[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                      THE EFFECT OF DODD-FRANK ON

                      SMALL FINANCIAL INSTITUTIONS

                          AND SMALL BUSINESSES

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



                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 2, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-12




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

EDWARD R. ROYCE, California, Vice    CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
DONALD A. MANZULLO, Illinois         LUIS V. GUTIERREZ, Illinois
WALTER B. JONES, North Carolina      MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas                GARY L. ACKERMAN, New York
PATRICK T. McHENRY, North Carolina   RUBEN HINOJOSA, Texas
THADDEUS G. McCOTTER, Michigan       CAROLYN McCARTHY, New York
KEVIN McCARTHY, California           JOE BACA, California
STEVAN PEARCE, New Mexico            BRAD MILLER, North Carolina
LYNN A. WESTMORELAND, Georgia        DAVID SCOTT, Georgia
BLAINE LUETKEMEYER, Missouri         NYDIA M. VELAZQUEZ, New York
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
SEAN P. DUFFY, Wisconsin             STEPHEN F. LYNCH, Massachusetts
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
FRANCISCO ``QUICO'' CANSECO, Texas


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 2, 2011................................................     1
Appendix:
    March 2, 2011................................................    43

                               WITNESSES
                        Wednesday, March 2, 2011

Borris, David, Main Street Alliance..............................    32
Buckley, John P., Jr., President and Chief Executive Officer, 
  Gerber Federal Credit Union, on behalf of the National 
  Association of Federal Credit Unions (NAFCU)...................     9
Cheney, O. William, President and Chief Executive Officer, Credit 
  Union National Association (CUNA)..............................    10
Kelly, Albert C., Jr., Chairman and Chief Executive Officer, 
  SpiritBank, on behalf of the American Bankers Association (ABA)     7
MacPhee, James D., Chairman, Independent Community Bankers of 
  America (ICBA).................................................    14
Nielsen, Robert, Chairman of the Board, National Association of 
  Home Builders (NAHB)...........................................    28
Schaible, John M., CEO, Chairman, and Founder, Atlas Federal 
  Holdings.......................................................    30
Sharp, Jess, Executive Director, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................    26
Skillern, Peter, Executive Director, Community Reinvestment 
  Association of North Carolina..................................    16
Stinebert, Chris, President and Chief Executive Officer, American 
  Financial Services Association (AFSA)..........................    12

                                APPENDIX

Prepared statements:
    Canseco, Hon. Francisco......................................    44
    Huizenga, Hon. Bill..........................................    45
    Borris, David................................................    46
    Buckley, John P., Jr.........................................    50
    Cheney, O. William...........................................    83
    Kelly, Albert C., Jr.........................................   100
    MacPhee, James D.............................................   116
    Nielsen, Robert..............................................   125
    Schaible, John M.............................................   140
    Sharp, Jess..................................................   161
    Skillern, Peter..............................................   169
    Stinebert, Chris.............................................   175

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the National Association of REALTORS 
      (NAR)......................................................   181
    Written statement of the National Association of Small 
      Business Investment Companies (NASBIC).....................   183
    Written statement of the Retail Industry Leaders Association 
      (RILA).....................................................   186
McCarthy, Hon. Carolyn:
    Written responses to questions submitted to John Buckley.....   218
    Written responses to questions submitted to O. William Cheney   220
    Written responses to questions submitted to Albert C. Kelly, 
      Jr.........................................................   224
    Written responses to questions submitted to Chris Stinebert..   226


                      THE EFFECT OF DODD-FRANK ON



                      SMALL FINANCIAL INSTITUTIONS



                          AND SMALL BUSINESSES

                              ----------                              


                        Wednesday, March 2, 2011

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:02 p.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Royce, 
Westmoreland, Luetkemeyer, Huizenga, Duffy, Renacci, Canseco; 
Maloney, Watt, and Scott.
    Chairwoman Capito. Thank you. This hearing will come to 
order.
    As many of you know, we have pending votes that are 
supposed to begin at any moment. Flexibility is the key here. 
What we would like to do is go ahead and get started and get 
our opening statements, and then we may have to adjourn the 
meeting and come back after our votes. So, to our witnesses, I 
apologize for the inconvenience in advance.
    I would like to thank the members of the Financial 
Institutions Subcommittee for joining me today in today's 
hearing entitled, ``The Effect of Dodd-Frank on Small Financial 
Institutions and Small Businesses.''
    As the House and Senate worked through financial regulatory 
reform, there was a constant theme: small institutions should 
be exempted from the provisions of this Act. In theory, I think 
we can all agree on this point. But, despite the efforts of 
many to carve out small financial institutions with less than 
$10 billion in assets, this is not the case. Now that Dodd-
Frank is being implemented, we are hearing concerns about 
additional regulatory burden from the very institutions that 
were supposed to be exempted.
    The most notable carve-out in the Dodd-Frank Act is the 
exemption of small institutions from supervision by the newly-
created Consumer Financial Protection Bureau (CFPB). In 
January, the Financial Services Committee heard testimony from 
Charles Maddy, a friend of mine and a community banker from 
West Virginia. Despite operating an institution that is below 
$10 billion in assets, Mr. Maddy is very concerned that small 
institutions like his will be subject to the rules that the 
Bureau creates even when they are not subject to their 
supervision.
    What does this mean for a small institution? They will have 
to hire more compliance staff, which puts additional cost 
pressures on their ability to cooperate. Higher compliance 
costs, combined with uncertainty about capital standards, will 
have a direct result on small institutions' ability to serve 
their small business clients.
    Our economy relies on the growth and innovation of small 
business and entrepreneurs. Some of these entrepreneurs are 
fortunate enough to have startup capital, but many are not. 
They are often dependent on small financial institutions for 
loans to start their companies. We must make sure that 
overburdensome regulations on small institutions do not have 
the spillover effect of stifling economic growth and small 
business development.
    I look forward to hearing from our two panels today.
    I would like to recognize the ranking minority member, the 
gentlelady from New York, Mrs. Maloney, for the purpose of 
making an opening statement.
    Mrs. Maloney. Thank you very much.
    I thank Chairwoman Capito and, on the Democratic side, 
Congressman Scott from the great State of Georgia for being 
with us for this important meeting.
    I am very proud of the work that we did to enact financial 
regulatory reform last summer in the wake of one of the deepest 
recessions in my lifetime. We did a number of critical things 
in that bill to put investors on an equal playing field with 
financial institutions, to provide consumers with a new bureau 
that will regulate predatory financial products, to end ``too-
big-to-fail,'' to regulate the derivatives market, and to 
ensure that systemically important firms are adequately 
supervised and regulated.
    We are still in the early days of the implementation of 
this reform effort, and there will still be some uncertainty 
about how the rules will affect financial institutions going 
forward. But, throughout our effort, we were mindful of the 
impact that these reforms would have on smaller financial 
institutions. Because we all agree that small financial 
institutions did not cause the financial crisis, we all agree 
that small financial institutions were absolutely critical to 
ensuring that capital would continue to flow to small 
businesses, and we all agree that small financial institutions 
function very differently than larger institutions.
    With all of this in mind, we enacted a number of important 
things in Dodd-Frank with small institutions in mind, and I 
would like to highlight a few of them.
    First, we changed the formula for deposit insurance in 
assessments so small institutions, including community banks 
and credit unions, will pay significantly less in premiums. We 
did this by putting forward a formula that better reflects the 
risks an institution poses to the Deposit Insurance Fund using 
total consolidated assets minus tangible equity, rather than 
simply domestic deposits. This will ensure that larger 
institutions engaged in riskier activities will then be 
required to pay more, and lower assessments will mean more room 
for smaller institutions to lend to small businesses.
    Second, we made the $250,000 deposit insurance limit 
permanent, which will increase public confidence and help 
smaller financial institutions continue to serve their 
communities.
    Third, we leveled the playing field for small financial 
institutions and credit unions so that they can compete with 
nonbank institutions for the first time. Nonbank institutions 
such as mortgage brokers and payday lenders were playing by a 
different set of rules, and now these institutions will have a 
new regulator, the CFPB, to ensure that they are regulated in 
the same manner as financial institutions are regulated.
    We also exempted institutions under $10 billion from the 
fee caps in our interchange rule.
    Finally, we exempted smaller institutions from CFPB 
supervision so they will continue to have a single Federal 
regulator for safety and soundness under either the OCC, the 
FDIC, or the Fed.
    I will be very much interested in hearing from the 
witnesses today what you see as the challenges going forward. I 
look forward to your testimony, and we appreciate the positive 
role that you have played in our economy. We want to make sure 
that you continue playing that positive role.
    Thank you, and I yield back. And I guess we have time for 
other people to comment?
    Chairwoman Capito. Yes. I would like to recognize the 
gentleman from California, Mr. Royce, for 2 minutes for an 
opening statement.
    Mr. Royce. I thank the chairwoman; and I do, Madam 
Chairwoman, want to recognize Bill Cheney from California, who 
is one of the witnesses here today.
    I want to say that there is agreement on both sides of the 
aisle on the fact that smaller institutions did not cause this 
crisis. Where we have some disagreement is the concern that we 
have on our side of the aisle, a concern many economists have 
pointed out is that, as a result of Dodd-Frank, we have now put 
smaller institutions at a structural competitive disadvantage 
because of the legislation. As time goes on, how we treated 
small institutions in this legislation becomes clear, and I 
would like to point out three things.
    The first would be what we did really compounds ``too-big-
to-fail,'' and it divides our financial system really between 
those who are going to have the implicit government backstop. 
The FDIC tells us the advantage of doing this, a lower 
borrowing cost, 100 basis points for the institutions that are 
large and, of course, for their smaller competitors, the ``too-
small-to-save'' competitors, this is an issue.
    The second issue is it adds another layer of regulations 
through the new CFPB and then it restricts the ability to 
recover costs through the interchange fee. Even the head of the 
Federal Reserve, the agency tasked with implementing the rule, 
says the small issuer exemption may not be workable; and I 
think these are issues that we have to examine at this hearing.
    Thank you.
    Chairwoman Capito. Thank you.
    I would like to recognize the gentleman, Mr. Scott, for 4 
minutes for an opening statement.
    Mr. Scott. Thank you very much, Madam Chairwoman, and thank 
you for this important hearing on the Dodd-Frank financial 
reform legislation and how it is impacting small businesses and 
small banks.
    The original intent of the Dodd-Frank legislation was to 
increase oversight and enforcement of existing protections for 
consumers while at the same time putting a stop to reckless 
behavior by Wall Street that helped cause the financial crisis.
    The law continues to promote transparency and 
accountability that was lacking in the financial sector so the 
consumers who are constituents are protected against predatory 
lending practices and excessive risk-taking. In the Dodd-Frank 
legislation, we also move to protect community banks. We 
exempted many of them from many of the bill's provisions so 
that they could continue to compete with large banks and serve 
the local communities.
    Our small community banks form the heart and soul of our 
local communities in terms of financial arrangements. Despite 
these protections for small institutions, there is one aspect 
of the financial legislation that remains a major point of 
concern to me and that issue is a limit on interchange fees. 
This was approved by a Durbin Senate amendment but was never 
considered by the House of Representatives.
    These interchange fees, whether restricted or not, are a 
contentious subject within the realm of finance and business, 
both large and small. The current rule proposed by the Federal 
Reserve would cap interchange fees at 12 cents, which is around 
10 percent lower than the average fee on such transactions last 
year and a very drastic reduction from the current level of 
around 44 cents, a decrease of 78 percent.
    I was happy to participate in a hearing in this 
subcommittee 2 weeks ago where the primary topic was 
interchange fees, and I am pleased we have an opportunity to 
discuss this issue again.
    Earlier today, I put the question to Federal Reserve 
Chairman Bernanke and I was pleased to get his response that 
there is concern that we make sure we move on this issue 
judiciously, very carefully so that we do what is in the best 
interest of the consumer and the retailer as well as our 
financial institutions and especially credit unions and the 
smaller banks that were not consulted in the initial survey.
    The intended purpose of interchange fees is to protect 
consumers who rely on debit cards for daily purchases. However, 
if the unintended consequence of this limit is a strain on 
consumers and on the smaller institutions, then we must revisit 
this issue.
    I look forward to a vibrant discussion on this critical 
issue, and I hope we can find a solution that both protects the 
consumer as well as our retailers and our smaller financial 
institutions from additional fees in this already challenging 
economic climate. Our small businesses and the smaller banks 
form the heart and soul of our economic system, creating most 
of the jobs and providing the way out of the economic 
difficulties we are in today; and that is why this hearing is 
so very, very important and timely.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize the gentleman from Georgia for 1 
minute for an opening statement.
    Mr. Westmoreland. I thank the chairwoman.
    As you know, I am keenly aware of the impact that 
government regulations have had on our community financial 
institutions and small businesses. Georgia has had 59 bank 
failures since 2008, including 6 failures already in 2011. When 
a community institution closes, millions of dollars in 
community wealth are lost.
    Unfortunately, the reality is the Dodd-Frank Act 
protections for small community institutions will not shield 
the backbone of our communities from the overreaching 
government regulations, despite its sales pitch. Failed banks 
are one of the top threats to the small business 
entrepreneurship and job growth in Georgia, and these 
overbearing regulations stemming from Dodd-Frank are a major 
threat to small businesses and job growth across the country.
    When small banks have employed more compliance officers 
than tellers or loan officers, we need to take pause and assess 
what we, the government, have done to put them under such a 
burden for their business and all their customers. I look 
forward to hearing from all of the witnesses, hopefully with a 
solution other than more regulation.
    I would like to thank the chairwoman for yielding.
    Chairwoman Capito. Thank you.
    I would now like to recognize Mr. Luetkemeyer for 1 minute 
for an opening statement.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman, and thank you 
for holding this hearing.
    As a former community banker, I have very serious concerns 
with the effect of Dodd-Frank, what it would have on small 
institutions and businesses. I am afraid that we are creating 
uncertainty among these institutions that are heading down a 
very slippery regulatory slope with many of the provisions of 
this bill.
    The Durbin amendment on interchange fees, for example, 
allows the Federal Reserve to set price caps on financial 
products. While many maintain that small institutions with less 
than $10 billion in assets will be carved out of this rule, I 
am concerned by the potential for discrimination and the 
potential for merchants to come back to Congress when they 
decide that institutions under $10 billion are charging what 
they deem to be unfair fees.
    Dodd-Frank also created the Consumer Financial Protection 
Bureau, a self-regulated body funded outside the congressional 
appropriations process that may even be unconstitutional that 
promises to promulgate rules to regulate every single financial 
product available. This agency puts consumer protection above 
safety and soundness, our financial system, causing great 
concern and further uncertainty in the marketplace. It is the 
uncertainty that is most damaging to our system.
    Across America, small businesses that could be growing and 
reinvesting in their customers are being forced to hire staff 
to deal exclusively with the increased regulatory burdens they 
face. I hear it from every business person who walks in my 
office, from banks and credit unions to utility companies and 
insurance agents and farmers. We are regulating ourselves out 
of an economic recovery, and legislation intended to help the 
situation will only make it worse.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Our final opening statement will be from Mr. Huizenga, who 
would also like to make an introduction.
    Mr. Huizenga. Thank you, Madam Chairwoman. I appreciate 
that.
    I know our votes clock has started, so we will make this 
quick, and you will see everybody rush out to go take care of 
our business.
    But I appreciate you having this hearing. This is an 
important hearing as we are moving forward on Dodd-Frank.
    The Congressional Research Service has estimated that there 
are 300 rules made by 10 different agencies regarding these 
rulemakings. And I can tell you that it also has stated that 
companies under 20 employees--there is over a $10,000 per 
employee estimation for just complying with Federal 
regulations. As a gentleman who owns a small gravel company 
with 2 employees, that means I have over $20,000 a year just 
for compliance on those things. And with an 11-year-old loader, 
which is the key to my business, I desperately could use that 
cash in my business.
    But I look forward to hearing your testimony from you all 
today regarding the effects of the Dodd-Frank.
    More importantly, I am pleased and honored to welcome one 
of the witnesses who is an important constituent of Michigan's 
2nd District, John Buckley. He is from a great little town 
called Fremont. If you have ever eaten Gerber Baby Food, that 
is the home of it, and we are very proud of that.
    Mr. Buckley is the president and CEO of Gerber Federal 
Credit Union located in Fremont. He has a long and impressive 
resume both in community banks and now with credit unions. He 
earned his BA in economics from Notre Dame, an MBA from the 
University of Illinois, and he is a graduate of the banking 
school of the University of Wisconsin. So you pretty much run 
the entire Big 10 there.
    And like most community leaders, he is very active in the 
area; and I think that is a key as we are looking at this. 
These are people who are very active in their communities.
    As a small business owner, I know that there are some 
universal principles of success that Congress needs to work on 
to grow this economy again. For government, that means creating 
an atmosphere for success for small business that does not 
include a burdensome regulatory environment.
    I believe, Madam Chairwoman, that my time is up. But I 
appreciate you all being here today and informing this 
committee. Thank you.
    Chairwoman Capito. Thank you.
    As you can hear, the bell is going off and probably some 
distractedness. We have three votes, which should probably 
bring us back here in half an hour. Again, I apologize. I will 
then introduce the witnesses, and we will have the testimony.
    Thank you. We are in recess.
    [recess]
    Chairwoman Capito. The hearing will come back to order.
    I am pleased to welcome--and again, excuse us for our 
little gap in the proceedings--the first panel. I will just 
introduce you right before you speak individually, if that is 
all right.
    Our first panelist is Mr. Albert C. Kelly, president and 
chief executive officer of Spirit Bank, on behalf of the 
American Bankers Association. Mr. Kelly, you are recognized for 
5 minutes. I ask that you all keep your statements to 5 
minutes. We have your larger statements for the record and we 
can ask some questions. Yes, sir.

