[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
               REGULATORY LANDSCAPE: BURDENS ON SMALL 
                       FINANCIAL INSTITUTIONS
=======================================================================



                                HEARING

                               before the

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS

                             UNITED STATES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                            DECEMBER 3, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] 
                               

            Small Business Committee Document Number 113-045

              Available via the GPO Website: www.fdsys.gov




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director



                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. David Schweikert............................................     1
Hon. Yvette Clarke...............................................     7

                               WITNESSES

Hester Peirce, Senior Research Fellow, Mercatus Center, George 
  Mason University, Arlington, VA................................     2
Linda Sweet, President and CEO, Big Valley Federal Credit Union, 
  Sacramento, CA, testifying on behalf of the National 
  Association of Federal Credit Unions...........................     4
B. Doyle Mitchell, Jr., President and Chief Executive Officer, 
  Industrial Bank, Washington, DC, testifying on behalf of the 
  Independent Community Bankers of America.......................     5
Adam J. Levitin, Professor of Law, Georgetown University Law 
  Center, Washington, DC.........................................     8

                                APPENDIX

Prepared Statements:
    Hester Peirce, Senior Research Fellow, Mercatus Center, 
      George Mason University, Arlington, VA.....................    28
    Linda Sweet, President and CEO, Big Valley Federal Credit 
      Union, Sacramento, CA, testifying on behalf of the National 
      Association of Federal Credit Unions.......................    37
    B. Doyle Mitchell, Jr., President and Chief Executive 
      Officer, Industrial Bank, Washington, DC, testifying on 
      behalf of the Independent Community Bankers of America.....    58
    Adam J. Levitin, Professor of Law, Georgetown University Law 
      Center, Washington, DC.....................................    65
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Wall Street Journal Article: Tally of U.S. Banks Sinks to 
      Record Low.................................................    75


     REGULATORY LANDSCAPE: BURDENS ON SMALL FINANCIAL INSTITUTIONS

                              ----------                              


                       TUESDAY, DECEMBER 3, 2013

                  House of Representatives,
               Committee on Small Business,
     Subcommittee on Investigations, Oversight and 
                                       Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. David Schweikert 
[chairman of the subcommittee] presiding.
    Present: Representatives Schweikert, Rice, Clarke, and Chu.
    Chairman SCHWEIKERT. I have received a request from Mr. 
Luetkemeyer of Missouri to participate in today's hearing. 
Without objection, Mr. Luetkemeyer, welcome. And as you all 
know, Mr. Luetkemeyer has an interesting banking background.
    Good morning. The hearing will come to order. I have 
already struck the gavel.
    Complaints with federal regulations create costs for all 
businesses but those costs are particularly burdensome for 
small businesses. The burdens are higher because small 
businesses do not have the capacity, compliance staff, the 
ability to do regulatory arbitrage as larger organizations do. 
For the past several years it has been difficult for small 
businesses and financial institutions. Many have been forced to 
close their doors or merge with others. And many times larger 
financial institutions have acquired those. For those 
institutions that have survived, the regulatory burden have 
required staff to spend more time on compliance than on helping 
customers. If this trend continues, banking customers and 
credit union members will have less choice when it comes to 
accessing financial services.
    Regulations can play an important role in preserving the 
health of the financial service sector. They can ensure that 
banks have sufficient resources to protect depositors and 
customers so they can continue to serve the needs of their 
communities. However, it is not adding layers of regulation 
that makes institutions safer. It is smarer regulation that 
does not arbitrarily add costs without adding benefits.
    Today we will hear from a distinguished panel of experts 
who will discuss the current regulatory burden and tell us what 
effects these rules are having on their businesses.
    And with that I would like to yield to Ms. Chu. Would you 
like to do the opening statement for the democrats?
    When Ms. Clarke shows up we will roll that in.
    In a previous life I spent a lot of time on Dodd-Frank, 
before being moved around on committees, and we have had this 
great question. I am hoping actually we partially hear this 
from the panel. How much it is preparing for the new regulatory 
environments, how much it is actually complying with, how much 
is it just getting definitions and mechanics, and how much of 
it is also now coming from rule sets that may be being 
promulgated through the CFPB? And are the mechanics coming from 
that sort of a ``one size fits all''? So if you are a small 
regional credit union, is it appropriate to in many ways face 
some of the same rule sets that a money center financial 
institution will face?
    Why don't we now go into testimony? As all of you know, or 
hopefully know, you have five minutes each. You will see the 
clock light up. When you see yellow, just talk faster.
    I would like to introduce Ms. Peirce. Our first witness 
today is Hester Peirce, senior research fellow for the Mercatus 
Center at George Mason University where she focuses her work on 
financial regulation. Prior to joining the Mercatus Center, 
Hester worked for the Senate Banking Housing and Urban Affairs 
Committee. She also serves as a staff attorney for the 
Securities Exchange Commission under Paul Atkins and has a law 
degree from Yale, which we will not hold that against her.
    Ms. Peirce, thank you for being here. You have five 
minutes. Share with the Committee.

  STATEMENTS OF HESTER PEIRCE, SENIOR RESEARCH FELLOW, GEORGE 
 MASON UNIVERSITY; LINDA SWEET, PRESIDENT AND CEO, BIG VALLEY 
  FEDERAL CREDIT UNION; B. DOYLE MITCHELL, JR., PRESIDENT AND 
   CEO, INDUSTRIAL BANK; ADAM J. LEVITIN, PROFESSOR OF LAW, 
               GEORGETOWN UNIVERSITY LAW CENTER.

                   STATEMENT OF HESTER PEIRCE

    Ms. PEIRCE. Thank you, Chairman. It is a real honor to be 
here today. I think this is a very important topic that we are 
talking about. It is important for all of us to have a 
financial system that is healthy, dynamic, and that has variety 
in it. We all benefit from having a range of financial 
institutions from the smallest ones to the largest ones. They 
meet different types of consumers and small businesses' and 
large businesses' needs.
    Unfortunately, the regulatory scheme that we are putting in 
place and that we have been putting in place over a number of 
years and decades is endangering this variety and we are moving 
more towards a system where we are going to end up with several 
very large financial institutions and that is going to leave 
needs unmet and small businesses and consumers will find it 
much harder to get their financial needs met. So today what I 
want to talk about is several ways in which this is happening. 
First, the regulatory system is just designed with large 
financial institutions in mind. Second, the regulatory burdens 
just fall more heavily on small financial institutions. It is 
much more difficult for them to deal with the regulations 
coming out. And third, the administrative procedures that are 
in place for agencies to take consequences of their actions 
into consideration, they are just not spending enough time and 
they are not taking those processes seriously enough.
    Small financial institutions serve a very important 
function in the community. They often serve rural communities 
and small businesses get a lot of their loans from small 
financial institutions, so they definitely fill a niche, and 
they do this through relationship lending, which is getting to 
know their consumers in the context of the local community and 
understanding what financial products and services they need.
    Unfortunately, the regulatory system is set up to not 
accommodate that relationship lending well. Instead, it is set 
up, for example, you can take the new Consumer Bureau, which 
views financial products and services in a plain vanilla lens, 
and so for them it is easy if they can deal with a large 
financial institution that offers standardized products, and 
they can go in and they can say, okay, these are the terms that 
we want you to offer those products according to. Well, for a 
smaller financial institution that is dealing with consumers 
and small businesses based on their individual facts and 
circumstances, that standardized model does not work as well. 
And just more generally, when financial regulators sit down to 
write regulations, they are thinking of the big, multinational 
bank. They are not thinking of a small bank down the street 
from them.
    And so what that means is that we end up with regulations 
that just work better for large institutions. So, for example, 
when the U.S. regulators go over to Switzerland to write the 
capital regulations, they are not thinking of small banks. They 
are thinking of international banks. Then they come back to the 
U.S., the put the regs out, and they realize, oh, this does not 
work as well for small financial institutions, and so they make 
some accommodations, but it is after the fact accommodations.
    And then another area is Dodd-Frank created a new system of 
identifying the biggest and most systemically important 
financial institutions, and in doing that it is sending the 
message that the government stands behind these large financial 
institutions. The smaller financial institutions are left to 
fend for themselves, so there is definitely now an 
understanding in the country that there are certain financial 
institutions that the government is really concerned about 
making sure that they survive, and that is just not a healthy 
system.
    The other issue with regulation is that just dealing with 
the mass of regulations that comes down is much more burdensome 
for a small financial institution that cannot afford to hire an 
army of consultants and lawyers and does not have a lot of 
regulatory staff, and so it just becomes much more burdensome 
for them to sort through regulations and figure out what those 
regulations mean for them.
    And then finally, I will just say that there are 
administrative processes that regulators can use to make 
federal rules. One of these is using economic analysis. 
Unfortunately, financial regulators have shown themselves to be 
very loathe to use economic analysis to try to figure out what 
the problem is, to look at different alternatives, and to look 
at the costs and benefits, and that would help them to identify 
unintended consequences of regulations.
    So I just want to thank you and just mention in closing 
that the Mercatus Center has done a survey on small banks, and 
the message that we are getting is loud and clear that the 
regulations are really an overwhelming burden for them. Thank 
you.
    Chairman SCHWEIKERT. All right. Thank you, Ms. Peirce.
    I would like now to introduce our second witness, Linda 
Sweet. Ms. Sweet is president and CEO of Big Valley Federal 
Credit Union located in Sacramento, California. Linda has been 
with Big Valley for 40 years and president and CEO for 25. Big 
Valley Federal Credit Union was founded in 1953 and has 56 
million in assets. Big Valley serves residents of Gold River, 
California and employees of Safeway grocery stores, Pepsi, and 
Automotive Aftermarket Services, Inc. Ms. Sweet is testifying 
on behalf of the National Association of Federal Credit Unions. 
Thank you for being here. You have five minutes.

                    STATEMENT OF LINDA SWEET

    Ms. SWEET. Thank you.
    Good morning, Chairman Schweikert, Ranking Member Clarke, 
and members of the Subcommittee. My name is Linda Sweet, and I 
am testifying this morning on behalf of the National 
Association of Federal Credit Unions. I serve as president and 
CEO of the Big Valley Federal Credit Union in Sacramento, 
California.
    NAFCU and the entire credit union community appreciate the 
opportunity to discuss the regulatory burden credit unions 
face. The overwhelming tidal wave of new regulations in recent 
years is having a profound impact on credit unions and their 97 
million members. Credit unions are some of the most highly 
regulated of all financial institutions facing restrictions on 
who they can serve and their ability to raise capital.
    There are many consumer protections already built into the 
Federal Credit Union Act. This is why during the debate on Wall 
Street Reform, NAFCU opposed credit unions being included under 
the Consumer Financial Protection Bureau rulemaking authority. 
We are still concerned about this today. Unfortunately, while 
credit unions did not cause the financial crisis and actually 
helped blunt the crisis by continuing to make loans, they are 
still firmly within the regulatory reach of the Dodd-Frank Act. 
The impact of this growing compliance burden is demonstrated in 
the declining number of credit unions, dropping by more than 
800 institutions since 2009. A main reason for this decline is 
increasing costs and complexity of regulatory compliance. Many 
smaller institutions simply cannot keep up.
    A 2012 NAFCU survey of our members found that 94 percent of 
respondents had seen their compliance burdens increase since 
the passage of the Dodd-Frank Act in 2010. A 2013 survey found 
that over 70 percent of respondents have had noncompliant staff 
members take on compliance-related duties, thus not serving 
members.
    At my credit union, I have seen our compliance costs 
skyrocket. These increased costs have resulted in the inability 
to provide the quality of service our members expect. Now we 
are often slower to offer services and there are some that we 
are forced to cut back. In order to truly comply with a rule, a 
credit union employee must read the regulation in its entirety, 
interpret the law and its intent, write or rewrite the credit 
union's policy and procedures, and identify which supervisor is 
assigned the responsibility for monitoring, complying, and 
reporting back to management on the necessary information.
    Keep in mind that this is required by each regulation. For 
most small credit unions, a single employee may be the only 
handling regulatory compliance. Megabanks have entire teams 
dedicated to compliance. NAFCU has called on Congress in a 
five-point plan to provide broad-based regulatory relief to 
help credit unions of all sizes, especially smaller credit 
unions like mine. A number of provisions in this plan have been 
introduced as part of the regulatory relief for Credit Union 
Act introduced by Representative Gary Miller. We urge the 
Subcommittee members to support this legislation.
    In conclusion, the overwhelming tidal wave of new rules and 
regulations has hampered the ability of credit unions to serve 
their members, and relief should be extended to the entire 
industry.
    Thank you for the opportunity to testify today, and I 
welcome any questions that you may have.
    Chairman SCHWEIKERT. Thank you, Ms. Sweet.
    Our third witness is Mr. Doyle Mitchell, Jr., president and 
CEO of Industrial Bank located here in Washington, D.C. It is a 
pleasure to have you here. I have come across your name in a 
number of articles.
    Industrial Bank was founded by Mr. Mitchell's grandfather 
in 1934 and is currently the sixth largest African-American 
owned bank in the country, with 370 million in assets. Mr. 
Mitchell has worked at Industrial Bank since 1994. Mr. Mitchell 
is testifying on behalf of the Independent Community Bankers of 
America. Thank you for joining us today. You have five minutes.

              STATEMENT OF B. DOYLE MITCHELL, JR.

    Mr. MITCHELL. Thank you, Chairman Schweikert, and good 
morning. Also, Ranking Member Clarke and members of the 
Subcommittee.
    My name is B. Doyle Mitchell, Jr., and I am president and 
CEO of Industrial Bank. As you indicated in Washington, D.C., 
founded in 1934 at the height of the Great Depression by my 
grandfather. We are the oldest and largest African-American 
commercial loan bank in the Washington metropolitan area. We 
employ over 120 individuals, and today I do testify on behalf 
of 7,000 community banks represented by Independent Committee 
Bankers of America, so I do thank you for convening this 
hearing.
    In addition to being a member of ICBA, I am also the 
chairman of the National Bankers Association. That is a trade 
association for the nation's minority and women-owned banks. 
There is an important segment of community banks like mine that 
were founded to serve minority communities in historically 
underserved areas often ignored by other institutions.
    In order to reach their full potential as a catalyst for 
entrepreneurship, economic growth, and most importantly job 
creation, community banks must have regulations that are 
calibrated to our size, our low-risk profile, and our 
traditional business model. ICBA has developed its plan for 
prosperity, a platform of legislative recommendations that will 
provide meaningful relief for community banks. The plan for 
prosperity is attached to my written testimony in addition to a 
list of the 23 bills that have been introduced in the House and 
the Senate that incorporate plan provisions.
    I would like to use this opportunity to highlight the 
single bill that best captures the full scope of the plan. That 
is the CLEAR Relief Act, H.R. 1750, introduced by 
Representative Blaine Luetkemeyer, a former community banker 
and member of this Committee, as well as the Financial Services 
Committee. 1750 has almost 90 co-sponsors with strong 
bipartisan representation. A Senate companion bill has similar 
bipartisan support. Key provisions of 1750 would provide relief 
for new mortgage rules that threaten to upend the economics of 
community bank mortgage lending which we do and drive further 
industry consolidation. Specifically, 1750 recognizes the 
overriding incentive of a lender to ensure that loans held in 
portfolio with full credit exposure are well underwritten and 
affordable. Under 1750, the community bank loans held in 
portfolio will be granted qualified mortgage status, or QM as 
it is called, which shields the lender from heightened 
liability exposure under the CFPB's new ability to repay rules. 
If my bank holds a loan in portfolio, it is in our best 
interest to ensure that the borrower has the ability to repay. 
Withholding QM status for loans held in portfolio and exposing 
the lender to litigation risk will not make loans safer, nor 
will it make underwriting more conservative; it will merely 
detour community banks from making such loans and curb access 
to credit.
    By the same token, 1750 would exempt community banks, bank 
loans held in portfolio for new escrow requirements for higher 
priced mortgages. Again, portfolio lenders have every incentive 
to protect their collateral by ensuring the borrowers make tax 
and insurance payments. For low volume lenders in particular, 
the escrow requirement is expensive and impractical. And again, 
it will detour lending to borrowers who have no other options.
    Another provision of 1750 will raise the threshold for the 
CFPBs small service exemption from 5,000 to 20,000 loans. 
Community banks have a strong personalized servicing record and 
no record of abusive practices. To put the 20,000 threshold in 
perspective, consider that the five largest servicers have an 
average portfolio of over 6.8 million loans.
    Other provisions of 1750 will provide relief from 
unworkable new appraisal requirements, Sarbanes-Oxley internal 
control esthestation, redundant privacy notices and other 
expensive requirements intended for large, complex banks. 1750 
provides strong, clear, legislative response to the threat of 
mistargeted regulation to the community banking charger without 
compromising safety and soundness or vital consumer 
protections.
    I encourage you to reach out to the bankers, community 
bankers in your districts and ask them whether 1750 would help 
them better serve their community. Your co-sponsorship would be 
greatly appreciated by community banks and ICBA. Thank you 
again for the opportunity to testify today.
    Chairman SCHWEIKERT. Thank you, Mr. Mitchell. And there is 
always that request for co-sponsorship, isn't there?
    I would actually like to hand the mic over to Ranking 
Member Clarke to do her opening statement and introduce her 
witness.
    Ms. CLARKE. I thank you, Mr. Chairman, and I thank the 
members of the panel for being here with us this morning. And I 
think it is prudent to take a moment to remember why Dodd-Frank 
was implemented in the first place. For those who might be 
experiencing selective amnesia, five years ago widespread 
malfeasance brought our nation to the brink of financial 
collapse. Were it not for swift congressional action on behalf 
of the American people, we would be living in a very different 
American today. And the American people have overwhelmingly 
supported this action. According to a survey conducted by the 
Center for Responsible Lending, 83 percent of those surveyed, 
including 75 percent of republicans, favored tougher regulation 
for financial institutions. Dodd-Frank has been a lightning rod 
for critics and supporters alike throughout its debate, and 
even as it has stood as the law of the land for the past three 
years.
    The Consumer Financial Protection Bureau, the agency whose 
responsibility it is to protect consumers from unfair, 
deceptive, and abusive financial products, was created by Title 
X of Dodd-Frank and remains one of the provisions under the 
most scrutiny. Since beginning operations, the CFPB has secured 
more than $750 million for consumers who were subjected to 
deceptive practices, imposed penalties on companies to deter 
future activity, and warned others to clean up their deceptive 
practices. While the CFPB's primary responsibility is to 
regulate financial products, it is clear that small financial 
institutions were not the cause--and I repeat, were not the 
cause--of the recent financial calamity.
    Small businesses use these products as well in the form of 
personal credit cards and home equity loans to finance their 
businesses. Therefore, it is important that the CFPB balance 
the need to regulate abusive practices without adversely 
affecting the credit market for small businesses.
    Understanding that small financial institutions were not 
the cause of the financial crisis, Congress took steps to 
shield small community banks, merchants, and retailers from the 
extreme and extra scrutiny by the CFPB. Additionally, the CFPB 
must conduct small business advisory review panels, becoming 
only the third agency to be required to do so. These 
protections were put in place with the small business community 
in mind and to assure that the engines of our national economy 
would be able to power us to a full recovery without undue 
burden. The CFPB is vitally important to improving the 
integrity of our financial apparatus and it is important that 
the CFPB ensure its integrity, while ensuring that small 
business community is allowed to thrive with little 
interruption.
    Today, as we have heard, experts and stakeholders are 
looking at the state of the CFPB's regulatory activities.
    I want to again thank each and every one of you for coming 
and lending your expertise at today's discussion, and I would 
like to take this opportunity now to introduce to everyone 
Professor Levitin.
    It is my pleasure to introduce Adam Levitin. Mr. Levitin is 
a professor at the Georgetown University Law Center in 
Washington, D.C., where he teaches courses on bankruptcy, 
commercial law, and consumer finance. He has previously served 
as a scholar in residence at the American Bankruptcy Institute 
and is a special counsel to the Congressional Oversight Panel 
supervising TARP. Before joining the Georgetown faculty, 
Professor Levitin practiced law at Weil, Gotshal and Manges, 
and served as a law clerk for the U.S. Court of Appeals in the 
Third Circuit. Professor Levitin holds a J.D. from Harvard Law 
School and degrees from Columbia University and Harvard 
College. I would like to welcome Professor Levitin.

