Questions in writing from Congressman Bruce F. Vento from the 2/25/97 hearing on H.R. 268 and Financial Services Modernization For Mr. Taylor: Brace Vesto 1. You cite that CRA has leverage over $160 billion in reinvestment dollars for home loans, small business development, and community facilities in minority and low-income neighborhoods across the country. Could you share for the record the study in which you came to that dollar figure? 2. Is there another way to look at community investment requirements if we were to apply them to affiliates other than insured depositories? Incentives? CRA by another name? 3. I note in your testimony (page 9) that you believe only CRA covered institutions should receive access to electronic payment benefits? Could you expound? Should there be a requirement to set up deposit accounts for recipients of these benefits for people who are currently not served by banks? Statement of The National Association of Home Builders before the Financial Institutions and Consumer Credit Subcommittee Committee on Banking and Financial Services U.S. House of Representatives on "The Depository Institutions and Thrift Charter Conversion Act of 1997" February 25, 1997 Madam Chairwoman Roukema, my name is Michael Fink and I am a home builder from Mahwah, New Jersey. I am pleased to be here today representing the 190,000 member firms of the National Association of Home Builders to present our views on H.R. 268, the “Depository Institution Affiliation and Thrift Conversion Act”. Before I proceed with discussion of your bill, I would like to provide you with some information about the membership of the National Association of Home Builders (NAHB). NAHB is a federation of over 800 state and local home building associations throughout the United States, representing approximately eight million employees in the construction, mortgage finance and real estate industries. The home building industry is composed mostly of small companies. In fact, about 80 percent of the firms in our industry build 25 or fewer homes a year. These small companies have little, if any, direct access to Wall Street or the capital markets. Most of us rely heavily on funding from community-based banks and thrifts. The relationship between the housing industry and banks and thrifts is long-standing and has been mutually beneficial. These institutions provide financing for every aspect of home buying, home building and investment in rental housing. Federally insured depository institutions are a major source of mortgage loans for families buying homes, as well as for companies providing affordable housing. Furthermore, banks and thrifts are overwhelmingly the principal source of funding for the construction activities of small home building companies. A recent survey of NAHB members showed that 87 percent rely on commercial banks or thrifts for their housing production funds. Thrifts, which specialize in housing finance, remain one primary source for residential production lending and they currently operate under more flexible loans-toone-borrower rules than commercial banks. I. ISSUES PRESENTED BY THE “DEPOSITORY INSTITUTION AFFILIATION The home building industry has a significant stake in legislation to modernize the financial services industry. As home builders and small business owners, any effort to change the provision of financial services will have a profound impact on our livelihoods, and as a consequence, on housing consumers. Generally, our concerns are focused on three central elements of your legislation. First, H.R. 268 permits companies financial in nature (i.e. financial firms, securities firms, insurance companies) to affiliate with banks through a financial services holding company structure. This new financial services holding company would be subject to a new model of regulation which essentially calls for functional regulation of each subsidiary by its primary regulator (where there is one). The holding company itself would be subject to some supervisory requirements regarding the protection of the safety and soundness of the bank. H.R. 268 also contains an express prohibition against direct investment in real estate development activities. NAHB has long standing policy against allowing direct investment and applauds the chair and other sponsors of the legislation for including this provision. Second, and of special significance to NAHB, are provisions which would merge the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) upon enactment. We support merger of these funds because it would allow for greater geographic diversity and risk spreading across a greater number of institutions. However, in our third area of concern, we do not believe that merging the BIF and SAIF necessitates merger of the bank and thrift charters, as required in your bill. H.R. 268 would require all federal savings associations to convert to a national bank, state commercial or savings bank, or state thrift charter. Federal thrifts which fail to convert by June 30, 1998, would automatically become national banks. NAHB opposes this provision. Also, H.R. 268 would abolish the Office of Thrift Supervision (OTS), calling for the the disposition of OTS staff to be determined by remaining federal regulators. NAHB feels it is important to maintain a housing finance focus in bank regulation. As part of the regulatory restructuring, the legislation includes a provision prohibiting regulatory criticism based on an