Main Street Capital Access Act: Empowering Community Banks to Drive Economic Growth

Good afternoon, everyone. The subcommittee on financial institutions will come to order. Without objection, the hearing has been noticed. Without objection, the chair is authorized to declare a recess of the committee at any time. Today's field hearing is titled " Main Street Capital Access Act, Empowering Community Banks to Drive Economic Growth." Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for five minutes for an opening statement. Well, first of all, I want to thank everybody for joining us here today, whether in person or tuning in remotely for this financial institutions subcommittee hearing in Richmond, Kentucky, in Kentucky's sixth congressional district, my home district. I want to first uh extend my sincere gratitude to Eastern Kentucky University for graciously hosting us in its beautiful Center for the Arts uh on this uh terrific campus. Today we are here to discuss the Main Street Capital Access Act and how the bipartisan House-passed legislation strengthens community banks across the country. And we uh hopefully are urging the Senate to take uh up this legislation uh before the end of the term of this Congress. I wanna personally at the outset uh thank my colleagues, uh Congressman uh Warren Davidson and Congressman Troy Downing uh for joining us h- here today. Uh uh Congressman Davidson is the Chairman of the National Security Subcommittee of the House Financial Services Committee, Tro- and he's from Ohio. Uh Troy Downing is a terrific uh new member of Congress from uh the great state of Montana, and has a great deal of uh uh private and public sector expertise in in uh in financial services. This bill that we are uh discussing today is exactly the kind of targeted reform needed to advance this committee's goal to make community banking great again. Community banks represent the financial backbone of this country. They finance farms, factories, family businesses, and first-time homebuyers. These institutions don't just serve communities, they are part of them. as we will hear from our uh terrific witnesses here today. But here's the hard truth. Federal regulators have not always been treating them that way. For years regulators have been writing rules as if every bank in America is a trillion dollar global institution and then acting surprised when community banks disappear that's the result of a regulatory culture that forgot who the system is supposed to serve. The Main Street Capital Access Act is about changing that. The goal here is simple. Regulation should follow risk, not size, not zip code, and not political fashion. A five hundred million dollar community bank in rural Kentucky should not be regulated under the same framework built for a globally systemically important bank. Community banks in Kentucky and across our nation face burdensome capital rules and a supervisory framework designed for large global institutions. That means higher costs, fewer loans, and more forced consolidation. And this hurts American consumers by reducing access to credit and opportunities for small business growth. We intend to rectify this uh with our community bank package. The Main Street Capital Access Act, a bipartisan bill, opens the door for new bank formation, improving transparency in the chartering process, making applications more predictable, and ensuring rural and underserved communities can once again see new institutions form instead of watching their local banks disappear. We are also restoring proportionality to regulation, updating capital, leverage, and enhanced prudential standards so they actually reflect a bank's risk profile, not just an arbitrary asset threshold. That means less money on regulatory gymnastics and more money available for loans in your communities. We are also bringing fairness and due process back to supervision. Banks should not be governed by unpublished examiner preferences. They should be governed by clear rules, risk-based testing, and transparent standards. You should know what you're being judged on before you're actually judged. That's how a system governed by law is supposed to work. The Main Street Act also addresses the structural problems that are driving consolidation. It requires regulators to justify their actions and create clarity and predictability in the merger process, so healthy banks can grow and troubled banks can find partners before they fail. And it ensures that when banks do fail, community banks are not shut out of the resolution process by design. Finally, this legislation recognizes the reality that innovation is happening whether Washington likes it or not. That is why it is critical that we remove outdated regulations and reform overly prescriptive supervision to ensure community banks can keep up with their customers' changing preferences. Our legislation lets banks partner, modernize and compete. The Main Street Capital Access Act is a critical step toward restoring the financial backbone of this country. For Kentucky, this is personal. Community banks are the financial infrastructure of rural America. When they thrive, small towns prosper. When they're regulated out of existence, capital dries up and opportunity for local ownership disappears. I'm excited to continue the conversation with our four Kentucky-based witnesses on our panel today. So today we welcome the testimony of Mr. Timothy Schenck, President and CEO of the Kentucky Bankers Association. Mister Kyle Aud, the President and CEO of Cornerstone Community Bank. Mister Jason Hawkins, President and CEO of First United Bank. And Mister Zach Worsham, Vice President of Winterwood Incorporated. We thank each of you for taking time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony. Without objection, your written statements will be made part of the record. Um, and before I uh turn it over to Mister Schank, one more thank you, and that is to our terrific staff. We've got a great group of professional staff members from uh the f- the Financial Institution Subcommittee uh led by Maura Woosley, wanna thank her and her team uh and I wanna thank uh uh my staff um Larry Seyfried and uh McKenzie Poe uh for helping us uh with today's logistics. So, Mister Schenck, uh, you are now recognized for five minutes for your oral remarks.