                  STATEMENT OF ADAM J. LEVITIN

    Mr. LEVITIN. Good morning, Chairman Schweikert, Ranking 
Member Clarke, members of the Committee, and Representative 
Luetkemeyer. Thank you for inviting me to testify today. I want 
to emphasize that I am testifying today solely as an academic, 
not as a member of the Consumer Financial Protection Bureau's 
Consumer Advisory Board or on behalf of the CFPB.
    There have been lots of new financial regulations since 
2008, and not all of it is perfect, but a lot of it, much of it 
was long overdue, especially for mortgages, credit cards, and 
bank capital regulation. The implementation of this new 
regulation is still in process, and I think that makes it 
really too early to judge the regulation at this point. That 
said, I think it is possible to offer some early observations.
    First, there obviously are some compliance costs with new 
regulation, and these costs are going to be harder for small 
businesses to amortize over their operations than for large 
banks. But it is important that we remember to weigh the 
compliance costs against regulatory benefits, and those 
benefits include more transparent and efficient markets, and 
more transparent and efficient markets can result in cheaper 
capital for small businesses of all sorts and for greater 
spending power for consumers who are the customers of small 
businesses.
    It is also hard to see the new regulations materially 
affecting the competitive landscape. We hear quite a bit about 
increased compliance costs for small businesses and small 
financial institutions, and I do not doubt that for a second, 
but I would note that we have no hard data about the actual 
extent of the changes and compliance costs. And I think that is 
an important thing that we would want to know before proceeding 
with any changes in regulation, particularly because some of 
the regulations actually help level the playing field between 
large institutions and small institutions. Right now, large 
financial institutions have a major advantage in the financial 
services marketplace. In part, this is because they have this 
too big to fail benefit that they are understood as being 
guaranteed implicitly by the United States Government, and I do 
not think that is a function of Dodd-Frank in any way; that is 
a function that neither this Congress nor any other Congress is 
every going to let the financial system collapse. This is just 
a reality we have to work with.
    But we can try and level the playing field between small 
institutions and large institutions. And some of the recent 
regulations actually have that effect. The recent regulations, 
like the Credit Card Act, Dodd-Frank Act, and the new capital 
requirements under Basel III, they actually put most of the 
burden on big banks. And this makes sense because while we have 
around 14,000 depositories and credit unions in the United 
States, most of the assets in the financial services space are 
controlled by about 100 banks. So we have lots of very, very 
small financial institutions but most of the action is 
happening with large banks. The small banks play a very 
important role in their communities, particularly with sources 
of small business credit, but it is important not to lose sight 
of the big picture on them.
    So let me just take you through the impact of a few of the 
recent regulations.
    The Credit Card Act of 2009. Well, 85 percent of credit 
cards are issued by 10 banks. Most banks do not issue credit 
cards. Only about half of credit unions issue credit cards of 
any sort. So most of the regulatory burden of the Credit Card 
Act is falling on a very small number of banks.
    The Durbin Amendment to the Dodd-Frank Act, dealing with 
interchange fees on debit cards only applies to--the key 
provision of the Durbin Amendment only applies to banks with 
over 10 billion in assets at the holding company level. That is 
just over 100 banks. Most banks are not subject to the key 
provision of the Durbin Amendment.
    The Consumer Financial Protection Bureau has examination 
authority only over the largest banks in the country, only over 
about 100 banks. Again, banks with over 10 billion in assets. 
Smaller financial institutions, be they banks or community 
banks or credit unions, continue to be examined by their 
regular prudential examiners.
    And the CFPB has actually been very solicitous about taking 
care of small banks and understanding that there are special 
concerns there. So, for example, the qualified mortgage 
rulemaking creates a safe harbor to the Dodd-Frank ability to 
repay rule. It has several carve-outs for smaller financial 
institutions, and the result of this is that at least in the 
current market, about 95 percent of mortgages that are being 
made today would comply with the QM requirement. Similarly, the 
Basel III capital requirements, 95 percent of financial 
institutions already apply with those according to the FDIC. So 
all in all, I think it is too early to judge the effect of 
recent financial regulatory reforms, but at least at first 
glance I think there is good reason to think that the costs do 
not outweigh the benefits and I think we should wait and see 
until we have more information before trying to change the 
regulatory scheme that we have in place now. Thank you.
    Chairman SCHWEIKERT. Thank you, Professor.
    I am going to actually go to Mr. Rice first, then back to 
the ranking member because I have a whole diatribe of 
questions. So, Mr. Rice, five minutes.
    Mr. RICE. Let me get my glasses here.
    Professor Levitin, does Dodd-Frank solve the problem that 
caused the financial collapse?
    Mr. LEVITIN. I am not sure we would agree on what the 
problem is. I think there are kind of two problems that are 
key, and I think Dodd-Frank goes a long way to addressing them 
but maybe does not do everything. The two key problems were 
one, just too much leverage in the financial system as a whole; 
and secondly, the spark, that is the powder keg, and then the 
spark that lit it was with mortgages.
    Dodd-Frank, I think, solves the mortgage problem. The 
ability to repay requirement in Title XIV of Dodd-Frank means 
that we really should not see mortgages as a systemic problem 
in the future.
    Mr. RICE. When does that take effect?
    Mr. LEVITIN. That takes effect in January 2014, I believe 
is the effective date. I think January 22nd maybe.
    Mr. RICE. Yeah.
    Mr. Mitchell, that requirement that he is speaking of, this 
mortgage requirement where all mortgages are under this 
microscope, how is that going to affect your lending practices?
    Mr. MITCHELL. Actually, it will probably decrease. It will 
decrease the amount of mortgages that we will make. We hold 
some mortgages in portfolio. It takes away a lot of flexibility 
of mortgage banks to look at individual circumstances, and we 
have to strictly standardize. If you have a 44 percent debt-to-
income ratio and not a 43 percent debt-to-income ratio, then we 
will not make the loan. And there will be a lot of people that 
will not get home mortgage financing.
    Mr. RICE. Okay. So you are saying that a loan that you 
would have made prior to this new regulation taking into effect 
you will no longer make?
    Mr. MITCHELL. Quite a few. Yes.
    Mr. RICE. And what people, what borrowers are affected by 
that? Is this the wealthy people that are affected by that or 
is this the middle income people?
    Mr. MITCHELL. No, sir. No, sir. It is probably lower middle 
income and low and moderate income individuals.
    Mr. RICE. So what you are doing is you are preventing 
access to capital to lower and middle income people?
    Mr. MITCHELL. There is no question about it. And the end 
effect is that it will have a negative effect on the rebounding 
housing market itself.
    Mr. RICE. How is Dodd-Frank going to affect your business 
lending?
    Mr. MITCHELL. Well, you know, Dodd-Frank, all in all, has 
added quite a few costs to our bank, particularly in man-hours. 
We have not had necessarily to hire more individuals, although 
you do spend more money on consultants to help you decipher all 
the new regulations. But the man-hours have gone through the 
roof. And that is a lot of time not spent with our clients--our 
small business clients and our retail clients.
    Mr. RICE. Ms. Sweet, I want to ask you the same questions I 
asked him.
    This new mortgage requirement, how is this going to affect 
your day-to-day lending?
    Ms. SWEET. It is the same as what he is speaking of. We 
have done mortgages for probably 25 years. Our membership is 
used to us where we know them, we are able to provide all of 
those loans and services to them. Under this new rule we are 
going to be passing most of our loans to a third party. We have 
started doing that and the feedback that we are getting is why 
can we not stay with you? Our fees were much lower on our last 
home loan and we do not have the loan with you any longer. That 
becomes an issue for us. It is a difficult situation to put our 
membership in. To put the consumer into another mortgage lender 
is very difficult.
    Mr. RICE. Did you portfolio lend? Did you keep loans?
    Ms. SWEET. We did.
    Mr. RICE. Did you keep that more for the higher income 
people or more for the lower income people?
    Ms. SWEET. I would say a little of both. We have sold loans 
about 10 years ago but we portfolioed most of them. Under the 
new act it is difficult because the debt-to-income ratio, we 
were very much able to look at the member individually. Under 
this, the set of rules are very specific.
    Mr. RICE. Okay. Is this going to hurt more people borrowing 
if they are high income people or low income people?
    Ms. SWEET. If they are low income people.
    Mr. RICE. So there is going to be more competition for the 
high income, high net worth borrower and the low income people 
are going to be shot out by this law?
    Ms. SWEET. Yes. In fact, as a good example, we could have 
done a mortgage loan around $350,000 mortgage loan, and in 
California that is reasonable for about $2,500 in fees and 
costs. And that included everything.
    Mr. RICE. I am confused. I thought we were trying to 
protect the middle class here.
    Thank you very much, Ms. Sweet. My time has expired.
    Chairman SCHWEIKERT. Thank you, Mr. Rice.
    Ranking Member Clarke.
    Ms. CLARKE. Thank you, Mr. Chairman. I would like to yield 
to Ms. Chu at this time.
    Chairman SCHWEIKERT. Ms. Chu.
    Ms. CHU. Thank you so much.
    The Consumer Financial Protection Bureau is one of the few 
agencies that is required to conduct small business review 
panels, and so Professor Levitin, in your testimony you stated 
that CFPB's outreach to smaller financial institutions is 
particularly important. How did CFPB engage with the small 
entities as it was formulating these new mortgage disclosure 
regulations?
    Mr. LEVITIN. Well, I want to emphasize I am speaking on 
only my own behalf. I do not know the full extent of the 
Agency's contact with small institutions, but what I have seen 
when the CFPB has advisory board meetings in various locations, 
top CFPB staff attends these meetings and they make a point 
when they are in places like Jackson, Mississippi or St. Louis, 
Missouri, to go and meet with the local bankers on their own 
time. They make a point that they are going to have breakfast 
with the community bankers and the credit unions in that area 
and talk face-to-face. The officers of these financial 
institutions with the very top leadership of the CFPB, not 
intermediated by any trade associations, and find out what are 
their concerns. And they are listening to them, that when they 
come back from these meetings and they are talking with the 
advisory board, it is very clear that they have been listening 
and they want to understand what the concerns are of small 
financial institutions. It is not that they are going to agree 
with them at every point, but they are going to listen to them. 
And the CFPBs see small financial institutions as really being 
very important within the U.S. financial system.
    Ms. CHU. In fact, let us talk specifically about the 
qualified mortgage rule that was made earlier this year. The 
CFPBs created four different pathways for a mortgage to quality 
to gain this QM status. Can you talk about these four pathways, 
including the small creditor definition and how they result in 
a broad qualified mortgage definition? Was the CFPB required to 
create a small creditor definition?
    Mr. LEVITIN. Absolutely not. The CFPB was directed by 
Congress on a fixed time table to adopt regulations 
implementing the statutory ability to repay requirement. The 
CFPB in its implementing regulation, this QM regulation, 
included a safe harbor for small financial institutions that 
have no more than $2 billion of assets--and that is actually 
not that small of an institution--and originate no more than 
500 first lien mortgage loans in a year. There is also now, 
more recently this October, the CFPB added another exception, a 
time limited exception for balloon mortgages that applies to I 
believe--I cannot remember the exact scope of who it applies 
to, but it is for smaller financial institutions on a broader 
definition, giving them two years more transition time for 
balloon mortgages.
    Ms. CHU. In fact, the Bureau estimates that more than 95 
percent of the mortgage loans being made in the current market 
will be qualified mortgages. What is your opinion about how the 
market will react given that 95 percent of mortgages would be 
considered qualified mortgages as of January 2014?
    Mr. LEVITIN. I think that there has been a lot of 
unnecessary panic in the market about QM. As you stated, in 
both the Bureau's estimate and private estimates, such as Mark 
Zandi of Economy.com, who was one of Senator McCain's campaign 
advisors in 2008, they estimate that 95 percent of mortgages 
being originated today would qualify as QM. If that is correct, 
I do not think that we are going to see very much of a change 
in the availability of credit in the market. And let me 
emphasize, it is possible to make a mortgage loan that is not 
QM. It is not illegal. Actually, the penalty for having a non-
QM loan is very, very limited. It creates a limited defense in 
a foreclosure. It is not a defense to foreclosure, so it 
creates a set-off right in foreclosure and it is a set-off 
right that may actually only be for about $1,000, depending on 
how one interprets the statute. It may also include legal fees.
    Ms. CHU. A moment ago you referred to this two-year 
transition for balloon loans to gain qualified mortgage status. 
Was the CFPB required to put in place this two-year transition 
period?
    Mr. LEVITIN. No. This was something the CFPB did on its own 
volition because the CFPB was concerned about the effect of the 
ability to repay requirement on small financial institutions. 
It has not given small financial institutions everything that 
they have wanted, but the CFPB has really been thinking about 
the needs of small financial institutions and trying to be 
accommodating to small financial institutions while still being 
faithful to its legal duty to implement the statute as Congress 
wrote it.
    Ms. CHU. Okay, thank you. I see my time has come back and I 
yield back.
    Chairman SCHWEIKERT. Thank you, Ms. Chu.
    Mr. Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    It is kind of interesting. This morning in the Wall Street 
Journal, the story below the fold, tally of U.S. banks sinks to 
record low. And it is a great article that talks about a number 
of small banks that have gone down now to below 7,000 in this 
country. It talks about the one bank in the last three years 
that has actually had a new charter; otherwise, all new 
charters are basically stopped as a result of--in this article 
it talks about the regulatory burden that a lot of small 
institutions are facing. One example was United Southern Bank 
of Kentucky that had to hire 15 different people while 
basically maintaining its same size just to be able to comply 
with the extra cost. As a result of that it is interesting to 
hear some of the comments this morning.
    Mr. Mitchell, I appreciate you being here. I missed some of 
your testimony. Also, you mentioned the FDIC study that came 
out last fall, and that study talked about banks under 100 
million probably would not be able to survive any longer 
because of the increased cost and being unable to spread it 
out. I think Mr. Levitin and Ms. Sweet, Ms. Peirce, all made 
that comment, unable to spread those costs out over a smaller 
amount of people.
    So can you talk just a little bit this morning about the 
amount of costs? You mentioned a while ago you did not hire any 
people, but you did have a percentage of cost, the number of 
hours that it cost you to comply?
    Mr. MITCHELL. Well, let me first of all say that $360, $370 
million in total assets, I am having a lot of conversations 
with a number of my peers that are also feeling that at our 
size we may be too small to survive. And so there is a lot of 
merger and acquisition conversation going on among institutions 
our size, not just at the $100 million and lower thresholds.
    Our cost is probably measured in man-hours, and I do not 
have exact figures in that. I do know it is over 200 man-hours 
that we have spent probably this year, additional man-hours on 
compliance and coming up to speed with new compliance 
regulations and so forth. And we do not rely just on ourselves; 
we rely on consultants and so forth. So the pressure on 
revenues in projecting for next year and the increase in man-
hours just takes away an inordinate amount of time from what we 
would really like to be doing.
    Mr. LUETKEMEYER. You know, the title of the hearing today 
is ``Regulatory landscape: burdens on small financial 
institutions.'' There has been some discussion already about 
the QM situation, but something has not been discussed about 
that yet and that is the liability exposure that if you make 
the loan or if you do not make the loan--I know that Mr. 
Levitin made the comment a while ago that 95 percent of the 
loans that are processed are going to be made. In the Financial 
Services Committee, a couple months ago, that number was 50 
percent of the loans were being made. And I think that is 
probably closer if you talk to the small banks of this country 
about the effect of QM and what it is going to be because not 
only because of the rules and the way it is structured, but 
because of the liability exposure. Will you make or will you 
not make that loan? Can you talk a little bit about the lateral 
exposure that you look at and that you see with the QM 
situation and making loans?
    Mr. MITCHELL. Most community banks, until they are 
absolutely sure, and that takes a team of lawyers to be able to 
tell you as far as certainty what your liability exposure is 
going to be, are not going to make those loans until we are 
absolutely certain exactly what the exposure is. We would just 
tend to stay away from it. That is why it makes sense to extend 
the review period before it is implemented so everybody can 
understand exactly what it is. I question that 95 percent of 
the loans are going to be made, and in particular, we serve 
underserved markets, and I can assure you that number is going 
to be much lower in underserved markets.
    Mr. LUETKEMEYER. Well, again, that number was given in 
testimony in the Financial Services Committee a couple months 
ago, so it is not my number; it is somebody else's number.
    Mr. MITCHELL. Yes.
    Mr. LUETKEMEYER. From the Committee.
    So just a quick comment with regards to--I know you are a 
small business with 370 employees.
    Mr. MITCHELL. One twenty.
    Mr. LUETKEMEYER. One twenty, excuse me, 120. You have $370 
billion in assets. There we go.
    Healthcare plan. Obamacare is still a concern, even for 
you. What are you doing to implement that? How is that costing 
out your program?
    Mr. MITCHELL. Well, from what I was told by the HR 
department, it does not affect us right now. I think we are 
over the threshold of number of employees limit.
    Mr. LUETKEMEYER. Okay. You have your own. Are you self-
insured?
    Mr. MITCHELL. No, we are not self-insured but we do offer 
healthcare benefits to our employees.
    Mr. LUETKEMEYER. Okay, all right. Well, I have some other 
questions with regards to that. I think it is important to 
understand that you are dealing with an environment with which 
you are not the problem. As a small business, as a small bank, 
you are not systemically important. Although you are important 
to the community that you are in, you are not systemically 
important from the standpoint that the overall financial risk 
