Consumer and Community Group Outreach Meeting Notes – Washington, D.C. – February 20, 2004

Introduction

On February 20th, the federal financial regulatory agencies met with representatives of consumer and community organizations to hear their views on opportunities to reduce regulatory burden while maintaining the protections provided to consumers under the various banking laws and regulations.

The meeting was attended by approximately 20 representatives from community and consumer organizations, as well as agency representatives from the FDIC, OCC, OTS, FRB and NCUA.

Welcoming Remarks
FDIC Director of Supervision and Consumer Protection, Michael J. Zamorski

Director Zamorski welcomed participants and talked about the goals of the forum, pointing out that it is critical to look at regulatory burden from the perspective of consumers as well as bankers. He told the attendees that Vice Chairman Reich and Director Curry are interested in their insights and would be active participants during the forum. He explained that regulators held a series of outreach meetings with bankers and state regulators last year that resulted in stimulating discussion, and that this meeting with consumer and community representatives was a continuation of this initiative. Director Zamorski indicated that the agencies invite comments on issues and ways regulations affect competition and small institutions, or have inconsistencies or redundancies. These comments will be analyzed, and burden reduction proposals developed where appropriate.

The goal of regulatory burden reduction often places regulatory agencies and consumer groups at odds. He reiterated that the attendees’ insight is critical in understanding how consumer protections work in practice. FDIC’s larger institutions can take the cost of regulatory burden and absorb it, but community banks have to pass costs on to consumers.

Opening Remarks
FDIC Vice Chairman John M. Reich

Vice Chairman Reich explained that EGRPRA is a Congressional mandate that requires review of all regulations every 10 years with the goal of eliminating burden without jeopardizing safety and soundness or important consumer protections. The Vice Chairman said he hopes that, at the end of the day, regulators, bankers and consumer and community representatives can all go arm-in-arm to Capitol Hill to ask for burden reducing changes. He went on to describe how the banking business is evolving and why it’s important for consumer groups to care. The industry has been consolidating for 30 years. Rapid consolidation will continue and may adversely affect access to credit for small businesses and consumers. According to Vice Chairman Reich, the future of community banks hangs in the balance. He cited a number of statistics, including:

• Twenty years ago, in June 1984, there were 17,000+ banks and thrifts. 13,900 (78% of the total) had assets of $100 million or less. Nineteen years later, the total number was 9,268 – a loss of 8,622 institutions. 3,000 failed during the 1980’s-1990’s. The remaining institutions were lost through mergers and consolidation.
• From 1984 to 2003, the number of banks under $100 million decreased from 13,900 to 4,500 – a loss of 9,000+ institutions.
• In 1984, 13,000+ community banks with assets under $100 million accounted for $3.2 billion in industry earnings (19% of total).
• In 1984, 13,000+ community banks with assets under $100 million accounted for $482 billion or 13.9% of industry assets.
• In 2003, the remaining 4,500 institutions under $100M represented $231 billion in total assets - a decrease from $482 billion in 1984 to $231 billion in 2003. Market share fell from 13.9% to 2.6%.

Vice Chairman Reich indicated he is not critical of the trend toward larger banks but acknowledged he is concerned. He explained that post merger, the three largest banks will be Citibank, J.P. Morgan Chase/Bank One, and Bank of America/Fleet. Total assets of these three banks exceed the combined total assets of all 5,300 FDIC-supervised institutions.

The number and relevancy of community banks is declining. For the first nine months of last year, 4,500 banks under $100M (representing 48% of institutions) had net earnings of $1.6 billion (representing 1.8% of total industry net income of $89 billion).

Vice Chairman Reich indicated that he recently hosted a delegation of 110 bankers from Florida. During a discussion of the EGRPRA project, he asked the bankers how many thought regulatory burden plays a role in decisions to sell an institution. Approximately 40% of hands went up. One CEO of a $350 million bank in SW Florida said his directors noticed a continued decline in profitability. One reason cited by the bankers for the decline in profitability is the cost of regulatory burden.

Vice Chairman Reich relayed comments made by a community banker, Terri Jordie of CountryBank USA, in Cando, ND, in testimony before Congress. She testified on the importance of agriculture to many small, growing communities. With community banks, she explained, locally owned deposits come into the bank and stay in the community as a result of policies set locally by the institution. This makes community banks ideally suited to meeting the needs of communities and are catalysts for growth in these communities.