Thank you, Chairman Barr and members of the committee, for the opportunity to testify today. The Cup- Kentucky Bankers Association, representing one hundred and fifty-one member banks across this Commonwealth, first would like to thank you and your hard work in the bipartisan passage of the Main Street Capital Access Act. This legislation includes many provisions that our association has long supported. such as measures to spur new bank formation, tailor bank regulation, index key asset thresholds to keep pace with inflation, promote greater transparency and fairness in supervision, encourage healthy merger activity, ensure regulatory accountability, and other important issues. These common sense reforms would promote economic growth in communities across the country. through the promotion of a robust, dynamic banking industry and the effective intermediation of credit for individuals, families and businesses of all sizes. Community banks play a c- c- vital role in the economic health of the communities they serve, and incentivizing the creation of new banks is critical to promoting a robust, diverse banking industry nationwide. Yet bank consolidation is a long-term trend. In fact, there are four thousand five hundred fifty-five fewer banks in the US now than in two thousand five. At the same time, community banks operate under a regulatory framework that too often fails to account for the s- risk, size, and profile, and business model of a m- of an institution. In addition to easing regulatory burdens on community banks, the bill would facilitate the formation of new banks in urban and rural areas. The Main Street Capital Access Act would be an important step toward expanding bank access for both individuals and small and medium sized bus- businesses while allowing community banks to focus on serving their customers. Equally important This legislation would advance common sense r- regulatory tailoring by aligning prudential regulation and supervision with bank's capital structure, risk profile, complexity, activities, business model, and size, while indexing key regulatory thres- re- thresholds so that such tailoring remains meaningful over time. Indexing is a low-cost, high-impact and durable reform that improves transparency, reduces arbitrary burden, and allows regulators to focus on actual risk. The Kentucky Bankers Association likewise supports the bill's provisions that would ensure greater accountability at the federal banking agencies. In testimony and other communications with Congress and policy makers, we have shared our members' concerns about the cumulative impact of uncoordinated agency initiatives and the misuse of regulatory guidance by the regulatory agencies. Furthermore, the Act establishes a clear articulable and reviewable criteria for the CAMELS component that is needed for consistency in examinations. The Main Street Capital Access Act is the most comprehensive banking bill we have seen in well over a decade that would ensure that communities in our commonwealth and our country could continue to thrive. I would also be remiss to not thank you, Mister Chairman, and members of your committee committee for all the work in passing the twenty-first century Road to Housing Act. As Zach Worsham will tell you, this is the most comprehensive bicameral housing and banking legislation passed in years. The Kentucky Bankers Association and its member banks are working diligently with our housing part- partners, prudential regulators and others to address Kentucky's housing crisis. The provisions of the twenty-first century Road to Housing Act will enable the Kentucky Bankers Association and our housing partners with additional tools to expand the housing supply in addressing Kentucky's estimated two hundred and fifty thousand housing unit shortage. We thank you, Chairman Barr and members of this committee, for all your efforts to aid Kentucky's community banks, our banking ecosystem, and our housing partners to allow our banks to continue to serve our communities, and our Commonwealth, and our country as we have for centuries. Thank you, Mr. Chairman.

Thank you, Mr. Schenck and Mr. Odd. I know you're gonna be talking uh a lot about uh the de novo chartering process. You are now recognized for five minutes for your oral remarks.

Thank you, Chairman, members of the committee, for having uh us here today. I would like to say uh thank you to An Andrew Howard, our Market President, uh for attending and he can uh he is also a witness as far as these experiences uh that we're about to discuss right in the middle of the crowd, Chairman. Uh, thank you again. Uh, Cornerstone Community Bank, we opened on June eighth of this year, uh, and we are the first new charter bank in Kentucky, uh, in seventeen years, since two thousand nine, and just under thirty years in Owensboro. Uh, I want to focus my comments, uh, primarily on section one O one of the Main Street Capital Access Act, because we just lived through this process and, uh, especially related to the provision, uh, it's intended to address. Uh, we were required to raise twenty million dollars in initial capital, and because of our community's support, we were able to raise twenty-seven million from just uh around two hundred and thirty shareholders. No individual shareholder owns more than five percent, uh which we are extremely proud of, which really means that this bank is owned by our community, uh the majority of it. Also wanna make very clear that our support of this act is not a criticism of our regulators. Uh, the FDIC and especially the Kentucky Department of Financial Institutions, uh, Commissioner Marnie Wright-Gibson and her team, Holly Ross, they were uh fantastic throughout this process. They were accessible, professional, constructive, while still taking their responsibility to protect depositors seriously. But good regulators cannot change the economics or the framework uh that are required uh that they are required to administer. And that is where section one O one matters. Uh there's something about starting a bank that you don't realize until you've lived it. Uh before you make your first loan or collect your first dollar of interest income, we had to hire ex uh experienced executives, employees, uh had to secure facilities, had to find a core uh system, uh which is very expensive. uh hire outside professionals, uh write more than a dozen dozen policies and spend countless hours working on the regulatory process. Uh and simply put, a de novo, we start with a ton of the expenses of an operating bank without any of its income. Um so throw on top of that the daunting process of trying to raise twenty million dollars. Uh, this is why the phase-in approach that's contemplated in the section one O one of uh the Main Street Capital Access Act is so important. Uh, phase-in doesn't eliminate capital requirements. Uh, it doesn't give an excuse for a new bank uh to not have sound underwriting or strong governance uh and it does not mean a bank should not be allowed to grow faster than its systems management or capital uh or capital can support. It just recognizes that a new bank's capital needs and earnings capacity develop over time. In the earliest months, a new bank is absorbing the cost of becoming operational. It is building its loan portfolio, establishing customers, and demonstrating that our business plan uh actually works. Uh, requiring the full long-term capital structure before any of this happens, uh, can make the economics of de novo unnecessarily difficult. A carefully supervised phase-in would allow qualifying banks to build toward full capital requirements as their balance sheets earnings and operations, uh, mature. Regulators would still have the authority to impose higher requirements when the facts warrant it. And banks would still be expected to maintain meaningful capital from day one. The difference is that the framework would be better matched with the timing of c- of capital requirements. uh on a new bank's ability to generate revenue, which I believe is uh more of a practical approach. I also believe it a safer approach because it gives a new bank more flexibility to invest in the people, systems and controls necessary to operate responsibly rather than requiring so much capital to be raised before a bank has even opened its doors. Our ability to significantly clear this capital hurdle should not be mistaken for evidence that uh the hurdle is appropriate for every community. Uh, it's been seventeen years, uh, like I said, since one has been opened in Kentucky and we should all be asking ourselves, " Why is it taking that long?" Uh, and there may be another group in a smaller community with the same makeup, uh, that we never see an application from just because it's that difficult. The twenty million dollars or the or the regulation that requires the twenty million dollars is just too tall a task to even consider. uh from a smaller uh communities uh even smaller than Owensboro and Davis County. Uh we did not need another bank um Owensboro did not need another bank just cuz we didn't have banks. We needed another locally headquartered comp- competitor because local ownership, local decision making and competition still matter. The goal should not be to make starting a bank easy. It should be difficult. Uh, depositors trust us with their money and regulators demand capable management, strong governance and sound systems, and meaningful capital. Um, if the Main Street Capital Access Act helps one more responsible community bank move from an idea around a kitchen table to an open bank door I believe that is good for competition good for local businesses, and good for communities across this country. Appreciate uh You all having us today.

