[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
OPEN FOR BUSINESS: THE IMPACT OF THE CFPB ON SMALL BUSINESS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INVESTIGATIONS,
OVERSIGHT AND REGULATIONS
of the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 28, 2011
__________
Small Business Committee Document Number 112-030
Available via the GPO Website: http://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 Sally, 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
Coffman, Hon. Mike............................................... 1
Altmire, Hon. Jason.............................................. 2
WITNESSES
Mr. Dan Sokolov, Deputy Associate Director for Research, Markets
and Regulations Consumer Financial Protection
Bureau,Washington, DC.......................................... 3
Mr. Jess Sharp, Executive Director, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, Washington, DC...... 10
Mr. Terry Jones, Chairman, Legislative and Regulatory Affairs
Committee, Colorado Mortgage Lenders Association, Castle Rock,
CO............................................................. 12
Mr. Adam J. Levitin, Professor of Law, Georgetown University Law
Center, Washington, DC......................................... 14
Mr. Daniel Fleming, President, Fleming Leasing, Alexandria, VA... 16
APPENDIX
Prepared Statements:
Mr. Dan Sokolov, Deputy Associate Director for Research,
Markets and Regulations Consumer Financial Protection
Bureau,Washington, DC.......................................... 25
Mr. Terry Jones, Chairman, Legislative and Regulatory Affairs
Committee, Colorado Mortgage Lenders Association, Castle Rock,
CO............................................................. 30
Mr. Jess Sharp, Executive Director, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, Washington, DC...... 44
Mr. Daniel Fleming, President, Fleming Leasing, Alexandria, VA. 54
Mr. Adam J. Levitin, Professor of Law, Georgetown University
Law Center, Washington, DC..................................... 59
Statements for the Record:
Independent Community Bankers of America....................... 66
OPEN FOR BUSINESS: THE IMPACT OF THE CFPB ON SMALL BUSINESS
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THURSDAY, JULY 28, 2011
House of Representatives,
Subcommittee on Investigations, Oversight, and
Regulations,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:35 p.m., in
room 2360, Rayburn House Office Building, Hon. Mike Coffman
(chairman of the subcommittee) presiding.
Present: Representatives Coffman, West, Hanna, and Altmire.
Chairman Coffman. The Committee is called to order.
Good afternoon.
July 21st, 2011, marked the 1-year anniversary since the
passage of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The date also marked the day where the Consumer
Financial Protection Bureau assumes authority for regulating
consumer financial products and services.
While milestones are usually celebrated, this one is marked
by uncertainty, because the true effect of this bureaucracy
remains to be seen. The CFPB was given extraordinary broad
oversight powers to fundamentally change the way both banks and
nonbanks are regulated. In the rush to establish the CFPB, I
believe that a fundamental element of regulation was lost--that
is, a comprehensive review of how rules will affect the
industry and whether the financial products are meeting the
needs of consumers.
All of us in this room today are consumers of goods and
services. I don't think anyone here wakes up in the morning and
says, ``I want to be a victim of unfair, deceptive, or abusive
practices.'' No one here wants to end up in bankruptcy. No
entrepreneur wakes up in the morning and says, ``I am going to
start a business, and it will fail.'' Our society is built on
the optimism of entrepreneurs who will wake up in the morning
and say, ``I have a great idea for a business.''
With this optimism about business creation comes the
responsibility to make the right decisions to best position
your business for success. What we need to do is create a
vibrant marketplace. Creating onerous rules and regulations on
an industry is not the answer and is likely to have an adverse
effect by driving many providers out of the marketplace.
A banking relationship is a partnership. A bank that abuses
its customers might make money in the short term, but they will
not be in business for very long. We need to find a system that
goes after those bad actors without impeding the ability of
good actors to help build their communities.
I am looking forward to hearing from both the CFPB to see
how they envision the new bureau operating and learn about what
provisions they are putting into place to protect small
businesses from the burdens of overregulation. I am also
looking forward to hearing from small businesses about how the
new bureau will affect them and their businesses.
With unemployment remaining above 9 percent, we need to do
everything we can to avoid further burdening our job creators
with regulation that will not add meaningful protections.
With that, I would like to yield to Ranking Member Altmire
for his opening statement.
Mr. Altmire. Thank you, Mr. Chairman.
It was just over 1 year ago that the Dodd-Frank Wall Street
Reform and Consumer Protection Act was signed in to law.
Perhaps no other part of this law has attracted as much
attention as the creation of the Consumer Financial Protection
Bureau. Last week, the Bureau officially assumed its duties,
making this an ideal time to step back and take stock of how
this law will affect our Nation's small businesses.
While the authority of this new regulator will primarily
extend only to financial products that are marketed to
consumers, its rules will affect small-business owners as well.
According to the last Federal Reserve survey on small-business
finance, nearly half of all small firms use personal credit
cards to finance their enterprise. In another survey, one in
five entrepreneurs reported using a home equity loan for
business purposes.
These findings guarantee that the rules developed by the
Bureau will inevitably have an impact on access to capital for
small businesses. It is imperative that, as the agency develops
these regulations, we bear in mind the needs of small
businesses and not further worsen the current credit shortage
for small firms.
For precisely this reason, significant efforts were made to
ensure that potentially negative effects on the small-business
community were mitigated by excluding merchants and retailers,
as well as businesses that are already subject to insurance or
securities regulation at the State level. Additionally, some
entire industries were excluded from the Bureau's authority,
such as realtors and auto dealers. Clearly, lawmakers recognize
that small businesses were not the cause of the financial
crisis and should, therefore, not bear the burden of the new
regulations.
An additional safeguard is the Bureau will be subject to
the Regulatory Flexibility Act and the Small Business
Regulatory Enforcement Fairness Act. These laws will ensure
that small businesses have the opportunity to participate in
the CFPB's rulemaking process. This will help reduce the
potential impact on small businesses while minimizing
additional cost for small firms.
So, Mr. Chairman, since we are approaching a vote, if I
could just insert the rest of my statement into the record, and
we could move on with the hearing.
Chairman Coffman. They have just called votes. Welcome to
the United States House of Representatives. I think this is
going to be a long series, so it looks like it is going to be
about an hour. We are going to recess for an hour. Then we will
come back immediately after the last vote to resume our
hearing. I apologize for that, but welcome to representative
government.
Let's recess for the vote.
[Recess.]
Chairman Coffman. The committee is now in session.
I would like to take a moment to mention that the
Subcommittee has received a statement for the record from the
Independent Community Bankers of America. And, without
objection, I would like to insert this statement in the record.
Hearing none, the statement will be inserted into the
record.
[The statement of the Independent Community Bankers of
America follows on p. 66.]
Chairman Coffman. 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 5 minutes to deliver your
testimony. The light will start out as green. When you have 1
minute remaining, the light will turn yellow. Finally, it will
turn red at the end of your 5 minutes. I ask that you try to
keep to that time limit, but I will be a little lenient as you
finish.
Our first witness today is here representing the Consumer
Financial Protection Bureau. Dan Sokolov--have I got that
right?
Mr. Sokolov. Yes.
Chairman Coffman. Dan Sokolov is deputy associate director
for Research, Markets, and Regulations. This division is
responsible for understanding consumer financial markets and
evaluating whether there is a need for regulation and the cost
and benefit of potential or existing regulation.
Prior to joining the CFPB, Mr. Sokolov held positions with
the Department of the Treasury and served as an attorney for
the Federal Reserve.
