[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE DODD-FRANK ACT: IMPACT ON SMALL BUSINESS LENDING
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH, CAPITAL ACCESS AND TAX
of the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JUNE 16, 2011
__________
Small Business Committee Document Number 112-022
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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Page
OPENING STATEMENTS
Walsh, Hon. Joe.................................................. 1
Schrader, Hon. Kurt.............................................. 2
WITNESSES
Mr. Thomas Boyle, Vice Chairman, State Bank of Countryside,
LaGrange, IL................................................... 4
Mr. Mark Sekula, Executive Vice President, Chief Lending Officer,
Randolph-Brooks Federal Credit Union, San Antonio, TX.......... 6
Mr. William Daley, Legislative and Policy Director, Main Street
Alliance, Washington, DC....................................... 8
Mr. Greg Ohlendorf, President and CEO, First Community Bank and
Trust, Beecher, IL............................................. 9
APPENDIX
Prepared Statements:
Mr. Thomas Boyle, Vice Chairman, State Bank of Countryside,
LaGrange, IL............................................... 25
Mr. Mark Sekula, Executive Vice President, Chief Lending
Officer, Randolph-Brooks Federal Credit Union, San Antonio,
TX......................................................... 35
Mr. William Daley, Legislative and Policy Director, Main
Street Alliance, Washington, DC............................ 48
Mr. Greg Ohlendorf, President and CEO, First Community Bank
and Trust, Beecher, IL..................................... 52
Statements for the Record:
Mr. Peter J. Haleas, Chairman, Bridgeview Bank Group......... 60
National Association of Small Business Investment Companies.. 62
THE DODD-FRANK ACT: IMPACT ON SMALL BUSINESS LENDING
THURSDAY, JUNE 16, 2011
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Joe Walsh
(chairman of the subcommittee) presiding.
Present: Representatives Walsh, Chabot, Coffman, Mulvaney,
Schrader, Clarke, Cicilline, and Peters.
Chairman Walsh. Good morning. I call this hearing to order.
Welcome.
I would like to start today's hearing by thanking everyone
for attending. Specifically, I would like to thank our
distinguished panel of witnesses for taking time out of their
busy schedules to participate in what I believe to be a
critical issue facing lenders as they work towards providing
capital for our nation's small businesses.
On Wednesday, June 8, in response to a question from JP
Morgan Chase CEO Jamie Diamond at the Bankers Conference in
Atlanta, Federal Reserve Chairman Ben Bernanke stated that
there has never been a study that examined the impact of the
new financial regulatory structure on economic growth. For many
of us in the room today and on this Subcommittee, this
statement is very troubling. As we work to grow our economy and
create jobs, it is critical that in everything we do we
consider how policies made in Washington will impact small
business owners that are struggling to make their businesses
successful.
Regulations always require a careful balancing act, and
here we have two very important concerns to worry about. First,
we must make sure that the users of financial products are
protected. Small business owners and consumers take advantage
of a wide variety of financial products to fund their business.
For business owners to succeed, they need to have faith that
their financing options will continue to be available when they
need them and that their money is secure. Customers also need
financial products to purchase the goods and services that
sustain small business.
On the other hand is the burden of regulation and
compliance costs associated with oversight. A regulation that
chokes off all economic activity is not meeting its purpose. If
banks stop lending or cut back dramatically in response to
regulators, the regulation itself must be reconsidered. While
there is always going to be risk in the financial sector, we
need to make sure to manage that risk responsibly so that banks
are secure and small businesses have confidence that they can
obtain the credit necessary to sustain or grow their business.
We cannot afford a system where banks are afraid to take risks
on small businesses for fear of regulatory reprisal.
Today we will discuss the new financial regulatory
structure that was created by the Dodd-Frank Act. This new law
responded to the perceived weakness in the former regulatory
regime that left many lines of business without supervision,
allowing systemic risk to develop. We know that the Dodd-Frank
Act is over 2,300 pages. Within these pages are requirements
for 243 new rulemaking actions and 60 studies. According to
GAO, it will cost a billion dollars just to implement this new
law. It will drain 27 billion job-creating funds from the
economy over 10 years and require hiring more than 2,600 new,
full-time government employees.
What we do not know, however, is the overall economic
impact of this law and what it will do to small business job
creation in this country. To help us grasp the impact of the
new law we have a distinguished panel of witnesses who are on
the ground dealing with the impact of this new law every day
and working to prepare for the new rules coming down the pike.
I am extremely interested to hear what these witnesses have to
say about how they are dealing with this law and how it is
impacting their small business lending.
With that, I happily yield to Ranking Member Schrader for
his opening statement.
Mr. Schrader. Thank you, Mr. Chairman.
Less than three years ago our financial system was thrown
into disarray with Lehman Brothers filing the largest
bankruptcy in American history. In years since, our private and
public sectors have taken unprecedented steps to pull us back
from the brink and return our economy to a stable path. In the
process we have learned a great deal about what caused the
crisis and it appears that for decades I think, as we all know,
regulators allowed an overabundance of high risk credit to grow
unchecked. And in short, our entire financial system was flawed
and the reprised regulatory framework definitely being called
for and enacted in the Dodd-Frank bill.
While the legislation itself was directed primarily at the
financial services industry, we are concerned about its impact
and ramifications for all small businesses. It is imperative
that as the statute is translated into meaningful regulations
that we carefully consider how these changes might affect our
small banks, our small credit unions, and the small business
community in general. Community banks and credit unions
comprise over 90 percent of our banking industry and
significant efforts were made in the Dodd-Frank bill to
mitigate the adverse effects this new regulation might have on
them.
Indeed, I hope that in many respects small banks will
benefit from the new law, with lower premiums for FDIC
insurance, revised capital requirements, more freedom to open
branches across state lines, community banks should see
hopefully some reduced operating costs. You will correct me, of
course, if that is not being achieved at this stage.
Nonetheless, small financial institutions will have their
business models, I think, profoundly changed as a result of
these regulations. We are hearing pushback already. We hear the
higher compliance costs that are imposed on small firms that do
not have the large capacity that bigger firms do to deal with
those compliance costs. It is also undeniable that small
lenders bear less responsibility, I think, for this financial
crisis and should not bear the brunt of all these new
regulations, so we want to make sure we get it right.
The new regulations created by the Consumer Financial
Protection Bureau will be subject to the Regulatory Flexibility
Act. This new regulator also becomes just the third agency to
be subject to the Small Business Regulatory Enforcement
Fairness Act. We are concerned about how it views its mission
and how it will impact small businesses and small banks and
small credit unions.
Businesses on Main Street also rely on the healthy
functioning of our financial system. Perhaps no other group has
been more affected by the collapse of Wall Street and the big
investments banks and its trickledown effect to the smaller
banks than small businesses on Main Street. We still find small
firms at previous hearings struggling to find credit. Medium
and larger firms are now able to access credit. We have to be
careful that these new regulations do not exacerbate the
current capital shortage that we already have out there.
Changes to our laws, I think, are overdue. There is this
tendency, however, to overregulate and overrespond to the
crisis. I need to hear feedback from our distinguished panel to
make sure we do not go down an overcorrection path.
Both lenders and borrowers and small businesses have a lot
at stake with this financial reform. The Dodd-Frank Act is
going to affect every sector of American economy and I hope
that if done properly as a result of your feedback and the work
we will do to continue to improve the Dodd-Frank Act, that it
will create more jobs and more credit will flow.
