[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
FINANCING MAIN STREET: HOW DODD-FRANK IS CRIPPLING SMALL LENDERS AND
ACCESS TO CAPITAL
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 17, 2015
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-022
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
TOM RICE, South Carolina
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Stephen Denis, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Tom Rice.................................................... 1
Hon. Judy Chu.................................................... 4
WITNESSES
Mr. Doyle Mitchell, Jr., President/Chief Executive Officer,
Industrial Bank, Washington, DC, testifying on behalf of the
Independent Community Bankers of America....................... 6
Mr. Scott Eagerton, President/CEO, Dixies Federal Credit Union,
Darlington, SC, testifying on behalf of the National
Association of Federal Credit Unions........................... 7
Mr. Marshall Lux, Senior Fellow, Mossavar-Rahmani Center for
Business and Government, John F. Kennedy School of Government,
Harvard University, Cambridge, MA.............................. 9
Ms. Julia Gordon, Senior Director, Housing and Consumer Finance,
Center for Amerian Progress, Washington, DC.................... 11
APPENDIX
Prepared Statements:
Mr. Doyle Mithcell, Jr., President/Chief Executive Officer,
Industrial Bank, Washington, DC, testifying on behalf of
the Independent Community Bankers of America............... 27
Mr. Scott Eagerton, President/CEO, Dixies Federal Credit
Union, Darlington, SC, testifying on behalf of the National
Association of Federal Credit Unions....................... 40
Mr. Marshall Lux, Senior Fellow, Mossavar-Rahmani Center for
Business and Government, John F. Kennedy School of
Government, Harvard University, Cambridge, MA.............. 60
Ms. Julia Gordon, Senior Director, Housing and Consumer
Finance, Center for American Progress, Washington, DC...... 66
Questions for the Record:
Question from Hon. Auma Amata Coleman Radewagen to Mr. Doyle
Mitchell, Jr............................................... 83
Answer for the Record:
Response from Mr. Doyle Mitchell, Jr. to the Question from
Hon. Auma Amata Coleman Radewagen.......................... 84
Additional Material for the Record:
Payne's Check Cashing........................................ 86
FINANCING MAIN STREET: HOW DODD-FRANK IS CRIPPLING SMALL LENDERS AND
ACCESS TO CAPITAL
----------
THURSDAY, SEPTEMBER 17, 2015
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:00 p.m., in
Room 2360, Rayburn House Office Building. Hon. Tom Rice
[Chairman of the Subcommittee] presiding.
Present: Representatives Rice, Chabot, Luetkemeyer, Hanna,
Brat, Radewagen, Kelly, Chu, Hahn, and Payne.
Chairman RICE. We are going to go ahead and proceed. I will
call to order this meeting of the Subcommittee on Economic
Growth, Tax and Capital Access of the Small Business Committee.
Thank you to everybody, especially to our witnesses for being
here.
Five years ago, the Dodd-Frank Wall Street Reform and
Consumer Protection Act was signed into law. With its passage
came an onslaught of regulations. As we are aware, prior to
Dodd-Frank's passage, there was a commonly repeated phrase of
``too big to fail,'' and a sense that our economy had been hurt
due to large financial institutions inappropriate actions. This
law was meant to curtail the inappropriate and risky actions of
these ``too big to fail'' banks and increase financial
stability and transparency while providing greater consumer
protection.
Today, we are not seeing the benefits promised by the
proponents of the law. The economy is not rebounding
exponentially. We are not seeing financially stronger and
smarter banking. Instead, as we will hear from our witnesses
today, the small guys, who did not create the problems, are the
ones who are suffering. The losers in this equation are small
businesses, both the everyday Main Street business that has
trouble getting a loan, and the local bank that has to hire
compliance officers instead of getting capital into the hands
of local small businesses.
These small financial institutions, our community banks and
credit unions, are traditionally the individuals who lend to
small firms. Recent research has found that community banks
provide over 50 percent of the loans to small businesses.
Especially in rural communities, like my district, the burdens
created by Dodd-Frank are causing many small financial
institutions to merge with larger entities or shut their doors
completely, resulting in far less options where already there
were not many options to choose from.
We have all heard that Dodd-Frank contained exemptions
meant to ensure that financial institutions under a certain
size would be unaffected. The creators and proponents of this
legislation have repeatedly assured folks that they truly
understand the importance of small financial institutions and
that these entities were not why the law was created, nor were
the proponents intending to harm them. Unfortunately, as we
will hear today, even the smallest financial institutions are
feeling the effects the burden of this law, and not just this
law, but exponential growth in all federal banking regulations
as it trickles down and creates substantial regulatory burdens.
At this time, I would just like to put up a couple of
graphs that exhibit the point that I am trying to make here.
You know, all of us--Republican, Democrat, House, Senate,
the President--say repeatedly--I have heard the President say
over and over again that we need to simplify and streamline
regulations affecting small business. I think there is a graph
before this one. This is the first one? Okay.
Well, if you will look, that is all the regulations that
have been issued. This is a study done by the Mercatus Center
that looks at mandates and prohibitions and regulations. And if
you look at this, you will see that all of the regulations
issued under the Obama Administration, including Obamacare,
EPA, the war on coal, all these other things, and then the
regulations under Dodd-Frank there in the lighter colored line,
the regulations issued just under Dodd-Frank outnumber the
regulations issued in every other area of the federal
government.
Next slide, please.
All right. There was another slide that I have got a copy
of here, but it shows that in the six years since the president
has been in office, that the number of regulations issued by
the Administration is higher than any Administration since
Richard Nixon. In six years. And we still have two years to go.
