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Committee on Financial Services

United States House of Representatives

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ON H.R. 1121






Good morning, Chairman Leach and members of the committee, thank you for the opportunity to testify today on H.R. 1121, the Financial Freedom Act. This approach addresses the current credit union issue in a more comprehensive way than some other proposals Congress may consider. The idea is simple: recognize the individual’s right of association to join a credit union while recognizing the legitimate concerns of the banks with tax and regulatory relief to "level the playing field" for them.

There are others that will testify today regarding the benefits that credit unions have brought to many people and various communities; I will try not to duplicate their arguments and prolong the hearing. In short, credit unions are the epitome of the success in the free market.

The benefits of voluntary association and exchange are at the heart of the free market. The many members of credit unions who have contacted their respective Representatives understand this well. Freed from the shackles of many burdensome governmental regulations and other taxes, the credit unions have prospered and shared that prosperity with their members through low rates and few transaction fees. The credit unions have never come to Washington for a taxpayer-funded bailout--in fact, the NCUSIF is the only deposit insurance fund that was started without any federal seed money. Credit unions clearly meet the needs of their members or their members would not voluntarily continue their membership in the credit union. We must not interfere with an individual’s right to voluntary association.

It is this process of individual voluntary association and exchange that we call the free market. The competition of this process--the individual’s inherent right to choose--is the necessary ingredient for the greatest utility that we can foster. Our constituents have an option not only of choosing the credit union of their choice but of choosing whether to join a credit union or choose another type of financial institution in addition to or in place of a credit union.

The other types of financial institutions come before us today with real concerns about the inequities that the federal government has imposed on the associations of the free market. Through federal taxes directly, and indirectly through regulation, the federal government has hindered the voluntary economic associations of individuals who choose a bank over a credit union for a financial transaction.

Given the current reality of taxpayer-backed deposit insurance, some governmental regulation to maintain the safety and soundness of the banking system may be understandable. However, we have imposed burdensome regulations, such as the Community Reinvestment Act, on the banks (but not on the credit unions) that do nothing to safeguard against the possibility of a taxpayer-financed bailout. In fact, the increased regulatory taxes on them add marginally to the likelihood of failure at taxpayer expense.

While carrying the noble purpose of ending discrimination among banks regarding the loans they make, the Community Reinvestment Act (CRA) infringes on an individual’s right to voluntary economic association. CRA, even some of its supporters will acknowledge, was not introduced with great success. The Act passed in 1977 without so much as a hearing in the House of Representatives. The Clinton Administration wisely worked to reduce the regulatory costs associated with compliance of CRA, focusing on performance as opposed to paperwork. That job remains unfinished. Money taken from a community (as if communities, rather than individuals, had rights), but lent outside of a community, was seen as repugnant against the community. This argument misses an important point: banks offer an invaluable service to the individuals in these communities by safeguarding deposits and offering interest regardless of the superficial characteristics (such as geography, race or gender) of the individual to whom a loan is made.

By focusing on perceived credit "exploitation," Congress imposed CRA regulations and "fair lending" requirements on banks--but not on credit unions. These regulations come at a great cost. All of these costs are money and manpower diverted from the cause of community development.

According to a 1993 study by the Independent Bankers Association of America, the annual cost for complying with just 13 of the many federal regulations community banks face was $3.2 billion in taxes in 1993. This figure means that the community banks spent a staggering 24 percent of net income before taxes to comply with a fraction of the rules that govern the industry. The study identifies the Community Reinvestment Act as the most burdensome regulation. CRA compliance costs community banks $1,256.53 for each $1 million in total assets and approximately $0.08 for each dollar of net income before taxes. The total cost of compliance being approximately $1 billion and approximately 14.4 million employee hours. The costs of compliance fall most heavily on smaller banks.

The Community Reinvestment Act continues to impose a disproportionately heavy regulatory burden on small banks as full interstate banking becomes a reality. The Riegle-Neal Interstate Banking and Branching Act of 1994 permits the establishment of huge multi-state banks with thousands of branches, yet these individual branches may never see a CRA examiner and be directly examined. Community banks, in contrast, see an examiner in each investigation cycle. This cannot be interpreted as anything less than a competitive advantage for large banks. The cost of CRA compliance, relative to assets, hands the small community banks a sizable competitive disadvantage. A repeal of CRA would restore regulatory balance between large and small banks-- and allow the small banks to focus resources on the community. Furthermore, an extension of CRA to include credit unions would only extend this regulatory burden to another sector of the banking industry.

