixed-use development project economically feasible. To us it

sounds as if a national bank can virtually any type of commercial

or residential real estate development project, so long as the bank

says an activity is needed for the economic success of the project.

And last but certainly not least, the OCC allowed Union Bank

of California to own 70 percent of a windmill energy project. In the

ruling, the OCC disregarded its own guidance on whether or not

the windmill investment was an integral part of the business of

banking and instead, relied on the economics of the deal, the deal

being that the transaction is structured as an investment, rather

than a loan, to take advantage of certain tax credits. Interestingly,

the OCC is not requiring the windmill company to repay the principal. Instead, the bank will receive periodic payments based on

revenue generated by the windmill farm. I hope for Union Bank’s

depositors that it is very windy in California.

In conclusion, we believe that with these three real estate rulings

the OCC has opened the door and all but invited in national banks

to engage in widespread real estate development, which breaches

the fundamental separation of banking and commerce. Accordingly,

we ask Congress to urge the Comptroller to reconsider the December 2005 rulings, and we ask you to direct the OCC not to take any

future actions that have the intended or unintended result of expanding banking powers to engage in real estate development.

I thank you for the opportunity and would be more than happy

to answer any questions.

[The prepared statement of Mr. Stevens follows:]

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Mr. PLATTS. Thank you, Mr. Stevens.

Mr. Yingling.

STATEMENT OF EDWARD L. YINGLING

Mr. YINGLING. Mr. Chairman, members of the subcommittee, I

am pleased to present the ABA’s views on the three recent letter

rulings by the OCC.

There has unfortunately been a lot of misinformation and exaggeration spread about these three rulings. Frankly, there is very

little new here, other than applying longstanding policy to today’s

economy. At the same time, we welcome the opportunity to clarify

the situation, and I thank the subcommittee and its staff for the

fairness and openness of this hearing process.

First, it is absolutely clear that the OCC is applying longstanding law upheld by the courts. It is worth quoting a 1902, over 100

years old, opinion upheld by the Supreme Court in 1904, and

frankly, I think this goes to some of the discussion in the previous

panel. This is what the court said in 1902, and still applies: ‘‘Nor

do we,’’ that being the court, ‘‘perceive any reason why a national

bank, when it purchases or leases property for the erection of a

banking house, should be compelled to use it exclusively for banking purpose. The National Bank Act permits banking associations

to act as any prudent person would,’’ any prudent person would, ‘‘in

making investment in,’’ and they are referring to that bank, ‘‘real

estate.’’

The windmill farm letter is also firmly based in law, as shown

by the M&M leasing decision in 1977, 30 years ago.

Second, the rulings are in fact quite limited. They do not serve

as precedents for broad real estate development or for engaging in

commercial activities. Rather, the two rulings interpret what a

bank can do with its own property and for its own business, not

broad real estate development.

The other ruling involves the functional equivalent of a loan, not

engaging in commerce but extending credit. Thus, it is totally inappropriate, we believe, to extrapolate from these limited rulings to

imply that they allow broad-scale real estate development and commercial activities.

Importantly, banks have been engaged in these very limited activities for decades, decades, without any problem whatsoever. Last

summer, I visited the town in Arkansas where my family is from.

I had not been there in a number of years, and I walked down to

the town square. Several years ago, the downtown area, like many

small towns, was slowly going downhill as businesses moved out to

the malls on the highway. I was pleased to see that the downtown

had made a comeback, with law office, specialty shops, restaurants

and a community theater. At the heart of the redevelopment were

the office buildings of two local banks. These were among the newest and biggest buildings, although certainly not very big by city

standards.

One of those bank buildings also served as offices for others. Examples could be lawyers, title companies and while I don’t remember, perhaps even a realtor. These banks were fortunately not limited to erecting a building only they could use. They built what

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made the most economic sense. We have other examples in the appendix to my written testimony.