Next? Or excuse me. On this slide, yeah, that is the first
slide I wanted there. Yeah. Can you make that bigger?
If you look at the top, you will see the top line is the
regulations issued under the current Administration, and then
underneath that--in six years--and you will see every President
since Richard Nixon under there. And this Administration has
already outpaced the number of regulations, despite the fact
that they say we need to streamline and simplify regulations
applying to small business. You know, let us look at not just--
not just hear the words, but let us look at what is actually
happening.
Okay. Next slide. And then you will see the regulations,
which are more than any other Administration in the last 40
years. Most of those regulations are under Dodd-Frank. And in
fact, we are just over halfway through with the rules that are
supposed to be implemented under Dodd-Frank. So many more tens
of thousands of regulations ultimately will be issued under
this law. And those regulations obviously have a stifling
effect on banking.
Next slide, please.
Dodd-Frank was passed under the guise of ``too big to
fail,'' that we needed to do what we could to prevent large
institutions from becoming so large that they were a threat to
our financial system. This graph is a graph of the assets held
by the large banks. And if you will see in that red line, it is
the percentage of total banking assets held by large financial
institutions. And since 2010--it is hard to read--but the total
banking assets in the country since Dodd-Frank was passed, held
by large financial institutions, has increased from 39 percent
to about 42 or 43 percent. And I think this is the top five
largest U.S. banks only. So Dodd-Frank has been a failure in
terms of preventing these banks from becoming ``too big to
fail,'' its primary mission.
Next slide, please.
Let us look at the effect on small banks. This is the
number of banks being formed in the country. From 2000 to 2010,
the number of banks being formed in the country averaged about
100 per year. And if you will look, since 2010, when Dodd-Frank
was implemented, I think the average is about one or two banks
per year, which is a scary, scary thing for our economy,
because small banks are typically the new banks, and they are
the primary lenders for small business. And small business
employs 75 percent of the people in this country. So should we
be surprised with no banks being formed that small businesses
struggle to find capital--access to capital being one of
America's biggest assets in the past? Should we be surprised
that our economy continues to limp along at 2 percent instead
of 4 percent?
Next slide, please.
This is the number of business startups and business
closings. And you will see since 2009, that for the first time
since the Great Depression, that business closings out number
business startups in this country. Could that perhaps be tied
to a lack of access to capital? I think that is very likely. I
do not think this is coincidental. And again, this is small
businesses going out of business at a faster pace than small
businesses are being created, and these businesses are the
primary employers of the American people.
Next slide, please.
This slide, okay, the primary source of wealth building in
the country for the last 50-plus years, 100 years, has been
homeownership. And you can see that homeownership has taken a
nosedive and continues to dive, due largely to these new
lending restrictions under Dodd-Frank. Homeownership now stands
at the lowest level in 48 years.
Next slide, please.
And this is participation of people in the workforce. And
you can see that it took a nosedive after the recession and
continues to--it is now at record levels percentage of people
who are outside of the workforce in this country.
So we have got the highest number of people that are
outside the workforce in 30 years.
Back up a slide.
The lowest homeownership in 50 years.
Back up a slide.
The slowest rate of net business formation in 80 years.
Next slide. Back up a slide.
The lowest rate of bank formation in 80 years.
Next. Back up a slide.
So this is not a record, an economic record that anybody
should be proud of. And Dodd-Frank plays a big part in this
equation.
So with that, I want to thank all of our witnesses for
being here this afternoon. I look forward to your testimony.
I now yield to Ranking Member Chu for her opening remarks.
Ms. CHU. I want to thank all of you for being here today.
Today's hearing will focus on the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 and the impact of these
regulations on small financial institutions and on access to
capital for small businesses.
In 2008, our country faced one of the worst economic
downturns in history. In the midst of this financial crisis,
the U.S. lost four million jobs, seven million people faced
foreclosure, and many entrepreneurs abandoned their dreams and
small businesses closed their doors believing that they would
never open again.
After taking extraordinary steps to stabilize the economy,
Congress enacted the Dodd-Frank Act in July 2010 to address the
loopholes that caused the collapse. The bill established strong
new standards for the regulation of large leveraged financial
institutions and made the protection of consumers seeking
mortgages and credit products a top priority.
While this legislation was primarily directed at the
largest financial firms, we often hear that small banks are
impacted primarily due to the high cost for compliance, and it
is clear that the small lenders on Main Street are not the ones
responsible for the financial crisis. Community banks and
credit unions are on the frontlines of community lending
providing personal, familiar services to small businesses and
entrepreneurs. These entities should not be forced to carry the
burden of new regulations.
For these reasons, critical measures have been put in place
to ensure that any new regulatory burden on the small banking
community is properly mitigated. First, many of the Dodd-Frank
Act provisions only apply to institutions with over $10 billion
in assets, leaving 98.2 percent of all banks in the U.S.
largely exempt. Second, new regulations created by the Consumer
Financial Protection Bureau that do apply to small financial
institutions are subject to the Regulatory Flexibility Act and
the Small Business Regulatory Enforcement Fairness Act.
Now, in the midst of this, small business lending has
increased. In fact, according to the Thomson Reuters/PayNet
Small Business Lending Index, access to credit has continued to
improve for small businesses, reaching its highest level ever
in June 2015. Moreover, small business lending is up 19 percent
over the same period in 2014, pointing to steady economic
growth.
