While the Committee is concerned that HUD/FHA overlooks structural and management problems, the Administration's new proposal to provide a hybrid Adjustable Rate Mortgage product may prove helpful in today's changing housing finance system. This type of innovation will provide affordability and hopefully diminish the significant and disproportionate rise in defaults by current one-year ARM products.

PUBLIC HOUSING

The Committee notes that HUD's budget provides for full funding of public housing operating subsidies. In past years, HUD's request for funding of the operating subsidy account was below 100 percent of the amount required by HUD's Performance Funding System formula. At the same time, local public housing authorities that took entrepreneurial or creative steps to increase their revenue by increasing non-rental income were punished by a subsequent further reduction in their operating subsidy. A major component of the public housing reforms in the "Quality Housing and Work Responsibility Act" addressed this problem by allowing PHAs to retain such income so long as it was used for low-income housing purposes. The intent was to encourage local housing authorities to increase their non-rental income for the benefit of the residents. Unfortunately, several public housing authorities, including the Chicago Housing Authority and their representatives, have informed the Committee that HUD has been slow to implement these beneficial reforms. The Committee will continue to review such concerns with the goal of ensuring that the Congressional intent of the legislation is achieved.

Financial Institutions and Consumer Credit

BANK AND BANK HOLDING COMPANY EXAMINATION FEES

The President's proposed budget again attempts to impose new fees on banks and bank holding companies as a mechanism for raising revenues. Under the Administration's proposal, the Federal Deposit Insurance Corporation (FDIC) would be required to impose examination fees on state-chartered banks that are not members of the Federal Reserve System (state non-member banks), in addition to the examination fees that such banks are assessed by their state banking regulators. The proposal would also require the Federal Reserve to impose examination fees on state member banks and inspection fees on bank holding companies. Neither the Federal Reserve nor the FDIC has expressed support for this proposal, and a bipartisan majority of the Committee has rejected similar Administration proposals in each of the past several years.

According to Administration estimates for FY 2001, the proposed fees would generate $92 million in additional revenues for the FDIC's Bank Insurance Fund, and $78 million in additional revenues for the U.S. Treasury from the Federal Reserve, for a combined total of $170 million. Over five years (2001-2005), OMB estimates the FDIC examination fees for state non-member banks would total $507 million, and the federal receipts generated by Federal Reserve fees on state member banks and bank holding companies would be $431 million.

There are several reasons why the Administration's proposal on examination fees is unnecessary and should be rejected.

State non-member banks already pay significant examination fees to their state chartering authorities. The costs of federal examinations by the FDIC are covered by the FDIC Bank Insurance Fund, which was built from the assessment of insurance premiums paid by insured depository institutions and accumulated earnings. Furthermore, the Bank Insurance Fund, to which the fees would be dedicated, is already fully capitalized. With regard to state member banks, the costs of federal examinations by the Federal Reserve are covered through the payment by banks of fees for various services provided by the Federal Reserve, and by banks' placement of sterile reserves with the Federal Reserve System.

The proposed additional fees on state banks would raise their operating costs and likely increase the cost of credit for individual consumers and businesses. In addition, the increased costs would disproportionately affect small banks, which comprise a substantial portion of our nation's state-chartered depository institutions. These small banks serve a critical role in meeting the credit needs of small businesses and farmers, particularly in communities that may not be adequately served by larger banking organizations. While the proposed budget exempts the smallest of state banks (those with less than $100 million in assets) from having to pay federal examination fees, state banks not meeting this exemption would be significantly disadvantaged.

Imposing additional fees on state banks would also potentially undermine our nation's historical dual banking system, by increasing the advantages of nationally-chartered banks at the expense of state-chartered banks. One potential result of the substantial additional fees proposed for state banks would be that many state-supervised institutions would abandon the state charter in favor of a national bank charter in order to avoid double examination fees. Such an occurrence would result in the expansion of our nation's banking assets under the umbrella of the Office of the Comptroller of the Currency (OCC), a division of the Department of the Treasury. It is important to note that the total assets of national banks comprise the bulk of the total assets of all commercial banks (nearly 59 percent), according to the latest figures available as of the third quarter of 1999. In addition, the total assets of all national banks have grown faster in the past few years than the assets of state banks. For example, since 1995, the assets of state banks have fallen from 44 percent to just 41percent of the total assets of commercial banks. Criticism that state banks are benefiting from the

Suggestions that state banks receive credit for state examination fee payments with respect to any new required federal examination fees in an effort to equalize the fee structure with national banks is also problematic for the dual banking system. The dual banking system provides incentives for state and federal agencies to keep fees at a reasonable level and conduct activities in the most efficient manner possible. Such an incentive could be lost if fees were equalized. Additionally, if state fees were to be increased to the level of federal fees and federal fees credited for that amount, there would be no additional revenue to the federal government. Such a scenario would contradict the original purpose of the Administration's proposal to charge state banks fees for federal examinations and thereby raise revenue. It should also be noted that the OCC discontinued charging separate examination fees in 1997. The OCC funds its operations by charging national banks semiannual assessments based on their asset size. Clearly, these assessments cover more than the cost of examinations. The proposal to charge state banks specific examination fees for federal examinations seems fundamentally unfair and could potentially be punitive, as it is unclear to what extent the assessments paid by national banks cover examination-related expenses.

