Selected Testimony on HB2103 Which would create a Hawaii State-run Bank:
From Testimony of Stefanie Sakamoto on behalf of the Hawaii Credit Union League, the local trade association for 81 Hawaii credit unions, representing approximately 811,000 credit union members across the state February 29, 2012:
Our main concern is simply that funds being deposited into a state bank would be insured by the state itself. Without the benefit of being insured by a separate entity like the National Credit Union Administration (which insures and oversees all credit unions in the State of Hawaii), the state would be in an extremely precarious situation in the event of any financial difficulty within the bank, and within the state. Coupled with the notion of purchasing troubled mortgages, this could be an extremely dangerous concept, which would place taxpayer money at enormous risk.
From Testimony of Gary Y. Fujitani, Executive Director of the Hawaii Bankers Association, February 29, 2012:
It is unclear, but, this bill appropriates either $500,000 or $1 million to review state laws for the purpose of developing legislation in order to establish a state owned bank without first conducting a comprehensive feasibility study. Forming a state-owned bank is a complex and potentially costly process and deserves thorough analysis to determine whether there is truly a legitimate unfulfilled need. Legislators must ask if it can be accomplished without risking the public’s money and if it can be operated in a safe and sound manner.
We are not aware of any detailed business plan that addresses any of these issues or that speaks to the future success of such a bank. This should be especially important considering the state’s fragile economic climate and the state’s lack of prior experience in operating a for-profit business, especially a bank. Without proper vetting and consideration, the state could be burdened with more costly bureaucracy, not to mention the cost to set up the initial banking infrastructure.
With this in mind, HBA has a number of concerns:
- Start Up Time and Diversion of Funds: It could easily take a couple years before the State Bank is operational, thus paying for all costs during the startup and diverting unknown amounts of taxpayer funds for a speculative venture. This will divert funds away from cash-short programs that benefit the public at large. This is asking for use of taxpayer funds to pursue a business idea without concrete justification.
- Unknown Funding Source: What is the source of funding to start the bank and carry the bank until it makes a profit, if ever.
- State Liability: In the previous version of this bill the State would incur liability to guarantee the public deposits. This could impact the State’s bond rating and potentially lower the State Bond rating as a guarantor of the State Bank public deposits.
- Policy Conflict: There could also be a potential public policy conflict of the Bank’s mission of doing social good instead running a sound bank for profit. The potential exists for politics to influence lending policies that lead to lower quality loans with increased likelihood of nonpayment.
- Tying Up Public Funds: Public deposits are intended to pay for current operating expenses. Turning them into loans that would be repaid over a number of years will impact the availability of these funds to pay for current operating expenses. It is critical to the well-being of any bank to match assets and liabilities. It is a fundamental error to match short-term assets (operating income) with long-term liabilities (30-year mortgages). Unlike a bank that has short term and long-term assets as well as short term and long term borrowing sources, a State Bank will only have short-term assets and thus buying long-term assets would not be in the best interest of the State.
- Unfair Competition: There is the potential for unfair competition from a State Bank over Hawaii banks since it would enjoy a Hawaii tax-free status and not have to comply with costly and burdensome federal regulations.
In regard to the proposal to buy troubled mortgages there are several specific issues:
- Bailing out Toxic Lenders: In those instances where the State Bank may buy trouble mortgages where lender ownership cannot be clearly established is essentially bailing out toxic lenders
- Defective Mortgage Titles: This uses public taxpayer money to buy a loan that the state will not be able to prove it owns. The rationale for this is not clear since the eligibility to buy is a loan the foreclosing entity cannot prove it owns. Therefore, automatically, the state cannot prove its ownership as well since the chain of title is suspect.
- Making Sub-Prime Mortgages: Making and holding sub-prime mortgages in the bank where troubled borrowers were previously denied a loan modification, due, in part, to not having income necessary to make lower payments. As been demonstrated in the current housing crises, sub-prime mortgages increase the risk of default and also places the State in a difficult position of possibility foreclosing on these troubled borrowers.
From Testimony of Iris Ikeda Catalani, Commissioner of Financial Institutions on behalf of the Department of Commerce and Consumer Affairs February 29, 2012:
Capitalizing the state bank.
First, the Department has concerns that if the State withdraws funds from local banks to deposit State monies in the State-owned bank, it would significantly decrease capital reserves of existing local banks and threaten the safety and soundness of the local banks, which are the backbone of Hawaii’s financial institutions. This action may be an unintended consequence for the banking industry.
Second, the funds of the state deposited into local financial institutions are used for operations of the state. The funds must be liquid (available) to meet the State’s obligations including of payroll, pension benefits, mortgage or rent on buildings, and of the state funds into the state bank. This may compromise the security and availability of the State’s funds.
Third, funds deposited by the State in our local banks are secured with bonds to ensure the security and liquidity (availability) of the funds at all times. It is not clear whether the Bank of the State of Hawaii will also issue bonds to secure the availability of the funds. If not, the safety of those funds would be at risk. If all State funds, such as general and special funds, are required to be deposited in the Bank, then the legislature must consider whether the State should require that those funds be secured….
…some of the provisions in the measure appears to conflict with the recently announced multi-state mortgage servicer settlement agreement (“Settlement Agreement”)….
From testimony of Madeleine Young, representing the Legal Aid Society of Hawai’I, February 29, 2012:
The multi—state settlement agreement with the five largest national loan servicers was intended to address foreclosure misconduct and direct “hard dollars” to states, including Hawai’i, for counseling, public education, mediation, and the enforcement of laws protecting mortgage consumers. It is not clear that appropriating $500,000 of the settlement funds to DCCA to conduct a study on the feasibility of a state-owned bank would satisfy the intended purpose of the settlement.
From testimony of George Zweibel, former regional director and staff attorney at the Federal Trade Commission serving on the Legislature’s Mortgage Foreclosure Task Force since its inception in 2010:
I strongly oppose diverting $500,000 from the multi-state settlement to DCCA as described in proposed HB 2103, HD2.
The settlement reached by state attorneys general with the five largest mortgage servicers addresses massive mortgage loan servicing and foreclosure abuses and fraud. The settlement will include direct payments to participating states, including Hawaii. Given the nature and magnitude of the practices that led to the multi-state settlement, some states have already announced they will use the settlement funds they receive to directly benefit affected homeowners. Utilizing any of the money Hawaii will receive from the mortgage fraud settlement in connection with creating a state bank is not an appropriate use of money clearly intended for consumer protection.
From testimony of Kalbert K Young Director, Department of Budget and Finance:
The Department opposes sections 8, 9 and 10 of the bill, which requires the Director of Finance to deposit funds with the yet to be established bank of the State of Hawaii in 2016, 2017 and 2018. The Department believes that any statutory requirement to transfer or deposit funds into a bank of the State of Hawaii should be enacted after the study is completed and the statutory framework of the bank of the State of Hawaii is established.
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