to the whole system, yet you are now a part of the solution 
which you fall under these rules and regulations. And so it is 
frustrating for me to see that the CFPB is making some rules 
and regulations.
    I had a group of bankers come to my office about a month or 
two ago and they had been to CFPB to talk about rules and 
regulations, and the CFPB told them they were the 42nd group to 
be there to complain about these rules and regulations, and yet 
nothing is being done and they are not listened to. So it is 
disappointing to hear that from them. Hopefully, CFPB will get 
on board.
    I appreciate your testimony this morning. Thank you very 
much. I yield back.
    Chairman SCHWEIKERT. Thank you, Mr. Luetkemeyer.
    Ranking Member Clarke.
    Ms. CLARKE. Thank you, Mr. Chairman.
    Mr. Mitchell, as I stated in my opening statement, Dodd-
Frank was necessary because we came to the verge of a complete 
economic collapse three years ago. That said, very few things 
in this world are perfect, especially legislation. There are 
always unintended consequences, including federal regulations 
upon introduction. However, federal regulations can be tweaked 
and improved to adjust for these imperfections.
    What would you recommend as a perfecting tweak, and if 
there was a potential small business institution carve-out, 
what would you suggest? Or is it your opinion that we should 
return to the deregulated era that caused the financial 
collapse?
    Mr. MITCHELL. Well, I think we are on the same page in many 
respects. However, I have been in the banking industry since 
1984. I have been president for 20 years. And even before Dodd-
Frank, you had bankers in our industry complaining that there 
was already too much regulation, particularly on community 
banks. While Dodd-Frank may have been targeted towards large 
banks, it actually applies to all of us. And that is the 
difficulty and the frustration the community banks and 
particularly minority banks share.
    My tweak would be that community banks should be exempt 
from Dodd-Frank overall. In particular, if there is another 
opportunity, then I think H.R. 1750 is a great start.
    Ms. CLARKE. Let me open that question to the rest of the 
panel and get your take on it. Professor Levitin, Ms. Sweet, 
Ms. Peirce.
    Mr. LEVITIN. Again, I think it is a little too early to 
tell, and I agree with you. We cannot assume that legislation 
is perfect but the implementing regulations for Dodd-Frank, 
many of them have not even gone into effect yet. It is just too 
early to tell what the effects are going to be. I want to 
address in particular that 50 percent number that Mr. 
Luetkemeyer cited. That comes out of core logic and they were 
basing that on 2011 mortgage origination activity. A lot of 
that activity in 2011 would not have qualified for QM because 
it was streamlined refinancing. In other words, without full 
documentation. That is a cheap thing, a relatively cheap thing 
to fix. It was not about debt-to-income ratios. If you carve 
out even in 2011 the streamlined refinancing, you get up to 
around 75 percent of 2011. The market has shifted again and the 
95 percent number is based on what is going on in 2012-2013, 
but I think again it is just too early to be stepping away from 
regulatory implementations that we do not even know what their 
effect is.
    Ms. CLARKE. Ms. Sweet, do you agree that it is too early to 
step away and we do not know what the effect would be 
particularly for small institutions?
    Ms. SWEET. I think we have already felt an enormous amount 
of effect from the regulation. And I do not think it is too 
soon to tell. We also do not have the funds, the resources, the 
budget to make sure whether we comply with the regulation or 
not, so it takes an enormous amount of my time away from our 
members, especially the ones that are underserved, the ones who 
are confused and scared and need me. Often, I am behind closed 
doors trying to read piles of regulations to see if, in fact, 
we are exempt or if we are not, what is necessary to comply 
with that regulation. The cost also that we do hire consultants 
for these regulations, it is impossible to know specifically 
all the answers once I read them. We hire attorneys for their 
opinions, and who is hurt is our members. And I know that was 
the reason for the regulation, was to protect. I do understand 
why many of these regulations were put into place, to protect 
the underserved or protect the person who has no idea and they 
are signing contracts they do not know what they are doing. And 
it is very important to have those regulations. However, when 
you see an organization such as credit unions that have never 
had those kinds of problems, it just seems so unnecessary to 
spend that kind of money and put it toward the regulation when 
it could be put toward the minority groups, to the underserved, 
to the immigration groups that are in California.
    And I can give you an example. Just a few weeks ago, and I 
believe part of the underserved, is the senior citizens. They 
are afraid are they going to lose their medical care? Is their 
social security going to be decreased? Can they survive? And 
often they have one of their family members that are ill that 
they are trying to deal with an enormous amount of problems. I 
see that they do need us as an entity that they have trusted 
for 40, 50 years.
    And as I said, a few weeks ago, a lady came into our office 
saying, ``I have one of your members. I have driven her here. 
She needs your help. Someone took all of her money.'' My staff 
went to the car, pulled me up a history of the account, and in 
six months her whole account had been drained. I looked through 
that history and found through an investigation that she put 
her granddaughter on with the agreement that her granddaughter 
would drive her car to help her to doctors' appointments, use 
her ATM card for doctor appointment costs, and for food. Her 
granddaughter took all of that. The car. We saw hotel bills, 
pizza parlors, an excessive amount of costs, $11,000 was 
drained from her account and she was on social security. Had I 
not had the time to spend with her in the car, this could not 
have been even noticed. And that is a bit of the underserved. 
It is not just a minority group. It is often seniors who have 
nowhere else to turn. And luckily, the end of that story is we 
turned it over to the Elder Financial Abuse Department. They 
found the car. We closed the ATM card and we have helped the 
woman to a positive result.
    Ms. CLARKE. Ms. Peirce, did you want to add anything to 
what has been said?
    Ms. PEIRCE. I think that Ms. Sweet and Mr. Mitchell tell 
the story very powerfully, but I do think that we should reopen 
Dodd-Frank, because while the intentions were good, the 
philosophy behind it is bad. It is taking away lending 
decisions from local institutions that know their customers and 
giving it to folks at the CFPB whose intentions are good but 
who do not know the circumstances on the ground.
    Ms. CLARKE. Thank you.
    Mr. Chairman, I want to ask just one more question.
    Professor Levitin, considering the hundreds of smaller 
banks that have failed since the near collapse five years ago, 
do you believe that Basel III capital requirements are 
sufficient to prevent future failures and help shore up 
vulnerable institutions?
    Mr. LEVITIN. Basel III is a mess. I think that is the 
polite way to address it. It is overly complicated. It is still 
gameable. And I think the critical problem with Basel III is it 
just basically does not get capital levels high enough. It is 
very complicated to implement and yet in the end the capital 
levels really do not go high enough under Basel III. So I do 
not think Basel III really makes our financial system that much 
stronger.
    I would note though that we have lots of smaller financial 
institutions failing well before any of the current regulations 
when in place. We have an incremental change but there is a 
fundamental problem in the economics of smaller financial 
institutions which is they do not have the economies of scale 
necessary to compete in a lot of areas with larger financial 
institutions, particularly credit cards. That is just an 
economy of scale business. You cannot compete if you are small. 
And it is easy to point the finger at regulations as being the 
problem, but regulations are really not the key problem. The 
key problem is one of the economic model. And we like to 
celebrate that we have lots of small financial institutions in 
the United States, but it is also notable that no other country 
has anywhere close to 14,000 financial institutions. Even 1,000 
would be a huge number for any other country.
    Ms. CLARKE. Thank you, Mr. Chairman. I yield back.
    Chairman SCHWEIKERT. Thank you, Ms. Clarke.
    Ms. CLARKE. And I thank our panelists.
    Chairman SCHWEIKERT. A handful of questions for myself.
    Mr. Luetkemeyer, I would actually like to put this article 
from last night's Wall Street Journal into the record just sort 
of as a benchmark for discussion.
    So without objections, it is placed for the record.
    I would like to do actually a handful of quick discussions 
and make sure I am doing some follow up here.
    Ms. Sweet, you had started to discuss your credit union and 
your history of actually doing home loans, home mortgage loans.
    Ms. SWEET. Yes.
    Chairman SCHWEIKERT. So first, you are in California, so it 
would be first deeds of trust?
    Ms. SWEET. It would be. Or second mortgages and home equity 
lines of credit.
    Chairman SCHWEIKERT. Now, your cost structure, because a 
lot of your historic population for your credit union where 
grocery store workers. If it were a couple years ago, I walk in 
and I am going to get my $350,000 loan, which for those of us 
in Arizona seems appallingly high, but you are in California. 
What was my cost of that loan and what happens to me today if I 
walk in today and ask for that same loan? What is my cost?
    Ms. SWEET. A couple of years ago that probably would have 
cost you around $2,500 and that would have covered your 
appraisal, your title search, credit report, and all the fees, 
all the hard costs that go into that loan. Today that is going 
to cost our members about $6,000 to $6,200. Many of our members 
are not getting those loans. Also, the qualifications, some of 
them do not comply with the regulations and the mortgage 
companies or the banks, they are very tight. They are very set 
within their standards, and the cost of that loan is just 
astronomical for these people, our members who cannot afford 
that. So most of them have decided to rent.
    Chairman SCHWEIKERT. And just to make sure, give me what 
would be an average, or typical demographic of your clients, 
your customers, actually your members because as a credit 
union, who would that be? Who are you serving on that loan?
    Ms. SWEET. As far as their positions, most of our members 
have been there for many, many years. So you have the elderly. 
We know their children, their children's children, and they may 
have started out to be either family members of or worked for 
Safeway either as a checker, a bagger, in the Milk department, 
unionized workers often. And the demographics now I see a huge 
portion, maybe it is the baby boomers, a huge portion of senior 
citizens. We are also seeing a very large portion of 
minorities, California being very close to Mexico. We have a 
great deal of Hispanic groups. We would like to serve that 
group more and their needs are being underserved. It is very 
costly and the remittance rule is one of the things that we 
were going to and we are ready to implement, and we are very 
happy to implement.
    Chairman SCHWEIKERT. And none of us has actually spoken of 
some of those costs of the mechanics of, as you refer to it, 
the remittances rule, which is a function of Dodd-Frank and 
what that is doing. And that may be a whole another discussion 
and a whole another hearing.
    Professor Levitin, first off, you get a gold star from me 
on your comments about Basel III. I tried to become an expert 
on Basel 2-\1/2\ and Basel III and partially coming from sort 
of a financial world, I can find places where I can run a 
freight train through it. I wanted to touch two things. One, 
part of your testimony is we do not actually have enough data 
of actual experience of regulatory environment affecting small 
institutions, fully enforced to truly understand them. Am I 
treating that fairly?
    Mr. LEVITIN. I think so.
    Chairman SCHWEIKERT. Second of all, on your QM comment, my 
concern is that we have passing information. Mr. Mitchell's 
institution can do a non-QM loan if he keeps it on his books, 
but if he needs to manage certain capital calls, where is the 
secondary market for a non-QM loan? Where does he take those 
packages of loans and sell them today?
    Mr. LEVITIN. It is not clear. Well, right now we just do 
not know because QM is not in place, but at this point it does 
not appear that there is a secondary market for non-QM loans. 
That may change.
    Chairman SCHWEIKERT. So one of our solutions here is on the 
positive side is do we have to come back and rebuild a more 
robust, private secondary market to package inquire? Because 
right now it would almost be a level of misfeasance if Mr. 
Mitchell's institution produces those loans, puts them on the 
books.
    Mr. LEVITIN. He can get stuck in a liquidity bind very 
easily. And certainly, there is the whole related issue of GSE 
reform. I am happy----
    Chairman SCHWEIKERT. God forbid we go there because we will 
spend all day.
    Mr. LEVITIN. I am happy to talk at length about that. I 
have another testimony but it is not an easy issue.
    Chairman SCHWEIKERT. Thank you, Professor.
    Ms. Peirce, we were actually back and forth in testimony. I 
would like to try to help everyone sort of understand what you 
see from your research of rules that are in effect, rules that 
are coming, rules that we are not sure of because right now it 
is call your lawyer. Just as an example here of would an 
institution write a non-QM loan and put it on their books for 
fear of what happens tomorrow? From some of your research, what 
are you finding out there in sort of the command and control 
regulatory environment we are putting on small institutions 
today?
    Ms. PEIRCE. Well, I think that you are right to kind of 
segregate it between what is happening and what is coming down 
the road, but I think a lot of what is the problem is that 
there are mortgage regulations that are coming in place in 
January. People have been saying, look, we are not ready. So 
even if we might be able to adjust to these, we need more time 
and they are not getting the time. So there is that problem. 
And then there is the problem of the uncertainty about what is 
going to happen down the road. The Consumer Bureau has been 
focused on putting rules in place that they had to put in 
place, but what is going to come after that, I think people 
have a lot of uncertainty about that. And then there is just 
the existence of the change in the regulators' kind of state of 
mind and the examination change which is already affecting 
small banks. And I think they are already feeling the change in 
the way that examiners are coming in and looking at what they 
are doing.
    Chairman SCHWEIKERT. Okay. Thank you, Ms. Peirce.
    Mr. Mitchell, I had a couple of questions for you, just 
because I do not think we have communicated it much. Tell me 
about your institution here in D.C. What would be the typical 
demographic of the customers you serve?
    Mr. MITCHELL. Typically, it is in low and moderate income 
neighborhoods. We are a CDFI under the Treasury Department, 
mostly African-Americans. That is changing a lot by virtue of 
the fact that we are doing more commercial real estate lending 
and the demographics of Washington are changing.
    Chairman SCHWEIKERT. Now, also, you were the president of 
the Association of the Smaller Banks.
    Mr. MITCHELL. Chairman of the National Bankers Association, 
which makes up a lot of minority owned and specialty 
institutions and just small, minority and women-owned 
institutions.
    Chairman SCHWEIKERT. Because Professor Levitin actually 
touched on it, I am curious from your chairmanship there, your 
presidency. Do you see any Cascade effect in sort of a Basel 
III environment which was really meant for I truly believe more 
money center banks getting down to our neighborhood and 
community institutions?
    Mr. MITCHELL. It definitely is cascading down to community 
banks like ours, but Basel III, just by the nature of the 
Committee itself is really for international banks, 
multinational and international institutions and much larger 
institutions.
    Chairman SCHWEIKERT. If you had to talk right now and 
share, saying the staff difference in time. So if it were a 
couple of years ago you were making the argument that your 
employees were working with customers; today they are doing 
regulatory compliance. How much of that is also them having to 
reach out to consultants and outside to try to find out if you 
are operating in the proper manner?
    Mr. MITCHELL. Well, it depends on the employee, but if I 
had to average it out among 120 employees, I would probably say 
everybody is probably spending 10 percent more time on 
regulatory and legislative issues. And that is a lot when you 
talk about 120 employees.
    Chairman SCHWEIKERT. Ms. Sweet, you actually touched on 
something very similar of what has happened to some of your 
cost structure of how many outside lawyers and consultants you 
are now using. Can you give us a window into what that is and 
that cost?
    Ms. SWEET. I would say just on the CFPB, for our 
consultants and legal opinions and other costs that are 
associated with that compliance is close to $50,000. To us that 
is enormous. Attorney fees is just astronomical. Our legal 
staff, it is a legal firm for credit unions. They now have a 
complete segment of their attorneys dealing with regulatory 
compliance. When I started with that firm 25 years ago, 
regulatory compliance was never what we would contact them for. 
So it is an enormous amount of money just from us that could 
have gone to our membership, that could have lowered those 
interest rates on loans and given higher dividends on savings 
accounts.
    Chairman SCHWEIKERT. Ms. Sweet, as sort of a neighborhood 
credit union, let us say I am an employee at the auto parts 
manufacturer, or Safeway, I do not have a lot of credit 
history. I would have been able to come and open my account at 
the neighborhood credit union and have you issue me a debit 
card, credit card, and begin to become what many of us refer to 
as bankable. I will share to anyone that cares, this is one of 
my fixations ever since I was county treasurer in Maricopa, of 
the amount of my population that was underbanked, almost 
unbankable because of lack of credit history, not because they 
were dodging a collection issue from an ex-wife.
    I know, there are always giggles on that one but it is the 
data.
    Ms. SWEET. Yes.
    Chairman SCHWEIKERT. Today is there more of a barrier for 
you to work with that underbanked individual? I am trying to 
understand my cost structure of how do I take in some 
communities 20, 25 percent of my population that is 
underbanked, how do I make that more robust? Is this cost 
structure, regulatory structure we are talking about now 
hurting that population?
    Ms. SWEET. It is enormously hurting the population. The 
time and resources that are spent trying to either identify the 
intent of the regulation. That time and money could be spent on 
education. We have very young people coming into financial 
institutions that have no credit whatsoever and they have never 
had a checking account. Our staff needs to take time with them 
and educate them, help them through the process and help them 
understand what is important to get them started and what is it 
going to take to get that credit report, because some day they 
may get married, have families, want the home, want the new 
car. It is important to educate all of our members so that 
their finances are set in place. And there are glitches in 
that, whether it is divorce or death or something, that we are 
there for them. Credit unions, community banks often are the 
people that we are willing and able outside of a lot of these 
regulatory timeframes to sit down with people and help them 
through their concerns.
    Chairman SCHWEIKERT. Thank you.
    And last one--and I appreciate your patience.
    Professor, and this may not be the place to do it, this may 
be something you and I should talk about over a cup of coffee.
