On July 8th, the Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities” to discuss the effects of the economic crisis on community banks and credit unions across rural communities. Testifying before the committee were:

  • Jack Hopkins, President and Chief Executive Officer, CorTrust Bank National Association, Sioux Falls, SD on behalf of the Independent Community Bankers of America (ICBA)
  • Frank Michael, President and Chief Executive Officer, Allied Credit Union, Stockton, CA on behalf of the Credit Union National Association (CUNA)
  • Arthur Johnson, Chairman and Chief Executive Officer, United Bank of Michigan, Grand Rapids, MI on behalf of the American Bankers Association (ABA)
  • Ed Templeton, President and Chief Executive Officer, SRP Federal Credit Union, North Augusta, SC
  • Peter Skillern, Executive Director, Community Reinvestment Association of North Carolina

Mr. Hopkins, on behalf of the ICBA, testified that, although many community banks have not participated in subprime lending, these banks have been impacted by the economic crisis. According to the Aite Group LLC study conducted in March 2009, “of the 773 community banks surveyed, 73 percent stated they have seen an increase in their traditionally low loan delinquencies and charge-offs since the start of the crisis.” Despite this, Mr. Hopkins argued “most community banks are well-positioned to overcome new challenges, take advantage of new opportunities, and reclaim some of the deposits lost to larger institutions over the last decade.” Because community banks are in the best position to lend to small businesses and rural communities during the current economic climate, ICBA recommends initiatives that will enable these community banks to serve their rural communities, including providing additional funds for USDA direct and guaranteed farm loans and enhance the USDA’s Business and Industry loan program.

Mr. Michael, on behalf of CUNA, reemphasized that “credit unions are careful lenders ... [and] did not contribute to the sub-prime meltdown or the subsequent credit market crisis.” Consistent with Mr. Hopkins’ testimony, Mr. Michael argued that, although credit unions can play a vital role in the economic recovery, they are threatened by inconsistent regulatory scrutiny and re-regulation, including the implementation of Section 106 of the new Credit Card Accountability Responsibility and Disclosure Act, which, among other onerous limitations, requires periodic statements be provided for all open-end loans 21 days before a late fee can be assessed, and the restrictive statutory cap on the amount that credit unions are permitted to lend.

Mr. Johnson, on behalf of the ABA. argued that “the success of many local economies – and, by extension, the success of the broader national economy – depends in large part on the success” of community banks. In this critical time, ABA recommends that capital programs be broadened so that a larger cross-section of banks could participate, risk-based capital rules be revised to more accurately reflect the actual risks of these investments and conservative asset valuations and underwriting standards be relaxed to avoid “appraising banks into insolvency.”

Mr. Templeton began by testifying that “the federal credit union system was created, and has been recognized, as a way to promote thrift and to make financial services available to all Americans, many of whom would otherwise have limited access to financial services.” In this current economic climate, he argued that credit unions are continuing to play an important role in their communities as many are seeing increased demands for mortgage, auto and small business loans, but, since “credit unions are the most highly regulated of all financial institutions,” these regulations, including the credit union member business lending cap and the definition of “underserved areas” of the Credit Union Membership Access Act, are restricting their ability to serve their members.

Peter Skillern of Community Reinvestment Association of North Carolina argued that small community banks will be benefitted by a regulatory reform of the banking system as a whole. He also recommended that Congress expand the Neighborhood Stabilization Program “both in scale of funding and in scope to include rural areas.”