Vice Chairman Reich gave his personal perspective on regulatory burden. He explained that 29 years ago, he took over as CEO of a bank in Sarasota, Florida. Over a 10 year period, the bank grew to $450 million with a Board of Directors consisting of 16 people from the local community. People cared deeply about community and investment. Then, a bank holding company based in Georgia made an offer to acquire the bank, it was accepted, and authority was transferred to Atlanta. The locally-based Board of Directors and CEO disappeared and the branch manager was replaced with someone who knew none of the customers. Charitable contributions from the bank declined and investments in municipal bonds decreased.

There is growing information from the previous outreach sessions with bankers that regulatory burden negatively impacts a bank’s capacity to serve customers. Return on assets and return on equity are showing decline. In summary, the cost of regulatory burden is high for banks and for all of us.

Goals of EGRPRA

Claude Rollin, EGRPRA Project Manager, provided an overview of the regulatory burden reduction process. After summarizing the requirements of the statute, he described the process of categorizing the regulations. He then referred to the regulations currently available for comment and encouraged the audience to submit comments through the EGRPRA website. Mr. Rollin outlined several topics for discussion during the Roundtable Discussion Group session but emphasized that the participants were free to raise any issues they wished to discuss. The topics of discussion and overview are detailed below.

Mr. Rollin explained that the EGRPRA initiative is intended to reduce regulatory burden. EGRPRA requires the banking agencies to identify outdated, unnecessary, or unduly burdensome statutory or regulatory requirements and propose statutory and regulatory changes. Because of the volume of statutes and regulations involved, the law first requires the federal agencies to categorize the regulations. Next, the agencies must solicit public comments regarding the regulations by category. The law then requires the agencies to: publish a summary of the comments received; identify significant issues raised; eliminate unnecessary regulations if appropriate; and, finally, submit a report to Congress advising if legislative changes are needed.

Mr. Rollin again referred to the regulations currently available for comment and encouraged the audience to submit comments through the EGRPRA website. Mr. Rollin then reviewed the top 10 concerns raised by bankers during a series of meetings conducted in 2003, and outlined several of the topics for discussion during the roundtable discussions.

Panel Discussion
Moderator: Jeanne Hogarth, Program Manager, Federal Reserve Board

Panelist: Charlotte Bahin, Senior Vice President for Regulatory Affairs,
               America’s Community Bankers (ACB)

Ms. Bahin began her remarks by stating that she doesn’t think anyone wants to see the demise of the community banking industry. She indicated that bankers are concerned most about competition with unregulated entities. She believes that banks have to pass costs on to consumers, but unregulated entities do not have the same costs as banks that are regulated. Ms. Bahin said she recognized that what she had to say may not be popular but she hopes everyone is willing to have a dialogue about it.

She summarized the general themes from bankers at the previous outreach meetings. In general, the bankers believed that:

• Regulations should be streamlined for well performing banks.
• Use of technology for disclosures to consumers should take into consideration the way institutions operate. A number of community banks do not have ATMs or checking accounts.
• ACB hopes for less time and effort filing applications for new products and requests regulators to provide a list of already approved products and services.
• From the community banks’ perspective, bankers try to do the right thing. Patriot Act and Bank Secrecy Act requires them in their view to act in a law enforcement capacity. Ms. Bahin acknowledged the large number of consumer protection requirements, and stated that she was not suggesting community banks are not interested in consumer protections. However, she believes cost/benefit analysis is very important in looking at the issue of regulation.

Ms. Bahin also shared some of the specific issues raised by bankers during banker outreach sessions.

