Please Support Community Bank Priorities

Please Support Community Bank Priorities October 2018 On behalf of the 320 community banks represented by the Community Bankers Association of Illinois (CBAI) we urge your support for our positions on importance issues facing Illinois community banks. Support Swift Implementation of the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) Support Additional Meaningful Regulatory Relief for Community Banks Support Community Banks in Payments System Improvements Support Modifying the FDIC s Deposit Rate Caps Support Modernizing the Community Reinvestment Act (CRA) Support Sound Principles for GSE Reform Support Agriculture and Rural America Support Community Bank Position on Credit Unions and the Farm Credit System and Oppose Their Expanded Powers

CBAI and community bankers are hopeful that Congress will pass additional long-overdue, welldeserved and meaningful regulatory relief for community banks. Community banks continue to suffocate under an unprecedented regulatory burden. Complying with this burden is diverting resources away from serving customers and communities and towards compliance review and documentation. For the health of our Nation s financial system, now is the time for additional meaningful Congressional and regulatory action. Support Swift Implementation of the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) CBAI sincerely thanks the bi-partisan majority of the Illinois Congressional Delegation who voted in favor of the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155): Mike Bost (R-12 th ), Danny Davis (D-7 th ), Rodney Davis (R-13 th ), Bill Foster (D-11 th ), Randy Hultgren (R-14 th ), Adam Kinzinger (R-16 th ), Darin LaHood (R-18 th ), Peter Roskam (R-6 th ), Brad Schneider (D-10 th ) and John Shimkus (R-15 th ). The banking regulators must now focus on the implementation of the regulatory relief contained in S. 2155. Community bankers, the associations that represent their interests, and Congress which represent this vital economic constituency must be diligent in insisting on the swift implementation of the many beneficial provisions in this legislation. Support Additional Meaningful Regulatory Relief for Community Banks While community bankers were greatly relieved by the passage of the regulatory relief bill more needs to be accomplished to reverse the trend of losing one community bank a day to industry consolidation, which when combined with an increased concentration of banking assets in the largest banks, poses a pernicious threat to our financial system and economy. The additional regulatory relief community bankers are seeking include: Modernize the Bank Secrecy Act (BSA) by raising the currency transaction report (CTR) threshold from $10,000 to $30,000 and indexing future increases, on an annual basis for inflation. The current threshold was established in 1970, it is significantly outdated and requires capturing many more transactions than was ever originally intended. A higher threshold would produce more targeted and useful information for law enforcement and reduce the regulatory burden on community banks. Create a tax credit to offset the cost of BSA compliance. Community banks have long been enlisted in the fight against identity theft, financial fraud, money laundering, and terrorist financing. In recent years monitoring and reporting this activity has become

increasingly important both nationally and globally. As good citizens, community banks are proud to fulfill their responsibility to assist in identifying illicit actors but doing so comes with a very real regulatory burden including significant costs of compliance which fall particularly hard on community banks. A tax credit to offset the cost of BSA compliance will help compensate community banks for this additional burden. Fully repeal the statutory authority (Dodd-Frank Section 1071) for new small business data collection. While community banks unfortunately represent less than 20% of banking industry assets they make 50% of the small business loans and 80% of agricultural loans. This obviously suggests community banks treat their customers fairly and with respect. The additional reporting is meant to facilitate the enforcement of fair lending laws in small business lending which the data clearly suggests is not an issue at community banks. This additional analysis and reporting requirement fall disproportionately hard on community banks that lack scale and compliance resources and should be repealed. Support Community Banks in Payments System Improvements A fast and secure payments system is at the very foundation of our financial services and economy. The number of payment options and the pace of change in this area are not expected to abate in the future. Unfortunately, community banks do not account for a majority of payment transactions and therefore must rely on the Federal Reserve to provide access, speed and security for all members of the payments system. Community banks, however, provide half of the loans to small businesses and the vast majority of agricultural loans, so a payments system that does not serve all, or disadvantages community banks, will have a devastating impact on the nation s consumers, agriculture and small businesses. CBAI is concerned about payments system improvements that are dominated by the largest banks and financial firms as well as private-sector non-bank solutions. The largest banks endangered our financial system and economy during the financial crisis while non-banks present significantly different risks and are not subject to the same safety and soundness regulations as community banks. Therefore, several non-large-bank controlled alternatives should be incorporated into an improved payments system, and non-banks must be subject to the same robust safety and soundness regulations (including examination and enforcement) as community banks. Implementing these safeguards will increase competition, reduce concentration and other risks, and be less likely to disadvantage community banks. CBAI has met with senior officers of the Federal Reserve Bank of Chicago and St. Louis who are responsible for this initiative and has submitted comments to the Board of Governors regarding the Fed s involvement in payments system improvements. CBAI presented a detailed analysis and recommendations that are progressive, competitive and secure, and that offer fair

