[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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65-671 WASHINGTON : 2011
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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
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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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