So I also want to thank the witnesses for being here and
sharing their wisdom with us. I look forward to the hearing,
Mr. Chairman.
Chairman Walsh. Thank you, Mr. Schrader.
A couple rules. If Committee members have an opening
statement prepared, I ask that they be submitted for the
record. I would like to take a moment to explain the timing
lights for you. You will each have five minutes to deliver your
testimony. The light will start out as green. When you have one
minute remaining, the light will turn yellow. Finally, it will
turn red at the end of your five minutes. If you go over your
five minutes, someone will come in and escort you out of the
room. I am just kidding.
I ask that you try to keep it to that time limit but will
be as lenient as possible.
STATEMENTS OF THOMAS BOYLE, VICE CHAIRMAN, STATE BANK OF
COUNTRYSIDE; MARK SEKULA, EXECUTIVE VICE PRESIDENT, CHIEF
LENDING OFFICER, RANDOLPH-BROOKS FEDERAL CREDIT UNION; WILLIAM
DALEY, LEGISLATION AND POLICY DIRECTOR, MAIN STREET ALLIANCE;
GREG OHLENDORF, PRESIDENT AND CEO, FIRST COMMUNITY BANK AND
TRUST
Chairman Walsh. Before we get to the witness introductions
this morning I would like to first mention that there has been
a great deal of interest in today's hearing from people who
could not join us today as witnesses. So I would like to make
sure that the hearing record reflects their views.
I received a letter from Peter Haleas as chairman of
Bridgeview Bank Group. Peter is a constituent of mine from
Illinois, so I am pleased that he wrote to share his view on
this important issue. So I ask unanimous consent that this
letter be made part of the record for this hearing.
Without objection, so ordered.
[The statement of Mr. Haleas follows on page 60.]
Chairman Walsh. Our first witness today is Thomas Boyle,
vice chairman of State Bank of Countryside in Countryside,
Illinois. I am very pleased to have someone from my home state
of Illinois here today. Prior to Mr. Boyle's current role as
vice chairman, he was the president/CEO of the bank from 1997
to 2009. State Bank of Countryside opened in 1975 and operates
from six locations, including its main headquarters in
Countryside, plus branches in Burbank, Darien, Orland Park,
Chicago, and Homer Glen, Illinois. Mr. Boyle is testifying on
behalf of the American Bankers Association where he has served
a variety of leadership roles. Tom has also served as a
director of the Illinois Bankers Association. Mr. Boyle, we
look forward to your testimony.
STATEMENT OF THOMAS BOYLE
Mr. Boyle. Thank you. Chairman Walsh, Ranking Member
Schrader, and members of the Subcommittee. My name is Thomas
Boyle. I am the vice chairman of the State Bank of Countryside
in Countryside, Illinois, and I thank you for the opportunity
to testify on behalf of the ABA.
These are very important issues for thousands of community
banks that work hard every day to serve small businesses and
our communities. The health of the banks and the economic
strength of our communities are closely interwoven. A bank's
presence is a symbol of hope and a vote of confidence in the
town's future. As a family business, State Bank of Countryside
understands the concerns faced by our customers' personal and
business lives, and we believe our success is tightly linked to
their success. Our motto even reflects this, the family-owned
bank for families and their businesses.
Banks are working very hard to make credit available in
their communities. Efforts are made more difficult by hundreds
of new regulations expected from the Dodd-Frank Act. Although
these new regulations are inevitable, the sheer quantity will
overwhelm many community banks who are already facing difficult
times due to the economic conditions in many parts of the
country. Second guessing by bank examiners makes this situation
worse yet.
Let me give you a few examples of how Dodd-Frank will
negatively impact small business lending. First, new
regulations limit access to capital. Capital is the foundation
upon which all lending is built. Having sufficient capital is
crucial to lending and to absorb losses when loans are not
repaid. In fact, $1 worth of capital supports $10 in loans.
In the past two years, bank regulators have requested
greater levels of capital, taking away precious resources that
could be used for lending. In conversations with fellow
community bankers, I often hear how regulators are pressing
banks to increase capital-to-asset ratios by as much as four to
six percentage points above the minimum standard. Dodd-Frank
limitations on capital sources have made access to capital even
more difficult. The lack of access to capital has caused many
banks to become smaller in order to maintain specific capital
ratios. The result, loans become more expensive and harder to
get, relieving the increased regulatory demands for more
capital will help banks make loans needed for our nation's
recovery.
Second, Dodd-Frank increases uncertainty for banks in the
turn, raising credit risk, litigation risks and costs, and
leading through less hiring or even a reduction in staff. The
uncertainty makes hedging risks more costly and restricts new
business outreach. All of this translates into a less
willingness to make loans and worse, increases the likelihood
of a massive consolidation.
Of particular concern is the additional compliance burden
expected from the Bureau of Consumer Financial Protection. This
bureaucracy will impose new obligations on community banks that
have a long history of serving consumers fairly in a very
competitive market. 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.
Third, consequences for small businesses and the entire
economy are severe. Costs are rising, access to capital is
limited, and revenue sources have been severely cut. It is
difficult to meet the needs of local businesses when we are
dealing with regulatory overreaction, piles of new laws, and
uncertainty about the government's role in the day-to-day
business of banking. This will undoubtedly lead to a
contraction of the banking industry. We must work together to
ensure that banks meet the needs of small businesses and their
communities.
Thank you for the opportunity to present the views of the
ABA. And I am happy to answer any questions.
[The statement of Mr. Boyle follows on page 25.]
Chairman Walsh. Thank you, Mr. Boyle.
I would now like to introduce our next witness, Mark
Sekula, executive vice president and chief lending officer at
Randolph-Brooks Federal Credit Union. Mr. Sekula has 25 years
of lending experience covering credit cards, mortgage,
commercial, indirect lending, and collections. Mark and his
team currently manage a $200 million commercial portfolio that
includes SBA lending. In 2009, Randolph-Brooks was recognized
as the SBA Credit Union Lender of the Year. Mr. Sekula is
testifying on behalf of the National Association of Federal
Credit Unions. Welcome. You have five minutes to present your
testimony.
STATEMENT OF MARK SEKULA
Mr. Sekula. Good morning, Chairman Walsh, Ranking Member
Schrader, and members of the Subcommittee. My name is Mark
Sekula, and I am testifying today on behalf of NAFCU. I serve
as the executive vice president and chief lending officer for
Randolph-Brooks Federal Credit Union headquartered in Live Oak,
Texas.
NAFCU and the entire credit union community appreciate the
opportunity to participate in this discussion regarding the
Dodd-Frank's impact on small business lending. Despite the fact
that credit unions are already heavily regulated and were not
the cause of the financial crisis, they are still within the
regulatory reach of a number of provisions in the Dodd-Frank
Act, including all credit unions being subject to the
regulations and rulemaking of the Consumer Financial Protection
Bureau (CFPB). This means that credit unions, like mine, are
facing a host of new compliance burdens and costs.
As it relates to our business lending, the creation of the
CFPB, the breadth of its power and the costly regulations it
will undoubtedly prescribe will impact how we allocate our
resources for our membership. For example, Section 1071, which
has not received much attention, creates a data collection
system for small business lending, similar to the Home Mortgage
Disclosure Act for financial institutions. Under Section 1071,
every financial institution will need to inquire whether the
applicant is a small business or women- or minority-owned.
While well intentioned in its own right, it is yet another
compliance burden emerging from the Dodd-Frank.