Great. Thank you, Mr. Hawkins. Mr. Hawkins, you are now recognized for five minutes for your oral remarks.

Chairman Barr, members of the committee, and distinguished guests, thank you for in- holding this important field hearing and for your leadership on the Main Street Capital Access Act. Um, I am President and CEO of First United Bank and Trust in Madisonville, Kentucky, and I'm also currently the Vice Chairman of the Kentucky Bankers Association. That gives me a front row seat to the challenges facing community banks across our Commonwealth. First United Bank and Trust was actually founded as a de novo bank, thirty years ago, in nineteen ninety-six, when starting a community bank was still economically feasible. We're living proof that de novo banks can s- succeed, grow responsibility, and serve communities for decades when given the opportunity. Today we've grown to over a six hundred million dollar bank. And we're not a Wall Street bank, we're a Main Street bank. We employ a hundred and seven full-time employees who serve families, small businesses, and farmers in our local communities. Over the past decade alone, we've doubled in size because we've stayed focused on what we do best. And that's relationship banking, local decision making, and putting capital to work where it's needed most. But here's a sobering reality. If we were to try to start First United Bank today, we don't, we're not in as large of a community as Owensboro where Bisteraud is. Uh, Madisonville is a much smaller community and that capital raise of twenty million dollars would probably been pretty tough. And so, um, I'm, I'm glad that we're able to get this done today and, uh, and, and I'm looking forward to what the Main Street Capital Act can do to help uh grow De Novo banking. Chairman Barr, let me also be direct. One size fits all regulation, um, does - simply doesn't work for community banks like mine. We face the same regulatory framework as you mentioned earlier as trillion dollar banks. The Dodd-Frank Act subjected community banks to the same rules designed for the largest institutions. That has stifled local lending, constrained economic growth, accelerated industry consolidation, and pushed lending activity outside the banking sector. Exactly the opposite of what we need. Our efficiency ratio has climbed over the past few years, from sixty-five percent in early twenty-twenty to over seventy percent in recent years. And that means we're spending more to generate less, not because we're inefficient, but because regulatory compliance costs are consuming resources that should be deployed to serve our communities. Let me also be clear about capital. We maintain strong capital ratios, but complex risk-based calculations consume enormous resources. The community - the community bank leverage ratio framework that your bill would strengthen is transformational. It would allow us to maintain a simple, transparent nine percent leverage ratio and opt out of risk weighting calculations that add virtually no value but consume significant time and cost. It's not about lowering standards, it's about right-sizing them. The interest rate um environment of recent years has also pr- um exposed us to critical vulnerabilities, access to reliable liquidity. Um, you know, over the past several years uh we needed reliable liquidity sources, but the Federal Reserve's discount window has remained stigmatized and cumbersome. Your bill's provision to modernize the discount window is exactly what community banks need. A reliable backstop that we can access without concern that regulators or markets will view us as trouble. We also would uh like fair and transparent bank supervision. Um the camel's rating system needs clear uh and reviewable criteria. The appeals process needs strengthening and we must eliminate reputational risk f- as a supervisory tool. Bank regulation and supervision were weaponized in recent years, leading to the de-banking of law-abiding businesses and individuals, based on political views rather than actual credit risk. Community banks like First United pride ourselves on serving everyone in our community, based on creditworthiness, not ideology. The anti-banking provisions in your bill protect both banks and customers by focusing supervision on material risk related to safety and soundness, not politics. I also want to commend you and your committee on the leadership for the twenty-first century road to housing act. The housing crisis is real and community banks like First United are on the front lines of housing finance. We make one to four family residential loans and that helps working families achieve the American dream. We also face constraints on reciprocal deposits. And your um proposal in the Main Street Banking Act would help us have access to more funding through that source because we do have several public fund deposits w- um at First United Bank. The bottom line is this would help First United Bank to safely increase our lending by ten to fifteen percent over the next three years. That's forty to sixty million in additional loans to families, small businesses, farmers and housing developers in our community. That translates into more homeownership, more jobs, and more o- economic opportunity on Main Street. You understand that community banks aren't the problem. We're the solution. We don't need a handout. We need a level playing field and regulations that are proportionate to our risk profile and business model. Thank you, Mister Chairman.

Thank you very much. And last but not least, Mister Worsham, you are now recognized for five minutes for your oral remarks.

Um, Chairman Barr and members of the subcommittee, thank you for the opportunity to testify today. I'm here today representing Winterwood Incorporated, my family's affordable housing development and management firm based in Lexington, Kentucky. For over forty-five years, our organization has provided affordable rental housing in rural, suburban and urban communities throughout our region. And our country is currently facing a significant housing supply shortage, and that shortage is particularly acute for working class Americans. At the same time, the development of affordable housing has become increasingly challenging. Affordable housing developers have been subject to the same inflationary pressures as our market rate counterparts over the last several years, while continuing our commitment to restricting rents and home prices with programs like the Low Income Housing Tax Credit. Our industry has faced rising labor and construction material costs, skyrocketing insurance premiums, and higher for longer interest rates, all while operating under a restricted revenue profile that has not kept pace. These conditions have created financing gaps, required increasingly complicated capital structures, and ult- ultimately made the production of affordable housing more difficult. But in response, Congress, with the support of the House Financial Services Committee and this subcommittee on financial institutions, has enacted historic improvements to the housing and community development resources available. The one big beautiful bill act included the largest increase in the low income housing tax credit in the program's history, with a permanent twelve percent increase in the nine percent housing credit, and the reduction of the four percent housing credit tax exempt bond test from fifty percent to twenty-five percent. Some estimates predict that this increase will su- will of supply in these resources could create over one million new homes over the next ten years. The twenty-first century Road to Housing Act builds on this success. With the public welfare investment cap increase, Congress has implemented a complimentary reform that will cut regulation in the private market and allow demand to catch up to this increased supply of housing credits. In addition to the PWI increase and many other important provisions, the Road to Housing Act reauthorizes and modernizes several important housing programs, like the Home Investment Partnership, USDA Rural Development's MPR program, and decoupling of rental assistance from section five fifteen mortgages, all meant to fill the growing financing gaps I mentioned previously. While the tools that Congress has provided us through this legislation are critical, it takes private investment to put these resources to work. And community banks are one of the key stakeholders in providing this investment into affordable housing in their communities. That is why we strongly support the Main Street Capital Access Act and any common-scent le common-sense legislative efforts that right-size regulation of community banks. The strengths of our community bankers should not be in cutting through burdensome red tape but in engaging actively with the needs of the communities they serve. Increasingly we are seeing community banks participate in low-income housing tax credit transactions, not just through construction and permanent lending, but in the direct purchase of these housing credits. Having access to local community reinvestment act motivated equity lowers our costs of capital and makes more projects financially feasible particularly in suburban and rural markets. In addition to local capital access, community banks have a unique ability to respond directly to the needs of their communities. We've seen this firsthand just north of here in Lexington. Lexington is a land constrained community where limited availability makes suitable development sites both scarce and highly competitive. Recognizing this local challenge, five local community banks came together through an effort led by the Kentucky Bankers Association to provide the capital necessary to secure land, and set it aside for affordable housing. Their partnership has created an opportunity for five local affordable housing developers to build a master-planned community. that will ultimately provide more than two hundred and thirty affordable rental and home ownership opportunities for people in Lexington. This is the kind of effort that can be replicated by our community banks across the country when our local institutions have adequate capital access and the regulatory framework that allows them to deploy it efficiently. Congress has taken meaningful steps to ensure that affordable housing developers have the necessary tools to meet our current housing shortage. And now we must ensure that our community banks continue to partner with developers to turn these tools into homes. Thank you for the opportunity to testify, and I look forward to answering your questions.

