    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                           FULL COMMITTEE HEARING ON
                       THE IMPACT OF FINANCIAL REGULATORY
                       RESTRUCTURING ON SMALL BUSINESSES
                             AND COMMUNITY LENDERS

    =======================================================================

                                    HEARING

                                   before the

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD
                               SEPTEMBER 23, 2009

                                   __________

                      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 111-046
    Available via the GPO Website: http://www.access.gpo.gov/congress/house

                                   ----------
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    52-261 PDF                       WASHINGTON : 2009

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                       HOUSE COMMITTEE ON SMALL BUSINESS

                    NYDIA M. VELAZQUEZ, New York, Chairwoman

                              DENNIS MOORE, Kansas

                          HEATH SHULER, North Carolina

                         KATHY DAHLKEMPER, Pennsylvania

                             KURT SCHRADER, Oregon

                            ANN KIRKPATRICK, Arizona

                              GLENN NYE, Virginia

                             MICHAEL MICHAUD, Maine

                             MELISSA BEAN, Illinois

                             DAN LIPINSKI, Illinois

                          JASON ALTMIRE, Pennsylvania

                            YVETTE CLARKE, New York

                            BRAD ELLSWORTH, Indiana

                            JOE SESTAK, Pennsylvania

                             BOBBY BRIGHT, Alabama

                            PARKER GRIFFITH, Alabama

                          DEBORAH HALVORSON, Illinois

                      SAM GRAVES, Missouri, Ranking Member

                          ROSCOE G. BARTLETT, Maryland

                             W. TODD AKIN, Missouri

                                STEVE KING, Iowa

                         LYNN A. WESTMORELAND, Georgia

                              LOUIE GOHMERT, Texas

                             MARY FALLIN, Oklahoma

                             VERN BUCHANAN, Florida

                          BLAINE LUETKEMEYER, Missouri

                             AARON SCHOCK, Illinois

                          GLENN THOMPSON, Pennsylvania

                             MIKE COFFMAN, Colorado

                      Michael Day, Majority Staff Director

                     Adam Minehardt, Deputy Staff Director

                          Tim Slattery, Chief Counsel

                      Karen Haas, Minority Staff Director

            .........................................................

                                      (ii)

                             STANDING SUBCOMMITTEES

                                     ______

                   Subcommittee on Contracting and Technology

                         GLENN NYE, Virginia, Chairman

    YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
    BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
    KURT SCHRADER, Oregon                W. TODD AKIN, Missouri
    DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
    MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
    JOE SESTAK, Pennsylvania
    PARKER GRIFFITH, Alabama

                                     ______

                        Subcommittee on Finance and Tax

                        KURT SCHRADER, Oregon, Chairman

    DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
    ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
    MELISSA BEAN, Illinois               W. TODD AKIN, Missouri
    JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
    DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
    GLENN NYE, Virginia
    MICHAEL MICHAUD, Maine

                                     ______

                  Subcommittee on Investigations and Oversight

                     JASON ALTMIRE, Pennsylvania, Chairman

    HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
    BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
    PARKER GRIFFITH, Alabama

                                     (iii)

                   Subcommittee on Regulations and Healthcare

                   KATHY DAHLKEMPER, Pennsylvania, Chairwoman

    DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia,
    PARKER GRIFFITH, Alabama             Ranking
    MELISSA BEAN, Illinois               STEVE KING, Iowa
    JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
    JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
    BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                     ______

         Subcommittee on Rural Development, Entrepreneurship and Trade

                     HEATH SHULER, North Carolina, Chairman

    MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri,
    BOBBY BRIGHT, Alabama                Ranking
    KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
    ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
    YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                      (iv)

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page

    Velazquez, Hon. Nydia M..........................................     1
    Graves, Hon. Sam.................................................     2

                                   WITNESSES

    Harris, Mr. Robert R., Managing Director, Harris, Cotherman,
      Jones, Price & Associates, Vero Beach, Florida and Vice Chair,
      American Institute Of Certified Public Accountants.............     3
    Loy, Mr. Trevor General Partner, Flywheel Ventures, Santa Fe, New
      Mexico. On behalf of The National Venture Capital Association..     5
    Hirschmann, Mr. David T., President And CEO, Center For Capital
      Markets Competitiveness, U.S. Chamber Of Commerce..............     7
    Anderson, CRMS, Mr. Mike, Essential Mortgage Company, Baton
      Rouge, Louisiana. On behalf of The National Association Of
      Mortgage Brokers...............................................     9
    Robinson, Mr. J. Douglas, Chairman and CEO, Utica National
      Insurance Group, New Hartford, New York. On behalf of Property
      Casualty Insurers Association of America.......................    10
    Macphee, MR. James D., CEO, Kalamazoo County State Bank,
      Schoolcraft, Michigan. On behalf of Independent Community
      Bankers Of America.............................................    25
    Roberts. Mr. Austin, CEO, Bank of Lancaster, Kilmarnock,
      Virginia. On behalf of The American Bankers Association........    26
    Hampel, Mr. Bill, Senior Vice President, Research and Policy
      Analysis & Chief Economist, Credit Union National Association..    28
    Moloney, Mr. John, President & CEO, Moloney Securities Co., Inc.,
      Manchester, Missouri. On behalf of The Securities Industry and
      Financial Markets Association..................................    30
    Donovan, Ms. Dawn, CEO, Price Chopper Employees FCU, Schenectady,
      New York. On behalf of The National Association of Federal
      Credit Unions..................................................    32

                                      (v)

    ?

                                    APPENDIX

                                         Prepared Statements:
    Velazquez, Hon. Nydia M..........................................    41
    Graves, Hon. Sam.................................................    43
    Harris, Mr. Robert R., Managing Director, Harris, Cotherman,
      Jones, Price & Associates, Vero Beach, Florida and Vice Chair,
      American Institute Of Certified Public Accountants.............    45
    Loy, Mr. Trevor General Partner, Flywheel Ventures, Santa Fe, New
      Mexico. On behalf of The National Venture Capital Association..    54
    Hirschmann, Mr. David T., President And CEO, Center For Capital
      Markets Competitiveness, U.S. Chamber Of Commerce..............    70
    Anderson, CRMS, Mr. Mike, Essential Mortgage Company, Baton
      Rouge, Louisiana. On behalf of The National Association Of
      Mortgage Brokers...............................................    79
    Robinson, Mr. J. Douglas, Chairman and CEO, Utica National
      Insurance Group, New Hartford, New York. On behalf of Property
      Casualty Insurers Association of America.......................    92
    Macphee, MR. James D., CEO, Kalamazoo County State Bank,
      Schoolcraft, Michigan. On behalf of Independent Community
      Bankers Of America.............................................   100
    Roberts. Mr. Austin, CEO, Bank of Lancaster, Kilmarnock,
      Virginia. On behalf of The American Bankers Association........   114
    Hampel, Mr. Bill, Senior Vice President, Research and Policy
      Analysis & Chief Economist, Credit Union National Association..   135
    Donovan, Ms. Dawn, CEO, Price Chopper Employees FCU, Schenectady,
      New York. On behalf of The National Association of Federal
      Credit Unions..................................................   144
    Moloney, Mr. John, President & CEO, Moloney Securities Co., Inc.,
      Manchester, Missouri. On behalf of The Securities Industry and
      Financial Markets Association..................................   158

                                         Statements for the Record:
    The Impact of the Consumer Financial Protection Agency on Small
      Business.......................................................   173
    National Association of Small Business Investment Companies......   201

                                      (vi)

                           FULL COMMITTEE HEARING ON
                       THE IMPACT OF FINANCIAL REGULATORY
                       RESTRUCTURING ON SMALL BUSINESSES
                             AND COMMUNITY LENDERS

                                  ----------

                         Wednesday, September 23, 2009

                         U.S. House of Representatives,
                                   Committee on Small Business,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 1:00 p.m., in Room
    2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
    [Chair of the Committee] Presiding.
        Present: Representatives Velazquez, Moore, Dahlkemper,
    Schrader, Clarke, Ellsworth, Bright, Halvorson, Graves,
    Westmoreland, Luetkemeyer, and Coffman.
        Chairwoman Velazquez. I call this hearing to order.
        One year ago this month, we saw the largest bankruptcy in
    United States' history when Lehman Brothers filed for Chapter
    11. The following weeks were a whirlwind of activity. The FDIC
    seized Washington Mutual, selling the company's banking assets
    to JPMorgan Chase. Wachovia was acquired by Wells Fargo and
    Merrill Lynch, by Bank of America. Attempting to provide relief
    to our teetering financial system, Congress passed and
    President Bush signed into law the $700 billion TARP
    legislation.
        Since then, it has become evident that the problems leading
    up to this crisis did not accumulate overnight. In fact, flaws
    in our risk management systems, both governmental regulations
    and private mechanisms, had been growing for decades.
        In coming weeks, Congress and the administration will
    examine options for strengthening our regulatory structure.
    This is long overdue; the gaps in the system have grown too
    large to be ignored. We cannot count on current regulations to
    prevent another crisis.
        While considered by many an issue for the financial
    services industry, how we address those gaps will be critical
    for all small businesses. It is imperative that as we look at
    alternatives for updating our financial regulations, we
    carefully consider how these changes might affect
    entrepreneurs.
        Small businesses rely on the healthy functioning of our
    financial systems in order to access capital. New rules
    governing how financial institutions extend credit will
    directly affect entrepreneurs seeking loans at affordable
    rates. The biggest challenge facing small firms right now is
    access to affordable capital. We must be careful that
    regulatory changes do not exacerbate the current capital
    shortage and undercut our recovery as it begins to take hold.
        Likewise, financial regulatory reform could unintentionally
    touch sectors of the small business community that we do not
    think of as financial institutions. Businesses that allow
    customers to pay for goods and services after delivery are
    essentially extending credit. Congress and the administration
    must be careful not to define the term "credit" too broadly.
    Otherwise, businesses like home builders, physicians, and
    others may face new rules that were not meant for them.
        Small businesses come in all shapes and sizes and there are
    many in the financial sector. Community banks and credit unions
    could see their business models profoundly affected by many of
    the proposed changes. Small firms in the financial sector often
    face higher compliance costs than their larger competitors.
    Several proposals would result in small lenders answering to a
    new regulatory entity.
        I expect some of our witnesses today will testify that
    small lenders bear less responsibility for the recent turmoil
    and, therefore, should not carry the brunt of new regulations.
    This argument seems to at least carry some credibility. The
    committee should consider it carefully as we proceed.
        As both lenders and borrowers, small businesses have much
    at stake when it comes to regulatory reform. The financial
    crisis of last year and the recession it triggered have hit
    small firms hard. As much as anyone, entrepreneurs want these
    problems fixed so that financial markets can again play their
    vital role in promoting commerce.
        Numerous strategies have been floated for restoring
    transparency and stability to our financial systems. Depending
    on how they are crafted, these proposals could touch every
    sector of the American economy. For these reasons, we have
    invited representatives from a range of industries to testify.
    It is my hope that their testimony will add important
    perspectives to our discussion.
        On that note I would like to take the opportunity to thank
    all the witnesses for taking time out of your busy schedule to
    be with us here today.
        And I yield to the ranking member, Mr. Graves, for an
    opening statement.
        [The statement of Chairwoman Velazquez is included in the
    appendix.]
        Mr. Graves. Thank you, Madam Chair, and I would like to
    thank you for holding this important hearing on the debate that
    is going to occur about restructuring the regulatory oversight
    of America's financial sector. Given the fact that the
    financial services sector contributed more than a third of
    corporate profits in this country during the last decade, it is
    a significant debate.
        No one can question that the events affecting Wall Street
    last year had consequences on the overall American economy.
    Once credit becomes unavailable, the modern economy comes to a
    grinding halt. Consumers and businesses do not buy,
    manufacturers do not sell, and unemployment skyrockets.
        Any reform to the financial regulatory process must meet
    two key objectives. First, it must provide for an efficient
    operation of the financial markets; and second, small
    businesses, the prime generator of new jobs in the economy,
    must have access to capital.
        Competitive markets need full information to operate
    properly. To the extent that regulatory reform improves the
    information available to all parties that use the financial
    markets, it will be beneficial. That benefit must be weighed
    against the cost of providing information.
        Much of the focus on financial regulatory reform proposals
    address either protecting consumers or preventing one or a
    group of institutions from creating systemic risk leading to
    the collapse of capital and the credit markets. However, little
    has been said on the impact that such regulatory oversight
    might have on the access to capital for small businesses. If
    the regulatory reform inhibits the ability of small businesses
    to obtain credit or access needed capital, the regulation will
    have an adverse long-term consequence on the ability of the
    economy to grow.
        A famous philosopher once said that "Those who cannot
    remember the past are condemned to repeat it." Whatever the
    outcome of the debate on restructuring the regulation of the
    financial sector, we cannot repeat the mistakes of the past.
    Given the fact that financial panics have periodically occurred
    in this country going back to 1837, achieving a regulatory
    restructuring that ensures Congress does not repeat the
    mistakes of the past will be one of our most difficult tasks.
        I again would like to thank the Chairwoman for holding this
    important hearing, and I yield back.
        [The statement of Mr. Graves is included in the appendix.]
        Chairwoman Velazquez. Now I welcome Mr. Robert Harris, the
    Managing Director of Harris, Cotherman, Jones, Price &
    Associates in Vero Beach, Florida. He is also the Vice Chair
    for the American Institute of Certified Public Accountants, the
    national professional association of certified public
    accountants. The AICPA has more than 330,000 members.
        Welcome, sir. And you have 5 minutes to make your
    statement.