Furthermore, given that credit unions serve a defined field
of membership, individual credit unions' information in
comparison to other lenders could be skewed.
Credit unions are chartered to serve their members. Thus,
regulatory data collection that is intended for institutions
that can serve anyone, should not be imposed on credit unions.
The financial institution must also maintain a record and
report it to the CFPB. The information must be made public in
accordance with the CFPB regulations. These provisions are
effective on July 21, yet implementing regulations will not be
issued until after that date, leaving financial institutions
with no compliance guidance on the effective date. While the
CFPB has indicated that compliance will not be mandatory on
July 21, Congress should consider delaying the effective date
of this provision until such time as implementing regulations
take effect.
The Dodd-Frank Act also includes a section, Section 1100(G)
that says the CFPB must evaluate the impact that its actions
have on small entities. We believe that credit unions meet the
definition of a small entity. We would urge Congress to ensure
that the CFPB abides by this congressionally mandated standard
and does not try to narrow the definition of small entity in
the future. The environment around regulatory reform has led
regulators to make changes that impact credit unions and may
cause them to tighten their lending to small business.
At Randolph-Brooks, our SBA loan volume has diminished in
recent years, partly due to the economic downturn but also
because of the inconsistent nature of SBA examinations. On one
hand the SBA encourages granting small loans to qualifying
businesses, yet on the other, the agency states that a lender's
status with the SBA can be rescinded if these higher risk loans
default. The SBA provides a lender portal and a lender score
from the SBA's credit risk assessment model. Our score is
derived by averaging other lenders, mostly large 7A loans with
our small SBA express loans.
The blending of all lenders with varying portfolios to
arrive at a score dilutes the true picture as one cannot
compare a small SBA, unsecured working capital line of credit
with a large SBA loan secured with commercial real estate. The
two loans should not have the same evaluation process. If this
does not change, it may eventually drive all small loans from
the lenders' portfolios.
In addition to the SBA's scoring problem, practices by
other regulators have had an impact as well. Last year the
National Credit Union Administration (NCUA), issued a rule to
amend the agency's Regulatory Flexibility program known as
RegFlex as it relates to business lending. The new rule
requires a personal guarantee for all credit union member
business loans (MBLs). Unfortunately, this proposal will make
credit union MBLs significantly less attractive to members.
NAFCU believes and has told the NCUA that requiring a
personal guarantee for all MBLs is unnecessary given the
underwriting policies that RegFlex credit unions already have
in place. Currently, there is a divide between Congress, the
administration, and other policymakers that wish to spur
lending and the regulators that oversee financial institutions.
On the one hand, we sit in this hearing today discussing ways
to encourage small business lending. On the other hand,
regulators explicitly create barriers to new lending by
regulation, the exam process, and implicitly warn credit unions
against making any loans that may be deemed risky. Forced to
choose between these two conflicting objectives, Randolph-
Brooks must, of course, follow the directive of our regulators.
In short, any congressional goal to promote lending will never
be successful when the regulators are not on the same page.
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 statement of Mr. Sekula followson page 35.]
Chairman Walsh. Thank you. I would again like to recognize
Ranking Member Schrader, who is going to introduce our next
witness.
Mr. Schrader. Very good. Thank you, Mr. Chairman.
Bill Daley is a legislative and policy director for Main
Street Alliance, a national network of state small business
coalitions that give, hopefully, small business owners a voice
in all this discussion, particularly those small businesses
that are busy trying to put food on the table and create jobs
and unable to come to Washington, D.C. to testify.
Prior to joining Alliance, Mr. Daley worked on the staff of
the Washington State legislature, numerous state agencies and
served two years as mayor of Olympia. So you have been in the
trenches, sir. Thanks for coming, Mr. Daley. I look forward to
your testimony.
STATEMENT OF WILLIAM DALEY
Chairman Walsh. Congressman Schrader, members of the
Committee, thank you very much for the opportunity to testify
on behalf of our small business owners. We represent
organizations in 14 states.
Our members supported the passing of Dodd-Frank,
particularly some provisions of it were very important to us.
Our interest is essentially economic. When the Great Recession
hit, small businesses were among its major victims. As of late
2009, small business job losses are responsible for about two-
thirds of the employment decline that occurred as the recession
came, and small business bankruptcies nearly doubled in March
to March 2008-2009. We are still suffering from a significant
loss of our customer base held down by high unemployment rates
and the foreclosure crisis. We do not want to go through this
again. It is important that this law be implemented and we do
not want to see it undermined as the effort to make it work
goes forward.
We commented on a couple of specific issues about Dodd-
Frank. First, whether or not the Act causes a credit crisis.
Our small businesses hear a statement like that and they kind
of bristle. We do have a credit crunch in small businesses.
Credit dried up well before Dodd-Frank, and credit dried up
because Dodd-Frank was not in place. We had a meltdown that
could have been mitigated or prevented.
Blaming the act for a crisis-induced credit crunch confuses
cause and effect. We lost our customer base, and until those
customers begin to return, there will be a credit crisis for
small businesses.
Second, Dodd-Frank is a source of uncertainty in the
economy. Surely the implementation of any act of Congress
causes some uncertainty and something this big and complex will
cause uncertainty. But we think that a period of uncertainty is
important to go through in order to have certainty in the
future about the credit that we can obtain. And Dodd-Frank
provides protections for that. So we are tolerant of a little
uncertainty in the short-term to get certainty in the long-
term.
Will the Act's new reserving requirements limit small
business capital? I think it remains to be seen whether that
will be the case, although you have heard some concern about
that from the testimony so far. The improvements in the
requirements to protect against risk that are associated,
however, with these new reserving limits are important.
Let me parenthetically comment about the availability of
capital. The financial institutions' reserves now are at levels
even the Wall Street Journal calls eye-popping. There was last
year 1.2 trillion in excess reserves beyond amounts required by
law. That increased in the first quarter of this year by $225
billion. And the money is sitting in the Fed gaining interest
at a .25 interest rate. Putting that investment back into the
economy would help us tremendously.
And then, are new data requirements a benefit to small
businesses? Again, I think I have to be real clear about it.
Our folks do not like paperwork. Thank you for getting rid of
the 1099 provision. There is a considerable flexibility in the
Act about how the rules are imposed with regard to this
requirement and we think it remains to be seen just how much of
the burden will fall on the small business, how much will fall
on the lending institution.
And then I want to close by noting some features of the
Dodd-Frank that our members find especially attractive. Swipe
fever forms are a benefit to our small businesses. They will
help save us some money. We like the Consumer Protection
Bureau. We are all financial customers ourselves and our
members have been harmed by attractive but risky products.
Dodd-Frank helps restore focus on traditional lending
through limits on proprietary trading. In short, Dodd-Frank is
a good thing for small businesses, and we hope that its
progress will not be hindered.
[The statement of Mr. Daley follows on page 48.]
Chairman Walsh. Thank you, Mr. Daley.
The final witness that I have the pleasure of introducing
is also from Illinois, Mr. Greg Ohlendorf. Greg is president
and CEO of First Community Bank and Trust in Beecher, Illinois.
First Community Bank and Trust specializes in small business
lending, including commercial real estate. Mr. Ohlendorf is
testifying on behalf of the Independent Community Bankers of
America where he serves as chairman of their Policy Development
Committee.
Mr. Ohlendorf, you have five minutes to present your
testimony.
