[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
WHO'S IN YOUR WALLET? DODD-FRANK'S
IMPACT ON FAMILIES, COMMUNITIES,
AND SMALL BUSINESSES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JULY 19, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-146
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76-117 WASHINGTON : 2013
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
RANDY NEUGEBAUER, Texas, Chairman
MICHAEL G. FITZPATRICK, MICHAEL E. CAPUANO, Massachusetts,
Pennsylvania, Vice Chairman Ranking Member
PETER T. KING, New York STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota MAXINE WATERS, California
STEVAN PEARCE, New Mexico JOE BACA, California
BILL POSEY, Florida BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
July 19, 2012................................................ 1
Appendix:
July 19, 2012................................................ 49
WITNESSES
Thursday, July 19, 2012
Del Rio, Deyanira, Chair, Board of Directors, Lower East Side
People's Federal Credit Union.................................. 19
Flores, Michael, Chief Executive Officer, Bretton Woods, Inc..... 8
Johnson, Garrick ``Gary,'' President, American Flooring
Installers, LLC, on behalf of the Ohio Hispanic Chamber of
Commerce....................................................... 15
Min, David K., Assistant Professor of Law, University of
California Irvine School of Law................................ 17
Purcell, Jim R., Chairman and Chief Executive Officer, The State
National Bank of Big Spring, Texas............................. 10
Sharp, Jess, Managing Director, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, on behalf of the
U.S. Chamber of Commerce and the Coalition for Derivatives End-
Users.......................................................... 13
Smith, Gregory W., Chief Operating Officer and General Counsel,
the Colorado Public Employees' Retirement Association (CoPERA). 22
Smith, Lynette, President and Chief Executive Officer, Washington
Gas Light Federal Credit Union, on behalf of the National
Association of Federal Credit Unions (NAFCU)................... 11
APPENDIX
Prepared statements:
Del Rio, Deyanira............................................ 50
Flores, Michael.............................................. 55
Johnson, Garrick ``Gary''.................................... 59
Min, David K................................................. 64
Purcell, Jim R............................................... 78
Sharp, Jess.................................................. 84
Smith, Gregory W............................................. 90
Smith, Lynette............................................... 100
Additional Material Submitted for the Record
Capuano, Hon. Michael:
Forbes article entitled, ``What's In Your Wallet? If It's a
Capital One Card, You May Be Due a Refund,'' dated July 18,
2012....................................................... 133
Article from The Wall Street Journal entitled, ``Financial
Crisis Amnesia,'' dated March 1, 2012...................... 135
Neugebauer, Hon. Randy:
Letter from Bill Cheney, President & CEO of the Credit Union
National Association (CUNA), dated July 19, 2012........... 138
WHO'S IN YOUR WALLET?
DODD-FRANK'S IMPACT ON
FAMILIES, COMMUNITIES,
AND SMALL BUSINESSES
----------
Thursday, July 19, 2012
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Fitzpatrick,
Pearce, Posey, Renacci, Canseco, Fincher; Capuano, Baca, Miller
of North Carolina, and Carney.
Ex officio present: Representative Frank.
Also present: Representative Green.
Chairman Neugebauer. The Subcommittee on Oversight and
Investigations will come to order. Today's hearing is entitled,
``Who's in Your Wallet? Dodd-Frank's Impact on Families,
Communities, and Small Businesses.'' I want to thank our
witnesses for being here today, particularly Mr. Purcell, who
is from the 19th Congressional District of Texas.
Thank you for being here this morning.
There are a lot of different ways that the government can
get in your pocket, and I think most people think about taxes
as the primary way because basically the government gets to
determine how much of your hard-earned money you get to keep.
But what I think a lot of people underestimate is the cost of
other ways that the government does that through regulations.
I think one of the things that this Congress has been
trying to focus on for a number of months now is jobs in this
country. We still have a number of Americans who are out of
work and we are looking for ways to help get those people back
to work.
For example, in my State of Texas, about 98 percent of the
employers in Texas are small businesses. I will tell you, in
the 19th Congressional District, that is probably a higher
number, because we just have a bunch of really hard-working
small business people, many multi-generational businesses that
have worked hard to build those businesses up. We don't have a
big Toyota plant in the 19th Congressional District. But these
small businesses are a major job creator for us.
And so what small businesses rely on is access to capital,
and obviously our community banks have been the primary
provider of that capital. When you look at the small business
loans in this country, most of those loans are under $100,000.
And while that is not a small amount of money, for many banks
that would be a relatively small loan.
But to those businesses it is a very important loan, and so
we want to make sure that as we move forward, we are not part
of the problem of inhibiting the financial communities,
particularly our community banks, from providing important
lending opportunities, but also serving the customers. I was
talking to someone the other day, and in many of the smaller
communities across my district, with the consolidation that has
happened in the agricultural business, there is a smaller
number of farmers farming a lot more acres. And so a lot of
those communities that used to be a lot larger because there
were more farm families are smaller now. And in many cases, the
small community bank is one of the last large corporate
citizens in those communities, and is important not only as a
provider of capital but for other financial services for those
individuals.
What I am hoping to accomplish with this hearing today is
that I think there has been a lot of focus on Wall Street, but
what we really know is that Main Street is where ultimately all
of the cost and burden of regulation tends to fall. We don't
think about the fact that we raise the cost of the asphalt in
the parking lot at the supermarket if we begin to tinker with
some of these markets, or that the cost of buying or financing
a car, the cost of your groceries, the commodities, and the
availability of certain banking services where in many cases
those used to be provided free now are at a cost.
And so, there are costs to that. What I would hope to
accomplish with this hearing today is to begin to identify some
of these costs because I think on both sides of the aisle, we
want to make sure that if we want to have regulation, we need
to understand the consequences of that regulation. But also, we
have had a lot of discussions about the cost and the benefit.
You can make a car really, really, really safe, but if it costs
$100,000 to make a car really, really safe, then how many
people can afford the car?
So I look forward to our discussion and our panel. I think
we have a great panel today, and I want to thank you again for
being here.
And with that, I will now yield to the ranking member of
the subcommittee, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
And again, I want to thank the witnesses for being here as
well. I know that some of you had to travel a long distance and
I appreciate your efforts.
I look forward to this hearing and the other hearings that
are scheduled this week, as well. Again, Dodd-Frank--I don't
think anyone would suggest that Dodd-Frank was a perfect bill,
certainly not by my measure, but perfection is really never the
measure of anything. If it was, none of us would be elected,
except of course for Randy--he might be, but the rest of us
wouldn't be.
And so therefore, we have to look for the cost-benefit
analysis, as was said. But at the same time, costs are easy to
measure. How much does it cost to hire a new person to do
regulation? And that is a fair and important thing to look at.
Benefits, on the other hand, are a little bit more
difficult to measure. What are the benefits not just to the
individual institution but also the economy as a whole? That is
almost impossible to measure.
And I fear that some people are suffering under a little
problem of amnesia. Secretary Geithner wrote a nice little
article in The Wall Street Journal a couple of months ago that
talked about the amnesia of people who forget how we got to
where we are, what inspired Dodd-Frank. It didn't just come out
of nowhere; it came out of a response to an economic crisis
that was caused by a massive unregulated banking industry.
And I don't mean the regular banks like we all think of
banks, but people who were totally unregulated in competition
with regulated banks. They, as far as I am concerned, were more
at fault than the regulated banks and they are now subject to
some regulation.
They took excessive risk. They had no-document loans--just
giving out loans to people with no documentation whatsoever.
Totally unacceptable. Predatory lending. Credit default swaps
squared, and tripled, and all kinds of things which I have
actually not yet met a human being who really understands.
Off-balance sheet investments that nobody could find. Cozy
relationships with regulators. Cozy relationships with credit
rating agencies.
All of that led us to the second worst recession in
American history. Let's not forget, we lost $19 trillion of
household wealth--$19 trillion. It wasn't a small little bump,
it was a big one: 9 million jobs lost, 10 million homes in
foreclosure.
It required some sort of a reaction and Dodd-Frank was an
attempt to do that. I don't think anyone would suggest that we
have it perfect nor that anyone could get it perfect on the
first draft.
And let's not forget that most of Dodd-Frank has not been
implemented yet. It has not been implemented because of the
normal course of time it takes to implement any new law and
because of the attempts to cut back. As we are expanding the
requirement responsibilities of the SEC, we are also--not we,
but some people are proposing to cut their budget by 12
percent.
Also, massively increasing and expanding the
responsibilities of the CFTC, and suggesting to cut their
budget by over 40 percent. That is ridiculous. Of course you
can't get things done when you are facing those situations.
Seventy-five years ago, this country faced the worst
economic problem that we have ever had and immediately
thereafter, in the middle of it, a lot of people cried, ``Oh,
my God. These regulations are going to kill everything,''
before most of them were implemented, by the way. And when they
were implemented through the SEC and the other regulations that
happened for 75 years we had the most stable economic
environment in the history of mankind. We had the greatest
expansion of economic wealth in the history of mankind.
And then we got into this thing: all regulation is evil;
all regulation is terrible. Let me be very clear: No one in
their right mind wants or supports excessive, overly burdensome
regulation. No one that I know of would advocate for that,
including me.
However, no one in their right mind should forget what we
just went through and therefore argue that nothing should have
happened. No one in their right mind should say that we should
have too little regulation.
It is always an attempt to find a balance, and that is what
I hope these hearings come up with is an attempt to yes, costs,
but also some benefits--try to figure out what we have right,
what we have wrong, and try to keep the good without throwing
out the bad.
And with that, Mr. Chairman, I yield back. And thank you
very much for having this hearing.
Chairman Neugebauer. Yes. I thank the gentleman.
And now the vice chairman of the subcommittee, Mr.
Fitzpatrick, is recognized for 2 minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
We are here today to examine how Dodd-Frank affects our
constituents. Our constituents are everyday people who don't
work on Wall Street, and who don't deal in complicated
financial products or sit at trading desks of investment banks.
The law may have been designed to rein in Wall Street and
regulate wealthier financiers, but the fact of the matter is
that this 2,300-page bill reaches into the pockets of just
about every American. A lot of people may be surprised to learn
that Dodd-Frank rules govern commodities and could cause prices
to rise in everything from airline tickets to a six-pack of
beer.
There are also the effects of increased regulations on
small financial institutions. Access to credit and even the
ability to maintain a simple checking account could be
jeopardized. Higher fees, increased costs, and reduced services
are all naturally occurring byproducts of increased regulation,
and these costs are not going to be borne simply by the
customers of financial institutions but they are going to be
felt across the economy because this bill crosses into so many
areas of American life.
We should all expect a well-regulated financial system that
is free of fraud and abuse and includes robust consumer
protections. The 2008 crisis was an event that exposed flaws in
our markets and should absolutely have led to policy changes.
However, as happens so often in Washington, this opportunity to
work together on needed reform resulted in a bill rife with
unintended consequences.
So I look forward to today's hearing, and continuing to
work with all of our colleagues on financial reform that does
more good than harm.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the ranking member of the full Financial Services
Committee, Mr. Frank, is recognized for 3 minutes.
Mr. Frank. Thank you, Mr. Chairman. I am struck by what
seems to me to be a nice irony in the title, ``Who's in Your
Wallet?'' Borrowing--given the looseness of intellectual
property constraints here--from Capital One's slogan, ``What's
in Your Wallet?'' And we learned from one of the agencies that
many on the panel wish never existed, the Consumer Financial
Protection Bureau (CFPB), that what was in the wallet of many
consumers were the hands of Capital One. So references to who
is in whose wallet and for what purpose are very relevant to
today's hearing.
The CFPB, in coordination with the OCC, just fined Capital
One, which agreed to have--the fact that it had violated basic
consumer rules. So yes, there are all kinds of people in the
wallet.
I see the testimony here from the U.S. Chamber of Commerce.
Deja vu. In 2006, I was the chairman-in-waiting of this
committee and in December, I was asked to come to a session of
the U.S. Chamber of Commerce in which the point was--this is
2006--we are overregulating the financial industry. And we were
told that we had to cut back, that if we did not cut back on
Sarbanes-Oxley, the likelihood of IPOs ever being issued in
America would be substantially diminished. And of course, they
could not have been more wrong.
One of the things we were told at the time by the Chamber
and others was we should emulate the light touch regulation of
the British Financial Services Authority, the people who have
done, by their own admission, a fairly poor job of of not
regulating when they should have regulated.
I look here and I see complaints that we are overregulating
mortgages, and there is a complaint from some of the people, I
think, in the credit unions and elsewhere that we are being too
tough in requiring payment standards for people who are taking
out mortgages. I confess that I am surprised to hear that
complaint. Given the unfortunate role that was played by laxity
in mortgage standards in helping to bring this crisis about, I
am surprised by that.
I have also heard--I haven't seen it yet here--some
complaints that the bill's requirement that those who
securitize mortgages retain some of the risk is retarding
mortgages. In fact, it is not in effect yet and it is not
retroactive so it clearly cannot be blamed for retarding
anything. But this resistance to tightening up mortgage
standards is just odd to me, given what happened.
And then, from the Chamber we also have complaints about
the overregulation of derivatives, as if there never was an
AIG, as if the problems that recently surfaced with JPMorgan
Chase and others hadn't existed.
We have done some refinements and I will do some more, but
this wholesale rejection of regulation of the financial
industry, I would have to say to my friends at the Chamber,
going back to 2006, they remind me of the Bourbon, when the
Restoration came in the 19th Century in France, and people
said, they have forgotten nothing because they learned nothing.
The notion that people would be repeating the argument in 2006
is really quite startling to me.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Texas, Mr. Canseco, is
recognized for 2 minutes.
Mr. Canseco. Thank you, Mr. Chairman.
Mr. Chairman, before I came to Congress last year, I spent
most of my life in the private sector in banking, in real
estate, and in law. One thing that continues to amaze me is the
complete disconnect between what goes on in Washington and the
realities on the ground in our economy.
Two years ago, we were given a lot of promises about Dodd-
Frank, but the one that sticks out the most is the one that
this bill would ``bring greater economic security to families
and businesses across the country.'' All it takes is a 5-minute
conversation with a community banker, a small businessman, or a
credit-worthy family who can't get a loan to comprehend just
how badly this promise has been broken.
