[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
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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.
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\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
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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.
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\2\ Source: Office of Mortgage Settlement Oversight
(www.mortgageoversight.com).
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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.
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\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\
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\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\
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\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\
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\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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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