STATEMENT OF ALBERT C. KELLY, JR., CHAIRMAN AND CHIEF EXECUTIVE 
    OFFICER, SPIRITBANK, ON BEHALF OF THE AMERICAN BANKERS 
                       ASSOCIATION (ABA)

    Mr. Kelly. Chairwoman Capito, Ranking Member Maloney, and 
members of the subcommittee, my name is Albert Kelly. I am 
president and CEO of SpiritBank in Bristol, Oklahoma, and 
chairman-elect of the American Bankers Association.
    Thank you for the opportunity to testify today. These are 
very important issues for the thousands of community banks that 
work hard to serve our communities every day.
    The health of banks and the economic strength of our 
communities are closely interwoven. A bank's presence is a 
symbol of hope, a vote of confidence in a town's future.
    This connection is not new. Most banks have been in their 
communities for decades. SpiritBank has served our community 
for 95 years. In fact, 2 out of every 3 banks have served their 
communities for more than 50 years and one of every three has 
been in business for more than a century. These numbers tell a 
dramatic story about banks' commitment to the communities that 
they serve.
    Just to illustrate this commitment, my bank contributed 
over $550,000 last year and our 330 employees have logged 
thousands of hours of service to schools, charities, and 
community organizations throughout our area in a year when our 
investors saw no return.
    Banks are working hard every day to make credit available. 
Those efforts are made more difficult by the hundreds of new 
regulations expected from Dodd-Frank and the constant second-
guessing by bank examiners. Managing the tsunami of regulation 
will be a challenge for a bank of any size, but for the medium-
sized bank with only 37 employees, it is overwhelming. Let me 
give a few examples of how Dodd-Frank will negatively impact 
community banks.
    First, the cumulative burden of hundreds of new regulations 
will lead to massive consolidation in the banking industry. Of 
particular concern is the additional compliance burden expected 
from the Bureau of Consumer Financial Protection. This new 
bureaucracy will impose new obligations on community banks that 
have a long history of serving consumers fairly in a 
competitive environment.
    One claim is that community banks are exempt from the new 
Bureau, but community banks are not exempt. All banks, large 
and small, will be required to comply with all rules and 
regulations set by the Bureau. Bank regulators will enforce 
these rules as aggressively as the Bureau.
    The Bureau should focus its energies on supervision and 
examination of nonbank financial providers. This lack of 
supervision of nonbanks contributed mightily to the financial 
crisis. We urge Congress to ensure that this focus on nonbanks 
is a priority of the Bureau.
    Second, the government has inserted itself in the day-to-
day business of banking, which will mean less access to credit 
and banking services. The most egregious example is the price 
controls on interchange fees which will devastate retail bank 
profitability, stifle innovation, and force some people out of 
the protection of the banking system.
    Some will say the so-called carve-out for community banks 
from the Fed's interchange rule will protect community banks. 
Nothing could be further from the truth. Having two different 
prices for the same exact product is not sustainable. The 
result for small banks is a loss of market share and loss of 
revenue that support products like free checking.
    It is imperative that Congress take immediate action to 
stop the Fed's interchange rule. I urge you to suspend 
implementation until a full understanding of the consequences 
is known.
    Third, some rules under Dodd-Frank will drive banks out of 
some business lines. For example, the SEC rules on municipal 
advisors, if done improperly, will drive community banks out of 
providing basic banking products to the local and State 
governments. Similarly, the mortgage risk retention rules, if 
done improperly, will drive community banks out of mortgage 
lending.
    ABA urges Congress to use its oversight authority to ensure 
that the rules adopted will not have adverse consequences for 
municipalities and mortgage credit availability. Ultimately, it 
is the consumers who bear the consequences of government 
restrictions. The loss of interchange income will raise the 
cost for consumers of using their debit cards. The lack of a 
true safe harbor for low-risk mortgages means that community 
banks will make fewer mortgage loans or none at all. More time 
spent on government regulations mean less time devoted to our 
communities.
    The consequences for the economy are severe. These 
impediments raise the cost and reduce the availability of 
credit. Fewer loans mean fewer jobs, and fewer jobs mean slower 
economic growth. Since banks and communities grow together, 
limits on one mean limits on the other.
    The regulatory burden from Dodd-Frank must be addressed in 
order to give all banks a fighting chance to maintain long-term 
viability. Each bank that disappears from a community makes 
that community poorer. It is imperative that Congress take 
action to help community banks do what they do best, namely, 
meet the credit needs of their communities.
    Thank you for the opportunity to present the views of the 
American Bankers Association. I would be happy to answer any 
questions that you may have.
    [The prepared statement of Mr. Kelly can be found on page 
100 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Kelly.
    Our next witness is Mr. John Buckley, president and chief 
executive officer of Gerber Federal Credit Union, on behalf of 
the National Association of Federal Credit Unions. Welcome.

    STATEMENT OF JOHN P. BUCKLEY, JR., PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, GERBER FEDERAL CREDIT UNION, ON BEHALF OF 
   THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)

    Mr. Buckley. Chairwoman Capito, Ranking Member Maloney, and 
members of the subcommittee, my name is John Buckley, and I am 
testifying this afternoon on behalf of the National Association 
of Federal Credit Unions. I serve as the president and CEO of 
Gerber Federal Credit Union in Fremont, Michigan. Gerber has 
more than 13,400 members, with assets totaling $114 million.
    NAFCU and the entire credit union community appreciate the 
opportunity to discuss the impact that regulatory restructuring 
under the Dodd-Frank Act is having and will have on credit 
unions.
    Credit unions were not the cause of the financial crisis. 
This point was reiterated last month by the cochairman of the 
congressionally-established Financial Crisis Inquiry Commission 
during testimony before the House Financial Services Committee. 
In fact, credit unions helped blunt the crisis by continuing to 
lend to creditworthy consumers during difficult times. Yet, 
they are still firmly within the regulatory reach of several 
provisions contained in the Dodd-Frank Act. The additional 
requirements in Dodd-Frank have created an overwhelming number 
of new compliance burdens which will take credit unions 
considerable time, effort, and resources to resolve.
    We applaud recent efforts by the Administration and 
Congress to tackle excessive regulations that hamper the 
ability of our industry to create jobs and aid in the economic 
recovery. With a slew of new regulations emerging from the 
Dodd-Frank Act, such relief from unnecessary and outdated 
regulation is needed now more than ever by credit unions.
    First and foremost, the Durbin amendment on debit 
interchange included in the Act and the Federal Reserve's 
proposed rule are disastrous for credit unions and the 19 
million members we serve. We believe that the exemption for 
financial institutions under $10 billion in assets will not 
work. In recent testimony before the Senate Banking Committee, 
Federal Reserve Chairman Ben Bernanke reinforced that belief 
when he stated that the small issuer exemption will not be 
effective in the marketplace.
    We believe the purported exemption actually creates a 
negative impact on small institutions like mine as the Federal 
Reserve only surveyed large, nonexempt institutions to 
determine the price cap. When small issuers receive the lower 
capped interchange rate, that rate will be twice as difficult 
for small issuers to manage because the fee is based not on 
their own costs but on the costs of larger, more complex 
institutions with better economies of scale. Consequently, the 
so-called small issuer exemption will create the perverse 
effect of providing a significant competitive advantage to 
large issuers. In order to compensate for this, credit union 
members may lose free checking, face new fees for debit cards, 
and some may even lose access to debit cards.
    At Gerber, we estimate we will lose $210,000 annually under 
the proposed rule, and as a not-for-profit, this lost income 
will come directly out of our members' pockets. To put this in 
perspective, such a loss would have put us significantly in the 
red last year. I am dismayed that our members will shoulder 
tremendous financial burden and still be on the hook for fraud 
loss, while large retailers receive a giant windfall at the 
hand of the government with no obligation to lower prices for 
consumers.
    Today, on behalf of credit unions and their 92 million 
members, I am asking Congress to take action to stop the 
Federal Reserve's proposed rule from going into effect this 
July. This issue should be studied further to examine the true 
impact. And if Congress decides further action is needed, a new 
fair process for rulemaking must be established.
    While debit interchange is the industry's immediate 
concern, the creation of the new Consumer Financial Protection 
Bureau is also potentially problematic as the Bureau will have 
rule-writing authority over credit unions of all sizes.
    Additionally, the CFPB was granted examination and 
enforcement authority for credit unions with more than $10 
billion in assets. We already protect consumers, our member 
owners, and have consistently opposed efforts to include credit 
unions in any unnecessary regulatory scheme. I cannot emphasize 
enough how burdensome and expensive unnecessary compliance 
costs can be to credit unions. My employees already spend 
countless hours updating disclosure booklets and Web sites, 
retrofitting facilities for new regulations, and rewriting 
documents to comply with changes to regulations. The time and 
costs spent on this compliance burden are resources lost that 
could be used to help members purchase a new car or buy their 
first home.
    We believe that Congress can help ease some of these new 
regulatory burdens by taking the following steps: first, 
strengthen the veto authority of the Financial Stability 
Oversight Council in reviewing proposed rules of the CFPB; 
second, extend the transition time for many of the new 
compliance burdens of the Dodd-Frank Act; third, annually index 
for inflation all monetary thresholds in the bill; and fourth, 
provide credit unions parity with the FDIC and insurance 
coverage for IOLTAs.
    Finally, as outlined in my written testimony, NAFCU urges 
Congress to enact a series of additional fixes to the Dodd-
Frank legislation to help relieve the new regulatory burdens on 
credit unions.
    I thank you for the opportunity to appear before you today 
on behalf of NAFCU and would welcome any questions that you may 
have.
    [The prepared statement of Mr. Buckley can be found on page 
50 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Buckley.
    Our next witness is Mr. O. William Cheney, president and 
chief executive officer on behalf of the Credit Union National 
Association.