Mr. Sokolov, we look forward to your testimony.
STATEMENT OF DAN SOKOLOV, DEPUTY ASSOCIATE DIRECTOR FOR
RESEARCH, MARKETS, AND REGULATION, CONSUMER FINANCIAL
PROTECTION BUREAU, WASHINGTON, D.C.
Mr. Sokolov. Thank you, Chairman Coffman and Ranking Member
Altmire, for inviting me to testify today on the subject of
small business and the Consumer Financial Protection Bureau.
The CFPB is the Federal agency accountable for establishing
clear rules of the road for the consumer financial marketplace.
And, Mr. Chairman, you mentioned the importance of a vibrant
marketplace; that is precisely what we are striving for.
Although the Bureau's jurisdiction is very limited with
regard to small-business credit, we take our responsibilities
in this area very seriously. We recognize that small businesses
are critical to the Nation's economy and that small financial
services providers are a critical source of products and
services for millions of consumers.
Today, I want to provide a brief update on the standup of
the CFPB, as well as explain our efforts to reduce and avoid
unwarranted regulatory burdens on small providers and how we at
the CFPB believe we may be able to assist small-business
borrowers over time.
The Bureau opened for business last Thursday, July 21st.
Inspectors general of the Treasury Department and Federal
Reserve Board have reported favorably on our efforts to stand
up this agency. We are already at work strengthening consumer
financial markets. We are working toward a market where
consumers can readily see prices and risks and compare products
so they make the choices that they believe are best for them.
We have taken input from thousands of individual consumers
and mortgage lenders and brokers on how to simplify Federal
mortgage disclosures and make them less burdensome. We are
launching our program for supervising the largest banks and
their affiliates. We are taking our first consumer complaints
about credit cards. And Holly Petraeus has set up a strong
Office of Servicemember Affairs, reaching out to military
families and working to address the unique financial challenges
that they face.
To fulfill the mandate established by Congress, we have
hired an expert staff from the private, public, and nonprofit
sectors. They are striving to build an agency that is smart,
effective, and balanced.
At the CFPB, we have been building in to the agency's DNA
extensive outreach to small financial institutions such as
community banks and credit unions. We believe in the importance
of a financial services marketplace where small providers can
thrive.
We will work to reduce regulatory burdens on small
financial service providers wherever possible, and we can take
as an example disclosure reform. We understand lenders' deep
frustration with the current mortgage forms required by Federal
law. They are complicated, sometimes duplicative, and more
costly to fill out than they need to be. So we have solicited
feedback from thousands of consumers, lenders, and brokers to
help us make the disclosure simpler to use and easier to
complete.
Minimizing regulatory burden will continue to be a priority
for us. Often, a regulation is not the best answer to a
problem. Congress has given us many different tools to address
problems in consumer financial markets. We will strive to
address problems as we see them as effectively as we can and
through the least burdensome means available to us.
In addition, we will consider the potential benefits,
costs, and impacts of proposed regulations for consumers and
covered persons, including small lenders. We will diligently
comply with the Regulatory Flexibility Act, and we will follow
the requirements of the Small Business Regulatory Enforcement
Fairness Act, known as SBREFA.
Our statutory objectives and statutory authorities do focus
on financial products and services for consumers. The Bureau
does not have jurisdiction over business credit, except in
limited cases where Congress has explicitly and affirmatively
granted the Bureau such jurisdiction.
We recognize that a vibrant small-business sector is
critical to our economy, and we are aware that many small
businesses today report having difficulty obtaining credit--a
difficulty rooted in the most severe financial crisis since the
Great Depression.
So, although our role with respect to small-business credit
is quite limited, we hope to help many small-business owners in
three ways: First, we will implement diligently the Equal
Credit Opportunity Act. This law prohibits discrimination in
business lending.
Second, as required by law, we will provide the public new
data that may shed new light on the demand for and supply of
small-business credit. We will move deliberately and we will
consult widely to attempt to maximize the benefit of these loan
data for small businesses and to minimize the cost for the
lenders that will report the data.
Third, we will work to ensure that consumer credit
histories are as accurate as possible. More accurate credit
histories would help startups. New businesses owners frequently
rely on their personal credit histories to apply for their
first business loan.
We believe that a fairer and more transparent consumer
financial services marketplace will be a boon to financial
services providers of all sizes, and a more level playing field
will benefit the smaller ones in particular.
Thank you, and I look forward to your questions.
[The statement of Mr. Sokolov follows on p. 25.]
Chairman Coffman. Thank you, Mr. Sokolov.
The CFPB recently sent a letter to the CEOs of financial
institutions informing them that they are now subject to the
jurisdiction of the Bureau. Twenty-six of these lenders are on
SBA's list of 100 top SBA lenders. These 26 lenders issued a
total of 5,334 loans, for approximately $1.5 billion.
That is just looking at SBA's top 100 lenders and only at
their SBA-backed loans. Is CFPB considering how actions against
larger institutions will impact small-business lending?
Mr. Sokolov. So, the letter you are referring to the CEOs,
Mr. Chairman, was sort of introducing our program of
supervision. That is a program that is, by statute, now focused
on the depositories side. It is focused on insured depositories
and credit unions with more than $10 billion in assets and
their affiliates, just to put that in to full context.
And that process of supervision, which is essentially
working with the institutions by sending examiners to them and
understanding how they operate and understanding their
businesses and understanding where there may be questions about
their compliance with applicable Federal laws, that process is
focused on the consumer protections. And, as I said, our
jurisdiction over business credit is quite limited.
The main exception is in the area of implementation of the
Equal Credit Opportunity Act. And, in that area, as we are
required, we will--you know, that will be an important part of
our process.
Chairman Coffman. Okay.
Federal Reserve Chairman Bernanke recently stated that
there has been no examination about the impact that the new
regulatory environment will have on the overall economy.
Has CFPB done any such study on how the Bureau, fully
implemented, will affect the economy?
Mr. Sokolov. Mr. Chairman, could you repeat the question
again?
Chairman Coffman. Sure. Federal Reserve Chairman Bernanke
recently stated that there has been no examination about the
impact of the new regulatory environment, what it will have on
the overall economy.
Has your organization done any studies about its--when you
are fully implemented, what impact it will have on the economy?
Mr. Sokolov. Well, we are still the process of, well,
building out our processes. As I said, we have launched our
supervision program. We are taking complaints from consumers on
credit cards.
We are working diligently to--in the area of regulations,
our focus is on regulations that Congress has directed us to
adopt and implement--directed us under the Dodd-Frank Act. And
so, you know, in cases such as that, we are doing Congress'
will where Congress has made judgments about the benefits of
certain policies for the economy.
Chairman Coffman. One of my concerns about CFPB is that,
when you have an agency charged with looking for problems, they
have a tendency to find them, whether they exist or not.
How will we know when we have a financial system that is
free of abusive practices? What steps are in place or
benchmarks exist to know if CFPB has achieved its mission?
Mr. Sokolov. So, we, indeed, are focused, as part of our
core mission, on working toward a marketplace that is free of
unfair, deceptive practices. It can be challenging to identify
the full range of acts and practices in an economy as large as
ours. We are going to use all available sources of information,
though, to see where risks to consumers may lie and where
compliance risks my lie.
And our sources of information will include, as I
mentioned, our examination function, which is one of the
important tools that Congress has provided us and a tool that
we can use to try to provide a level playing field between
institutions that have bank charters and financial services
providers that compete in the same market but are not banks.