                     STATEMENT OF ROBERT R. HARRIS

        Mr. Harris. Chairwoman Velazquez, Ranking Member Graves,
    members of the committee. My name is Robert R. Harris and I am
    Vice Chairman with the American Institute of Certified Public
    Accountants. I am a CPA and a partner in the CPA firm of
    Harris, Cotherman, Jones, Price & Associates. We are located in
    Vero Beach, Florida, and are a small firm with 11 CPAs. My
    firm's clients are primarily small businesses and individuals.
    We do financial planning and tax service for most of these
    clients.
        I am here today representing the American Institute of
    CPAs. AICPA is the national professional association of CPAs
    with more than 360,000 CPA members in business, industry,
    public practice, government, education, student affiliates, and
    international associates.
        As a result of the economic crisis precipitated by the
    subprime lending, the administration and Congress felt that
    financial regulatory restructuring was necessary. The
    administration called for a new regulatory scheme that
    encompasses strong vibrant financial markets operating under
    transparent fairly administered rules that protect America's
    consumers and our economy from the devastating breakdown that
    we have witnessed in recent years.
        The administration also said that to accomplish this goal
    it would be necessary to seek a careful balance that will allow
    our markets to promote innovation while discouraging abuse. To
    this end, Congress is looking at a number of financial
    activities with an eye towards how to appropriately and
    adequately regulate those activities.
        The AICPA supports the goal of enhanced consumer
    protection, but we believe that it is critical to consider the
    plan's effect on small business to ensure that it does not
    stifle the innovation, creativity and inventiveness of the
    American entrepreneur that has driven our economic engine.
        In this context, I would like to discuss The Consumer
    Financial Protection Act of 2009, H.R. 3126, which would create
    the Consumer Financial Protection Agency, or CFPA, and its
    effect on small business from the point of view of a CPA.
        The stated aim of the consumer protection bill is to
    protect consumers by consolidating financial consumer
    protection in one agency. This would be a safeguard against
    consumers getting inappropriate loans that they could not
    afford repay. But the bill is much broader than protecting
    consumers when they borrow money.
        The CFPA, as introduced, would cover most CPAs because its
    scope of authority includes tax return preparation, tax advice,
    financial planning, and pro bono financial literacy activities.
    The accounting profession's pro bono financial literacy
    programs, "360 Degrees of Financial Literacy" and
    FeedthePig.org, which are designed to teach consumers and young
    people how to make smart decisions would be covered by the
    bill. Our own Lisa Baskfield, a CPA from Minnesota, was
    recently awarded the civilian service medal for providing pro
    bono financial access to more than 2,000 armed services
    members. Her advice would have been covered under this bill.
        Many of the members are affiliated with CPA firms that are
    small businesses and will be adversely affected by the bill,
    and many of their clients are small businesses, sole
    proprietorships and partnerships. It is impossible to separate
    the advice and tax service given to these small businesses from
    the advice and tax services given to the owners. They both are
    covered by the bill--thus, both would be covered by this bill.
        Additionally, any person who provides a material service to
    a covered person such as a financial institution is included in
    the definition of a covered person. My practice of forensic
    accounting would subject me to the CFPA when I do a financial
    audit of a lender making consumer loans even though I do not
    have direct dealings with the consumers and provide no services
    to consumers.
        As a CPA, I can tell you that CPAs are heavily and
    effectively regulated by three sources. State boards of
    accountancy, the Internal Revenue Service, and the AICPA. This
    regulatory structure protects consumers first with the first
    rule being, service the public interest. The bill consolidates
    the enforcement of a number of Federal consumer protection laws
    into one Federal agency; however, it adds another layer of
    regulation to the accounting profession without consolidating
    any of our regulation.
        This regulation would be costly because the assessment that
    would be levied by CFPA, and it will take significant time from
    our ability to serve our clients because we would be subject to
    periodic examinations by the agency. These are all costs that
    will ultimately be borne by our clients, the very consumers
    that this bill is supposed to protect. And it will do so
    without any commensurate benefit.
        CPAs are asking for an exemption only for the customary and
    usual CPA services and volunteer or pro bono financial
    education activities. We are not asking for an exemption when
    CPAs are offering consumer financial products, such as a loan
    or investment products.
        In fact, areas of potential abuse, such as refund
    anticipation loans, are covered by other provisions of the
    bill. We are encouraged by recent press reports that Chairman
    Frank is considering exempting professional services from the
    reach of the bill.
        We appreciate the opportunity to testify today on the
    impact of the bill that will have effect on thousands of CPA
    firms that are small businesses and their clients, many of whom
    are also small business.
        Chairwoman Velazquez. Thank you Mr. Harris.
        [The statement of Mr. Harris is included in the appendix.]
        Chairwoman Velazquez. Our next witness, Mr. Trevor Loy, is
    a venture capital investor in Santa Fe, New Mexico. Mr. Loy is
    testifying on behalf of the National Venture Capital
    Association, which represents the U.S. venture capital industry
    and is comprised of more than 450 member firms.

                        STATEMENT OF TREVOR LOY

        Mr. Loy. Thank you, Chairman Velazquez, Ranking Member
    Graves, and members of the committee. Thank you for the
    opportunity to be part of this important discussion today.
        I would like to begin by talking about risk and the
    difference between entrepreneurial risk and systemic financial
    risk.
        Entrepreneurial risk involves making calculated and
    informed bets on people and innovation and is critical to
    building small businesses. Systemic financial risk involves a
    series of complex financial interdependencies between parties
    and counterparties operating in the public markets. The venture
    industry and the small business community are heavily dependent
    on embracing entrepreneurial risk, but we have virtually no
    involvement in systemic risk. Let me explain why.
        The venture capital industry is simple. We invest in
    privately held small businesses created and run by
    entrepreneurs. These entrepreneurs grow the business using
    their own personal funds as well as the capital from ourselves
    and our outside investors, known as LPs or limited partners. We
    invest cash in these small businesses to purchase equity, i.e.,
    stock, and we then work closely alongside the entrepreneurs on
    a weekly basis for 5 to 10 years until the company is sold or
    goes public. When the company has grown enough so that it can
    be sold or taken public, the VC exits our investment in the
    company and the proceeds are distributed back to our investors
    in our funds.
        When we are not successful, we lose the money we invested,
    but that loss does not extend to anyone else beyond our
    investors. Even when we lose money on investments, it does not
    happen suddenly or unexpectedly. It takes us several years to
    lose money and the investors in our funds all understand that
    time frame and the risk when they sign up.
        Debt, known as leverage, which contributed to the financial
    meltdown, is not part of our equation. We work simply with cash
    and with equity. We do not use debt to make investments or to
    increase the capacity of the fund. Without debt or derivatives
    or securitization or swaps or other complex financial
    instruments, we don't expose any party to losses in excess of
    their committed capital.
        In our world, the total potential loss from a million
    dollar investment is limited to a million dollars. There is no
    multiplier effect because there are no side bets, unmonitored
    securities, or derivatives traded, based on our transactions.
    There are no counterparties tied to our investments.
        Nor are venture firms interdependent with the world's
    financial system. We do not trade in the public markets and our
    investors cannot withdraw capital during the 10-year life of a
    fund, nor can they publicly trade their partnership interest in
    the fund.
        The venture capital industry is also much smaller than most
    people realize. In 2008, U.S. venture capital funds held
    approximately $200 billion in aggregate assets and invested
    just $28 billion into start-up companies. That is less than 0.2
    percent of the U.S. gross domestic product. Yet, over 40 years,
    this model has been a tremendous force in U.S. economic growth,
    building industries like biotech, semiconductor and software.
    Now we are increasingly helping to build renewable energy and
    other green-tech sectors.
        Companies that were started with venture capital since 1970
    today account for 12.1 million jobs and $2.9 trillion in
    revenues in the U.S. That is nearly 21 percent of the U.S. GDP,
    but it grew from our investments of less than 0.2 percent of
    GDP.
        My main point, therefore, is that harming our industry will
    prevent a major part of the future American economy from
    growing out of businesses that are today's small businesses;
    and that is the risk that you should be concerned about.
        Now, we do recognize the legitimate need for transparency
    and we simply ask that you customize the regulatory approach to
    fit what we do. Today, VCs already provide information to the
    SEC. That information, submitted on what is called Form D,
    should already be sufficient to determine the lack of systemic
    risk from venture capital firms. This filing process could
    easily be enhanced to include information that would provide
    greater comfort to our regulators. An enhanced Form D--let's
    call it Form D-2, could answer questions on our use of
    leverage, trading positions, and counterparty obligations,
    allowing regulators to then exempt from additional regulatory
    burdens firms like ours that don't engage in those activities
    and, therefore, don't pose systemic risks.
        In contrast, formally registering as investment advisers
    under the current act, as the current proposals require, has
    significant burdens without any additional benefits. And let me
    be clear, registering as an advisor with the SEC is far from
    simple, and it is not just filling out a form. The word
    "registration" in that context might sound like registering
    your vehicle, telling the motor vehicle department what kind of
    car it is and who you are and where you live. It might conjure
    up images of things like smog checks and our proposal for the
    Form D-2 is equivalent to that.
        But actually the word "registration" in the SEC context
    comes with a lot of other requirements. To continue my analogy
    with your car, it is equivalent to having to hire a full-time
    driver, plus a compliance officer who rides in the front seat
    to make sure that driver is operating the car correctly, plus a
    mechanic who lives at your house to fix the car and works only
    on your car, plus providing the government with information
    about every place you drive.
        Moving back to the actual world of SEC registration
    involving examinations, complex programs overseen by a
    mandatory compliance officer, it will demand significant
    resources which promise to be costly from both a financial and
    human resources perspective. My own firm believes it will be
    one-third of our entire annual budget.
        Your support has not gone unnoticed by us and we appreciate
    it. We cannot afford another situation where the unintended
    consequences of well-intentioned regulation harms small
    businesses and the economic growth that we drive. We look
    forward to working with the committee on that goal.
        Chairwoman Velazquez. Thank you, Mr. Loy.
        [The statement of Mr. Loy is included in the appendix.]
        Chairwoman Velazquez. Our next witness is Mr. David
    Hirschmann. He is the President and CEO of the Center for
    Capital Markets Competitiveness in the U.S. Chamber of
    Commerce. The U.S. Chamber of Commerce is the world's largest
    business federation, representing 3 million businesses.
        Welcome.

                    STATEMENT OF DAVID T. HIRSCHMANN

        Mr. Hirschmann. Thank you, Chairwoman Velazquez, Ranking
    Member Graves, members of the committee. I really think this is
    a very timely hearing.
        Today, what I would like to do is talk specifically about
    an issue of great concern to many of our members, especially
    our small business members, the proposed Consumer Financial
    Protection Agency.
        The U.S. Chamber supports the goal of enhancing consumer
    protection. In fact, the Capital Markets Center that I run was
    founded 3 years ago before the financial crisis to advocate for
    comprehensive reform and modernization of our regulatory
    structure, including strong consumer protection.
        Consumers, including small businesses, need reforms that
    will ensure clear disclosure, better information; they need
    vigorous enforcement against predatory practices and other
    consumer frauds, and we need to close the gaps in current
    regulation. However, the proposed Consumer Protection Agency is
    the wrong way to enhance protections. It will have significant
    unintended consequences for consumers, small businesses, and
    for the overall economy.
        Today, the Chamber will release a study that examines the
    impact of CFPA on small business access to credit. The study is
    authored by Thomas Durkin, an economist who spent more than 20
    years at the Federal Reserve Board. My remarks draw on the
    findings of that study to make the following points. [The study
    is included in the appendix]
        Small businesses, including those that we traditionally
    count on to be the first to add jobs in the early stages of an
    economic recovery, need access to credit to survive, meet
    expenses, and grow. Small businesses often have difficulty
    obtaining commercial credit and, therefore, turn to consumer
    credit and consumer financial products to supplement their
    short-term capital needs. The CFPA will reduce the availability
    and increase the costs of consumer credit. As users of consumer
    credit products, small businesses will see the same result
    despite being fundamentally different than the average
    consumer.
        The proposed CFPA will likely restrict, and in many cases
    eliminate, small business access to credit and increase the
    cost of credit they would be able to obtain. This CFPA "credit
    squeeze" could result in business closures, fewer start-ups,
    and slower growth, ultimately costing a significant number of
    jobs that would be lost or simply not created.
        Finally, the CFPA will only exacerbate the weaknesses of
    our current regulatory system without enhancing consumer
    protections.
        In 2006, 800,000 businesses created new jobs in this
    country; 642,000 of them had fewer than 20 employees. Small
    businesses generally have trouble borrowing money. Either they
    can't borrow or they cannot borrow as much as they need, and
    almost certainly they cannot secure long-term financing
    available to larger companies.
        To supplement the reduced access to traditional loans,
    small businesses rely extensively on consumer lending products,
    and they use them as a source of credit very differently than
    consumers. In other words, personal credit is the lifeline that
    sustains small businesses, particularly start-ups.
        Many of the products that small businesses rely on may be
    considered to some as fringe products, but they are the very
    products that small business owners use to meet their short-
    term capital needs. As one example, auto title loans provide
    small business owners immediate access to cash and no upfront
    fees or prepayment penalties, and therefore can be useful
    meeting short-term business expense.
        However, the CFPA in its approach failed to recognize the
    difference between small businesses and average consumers both
    in terms of need and sophistication and their appetite for
    risk. As proposed, the CFPA will likely reduce the availability
    of these products and increase their costs. It will make it
    harder for financial firms to meet the needs of small
    businesses. The CFPA will create considerable new risks to
    lenders in terms of regulatory fines and litigation risks from
    extending credit to small businesses.
        H.R. 3126 is the wrong approach. It simply adds a new
    government agency on top of an already flawed regulatory
    structure.
        As one example, rather than streamline consumer protections
    to eliminate gaps, regulatory arbitration, and create uniform
    national standards for key issues like disclosure, the
    legislation would foster a complex and confusing patchwork of
    51-plus States regulation in addition to new Federal rules.
        As we begin to see signs of economic recovery, we need to
    be especially careful to fully understand the impact of a new
    regulatory layer on small businesses, both as consumers and as
    providers of financial products. We look forward to working
    with the members of the committee on the modernization of our
    regulatory structure and appreciate your holding this hearing
    today.
        Chairwoman Velazquez. Thank you, Mr. Hirschmann.
        [The statement of Mr. Hirschmann is included in the
    appendix.]
        Chairwoman Velazquez. Our next witness is Mr. Mike
    Anderson. He is the President of the Essential Mortgage Company
    in Baton Rouge, Louisiana. Mr. Anderson is a 30-year veteran in
    the mortgage industry. He is testifying on behalf of the
    National Association of Mortgage Brokers, which represents the
    interests of mortgage brokers and home buyers.