STATEMENT OF GREG OHLENDORF
Mr. Ohlendorf. Chairman Walsh, Ranking Member Schrader, and
members of the Subcommittee. I am Greg Ohlendorf, president and
CEO of First Community Bank and Trust, a $147 million asset
community bank in Beecher, Illinois.
I am pleased to be here today to represent the nearly 5,000
members of the Independent Community Bankers of America. Thank
you for convening this hearing on the Dodd-Frank Act and its
impact on small business lending.
Community banks are prodigious small business lenders. In
his recent speech before the ICBA Annual Convention, Federal
Reserve Chairman Ben Bernanke shared new research that shows
while overall small business lending contracted during the
recent recession, lending by a majority of small community
banks, those of less than $250 million in assets, actually
increased. By contrast, small business lending by the largest
banks dropped off sharply. The viability of community banks is
linked to the success of our small business customers and we do
not walk away from them when the economy tightens.
Community banks have little in common with Wall Street
firms, mega banks, or shadow banks. We have a much different
risk profile because our business model is built on long-term
customer relationships. We cannot succeed without a reputation
for fair treatment. We make quality small business loans often
passed over by the large banks with their statistical models
because our personal knowledge of the borrower gives us first-
hand insight into the true credit quality of a loan. These
localized credit decisions made one by one by thousands of
community bankers will restore our economic strength.
The Dodd-Frank Act is a generational law and will
permanently alter the landscape for financial services. It has
proven to be a mixed outcome for community banks, combining
both punitive and helpful provisions. Every provider of
financial services, including every single community bank, will
feel the effects of this new law to some extent.
While there are many provisions of the law I could discuss
at length, I will focus my comments on the new CFPB. Community
banks are already required to spend significant resources
complying with consumer protection rules. This compliance
burden is a distraction from our small business lending. Every
hour I spend on compliance is an hour that could be spent with
a small business customer. CFPB rules should not contribute to
this distraction. The CFPB should use its authority to grant
broad relief to community banks where appropriate. ICBA also
supports legislation recently passed by the Financial Services
Committee to reform the CFPB to make it more balanced and
accountable in its governance and rule writing.
Probably the most frustrating aspect of the current
regulatory environment is the trend toward oppressive exams.
The misplaced zeal and arbitrary demands of examiners are
having a chilling effect on small business lending. Good loan
opportunities are passed over for fear of examiner write-downs.
I am fortunate in my bank to enjoy a cooperative and
constructive working relationship with my regulator, the
Federal Reserve Bank of Chicago. Examiners perform a difficult
job and the stakes were raised sharply after the financial
crisis, but I believe many examiners have overreacted to the
crisis. I have met with hundreds of community bankers from
every part of the country in recent years and I can tell you
there is an unmistakable trend toward arbitrary, micromanaged,
unreasonably harsh examinations that have the effect of
suffocating small business lending.
ICBA supports legislation to bring more consistency to the
examination process. Arbitrary loan classifications are a
particular source of frustration for community bankers.
Representative Bill Posey's commonsense Economic Recovery Act,
H.R. 1723, would establish conservative, commonsense criteria
for determining when a loan is performing and provide more
consistent classification guidance. This bill would give
bankers flexibility to work with struggling but viable small
business borrowers and help them maintain the capital they need
to support their communities.
The ICBA-backed Communities First Act or CFA, H.R. 1697,
introduced by Representative Blaine Luetkemeyer contains many
reforms that would improve the regulatory environment and
community bank viability to the benefit of our customers and
our communities. To cite just a few examples, CFA would raise
the threshold number of bank shareholders that triggers SEC
regulation from 500 to 2,000. SEC compliance costs are a
significant expense for listed banks. Another provision would
extend the five-year net operating loss carryback provision to
free up community bank capital now when it is needed most. We
are very pleased that CFA has bipartisan co-sponsorship and
look forward to its advancement in the House.
Given the state of the private capital markets for small-
and mid-sized banks which are largely still frozen since the
financial crisis, ICBA supports the Small Business Lending Fund
as an alternative source of capital for interested healthy
banks structured to incentivize increased lending. We hope that
the first round of capital will be disbursed soon.
Thank you again for your commitment to small businesses and
your interest in the institutions that partner with them. I
have outlined some of the more significant regulatory
challenges we face in the months ahead.
Thank you for hearing our concerns. We look forward to
working with you.
[The statement of Mr. Ohlendorf follows on page 52.]
Chairman Walsh. Thank you. And thank you all for your
testimony.
Let me begin my series of just a couple of brief questions.
And this first one will directed toward each member of the
panel. Try to be brief and specific with your answer.
Dodd-Frank. An appropriate reaction to the financial
crisis? An overreaction? Or a reaction that was not strong
enough to the financial crisis? How would you answer that?
Brief and specific. An appropriate reaction, an overreaction,
or not a strong enough reaction. Let us start our way here and
we will work our way down.
Mr. Ohlendorf. Dodd-Frank is a mixed bag. There are many
provisions that are, I think, an overreach and there are some
provisions that I think are very helpful, including deposit
assessment reform and the assessment base that community banks
and other banks are able to take advantage of which are going
to save us a whole lot of money and put the burden more
appropriately where it needs to be. There are other provisions
of Dodd-Frank that frankly scare us tremendously.
The CFPB, while we have a bit of an exemption or a carve
out in community banks, we are still subject to their rule
writing. Today what we have to understand is we are already
overburdened with regulation. We have a significant number of
regs that we need to comply with today and it seems like just
one more is not going to change the deck a whole lot. But the
piling on and the consistent piling on of additional regulation
is very, very stunning.
In the good old days I had a part-time person that did 10
percent of their job in the area of compliance and we complied
with all the rules of the land. Today, we have got six or eight
people, all senior officers that sit on a compliance committee,
attempting to deal with these reforms as they come along. And
it is punishing and it is very difficult for small
institutions.
Chairman Walsh. Mr. Daley, an appropriate reaction? An
overreaction?
Mr. Daley. Thank you. I think our members would say it is
largely appropriate. The process in the Congress was
fascinating to watch for us. And the balance that came through
the debate and exchange really served the country well we
think. There are a couple of areas where we would like to see
things stronger. The proprietary trading provisions we thought
could be strengthened. We would have liked to see the swipe fee
rules applied to credit cards as well as debit cards. But
overall the work of the Congress seemed appropriate.
I also think it is appropriate for you to continue your
work now. Congressional oversight of the implementation of this
act is important. It is good that you are holding a hearing
here and there are other hearings because that balance that we
think was achieved in the Congress needs to be achieved in the
implementation of the act.
Chairman Walsh. Mr. Sekula.
Mr. Sekula. NAFCU does not blame Dodd-Frank for the credit
crunch, but we do believe that it overreaches and is an
overreaction as all credit unions are under the CFPB's
rulemaking authority. A couple of items that we do like, we
feel positive about the Dodd-Frank, of course, as mentioned
earlier, the permanent increase in the Federal Deposit
Insurance from $100,000 to $250,000, and consumers do need
protection from predatory lenders. And we understand and we
support that view. We are just hopeful that more time will be
spent on unregulated entities, such as payday lenders that
should be the focus of the CFPB.
Chairman Walsh. Mr. Boyle.