The authors of Dodd-Frank told us that they had crafted
reforms that were absolutely necessary, but when you pile
hundreds of new rules on top of existing rules and give greater
authority to the same regulators that missed the last crisis,
calling it ``reform,'' suffice it to say that is a little
ambitious.
Mr. Chairman, the more we hear about Dodd-Frank the less
there is to like, and I look forward to our committee's
continued examination of this bill during today's hearing, and
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Baca, is
recognized for 2 minutes.
Mr. Baca. Thank you very much, Chairman Neugebauer, and
Ranking Member Capuano, for calling this hearing.
And I also want to thank the witnesses for being here this
morning. Thank you all.
It has been almost 2 years since the passage of the Dodd-
Frank legislation, yet we have not had an opportunity to
implement all aspects of the Frank-Dodd legislation. So as we
begin to look at it, it seems like from the other side of the
aisle they want less regulations, but we have to keep in mind
that the regulations are good because we have to protect the
consumer and the stockholders, such as what happened with
JPMorgan in that area. If we don't have these regulations, then
what is going to happen?
It is important that we continue to protect them, to assure
that the consumer is protected, and the stockholders are
protected in the area. And I think having the regulations are
very important.
And while our economy has not yet fully recovered from the
financial crisis that got us in this mess, I am proud that we
now have the tools to prevent another crisis. That means having
the tools to have the oversight and making sure that we have
the enforcement. We have not done a lot of the enforcement that
needs to be done.
And it is easy to say, let's not have these regulations.
Well, look at what happened with the Supreme Court making the
decision on independent expenditures that can be given out.
Now, you have all kinds of independent expenditures that are
going on, and everybody says, ``I wish we could regulate
them.''
We need regulations. Regulations are important to a lot of
us.
And again, when the situation was made about buying a car,
or not having access to credit, we want to make sure that the
individuals who are getting credit are able to pay for whatever
they are borrowing to, as well, because that is taxpayer money
that is being used, and we have to protect taxpayer money.
Instead, Congress needs to work together and--we need to
all work together in trying to get our fiscal house in order,
to compromise by making spending cuts, find new resources of
revenue to support our economy. With that in mind, I hope that
we can strike a tune instead of focusing on partisan talking
points, and that seems like what you have heard on both sides
here.
Over reform, we need to stop the abuse and work together on
trying to find solutions to make sure that we protect the
American consumer and so they have more confidence in us.
With that, I yield back the balance of my time.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from New Mexico, Mr. Pearce, is
recognized for 2 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
I am listening with interest to our friends on the other
side of the aisle. I think my objection to what is occurring in
Dodd-Frank is that regulators were sitting in the room with MF
Global as they were making the decisions and no one said a
word. Then, with JPMorgan, 57 regulators were in that building.
I think if we were to tighten up the regulations that were
in place, and then if we need more that would be fine. But what
I am hearing now in New Mexico is that the safety and soundness
interviews are no longer preeminent. They have been replaced by
the compliance reviews, and they are telling me if they make a
clerical error, they could face a $50,000 fine for a clerical
error on something in New Mexico.
Nobody in New Mexico caused the problem on Wall Street, and
yet they are getting stuck with this regulation which causes--
just this past weekend, I was visiting a small cabinetmaker in
Grants, New Mexico. Grants is just decimated. Their economy is
in horrible shape, and yet this guy--whose family started this
little cabinet shop, his father did--couldn't get a $50,000
loan. He has plenty of equity, and he has never been late on
payments, but he couldn't get a $50,000 loan to just kind of
get him through these rough periods. So they are sitting there
hiring fewer people, and laying people off.
We hear that across New Mexico and I will guarantee that
none of the problems on Wall Street originated there, but when
it came time to regulate, we regulated the Main Street small
banks and we let, say, Fannie Mae and Freddie Mac go completely
unregulated. And so those are my objections. I agree with the
friends on the other side of the aisle that we should be
sitting here discussing it, but let's hold the regulators
accountable that are in the room allowing things to go on
before we start laying on new regulations to people who weren't
even involved in the problems.
I yield back my time. I thank the chairman for giving me
the opportunity to speak.
Chairman Neugebauer. I thank the gentleman.
I ask unanimous consent to make a letter from the Credit
Union National Association a part of the record today. Without
objection, it is so ordered.
We will now turn to our panel: Mr. Michael Flores, chief
executive officer for Bretton Woods, Incorporated; Mr. Jim
Purcell, chief executive officer, the State National Bank of
Big Spring, Texas; Ms. Lynette Smith, president and chief
executive officer, Washington Gas Light Federal Credit Union;
Mr. Jess Sharp, managing director, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, on behalf of the
Chamber and also the Coalition for Derivatives End-Users; Mr.
Garrick ``Gary'' Johnson, president, American Flooring
Installers, LLC, on behalf of the Ohio Hispanic Chamber of
Commerce; Mr. David Min, assistant professor of law at the
University of California Irvine School of Law; Ms. Deyanira Del
Rio, chair of the board of directors, Lower East Side People's
Federal Credit Union; and Mr. Gregory Smith, chief operating
officer and general counsel, Colorado Public Employees'
Retirement Association.
Without objection, your written statements will be made a
part of the record, and you will be each recognized for 5
minutes to summarize your testimony.
Mr. Flores, you are recognized for 5 minutes.
STATEMENT OF MICHAEL FLORES, CHIEF EXECUTIVE OFFICER, BRETTON
WOODS, INC.
Mr. Flores. Thank you, Mr. Chairman.
And good morning, members of the committee.
My firm provides consulting and research services to
commercial banks, credit unions, and alternative financial
services providers. I have more than 30 years of experience in
banking and consulting and have published several articles and
studies on the financial services industry, including issues
addressing overdrafts, short-term credit alternatives, and
general purpose reloadable prepaid and payroll cards.
Because this hearing is about the consequences of Dodd-
Frank on communities, small businesses, and individuals, I am
here to describe both my analysis of the issue as well as to
relate comments from my clients about their assessment.
In general, while there is a need to address the causes of
the financial meltdown in 2008, there are aspects of Dodd-Frank
that are having a disproportionate and negative impact on
financial services providers that played no role in the
financial crisis. Small businesses and the 60-plus million low-
to moderate-income consumers are particularly impacted.
Contrary to making financial services more available,
affordable, and consumer friendly, the increased restrictions
and compliance costs are reducing services to small businesses
and consumers, which ultimately has a negative impact on the
economic well-being of the communities they serve.
Additionally, many of the 6,700 community banks and 7,000
credit unions are burdened with legacy operating costs and
dated technologies that inhibit their ability to profitably
serve their customers. Local small businesses and LMI
consumers--low- to moderate-income consumers--suffer as a
result.
Resources that could be used to update technologies and
create more efficient operations are now allocated to
regulatory and compliance purposes. Both transaction accounts
and credit options are impacted. Our own studies indicate that
it is unprofitable for most banks and credit unions to
individually underwrite loans under $5,000.
The traditional options of overdrafts, credit card
advances, and home equity loans are less viable today because
of the poor economy and regulations. With the reduction of
overdraft and interchange fees, many banks have eliminated free
checking accounts. The reduction of interchange fees has
actually resulted in what I would term a wealth transfer from
consumers to merchants.
I contacted several of my clients to solicit their feedback
on these issues. I have listed their quotes in my written
testimony but will summarize the thoughts here.
The consensus of the responses include, and it has been
mentioned here by the Members: a substantial increase in
compliance costs for banks and credit unions; increased fees
for small businesses and consumers; decreased products and
services; an increase in the number of underbanked, and now the
new term ``de-banked'' individuals; and a decrease in the
number of branches in low- to moderate-income markets as banks
attempt to reduce expenses.
Other more specific comments include, ``Of the almost 400
rulemakings required by the law, only a quarter have been
finalized, while 36 percent have not even been proposed.'' A
significant decline in traditional wholesale purchasers of
residential mortgages from mortgage bankers and brokers reduces
access to mortgage credit, particularly for those without an
established relationship with a bank.''
Something very specific but mentioned several times was
that the requirement to get new appraisals and updated credit
reports on renewals and existing loans creates extra costs to
the consumer. This requirement is regardless of the market or
strength of the customer.
People talked about Section 1071 of Dodd-Frank having a
chilling effect on small business lending. There are others
that deal with unaffiliated network routing requirements on
government benefits on prepaid cards as well as now the
requirement to get State money transmitter licenses for prepaid
card program managers. The remittance rule is going to drive up
costs and reduce competition for consumer remittances to
foreign countries.
And of course, the limited functionality of prepaid cards
from large issuers--those banks over $10 billion in assets. As
a matter of fact, Congressman Frank, in a letter to Fed
Chairman Bernanke dated February of this year, states that the
Board's decision to condition the reloadable prepaid card
exemption from interchange fee restrictions on the card being
the only means of access to the underlying funds associated
with the card might inadvertently result in consumers not
having access to useful features and services.
Dodd-Frank has layered significantly more regulations over
existing regulations to the point of making the traditional
business model for community banks and credit unions almost
unworkable. At the same time it is creating roadblocks to
innovators such as alternative financial services providers who
are working diligently to address the underbanked segment of
our society.
In essence, some provisions of Dodd-Frank are solutions
looking for problems--problems that do not exist for the
majority of financial institutions in this country.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Flores can be found on page
55 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Flores.
Mr. Purcell, you are recognized for 5 minutes. Thank you.
STATEMENT OF JIM R. PURCELL, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, THE STATE NATIONAL BANK OF BIG SPRING, TEXAS
Mr. Purcell. Thank you, Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee. I am Jim Purcell, CEO
of the State National Bank in Big Spring, Texas.
In order for you to understand a little bit about me, I was
raised on a ranch in eastern New Mexico. I was about 20 miles
from the town of San Jon, and for those who do not know where
San Jon, New Mexico is, it is a bastion of 300 or 400 people
and it is right between--or was when I was there--``Rest Stop''
and ``Resume Speed.'' So, it was not a very large place.
When I started the first grade, my teacher had some things
to teach us, and one of the first things was, what do you do
when you come to a railroad crossing? You stop, look, and
listen.
I would humbly urge you to do the same with regard to this
bank regulation, and more particular, to the Dodd-Frank Act.
Currently this Act, and inclusion of the CFPB, has and will
have implications on community banks across America, much more
than what was stated when it was passed and much more than I
could have dreamed would affect us.
In quoting Senator Dodd, ``Community banks which were not
responsible for the crisis will pay lower premiums for deposit
insurance and continue to work with their existing regulators.
And in a nation with more than 6,000 banks, the bulk of the
bill's new regulations apply only to a few dozen of the largest
ones.''
Jennifer Kelly, Senior Deputy Comptroller for Mid-Size and
Community Bank Supervision of the OCC stated, ``Regardless of
how well community banks adapt to Dodd-Frank Act reforms in the
near to medium term, these new requirements will raise costs.''
The President's Executive Order of January 18, 2011, urged
independent agencies to propose a regulation only upon a
reasoned determination that its benefits justify its cost. When
the stated goals by both the proponents and opponents of Dodd-
Frank disclosed that community banks weren't the problem and
shouldn't be affected, we should have a clear starting point to
undo the harm and consequences of this legislation.
State National Bank is over 100 years old. We have survived
droughts, depressions, and recessions, and our motto after the
1930s bank holiday was ``time-tried and panic-tested.'' We have
had examples of time-tried and panic-tested recently in the
last 4 or 5 years.
We have had customers who went out of business in the 1950s
drought, and then came back in the 1970s and paid their
obligations. We have had customers who sold all of their
collateral and paid what they could on their notes in the mid-
1980s during the Texas bad days and they are continuing to make
payments with no collateral, never missing a payment for 24
years.
We have relied on our handshake for over 100 years. That is
a commitment of trust and loyalty and commitment both to our
customers and from our customers.
In the past, we have wired money to Europe, to a stranded
foreign exchange student or to a retiree whose purse was
stolen. We didn't know the exchange rate in Spain or France. We
didn't know the fee that was being charged upon receipt. But we
did know our customer needed help and we provided that.
This month, we had a customer who had a family problem and
a need in Mexico. We could not wire him the money because we
did not know the exchange rate or the fees which we would be
charged if we abided by the proposed rule.
Our bank, through the years, has made consumer real estate
loans to purchase and occupy the home in which they would live.
We never sold the loans; we serviced the loans. We didn't
charge any application fees, origination fees, or any other
type of fee.
They were typically 5-year balloon notes, which under the
proposal would not be allowed. We would have the customer put
up 20 percent, and we would put up 80 percent.
If a customer paid his own taxes and insurance, if he paid
as agreed, we would renew the loan, keeping the payment
schedule the same. That is how it was then; that is not how it
will be under the proposals.
Now, our customers have a dilemma: Where do we turn?
Loyalty, service, our bank knowing our character, simple
solution for simple needs will be the sacrifices.
They will end up getting toll-free numbers, and application
fees. They will get to speak to more people with one problem
than what we even employ at our bank.
And then the next question comes, do we move all of our
business to that megabank? Our bank's compliance costs continue
to increase with the CFPB. We are starting with 40 years worth
of regulation and adding to that.
But who pays the price? When you disregard the needs of the
community and the customer to make everyone the same, who
suffers? The customer pays the price of additional compliance
or the product will be sacrificed.
I would like to ask you to do the same thing that my first
grade teacher, Ms. Olen, said: Stop, look, and listen. If we
continue to disregard reality and stack regulation upon
regulation with no thought of the consequences, we will not be
able to cross the proverbial track to serve our customers.
I thank you for the time, and I hope that this makes a
difference.
[The prepared statement of Mr. Purcell can be found on page
78 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Purcell.
Ms. Smith, you are recognized for 5 minutes.
STATEMENT OF LYNETTE SMITH, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WASHINGTON GAS LIGHT FEDERAL CREDIT UNION, ON BEHALF
OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)
Ms. Lynette Smith. Good morning, Chairman Neugebauer,
Ranking Member Capuano, and members of the subcommittee. My
name is Lynette Smith and I am testifying on behalf of NAFCU.
I serve as the president and CEO of Washington Gas Light
Federal Credit Union in Springfield, Virginia. We have 8,000
members and we are $87 million in assets. Thank you for the
opportunity to testify here today about the impact the Dodd-
Frank Act has had on credit unions.
Credit unions were not the cause of the financial crisis.
Still, they are significantly impacted by Dodd-Frank, such as
being subject to the rulemaking authority of the new CFPB.