    If I came to you and said you could have an A and a B 
regulatory environment--A is what we are doing and B would be 
one where we approach Mr. Mitchell's institution and say, if 
you hold 15 percent true equity capital--not operating but 
equity capital--at that point all we ask from you is a single 
touch audited financials. Because if we look back at multiple 
financial events over the last century, it was small 
institutions that had equity, had capital on their books, 
survived. My father's favorite saying was ``for every 
complicated problem there is a simple solution that is 
absolutely wrong.'' In this case, is holding equity capital the 
ultimate buffer?
    Mr. LEVITIN. There is really no replacement for capital if 
you are worried about an institution's solvency. And the Basel 
rules, the existing ones and the ones that are coming in place, 
both play games. But if you just went with a very simple, just 
plain common equity, I do not know what the right percentage 
is. I cannot say that it is 15 percent, but if you went with 
just a simple plain common equity level, yeah, I think that 
would be an easy way to figure out. It would be easy to 
implement and if you put it high enough that I think would----
    Chairman SCHWEIKERT. So there may be an elegant solution 
that is sort of an A and a B?
    Mr. LEVITIN. Well, it will have effects on what kind of 
assets financial institutions hold. Because if you are not 
doing risk-weighted assets, that is going to really change what 
kind of lending is done.
    Chairman SCHWEIKERT. Liquidity score. All right. Professor, 
thank you.
    Ranking Member Clarke.
    Ms. CLARKE. Mr. Mitchell, section 1070 of Dodd-Frank 
requires information gathering regarding loans made to women 
and minority-owned businesses. Critics have cited this section 
as being prohibitively expensive and an undue burden to small 
financial institutions.
    So I have a two-part question for you. How is this a 
prohibitively expensive burden, and in a cost benefit analysis, 
does this regulation not give us a better idea of how we can 
assist these small businesses gain capital access?
    Mr. MITCHELL. I think it does have a benefit. However, if 
you look at HMDA regulations, which is pretty much the same 
thing as it applies to mortgages, the number of different data 
points and the number of different fields that have to be 
compiled and accurately compiled, many institutions even now 
get it wrong and the penalties are very high. So it can be very 
expensive. It is definitely very expensive.
    Ms. CLARKE. So then I am going to apply another question to 
that.
    What would you see as probably an alternative to be able to 
get at the goal of trying to basically preserve this space in 
banking for these institutions?
    Mr. MITCHELL. Well, number one in the community banking 
space, we care about our customers. I mean, all over the 
country, not just urban community banks, but rural community 
banks. We are there because we know the community, we want to 
serve the community, we want to see the community developed, we 
want to provide access to capital in the community. We are part 
of those communities. So we just do business differently. And I 
do not think you see discrimination problems at community 
banks. That is really the long and short of it. And I think 
larger institutions, they operate in ways that larger 
institutions operate. I think there is evidence that they have 
been discriminatory but I do not think that is necessarily true 
across all the board for large institutions. They do what they 
do and they focus on larger customers and larger deals. And so 
the individuals fall through the cracks for one reason or 
another, and that is exactly why they tend to standardize a lot 
of their credit processes for smaller businesses and 
individuals.
    Ms. CLARKE. I want to open up the question to the other 
members of the panel.
    We are just trying to figure out if Section 1070 of Dodd-
Frank is prohibitively expensive and burdensome, and in terms 
of cost-benefit analysis, is it worth it? Does anyone else have 
a take on that? Professor Levitin?
    Mr. LEVITIN. Well, if you are concerned about 
discriminatory lending, if you want to make sure that there 
really is equal credit opportunity in the United States, the 
only way that we can really police that is if there is data 
available. The Home Mortgage Disclosure Act creates that data 
for mortgage lending but we do not have comparable data for 
other types of lending. There is a cost to gathering that data, 
and it is really just a question of do you think that the costs 
of gathering that data are worth the benefits of being able to 
police discriminatory lending? In my mind it is an easy 
question but I imagine someone could disagree on that.
    Ms. PEIRCE. Yeah. I would be one of those people who would 
disagree.
    My concern is that data collection often sounds like an 
easy thing but it does end up being a really big cost on the 
institutions that have to do it. I think the best thing that we 
can do in terms of preventing discriminatory lending is to make 
sure that we have that diversity in our financial system, and 
that is the concern that I have. You know, when these smaller 
institutions decide I am not a banker anymore. I am just a 
regulatory compliance person so I am going to shut my 
institution down, that is when we are going to see people who 
we would want to be able to get loans not be able to get the 
loans that they would otherwise have gotten.
    Ms. CLARKE. Did you want to add anything, Ms. Sweet?
    Ms. SWEET. I do. I believe that there is an area of this 
that we need to look at. We have, as credit unions we have our 
NCUA, which is our regulatory examination process. And during 
that there are all types of compiling of information and 
reporting to them on a quarterly basis and then annually them 
coming in and examining us which takes about now through all 
the regulations through the years about 90 days to get through 
that. So there is already in place--I do not believe we need 
new regulators. I do not believe we need new regulations. We 
are compiling that data and have for quite some time and it is 
examined already.
    Ms. CLARKE. So I am just wondering, part of the challenges 
that we face as a legislative body is sort of working from the 
outside in. It always amazes me the level of consultation. In 
other words, living vicariously through institutions like 
yours. That ought to take place so that we have an informed 
process. It does not take place often enough. And so I just 
wanted to just to share with colleagues that I think it 
benefits us in the long run. These ``one size fits all'' 
solutions, the unintended consequences oftentimes are not 
really worth it. Even if there is the fear that these 
regulations will be burdensome and it shocks the culture of the 
institutions that we are trying to preserve, then we are 
defeating the purpose that we are all seeking.
    I am rambling right now but it just amazes me that we would 
not have done a fear analysis and have a strong and robust 
conversation with the diversity of institutions that we are 
trying to regulate here so that we do not create a crisis by 
trying to avert a crisis.
    With that, Mr. Chairman, I yield back.
    Chairman SCHWEIKERT. Thank you, Ms. Clarke.
    Mr. Rice?
    Mr. RICE. Thank you, Mr. Chairman. And I would certainly 
like to associate myself with the comments Ms. Clarke just 
made. I do believe that we need to take a very close look at 
this law.
    Mr. Mitchell, something you said earlier peaked my 
curiosity. You were talking about discriminatory lending 
practices and you indicated, I think, that the standardization 
of lending criteria by big banks led to some of that. Is that 
right?
    Mr. MITCHELL. No, not necessarily. I just think that there 
was discrimination with some of the larger institutions. The 
point I was trying to make is that community banks by nature is 
we do a lot of creative personalization in trying to make 
loans.
    Mr. RICE. And why do you do that? Why do you have to do 
creative personalization?
    Mr. MITCHELL. Because you know, I think we more so want to 
make loans then we want to decline them.
    Mr. RICE. And does not this law--in an effort to 
standardize these loans, does it not take away your ability to 
do exactly that?
    Mr. MITCHELL. Absolutely.
    Mr. RICE. And that disproportionately affects who?
    Mr. MITCHELL. Low and moderate income individuals
    Mr. RICE. Right. So what we are doing is we are actually, 
probably expanding income disparity, expanding access to 
capital--disbanding incomes and access to capital with this 
law. And is this not exactly the opposite of what this law was 
supposed to do?
    Mr. MITCHELL. I believe so.
    Mr. RICE. I think this law is fundamentally flawed. Perhaps 
more so. I think it threatens our economy perhaps more than 
most because I believe America is built on innovation and 
competitiveness, and we complete with people around the world, 
not just in this country. And everybody is trying to complete. 
And we needed if we are better by small degrees. It is not vast 
things. It is small degrees. And I think that this law makes us 
let competitive. One of the big things that American has had as 
an advantage is access to capital.
    A disproportionate amount of the jobs in this country are 
created by small businesses. And a disproportionate amount of 
those jobs are created by startup businesses. Now, when you are 
looking to make a loan, I am going to go to Mrs. Peirce now 
because I have not picked on you yet.
    Do you think when a small bank is looking to make a loan to 
a small business startup, is it going to be easier to more 
complicated under Dodd-Frank?
    Ms. PEIRCE. Certainly more complicated. It is definitely 
more complicated. Of course, I mean, the regulators are coming 
and they are looking more closely, and so what I had one small 
banker say to me is look, I can know that a business is going 
to pay back a loan, but I will not make that loan because I 
know that I am going to have to explain it to a regulator later 
and I will not be able to because I will not be able to say--
the regulator is not going to meet the small businessman and is 
not going to know the same things I know about that person. And 
so it is impossible to justify it so I just will not do it.
    Mr. RICE. All right. And I guess this is not an area where 
you are really qualified, but in small businesses, the jobs 
that are created, are those jobs, do you think, going to higher 
income people or lower income people?
    Ms. PEIRCE. Well, you are right to say that I am probably 
not qualified to answer that but my guess is that those would 
mostly be lower income people.
    Mr. RICE. So that is another aspect of this law that 
attacks the middle class.
    Ms. PEIRCE. Yeah. I mean, when you put constraints on the 
ability of people to get capital, it has follow-on effects in 
the economy.
    Mr. RICE. If you look at areas where America has succeeded 
in competing worldwide, and we have for decades, but if you 
look at our infrastructure which is other countries are coming 
up and our infrastructure I would argue is declining or perhaps 
crumbling. When you look at our educational system, certainly 
other countries have lifted themselves, and perhaps we have 
been stagnant or fallen behind. And now you look at our access 
to capital which is just one more area where we are making this 
country less competitive. I think this law, the federal 
regulatory environment does more to stifle innovation and job 
creation than anything else, and I think this is a huge 
addition to the federal regulatory environment and I certainly 
think we need to rethink the entire law, but if not that, as 
much of it as we can. Thank you very much.
    Chairman SCHWEIKERT. Sorry, Mr. Rice.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. I appreciate the 
deference to allow me to be here today and to participate in 
this hearing. I certainly appreciate everybody's great 
testimony.
    I just have a few comments. Ms. Sweet, in your testimony 
this morning, written testimony, you made the comment that one 
of every two dollars lent to small businesses comes from 
community banks. And I think that is a very, very significant 
figure. I think that is important that we understand the role 
that the banks play in the communities that they are in.
    We talked about that a little bit at length here in the 
last couple of minutes but I think it needs to be reinforced 
that this is a tremendous role that they have. They are the 
hands-on, if you will, institutions within the communities that 
they serve.
    Mr. Mitchell made the comment a few minutes ago about--and 
I noticed in your testimony also you made comments to the 
effect that the small community banks tailor the products to 
fit their individual needs, and I thought Mr. Mitchell did a 
good job explaining it. They have the ability to do that where 
the big banks sometimes, that is where they get themselves in 
compliance problems, have a standardized way of looking at 
things and if it does not fit, you do not get the loan, where 
the other institutions seem to be able to make those 
adjustments on the fly.
    Would you like to comment just a little bit more and 
elaborate? I know you went into it a little bit just now but I 
think it is important to reinforce that point.
    Ms. PEIRCE. Certainly. I think that is one of the beauties 
of the system that we have. There is nothing wrong if a big 
bank wants to make only standardized loans, that is fine as 
long as we have a system that allows these smaller institutions 
to come in and fill the gap. And that is the situation that we 
have had, but I think the more that you put in a regulatory 
framework that is designed with these big banks in mind, you 
leave out the smaller institutions. And what we are seeing in 
the survey that the Mercatus Center conducted is that a lot of 
people are saying we are just going to try to stay away from 
the consumer business altogether because it is too dangerous 
for us to be there. So while we would like to make those loans, 
we just will not make them anymore.
    Mr. LUETKEMEYER. Did you say in your survey that there was 
an intimidation factor by the regulators with regards to how 
punitive they are sometimes with the way that they enforce the 
rules?
    Ms. PEIRCE. Yeah. I think one of the comments that sort of 
struck me was that you can be trying to do everything right and 
you make a mistake and the consequences are so high of that 
mistake. And so because there are so many rules to keep track 
of it is really difficult to stay on the right side of the 
line.
    Mr. LUETKEMEYER. I think this is one of the comments that 
was made and I had a long discussion with the FDIC chairman 
with regards to this. Mr. Mitchell, you made comment in your 
testimony to the FDIC study last fall, and you made the comment 
with regards to HMDA. This has been just a nightmare for the 
institutions to comply with. I think Ms. Sweet made a comment 
about it a minute ago as well. What has been your experience 
with regards to regulators and HMDA? I mean, all this is, for 
those who do not know what is going on is just box-checking. 
You check a box to make sure that you total individual this 
statement. You hand them this piece of paper. You make sure--if 
you go down the list there are about 25 different things, and 
if you miss one box the whole loan, the whole loan is 
considered in violation versus one boxed fail check. What is 
your experience with that?
    Mr. MITCHELL. Well, first of all, I think HMDA could be 
simplified, and I think there are small business reporting 
requirements that need to be something that can be complied 
with and be relatively simple to achieve the objectives with 
not much expense.
    But with respect to HMDA, I speak to bankers all the time 
and all bankers have problems with HMDA because it is a lot of 
box-checking. And if you make a mistake with one field, you 
know, there could be 16 or 20 different fields just for one 
loan, and if you make a mistake with one field, you have made a 
mistake for that entire loan. We are administratively pretty 
well run when it comes to compliance and we continue to 
struggle with HMDA.
    Mr. LUETKEMEYER. From my experience in talking with 
security bankers, you are not alone. It seems like everybody--
and this is something I have talked with the regulators about 
is having some deference here with regards to trying to comply 
with all these things. And I will give you a quick example.
    In Missouri, over about a two and a half year period, FDIC 
had civil penalties for 160 to 180 violations. And during the 
same period of time, the fail/uncomfortable had a total I think 
of five. So we had a long discussion of ``look, what is going 
on here?''
    Now, he used to be a regulator himself. This is not the way 
that this is supposed to be enforced. Tell us what is going on. 
I think they are trying to take a look at this but the point I 
am trying to make is it seems to be an intimidation factor. 
Sometimes also with regulators it makes it very difficult for 
these kinds of banks to exist because they do not have the 
power to back. Would that be a fair statement?
    Mr. MITCHELL. There is no question about it.
    Mr. LUETKEMEYER. Thank you.
    And again, Mr. Chairman, I appreciate your deference and I 
appreciate the opportunity to be with you. Thank you.
    Chairman SCHWEIKERT. Mr. Luetkemeyer, it was fun having you 
on the Committee with your background.
    Ms. Clarke, okay to close up?
    Chairman SCHWEIKERT. I am going to share just the old 
danger of when they hand me a microphone and there is no clock 
on me. This is a Small Business Oversight Subcommittee But the 
reality for all of you, what you do, whether it be helping 
organize the regulatory environment as a community banker, as a 
community credit union, as someone trying to work on public 
policy? The access to capital is the lubricant that runs this 
engine of an economy. We spend a lot of time talking about you 
as small businesses and your clients and the cost of the 
clients. But there is that next tier out and that is when your 
clients are those small businesses. The person coming in, 
trying to buy a piece of real estate and the cascade effect 
that has. Or trying to find access to capital. Ranking Member 
Clarke and I were just kibitzing a bit on the ideas of the 
flexibility for our small community banks and neighborhood 
credit unions to be able to also be the alternative to a check-
cashing store or a title loan or those things, but that is a 
very different view in a regulatory environment. There has got 
to be a way to create lots of competition, lots of access to 
capital for things that grow our economy. And it is helping 
that part of our population that is underbanked, but also the 
person who is starting a business. For many of us we keep 
saying access to capital is going to be very different by the 
end of this decade, if we do not screw it up. But yet I see 
what is coming out of the regulatory environment on equity 
crowdfunding and it breaks my heart because this egalitarian 
idea is going to be crushed if the rule moves forward where it 
is. I see that happening in our community banks and our credit 
unions of you are just going to move up the food chain and 
income and status. And once again, we were going to leave more 
and more of our brothers and sisters there underbanked and left 
in the cold.
    So I appreciate this discussion, it is a big discussion. My 
fear is we do not spend enough time trying to also come up with 
a mechanical solution. There is also a lot of folklore about 
what we went through in 2008, what caused the cascade. We 
discuss community banks. Well, if community banks' real estate 
portfolios had not collapsed in value, how many of them would 
be here today? And was that from their poor underwriting or was 
it at the top of the pyramid that collapsed that came down 
through much larger institutions.
    So there is lots of data, and a lot of bad data out there 
that we make these decisions on.
    So as we wrap up today--I think I make senior staff nervous 
when I go off script like that--but with that I ask unanimous 
consent that members have five legislative days to submit 
statements and supporting materials for the record. Also, as 
witnesses, do be prepared that there may be some questions that 
come your way that we will ask you to respond to.
    And without objection, this hearing is adjourned.
    [Whereupon, at 11:41 p.m., the Subcommittee was adjourned.]
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                          Introduction