And we have a research capacity that we are building, as well.
We have teams that are designed to be expert in particular
markets, where often we are hiring people who have expertise in
specific industries.
So we plan to take in information from a wide variety of
sources to best understand what is going on, to be responsive
and to have a smart, balanced, and effective approach.
Chairman Coffman. Thank you.
Mr. Altmire.
Mr. Altmire. Thank you, Mr. Chairman.
As I mentioned in my opening statement, with one in five
entrepreneurs reportedly using home equity loans for business
purposes and nearly half of all small businesses relying on
personal credit cards for capital, consumer financial products
provide a critical source of capital for many small firms.
How will your agency tailor its oversight of these products
to ensure that small businesses do not find their access to
credit unduly restricted by the new regulations?
Mr. Sokolov. Thank you, Mr. Altmire, for that question. And
we talked a bit about this in our written testimony, as well.
There is certainly some overlap. There are some small
businesses that for some periods in the life of the business do
use personal credit. And we are aware of that, and we want to,
in fact, as we said, we addressed that in our testimony.
I think that the amount of overlap varies over time. And
what we are going to look to, for example, in understanding
that overlap is, just as an example, to what extent small
businesses are using credit cards that are designed for
consumers to make payments and to what extent they are actually
borrowing on the card. And we bring some data on that point in
our testimony based on a Federal Reserve study and a survey by
the National Federation of Independent Businesses.
And we have already started to reach out to these other
organizations to make sure that we do understand where this
overlap might be.
Mr. Altmire. We on this Committee and back home I, as well,
continue to hear from small firms who are concerned that they
will be subject to CFPB oversight for financial transactions
they provide to other businesses.
Will your agency attempt to exercise oversight over
financial products when no consumer is involved?
Mr. Sokolov. As I mentioned, our jurisdiction over small-
business credit is quite limited. There are a couple of fairly
limited provisions in the Truth in Lending Act where Congress
has extended protections to business credit cards. And then
there is our obligation to implement the Equal Credit
Opportunity Act, where we and other agencies are also
responsible for enforcing it.
And Equal Credit Opportunity Act prohibits discrimination
in lending, both in consumer lending and in business lending.
And, therefore, we have to fulfill, of course, and will fulfill
diligently the mandate Congress has given us in that area.
Mr. Altmire. The original bill, the Dodd-Frank Act, created
new data reporting requirements that are aimed at helping
regulators understand credit conditions for small, women-owned,
and minority-owned businesses. Some have said these
requirements will be burdensome and could raise privacy
concerns for those types of firms.
How will you balance these concerns while ensuring
policymakers have sound and accurate information on small-
business credit?
Mr. Sokolov. So, Congressman, you are referring to section
1071 of the Dodd-Frank Act, which does amend the Equal Credit
Opportunity Act to add this data collection on small-business
lending. And this is potentially an important source of data to
better understand demand conditions and supply conditions in
the market for small-business lending, where data, to date,
have tended to be somewhat limited. So we see it as potentially
a boon to have these data, as a boon both to small-business
borrowers and to lenders to better understand the market.
Now, inevitably, with the data collection nothing is free.
There is some cost involved. Congress has set the parameters
for this data collection, but, within that, where we have
discretion about how to do it, we are going to seek to make the
most of the benefits of these data for the public and only
impose the burdens that are necessary to achieve those
benefits. And we intend to make sure that the data have
integrity and will be useful in the end.
And the issue of privacy that you mentioned of course is an
important consideration--a consideration that has arisen in
other data collections. And those issues are important, and we
intend to pay attention to them.
Mr. Altmire. Thank you. No further questions.
Chairman Coffman. Mr. West.
Mr. West. Well, thank you, Mr. Chairman, Mr. Ranking
Member.
And thank you for being here today.
One of the things that I continually hear from our district
down in south Florida is small-business owners and their access
to credit. Of course, everything worth reacting to can
sometimes be worth overreacting to, with Dodd-Frank.
Do you think that we need to have regular review of some of
these regulations to make sure that they are effective and
efficient and not constraining, as far as its relationships
with our community banks and also our small-business owners?
Mr. Sokolov. That is a good question. And the Dodd-Frank
Act, to some extent, contemplates this, because it does provide
that for significant regulations that the Bureau adopts, that
we should be assessing the regulation within--I think it is
about 5-years. And so that is a statutory requirement and one
that we intend to follow diligently.
Mr. West. Well, I am concerned with that because, with the
last jobs report that came out, small businesses were saying
that they are going to freeze hiring for the next year. Seventy
percent of them said that. So if we are going to wait 5 years
to go back and do a review, that is really not setting the
conditions for the growth of our small businesses.
So can we come back and look at a semiannual review and
make sure that we include some of the people that this could be
affecting--community banks or small-business owners--instead of
waiting 5 years for a review?
Mr. Sokolov. We have a process, in fact, a statutory
process, the Small Business Regulatory Enforcement Fairness
Act, that actually provides small businesses the opportunity to
provide input before we issue a proposal, in certain
circumstances.
Mr. West. Was that part of Dodd-Frank?
Mr. Sokolov. There were amendments--Dodd-Frank included
amendments to the Regulatory Flexibility Act and the related
Small Business--the SBREFA. And those amendments, among other
things, extended SBREFA obligations to us. We are only the
third Federal agency to be subject to SBREFA. And that will be
one way that we get input from small businesses even before we
have adopted a regulation.
And I think what we are trying to do is, where we can, go
beyond the statutory requirements for public comment on
regulations. And a prime example of that is how we have been
handling the reform of Federal mortgage disclosures. Long
before we had put a regulation out there that would implement
these reforms to the disclosures, we put initial prototype
forms on our Web site, and we created a channel for consumers
to respond and a channel for industry to respond. And both
channels have produced thousands of comments, often quite
detailed comments. And we have used--the wonders of
technology--we have used the Internet to make it easy to
comment and to click on parts of the form and give feedback on
specific parts.
And, in addition, we are conducting more controlled
laboratory testing of these potential disclosures, where we are
going into a room and we ask individual consumers questions
about it. And I think maybe for the first time for an agency--
in any event, we have found it very productive to also include
in this testing lenders and brokers. So we are asking
individual lenders and brokers to sit down with us so we can
test the forms with them.
And we do round after round of this sort of testing and
will continue to use the Internet to allow thousands of others
to be able to give input, so that by the time--and, as I had
said in my written testimony, we also plan to conduct SBREFA
panels around these forms--so that, by the time we get to a
final regulation, it will receive that kind of input.
And then, under the Dodd-Frank Act, when we get to the
point of implementing these newly reformed disclosures, we will
wait an appropriate period of time and come back and review it
again.
Mr. West. And so, once again, I come back to the original
question. You know, what I heard you say was, right now that is
5 years. In the type of fiscal or economic situation in which
we find ourselves, where our small businesses are suffering--
and I applaud you for looking for their input before the
regulation comes in--but can we have a semiannual or an annual
review of these regulations so that, once again, we can go back
and do the checks and balances and make sure that these things
are working properly?
Mr. Sokolov. We can certainly consider that. I think an
important factor is that, when we review--say, for reviewing a
disclosure--let's say we wanted to go back and test the
disclosure again and see if it was still working in light of
whatever changes in the market may have occurred. It is a
pretty extensive process. It takes many months. And it can
involve both what we call qualitative testing, where you speak
to small groups of consumers and lenders, and then more
extensive quantitative and statistically valid testing,
something we plan to do after we finish this initial round of
qualitative testing. And that can take a while to do correctly
to gather useful data.