                    STATEMENT OF MIKE ANDERSON, CRMS

        Mr. Anderson. Thank you. I have a little opening statement:
        Small businesses in the financial service arena are under
    tremendous risk and we need your help.
        Good afternoon, Chairwoman Velazquez and Ranking Member
    Graves and members of the committee. I am Mike Anderson. I am a
    Certified Residential Mortgage Specialist and Vice Chairman of
    the Government Affairs Committee of the National Association of
    Mortgage Brokers. I am also a practicing mortgage broker in the
    State of Louisiana, with over 30 years of experience. I would
    like to thank you for the opportunity to testify today.
        We applaud this committee's response to the current
    problems in our financial markets. We share a resolute
    commitment to a simpler, clearer, more uniform and valid
    approach relative to financial products, most specifically with
    regard to obtaining mortgages and to protecting consumers
    throughout the process. NAMB has several areas of concern with
    the CFPA.
        It is impossible to have one large agency develop and
    maintain comprehensive consumer protections. Consumer
    protection needs to exist at the State level, closer to the
    consumers. As proposed, the CFPA will favor big business. It
    will choose winners and losers, and the losers will be the
    small businesses and consumers.
        Before I address our overall concerns, I must first
    extinguish the false allegations targeted at mortgage brokers
    for many years. First of all, brokers do not create loan
    products. We do not underwrite the loan or approve the borrower
    for the loan. We do not fund the loan. We provide consumers
    with an array of choices and permit them to choose the loan
    payments that fit their particular needs and to provide an on-
    time closing.
        We are regulated. State-regulated mortgage brokers and
    lenders comply with State and Federal consumer protection laws,
    including State predatory lending laws. Federally chartered
    banks are preempted from these predatory lending laws.
        And lastly, we did not receive any TARP funds.
        The typical mortgage broker of today exists as an
    origination channel for consumers who wish to purchase or
    refinance their home. Mortgage brokers typically employ
    anywhere from 2 to 50 people, and they serve communities big
    and small, urban and rural in all 50 States, truly classifying
    them as a valuable small business entity.
        In order for the CFPA to be effective, it must act
    prudently when promulgating and enforcing rules to ensure that
    real protections are afforded to consumers and not merely
    provide the illusion of protection that comes from incomplete
    or unequal regulation of similar products services or
    providers, whereas financial reform is to provide transparency,
    clarity, simplicity, accountability, and access in the market
    for consumer financial products and to ensure the markets
    operate fairly and efficiently.
        It is imperative that the creation of new disclosures or
    the revision of the antiquated disclosures be achieved through
    an effective and even-handed approach and consumer testing. It
    is not the who, but the what that must be addressed to ensure
    true consumer protection and success with this initiative.
        There should be no exemptions from consumer protections
    whether the CFPA is created or not. The Federal Government
    should not--and I repeat, should not--pick winners and losers,
    which is where we believe the Federal reform is heading.
        We are very supportive of the concepts of the proposed
    single, integrated model disclosure for mortgage transactions
    that combine those currently under TILA and RESPA. Consumers
    will greatly benefit from a uniform disclosure that clearly and
    simply explains critical loan terms and costs.
        Therefore, NAMB strongly encourages this committee to
    consider imposing a moratorium on the implementation of any new
    regulations or disclosures issued by HUD and the Federal
    Reserve Board for at least a year until financial modernization
    has become law. This will help to avoid consumer confusion and
    minimize the increased cost and the unnecessary burden borne by
    industry participants to manage and administer multiple
    significant changes to the mandatory disclosures over a short
    period of time.
        NAMB strongly supports the concept of mandating a
    comprehensive review of the new and existing regulations,
    including the Home Value Code of Conduct, the HVCC. Too often
    in the wake of our current official crisis we have seen new
    rules promulgated that do not effect measured balance and
    effective solutions to the problems facing our markets and
    consumers--
        Chairwoman Velazquez. Mr. Anderson, time has expired. You
    will have an opportunity during the question-and-answer period.
        Mr. Anderson. Thank you.
        [The statement of Mr. Anderson is included in the
    appendix.]
        Chairwoman Velazquez. Our next witness is Mr. J. Douglas
    Robinson. He is the Chairman and CEO of Utica National
    Insurance Group in New Hartford, New York. Utica National is
    among the top 100 property casualty insurance organizations in
    the country. He is testifying on behalf of the Property
    Casualty Insurers of American, which has over 1,000 members.