Thank you, Mr. Worsham. We will now turn to member questions. I will now recognize myself for five minutes for questioning. Um, Mister Schank, we talked about the current one size fits all framework codified under the Dodd-Frank law, and how it continues to be an ineffective approach, limiting the growth and expansion of financial institutions and burdening banks like the ones you represent. The Main Street Capital Access Act was developed in response uh to that, one size fits all approach, with the intention to help community banks thrive, expand and support the growth of new banks. Key provisions in title two, like the Taylor Act and my Tier Act, Community Bank Regulatory Tailoring Act, aim to reduce regulatory burdens on lower risk and smaller financial institutions by raising asset thresholds and requiring regulatory thresholds to adjust over time for economic growth or inflation. From the perspective of the banks that you represent, how would this more tailored regulatory framework affect the ability of these institutions to serve their customers, expand access to capital, and grow?

Thank you, Mister Chairman, and thank you for the members of the committee for your work on the Taylor Act and the Tier Act which are both part of the Main Street Capital Access Act. Kentucky has banks of every size and every bank serves an important role in the financial ecosystem. In many of our communities though, most of the lending comes from the Main Street Community Banks. They fin finance small business, family farms and homes, and they are the first call when a community needs to recover from a disaster. These banks are well capitalized and have conservative risk profiles. Their business models are simple. They take local deposits and lend them back to the communities they serve. However, despite their business model and capital sufficiency, they're often subject to rules written for larger, more complex financial institutions. The Taylor Act fixes that. It requires prudential regulators to consider a bank's risk profile and business model when they write a rule. It requires them to create a framework that is reflective of their actual business model and not an arbitrary asset threshold. The Tier Act addresses a related problem. Many of the asset thresholds in banking law haven't moved in years, and sometimes decades, while the economy and bank balance sheets have grown. A bank can cross a regulatory line without changing what it does and taking on more risk. The Tier Act updates those thresholds and indexes them going forward, so that growth alone doesn't pull a community bank into a regime built for a different kind of situation. Together, these two acts will equate to less time, money, and expenses spent on responding to over-burdensome regulation, while creating more liquidity for community lending and without compromising the safety and soundness of our banking system.

Well, thank you for that uh answer and um title two uh of our uh legislation does uh resolve a lot of these issues, raises thresholds. We wanna pass this and we wanna build on that. Um, especially when you consider that the OCC is now changing its view of what, uh, a small community bank is to thirty, uh, to thirty billion dollars, uh, up from ten. I think that, uh, in all of these thresholds, that ten billion dollar threshold is, is an arbitrary limit that, especially for those eight, nine billion dollar banks, is an impediment to grow. We, we want to address that threshold as well. Mister Odd, um, Let me ask you about the decline of in community bank growth. Congratulations by the way on a rare uh de novo charter and uh the successful opening up of your bank uh Cornerstone. Um the goal of Main Street was to provide more communities with access to that de novo chartering uh like you were able to achieve. Um title one a as you know, it's uh uh it makes it easier to establish new banks, uh and um it builds on the phase-in pilot program that was included in the twenty-first century road to housing uh act. Why do you think it is so difficult today to form a new community bank, and what do you think a healthier de novo bank regulatory environment would would look like?

The n Chairman, thank you. Uh, the first question's a little easier to answer. Um H the uncertainty uh of coming into a bank as far as our process uh, you know, we started the process in June of two thousand twenty-five and opened in June of two thousand twenty-six and it probably wasn't in until February or March of twenty-six that I felt pretty good that we were gonna have a bank uh and a lot of that had to do with with timing and with, again, the capital that we were required to uh to have. And it was so everything revolved around the capital. I I believe the difficulty that you've seen since two thousand eight where m- there were many banks that were opening every year and I believe it's closer to an average of about six a year cent. uh has everything to do with the regulations in place that would require a twenty million dollar upfront uh capital need. Uh and it's just intimidating.

My time has expired but um I wou that that decline in de novo charter uh the charters is really an indication that that we we need to change the law to make it easier so that as this consolidation happens we can backfill and we can have new uh di- dynamism with new bank formation in our country. But thank you for p- thank you for sharing your perspective and your recent experience uh on the challenges of - of - of new - of - of building a new bank and

Thank you.

starting a new bank. Um, I now recognize the gentleman from Ohio, uh, Mister Davidson for five minutes.