Mr. Boyle. I feel that it is an overreaction. In our shop
of $800 million bank, we have two full-time compliance officers
and we also outsource to a third party to make sure we remain
in compliance. We are anticipating with the uncertainty that
the Dodd-Frank bill is going to bring that we are actually
interviewing additional consulting firms that could cost us
anywhere from $75,000 to $125,000 going forward to make sure we
maintain our good standing in the compliance arena. So we feel
that it is an overreaction.
Chairman Walsh. Thanks. Mr. Daley, quick question, and I am
confused. And I apologize for that.
Briefly describe your members to me because I think if I
took you by the hand and you and I walked around my district
for a day and we talked to 50 small businessmen and women, you
would hear the same refrain. They are scared to death. There is
so much uncertainty out there and there is a lot of angst about
the additional regulations and the regulatory climate that they
believe Dodd-Frank is going to lead to. Your members are fine
with what is coming?
Mr. Daley. May I describe our members? They are small
businesses. We have about 10,000 members. Our members are the
owners and they own and operate their businesses. I talk to
them a lot, we are in fairly constant communication. And they
come a lot to testify to Congress and go to meetings. They are
more concerned about the long-term return to practices that put
them in the bank. And when I have these conversations, because
I remember, they said that is their greatest concern. The
problems that were caused by these practices as having harmed
them, as having destroyed their customer base, and the law that
is being put in place to prevent that from happening in the
future is important.
Chairman Walsh. Did they feel overregulated before Dodd-
Frank?
Mr. Daley. When I talked to them about the operation of
their businesses, they do not talk to me about regulation. They
talk to me about what is going on in my community. My community
is--the quality of life and the quality of the local economy is
what is important to them. They do not draw their business from
around the state or around the country or internationally. They
do all their business from their community. And their community
is in trouble now and their business is in trouble as a
consequence. So they do not talk to me about regulation. They
do not talk about taxes. They talk about getting investment
into the community. Getting jobs into the community so that my
business can continue to thrive.
Chairman Walsh. You and I are talking to different folks.
That is fascinating. It actually is.
One final quick question. Mr. Ohlendorf, are you getting
consistent information from regulators about your portfolio?
Mr. Ohlendorf. I talk to a lot of bankers around the
country and we feel like there is some very inconsistent data.
I talked to a banker on the way to the airport yesterday from
one of our neighboring states who was dealing with an appraisal
and they had gotten the appraisal, you know, it is supposed to
be the be-all, end-all. This is the value of the property. And
they were concerned about some of the assumptions. So they
shared some of their thoughts on those assumptions with the
appraiser or with the examiner. And the examiner came back and
said that the bank had no business making any changes to the
assumptions to the appraisal. Okay, fine.
A banker 30 minutes from that bank had a set of examiners
in and had a piece of commercial real estate that was worth, on
their books, $4 million. It had just been appraised at $4
million and the regulators came in and asked that bank to
charge that loan down to $2 million because the appraisal was
not worth anything.
As a banker, in trying to work in this economy, how am I
supposed to take those two stories that are both very current
with banks that are 30 minutes apart in a neighboring state and
gel that together to understand what I am supposed to do to
help, you know, make small business loans. I cannot have
arbitrary 50 percent write-downs to my portfolio when the
appraisal just indicated that the value is what I said it was.
And on the other hand, I cannot look at another appraisal and
try to, you know, say well, maybe some of those assumptions are
not accurate and try to massage it because they were told they
did not have the credentials and the expertise.
Chairman Walsh. Thank you. I now turn to Ranking Member
Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
As I listen to the panel, it would appear that the biggest
problem seems to be the regulators maybe more than Dodd-Frank
itself. And I hear that same song and verse back at home with
my local banks and credit unions. You get that inconsistent
regulation.
Question for Mr. Ohlendorf and Mr. Boyle, in particular. In
Dodd-Frank, they talked about a five percent capital
requirement holdback that was going to be mandated and maybe
even some flexibility for mortgage-based loans. But when I
talked to some of my folks at home they are saying, well,
actually, we are getting rules that are talking about a 20
percent downpayment and stuff. Could you comment on are you
hearing that also? That would seem to be in contravention to
what was put out there. Mr. Ohlendorf and then Mr. Boyle.
Mr. Ohlendorf. We heard that discussion. We are concerned
that the horse is out of the barn. Back in the days when I
started in banking, a 20 percent downpayment may have been
traditional and you saved up money and you tried to buy your
first house. The rules somewhere along the line were changed
significantly and obviously lower downpayments were allowed,
which fueled tremendous boom in the housing industry and a lot
of first-time homebuyers were able to buy homes that were not.
And we can argue the political policy of that for all it is
worth for a long time and that is not probably what you want to
do.
The problem that we have today is to go backward to that is
going to have significant additional downward pressure on real
estate. There is a lot of real estate out there and if only
people with 20 percent downpayments are eligible to be able to
buy a home, it is going to be very difficult to take and handle
the slack and the supply.
Mr. Schrader. Are your regulators mandating that right now?
Mr. Ohlendorf. We are not seeing it mandated right now but
we have seen it talked about in a variety of a number of places
within some of the proposed regulations. You know, a limit at
some level of a required downpayment may be appropriate. Twenty
percent, I believe, and the ICBA believes is too high.
Mr. Schrader. Okay. Mr. Boyle.
Mr. Boyle. We also believe that the 20 percent is
excessive, but we do believe that the borrower should have some
skin in the game. And maybe the right answer might be 10
percent. But in our marketplace, and Greg's as, well, you know,
we are in a relatively upscale-type of product and if it is
very difficult for someone to save $80,000 to $100,000 as a
downpayment, so there needs to be some adjustment from the 20
percent down to a more manageable number to allow younger
people to move into communities.
Mr. Schrader. Okay. Yeah, I would hope that would be the
case. I mean, 20--I had to do that way back when but times have
changed and I believe we got way too lax. Prior to Dodd-Frank
we are making lots of mistakes, so some intermediate area and
hopefully our Committee and others will talk to FDIC and some
of our friends, comptroller, to make sure that they get this
right.
I guess, Mr. Daley, it would appear to me that from your
testimony you feel that access to credit has been a long-term
issue for small businessmen and irrespective, I guess, Dodd-
Frank came last year. And prior to Dodd-Frank, if I look at the
graphs, it looked like small business credit was inaccessible
long before Dodd-Frank came into being. Would that be your
assessment also?
Mr. Daley. The difficulty our members expressed to me about
access to credit has to do with the idea that they are
reluctant to borrow and lenders are reluctant to lend if their
business is not thriving. The key question for them is
customers. We need people coming in the door with money in
their pocket. And when that happens, it is easier for us to
borrow.
Let me mention one borrowing phenomena for small businesses
that is important, and that is a lot of small business start-
ups are financed by equity in their homes. You can see the
people will start up a small business by borrowing against the
equity in their home. And the housing crisis, the drop in
housing value throughout the company has had an impact on that
as well. And I think as you evaluate the credit problem for
really small businesses, you need to think of that as well.
Mr. Schrader. So it is a longstanding, ongoing issue
irrespective I think of the new regulations.
Mr. Daley. It came well before the passage of this bill or
the introduction of it even.
Mr. Schrader. I guess I had a question regarding small
business lending. Small businesses come in all sizes
apparently. They are not just small-small, you know, under 500
employees under a certain gross retail volume, you fit into a
small business category. Get I a comment from you, Mr. Sekula
and Mr. Boyle on which small businesses are now getting credit?
Because anecdotally I hear back home that for some of my larger
small businesses it is okay; for some of my smaller small
business, not so much. What are you seeing? Do you see that
differentiation? Or is lending improving slowly but surely for
all those businesses?