We are very concerned that efforts in Dodd-Frank to reign
in bad actors and greed on Wall Street will inevitably have a
negative impact on credit unions, especially when it comes to
regulatory and compliance burdens. One of the biggest impacts
Dodd-Frank has had on credit unions comes from the debit
interchange price cap. Market forces have already seen some
credit unions begin to have higher debit card costs and
declining interchange revenue.
Many of the regulations flowing out of Dodd-Frank are well-
intended. However, for credit unions, they are often a solution
in search of a problem.
I cannot overemphasize how burdensome and expensive Dodd-
Frank-related compliance costs will be for credit unions. We
can only hope Congress will urge regulators to do more robust
cost-benefit analysis of potential regulations and look for
areas to streamline. More importantly, we hope that they will
follow up once the regulations are in place and make changes if
these costs are too high.
Washington Gas Light has a staff of 17. My employees and I
already spend countless hours trying to comply with the never-
ending changes to laws and regulations.
My credit union is healthy, growing, and we have very good
loan demand. Still, rather than looking to hire a new loan
officer, the growing compliance burden means that I must first
look to hire a compliance officer. While we still try to make
the loans to our members' needs, the staff time dedicated to
compliance means that members have to wait longer for their
loans.
Under the Dodd-Frank Act, the Financial Stability Oversight
Council has a duty to facilitate regulatory coordination. We
hope that you will take this duty seriously, for it is not any
single regulation but an accumulation of regulations from
numerous regulators operating independently of each other that
magnifies the regulatory burden credit unions face today.
Attached to my written testimony is a letter NAFCU sent to
Treasury Secretary Geithner last month on this issue. The CFPB
remittance rule is nearly 800 pages and only exempts those
making fewer than 25 transfers per year.
A NAFCU survey found that nearly 84 percent of those credit
unions that provide remittances make more than 25 transfers a
year and a majority of those barely break even or will have to
operate at a loss. The new compliance costs for this rule may
force many of the credit unions and financial institutions to
eliminate this service.
The CFPB recently released its semi-annual regulatory
agenda, which outlines 27 different areas where potential
rulemaking may occur in the future. It will be very challenging
for my staff because we are limited in resources. I am not sure
how I will keep up.
In conclusion, while credit unions were not the problem,
the Dodd-Frank Act impacts credit unions in many ways and it is
increasing their regulatory burden. Congress must continue
vigorous oversight and look for ways to act on regulatory
relief. Regulators, on the other hand, must also accept
responsibility for this regard and the newly created FSOC
should make regulatory coordination part of its focus.
Thank you for your time, and for the opportunity to testify
here before you today. I will welcome any questions you may
have.
[The prepared statement of Ms. Smith can be found on page
100 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Sharp, you are recognized for 5 minutes.
STATEMENT OF JESS SHARP, MANAGING DIRECTOR, CENTER FOR CAPITAL
MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE, ON BEHALF OF
THE U.S. CHAMBER OF COMMERCE AND THE COALITION FOR DERIVATIVES
END-USERS
Mr. Sharp. Chairman Neugebauer, Ranking Member Capuano, and
members of the subcommittee, it is a pleasure to be here with
you this morning.
My name is Jess Sharp. I am the managing director of the
U.S. Chamber's Capital Market Center, and I am here today
representing more than 300 end-user companies and dozens of
trade associations that have been active in the Coalition for
Derivatives End-Users. The Coalition represents companies
across the economy in manufacturing, agriculture, energy, and
other sectors all united in one respect: They use derivatives
to manage risk, not to create it.
Throughout the legislative and regulatory processes of the
Dodd-Frank Act, the Coalition has advocated for strong
regulation that brings transparency and stability to the
derivatives market while avoiding needless costs on end users.
So how do end users use derivatives and why is that
relevant to consumers? Many auto manufacturers, for example,
use derivatives to manage commodity, foreign exchange, and
interest rate risk resulting from the design, manufacture,
sales, and financing of vehicles. The price of commodities used
in production, such as aluminum and copper, fluctuate with the
market, so companies can use derivatives to lock in prices and
long-term supply arrangements sometime years in advance of
delivery.
On the revenue side, manufacturers that export their
products need to hedge currency exposure that arises from
production costs being in U.S. dollars and revenue in pesos, or
Canadian dollars, or Euros, and they can use derivatives like
foreign exchanges swaps to do that.
Auto manufacturers and other big equipment manufacturers--
for instance, in the construction or agriculture world--also
finance the sale of their products. Derivatives enable these
companies to match the interest rate characteristics of the
funding available from the capital markets to put together
their loan portfolios with the financing needs of their
customers.
The energy company members of the Coalition also rely on
derivatives heavily because of the nature of the business of
energy production and transmission. For example, in the case of
electricity, which must be produced and consumed
simultaneously, cannot be stored, and has huge exposure to fuel
markets in coal, natural gas, and uranium, those physical
energy markets are volatile and unpredictable, but hedging with
derivatives allows energy companies to lock in prices and
provide thousands of customers with electricity and natural gas
at a low fixed price.
So these are just a few examples of the ways in which end
users use derivatives, and I want to talk quickly just about
the impact of Dodd-Frank and sort of where we are today. As I
said at the top, the Coalition has been supportive of increased
transparency in the OTC market and we are fully supportive of
the overall move toward clearing and exchange trading. That is
not something with which we have argued.
However, we do remain concerned that a few regulations that
were never intended by Congress to affect Main Street companies
will make derivatives either more expensive or altogether
unavailable for end users.
Now, the good news is we have seen very, very strong
bipartisan support for measures that would shield Main Street
businesses from this kind of regulatory overreach. This
committee has been a very good ally for end users.
And I would like to thank you for your hard work in passing
two bills in particular through the House that have addressed
some of these unintended consequences, or would if enacted. The
first, H.R. 2682, which this committee approved unanimously and
the full House approved 370 to 24, creates an exemption for
margin requirements for nonfinancial businesses.
Imposing unnecessary margin requirements on these
nonfinancial end users would divert working capital away from
productive business use. And again, despite clear evidence that
Congress did not intend for regulators to impose margin
requirements on end users, the prudential banking regulators
have proposed to do so, and this would be a huge capital drain
from the economy and could be a jobs issue, as well.
And I would point out that this week, Chairman Bernanke did
address this issue in testimony and said that he would be
supportive of the legislation that has passed the House.
A survey by the Coalition, just to put a fine point on the
impact here, found that imposing a 3 percent margin requirement
on OTC derivatives could cause the loss of 100,000 to 120,000
jobs and reduce capital spending by up to $6.7 billion, and
that is just extrapolated to the S&P 500. So the passage of
H.R. 2682 in particular will help shield Main Street businesses
from these huge cash calls that they are very concerned about,
which could be a reality if these regulations are finalized as
is.
The second bill, H.R. 2779, which this committee also
approved unanimously and passed the full House 357 to 36,
prevents internal interaffiliate trades from being subject to
regulatory burdens that were intended to market-facing swaps
and will ensure that companies are not forced to abandon
hedging through central risk mitigation centers. These
centralized risk mitigation centers generate economic savings
by allowing U.S. companies to manage commercial risk more
efficiently and secure better pricing for derivatives
transactions. And this savings can be either passed on to
consumers or they can use that savings to grow their businesses
and create jobs.
The overwhelming bipartisan and collegial process that led
to the passage of these two bills in the House demonstrates
that these two bills provide noncontroversial approaches to
helping grow businesses and improve the economy through end-
user companies. So, we are hopeful that the Senate will take up
and pass these bills quickly.
Ensuring that congressional intent is followed is paramount
here, and if legislation is not enacted to clarify the
statute's intent, end users could use the critical management
tools, and that is bad for Main Street businesses, it is bad
for their customers, and it is bad for the economy.
Thank you. I am happy to respond to your questions.
[The prepared statement of Mr. Sharp can be found on page
84 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Sharp.
Mr. Johnson, you are recognized for 5 minutes.
STATEMENT OF GARRICK ``GARY'' JOHNSON, PRESIDENT, AMERICAN
FLOORING INSTALLERS, LLC, ON BEHALF OF THE OHIO HISPANIC
CHAMBER OF COMMERCE
Mr. Johnson. Good morning, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee. My name is
Gary Johnson, and I am the owner, president, and CEO of a small
but fast-growing construction business in Toledo, Ohio. It is
called American Flooring Installers.
I am testifying today on behalf of the Ohio Hispanic
Chamber of Commerce, where I am currently the chairman. The
primary objective of our Chamber is to promote the development
and continued growth of Hispanic businesses in the Ohio
community. It is a pleasure to appear before you today.
In my testimony this morning, I want to tell you a little
bit about my company and also provide you with a personal
account of some of the ways in which I am using financial
products and services to run and grow my business. I know that
I am here to talk about the effects of regulation, but I hope
to tell you about how my business works, and how I use
financial products, to help you consider proposals for new
regulations.
My company currently has 23 full-time employees and we had
gross revenues in 2011 of approximately $1.8 million. I am
looking forward to hiring additional workers and we are on
track to double our revenues again this year. One part of
meeting that goal is the financial products and services that
we and our customers use.
A healthy financial sector is important for business of all
sizes, especially businesses like mine. In the business
community, many of us are concerned about the new financial
sector law enacted by Congress, which is indirectly hurting
small businesses through tighter lending practices and new
increased fees and routine financial services for businesses
and consumer banking customers.
Among the subjects that always seem to come up when I talk
to other Chamber members is the challenge of cash flow. Many of
us believe that the challenge is exacerbated by the law enacted
by Congress in response to the financial crisis.
While less regulation in some areas has contributed to the
necessity for government to act, overregulation has made it
extremely hard to obtain the necessary funding needed to grow
many small businesses. We are concerned that overregulation is
making it harder for banks to make credit card loans to us and
harder for our customers to use payment cards.
These cards are essential for cash flow on both the expense
and revenue side of small business. Other options, such as
lines of credit, either take too long to obtain or simply are
not available. When I accept credit cards from my customers, I
get paid faster, and the time-value of money means I get paid
more, relatively speaking.
One tool that I am increasingly using to enhance my cash
flow involves the acceptance of payment cards using a device
attached to a mobile phone. This device allows me to accept the
credit care and debit payments while I am face-to-face with a
customer.
If I am out on a jobsite using this device, I know whether
or not I am going to get my money within the next 3 days. If
the payment is declined, I know about it right then and there,
and I can address that with my customer. If authorization goes
through, then I know I can put that money back to work within 3
days.
I accept anywhere between $2,500 to $10,000 per month on
cards and it would be great if more of my customers paid me
this way instead of sending a check. Again, accepting payment
cards enables me to get paid typically within a few days.
This is light years faster than the invoice system I
otherwise use that typically results in me receiving a payment
from a customer by check, which takes as long as 60 to 90 days.
Also, with payment cards, small businesses do not need to worry
about bounced checks.
Even though I pay a fee to accept card payments, I prefer
them as a payment method because I get access to funds almost
immediately. That allows me to put the money back to work in my
business in near real time. When I receive payment from my
customers more quickly, I can put the money to work quickly in
my growing business.
If you consider what I pay to accept payment cards as
opposed to the cost of me essentially floating a loan to a
customer for 60 to 90 days, when I could be putting the cash
back to work in my business, it is a no-brainer. I have learned
not from a book but from my business and about the time value
of money. I want to keep going back to that because knowing
time value of money is one of the keys to successfully growing
your business.
The situation I just described hits me in two ways. Even if
I was not growing business during the 60-to 90-day period, I
have to wait to have the invoices paid by check. I have to pay
the employees who work for the job out of the other funds. I
lose the use of the money and the money that I am owed. I
cannot even earn interest on it. As I said, I am basically
extending a loan.
When I am growing my business, the impact is even worse. In
my view, if laws and regulations make it harder for banks to
make payment cards available to my customers or make it harder
for companies to develop innovative products like the mobile
phone device, that hurts my business.
Of course, like all small businesses, I want to pay less
for almost everything that I use in my business. However, if
the State of Ohio limited what it could charge to install a
wood floor in a government building--I do a lot of work for the
State of Ohio--to some percentage of my costs, I guarantee you
that I would do best to recover my costs across the rest of my
lines of business.
If the limit was too much, I would stop doing that line of
business, but no matter what, I would try to grow other areas
of my business as opposed to devoting resources to that area of
business.
Let me be clear: I do support having some rules of the road
as long as I know what those rules are and they make it easier,
or I should say better, for both my customers and I to do
business. Of course, it would not be fair if the rules were
drawn up in favor--and I certainly do not want someone
dictating basic choices or business decisions.
I think in many cases, we swing back and forth too far in
both directions. I am a small business. I can't always see it
coming and I can't always duck.
Not only are extremes bad but there is not--I am sorry, but
there is the not knowing that is coming. So I just want to say,
if Dodd-Frank or any other legislation like it does not have
any things that I have just talked about, I would likely oppose
it or whatever parts of it affect or hurt my business.
While I am here, I also want to talk about how my business
uses credit cards for purchasing so that I can consider--
Chairman Neugebauer. Mr. Johnson, if you can kind of wrap
up there--
Mr. Johnson. Oh, sure.
In my experience, any regulation that increases costs to
businesses regardless of the industry will ultimately be borne
by the business customers and from higher prices. It is
difficult for me to characterize exactly how the financial
sector law is enacted in Congress because I am not a banker.
Other witnesses are better suited to speak to these issues.
What I can say is in the wake of a financial crisis, it is
crucial that Congress and regulators not react so strongly that
good parts of banking that we rely on--the parts that are not
involved in the financial crisis--cease to be viable and
healthy. When small business is healthy, the economy is
healthy.
And I will be more than happy to answer any questions.
[The prepared statement of Mr. Johnson can be found on page
59 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Johnson.
And now, Mr. Min, you are recognized for 5 minutes.
STATEMENT OF DAVID K. MIN, ASSISTANT PROFESSOR OF LAW,
UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW
Mr. Min. Chairman Neugebauer, Ranking Member Capuano, and
members of the subcommittee, my name is David Min and I am an
assistant professor at the University of California Irvine
School of Law where I teach and research in the area of banking
law and financial regulation. I thank you for the opportunity
to testify here today on the topic of the impacts of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010,
as I believe this is an issue that has been fraught with
confusion.