                    STATEMENT OF J. DOUGLAS ROBINSON

        Mr. Robinson. Chairwoman Velazquez, Ranking Member Graves,
    and members of the committee, thank you for the opportunity to
    testify.
        I am J. Douglas Robinson, Chairman and Chief Executive
    Officer of the Utica National Insurance Group, a group led by
    two mutual insurers headquartered near Utica, New York. Utica
    National provides coverages primarily for individual and
    commercial risks with an emphasis on specialized markets,
    including public and private schools, religious institutions,
    small contractors, and printers.
        My company markets its products through approximately 1,200
    independent agents and brokers. Our 2008 direct written
    premiums were more than $632 million. I am testifying today on
    behalf of the Property Casualty Insurers Association of
    America, which represents more than 1,000 U.S. insurers.
        We commend President Obama and Congress for working to
    ensure that the financial crisis we experienced last fall is
    never repeated. Achieving this goal requires a focus on fixing
    what went wrong with Wall Street without imposing substantial
    new one-size-fits-all regulatory burdens on Main Street, small
    businesses, and activities that are not highly leveraged nor
    systemically risky.
        My company insures small businesses like bakeries, child
    care centers, auto service centers, and funeral homes. These
    Main Street businesses should not bear the burden of an
    economic crisis they did not create. Home, auto, and commercial
    insurers did not cause the financial crisis, are not
    systemically risky and have strong and effective solvency and
    consumer protection regulation at the State level. We are
    predominantly a Main Street, not a Wall Street, industry with
    less concentration and more small business competition than
    other sectors.
        Property casualty insurers have not asked for government
    handouts. Our industry is stable and continues to provide
    critical services to local economies and communities.
        However, small insurers are concerned about being subject
    to administration proposals intended to address risky Wall
    Street banks and securities firms, but that apply broadly to
    the entire financial industry.
        Specifically, we are concerned about the following:
        The proposed Consumer Financial Protection Agency does not
    adequately exclude insurance from its scope. An exclusion
    should be added for credit, title, and mortgage insurance,
    which are generally provided by and to relatively small
    businesses. Protection should be added for insurance payment
    plans which are already well regulated by State insurance
    departments.
        The proposed new Office of National Insurance is given too
    much subpoena and preemption power without adequate due process
    or limits on its scope and its ability to enter into
    international insurance agreements. It also needs a definition
    of "small insurer" to prevent excessive reporting requirements.
        Systemic risk regulation needs to be modified to reduce
    government backing of large firms at the competitive expense of
    small financial providers. Leveraged Wall Street behemoths must
    not be made bigger through government bailouts and
    consolidation. Government shouldn't forget or harm Main Street
    in addressing systemic risk regulation.
        Resolution costs of systemically risky firms should be paid
    for by firms with the greatest systemic risk. Bank regulators
    should not be allowed to resolve systemic risk failures by
    reaching into the assets of small insurance affiliates whose
    losses would then be charged to other innocent small
    competitors through State guaranty funds.
        Finally, congressionally proposed repeal of the McCarran-
    Ferguson Act would significantly reduce insurance competition,
    primarily harming smaller insurers that would not otherwise
    have access to loss data and uniform policy forms necessary to
    compete effectively, and that would ultimately harm consumers.
        The cost of new regulations almost always
    disproportionately affects small business who can least afford
    the necessary legal and compliance requirements. The property
    casualty industry is healthy and competitive and the current
    system of regulating the industry at the State level is working
    well. Should the Congress fail to address the issues we have
    identified, the consequences on consumers and the economy could
    be quite harsh, imposing an especially large burden on small
    insurers and small businesses.
        Thank you.
        Chairwoman Velazquez. Thank you, Mr. Robinson.
        [The statement of Mr. Robinson is included in the
    appendix.]
        Chairwoman Velazquez. And we have four votes right now, so
    the committee will stand in recess for approximately 30 minutes
    and will reconvene right after.
        [Recess.]
        Chairwoman Velazquez. The committee is called to order.
        I want to address my first question to Mr. Hirschmann, Mr.
    Harris, and Mr. Anderson.
        In determining the impact of a new consumer protection
    authority, structure and details are key. For example, the
    manner in which the term "credit provider" is defined will be
    especially critical.
        So how can Congress define these terms in a way that
    minimizes the impact for small businesses?
        Mr. Hirschmann?
        Mr. Hirschmann. I think you are exactly right. Both the
    scope of the bill, as originally drafted--and we recognize that
    Chairman Frank has indicated that he is working on that issue--
    as well as the terms. Many of the key terms were so ill defined
    and the powers that were granted to the proposed agency are so
    significant that it really leaves that up to the new regulator
    to decide; and we can't afford to do that.
        So I don't have an answer for you on how to specifically
    define credit, but clearly you need to target it to the
    specific firms that are providing direct credit and not
    indirectly to those who are providing material support or
    indirectly the way the original bill contemplated.
        Chairwoman Velazquez. Mr. Harris.
        Mr. Harris. I would concur with that.
        We were providing a service or even those who are providing
    a trade or business that is not just purely loaning of money is
    where we would get into it. I mean, I cannot think of one
    client I have--virtually, other than a restaurant--that would
    not be one who does not provide credit of some sort. A doctor's
    office--and doctors' offices even for people who are on
    Medicare, you have copays; and the copays are billed to those
    people after they have seen the doctor. So then the doctors
    have substantial accounts receivable.
        Are they credit providers? I don't think that was ever the
    intent.
        Chairwoman Velazquez. Mr. Anderson?
        Mr. Anderson. I guess we really have to define who is the
    creditor on behalf of the mortgage brokers. I mean, we are
    truly not the creditor, and yet we do perform a function,
    taking loan applications from applicants and explaining loan
    terms and giving them disclosures.
        So until we define who really is the creditor, that is all
    I can answer on that.
        Chairwoman Velazquez. Mr. Hirschmann, Mr. Harris, the
    financial crisis wreaked havoc on consumers. We all know that.
    And to that end, several Members of the House, including
    Representative Minnick, are proposing an alternative consumer
    protection council, one that will coordinate regulatory actions
    across several State jurisdictions.
        What is your take on this idea?
        Mr. Hirschmann. We have not yet seen the details, but we do
    think that consumer protection should be an important part of
    the overall regulatory reform; and so we welcome alternatives,
    particularly alternatives that build on the current structure
    that requires better coordination among existing regulators,
    that provide for better disclosure to consumers and tougher
    enforcement against predatory practices.
        Mr. Harris. I think AICPA would concur with that. We are
    talking about in our area--of course, we believe that products
    should be in and certain services should be out.
        Chairwoman Velazquez. Mr. Loy, in your testimony you touch
    on the distinction between hedge funds and venture capitalists.
    Given the role that hedge funds play in this debate, can you
    elaborate on that distinction and talk about differences about
    how VCs and hedge funds should be regulated?
        Mr. Loy. Thank you. So I think I would begin by saying it
    is easier to define it by what is similar. There is really only
    one similarity between a hedge fund and a venture capital fund,
    and that is the legal structure that we use. We typically are
    organized as limited partnerships and they are typically
    organized as limited partnerships and the investors become the
    limited partners.
        Beyond that, hedge funds are associated with trading in the
    public markets. They typically--in addition to the capital that
    investors put into the hedge fund, they borrow, in other words,
    they use leverage, several multiples of that capital that the
    investors have put in, to make a broader set of investments.
        They often invest for fairly short periods of time, and I
    know that can range based on their strategy. But it can be as
    short as a few hours, typically in the days or weeks; some
    hedge funds may be for a few months. And so they are also
    bringing the capital in up front from the investors and the
    investors have the ability typically to pull their money in and
    out.
        And then, lastly, a lot of hedge funds particularly trade
    in these off-balance-sheet securities, derivatives.
        Beyond that, I would be clear to say that I not an expert
    on hedge funds, so I am not going to comment on how they should
    be or should not be regulated.
        But what I will comment on is for venture capitalists. We
    use the same legal structure, but the similarities end there.
    Our investors put money in as limited partners, but do not have
    the ability to take money out for 10 years. We do not use
    leverage at all, so the money that investors put in our fund in
    cash is the money that we have available.
        On top of that we invest only in stock, not in credit. We
    expect each investment we make to hold that investment for 5 to
    10 years. And the last difference is that we work very closely
    operationally with the businesses, the small businesses, to
    help them grow. Hedge funds, I think, more typically have a
    distance between them in that regard.
        So all I can say is that the current advisor act in the
    contemplated regulations for hedge funds are clearly designed
    for hedge funds and, for example, require a compliance officer
    in a firm to report periodically on the public market trading
    positions of that hedge fund.
        If we were to be--right now we are encompassed in the same
    regulation--we would similarly be required to hire a chief
    compliance officer to tell the SEC about our public market
    trading positions, even though our fund agreements do not even
    allow us to trade in the public market. So this very expensive
    person would sit there and fill out a form that said zero or N/
    A every month.
        Chairwoman Velazquez. But in the sense that hedge funds
    borrow big money and try to exploit inefficiencies in the
    market, wouldn't you say that there is an element of risk that
    we don't see in venture capitalists?
        Mr. Loy. Again, I would rather comment on the venture
    capital piece.
        Chairwoman Velazquez. Can we touch on the private equity
    firms?
        Mr. Loy. Sure.
        Chairwoman Velazquez. They are another unique financial
    entity. Do you have any position as to how they should be
    regulated?
        Mr. Loy. I don't. I think that that is up to the expertise
    of the people on this and other committees.
        I do think that there are substantial differences in the
    types of investing and the types of leverage that they use.
    Again, they use the same legal structure as us, but there are
    significant differences beyond that.
        Chairwoman Velazquez. Thanks.
        Mr. Harris, in your testimony, you said that CPAs should
    be--should not be exempt from activities that are not customary
    and usual. And the vagueness of the phrase "not customary and
    usual" could create the exact kind of problems that you are
    seeking to avoid.
        How do you recommend that legislators implement this
    distinction?
        Mr. Harris. CPAs have a very close relationship with their
    clients, and there are a lot of questions that go back and
    forth on a routine basis. And so many of these are small
    clients and they rely upon us for all kinds of advice, both tax
    advice for the company and the individual.
        When I am talking with a doctor who happens to be set up in
    a form--an entity which is a partnership or a PA, I can't help
    but talk to him about both at the same time. That is where our
    biggest problem is.
        Where we believe that CPAs should come under the act would
    be when they are involved in selling some form of a product.
    So, for instance, my client comes to me and says, I need some
    help. We say we believe you need a loan and we recommend that
    you go to the bank and talk to the bank. That would be exempt.
        However, if we said, But by the way, we will make you that
    loan, in that case we should come under the act, where there is
    a product involved.
        Chairwoman Velazquez. Can we use like the example of H&R
    Block?
        Mr. Harris. Who are not CPAs? Yes.
        Chairwoman Velazquez. But they do accounting. And also they
    make refund anticipation loans. So that part should be
    regulated.
        Mr. Harris. We totally agree with that, and if there is a
    CPA doing that, we believe that is a product and, in fact,
    should be regulated.
        Chairwoman Velazquez. Mr. Graves.
        Mr. Graves. In all the debate, when it came to the bailouts
    and everything that took place, we had a lot of talk about
    financial institutions being too big to fail. And my question
    to each of you is there--in our capitalist society, such a
    thing as an institution that is too big to fail? And if one of
    the very large financial institutions did fail, how would that
    affect you or your business or your clients, whatever the case
    may be?
        Mr. Harris?
        Mr. Harris. I have listened quite a bit to Mr. Geithner and
    Mr. Bernanke on that issue, and I happen to concur with them.
    There are some institutions which are too big to fail and would
    have brought the world financial markets to a standstill if
    they did.
        I also understand what happened with those that did fail
    and what their limitations were at time. It would have a
    tremendous effect--it is already having a tremendous effect,
    because right now most small businesses are having a difficult
    time borrowing money with the same entities that did not fail.
    But because they are having to go from a leveraged model to a
    much lower leveraged model than they were practicing--and those
    are major banks that we all know that are still here today,
    that may be owned by someone else.
        I can give a perfect example of a public hospital that I
    sit on the board of; and we were forced to liquidate our
    endowment fund to pay off our bonds because we couldn't get the
    line of credit to secure those bonds that we could always get
    with no problem. We had the money to do it, but it will put the
    hospital in a very tenuous situation in the event we continue
    to lose money because of Medicare cuts. And I happen to live in
    an area which is a very high Medicare area.
        So it is already having that effect. I can tell you it has
    had that effect just on what has occurred to small business.
    Lines of credit and letters of credit are virtually impossible
    to get for small business.
        Mr. Graves. Mr. Loy?
        Mr. Loy. What I would say we do: We invest in companies
    that often don't exist; we help them start.
        We have been using a phrase of "too small to fail." These
    are the companies that, a very small proportion of which are
    going to grow up to be the next Google, Cisco, Apple,
    Genentech, FedEx, Starbucks, et cetera. And we are concerned
    about the opposite problem, which is the situation where we are
    creating a problem, where it is too hard for those companies to
    get really big, particularly on the IPO side, so they are
    choosing to sell out early in order to get some money back to
    the investors.
        And typically when other companies are acquired by
    companies--including, increasingly, overseas companies--they
    are not going to grow up to be the drivers of 12.1 million jobs
    that represent the last 20 years of venture investing.
        In terms of the impact of the Lehman-led crisis or another
    one--Mr. Harris' example is actually an interesting one; he
    mentioned that in order to get liquidity for their bond fund,
    they had to liquidate their endowment--the largest source of
    capital for our industry is actually endowments and foundations
    and pension funds; and we have seen a dramatic drop in their
    willingness or ability to provide capital to our industry
    because they are repurposing it away from higher risk, higher
    reward, but highly illiquid and long-term investments to short-
    term liquidity needs.
        I would characterize it as much as a timing problem at any
    moment in time. The capacity and willingness to fund things for
    5 or 10 years, while they grow up to be the next generation
    drivers of job creation, are seriously at risk. Even as it is,
    adding more burdens onto us is sort of why we are particularly
    concerned at this critical moment.
        Mr. Hirschmann. The right to fail in an orderly fashion has
    been one of the key strengths of our economy. Obviously, when
    everything fails at one time, it requires extraordinary steps.
        But I think one of the things we need to be careful about
    is not to design our system so that there is an implied
    backstop by the Federal Government against the two largest
    mutual fund companies, the two largest hedge funds, the two
    largest private equity firms, or the two largest of anything.
    We need to be able to have the information at the regulator
    level to understand systemic risk, but not set anybody up to be
    permanently protected against failure.
        We can make them fail in a more orderly fashion so they
    don't burn down the neighborhood, but nobody should be
    insulated against failure.
        Mr. Anderson. I love your question.
        I don't know if you saw the Wall Street Journal a couple of
    days ago where it shows that 52 percent of all loan
    originations and closings happen by the top three companies,
    where if you look at that 2 years ago, one of them was down to
    like 4 percent. That is dangerous. That is why I said in my
    opening remarks that the small businesses are at risk.
        Do we want loan origination for home mortgages to be
    controlled by three companies in America? There have been an
    awful lot of choices for mortgages--a lot of small mortgage
    bankers who have done a phenomenal job, who never ever
    participated in the subprime or pay option ARMs that got us in
    this mess to begin with. But a lot of these small companies
    can't get warehouse lines of credit.
        We did a very good job. My company, personally, we had the
    second lowest FHA delinquencies in the State of Louisiana, and
    we are at risk. So is a company too big to fail? I don't think
    so.
        Mr. Robinson. Congressman, it is hard to come up with the
    number as to how large is a company that is too big to fail. I
    think more important is, how much it is leveraged, how
    interconnected it is; and in our business, how you manage your
    accumulations or how much stuff do you have out there that
    could cause a problem.
        For example, as far as leveraging goes, our company is a
    mutual company. The only way we can raise capital is through
    operations. We do not issue stock. In our business, one of the
    leverage measures is premium-to-capital or premium-to-surplus,
    which is a proxy for how many policies you write and how much
    exposure you have.
        In our business three-to-one, three times your capital, is
    probably the upper limit. Two-to-one is much better. My company
    is one-to-one because we are pretty conservative. I am told
    some banks get up to 30-to-1. The question really is, what is
    your leverage ratio? I think that is one point that is more
    important than absolute size.
        Another question is how interconnected you are. What is the
    counterpart of your risk if either the counterpart or yourself
    has a problem?
        In our industry rarely reinsure one another. When we buy
    reinsurance, kind of like laying off a bet, we go to the
    worldwide market. So there is not much interconnectivity in our
    industry, but it is something I believe you can measure.
        And finally, there is what we call "accumulations". That
    is, how many houses do you insure on the beach and how many
    businesses on an earthquake fault line and so on. You need to
    be able to measure precisely that and report that to regulators
    to make sure that you haven't overextended yourself.
        I think if you look at those three items instead of
    absolute size, you could come up with a much better result.
        Mr. Graves. Thank you, Madam Chair.
        Chairwoman Velazquez. Mrs. Dahlkemper.
        Mrs. Dahlkemper. Thank you, Chairwoman Velazquez and
    Ranking Member Graves for convening this critical hearing on
    the impact of financial and regulatory restructuring on small
    businesses and community lenders. And thank you to the panel of
    witnesses for joining us today.
        While it is clear from the recent economic crisis that we
    must impose greater oversight, transparency and accountability
    in the financial sector, we must also ensure that our financial
    regulatory restructuring does not negatively impact the ability
    of financial institutions to continue to provide the American
    people, our small businesses and our communities with access to
    capital. Ensuring liquidity in the market will continue to
    promote economic recovery.
        In my district in Pennsylvania, local businesses are
    reeling as a result of banks not lending. So we have to enact
    balanced reform, but still allow for a healthy flow of capital.
    However, we must also ensure that consumers are protected and