and open access to all community banks regardless of size, charter type or location so that they can meet the existing and evolving payment needs of their customers and communities. The specific recommendations to the Fed included: Providing central bank settlement; Using its connectivity to provide all financial institutions with access to real-time payments; Serving as an operator for real-time payments as it does for checks, ACH and wire transfers; and, Operating as a payments directory that would link to financial and other private sector directories. Following these recommendations will ensure the Federal Reserve s actions are consistent with its own statement of functions and the Payment System Policy Statement and will satisfy its required criteria before introducing a new service or major enhancement. Support Modifying the FDIC s Deposit Rate Caps CBAI recently submitted a letter to Chair Jelena McWilliams of the Federal Deposit Insurance Corporation (FDIC) urging the FDIC to modify Deposit Rate Caps in the brokered-deposit regulations to avoid the harmful consequences of these restrictions on community banks. In its letter to the FDIC the CBAI highlighted the following issues: The Deposit Rate Caps do not reflect either the realities of competitive funding or investment opportunities community banks face by not more closely equating the Caps to rates for Federal Home Loan Bank Advances and U.S. Treasury Securities. The largest banks asset sizes, extensive branch networks and their continued too-big-tofail subsidies negatively impact the calculation of Rate Caps which harm primarily community banks. The calculation of the Rate Caps ignores promotional and negotiated rates which are more prevalent at community banks and therefore do not present a complete and accurate picture of the deposit-rate landscape, are not competitive and negatively impact a community bank s ability to obtain new or retain existing deposits. The regulations are not sufficiently tailored because they do not differentiate between a bank that is either adequately or undercapitalized," where the bank is on its path toward becoming well capitalized and the extent of management cooperation with its regulators in resolving the capital issues.

The exclusion of credit unions from the calculation of the Rate Caps wrongly ignores thousands of financial institutions that are similar to community banks and would likely have a positive impact on the Caps. The current problems and consequences of the Deposit Rate Caps are numerous and their impact on a small but not insignificant number of community banks is affecting their ability to grow and thrive. CBAI urged the FDIC to modify the brokered-deposit restrictions and we urge Congressional support for CBAI s recommendations. Support Modernizing the Community Reinvestment Act (CRA) Community banks have traditionally excelled in the performance of their Community Reinvestment Act (CRA) compliance and examinations. This high level of performance is indicative of their exemplary treatment of their customers and communities and not weak requirements or a flawed examination process that require strengthening. The OCC has begun the regulators effort for the modernization of the CRA with the publication of an Advanced Notice of Proposed Rulemaking (ANPR). CBAI will be responding to the ANPR specifically highlighting the following regarding the CRA: What is working work and needs to be retained; What should be changed to encourage more lending, investment and services where they are needed the most; What is the most cumbersome, complex and outdated that needs to be eliminated; What should be included to better reflect how banking services are evolving; What needs to be changed to most accurately reflect a community bank s credit for CRA activity; How should the examination process be improved; What should be done to decrease the regulatory burden on community banks; and, What are other ways to improve the CRA? CBAI urges Congress to support the meaningful modernization of the CRA that does not impose an additional regulatory burden on community banks. CBAI also urges that all financial service providers be subject to the CRA to provide a complete picture of their performance in serving their communities. A modernization of the CRA that does not encompass credit unions and fintechs will be a sham.