The Federal Reserve has found lending standards for small
firms have eased considerably since the recession, while loan
balances at community banks have increased nearly 9 percent in
the last year alone.
And finally, even Small Business Administration lending has
reached record levels. SBA is currently on track to make 65,000
loans totaling over $26 billion in its 7(a) and 504 programs
combined. In fact, the National Federation of Independent
Businesses reports a historically low 3 percent of small
business owners are unable to fulfill their capital needs.
Critics of Dodd-Frank point to the decreasing number of
small financial institutions as proof of regulations that are
too burdensome, but it is crucial to remember that the decline
in the number of community banks did not begin with Dodd-Frank.
For the past 30 years, the number of community banks in the
U.S. has been declining at a rate of 300 per year for the past
30 years, and 80 percent of these losses were actually due to
mergers and consolidations.
There is no doubt that the regulations implemented by Dodd-
Frank will impact many facets of the financial industry, and
there is also no doubt that the economy has been improving at a
greater pace since its passage. Private employers have created
12 million jobs, and unemployment has been cut in half. The
housing market is recovering, and small business credit has
returned to pre-recession levels in many sectors.
Both democrats and republicans have introduced legislation
to make technical corrections to the bill that will support
community banks. However, moving forward, it is essential that
we legislate prudently and avoid allowing big banks to exploit
the genuine concerns of small institutions to promote
legislation that benefits Wall Street at the expense of the
American people.
Today, eight years after the housing bubble burst, small
business is creating two out of three new private jobs and
resuming its position as the economic engine of our country.
The success of these businesses depend on their access to
capital and credit and small financial institutions, like the
credit unions and community banks represented here today, play
an extensive role in lending to them. As both lenders and
borrowers, small businesses have much at stake when it comes to
financial regulatory reform. It is my hope that the testimony
today will add important perspectives on the interaction
between Dodd-Frank and Main Street and we can all learn.
I want to thank the witnesses for being here today and I
yield back.
Chairman RICE. Okay. If Committee members have an opening
statement prepared, I ask they be submitted for the record.
I would like to take a moment to explain the timing lights
to you. You will each have five minutes to deliver your
testimony. The light will start out as green. When you have one
minute remaining, the light will turn yellow. Finally, at the
end of your five minutes, it will turn red, and there will be a
certain amount of flexibility allowed there. I ask that you try
to adhere generally to the time limit.
Our first witness is B. Doyle Mitchell, Jr., President and
CEO of Industrial Bank located here in Washington, D.C.
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 the Industrial Bank since 1984. Mr. Mitchell is
testifying on behalf of the Independent Community Bankers of
America.
Welcome, sir. You have five minutes, and you may begin.
STATEMENTS OF DOYLE MITCHELL, JR., PRESIDENT/CHIEF EXECUTIVE
OFFICER, INDUSTRIAL BANK; SCOTT EAGERTON, PRESIDENT/CEO, DIXIES
FEDERAL CREDIT UNION; MARSHALL LUX, SENIOR FELLOW, MOSSAVAR-
RAHMANI CENTER FOR BUSINESS AND GOVERNMENT JOHN F. KENNEDY
SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY; JULIA GORDON, SENIOR
DIRECTOR HOUSING AND CONSUMER FINANCE, CENTER FOR AMERICAN
PROGRESS
STATEMENT OF B. DOYLE MITCHELL, JR.
Mr. MITCHELL. Thank you, Mr. Chairman, and Ranking Member
Chu, for the opportunity to testify before this Subcommittee.
As you stated, my name is B. Doyle Mitchell, Jr. I am
president and CEO of Industrial Bank headquartered in
Washington, D.C. The bank was founded by my grandfather at the
height of the Great Depression in 1934. We just celebrated our
81st birthday, and we are the oldest and largest African-
American commercially-owned bank in the Washington metropolitan
area. We have over 100 employees, and I testify today on behalf
of 6,000 community banks represented by the Independent
Community Bankers of America. Thank you again for convening
this hearing.
In addition to being a member of ICBA, I am also former
immediate past-chair of the National Bankers Association, which
is a trade association for the nation's minority-owned and
women-owned financial institutions. There is an extremely
important segment of community banks like mine that were
founded to serve minority communities and historically
underserved areas often ignored by larger financial
institutions. Community banks play a critical role in providing
small business credit, and yet, the vital partnership between
community banks and small businesses is at risk today because
of the exponential growth of regulation. Dodd-Frank is really
just the pile-on of regulation. And in a few short years, the
nature of community banking has fundamentally changed from
lending to compliance.
I was speaking to my CFO two days ago and he was talking
about the growth in the call reports going from 60 pages to 80.
I believe regulatory burden has contributed significantly to
the loss of 1,300 community banks since 2010. While, yes, there
have been acquisitions and consolidations, many community banks
that I come in contact with have just thrown their hands up and
given up. And so the good news is there is a solution, and
ICBA's plan for prosperity is a regulatory relief agenda that
will allow Main Street's small businesses to prosper. A copy of
the plan is attached to my written statement.
Now, I come in contact with hundreds of banks on an annual
basis from four different associations. So while ICBA has put
this forth, I can tell you I do not get any argument from other
bankers. The plan includes 40 recommendations--nearly 40
recommendations covering major threats to community banking,
and I want to focus my comments on the plan's mortgage reform
provisions.