I would like to make three main points in my testimony
today: First, the negative impacts of Dodd-Frank have been
greatly exaggerated. The fact is that Dodd-Frank has not had
much of an impact to date because most of it has not yet been
implemented, thanks in large part to a very successful campaign
by Wall Street lobbyists who have spent a record $302 million
in 2010 alone to delay and undermine the implementation of this
law.
As of July 2, 2012, less than 30 percent of the rules
mandated by Dodd-Frank have been issued in their final form,
with most of these issued only in the last few months. It is
thus difficult to understand the claim that Dodd-Frank has
resulted in large regulatory costs, given that it has mostly
not yet taken effect.
Second, most of the negative effects being blamed on Dodd-
Frank are actually highly speculative and often misplaced.
Because of the severe delays in implementing Dodd-Frank, we do
not yet have much of a reasonable basis to know what Dodd-Frank
will look like, let alone what the impact of those rules might
be.
Thus, almost all the claims being made about the regulatory
burdens created by Dodd-Frank have been based on unfounded and
often wildly incorrect speculation. For example, many critics
of Dodd-Frank have claimed that its proposed regulation of
derivatives would dramatically increase the compliance cost for
end users who currently utilize these derivatives for hedging,
such as farmers, energy companies, and airlines, thus
increasing the cost of our food, energy, and travel.
This argument has been proven both baseless and wrong. The
Commodity Futures Trading Commission, the regulatory agency
responsible for promulgating Dodd-Frank's derivatives
regulations, did not even release its first set of final rules
on this issue until last week, and these rules specifically
crafted a broad exemption for this type of end user, rendering
this criticism largely moot.
Similarly, while there has been much grumbling about the
compliance costs that Dodd-Frank will create for small banks,
it is not clear that Dodd-Frank actually will lead to increased
compliance costs for these lenders. The primary evidence cited
so far that Dodd-Frank will lead to these compliance costs is
its length, which some have cited as being 2,300 pages, but
which is actually 848 pages long--still a long bill.
In fact, the vast majority of Dodd-Frank has targeted non-
bank activities, such as securitization, derivatives trading,
prop trading, or the activities of banks with over $50 billion
in assets. The fact is that if you are not a megabank, and if
you are not running a hedge fund, and you are not dealing in
products like derivatives or other exotic products, the
overwhelming majority of Dodd-Frank simply doesn't apply to
you.
Indeed, Dodd-Frank may actually reduce compliance costs for
some small banks since it consolidates a number of regulatory
rulemaking responsibilities which previously had been scattered
among the Federal Reserve, the Office of the Comptroller of the
Currency, the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation, and the Federal Trade Commission, among
others, into one central body, the CFPB.
There has also been a great deal of confusion about the
negative impacts caused by Dodd-Frank and conflation between
the negative impacts caused by the financial crisis. Most of
the burdens on small businesses and consumers being blamed on
Dodd-Frank, including many of the ones you have heard here
today, are actually the result of the financial instability
that led to the enactment of Dodd-Frank in the first place.
For example, many have blamed Dodd-Frank for leading to
tightened underwriting standards and a lack of credit
availability in the marketplace. In fact, the lack of liquidity
in credit markets was clearly caused by the financial crisis
and predates even the passage of Dodd-Frank let alone the
implementation of rules that might have impacted liquidity,
such as the Qualified Mortgage (QM) standard, which has not
even been implemented yet.
My third point is that in considering the impacts of Dodd-
Frank on families, communities, and small businesses, it would
be irresponsible for us here today to focus merely on the
negative impacts. We must also consider the many positive
impacts that this law may have.
Dodd-Frank was passed with the aim of increasing financial
stability, improving investor confidence, and enhancing
consumer protection, and it has been well-documented that these
goals have enormous benefits for families, communities, and
small businesses.
Now, many of us have forgotten recent history. I know 4
years is a long time in Congress, but the recent financial
crisis in 2008, as Representative Capuano mentioned, caused
enormous losses--$19 trillion in lost household wealth. While
many critics have focused on the 848-page length of Dodd-Frank,
it should be noted that if this law prevents a similar
financial crisis from occurring it would actually save American
households approximately $22.4 billion per page.
To conclude, the actual impacts of Dodd-Frank have
unfortunately been far too minimal so far thanks to a
successful lobbying campaign led by Wall Street to delay Dodd-
Frank's implementation. The impacts of Dodd-Frank, once it has
been fully implemented, are likely to be significant and
positive insofar as it will reduce the likelihood of another
major financial crisis, restore the shaken confidence of
investors who have lost faith in American capital markets, and
prohibit predatory lending practices.
I urge the members of this subcommittee to make all efforts
to help facilitate the robust and prompt implementation of this
law. I thank you again for giving me the opportunity to
testify, and I look forward to your questions.
[The prepared statement of Professor Min can be found on
page 64 of the appendix.]
Chairman Neugebauer. Thank you.
Ms. Deyanira?
STATEMENT OF DEYANIRA DEL RIO, CHAIR, BOARD OF DIRECTORS, LOWER
EAST SIDE PEOPLE'S FEDERAL CREDIT UNION
Ms. Del Rio. Good morning, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee, and thank you
also for the opportunity to testify today at this hearing. My
name is Deyanira Del Rio and I am the board chair of the Lower
East Side People's Federal Credit Union in New York City. We
are a small, not-for-profit community development financial
institution that has $33 million in assets and serves 6,000
members in New York City.
We serve low-income New Yorkers Citywide, but we have a
particular focus on two of New York City's poorest
neighborhoods, including Central Harlem and parts of the Lower
East Side. And I will just say that while we are close to Wall
Street geographically, we are very far philosophically and in
terms of our members.
I am pleased to comment on the Dodd-Frank Act and the
Consumer Financial Protection Bureau from the perspective of
our small financial institution and the communities we serve.
So I have four main points and I will try to do them speedily.
First, I want to say that from our point of view, the Dodd-
Frank Act and the other financial reforms of recent years have
not harmed our credit union in any way in terms of our ability
to provide low-cost loans and services to our members. If
anything, our credit union has improved in performance and
profitability in recent years: our lending has increased; we
have flexible but responsible underwriting standards that we
don't think will be curtailed by any of the regulation; we have
95 percent of our members' deposits in our credit union
reinvested back into our neighborhoods in the form of
affordable housing, small business, and consumer loans; and we
continue to provide free checking accounts to all of our
members who maintain at least $25 in our credit union.
We see more and more members coming to us, leaving the
banks, which are becoming increasingly unfriendly, particularly
to lower-income customers. We also have not experienced any
decrease that is noticeable in our revenue as a result of the
credit card and overdraft reforms of recent years, although I
will say that it is primarily because we didn't engage in the
types of deceptive practices that were curbed and addressed in
the CARD Act nor did we ever become reliant on these high
overdraft fees that a lot of banks and even credit unions
turned into their profit centers. We have never offered those
kinds of products and have chosen instead to offer traditional
overdraft lines of credit and other responsible services to our
members.
I will note that also, I think as others have said, that
Dodd-Frank does make important accommodations for small
institutions like ours. So, for example, as an institution with
less than $10 billion in assets, we will be supervised for
compliance with consumer financial protection laws by our
existing regulator, the National Credit Union Administration.
And further, the CFPB is required, as we know, to assess the
impact of its rulemaking on financial institutions and small
businesses like ours.
My second point is that to the extent our credit union is
facing challenges, they overwhelmingly result from the
financial crisis and the ongoing economic downturn and not from
excessive regulation, and I can't stress this enough. Our
credit union, also like many other credit unions, had no part
in causing the crisis, but we are certainly feeling the effects
and the costs through continued unemployment, the depressed
interest rate environment that we are operating in, and the
ongoing foreclosure crisis.
These are the threats to our institution over the long term
and certainly to our members and our community's well-being.
Lack of financial regulation we see as actually causing the
stresses that our institution now has to work around.
My third point is that in response to the crisis, strong
prudential regulation and consumer protections are needed to
prevent future crises and to ensure fairness and opportunity
for low-income people and communities. The repercussions of the
economic crisis are going to be felt in low-income communities
like ours for many years to come.
I will give you one grim statistic, which is that the
median net worth of American families fell by almost 40 percent
between 2007 and 2009. These are losses that will take families
years or possibly generations to recover.
In addition to lost wealth, we are concerned that a growing
number of our members and Americans generally are now
contending with damaged credit histories as a result of abusive
lending practices, the foreclosure crisis, job losses, and just
the overall economic downturn, and this is particularly
distressing for us because damaged credit histories not only
impede people's access to fairly priced loans and credit, but
increasingly they are being used outside of the credit sphere
and can block people's opportunities for affordable housing,
for jobs--increasingly employers are denying people jobs based
on having damaged credit--and many other economic opportunities
that people will be denied access to because of this damaged
credit, often through no fault of their own.
So Congress enacted the Dodd-Frank Act in the wake of
undeniable regulatory failure and abusive lending practices. It
includes such provisions as a requirement that lenders consider
borrowers' ability to repay loans. We think this is a
fundamental tenet of responsible lending that was lost in the
years leading up to the crash, and we support these and other
common-sense regulations which we think all responsible lenders
should embrace.
And my last point is that we believe the Consumer Financial
Protection Bureau has a vital role to play in regulating and
leveling the playing field for both depository and non-bank
financial institutions. Our credit union welcomed the creation
of the CFPB as the first Federal agency tasked specifically
with protecting consumers in the financial services
marketplace, something that we certainly could have used in the
years leading up to the crash when neighborhoods like ours and
across the country were flooded with high-cost, destabilizing
forms of credit that ultimately caused havoc for the economy as
well as for neighborhoods.
This regulatory failure--the fact that the seven regulatory
agencies didn't catch or prevent the crisis--is particularly
distressing to us because many of the problems we are facing
could have been avoided had regulators paid meaningful
attention to the harms that reckless lending was causing on
families and communities. And in fact, this overemphasis on
what ostensibly is safety and soundness, which is certainly
important--and we are examined, like all depository
institutions, for safety and soundness--but by focusing on that
to the expense of consumer protection, regulators ironically
failed to detect the broad systemic risk that was being caused
by predatory lending practices which were, after all, lucrative
in the short term.
So we think that the agency has a really important role to
play in identifying future problems--
Chairman Neugebauer. Ms. Del Rio, I am going to need you to
wrap your testimony up.
Ms. Del Rio. Yes. Okay. So my last point is that I want to
say that we at the Lower East Side People's Federal Credit
Union and credit union allies of ours have met with CFPB
Director Richard Cordray at field hearings and regional
meetings and weighed in on comment letters like many others
here. We have so far--I want to note, we have been impressed by
the approach and the thoughtfulness of the CFPB toward its
rulemaking, and rather than coming in and issuing decrees, they
have actually been exceptional in the way that they have
solicited feedback from small businesses and financial
institutions as well as Americans, consumers who are being
affected by the practice.
We appreciate that and we think that their efforts to
promote transparency and accountability are going to bring
benefits to institutions like ours and our communities that are
going to far outweigh any marginal or short-term costs of
regulatory compliance.
So thank you, and I look forward to answering your
questions.
[The prepared statement of Ms. Del Rio can be found on page
50 of the appendix.]
Chairman Neugebauer. Mr. Smith, you are recognized for 5
minutes.
STATEMENT OF GREGORY W. SMITH, CHIEF OPERATING OFFICER AND
GENERAL COUNSEL, THE COLORADO PUBLIC EMPLOYEES' RETIREMENT
ASSOCIATION (CoPERA)
Mr. Gregory Smith. Thank you, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee. Good morning.
I am Greg Smith, the chief operating officer and general
counsel of the Colorado Public Employees' Retirement
Association (CoPERA). I am pleased to appear before you today
on behalf of CoPERA.
With over $39 billion in assets under management, CoPERA is
responsible for the retirement security of over 480,000
employees and retirees of State and local government in
Colorado. Our members include teachers, snow plow drivers, and
prison guards--regular people, hard-working people, people who
support small businesses across the State of Colorado and who
use local banks throughout the State of Colorado.
Colorado provides over $3.3 billion in annual benefit
payments to over 95,000 beneficiaries of the Public Employees'
Retirement Association. Ninety percent of these payments are
made to beneficiaries living in the State of Colorado. Using
commonly recognized economic impact measures, such as output,
value-added, and labor income, and employment, these payments
in Colorado represent $4.3 billion in output, $1.87 billion in
value-add, and $1.1 billion in labor income, and over 23,000
jobs in the State of Colorado.
The annual benefit payments made by Colorado PERA to our
beneficiaries represent approximately 3.3 percent of total wage
income in the State of Colorado. In the rural counties of
Colorado, this percentage is far greater.
In some of our counties, PERA benefits payments represent
over 25 percent of total payroll in that county. This infusion
of income into the local economies in Colorado creates a
critical and stable source of income that fuels Main Streets
and businesses throughout the State of Colorado.
As an owner of many of the Nation's large and small public
corporations, our fund is strongly aligned with corporate
America. We have every interest in its long-term success and in
its profitability. As a result, we believe in good corporate
governance, and good corporate governance practices are
essential to maximize and protect long-term shareowner value
and interests.
It is well-established that a key cause of the financial
crisis was a failure in corporate governance. Our members have
paid a deep price for that failure. Not only did they suffer
billions of dollars in investment losses, but many also lost
confidence in the integrity of our markets and in the
effectiveness of board oversight of corporate management.
In the lead-up to the financial crisis, boards of directors
failed to adequately understand, monitor, and oversee
enterprise risk and corporate strategy. And far too many boards
structured and approved executive compensation programs that
motivated excessive risk-taking and yielded outsized rewards
for short-term results.
As the costly fallout of such poor board oversight became
clear, investors were left with few effective tools to hold
directors accountable. Congress responded in the Dodd-Frank Act
by providing investors with some of the tools needed to improve
market-based oversight of corporate boards.
Those corporate governance reforms, some of which have yet
to be fully implemented, have already begun to improve investor
oversight of boards. Those key corporate governance provisions
of Dodd-Frank, the benefits of which are described in more
detail in my testimony, include the following: shareowner
advisory vote on compensation; independent compensation
committees; clawback of erroneously awarded compensation;
enhanced disclosure of incentive-based compensation
arrangements; and shareowner proxy access.
To date, only the first of these five important corporate
governance reforms, the advisory vote on executive
compensation, has been fully implemented as intended. That
reform alone has proven highly successful in opening up
dialogue between boards and shareowners on executive pay
concerns and has also had an impact on eliminating poor pay
practices at many companies--practices that were unrelated, and
in some cases inconsistent with the company's long-term
performance.
