State Senate plans hearings on banking regulation

The state Senate Commerce Committee will hold public hearings as early as next month to investigate whether the Minnesota Commerce Department has been vigilant enough in preventing excessive risk-taking by the state's community banks and credit unions.

The hearings are a response to a three-part series, "Lenders Gone Wild," published by the Star Tribune this week. The series highlighted the high concentration of real estate loans held by Minnesota's nearly 600 banks and credit unions, and raised questions about whether the state Commerce Department had enough staff to adequately supervise those it regulates.

Sen. Linda Scheid, DFL-Brooklyn Park, committee chairwoman, said she began contacting members of her 11-person committee Wednesday, and hopes to hold a series of public hearings beginning in September. Those called to testify, she said, likely will include: Commerce Commissioner Glenn Wilson; Deputy Commissioner Kevin Murphy, in charge of the Commerce Department's financial examinations division; the heads of several banks and credit unions, and their industry trade groups.

Scheid said the goal of the hearings is to determine if the Commerce Department has enough regulatory muscle -- in terms of staffing and enforcement powers -- to effectively police banks and credit unions. Scheid said she was "dismayed to learn" from the Star Tribune series that Minnesota has the lowest ratio of state examiners to banks in the nation and that the Commerce Department pared the hours it spent examining banks as the financial crisis deepened in 2007 and 2008.

"This is a fact-finding mission," Scheid said. "We're not out to get anyone. But perhaps we need more examiners. Maybe we need more teeth in our regulation. ... We keep being a day late and a dollar short. The sooner that we have hearings, the sooner things will happen."

In an e-mailed statement, Commerce Department spokesman Bill Walsh said the department was notified of the hearings and would "welcome any opportunity to showcase the work of our department protecting consumers in the financial marketplace."

Loans backed by real estate are going sour at an accelerating pace, eroding the capital that many of those institutions keep on hand to absorb future loan losses and falling asset values.

Minnesota ranks fifth nationally, with 50, or 12 percent, of its banks carrying particularly high levels of dead real estate loans, according to an analysis done for the Star Tribune by Foresight Analytics, a financial research firm in Oakland, Calif.

Credit unions, too, have jumped heavily into real estate. In Minnesota, about 57 percent of their loans are backed by real estate, primarily mortgages and home equity lines of credit, up from 43 percent in 2003. As home prices tumbled, losses on residential real estate loans have cascaded through the credit union system. Nearly half of Minnesota's 156 credit unions lost money in the first quarter.

Some regulatory experts argue that strict limits on real estate lending could have protected banks and credit unions from such losses and prevented the rash of bank failures that are spreading across the country. In June, the state Commerce Department shut down Horizon Bank of Pine City after determining it was too weak to continue operating. Prior to its closure, Horizon had one of the highest levels of commercial real estate loans, compared with its capital, in the state.

"The lady who bought a townhouse in an empty [housing project] is hurt," Scheid said. "So are the businesses sitting next to empty buildings. We tend to think this kind of excessive risk-taking only affects the banks and their investors. But it affects consumers, too."

Scheid said the hearings may result in legislation setting limits on real estate lending, or more examiners for the Commerce Department. She also wants to question the bank and credit union trade groups, which she believes downplayed their risky lending practices in their campaign earlier this year to kill proposed legislation that would have given borrowers the right to mediation in case of foreclosure. The bill was vetoed by Gov. Tim Pawlenty in May.

Steven Johnson, director of government relations for the Minnesota Bankers Association, said the hearings would give the industry an opportunity to challenge the "misperception" that all of the state's banks were struggling with large amounts of commercial real estate loans. His group estimates that about 130 of Minnesota's 430 banks do not have a single bad commercial real estate loan on their books. "There are some good things to say about banks that need to be said," Johnson added.

Chris Serres • 612-673-4308