Mr. Sekula. Well, for lending at Randolph-Brooks, our
members, our small business owners are still able to get loans.
We have realized continued growth through our portfolio for the
last three years in a row. Where we are running into a problem
is that, as an SBA lender, we have had problems being able to
maintain. See, our membership is specific. I mean, they are
military or Air Force. We support the Patriot Express SBA
program. And as a result, we are the fifth largest Patriot
Express lender in the country for a credit union. So that is
our membership. That is who we are serving. They are coming to
us for these business express lines of credit under $50,000,
and we are granting them. I think probably close to 75 percent
of our portfolio is made up of those type of loans. Our average
loan size on the SBA size is only $44,000. So those are the
members who are coming to us that we are trying to serve.
The problem that we have is that we just completed an SBA
exam and it was cited as a finding that we needed to improve
our delinquency rate, our past due rate. If not, we run the
risk of losing our preferred lender status and access to these
funds. Well, as we look at the lender portal that the SBA puts
out, our numbers, as we view it, are great. We think that they
are good. So we do not know if SBA added this as a finding as
the shot across the bow as a warning maybe for all financial
institutions, but as a result and by listing it as a finding I
have to address and explain what our actions are going to be to
make sure that delinquency in those losses do not go up, yet we
are a well-capitalized organization. Our underwriting standards
are top-notch. Our performance is great. And here we are, we
think that we are doing things right. Our numbers show that we
are doing things right, but yet the SBA is now telling us that
I have got to put a plan in action to improve those numbers,
which means then now instead of me focusing on these loans that
are for the $35,000 to $50,000 range that our membership is
asking for; now I need to focus on maybe a larger 7A loan or a
504 loan just so I can make my numbers look better. That is not
my membership. That is not what they are asking for. And so as
a result, that is the biggest problem I have.
Now, in defense of the SBA, we have had a great
relationship working with them since we have been offering SBA
loans. And also in their defense, we just got our write-up, our
finding two weeks ago. So as a result, I have not had an
opportunity to respond back to them about my concerns. But
since the timing of this hearing was right now, I felt it was
important to share it because I feel that we are not the only
institution experiencing these type of experiences with the
SBA.
Mr. Schrader. Thank you. Mr. Boyle.
Mr. Boyle. We believe that each individual credit request
is unique in and of itself. And we are a relationship lender by
nature. And we always have viewed our business is to make
loans. We are not profitable unless we make loans. I will admit
to the fact that over the last two years the underwriting has
significantly increased and that the scrutiny and the
requirements from the businesses, the additional information
that we request is probably more than we have in the past. But
it is our goal to continue to make small business loans going
forward because without it we are not profitable.
Mr. Schrader. I will yield back, Mr. Chairman, and let the
others.
Chairman Walsh. Thank you, Mr. Schrader.
I now turn to my colleague from Colorado, Mr. Coffman.
Mr. Coffman. Thank you, Mr. Chairman.
You know, I want to say, first of all, one of the stunning
things that is lacking in Dodd-Frank, and I think it is part
due to the fact that--well, part largely due to the fact that
government never wants to point the fingers at itself. But if
we look at the catalyst of the financial crisis it is subprime
lending. And who mandated subprime lending? Who was the one who
came forward with this policy that said let us take people that
really cannot afford these homes and let us put them in these
homes. You know, and then, of course, we will securitize it and
bundle it up and credit rating agencies missed it. So therein
lies the catalyst of this crisis. And it was government.
And guess what is not included in Dodd-Frank? Fannie Mae,
Freddie Mac, the very catalysts that drove us into the ditch is
nowhere mentioned because the very politicians who wrote it had
their fingerprints on it. And so I just think it is stunning
that we have not dealt with that issue that is the basis of
really the problem that we have today.
But let me just ask this question to the three bankers, and
that is are regulators communicating with each other? Or are
you answering duplicative questions from various regulators?
Mr. Boyle.
Mr. Boyle. In our situation we are of a size where most of
our or all of our examinations are a joint examination between
the FDIC and the state. And we have not seen a duplication of
questions. In Chicago, the FDIC is very well organized and
getting the requirements ahead of time makes the examination as
last burdensome as possible even though it takes four weeks.
Mr. Sekula. In regards to the National Credit Union
Association, communication with them has been very good in
regards to some of their expectations coming down and giving us
an opportunity to prepare. Whether they coordinate with the SBA
on any of their exams or audits, that is information I am not
aware of. So I am sorry, I am not able to add much more
information to that.
Mr. Ohlendorf. We are federally regulated by the Federal
Reserve in the state and we have experienced very little
difficulty in communication. Where there have been overlaps, we
have brought it to their attention where they have asked us to
do things twice and in general sense they have been able to
work that out amongst themselves. So I do not think it is the
nature of them doing duplicative things. I think we have other
issues that need to be addressed.
Mr. Coffman. Great. Thank you, Mr. Chairman. I yield back.
Chairman Walsh. Thank you. I will now turn to my colleague
from Michigan, Mr. Peters.
Mr. Peters. Thank you, Mr. Chairman.
You know, much of the testimony that we have been hearing
today has been kind of focused on some of the potential
negative aspects of Dodd-Frank. And I say potential because
most of the bill has not gone into effect. And so the criticism
that we are hearing is speculative in nature at this point. And
yet we have already seen numerous attempts from the Republican
majority to delay, to weaken, and even to kill this new bill.
Community banks and credit unions certainly did not cause the
financial crisis. In fact, in many respects I believe that you
are among the worst victims of the crisis. There have been
hundreds of bank failures since the 2008 financial crisis and
each time one of these banks fails, another community lender is
not in a position to make critical, small business loans. As
was mentioned, where most of the small business come from are
credit unions and small community banks.
But now that the worst of the crisis is over, there seems
to be a tendency to forget what caused it and how it affected
Americans all across the country who lost their jobs, their
homes, and saw their retirement savings vanish. I want to work
certainly with the industry to make sure that this bill is
implemented in ways that work, but I also believe it is very
shortsighted to lose focus of the fact that the bill was passed
in the face of the worst financial crisis in generations that
absolutely destroyed our economy. A crisis that was caused for
a variety of reasons that caused it but it was excessive
speculation and risk taking particularly by some of the very
large, systemically risky institutions that are in our country.
And so I think that needs to be the focus of what we are
looking at for reforms. Folks here before us on the panel are
not part of those large, systemically risky institutions but we
need to address that so we do not ever have a situation where
we are put into a catastrophe like we had.
So with that kind of premise, Mr. Boyle, I want to direct
this question to you. When small banks get into trouble now,
the FDIC will come in and will unwind them through an orderly
dissolution process. As you know, that did not exist for some
of these very large institutions. That caused a significant
problem for our economy as we were going off the cliff. The
Dodd-Frank bill did create a new dissolution process for these
large, systemically risky institutions. You know, what is your
assessment of that? Is that helpful to small banks and does it
help put smaller banks on the same footing that these large
institutions will be under?
Mr. Boyle. The Dodd-Frank Act and its treatment of the too
big to fail concept was probably one of the better aspects of
the bill. With regards to leveling the playing field, the
Chases and Bank of Americas are not my competitors. My
competitors are my local community banks within the
metropolitan area of Chicago. So I do not think that it leveled
the playing field. We each carve out our own niche and we do
not view the Bank of America as our competitor.