The other four corporate governance reforms described in my
testimony await rulemaking by the Securities and Exchange
Commission and, in some cases, the stock exchanges. These
provisions are integral in improving oversight and meaningful
accountability of corporate directors. Thus, CoPERA
respectfully requests that the subcommittee actively support
the prompt and effective implementation of these provisions and
support providing the SEC with the resources they need to
effectively write and enforce the related rules while at the
same time continuing to perform their core responsibilities as
the only agency in the Federal Government whose mission
includes protecting investors and policing the capital markets.
Thank you, Mr. Chairman, for inviting me to participate at
this hearing, and I look forward to your questions.
[The prepared statement of Mr. Smith can be found on page
90 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
I thank the panel for those opening statements, and we will
now go to the question-and-answer period. Each Member will be
recognized for 5 minutes, and the Chair now recognizes himself
for 5 minutes.
Mr. Purcell, one of the things that I hear, and you alluded
to in your testimony from small community bankers, particularly
who have been used to making what I, when I was in the banking
business, would call portfolio mortgage loans. These are loans
that sometimes are $25,000, $30,000, $40,000 for houses in the
community or outside of town. And a number of those banks have
quit making those loans because of some of the requirements of
new regulations.
There are two things I want you to elaborate on. First, who
is going to make those loans? Because those loans normally
aren't securitized and so their only source of funding for
those loans in the past has been our community banks. And so
how are the citizens, the families in these little small
communities, how are they going to buy a house?
Mr. Purcell. Mr. Chairman, I appreciate the opportunity to
speak here, and that is a dilemma in our area. We are a rural
area. We have made loans since the inception of the bank 100
years ago throughout the community and we filled a need that
was not being met in that no one was interested in making a
loan 10 miles from a town of 400 people, we will say, for
O'Donnell, Texas, that was only on the small acreage.
We have done 5-year balloon notes. Under the new proposed
regulation, the 5-year balloon notes will be high-priced. We
don't charge fees.
I have had 14 or 15 community banks in our area--our area
is within 200 miles; there are not a lot of people there--that
are getting out of the mortgage lending because of the cost. I
am not certain where those will go, where they will have to go
to family.
But the real problem is that if you can't provide that each
one of those customers, they have family, they have friends,
and so, ``The bank won't take care of me, you know? I have put
my money down. I have always paid my obligations as agreed.
Where do I go?''
So it is a dilemma. If you want to go to the farm credit
system, the Federal Land Bank or some of those, they require 80
acres of land to be there. You can't sell a $25,000 mortgage
loan in the secondary market for whatever price you pay.
Chairman Neugebauer. Yes. I think you heard Mr. Min say
that all of the claims by small financial institutions that
Dodd-Frank is going to have an impact on them are not true. Mr.
Purcell, are these community bankers dreaming this stuff up?
Mr. Purcell. Our customers are not dreaming it up, and they
are worried.
I understand that there was a calamity here. Unfortunately,
for our part of the world in the 1970s and 1980s, we had a
calamity there. I didn't get these bald spots from banking in
good times; I got them from bad times.
We did learn some lessons--and I concur that the customer
needs to be able to afford it, but if the payments are
structured to what they would be paying in rent, they have a
chance to build equity in their home. They have a chance to
have homeownership.
But at times, we kind of outsmart ourselves, and we try to
make people fit in a certain category, and that is one of the
unique things about our community is that in our particular
bank, a customer goes to whichever officer they want. I have
more $500 loans than I do $3 million loans of my customers. It
is ones that I started with 25 years ago, and we continue to
try to meet their needs.
They have something to lose. If you have skin in the game,
your commitment to paying is much, much better. The bank
realizes it, and the customer realizes it.
So we are unique, I guess, in the whole scope of things. I
don't understand all there is about Wall Street, but we are not
driving for Wall Street in Big Spring, Texas.
Chairman Neugebauer. Of course, one of the things that I
hear from a lot of the smaller community banks, and maybe even
some of the regional banks, is that the scale and the cost of
compliance of all of these new regulations obviously impacts
their ability to deliver some of those services. And so, we
hear people talking about how we are going to see more
consolidation in the banking industry, and one of the things
that I have heard is that there was a call to break up the big
banks because they were too big, but it almost looks like we
are forcing a consolidation in the banking industry that
basically just kind of going the other direction. Would you
agree with that?
Mr. Purcell. It is amazing that both--
Chairman Neugebauer. Let Mr. Flores--
Mr. Purcell. Okay.
Chairman Neugebauer. --take that question, thank you.
Mr. Purcell. I am sorry.
Mr. Flores. Yes, I would agree with it. I have a colleague
who teaches commercial lending in most of the graduate schools
of banking around the country, and that is one of the key
concerns that they are raising is community bankers,
particularly those that are in markets that are low-growth or
no-growth, they have had business model issues before this
crisis. This has just basically exacerbated that.
And so with the thin margins they were operating under
before, with the additional cost and loss of fee income, they
are looking to sell. And you are right. Who is going to buy
them? It is obviously the bigger banks, and so the default
position is that the too-big-to-fail banks will get bigger.
Chairman Neugebauer. I thank the gentleman, and I think my
time is up.
Mr. Capuano is now recognized for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Flores, I can't help myself. You do realize that your
company is named after a place where one of the most--not
devastating--broad-based regulations in history came out of.
Bretton Woods is a beautiful place but--
Mr. Flores. It is.
Mr. Capuano. --but Bretton Woods resulted in a lot of
things that--I was actually hoping Dr. Paul would be here
today; that would be interesting.
Mr. Purcell, Ms. Smith, and Ms. Del Rio, I hope that you
will take some comfort in a little fact of my life. I have all
of my family's personal, business, and campaign funds in small
banks. I don't have any--not one penny that I have control over
is in a large bank. Not for any reason. I just prefer small
banks. I like knowing my bankers and all that other stuff.
So I will just tell you that. Hopefully, you will take some
comfort before I go in a different direction.
[laughter].
Mr. Purcell, stop, look, and listen. I totally agree. I
actually haven't disagreed with anything I have heard here this
morning of significant nature--minor little points, but nothing
major. And I agree with everything you said. Stop, look, and
listen is 100 percent right.
But Dodd-Frank is now 2 years old. We are stopping,
looking, and trying to listen. It doesn't mean we will get it
all right, but stop, look, and listen doesn't mean don't cross
the street; it means be cautious, be careful, keep an eye on
what is going on, and then cross the street. And I would like
to think that is what we are trying to do.
Ms. Smith, on the remittance item, to be perfectly honest,
today is the first day I have heard about that issue and the 25
per year. It is an interesting issue and I wish it had been
brought to my attention.
I am under the impression at the moment that that aspect of
this regulation has not been finalized, and I intend to leave
this hearing and go look into it. I don't know whether I agree
with you or not.
I would just say that is exactly what this stop, look, and
listen is all about. It is 2 years later. We still haven't
implemented that aspect and, again, I am not informed enough to
agree or disagree, but it is an interesting point, a good
point, one that is worthy of pursuit. And I assume you know
that is not finalized yet.
Ms. Lynette Smith. Thank you very much. I appreciate you
looking into that.
That is catastrophic. We do, on average, three
international wires a month. If you multiply that times 12,
that is 36. I might get to a point where I cannot even offer--
Mr. Capuano. No, I understand. I am not arguing with the
point at all. I am saying it is a good point worthy of
consideration and--
Ms. Lynette Smith. Thank you.
Mr. Capuano. --I will look into it, and I wish I had been
informed of it as we were going forward.
I guess my bottom line here is that a lot of the concerns I
have heard about Dodd-Frank from not just today's panel, but
going forward, are fears of what might happen. Some of them are
very legitimate and some of them I share--but the way to deal
with the fear is not to not do it; the way to deal with the
fear is to try to get it right before the mistake is made, or
even after the fact.
Things happen after you do something that you did wrong.
Everybody on this panel has made a mistake in your life, and
when you do, you correct it. You don't just throw the whole
thing out; you correct it.
So that is hopefully what we are trying to do. Regulations
are not meant for the good players. No regulation is ever meant
for the good players. They are only meant to say, ``There is
the line. Bad players can't cross here.''
I use it all the time. One regulation we have is: Don't
kill anybody. That is a regulation, guys. It doesn't mean
anybody is going to go out and kill somebody; it just means
that if you do, there are consequences. All regulations are
simply drawing the line saying, here is where we are.
I guess, Mr. Johnson, I just want to ask you a--and I
appreciate you being here. I realize you are not a banker; I am
not going to ask any technical banking questions. But if--
Mr. Johnson. I certainly appreciate that.
Mr. Capuano. That is okay. I am only like half a step ahead
of you--don't worry--and maybe even less than that.
But if you had a company--and again, you are a member of an
association, you are a businessman--I presume you have never
misled or deceived any of your customers?
Mr. Johnson. I try very hard not to do that.
Mr. Capuano. Again, not mistakes, but you have never
intentionally--never deceived them into thinking that something
you were providing was free, did you?
Mr. Johnson. No, I haven't.
Mr. Capuano. You have never deceived them into telling them
that they were eligible for something for which they are not
eligible?
Mr. Johnson. No, I haven't.
Mr. Capuano. So you would think that any business that
engages in intentional misleading of customers is doing
something wrong and bad for the economy, bad for America. Would
you agree with that statement?
Mr. Johnson. I would agree with that statement.
Mr. Capuano. Then, you must support what the CFPB did
yesterday, which is to enforce Capital One, because that is
exactly what they were doing. Now, I don't know whether Capital
One is a good, bad, or indifferent company, but they were
clearly engaged in misleading customers--2 million customers--
and they were slapped for it. Now, that doesn't mean they
should be put out of business; it means they were slapped. They
are going to have to refund $140 million hopefully to somebody
who will need new flooring in your area.
Mr. Johnson. And I don't know enough about--
Mr. Capuano. I know.
Mr. Johnson. --Capital One, but what I can tell you from my
vantage point as a business person is that I have seen the
effect simply because lines of credit have been snatched away
from me and I had to resort to credit cards to keep my business
afloat and it was the result of the regulations.
Mr. Capuano. But according to your testimony, you are not
sure that it is a result of regulation, and Mr. Min has
testified--not just about you, obviously, personally--but about
most loss of credit in this country was not the result of
regulation, it was the result of an economic downturn, that the
banks, even when they were infused with capital against the
advice of some of my colleagues--they have tons of money, they
still refuse to loan it. To my knowledge, there is no way for
the Federal Government to force them to loan it.
Mr. Purcell, are you aware of anything that we can do to
force you to make a loan?
Mr. Purcell. No. But I sure wish you would convince our
customers of the uncertainty, so they will start borrowing
again.
Mr. Capuano. I agree with you. I totally agree.
Mr. Johnson. So, Mr. Capuano, I can--
Mr. Capuano. So, Mr. Johnson, the lack of credit has
nothing to do with--
Mr. Johnson. But I can tell you that what happened from the
collateral standpoint, when the banks would give me financing
based on certain pieces of collateral that I had, the
regulations took that away and they were unable--
Mr. Capuano. Which regulations did that?
Mr. Johnson. I don't know. You tell me.
Mr. Capuano. That is the problem, Mr. Johnson.
And here is the problem as stated by--oh, I had it here
somewhere; who knows where it is--here it is--by the
Independent Community Bankers of America president, he said it
is more fear than fact. I am interested in facts. I need to
know facts. I need to know specific regulations that are either
proposed or finalized that don't work. And when that happens, I
have done it repeatedly to advocate to stop them or to change
them, and I will do it tomorrow. All of us will, on both sides
of the aisle.
But to simply say that all regulation has caused me
problems is not helpful, especially if you can't point out to
me a specific regulation that has done it and--
Mr. Johnson. I hope my testimony did not say that, because
I really don't believe that. I just believe that you need to
take a look at it and say, okay, how can we get cash flow back
into the hands of small business people, because it is our
lifeblood.
Mr. Capuano. There is no disagreement with that. That is
exactly what we are trying to do.
All I am trying to do is point out that--I am way over
time; I apologize, Mr. Chairman.
All I am trying to do is point out that we are trying to
get it right, and that not all regulation is inherently bad.
Some regulations are necessary and it is important for all of
us to work together to try to get it right.
With that, Mr. Chairman, I appreciate your indulgence.
Chairman Neugebauer. I thank the gentleman.
And now the vice chairman of the subcommittee, Mr.
Fitzpatrick, is recognized for 5 minutes.
Mr. Fitzpatrick. I thank the chairman, and I would also
like to thank all the members of the panel for your testimony
and your participation in the hearing. You are performing a
great service for our country and I think that no matter where
each of us stand or fall on the issue of the legislation, I
think we can agree that what we are doing here today, which is
oversight, is incredibly important for the industry, for our
customers, and for our constituents. It is appropriate,
especially for bills that are new bills that exceed thousands
of pages in length, and also in connection with regulations
that are yet to be written.
And so, Mr. Purcell, I agree, as Mr. Capuano agrees, stop,
look, and listen. We can do that now with regard to regulations
and we are interested in hearing from you how these regulations
that you know about, as well as the regulations that are
threatened or yet to be written, how that impacts your small
banks, your institutions, and our constituents.
Mr. Flores, according to your testimony you said Dodd-Frank
has increased fees to small businesses and consumers. What
effect do these increased fees and reduced services have on
consumers? Can you develop that a little bit for us?
Mr. Flores. It is not a direct relationship because of
increased compliance costs. And you are right, a lot of the
provisions have not been implemented, but people are preparing
and so they are hiring compliance people, or they are re-
tasking existing employees to compliance, or they are
outsourcing aspects of compliance.
But with the--let's say the Durbin Amendment, with the
reduction of interchange fees, that has required--a lot of
banks have eliminated free checking. Therefore, with the new
checking products that are out there, the cost to have a
checking product has gone up, and this primarily impacts low-
to moderate-income consumers because if they don't maintain a
$1,500 daily balance, they are going to get a service charge.
So it is the indirect impacts--the loss of fee income and
the increase of operating expenses that banks are looking for
new avenues of revenue production, be it fees or they have very
little control on interest margins and so the only thing they
can look at are fees. And they are being passed on to consumers
and small businesses.