These banks saved their downtowns. The same can be said in

many towns and cities across the country. If these banks had been

artificially limited in what they could build, I doubt very seriously

they would have built downtown, because of the expense. Frankly,

the primary difference between these examples and the letter rulings now under scrutiny is size. The banks covered by the letter

rulings are much bigger and so are the buildings. But that makes

no difference under the law or the 100 years of precedents. These

buildings are designed to make the best economic use, as the law

clearly allows, in their downtown city locations. One need only read

the OCC’s letters to see how these fit into longstanding precedents

and how limited the rulings are.

We appreciate the opportunity to set the record straight, Mr.

Chairman.

[The prepared statement of Mr. Yingling follows:]

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Mr. PLATTS. Thank you, Mr. Yingling.

Ms. Shelton.

STATEMENT OF CYNTHIA C. SHELTON

Ms. SHELTON. Thank you, Chairman Platts, Ranking Member

Towns, Chairman Davis and my friend Mr. Kanjorski, for allowing

me to be here to speak with you today.

My name is Cynthia Shelton and I am a practitioner and commercial real estate broker with the firm of Colliers Arnold in Orlando, FL. I have been in the real estate business for 32 years.

Commercial real estate professionals help clients with all aspects

of commercial real estate needs.

In the case of real estate development, commercial real estate

professionals help clients locate properties, work with them and a

financial institution to create the most suitable financing plan

available, find tenants that would occupy those spaces and many

times in helping them sell the projects once they are completed.

Commercial real estate professionals provide these services with

the knowledge and unique understanding of the economic health

and sometimes high risk of developing real estate projects in local

markets. The OCC’s decision in expanding the authority of banks

to develop real estate undermine the ability of the commercial real

estate professional to work with a financial institution on a level

playing field and further blur the lines that distinguish banking

from commerce.

I have always understood that a key purpose of the national policy against mixing banking and commerce is to protect banks from

the inherent risks posed by a commercial venture. Banks strive to

maintain soundness and stability by managing their risks, keeping

sufficient reserves and diversifying their loan portfolios. In determining a potential loan, the bank evaluates the strengths of the developer’s business plan and their overall assessments of the risks

that the loan would pose.

There is an implicit acknowledgement that the borrower-developer assumes the risk of the venture and the venture’s ultimate

failure or success, and the bank must ensure that its soundness

won’t be unduly jeopardized by that risk, or that the borrower-developer has personally signed and has sufficient assets to cover

that risk.

The OCC’s recent rulings complicate that mutual beneficial relationship by allowing banks to compete in the business of real estate

development. Could a bank change its lending criteria to favor a

potential development deal in which it has stake over another one,

which it doesn’t? What would prevent a bank from taking advantage of the business plan of a sound commercial real estate venture

that applies to that bank for financing?

I can’t believe that the OCC envisioned these scenarios, but I do

not see anything that would present this from happening. I am

concerned that the OCC may have considered the potential impact

of these decisions on a bank’s ability to act as an honest broker of

financial services.

We believe that Congress requires the separation of banking and

commerce also for the consumer’s protection and to enhance the

safety and soundness of the banking system. I had personal experiVerDate 11-MAY-2000 11:08 Dec 18, 2008 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 C:\DOCS\45711.TXT KATIE PsN: KATIE
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ence with these issues when the separation was breached during

the devastating savings and loan crisis of the 1980’s. Then many

savings and loans were permitted to invest in real estate developments and to make commercial real estate loans with little regard

to sound risk management practices, such as the understanding of

the local commercial markets and their changes.

Thankfully, because of new laws, strong underwriting standards

and risk management practices, we believe a repeat of the late

1980’s and the days of the RTC is highly unlikely. Though the commercial real estate markets have been strong as of recent on a national level, I remind you that it is like a giant quilt made up of

local markets that can vary significantly and shift fairly easily.