 STATEMENT OF O. WILLIAM CHENEY, PRESIDENT AND CHIEF EXECUTIVE 
       OFFICER, CREDIT UNION NATIONAL ASSOCIATION (CUNA)

    Mr. Cheney. Thank you.
    Chairwoman Capito, Ranking Member Maloney, and members of 
the subcommittee, thank you very much for the opportunity to 
testify. My name is Bill Cheney, and I am president and CEO of 
the Credit Union National Association, which represents nearly 
90 percent of America's 7,700 State and federally chartered 
credit unions and their 92 million members.
    Credit unions support reasonable safety and soundness 
rules, as well as meaningful consumer protection laws. However, 
credit unions are already among the most highly regulated 
financial institutions in the country. Credit union executives 
and volunteers are concerned that the mountain of regulation 
will only grow under the Dodd-Frank Act.
    Credit unions concern with regulatory burden is not 
motivated by a desire to avoid the intent of consumer 
protection legislation. Because credit unions are owned by 
their members, they already face very strong incentives to 
treat consumers well. Consumer protection rules hardly ever 
require changes in credit union business practices. However, 
compliance with those rules is often very expensive.
    The combination of existing rules and new burdens is a 
prime consideration when credit unions think about 
consolidation. It is becoming a crisis of creeping complexity. 
The steady accumulation of regulatory requirements over the 
years eventually adds up until a straw breaks the camel's back.
    Twenty years ago, there were over 12,000 credit unions with 
under $50 million in assets. Today, there are approximately 
5,500. Many of these smaller credit unions found it untenable 
to continue as standalone operations, often because of the 
employee time required to comply with numerous regulatory 
requirements.
    Credit unions are concerned that these creeping regulatory 
burdens also stifle innovation. It is critical that Congress 
provide diligent oversight to ensure that new regulation is not 
overly burdensome and redundant. My written testimony goes into 
detail regarding the overall regulatory burden facing credit 
unions.
    With respect to the Dodd-Frank Act, I would like to 
highlight two key areas of the law that are very significant to 
credit unions.
    The first is Section 1075 regarding interchange fees, which 
is why we oppose the Dodd-Frank Act. Last month, CUNA testified 
before this subcommittee regarding the Fed's debit interchange 
regulation. While Congress exempted all but three credit 
unions, we believe this statutory carve-out is rendered 
essentially meaningless by market forces created by a rule that 
excludes many of the costs of providing debit at large issuers 
and by the Fed's proposed rule that does not enforce the 
exemption.
    Further, the network exclusivity and routing provisions are 
very problematic. Credit unions are not exempt from these 
provisions, which, as Federal Reserve Chairman Bernanke has 
indicated, will likely put downward pressure on small 
institutions' interchange fees. Ultimately, interchange 
regulation will make it more expensive for consumers to access 
their checking accounts. This is not what Congress intended.
    A legislative remedy is necessary to fully realize the 
intent of one of the sponsors who said small institutions would 
not lose any interchange revenue that they currently receive. 
We urge Congress to intervene to ensure small issuers are 
protected as Congress promised.
    The second area I call your attention to are the two 
provisions of the Act which are designed to reduce regulatory 
burden. The first provision directs the Bureau to ensure that 
outdated, unnecessary, and unduly burdensome regulations are 
regularly identified and addressed in order to reduce 
unwarranted regulatory burdens. The second provision directs 
the Bureau to consider the impact of proposed rules on credit 
unions and community banks with less than $10 billion in 
assets.
    It is widely expected that the Bureau will engage in a 
comprehensive regulatory review process. Quite frankly, credit 
unions and others fear that at the end of this process, the 
overall regulatory burden will have increased. You cannot 
simplify regulation by creating new rules. Outdated regulations 
must be peeled back.
    These provisions offer credit unions hope that the Bureau 
will take steps to reduce regulatory burden and that it will 
fully consider the impact of its rules on credit unions. The 
Bureau staff has acknowledged this concern, and congressional 
oversight of this process is critical.
    My written testimony describes several other impediments to 
credit union member service beyond the scope of the Dodd-Frank 
Act. We ask Congress to increase the statutory member business 
lending cap, which would permit creditors to lend an additional 
$10 billion to small businesses in the first year, helping them 
create over 100,000 new jobs at no cost to the taxpayers. We 
also encourage Congress to enhance safety and soundness by 
permitting credit unions to count supplemental forms of capital 
as net worth. This would permit credit unions to more quickly 
recover from the financial crisis and position them to continue 
to be a source of stability to their members in the future.
    Madam Chairwoman, thank you for the opportunity to testify 
at today's hearing. I am pleased to answer any questions that 
the members of the subcommittee may have.
    [The prepared statement of Mr. Cheney can be found on page 
83 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Stinebert. He is president and 
chief executive officer of the American Financial Services 
Association. Welcome.

  STATEMENT OF CHRIS STINEBERT, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, AMERICAN FINANCIAL SERVICES ASSOCIATION (AFSA)

    Mr. Stinebert. Thank you.
    My name is Chris Stinebert. I am president and CEO of the 
American Financial Services Association. AFSA is a national 
trade association. I represent the consumer credit industry. I 
am happy to report that the Association will celebrate its 
100th year 5 years from now, and its 370 member companies 
include consumer and commercial finance companies.
    First, I would like to say that I certainly agree with my 
colleagues here and their concerns about regulatory costs and 
compliance type issues. Certainly we agree in many of the areas 
with mortgage concerns and debit interchange fees.
    Madam Chairwoman, you and the members of the committee are 
probably more familiar with AFSA's bigger members, which 
include many banks, bank subsidies, and large captive auto 
finance companies. But AFSA's roots lies with the local finance 
companies that have been serving communities for many 
generations. Today, I am testifying on behalf of these small 
financial institutions, finance companies who provide personal 
loans to people in their communities, like the carpenter who 
needs to repair a transmission on his truck or somebody who 
needs to buy a washer or dryer.
    The Department of Defense, in its recent policymaking on 
credit for military families and dependents, described 
installment loans as a beneficial product and specifically 
cited the differences between installment loans and payday 
loans. I should note that we do not represent the payday 
lenders.
    Each loan, installment loan is individually underwritten 
for affordable and sensible debt. Equal installments of 
principal and interest support repayment over, on average, from 
9 to 12 months with no balloon payments due. Lending and 
consumer service, customer service are provided by real people 
in local bricks and mortar offices. Customers are constantly 
monitored for their capacity to repay, and performance is 
reported to the credit bureaus.
    The FDIC recently reported in its small dollar loan pilot 
program that loans up to $2,500 were too costly for 
depositories to achieve much acceptance of future 
participation, except perhaps in cases where government 
taxpayer subsidies could be applied and/or saving accounts were 
mandatory or additional bank products could be sold.
    Finance companies are certainly not afraid to be regulated, 
but we do not want to be regulated like depositories, because 
they simply are not banks. Unlike banks, when a finance company 
makes a loan, its customers' deposits are not at risk and the 
government and the taxpayers do not insure its capital. The 
only entity harmed by poor underwriting and defaults is the 
finance company because it is their money they are lending, 
certainly not yours or mine.
    Prior to enactment of the Dodd-Frank Act, finance services' 
regulation has been dominated by oversight of the depositories, 
banks, thrifts, and credit unions. Therefore, regulators have a 
very good, I think, understanding of the Federal banking model.
    For decades, nonbanking finance companies have worked 
effectively with State regulators in complying with both State 
and Federal consumer protection loans. These nonbank finance 
companies have been successful in providing credit and other 
products and services in communities in which they operate in 
part because of the oversight of these State regulators that 
have often been the first to identify emerging practices and 
products that they deem need further examination.
    ASFA's finance companies are concerned that the wealth of 
experience and knowledge will be lost on Federal regulators 
with their emphasis on bank-centric experience that they have. 
Nonbank finance companies want to make sure that they are not 
regulated to the point they can no longer make sustainable 
loans.
    The U.S. Small Business Administration study shows that the 
expense for small firms to comply with Federal rules is 45 
percent greater than it is for larger business competitors, and 
almost 90 percent of the country's 26 million small businesses 
use some form of credit. As part of the Dodd-Frank Act, the 
CFPB is required to comply with the Small Business Regulatory 
Enforcement Fairness Act panel process. That panel study and 
the potential impact must be studied, and we encourage this 
committee to make sure and clear that the CFPB has a full 
complement of small institutions represented on that panel. 
Consumers and the economy need to expand installment lending.
    The only thing I can close in saying is that preserving and 
expanding access to affordable credit should be the goal of 
every legislator and regulator, Federal and State. But it must 
also acknowledge that the uncertainty and the fear of excess 
regulation is an ever-present anchor on meeting this goal.
    Again, AFSA appreciates the opportunity to testify to the 
subcommittee, and I am happy to take any questions.
    [The prepared statement of Mr. Stinebert can be found on 
page 175 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. James MacPhee. He is chairman of 
the Independent Community Bankers of America. Welcome.

STATEMENT OF JAMES D. MACPHEE, CHAIRMAN, INDEPENDENT COMMUNITY 
                   BANKERS OF AMERICA (ICBA)

    Mr. MacPhee. Thank you, Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee.
    I am Jim MacPhee, CEO of Kalamazoo County State Bank in 
Schoolcraft, Michigan, and chairman of the Independent 
Community Bankers of America. Our bank is a State-chartered 
community bank with $85 million in assets, 40 employees, and 
103 years of continuous business to our community. I am pleased 
to represent community banks and ICBA's nearly 5,000 members 
and 18,000 locations and 270,000 employees at this important 
hearing.
    Community banks are the primary source of credit, 
depository, and other financial services in thousands of rural 
areas, small towns, and suburbs across the Nation. As such, 
they play an essential role in the recovery of our national 
economy. Regulatory and paperwork requirements impose a 
disproportionate burden on community banks, thereby diminishing 
their profitability and ability to attract capital and support 
their customers, including small businesses. Every provider of 
financial service, including every single community bank, will 
feel the effects of this new law to some extent.
    By a wide margin, the most troubling aspect of Dodd-Frank 
is the debit interchange amendment. We are grateful to you, 
Chairwoman Capito, for dedicating a recent hearing to the debit 
interchange amendment and the Federal Reserve's proposed rule. 
The hearing substantiated the grave concerns we have with the 
law and the proposed rule, which would fundamentally alter the 
economics of consumer banking.
    In light of that hearing, for which we submitted a 
statement for the record, I will be brief in my comments here. 
But this point bears emphasis: Community banks were not 
effectively carved out by the statutory exemption for debit 
cards issued by institutions with less than $10 billion in 
assets. Small issuers will feel the full impact of the Federal 
Reserve proposal over time. To use my bank as an example, in 
2010, we had 1,600 debit cards outstanding and our profits on 
those cards for the year was a modest $4,800.
    If the Federal Reserve proposal goes into effect, I 
estimate that we will lose $20,000 on that debit card program, 
lost income that we would have to make up through higher fees 
and other products and services.
    Another source of concern is the CFPB. While we are pleased 
that Dodd-Frank allows community banks with less than $10 
billion in assets to continue to be examined by their primary 
regulators, we remain concerned about the CFPB regulations to 
which community banks will be subject. In particular, the CFPB 
should not implement any rules that would adversely impact the 
ability of community banks to customize products to meet 
customers' needs. Because bank regulators have long expertise 
in balancing the safety and soundness of banking operations 
with a need to protect consumers, ICBA supports amending the 
law to give prudential regulators a more meaningful role in 
CFPB rule writing.
    In representing our members during consideration of Dodd-
Frank, ICBA focused on making the Act workable for community 
banks. This meant seeking exemptions that were appropriate. It 
also meant seizing the opportunity to advocate for long-sought 
community bank priorities that we believe strengthen community 
banks over the long term.
    ICBA was the leading advocate for the deposit insurance 
provision of the Act, including the change in the assessment 
base from domestic deposits to assets--minus tangible equity--
which will better align premiums with a depository's true risk 
to the financial system and save community banks $4.5 billion 
over the next 3 years. The deposit insurance limit increase to 
$250,000 per depositor and the 2-year extension of the 
transaction account program, which provides unlimited deposit 
insurance coverage for noninterest bearing transaction 
accounts, will both help to offset the advantage enjoyed by the 
``too-big-to-fail'' mega-banks in attracting deposits.
    The legislative ideas highlighted in this testimony will be 
included in the Communities First Act, legislation which the 
ICBA is working on with members of both Houses of Congress. We 
hope it will be introduced in the near future and considered by 
this committee. In addition to proposed changes in Dodd-Frank, 
the Community First Act will include other provisions that 
would offer regulatory and tax relief to community banks.
    Thank you for the opportunity to testify today on behalf of 
the ICBA and its members. Like most pieces of legislation, 
especially those that run 2,300 pages, Dodd-Frank offers a 
mixed outcome for community banks. I hope that my testimony, 
while not exhaustive, helps to clarify some of the concerns as 
well as the bright spots in Dodd-Frank for community banks. 
Legislation of this magnitude cannot be gotten right the first 
time. We hope to work with this committee to improve the law 
and to ensure that it is implemented in a way that will impose 
the least burden on community banks.
    I would be happy to answer any further questions. Thank 
you, Madam Chairwoman.
    [The prepared statement of Mr. MacPhee can be found on page 
116 of the appendix.]
    Chairwoman Capito. Thank you.
    Our final witness is Mr. Skillern, executive director of 
the Community Reinvestment Association of North Carolina. 
Welcome.