Mr. Fitzpatrick. Mr. Purcell, when you were describing your
bank and the type of mortgages you grant and the way that you
grant them, it sounds a lot like the small bank back home in
Bucks County, Pennsylvania, that my wife and I use for our own
family. I think you said for most of the loans, you require 20
percent down, and the bank provides 80 percent; you don't sell
the mortgages, you actually keep them and service them. Is that
a fair assessment of the way that your bank operates?
Mr. Purcell. That is correct. We have never sold a
mortgage. And I will say that in the times of distress over the
last 7 years, there was kind of the end of good times and it
has been tough times since then, I might also add we have not
foreclosed on any home mortgage. But we do work with the
customer.
Mr. Fitzpatrick. So you know what a qualified borrower
looks like. You don't need a 1,000-page regulation to describe
that for you?
Mr. Purcell. I don't. The problem on the balloon payment,
though, is that--on the 5-year balloon payment, you have to be
able to show that customer can continue to make the payments.
If you went out to 10 years or 15 years--by the way, we have no
deposits committed in our institution for that, and that is
what the savings and loans got in trouble for in the 1980s was
extending loans further than what their deposits were. That is
the reason for the 5-year balloon payment.
Mr. Fitzpatrick. I was intrigued by something that you said
in your testimony about the cost of compliance on big banks
versus the Main Street, the community banks like yours, that
most of us think of when we think about the banking industry.
You said, in fact, big banks--the very banks at the center of
the problems that spurred the enactment of Dodd-Frank--are
among the new law's greatest beneficiaries precisely because
they can much more easily shoulder Dodd-Frank's compliance
burdens.
Can you describe for us how it is they have benefitted--how
the big banks have actually benefitted from the law and how the
law has actually negatively impacted your ability to continue
to service your customers?
Mr. Purcell. I know there are Members on both sides of the
aisle who want what is best for our country. I want what is
best for it. I want what is good for our borrowers, too, and
our community.
But when you enact legislation, and you have a large
megabank that has a consumer department that is probably 100
times or greater than our total employees are, when you talk
with your regulators and you talk about their compliance--how
they go, they have two paths. They have a path for the
compliance officer who studies--or who handles compliance on
the deposit side, and now they have a path for the ones on the
lending side.
If it is so complicated that someone who examines
compliance issues every day, they have to split it up in two
different directions; we are a small bank. And all this time of
what everyone has said they wanted, the things that we wanted
to avoid--we don't want too-big-to-fail; we want people to have
risk and responsibilities for their actions--the large
megabanks have continued to increase in size at the expense of
small banks.
Mr. Fitzpatrick. Thank you, sir.
Chairman Neugebauer. I thank the gentleman.
And now the ranking member of the full Financial Services
Committee, Mr. Frank, is recognized for 5 minutes.
Mr. Frank. Mr. Johnson, I wanted to pursue something that
you said which, like Mr. Capuano, I was surprised to hear. You
said one of the problems is that the banks you deal with are
now rejecting collateral had previously given them or have
somehow changed their attitude. Would you describe that to me?
Mr. Johnson. Sure. There were times when banks would turn
around and look at your credit rating, they would look at your
character and things like that, and they had done business with
you historically before. They would take your receivables and
other things like that and they would go ahead and loan you
money.
Now what is happening is they are sitting there saying,
hey, you know what, we can't do that anymore--
Mr. Frank. Let me say that there is nothing in the statute
that compelled them--other than--I assume you are not talking
about a residential mortgage?
Mr. Johnson. No.
Mr. Frank. Okay. We do have a problem, and some of us have
expressed this frustration that some of the examiners have been
overreacting, and I think the problem is it is in the culture.
In the history of the world, no examiner was ever reprimanded
for a loan that should have been made and wasn't made; they get
reprimanded for the loans that were made that shouldn't have
been, and that is a constant problem.
But there was nothing in the statute, I am sure, that in
any way requires a bank to change its pattern with regard to
what you just said.
Now, let me just ask Mr. Sharp, you mentioned two pieces of
legislation that this committee has approved. Are there other
changes you want to see with regard to derivatives or do you
want to make sure that those become law? Is that--
Mr. Sharp. Those are the absolute highest priorities.
Mr. Frank. All right. Then, we are in agreement there.
With regard to the nonfinancial aspects of it--the non-end-
user, the JPMorgan Chase and others, do you have changes you
want to see with derivatives in the non-end-user area where we
were talking about financial institution or financial
institution?
Mr. Sharp. No. Again, the Coalition doesn't have national
members or--
Mr. Frank. I appreciate that. And so, because as I said,
and I appreciate--there always are some things that nobody can
anticipate on every issue. We did think the regulators were
sure--I am hoping that those are unnecessary but I have a
principle of legislation: Redundancy is a lot better than
uncertainty, particularly for lawyers, because we are the belt-
and-suspenders group, so we never mind that.
Mr. Purcell, on the question you mentioned, your lawsuit,
and you say you have brought the lawsuit against the CFPB on
the grounds that it is an independent agency, not susceptible
to checks and balances--that is the CFPB. It doesn't go through
the regular appropriations process--the Director is appointed
by the President but not otherwise controlled.
Why didn't you sue to get the Comptroller of the Currency
thrown out, because everything in your lawsuit of which you
complain about the CFPB applies even more strongly to the
Comptroller of the Currency? In fact, the CFPB does--Congress
can restrict its money.
The Comptroller of the Currency has a totally independent
source. He or she is appointed by the President and that is it.
What about the CFPB's structure is different in this sense from
the Comptroller of the Currency, or you just don't like
consumer protection?
Mr. Purcell. I appreciate you being aware of the lawsuit
that we filed. However, I am going to leave that up to the
attorneys because--
Mr. Frank. You mentioned it in your testimony.
Mr. Purcell. I understand, but it says that I will answer
questions about the other part of it. But--
Mr. Frank. All right. If you don't want to answer, okay. I
am sorry, Mr. Purcell. I only have 5 minutes, and if you don't
want to answer it, don't answer it.
I have to say--and I would ask people to look at this--the
argument aimed at the CFPB, they legally are on all fours, as
lawyers say, with the CFPB.
Let me just ask you though, Mr. Purcell, with regard to
mortgages--and let me ask--is it Ms. Smith, from the credit
union, because some of the criticisms were there: Do you think
we should have passed any laws to change the rules regarding
the granting of mortgages when we looked at what happened up
through 2008?
And if so, for instance, did NAFCU submit to us any
proposals for what we should have done with regard to
mortgages, Ms. Smith?
Ms. Lynette Smith. Yes, we do. We do support the TILA and
RESPA forms. We think that they are--
Mr. Frank. Okay. I appreciate that. What about the
substantive mortgages? That is, should we have changed the law
with regard to the ability to do mortgages with 2 years and 28
years interest, and no prepayment allowed, or should we have
said, as we do, that there has to be some showing, Mr. Purcell
mentioned skin in the game--that you shouldn't give mortgages
to people who can't afford it?
Would you in 2009 have recommended to us, or did you, Ms.
Smith--obviously it wasn't your job, Mr. Purcell, as an
organization--any substantive changes in mortgage law?
Ms. Lynette Smith. I believe there are substantive changes
that need to me made and I can give that to you at a later--
Mr. Frank. Did the NAFCU ever tell us what they were? I
don't remember. Do be honest, I think--
Ms. Lynette Smith. No. Honestly, I--
Mr. Frank. Okay. I am very skeptical of this. People come
before us now because they don't like the regulations that are
out, then say, ``We are not saying there shouldn't be any
regulation.'' Except, many of you did say there shouldn't be
any regulation by not saying anything. People who did not tell
us in 2009, ``Yes, you are right. There were mortgage abuses.
Here is the way to correct them,'' but were perfectly content
to let the situation go forward, I am a little skeptical when
you now say, okay, yes, there was a need for things, but you
should have done it differently.
So if I am wrong that if, in fact, in the prior years you
had submitted some things I would be--I will correct myself.
Ms. Lynette Smith. Okay.
Mr. Frank. Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Ohio, Mr. Renacci, is recognized
for 5 minutes.
Mr. Renacci. Thank you, Mr. Chairman.
And I want to thank all the witnesses for being here.
Mr. Min, in your testimony you say--and, of course, this
was in regard to the negative aspects of conclusions on Dodd-
Frank--``Because of the severe delays in implementing Dodd-
Frank it is impossible''--you use the word impossible--to know
what the actual impacts of Dodd-Frank will be.'' Would you also
agree that from a positive standpoint, it would be impossible
to determine what the impacts of Dodd-Frank would be?
Mr. Min. I do agree. That is why I don't attempt to
quantify what the numbers might be. I think we have some recent
evidence, of course, with the financial crisis of 2008, of what
the status quo looks like, but whether Dodd-Frank is a perfect
answer to that--
Mr. Renacci. Right. So it is a definitely impossible.
Have you ever operated a small business, or a bank, or a
small bank or credit union?
Mr. Min. No, sir.
Mr. Renacci. Okay. But you are a professor. If I came to
your office before your semester started and I threw 2,300
pages in front of you and said you now had to teach based on
those 2,300 pages, that would bring some uncertainty to you,
wouldn't it?
Mr. Min. Actually it depends--it is 848 pages, and if I had
to teach it tomorrow, of course that would be a problem; but if
you told me that I needed to teach it in the spring, I think
that would probably be doable.
Mr. Renacci. But you would have to get some resources; you
would have to understand what is in it; you would have to spend
some time and energy to determine--
Mr. Min. Of course. I would have to read it. The first
thing I would do is look at the table of contents and see what
provisions I wanted to teach, what seemed applicable to banking
law versus, say, securities law or other areas--
Mr. Renacci. Well, no. What I am talking about on how you
teach and how you interact and how you move forward, so it is
really how you would move forward, and that is what I am trying
to get at. There would be some certainty, you would have to
spend some resources.
Mr. Min. Of course.
Mr. Renacci. Okay.
Ms. Smith, you talked about regulations and which--give me
some idea of which yet-to-be-implemented regulations you
anticipate will have the most profound effect on you, your
customer base, and the community you serve.
Ms. Lynette Smith. I am really concerned about the
interchange price cap. Also, just the overwhelming compliance
burdens in the new rules, it is hard for me, running an $87
million credit union, to keep up with all of the compliance, if
that answers your question. That is what I have sleepless
nights about.
Mr. Renacci. So you are concerned with the 2,300 pages and
what is in it, and--
Ms. Lynette Smith. Yes.
Mr. Renacci. --compliance, and you have already had to
spend some money, I am sure, to prepare for the compliance on
it.
Ms. Lynette Smith. Absolutely. I am going to have to hire a
full-time compliance officer at this point.
Mr. Renacci. Do you fear that some of these costs will have
to be--that you will have to increase fees for services?
Ms. Lynette Smith. Yes, they could down the road. Credit
unions have always been the lender of last resort, and if I
could just share with you for a minute, when I have members
come into my office and I know they have no other place to go,
I can provide them with a loan within an hour. I want to
continue to do that. And they walk away and the next day they
are bringing me cucumbers from their garden. That is the
grassroots that credit unions do. That is what we are in
business for.
Mr. Renacci. Mr. Johnson, welcome. I want to welcome a
fellow Ohioan here to Washington. You talked a little bit about
credit cards and debit cards and the value to your business and
how you were able to get your cash in 3 days versus 90 days.
You also talked about the cost of it, and you compared it
to the cost of if you were putting in a wood floor. Can you
explain a little bit of what you were trying to get at there?
Mr. Johnson. Sure. If I were able to get the money in 3
days, I can take that money and turn it around and do 5 jobs as
opposed to having to wait for 60 to 90 days to get that money,
so by being able to accept credit cards for payment, I am
assured that I am getting the money. I don't have to worry
about getting a check, and if the check bounces, I have to take
out another loan to pay the bounce fee from the banks.
So it is very, very good for me to be able to get that
money and turn it around. If there is a cost to it, I get that,
but I can still make a lot more money by getting it and turning
it back into the business as opposed to having to wait for 90
days.
Mr. Renacci. So you weren't really concerned about the cost
at the time; you are more concerned about getting the cash in?
Mr. Johnson. Absolutely. Cash flow is the lifeblood of my--
Mr. Renacci. I was a small business owner. I understand
wholeheartedly.
Ms. Del Rio, before my time runs out, you heard what Ms.
Smith said about some of her concerns. You acted like there
were no concerns. You have some compliance costs that you have
to prepare for, and you are going to have to pass those costs
on to someone.
Ms. Del Rio. We comply with a wide array of consumer
protections and regulations. To us, Dodd-Frank is not going to
be something that is going to be a weighty new regulation for
us; we are going to incorporate it into our practices.
We don't, at the moment, anticipate having to raise fees
for our services. It is something that we are--we do everything
we can. We are a low-income credit union and 82 percent of our
members are low-income in New York City. So we--
Mr. Renacci. So even though you are going to have to
prepare for 2,300 more pages, you don't see any more costs and
no concern about passing that on to--
Ms. Del Rio. No. Actually, as my colleague said, the
majority of those pages don't apply to us.
If you are a responsible lender, the majority of those new
checks and balances aren't going to change your practices.
There will be some new disclosures, and reporting, and proving
that you are in compliance, but that is much different than
having to revamp your entire business model.
Mr. Renacci. Ms. Smith, quickly, I see you just--
Ms. Lynette Smith. Yes. I just wanted to say, the $30
million credit union may not have all the services that an $80-
plus million credit union does. We are trying to compete with
the big banks. So we are going to--our infrastructure, our
array of services are going to be more than a smaller, low-
income credit union. And--
Ms. Del Rio. Can I address that?
Mr. Renacci. I am running out of time--
Ms. Del Rio. Okay.
Mr. Renacci. --so I am going to yield back to the chairman.
Chairman Neugebauer. I thank the gentleman.
And now, Mr. Miller is recognized for 5 minutes.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
When I hear of the complaints about compliance costs with
consumer protections in financial transactions, it sounds like
what is happening is the consumer is walking in and the loan
officer or whomever pulls out a legal pad or pulls up their
computer screen and says, ``Okay, you want to be the party to
the first part or you want to be the party to the second
part?'' and then drafts something from scratch and has to have
2,300 pages of statute or regulations in their head or by their
desk that they can consult, and that is pretty seriously
different from my own experience in practicing law for 20
years.
There was something called forms, which made life a lot
easier. They were published. They were kind of vetted that they
were legal. They were often developed by trade associations.