Uh, thank you, Chairman, thank you uh to you all for taking time out of your day to really help us with our legislative process hopefully help motivate the United States Senate. I'm encouraged that Mister Barr will hopefully uh get the support of the people of Kentucky, get a go serve there, but um hopefully this will be law before then. Uh if if we get everything right, we can get it across the finish line yet this year. It's nice to see something bipartisan like this. And I think about the Ma- Main Street uh capital access first and foremost as a customer. You know, before coming to Congress I owned and operated manufacturing companies uh based in Ohio. And, you know, I think about a time when uh I had a a big systemically important financial institution that was my banker. And they came to me and said, " Hey, did you ever think about growing slower and maybe playing golf or something instead of growing your manufacturing companies?" I'm like, " Not really, uh but why would you guys as my bankers wanna do that?" Without seeing the word Basel-Switzerland, they were basically saying, " Hey, these guys in Basel-Switzerland have this concept on how you all oughta run things and how we should treat your balance sheet. And then of course they've also expressed opinions on how the bank's balance sheet oughta look and that's why our our our dual banking system between nationally regulated systems are there you have you know the idea of some systemically important banks, okay Uh, I don't know that they got that right, but the idea that we're gonna push that same kind of regulatory burden down on banks, what are the implications for the consumers that just want access to capital? So, either Mister Hawkins or Mister Odd, you know, you think about some of your clients, some of your customers. Can you talk about an experience where just looking at the numbers doesn't tell the whole story?

Yeah, I mean, obviously we know our customers. We know our communities. We know our borrowers. I mean, I can remember back to back in the day when I worked for Farmer's Bank in Clay, Kentucky, a gentleman by the name of Clarky Clark, the way he managed and the way he operated was, alright, you want a loan? Who's your dad? Let's talk about who that is. Let's talk about character. Let's talk about all of those things. And so As a community bank, we know those relationships, we know safe and sound loans, we know um the borrowers that are going to have the creditworthiness just by the their th you know, what they do for our communities. And so we wanna partner with them and we wanna create opportunities for those people to grow. And we don't wanna have complex regulatory rules and restrictions that that say no we don't wanna do that or that we need to debank somebody or that we need to turn someone down simply because they're starting to reach some some threshold that that we're not even controlling or frankly even care that much about, to be honest with you.

Yeah, thanks for that example, and I think about, you know, you all uh operating businesses in banking uh seems like a pretty competitive industry. There are a lot of folks out there, so if you all say no, maybe somebody else says yes, people are shopping the business. getting multiple bids, so um i- is banking competitive?

Uh yes, very competitive, uh Congressman. But it doesn't mean you can't have fun while you're doing it. Uh, Mister Hawkins and I, we uh he has a location about a half a mile from myself uh but we will root uh for community banks and it's friendly competition uh but friendly competition leads to good results for our customers uh there in the community, which is that's what we're trying to provide. Uh there's plenty of business out there for all of us uh but it is the community banks that really make everything work within uh communities of our size.

Well, it, one of the implications of that competitiveness is is let's say you get it wrong, and you run your own balance sheet, maybe not as good as you should. Let's say the regulators miss something or allow you to, since it's your capital that you've put together, and you've put it at risk, um what you know, we wanna protect the depositors of course, um what happens if somehow a bank fails? I mean, there there's a difference between a community bank and a smaller bank in terms of the range, the challenge of completing a merger or acquisition, than say, you know, the three or four largest banks in the country, having the same kind of problem with their balance sheet, isn't there?

Yeah, I would say that that's absolutely correct. You know, one of the things that we wanna make sure that we're doing is raising core deposits so that we can put those funds back into lending. And so raising core deposits, a lot of times you'll have an individual that looks at a community bank and says, should I put more than two hundred fifty thousand with you guys, um, I have a concern about FDIC insurance. And so with reciprocal deposits in the advent of that, we're able to continue to serve those customers, take in their deposits, make sure that we keep that local, and then plow those funds right back into lending their local communities.

Yeah, thanks for that. My time's expired for this panel. Uh, yield back, Chairman.

The gentleman yields back. The gentleman from Montana, Mister Downing, is now recognized for five minutes.

Well, thank you, uh, Mister Chairman, for holding this hearing and, uh, thank you for inviting me to your beautiful state. Uh, I've really appreciated that. Uh, community lenders are the lifeblood of credit in my home state of Montana and I know that the story goes across rural America. You know, Montana banks uh support over twenty-four thousand small farm loans across our state. And these family farms, they're putting food on our tables, uh clothes on our backs, incredibly important. And community banks face many challenges that prevent new bank formation or lead to consolidation. So in two thousand eight in Montana there were sixty-four state chartered banks and today there are thirty-three, so we lost that by almost half. And a lot of this can be traced directly back to the passage of Dodd-Frank. And uh, little uh, little background is uh, I never had any interest in politics until politics had interest in me. The first time I ever went to DC was when this Dodd-Frank bill was coming down that affected my business doing investment banking, and you know, I - I - I had a lot to say about it, so uh, went from there to being a regulator and now I'm the lawmaker, so hold my beer. So I'm really glad that we're here today discussing the necessity of community banking and the important provisions in our bipartisan Main Street Capital Access Act. So I'm gonna start uh with Mister Schenck. To what extent do you believe restrictive capital rules accelerate the consolidation among smaller banks?

You know, I I obviously r- there there's a lot of great pieces here on the CBLR framework that will provide some some flexibility with capital, but when when you look at what's happened with Dodd-Frank and and across the board, you know, you see banks that are stymied uh by virtue of artificial thresholds that limit them and their abilities to expand into communities. Um, by accessing additional capital, and still we have the well amongst the well most well finan uh capitalized banks in the entire country. Um, that will allow us to deploy more into the communities, and that framework and the provisions that are in the Main Street Capital Access Act will significantly help our community banks in that space.

Right. You had mentioned something in your opening comments about fairness and supervision and I think that's one of the few things we can expect, is fairness and supervision. So, what risk does, um, this pose to financial stability in local credit?

I think it doesn't propose a- it doesn't have any. Um, in fact, I think it will increase it.

Right.

Um, when you look at things like the camel system, and I was a former banker, but not ever knowing what the M was on a number, those things are challenges for community bankers.

Mm-hmm.

And when you focus time on that and meeting artificial regulations or arbitrary thresholds that's taking time away from serving your community communities and your consumers.