Home equity is often an entrepreneur's greatest source of
capital, and they should be able to tap into that to start or
expand a business. However, it is often hard for self-employed
individuals to document their income as required by the CFPB's
qualified mortgage, or QM rule. QM is a safe harbor that
shields a lender from draconian litigation risk. For most
community banks, QM essentially puts a tight box around
underwriting and loan terms. Because it is inflexible and does
not give bankers discretion, such as ours, to use his or her
judgment, QM is cutting off small business credit.
We believe any mortgage community bank holes in the
portfolio should be QM. And we sell loans, but we sell about
50, 60, sometimes 70 percent of our loans, and the loans we
hold in portfolio are those creative loans that QM would
effectively stop from occurring.
We are encouraged by the bills' introduction in the Senate
and the House so far. Two bills in particular best represent
the scope of the plan for prosperity. The Clear Act, H.R. 1233,
sponsored by Representative Blaine Luetkemeyer, includes the
portfolio QM provision that I described, in addition to other
provisions designed to preserve community bank mortgage lending
and servicing, reform bank oversight and examination, and
provide relief from redundant annual privacy notices.
The second bill is H.R. 1523, introduced by Representative
Scott Garrett, which would provide community banks with new
capital options to strengthen their viability. Minority banks
are always looking for additional capital and most other
community banks are as well. We encourage you to co-sponsor
these important bills as well as other bills embodying the plan
for prosperity provisions.
One last item I would like to note is that ICBA believes
community banks should be excluded from CFPB's forthcoming
small business data collection rules. Small banks did not
create those problems and they should apply to the institutions
or larger institutions that actually do. This rule will require
information reporting on every small business loan application,
much like HMDA, which is very tedious. HMDA, at this point,
probably has nearly 100 different data points, and if you miss
one, the examiners will call you in violation of law.
Thank you again for the opportunity to testify. I look
forward to your questions.
Chairman RICE. I am pleased to introduce our next witness,
one of my constituents, Scott Eagerton, the President and CEO
of Dixies Federal Credit Union, which is headquartered in South
Carolina's Seventh District and serves all of Florence and
Darlington Counties. This small credit union has 7,000 members
and nearly $42 million in assets. Mr. Eagerton is testifying on
behalf of the National Association of Federal Credit Unions.
Thank you for making the journey here today, sir. You may
begin.
STATEMENT OF SCOTT EAGERTON
Mr. EAGERTON. Good afternoon, Chairman Rice and Ranking
Member Chu and members of this Subcommittee. My name is Scott
Eagerton. I am testifying on behalf of NAFCU. I serve as the
president and CEO of Dixies Federal Credit Union headquartered
in Darlington, South Carolina. NAFCU and our members thank you
for holding this hearing today.
During the consideration of financial reform, NAFCU was
concerned about the possibility of overregulation of good
actors, such as credit unions. This is why NAFCU was the only
credit union trade association to oppose CFPB having rulemaking
authority over credit unions. Unfortunately, many of our
concerns about increased regulatory burden of credit unions
have been proven true. The CFPB's primary focus should be on
regulating the unregulated bad actors, not creating new burdens
for good actors like credit unions. While it is true credit
unions under 10 billion are exempt from CFPB examination and
enforcement, all credit unions are subject to the CFPB rules.
The impact of the growing compliance burden is evident in
the number of credit unions that continue to decline, dropping
more than 17 percent in the second quarter of 2010. Ninety-six
percent of those smaller institutions were like mine, below
$100 million in assets. At Dixies, our compliance cost has
risen fivefold since 2009, from about $20,000 a year to
$100,000 annually. We spend more today on compliance than we do
on loan loss.
During financial reform, the National Credit Union
Administration moved to a 12-month exam cycle for credit
unions, increasing costs for both the agency and for credit
unions. We now have four full-time staff members who spend two
weeks preparing for an exam, two weeks during the exam, and two
weeks following the exam. The average cost in wages is about
$30,000 per exam.
The financial crisis is now over. We believe the NCUA
should use their authority to return back to the 18-month exam
cycle for healthy and well-run credit unions.
New regulation on top of new regulation has hindered
Dixies' business and our ability to retain top talent. We have
had several staff departures due directly to these
frustrations. Most of our staff has indicated that they do not
want to participate in real estate lending because of the cost
of change and regulatory uncertainty. Through August of this
year, Dixies has already spent over $20,000 for system upgrades
and software licenses. This does not include the time to set up
the software and train on it. That costs roughly an additional
7,500 bucks.
Discussions with NAFCU member credit unions led to the
creation of the NAFCU Five-point Plan for Regulatory Relief,
which is outlined in my written testimony. One area where the
CFPB could be most helpful to credit unions would be to use its
legal authority under Section 1022 of Dodd-Frank to exempt
credit unions from various rulemakings. Congress can also bring
greater accountability and transparency to the CFPB by making
structural improvements to the agency. For example, enacting
H.R. 1266 of the Financial Products Safety Commission Act of
2015 would replace the sole director of the agency with a
bipartisan five-person commission. The qualified mortgage rule
is a prime example of a regulation that was unintended with
unintended consequences. Because the rule was written with a
``one size fits all,'' it has significantly limited member
access to a variety of mortgage products. We decided the
liability risk was not worth it. This has resulted to our
mortgage portfolio shrinking from 60 percent prior to the
crisis to 30 percent today. Despite a strong track record, we
are now making fewer mortgage loans in South Carolina.
Finally, credit unions are not immune to the regulatory
creep from Dodd-Frank. Despite strong credit union performance
during the financial downturn, the NCUA board proposed a new
risk-based capital system for credit unions. NAFCU maintains
that this costly proposal is unnecessary and will further
burden credit unions. We believe that Congress should enact
legislation H.R. 2769 to stop and study proposals before moving
forward.