Almost every real estate form, every form used for
residential real estate transactions, were forms that had been
developed and approved by the Bar Association and by the
REALTORS, and it not only was a lot less work for me--I didn't
think I was really cheating--it was a lot less work for me. I
think every lawyer used them. They saved a lot of money for the
client and you ended up with better forms, with better legal
documents that complied with the law.
Ms. Del Rio, how does it work? Do you really generate all
of the forms from scratch for your credit unions or does
someone develop forms that comply with the law that you can
use?
Ms. Del Rio. It is a variation. It is a mix. We have third-
party vendors, for example, that process our credit cards, and
they do a lot of the regulation, the compliance work for us.
There are times where we have to update a disclosure form to
comply with the new regulations.
We welcome these regulations, and we want to be a
transparent institution. This is our mission. So for us, that
is not a cost.
And I just want to make a small point, which is that we are
a full-service institution, so we have checking, savings,
business lending, online banking. We have everything that the--
all of the consumer financial services and products that a bank
and other credit unions do.
We have grown to this. We prioritize where and how we
offset our costs, where we raise money to be able to grow and
expand our services.
And because we never became dependent on these high fees
that a lot of other institutions did, we are not now scrambling
to try to figure out where to make it up. I remember just even
in the credit union world, there were consultants, regulators,
examiners even, encouraging us to find more ways to charge
members fees, and we have chosen not to do that and that is why
we generate most of our income off of loan interest.
We want to make our income in a way that is responsible,
that is actually generating activity in our community. So we
did a lot of small business lending, including from businesses
that are sent to us by our local banks.
Mr. Miller of North Carolina. One complaint I did hear from
lenders that wanted to do the right thing--honest lenders--was
that one of the reasons the disclosures were so unreadable and
so big was that their lawyers advised them or they understood
that the safest thing to do was to set out disclosures verbatim
from the statute. It was safer than trying to summarize them or
put them in plain English.
And they specifically cited the example of TILA and RESPA
of being similar but not quite the same, and what they would do
was set out both statutes verbatim in the disclosures. And so,
when the CFPB approved a form that was plain English which
included both, it seemed to be a great service to everybody.
Ms. Del Rio, has that been the case at your credit union?
Ms. Del Rio. As far as I know, the new form is not--
Mr. Miller of North Carolina. And, Ms. Smith, you said you
were okay with that--
Ms. Lynette Smith. Yes. I am okay. I--
Mr. Miller of North Carolina. You favor that.
Ms. Lynette Smith. Yes. I do favor that. As a matter of
fact, I was at the CFPB last year before that form was--
Mr. Miller of North Carolina. Okay. I do have limited time
so--
Ms. Lynette Smith. --generated. So yes.
Mr. Miller of North Carolina. Mr. Purcell, have you not
figured out that you really don't have to write every consumer
credit contract at your bank, that there are forms that you can
use?
Mr. Purcell. We do, and every time the law changes, we get
to increase our fees for those forms and changes. But yes, we
do.
Mr. Miller of North Carolina. Your national trade
associations don't provide you forms that comply with the law?
There aren't publishers who will develop forms that comply with
the law?
Mr. Purcell. There are major vendors that do provide that
but they do charge maintenance fees and they do charge when you
have to have major modifications in it. So--
Mr. Miller of North Carolina. Okay.
Mr. Min, I know that you are now a professor, so presumably
you have no idea what goes on in the real world, but do you
have any understanding of how this really works? Are there
standard forms?
Mr. Min. --it should be from the trade association, as I
think Ms. Del Rio stated. I would be surprised if the law was
as onerous--in practice if it was as onerous as has been
claimed.
Mr. Miller of North Carolina. Okay.
One last--there are 14 titles to Dodd-Frank. Mr. Flores,
Ms. Smith, Mr. Sharp--well, not you, Mr. Sharp--but you, Mr.
Purcell, how many of those titles apply to your business?
Mr. Flores. To my business, none, but to my clients'
business, several, depending if they are alternative financial
services, or community banks, or credit unions, and the size,
if they are under $50 billion or over $50 billion in assets.
Mr. Miller of North Carolina. Mr. Purcell?
Mr. Purcell. You have your Fair Credit Reporting Act, which
is one example. But you also have your different types of
lending. You have multiple titles within the Dodd-Frank. You
have the CFPB that is wrapping its arms around things that
covered us before, but they are changing some of the
definitions to include things that weren't, so I could not tell
you at this moment exactly which ones do or which ones don't.
Mr. Miller of North Carolina. Ms. Smith?
Ms. Lynette Smith. Okay. Thank you. There are several, and
I can give you that in writing at a later date. Thank you.
Mr. Miller of North Carolina. All right. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from New Mexico, Mr. Pearce, is
recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
It is nice to hear each one of you testify. I especially
appreciate Mr. Purcell. I can identify with that lingo you
speak there; it sounds like where I grew up. If you know where
San Jon is, you know where every place in New Mexico is--now
that is getting small.
Mr. Johnson, I really appreciate your testimony. We need to
be hearing from the people who have built businesses and are
out there just trying to make it work. I was a small business
man and I appreciate that.
I am going to bypass the desire to ask you what you thought
about the President's comment that if you built a small
business, you didn't really do that. Again, I built a small
business from 2 to around 50 people, and so I have this--we
struggled all the way along and I can hear the struggle that
you have and ours.
Mr. Smith, I am interested, what assumption of rate of
return do you have to make the distributions out of your
pension fund?
Mr. Gregory Smith. Representative Pearce, our current
assumption is 8 percent; our 25-year return is 8.9 percent; our
30-year return is--
Mr. Pearce. What did you make in the last--what have you
made in the last quarter?
Mr. Gregory Smith. I don't know; in the last quarter, about
4 percent--
Mr. Pearce. About 4 percent.
Mr. Gregory Smith. In the last 3 years, it--
Mr. Pearce. How much shorter do your--in other words, your
assumptions are at 8 percent. Let me just--
Mr. Gregory Smith. We got a 1.9 percent compared to our 8
percent, if that is what you are trying to get to.
Mr. Pearce. Yes. So yesterday, CalPERS announced that they
had a 1 percent rate of return; their assumption is 7.5
percent, and it is looking like maybe they are $800 billion
short if they figured at a 3.8 percent, so the calculation for
a 1 point rate of return is probably in the trillions--just for
California.
So these pension funds that make these assumptions and then
pay out very large retirement bonuses or retirements are really
putting the long-term future of the pension fund at jeopardy.
I was interested in your comments, Mr. Smith, on executive
compensation. Your shareholders would be the pension
beneficiaries. Do you allow them to vote on your compensation?
Mr. Gregory Smith. Our board of directors is directly
elected by our membership and our board of--
Mr. Pearce. So you allow them to vote like you are asking--
Mr. Gregory Smith. --corporation is.
Mr. Pearce. Do you allow them to vote, Mr. Smith, on your
compensation the way that you are requesting in your testimony
that corporations would allow?
Mr. Gregory Smith. I would challenge whether that is a
comparison, sir, but no, they do not vote on my compensation.
Mr. Pearce. Okay. What do you make? What is your salary?
Mr. Gregory Smith. About $300,000 a year.
Mr. Pearce. And they don't get to vote on that. That is
very interesting.
Ms. Del Rio, do you keep track of people who don't make--
they are not able to service the loans? Do you all track that?
Your customers who can't service the loans?
Ms. Del Rio. Of course. Sure. You mean people who fall
behind on our loans--on their loans--
Mr. Pearce. And so if someone defaults on a loan, and they
come back in for a loan, you have a record of that?
Ms. Del Rio. Yes. We try to restructure people when they
fall behind so that we don't have to get to the point of--
Mr. Pearce. But you are not just not knowledgeable if they
have defaulted on a loan?
Ms. Del Rio. Oh, no.
Mr. Pearce. And so, I find your testimony where you are
critical of those who do track and do make available credit
histories, you are very critical of those who allow credit
histories to go about, and yet you all track a credit history.
Your testimony--
Ms. Del Rio. Oh, sorry. Maybe I wasn't clear. So first, in
terms of the credit, we do look at credit history of people but
we also look at many other things. A lot of our borrowers--
Mr. Pearce. I understand, but there are people--
Ms. Del Rio. --have no credit history and so we look at
other--
Mr. Pearce. Thank you.
Ms. Del Rio. --things.
Mr. Pearce. Thanks.
Ms. Del Rio. I am sorry. My critique in my testimony was
not about even lenders using credit history, although there are
some questions there. It was about employers and others outside
of the credit system using that to judge character and whether
someone would make a good employee, and--
Mr. Pearce. Okay.
If I could follow up, Mr. Sharp, do you know on the U.S.
Chamber how many employers ask about credit history before they
hire? Because in New Mexico, people are dying for employees.
They are saying, ``Please, send us the employees. All they
would have to do is show up for work and pass a drug screen. We
need employees badly.'' And I have never heard one employer in
New Mexico ask for a credit history.
Anyway, it is just curiosity.
Mr. Min, have you ever downloaded content off the Web?
Yes, of course, you have. So you might have an opinion
about Net neutrality regulations, those who would regulate
those who are downloading?
Mr. Min. I actually don't. I don't think I have enough
information about--
Mr. Pearce. You don't have an opinion about that?
Mr. Min. I don't actually know enough about the issues, and
outside of my issue area, so--
Mr. Pearce. Okay. There are people who would like to limit
your ability to download information, films, whatever.
Mr. Min. Okay.
Mr. Pearce. Now, I suspect that they don't have one shred
of empirical evidence; they just understand that they are
opposed to the government coming out and regulating, so when I
see that you talk about regulation being highly speculative, it
would be highly speculative that people want to say, ``You
can't stop me from downloading content. It is a free society.
It is free.'' They won't have one shred of empirical evidence.
Mr. Min. Sure. I think--
Mr. Pearce. You would declare that to be highly speculative
and I am finding that to be a deep flaw in your testimony.
I yield back, Mr. Chairman. Thank you very much.
Chairman Neugebauer. I thank the gentleman.
Mr. Carney is now recognized for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman, and Mr. Ranking
Member, for holding this hearing.
And thank you to all the folks who have come to share your
experience and expertise with us. I have been sitting--I am
usually the lowest man on the totem pole so I get to ask my
questions last, and I hear a lot of the back-and-forth and the
testimony, and it has been very interesting today.
I liked, Mr. Purcell, your comparison to standing on the
corner crossing the railroad tracks and the guidance to stop,
look, and listen. My experience--I am new here--in the last
year-and-a-half is that we do a lot of stopping and listening
and we don't cross many streets. And I think with respect to
the Dodd-Frank regulatory reform legislation, the Congress
responded to a devastating crisis and crossed the street, and
we are here today to explore how crossing that street has
affected small businesses and families.
The hearing is entitled, ``Who's in Your Wallet? Dodd-
Frank's Impact on Families, Communities, and Small
Businesses,'' which suggests to me that somehow the regulations
are having an impact on individuals while it is a small
business wallet. We forget, I think, the impact on our wallets,
our bank accounts, our home equities, our retirement funds,
that the financial crisis had on all of us. I think Professor
Min said $19 trillion of lost wealth across our country.
We had Fed Chairman Bernanke in yesterday testifying and
telling us that the recovery is slowing down, that there are
still millions of people out of work. He didn't have to tell me
that. I talk to those people every day.
I didn't hear any of you say that financial regulatory
reform wasn't necessary, but that it is having some unintended
negative consequences on each of you. And I think the purpose
of our hearing today is to identify some of those unintended
consequences or intended consequences that are having a
negative effect on our economy.
It is in all of our interest--Democrats, Republicans--I
think it has been said a couple of times that we have a strong
economy, that we have a financial system that we have
confidence in, that is strong.
So I would like to just ask you, I hear all the time about
how it is not so much the regulation--one regulation or
another--it is the accumulation of regulations and the
duplication.
Could somebody--I see Mr. Purcell shaking his head. Could
you address that? And tell us how you think we can change
something to address that problem?
Mr. Purcell. I do not doubt the intent of the Act. I do not
disagree that there should not be regulation. The stop, look,
and listen is let's think about some of the things that are
enacted--and I am speaking in regulation in general, as you
spoke of.
It doesn't make a lot of sense to me. We just replaced our
ATM about a month ago. Our drive-up ATM didn't have Braille on
it. And I don't know which is worse--someone driving in who
can't see to use the Braille or not having the Braille on the
drive-in. And I am not being critical, I am just saying that is
part of trying to make regulations and what we pass effective.
Mr. Carney. So is the point that maybe we go too far with
small things and it is the accumulation of those small things--
Mr. Purcell. I believe it is. I think it is. Everyone has a
good idea, they have good intentions, but when we start adding
it up, and we start with 40 years worth of regulations, and we
say we are going to--
Mr. Carney. So maybe we need a process to clean out the
underbrush, so to speak--
Mr. Purcell. Yes.
Mr. Carney. --and to eliminate some of the things? We have
done that a--we have one bill, actually, that is coming through
to do that.
Mr. Flores, did you have--it seemed like you had a response
there?
Mr. Flores. I did. It is rationalizing regulations. A lot
of my clients would say, ``We are being painted with a broad
brush''--
Mr. Carney. Right.
Mr. Flores. --when they weren't responsible for the
financial meltdown.
As a matter of fact, when you look at re-engineering a
process, it is the 80-20 rule. Look at the things that are
really creating a bottleneck and it creates an 80 percent
efficiency, if you will.
A lot of people who wrote mortgages--the liar loans, the
no-docs, the no income verification--they wouldn't have done
that if they held them in portfolio. They only did that because
they were unable to buy the secondary market buying of
primarily Fannie--
Mr. Carney. So the legislation addressed that to a certain
extent by requiring banks to have some skin in the game, as I
heard somebody say earlier, correct?
Mr. Flores. And I have no problem--if you are selling in
the secondary market and if you are servicing a loan because
you can know who the customer is and deal with that, then
retaining 5 percent to me is not a problem. I know a lot of
people disagree with that.
Mr. Carney. My time is running out.
But let me just say to all of you, if you have specifics,
if you could send them to us so that we could try to address
that directly?
I just want to reiterate or revisit the question that Mr.
Frank asked with respect to Mr. Sharp on the derivative. So we
have passed these two pieces of legislation overwhelmingly in
the House addressing some of the concerns that your clients
have, but you said there is nothing else. Are there any next
steps there, just to reiterate?