  STATEMENT OF PETER SKILLERN, EXECUTIVE DIRECTOR, COMMUNITY 
           REINVESTMENT ASSOCIATION OF NORTH CAROLINA

    Mr. Skillern. Thank you very much, Chairwoman Capito and 
Ranking Member Maloney, for the opportunity to testify today. I 
am Peter Skillern, executive director of the Community 
Reinvestment Association of North Carolina.
    Small financial institutions are facing long-term trends of 
consolidation and competition from mega-banks and unregulated 
financial institutions. The Dodd-Frank Act will help to create 
baseline rules for all lenders which will help small banks by 
providing a more level playing field such as an example of 
mortgage origination rules.
    Small businesses are facing a tougher credit market and 
slower recovery. The Act makes an extraordinary effort to do no 
harm to small businesses and to help them through increased 
transparency in credit decisions. Most importantly, Dodd-Frank 
provides a more stable financial system for small banks and 
businesses by mitigating the systemic risks and abuses that 
catalyzed the financial crisis. This legislation stands up for 
the little guy in the financial marketplace--small 
institutions, small businesses, and families.
    Nationally, the number of banks with under $100 million in 
assets dropped by more than 5,400 from 1992 to 2008. In North 
Carolina, of 146 institutions, the bottom 100 hold only 10 
percent of the deposits, while the top 6 hold 76 percent. Yet 
small banks remain essential components of local financial 
services lending and civic engagement. Many areas of the 
country would not have banking services if it were not for the 
small institution.
    By contrast, the consolidation of assets and market share 
of mega-banks has increased. In 1995, the top banks had 11 
percent of the deposit shares. By 2009, they had nearly 40 
percent. In the last half of 2010, 3 lenders conducted 50 
percent of mortgage activity.
    The challenges that small financial institutions face are 
not from the Dodd-Frank Act but from long-term trends of 
capital concentrations and consolidation. The Dodd-Frank Act 
primarily focuses on large financial institutions that operate 
in the capital markets. Its focus is on reducing systemic risk, 
creating a means for the resolution of failed giant 
institutions, prohibiting proprietary trading, regulating 
derivatives, and reforming the regulatory system itself. These 
are not primarily the concerns of small banks, other than 
whether the system itself is stronger and more stable in which 
they operate.
    The creation of the Consumer Financial Protection Bureau, 
in our opinion, will benefit banking by consolidating and 
simplifying rule writing for all financial institutions. It 
will supervise 2 percent of deposit institutions. The remaining 
98 percent will be supervised by their prudential regulators. 
And, ironically, the efforts to reduce the CFPB's ability to 
regulate mega-banks and non-depository institutions will mean 
that small banks will again be regulated by their prudential 
regulators, while the bad practices are allowed to drive out 
the good ones that they model.
    There will be costs related to regulatory reform, and there 
is uncertainty in change. We agree that the unique needs of 
small institutions need to be considered as rules are written 
and implemented. We, too, urge simplicity, paper reduction, and 
cost savings. We want our money back in the community, not in 
paperwork. But that is not an argument that rules and reforms 
are not merited. The CFPB will benefit the financial system and 
small banks.
    Given the record number of small bank failures, 
foreclosures, and mega-bank collapses, we support Dodd-Frank's 
emphasis on safety and soundness, yet we urge that the 
rulemaking does not overly restrict credit or disadvantage 
small institutions in lending. As an example, the rulemaking to 
define the Qualified Residential Mortgage, QRM, exemption from 
capital retention could adversely impact small lenders and 
consumers. Capital risk retention should be targeted towards 
non-conventional risky loans. If the definition is overly 
restrictive, such as having high downpayments or not utilizing 
mortgage insurance, small lenders will be sidelined by capital 
requirements and first-time home buyers will have an 
unnecessary hurdle to homeownership.
    Small businesses are currently faced with constriction of 
credit availability. Loans to small businesses in 2009 were 
only 44 percent of those in 2008, and the decline in 
outstanding balances to small business continued in 2010.
    The Dodd-Frank Act makes explicit protections to protect 
small businesses from unintended consequences of regulation. 
Section 619 prohibitions on proprietary trading do not apply to 
small business investment corporations, allowing for banks to 
invest in SBICs. Section 1027 explicitly excludes merchants, 
retailers, and other sellers of nonfinancial goods and 
services. Subtitle C, Section 1031, specifically allows for 
small business income to be considered in loan underwriting. 
Subtitle G, Section 1071, which requires new data collection, 
will better ensure lending to small business is done without 
bias. Three different sections--1099, 1424, and 1474--all 
require studies to ensure that credit costs are not increased 
for small businesses through this regulation.
    As I read it, the Dodd-Frank Act is small-business 
friendly. Small banks, small businesses, and families will be 
well served by the Dodd-Frank Act and Consumer Financial 
Protection Bureau.
    Thank you.
    [The prepared statement of Mr. Skillern can be found on 
page 169 of the appendix.]
    Chairwoman Capito. Thank you. I appreciate all of the 
testimony, and I am going to begin the questioning. It appears 
as though we are going to have votes again at 3:45. So my plan 
is, as the Chair, I will shorten my questions and try to get as 
many as we can in and dismiss the first panel, if that is all 
right with the rest of the committee.
    Our final witness gave us a contrast. But I want to go back 
to what Mr. Kelly mentioned when we are talking about 
contracting credit and accessibility to the smaller 
institutions in the different communities.
    You listed three ways. You mentioned interchange. You also 
said that your banks could be out of certain business lines, 
and that with the mortgage risk retention provisions, which I 
guess is in the qualified mortgage, those are three pretty 
significant issues. We did have the hearing on interchange, So 
if you could talk a little bit more about the latter two. What 
kind of business lines are you concerned that you might fall 
out of under this regulatory regime? And, also, let us talk 
about the mortgage risk retention and how that will influence 
credit to the little guy.
    Mr. Kelly. Thank you, Madam Chairwoman.
    The mortgage risk retention, to speak of that first, our 
bank provides a retail mortgage product of about $20 million a 
month in mortgages. We also provide warehouse funding for over 
900 locations across the Midwest, which make all prime, no 
subprime, mostly government-insured loans of one manner or 
another.
    Because of the really unknown nature of what the risk 
retention is, the title of that risk retention is drawn, the 
more difficult it is going to be for a bank of our size or 
smaller or really any moderate-sized bank to have the capital 
to retain 5 percent of every mortgage that they make. So if 
that rule is drawn narrowly, we are concerned that we and 
others will be out of the mortgage business and thereby the 
mortgage business will move away from community banks and we 
will not be able to be competitive in that particular market.
    Chairwoman Capito. Let me just clarify here so I make sure 
I understand exactly. This provision does not exempt any 
community banks or certain asset level--it corrects across 
every financial institution that is in the mortgage business; 
is that correct?
    Mr. Kelly. Yes, Madam Chairwoman, that is correct.
    We are also concerned about the competitiveness of the 
supposed two-tier system relative to the debit cards, and I 
realize that was one that you said we have already had some 
discussion on. But, likewise, that will require us to examine 
our fees and look to see how those fees could be made up that 
we will no longer be getting from the debit cards.
    As an example, the fact that we have to retain--all banks 
retain the fraud risk of a transaction such as that. In our 
particular instance, we actually lost during one month when we 
had a scam that was in the area, a debit card scam resulted in 
a $143,000 loss for our bank. There is no way that 12 cents 
makes up the fraud loss, much less that it makes up and allows 
us to make any money.
    From the standpoint of being able to lose business lines, 
we are concerned about the municipal advisor provision of the 
SEC rule or the SEC attempted position because we believe that 
while in our communities--and we cut across many communities in 
Oklahoma. We have many school districts. We have all sorts of 
municipal-type companies that we bank. We believe that those 
rules, if construed the way that we understand the SEC is 
attempting to construe them, will not only require us to 
register my teller and my new accounts and CD clerk, but it 
will also give the SEC the ability to come in and examine us 
for those things, one more examination, a regulatory scheme 
that we will have to put up.
    Yes, ma'am.
    Chairwoman Capito. Have you all made comments or been asked 
to weigh in on the formulation of that rule?
    Mr. Kelly. Have we made comments? Yes. Our bank did make an 
extensive comment, and the ABA likewise has made comments. We 
have had a number of banks that have made comments on that, and 
we tried to point that out.
    We believe that we provide marvelous service to the 
municipalities and the school boards and the like across the 
State of Oklahoma. We merely warehouse their money or put their 
money into an instrument. We are not serving as a ``municipal 
advisor.'' Yet, the requirement is for us to go into the 
municipal deposit rulemaking and register, as well as with the 
SEC, both of which will be very onerous.
    Chairwoman Capito. Thank you.
    I am going to turn this over to Mrs. Maloney for questions.
    Mrs. Maloney. I want to thank all of you and to underscore 
what has been said many times in your testimony: The crisis was 
not caused by smaller institutions. If anything, you were a 
rock on which to lean during the crisis for communities and 
continue to be a rock for available liquidity and loans across 
America. You are a big part of the solution to the recession 
that we are experiencing.
    One of the things that we tried to do after safety and 
soundness and restoring stability to our markets was to level 
the playing field for smaller institutions so that you could 
compete and win in an easier way, and one way that we tried to 
do that was to say that all nonbank financial companies should 
be brought to the same level as any financial institution.
    Many people were going to mortgage brokers because there 
was no requirements. And many banks had all kind of regulatory 
requirements. And the financial crisis in many ways was not 
with the regular banking system that was regulated. It was for 
the nonbank financial institutions and new exotic products that 
were not regulated.
    So I would like to ask, does this help bringing in mortgage 
companies, payday lenders, private student lenders, and other 
large players in sort of the shadow banking system? We tried to 
bring them into the same regulations as smaller institutions. 
And I believe that this will be a benefit to smaller 
institutions.
    But I would like someone to answer me, does it not help the 
competition in bringing the shadow financial industry under the 
same regulation?
    Mr. Cheney. Ranking Member Maloney, thank you very much for 
the question. As I said in both my oral testimony and the 
written testimony, credit unions are already the most highly 
regulated financial institutions. We have additional 
restrictions that don't exist, even in the traditional banking 
sector. So we are not in favor of additional regulation for 
other financial institutions.
    However, I do think that there are parts of the financial 
services system that are not currently regulated that could 
benefit from some oversight. Certainly, credit unions--we have 
a unique business model in that our business interests and our 
members' interests are completely aligned because the members 
own the institution. So it is a little different business 
model. But we are not opposed to additional regulation for 
other people who are providing similar products and services.
    Mr. Kelly. Ranking Member Maloney, if I might, in my 
testimony, I said we urge Congress to ensure the focus on those 
nonbanks. And we thank you for that. The shadow banking 
industry is in need of that type of supervision. And we believe 
that the CFPB would be something that would be quite adequate 
to do that. Our urging is that banks are already so regulated 
by our existing prudential regulators that the focus of the 
CFPB should be on those that have, as you described, no 
regulation today.
    Mrs. Maloney. Certainly, one of the things that we wanted 
to accomplish was to reduce the regulatory burden. And one of 
the ways that we did that was creating a single form for 
federally required mortgage disclosures, simplifying the 
process for financial institutions and consumers alike, and 
reducing compliance costs. And I, for one, would like to 
continue to work in any way to reduce a duplication or 
regulatory burden.
    Possibly there is a way you could computerize the 
requirements that are required from various regulators and have 
that go out quarterly. There may be other ways that we could 
make it less onerous on people. I specifically would like to 
hear from any of you how you think the regulatory burden could 
be reduced while preserving safety and soundness necessary, 
obviously.
    Mr. Cheney. As I mentioned in my oral testimony, we can't 
simplify regulation just by creating new regulations. We have 
to peel back decades of outdated and overly burdensome 
regulation. The mission of the Consumer Financial Protection 
Bureau is to do that. But I think it is critical that as new 
regulations are even being considered, much less promulgated, 
they look at what currently exists.
    You mentioned the mortgage form, a 1-page form. Anybody who 
has ever closed a mortgage loan knows how onerous that is, not 
only on the financial institution but on the consumer; how 
difficult it is to understand. But if all we do is create a new 
form and we don't get rid of the stacks and stacks of 
conflicting forms, we really haven't simplified anything.
    And I know that wasn't the intent of the legislation. It is 
just important that as the Bureau implements the legislation, 
they make sure that they remove that outdated regulation.
    Mr. Stinebert. Speaking on behalf of the nonbank 
participants up here on this panel, I should note that leveling 
the playing field is basically increasing regulations on 
another entity. I think for the nonbanks that are certainly 
here, if you look at the total auto sector and you look at the 
small loan sector and others, they didn't cause any of the 
problems that we are talking about. We are really talking about 
specifically mortgage that cut across all lines that created 
the crisis.
    And as we start talking about regulation, we want to make 
sure that regulations are truly going to protect the consumer 
and that are smart, that are good; not necessarily creating 
additional supervision, additional examinations that perhaps 
are unnecessary.
    We have been talking about the level of regulation now. And 
burdening another sector with increased regulations is not 
always the way to go.
    Chairwoman Capito. Thank you.
    Mr. Westmoreland.
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    Mr. Skillern, have you ever heard of a recording artist by 
the name of Alan Jackson?
    Mr. Skillern. No, sir.
    Mr. Westmoreland. He is a country recording artist, and he 
has a song out called, ``Here in the Real World.'' I suggest 