In conclusion, the Dodd-Frank Act has a significant impact
on credit unions, despite not being the cause of the financial
downturn. We would urge members to support credit union
regulatory relief efforts as outlined in my written testimony.
Additionally, the Subcommittee should also encourage regulators
to provide relief where they can without congressional action.
Thank you for the opportunity to share my thoughts with you
today. I welcome your questions.
Chairman RICE. Thank you, sir.
Our third witness is Marshall Lux, a senior fellow at the
Mossavar-Rahmani Center for Business and Government at Harvard
University's John F. Kennedy School of Government. Mr. Lux
worked in the financial services industry for over 30 years. We
look forward to your testimony, sir. Please begin.
STATEMENT OF MARSHALL LUX
Mr. LUX. Thank you. Chairman Rice, Ranking Member Chu, and
members of the Subcommittee, thank you for the opportunity to
speak with you today. In doing so, I will draw heavily from the
State and Fate of Community Banking, which is a working paper I
co-published in February 2015 as a senior fellow at the
Mossavar-Rahmani Center for Business and Government at Harvard,
with Robert Green, a research assistant at the center who is
seated directly behind me.
Before I begin, let me be clear that the views expressed
here do not necessarily reflect those of any organization and
that either Robert Green or I are affiliated with, and instead
stem from independent scholarly research we have undertaken to
understand the critical issues facing America's financial
system.
Capital access for small business remains a critical pillar
of economic vitality. Members of this Committee are likely
aware that small businesses account for roughly one-third of
enterprise employment. But the current size of a business
matters less than its potential to expand. Capital access is
critical to achieving such growth.
As of 2012, banks were the primary financial institution
for 85 percent of small businesses. In our February working
paper, Mr. Green and I found that an astonishing 51 percent of
small business loans were from community banks. And why is
this? Community banks leverage interpersonal relationships in
lieu of financial statements and data-driven models in making
decisions. As Federal Governor Tarulla has noted, credit
extensions to small firms is an advantage in which the
relationship-lending model of community banks retains a
competitive advantage. It means that community banks are of
special significance to local economies.
Yet, the state of small business banking today is different
than that of several years ago. For starters, the number of
community banks--banks with less than $10 billion in assets--
has declined rapidly in recent years. It did start with Dodd-
Frank. In mid-1994, there were 10,329, and in mid-2014, there
were only 6,094. Similarly, since 1994, community banks share a
view as U.S. banking assets has decreased by more than half to
18 percent.
More concerning to this Committee is the post-crisis
decline in the volume of bank loans to small business. In the
four years before the crisis, from mid-2003 to 2007,
outstanding loans to small business grew 25 percent in 15
percent of community banks. Yet, outstanding bank loans to
small business is attributable to small community banks which
realized a 17 percent fall. During this time, small business
lending by larger community banks remained relatively flat.
What factors are at play here? Nonbank lenders, while
growing rapidly and increasingly playing a viable role in both
credit and the overall U.S. economy have, and will, only fill
some of the gap left in the wake of less community banks mobile
lending. The vast share of small business lending is still
performed by banks, so while these nonbank firms and
technology-based platforms are a factor, community banks will
remain a critical part of small business lending.
Instead, a major cause of decreased community banking small
business lending is our nation's tepid economic recovery. Labor
force participation is at a 10-year low. Quarterly GDP has
averaged just 2-1/2 percent in the last two years.
In August 2015, a survey of small businesses by the
National Federation of Independent Banks reinforced this
concern. It found that 49 percent of respondents were on the
credit sidelines with no good reason to borrow. But the most
troubling fact is that the firms seeking credit may not be able
to access it. As former small business head Karen Mills and a
colleague recently noted, ``While measuring the credit gap is
difficult, the evidence strongly suggests that there are acute
impediments to accessing capital for many credit-worthy small
businesses.'' Dodd-Frank shrinks credit access because of its
shared scope. It stands to increase financial regulatory
restrictions by 32 percent.
As a recent paper published by the Federal Reserve of
Richmond said, ``Banking scholars have found that new entities
are more likely when there are fewer regulatory restrictions.
The current bank or lack of new bank formation inherently
hampers credit access.''
Furthermore, a recent IBA study found that 21 percent of
banks report new regulatory burdens as a factor. For 83 percent
of small banks, compliance costs have increased at least 5
percent. This capital is not being deployed in our economy.
Some will argue that because consolidation has occurred,
Dodd-Frank is not a factor in declining community banking. But
in fact, large-scale regulatory accumulation with the banking
sector has simultaneously occurred with rapid consolidation.
Regulatory restrictions within Title XII----
Chairman RICE. If you could wrap up your testimony.
Mr. LUX. Sure. Absolutely.--grew every year.
Reforming financial regulatory process is critical. Mr.
Green and I propose several strategies to do so. Credit benefit
analysis brings about transparent deliberation and regulators
to avoid unintended consequences.
While Dodd-Frank was intended to focus on large banks,
there is trickle down. Community banks have recently reported
held to the same stress tests and capital standards as large
financial institutions.
In conclusion, small businesses clearly play a critical
role in bringing about heightened U.S. growth, and community
banks today are, and for many years have been essential sources
of credit--their reliance upon community banks from a variety
of factors, an emphasis on relationship-based lending, on
standard lending, geographic necessity. One out of five people
lives in a county with only one community bank.