    Good morning Chairman Schweikert, Ranking Member Clarke and 
Members of the Subcommittee. My name is Linda Sweet and I am 
testifying this morning on behalf of the National Association 
of Federal Credit Unions (NAFCU). I serve as President and CEO 
of Big Valley Federal Credit Union in Sacramento, California. 
Big Valley was founded in 1953 as Safeway Sacramento Employees 
Federal Credit Union and serves Safeway stores as far as Nevada 
and most of northern California.

    Over the years, Big Valley merged with four small credit 
unions unaffiliated with Safeway and therefore has a diverse 
field of membership. Three of our nine full time employees make 
up our management team that consists of a former branch manager 
of a large bank, a former employee of one of the largest credit 
unions in California, and the CEO of a credit union we merged 
with. Opening 60 years ago with only $50.00 on deposit, Big 
Valley has grown to $56 million in assets and serving more than 
7,000 members with two branch locations. In my 40 years with 
Big Valley, 25 as the President/CEO, I have watched the 
industry go from helping people with their financial needs and 
life goals, to a point now where I have limited member 
interaction due to the unprecedented regulatory onslaught my 
credit union has faced since the financial crisis.

    NAFCU is the only national organization exclusively 
representing the interests of the nation's federally chartered 
credit unions. NAFCU member credit unions collectively account 
for approximately 68 percent of the assets of all federally 
chartered credit unions. NAFCU and the entire credit union 
community appreciate the opportunity to discuss the regulatory 
burden that our nation's credit unions face. The overwhelming 
tidal wave of new regulations in recent years is having a 
profound impact on credit unions and their ability to serve 
some 96 million member-owners nationwide.

    Historically, credit unions have served a unique function 
in the delivery of essential financial services to American 
consumers. Established by an Act of Congress in 1934, the 
federal credit union system was created, and has been 
recognized, as a way to promote thrift and to make financial 
services available to all Americans, many of whom may otherwise 
have limited access to financial services. Congress established 
credit unions as an alternative to banks and to meet a precise 
public need--a niche that credit unions still fill today.

    Every credit union is a cooperative institution organized 
``for the purpose of promoting thrift among its members and 
creating a source of credit for provident or productive 
purposes.'' (12 USC 1752(1)). While nearly 80 years have passed 
since the Federal Credit Union Act (FCUA) was signed into law, 
two fundamental principles regarding the operation of credit 
unions remain every bit as important today as in 1934:

           credit unions remain wholly committed to 
        providing their members with efficient, low-cost, 
        personal financial service; and,

           credit unions continue to emphasize 
        traditional cooperative values such as democracy and 
        volunteerism.

    Credit unions are not banks. The nation's approximately 
6,700 federally insured credit unions serve a different purpose 
and have a fundamentally different structure than banks. Credit 
unions exist solely for the purpose of providing financial 
services to their members, while banks aim to make a profit for 
a limited number of shareholders. As owners of cooperative 
financial institutions united by a common bond, all credit 
union members have an equal say in the operation of their 
credit union--``one member, one vote''--regardless of the 
dollar amount they have on account. Furthermore, unlike their 
counterparts at banks and thrifts, federal credit union 
directors generally serve without remuneration--a fact 
epitomizing the true ``volunteer spirit'' permeating the credit 
union community.

    America's credit unions have always remained true to their 
original mission of ``promoting thrift'' and providing ``a 
source of credit for provident or productive purposes.'' In 
fact, Congress acknowledged this point when it adopted the 
Credit Union Membership Access Act (CUMAA - P.L. 105-219). In 
the ``findings'' section of that law, Congress declared that, 
``The American credit union movement began as a cooperative 
effort to serve the productive and provident credit needs of 
individuals of modest means ... [and it] continue[s] to fulfill 
this public purpose.''

    Credit unions have always been some of the most highly 
regulated of all financial institutions, facing restrictions on 
who they can serve and their ability to raise capital. 
Furthermore, there are many consumer protections already built 
into the Federal Credit Union Act, such as the only federal 
usury ceiling on financial institutions and the prohibition on 
prepayment penalties that other institutions have often used to 
bait and trap consumers into high cost products.

    Despite the fact that credit unions are already heavily 
regulated, were not the cause of the financial crisis, and 
actually helped blunt the crisis by continuing to lend to 
credit worthy consumers during difficult times, they are still 
firmly within the regulatory reach of several provisions 
contained in the Dodd-Frank Act, including all rules 
promulgated by the Consumer Financial Protection Bureau (CFPB). 
The breadth and pace of CFPB rulemaking is troublesome as the 
unprecedented new compliance burden placed on credit unions has 
been immense.

    The impact of this growing compliance burden is evident as 
the number of credit unions continues to decline, dropping by 
more than 800 institutions since 2009. While there are a number 
of reasons for this decline, a main one is the increasing cost 
and complexity of complying with the ever-increasing onslaught 
of regulations. Many smaller institutions cannot keep up with 
the new regulatory tide and have to merge out of business or be 
taken over.

    Credit unions didn't cause the financial crisis and 
shouldn't be caught in the crosshairs of regulations aimed at 
those entities that did. Unfortunately, that has not been the 
case thus far. Accordingly, finding ways to cut-down on 
burdensome and unnecessary regulatory compliance costs is a 
chief priority of NAFCU members. As evidenced by today's 
hearing, it is clearly a priority of the Subcommittee. We 
appreciate your focus on this important issue.

          Growing Regulatory Burdens for Credit Unions

    A 2011 NAFCU survey of our membership found that nearly 97% 
of respondents were spending more time on regulatory compliance 
issues than they did in 2009. A 2012 NAFCU survey of our 
membership found that 94% of respondents had seen their 
compliance burdens increase since the passage of the Dodd-Frank 
Act in 2010. Furthermore, a March 2013 survey of NAFCU members 
found that nearly 27% had increased their full-time equivalents 
(FTEs) for compliance personnel in 2013, as compared to 2012. 
That same survey found that over 70% of respondents have had 
non-compliance staff members take on compliance-related duties 
due to the increasing regulatory burden. This highlights the 
fact that many non-compliance staff are being forced to take 
time away from serving members to spend time on compliance 
issues.

    At Big Valley FCU, I have seen our compliance costs 
steadily climb from year-to-year, and skyrocket over the last 
few. Unfortunately, this is the same at many credit unions. A 
recent survey of NAFCU members found that of those credit 
unions that are increasing their education budgets for next 
year, 84% cited increasing compliance burdens as the most 
important factor for this increase. Furthermore, it must be 
noted that new regulations also impact many of the vendors 
credit unions deal with (such as those providing forms, etc.), 
and the same NAFCU survey found that over 70% of responding 
credit unions have seen increased vendor costs stemming from 
new regulations.

    These increased costs at Big Valley have resulted in the 
inability to provide the quality of service our members have 
grown accustomed to. Now, we are often slower to offer services 
that our members want and there are some services we have been 
forced to cut back on. For example, in many cases we are unable 
to offer a member a mortgage product that we were once able to. 
We have actually started to outsource many of our mortgages 
because we cannot afford a loan officer with the qualifications 
that new CFPB regulations require. In addition to requiring a 
member to turn elsewhere for a product we once offered them, 
they are faced with increased costs that often rise to several 
thousands of dollars. That certainly seems like an unintended 
and unnecessary cost to the consumer that the new agency was 
meant to protect.

    The thousands of pages of new mortgage regulation and 
guidelines from the CFPB is a prime example of the growing 
compliance burden our nation's credit unions face. Covering 
everything from the scope of coverage under the Home Ownership 
and Equity Protection Act, comprehensive changes to mortgage 
origination and servicing, amended rules associated with the 
Truth in Lending Act and Financial Institutions Reform, 
Recovery, and Enforcement Act, changing requirements for escrow 
accounts and issuing rules under Dodd-Frank relative to what 
constitutes a ``qualified mortgage''--the breadth and pace of 
new requirements are daunting. A timeframe of under 12 months 
to implement the rules should cause serious pause for lawmakers 
and regulators. Even if the mortgage proposals are well 
intended, they come with a significant burden particularly to 
smaller institutions that have trouble just keeping up to be 
sure that they stay compliant with all of the new rules. That 
is why NAFCU has urged a delay in the implementation date of 
the new rules. Furthermore, we believe that CFPB Director 
Richard Cordray should be very specific about what he means 
when he promises flexibility for the first few months of 2014 
in relation to ``good faith'' compliance efforts with the 
mortgage rules slated to take effect in January. The CFPB must 
work closely with the NCUA to ensure that (1) the NCUA has a 
clear understanding of what ``good faith effort'' means; and 
(2) the NCUA communicates with credit unions their exam 
expectations in regard the mortgage rules.

    While some may argue that the directive aspects of the 
``rule'' itself are far less than thousands of pages, they do 
not recognize the extent of what it takes to be compliant. In 
order to fully comprehend and comply with the ``rule'' a credit 
union employee must read the regulation in its entirety, 
interpret the law and its intent, write or rewrite the credit 
union's policies and procedures, and identify which supervisor 
is assigned the responsibility for monitoring, compiling and 
reporting back to management on the necessary information. 
Management then either audits or hires an outside audit firm, 
whichever is required by the law, to verify that the regulation 
is followed. Keep in mind that this is required of each and 
every regulation, in addition to the employee handling all 
other daily responsibilities. For most small credit unions, 
that employee is the only person handling the same regulatory 
issues that a megabank must comply with. While the CFPB was 
created under the guise of ``leveling the playing field'' with 
unregulated entities, a survey of NAFCU members this fall found 
that only 4% of responding credit unions have seen a positive 
impact from CFPB regulating the unregulated.

    For small institutions who are just trying to keep up, the 
ever-increasing amount of time consumed by compliance is 
daunting. The NCUA has changed the examination process over the 
years, which has resulted in the transformation from 3 to 5 
days of helpful input and teamwork, to a process that now 
requires months of preparation. The examination time at Big 
Valley, from start to finish, takes roughly 90 days. Regulatory 
requirements have also shortened the time between examinations 
which then condenses the time to prepare for other regulatory 
audits; CPA audit, BSA audit, ACH audit and Risk audit also 
take months to prepare for. Furthermore, it seems that these 
exams are taking longer due to the large number and complexity 
of regulations and not because of the increasing size or 
complexity of the credit union.

    The 5300 Call Report requirements by the NCUA have 
increased from a few hours every 6 months to three weeks of 
compiling and reporting data every quarter. Each quarter's 
instructions must be reviewed, as there are often changes that 
are vague, open to interpretation, and requiring clarification. 
Compiling the data is mostly a manual process because the 5300 
Call Report requirements change faster than a data processor 
can reprogram the computer systems to search and assemble the 
required data.

    The ever-increasing regulatory burden on credit unions 
stems not just from one single onerous regulation, but a 
compilation and compounding of numerous regulations--one on top 
of another--stemming from a number of federal regulators. A 
number of these regulations may be worthwhile and well-
intentioned, but they are often issued with little coordination 
between regulators and without elimination or removal of 
outdated or unnecessary regulations that remain on the books. 
It was with this in mind that former NAFCU President and CEO 
Fred Becker wrote then Treasury Secretary Timothy Geithner in 
his role as Chairman of the Financial Stability Oversight 
Council (FSOC) in June of 2012. In this letter, NAFCU urged the 
FSOC to focus on its duty to facilitate regulatory coordination 
under the Dodd-Frank Act. A copy of this letter is attached to 
this testimony (Attachment A).

    In testimony before a House Financial Services Subcommittee 
in May of 2012, NAFCU Board Member and witness, Ed Templeton 
noted that it is not any single regulation, but the panoply of 
the regulatory regime of numerous regulators, each operating 
``within their own lanes'' and with minimal, if any, 
interagency coordination, that not only helps create, but also 
significantly magnifies today's undue regulatory burden on 
credit unions and other small financial institutions.

    It is important to make clear that the tsunami of 
regulatory burden is impacting all credit unions and hampering 
the industry's ability to serve our nation's 96 million credit 
union members. NAFCU believes that any relief efforts should 
not bifurcate the industry by asset size and would not support 
such an approach. Providing broad-based relief will help credit 
unions of all sizes, especially smaller institutions like Big 
Valley FCU, as we have limited compliance resources and don't 
have the economy of scale of larger institutions. All credit 
unions need regulatory relief and we hope that this 
Subcommittee can help provide it.

        Areas Where Credit Unions Need Regulatory Relief

    In early February of this year, NAFCU was the first credit 
union trade association to formally call on the new Congress to 
adopt a comprehensive set of ideas generated by credit unions 
that would lead to meaningful and lasting regulatory relief for 
our industry. As part of that effort, NAFCU sent a five-point 
plan for regulatory relief to Congress to address some of the 
most pressing areas where credit unions need relief and 
assistance (Attachment B). There are number of provisions in 
this plan that have been introduced as part of the Regulatory 
Relief for Credit Unions Act of 2013 (H.R. 2572), by 
Representative Gary Miller (R-CA). NAFCU and its member credit 
unions appreciate this opportunity to outline our ideas for 
meaningful and lasting regulatory relief for our industry. The 
five points outlined in our plan include:

   1. Administrative Improvements for the Powers of the NCUA

    NAFCU believes that Congress should take steps to 
strengthen and enhance the National Credit Union Administration 
(NCUA).

    First, the NCUA should have authority to grant parity to a 
federal credit union on a broader state law, if such a shift 
would allow them to better serve their members and continue to 
protect the National Credit Union Share Insurance Fund 
(NCUSIF). This is a parity issue that will enable federally 
chartered credit unions to adequately serve their members in 
instances where a state law is more conducive to the lending 
needs and environment in that particular state. It is important 
to note that this does not simply mean that a federal credit 
union can default to a state law. The NCUA would need to 
approve any such shift on a case-by-case basis, ensuring that 
safety and soundness concerns are addressed. It also must be 
recognized that in many instances a federal rule addressing an 
issue that has arisen in a particular state or region simply 
does not exist. Without the ability to instead use the state 
law, federal credit unions could be hamstrung in trying to 
serve their member-owners. We are pleased that this provision 
was included in the Regulatory Relief for Credit Unions Act of 
2013 (H.R. 2572).

    Second, the NCUA should have the authority to delay the 
implementation of a CFPB rule that applies to credit unions, if 
complying with the proposed timeline would create an undue 
hardship. Furthermore, given the unique nature of credit 
unions, the NCUA should have authority to modify a CFPB rule 
for credit unions, provided that the objectives of the CFPB 
rule continue to be met. Since the modified rule would be 
substantially similar to the original rule, and achieve the 
same goal, the argument that this would undermine the CFPB's 
intentions is not valid. Granting NCUA this authority would 
help address one major issue facing the CFPB. Unfortunately, 
the CFPB has been given the impossible task for writing one 
rule that will work well for both our nation's largest banks 
and the smallest credit unions. Such a provision is also 
included in H.R. 2572.

    An example of where this is necessary is the CFPB's new 
remittance transfer rule. As part of a regulatory relief 
package in the 109th Congress (H.R. 3505 / P.L. 109-351), 
Congress explicitly granted all credit unions the ability to 
offer remittance services to anyone in their field of 
membership in an effort to draw the unbanked and under-banked 
into the system by familiarizing them with credit unions. NCUA 
could very likely tailor this new rule while maintaining the 
CFPB's intent. The NCUA has already had this type of authority 
in the past in conjunction with other regulators, and has this 
authority now with tailoring Truth in Savings to the unique 
nature of credit unions.

    NAFCU is seriously concerned about the remittance transfer 
rule and has taken every opportunity to educate the CFPB on the 
position of credit unions and how the new rule will likely 
impact the marketplace. The overly broad definition of 
``remittance transfer'' used in the rule imposes new 
requirements on all international electronic transfer of funds 
services, and not just transmissions of money from immigrants 
in the U.S. to their families abroad--which are in fact 
conventional remittances. In fact, a September 2013 survey of 
NAFCU members found that nearly 25% of respondents will cease 
offering remittance services because of the new rule.

    Third, the NCUA and the CFPB should be required to conduct 
a look-back cost-benefit analysis on all new rules after three 
years. The regulators should be required to revisit and modify 
any rules for which the cost of complying was underestimated by 
20% or more from the original estimate at the time of issuance. 
Credit unions did not cause the financial crisis yet all credit 
unions are subject to the same CFPB rules as larger for-profit 
mega banks. As a result, credit unions find themselves drowning 
in regulatory burden stemming from the CFPB and NCUA. It should 
be noted that many credit unions only have one or two people 
dedicated full-time to compliance issues, yet they have to 
comply with the same CFPB rules as mega banks that have an army 
of lawyers to work on these issues.

    There are many instances where the regulator is off base in 
terms of projecting the compliance cost for credit unions. 
While some examples may seem insignificant, it is the 
cumulative effect of layering requirements on top of 
requirements that creates an environment where a credit union 
simply cannot keep up. For example, the CFPB recently expanded 
their survey of credit card plans being offered by financial 
institutions to include credit unions. The survey purports that 
the ``Public reporting burden for this collection of 
information is estimated to average 15 minutes per response, 
including the time to gather and maintain data in the required 
form and to review instructions and complete the information 
collection.'' Feedback from NAFCU members indicates that it 
takes more than 15 minutes just to read the survey 
instructions, so the idea that the entire process of reviewing 
and completing the survey could take a total of 15 minutes 
defies common sense.

    In a March 2013 survey of NAFCU members, over 55% of 
respondents said that compliance cost estimates from the NCUA/
CFPB were lower than the credit unions actual cost (That is, 
the cost was greater than the estimate from the regulator). In 
the instances where the compliance costs were underestimated, 
the costs were off by more than 25% over a quarter of the time. 
Relief on this matter is also an important part of H.R. 2572.

    Fourth, new examination fairness provisions should be 
enacted to help ensure timeliness, clear guidance and an 
independent appeal process free of examiner retaliation. NAFCU 
supports the bipartisan ``Financial Institutions Examination 
Fairness and Reform Act'' (H.R. 1553) introduced on April 15, 
2013 by Representatives Shelley Moore Capito and Carolyn 
Maloney and is hopeful that the issues this bill seeks to 
address are given consideration moving forward. Credit unions 
must have adequate notice of and proper guidance for exams, the 
right to appeal to an independent administrative law judge 
during the appeal process, and be assured that they are 
protected from examiner retaliation.