And when we do that, we want to do it in the most careful
way, and we want to put out the results of our testing and
research for people to learn from and to comment on and do
their own research. So the process of doing good analysis on a
regulation that gives you a meaningful answer can take some
time.
Mr. West. Thank you, Mr. Chairman. I yield back.
Chairman Coffman. With no other questions, Mr. Sokolov,
thank you so much for your testimony today. I really appreciate
it.
Mr. Sokolov. Thank you.
Chairman Coffman. I want to thank Deputy Associate Director
Sokolov again for being here today to tell us about the CFPB,
to see how it is structured, and for answering questions about
how they are trying to limit the burden of regulations on small
business.
I hope that they will continue to think about how small
businesses will be affected as they begin to exercise their
regulatory authority. We will continue to closely follow the
impact of the CFPB on small businesses and want to work with
you to reduce the regulatory burden on our Nation's job
creators.
I also suggest that your staff listen to our second panel
of witnesses so you can learn about the concerns that small
businesses have about the CFPB.
I would like now to call the second panel of witnesses to
the witness table.
I would now like to welcome our second panel to the
hearing.
For the benefit of the witnesses, I will take a moment to
again explain the light system that you see before you. You
will each have 5 minutes to deliver your testimony. The light
will start out as green. When you have 1 minute remaining, the
light will turn yellow. Finally, it will turn red at the end of
your 5 minutes. I ask that you try to keep it to that time
limit, but I will be a little lenient as you finish.
Our first witness is Jess Sharp, executive director of the
U.S. Chamber of Commerce Center for Capital Markets
Competitiveness. This organization was founded in 2007 with the
mission of supporting capital markets that are the most fair,
efficient, and innovative in the world.
Prior to becoming executive director at the Center, Mr.
Sharp served as deputy assistant to the President for domestic
policy and special assistant to the President on the White
House Domestic Policy Council.
Welcome, Mr. Sharp. You have 5 minutes to present your
testimony.
STATEMENTS OF JESS SHARP, EXECUTIVE DIRECTOR, CENTER FOR
CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE,
WASHINGTON, D.C.; TERRY K. JONES, CHAIRMAN, LEGISLATIVE AND
REGULATORY AFFAIRS COMMITTEE, COLORADO MORTGAGE LENDERS
ASSOCIATION, CASTLE ROCK, COLORADO; ADAM J. LEVITIN, PROFESSOR
OF LAW, GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, D.C.; AND
DANIEL FLEMING, PRESIDENT, FLEMING LEASING, ALEXANDRIA,
VIRGINIA, ON BEHALF OF THE TRUCK RENTING AND LEASING
ASSOCIATION
STATEMENT OF JESS SHARP
Mr. Sharp. Thank you very much, Mr. Chairman, Ranking
Member Altmire, and distinguished members of the Subcommittee.
My name is Jess Sharp. I am the executive director of what
we call CCMC, the capital markets shop at the U.S. Chamber of
Commerce. I appreciate the opportunity to testify today on
behalf of the hundreds of thousands of Main Street businesses
that the Chamber represents.
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. But we want to ensure that the Bureau takes
a targeted approach to regulation and enforcement, without
making sweeping policies that would impose duplicative
regulatory burdens on small businesses and, perhaps even more
importantly, that would prevent small businesses from obtaining
the credit they need to expand and create the jobs we need so
desperately in this country.
So I am going to lay out some of our concerns in, sort of,
two general baskets.
First, you know, we have concerns that small businesses may
be subject to the CFPB's regulation and other oversight because
they engage in 1 of the 10 broadly described activities laid
out in the law. So they could be directly supervised or
regulated by the Bureau. Virtually all of these businesses are
already subject to oversight by the FTC. I think it is
important to point out that these are not businesses that have
been heretofore unregulated. The Chamber fears that overlap and
duplication will be inevitable as the Federal agencies sort out
lines of jurisdiction and responsibility.
Second, and as has been raised here already today, CFPB
regulation may decrease the availability or increase the cost
of forms of consumer credit that small businesses use. We have
talked about credit cards, I think home equity loans as well,
auto title loans. There is a slew of, sort of, nontraditional
commercial bank lending instruments that small businesses do
rely on.
And this is, of course, particularly troubling given the
already challenging lending environment. According to a June
30th story in the Wall Street Journal, quote, ``In the past 6
months, only 17 percent of loan-seeking business with less than
$5 million in revenue landed bank financing.'' It is a tough
environment out there, and we are concerned about any tools
being taken off the table.
Last week, the House approved an important piece of
legislation that would make changes to the Bureau's structure
and operations to increase its accountability to Congress and
to ensure that the Bureau's decisions are based on diverse
inputs. H.R. 1315 would replace the Bureau's current single
director position with a bipartisan multimember leadership
team, giving the agency more stability and balance over the
long term, and would give small community credit unions and
banks a voice in the process that allows the Financial
Stability Oversight Council, or FSOC, to override Bureau
regulations that harm safety and soundness.
The risks of agency tunnel vision, overreach, and
politicization are real for any government regulator, including
the Bureau. If these risks are not properly addressed at a
structural level, agencies inevitably will, over time, abandon
sound regulatory principles.
I want to speak next about SBREFA. That has also been
mentioned here this morning, and it is a very important point.
As has already been mentioned, the Bureau is included on the
list now of agencies that must follow SBREFA, in addition to
the EPA and OSHA. And it is a very important requirement--it is
a very important requirement for the Bureau to follow in order
to get small-business input up front.
However, the panel process is not a perfect mechanism, and
it is not necessarily enough to ensure an independent check on
the Bureau's activity that affects small businesses. And so,
this Committee's role is incredibly important in overseeing the
Bureau's work and its implementation of SBREFA.
Just to mention a few of the concerns we have about how
this process could play out: First, the Bureau itself is
responsible for the threshold determination, that a proposed
regulation is expected to significantly impact a substantial
number of small entities. And the terms ``significant'' and
``substantial'' are basically subject to the CFPB's discretion
to define.
Second, the Bureau does not have to adopt the panel's
recommendations, which are advisory, and need only supply a
reasoned explanation for adopting or rejecting them.
Third, SBREFA covers only the rulemaking process. And I
think you heard the first witness, Mr. Sokolov, describe that
regulation isn't always the best way to go about doing things.
They can use compliance assistance, they can supervision, they
can use enforcement actions to essentially dictate broader
policies. And, of course, none of those are subject to SBREFA
or to any sort of formal process whereby small-businesses input
is taken.
And just to, again, put a fine point on it, I mean, actions
do speak louder than words. And, as has mentioned here this
afternoon, the Bureau already does have rulemakings essentially
in progress, if not technically: one to merge these two
mortgage forms; another to define the types of businesses that
the Bureau will supervise in the nonbank space. And in neither
case has a SBREFA panel been put together. Now, technically, I
guess it is not required at any particular stage. But, you
know, if we want to get this right from the beginning, we would
encourage the Bureau to begin that process as soon as possible.
So, with that, I thank you all for having me here, and I am
happy to answer questions.
[The statement of Mr. Sharp follows on p. 44.]
Chairman Coffman. I would now like to introduce our next
witness, who came here all the way from my home State of
Colorado, Mr. Terry Jones.
Mr. Jones is from the city of Castle Pines, Colorado, where
he resides with his wife Carol. Terry Jones has over 40 years
of experience working in the mortgage banking industry.