Certainly, market factors may diminish the role of
community banks in small business lending. Unfortunately,
regulatory pressures, such as those brought by Dodd-Frank are
undermining the competitiveness of community banks.
Chairman RICE. Thank you, sir. We are going to have to wrap
it up. Thank you.
Mr. LUX. Okay. Thank you.
Chairman RICE. I now yield to Ranking Member Chu for the
introduction of her witness.
Ms. CHU. It is my pleasure to introduce Ms. Julia Gordon,
senior director of Housing and Consumer Finance at the Center
for American Progress. Gordon has written extensively about the
Dodd-Frank Act and has been cited in the New York Times, Wall
Street Journal, and the Washington Post among others.
Prior to joining the Center for American Progress, Gordon
managed the Single Family Policy Team at the Federal Housing
Finance Agency and served as senior policy counsel at the
Center for Responsible Lending. Ms. Gordon received her
bachelor's degree in Government from Harvard College and her
J.D. from Harvard Law School.
Welcome, Ms. Gordon. We are so happy to have you here
today.
STATEMENT OF JULIA GORDON
Ms. GORDON. Thank you so much, and good afternoon, Chairman
Rice, and Ranking Member Chu and distinguished members of the
Subcommittee. I really appreciate being invited to discuss the
very important topic of small lenders and access to capital.
Small lenders, as everyone has discussed today, play a
critical and unique role in meeting America's credit needs.
They often serve nonmetropolitan areas poorly served by larger
institutions, and they focus their lending on everyday
customers, such as small businesses and families.
Over the past five years, a number of indicators of health
of small banks have shown consistent improvement--financial
performance, overall health, the overall lending. It is
absolutely certain though that the overall number of small
institutions continues to decline. As Ranking Member Chu noted,
this trend began decades ago, and the pace of that decline,
kind of the slope of the line on the chart in my testimony, has
not been affected by any individual regulation or piece of
legislation, including the Dodd-Frank Act, which, of course, is
a very large set of regulations.
Now, this makes sense because the pressures driving the
decline in small bank are not just regulatory pressures,
although, of course, that is a factor. It is also unlikely that
a decline would have been triggered at the moment of signing of
the Dodd-Frank Act because it took quite a while for the
provisions to be implemented. In fact, they are not all
implemented yet. Even the CFPB was not open for business until
a full year after the act was passed.
Other factors driving this decline all surround the simple
fact that in today's complex financial market, size matters.
The vast majority of small banks that have exited the industry
have actually merged or consolidated. Less than 20 percent of
those exits have been due to failure or simply exiting the
business entirely. So those banks are still out there doing
business in a larger form.
Now, these pressures are because larger financial
institutions engage in a wide variety of activities and serve a
broad array of markets and that better insulates them. When
particular business lines or markets are experiencing
difficulties, they can rely on economies of scale. A very big
factor, and one of the pressing challenges facing all lenders
today, is the rapid pace of technological change and
innovation. Today's customers demand everything from online
lending on mobile devices to cloud-based systems where
documents and other items can be stored. And these demands can
be tougher to meet for small lenders, many of which have aging
and inflexible technology infrastructures and limited staff and
financial resources for projects of that nature. There is also
the weak demand that Mr. Lux talked about, that the economy is
still recovering from the worst downturn since the Great
Recession. And because of the terrible mortgage lending in the
run-up to the crisis, the loss in home equity, which is
generally the largest source of capital for starting small
businesses has, you know, was hit very, very hard, and there is
still a lot of negative equity out there and people are
reluctant to tap their equity.
So, you know, while, of course, regulatory compliance is
part of the challenge, policymakers have recognized that, which
is why many of Dodd-Frank's provisions do not actually apply to
the smaller institutions. Enhanced supervision only applies to
the very largest institutions, and only four out of
approximately 5,900 community banks must undergo stress tests.
Small lenders also are exempt from many of the new rules
governing mortgage lending, which gives them much more
flexibility than larger lenders. And if they were willing to
take advantage of this flexibility, they could see a
significant competitive advantage in the marketplace.
Now, no regulation is perfect, and we have supported a
number of small regulatory changes that could reduce compliance
costs without weakening consumer protections or endangering
safety and soundness. And there is a targeted regulatory reform
package supported by the ranking members of both the House
Financial Services Committee and the Senate Banking Committee
that would ease some of the burden. You know, relates to things
like the exam schedule that I believe Mr. Eagerton mentioned.
Unfortunately, some of the more sweeping legislative
proposals, particularly the very large package that passed the
Senate Banking Committee, uses the rhetoric of helping small
banks to advance the regulatory reform agenda of larger banks,
and that could actually increase and accelerate that chart that
Chairman Rice showed earlier of the big banks having more
business and cement the advantages that those institutions have
relative to the smaller institutions. So we need to be very
careful about that.
If we really want to help small lenders, what we need is a
strong, proactive agenda to help upgrade technology, improve
marketing, and gain access to cloud-based resources that can
help smaller institutions work more like larger ones. We also
need an agenda to support entrepreneurship and formation of
small business, whether it is providing people with higher
quality education, portable benefits that prevent job lock,
upgrading investments and technology.
Chairman RICE. If you could be wrapping up.
Ms. GORDON. And welcoming new entrepreneurs through our
immigration system. An agenda like that would address the
obstacles facing small business without putting America's
taxpayers on the hook again for risking unsustainable lending
practices.
Thank you for inviting me today, and I look forward to your
questions.
Chairman RICE. Thank you, ma'am.
I have quite a number of questions. I learn so much every
time I hear you speak. I have a couple of general questions for
the guys in here on the ground that are doing the banking work.
