Community bankers urged lawmakers at a House Financial Services Committee hearing to trim the rough edges from heavy banking regulations that will likely result in a disparate impact on smaller banks.

Tuesday's hearing, held in Georgia, where failed community banks started closing after the financial meltdown three years ago.

So far, sixteen Georgia banks went under this year with many small players pointing the finger at onerous regulations and a system stacked against smaller players.

Since 2007, 388 banks and thrifts failed in the United States, with 140 of those institutions in states across the Southeast, according to testimony from Kevin Bertsch, associate director of the Federal Reserve's division of banking supervision and regulation.

While Bertsch said regulators continue to examine the impact regulations and rules have on local banks, he said the community banks' asset quality and earnings issues stem from their exposure to construction and commercial real estate loans.

"As real estate markets began weakening in 2007, cash flows supporting commercial real estate loans fell, and banks experienced a significant increase in weak and impaired assets," he told the committee. "Community banks in all regions of the country have experienced problems stemming from the weakened real estate market, but those operating in regions that experienced the greatest run-ups in real estate prices — the Southeast, Southwest, and West Coast — have been most significantly affected."

Community banks and smaller lenders pushed back during the hearing, saying other contributing factors to weaknesses at community banks include the changing regulatory landscape and government intrusion into financial markets.

Michael Rossetti, owner of Ravin Homes Inc., questioned the government's excessive focus on too-big-to-fail banking institutions during the hearing.

"If our bank could borrow $6 million to $10 million to use as capital we would return to being well capitalized and we would be profitable," Rossetti said. "My point is that many banks could survive with a minimal (compared to closing the bank) capital injection. This is what should have been done with TARP funds instead of forcing them on healthy institutions and telling them they were too big to fail."

Gary Fox, who saw his bank closed by regulators in April, specifically blamed appraisal-driven declines on property values for putting community banks in a risky situation.

"Most banks in Georgia that have failed have been appraised out of business," Fox told the House Committee. "To give a specific example of the appraisal problem, in the metro-Atlanta area historically the cost of a lot is 20% of the overall cost of a home. That means if you had a new home that costs $200,000 the lot cost would be $40,000. Today the cost of a lot is 5% of the overall cost of a home, meaning that in the same $200,000 home the lot cost is now $10,000. We have gone from a cost norm of 5 to 1 to an abnormal TARP and loss-share induced 20 to 1."

Fox added, "Under the new appraisal standards many appraisers will tell you that cost is not relevant, all that matters is the market approach and to a lesser extent, the income approach. Therefore, since the market approach is the most heavily favored approach and you have federally funded asset disposals by TARP and loss-share banks we have an incredible disruption in our real estate markets here in metro Atlanta and Georgia in general."

Bret Edwards with the Federal Deposit Insurance Corp. said regulators are "aware of concerns expressed by some bankers that examinations are being conducted in an overly conservative manner during this challenging economic time.

"To address these perceptions, we have expanded our outreach at the national, regional, and state level to broaden our communication with both individual banks and trade associations," Edwards said.

Earlier this year, when new mortgage servicing standards began to appear, smaller banks pushed back, saying an exemption for community banks should be included since the mortgage crisis stems from the actions of big banks.

Write to: Kerri Panchuk.