From the perspective of your members, what trends are they seeing in new bank formation and what do they believe are contributing factors to that trend?

I - I think Kyle's probably the best example of it here, but raising that capital at the front-end is probably the largest challenge. And obviously this bill in - in section - section one addresses a lot of that, and having that tiered-in approach and phased-in approach, which allows for actual growth and not just commensurate with one outstanding number, and as well as working with the regulators in the process.

Right. You know, I - I noticed a couple of you, uh, mentioned housing and the, uh - the twenty-first century road to housing. I sit on the housing subcommittee, so I kind of made my ears perk up. So I - but I'm gonna move to, uh, Mr., uh, Worsham here. Housing affordability has been a major focus of this Congress, which culminated in the passage of our first major housing reform bill in decades. But everyone acknowledges there's more work to be done here. So do you believe consolidation of community banks has a positive or negative impact on access to financing opportunities for affordable housing projects?

Uh, I certainly think that, uh, consolidation has a negative impact. As you know, the, uh, low income housing tax credit is one of the largest drivers of affordable housing production in our country. And what we see increasingly as Congress is increase the supply of those credits uh, that larger regional and more consolidated banks, uh, uh, have less appetite to participate in our rural and suburban communities. And our organization is very, um, interested in continuing to serve rural communities, and what we find is while we can secure those credits, we can't always find competitive buyers for them until our community banks come to the table. More and more we're seeing community banks come in with fair cost of capital investments into these housing projects. So we need more competition and people who understand the local markets and the communities they serve.

Right. So - so just to clarify one point, so do you see small banks as more willing to finance affordable housing projects than larger institutional banks?

I'm not sure it's more willing. They're certainly more willing in the communities that are uh outside of big metro markets. We see more willingness in our rural communities across the state of Kentucky for our local community banks to participate

Uh, thank you. And I've run out of time, so, Mr. Chair, yield.

Uh, gentlemen yields, and we're gonna um move on to a second round of questioning, because we only have three members here, so we'll get the benefit of additional uh a uh answers and insights from our witnesses. Uh, Mr. Worsham, I'll just uh jump in right following uh uh, Mister Downing's line of questioning on affordable housing. It it it has been an emphasis and focus of this Congress to increase the supply of affordable housing. Um, I appreciate your acknowledgement and recognition of the importance of the provisions in the working family tax cut uh legislation, the one big beautiful bill where we enhance the low income housing tax credit. And then in the the the bipartisan twenty-first century road to housing act, um, Focusing on increasing the supply of housing by making it faster, easier, and less expensive to build. Also, increasing that public welfare investment cap. But my question also is about the role of community banks in the affordable housing ecosystem um your company manages affordable housing properties in Kentucky how important are community banks these gentlemen just to your right um to financing these types of properties and what challenges do you see when it comes to securing financing for affordable housing developments?

Thank you, Mister Chairman, I'll I'll uh I'll kind of echo what has already been said that uh over the last several years with the increase from the one big beautiful bill act which was critical to the continued production of uh affordable rental housing particularly, uh there's just so many tax credits, so many low income housing tax credits on the market now that some of the bigger players who have traditionally been the main buyers of these resources have more options and wanna focus more in urban metro markets and as we continue at Winterwood to serve our rural communities across the commonwealth, it's critical that we find local uh community banks who understand the market and want to participate in that market, as opposed to some large metro market. What we've seen recently is we've been able to secure these housing credits, and have had a hard time at a national level marketing those uh to large institutions. And in every case when we go to community banks, they're excited about finding ways to serve their communities. They want to see this housing built, they wanna make the loans, they wanna make the investment, and they're of the utmost importance for us.

Mr. Hawkins, let me um uh focus in on the the part of your testimony where you you uh applaud title three of our legislation fair and transparent bank supervision. Uh in addition to modifying the CAMELS rating system to establish more clear, articulable and reviewable criteria for each component, uh I wanna really hone in on section two O three, the fair audits and inspections for regulator exams section. In that section, we require the - the - the regulators to complete exams timely, provide final examination report, conduct an exit interview in a timely manner, and establish a mechanism for depository institutions to obtain written advice from those agencies about certain matters. Also, it - it would establish a - an office of independent exam review within the FFIEC to review material supervisory determinations issued by those agencies Um, uh, where you could actually appeal uh, unfavorable supervisory determinations with which you disagree. Tell me how important that is.

I think that's extremely important to community banks. You know, obviously, uh, as I, as I talked about in, in my testimony, you know, we have some of the same rules as trillion dollar banks and sometimes they're looking at you know our um accountings our records um the way we underwrite our credits. And, you know, a lot of times we get scrutinized on on those things. And so having a process that gives us, you know, measurable ways to determine how to um how to run our business, but also let's let's know what those that those goal posts are. Let's make sure that we understand that and that we can manage to those expectations. Um, my goal as a community bank is to make sure that I'm working within the framework that's given to me And that it's not arbitrary, that it's not something that uh can constantly be changing just because of the M in the camel's rating and and what the what management is doing um I really wanna make sure that we have that appeal process as well fortunately we we've ha- not had to do that as a community bank, but that is extremely important in the event that you get uh, a a rogue examiner, so to speak, that might come in with an agenda.

And we even have a a a a right to remove an ag- agency enforcement proceeding to to federal court, so we've got judicial review in there. Final question, Mr. Schenck. Uh, the cumulative impact of regulation. That's what we hear about a lot. Main Street, our bill, addresses this by requiring the federal prudential banking agencies to periodically review the cumulative impact Um, how would requiring these regulators to consider these cumulative costs ensure that the regulatory environment isn't duplicative and overly burdensome for these institutions?

Thank you for the question, Mister Chairman, and we talk a lot about regulation and for a period of time we saw regulation that collectively was so over burdensome that it threatened the livelihood of some of our banks in this country and in Kentucky. And there's no better example of that than ten seventy-one, as we were going through that, where banks were subject to reporting, with us making as few as one hundred small business loans. And they were saying to us they were spending hundreds of thousands of dollars, if not millions of dollars, to implement a rule. Now, thankfully, that rule has changed, but that was after years of litigation and years of fighting to get that where it is today. But, um, where we are is that at the end of the day, in having safe and sound banking system, we have to have consistency. And as as these reach together, we'll be able to put together a framework. And your bill does that.