    adequately informed in their financial choices and that they
    are ensured a variety of financial products that carry better
    disclosed and understood risk.
        Mr. Anderson, I do have a couple questions for you. In your
    testimony, you mentioned a host of Federal regulations that
    mortgage brokers must comply with.
        Which Federal agencies are charged with enforcing these
    regulations?
        Mr. Anderson. Well, we have got RESPA; that is number one,
    under HUD.
        We have the Truth in Lending Act. I mean that has to do
    with your disclosures, your good faith and truth in lending.
    All of this, mortgage brokers, banks savings and loans, we all
    operate under that umbrella.
        Also in our States, individual States, we have to adhere to
    the same policies; and some of our States have predatory
    lending laws. In Louisiana, we just passed a law that there are
    no prepayment penalties, which is a good thing.
        So we are all under the same umbrella, and we have to
    comply with our own State lending laws. And we have got the
    Safe Licensing Act, which is for everybody.
        Mrs. Dahlkemper. Let me ask you, because there are a number
    of agencies: Do you think it would be better, in your view, to
    combine enforcement under one agency or entity, rather than
    having to deal with a number of different agencies?
        Mr. Anderson. I don't know if that is going to create a
    bottleneck. I am not sure.
        We feel that we need to slow down, maybe look at this
    further. We are all for--the National Association of Mortgage
    Brokers is all for simpler, easier disclosures. I think if we
    look at what happened in the past with the subprime and all of
    those other loans, I think we--I relate it to the
    pharmaceutical industry.
        If you take Vioxx, what happened to Vioxx? It was banned.
    We didn't go after the pharmacists or the drugstores on the
    corner. We went after the manufacturer. And I think if we
    control the manufacturer, that is, the product--if the product
    caused the foreclosure crisis, we need to eliminate that
    product.
        Mrs. Dahlkemper. Let me ask you then a question that goes
    along with that, because it has been reported that mortgage
    brokers who processed the subprime loans are now counseling
    individuals who are indebted by those loans regarding their
    restructuring.
        So does your association promote standards by which brokers
    evaluate the financial suitability of loan products by
    prospective borrowers? Or do you just rely upon the lenders,
    underwriters for that?
        Mr. Anderson. Well, the way the National Association of
    Mortgage Brokers operates, we have a very strong code of
    ethics. We do not have a fiduciary responsibility to the
    borrowers. We counsel the borrowers. We do not underwrite the
    loans.
        And I will give a prime example where the mortgage broker
    got blamed, and that was with Fannie Mae and Freddie Mac. And
    we know what happened there. I can tell you, I have done a lot
    of loans, and Fannie Mae and Freddie Mac had an automated
    underwriting system and they would approve borrowers at 100
    percent financing with a 65 percent debt-to-income ratio before
    taxes.
        Now, can the mortgage broker turn that borrower down when
    it was approved by Fannie Mae and Freddie Mac? If we did take
    that approach, if I would turn somebody down for that, I could
    be sued because--for discrimination or what have you. And those
    are the mistakes that happened.
        Mrs. Dahlkemper. So what is your role then in this?
        Mr. Anderson. The role of a mortgage broker is to offer the
    products, just like an insurance broker.
        Why do you go do a insurance broker? Because they represent
    a whole host of carriers. The mortgage broker does the same
    thing; we represent a whole host of carriers of lenders and
    banks across the country. We service a lot of small, rural
    areas. And the mortgage broker has done a phenomenal job. There
    is equal blame across the board for banks, mortgage brokers--
        Mrs. Dahlkemper. So you don't have any financial stability
    standards that you, as an association, apply?
        Mr. Anderson. I mean, we have a strong code of ethics.
        Mrs. Dahlkemper. Thank you.
        My time is up. I yield back.
        Chairwoman Velazquez. Would the gentlewoman yield?
        Mrs. Dahlkemper. Yes.
        Chairwoman Velazquez. Mr. Harris, if you provided bad
    advice to a customer or client, would you be liable?
        Mr. Harris. Oh, yes.
        Chairwoman Velazquez. Mr. Anderson, if you sell a product
    that is inappropriate, that is not a good product, are you
    liable?
        Mr. Anderson. That is a hard question. I mean--
        Chairwoman Velazquez. My guess is that that is the core of
    her question when she asked "regulators."
        There is not such a regulator who would come in and examine
    and do any regulating examination of your activities?
        Mr. Anderson. No. We are regulated. We are examined; on a
    State level, we are examined.
        Chairwoman Velazquez. We are talking about the Federal
    Government and Federal legislation that is pending before--that
    is being considered now, that is being worked by Chairman
    Frank.
        So the question is consolidating Federal regulation so that
    it has uniformity with the mortgage brokers industry.
        Mr. Harris. Madam Chairwoman, if I could also comment
    because I answered you with a very simple answer when I said,
    "Oh, yes."
        Not only to our client, but if we provide bad tax advice
    and in the end, as the result of an IRS audit, the IRS can and
    will fine us significantly. We also face criminal penalties
    from the IRS.
        Chairwoman Velazquez. Okay.
        Mr. Westmoreland.
        Mr. Westmoreland. Thank you, and I want to thank the
    Chairlady for having this hearing. I--this is my third term in
    Congress, and I want to congratulate her in having this,
    because this is the first hearing we have had, I think--at
    least that I have been associated with in my committees--that
    really we get to hear the unintended consequences of what a
    proposed piece of legislation can bring into different entities
    that are so important to our economy.
        So I want to thank her for doing that, because unintended
    consequences are things that happen when we pass legislation
    hastily up here.
        Mr. Anderson, I want to say that I know that the mortgage
    brokers--I come from a real estate background, the building
    business--that you all were very big proponents of the SAFE Act
    that was passed in 2008 that basically licensed brokers,
    mortgage brokers, which had not been the case. So you have been
    a proponent of regulation that you thought was necessary for
    your industry.
        But we see unintended consequences all the time up here.
    The credit card act that we passed with the consumer protection
    stuff in there, there has been an unintended consequence that
    people that actually really need a credit card and actually
    need some short-term credit are not able to get it.
        And when we passed some housing legislation--and, Mr.
    Anderson, I will address this to you--I think it has some
    unintended consequences. And, sure, we made bad loans and we
    had all different types--as Mr. Loy said, derivatives. We were
    selling programs that nobody even knew what they were. They
    just knew they were making a bunch of money doing it.
        But right now, if I understand it correctly from some of my
    friends still in the real estate business and still in the
    mortgage business, there are some loans in some States that you
    can't even offer people. Because of some of the regulations
    that have been put on as far as what credit scores are,
    additional points and fees that are added to these things, that
    came from some of the regulation that we passed trying to help
    the situation, have actually hindered it.
        Can you comment on that?
        Mr. Anderson. Yes, we have--if I can use the term, "we have
    had our hands tied." And there are many, many States out there,
    and we are one of them, that we enjoyed a very low foreclosure
    rate. And the restrictions, I will tell you that there is no
    question--my firm is also part of the largest real estate firm
    in the Gulf south, and I will tell you that there is no
    question that the pendulum has swung so far this way now that
    the credit is tightening, we depleting the pool of eligible
    borrowers to buy these properties, and we have got to be
    careful. We have got to, somehow, come back in the middle
    somewhere.
        We know the subprime loans were bad, and you are right.
    People made an awful lot of money from Wall Street on down.
    There is no question, plenty of blame to go around.
        But get back to the safe mortgage product, but the credit
    score restrictions; and I tell you all, of all the loans that
    have a done in my 31-year career, if anyone can tell me the
    difference between a 619 and a 620 credit score, I would like
    to know what that is. Or a 679 and a 680. The difference is
    nothing on the credit.
        The difference is, one borrower is going to pay an extra
    1.5 to 2 points; and on an investment property--and I see it
    every day, every day, somebody with an 832 credit score putting
    20 percent down can't get a mortgage. That is pretty sad.
        Mr. Westmoreland. And Mr. Anderson, with the little bit of
    time that I have left, I know that some of our returning
    veterans who have been in theater and fought and defended our
    country, a lot of times our National Guard members and Reserve
    officers leave great paying jobs to go serve our country. And
    when they come back, sometimes their credit score has been
    hurt, or the spouse maybe has done something.
        I understand that some of these restrictions are making it
    harder and harder for our military to be able to get it.
    Because if I understand it correctly from some of the news
    today, some of these credit scores are being lowered 10, 20,
    30, 40, even 50 points, without anyone knowing it, just because
    of the reduction in the credit market.
        Mr. Anderson. You are absolutely right.
        Guys, I have seen credit scores drop 30, 40 points--and I
    am not kidding you--for a $12 medical collection that they had
    no idea that they had. I mean, it is amazing. We are just set
    on this number of a credit score.
        There are so many factors that you have to look at. I mean,
    it seems like we are going back 20 or 30 years which--there is
    nothing wrong with that concept, but people have to qualify.
    But just using a number and a credit score, that is creating
    some problems.
        Mr. Westmoreland. Thank you, Madam Chair.
        Chairwoman Velazquez. Thank you.
        Mr. Luetkemeyer.
        Mr. Luetkemeyer. Thank you, Madam Chair. You know, it seems
    as though the approach that the Financial Services Committee is
    taking is that we have got a problem out here, and/or they
    think they have got a problem, and we are going to use a big
    patch on it. And it seems like having a sprained ankle and cut
    the leg off to solve our problem.
        I think sometimes when we have a problem, we have to see
    what the problem is and then go back and fix that problem and
    not have the unintended consequence, what Congressman
    Westmoreland was talking about.
        Too often it appears to me in this situation that this
    piece of legislation is so broad it is going to provide an
    umbrella over anything when anybody has any sort of a monetary
    transaction. I think you gentleman have helped to define where
    we ought to be going this, and it is the big guys that have
    stumbled along and not done things the way they should have;
    and a lot of other folks are being caught in this net.
        So I guess my comment is, have I identified this correctly?
    Do you think basically we need to be looking at the too-big-to-
    fail-guys that really were--the problem seems to originate
    from? Are there some small players in this that have got enough
    blame to go around, and we can play with them too?
        Mr. Robinson?
        I don't think you guys had any problems. We only had one
    insurance company, and that was the investment portion of that
    that was the problem versus the insurance company; is that
    right?
        Mr. Robinson. That is correct, Congressman.
        If there is a common thread that I could recommend that
    might answer some of these questions, it is, how broad a
    measure would be needed to cover all kinds of problems. It is
    answering a simple question like, Who underwrites the risk and
    who prices it? Because you could have somebody saying, Well, I
    thought the loan originator was. Well, I thought they were.
        Well, who is? Whether it is a credit default swap or a
    mortgage.
        And I think as we try to solve these issues--and there is
    no question that there are issues to be solved--that instead of
    perhaps picking a number to define too-big-to-fail, say, All
    right, you are big; what are your exposures and how much
    capital do you have to handle what statisticians would call the
    tail events--things that you don't think happen?
        And if they cannot answer those questions clearly and they
    perhaps have no idea, then that might aim you towards the real
    root cause of the issue. And that might be a good step, I would
    recommend.
        Mr. Luetkemeyer. Okay.
        Mr. Hirschmann. I think you are right to identify the scope
    of the proposed CFPA as one of the problems.
        There are a couple of other issues, including, it separates
    out consumer protection from safety and soundness regulation.
    So you might have one regulator telling you to go left and the
    other telling you to go right with no way to reconcile the
    differences. That clearly will impact the availability of
    credit, particularly for small firms.
        The other is the ill definition of all the terms. For
    example, it sets up a new, vaguely defined abuse standard. What
    our study reveals is that a product that might seem to be
    abusive for one individual consumer in a particular financial
    condition might be the lifeline for a small business to meet
    their payroll that week and perfectly appropriate for the small
    business.
        It is hard to imagine how a Federal regulator could
    anticipate those differences and make sure we don't
    accidentally cut off the vital lifeline for small businesses.
        Mr. Luetkemeyer. My time is going to run out here. Quickly,
    with Mr. Hirschmann and Mr. Loy and Mr. Harris, quick answers.
    I know we are going to have some bankers in the next section.
        I was curious about access to credit. I think that really
    impacts small businesses in small communities and suburbs of
    our cities.
        Have you had any comments or problems with some of the
    members of Chambers of Commerce with regard to access to credit
    that you would like to comment on--particular industries, in
    particular?
        Mr. Hirschmann. Access to credit is a significantly
    enhanced problem in this crisis. What our study finds is that
    even before the crisis, half of the smallest firms had access-
    to-credit problems. It is clearly magnified.
        I don't know whether you point--obviously, you don't want
    banks to make loans that are being given to inadequate--people
    that don't have adequate credit.
        On the other hand, you want to make sure that the small
    businesses have credit. That is why this secondary credit
    market, the ability of small firms to rely on their personal
    credit, especially when they are starting a business, is vital
    to start-ups and vital to creating new jobs in this country.
        Mr. Loy. I would agree, with a caveat.
        Most of the businesses that we fund are so raw, they are
    pure garage start-ups, they are not eligible for credit. So we
    don't use credit, or companies don't, until they have grown
    into larger entities. And it is at that stage where,
    historically, we have been able to bring in credit provider to
    scale the job creation.
        That now is not happening, so we are having to supply more
    and more equity to later-stage start-ups, and that is causing
    us to not have as much ability to invest in the brand-new
    things. There is a falloff in seed-stage company creation
    because the capital that we have, that was supposed to be for
    that, is filling the role that debt used to play for our larger
    companies.
        Chairwoman Velazquez. Time has expired.
        Ms. Fallin.
        Ms. Fallin. Thank you, Madam Chair. I am sorry I couldn't
    be here for all the hearing, but what I have heard is very
    interesting; and I will talk about what I am hearing in my home
    State of Oklahoma.
        I am hearing from businesses that lines of credit are hard
    to come by, that they are seeing sometimes double-increased
    rates on their interest rates. I am hearing that their lines of
    credit have been, many times, cut in half to where they do not
    have the lines of credit. And I am hearing from some of our
    business owners that when they do want to take equity out of
    their businesses, they can't take it out of their businesses to
    expand their product.
        My question would be, what has changed over the last 2 to 3
    years that has caused this market to tighten up? And what are
    the problems associated that have caused those things?
        And in this new Consumer Financial Protection Act, do you
    think that will help the situation where more money will be
    available and the credit will start flowing? Or are we reaching
    too far, and it is going to cause the market to contract?
        Mr. Harris. I will say that it is very hard--I refer to
    smaller businesses and some are public institutions--hospitals,
    private schools--who are suffering because they can't get their
    loans.
        The problem is--the community banks are wonderful, and they
    serve a tremendous need for smaller clients, and they have come
    through for the clients and the small businesses. The community
    banks have been very good.
        The problem we see in that area is when you get to $2 and
    $3 or $4 and $15 or $18 million, which are still small entities
    in small towns, who have these kinds of lines of credit or
    letters of credit to secure bonds, public bonds that have been
    issued. The big banks are the ones who can no longer make those
    loans, and as a result--we are seeing in a number of private
    institutions--they are having to try to figure out a way to pay
    off the bonds with far more expensive capital. And it is not a
    positive thing; it is not good for them.
        And what you are hearing at your home is the same as I am
    hearing all across the country.
        Mr. Loy. I was just in Oklahoma last week for 3 days
    looking at seed-stage start-ups to invest in, coming out of
    your research universities. Some really exciting things,
    particularly in the energy arena.
        Ms. Fallin. I hope you put the money there.
        Mr. Loy. We are looking and we want to, precisely for that
    reason. We don't provide credit; we provide investment equity
    capital. But because these start-ups cannot get a home equity
    loan to finance their start-up, they are needing $500,000 from
    us; and it is getting harder and harder for us to provide that
    for the reasons I just said.
        And the potential for this regulation would be
    disproportionately felt on the smallest firms that provide that
    earliest stage of capital. So there is a good chance that
    entire swath of $500,000 to $1 million of seed-stage capital,
    if we are forced to follow hedge funds regulation, the cost of
    that will drive the firms who do that out of business.
        Ms. Fallin. Can I ask, also, another question?
        I am hearing from our local bankers that the fee increases
    to recapitalize FDIC is causing them not to have as much
    capital and loans to put out into the marketplace. And they
    have told me, like in my State, that $37 million has gone out
    in fee increases which they could be lending out to our small
    businesses and even to those who are wanting to have mortgages.
    And they are concerned about another fee increase on those
    small bankers that will once again drive capital and take it
    out of the marketplace.
        Are you seeing that back in your individual organizations
    and States, that it is taking the capital out of the
    marketplace, lending ability?
        Mr. Hirschmann. It is certainly something we hear from our
    small banking members.
        If you go to any local Chamber across the country, you will
    find a small banker on the board, and it is particularly one--
    so whether those fees are necessary, clearly you have to keep
    FDIC moving.
        We are going through a very exigent period here. The real
    question is, do you want to add fees on top of that even
    further through the Consumer Financial Protection Agency? It is
    clearly the wrong time to add unnecessary fees, particularly
    when they won't produce the intended result.
        Mr. Robinson. Congresswoman, perhaps there is a parallel in
    the financial services--noninsurance financial service area you
    that might consider.
        I mentioned earlier about underwriting, or identifying the
    risk, underwriting it and pricing it properly. And you do the
    best job you can, whether it be a house on a beach or a
    subprime mortgage or whatever. And then, when the hurricane
    comes or the collapse happens, management meetings happen that
    say, We are not going to do that again.
        And then we have to recast our expectations, and that
    usually results in underwriting tightening up, which could mean
    change in credit score or unwillingness to put out lines of
    credit.
        Also, a bad result could result in an organization being
    overleveraged. We have too much out there and so we have to
    pull back.
        Ms. Fallin. Thank you, Madam Chairwoman.
        Chairwoman Velazquez. With that, let me take this
    opportunity to thank all of you for participating. You have
    given very insightful information. The members of the panel are
    excused.
        And I will ask the members of the second panel to please
    come forward and take your seats. Thanks.
        Chairwoman Velazquez. Our first witness is Mr. James D.
    MacPhee, the CEO of Kalamazoo County State Bank in Schoolcraft,
    Michigan, founded in 1908. Mr. MacPhee is testifying on behalf
    of the Independent Community Bankers of America. ICBA
    represents 5,000 community banks of all sizes and charter types
    throughout the United States.
        Thank you. You will have 5 minutes.