When a bank is permitted to develop real estate, the bank does so

in a localized real estate market. And because we are real estate

professionals, we know first hand how fast the local markets can

change. Banks should not be permitted to impair their safety and

soundness by assuming the high risk of a commercial real estate

development.

How many other national banks will engage in these real estate

development activities tomorrow? How many banks will choose to

get into the risky commercial real estate ventures in the weak local

markets because of their easy access to cheap capital through federally insured deposits? How far will the OCC go in granting this

unfair business advantage to the banks? Let’s hope we don’t have

to find out.

In conclusion, we ask Congress to urge the OCC to curb the ability of banks to develop commercial real estate, so that the distinction between banking and commerce is not diminished further, and

that the commerce of real estate is not undermined.

Thank you for allowing me to testify, and I am open to any questions you may have.

[The prepared statement of Ms. Shelton follows:]

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Mr. PLATTS. Thank you, Ms. Shelton. I would like to recognize

the chairman of the full committee, Mr. Davis, for purposes of

questions.

Chairman TOM DAVIS. Thank you, Mr. Chairman. I have people

waiting in my office, so I need to get up there, but I want to just

ask, do you know how many letters are put out a year on this subject? Anybody have any idea? I should have asked the previous

speaker. These three, I think because of the magnitude, and maybe

the facts on the ground don’t match the facts that were perceived

in the letter, have generated more controversy. Does anybody know

how many letters?

Mr. YINGLING. I don’t know. We can get you that number. I think

it is kind of a slow trickle on this subject. There are letters, interpretive letters all the time. I think one of the disconnects we may

have here is that these letters were seen within the banking industry as non-events. And I think some people to my left and right and

some Members of Congress see them as big events.

But to put it in perspective, we have had 800 new regulations in

the last 15 years. That is one a week. We constantly are going to

our regulators, formally and informally, on an ongoing basis, asking for their feedback. We get informal feedback, we get informal

letters. So in the broad context, from our industry, these were seen

as very, very minor events that would have buried had they not

been brought up.

Chairman TOM DAVIS. Even prior to this, there has been some

controversy in terms of how the OCC may interpret this, correct?

Mr. YINGLING. This issue?

Chairman TOM DAVIS. Yes.

Mr. YINGLING. No.

Chairman TOM DAVIS. You don’t think so?

Mr. YINGLING. No, sir.

Chairman TOM DAVIS. Do you feel, let me just ask, and I will

start with you, Mr. Stevens, on the notice requirements, when a

letter like this comes up, do you think there ought to be a broader

notice or do you think you just ought to have somebody write and

kind of have the ex parte communication over what the project is

and let the decisionmaker make it? How should this work and do

you feel in this particular case the notice provisions weren’t adequate?

Mr. STEVENS. I definitely think that the notice, as described earlier, that it should be broadened, it should be heightened. Because

we had a member that I think saw it on the Internet somewhere

and notified us in January, almost a month after the letters were

issued. And a news reporter in New York brought it to our attention at about the same time.

So I don’t think it is, the exposure or the notification process is

significant enough when you are talking about the possibly of

changing Congress, a decision that Congress has made. That is

why we are involved in this. We think that is an important policy

question, a serious policy question, that has the OCC gone too far.

When they are making decisions and you can’t find the notification

of these decisions, that is a challenge.

Chairman TOM DAVIS. Do you feel better or worse after hearing

the OCC testify? I guess I would ask everybody that.

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Mr. STEVENS. Well, I think it is real clear that there are some

challenges here, that I still feel that they have overstepped their

bounds. I think they have gone too far. When you start to look at

the rationale that they are using to approve this real estate development, nowhere in any law that I have seen does it allow you to

build speculative condominiums. Is it really a Ritz Carlton that is

going to help fulfill the banking needs, a speculative hotel that is

going to be used very little, truly, by the bank, or its employees or

its clientele, when you get down to it? It is a challenge.

Chairman TOM DAVIS. Mr. Yingling, you think it is a non-event,

basically, is that right?