Terry is testifying on behalf of the Colorado Mortgage
Lenders Association, where he serves as chairman of their
Legislative and Regulatory Affairs Committee.
I am pleased that Terry Jones could be here today, and I
look forward to your testimony.
Mr. Jones.
STATEMENT OF TERRY K. JONES
Mr. Jones. Good afternoon, Chairman Coffman, Ranking Member
Altmire, and distinguished members of the Subcommittee.
The Colorado Mortgage Lenders Association is a 56-year-old
organization made up of over 100 companies, employing over
2,500 individuals. Over 75-percent of our members are small
businesses that employ less than 25 people.
In my 42-year career in mortgage lending, I have been a
loan originator, a manager, an entrepreneur, and a small-
business owner. I have always been proud to be part of an
industry that helps people and families reach their dreams of
homeownership.
I have seen many people in the business start as loan
originators and then go on to start their own small mortgage
lending businesses. These people have lived their own American
dream and, in doing so, have served the real estate markets and
the buyers and borrowers of their local communities.
The Dodd-Frank Act creates a super-regulator for the
mortgage lending industry in the CFPB. This is in addition to
the oversight already in place by the States, FHA, the VA,
Fannie Mae, and Freddie Mac.
The CFPB is tasked with issuing more than 100 mortgage
lending rules over the course of the next 18-months. It will be
difficult for small mortgage lending businesses to keep up with
so many new rules in such a short timeframe. So it is essential
for the CFPB to develop an orderly process for its rulemaking
initiatives, not only to ensure meaningful input from industry,
small business, and other stakeholders, but to develop well-
conceived and clear rules that are neither duplicative nor in
conflict with those of the States and other agencies.
The CFPB must also develop a process for providing timely,
reliable guidance to the industry and to the State regulators
well prior to the implementation of new rules.
We believe that the CFPB has a historic opportunity to set
the tone for the future regulation of the mortgage lending
industry in finalizing the ability-to-repay rule and defining
the qualified mortgage as a safe harbor characterized by
traditional, well-underwritten, and properly documented loans.
By pursuing such a course, the CFPB can help to preserve
the best practices and products of the industry, yet still curb
the abuses of the early 2000s. If the CFPB takes this approach,
it will be of great benefit to small mortgage lenders because
it will create a clear safe harbor that they can rely on when
making loans. If the CFPB chooses to adopt the qualified
mortgage as a rebuttable presumption, we believe that the
increased levels of litigation will force many small lenders
out of business.
The CMLA believes a qualified-mortgage safe harbor will
define the arena in which most loans will be made. The risk to
smaller businesses, in particular, will be too great for most
of them to venture outside the qualified-mortgage parameters.
Consumers in Colorado and across the country need a viable
small-business mortgage lending industry to provide a
competitive local alternative to the large national lenders
that dominate the marketplace today.
The CFPB is also responsible for enforcement of the SAFE
Act, which requires loan officers for nonbank firms to meet
education, testing, and financial standards, while bank loan
officers need only be registered. This creates an unlevel
playing field and additional costs for small, nonbank lenders
and creates unequal protection for consumers.
In addition, licensed originators can move freely to
depository lenders from licensed originators, but the reverse
is not true. A loan originator working for a bank will have to
go through the entire licensing process in order to be able to
be employed by a small-business lender. We ask that the CFPB
undertake rulemaking as soon as possible to create a
transitional license to allow registered loan originators to
move from depository institutions to nonbank lenders for a
limited time while they complete their licensing requirements.
Finally, it is important for the CFPB to address the loan
officer compensation rule under the Truth in Lending Act and
reconsider some of the rigid requirements that were recently
imposed by the Fed on the ability of a small business to pay
its employees in a manner consistent with the profitability of
the loan products they produce.
Confusing standards and lack of official guidance from the
Fed has created some unusual outcomes. For example, the current
rule severely impacts revenue bond programs that serve low- to
moderate-income and rural borrowers. These programs typically
limit fees that can be charged to the borrower, yet the loan
officer compensation rule specifies that the loan officer must
be paid exactly the same on these loans as any other. This can
easily cause losses on these loans, and many lenders will be
unable to offer these affordable loan programs. We urge the
Bureau to clarify this and other problematic issues with the
compensation rule.
We respectfully urge Congress and this Subcommittee to
carefully monitor all of these new rules to be certain that
they do not unwittingly harm American families, small business,
the mortgage market, the housing recovery, or the Nation's
economic recovery.
I thank you very much for the opportunity to testify before
you today.
[The statement of Mr. Jones follows on p. 30.]
Chairman Coffman. Thank you, Mr. Jones.
I would now like to recognize Ranking Member Altmire from
Pennsylvania, who is going to introduce our next witness.
Mr. Altmire. Thank you, Mr. Chairman.
And it is my pleasure to introduce Adam Levitin.
Mr. Levitin is professor at the Georgetown University Law
Center in Washington, D.C., where he teaches courses in
bankruptcy, commercial law, and consumer finance. He has
previously served as a scholar in residence at the American
Bankruptcy Institute and as special counsel to the
congressional oversight panel supervising TARP.
Before joining the Georgetown faculty, Professor Levitin
practiced law and served as a law clerk for the U.S. Court of
Appeals for the Third Circuit. Professor Levitin holds a JD
from Harvard Law School and degrees from Columbia University
and Harvard College.
Welcome, Professor Levitin.
STATEMENT OF ADAM J. LEVITIN
Mr. Levitin. Mr. Chairman Coffman, Ranking Member Altmire,
and members of the Committee, good afternoon. My name is Adam
Levitin. I am a professor of law at Georgetown University Law
Center. My research and teaching focuses on consumer finance
and financial regulation. I am also a small-business owner.
The Consumer Financial Protection Bureau has only limited
and generally indirect connections to small-business finance.
With three very limited exceptions, the CFPB's jurisdiction is
restricted to consumer financial products.
While many small businesses use consumer financial
products, like personal credit cards and home equity lines of
credit, for business transactions, small-businesses owners
need, deserve, and want the same protections on their financial
products whether they are using them for personal or business
use. Thus, the National Small Business Association has
advocated for extending Truth in Lending Act protections to
small-business credit cards.
Now, there are only two ways the CFPB might directly affect
small-business lending.
First, the Dodd-Frank Act requires the CFPB to collect data
on small-business lending under the Equal Credit Opportunity
Act. This is to ensure against discriminatory lending in the
small-business space. The ECOA data collection requirement will
impose some limited costs on lenders, but it will also provide
an important protection for small businesses, particularly
those owned by women and people of color.
More generally, though, the CFPB has regulatory authority
over almost all consumer financial service providers, large and
small. The CFPB regulations could affect the cost or
availability of business credit, but I want to emphasize, it is
simply premature to judge the CFPB's impact on financial
service providers or the impact of the CFPB on small-business
credit costs and availability. Instead, individual rules will
need to be evaluated on their own merits when and if they are
proposed.
The Dodd-Frank Act imposes numerous safeguards on CFPB
rulemaking to ensure against unnecessary regulatory burdens.
CFPB rulemaking and adjudication is subject to the
Administrative Procedures Act. It is also subject to the
Regulatory Flexibility Act. The CFPB is one of only three
agencies required to have regulatory flexibility review panels
under the Small Business Regulatory Enforcement Fairness Act.
The CFPB is also required to consult with prudential
regulators on its rulemakings and to reevaluate those
rulemakings within 5-years. Additionally, the CFPB is subject
to Financial Stability Oversight Council review for its
rulemakings, which is unlike any other bank regulator.