Mr. Sharp. I wouldn't say there is nothing else, it is just
that these two bills are absolutely the highest priority for
this group. They would help the largest number of members of
this Coalition, so--
Mr. Carney. Great. Thanks very much.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman, and now the
gentleman from Texas, Mr. Canseco, is recognized for 5 minutes.
Mr. Canseco. Thank you, Mr. Chairman.
And thank you all, panel members, for coming here today. I
think it has been a good discussion.
I am sometimes very concerned about what happens when we
talk about Dodd-Frank, and when we talk about the 2008 economic
crash that happened, and the solutions, and the languishing
economy, it sort of seems to me that what we are doing is
stepping on the brake of an automobile at the same time that we
are pressing on the accelerator, not realizing that what we are
doing is very counterproductive.
Professor Min, let me--I am sure you are familiar with
Sarbanes-Oxley, being an academician in the banking area, and
Section 404(b) compliance has resulted in costing 20 times more
in reality than the original estimates. You seem to argue in
your testimony that we shouldn't worry because we haven't seen
the full effects of Dodd-Frank, but doesn't the experience that
we have had with Sarbanes-Oxley suggest this is exactly the
time to be concerned?
Mr. Min. So you are asking, essentially, looking back at
SOX 404 and the higher costs, I am not sure about the 20-times
figure you just cited, whether we should use that as a basis to
estimate our--assume that regulation might cost more than
evidence gives us belief to do. Is that the question you are
asking?
Mr. Canseco. I am asking you if you are not just projecting
wrong and not realizing that sometimes these over-regulations
that seem to paint everyone, as Mr. Flores says, with one broad
brush are very costly and counterproductive.
But let me go on to this other thing, because I have
limited time here.
Mr. Purcell, we hear a lot of talk in Washington about how
we need government bureaucrats to protect American citizens
from their own judgment. This was a large part of the argument
behind the creation of the CFPB.
And I was in community banking for quite a number of years
in Texas, just a little bit south of where you are, and--that
was before I came to Congress--so I understand that if you are
not taking care of your customers, you are going to be put out
of business pretty quickly. So can you explain to us from a
community banker's perspective why consumer protections, safety
and soundness, and doing the right thing all go hand-in-hand
and why the creation of the CFPB could disrupt that and
actually hurt consumers and families?
Mr. Purcell. I am not certain that I could answer that in
the 2 minutes that is allotted with your time, sir, but I will
tell you that many times, we get carried away. The pendulum
swings, and times get good and times get bad, and we overreact,
generally, in both scenarios.
But we cannot remove the culpability of the person who
causes the problem. For instance, overdraft protection; there
has been all kinds of news about that.
The question I would have is, who has the checkbook? Who
has the deposit slip? And who issues the checks?
And I find it somewhat ironic that the Federal Reserve will
charge you $300 for being overdrawn 20 minutes during the
daytime, but $25 for someone who is overdrawn 2 weeks. It is
unfair. We compare different things, but the person who wrote
the check is the one who should be responsible for making that
deposit.
For the person who borrowed money at a greater amount--
maybe 102 percent of the value of his home--there is a price to
pay. For the person who loaned at the 102 percent of that had
somewhat of greed in their heart too, they should be the ones
who stand the loss. When we let the losses fall around the
necks of the ones who create it and we try to let that take
place rather than coming up with a regulation to prove that we
are going to prevent any future effort--or problem and
catastrophe.
Maybe it is skepticism, maybe it is cynicism in my heart,
but I am pretty sure that Dodd-Frank will not prevent another
catastrophe as long as civilization moves.
Mr. Canseco. Let me move on to another vein, because I have
a couple of seconds left. Recently in a speech, the President
remarked that if you own a business, you didn't build that;
somebody else made that happen.
I am sure you deal with plenty of small businesses in West
Texas. In your experience, who built those businesses?
Mr. Purcell. The individual did. And if you doubt it, you
should come to Texas, and you are from Texas, so you know the
independent nature that our business people have.
Mr. Canseco. Thank you very much.
I yield back the balance of my time.
Chairman Neugebauer. I thank the gentleman.
And now another great gentleman from Texas, Mr. Green, is
recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. Actually, we have about
four Texans in the House currently, and I would like to welcome
Mr. Purcell to the committee.
I have met with the small bankers in Texas--a good many of
them; not all of them--and small bankers from other places as
well, and they all echo the same concerns, and it has been said
enough for me to want to find some means by which we can ease
some of the consternation.
I am not sure what the solution is, but I would like to, if
I may, ask you, do you in your mind, sir, make a distinction
between the $10 billion demarcation that we have and a
community bank? Because many of the bankers that I meet with
are not at the $10 billion mark; they are considerably smaller.
Do you make a distinction in your mind?
Mr. Purcell. I do. I don't know if it is a magic $10
billion; I don't know if it is $2 billion; I don't know if it
is $50 billion. But there is definitely a difference for
someone who has to--if they make a loan, they get to drive by
that business and be proud of it. The bad side of it is is if
you made that bad loan, you still have to drive by that
property every day and decide that it was not a good deal and
remember that.
So it is so foreign. I don't understand all the default
swaps and the things that happen on Wall Street. I am even
confused by the definition of what a bank is, or how they can
come into the FDIC without paying pass premiums, and now they
are automatically a bank, because by my definition of a bank it
doesn't include a lot of those on Wall Street, sir.
Mr. Green. Are you considerably smaller than $10 billion?
Mr. Purcell. We are less than $300 million.
Mr. Green. Less than $300 billion?
Mr. Purcell. Less than $300 million. That--
Mr. Green. $300 million.
Mr. Purcell. I know zeroes in Washington kind of get
confused, sir, but--
Mr. Green. It is my hearing.
Mr. Purcell. --we are a lot less.
Mr. Green. It is my hearing. Some things don't function as
well as they used to. But, $300 million.
And are most of the community banks that you refer to, are
they less than let's say $500 million or--are they less than $1
billion, most of the community banks that you are referring to?
Mr. Purcell. By my definition, a true community bank would
probably be less than $1 billion. There are some successful
banks in our area that are $2 billion that really do serve
their communities.
Mr. Green. And when you are smaller than $1 billion, do
you--tell me, how are your departments organized? Do you have
many departments or do you have people who multi-task? Now
believe me, I have heard the answer, but I want it for the
record now.
Mr. Purcell. It doesn't snow very often in Big Spring, but
we multi-task. I sweep the porch off--
Mr. Green. How many employees?
Mr. Purcell. We have about 40 employees, and we have a
lending department, and then we have customer service and
operations departments. Now, there are some cross-issues there
because you have to wear many hats at the same time.
So if a customer comes into the bank and they want to
borrow money, they choose who they want to go to. We do not
assign them. We don't say, if you are doing consumer credit you
need to go to this gentleman, or you need to go to this lady,
or you need to fill out an application and we will run your
credit check, and we will get back with you in a week. We don't
do it that way. We try to answer immediately.
Mr. Green. And would you say that most community banks with
assets under $1 billion, that they do a lot of what we call
multitasking, that they don't have departments set aside for
compliance adherence?
Mr. Purcell. That is correct.
Mr. Green. I am asking this because it seems that as I talk
to the bankers in Texas--and I talk to a good many--in their
minds, they have a distinction between a $10 billion small bank
and what they call a community bank. And that is where I am
trying to find some means by which we can address some of these
concerns.
I don't know that we can go to a third tier. Right now, we
have a two-tiered system. But small community banks, they seem
to have a different role.
I am picking up that they seem to serve a clientele that is
much more intimately known to them. The way that they do
business has a lot to do with tradition. And I am trying in my
mind to find a way to resolve some of these issues for the
small community banks.
Mr. Purcell. I don't know if I can help you with that, but
I do know that if our customer does not do well and survive,
our bank does not do well and survive.
Mr. Green. If I may, Mr. Chairman, I want to ask one more
question. What percentage of your loans do you maintain in-
house, maintain on your portfolio?
Mr. Purcell. One hundred percent of the loans, unless it is
too large of credit, and we would participate that out with
other community banks in the area that understand the risk
involved and know that type of credit. But our customer is
serviced there; he does not go anywhere else. If he has a
problem, he comes to us. If we have a problem, we go to him
too, though.
Mr. Green. Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now, Mr. Fincher is recognized for 5 minutes.
Mr. Fincher. Thank you, Mr. Chairman.
And I thank the witnesses for taking the time to be with us
today. It is good testimony.
Mr. Purcell, I am from West Tennessee, a lot of farms,
agribusiness is big, as in Texas. There is a severe drought
right now that we are facing. We have been farmers for 7
generations, with ups and downs many, many times.
I want to just use a hypothetical and some real-time
situations as well. Years ago we had some bad times, and I can
remember my father going to the bank--our local community
bank--and saying, ``We have had a bad crop, a bad season, so I
want to pay the interest on my notes.'' We had been doing
business at the bank forever and ever. And my father and the
banker were able to work out a solution to go forward and work
down the road and end up paying the bank off in full.
Today, with what is happening with the drought situation in
the country and all the farmers who are going to be short this
year, do you still have that same authority and the flexibility
to sit down with that customer and work out a solution or are
we standing in the way?
Mr. Purcell. We have the ability to do it, but I don't know
that we could sustain it for very long with the regulatory
climate, because everything needs to be loss-free. The reason
you pay interest, that is the price for taking the risk.
But yes, we would attempt to do that. We would talk about
the capacity. If you make a crop next year--the way we would
actually structure it is that we would try to set up your
carry-over over a 3-to 4-year period but you couldn't stub your
toe 3 years in a row and--
Mr. Fincher. Right.
Mr. Purcell. --and come out okay.
Mr. Fincher. Right.
Mr. Purcell. So yes, we do try to do that.
One of the problems that may be ongoing is the Basel III,
which we haven't even discussed, but your mark-to-market
accounting on small loans, what is a drought-ridden agriculture
loan in West Tennessee worth when he can't pay this year? What
is the market value of that and who would buy it?
We can stop credit really fast if we have to go to mark-to-
market. It is like, a guy comes in and he wants to borrow some
money; he just inherited the land and he is going to use it for
collateral, and we tell him to mark-to-market and he is okay.
He is 150 percent collateralized.
And next year real estate values go down, and we mark it to
market, we say, ``We can't loan you the money because your
value has gone down.'' And he says, ``But I haven't had a
loss.''
Mr. Fincher. Right.
Mr. Purcell. So it is complicated.
Mr. Fincher. And again, to Mr. Frank's comments a few
minutes ago, the ranking member, about the--some of you not
giving suggestions on the rules and what you wanted to see
changed and all. The unfortunate part of what I hear when I am
out in the district is that most of you were doing it right.
You weren't doing things wrong.
So you were cooperating and working in the system as it
was, and as you said a few minutes ago, we will--if the--if
time goes on and the country exists, and it will, then we will
have problems in the future. And us getting in the way most of
the time--the unintended consequences usually will mess things
up, we won't fix them.
To Ms. Del Rio, you talked about how successful you have
been. Five years ago, you would charge the same rate or the
same charge for doing business as you charge today? Nothing has
changed?
Ms. Del Rio. You mean in terms of the cost of our services?
Yes, more or less. There might be some small modifications here
and there, but more or less, we are the same.
Mr. Fincher. So the charges would be the same?
Ms. Del Rio. In terms of what we charge our members?
Mr. Fincher. Right.
Ms. Del Rio. Interest rates obviously have changed, so
those would have been adjusted in accordance with prime rates
and so forth, but in terms of fees, we have not raised fees.
Mr. Fincher. Did your credit union take TARP money?
Ms. Del Rio. Credit unions didn't take TARP money.
Mr. Fincher. Any special government funding?
Ms. Del Rio. Yes. Actually, in my testimony I talk about
one of the actual regulatory tools that our credit union--that
low-income credit unions that are certified as community
development financial institutions by the Treasury Department
in 2010 were able to apply for--
Mr. Fincher. Why did you apply and need money if you were
doing things so well?
Ms. Del Rio. First, let me tell you what we received, if I
may. This was actual money that was returned by the banks and
was made available to community development financial
institutions serving the most distressed neighborhoods.
And what it was was a loan--a secondary capital loan--and
it was to strengthen our bottom line, our net worth, so that we
could expand lending. So we specifically took that money so
that we could increase small business and other lending in our
neighborhoods which were the most affected by the economic
crisis.
Mr. Fincher. And you paid the loan back?
Ms. Del Rio. It is over a length of 8 years, I believe, so
we are in the process. We are only in our second year.
Mr. Fincher. Okay.
And, Mr. Min, to wrap up, in your testimony I heard you say
``unclear, uncertain'' as we roll out, as we go forward. Dodd-
Frank was enacted July 21, 2010--728 days ago. What happens--
and I am a freshman Member of Congress, but I am afraid that we
may be sitting here 3 years from now saying, what if it is
unclear, it is uncertain, we need more stability because it is
so big.
And Mr. Frank, again, said, well, a lot of times the
regulators, they don't get blamed if they--someone doesn't make
a loan, but if they make a bad loan they do, so they are
overprotective of what is happening in the private sector. We
are not recovering. If you saw the jobs numbers this morning--
the jobless claim numbers this morning--this is not getting any
better.
And this is just a monster. We are afraid. Absolutely,
reforms after 2008, but to this magnitude? It just has to stop
somewhere.
So with that, Mr. Chairman, I yield back. I am out of time.
Chairman Neugebauer. I thank the gentleman.
And I thank the panel. I think we have had a great
discussion today, and I think we have really been talking about
the people that we need to be talking about: the consumers of
financial products. Those are actually the people who are most
affected by this.
I think we had some good dialogue, and I think one of the
things that I feel encouraged about is there seems to be a
bipartisan feeling that there are some areas that we need to
take a look at. I look forward to working with my colleagues to
do that.
I yield to the gentleman.
Mr. Capuano. Mr. Chairman, I ask unanimous consent to place
2 news articles in the record: one from The Wall Street Journal
entitled, ``Financial Crisis Amnesia,'' by Secretary Geithner;
and another one from Forbes Magazine entitled, ``What's in Your
Wallet?'' by Mickey Meece.
Chairman Neugebauer. Without objection, it is so ordered.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to these
witnesses and to place their responses in the record.
And with that, this hearing is adjourned.
[Whereupon, at 12:22 p.m., the hearing was adjourned.]
A P P E N D I X
July 19, 2012
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