And and my my time has expired and I've uh as I think some of my colleagues

Thank you.

supported legislation to actually repeal ten seventy-one altogether, but certainly uh the direction of travel is positive, but we we need to continue to to make sure that that is uh not bur- overly burdensome uh on small business lending and force community banks to exit small business lending, because of that burden. Um, we'll move on to uh, Mr. Davidson's next round of questioning.

Uh, thanks again, Chairman, and and again thanks to you and your team for hosting us here. It's been a really good field hearing, helpful to me and my team. And, you know, speaking about regulation, I mean it's you know, banks are pretty regulated, right? Uh, we're talking about how uh heavily regulated, and you think about state chartered banks, uh it's it's one thing to be regulated by your own state. Uh, but there are states that are out there trying to regulate banks in other states. Uh, so they they don't think the national bank regulators do enough. They don't think your state regulator does enough. So they wanna apply their state policy to out of state banks. Colorado, Oregon, some of these states are trying to uh not regulate their c- their citizens, uh not even regulate their banks, they're trying to regulate those. So can you comment on how important it is for you guys to stay competitive, with national banks and to keep the c- competitive les- landscape, you just have your state to regulate you versus every other state.

Well, I I do think it's extremely important that we have a fair and level playing field and that we understand um regulatory impacts in in our markets. You know, we're a community bank, um we don't have uh, you know, complex uh behind the scenes derivative trading, we don't have trading desks, we don't uh operate under um these the these complex scenarios that were too big to fail. And so, I I like having a regulatory environment that allows me to know what the goal posts are and know how to achieve those goal posts know where I need to have some corrective action and I'll look at my regulatory group as a team with the bank in trying to make sure that we're doing the right things for our communities.

Yeah, well, thank you for that. I mean, one of the big areas is uh interest rates where, you know, some Colorado's basically trying to cap uh, you know, what banks can charge for interest rates and usually the laws maybe are different amongst the states, but if you're running it, you you know, you should be regulated in the state you're in. That was always the way it was viewed until recently. I think we're gonna win in court, but that's why I introduced the American Lending Fairness Act, so hopefully along with this we'll get that across the finish line this year. Um. You know, one of the big things that you're doing, you have uh know your customer laws, community banks are right there close to the customers, any money laundering, and of course we wanna catch bad guys. But we have things like the suspicious activity reports that we're collecting massive amounts of information on, not getting much feedback on it. So FinCEN, the Financial Crimes Enforcement Networks, in the process of up updating some of that, One of the other things is you have fraud and scams going on where, you know, state and local law enforcement's overwhelmed. I mean, these are international, transnational criminal organizations often behind it. But when the money's left the bank or left the uh, you know, the person intentionally sent it to some offshore uh, you know, third party. You did what the customer asked you to do. It's hard to recover it. But you get the sta you hear a crime has actually occurred And I don't know that we're spending enough energy at FinCEN building the intelligence picture on crimes that have actually occurred versus crimes that might occur you start dinovo banks and everything else you could have all this it's sort of like a tax you have to fund all this compliance cost at a certain level just to operate the bank so how important is it that we know whether that's effective or not versus just a high hurdle.

I'll ju- I'll just start by saying from our side, uh, I'm not as well versed from the FinCEN side, but everything that you just talked about goes back to community banks and how important we are uh on the landscape just because we know our customers so much better. Um, because check fraud and and those tyi- that type of fraud is still probably the most prevalent. Uh, and we are the ones that know our customers the best, and probably can help protect them as much as anybody. So, we do know that there's a lot of regulation around FinCEN and our Director of Operations is on top of it. But we sleep a little bit better in the fact that we know our customers probably better than most large banks.

Yeah. Thank you. Mister Shunk, when you think about all your member banks, um the kinds of things they're dealing with, with the the kind of BSA, AML, know your customer compliance. Uh, along with there are other cyber risks just to protecting uh safety and soundness for the bank, what are the real threats uh that that you and your member banks are confronting?

Uh, there's existential threats everywhere. Um, the reality is fraud changes by the day. Um, you know, but when we when you talk a little bit about some of the thresholds and things with CTR filings and that they file more paperwork than sometimes it can actually get to addressing the situation. Um and we have a fraud academy with forty-three states that participate it goes across the country. We thank Chairman Barr for his work in in amending some of the s- the s- safe harbors of three fourteen B. But it's critical that we share information's whether it's from Ohio or Kentucky or Florida or anywhere else so that we know the trends coming up and we see it move along, expressways and across county lines. Um, but information sharing's gonna be critical and I don't think it's in the, necessarily in the CTR formal filing space, but amongst us as an industry on how we can share in real time to take on criminals.

Yeah, thanks and thanks uh, Mister Barr for this great piece of legislation. It'll get after some of that uh, just by making sure it's not uh, used as a weapon to say, " Well, I don't know, you don't have enough CTRs for a bank your size." uh well maybe we have less risky customers. So uh thanks for this uh smart piece of legislation and I yield back.

Thank you, Mister Davidson, for your participation in our field hearing. And I now uh recognize Mister Downing for his final uh five minutes of questioning.

Thank you, Mister Chair. You know, something I hear from my banks in Montana all the time is the needless cost of compliance. Uh, a couple of things that, uh, came up in this, uh, conversation that caught my attention was first, uh, Mister Hawkins, you made a comment, " We know our customers." And when I talk to a lot of my len- and we also - there's a couple of you that, uh, mentioned, uh, CFPP and rule ten seventy-one. And so that's something that comes up very often when I'm talking to my lender, my bankers. and they they wanna l- l- they wanna underwrite the person they know, in the community kn- they know, in the business they know. And we've got, you know, ten seventy-one with eighty-eight extra questions and, you know, eight hundred pages of of a rule there that uh it's not only compliance cost, not only slowing things down, but it's frustrating the customer of trying to go through all those boxes and asking all those questions. So I'm I'm glad that you know, that uh we - we touched upon that because I - I just wanna let you know, we're - we're not done in our attempts to reform that because it's - it's definitely uh out of sync on what's actually creating safety and value. It's gone well beyond that. So I'm - I'm gonna stick with uh Mr. Hawkins for one moment. So in - you know, with all this in mind, how much of your bank's resources and employees' time get devoted to compliance that you believe provides minimal benefit to your customers?