Finally, small banks and all but three credit unions are
exempt from CFPB supervision and enforcement. Their supervision
and enforcement remains with their existing prudential
regulators. Now, I want to emphasize that this is a battery of
safeguards that does not apply to any other bank regulator.
It is also important to note that the CFPB is likely to
help small businesses. The CFPB can help improve competition in
small-business lending by ensuring that consumer financial
products which are used by small businesses are fair and
transparently priced. Small businesses want to use fair and
transparent products.
Second, the CFPB can help small businesses by helping
small-business customers. When consumers feel confident that
they won't get caught by financial-product tricks and traps,
they are going to have greater willingness to make purchases,
including from small businesses. And the CFPB can help protect
against consumer asset bubbles and, thus, smooth the volatility
of consumer spending. That means a more stable business
environment, which benefits small businesses.
In short, the CFPB has limited jurisdiction over small
businesses. It is subject to numerous safeguards to ensure
against excessive regulatory burdens on small business, and it
may be able to help increase the efficiency of small-business
lending by increasing consumer confidence and spending
stability.
Thank you very much.
[The statement of Mr. Levitin follows on p. 59.]
Chairman Coffman. Thank you, Mr. Levitin.
Our final witness to testify here this afternoon is Daniel
Fleming, president of Fleming Leasing, a truck-renting and -
leasing business located in Springfield, Virginia. Fleming
Leasing is a family-owned business founded in 1903, when the
transportation services they were providing consisted of a
horse and buggy.
Mr. Fleming is testifying on behalf of the Truck Renting
and Leasing Association.
Mr. Fleming, you have 5 minutes to present your testimony.
STATEMENT OF DANIEL FLEMING
Mr. Fleming. Thank you, Mr. Chairman. Thank you, Mr.
Altmire.
As you said, my name is Dan Fleming. I am president of
Fleming NationaLease in Springfield, Virginia. And our company
is a member of the Truck Renting and Leasing Association, or
TRALA.
I am testifying today on a troubling aspect of the Dodd-
Frank Act, namely section 1071, the small-business loan data
collection provision.
Fleming NationaLease is a family-owned business with 18
permanent employees with locations in Springfield, Virginia,
and Landover, Maryland. We are a proud member of TRALA, an
association comprised of about 550 companies, employing 100,000
people, and operating out of 24,000 locations throughout the
United States.
Not only are nearly all of TRALA's 550 members small
businesses themselves, but the vast majority of the customers
that we deal with are also small businesses in search of
vehicles and equipment offered for rent or lease at a
reasonable price.
Part of the process in acquiring rented or leased vehicles
is to fill out an application of credit. As written, section
1071 adds extensive new application requirements to the ECOA.
These requirements would be offered by and monitored through
the CFPB. While I certainly do not operate a bank, under the
definitions listed within this new law I am considered a
financial institution because I have an application for credit
for my customers.
In my opinion, the small-business data collection provision
is counterproductive, contradictory, costly, and confusing.
The provision is counterproductive in that the CFPB was
created with the intention of giving consumers protection from
the predatory lenders and allowing them to find more options
for information in obtaining a loan, but instead is now
intended to regulate commercial loans and lenders.
Section 1071 is contradictory in that the statutory
language conflicts with existing language already on the books.
My understanding is that section 202.5 of Regulation B under
the ECOA explicitly says, ``A creditor shall not inquire about
the race, color, religion, national origin, or sex of an
applicant.'' The personal information should have no basis in
determining whether or not someone receives a truck from
Fleming NationaLease.
In terms of cost, this could cause a real strain on my
bottom line. According to section 1071, after a lender inquires
whether an applicant for a loan is a minority, woman-owned, or
small business, no one involved in the credit decision can have
access to this information. This would require me, the so-
called lender under this definition, to completely alter my
application process, which would be expensive. If we were to
comply with this new regulation, I estimate that we would have
to, at a minimum, hire a new part-time employee. That could
cost our company somewhere between $10,000 and $20,000
annually. And while that doesn't seem much in the scheme of
things, for me it is money that could be spent hiring another
mechanic or purchasing a new vehicle, both of which, in turn,
makes my company more profitable, but instead would be spent on
more administrative burdens.
Lastly, section 1071 is extremely confusing and leaves many
questions unanswered regarding what information I am to collect
and what definitions will be used to ensure compliance. There
also remains a concern over whether or not the CFPB and the
Federal Reserve will work jointly to rectify issues that could
remain from any exemptions that exist.
Just to touch on this final point, since section 1071
amended the ECOA, both the CFPB and the Federal Reserve now
have jurisdiction over entities such as auto dealers. I believe
it is imperative that if this new law was to be enacted and
enforced, regulators must coordinate their implementation of
these new requirements. If not, financial companies might
receive different data from the dealers than that which they
are required to file with the CFPB and open an entirely new
problem.
While I recognize the fact that the CFPB has now decided it
will issue a formal rule that hopefully will address and answer
some of the confusing qualities within the law, ultimately I
remain unconvinced that there is even a reason to have such a
rule implemented for businesses like my own. I am not a banker.
I lease trucks. To be placed in the same category with a
multibillion-dollar financial giant makes absolutely no sense
to me. In my opinion, making a truck-leasing company or any
small business comply with section 1071 is a mistake.
Thank you for allowing me to issue my testimony today.
[The statement of Mr. Fleming follows on p. 54.]
Chairman Coffman. Thank you, Mr. Fleming.
Questions. I will start with Mr. Jones.
On a scale of 1 to 10, how would you rate the CFPB's
outreach on the mortgage disclosure forms that they are
currently in the process of revising?
Mr. Jones. Thank you, Chairman Coffman.
I would rate them at a 6 or a 7, especially compared to
previous regulatory form changes. I think they really have
reached out and provided an opportunity for our members and
members of the mortgage lending community to comment on those
forms.
Chairman Coffman. Thank you.
With your 40 years of mortgage lending experience, can you
tell me what happens if an entity is seen by its customers as
being abusive?
Mr. Jones. I think that if an entity is seen by its
customers as abusive, basically, they stop using the lender. I
think good businesses in our business and in any business have
to be close to their customers. And that, I think, is one of
the real benefits of being a small business, being located with
your customers in the same towns, going to the same meetings,
the same social functions, and the same churches. It is
critical that you have good customer relationships.
Chairman Coffman. Mr. Sharp, we hear frequently that there
is a fight between Main Street and Wall Street. However, our
economy is interconnected, and we must make sure both are
healthy if we want to grow our economy.
Can you tell me about the impact that financial regulations
will have for Main Street small businesses?
Mr. Sharp. Yes, Mr. Chairman. Thanks for the question.
As I said in my testimony, I mean, it is hard to know
exactly what the impact will be. And I think we heard that from
the first panel, as well. But, again, our concern is that, you
know, small businesses have the hardest time and the most
expensive time, really, complying with new regulations. And, as
you know, there are a flood of regulations headed their way.
In this case in particular, again, our concern is that some
companies may be directly regulated who didn't expect to be
regulated, as my fellow panelist, Mr. Fleming, has mentioned,
and others may find that access to credit lines or to credit
instruments that they rely on are either more expensive or
unavailable.
So there is no way to know for sure what the impact is
going to be, but those are the two areas where we are hopeful
that there won't be an adverse impact.
Chairman Coffman. Can you tell me how small businesses use
the equity in their home to finance small businesses,
particularly in the early stages of development?