you buy it and listen to it for a little bit.
    Mr. MacPhee, I continue to hear from both banks and 
builders in my congressional district--and I come from a 
building background, a real estate background--that the 
examiners are turning some of this regulatory guidance on 
commercial real estate into assuming that if a builder has a 
qualified presale, somebody who comes in who is a qualified 
buyer, a presale, a lot of banks are saying--regulators are 
saying, ``You're at 100 percent of your commercial real estate 
exposure, so, therefore, you cannot make a loan to this builder 
to build this presale house even though he has a qualified 
buyer.''
    Are you getting any of that from some of your banks? I know 
in Georgia, we have had more bank failures than I guess any 
other State, 59 total, and 6 in this last year. So this is a 
problem that we are having, that banks are not being able to do 
what they do to make money, and that is to loan money.
    Mr. MacPhee. Thank you for the question, Congressman.
    I have heard that from a number of community banks within 
the ICBA family around the Nation. And it depends on the 
geographic area as to how serious or what level the examiners 
do criticize any new commercial loan activity. I think there 
are areas, like Texas as an example, where the economy is 
pretty strong. They don't seem to be criticized too heavily 
there.
    But I can tell you, coming from Michigan, with the highest 
unemployment in the Nation for a number of years, if I were a 
bank on the east side of Michigan doing a commercial loan, I 
would be heavily criticized for that.
    Mr. Kelly. Congressman Westmoreland, may I? Could I 
respond?
    Mr. Westmoreland. Sure. Absolutely.
    Mr. Kelly. I might give you a real world example when we 
talk about this. For our bank, the guidelines are 300 percent 
of capital. And CRE is also--a component of that is 
construction and development, which are not supposed to be, as 
you stated, over 100 percent. We are at 150 percent, and we 
were over that when the guidance became a rule, so to speak, so 
we have yet to get down below that, even though our total 
concentration is below 300 percent.
    We had the real world example of a company that wanted to 
build their headquarters building in Oklahoma, about a $10 
million headquarters building, and the problem was they came to 
us for the construction loan, and we went up the chain of the 
regulatory ladder and were told, ``Well, even though they are 
going to be occupying it and even though once they occupy it, 
it will be owner-occupied, and outside the CRE, no one occupies 
it during that construction, so you can't make that loan.'' And 
so, to my knowledge, that loan has not been made. That building 
has not been constructed, and that headquarters isn't in 
Oklahoma.
    The same is true for all of our custom builders. You may 
have a custom house to build, but the owner doesn't live there 
until it is finished. So you technically can't build it without 
raising your CRE. To me, that is counterintuitive, but that is 
the rule.
    Mr. Westmoreland. Yes, sir, it is counterintuitive. And 
until the construction business is able to come back, I would 
say that 60 percent of the people who are unemployed in this 
country right now are former construction workers. So we have 
to do something to help the housing market come back.
    The other thing is the regulation about writing down toxic 
assets, nonperforming assets, to zero or to some amount, when 
this asset is really performing; it is a performing asset. 
Somebody is paying their interest every month. They are making 
the calls at renewal periods. But yet the regulator comes in 
and says, ``You have to write this loan down.'' And the people 
who can't bring in any more equity--they can't even get their 
equity out of the some of the stuff they have now. That is 
what, to me, is causing a lot of the bank failures. Would you 
agree from both the banking ends of it?
    Mr. Kelly. Congressman, I think you have hit exactly on the 
head the issue, and that is that we all know that when you have 
a robust economy and you make a loan, even though it is 
performing, if that robust economy then falls and the value of 
that collateral falls with the potential of saying, we expect 
you to reappraise that. And once that is reappraised, you now 
have an impairment on the loan, which conceivably could go to 
zero or could be a very large impairment, which immediately 
becomes a hit to capital.
    In the case of Georgia, as you are well aware, what happens 
when those banks close and the regulators then dispose of the 
property at a lower price, I may have a good loan that is well 
capitalized--or, excuse me, well collateralized, but when the 
assets are sold by the regulator to be rid of them, now my loan 
that was good gets a low appraisal and, whoa, all of a sudden, 
I have an impairment. It becomes almost a self-fulfilling 
prophesy, and it becomes kind of the death spiral. So the 
suspension of that type of an appraisal requirement to go in 
and immediately write it down and immediately impair capital is 
a serious problem.
    Mr. Westmoreland. Whatever the level of the playing field, 
we have a steeper slope for businesses.
    Chairwoman Capito. Thank you.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you, Madam Chairwoman.
    First of all, let me start with you, Mr. Cheney. We have 
somewhat of a clear understanding of how this rule would affect 
our larger banks. How would this rule affect credit unions, the 
interchange fee rule?
    Mr. Cheney. We are concerned that the interchange rule will 
have a dramatic effect on credit unions. All but three credit 
unions are exempt in terms of the asset size limit. However, 
there is nothing in the rule that enforces the exemption. There 
is nothing that requires a two-tiered system. There is nothing 
that enforces honor all cards. And so we are concerned that 
what we are talking about here is a $1.5 billion annual impact 
on credit unions and, more importantly, the impact on 
consumers.
    Credit unions, as I said earlier, serve 92 million 
Americans, millions and millions of debit cards. The two-tiered 
system--even if there is a two-tiered system, because there is 
no enforcement of honor all cards, market forces we know will 
drive those rates down even at smaller issuers, and ultimately 
the cost, especially at a credit union, which is a cooperative 
institution, has to be passed on to consumers. And that drives 
people out of the banking system. It raises costs for the 
people who can least afford it.
    We are concerned that this is a train wreck for consumers. 
But we can stop it before it happens if we can take action 
quickly.
    Mr. Scott. And if you had to put some dollar figure on 
where we are now, where it is basically recommended of a 73 
percent decrease, from 45 to around 12, in terms of economic 
impact and in particular dealing with the credit unions, what 
are we talking about in loss of revenue?
    Mr. Cheney. The numbers that you mentioned in your opening 
statement and you just repeated, from 44 or 45 cents a 
transaction down to 12 cents a transaction, if the exemption 
doesn't work, it is a $1.5 billion a year for the credit union 
movement for not-for-profit credit unions. And, more 
importantly, ultimately that will have to be passed on to the 
consumer.
    Mr. Scott. Now let me go to you--the banker. Mr. Kelly. I 
had it written here.
    You are the president and CEO of a small bank. Small banks 
were not covered in the survey that were done. How do you think 
that has skewed the results of that survey by you all not being 
involved in that survey?
    Mr. Kelly. I think both the survey and some of the 
instructions certainly were skewed against the community banks. 
We don't have the economies of scale that a very, very mega-
bank would have. We have a lot of costs that have to be 
consolidated as we offer those debit cards to our customers. 
And so when we talk about, in our case, Congressman, one of the 
things that we have gone and evaluated is we believe that the 
cost, exclusive of fraud, will be about a million dollars to 
our bank. That is just a guess based on this pricing at twelve 
cents. The thing that, again, the Federal Reserve study did not 
take into account was they said you can take into account fraud 
prevention, but it was not anything as far as fraud cost.
    Our estimate is that fraud cost is about those 12 cents. So 
whether you are right or wrong about that, it is going to be a 
fairly massive loss for banks across the scale that are 
community banks. You can do the index on it, but it will be a 
very, very large loss, depending on the number of debit cards.
    Mr. Scott. Now we are concerned about small businesses. 
Would this affect your ability to lend to small businesses?
    Mr. Kelly. The ability that we have to lend to small 
businesses obviously is directly proportional to your ability 
to both take a risk and have a risk appetite and also have the 
ability to fund the necessary positions to cover all of the 
necessary lending function that there is.
    As far as the ability to lend to small businesses, I don't 
think this is going to counter our ability to lend to small 
businesses. I think, though, it will reduce significantly, 
absent finding a way to increase our cost, I think it will 
reduce significantly the dollars that we have at our disposal 
to reinvest.
    Mr. Scott. Now how would it affect your customers' access 
to existing benefits, like free checking?
    Mr. Kelly. I believe that the debit card income that we 
have seen and we see across our industry is used by banks to 
offset some of the loss leaders that we have, free checking and 
other things such as that. Those products would have to have 
some type of cost to the consumer. I can't tell you exactly 
what those costs would be, but we would have to make up some of 
that loss somewhere in order to fund the additional compliance 
requirements that we are going to have out of the Dodd-Frank 
Act and in order to just make up for the loss that we are 
currently carrying relative to the debit cards themselves.
    Mr. Scott. Thank you.
    Chairwoman Capito. Thank you. We are on a tight timeframe 
here. What I am going to do is call on Mr. Renacci, and then if 
we have any time left, I am going to give it to Mr. Royce. 
Then, if it is okay with the other members, I am going to 
dismiss the first panel. So when we come back from voting, we 
will start up with panel two.
    Mr. Renacci.
    Mr. Renacci. Thank you, Madam Chairwoman.
    Just a couple of quick questions for Mr. Buckley and Mr. 
Cheney. This is in regard to credit unions. Can you tell me 
what percentage of your customer base is low- or moderate-
income customers? And also, I am trying to frame this in total. 
What is the total impact of the Dodd-Frank regulations on the 
credit unions to raise capital? I know that is a broad 
question. And knowing that the credit unions raise capital 
through earnings only, which is an issue, and then what is the 
impact of the loss of this capital or earnings, if that 
potentially is the case, because of these regulations on the 
sustaining of credit unions in the marketplace in the future?
    Mr. Buckley. Congressman, in Newaygo County, where we 
primarily operate, I would estimate that fully 40 to 50 percent 
of our membership would be classified as low- to moderate-
income folks. Again, this gets back to the historical nature of 
employer-based credit unions and their service to people of low 
or modest means.
    With respect to the impact of Dodd-Frank and the raising of 
capital, our concern is that we are now pitting safety and 
soundness concerns against the regulatory environment, which by 
its nature is more costly than the current environment.
    So as regulations change or are modified and we then incur 
costs to change documentation, to put out new disclosures, that 
is every dollar of additional cost is a dollar out of my 
members' pocket. That comes right out of our bottom line and 
out of our capital. We don't have the means of raising capital 
through mezzanine financing or the like that some of my fellow 
financial institutions on the panel might have.
    Mr. Cheney. Just to comment, if I might, Mr. Buckley is 
exactly right: Every dollar that credit unions lose in revenue 
or every dollar that they have to spend on compliance is a 
dollar that comes out of the bottom line. The bottom line of 
credit unions is retained earnings is the only way they can 
build capital in this environment. We talked about the 
possibility of supplemental capital.
    But I think at $1.5 billion in potential lost revenue, that 
is the difference for many credit unions, if you get down to 
the local level, that is the difference between a continued 
recovery out of this economic crisis, a crisis that credit 
unions didn't create, and continued losses. It is a very, very 
severe impact in this environment.
    Mr. Renacci. Or the sustainability of a credit union.
    Mr. Cheney. Or the sustainability, absolutely.
    Mr. Renacci. For Mr. Kelly and Mr. MacPhee, this goes over 
to the small financial institutions. Again, I think everybody 
would agree that as regulations increase, costs go up. My 
concern again would be for the low- and the moderate-income 
families who use your small institutions. And as these costs go 
up, what is going to be the ability to maintain checking 
accounts for the low- and moderate-income and also the ability 
to maintain branches, small branches in areas where there is 
low- and moderate-income, as your costs continue to increase? 
If you agree, and again, I have had a number of conversations 
with small bankers who said these regulations are going to 
drive up costs.
    Mr. MacPhee. I couldn't agree more, Congressman.
    We are in a small community where we know our customer 
pretty well. Our products aren't plain vanilla in our 
communities. We make loans to people, and we have to fashion 
them to their needs. And when you get something as ominous as 
the interchange bill, as an example, that ratchets up your 
costs to a point where, as an example, I only make $2.28 on the 
transaction on each of my 1,600 cards. It is not a get-rich-
quick program. So when I lose just even that $5,000 a year in 
income, it is significant to our little bank, and it does 
affect my customers.
    Mr. Kelly. Congressman, I think that in Oklahoma, the 
counties that we are in are mostly low- to moderate-income 
areas. And so we have a tremendous concern and also respect for 
the people who make up that population. This debit card--
certainly, the debit card situation the way that it is today 
has the potential to impact them. It is either going to impact 
their ability to afford an account or it is going to impact our 
ability to bring more money in to reinvest in our communities 
and do other things. We have been very mindful of trying to be 
sure that those folks do have banking services. And so the 
banks that do that, and they do traditionally do that, will 
have to make the decision, are we going to go ahead and reduce 
our ability to invest in other things like more compliance 
officers and eat those charges, or are we going to have to 
charge those people who are in those accounts?
    So I would hope that we are able to keep them in the bank. 
But it will require the banks to sacrifice more of their 
revenue to do so.
    Chairwoman Capito. I think in the interest of time--we have 
3 minutes before we need to vote. I had told Mr. Royce that he 
could have a minute or two, but it looks like we are down to 
the wire here. So I want to thank the panel for attending.
    I would note that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Thank you very much. Thank you for your patience.
    We will return after votes.
    [recess]
    Chairwoman Capito. Ranking Member Maloney said we could go 
ahead. I am really pleased that you are here, and I look 
forward to your testimony. I will introduce each of the 
panelists before you speak and ask that you speak for 5 
minutes. We have your written statements in the record.
    So our first speaker is Mr. Jess Sharp, executive director 
for the Center for Capital Markets Competitiveness, with the 
U.S. Chamber of Commerce.
    Thank you.