Mr. Peters. But now you talked about the too big to fail as
probably the best part of the bill. Would you just elaborate on
that, please?
Mr. Boyle. Well, I think the way that they would deal with
the orderly liquidation or the solving or a problem of too big
to fail, you know. Having a system in place that does not exist
currently.
Mr. Peters. Do others share that opinion?
Mr. Ohlendorf. I think one of the obvious benefits was the
whole change in the FDIC Act and the assessment base and so on.
But also one of the other major provisions that we have yet to
see how it is going to work out is bringing the shadow banks
and the mortgage brokers and the nonregulated financial
institutions into the fold. Our consumers do not understand the
difference. When they hear someone can make them a mortgage
loan, they do not understand, Congressman, that that person may
be or may not be from a regulated financial institution. They
assume that they may be getting a better rate or it looks like
a better rate but they are not sure we are playing by all the
same rules. Their assumption is we are all playing by the same
rules. And in fact, we are not. And if in part of this crisis
we can reign that in, find out who those folks are and bring
them under the same type of regulation that we have long been
under and have successfully operated under those types of
rules, I think it is going to make a major change. That has yet
to be seen.
Mr. Peters. Again, a lot of this still has to be
implemented going forward so we are in the very beginning
stages, which is why it seems to be premature to try to unwind
this because I agree with you that we had a system prior to
Dodd-Frank that had heavily regulated institutions like
yourself and everybody at this panel here. We had silos of
regulation but between those silos there was a lot of open area
where people would compete. And they were your competitors,
whether they were paid A lenders or other folks that are in
that shadowy area that is significant competition to you. And
they are playing in an unregulated environment and they are
using tactics that often are predatory on customers. You know,
you are trying to do what is right for your customers. You are
playing by all the rules, you believe in having a long-term
relation with those customers. And yet you have folks out there
who have a whole different business model and it is disruptive
to your ability to raise funds, raise capital, investment in
small businesses if you have got to compete with these shadowy
organizations. So Dodd-Frank is a move forward to try to reign
in that practice and those unsavory type business practices.
And so I look forward to working with you so that we can
continue to do what is right for the American consumers and the
American taxpayers and stand up to some of these very large,
systemically risky financial institutions as well that caused
so much trouble in our economy. So with that I will yield back
my time.
Chairman Walsh. Thank you. Now it is my pleasure to hear
from my colleague from South Carolina, Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
Gentlemen, I have run a couple of small businesses. I have
started three or four of them myself. I have served on this
Committee now for about six months with the rest of these
gentlemen. And I have to admit that I have never heard anybody
come in and talk about the things Mr. Daley has. Mr. Daley, you
heard the Chairman say that he might be speaking to people who
are different than the people you are talking to. Is that at
all possible?
Mr. Daley. I do not know. How would I assess that? I do
talk--I actually have a business myself. It is very small. And
have in the past operated small businesses. I have worked, as
was mentioned, as a mayor in a small town, small-time mayor
actually. Small town, Olympia, Washington, where I lived for
many years. And worked with the businesses community closely as
we tried to bring back our downtown, revitalize the core of the
city.
I find the values that I experience when I interact with
small businesses to be close to what I have described here.
They are very concerned about the quality of their communities.
They choose to do business with banks like the ones that are--
financial institutions like the ones that are represented here
because they have a relationship to the communities. And they
do that when they can and appreciate them.
Mr. Mulvaney. And let us talk about those businesses for a
second if we can, because I admit when I came into prep for
this meeting, I know who the American Bankers Association is, I
know who the federal credit unions are, and I know who the
community bankers of America are. In fact, all of those
organizations are very active in my state of South Carolina.
I had not been familiar with the Main Street Alliance, but
was surprised to find out that it is also active in my home
state of South Carolina through an organization called the
South Carolina Small Business Chamber of Commerce. And as I was
sitting here, I just learned that, Mr. Daley, as I was going
through the internet while you were testifying. I am familiar
with this organization, and I think it would be of value to
those of you who have heard testimony today and to this
Subcommittee to recognize who that group is in South Carolina,
if it is representative, Mr. Daley, of who your organizations
are. It is an organization that exists only on paper. Its core
group is a liberal talk show host, a Democrat lobbyist, a
Democratic political consultant, and a Democrat public
relations specialist. They supported Obama Care, including the
public option. They supported cap-and-trade, and they actually
got very active in South Carolina in encouraging the state
government to create a new agency to oversee small business. In
fact, the quote that they had that was much talked about in my
state was let us acknowledge that small businesses are a pillar
of success in the state and are just as deserving of a new
state agency to lead them. I have never heard of a small
business group talk about creating new state agencies to
oversee them.
Actually, in South Carolina they claim to have 5,000
members, just as you heard Mr. Daley claim that nationwide they
have about 10,000 members. The only way they get to 5,000
members in the state of South Carolina is by using the lists of
the South Carolina Association of Trial Lawyers and the South
Carolina Association of Claimants Attorneys.
I heard Mr. Daley testify earlier today that he actually
likes the uncertainty that comes with Dodd-Frank, which would
surprise me none as trial lawyers love uncertainty. Mr. Daley,
I used to--before I was a small businessperson, I was actually
a trial lawyer, so I have been down that road as well. The NFIB
has spoken out against South Carolina Small Business Chamber of
Commerce, another organization that I am a little bit familiar
with, as have our two largest Chambers of Commerce in the state
of South Carolina, decrying it as nothing more than a front for
the trial lawyers in our state. It does not surprise me then,
sir, that you have come in here today to defend Dodd-Frank, and
in all fairness, probably just reaffirms my position that the
bill is a complete travesty to begin with and should be
repealed in its entirety.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Mr. Daley. Mr. Chairman, may I for the record point out
that we do not have an affiliate in South Carolina, and we are
not affiliated with the Small Business Chamber of Commerce.
Mr. Mulvaney. To that point, if I may reclaim my time, Mr.
Chairman, your website identifies 14 agencies, 14 state
agencies that make up your base, essentially your affiliate
agencies. They include the Idaho Main Street Alliance, the
Colorado Main Street Alliance, the Iowa Main Street Alliance,
the Maine Main Street Alliance, something called the Keystone,
which I assume is Pennsylvania, and then very clearly on your
website, the South Carolina Small Business Chamber of Commerce.
Thank you, Mr. Chairman. I yield back.
Chairman Walsh. Thank you. I now turn to Ms. Clarke, my
colleague from New York.
Ms. Clarke. Thank you very much, Mr. Chairman. And thank
you Ranking Member Schrader.
I have a statement that I would like to insert for the
record, Mr. Chairman.
Chairman Walsh. Yes, without objection.
Ms. Clarke. Thank you very much.
Let me just start by recognizing the support in my district
in Brooklyn, New York, for the work of community banks and the
credit unions and acknowledge that as all of America knows,
your entities were not a part of what took down our economic
system. And so we want to thank you for your steadfast work and
your commitment to the growth and development of communities
across this nation and the businesses they are in.
Let me ask my question to Mr. Daley. And let me say that,
you know, we recognize how much small businesses have suffered
during the downturn and that you welcome any of the provisions
of Dodd-Frank. One of the number one issues that I hear when
talking to small business owners and entrepreneurs in my
district is the lack of access to capital. I think, you know,
it is almost a mantra at this point. So my question is given
that small businesses, we all recognize as the engines of our
economy, and recognize that Dodd-Frank is the law of the land,
what else can be done to get lenders to free up the over one
trillion in reserves that they are holding so that small
businesses can hire again and power our economy toward a full
recovery? Or is the business model of lenders so inflexible at
this stage that it simply cannot adjust to the current
regulatory environment.