    Finally, the Central Liquidity Facility (CLF) should be 
modernized with changes such as: (1) removing the subscription 
requirement for membership, and (2) permanently removing the 
CLF borrowing cap so that it may meet the current needs of the 
industry.

             II. Capital Reforms for Credit Unions

    NAFCU believes that capital standards for credit unions 
should be modernized to reflect the realities of the 21st 
century financial marketplace.

    First, the NCUA should, with input from the industry, study 
and report to Congress on the problems with the current prompt 
corrective action (PCA) system and recommended changes.

    Second, a risk-based capital system for credit unions that 
more accurately reflects a credit union's risk profile should 
be authorized by Congress. We ask that Congress amend current 
law to make all credit unions subject to risk-based capital 
standards, and direct the National Credit Union Administration 
(NCUA) to consider risk standards comparable to those of FDIC-
insured institutions when drafting risk-based requirements for 
credit unions. Credit unions need this flexibility to determine 
their own risk and to leverage all their resources to provide 
the best financial services possible to their membership. Such 
a proposal is a key element of H.R. 2572.

    Third, the NCUA should be given the authority to allow 
supplemental capital accounts for credit unions that meet 
certain standards. NAFCU applauds Reps. Peter King and Brad 
Sherman for introducing bipartisan legislation, the Capital 
Access for Small Businesses and Jobs Act (H.R. 719), that would 
improve the ability of credit unions to serve their members by 
enhancing their ability to react to market conditions and meet 
member demands. We would urge members of this Subcommittee to 
consider supporting this legislation.

    Under current law, a credit union's net worth ratio is 
determined solely on the basis of retained earnings as a 
percentage of total assets. Because retained earnings often 
cannot keep pace with asset growth, otherwise healthy growth 
can dilute a credit union's regulatory capital ratio and 
trigger nondiscretionary supervisory actions under prompt 
corrective action (PCA) rules. Allowing credit unions access to 
supplemental capital would help address this issue.

    Finally, given that very few new credit unions have been 
chartered over the past decade, including only 1 new credit 
union this year, and in order to encourage the chartering of 
new credit unions, the NCUA should be authorized to further 
establish special capital requirements for newly chartered 
federal credit unions that recognize the unique nature and 
challenges of starting a new credit union.

         III. Structural Improvements for Credit Unions

    NAFCU believes there should be improvements to the Federal 
Credit Union Act to help enhance the federal credit union 
charter.

    First, Congress should direct the NCUA, with input from the 
industry, to study and report back to Congress suggested 
changes to outdated corporate governance provisions in the 
Federal Credit Union Act as several parts haven't been updated 
to reflect modern day corporate governance since the advent of 
credit unions and the Acts in 1934. Congress, upon receiving 
the report, should ensure this mundane yet important issue 
receives the consideration it deserves. For example, the FCUA 
currently requires a two-thirds vote to expel a member who is 
disruptive to the operations of the credit union, at a special 
meeting at which the member in question himself has the right 
to vote. NAFCU does not believe that this is in line with good 
governance practices, and feels that the FCUA should be amended 
to provide federal credit union boards flexibility to expel 
members based on just cause (such as illegal behavior, 
harassment or safety concerns). Given more flexibility in 
statute, the NCUA would be able to work with credit unions on a 
case-by-case basis on a number of different issues pertaining 
to corporate governance.

    Second, a series of improvements should be made to the 
field of membership (FOM) restrictions that credit unions face. 
This should include expanding the criteria for defining 
``urban'' and ``rural'' for FOM purposes and also allowing the 
federal credit unions that convert to community charters to 
retain their current select employee groups (SEGs).

    Finally, Congress should clarify that all credit unions, 
regardless of charter type, should be allowed to add 
underserved areas to their field of membership.

         IV. Operational Improvements for Credit Unions

    Credit unions stand willing and ready to assist in our 
nation's economic recovery. Our industry's ability to do so, 
however, is severely inhibited by antiquated legislative 
restrictions.

    First, Congress should show America that they are serious 
about creating jobs by modifying the arbitrary and outdated 
credit union member business lending (MBL) cap. This can be 
done by raising the current 12.25% limit to 27.5% for credit 
unions that meet certain criteria. We are pleased to see 
legislation introduced in the form of H.R. 688, the Credit 
Union Small Business Jobs Creation Act, by Representatives Ed 
Royce (R-CA) and Carolyn McCarthy (D-NY) which would do just 
that. We would urge members of this Subcommittee to consider 
supporting this important legislation.

    An alternative approach to H.R. 688, would be raising the 
outdated ``definition'' of a MBL from last century's $50,000 to 
a new 21st century standard of $250,000, with indexing for 
inflation to prevent future erosion. Furthermore, MBLs made to 
non-profit religious organizations, made for certain 
residential mortgages (such as non-owner occupied 1-4 family 
residential mortgages), made to businesses in ``underserved 
areas'' or made to small businesses with fewer than 20 
employees should be given special exemptions from the arbitrary 
cap.

    Second, requirements to mail redundant and unnecessary 
privacy notices on an annual basis should be removed, provided 
that the credit union's policy has not changed and additional 
sharing of information with outside entities has not been 
undertaken since the distribution of the previous notice. At 
Big Valley FCU, unnecessary notices cost our institution 
several thousand dollars a year. NAFCU appreciates the work of 
Reps. Blaine Luetkemeyer (R-MO) and Brad Sherman (D-CA) in 
introducing the Eliminate Privacy Notice Confusion Act (H.R. 
749) to address this issue. As you may remember, this bill 
passed the House under suspension of the rules on March 12. We 
thank the House for its support and are pleased to see that 
similar legislation has been introduced in the Senate in the 
form of S. 635.

    Third, credit unions should be given greater authority and 
flexibility in choosing their investments, such as: allowing 
credit unions to invest in investment grade securities up to 
10% of assets; granting credit unions the ability to purchase 
mortgage servicing rights for investment purposes; and raising 
the investment limit in Credit Union Service Organizations 
(CUSOs). These small steps would allow credit unions to better 
balance and manage their investment options. Investment relief 
is also included in H.R. 2572.

    Fourth, the NCUA should be given greater flexibility in how 
it handles credit union lending, such as the ability to 
establish longer maturities for certain loans. Currently, most 
loans are statutorily capped at 15-year maturities. Allowing 
the NCUA to grant longer maturities for certain types of loans 
will allow credit unions to better offer the loan products that 
their members desire.

    Fifth, Congress should clarify that Interest on Lawyers 
Trust Accounts (IOLTAs) at credit unions are fully insured. We 
are pleased that this proposal has also been included in H.R. 
2572. Furthermore this issue has been recently addressed by 
legislation introduced by Representatives Ed Royce (R-CA) and 
Ed Perlmutter (D-CO) in the form of the Credit Union Share 
Insurance Fund Parity Act (H.R. 3468) which was unanimously 
reported out of the House Committee on Financial Services on 
November 14, 2013. To the extent the FDIC is required to fully 
insure IOLTA accounts, it is essential for the NCUA's share 
insurance fund to be treated identically in order to maintain 
parity between the two federal insurance programs. Congress 
passed a change to the Dodd-Frank law to clarify the FDIC's 
ability in this area, but failed to provide parity to credit 
unions in its last minute action. We urge Congress to correct 
this mistake and ensure continued parity. The Federal Credit 
Union Act states that funds held at a credit union are not 
protected by the share insurance fund unless the person or 
persons the funds belong to are also members of the credit 
union. Furthermore, many states require funds held by an 
attorney for clients to be held in accounts with federal 
insurance. In addition, IOLTA accounts often contain funds from 
many clients, some of whom may have funds in excess of the 
standard $250,000 share insurance limit. IOLTA funds are 
constantly withdrawn and replenished with new funds from 
existing and new clients. Accordingly, it is impractical to 
require attorneys to establish multiple IOLTAs in different 
credit union to ensure full share insurance coverage.

    Lastly, Congress should make sure that the NCUA has 
practical requirements on how credit unions provide notice of 
their federally-insured status in any advertising.

            V. 21st Century Data Security Standards

    Credit unions are being adversely impacted by ongoing 
cyber-attacks against the United States and continued data 
breaches at numerous merchants. The cost of dealing with these 
issues hinders the ability of credit unions to serve their 
members. It should be noted that these breaches are often not 
just the national breaches that make the evening news, but 
often are localized breaches that can have a devastating impact 
on a credit union and its members. A 2011 NAFCU survey of our 
membership found that these local breaches are often the most 
costly breaches to an institution. These breaches have led to 
increased costs to credit unions such as higher insurance 
costs, higher software costs, higher security costs, higher 
card reissuance costs and higher staffing costs to deal with 
data breaches.

    Congress needs to enact new 21st century data security 
standards that include:

           the payment of costs associated with a data 
        breach by those entities that were breached;

           establishing national standards for the 
        safekeeping of all financial information;

           requiring merchants to disclose their data 
        security policies to their customers;

           requiring the timely disclosure of entities 
        that have suffered a data breach;

           establishing enforcement standards for 
        provisions prohibiting merchants from retaining 
        financial data;

           requiring the timely notification of the 
        account servicer if an account has been compromised by 
        a data breach; and,

           requiring breached entities to prove a 
        ``lack-of-fault'' if they have suffered from a data 
        breach.

            Additional Areas Where Relief is Needed

    In addition to the five major areas outlined above, there 
are other areas where Congress should act to provide relief for 
credit unions and other financial institutions:

           Dodd-Frank Act Thresholds: The thresholds 
        established in the Dodd-Frank Act should be raised and 
        indexed. The Act established $10 billion as an 
        arbitrary threshold for financial institutions being 
        subject to the Durbin interchange price cap and the 
        examination and enforcement of the CFPB. We believe 
        that raising such a threshold would still accomplish 
        the same objectives, while not penalizing the number of 
        ``good actors'' that have found themselves above the 
        arbitrary $10 billion line but below mega-bank status. 
        As the very least, the $10 billion line should be 
        indexed for inflation on an annual basis--going back 
        retroactively to its establishment.

           Patent Reform: Despite the enactment of the 
        Leahy-Smith American Invents Act in 2011, many credit 
        unions find themselves targets of patent trolls and 
        their frivolous lawsuits and demand letters. NAFCU 
        supports efforts to curb these practices, such as H.R. 
        3309, the Innovation Act, which was recently reported 
        out of the House Judiciary Committee by an overwhelming 
        bipartisan margin.

           E-SIGN Act: Passed in 2000, the E-SIGN Act 
        requires financial institutions to receive consumer 
        consent electronically before electronic disclosures 
        can be sent to members. Credit unions cannot accept 
        their member's consent to receive e-statements over the 
        phone or in person, but must instead direct the member 
        to their own personal computers to consent 
        electronically, adding an unnecessary hurdle in this 
        otherwise straightforward process. This outdated 
        provisions is a burden for financial institutions and 
        consumers and should be stricken.

           CFPB Document Access: While Dodd-Frank 
        excludes financial institutions with $10 billion or 
        less in assets from the examination authority of the 
        CFPB, the new agency is provided with unlimited access 
        to financial reports concerning covered persons issued 
        by other regulators. Since the reports are drafted by 
        federal agencies as part of their examination 
        procedures, access by the CFPB to the reports 
        essentially amounts to an examination in itself, even 
        for those institutions with assets of $10 billion or 
        less. NAFCU does not believe that this is the result 
        Congress intended, and asks that this broad language be 
        narrowed appropriately.

           Appraiser Independence: Section 1472 of the 
        Dodd-Frank Act imposes mandatory reporting requirements 
        on credit unions and other lenders who believe an 
        appraiser is behaving unethically or violating 
        applicable codes and laws, with heavy monetary 
        penalties for failure to comply. These provisions would 
        impose a significant burden on each credit union to 
        essentially serve as a watchdog for appraisers 
        violating their own professional practices, and should 
        therefore be optional. If reporting continues to be 
        compulsory, NAFCU asks that Congress amend the severe 
        penalties of up to $10,000 or $20,000 per day which we 
        believe to be excessive.

           SAFE Act Definition of ``Loan Originator'': 
        The S.A.F.E. Mortgage Licensing Act of 2008 required 
        financial institutions to register any ``loan 
        originator.'' While the intent was to record 
        commissioned originators that perform underwriting, 
        regulators have interpreted the definition very broadly 
        to include any employee accepting a loan application, 
        and even call center staff or credit union volunteer 
        board members. NAFCU asks that Congress narrow the 
        meaning of what it means to ``take'' an application and 
        to ``offer'' or ``negotiate'' terms, which would help 
        prevent credit unions from going through a burdensome 
        process to unnecessarily register individuals not 
        involved in underwriting loans.

           SEC Broker-Dealer Exemption: while the 
        Gramm-Leach-Bliley Act allows for an exemption for 
        banks from broker-dealer and investment adviser 
        registration requirements with the SEC, no similar 
        exception for credit unions is included, even though 
        federal credit unions are permitted to engage in 
        securities-related activities under the FCUA as 
        regulated by NCUA. We ask that credit unions be treated 
        similarly to banks under these securities laws. This 
        would ensure they are not dissuaded from providing 
        services that consumers demand, thereby putting their 
        members at a disadvantage.

                           Conclusion

    Credit unions are suffering under an ever-increasing 
regulatory burden. This burden is hampering their ability to 
serve our nation's 96 million credit union members. A NAFCU 
survey of our members indicates that 94% of respondents have 
seen this burden increase since the passage of the Dodd-Frank 
Act in 2010--despite the fact that everyone agreed during the 
financial reform debate that credit unions were good actors and 
did not cause the crisis. This is why, during the debate on 
Wall Street reform, NAFCU opposed credit unions being included 
under the CFPB rulemaking and why we still have concerns about 
them being subject to it today.

    While many of the rules placed on credit unions are time 
consuming and burdensome, no single regulation is creating the 
unbearable regulatory overburden that is leading to industry 
consolidation, rather it is the tidal wave of new rules and 
regulations coming from multiple regulators--often with little 
or no coordination between them. The burden is compounded as 
old and outdated regulations are not being removed or 
modernized at the same pace. This regulatory tsunami has 
hampered all credit unions ability to serve their members and 
any relief effort should not attempt to split the industry.

    NAFCU was the first to call on Congress to provide such 
relief this past February and our five-point plan, outlined in 
my testimony, provides a good road map to start on any relief 
package for credit unions.

    NAFCU appreciates your time and thanks the Subcommittee for 
the opportunity to testify before you here today on these 
important issues to credit unions and ultimately our nation's 
economy. I welcome any questions you may have.

    Attachment A: NAFCU letter to Secretary Geithner on FSOC's 
role to reduce regulatory compliance burden; June 27, 2012.

    Attachment B: NAFCU letter to Chairman Johnson, Chairman 
Hensarling, Ranking Member Crapo and Ranking Member Waters 
calling on Congress to provide credit union regulatory relief; 
February 12, 2013.
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    Chairman Schweikert, Ranking Member Clarke, and members of 
the subcommittee, my name is Doyle Mitchell, and I am President 
and CEO of Industrial Bank, a $350 million asset bank 
headquartered in the District of Columbia. Industrial Bank was 
founded in 1934, in the depth of the Great Depression, and is 
the oldest and largest African American-owned commercial bank 
in the metropolitan Washington, D.C. area. We have over 120 
employees, I testify today on behalf of the nearly 7,000 
community banks represented by the Independent Community 
Bankers of America. Thank you for convening this hearing on the 
``Regulatory Landscape: Impact on Small Financial 
Institutions.''

    In addition to being a member of ICBA, I am also the 
Chairman of the National Bankers Association, a trade 
association for the nation's minority and women-owned banks. 
While many community banks serve rural areas and small towns, 
there is also an important segment of community banks like mine 
that serve urban areas and that were founded to serve minority 
communities that were historically and many times currently, 
ignored by other financial institutions.

    America's 7,000 community banks are playing a vital role in 
ensuring the economic recovery is robust and broad based, 
reaching communities of all sizes and in every region of the 
country. The recent FDIC Community Banking Study showed that in 
one out of every five counties in the United States, the only 
physical banking offices are those operated by community 
banks.\1\ Community banks provide 60 percent of all small 
business loans under $1 million, as well as customized mortgage 
and consumer loans suited to the unique characteristics of 
their local communities. Federal Reserve data shows that while 
overall small business lending contracted during the recent 
recession, lending by a majority of small community banks 
(those of less than $250 million in assets) actually increased, 
and small business lending by banks with asset sizes between 
$250 million and $1 billion declined only slightly. By 
contrast, small business lending by the largest banks dropped 
off sharply. The viability of community banks is linked to the 
success of our small business customers in the communities we 
serve, and we don't walk away from them when the economy 
tightens.
---------------------------------------------------------------------------
    \1\ FDIC Community Banking Study, December 2012, Page 3-5. (http://
www.fdic.gov/regulations/resources/cbi/study.html)

    In order to reach their full potential as catalysts for 
entrepreneurship, economic growth, and job creation, community 
banks must have regulation that is calibrated to their size, 
lower-risk profile, and traditional business model. Working 
with community bankers from across the nation, ICBA has 
developed its Plan for Prosperity, a platform of legislative 
recommendations that will provide meaningful relief for 
community banks and allow them to thrive by doing what they do 
best--serving and growing their communities. By rebalancing 
unsustainable regulatory burden, the Plan, if adopted by 
Congress, will ensure that scarce capital and labor resources 
are used productively, not sunk into unnecessary compliance 
costs, allowing community banks to better focus on lending and 
investing that will directly improve the quality of life in our 
communities. The Plan for Prosperity is attached to this 
testimony, as is a list of the 23 bills that have been 
introduced in the House and Senate to date that incorporate 
---------------------------------------------------------------------------
Plan for Prosperity provisions.