STATEMENT OF JESS SHARP, EXECUTIVE DIRECTOR, CENTER FOR CAPITAL 
       MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Sharp. Thank you, Chairwoman Capito, Ranking Member 
Maloney, and distinguished members of the subcommittee. I am 
Jess Sharp, executive director for the Center for Capital 
Markets Competitiveness at the U.S. Chamber of Commerce. The 
Chamber is the world's largest business federation, 
representing more than 3 million businesses and organizations 
of every size, sector, and region. We appreciate the 
opportunity to testify before the subcommittee today on behalf 
of the businesses that the Chamber represents.
    I am going to focus my testimony this afternoon on the 
potential impact of the Consumer Financial Protection Bureau, 
called the CFPB, on America's small businesses. First, I want 
to say the Chamber firmly supports sound consumer protection 
regulation that weeds out fraudulent and predatory actors and 
ensures consumers receive clear and concise disclosures about 
financial products. However, we also want to work with the CFBP 
to ensure that in doing this work, the Bureau avoids sweeping 
policies that would impose duplicative regulatory burdens on 
small businesses, and perhaps even more importantly, policies 
that would prevent small businesses from obtaining the credit 
they need to expand and create the new jobs that our economy so 
desperately needs.
    The CFPB has broad authority to regulate consumer financial 
products and services of banks and nonbank financial 
institutions. So credit cards, mortgages, and student loans, 
for instance. The Dodd-Frank Act, however, also gives the CFPB 
the authority to regulate a number of activities that are 
fairly common to businesses outside the financial services 
sector, sort of the financial services mainstream; for example, 
merchants that extent credit to customers. While there is sort 
of an exemption, at least in principle in the statute, it is 
very, very complicated, and I think it is a five-part test to 
ensure that you actually can qualify for that exemption as a 
business extending credit.
    In addition to casting this very wide net of coverage, the 
Dodd-Frank Act also gives the CFPB a very broad standard to 
enforce: the prevention of unfair deceptive or abuses acts or 
practices. While unfair and deceptive practices have been 
proscribed for years, with decades of case law to guide 
compliance and enforcement, the new abusive standard will 
require immediate interpretation by the Bureau that will likely 
continue to evolve into the future.
    Together, these standards are very vague and give the CFPB 
tremendous power to interpret its own mandate and give the 
regulated community, including small businesses, very little 
guidance to follow as we approach the July 21st transfer date. 
The full universe of covered entities is unknown, and the 
standards by which those entities will be judged compliant or 
noncompliant have yet to be written.
    So our two main concerns about the CFPB relative to small 
business are these. First, as I sort of alluded to at the top, 
small businesses may be subject directly to the CFPB'S 
regulation and other oversight because they engage in one of 
these 10 activities laid out in the statute or are service 
providers to one of those companies. Under current law, most of 
these companies, if not virtually all of them, are already 
subject to some sort of oversight by the Federal Trade 
Commission. So the Chamber fears that overlap and duplication 
of efforts and sort of double jeopardy will be inevitable as 
the Federal agency sorts out lines of jurisdiction and 
responsibility. And to some extent, those are the growing pains 
of the new agency as we have here, but it is something we want 
to be mindful of and caution against.
    Second, CFPB regulation--and I think we heard a little bit 
of this on the first panel--may possibly decrease the 
availability or increase the cost of the forms of credit small 
businesses rely on to provide working capital. According to 
research conducted by the Small Business Administration's 
Office of Advocacy, 80 percent of small firms use 
nontraditional sources of funding, including owners' loans, and 
personal and business credit cards, while 60 percent use 
traditional types of loans, such as credit lines, mortgage 
loans, and others. In fact, 47 percent of all small businesses 
use personal credit cards rather than business credit cards.
    So, in regulating consumer products, it is fair to say 
there will be an indirect effect on the availability of credit 
to small businesses as a result of that.
    Yesterday, the Chamber and a number of other trade 
associations sent a letter to Secretary Geithner laying out a 
series of recommendations to guide the Bureau's development in 
some of the early decision-making. I am just going to work 
through a quick summary of that. If you would like, I will 
provide a full copy of that for the record.
    We have some structural recommendations, one of which we 
are happy to see that the CFPB has already incorporated, and 
that is the creation of a COO position. So often with new 
regulatory agencies and even with existing regulatory agencies, 
there can be an inability to see the whole field. So a COO 
position that kind of cuts across the silos, we think is a good 
idea, and we are happy they are ahead of us on that.
    As I said at the top as well, empowering consumers by 
rationalizing disclosure requirements should be, we believe, 
the primary focus of the CFPB's work, and we think they can add 
a lot of value there, and we look forward to working with them 
to do that. We are hoping they will prevent duplicative and 
inconsistent regulation to Main Street businesses. As I said, 
some of that will have to be negotiated, I think, between the 
CFPB and the Federal Trade Commission and the attorneys general 
and the prudential regulators, but we understand that is a work 
in progress.
    As I said, we want them to preserve small business access 
to credit, and we want to ensure they are coordinating with 
potential regulators; that is very critical. And last, what we 
have asked is that the Secretary of the Treasury, in the event 
that there is a period of time between the transfer date and 
the confirmation of a director, what we have asked is that 
there not be any attempts to regulate or take enforcement 
actions that would interpret the new authorities under the 
statute.
    With that, thank you very much. I am happy to answer 
questions.
    [The prepared statement of Mr. Sharp can be found on page 
161 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Robert Nielsen, chairman of the 
board, National Association of Home Builders.
    Welcome.

 STATEMENT OF ROBERT NIELSEN, CHAIRMAN OF THE BOARD, NATIONAL 
              ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Nielsen. Chairwoman Capito, Ranking Member Maloney, and 
members of the Subcommittee on Financial Institutions and 
Consumer Credit, I am pleased to appear before you today on 
behalf of the National Association of Home Builders to share 
our views on the effect of the Dodd-Frank Act on small 
financial institutions and small businesses and to highlight 
the existing regulatory obstacles to housing production credit.
    My name is Bob Nielsen. I am the 2011 National Association 
of Home Builders chairman of the board and a home builder from 
Reno, Nevada.
    The housing sector is an industry made up of mostly small 
businesses. Over 85 percent of the NAHB builders members 
reported building fewer than 25 homes per year in both 2008 and 
2009. And over 95 percent have receipts less than $15 million. 
Thus, the typical home builder easily qualifies as a small 
business. And these small businesses depend almost entirely 
upon commercial banks and thrifts for housing production 
credit.
    Indeed, small community lenders account for over 90 percent 
of residential land acquisition, development, and residential 
construction, that is AD&C, loan originations. With no 
alternative source of housing production credit for most firms 
in the home building industry, NAHB is extremely interested in 
how the rulemakings required by the Dodd-Frank Act will impact 
the ability of small community banks to service our industry in 
the coming months and years.
    Federal banking regulators are now entering an intense 
period of rulemaking on key components of the Dodd-Frank law. 
NAHB will be examining and commenting on these crucial 
rulemakings, not only for their potential to impact the already 
struggling home building industry but also for the additional 
uncertainty that the sheer weight of new regulation will have 
on the ability of small builders to obtain much-needed housing 
production credit. Additional burdensome and unnecessary 
regulatory excesses will be sure to have a negative impact on 
small homebuilding companies and thus for the entire economy.
    NAHB is concerned that the forthcoming credit risk-
retention rules required by Dodd-Frank Act may result in an 
unduly narrow definition of the important term ``qualified 
residential mortgage,'' which could forestall recovery of the 
housing market by making mortgages unavailable or unnecessarily 
expensive. This could occur, for example, if the rules required 
home buyers to make large downpayments. A move to a larger 
downpayment standard at this juncture would cause renewed 
stress and uncertainty for borrowers who are seeking or are on 
the threshold of seeking affordable sustainable, homeownership. 
Moving forward, NAHB recommends the broadest criteria possible 
when defining the qualified mortgage exemption without 
interfering with the safety and soundness requirements of the 
Dodd-Frank Act.
    While the possible effects of ongoing Dodd-Frank 
regulations on community lending institutions are concerning, 
small builders have already been significantly impacted by 
existing regulatory requirements. Community banks are under 
intense regulatory pressure that has resulted in a severe lack 
of credit to home builders for AD&C loans. Such short-term 
loans are the life blood of our industry.
    Unfortunately, I continue to hear from my fellow builders 
that it is extremely difficult if not impossible to obtain new 
AD&C loans. Additionally, builders with outstanding loans are 
experiencing intense pressure as a result of requirements for 
additional equity, denials on loan extensions, and demands for 
immediate repayment. This is a major impediment to the housing 
recovery and an increasing threat to the ability of many home 
builders to survive the economic downturn.
    Of concern to NAHB is that lenders often cite regulatory 
requirements or examiner pressure that banks shrink their AD&C 
loan portfolios as the reason for their actions. While Federal 
bank regulators maintain that they are not encouraging 
institutions to stop making loans or to indiscriminately 
liquidate outstanding loans, reports from my fellow members and 
their lenders suggest that bank examiners in the field are 
adopting a significantly more aggressive posture.
    To address this situation, NAHB has presented banking 
regulators with specific instances of credit restrictions. To 
date, these efforts have not produced any tangible result. It 
is clear that congressional action is now needed. As my written 
statement outlines, NAHB is offering a formal legislative 
blueprint focusing on fixing specific instances of regulatory 
excesses. NAHB stands ready to work constructively with this 
subcommittee to find prudent and workable solutions to both the 
current and ongoing regulatory constraints that are impacting 
the ability of the home building industry to fully participate 
in our Nation's economic recovery. Thank you.
    [The prepared statement of Mr. Nielsen can be found on page 
125 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. John Schaible, chairman of Atlas 
Federal Holdings.
    Welcome.

  STATEMENT OF JOHN M. SCHAIBLE, CEO, CHAIRMAN, AND FOUNDER, 
                     ATLAS FEDERAL HOLDINGS

    Mr. Schaible. Chairwoman Capito, Ranking Member Maloney, 
and members of the subcommittee, my name is John Schaible. I am 
the chairman, founder, and CEO of Atlas Federal Holdings. I 
want to begin by commending the committee for holding this 
hearing on Dodd-Frank, and I want to thank you for providing me 
the opportunity to share my opinions and hopefully what amounts 
to insights.
    I am a businessman and an entrepreneur. I founded a company 
called NexTrade, which was one of the first electronic 
exchanges to compete directly with the New York Stock Exchange. 
I founded another company called Matchbook FX, which was the 
first spot foreign currency electronic exchange. I also founded 
a company called Anderen Financial, which is a Florida State-
chartered bank and brokerage firm. Anderen remains today one of 
the best capitalized banks in the country.
    To the success of my firms, I have employed, contracted 
thousands of Americans and been responsible for facilitating 
billions of dollars of economic activity, all of it generated 
from scratch. In the simplest sense, my business has been about 
inventing better ways for other businesses to access capital 
and distribute risk.
    From this level, I submit to you that business in America 
needs certainty. And Dodd-Frank undermines that certainty. To 
make matters worse, Dodd-Frank is aimed at the financial 
services industry, which is the fuel pump for capital formation 
for all other businesses. At the core of the legislation, there 
is a philosophy inherently opposed to capital formation: the 
concept that regulation should be maximally flexible. To an 
entrepreneur like me, flexible regulation is a euphemism for 
arbitrary regulation, and it deters investment.
    Dodd-Frank is massive, but there are three provisions in 
particular I want to reference that give me the most 
uncertainty. The first is Title X, which creates the Consumer 
Finance Protection Bureau. The reach of the CFPB does not seem 
to be limited in any material way for any firm engaged in 
finance. In addition, Congress has seen fit to abdicate the 
entire construction of the body of rules of the agency to the 
agency itself. For the business entrepreneur considering 
entering the field of finance, the entrepreneur has no way of 
forecasting the costs of this new rulemaking body and, 
therefore, has no real way to convince someone to put capital 
into them.
    The secondary provision of concern is Title II, under which 
Dodd-Frank creates the orderly liquidation authority. The 
powers extended to the government during an orderly liquidation 
are practically limitless. While the vocalized intent is that 
the authority will seldom, if ever, be utilized, the reality is 
that it can occur. And potential investors and financial 
services have to look at two distinct scenarios: The first 
scenario is the possibility that their firm that they are 
investing in gets placed under OLA. The second scenario, which 
is more likely, is that one of the firms that they contract 
with or are a customer of gets placed into OLA.
    I will give you an example of a firm, like Bank of New 
York, which handles over $24 trillion in custody and 
administration services. They clear for over 1,150 other 
brokerage firms, and they provide services to what is roughly 
45 percent of all exchange-traded funds. Bank of New York is 
one of the preferred places for small firms like mine to go to 
for services that we need. Our fear is that, under the OLA, 
what happens to our investors if such a bank like that gets 
seized?
    We are faced with the cold reality that our contracts that 
we have with them can be canceled, or worse, forced to stay in 
place even though this firm is now recognized because of the 
seizure as a credit risk.
    The OLA not only strips firms under resolution of certain 
rights, but it also otherwise can strip innocent and otherwise 
solvent end customers of their rights. To me, this is not even 
remotely American, very scary, and a severe deterrent to future 
capital formation.
    The third section that gives me great concern is Title VI 
and, specifically, the Volcker Rule. The unintended 
consequences of the Volcker Rule can be very broad. Without the 
liquidity that bank-owned dealers provide, there can be some 
substantial negative effects for business formation in general. 
There will be higher funding and higher debt cost for U.S. 
companies, there will be a reduced ability of households to 
build wealth through the participation in liquid securities. 
Hopefully, if we learned anything during the recent crisis, it 
is the importance of liquid markets. The reduced willingness of 
investors to provide capital for new financial service firms 
because of the illiquidity and the higher trading costs in 
general will probably impact investors.
    We have to realize that we face very strong competition 
from overseas capital markets and a prescriptive rule set that 
precludes liquidity support from some of largest capitalized 
players will substantially drain liquidity and important trade 
and products, and move jobs and wealth offshore.
    In conclusion, I think that the passage of Dodd-Frank was 
definitely made with the best intentions, but I am concerned 
that we are trading prosperity for political expedience. I 
think we have a misunderstanding as to what caused the crisis. 
I think it is in fact a cause of government intervention and a 
very ill-defined regulatory rule set that tends to drive good 
business into small margins and allows what I call the 
``cockroaches of the industry'' to survive in the dark margins 
and even thrive.
    So, to that extent, when we understand that government 
intervention and bad rule sets are the cause of the problem, I 
think that Dodd-Frank probably is just one more Band-Aid and 
not a good solution.
    Thank you.
    [The prepared statement of Mr. Schaible can be found on 
page 140 of the appendix.]
    Chairwoman Capito. Thank you.
    Our final panelist is Mr. David Borris of the Main Street 
Alliance.
    Welcome.