Mr. YINGLING. Yes. First, back to your first question, I am informed that Ms. Williams’ testimony says there were 22 letters in

roughly 30 years in this area.

Chairman TOM DAVIS. On this subject.

Mr. YINGLING. I will tell you why I think it is a non-event. Go

to any town, any city, any big city in the country, and go downtown. Quite often you will see at the heart of the downtown bank

buildings. Go to the areas in your district that are the key areas.

You will see major buildings, depending on the size, relatively

major buildings, with a bank name on them. They are bank buildings. By and large they are owned by the bank.

Very, very many of those buildings are not fully used by the

bank. It has been that way always. They build the buildings, they

look at what they may need, they play ahead and say, we may

grow, so we need extra space. Sometimes they say, well, in order

to build in this position, I need to do some other things with that

building. And sometimes, frankly, they are trying to, very often

they are trying to help save a downtown or build enough of a critical mass downtown to have a good downtown.

It has gone on for 100 years. It has never been a problem. That

is why from our perspective, while these were applying old law to

new facts, we didn’t see it as a big deal at all. And nobody in the

industry has come to me as the president of the ABA and said,

wow, what a great opportunity this is. Nobody has come to us

about it, because it is seen as just part of a continuum.

Chairman TOM DAVIS. Mr. Stevens.

Mr. STEVENS. Can I just respond? I want to make it real clear,

NAR has no problem with banks building buildings to accommodate their business. I don’t know if you saw the Metro section of

the Washington Post this morning, but the lead column is where

a major developer of a condominium in Bethesda, Maryland, has

pulled out of that project. And with a market changing like this,

when you start to deviate from your core competency, and I think

banking is banking, and commerce is commerce, I think when you

start to deviate from your core competency, you are going to end

up in trouble. We have seen that before with savings and loans.

That is why I think they have overstepped their bounds.

Mr. YINGLING. These buildings I am talking about, there are a

large number of them that you see in every town and city, have significant percentage of it that is not used for banking purposes.

That has been the way they have been built all along. They sometimes go and buy old buildings that are falling down, refurbish

them down in these small towns.

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Chairman TOM DAVIS. I gather there is no problem with that scenario, it is when you get into the larger scenarios——

Mr. YINGLING. No.

Chairman TOM DAVIS [continuing]. I guess everybody——

Mr. STEVENS. We support the current statutory authority to

allow banks to invest in community and economic development.

That is a whole different issue.

Chairman TOM DAVIS. And even a bank building can be used for

other, is that right? OK, thank you both.

Mr. PLATTS. Thank you, Mr. Chairman.

Mr. Yingling, in your opening you said that this is all about misinformation and exaggeration. What are examples of the mis-information and exaggeration?

Mr. YINGLING. I think the thing that most concerned us was

some of the rhetoric that came out early on and is still used from

time to time. You hear references to the savings and loan crisis as

thought this somehow or other is going to lead to some kind of

major crisis in our banking system. We think that is completely

uncalled for.

We as an industry are on the record that we don’t want to be

in the real estate development business. There is a provision in

Gramm-Leach-Bliley that says we can engage in financial services

and there are two exceptions. One of them is explicitly real estate

development. We supported that provision. We have no desire to be

in real estate development. But to use language that somehow or

other this is going to develop into major involvement of banks and

real estate development we think is just a gross exaggeration. We

think it is a very limited, targeted provision.

Mr. PLATTS. As a lay person looking at the project, and I will

take the PNC project, which again, as Paul said, we want PNC to

succeed, they are a very large employer in our State. But as a lay

person looking at that project, office space, hotel, condos, wouldn’t

a lay person look at that and say, that is a great real estate development project?

Mr. YINGLING. I think that is a fair point. I think you have to

go and look at the history of it and look into what PNC is doing

there. They have two office towers in downtown Pittsburgh that are

fully used by them, and they have people around the city, their employees, in buildings that are not part of their core. Naturally, they

want to get them back to the core, and these leases are expiring.