                     STATEMENT OF JAMES D. MacPHEE

        Mr. MacPhee. Thank you, Chairman Velazquez and Ranking
    Member Graves. I am pleased to represent the 5,000 members of
    the Independent Community Bankers of America at this timely and
    important hearing.
        Just over one year ago, due to the failure of some of the
    Nation's largest firms to manage their high-risk activities,
    key elements of the Nation's financial system nearly collapsed.
    Community banks and small businesses, the cornerstone of our
    local economies, have suffered as a result of the financial
    crisis and the recession sparked by megabanks and unregulated
    financial players.
        In my State of Michigan, we face the Nation's highest
    unemployment rate of 15.2 percent. Yet community banks like
    mine stick to commonsense lending and serve our customers and
    communities in good times and bad.
        The bank has survived the Depression and many recessions in
    our more than 100-year history, and it proudly serves the
    community through the financial crisis today--without TARP
    money, I might add.
        The financial crisis, as you know, was not caused by well-
    capitalized, highly regulated commonsense community banks.
    Community banks are relationship lenders and do the right thing
    by their customers. Therefore, financial reform must first do
    no harm to the reputable actors like community banks and job-
    creating small businesses.
        For their size, community banks are enormous small business
    lenders. While community banks represent about 12 percent of
    all bank assets, they make 31 percent of the small business
    loans less than $1 million. Notably half of all small business
    loans under $100,000 are made by community banks.
        While many megabanks have pulled in their lending and
    credit, the Nation's community banks are lending leaders.
    According to an ICBA analysis of the FDIC's second quarter
    banking data, community banks with less that $1 billion in
    assets were the only segment of the industry to show growth in
    net loans and leases.
        The financial crisis was driven by the anti-free-market
    logic of allowing a few large firms to concentrate
    unprecedented levels of our Nation's financial assets, and they
    became too big to fail. Unfortunately, a year after the credit
    crisis was sparked, too-big-to-fail institutions have gotten
    even bigger. Today, just four megafirms control nearly half of
    the Nation's financial assets. This is a recipe for a future
    disaster.
        Too-big-to-fail remains a cancer on our financial system.
    We must take measures to end too-big-to-fail by establishing a
    mechanism to declare an institution in default and appoint a
    conservator or receiver that can unwind the firm in an orderly
    manner. The only way to truly protect consumers, small
    businesses, our financial system, and the economy is to enact a
    solution to end too-big-to-fail.
        To further protect taxpayers, financial reform should also
    place a systemic risk premium on large, complex financial firms
    that have the potential of posing a systemic risk. All FDIC-
    insured affiliates of large, complex financial firms should pay
    a systemic risk premium to the FDIC to compensate for the
    increased risk they pose.
        ICBA strongly supports the Bank Accountability and Risk
    Assessment Act of 2009, introduced by Representative Gutierrez.
    In addition to a systemic risk premium, the legislation would
    create a system for setting rates for all FDIC-insured
    institutions that is more sensitive to risk than the current
    system and would strengthen the deposit insurance fund.
        ICBA strongly opposes reform that will result in a single
    Federal bank regulatory agency. A diverse and competitive
    financial system with regulatory checks and balances will best
    serve the needs of small business.
        Community bankers agree that consumer protection is the
    cornerstone of or financial system. However, ICBA has
    significant concerns with the proposed Consumer Financial
    Protection Agency. Such a far-reaching expansion of government
    can do more harm than good by unduly burdening our Nation's
    community bankers, who did not engage in the deceptive
    practices targeted by the proposal. It could jeopardize the
    availability of credit and choice of products, and shrink
    business activity.
        In conclusion, to protect and grow our Nation's small
    businesses and economy, it is essential to get financial reform
    right. The best financial reforms will protect small businesses
    from being crushed by the destabilizing effects when a giant
    financial institution stumbles. Financial reforms that preserve
    and strengthen the viability of community banks are key to a
    diverse and robust credit market for small business.
        Thank you.
        Chairwoman Velazquez. Thank you, Mr. MacPhee.
        [The statement of Mr. MacPhee is included in the appendix.]
        Chairwoman Velazquez. Our next witness is Mr. Austin
    Roberts, the CEO of the Bank of Lancaster, Virginia. The Bank
    of Lancaster was founded in the northern neck of Virginia in
    1930. Mr. Roberts is testifying on behalf of the American
    Bankers Association. ABA is the trade group and professional
    association representing the Nation's banking industry.

                      STATEMENT OF AUSTIN ROBERTS

        Mr. Roberts. Chairwoman Velazquez, Ranking Member Graves,
    members of the committee, my name is Austin Roberts. I am Vice
    Chairman, President and CEO of the Bank of Lancaster, which is
    headquartered in Kilmarnock, Virginia. I am pleased to be here
    on behalf of the ABA.
        Small businesses, including banks, are certainly suffering
    from the severe economic recession. This is the not the first
    recession faced by banks. Many banks have survived the ups and
    downs of the economy; mine has survived those for the last 80
    years. In fact, most banks have been in their communities for
    decades and intend to continue to be there for decades.
        We are not alone, however. In fact, there are more than
    2,500 banks, 31 percent of the banking industry, that have been
    in business for more than a century; 5,000 banks have served
    their communities for more than half a century. These numbers
    tell a dramatic story about the staying power of banks and
    their commitment to the communities they serve.
        The success of small entrepreneurial businesses are very
    important to my bank. My bank's focus and those of my fellow
    bankers throughout the country is on developing and maintaining
    long-term relationships with these and other customers.
        In this severe economic environment, it is natural for
    businesses and individuals to be more cautious. Businesses are
    reevaluating their credit needs, and as a result, loan demand
    is also declining. Banks, too, are being prudent in
    underwriting, and our regulators are demanding it. In fact, in
    some cases, overly restrictive rules and examinations are
    hampering the banks' ability to make new loans.
        While a great deal of attention is rightfully being paid to
    the administration's regulatory proposal, I would like to share
    with you other issues that banks like mine are facing.
        First, the most important threat is the very high premiums
    being paid by banks to the FDIC. For example, my bank paid
    $75,000 in premiums in 2008. This year we will pay $550,000 in
    premiums, with the possibility of it even going to $700,000.
        There is no question that the industry fully backs the
    financial health of the FDIC, but such large expenses have a
    very strong dampening effect on bank lending. ABA has detailed
    options in a letter to FDIC Chairman Bair that meet the funding
    needs without creating a financial burden on banks that could
    reduce bank lending and hurt the economic recovery.
        Second, ABA is continuing to hear from bankers that
    regulators are demanding increases in capital and that banks
    improve the quality of their capital. With capital markets
    still largely unavailable, especially for community banks, the
    only course of action in the short run is to reduce lending in
    order to improve the bank's capital ratio.
        Third, the recession has strained the ability of some
    borrowers to perform, which often leads the examiners to insist
    that a bank make a capital call on their borrower, impose an
    onerous amortization schedule or obtain additional collateral.
    These steps can set in motion a death spiral where the borrower
    has to sell assets at fire sale prices to raise cash, which
    then increases the write-downs that the banks have to make, and
    the cycle goes on and on.
        These actions are completely counter to the notion of
    working with customers to make sure that credit is available to
    them or working with borrowers that may even be in distress.
        There is much more included in my written testimony that
    details the difficulties that have arisen in the past year, but
    I want to take a moment to mention one idea that ABA has to
    increase capital to community banks in areas most hard hit by
    recession. Banks in these areas are doing everything they can
    to make credit available, but it is against the significant
    headwinds of losses from problem loans.
        The idea, which the ABA shared in a letter to Secretary
    Geithner 2 days ago, would be to modify Treasury's existing
    capital assistance program to help well-managed, viable
    community banks access capital. These banks would match any
    investment the Treasury makes with private equity.
        In this way, a relatively small sum of money, say, $5
    billion invested by Treasury, matched by $5 billion in private
    equity, would bring all small banks' capital to levels
    significantly higher than regulators require to be well
    capitalized. Having additional capital will provide a cushion
    for these banks to meet the credit needs of their communities
    rather than reducing lending to meet regulatory capital
    requirements.
        I want to thank you for the opportunity to present these
    views on challenges ahead for banks that serve small
    businesses, and I am happy to answer any questions.
        Chairwoman Velazquez. Thank you, Mr. Roberts.
        [The statement of Mr. Roberts is included in the appendix.]
        Chairwoman Velazquez. Our next witness is Bill Hampel, the
    Senior Vice President of Research and Policy Analysis for the
    Credit Union National Association. CUNA provides many services
    to credit unions, including representation, information, public
    relations, and business development.
        Welcome.

                        STATEMENT OF BILL HAMPEL

        Mr. Hampel. Thank you. Chairwoman Velazquez, Ranking Member
    Graves, and other members of the committee, thank you very much
    for the opportunity to testify at today's hearing on behalf of
    the Credit Union National Association, which represents over 90
    percent of our Nation's 8,000 State and Federal credit unions,
    the State leagues, and their 92 million members. I am Bill
    Hampel, the Chief Economist.
        Credit unions did not contribute to the recent financial
    debacle, and their current regulatory regime, coupled with
    their cooperative structure, militates against credit unions
    ever contributing to a financial crisis.
        As Congress considers regulatory restructuring, it is
    important that you not throw out the baby with the bathwater.
    Regulatory restructuring should not just mean more regulation.
    There needs to be recognition that in certain areas, such as
    credit unions, regulation and enforcement is sound and
    regulated entities are performing well.
        Credit unions have several concerns in the regulatory
    restructuring debate. These include the preservation of the
    independent regulator, the development of the CFPA, and the
    restoration of credit unions' ability to serve their business-
    owning members.
        First, it is critical that Congress retain an independent
    credit union regulator. Because of credit unions' unique
    mission, governance, and ownership structure, they tend to
    operate in a low-risk, member-friendly manner. Applying a bank-
    like regulatory system to this model would threaten the
    benefits that credit unions provide their members.
        There is some logic for consolidating bank regulators where
    competition can lead to lax regulation and supervision, but
    that condition does not exist for credit unions which have only
    one Federal regulator, the National Credit Union
    Administration. The general health of the credit union system
    proves that our system works well.
        Considering the CFPA, consumers of financial products,
    especially those provided by currently unregulated entities, do
    need greater protection. CUNA agrees that a CFPA could be an
    effective way to achieve that protection, provided that the
    agency does not impose redundant or unnecessary regulatory
    burdens on credit unions. In order for a CFPA to work, consumer
    protection regulation must be consolidated and streamlined to
    lower costs and improve consumer understanding.
        CUNA strongly feels that the CFPA should have full
    authority to write the rules for consumer protection, but for
    currently regulated entities, such as credit unions, the
    examination and enforcement of those regulations should be
    performed by the prudential regulator that understands their
    unique nature. Under this approach, the CFPA would have backup
    examination authority.
        CUNA urges Congress to take the difficult step of
    preempting State consumer protection laws if establishing a
    CFPA. We are confident that by creating a powerful Federal
    agency with the responsibility to regulate consumer protection
    law, with rigorous congressional oversight, more than adequate
    consumer protection will be achieved. And if the CFPA is
    sufficiently empowered to ensure nationwide consumer
    protection, why should any additional State rules be necessary?
        Conversely, if the proposed CFPA is not expected to be up
    to the task, why even bother establishing such an agency in the
    first place?
        Finally, because they are already significantly regulated
    at the State level, we don't believe that certain types of
    credit life and credit disability insurance should be under the
    CFPA.
        As Congress considers regulatory restructuring legislation,
    CUNA strongly urges Congress to restore credit unions' ability
    to properly serve the lending needs of their business-owning
    members. There is no economic or safety and soundness rationale
    to cap credit union business lending at 12.25 percent of
    assets.
        Before 1998, credit unions faced no statutory limit on
    their business lending. The only reason this restriction exists
    is because the banking lobby was able to leverage the provision
    when credit unions sought legislation to permit them to
    continue serving their members.
        The credit union business lending cap is overly restrictive
    and undermines America's small businesses. It severely limits
    the ability of credit unions to provide loans to small
    businesses at a time when these borrowers are finding it
    increasingly difficult to obtain credit from other types of
    financial institutions, as was described by Mr. Hirschmann from
    the U.S. Chamber in the previous panel. It also discourages
    credit unions that would like to enter the business lending
    market from doing so.
        We are under no illusion that credit unions can be the
    complete solution to the credit crunch that small businesses
    face, but we are convinced that credit unions should be allowed
    to play a bigger part in the solution.
        Eliminating or expanding the business lending cap would
    allow more credit unions to generate the portfolios needed to
    comply with NCUA's regulatory requirements and would expand
    business loans to many credit union members, thus helping local
    communities and the economy. Credit unions would do this
    lending prudently; the loss rate on business loans at credit
    unions is substantially below that of commercial banks.
        A growing list of small business and public policy groups
    agree that now is the time to eliminate the statutory credit
    union business cap for credit unions. And in July,
    Representatives Kanjorski and Royce introduced H.R. 3380, the
    Promoting Lending to America's Small Business Act, which would
    increase the credit union business lending cap to 25 percent of
    total assets and change the size of a loan to be considered a
    business loan. We estimate that credit unions could safely and
    soundly lend an additional $10 billion in small loans in the
    first year after enactment of such a bill.
        Madam Chairwoman, thank you very much for convening this
    hearing, and I look forward to answering the committee's
    questions.
        Chairwoman Velazquez. Thank you.
        [The statement of Mr. Hampel is included in the appendix.]
        Chairwoman Velazquez. We have three votes, so the committee
    will stand in recess and reconvene after these votes.
        [Recess.]
        Chairwoman Velazquez. The committee is called to order.
        Our next witness is Mr. John Moloney. He is President and
    CEO of Moloney Securities in Manchester, Missouri. Mr. Moloney
    began his career in brokerage over 30 years ago. In the mid-
    1990s, Mr. Molony formed Moloney Securities. He is the Chairman
    of SIFMA's Small Firms Committee and serves on FINRA's Advisory
    Board for small brokerage.
        Thank you and welcome.

