June 8, 2017
Senate Banking Committee: Fostering Economic Growth – The Role of Financial Institutions in Local Communities
Key Topics & Takeaways
- SIFI Threshold: In her questions, Sen. Elizabeth Warren (D-Mass.) said that any attempt to alter the $50 billion asset threshold for banks’ regulatory burden would be “dangerous.” She criticized several proposals to adjust the threshold, including proposals to raise the threshold to $500 billion or to tie the threshold to the global reach or complexity of an institution.
- Housing Finance Reform: At the end of the hearing, Chairman Mike Crapo (R-Idaho) said that housing finance reform was a priority of his and the Senate Banking Committee, and said he wanted the organizations represented at the hearing to work with the committee on the issue of small lender access to the secondary mortgage market. Several other Senators also had questions about housing finance reform.
- Bank Relief Proposals: During his opening statement, Crapo outlined three specific proposals that he supported including in an eventual bank relief bill. These proposals were: 1) automatically grant qualified mortgage status for home loans held in portfolio; 2) streamline and simplify capital requirements for community financial institutions (especially the requirements that were put in place by Basel III); and 3) exempt some financial institutions from some Home Mortgage Disclosure Act (HMDA) requirements.
- Dorothy A. Savarese, Chairman President & CEO, The Cape Cod Five Cents Savings Bank, on behalf of the American Bankers Association (ABA)
- Steve Grooms, President & CEO, 1st Liberty Federal Credit Union, on behalf of the National Association of Federally-insured Credit Unions (NAFCU)
- R. Scott Heitkamp, President & CEO, ValueBank, on behalf of the Independent Community Bankers of America (ICBA)
- Dallas Bergl, CEO, INOVA Federal Credit Union, on behalf of the Credit Union National Association (CUNA)
- John Bissell, President & CEO, Greylock Federal Credit Union
- Adam Levitin, Professor of Law, Georgetown University
In his opening statement, Chairman Mike Crapo (R-Idaho) discussed the importance of community financial institutions to the economy, especially in localities and rural states, but noted that the operating environment for community financial institutions has worsened due to regulatory burdens and industry consolidation. Crapo said he is worried regulators have “ignored the cumulative impact” of regulations and stressed that regulations – which can disproportionately harm small institutions – should preserve safety and soundness while encouraging economic growth.
Crapo then discussed his goal for the Senate Banking Committee, which is to pass a bipartisan reform bill which will encourage economic growth through changes in financial sector regulations. Crapo enumerated three specific ideas for inclusion in the hypothetical bill, which were: 1) automatically grant qualified mortgage status for home loans held in portfolio; 2) streamline and simplify capital requirements for community financial institutions (especially the requirements that were put in place by Basel III); and 3) exempt some financial institutions from some Home Mortgage Disclosure Act (HMDA) requirements.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) discussed the devastation that the 2008 financial crisis wreaked on Americans, especially in minority communities. Brown also deplored the slow pace of economic recovery in rural areas as compared to urban ones, and linked the opioid crisis to the 2008 financial crisis and subsequent economic issues. Brown criticized President Trump’s budget for cutting funding for affordable housing programs and healthcare programs, among other programs. Brown dismissed the idea that deregulation would unleash economic growth and warned that breakdowns in consumer protections could lead to a new economic crisis.
Dorothy A. Savarese, Chairman President & CEO, The Cape Cod Five Cents Savings Bank, on behalf of the American Bankers Association (ABA)
In her testimony, Savarese testified that while regulation is important, some Dodd-Frank Act rules have hurt the ability of small banks to serve credit-worthy customers. Savarese dismissed the idea that bank profitability is a sign that the regulatory burden on banks is bearable, positing instead that banks have shown resilience in spite of regulations. She then cited several figures on industry consolidation (specifically noting that each business day sees a community or small bank acquired or merged) and noted that loan growth is below its pre-crisis pace. Savarese closed by calling on Congress to lighten the regulatory burden on community banks before the damage to the sector is irreversible.
Steve Grooms, President & CEO, 1st Liberty Federal Credit Union, on behalf of the National Association of Federally-insured Credit Unions (NAFCU)
In his testimony, Grooms discussed the importance of credit unions to small communities, and said the regulatory environment should be tailored to encouraging credit union growth. He specifically called on Congress to raise credit union membership limits. Grooms also said that NAFCU’s membership supports exempting credit unions from Consumer Financial Protection Bureau (CFPB) regulations and instead exclusively relying on the the National Credit Union Administration(NCUA) for regulatory oversight.
Scott Heitkamp, President & CEO, ValueBank, on behalf of the Independent Community Bankers of America (ICBA)
In his testimony, Heitkamp said that the competitive advantage of community banks is that they make loans at a local level that large banks cannot, and called on Congress to support this mission. Heitkamp noted that community banks are best positioned to provide financial services to struggling households due to their connections to the communities that they serve. Heitkamp described the negative impacts of new regulations on community banks, which have dramatically raised compliance costs and by extension, borrowing costs.
Dallas Bergl, CEO, INOVA Federal Credit Union, on behalf of the Credit Union National Association (CUNA)
In his testimony, Bergl discussed the important role that credit unions played during the financial crisis as a source of financial stability to Americans. Bergl said that the Credit Union National Association (CUNA) does not support new regulations for credit unions, as credit unions “put their members first.” Bergl also complained that the growth in size of the largest financial institutions has put competitive pressures on credit unions.