Naturally, they also, this is a very vibrant institution that is

growing, they need to plan for growth. So it is natural for a business to say, I am not just building a building that is going to fit

me today, I want the opportunity to fit my growth into that building. So they are taking a run-down piece of property, as I gather,

that they own, and they are developing it.

Now, having made that decision, the current law is, and I am

going to separate that from your view of what it ought to be, the

current law, and I just read you the relevant court case, 100 years

old, is quite clear. They are allowed to develop that as long as it

is basically, at its core, done for banking. They are allowed to develop it as anybody else would.

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Mr. PLATTS. Do you think the Supreme Court justices in 1902 or

1904, in the opinion, would look at the hotel and say that is a

banking service?

Mr. YINGLING. That is not the standard.

Mr. PLATTS. No, but as you are saying that it s core to their

banking operation.

Mr. YINGLING. No, that is not the standard. The standard is

when they are starting the building is, are they building a building

to have something that is core to their business. Once they start

that, the rest of the building doesn’t have to be core to their business. They can develop it as any prudent man. That is the standard.

Mr. PLATTS. OK, let’s not use Pittsburgh as an example. Bank

of America built a hotel, not office space for the bank, built a hotel.

How is that banking operation?

Mr. YINGLING. If you go back and look for dozens and dozens of

years at the precedent, and they are very limited things that you

can do, one of them is housing your employees.

Mr. PLATTS. But the OCC has said, if there are no other reasonable options——

Mr. YINGLING. I am sorry, that is not the standard.

Mr. PLATTS. Isn’t that what the law says?

Mr. YINGLING. No. Julie Williams explained it, and that is what

was just said in the testimony, she explained it, that was one of

the included standards. It is not an exclusive standard. It says ‘‘including.’’

Mr. PLATTS. No, but the real estate, for the temporary lodging,

but the first part of that standard is, let me read it: ‘‘A national

bank may invest in real estate that is necessary for the transaction

of business.’’ If there are two hotels right there, that goes to, the

first question is, is it necessary. If it is, then it allows, this type

of real estate. You are looking at the second part of the rule.

Mr. YINGLING. Well, I will get back to you on it, but I don’t think

that is the correct, that you are articulating, frankly, the correct

standard.

Mr. PLATTS. Well, I am reading, I believe, straight from the rule,

that it says, a national bank may invest in real estate that is necessary for the transaction of business. Then it goes on to talk

about, lists the types of real estate that are allowed.

Mr. YINGLING. Right. Then you are going back to the word necessary. And I just agree with Julie Williams’ discussion there on

what the word necessary means and the history of it.

Mr. PLATTS. Well, let’s go back to the court case and where you

started, I think that is a good place to start. It says, ‘‘Nor do we

perceive any reason why a national bank, when it purchases or

leases property for the erection of a banking house, should be compelled to use it exclusively for banking purposes.’’

Mr. YINGLING. Right.

Mr. PLATTS. Building a hotel is not ‘‘purchasing a property for

the erection of a banking house.’’ So if I am looking to distinguish

that case, very quick I am saying, they didn’t buy this building or

this property to build a banking house. They bought it to build a

hotel. Why is that not significantly different than that court case?

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Mr. YINGLING. Then you get to, when you get there you get to

the issue of whether the hotel they are building is part of the banking business.

Mr. PLATTS. Is a banking house?

Mr. YINGLING. Yes, I agree with that. That is different from

PNC, where you are adding the hotel onto a bank office.

Mr. PLATTS. And that is the challenge here. There are a lot of

issues here. But PNC, I think they make a stronger case. Office

space for their own bank, they can expand. But when you go to the

windmill, when you go to the hotel, you look at the language of

that case, that is the controlling part of that opinion, when it purchases property for the erection of a banking house, it can use

some other part of that same building for other purposes.