The proposed imposition of fees on bank holding companies by the Federal Reserve is unnecessary and inconsistent with the new financial modernization law and the functional regulation of holding companies. First and foremost, the Bank Holding Company Act of 1956 (BHCA), which previously authorized the Federal Reserve Board to assess holding companies the cost of an examination was repealed by the Gramm-Leach-Bliley Act. Therefore, the Federal Reserve no longer has statutory authority to assess such fees. This amendment to the BHCA is a clear indication of Congressional opposition to imposing additional fees on our nation's financial institutions.

Second, even if the Federal Reserve continued to have such authority, imposing a holding company examination fee runs counter to the principle of functional regulation incorporated in the Gramm-Leach-Bliley Act. Since the principal assets of bank holding companies are their subsidiary banks, the Federal Reserve's examinations of bank holding companies rely primarily on the examination reports of the subsidiary banks already prepared by federal and state examiners. Similarly, under the Gramm-Leach-Bliley Act, the Federal Reserve is directed to rely on the reports of the functional regulator of any non-bank subsidiary of the holding company, to the fullest extent possible.

In summary, Congress should reject the Administration's unwarranted proposed fee increases on state banks and holding companies.

"FIRST ACCOUNTS" INITIATIVE

The Administration proposes $30 million to fund the "First Accounts" initiative, which targets assistance to low- and moderate-income individuals to access basic financial services. The Administration describes the initiative in four components:

The Department of the Treasury (Treasury) will work with financial institutions in pilot locations across the United States to encourage the expansion of access to financial services among low-income individuals who do not have a bank account.

Treasury will work with financial institutions to encourage expanded access to Automated Teller Machines (ATM) in locations such as U.S. Post Offices in lowincome neighborhoods where access to ATMs is limited.

Treasury will seek to educate low- and moderate-income families regarding First Accounts, as well as other financial services, managing household finances, and building savings and assets.

Treasury will conduct research on individuals who do not have a bank account with a financial institution (the "unbanked").

The benefits of bringing traditionally underserved individuals into the economic mainstream are significant. Many of the unbanked currently rely on alternatives which are often more costly than a traditional bank account. For example, "Banking Relationships of Low-Income Families and the Governmental Trend Towards Electronic Payment" (Federal Reserve Bulletin, July 1999, Hogarth and O'Donnell) reported that consumers relying on check cashers pay from $86 to $500 per year to cash checks and pay bills, while the cost would have been $30 - $60 had they used a bank where they held an account. In addition, the unbanked conduct a large number of their transactions in cash, which denies them safety and convenience enjoyed by individuals with account relationships. Introducing unbanked individuals to basic financial institution services facilitates the building of a relationship to further savings, financial education, and money management.

The Federal Reserve's 1998 Survey of Consumer Finances reports that the number of households without any type of transaction account (defined as checking, savings, and money market deposit accounts, money market mutual funds, and call accounts at brokerages) was 9.5 percent, a decrease from 1989's figure of 14.9 percent. The survey breaks that figure down to examine how many households do not have a checking account. The survey shows that 13.2 percent of households do not have a checking account compared to 18.7 percent in 1989.

The survey asked each household without a checking account to give the reason. The two main reasons given were "do not write enough checks" (28.4 percent) and "do not like dealing with banks" (18.5 percent). Other reasons included: "do not have enough money" (12.9 percent), "service charges are too high" (11 percent), "minimum balance is too high" (8.6 percent), "cannot manage or balance a checking account" (7.2 percent), "do not need/want an account" (6.3 percent), "credit problems" (2.7 percent), "no bank has

The Administration should provide more detail on how it intends to utilize the $30 million request in FY 2001 to achieve the objectives of the First Accounts initiative. The Committee expects Treasury to provide additional details and definitive plans for implementing the First Accounts initiative before receiving any appropriations. The Committee urges Treasury to review results from ATM pilot programs undertaken in November 1999 and work with regulatory agencies, industry, consumer groups, and community groups to leverage, to the maximum extent possible, available knowledge and expertise so that the laudable goals of First Accounts may be achieved.

PROGRAM FOR INVESTMENT IN MICROENTREPRENEURS

Last year, the Committee proposed legislation, the Program for Investment in Microentrepreneurs Act of 1999 (reported out of the Committee on May 26, 1999), and is pleased to note that the Administration supports the program with a $15 million budget request for FY 2001. With modifications, the Program for Investment in Microentrepreneurs Act of 1999 (PRIME) was included in the Gramm-Leach-Bliley Act, which was enacted into law November 12, 1999 (P.L. 106-102). The legislation authorizes PRIME for four years at $15 million each year. The Small Business Administration is responsible for awarding PRIME funds to qualified organizations to:

Provide training and technical assistance to low-income and disadvantaged
entrepreneurs interested in starting or expanding their own business;

Engage in capacity building activities targeted to microenterprise development
organizations that serve low income and disadvantaged entrepreneurs; and

Support research and development activities aimed at identifying and promoting entrepreneurial training and technical assistance programs that effectively serve low income and disadvantaged entrepreneurs.

Encouraging entrepreneurship as a strategy for poverty alleviation and community development has evolved over the past ten years. In testimony provided to the Committee, the Aspen Institute, a nonprofit education and research organization, presented the findings of its Self Employment Learning Project (SELP). Over a five year period, SELP's study tracked 405 entrepreneurs who were each served by one of seven microenterprise programs. The purpose of the study was to evaluate the costs and performance of the programs as well as the outcomes experienced by the micro-entrepreneurs. SELP reported the following results:

The average household income increased approximately $8,484 - rising from $13,889 to $22,374 over five years;