February 27th, 2017
The Honorable Daniel Tarullo
Governor, Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551
The Honorable Martin J. Gruenberg
Chairman, FDIC
Washington, D.C.
The Honorable Thomas J. Curry
Comptroller, OCC
Washington, D.C.
Dear Governor Tarullo, Chairman Gruenberg and Comptroller Curry:
As the Federal Financial Institutions Examination Council (FFIEC) prepares to finalize the second
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA)1 review and deliver a report to
Congress detailing efforts made by the Federal banking agencies (the agencies), the State Liaison
Committee2 (SLC) offers its perspective on certain issues raised through the process. The SLC would like
to underscore its priorities with respect to the matters at hand and offer suggestions to further EGRPRA
efforts made by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit
Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).3
The SLC serves as a conduit through which state regulators can share their regulatory and supervisory
perspectives with its fellow FFIEC members. As the chartering and supervisory authorities for over 75%
of the banks in the United States, state regulators are charged with protecting consumers, ensuring
safety and soundness, and encouraging economic prosperity in their states. State bank regulators,
represented by the SLC, charter approximately 4,713 banks with $5.3 trillion assets under supervision,
and license and supervise over 177,000 mortgage companies, branches and individual mortgage loan
originators. In addition to commercial banks and mortgage entities, state regulators supervise credit
unions, savings banks, savings and loan associations, bankers’ banks, credit card banks, industrial loan
companies, and non-depository trust companies.
1
See 12 U.S.C. 3311. The stated goal of the statute is to identify outdated, unnecessary, or unduly burdensome
regulations, and consider how to reduce regulatory burden on insured depository institutions while, at the same
time, ensuring their safety and soundness and the safety and soundness of the financial system.
2
Pursuant to 12 U.S.C. 3306, the SLC is comprised of five representatives of State agencies that supervise financial
institutions, including the SLC Chair who is a voting member of the Council.
3
The SLC commends the NCUA for its voluntary participation in the EGRPRA process. As the NCUA is not statutorily
mandated by the EGRPRA, this letter only addresses the federal banking agencies within the framework of the
FFIEC. State regulators filed comments directly with the NCUA, pursuant to the public request for comment
throughout the NCUA’s voluntary EGRPRA review.
1
SLC members and other state bank supervisors participated in several EGRPRA Outreach meetings held
during 2014 and 2015. Based on these discussions and conversations with industry and regulator
stakeholders, state regulators have identified opportunities to fulfill EGRPRA’s stated goals, without
compromising safety and soundness or consumer protections, including:
1.
2.
3.
4.
I.
The simplification of capital rules for smaller and less-complex institutions;
A continuation and expansion of Call Report burden reduction efforts;
A reexamination of regulatory appraisal thresholds for federally-related transactions; and
A reevaluation of the use of the Herfindahl-Hirschman Index in determining market
concentration.
Capital Rule Simplification
State banking regulators strongly support requiring sufficient, quality capital. However, the costs
associated with the complexity of the current rules disproportionately impact smaller institutions, and
potentially inhibit community banks from serving the credit needs of their markets. We urge the
agencies to hasten efforts to devise a more practical approach to regulatory capital for small, noncomplex banks. In both written and in-person comments at the EGRPRA Outreach meetings, small bank
stakeholders and industry representatives raised concerns regarding how various aspects of the revised
capital rules – such as high volatility commercial real estate and the treatment of mortgage servicing
assets– are affecting small bank operations. In addition to specific concerns, commenters expressed that
the general complexity of the rules requires institutions to redirect resources that could otherwise be
employed to serve the financial needs of their communities. SLC members recognize that simplifying the
capital rules will be a significant undertaking, and are prepared to support the agencies’ efforts to tailor
capital requirements commensurate with smaller and less complex institutions.
II.
Call Report Burden Reduction
Regulators agree that the complexity of the capital rules complicate Call Report preparation, and
recognize that simplifying the capital standards will meaningfully reduce the burden associated with
reporting Schedule RC-R (Regulatory Capital). As it stands, significant resources are required to interpret
lengthy, complicated instructions and gather data necessary to complete the Schedule. In addition to
the capital schedule, further simplification of the Call Report is necessary to reduce burden on smaller
and less complex banks.
SLC members participated in and acknowledge the deliberate efforts of the FFIEC members that resulted
in the creation of the new Consolidated Reports of Condition and Income for Eligible Small Institutions
(FFIEC 051). A more streamlined Call Report was a requisite first step; however, industry reaction
indicates that this work needs to accelerate and broaden in scope. Small and less complex institutions
continue to comment on the time-consuming effort and cost associated with completing several
Schedules, as well as line items that require a high degree of manual intervention. Even after the burden
reduction process that resulted in FFIEC 051, the aforementioned capital Schedule RC-R remains
fourteen pages long and comprises a significant portion of the full Call Report.