Mr. YINGLING. Let me address the windmill farm and Bank of

America. The hotel I think is something that I understand your reaction to.

Mr. PLATTS. That and the windmill I think really jumped off the

screen.

Mr. YINGLING. The windmill I think is very different, because of

the tax credit aspect of it. The hotel, I think you have to go back

and look at the facts. Bank of America had 72,000, this is a trillion

dollar bank, one of the biggest banks in the world, growing very

rapidly, they had 72,000, it says in the record, nights of employees

visiting Charlotte. That doesn’t include customers and partners

and people they are doing deals with.

That averages out, to my calculation, to over 200 every single

night. And if you assume there are not as many on the weekends,

it is 300, 400, 500. It seems to me it would be understandable, it

is a 150 room hotel, which is not a very big hotel. That is the minimum they could build to get somebody to agree to manage it. It

would seem to me understandable that they want that in their core

campus, if you will, to have people in a high-end hotel that can

come and go to their offices.

But I wouldn’t extrapolate from a hotel because you do have this

long history, talking about——

Mr. PLATTS. Excuse me for a moment.

Mr. YINGLING. Sure.

Mr. PLATTS. I apologize for the interruption, Mr. Yingling.

Mr. YINGLING. Sorry if I filibustered. [Laughter.]

So I think the hotel comes into being based on this series of

precedents about housing your people. The windmill farm is completely different. Just to give you a feel for it, the ABA, with a

partner, applied to the Treasury Department for new market tax

credits, and we got some of them, as did some individual banks.

The idea is we distribute them to community banks, who will make

the same type of deal with a not-for-profit. They will have an equity ownership, because that is the way you get the tax credit.

Mr. PLATTS. The non-profit can’t get the credit.

Mr. YINGLING. Right. So these are very limited to those deals

where there is a tax credit involved. And I think that is a very distinguishable event.

Mr. PLATTS. I would agree. And I think, of the three cases, I

think the windmill, the way it is structured, with the tax credits

and no profit from appreciation of values, is a little different, PittsVerDate 11-MAY-2000 11:08 Dec 18, 2008 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 C:\DOCS\45711.TXT KATIE PsN: KATIE
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burgh is a little different. The hotel to me is clearly one that seems

contrary to commerce.

But even the other two, especially Pittsburgh, and Ms. Shelton’s

testimony I thought really went to an important part of this, the

risk assumed in developing these properties is that, the intent of

the separation of commerce is to protect the security of the banks,

the stability of the banks. And what has transpired since that 1902

case, the stock market crash, the bank closures of the 1930’s, we

have tried to learn from those lessons. It is a lesson of risk to

banks.

And Ms. Shelton’s comments really go to the risk assumption

that banks are taking, the bigger the project, the more comprehensive the project. I think that is a legitimate issue that we need to

be worried about, is, are banks getting into development projects

that even where a part of it is for their own use, it involves a substantial risk in that marketplace versus somebody else taking the

risk that the bank is helping to finance with it.

Mr. YINGLING. I understand. I would just say that size is relative. A 150 room hotel to a trillion dollar institution isn’t much.

You go into all these cities I was talking about around the country,

you will find community banks who have taken only one story, only

needed one story or one and a half stories, they have built three

stories or acquired an old building and rehabbed it with three stories, they have been doing it for over 100 years. It hasn’t been a

problem.

Mr. PLATTS. But I think the issue is, that with Bank of America

that there was a shortage of hotel rooms, and those hotels right adjacent, Marriott and Omni, weren’t satisfactory. The market will

fill that risk by developers taking the risk and saying, we believe

there is a need here for more rooms. We will take the risk and

build it. Instead, the bank says, we are going to build it and take

the risk. That goes back to the issue of, is that what we want

banks doing, is taking the risk versus lending money to others who

take the risk. That comes back to the core issue, especially on the

freestanding hotel.