And I am going to start with you, Mr. Mitchell.
Do you think you were adequately regulated before the
financial crisis? In other words, has additional regulation
made your business safer? More efficient? More profitable? Are
you serving your customers better as a result of this
additional regulation?
Mr. MITCHELL. Absolutely not, Mr. Chairman. In fact, even
before Dodd-Frank, I think we were overregulated. I have been
in the business for 30 years and I have seen periods of
additional regulation. And it always increases. It always
increases.
My colleague spoke a little bit about the amount of money
that he spends on regulation. What we spend--and we are only
$370 million--dwarfs that. And I do not see any benefit to the
customer. Community banks take care of their customers anyway.
That is what we do. So the answer is no.
Chairman RICE. All right. And you lend to a broad spectrum
of people. The new tightened lending requirements, have they
affected your ability to lend to the top 1 percent, to the
wealthy people? Or would you say it disproportionately affects
the middle class?
Mr. MITCHELL. You know what? It affects lending to all
people because many times we think about the regulations while
we are actually trying to look at and underwrite a loan. You
know, in the back of your mind you are always thinking about
what if the regulators do this.
Chairman RICE. When you say ``many times,'' give me a
percentage, somewhere between zero and 100.
Mr. MITCHELL. Half.
Chairman RICE. Half? You think about regulations half the
time when you are making a loan?
Mr. MITCHELL. Yes.
Chairman RICE. And is it more common that you would be
prevented from making a loan to a wealthy person or to a
middle-class person?
Mr. MITCHELL. It is always tougher on those that are low,
moderate, and middle class.
Chairman RICE. Have not the new lending restrictions taken
away your ability to loan to somebody that might have been on
the border?
Mr. MITCHELL. No question about it.
Chairman RICE. And would you say that disproportionately
affects a minority community?
Mr. MITCHELL. Absolutely.
Chairman RICE. Mr. Eagerton, I am going to go to you next,
sir. Do you think you were adequately regulated prior to the
financial crisis?
Mr. EAGERTON. Absolutely.
Chairman RICE. And do you think that all these new
regulations have made your bank safer? Have made it more
efficient? Have allowed you to better take care of your
customers?
Mr. EAGERTON. It is probably one of the biggest threats
that we face today. I spend about $9,000 a year on loan loss
reserves for real estate loans. We spend 120 to make sure we
are in compliance.
Chairman RICE. All right. And would you say that these
regulations affect more your ability to loan to wealthy people
or to people who you might otherwise have been on the
borderline and you might have taken a chance on?
Mr. EAGERTON. The latter, for sure.
Chairman RICE. So you think it disproportionately affects
the middle class?
Mr. EAGERTON. Absolutely.
Chairman RICE. And minority borrowers?
Mr. EAGERTON. Absolutely.
Chairman RICE. Mr. Lux, can you generally describe for me,
you know, we were talking earlier about the SBA kind of filling
the gap for these community banks. Ms. Chu referred to the SBA
making 65,000 loans. Do you think the SBA can fill the gap that
these community banks are leaving open?
Mr. LUX. Not at all. Nor can these new lenders that are
emerging. Karen Mills has a wonderful paper that you all should
read, if you have not, on small business lending. But there is
no question. The SBA has never been able to fill the gap, and
they are not going to be able to fill a very large, gaping tap.
Chairman RICE. Do you think the additional regulatory
burden, not just by Dodd-Frank but the accumulative banking
regulations since the financial crisis--you know, the pendulum
has swung. Right? It had swung too far to be too loose, and
clearly it swung the other way. Do you think that shaves points
off of our GDP? Do you think that negatively affects our
economy?
Mr. LUX. Yeah, I do. I mean, the amount of, you know, we
are talking about small banks and small lending, but even for
the larger banks it is a huge amount of money that has
transitioned out of the economy for, I would argue, no good
reason. And when you try to interpret a law that is six times
larger than Basel III. You know, they created in a heartbeat a
bunch of laws that are yet to be even interpreted. But that is
really important to recognize, that a lot of Dodd-Frank has not
been implemented, and it just gets worse and worse. I frankly
think it is a drag on the economy and sort of the work that we
are doing, which is----
Chairman RICE. If you can wrap up, my time is up.
Mr. LUX. Okay.
Chairman RICE. Thank you, sir. Thank you very much.
Mr. LUX. Sure.
Chairman RICE. I now recognize Ms. Chu, the Ranking Member.
Ms. CHU. Ms. Gordon, small businesses are the backbone of
our economy, and small lenders are largely responsible for
getting small businesses and entrepreneurs the capital they
need. Many critics of the Dodd-Frank Act point to the declining
number of community banks and credit unions as proof that the
regulations are too burdensome. However, you state that Dodd-
Frank is not the cause of the decline. Can you tell us why you
believe this is true, and what are the factors that have led to
the decline?
Ms. GORDON. I spoke about some of this in my earlier
testimony. And just to hone in on a few things, we went through
a very, very bad financial crisis, and that impacted a variety
of things. For one thing, the decline in home equity was
monumental. Home equity is a key resource that people use when
they are starting or expanding home businesses. Even now as we
are coming out of that period of negative equity, consumer
confidence remains shaky and we see particularly in the
mortgage market people unwilling to borrow against their homes
or concern that they are actually not back in positive equity.