John Bissell, President & CEO, Greylock Federal Credit Union
In his testimony, Bissell talked about how many people who are credit union members are low- to middle-income, and may lack the disposable income to weather monetary problems, such as car repairs or job losses. Bissell discussed the steps his firm has taken to help people within their market, and called on Congress to prevent predatory business practices from developing, specifically criticizing payday lending.
Adam Levitin, Professor of Law, Georgetown University
In his testimony, Levitin described community banks as “thriving” and noted that their profitability is higher than at any time in the last 20 years. Levitin also said that industry consolidation predates passage of Dodd-Frank and that there has been no measurable change in the rate of consolidation since the bill passed. Levitin said that consolidation has been driven not by regulations, but by a lack of economies of scale and generational transition problems. Levitin then discussed the impact of the recovery on Americans, noting that most American families have seen real incomes drop since 2010 and that the gains from economic growth have been distributed unevenly. Levitin closed by criticizing reform proposals that would benefit large institutions along with small ones, some of which, he said, were submitted to the Senate Banking Committee during the bipartisan call for proposals.
Question and Answer
In her questions, Sen. Elizabeth Warren (D-Mass.) noted that the Dodd-Frank Act imposed tougher rules on banks with more than $50 billion in assets. Warren asked Levitin if raising the threshold to $500 billion (which has been proposed in the past) would increase risk to the financial system. Levitin said it would, as the failure of institutions with less than $500 billion in the last financial crisis proved to be “incredibly destabilizing.” Warren also criticized proposals to eliminate the threshold, saying it would be “dangerous” to adjust the current $50 billion threshold.
Housing Finance Reform / Home Mortgage Disclosure Act
Sen. Mike Rounds (R-S.D.) discussed a bill he had introduced that would exempt small institutions from Home Mortgage Disclosure Act (HMDA) reporting requirements. Rounds asked the witnesses for their thoughts on the bill and many were supportive of it. Witnesses also said that they have had to raise customer fees in response to HMDA reporting requirements.
Sen. Cortez-Masto (D-Nev.) asked the witnesses about their organizations’ priorities in any legislative package that would reform the government-sponsored enterprises (GSEs). Bergl said that GSE reform legislation should address secondary market access for small lenders, and that small lenders should pay the same prices for secondary market access as large lenders. Cortez-Masto agreed that small lenders access to secondary markets should be preserved.
Crapo stressed that housing finance reform was a priority of his and the Senate Banking Committee, and said he wanted the organizations represented at the hearing to work with the committee to ensure that any GSE reform bill will maintain small lender access to the secondary mortgage market.
Crapo noted that community banks have very little trading activity, other than general operational hedging. Crapo asked witnesses for their thoughts on providing trading regulation relief to community banks. Savarese said that a nuanced application of the Volcker Rule based on institution size and complexity was an idea with merit. Levitin said that any exemption from the Volcker Rule should be narrowly tailored and not apply to any institutions with more than $10 billion in assets.
Qualified Mortgage Rule
Crapo asked witnesses about the Qualified Mortgage (QM) rule, noting that many small lenders have stopped or significantly decreased mortgage lending since the creation of the rule. Crapo noted that there is bipartisan support for providing QM status to loans held in portfolio by the lender, and asked if this would add flexibility for banks to extend credit. Both Bergl and Grooms said their institutions have seen the regulatory burden accompanying mortgage lending increase dramatically, and said the QM rule has hurt their ability to offer loans.
Sen. Tim Scott (R-S.C.) asked witnesses for their thoughts on what factors are driving industry consolidation. Savarese said the low interest rate environment, the sluggish economic recovery generally, and the regulatory burden have combined to encourage industry consolidation. Scott noted that consolidation has the potential to increase the number of unbanked and underbanked Americans.
Sen. Jon Tester (D-Mont.) also asked if regulatory costs have driven consolidation in the community bank industry. Grooms said that overly broad rules have forced banks to buy expensive new software programs and hire new compliance staffs, which has hurt their business and encouraged consolidation.
Cortez-Masto asked if it would be bad in the long-term for community banks if Dodd-Frank regulations were rolled back “wholesale.” Levitin agreed and said that it would also hurt consumers. Levitin said that proposals to raise the threshold for CFPB examination to $150 billion from $10 billion would only benefit a handful of firms, and that those firms do not remotely qualify as small. Levitin also said that the CFPB already provides regulatory exemptions for the smallest institutions.
Sen. Joe Donnelly (D-Ind.) asked witnesses for their thoughts on tailoring CFPB regulations to lighten the cost of compliance to community banks. Bergl said that many small institutions struggled to afford the software necessary to comply with CFPB rules, and that such exemptions would be beneficial to community institutions and their customers.
Consumer Financial Protection Bureau
Brown asked if changing the funding and governance structure of the CFPB would increase economic growth. Levitin said this was categorically untrue, and that the CFPB’s structure ensures its effectiveness. Bissell also said that it is important to prevent predatory practices from taking hold in the financial sector, which could compromise stability and growth.
For more information on this hearing, please click here.