• Regulation D withdrawal limits - came up at all meetings in context of competition.
• RESPA/TILA – bankers are interested in seeing what HUD comes up with and hopes that disclosures are easy to understand.
• Right of Rescission – came up at every meeting. Community bankers would like to see flexibility, not the elimination of the right to rescind all together. In most cases, community bankers have never had a customer use it.
• HMDA – confusing before changes; after changes HMDA is incomprehensible to bankers. Would like to see data that is collected this year released. New HMDA disclosure doesn’t help and causes more confusion among lenders.
• Privacy notices – bankers suggested that notices should be given only once and if bank changes practices, the notices can be provided again.
• Patriot Act – concerns vary across the country. In Miami, the #1 issue is the vast number of CTRs and SARs filed (where do these reports go, does anyone read them?). Concern that law enforcement doesn’t look at them or follow up.
• Deposit insurance coverage – customers confused about level of coverage; bankers often don’t know how to explain coverage.
• Flood Insurance – Maps are difficult to get. There is a certain level of difference in the application of rules.
• CRA – did not come up as big issue. Not a lot of complaints.
• Bankers would like uniform definitions in consumer protection regulations.
• Application and notices – it would be helpful to know if a regulator previously has approved an activity, as this would save time and effort.
• Regulation O loans to insiders – after Sarbanes Oxley, bankers more focused on corporate governance.
• Regulatory burden is not about just one regulation, it is concern about all regulations in conjunction with each other. Two more laws recently passed by Congress impose regulatory burdens. FACT Act – think about making as uniform as possible – consumers don’t need more disclosures.

Panelist: Charles Tansey, Senior Advisor, Neighborhood Reinvestment Corporation (NRC)

Mr. Tansey explained that the NRC serves those who are “unbanked” and overlooked by traditional lenders. NRC and Community Development Corporations (CDCs) are working together to develop a secondary market for low income mortgages. Mortgage backed securities create a cost problem in this regard: in order to get access to money in secondary markets, CDCs need information that has not been traditionally been collected on low income loans, credit scores, etc. Specific points noted were:

• Information collected from borrowers is insufficient;
• Automation may diminish some CDCs efforts to make the hard-to-make loans in favor of more conventional mortgages. FNMA should be allowed to handle this or put it to a smaller community bank that can handle risk better;
• Conventional lenders are better situated than CDCs to take on credit risks because they have more money;
• There are more aggressive home ownership - initiatives with the banks and FNMA market;
• Consider where low income mortgages are better lodged, million dollar banks or CDCs.
• CRA and HMDA have had a beneficial impact on marketplace, e.g., lenders are now doing loans that some years ago only NRC would have done;
• When looking at regulations need to consider three things: feasibility, clarity and simplicity.

Panelist: Margot Saunders, Managing Attorney, National Consumer Law Center (NCLC)

Ms. Saunders began her remarks by stating that the interagency EGRPRA effort has looked at the issue only from the banker perspective. She sees nothing in the law that limits the perspective to one point of view. She noted that regulatory burden also affects consumers, and pro-consumer changes should be considered as well. She commented that this is the only meeting presently planned for consumer representatives, and the consumer representatives in attendance are outnumbered by regulators. Consumers are experiencing more foreclosures, more bankruptcies, more forms of predatory credit. Ms. Saunders explained that consumers are not equal partners, in their relationships with financial institutions and that they need better disclosures, more transparency, and HMDA expanded. She indicated that the NCLC had a long list of proposals to streamline regulations that it would be happy to provide.

She suggested that the regulatory agencies revisit the recommendations made in the Federal Reserve Board’s 1998 joint report on improving TILA/RESPA that was presented to Congress. She believes the recommendations were not adopted because the industry didn’t support them.

On the right of rescission, Ms. Saunders believes that Congress has already addressed this issue. She explained that in the regulations, there are exceptions based on emergency, and that there are no statutory or regulatory prohibitions on providing funds up front.

Other comments included:

• Regarding RESPA, Ms. Saunders believes the main problem is that the Good Faith Estimate has no private enforcement.
• A new product, bounce protection loans, is a banking product for low-income consumers offering overdraft protection if a $20-$30 fee is paid and the overdraft is recouped. Ms. Saunders believes the Federal Reserve should apply TILA and open-end disclosures to bounce loans.
• Ms. Saunders suggested updating TILA and the Consumer Leasing Act to increase the cap for non-real-estate-secured loans above $25,000 and update statutory damages.
• Regarding Regulation AA, she believes the Fed should take all the FTC’s unfair trade regulations and apply them to banks.

Among other suggestions, Ms. Saunders recommended three things:

• Enlarge perspective to include pro-consumer changes.
• Make an effort meet with consumer advocates, looking at different ways to do it such asconference calls or smaller meetings.
• Consider proposals regarding pro-consumer changes. There have been two pro-consumer changes in 12 years: HOEPA and regulatory amendment to HOEPA. Other regulatory changes are not perceived as consumer friendly.