Mr. Sharp. Sure. I think it is pretty widely accepted that
particularly the very smallest businesses, sort of, you know,
the two guys in a garage, kind of, you know, very earliest
stage of a small business. And I think, you know, if you look
at Google or some of the real tech giants these days, you can
trace almost all of them back to, again, a couple guys in a
garage with either a personal credit card or someone borrowing
against their house or borrowing against their car.
Now, of course you grow out of that phase at some point
and, you know, you have access to the capital markets. But each
of those tools, which are not, you know, designed to be for
commercial lending, have become critical lifelines for small
businesses.
Chairman Coffman. Right.
Based on your experience in government and observing the
CFPB, do you think they are prepared to assume authority, or do
you feel that they have been rushed?
Mr. Sharp. Well, you know, a year sounds like a lot of
time, but it is really not, to stand up a brand-new agency,
particularly when you have a responsibility to sort of gather
up bits of law, I think, in seven other agencies. I think it is
19 statutes that they are consolidating under one roof.
So we do have a concern that they are moving awfully fast.
You know, I think on the transfer date they began to issue--
they, the CFPB--began to issue interim final rules, which
essentially says, ``This is the final rule, but we are going to
take comments and adjust as needed.'' And in some cases, that
is probably good; in some cases, you know, we may have
concerns. We are trying to keep up, as well.
But I don't think a year is enough time for this bureau to
have gone active, particularly without a confirmed director. I
think that also creates serious challenges for them.
Chairman Coffman. Mr. Fleming, you mentioned compliance
costs in your testimony, but can you reiterate how much will it
cost for your business to comply with the new data collection
requirements?
Mr. Fleming. Well, again, Mr. Chairman, I am estimating
that we could potentially have to add at least a part-time
clerk, which, for us, as such a small business that is so flat,
that is really a significant investment for us for, really, a
position that doesn't add to the bottom line.
I would prefer to spend those funds on, as I said, a
mechanic or some equipment that adds to revenue for our
customer. You know, we are constantly looking for good,
qualified diesel technicians to fix our trucks, to keep them
out on the road, to help produce revenue for our company.
So while, again, I said one part-time position seems small,
that really would be better used in a revenue-generating-type
position rather than just an administrative burden to comply
with potentially new Federal regulations.
Chairman Coffman. Do you feel taken advantage of by the
banks that you work with? If so, I mean, do you just switch
banks or providers?
Mr. Fleming. Actually, we did switch our banking
relationship. I wouldn't say felt taken advantage of, but just
didn't feel that it was working for us. And we had a
relationship with banks out in Ohio and changed those banking
relationships.
I think, as other members of the panel said, it is a free
market, and there are certainly plenty of other opportunities
for us. And we took advantage of other opportunities when they
presented themselves.
Chairman Coffman. Thank you.
Mr. Levitin, according to the SBA Office of Advocacy, small
businesses create 7 out of every 10 jobs in America. Yet, in a
recent article, you claimed that small businesses' contribution
to long-term, stable employment is limited.
Do you disagree about the importance of small businesses in
helping our country recover from 9-percent unemployment?
Mr. Levitin. No, I do not disagree with that. I would
actually point out that what I said is entirely consistent with
the Small Business Administration's Office of the Advocate,
that small businesses create a tremendous number of jobs every
year, but the general story of small business is,
unfortunately, failure. Most small businesses don't last for
more than a couple years. So, instead, you just get churning,
rather than stable, long-term employment.
Chairman Coffman. Okay.
As a professor, I would assume that you see the value of
lawyers drafting contracts and committing agreements to
writing; this creates certainty. How can plain language
increase certainty in contracts? I can see the value in getting
rid of some legalese, but don't contracts require some specific
language that cannot always be made into, quote/unquote,
``plain language''?
Mr. Levitin. It really depends on the specifics here. So I
think where your question is going, if I understand it
correctly, is, how is the CFPB going to help make markets more
efficient? And getting rid of unnecessary legalese is certainly
something I think everyone at this table would think is a
wonderful thing. That is move one.
But, as you point out, not everything can be boiled down to
legalese. The second part is simply ensuring that, when a
business goes out, or a consumer, actually--well, really, a
consumer goes out and compares financial products, they can
compare them on an apples-to-apples basis. That is actually
very difficult to do right now with many financial products. It
is not like going to a grocery store, where there is unit
pricing and you can see the cost for an ounce of orange juice
of brand 1 and an ounce of orange juice of brand 2. Instead,
many financial products are designed in a way that they are too
complex to compare on an apples-to-apples basis, knowing what
the all-in cost will be.
The CFPB may be able to improve that by encouraging
standardization of financial products to the things that
consumers really want.
Chairman Coffman. Thank you.
Mr. Altmire.
Mr. Altmire. Thanks, Mr. Chairman.
Mr. Levitin, I wanted to follow up on a question I asked to
the earlier panel regarding the fact that many entrepreneurs
use personal credit cards and home equity loans to finance new
business ventures.
Many of you mentioned that in your testimony.
How should, in your opinion, the CFPB account for these
small-business owners when drafting regulations specifically
for credit cards and home mortgage products?
Mr. Levitin. Well, as someone who actually uses a small-
business credit card for some purchases, I think it is
important to note that many small businesses use the same
credit card for both their business transactions and personal
transactions.
And so, say you are going and filling up your car with a
tank of gas and you use that car partially for business use and
partially for your personal use. You want to make sure that
you--I think you would want the same protections on that
transaction, because you don't know whether that gas you are
putting in the tank is going to be used for when you are
driving your kids to the soccer game or whether you are using
it for work. You don't know, at that point, whether you are
doing a business transaction or not, ultimately.
And in situations like that, small-business owners should
have the same protections that they have when they are
consumers.
Mr. Altmire. For Mr. Jones, over the past 3 years, we have,
unfortunately, learned that bad mortgages are costly to
everybody. And to be successful, your business, in particular,
has had to make loans that borrowers can repay.
Is there, in your opinion, a potential benefit to the
mortgage industry if the CFPB's ability-to-repay rules are
structured appropriately?
Mr. Jones. Thank you, Mr. Altmire, for the question.
Yes, I think so. The ability-to-pay rule, again, if it is
characterized as a safe harbor, will provide a bright line,
especially for small lenders that don't have the ability to
hire compliance staff. If you have a 25-person business and you
need to hire an attorney to help you interpret the rules and
regulations, it becomes a very costly endeavor.
So it is important, if they do characterize it as a safe
harbor that is clearly interpretable by small businesses. I
think it will be a vast boon to our industry and to the
consumers of America, as well.
Mr. Altmire. Thank you.
For Mr. Sharp, many in the banking industry have expressed
concern that the Dodd-Frank Act will stifle lending to small
businesses, another point many of you brought up.
Hasn't the small-business community been struggling to get
credit from banks since well before the financial reform was
enacted? And is there something that could be done, perhaps
outside of this law, or something different, to help correct
for that?
Mr. Sharp. Well, thank you, Mr. Altmire.
First of all, I mean, to answer the first part of your
question, yes. I mean, the challenges that small businesses
face in the credit markets right now are not unique to 2011 or
2010. I mean, they have been around for several years now, and
they are sort of--and it is stagnant. It is not improving, and
that is a real concern.