institution's housing finance specialization. We thank the chairwoman and ranking member for this provision which we believe represents an excellent step in the right direction if we are, indeed, moving toward a consolidated regulatory structure. We feel some additional steps should be taken, however, as described below in our recommendations. II. RECENT LEGISLATIVE AND REGULATORY CHANGES Clearly, congressional enactment of legislation, as well as changes by the financial institution regulators during the 104th Congress, paved the way for action on the bank/thrift charter consolidation issue, merger of the BIF and SAIF, and expansion of bank powers. By enactment of the Economic Growth and Regulatory Paperwork Reduction Act, (part of FY'97 budget package) Congress addressed the capitalization of the SAIF and spread responsibility for paying off the Financing Corporation bonds among banks and thrifts. As a result of this action, thrifts will no longer pay substantially more for their deposit insurance than banks. We congratulate you for your efforts to secure enactment of this much needed change which eliminates the substantial competitive disadvantage for thrifts. Additionally, the Economic Growth and Regulatory Paperwork Reduction Act substantially liberalizes the remaining lending restrictions imposed on federal thrifts by the Home Owners' Loan Act (HOLA) and the qualified thrift lender test (QTL). Federal thrifts may now originate credit card and educational loans without restriction. They also may now invest up to 20 percent of their assets in business loans, double their prior limit, as long as at least half are loans to small businesses. While this change dilutes the traditional housing focus of federal thrifts, it does afford more flexibility and allows them to compete more effectively in today's market. Also, as part of the Act, the BIF and SAIF would be merged by January 1, 1999 if there are no savings associations in existence on that date. The new law also requires the United States Department of the Treasury to study the impact of charter consolidation and report to Congress its findings by March 31, 1997. We have had ongoing discussions with the Treasury Department to provide them with information on how charter consolidation would impact the housing industry. We are also in the process of exploring possible ways to mitigate any diminution of housing and small business lending as the debate over financial services modernization progresses. Clearly, Congress also set the stage for further evolution of the thrift industry by changes it made in the Small Business Job Protection Act of 1996. This Act repealed the tax code's special bad debt reserve provisions for thrifts. It provides for gradual recapture of thrift bad debt reserves that were established after January 1, 1988, while requiring no recapture for pre-1988 reserves, which represent the lion's share of accumulated reserves. As a result, thrifts no longer have a tax incentive to qualify as "domestic building and loan associations". At the same time that Congress was deliberating over the legislative changes, the federal regulators and the courts took steps to permit banks to exercise more expansive powers including securities and insurance powers. For example, rules issued by the Office of the Comptroller of the Currency, which were recently upheld by the Supreme Court, allow national banks to sell insurance from offices in towns with populations of less than 5,000. The Federal Reserve has also given bank holding companies the ability to undertake securities activities. More recently, regulatory actions have produced significant advancement toward expanding bank powers. On October 30, the Federal Reserve took steps to make it easier and more efficient for bank holding companies to pursue securities services. The Fed accomplished this by eliminating three firewalls it had previously required banks to maintain between themselves and their securities units. The Fed now will allow: (1) a single employee to sell commercial and investment banking products; (2) employees, officers, and directors to work for a bank and its securities affiliate (although there must be different CEOs); and (3) banks to buy a broader range of instruments from their securities units. The OCC followed on November 20 with a decision to allow national banks to offer many financial services directly rather than through holding company entities. Starting this year, the OCC will consider applications on a case-by-case basis for operating subsidiaries to engage in activities not permissible for the parent bank itself but that are nonetheless "part of, or incidental to the business of banking." The OCC set a 10 percent limit on the amount of a bank's capital that may be invested in such operating subsidiaries. Only banks that are well-capitalized, well-managed, and that have at least a “satisfactory" Community Reinvestment Act (CRA) rating may apply. III. NEED FOR FURTHER FINANCIAL SERVICES MODERNIZATION In the letter of invitation to today's hearing, we were asked to address whether there is, in fact, a need for financial services modernization and to assess the potential impact on industry and consumers. Since enactment and implementation of the Riegle-Neal Act, home builders have witnessed a reduction in the number of smaller, community banks and thrifts. As national branching becomes fully effective later this year, we believe that further merger and |