        STATEMENT OF DAVID BORRIS, MAIN STREET ALLIANCE

    Mr. Borris. Thank you. Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee, thank you for the 
invitation to testify regarding the impact of the Dodd-Frank 
financial reform law on small business.
    My name is David Borris, and I serve on the Executive 
Committee of the Main Street Alliance, a national network of 
small business owners. Our network creates opportunities for 
small business owners to speak for themselves on matters of 
public policy that impact our businesses.
    I have been a small business owner for over 25 years. My 
wife and I opened a gourmet carryout food store in 1985, and 
over the years have expanded into a full-service catering 
company with 25 full-time employees and up to 80 part-time and 
seasonal workers. We take pride in what we do.
    I think it is important to understand the vital connection 
small businesses share with the communities we serve. Unlike 
big corporations, Main Street business owners see our customers 
every day, in our businesses, at the local grocery store, at 
school bus stops. We share close personal relationships and 
equally close economic ties. Policies that impact the economic 
health of our customer base reverberate quickly to our bottom 
lines.
    Much attention has been paid to the severe tightening of 
credit markets. And this is certainly a serious issue for small 
business. But to blame Dodd-Frank for this credit crunch makes 
little sense. Credit dried up and has remained frozen because 
of the financial crisis itself, which could have been averted 
or mitigated had the stabilizing measures contained in Dodd-
Frank been in effect at the time. To blame Dodd-Frank for the 
credit crunch confuses cause and effect, especially as the new 
law has not even been implemented yet.
    When it comes to new capital requirements, leading 
financial experts dismiss the claim of a negative impact on 
lending. Professor Anat Admati from the Graduate School of 
Business, Stanford University, and her colleagues have looked 
carefully at the topic. They conclude that better capitalized 
banks will find it easier to raise funds for new loans and, 
further, that new capital requirements can help address biases 
in the current risk-weighted system and increase incentives for 
traditional lending.
    The real reasons why small institutions and small 
businesses are having difficulties with credit lending are the 
underlying uncertainties in the economy: high unemployment; 
stagnant consumer demand; and the lingering foreclosure crisis. 
The great recession cost this economy 8 million jobs and eroded 
the small business customer base severely. Those customers have 
yet to return. Uncertainty in the foreclosure market continues 
to hang like an albatross around the neck of consumer demand as 
the unwillingness of big lenders to write down principal 
lingers as a drag on lending markets on economic growth. It 
should be noted, too, that efforts to rewrite Dodd-Frank even 
before it is implemented only add to that uncertainty.
    New data on bank reserves reinforce the conclusion that the 
credit problem doesn't stem from regulatory requirements. 
According to last Friday's Wall Street Journal, U.S. bank 
reserves have swelled to $1.3 trillion, a figure the Journal 
describes as eye-popping. Those excess reserves represent money 
that could be out circulating in the economy on productive 
loans instead of sitting at the Fed.
    Yes, we are in a credit crunch. The banks slashed their 
small business lending by $59 billion between June of 2008 and 
June of 2010, but the current levels of excess reserves could 
fill that lending gap 20 times over. The $150 billion in 
reserve at small institutions is 2.5 times the amount necessary 
to restore small business lending to 2008 levels.
    While Dodd-Frank is hardly responsible for drying up 
credit, it does include a number of provisions that will 
provide real help for small business. The new Consumer 
Financial Protection Bureau will benefit small business in 
three ways: first, directly, because we are financial consumers 
also; second, by protecting people from bad credit arrangements 
and helping them keep money in their pockets to spend in the 
real economy at our Main Street stores; and third, by promoting 
a level playing field in lending.
    Meanwhile, the law's proprietary trading limits will 
encourage banks to restore the focus on economically productive 
lending, and that will boost commercial lending. And the law 
includes provisions that should restore some parity to credit 
and debit contracts and debit interchange fees, an important 
area for many small businesses.
    For me, as a small business owner, the bottom line is 
trust. Small businesses across America succeed by earning the 
trust of our customers. The financial sector lost sight of this 
basic principle of business, and we have all paid a very steep 
price. That is why we need these new rules of the road for the 
financial sector to engender trust, inspire confidence, and 
decrease uncertainty.
    Small businesses like mine are counting on Dodd-Frank to 
succeed so we can go back to doing what we do best, creating 
jobs, building vibrant economies, and serving local communities 
across America.
    Thank you.
    [The prepared statement of Mr. Borris can be found on page 
46 of the appendix.]
    Chairwoman Capito. Thank you.
    I want to thank all of the witnesses. We will begin the 
question portion. I am going to begin.
    First of all, Mr. Sharp, you raised an issue that I have 
great concern about as well in terms of the development of the 
CFPB in terms of the timing. We are at the beginning of March. 
We have no nominee for a director. We are going up against a 
timeline here. And I think there are some very fundamental 
questions as to what is going to happen in the short term if a 
situation should arise that there is not a nominee or the 
nominee hasn't been confirmed, etc., etc. So I thank you for 
raising that issue. I think it is very real and certainly 
leads, again, to more uncertainty, which I think we are trying 
to, in all facets of our economy, trying to create and bring 
about more certainty so that we can get moving again.
    I would like to ask Mr. Nielsen a couple of questions. 
Small home building companies, how will you be affected by the 
rules requiring banks to retain a portion of the credit risk 
associated with the mortgage loan? Is this a great concern for 
you all?
    Mr. Nielsen. Yes, it is. In fact, that could have a 
dampening effect on the ability of mortgage creators to create 
mortgages, and it would reduce the number of home builders that 
would qualify for a mortgage.
    Chairwoman Capito. What would you say is the most common 
reason now that banks are giving to home builders for denial of 
credit? Mr. Westmoreland was here for the last questioning, and 
I think he was hitting on this very topic. Is it regulatory 
guidance? Is it lack of confidence in the economy? Is it real 
estate prices? Is it all of the above?
    Mr. Nielsen. Two different issues there. The first issue is 
to the consumer who is trying to buy a home. And, certainly, 
the tightening of FHA regulations, the tightening of banking 
regulations in terms of scores, credit scores, and that kind of 
thing are an issue for someone trying to purchase a home today. 
The other piece is for home builders trying to get financing, 
trying to access capital to be able to build, which the 
regulators have absolutely shut down. And that is the reason 
why we believe there needs to be a legislative response to that 
kind of a problem.
    We have talked to the regulators. We have said bankers need 
to be able to make well underwritten loans in reasonable 
markets like Tulsa, Oklahoma, or North or South Dakota and 
parts of Texas, where home building can still be done. In fact, 
the regulators say, we encourage that with our examiners. But 
when you go out and talk to the community bankers, as you heard 
in your first panel, the examiners aren't telling them. So if 
the examiners are telling them to reduce their real estate 
lending book, they are going to do that, because they have to 
do that.
    So that is the concern. It is twofold: one on the consumer 
side; and one on the production side.
    Chairwoman Capito. All right. Thank you.
    This is really for anybody. It will be my final question. 
President Obama recently announced an initiative to reassess 
regulations in light of their effectiveness and their effort 
and their effect on economic growth and jobs. I am curious to 
know, have you all or has anybody in the course of your 
businesses, have you ever been the beneficiary of reduced 
regulation and--not oversight, but it seems to me we are piling 
more regulation upon more regulation. Are any of your 
regulations going away to ease the business moving forward?
    Mr. Nielsen. I can guarantee you, Madam Chairwoman, we have 
seen no reduction in regulations. In fact, we see additional 
regulations at this point. I guess you have to give them time 
to do that. But we certainly see no move at this point to 
reduce regulations that affect our builders.
    Chairwoman Capito. Does anybody else have a comment on 
that?
    Mr. Sharp?
    Mr. Sharp. I would just agree with what my colleague here 
said. I haven't seen a reduction anywhere.
    Chairwoman Capito. Thank you.
    Mrs. Maloney.
    Mrs. Maloney. Thank you. And I want to thank all the 
panelists for being here and for what you do every day to 
create jobs and be part of our economy.
    I do want to share that at the last hearing of this Joint 
Economic Committee, Dr. Hill, who was appointed by former 
President Bush to head the Bureau of Labor Statistics, 
testified that this recession was the first one that wasn't 
just economic factors but was a failure of the financial 
system. And when you look at the failures that took place, it 
was highly unregulated, risky products that got us into the 
mess that we are digging our way out of.
    It is estimated we lost $13 trillion in profits or value in 
our economy, 8 million jobs. It has been a devastating impact 
on all of us. Certainly, to respond to Mr. Nielsen and others 
who raised access to credit, there has been a dual story going 
on where the regulators and bankers will come in and say, oh, 
we are getting all the credit out into the community. And then 
you talk to the community and the community cannot find access 
to capital. And you are not going to grow, you are not going to 
invest until you have access to capital.
    So, in the last Congress, we passed a bill that would 
create in Treasury a $300 billion fund for small banks, for 
communities, to get the capital out in the community to get the 
building of small businesses going. That is the Small Business 
Lending Fund. And it is just beginning to provide the necessary 
liquidity to small businesses.
    The panel before you was a lot of smaller financial 
institutions, which I would say in this financial crisis have 
been the true heroes and heroines. They have been in the 
community. They have gotten the capital out. They have been 
well managed. They did not take risks. It was the old way of 
not handing out a loan unless people could pay for it. It got 
so bad during the heyday that the joke in New York was, if you 
can't afford your rent, go out and buy a home. Because there 
just wasn't any oversight. You didn't have to put anything 
down. You didn't have to have any credit. It was called no-doc 
loans. It really went overboard. And we are suffering.
    We are working very hard in New York to really handle the 
foreclosure process, but in some States, our colleagues 
literally are having brand new homes bulldozed down and 
destroyed because there is nobody there to buy them.
    I think one of the challenges, and I think Mr. Nielsen hit 
on it, is that there are some places where the economy is 
rebounding, where you need to be able to get these loans where 
they could pre-sell their homes and really prove that there is 
a demand and get it moving.
    I think one of the things that is confronting us, I believe 
it was Mr. Zandi, a private-sector economist who works for 
Moody's, which means that if he is not right in his forecast, 
he gets fired. But he was estimating that housing was 25 
percent of our economy. It is huge. If it is 25 percent of our 
economy, when you look at all of the aspects of it, with the 
home building, the contractors, the construction workers--and 
construction workers have been hardest hit in this downturn--I 
don't see how we really rebound in a positive way until we get 
housing moving again.
    Earlier today, Chairman Bernanke testified that the 
recession was over and that we are not falling, but we are not 
climbing out of it. We are not even creating enough jobs to 
equal the number of people going into the workforce, which is 
roughly 150,000.
    So my question, I guess, to Mr. Nielsen is, realistically, 
what can we do to get the housing moving? There are certain 
areas in the country where there is still a backlog of 
buildings that have been built. I would say that is true here 
in the Arlington, Virginia/Washington, D.C., area. There is a 
backlog of having built enough things that they can't even sell 
them.
    It is hard to build new things when there is a backlog 
there. So I just think it is a huge challenge, because I do 
think there are some piecemeal areas in the country, some in 
Florida, I would say some in New York, where the demand is 
there and you could move forward. But still the fact that the 
backlog is so deep and strong has everybody concerned.
    And I just want to put out there that the intent of this 
bill--government doesn't like to get involved with the private 
sector. But if the banks are closing and you are on the verge 
of a Great Depression and your entire financial community would 
have crumbled without the intervention of a Federal Reserve, 
that is why people came in. And, as I said, it was the 
deregulated areas that took the derivatives, moved them off the 
exchanges so no one knew what was going on with them.
    There is a movie out--actually, it won an Academy Award, a 
documentary called, ``Inside Job.'' But it was about the whole 
meltdown of the financial industry where all regulation was 
moved off the charts. We are now trying to put transparency 
back in so the consumers can see those areas.
    So I guess my question to you, Mr. Nielsen, or anybody else 
who wants to answer it, is what can we do to get the housing 
market moving again? And is the demand even out there? If you 
could build the houses, is there anyone there to buy them?
    As I said, we now have this lending fund that will be there 
if you can prove that, in fact, someone can pay for it. We are 
stopping the area of building things that people can't pay for 
and then leaving the taxpayer with the tab. And some people say 
that is too much regulation.
    I think it is smart not to give someone a house that they 
can't afford that is going to be foreclosed on and the taxpayer 
is going to have to pay for. I think that is a dumb public 
policy. So what we were trying to do is put some balance in it. 
But anything that could get housing moving if the demand is 
there.
    Number one, do you think the demand is there? And just your 
comments on it, because I don't believe we are going to ever 
get past the sort of treadmill area that we are in until 
housing, 25 percent of our economy, starts moving again.
    Mr. Nielsen. Absolutely correct. I love hearing you say 
that housing is what could lead this economy out of the 
recession.
    Clearly, housing is still in a huge recession, unless you 
want to call it a depression. Unfortunately, the small business 
bill that you spoke of expressly precludes home builders from 
accessing that. In fact, we had a fix-it bill that almost made 
it through in the last Congress but didn't. So we don't have 
access to those funds. That is part of the problem.