Support Sound Principles for GSE Reform American homeowners have benefited from the critical role Fannie Mae and Freddie Mac have played in helping finance homeownership for many decades. The GSEs have provided a steady, reliable source of funding for home mortgage lending through all economic cycles and in all markets. The GSEs operate as friendly aggregators and a source of capital for mortgage lending institutions of all sizes and charters including those lenders in rural areas. Community banks depend on the GSEs for direct access to the secondary market without having to sell their loans through larger financial institutions that compete with them. The GSEs help support the community bank business model of outstanding local service by allowing them to retain the servicing of the loans they sell, which helps to keep delinquencies and foreclosures low. And, unlike other private investors or aggregators, the GSEs have a mandate to serve all markets at all times which is critical to maintaining liquidity when the markets are experiencing financial stress. The following should be accomplished in GSE reform: The GSEs must be allowed to rebuild their capital buffers; Lenders should have competitive, equal, direct access on a single loan basis; The GSEs must be adequately capitalized, liquid, and reliable enough to effectively serve the entire mortgage industry, in all markets, at all times, including during the most challenging economic circumstances; Credit risk transfers must meet targeted economic returns; An explicit government guarantee on GSE MBS is needed; The TBA market for GSE MBS must be preserved; Strong oversight from a single regulator will promote sound operation; Originators must have the option to retain servicing, and servicing fees must be reasonable; Complexity of structure and operations should not force consolidation; GSE assets [automated underwriting technology, loan delivery portals, Common Securitization Platform, and multi-family housing businesses] must not be sold or transferred to the private market; The purpose and activities of the GSEs should be appropriately limited and must be focused on supporting residential and multifamily housing; GSEs must not be allowed to compete with originators at the retail level, where they would enjoy an unfair advantage; The regional structure, special functions and purposes of the Federal Home Loan Banks (FHLB) must be recognized and maintained and the FHLB System must remain a financially sound, stable and reliable source of funding for its members: and,

GSE shareholder rights must be upheld. GSE reform remains critically important to the future of the housing market and the U.S. economy. A strong plan to improve their capital position, grow earnings, manage expenses and restore high-quality service and increased liquidity to the mortgage market will drive a more robust primary and secondary mortgage market. Following these principals in the reform of the GSEs will make the housing finance system safer and sounder, providing access to lenders of all sizes and the communities they serve. Support Agriculture and Rural America A vibrant rural economy is vital to America s prosperity. Community banks which fund nearly 80% of all agricultural loans, serve a crucial role in creating and sustaining rural economic prosperity. CBAI applauds the recent passage of Farm Bills in the U.S. House and Senate. CBAI encourages Congress to complete conference negotiations and agree on a final robust bi-partisan Bill to provide a strong safety net for farmers and ranchers. The final version of the Farm Bill must include adequate price-protection programs and enhanced USDA-guaranteed farm and business loan programs. In the reauthorization of crop insurance, programs must be protected by opposing provisions that would increase the cost of crop insurance, reduce the number of those eligible for crop insurance and thereby reduce the risk pool, or cut the efficient and effective private sector delivery of crop insurance. Support Community Bank Position on Credit Unions and Farm Credit System and Oppose Their Expansion of Powers Both credit unions and Farm Credit lenders have long-since strayed from their founding purposes, blatantly abusing their competitive advantages, and harming Illinois community banks. In Congress and with regulators, credit unions continue to advocate for an increase in the percentage of asset cap on member business lending, greater access to capital to fund growth, and an expansion of credit union membership. The National Credit Union Administration (NCUA), the cheerleader regulator of credit unions fully supports an expansionist agenda, much of which is a blatant end-around Congressional intent for credit unions to serve individuals of modest means and with a common bond.

Farm Credit lenders are supported in their expansionist agenda by their own cheerleader regulator, the Farm Credit Administration (FCA). CBAI recommends Congress convene joint committee hearings to investigate the operations, supervision, risks and financial soundness of the Farm Credit System (FCS), and its increasingly harmful impact on rural community banks. An investigative hearing would inform the House and Senate financial services and banking committees respectively about the systemic importance and bailout risks of the FCS (which is operating outside of its purview) and inform the agricultural committee about the impact of the FCS (which is the 13th largest financial institution within its purview) on the financial system and particularly rural community banks. A legislative initiative that would help close the competitive gap between community banks and credit unions/fcs lenders would be the creation of new tax credits or deductions for community bank lending to low- and middle-income individuals, businesses, farmers, and ranchers. These credits or deductions would help to sustain and strengthen lending to low- and moderate-income customers and America s farmers and ranchers and would help offset the competitive advantage enjoyed by tax-exempt credit unions and Farm Credit System lenders. CBAI urges a highly productive finish for the 115 th Congress with the passage of additional meaningful regulatory relief to strengthen community banks and our communities. Thank you very much for considering our positions on these important issues. ###