[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

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

52-261 PDF                       WASHINGTON : 2009 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, 
Washington, DC 20402-0001 













                   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.]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                                 