    You are right that there are segments of the country that 
are beginning to come back. As I said in my testimony, Tulsa, 
Oklahoma, the Dakotas, and parts of Texas and, actually, 
specific areas of even Florida are starting to come back.
    But if builders are precluded from having capital to be 
able to fund their business, they can't come back; and that is 
what we are experiencing. Some of the very largest builders, 
the biggest builders have direct access to Wall Street and 
don't have that problem. But our members, 165,000 of them, are 
small builders. They are community builders. They are people 
who build less than 25 homes. And unless we can create capital 
flow to them, which we believe a piece of legislation that we 
are crafting right now will do, they are not going to get back 
and be building. And, without that, they won't be hiring the 
people, as you pointed out, that we need to hire for that.
    Mrs. Maloney. The $300 billion precludes home builders. 
What about a home buyer? Can a home buyer access that $300 
billion?
    Mr. Nielsen. I don't think that is for mortgages. At least, 
I don't believe it is.
    Chairwoman Capito. Thank you.
    I would like to ask for unanimous consent to insert into 
the record statements from the National Association of 
REALTORS, the National Association of Small Business Investment 
Companies, and the Retail Industry Leaders Association.
    Without objection, it is so ordered. We will now go to Mr. 
Luetkemeyer for questioning.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Mr. Nielsen, let us continue with your discussion here. You 
hit on an interesting problem here and one that I hear all the 
time as I go back and talk to my local folks in the district. 
And that is the one where--especially with the builders and 
contractors and developers where there is a huge disconnect 
between the regulatory officials here in D.C. and what is going 
on in the district where it affects the people who make the 
livings and get our economy going from the standpoint that they 
are forcing the local examiners, the ones in the field are 
forcing the banks to restrict credit, call notes that really--
there is nothing wrong with them, other than the fact that the 
market is kind of flipped upside down with regards to the 
values they have been performing and have never been past due 
and yet they are being called. It is a huge problem, and I am 
glad to hear your testimony along that fact.
    If you can just again confirm what is going on out there. 
One of the questions I have is, what is the present inventory 
of homes that is sitting there ready to be purchased that 
people have moved out of? Or how big is the inventory and how 
long would it take to get rid of it?
    Mr. Nielsen. That is a very fluid question, and I am 
certainly not an economist and couldn't give you a number. But 
I can tell you that the overhang is huge.
    But what you were talking about earlier, the banks 
calling--performing loans is what really concerns me, too. 
Because a lot of our builders have land that is ready to build 
at this point that they are holding. But because banks are, in 
essence, reappraising that land and they are forcing home 
builders or owners of that land to put additional equity into 
the--pay the bank, additional equity to keep the loan in 
balance. And if they can't do that, they are foreclosing on 
that.
    When they foreclose on it, the bank then sells that at a 
distressed value and reduces the value of every other piece of 
property around it because an appraiser has to look at that 
when they appraise a property, which is another problem, the 
appraisal problem.
    Both of those are addressed in our legislation.
    Mr. Luetkemeyer. I had a situation where I had a developer 
that was so big, he had four different banks involved, and they 
all foreclosed on him because he was bankrupt. But if they all 
foreclosed on him, it would drive all the prices in the whole 
area down to a level that everybody would lose everything else. 
All the good loans would suddenly be worthless. That is how big 
and how bad the situation can get.
    Mr. Nielsen. Right. And we will get you the number of 
foreclosed houses on that.
    Mr. Luetkemeyer. Mr. Schaible, you hit on a couple of 
points there that are of interest to me, saying that the CFPA 
and the whole bill as a whole, Dodd-Frank really undermines the 
certainty of what businesses need in order to be able to 
continue to operate. And as I go out and talk to my folks, over 
and over again, the key word is certainty. They can't go 
anywhere because they are not certain of the laws, not certain 
of the regulations, not certain of taxes, not certain--if you 
get to manufacture, not certain of trade policy.
    You used the word ``arbitrary'' regulation. I kind of like 
that. That is kind of a neat way to put what is going on here. 
They come in and they arbitrarily seem to, without any sort of 
documentation or real problem there, all of a sudden they are 
arbitrarily imposing rules and regulations on things.
    And you made a comment in your testimony with regard to 
them being able to come in and take away some of the businesses 
and come in and repossess or close down. Would you elaborate on 
it just a little bit? Because I think this is a very important 
point that we make here.
    Mr. Schaible. From my reading of the order of liquidation 
authority, they can seize certain enterprises when they feel 
that the enterprise is in trouble of potentially going under. 
And what is interesting is that they chose not to fall back on 
bankruptcy provisions or really any form of due process. They 
just kind of arbitrarily make that decision.
    If you are on the other side of that as a customer of one 
of these larger firms, you can depend on these customers for 
clearing, for settlement, for stock loans, for a whole variety 
of services that are critical to your business. But the 
downside is the contracts that you have, even if you put 
provisions in your contracts to get away from them if they go 
bankrupt, they have specifically nullified that. And from what 
I have seen and that, from my perspective, if I am on the other 
side of that situation and my service provider has suddenly 
been randomly seized, I cannot break my contracts and I can't 
go someplace else unless the FDIC for a period of 90 days gives 
me authority. And as a small firm dealing in trading, 90 days 
or 9 days, it doesn't matter. You will be out of business. It 
is a very scary situation.
    Mr. Luetkemeyer. I was talking to somebody today, and their 
comment was that it may be even unconstitutional to do this 
sort of thing. Because it is pretty arbitrary about where there 
they are doing it, and there is no basis there for them to be 
able to go in and basically take over a company without some 
sort of due process, which is basically what they are doing 
here.
    Just very quickly--my time is about out--with regards to 
interchange fees. Mr. Borris, I believe it is, I am just kind 
of curious, how many businesses do you have in your Alliance?
    Mr. Borris. We have about 8,000 businesses.
    Mr. Luetkemeyer. Do you know roughly what amount of the 
business transacted uses debit cards?
    Mr. Borris. I don't know that. I can get that for you, 
though.
    Mr. Luetkemeyer. I am just kind of curious from the 
standpoint that, if debit cards go away, how impactful is it 
going to be to your merchants?
    Mr. Borris. If debit cards were to disappear?
    Mr. Luetkemeyer. Yes.
    Mr. Borris. Implying that debit cards will disappear by 
bringing those debit card fees more in line with what can be 
afforded?
    Mr. Luetkemeyer. By breaking the folks who can no longer 
afford to provide the service without being able to be paid for 
it. That is my question. If they can't pay for it, where are 
they going to--and they will pull the service or go someplace 
else to find other moneys to be able to continue to provide 
service free.
    Mr. Borris. I think they indeed may go someplace else to 
try to find some of that money.
    Mr. Luetkemeyer. My question is, how impactful that will be 
to businesses? I am kind of curious. You are asking for the 
government to come in here and you seem to be approving this, 
to be able to set a price. How would you like to have somebody 
come in and set the prices on the products that you sell?
    Mr. Borris. Right. What I can say is that, in my experience 
with my business, in my experience with other merchant 
businesses, we have sort of been at the mercy and still conduct 
our business at the mercy of credit card interchange fees, 
which have changed dramatically over the last several years 
both in transaction fees as well as in discount rates, the 
difference between nonqualified cards and qualified cards and 
swipe cards. I think that it is time for us to get some sort of 
fairness and justice in the marketplace for merchants.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Renacci.
    Mr. Renacci. Thank you, Madam Chairwoman.
    Thank you to all the panelists there.
    After listening to all of you speak, the one thing that you 
all agree on is that we need certainty and predictability to 
move forward. But the one thing that you disagree on, and Mr. 
Borris especially, is the effects of Dodd-Frank. I want to go 
to Mr. Borris, some of your comments.
    You made the comment that--and again, I was a small 
business owner for 28 years. So I understand what it takes to 
run a small business, and I understand what certainty and 
predictability in a marketplace and how necessary that is. But 
it is interesting because you made the comment that the 
Consumer Financial Protection Bureau would bring certainty and 
predictability. And I am just intrigued by that comment because 
I know in my business background, after 28 years, I was never 
really comfortable about certainty and predictability when 
there was a new bureau coming in to oversee what I was doing. 
Can you kind of elaborate on that?
    Mr. Borris. Sure. I think that part of what happened to our 
business, and what happened to business across America over the 
last 2 years is that the demand disappeared as jobs were lost 
and as people had all of the equity sucked out of what they 
thought they had equity in, their homes. So as that demand 
disappeared and the money flowed strictly to a very narrow band 
of extraordinarily profitable--as it turned out because of 
taxpayer bailouts--extraordinarily profitable investment 
banking firms and loan originators who didn't have to hold on 
to any of their loans. So what I believe that the Consumer 
Financial Protection Agency will do is protect consumers from 
getting involved in predatory lending, bad mortgages that have 
no prayer of ever becoming repaid, and keep money in their 
pockets where it will be spent in our local communities. So 
that is where it will give some certainty to what is happening 
in the economy.
    Mr. Renacci. Mr. Schaible, do you believe that? I know you 
commented about that same organization.
    Mr. Schaible. Do I agree with what he said?
    Mr. Renacci. Yes. Do you agree that having another bureau 
coming in is going to bring you certainty and predictability?
    Mr. Schaible. No. I completely disagree.
    Mr. Renacci. Mr. Nielsen, in your organization, in the 
home-building industry, any more oversight, would that bring 
you certainty and predictability?
    Mr. Nielsen. No, it doesn't. I think that what we are 
looking at is additional regulation which, unless really 
watched very carefully, is going to be difficult for any of our 
guys to deal with.
    Mr. Renacci. Mr. Sharp?
    Mr. Sharp. As I said, at this point it is not clear who is 
covered by the CFPB and what the rules of the road are going to 
be. So, again, it is a tremendous amount of uncertainty for our 
members.
    Mr. Renacci. More uncertainty and more unpredictability.
    How about regulations? As a small business owner--again, I 
would just like for all four of you to comment. Do you believe 
regulations drive up costs? And in a business, if a regulation 
drives up costs, what are some of the things you have to start 
looking at? Would payroll, employment be one of those things? 
Will regulations drive up costs?
    We will go back to Mr. Borris first.
    Mr. Borris. I would answer that this way. There is 
regulation and there is undue regulation, right? So, no, do I 
want an authority saying to me that chicken salad has to be 
priced at $8.95 a pound no matter what your cost of producing 
chicken salad is? No, I would agree that is wrong. But do I 
want somebody stamping the meat that comes in my door so that I 
know that it is valid and that it works? Do I want reasonable 
regulation for workplace environments so that we don't have a 
situation like we had before Upton Sinclair wrote, ``The 
Jungle''?
    I think that there are some big-picture issues that are 
significant and need to be talked about. If you and I were 
having a conversation right now about what is--should we have a 
50-hour workweek, if there were no overtime provisions right 
now in law, I think it would be a very difficult conversation 
to have. And yet we wind up with a more productive society.
    Mr. Renacci. I guess it is more of a simple question. 
Because I do believe some regulations. I understand that. The 
question is, do overburdensome regulations increase your costs 
and reduce your ability to have people on the payroll?
    Mr. Borris. I don't think it is a fair question. It is like 
saying, if I put a 120 hitter up at the cleanup spot, is my 
team going to be less productive? If I am forced to do that, 
then, yes. So if we are taking it as a supposition that all 
regulation is overburdensome, then, yes, you are correct. But I 
think you and I agree that there is proper and good regulation 
that levels playing fields and gives everybody equal access and 
opportunities to succeed.
    Mr. Renacci. I am really trying to stick to the Dodd-Frank 
regulations coming forward, though, not the meat packing 
regulations.
    Mr. Borris. I don't see Dodd-Frank as overburdensome.
    Mr. Renacci. The other three panelists, just a quick 
answer.
    Mr. Schaible. I don't know. I do think that it is going to 
be overburdensome, and it raises a great deal of uncertainty. 
And part of your question is, how do we respond to that? I 
think when you are in businesses that can migrate anywhere 
because of a virtual economy, you start to look at other 
jurisdictions that can allow you to compete. Because if you 
don't have a competitive playing field, you are going to go out 
of business.
    Mr. Nielsen. I would say that regulations in general are 
always burdensome. However, as some of the other witnesses have 
said, some regulations are necessary. But they have to be based 
on sound science. They have to have a reason why they are 
there. And if that is the case, then we can deal with it. But 
regulations in general are always costly and always burdensome 
and reduce the ability of small business to hire people.
    Mr. Sharp. And I would essentially echo what Mr. Nielsen 
said. Regulation is always a tradeoff. And, of course, we 
always hope that the benefits of the regulation exceed, 
hopefully by a good deal, the cost of those regulations. So 
there is still a lot to be written at this point about the 
Dodd-Frank regulations. So many of them are yet to come. But, 
again, there is a lot of fear out there about regulators not 
moving cautiously and understanding the tradeoffs bound up in 
each of these rules.
    Mr. Renacci. A lot of uncertainty and predictability. I 
will end it there. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I want to thank the panelists certainly for your patience 
and for the great information that you provided for this 
committee.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record. This 
hearing is adjourned. Thank you.
    [Whereupon, at 5:38 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             March 2, 2011

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