To further reduce Call Report-related burden on small and less complex banks, we look forward to
working with our fellow FFIEC members to expand eligibility criteria for FFIEC 051. Currently,
domestically-based institutions with assets less than $1 billion will be eligible to file FFIEC 051. We
2
recommend consideration of an indexed, multi-factor set of criteria such as the FDIC’s Community Bank
Research definition from its 2012 Community Banking Study.4 In addition to the adoption of a broader
eligibility threshold for FFIEC 051, we look forward to participating in further Call Report improvement
efforts while striving to ensure that simplification does not unduly compromise the ability of regulators
to monitor financial performance and risk.
III.
Appraisals for Federally-Related Transactions
The SLC members find the appraisal regulation thresholds, established by the agencies to implement the
Financial Institutions Reform Recovery and Enforcement Act (FIRREA)5 to be outdated and are
concerned they may unnecessarily impede credit availability, particularly in rural and underserved urban
markets. The current threshold of $250,000 for both residential and nonresidential (commercial) real
estate transactions has not been adjusted since 1994.6 Real estate loans over the dollar threshold must
be supported by an appraisal performed by a licensed or certified appraiser, while loans below the
threshold may have the market value of the property determined by an evaluation7 that conforms to
published regulatory guidelines.8 In many instances, the costs associated with an appraisal on a
relatively small real estate loan are high in comparison to the property’s purchase price. Further, the
lack or limited number of qualified appraisers in numerous markets throughout the country can lead to
even higher appraisal costs and delays in the real estate transaction process. Costs, appraiser shortages,
outdated thresholds, as well as the inflexible nature of the appraisal thresholds, impact credit
availability. These issues, singly or in combination, can hamper real estate lending activity. The SLC also
notes that while real estate transactions in rural areas may comprise a low volume of the total
transactions nationwide, each rural transaction can have significant impact on the local community.
State regulators support updating the dollar thresholds for federally related transactions requiring an
appraisal to reflect inflation. We also suggest indexing the thresholds to account for changes in real
estate value over time. SLC members believe a reasonable increase in the threshold level does not
present an undue threat to the safety and soundness of institutions, and that real estate evaluations
conforming with regulatory guidance provide reasonable support for market values as well as protection
for consumers. Evaluations also offer cost control for both financial institutions and borrowers.
The SLC recognizes that FIRREA requires Consumer Financial Protection Bureau (CFPB) concurrence that
the threshold level provides reasonable protection for consumers purchasing 1-4 unit single-family
residences.9 We also acknowledge that the appraisal requirements of the Government-Sponsored
4
See here. The FDIC Community Banking Study (December 2012) defines an institution with assets over $1 billion
as a community bank if loans to assets are greater than 33%, core deposits to assets are greater than 50%, it
operates more than one office but no more than the indexed maximum number of offices, it serves equal to or less
than two large MSAs with offices, it serves equal to or less than three states with offices, and no single office has
more deposits than the indexed maximum branch deposit size.
5
See 12 CFR 34.43
6
See 12 C.F.R. 323.3(a)(1)
7
See 12 C.F.R. 323.3 (b). An evaluation provides an estimate of the property’s market value but does not have to
be performed by a state licensed or certified appraiser.
8
See here and here. Regulatory expectations for evaluations are detailed within the December 10, 2010
Interagency Appraisal and Evaluation Guidelines, and the March 4, 2016 Interagency Advisory on Use of
Evaluations in Real Estate-Related Financial Transactions.
9
See 12 U.S.C 3341(b)
3
Enterprises (GSEs) are unaffected by the dollar thresholds set by the agencies. However, action by the
agencies to update the residential real estate threshold would provide flexibility for institutions to make
and retain a greater number of such loans, which would still be subject to the agencies’ criteria for
evaluations as well as safety and soundness examination by bank regulatory authorities.
In addition to raising the appraisal dollar thresholds, we suggest the agencies consider a transactionbased, de-minimis test for real estate loans. A de-minimis test presents a simple option for relief that
would significantly reduce regulatory burden for banks that retain a limited number of real estate loans
exempt from the appraisal requirements. SLC members urge the agencies to consider the effective,
simple, and lasting solutions discussed above.
Agencies’ Options for Relief
The agencies have offered a solution to the appraiser shortage whereby requests may be made to the
Appraisal Subcommittee10 for temporary waivers of any requirement relating to certification or licensing
of a person to perform appraisals.11 This would not waive the appraisal requirement for real estate
transactions above the thresholds, but suspend the requirement that appraisals be performed by
certified or licensed individuals. SLC members question the feasibility of this option. Instituting waiver
proceedings to address widespread appraiser shortages is untested. The related regulatory process is
not expedient, and provisions for waiver termination are required. It is unclear whether this option
creates a third category of estimating the market value of real property: a USPAP-conforming appraisal
performed by individuals otherwise unauthorized to do so.
In addition to the waiver option, the agencies also emphasize that state appraiser certifying and
licensing agencies may temporarily recognize the credentials of an appraiser issued by another state
under certain conditions.12 This transfer of certifications across state lines is outside the authority of the
agencies, presents limited potential relief, and assumes the incoming appraiser has sufficient familiarity
with the market to make a reasonable determination of value. Based on the experience of state
regulators, the greatest factor impacting the reliability of real estate market value estimates – whether
in the form of an appraisal or an evaluation – is the preparer’s familiarity with the specific market.