    New Rules Threaten Community Bank Mortgage Lending

    A primary focus of the Plan for Prosperity is mortgage 
lending regulatory relief. Every aspect of mortgage lending is 
subject to new, complex, and expensive regulations that will 
upend the economics of this line of business. These regulations 
are being enacted in response to the worst abuses of the pre-
crisis mortgage market--abuses in which community banks did not 
engage. In particular, community bankers are deeply concerned 
by the Consumer Financial Protection Bureau's (CFPB's) new 
``ability-to-repay'' rule which will expose lenders to 
litigation risk unless their loans meet the definition of 
``qualified mortgage'' or ``QM.'' However, a staple of 
community bank mortgage lending, balloon loans, are explicitly 
excluded from QM status unless they are made in rural areas 
under an unreasonably narrow definition of ``rural.'' Many 
community banks are not willing to assume heightened litigation 
risk and will exit the mortgage lending business particularly 
in rural markets. While ICBA supports the CFPB's amendments to 
the QM rule which make accommodations for community banks, they 
do not go far enough to preserve access to credit for community 
bank customers.

    The ``ability to repay'' rule is scheduled to take effect 
January 10, 2014 and thousands of community banks, more than 50 
percent, will not be prepared or are uncertain of their 
readiness to comply by that date. Even the most negligible 
regulatory change can require many months to change systems, 
update policies and procedures, revise underwriting 
requirements, and train staff. Bankers must ensure that vendors 
and suppliers are prepared as well. Changes of the magnitude of 
the ``ability-to-repay'' rule are particularly challenging for 
community banks given their limited staff and legal and 
compliance resources. Many community banks may be forced to 
suspend their mortgage lending until they become compliant. 
This would have a significant adverse impact on the recovering 
housing market. Other community banks may exit the mortgage 
business altogether. For this reason, ICBA is urging the CFPB 
to extend the mandatory compliance date and allow optional 
compliance for a period of 9 to 12 months. We hope that members 
of this committee will support that request.

    The CLEAR Relief Act

    In addition to this administrative extension request, ICBA 
is seeking legislative solutions, included in the Plan for 
Prosperity, that would simplify community bank compliance with 
the CFPB ``ability-to-repay'' rule and other new mortgage and 
non-mortgage rules. While, as noted above, 23 bills have been 
introduced that embody Plan for Prosperity provisions, I would 
like to use this testimony to highlight the single bill that 
best captures the full scope of the Plan: the Community Lending 
Enhancement and Regulatory Relief Act (CLEAR Relief Act, H.R. 
1750), introduced by Rep. Blaine Luetkemeyer, a former 
community banker and current member of the Small Business 
Committee as well as the Financial Services Committee. The 
CLEAR Relief Act has over 80 cosponsors with strong bipartisan 
representation. A Senate companion bill has similar bipartisan 
support. The CLEAR Relief Act contains eight Plan for 
Prosperity provisions, including:

    Qualified Mortgage Status for Community Bank Portfolio 
Loans

    The CLEAR Relief Act solution to compliance with the 
``ability-to-repay'' rule is simple, straightforward, and will 
preserve community bank mortgage lending: QM status for 
community bank loans held in portfolio, including balloon loans 
in rural and non-rural areas and without regard to their 
pricing. This provision would apply to all lenders with less 
than $10 billion in assets. When a community bank holds a loan 
in portfolio it holds 100 percent of the credit risk and has 
every incentive to ensure it understands the borrower's 
financial condition and to work with the borrower to structure 
the loan properly and make sure it is affordable. Withholding 
safe harbor status for loans held in portfolio, and exposing 
the lender to litigation risk, will not make the loans safer, 
nor will it make underwriting more conservative. It will merely 
deter community banks from making such loans.

    Escrow Requirement Exemption for Community Bank Portfolio 
Mortgages

    The CLEAR Relief Act would exempt community bank loans held 
in portfolio from new escrow requirements for higher priced 
mortgages. This exemption would also apply to all lenders with 
less than $10 billion in assets. Again, portfolio lenders have 
every incentive to protect their collateral by ensuring the 
borrower can make tax and insurance payments. For low volume 
lenders in particular, an escrow requirement is expensive and 
impractical and, again, will only deter lending to borrowers 
who have no other options.

    Small Servicer Exemption

    The CLEAR Relief Act would raise the CFPB's small servicer 
exemption threshold from 5,000 loans to 20,000. Community banks 
are deeply concerned about the impact of servicing standards 
that are overly prescriptive with regard to the method and 
frequency of delinquent borrower contacts. These rigid 
standards reduce community banks' flexibility to use methods 
that have proved successful in holding down delinquency rates. 
Example of difficult and unnecessary requirements include new 
monthly statements; additional notices regarding interest rate 
adjustments on ARM loans; rigid timelines for making contacts 
that leave no discretion to the servicer; and restrictions on 
forced placed insurance. Community banks' small size and local 
presence in the communities we serve make many of these 
requirements unnecessary.

    A higher exemption threshold would preserve the role of 
community banks in mortgage servicing, where consolidation has 
clearly harmed borrowers. Community banks above the 5,000 loan 
threshold have a proven record of strong, personalized 
servicing and no record of abusive practices. To put the 20,000 
threshold in perspective, consider that the five largest 
servicers service hold an average portfolio of 6.8 million 
loans \2\ and employ as many as 10,000 people each in servicing 
alone.
---------------------------------------------------------------------------
    \2\ Source: Office of Mortgage Settlement Oversight 
(www.mortgageoversight.com).

---------------------------------------------------------------------------
    Appraisal Exemption for Smaller Mortgages

    The CLEAR Relief Act would reinstate the Financial 
Institutions Reform, Recovery, and Enforcement Act (FIRREA) 
exemption for independent appraisals for loans of $250,000 or 
less. Appraisal standards have changed significantly over the 
past few years. First as a result of the Home Valuation Code of 
Conduct from Fannie Mae and Freddie Mac, and more recently as a 
result of the Dodd-Frank Act. These standards are well 
intentioned, having been designed to prevent abuses by 
unregulated mortgage brokers that contributed to the collapse 
of the housing market. However, they have made it nearly 
impossible for many community banks to use local appraisers and 
forced them to hire appraisal management companies at 
significant expense. The CLEAR Relief Act would provide relief 
from these costs, which are passed on to the borrower and 
increase the cost of credit.

    Modernize the Federal Reserve's Small Bank Holding Company 
Policy Statement

    The CLEAR Relief Act requires the Federal Reserve to revise 
the Small Bank Holding Company Policy Statement--a set of 
capital guidelines that have the force of law. The Policy 
Statement, makes it easier for small bank holding companies to 
raise additional capital by issuing debt, would be revised to 
apply to both bank and thrift holding companies and to increase 
the qualifying asset threshold from $500 million to $5 billion. 
Qualifying bank and thrift holding companies must not have 
significant outstanding debt or be engaged in nonbanking 
activities that involve significant leverage. This will help 
ease capital requirements for small bank and thrift holding 
companies. This past November, the House Financial Services 
Committee passed out of committee a bill increasing to $1 
billion, the Small Bank Holding Company Policy Statement. We 
applaud passage of this bill and urge House leaders to give 
this bill floor consideration.

    Relief from Accounting and Auditing Expenses for Publicly 
Traded Community Banks and Thrifts

    The CLEAR Relief Act would exempt from the internal control 
attestation requirements of Section 404(b) of the Sarbanes-
Oxley Act banks with assets up to $10 billion. The current 
exemption threshold applies to companies with less than $75 
million in market capitalization. Because community bank 
internal control systems are monitored continually by bank 
examiners, they should not have to sustain the unnecessary 
annual expense of paying an outside audit firm for attestation 
work. This provision will substantially lower the regulatory 
burden and expense for small, publicly traded community banks 
without creating more risk for investors.

    Eliminate Redundant Privacy Notices

    The CLEAR Relief Act provides that a financial institution 
is not required to mail an annual privacy notice to its 
customers if it has not changed its privacy policies. Most 
community banks do not have the scale to automate the annual 
privacy notice mailings. For these banks, the mailings are a 
manual, labor intensive process. Eliminating this requirement 
when a bank has not changed it privacy policies, will conserve 
resources without putting consumers at risk or reducing their 
control over the use of their personal data.

    This provision of the CLEAR Relief Act is also contained in 
a separate bill introduced by Rep. Luetkemeyer, the Privacy 
Notice Confusion Elimination Act (H.R. 749), which passed the 
House in March.

    There are additional provisions of the CLEAR Relief Act. 
Together they provide a strong, clear legislative response to 
the threat of mistargeted regulation to the community bank 
charter.

    Closing

    I encourage you to reach out to the community bankers in 
your district. Ask them about the current regulatory 
environment and whether the CLEAR Relief Act, the Right to Lend 
Act, and the other Plan for Prosperity bills attached to this 
testimony would help them better serve their communities. We're 
confident that they will agree with us. Your cosponsorship of 
the CLEAR Relief Act and the other Plan for Prosperity bills 
would be greatly appreciated by community bankers and ICBA.

    Thank you again for the opportunity to testify today. I 
hope that my testimony, while not exhaustive, gives you a sense 
of the sharply increasing resource demands placed on community 
banks by regulation and what's at stake for the future of 
community banking.

    Left unaddressed, the increasing burden of regulation will 
discourage the chartering of new community banks and lead to 
further industry consolidation. Consolidation will lead to 
higher loan interest rates for borrowers, lower rates paid on 
deposits, and fewer product choices. A more concentrated 
industry, dominated by a small number of too-big-to-fail banks, 
will jeopardize the safety and soundness of the financial 
system and expose taxpayers to the risk of additional costly 
bailouts. That's why it's so important to enact the sensible 
regulatory reforms outlined above. We encourage Congress to 
consider ICBA's Plan for Prosperity as a guide to achieving 
these reforms.

    Thank you again for the opportunity to testify today.

    Attachments

           Plan for Prosperity Bills
      Bills Containing ICBA Plan for Prosperity Provisions

    The Community Lending Enhancement and Regulatory Relief Act 
of 2013 (H.R. 1750)

    The Community Lending Enhancement and Regulatory Relief Act 
of 2013 (S. 1349)

    The Protecting American Taxpayers and Homeowners Act (H.R. 
2767)

    The Terminating Bailouts for Taxpayer Fairness Act of 2013 
(S. 798)

    The Portfolio Lending and Mortgage Access Act of 2013 (H.R. 
2673)

    The Financial Institutions Examination Fairness and Reform 
Act (H.R. 1553)

    The Financial Institutions Examination Fairness and Reform 
Act (S. 727)

    The Eliminate Privacy Notice Confusion Act (H.R. 749)

    The Privacy Notice Modernization Act (S. 635)

    The Municipal Advisor Oversight Improvement Act (H.R. 797)

    The Municipal Advisor Relief Act (S. 710)

    The Consumer Financial Protection Commission Act (H.R. 
2402)

    The Responsible Consumer Financial Protection Regulations 
Act (H.R. 2446)

    The Consumer Financial Protection Safety and Soundness 
Improvement Act (H.R. 3193)

    Responsible Financial Consumer Protection Regulations Act 
(S. 205)

    The Holding Company Registration Threshold Equalization Act 
(H.R. 801)

    The Holding Company Registration Threshold Equalization Act 
(S. 872)

    Mutual Community Bank Competitive Equality Act (H.R. 1603)

    The Financial Regulatory Responsibility Act of 2013 (S. 
450)

    The SEC Regulatory Accountability Act (H.R. 1062)

    The Right to Lend Act (H.R. 2323)

    The S Corporation Modernization Act (H.R. 892)

    To enhance the ability of community financial institutions 
to foster economic growth and serve their communities (H.R. 
3329)
[GRAPHIC] [TIFF OMITTED] 85741.019

                      Witness Background Statement


    Adam J. Levitin is a Professor of Law at the Georgetown 
University Law Center, in Washington, D.C., where he teaches 
courses in financial regulation, contracts, bankruptcy, and 
commercial law.

    Professor Levitin has previously served as the Bruce W. 
Nichols Visiting Professor of Law at Harvard Law School, as the 
Robert Zinman Scholar in Residence at the American Bankruptcy 
Institute, and as Special Counsel to the Congressional 
Oversight Panel supervising the Troubled Asset Relief Program 
(TARP). Professor Levitin currently chairs the Mortgage 
Committee of the Consumer Financial Protection Bureau's 
Consumer Advisory Board.

    Before joining the Georgetown faculty, Professor Levitin 
practiced in the Business Finance & Restructuring Department of 
Weil, Gotshal & Manges, LLP in New York, and served as law 
clerk to the Honorable Jane R. Roth on the United States Court 
of Appeals for the Third Circuit.

    Professor Levitin holds a J.D. from Harvard Law School, an 
M.Phil and an A.M. from Columbia University, and an A.B. from 
Harvard College. In 2013 he was awarded the American Law 
Institute's Young Scholar's Medal.

    Professor Levitin has not received any Federal grants or 
any compensation in connection with his testimony, and he is 
not testifying on behalf of any organization. The views 
expressed in his testimony are solely his own.
    Mr. Chairman Schweikert, Ranking Member Clarke, Members of 
the Committee:

    Good morning. Thank you for inviting me to testify at this 
hearing. My name is Adam Levitin. I am a Professor of Law at 
the Georgetown University, where I teach courses in consumer 
finance, contracts, bankruptcy, and commercial law. I also 
serve on the Consumer Financial Protection Bureau's statutory 
Consumer Advisory Board. I am here today solely as an academic 
who has written extensively on consumer finance and financial 
regulation and am not testifying on behalf of the CFPB or its 
the Consumer Advisory Board.

    In my testimony today, I focus on five areas where new 
regulatory changes affect small businesses or small financial 
institutions:

          1. The effect of the CARD Act on small business 
        credit;
          2. The effect of the CFPB on small business credit
          3. The effect of the CFPB on small financial 
        institutions
          4. The effect of the Durbin Interchange Amendment on 
        small depositories; and
          5. The effect of the US implementation of the Basel 
        III Capital Accords on small financial institutions.

    Neither the CARD Act nor CFPB nor Basel III is likely to 
have a major effect on smaller financial institutions; the 
Durbin Interchange Amendment actually makes small financial 
institutions more competitive vis-a-vis large banks. These 
changes in regulation will undoubtedly impose some compliance 
costs. Some of these will be one-time costs, and some will be 
recurring. And these costs may affect the competitive landscape 
in financial services. It is hard, however, to see any 
currently proposed regulations as having a material effect on 
the ability of smaller financial institutions to compete or on 
the availability of credit to small businesses. When weighed 
against the clear benefits of better consumer protection 
regulation, more competitive markets, and safer banks, the 
overall effect of the regulatory changes appears positive.

    I. The Effect of the CARD Act on Small Financial 
Institutions and Small Business Credit

    The Credit Card Accountability, Responsibility, and 
Disclosure Act of 2009 (the ``CARD Act'') is the first major 
statutory overhaul of the credit card market since the 1968 
Truth in Lending Act. During the intervening four decades, the 
credit card market expanded and evolved dramatically, and the 
CARD Act was much needed legislation to rein in some of the 
more egregious billing ``tricks and traps'' that had emerged in 
the credit card market. The credit card market is one dominated 
by large banks--roughly 85% of credit card lines outstanding is 
on cards issued by just ten large banks.\1\ Many smaller banks 
do not even offer credit cards. Accordingly, the brunt of the 
CARD Act's regulatory burden has been born by a handful of 
megabanks.
---------------------------------------------------------------------------
    \1\ Nilson Report, #1012, Feb. 2013, at 9.

    The CARD Act applies only to consumer credit cards; small 
business credit cards remain virtually unregulated. 
Accordingly, the CARD Act cannot be held responsible for the 
reduction in small business credit lines. Thus, a recent 
statutorily mandated study by the CFPB on the impact of the 
---------------------------------------------------------------------------
CARD Act notes that:

          [N]othing in the evidence reviewed suggests that the 
        CARD Act was responsible for the reduction in credit 
        access--which largely preceded the Act's enactment--or 
        that the CARD Act has retarded the pace of the 
        recovery. The parallels between the consumer credit 
        card market and the small business credit card market, 
        and between the credit card market and other consumer 
        credit markets, do not suggest that, in general, 
        recovery in the card marketplace has been negatively 
        impacted by the CARD Act.\2\
---------------------------------------------------------------------------
    \2\ CFPB, CARD Act Report: A review of the impact of the CARD Act 
on the consumer credit card market, Oct. 1, 2013, at 61, at http://
files.consumerfinance.gov/f/201309--cfpb--card-
act-report.pdf.

    The CARD Act may have even helped small businesses by 
lowering their costs of credit and by enabling greater consumer 
purchasing power for goods and services. A recent study 
estimates that the CARD Act has saved US consumer $20.8 billion 
per year.\3\ Similarly, the CFPB concluded that ``the CARD Act 
likely did not raise credit card costs for consumers.'' \4\ To 
the extent that the CARD Act has helped consumers by making 
credit markets more transparent and thus allowing markets to 
operate more efficiently, it also has helped small businesses 
in two ways. First, small businessmen are consumers themselves. 
And second, to the extent that better consumer protection laws 
result in a more competitive consumer protection market place 
and reduce the rents that can be extracted from consumers by 
financial institutions, it means that consumers will have more 
money left over that can be spent on goods and services in the 
real economy. This suggests that the CARD Act has actually had 
a positive impact on small businesses generally.
---------------------------------------------------------------------------
    \3\ Sumit Agrawal et al., Regulating Consumer Financial Products: 
Evidence from Credit Cards, Sept. 25, 2013, at http://ssrn.com/
abstract=2330942.
    \4\ CFPB, CARD Act Report: A review of the impact of the CARD Act 
on the consumer credit card market, Oct. 1, 2013, at 36, at http://
files.consumerfinance.gov/f/201309--cfpb--card-
act-report.pdf.

---------------------------------------------------------------------------
    II. CFPB and Small Business Credit

    Small businesses account for roughly half of private-sector 
employment and 46 percent of GDP.\5\ These small businesses--
like any type of commercial enterprise--require credit to 
operate. As an initial matter, I want to underscore that the 
CFPB has no almost direct regulatory authority relating to 
small business credit.
---------------------------------------------------------------------------
    \5\ Kathryn Kobe, Small Business GDP: Update 2002-2010, Jan. 2012, 
at http://www.sba.gov/sites/default/files/rs390tot--0.pdf 
(the 46% figure is for 2010).