[The information follows on page 62.]
Mr. Daley. During the meltdown, Congress passed a law
allowing the Fed to pay interest on surpluses. They are
currently paying interest on surpluses that are way in excess
of the required financial holdings. And we raised the question
as to why? Why is that money not being invested back into the
economy rather than sitting in the Fed gaining interest? And I
hope you will take a look at that question.
There are some other things that might help our customers
that are related to lending that are not related to the lack of
capital. And one of them is the foreclosure crisis. It is a
tremendous drag on the neighborhood economies. And efforts by
the government to try to get these underwater loans drawn down
have not proven very successful and have not been very
aggressive. And we have a continuing drop in the value of
housing, a continued lack of construction industry would help
us tremendously if that crisis could be closed. So two answers.
Take a look at why we are sitting on all this money for one,
and please take a look at that foreclosure crisis.
Ms. Clarke. Thank you. Do any of you gentlemen want to add
your perspective to that question? I am trying to figure out,
you know, what is it? Is it that it is hard to adjust to the
current regulatory environment? Or what would you say? Yes.
Mr. Boyle. One way for us to increase our lending would be
for a reduction in the stringent capital requirements put on us
by the FDIC. We are currently holding nine percent capital. If
we could get that reduced to just eight and a half percent, we
could make as much as $10 million in new loans. So the joke
around our institution is the accountants are running the bank
because everything we do is dedicated towards the achievement
of the nine percent capital ratio.
Mr. Ohlendorf. One of the other things that I would like to
mention is in the days gone by we were able to show sources of
liquidity to the regulators as lines of credit with our
correspondent banks, lines of credit with the Federal Home Loan
bank, the discount window authorization, our relationships with
maybe brokered CD providers. Today the regulators are asking us
for on-balance sheet liquidity. They do not trust that we are
going to be able to draw on those lines because some of those
organizations have withdrawn lines from banks that show some
signs of weakness. So instead now I need to hold on my balance
sheet levels of liquidity that were prior unheard of in dollars
and cents. So part of it again is going back to what I am being
required to hold on my balance sheet which looks like
substantial loanable funds and I would love to loan those funds
out.
Ms. Clarke. Thank you very much, gentlemen. I yield back,
Mr. Chairman.
Chairman Walsh. Thank you. I have just a couple quick final
questions.
Mr. Daley, you state or stated that ``some small
curtailment of available credit over the long term is favorably
outweighed by the certainty that sensible requirements to
mitigate risk will stabilize credit markets over the long term
and less the like likelihood of another financial collapse.''
What data can you point to to show that the current regulations
are merely sensible and not burdensome and that they will
prevent another financial crisis?
Mr. Daley. I am not going to point that I do not have data
that would make a prediction like that. And I must be clear
that the provisions related to reserving in Dodd-Frank are very
complex. And I believe that there is a legitimate debate about
whether they need to be uniformly applied or is there some way
that different institutions with different circumstances should
have different applicability of those reserving requirements.
But the underlying idea of there being those reserving
requirements in place and being applied throughout lending
institutions is important to the long-term stability of credit.
And that is what I am trying to express here. That having some
base requirement there. I do think there is a reasonable debate
about how exactly to apply those provisions of the law. But
that there be provisions like that is important to the long-
term stability of credit.
Chairman Walsh. Your members are small business owners. Did
they support the repeal of the 1099 aspect of Obama Care?
Mr. Daley. Yes.
Chairman Walsh. Overwhelmingly?
Mr. Daley. There was one sense of hesitation. It was the
pay-for. The original proposals to pay for the repeal of the
1099 provision undermined aspects of the ACA, or the Affordable
Care Act, of which they supported passage.
Chairman Walsh. In describing your membership briefly, this
is a real short answer, the small business owners, do they feel
overregulated and overtaxed?
Mr. Daley. To the degree I have had conversations with them
about these things, they are not--they do not say they are
overregulated and they are overtaxed. They are much more
concerned about what happens to the money that they pay? Where
is it invested? They are much more concerned about what impact
the general quality of life in their community has on them than
anything else.
Chairman Walsh. You and I need to take a day. We will go
and randomly find 100 small business owners around the country.
We will ask them that question. Thank you.
One final question for the three bankers. In essence, you
are all small businessmen. What, to your estimation, and be
brief, is, as small businessman, your greatest fear right now
for the small business community?
Mr. Ohlendorf. My greatest fear is where does this
regulation stop. Every time we have to comply with a new
regulation we are just having to spend that much more time on
the regulation and that much less time supporting small
business people. We completely understand their need for
capital. We completely understand our role in that. We are in
business to make loans. We are in business to support our
communities. There does not need to be a regulation to tell us
how to support our communities because if we do not do that our
communities will not do business with us. So it is not
complicated in a community bank. We just need to find a way to
be able to get out from under the burden of oppressive
regulation.
Chairman Walsh. Mr. Sekula.
Mr. Sekula. The concern definitely is about the
overreaching, regulation. Right now we are talking about
investing and taking care of our members, their needs right
now. That is all they can think of right now. So some of them
are not investing and growing their business or seeking loans
because of the fear and uncertainty, but when they come to us
we want to make sure that they feel comfortable and that we are
going to be there to take care of their needs, whatever it may
be. When we have our regulators, whether it be the National
Credit Union Association or the SBA hindering and preventing us
from getting in the way, especially for a well-positioned
financial institution to be able to take care of them, what
kind of message does that send?
And that is my biggest fear, is that we think that we have
done everything right to take care of our business the way we
operate and our members, and now being possibly restricted from
being able to get them access. That concerns me because we
think we are doing everything right but now I am being told you
need to be careful.
Chairman Walsh. Mr. Boyle, your greatest concern for this
small business community?
Mr. Boyle. I have been a banker for 34 years and I started
off as a regulator and moved into the banking environment. And
in those 34 years I could not recall a regulation being
retracted. Every time they put a new layer of regulation on us
it costs us money. This new regulation for Dodd-Frank, as I
mentioned earlier, could cost us as much as an extra $150,000 a
year. The debit change effect last week where we lost, those
are $200,000 a year. That is $300,000 in profits I do not know
how I am going to make up. And if I had those dollars as
capital I could make as much as $30 million in new loans. So
the leveraging aspect worries me. The overregulation is only
going to hamper my ability to become more profitable.
Chairman Walsh. Thank you. I am done. Mr. Schrader, any
follow-up?
Mr. Schrader. No, sir.
Chairman Walsh. Great. Thanks. Now that the questions are
complete, I would like to again thank our witnesses for being
here today to discuss this important issue for small business.
We know that small businesses will lead any economic recovery
and jobs recovery. So today was a step in the right direction
towards focusing our efforts on determining the impact of the
law and resulting regulations on small business. As we move
forward with the implementation of this law, I would like to
encourage the participants here today to keep us informed about
the issues discussed. It is important that we know the exact
impact of policies for those who are working every day to grow
business and create jobs.
With that I ask unanimous consent that members have five
days, legislative days, to submit statements and supporting
materials for the record. Without objection, so ordered.
The hearing is now adjourned. Thank you.
[Whereupon, at 11:19 a.m., the Subcommittee hearing was
adjourned.]