After considering both options, the SLC has concluded neither is likely to materially improve the state of
appraiser availability in affected markets. Both are temporary, unclear, and do not address the
persistent nature of the issue. The associated cost to borrowers is also unknown.
IV.
Herfindahl-Hirschman Index
The SLC recommends a reevaluation of how the Herfindahl-Hirschman Index (HHI) is used when
considering the effects on market competition of proposed mergers. This topic was heavily discussed at
the Federal Reserve Bank of Kansas City EGRPRA Outreach meeting. The HHI serves as the principle
10
The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC) was created
on August 9, 1989, pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(Title XI). Title XI’s purpose is to “provide that Federal financial and public policy interests in real estate
transactions will be protected by requiring that real estate appraisals utilized in connection with federally related
transactions are performed in writing, in accordance with uniform standards, by individuals whose competency
has been demonstrated and whose professional conduct will be subject to effective supervision.”
11
See 12 C.F.R. Part 1102
12
See 12 U.S.C. 3351(a)
4
measure of market concentration, and its efficacy is highly dependent upon both the definition of the
market(s) and the products or services considered in determining market share. The agencies focus on
branch networks and deposit shares of depository institutions in a local banking market. Unless
specified on a case-by-case basis, non-depositories’ market influence is not factored into HHI
calculations, and credit union deposits must fulfill specific conditions to be included, albeit often at a
lower weight.13 SLC members recognize that due to the reliance on deposits and the discounting of
credit unions’ deposit influence on the market, the resultant HHI calculation does not offer a
representative assessment of market concentration. Consequently, as currently employed, use of the
HHI may impede in-market merger and acquisition activity in markets populated by small institutions.
The HHI’s reliance on deposit market-share to determine market concentration is problematic, as nondepositories with substantial market influence are not considered. There are numerous examples of
institutions that, despite engaging in a considerable degree of activity, are not accounted for. Because of
its reliance on deposits as a proxy for activity, the HHI does not consider the market share of a wide
breadth of financial firms, including: specialty lenders in mortgages and credit cards, commercial lending
finance companies, accounts receivable finance companies, and money market mutual funds for
deposits. SLC members have found that, without consideration of the market influence of nondepository financial firms, the HHI cannot provide a realistic representation of market concentration.
For example, in many rural markets, Farm Credit Associations (FCAs) hold nearly as much agricultural
loan market-share as their insured depository counterparts, but are not considered in HHI calculations.
Researchers at the Federal Reserve Bank of Kansas City14 found that, in assessments of market
concentration in rural areas, non-depository FCA market influence was not considered because of a lack
of deposits. Hypothetical inclusion of FCA market influence in HHI calculations indicates a lower degree
of market concentration. Researchers also found that when measures of market concentration include
FCAs, in-market mergers are less likely to be halted because of competitive concerns. This example
illustrates that the HHI’s dependence on deposits as the measure of market influence not only provides
a limited view of the market, but that this practice has a demonstrable effect on in-market merger and
acquisition activity.
The SLC recommends that, if deposits remain the primary data used to construct market shares, credit
union deposits be weighted commensurate with their market influence. Generally, if a credit union is
included in HHI calculations, its deposits are applied a weight of 50%, which suggests their competitive
influence in the deposit market is half that of another institution. SLC members find that the general
weight applied to credit union deposits underestimates their market influence.
The HHI’s reliance on deposits as a proxy for market share could inhibit small firms from engaging in inmarket merger and acquisition activity. Furthermore, this disadvantages in-market mergers of peer
institutions and could result in the entry of a large, deposit-gathering branch of a nationwide institution.
13
See here. Credit unions are typically included in these calculations if two conditions are met: (1) the field of
membership includes all, or almost all, of the market population, and (2) the credit union's branches are easily
accessible to the general public. In such instances, a credit union's deposits will generally be given 50% weight.
Commercial bank deposits are weighted at 100%, and deposits of thrifts are weighted at 50%. Thrifts may receive
100% weight under certain conditions.
14
See here. The Farm Credit System makes loans to their member borrowers through 76 Farm Credit Associations.
Farm Credit Associations originated about 40% of agricultural loans in 2014.
5
In-market acquisitions better serve consumer preference, as the majority would rather hold deposits at
a community bank.15 The SLC recommends that the agencies reconsider the HHI’s reliance on deposits
and the weight applied to credit union deposits, as it may place smaller institutions at a disadvantage.
We appreciate the efforts made by the Federal banking agencies over the two-year EGRPRA process.
State regulators agree there is much to be done to better tailor the current regulatory environment to
the diversity of the financial services industry. In the spirit of fulfilling the goals of the Economic Growth
and Paperwork Reduction Act, SLC members offer these straightforward and practical recommendations
to address certain persistent regulatory challenges. We look forward to continued discussion and
coordination with the agencies and our other fellow FFIEC members.
Sincerely,
Karen K. Lawson, Chair
State Liaison Committee
15
See here. According to the 2015 Consumer Banking Insights Study, if everything were equal, 66% of U.S. adults
would rather bank at a community bank or credit union than a larger competitor.
6