                      STATEMENT OF E. JOHN MOLONEY

        Mr. Moloney. Thank you. Good afternoon, Chairwoman
    Velazquez, and Ranking Member Graves is not here, but the rest
    of the committee. Thank you for the opportunity to testify
    before you on behalf of SIFMA on how changes to the financial
    regulatory system could affect small broker-dealers.
        SIFMA and its small member firms applaud your efforts to be
    the advocate on behalf of small businesses. Small businesses
    are the backbone of the U.S. economy and small broker-dealers
    are instrumental in serving individual investors and
    entrepreneurs on Main Street.
        I will forgo the statistics for the industry and my
    company. They are in my written testimony. The only thing want
    to add is--the last line I have here is that my firm, like the
    overwhelming majority of broker-dealers, was not a TARP
    recipient.
        The majority of financial service reform proposals before
    Congress do not impact smaller firms like mine. However, small
    firms are concerned that changes contemplated for large global
    financial service firms could cause disparate effects on small
    firm operations. Because the investor confidence in these
    markets is important to all firms, regardless of size, a sound
    regulatory regime must contain several key elements.
        It must minimize systemic risk, promote safety and
    soundness of the regulated entities, promote fair dealing and
    investigator protection, be consistent from country to country
    where applicable, and be as effective and efficient as
    possible. Well crafted and thoughtful legislation is needed to
    avoid unintended consequences that the firms that I am
    representing did not cause.
        Congress should also include sunset provisions under the
    new laws and regulations so that they may achieve their desired
    effect and do not promote any undesired consequences.
        I would like to address two specific features of the
    financial service reforms that do affect my firm and my
    brokers.
        First, SIFMA has long advocated the modernization and
    harmonization of disparate regulatory regimes for brokers,
    dealers, investment advisors and other financial
    intermediaries. We welcome Treasury's proposed legislation,
    which appears to acknowledge these important distinctions and
    which would give the SEC the authority to establish rules for a
    new uniform Federal fiduciary standard that supersedes and
    improves on existing standards and is applied only in the
    context of providing personalized investment advice to
    individual investors.
        Second, predispute arbitration clauses are vital to the
    securities arbitration system. Small investors benefit in
    particular, as arbitration allows them to pursue claims they
    could not afford to litigate and do it on a much more timely
    basis. Treasury has proposed giving the SEC the authority to
    prohibit predispute arbitration clauses in broker-dealer and
    investment advisory account agreements with retail clients if
    it studies these clauses and concludes that there is any harm
    on investors. SIFMA supports that provision.
        There are several issues that impact regulation of smaller
    firms that I would like to address. While each one may be
    insignificant, taken as a whole the cumulative effect can be
    quite devastating. For example, fees for financial audits of
    small firms will increase due to the SEC's decision not to
    extend an exemption from small firms' Sarbanes-Oxley audit
    requirements. FINRA has proposed to eliminate anti-money-
    laundering third-party exemption for small firms; this will
    increase AML audit costs. SIPC, FINRA, and the MSRB have
    proposed or implemented increased assessments to firms already.
    The cumulative impact of these and other changes drain limited
    resources from small firms and from their efforts in paying for
    the compliance training and customer service functions.
        Finally, SIFMA supports the small business community
    initiative to correct deficiencies in Reg X to eliminate
    outdated regulations, ensure agencies do not ignore the
    requirements of Reg X, and compel agencies to consider economic
    impacts on the rules of small business.
        Thank you, Madam Chairwoman and the rest of the committee
    for allowing me to present SIFMA's views. We hope to continue
    the dialogue on the financial service regulatory reform and
    stand ready to assist any way we can.
        Chairwoman Velazquez. Thank you, Mr. Moloney.
        [The statement of Mr. Moloney is included in the appendix.]
        Chairwoman Velazquez. Our next witness is Ms. Dawn Donovan,
    the CEO of Price Chopper Employees Federal Credit Union in
    Schenectady, New York. Price Chopper has over 6,500 members
    with assets of $16 million. Ms. Donovan is testifying on behalf
    of the National Association of Federal Credit Unions. The
    Association of Federal Credit Unions was founded in 1967 to
    shape the laws under which Federal credit unions operate.
        Welcome.