"The CRA utilizes fairly vague terms such as ‘convenience and needs’ and ‘meet the credit needs of the local community,’ and then explicitly delegates to the individual agencies the power to define these terms, while using the threat of denying applications to assure compliance with the agency-created definition," according to Vern McKinley, who worked at the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Resolution Trust Corporation, in Regulation magazine (1994 Number 4). He states clearly, "The CRA should be repealed. Altering the underlying regulation merely leaves the way open for future administrations to utilize the statute as a government credit allocation scheme."

Charles Powell, Senior Vice President of Texas Premier Bank, N.A., tells me that he has added up the costs of compliance of all of the regulations and forms that are required of him. These regulations add two percent to the cost of a loan, a fact which he often shares with his customers. He adds, "What a waste of time and money. If we, the community bank, do not lend money in our area, we are out of business!!!!" Many other banks have complained to my office and to me that this regulation is too costly and unnecessary.

Henry Weinzapfel, the then President-elect of Muenster State Bank (Texas), also wrote my office to tell me that it is unfair to legislate CRA exclusively on banks and says that the "Community Reinvestment Act should be terminated...It would be wonderful if good morals and community spirit and service to humanity could be legislated. However, human nature and thousands of years of experience and history dictates that even congress cannot dictate or legislate true community spirit and man’s charity to his fellow man." After receiving an outstanding rating on it first CRA exam, the bank’s rating slipped to satisfactory. He continued, "I asked the examiner why we did not get an outstanding rating. His reply. ‘You obviously do an outstanding job of community reinvestment and service to your community, but he could not give us and outstanding because we did not do enough documentation.’ "

After listening to the concerns of my constituents, both credit union members and bankers, and consistent with my belief that the economy is over-taxed and over-regulated, I came to the conclusion that there is a better way. Therefore, I drafted this legislation to deal with the larger issues at stake. Rather than infringing on the right of individuals to associate and exchange freely, I urge this committee to realize the choices before us.

We can choose the post-Supreme Court status quo (which pleases no one), or we can choose a path of responsible action to "level the playing field." We could do this by either adding new regulations and other taxes on credit unions or by easing the regulatory and tax burden on the banks. I should clarify that letting people keep their own money is not a "tax subsidy." I believe that we can best meet the goals consistent with a free country by leading the Congress down the path of lower taxes as the best way to prosperity and to meet the noble goals of community reinvestment.

By providing tax incentives for Qualified Community Lenders to reinvest in their communities, we can realize the goals of the architects of CRA without the burdensome regulations associated with its compliance--the costs of which divert money and other resources from community reinvestment. My bill would repeal CRA and encourage those same goals by a reduced tax rate for Qualified Community Lenders.

H.R. 1121 states: In the case of a qualified community lender, the tax imposed for any taxable year shall not exceed 15 percent of the excess (if any) of taxable income for such year, over $250,000. This amount is indexed for inflation. A qualified community lender is defined under the Federal Deposit Insurance Act for those institutions whereby 60 percent of the aggregate outstanding loans made by such institution, its parent, and its affiliates, consist of loans made to borrowers who are--

(A) not related persons with respect to such institution, and are residents of the local community in which such institution is chartered, or are engaged in a trade or business in such community, but only if such loans are made with respect to such trade or business in such community,

(B) two-thirds or more of the common stockholders of record of such institution or its parent company are residents of, or engaged in a trade or business in, such community,

(C) less than 10 percent of all outstanding common stock of such institution or its parent is owned directly or indirectly by persons other than individuals,

(D) neither the common stock of such institution nor the common stock of its parent is publicly traded on an established securities market, and

(E) the aggregate assets of such institution, its parent, and its affiliates do not exceed $5,000,000,000.

Such a holistic approach of allowing multiple common bonds for credit unions coupled with tax and regulatory relief for banks provides us with a clear, complete program to ensure the safety and soundness of the financial system regarding credit unions while recognizing the concerns both of the banks and those promoting the lofty goal of community reinvestment.

Just as the credit unions want to continue to meet the needs of their members and compete freely in the marketplace of financial services, the banks welcome the competition. Best of all, the consumer is best served by the rigorous competition for their business.

The banks do not want to spend more of their precious resources filling out government forms and unnecessary taxes which add nothing to their safety and soundness but detract from their ability to provide services to their customers--including community reinvestment. The credit unions clearly believe that they already meet the needs of their members and strongly oppose placing credit unions under CRA.

Everyone should be playing by the same rules. Let’s follow the approach of Senator Richard Shelby and others who want to follow the credit union model by easing the regulatory and tax burden on the banks. Pass H.R. 1121. Thank you.


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