Well, that's a - a very interesting question. I can go back and say, compared to what we looked like twenty years ago, it's a lot different today. Twenty years ago, we had one person in compliance. And that was a part-time position. Today, we are at about seven people that are directly involved in some form or fashion related to just compliance efforts Just checking the boxes, just making sure that we meet the regulatory requirements. Um, it is a constant time-consuming thing that - that we're having to allocate significant resources to. I'd love to be able to reduce those resources and pour them back into lending. I think that that would be a win-win for everybody.

Thank you. Uh, uh, on a similar note, but I'm gonna move to Mr. Schank for a moment. You know, when these compliance costs go up, Where does that show up? Is that fewer loans, higher rates, lower returns, all of the above?

All of the above. I mean, we saw the impact of what ten seventy-one was gonna have on our communities. And we were talking to bankers, we were talking about millions of dollars less deployed to their communities, not to mention the risk that was gonna be placed at consumers in having to answer eighty-one questions and put their personal information out there without even addressing their loan requests. That is stymieing uh lending at its finest. And those are the type of things that that that don't work.

Thank you. I'm gonna move to Mister Odd here. Um, as a newly chartered community bank, what are some of the biggest regulatory challenges you face in running your institution?

I wish I had a better answer for you, Congressman. Uh, we hadn't gotten that far yet. Uh, but uh, but we we've had our hands full just trying to get set up. But uh, ask me in a year and I'll have plenty to complain about, I'm sure. So.

Okay, sounds like we're coming back to Kentucky in a year. Not a bad place to visit. So uh, then I'll - I'll move back to uh, Mr. Hawkins. Uh, has the current regulatory framework made it more difficult for your bank to expand in your opinion, and why?

Yeah, one of the things that um, the current regulatory environment, I'm gonna speak, you know, we've talked about - a lot about capital, community bank leverage ratio, we've talked about access to the discount window. One of the things that I'm gonna focus on is reciprocal deposits. We have about a hundred and fifty million dollars in public funds on our balance sheet. And we wanna serve our public uh mar- you know, the the public depositors in our markets. We wanna make sure that we provide services for them, but as you know, we have to collateralize those deposits in some form or fashion. Currently, reciprocal deposits, we can use, we can actually collateralize about half of that. The other half we have to do something else to collateralize that with. Um, with the changes in in the uh in in this new act, we're gonna actually be able to really double that amount and pretty much be able to put all of those public funds into reciprocal arrangements without being treated as brokered deposits that's huge for us because that means we don't have to have securities on our balance sheet we can actually reduce those securities, and plow funds right back into lending. I think it's gonna be great for our balance sheet and for our income statement, but I think it's really gonna be great for our communities when we can do that.

Excellent. So in my last couple of seconds here I just wanna say, you know, we talk about the American dream all the time. I think one of you had mentioned that earlier. And uh, that's having a home, uh, building a small business, being able to, you know, make something that is, I think, really quintessentially American. And one of the biggest drivers in that is access to capital. and streamlining that access to capital in a safe and sound manner. And I really appreciate, you know, the work that you're all doing and your time here in this committee because it - it's important and uh, Mister Chairman, thank you again for having me in your beautiful state here. And on that I yield the re- remainder of my time.

Well, thank you very much uh, Mister Downing uh, and you come from a beautiful state as well uh, your mountains are a little taller than ours uh and and Glacier National Park but uh but thank you for coming to horse country,

Little bit taller.

bourbon country, the Commonwealth of Kentucky and as you can tell, great community financial institutions as well. Uh and I want to thank all of our witnesses for their testimony today, very insightful, very helpful. Uh we are uh striving uh to pass this legislation. So we can achieve all of the goals that you all uh discussed here today. I wanna thank my good friend and colleague from Ohio, uh, Mister Davidson, for also making a slightly shorter trip than Montana uh to Kentucky, uh, but we couldn't have done this field hearing without uh your uh very productive and constructive involvement and we we appreciate you bringing your expertise and your great questions uh to this I wanna once again thank our our terrific staff. It it's kind of a herculean effort to actually bring an official congressional hearing out into the field. So I wanna thank uh again Mara Woosley, uh the subcommittee staff director, James Whitaker, our terrific chief counsel, Danny Reeves, the director of member services and coalitions, David McGrath, uh professional staff member of the subcommittee, and Riley Pingree, the deputy communications director for the committee. And also uh Larry Seyfried, on my staff the deputy uh uh my deputy chief of staff and legislative director, And McKenzie uh Poe is here.

Josephine.

Uh and then also Mary Rosato, my Chief of Staff is here.

Josephine.

And Josephine is also here. We have a lot of staff here who made this happen. So thanks to all of you for doing that uh and being here. Um and thanks to all of you all in the in the audience who uh took time to um to be here and and to pay attention to to what we think is very impactful and important legislation that can really help and I'll just kinda conclude with an editorial comment. Look, uh, we have a diverse economy, we have a diverse financial system, uh, there's a lot of competition and choice within that ecosystem, within the banking sector, credit unions, non-banks, fintechs, digital assets, there's a lot of innovation that's happening, there's a lot of diversity, that diversity is a strength, it's a source of economic growth that's a source of financial stability. Uh, but we cannot have a dynamic economy in this country without a strong community banking sector. Uh, these are the American dream providers. And we are so grateful for all of you all for for for for helping strengthen our communities and providing that that dream of home ownership and that first time loan to that entrepreneur. uh, to build a business and build the American dream. So, uh, thank thanks to all of you all and that's what we're trying to preserve, protect and advance in this legislation. Without objection, all members will have five legislative days to submit additional written questions uh, for the witnesses to the chair. The questions will be forwarded to the witnesses for the response. Witnesses please respond no later than October twenty-third. twenty twenty six. This hearing is now adjourned. And I would like to invite uh President David McFadden, President of uh Eastern Kentucky University, to make an announcement, an invitation uh