Ms. SHELTON. And Chairman Platts, if I might add, if you were

in Florida when all the hurricanes came through and you owned

a hotel, and the occupancy rate dropped to 30 percent, the risk is

phenomenal. I happen to know the hotels in the Charlotte area

around the B of A, because I have been involved with the real estate investment trust in the past. I can tell you, owning a hotel

with the occupancy rate that I recently looked up in Charlotte is

67 percent in the past quarter. There is room there, including B

of A had agreements with some of the hotels in the surrounding

area to guarantee blocks of rooms.

So now they have put in 150 hotel rooms that will compete with

the same hotels that went there in the business aspect of making

a profit and consumer being able to utilize it as well as the bank.

So the last piece I would leave you with is the article Tom mentioned was in the business of today is the Canyon Ranch abandons

Maryland condos. They have issues that a year ago, when they

gave a business plan, they wouldn’t see what was going to happen

to the condo market. Instead of subsidizing their bank, in fact, if

they don’t sell them for the projected rates, will lose money and

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have to pay for it out of funds from the bank over and beyond what

a selling spec would have done.

So I just think there is a lot of business aspects to it that weren’t

looked at.

Mr. PLATTS. That again gets to the fairness, the market aspects

here of, I asked about the condos, putting 32 condos on the market,

what does that do to others. And it comes to Marriott, Omni, they

build hotels saying, Bank of America is here, so we are going to invest. If then Bank of America is now competing with them, the

fairness in the marketplace to those who took that risk privately,

aside from the banks.

I apologize, because the vote is about to close, which means I

need to run. But I don’t want to hold you guys here, because you

would be sitting here for a while before we get the other votes in

and come back. I guess if maybe I can ask one final question, and

we may followup with written questions to you, if that would be

OK, if there is something that we haven’t covered. That might a

broad question that kind of follows up where we just left off.

These rulings, Mr. Yingling, you don’t see it as precedent-setting

and earth shattering. Mr. Stevens, Ms. Shelton, do you see it as

kind of opening the door, we are going to see more of this type of

development, commercial development specifically, hotels that are

going to compete with other commercial development, impact the

market and therefore impact commerce?

Mr. STEVENS. I don’t think you can allow or approve these three

types of developments and not have it precedent setting. When the

question was asked of Julie, can you guarantee that it won’t, she

said, well, I can’t say that I won’t use it in a written example in

the future, or law. So yes, I think that once it is approved, it is sitting there as a precedent.

Ms. SHELTON. And I will just share, I think it will set some impact on the industry. How much, three deals, I agree, in the trillions of dollars of real estate that is out there, but the reality is,

I am not talking about the trillions. I am talking about the individual investors who would have invested in those projects with small

spreads to take the risk, to borrow the money from the banks, and

pay it back. Now the banks are using money that they have gained

from federally insured deposits that are at a lower rate. With rising

interest rates, I think it will have an impact and it could open the

door.

Mr. YINGLING. I would just say, to some degree we are trying to

have it both ways here. Because we said, banks ought to be able

to have mixed-use buildings, but when you listen to this, you are

saying they can’t. I would urge people to go to small towns, medium size towns, cities, and look at all those buildings that are at

the cores of downtowns, and be very careful if you are saying, we

are worried about the risk to the bank, we are worried about the

fact that what they are leasing takes from the office building across

the way. They do, but it has been that way for 100 years.

Mr. PLATTS. I think, Mr. Yingling, really what we are focusing

on is, what does the law allow, is the focus. And that is what we

tried to get at, to get more definitive answers, what does the law

allow and what does the OCC allow in their regulations.

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We are going to need to wrap up here. I very much appreciate

all three of you trying to help shed light in the varying cases here,

the three in particular we are looking at. We will keep the record

open for anything else you want to submit, and we may followup

with a written question or two to you.

Thanks for your participation. This hearing will stand adjourned.

[Whereupon, at 4:24 p.m., the subcommittee was adjourned.]

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