                       STATEMENT OF DAWN DONOVAN

        Ms. Donovan. Good afternoon, Chairwoman Velazquez, Ranking
    Member Graves, and members of committee. My name is Dawn
    Donovan, and I am testifying today on behalf of the National
    Association of Federal Credit Unions, NAFCU. I serve as the
    President and CEO of Price Chopper Employees Federal Credit
    Union in Schenectady, New York. Our credit union has seven
    employees, approximately 4,500 members in six States and just
    over $19 million in assets.
        NAFCU and the entire credit union community appreciate the
    opportunity to participate in this discussion regarding
    financial regulatory restructuring and its impact on America's
    credit unions.
        It is widely recognized that credit unions did not cause
    the current economic downturn; however, we believe we can be a
    important part of the solution. Credit unions have fared well
    in the current economic environment and as a result many have
    capital available.
        Surveys of NAFCU member credit unions have shown that many
    are seeing increased demand for mortgage and auto loans as
    other lenders leave the market. Additionally, a number of small
    businesses who have lost important lines of credit from other
    lenders are turning to credit unions for the capital that they
    need. Our Nation's credit unions stand ready to help in this
    time of crisis and unlike other institutions have the assets to
    do so.
        Unfortunately, an antiquated and arbitrary member business
    cap prevents credit unions from doing more for America's small
    business community. It is with this in mind that NAFCU strongly
    supports H.R. 3380, the Promoting Lending to America's Small
    Businesses Act of 2009. This important piece of legislation
    would raise the member-business lending cap to 25 percent of
    assets, while also allowing credit unions to supply much-needed
    capital to underserved areas which have been among the hardest
    hit during the current economic downturn.
        NAFCU also strongly supports the reintroduction of the
    Credit Union Small Business Lending Act, which was first
    introduced by Chairwoman Velazquez in the 110th Congress.
        As the current Congress and administration mull regulatory
    reform, NAFCU believes that the current regulatory structure
    for credit unions has served the 92 million American credit
    union members well. As not-for-profit member-owned
    cooperatives, credit unions are unique institutions in the
    financial services arena and make up only a small piece of the
    financial services pie.
        We believe that NCUA should remain the independent
    regulator of credit unions and are pleased to see the
    administration's proposal would maintain this independence as
    well as the Federal credit union charter.
        NAFCU also believes that the proposal is well intentioned
    in its effort to protect consumers from the predatory practices
    that led to the current crisis. We feel there have been many
    unregulated bad actors pushing predatory products onto
    consumers, and we applaud efforts to address this abuse.
        It is with this in mind that we can support the creation of
    the Consumer Financial Protection Agency, CFPA, which would
    have authority over nonregulated institutions that operate in
    the financial services marketplace. However, NAFCU does not
    believe such an agency should be given authority over regulated
    federally insured depository institutions, and opposes
    extending this authority to credit unions.
        As the only not-for-profit institutions that would be
    subject to the CFPA, credit unions would stand to get lost in
    the enormity of the proposed agency. Giving the CFPA the
    authority to regulate, examine, and supervise credit unions,
    already regulated by the NCUA, would add an additional
    regulatory burden and cost to credit unions. Additionally, it
    could lead to situations where institutions regulated by one
    agency for safety and soundness find their guidance in conflict
    with the regulator for consumer issues. Such a conflict will
    result in diminished services to credit union members.
        Credit unions already fund the budget for NCUA. As not-for-
    profits, credit unions cannot raise moneys from stock sales or
    capital markets. This money comes from their members' deposits,
    meaning credit union members would disproportionately feel the
    cost burden of a new agency.
        However, NAFCU also recognizes that more should be done to
    help consumers and look out for their interests. We would
    propose that rather than extending the CFPA to federally
    insured depository institutions, each functional regulator
    create a new strengthened office on consumer protection.
        We were pleased to see the NCUA recently announce its
    intention to create such an office. Consumer protection offices
    at the functional regulators will ensure those regulating
    consumer issues have knowledge of the institutions they are
    examining and guidance on consumer protection. This is
    particularly important to credit unions as they are regulated
    and structured differently from others.
        We believe such an approach would strengthen consumer
    protection while not adding unnecessary regulatory burden. Part
    of avoiding that burden will be to maintain a level of Federal
    preemption so small institutions like mine, with members in
    several States, are not overburdened by a wide variety of State
    laws.
        In conclusion, while there are positive aspects to consumer
    protection and regulatory reform, we believe Federal credit
    unions continue to warrant an independent regulator handling
    safety and soundness and consumer protection matters.
        I thank you for the opportunity to appear before you on
    behalf of NAFCU and would welcome any questions that you may
    have.
        Chairwoman Velazquez. Thank you, Ms. Donovan.
        [The statement of Ms. Donovan is included in the appendix.]
        Chairwoman Velazquez. I am going to ask this question to
    everyone. I will ask everyone to answer, even though I
    anticipate the answers that you will provide--but just to be on
    the record.
        As you know, the President laid out five core elements for
    reform in his white paper, and these include stronger
    supervision of institutions, comprehensive supervision of
    financial markets, enhanced consumer protection, the creation
    of tools for financial crisis, and increasing international
    cooperation.
        In your opinion, which of these elements should be
    prioritized? Mr. MacPhee?
        Mr. MacPhee. I think given what we have just come through
    in this country, and the lack of regulation on the
    unregulated--and oversight--and the dismal position that we
    found ourselves in when the smoke cleared in terms of the
    funding of our reserve for FDIC insurance, et cetera, I think
    oversight has to be the first priority. And I think the
    systemic risk in our whole system has to be priority.
        Chairwoman Velazquez. Mr. Roberts.
        Mr. Robinson. Madam Chair, I would think also that the
    issues surrounding systemic risk and surrounding those
    organizations that previously were unregulated or
    underregulated are the most important items to address among
    those items that you talked about.
        Chairwoman Velazquez. Thank you.
        Mr. Hampel.
        Mr. Hampel. I would agree with those comments. One thing
    the Congress needs to be concerned about is, right now there is
    a fervor to do regulatory reform because we are still in the
    latter stages of the crisis. And that is perhaps not the best
    time to make significant changes when we are so caught up in
    the moment.
        The risk is, if we wait too long, by the time we have had
    enough time to study it properly, there will not be sufficient
    impetus do it--extending some form of regulation to the
    currently unregulated.
        Chairwoman Velazquez. Mr. Moloney.
        Mr. Moloney. Again, I think the systemic element has to be
    dealt with as a high-priority item.
        I would also maybe go to the other end and start with the
    consumer protection and move up from there. Between those two,
    I think you can cover a lot of ground towards making it a more
    effective and fair playing field.
        Chairwoman Velazquez. Okay.
        Ms. Donovan.
        Ms. Donovan. Madam Chair, I would say our position would be
    the systemic risk. But also the regulation of the unregulated,
    pretty much as Mr. Hampel and the other members of this panel
    have said.
        Chairwoman Velazquez. Thank you.
        Mr. Roberts and Ms. Donovan, during times of financial
    duress, higher capital requirements can provide a cushion for
    lenders. But these increased levels can also restrict a bank or
    credit union's ability to make loans to small firms.
        Can you talk about how higher capital requirements might
    impact your small business lending practices?
        Mr. Roberts. I think that is really a very good question.
        In my testimony, I spoke about the fact that in 2008, my
    bank paid $75,000 in FDIC insurance. In 2009, that number could
    be anywhere between $550,000 and $700,000.
        When you start looking at those numbers, what in turn you
    see is, that means profitability. Money that is going to go
    into the capital of our organization is going to be reduced by
    $475,000 to about $600,000. In turn, what that relates to is
    capital to support loans, loans that might be available,
    supported by that capital, could be anywhere from $5 million to
    $7 million less. That is certainly going to impact our ability
    to lend to small businesses as well as customers as a whole.
        As those capital requirements get to be tighter, it
    certainly does provide an additional safety net, but one has to
    keep in mind that it is also going to restrict lending.
        Chairwoman Velazquez. And then there will be other people
    that will say that the risk to taxpayers and depositors goes
    down.
        Mr. Roberts. I would--my response to you is, I think there
    is a practical level of capital that can satisfy both sides of
    that particular equation.
        We talked earlier--I think at the prior panel--that some
    people were leveraged 30-to-1; that is probably too much. Is 5-
    to-1 too little? I would suggest that it is. I think there is a
    capital level that is a reasonable balance that continues funds
    able to be lent and still provides that safety to the taxpayer.
        Chairwoman Velazquez. Ms. Donovan?
        Ms. Donovan. Madam Chair, most credit unions today have
    sufficient capital. We have good capital on hand.
    Unfortunately, the artificial cap that is on member lending is
    what is refraining us from lending that out.
        I am a very small credit union, as I noted. We have hardly
    any member-business lending, very little. However, we do have
    the capital to lend to the small businesses in our community.
    And most credit unions do have that at this point.
        Chairwoman Velazquez. Okay.
        Mr. Moloney, up until the financial crisis, the economy
    experienced a decade of relatively solid growth, and during
    this time we saw an explosion of financial innovation and all
    of the products that went with it.
        Are you concerned that the proposed regulation might
    reverse this trend of financial innovation?
        Mr. Moloney. Good question.
        "Yes" is the short answer, but I probably would like to
    also state that I think that it is very possible that with the
    creation of these innovative products, we may have gotten ahead
    of ourselves and had things that people really did not fully
    think out and sold to clients who didn't have a clue.
        So maybe the answer is "yes." I want to have that ability,
    but I also want to make sure that the people who are involved
    on the buying and the selling side of it know the products that
    they are dealing with.
        Chairwoman Velazquez. Mr. MacPhee and Mr. Hampel,
    addressing systemic risk will be an essential element of the
    reform proposal. As you noted in your testimony, community
    banks are smaller and are much less interconnected than larger
    international institutions. Even so, community banks can still
    transmit risk into the financial system.
        In light of this, should community banks or all credit
    unions be subject to systemic regulation?
        Mr. Hampel. Well, Madam Chair, speaking for credit unions,
    my understanding of systemic risk is such that if even the
    largest 10 credit unions were all to get into extreme
    difficulty at same time, it would not spread to the rest of the
    financial system. So I don't think that credit unions could
    ever be the source of systemic risk, just by the nature of
    their size.
        However, credit unions, because they are connected and
    users of the rest of the financial system, can be victims of
    the systemic risk of other institutions; and that is why we are
    interested in the issue.
        Chairwoman Velazquez. Okay.
        I have other questions, but I will--
        Mr. Graves. I will pass, Madam Chair, for now.
        Chairwoman Velazquez. Mr. Westmoreland?
        Mr. Westmoreland. Thank you, Madam Chair.
        Let me say--you know, the first panel we talked about
    unintended consequences. And, Mr. Roberts, you hit the nail on
    the head with your testimony about being the victims of
    somebody else doing some wrong things in the banking industry.
        You understand that our concern about some of these new
    agencies that are created, we don't know what the rules and
    regs are going to be. And that is basically what has happened
    with some of the legislation that we have passed recently not
    knowing how the regulators are going to go out into these banks
    and enforce certain regulations that Congress really does not
    have any control over.
        Now, I know from talking to some of my independent bankers
    and community bankers that--how many sets of regulators, Mr.
    Roberts, does the typical bank have in Virginia? Are you in
    Michigan or Virginia?
        Mr. Roberts. I am in Virginia.
        Mr. Westmoreland. Virginia?
        Mr. Roberts. We are--again, with a dual banking system, we
    are a State-chartered bank that happens also to be a member of
    the Federal Reserve System. We are regulated by the
    Commonwealth of Virginia and we are also regulated by the
    Federal Reserve.
        Mr. Westmoreland. How many sets of regulators do you have
    come in?
        Mr. Robinson. We will have, in any particular year, at
    least two examinations. One would be a safety and soundness
    examination by either the State or the Federal Reserve. The
    second would be a consumer affairs examination that is solely
    looking at our adherence to consumer protection laws; that is
    done by the Federal Reserve.
        I think it was stated earlier in this testimony that I
    fully believe that the prudential regulator, the one who has
    responsibility for safety and soundness, ought to have
    responsibility for consumer affairs.
        I would also share with the committee, about 6 weeks ago we
    just completed a consumer affairs examination by the Federal
    Reserve. Prior to that examination, we received a questionnaire
    from the Federal Reserve, probably 45-50 pages long, requesting
    a number of documents, as well as questions. We had 14
    examiners come into our bank for 2 weeks to review all of those
    issues that they thought might have arisen through that pre-
    questionnaire.
        I would suggest to you that it was a very extensive, fully
    complete examination that is entirely separate from safety and
    soundness.
        Mr. Westmoreland. On top of that we had another knee-jerk-
    reaction kind of thing in Congress actually before I got here,
    Sarbanes-Oxley.
        Could you tell me, due to that knee-jerk reaction, how much
    that costs the average bank? I know you said your FDIC premiums
    went from 75 to 5 and something.
        What kind of cost and what kind of audit does the Sarbanes-
    Oxley law bring to the banking business?
        Mr. Robinson. We have done regular reviews of the cost of
    Sarbanes-Oxley at our bank. The cost, year in and year out,
    approaches $250,000 to $275,000. We have right at 2.5 million
    shares of stock outstanding.
        I have shared with my shareholders at annual meetings the
    cost is about 10 cents a share. If you are at a trading volume
    of 10 times earnings, that is going to be a dollar a share. At
    16 times earnings that is a $1.60 a share that takes place year
    in and year out. And I would suggest that my shareholders
    hardly see the benefit of that reaction.
        Mr. Westmoreland. Thank you.
        Mr. Moloney, when we talk about things being
    underregulated, we had the credit default swaps which, if I
    understand correctly, is a company that was offering insurance
    on something that they were selling that was not regulated to
    offer insurance, so they came up with a product called a credit
    default swap.
        Is that basically what that is in a common language?
        Mr. Moloney. It is an element that our firm was never
    involved with.
        Mr. Westmoreland. There is somewhere down the line with the
    credit default swap and all of these derivatives and stuff
    that, to me, somebody that was--these companies are regulated.
    The SEC or somebody should have caught this, and I don't know
    if it was underregulation or the lack of enforcement in people
    wanting to expose some of these programs that were out there.
        But the problem that we are having--and I am in Georgia,
    and we have had more failed banks that anywhere else, and what
    is happening is--Mr. Roberts, you spoke of this--the regulators
    are coming in and changing the way some of these banks, that
    had a good business going on, are able to lend money, how much
    cash reserves they have got to have versus how much money they
    are able to lend; reduction in real estate portfolios that are
    performing assets, but they are wanting them reappraised, more
    cash put in the deal. And it is really a snowball effect.
        And Madam Chair, I will yield. I know I have taken more
    time than the light. But--I would like to have at least one
    more round of questioning, if that is possible, but I yield
    back to you.
        Chairwoman Velazquez. You can continue.
        Mr. Westmoreland. Thank you, ma'am.
        From what I see, the problem is that--Mr. MacPhee, being a
    community bank, I would like to hear from you too.
        Because what it seems like, when we passed the TARP
    legislation, we were told that this was going to be used to
    free up the credit market. And it has had, to me, just the
    opposite effect on freeing up the credit market.
        It has already created a snowball effect of real estate
    values. What is going on in the marketplace; the banks that did
    get the TARP money are using this just to straighten up their
    books. And if you look at Goldman Sachs, and Bank of America
    talked about they made billions of dollars, they were able to
    buy these assets for 10 to 20 cents on the dollar and then sell
    them for 30 or 40 cents on the dollar, so they really did have
    a value there.
        But to clean up their books and to do what some of these
    regulators were making them do, people were losing their
    retirement, they were losing their equity, they were losing all
    the cash that they had put in the deal, now that they can no
    longer get out. It has had just the reverse effect on that.
        And that is what concerns me about some of this big
    legislation that we are talking about is, some of these
    unintended consequences of possible rules and regs that can be
    written and enforced by some agencies that we really have no
    control over.
        Could you comment on some of that?
        Mr. MacPhee. Yes, thank you. I am no expert on TARP. I do
    know that at the time that TARP was put into place and the
    institutions that were qualified for and took TARP, it was an
    important step in reassuring the public that the financial
    institution system in this country was going to go on. So I
    don't fault them for that.
        I think that being from a community bank, we are a $77
    million bank and have 13.7 percent to capital and 29 percent
    liquidity. It is not a model that you see very often today.
    When the others were paying out 75 percent in dividends and
    retaining 25 percent, our model was the opposite. We were
    paying out 25 percent and retaining 75 percent.
        I am not saying that we are right and they are wrong. But
    there was a happy medium in there. I think both the unregulated
    and the systemically risky, which I would define as those banks
    over $100 billion could wreak havoc on society again, and did
    need TARP money to survive.
        The community banks today, I can tell you, are willing and
    ready to loan. I have money. Unfortunately for me, I live in a
    State where the unemployment is so high that I am not seeing
    the loan value that you might see in other areas.
        Mr. Westmoreland. I will have you open up a branch in
    Georgia. We have borrowers down there.
        One thing for the credit union, you don't belong to the
    FDIC, right?
        Ms. Donovan. Correct. We are regulated by the NCUA.
        Mr. Westmoreland. What kind of fees do you pay them for
    your deposits?
        Ms. Donovan. On average to NCUA, it might be a $1,000 or
    $1,500, what it might cost me. It does not seem like a lot of
    money, I am sure. However, I have seven employees including
    myself--six, full-time; one, part-time--and we take care of all
    4,500 members over the six States.
        In the whole scheme of things, it is a lot of money for us.
    My payroll is very slim. I take on many roles.
        Mr. Westmoreland. But do you have to pay a premium for what
    your deposits are, what they guarantee? They guarantee your
    deposits, right?
        Ms. Donovan. Correct.
        Mr. Westmoreland. So your fee for your deposits would be
    1,500 bucks?
        Ms. Donovan. Yes.
        Mr. Hampel. This year, credit unions will pay an insurance
    premium of 15 basis points of their insured shares, which is
    higher than what it normally is for credit unions, but it is
    because of losses, collateral damage credit unions have
    experienced.
        We typically fund our system by credit unions makeing
    deposits into the fund, and it is the earnings from those
    deposits that the insurance fund uses to operate. Probably, for
    the next several years, credit unions will be paying premiums
    of about 15 basis points. It is probably less than what FDIC-
    insured institutions will pay, but it is significant compared
    to what credit unions have historically paid.
        Mr. Westmoreland. Thank you.
        I yield back, Madam Chair.
        Chairwoman Velazquez. Thank you.
        Mr. MacPhee, I would like to ask my last question to you.
    It is regarding securitization that has been billed as one of
    the chief culprits in the financial crisis. At the same time it
    has been credited with increasing the availability of capital
    for small firms.
        To what degree does your bank take advantage of loan
    securitization, and do you believe it should be constrained
    going forward?
        Mr. MacPhee. Our bank has basically used Fannie and Freddie
    secondary market for liquidity purposes and for helping out
    with our capital situation.
        We tend to retain most of our loans in our bank. We still
    do a 5-year balloon mortgage for our customers, and I think--
    one of the things that we have to do as a community bank is,
    relationship banking rather than transactional banking. So the
    structure out there for most community bankers that I deal
    with, it is important to have securitization and
    collateralization and selling off to the secondary market to
    keep liquidity in the system.
        Chairwoman Velazquez. Mr. Roberts.
        Mr. Roberts. I would agree with you wholeheartedly that
    securitization has been a part of the problem that has been
    created in our economy. And I would agree with you
    wholeheartedly that securitization is one of those avenues that
    has allowed greater lending to take place. It has provided
    additional liquidity, additional funding to come into financial
    institutions that have allowed for continuing loans to take
    place.
        It would seem to me, however, that it has been a part of
    what has caused some systemic risk; and I think that we need to
    consider what regulations that we can put into place that would
    not allow the issues that have happened over the past 12 months
    to happen again. But that does not mean throwing the baby out
    with the bathwater and stopping securitization. That has been a
    very important factor in the ability of this country to go
    forward.
        Chairwoman Velazquez. Very good.
        Does any other member wish to ask questions?
        Let me take this opportunity thank all of you. This has
    been very insightful, and as a member of the Financial Services
    Committee, it helps me to bring a different perspective into
    the debate. And so, for that, I really appreciate all your
    cooperation and being here today. Thank you.
        I ask unanimous consent that members will have 5 days to
    submit a statement and supporting materials for the record.
        Without objection, so ordered.
        This hearing is now adjourned.
        [Whereupon, at 4:53 p.m., the committee was adjourned.]

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