    The CFPB's organic authority is limited to products and 
services ``offered or provided for use by consumers primarily 
for personal, family, or household purposes''.\6\ Most statutes 
administered by the CFPB, such as the Truth in Lending Act are 
similarly restricted. The sole areas in which the CFPB has 
jurisdiction are a pair of seldom-invoked provisions of the 
Truth in Lending Act prohibiting the issuance of unsolicited 
credit cards \7\ and limiting liability of employees to card 
issuers for unauthorized business card usage \8\ and the Equal 
Credit Opportunity Act (ECOA), which prohibits various 
discriminatory lending practices,\9\ and which was amended by 
the Dodd-Frank Act to include a data collection provision on 
small business lending.\10\ This means that the CFPB can engage 
in only very limited regulation of small business financial 
products, and then primarily to ensure against discriminatory 
lending, rather than to regulate the terms and conditions of 
financial products.
---------------------------------------------------------------------------
    \6\ 12 U.S.C. Sec. 5481(5)(A).
    \7\ 15 U.S.C. Sec. 1642.
    \8\ 15 U.S.C. Sec. 1645.
    \9\ 15 U.S.C. Sec. 1691 et seq.
    \10\ 15 U.S.C. Sec. 1691o-2.

    Thus, the CFBP's direct authority over small business 
credit is primarily to the extent that the small business 
credit is obtained as consumer credit. While this is commonly 
done, it is typically in contravention to representation made 
by the borrowers to their lenders. Still, many small businesses 
rely on consumer credit cards and home equity lines of credit 
for liquidity, use consumer deposit accounts, and make use of 
---------------------------------------------------------------------------
vehicles financed through consumer loans or leases.

    To date, however, CFPB rulemaking and enforcement has had 
little impact on any of these particular financial products in 
a way that would affect small businesses. The CFPB has done 
only minor rulemakings relating to credit cards (and these 
loosened pre-existing regulations);\11\ the CFPB's major 
mortgage rulemaking regarding the ``qualified mortgage'' or QM 
exemption to the statutory ability-to-repay requirement does 
not apply to home equity lines of credit;\12\ and the CFPB has 
done no rulemakings in the deposit account or auto finance 
areas. Similarly, the CFPB has yet to engage in a rulemaking 
regarding data collection on small business lending, and has 
indicated that until such a rulemaking occurs, the reporting 
requirements do not go into effect.\13\
---------------------------------------------------------------------------
    \11\ 78 Fed. Reg. 25818 (May 3, 2013) (amending Regulation Z to 
remove the requirement that card issuers consider consumers' 
independent ability to pay for applicants who are at least 21 years old 
and permitting issuers to consider in ability to repay income and 
assets which a consumer can reasonably expect to access, such as 
spousal income and assets); 78 Fed. Reg. 18795 (Mar. 28, 2013) 
(amending Regulation Z to apply the limitation on the total amount of 
fees that a credit card issuer may require a consumer to pay solely to 
the fist year after account opening and not also prior to account 
opening).
    \12\ 12 C.F.R. Sec. 1026.43(a)(1). Some rules, such as regulations 
relating to mortgage counseling, mortgage servicing, and compensation 
rules for arbitration and credit insurance do apply to home equity 
lines of credit, but the impacts are minor. Similarly, the application 
of the Home Owners Equity Protection Act rules (requiring additional 
disclosures for high-cost mortgages) also apply to high-cost equity 
lines of credit.
    \13\ Letter from Leonard J. Kennedy, General Counsel, Consumer 
Financial Protection Bureau to Chief Executive Officers of Financial 
Institutions under Section 1071 of the Dodd-Frank Act, April 11, 2011, 
at http://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf.

    Instead, to the extent that the CFPB is affecting small 
business credit, it is only indirectly, to the extent that 
financial institutions are responding to CFPB regulation by 
changing their small business lending practices. To date, there 
is no evidence that this is occurring, much less that any such 
indirect effects are negative and outweigh any concomitant 
benefits. I make no attempt here to quantify the benefits of 
any particular consumer protection regulation, but note again, 
that small businesses benefit from such regulations both as 
because small businessmen are consumers themselves and because 
better consumer protection laws leave more money in consumers' 
pockets to spend on goods and services instead of on bank fees 
---------------------------------------------------------------------------
and interest.

    III. CFPB and Small Financial Institutions

    The creation of the CFPB has changed the regulatory 
landscape for consumer protection regulation, but the CFPB's 
impact on small banks is limited, and the CFPB has shown a 
particular solicitude toward the concerns of smaller financial 
institutions, such as community banks and credit unions, which 
are the source of a disproportionate share of small business 
lending.\14\
---------------------------------------------------------------------------
    \14\ 57% of small business loans by dollar amount outstanding are 
on the books of depositories with less than $10 billion in assets. FDIC 
Statistics on Depository Institutions ($335 billion of $586 billion in 
small business credit outstanding is from institutions with less than 
$10 billion in assets)

    The CFPB's attention to small financial institutions is 
partially a matter of statute. The CFPB is required to identify 
and address ``unduly burdensome regulations,'' which are a 
particular concern of smaller financial institutions.\15\ As 
part of these safeguards against unduly burdensome regulation, 
the CFPB is required to:
---------------------------------------------------------------------------
    \15\ 12 U.S.C. Sec. 5511(b)(3).

           Consult with prudential regulators and State 
        bank regulators in order to minimize the regulatory 
        burden upon lending institutions.\16\
---------------------------------------------------------------------------
    \16\ 12 U.S.C. Sec. 5513(b)(2)-(3).

           Consult with the prudential regulators of 
        small banks and credit when proposing regulations.\17\ 
        The prudential regulators are permitted to formally 
        object to the rules and their written objections must 
        be included in the rule-making record, along with the 
        Bureau's response to their concerns.\18\
---------------------------------------------------------------------------
    \17\ 12 U.S.C. Sec. 5512(b)(2)(B).
    \18\ 12 U.S.C. Sec. 5512(b)(2)(C).

           Evaluate the potential impact of rules on 
        small businesses under the Regulatory Flexibility 
        Act.\19\
---------------------------------------------------------------------------
    \19\ 5 U.S.C. Sec. Sec. 603, 604.

           Give small businesses a preview of new 
        proposals and receive extensive feedback from small 
        businesses before even giving notice to the broader 
        public (under the Small Business Regulatory Enforcement 
        Fairness Act).\20\
---------------------------------------------------------------------------
    \20\ 5 U.S.C. Sec. Sec. 603, 609; Executive Order 12866 of 
September 30, 1993.

           Assess possible increases in the cost of 
        credit for small entities and consider any significant 
        alternatives that could minimize those costs.\21\
---------------------------------------------------------------------------
    \21\ 5 U.S.C. Sec. 603.

    Assess the effectiveness of each rule within five years of 
implementation, including soliciting public comments on whether 
to change or eliminate the regulations.\22\
---------------------------------------------------------------------------
    \22\ 12 U.S.C. Sec. 5512(d).

           Finally, the CFPB also has the authority to 
        exempt any consumer financial services provider from 
        its rules.\23\
---------------------------------------------------------------------------
    \23\ 12 U.S.C. Sec. 5512(b)(3)(A).

    The CFPB's real attention to the concerns of smaller 
financial institutions is also a matter of agency culture. My 
observation from serving on the CFPB's Consumer Advisory Board 
is that the CFPB is an agency that is deeply committed, from 
the top down, to working with small financial institutions. 
Institutionally, the CFPB understands that small financial 
institutions play an important role in consumer protection 
through fostering greater competition, particularly along the 
lines of providing better service and simpler products for 
consumers. Moreover, small financial institutions play a 
particularly important role in consumer finance in smaller and 
rural communities. Thus, the CFPB has created an important 
exemption from the ability-to-repay requirement for mortgages 
for smaller financial institutions.\24\
---------------------------------------------------------------------------
    \24\ 12 C.F.R. Sec. 1026.43(e)(5); 1026.35(b)(2)(iii)(B)-(C) 
(exempting from the QM debt-to-income ratio requirement loans held in 
portfolio and made by creditors that originate less than 500 mortgages 
annually and have less than $2 billion in net assets).

    Because of the importance of small financial institutions 
to consumer finance, the CFPB has set up special community bank 
and credit union advisory boards--not required by statute--so 
that it gets regular feedback directly from small banks 
themselves, not simply from trade associations. When CFPB 
leadership travels outside of Washington, a routine and 
important part of the agenda are meetings with the officers of 
---------------------------------------------------------------------------
small financial institutions.

    The CFPB's outreach to smaller financial institutions is 
particularly important because the CFPB does not have much 
formal direct contact with small depositories and credit 
unions. Of the roughly 14,000 depositories and credit unions in 
the United States, only around 111 of them (those with over $10 
billion in net assets in the holding company) are subject to 
examination by the CFPB. The rest--all small depositories--are 
examined for consumer protection compliance by their prudential 
regulators: the FDIC, the Federal Reserve Board, the NCUA, and 
the OCC.

    While this spares smaller institutions the burden of having 
to deal with two separate examinations, it also means that 
there is no direct communication between the CFPB and these 
smaller institutions. Instead, what the CFPB expects in terms 
of regulatory compliance is communicated indirectly through the 
examiners from the prudential regulators. In theory, all of the 
examinations should be coordinated through the Federal 
Financial Institutions Examination Council, but it is possible, 
particularly as new regulations go into effect, that the lack 
of a direct communication channel through the examination 
process has made it harder for small financial institutions to 
understand what is--and is not--required of them.

    In short, the CFPB is an agency that is very attuned to the 
concerns of small institutions. This is not to say that the 
CFPB would or should always agree with these concerns, but it 
is clearly an agency that is listening with an open mind and 
trying to balance its statutory charges of consumer protection 
and access to financial services with the particular needs of 
smaller financial institutions.

    IV. Durbin Interchange Amendment

    The Durbin Interchange Amendment to the Dodd-Frank Act 
regulates the interchange or ``swipe'' fees that banks can 
charge on debit card transactions.\25\ While parts of the 
Durbin Amendment apply to all financial institutions, 
depositories with less than $10 billion in net assets are 
exempt from the Durbin Amendment's cap on interchange fees.\26\ 
The result is to give smaller financial institutions a 
significant leg up against their larger competitors.
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    \25\ 15 U.S.C. Sec. 1693o-2.
    \26\ 15 U.S.C. Sec. 1693o-2(a)(6)(A). Smaller financial 
institutions are still subject to the Durbin Amendment's routing 
exclusivity provision, but the Federal Reserve rulemaking currently in 
place does not meaningfully change pre-existing routing arrangements 
for most debit cards.

    The Durbin Amendment has also helped consumers and small 
businesses significantly. A recent study estimates that last 
year the Durbin Amendment saved consumers $5.8 billion in lower 
costs for goods and services and saved merchants $2.6 billion, 
which translates into roughly 38,000 new jobs.\27\ Taken as a 
whole, then the Durbin Amendment seems to have benefitted 
consumers, small businesses, and also small financial 
institutions.
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    \27\ Robert J. Shapiro, The Costs and Benefits of Half a Loaf: The 
Economic Effects of Recent Regulation of Debit Card Interchange Fees, 
Oct. 1, 2013, at http://21353cb4da875d727ald-
ccea4d4b51151ba804c4b0295d8d06a4.r8.cfl.rackcdn.com/SHAPIROreport.pdf.

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    V. Basel III

    In the wake of the financial crisis, bank regulators 
globally recognized the need to craft more stringent capital 
requirements for depositories and their holding companies. One 
of the most fundamental lessons of the financial crisis is that 
capital is key. Sufficient capital is the only real guarantee 
that a bank can absorb losses.

    The third round of the Basel Capital Accords (Basel III) is 
an attempt to take this lesson to heart. Basel III creates a 
more detailed and demanding system of bank capital requirements 
for US banks and their holding companies. The Basel III rules 
are not perfect. They are too complex and too gameable because 
of a continued reliance on risk-weighting. They also still 
require too little capital and liquidity for banks. In 
particular, the leverage ratio--the bottom line and simplest 
measure of capital--is still far too low at 3%.

    The proposed US implementation of Basel III,\28\ which goes 
into effect as of January 1, 2015 for most banks and bank 
holding companies, generally requires more capital for banks. 
It also defines capital more stringently. These are both good 
things, and neither should affect financial institutions' 
willingness to lend. Heightened capital requirements do not 
limit the amount of lending a bank can do--they are not reserve 
requirements. Instead, capital requirements merely require that 
banks be less leveraged. To the extent that a bank is less 
leveraged, it is less risky, which means that there is less 
chance that the public will be asked to pick up the tab. 
Greater capital requirements help move us away from the faux 
capitalism world of privatized gains and socialized losses.
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    \28\ Basel III is a non-binding set of coordinated principles 
agreed to by bank regulators from leading developed economies, in order 
to head off international arbitrage of regulatory capital standards, 
but there is room for variation in the actual national-level 
implementations, which are done via notice-and-comment rulemaking.

    While Basel III was in reaction to the financial crisis, 
which was first and foremost a large bank crisis, it applies to 
all banks. This is the correct approach. While no individual 
small bank is likely to pose a systemic risk, small bank 
failures are still costly for the FDIC. Requiring greater 
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capital makes these failures less likely.

    There will certainly be one-time cost of understanding the 
complicated new requirements and implementing proper compliance 
systems. Beyond that, however, it is hard to identify any 
provisions that are especially onerous on small banks,\29\ 
although it is notable that Basel III applies to small banks, 
but not to credit unions.
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    \29\ Basel III did restrict the definition of what can qualify as 
capital and increased requirements for more finely tuned sub-ratios. In 
addition, Basel III creates the concept of a ``capital conservation 
buffer'' that will, after a phase in, be an additional 2.5% of risk-
weighted assets. The capital conservation buffer is not a formal 
capital requirement--banks are not required to have a capital 
conservation buffer. The capital conservation buffer will function as a 
type of de facto capital requirement, however, because any bank that 
fails to have a capital conservation buffer will be subject to 
restrictions on dividends, share repurchases, and interest payments on 
preferred securities, and executive bonus payments. Basel III also caps 
the inclusion of mortgage servicing and deferred tax assets in capital. 
Both provisions are potentially burdensome, but not unduly so.

    The limited impact of Basel III on small banks is partially 
because Basel III left intact some key features of Basel I/II: 
the total risk-weighted capital ratio remains at 8%, and the 
leverage ratio remains at 4%. And key assets categories for 
smaller financial institutions, such as all residential 
mortgage loans and most commercial real estate loans retain the 
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same risk-weighting.

    Basel III's impact on small banks is also limited because 
the US Basel III rules contain numerous exceptions or 
exemptions for smaller financial institutions. Significantly, 
trust preferred securities (TruPS) and cumulative preferred 
stock issued before May 19, 2010 may still count for Tier 1 
capital for institutions with less than $15 billion in assets. 
Similarly, all institutions with less than $250 billion in 
assets may keep opt to continue their current regulatory 
capital treatment of accumulated other comprehensive income 
(AOCI), which would mean keeping available-for-sale securities 
on balance sheet without having to adjust regulatory capital 
levels based on the securities' current market value. And bank 
holding companies with less than $500 million in assets are 
entirely exempt from Basel III (their depository subsidiaries 
must still comply). As a result, the FDIC estimates that 95% of 
insured depositories already have sufficient capital to comply 
with the final Basel III rules.\30\
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    \30\ 79 Fed. Reg. 55340, 55347 (Sept. 10, 2013).

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    Conclusion: The Multi-Tiered Financial Regulatory System

    The past five years have seen remarkable change in the 
regulation of the financial services industry, starting with 
the CARD Act of 2009 and continuing through the Dodd-Frank Act 
and subsequent and still on-going regulatory implementation. On 
the whole, this regulation addressed serious problems in our 
financial regulatory system, particularly in regard to consumer 
protection and bank safety-and-soundness.

    The new financial regulations, taken as a whole, are not 
perfect. In some areas regulation may have gone too far, in 
other areas not far enough, and in yet other areas, simply 
taken the wrong approach. I make no claim in this testimony 
that all the changes in the financial regulatory system have 
been optimal. Instead, looking at the regulatory changes as a 
whole, what one sees is the emergence of four-tiered financial 
regulatory system: big banks and big non-banks; small banks; 
big non-banks; and small non-banks.

    In this four-tiered regulatory system, big banks are 
subject to stricter capital requirements; to examination and 
enforcement of consumer financial protection statutes by the 
CFPB; and to debit interchange fee caps. Small banks have 
looser capital requirements; have consumer protection 
examination and enforcement done by their prudential regulators 
instead of by CFPB; and are exempt from debit interchange fee 
caps. Small banks may also benefit from various exemptions to 
consumer financial protection statutes. Big non-banks may be 
subject to capital requirements (if systemically important) and 
may subject to CFPB examination (if defined by regulation as 
``larger participants'' in their product market). Small non-
banks are not subject to capital requirements or CFPB 
examination, although all non-banks are subject to CFPB 
enforcement. (Non-banks do not receive debit interchange fees.)

    The multi-tiered system has the effect of tilting the 
competitive playing field toward smaller financial 
institutions; whether they are banks or non-banks. Even with a 
tilted regulatory playing field, however, smaller financial 
institutions are still often at a competitive disadvantage to 
larger institutions because of the economies of scale that can 
exist in technology-heavy areas of financial services. There 
will be compliance costs from any changes in regulation, and 
some regulations will result in lower revenue for financial 
institutions. Ultimately, marginal changes in regulatory 
compliance costs are not what will determine the viability of 
smaller financial institutions, and no institution's 
profitability should depend on being able to take advantage of 
consumers or the ability to gamble with federally insured 
deposits. Financial regulation has costs for financial 
institutions, but these costs should not obscure the real and 
valuable social benefits of consumer protection, competitive 
markets, and safe-and-sound banks.


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