You know, honestly, at this point, I think part of what
everybody is hearing is, ``Let's not do anything to make it
worse.'' It is not exactly clear what it is that is gumming up
the works, but what we know for sure, that, again, the
commercial lending markets are not frozen, but, you know, they
are not in good shape. Sort of, our message and the message we
are hearing from our small-business and Main Street members is,
``Let's certainly not take away some of these tools that do
seem to be working well now. We can still use our credit cards.
We can still borrow money against our car title or our home.''
Even those markets are functioning fairly well.
So their message to us is, ``Do no harm,'' essentially. And
that means working closely with the CFPB to make sure they
understand the knock-on effects, you know, to the small-
business lending world in the actions they are taking.
Mr. Altmire. Thank you, Mr. Chairman.
Chairman Coffman. Mr. West.
Mr. West. Thank you, Mr. Chairman and Mr. Ranking Member.
And thanks to the panel for being here today.
Mr. Sharp, I will ask the first question to you, and others
from the panel can chime in.
What do you really see, in your assessment, the purpose of
the CFPB to be?
Mr. Sharp. I believe the purpose of the CFPB is to find
fraudsters in the consumer products market and put them out of
business or, you know, clamp down on their fraudulent
practices. Protect consumers against bad actors in the market.
Mr. West. Okay.
Anyone else?
Mr. Levitin. I would say that is part of CFPB's mission,
and that is an important part, but it is broader. CFPB's
mission is to ensure that we have fair, transparent, and
competitive consumer finance markets. And that is not just
getting rid of fraud; that is also ensuring that disclosures
are clear, that we can have good price competition in the
market.
Mr. West. Have we had, prior to this, any other government
agency or someone else that was doing this? I mean, do we see
this as a redundancy, or do we see this as some type of a
duplication of effort out there from the government?
Mr. Levitin. Prior to the Dodd-Frank Act, some parts of the
consumer finance space were regulated, by a laundry list of
Federal agencies. And this was one of the problems, that you
had a regulatory market that was splintered. So you had the
Federal Reserve, the FDIC, the Office of Comptroller of the
Currency, Office of Thrift Supervision, even the Department of
Defense and HUD each having little spaces in the market. And
many things fell between the cracks.
And, also, those missions--the consumer protection mission
given those agencies was typically a secondary and subordinate
mission to other missions, particularly to bank safety and
soundness, which is just a fancy term for bank profitability.
So, abusive lending practices, the only reason to do them
is that they are profitable. Banks don't do them for fun; they
do them because they are profitable. But if you are the
Comptroller of the Currency and you see your primary mission as
ensuring that banks are profitable, that puts you in a bit of a
bind, where you are going to be tempted to turn a blind eye to
abusive practices because they are profitable. And that is what
we saw. That is what led up to the housing bubble.
Mr. West. Okay.
So, in your assessment--for the panel--this was something
that we needed to institute. This was an agency, a bureau, or a
government program, whatever you want to call it, that we
needed to institute.
Mr. Levitin. Without a doubt. The financial crisis in 2008
came out of consumer financial products, out of mortgage
products. That was the root of it. And if we want to ensure
that doesn't happen again, we need to have better consumer
financial protection.
Mr. Sharp. I will just say that, you know, it is no secret
that the Chamber didn't support the creation of the Consumer
Protection Bureau. And, at this point, you know, our focus is
on--you know, it is there, it is up and running, it is no
longer an idea on paper. And, you know, our concern now is, as
it is beginning, as the gears begin to turn and it begins to
issue regulations and begins do its work, our concern is that
it not become a sort of duplicator of other agencies' work.
And there are some cases, at least one very obvious one
with the Federal Trade Commission, where the Bureau's
jurisdiction and the Federal Trade Commission's jurisdictions
overlap. And that was intentional, to some degree. And the law
requires the two agencies to prevent, you know, sort of,
stepping on each other's toes, you know, to prevent situations
where they are duplicating or conflicting with one another. But
we do have concern, sort of a general concern, that that will
be very difficult to avoid.
Mr. West. Mr. Jones and Mr. Fleming, do you believe that
the CFPB will enhance free-market competitiveness and
entrepreneurial spirit or not?
Mr. Jones. Mr. West, thank you for the question.
We were happy to see the CFPB's move toward consolidating
the Truth-in-Lending and the Good-Faith-Estimate disclosures,
two forms that have been a challenge for the industry, being
administered formerly by two separate Federal agencies that did
not always see eye to eye in terms of what should be done. So
we do think there is real benefit there.
Another benefit to our industry could be that--our industry
is very heavily involved in automation, in order to comply with
the multiplicity of rules and regulations that we have. To that
extent, I was very encouraged today to hear that the CFPB will
be doing an economic cost-benefit analysis to really determine
whether or not there will be an economic benefit to their
proposed rules and to the extent that that is what we do, then
I think it can be a boon, not only to the industry to help to
lower some costs, but it also will be a boon to consumers, who
hopefully will have less confusing and clearer disclosures.
So there definitely are some benefits.
Mr. Fleming. Mr. West, since I am a trucker and not a
banker, I would be hard-pressed to express an overall opinion
of the CFPB. What I am primarily concerned about is just, you
know, any new regulations that seem to me, as someone sitting
down in Springfield, Virginia, shouldn't really apply to me all
of a sudden coming down and creating new regulatory
requirements.
So, from that perspective, I am concerned about that
section. But, overall, I am certainly not in a position to
register an opinion on the group as a whole. So, thank you.
Mr. West. Very well.
Mr. Chairman, I yield back.
Chairman Coffman. Thank you, Mr. West.
To each of the panelists, if you could identify just one
top issue that bothers you about CFPB, just the top issue that
you think ought to be changed or improved to improve it, what
would that be?
Mr. Jones.
Mr. Jones. Thank you, Mr. Chairman.
I think our top issue with the CFPB will be the clarity of
the issues--or the clarity of the rules and regulations that
are issued, and the ability to receive and respond to industry
input prior to those regulations being implemented.
Chairman Coffman. Mr. Sharp.
Mr. Sharp. Mr. Chairman, our primary--the changes that we
are pushing for primarily are structural. You know, it is very
difficult, as I think we have all discussed today, to know
exactly what problems may arise and when and what type, in what
sector. So what we are advocating for is replacing the single
director with the panel and ensuring that safety and soundness
isn't compromised through a more effective check by the
prudential regulators.
So, at this point, we think that, sort of, the best long-
term hedge against, you know, poor policymaking by this agency
or any other independent agency is, sort of, collaborative
decision-making at the top with input from diverse, you know,
sectors, bipartisan input. So that is our top priority.
Chairman Coffman. Thank you.
Mr. Fleming.
Mr. Fleming. Mr. Chairman, I think I would just ask the
organization to take in to consideration unintended
consequences, such as, you know, these data collection
requirements that maybe in theory would be of interest and be
helpful to the organization, however be burdensome for us small
businesses that would have to comply with these new regulations
to provide the data.
Chairman Coffman. Mr. Levitin.
Mr. Levitin. As you might have guessed, I am going to give
a rather different answer.
I think the two most important things with the CFPB are,
number one, that the Senate should confirm a director; and,
number two, if you really wanted to start changing the scope of
CFPB regulation, I would strongly urge subjecting auto dealers
and realtors to CFPB regulation. There is not a very good
principled argument for exempting them.
Chairman Coffman. Thank you.
Mr. Altmire, any----
Mr. Altmire. No further questions.
Chairman Coffman. Thank you.
Panelists, I just want to thank you all so much for taking
the time and coming down to Capitol Hill and testifying today
on this very important matter.
With that, the Committee is adjourned.