I will say there is an area, something we can all agree on
is that in terms of mortgage lending, the pendulum has swung
too far in the opposite direction. And what is interesting is
much of that is not so much because of the Dodd-Frank rules,
per se. What you hear from Fannie and Freddie and FHA, which
are the major secondary market channels for mortgage lending
right now, is that banks themselves are placing what we call
overlays on the credit box established by those secondary
market entities because those banks themselves are feeling
very, very risk averse, no doubt due to the pressures that we
have all been through over the last decade. And it is
particularly interesting in this Committee where, as you know,
starting a small business is a risky thing and really, people
have to take chances. And we are in an environment now where
our lenders do not appear to take any chances at all. And that
is not so much about regulation because there actually have not
been enforcement actions against the type of institutions
represented at the table here. In fact, these institutions are
exempt from most of the mortgage rules. They are exempt from
parts of QM. They can still continue to make balloon loans.
They do not have to deal with escrow accounts for higher price
loans. If they are holding loans in portfolio, they do not have
to adhere to the QM debt-to-income ratio restrictions. So they
have got a lot of flexibility that they could use to compete.
But what I have heard when I talk to lenders is that their
lawyers and their risk offers are telling them, ``Do not do it.
Do not do it. Do not try it.'' And that is not a question of
the rule needing to be changed; that is something about the
environment that we need to change.
I think we should all be very open to ensuring that the
regulations are applying to the right group. If there are some
exemptions that need to be widened to bring in a few more
institutions with higher asset sizes because of all this
consolidation, we should look at that. You know, again, things
like exam schedules, make sure they are not too burdensome. But
some of the core changes of Dodd-Frank, like requiring that
lenders check whether a borrower can pay back a loan before
they make that loan, it is a shame we ever had to regulate
about that. That should have been common business sense, but it
was widely disregarded and that led to the crisis. So we need
that rule.
Ms. CHU. In fact, I wanted to ask about that. Low income
and minority communities were devastated by predatory mortgage
lending in the years leading up to the housing crisis. How are
these communities better off today with the ability to repay
and qualify mortgage rules that we enacted under Dodd-Frank?
Ms. GORDON. Well, what we know today is that when someone
gets a mortgage, we are probably supporting what I call ``home
ownership,'' rather than just home buyership. The importance of
the home is that you can afford it and you can sustain it over
the life of the loan. So people getting loans now, especially
under the new stringent requirements, that are much more likely
to be successful and to build wealth. We do need to take some
actions to reduce these overlays so that more people can get
into the market, and a lot of that has to do with working with
Fannie, Freddie, and FHA to give more certainty to lenders
about when they are going to get a buyback request.
Ms. CHU. Thank you. I yield back.
Chairman RICE. Representative Kelly?
Mr. KELLY. Thank you, Mr. Chairman. And thank you,
witnesses, for being here.
While I was home in the district in August, I visited all
22 counties which I have, and I visited lenders, bankers,
credit unions, in all those counties where they exist. And over
and over again I was shown the effects of Dodd-Frank on these
small banks. In Mississippi, we have nothing but small banks.
And the new regulations that are coming out that are about to
come in are five or six three-inch binders worth of new
regulations that my small Mississippi banks must comply with in
order to run their business, many of them who do not have as
many employees as you, Mr. Mitchell, who has a small bank, but
not as small as some of the ones that I represent. In
Mississippi, small businesses, and specifically our banks, our
small banks, are the cornerstone of every single town. It is
the basis of why we have a town. And if there is not a bank,
there is not a town. Mr. Eagerton, the same way. Every military
institution I have ever been on or installation, the credit
union there is the cornerstone of one of those military
installations.
That being said, Mr. Mitchell specifically, can you tell me
in any way that Dodd-Frank, since its enactment and the
regulations that currently exist and those that are coming, can
you tell me how they make banks more accessible? How they make
lending more fair? How they make you more responsible as a bank
to the people that you lend money to? How it has made it more
time sensitive in the way that you respond to your end
customer, and how it protects our customers better?
Mr. MITCHELL. Thank you, Mr. Kelly. In my travels I have
come across, as I said, a number of banks, and certainly, I
have come across a number of CDFIs in the state of Mississippi.
And I feel their pain as well. Dodd-Frank had a lot of great
intentions. It really did. The problem with Dodd-Frank is you
cannot outlaw and you cannot regulate a corporation's
motivation to drive profits at all costs. So while it had a lot
of great intentions, in over 1,000 pages, it has not helped us
serve our customers any better. Just like the institutions in
your state, community banks, you know, we are there for our
customers. We actually really do care about our customers.
Dodd-Frank was intended for maybe 50 to 100 institutions. It
was not intended for mainstream institutions, minority banks
around the country, like the one in Newark, New Jersey, City
National. Mr. Payne, your father was a great individual.
So it has not helped. It has not helped. It has only
increased our cost. And if my costs of complying were as low as
Mr. Eagerton's, I would be happy. But our cost of compliance is
probably approaching a half million dollars.
Mr. KELLY. I actually was a loan closing attorney in a
former life. It has been many, many years because it was too
complex for me in 1999 when I closed my last loan, and that was
way before all this.
Mr. MITCHELL. Do you have any idea what it is going to be
like on October 1?
Mr. KELLY. I do not want to know. That is why I came to
Congress, I think.
But that being said, do you think that more regulation and
more paperwork and thicker loan packages that take a longer
time to implement are better or worse? Do they cost more or
less for the end consumer, the person who is getting the loan?
Mr. Mitchell?
Mr. MITCHELL. It costs way more. The loan package is
probably this thick, and if anyone in this room bought a house
20 years ago, you already remember how many documents you had
to sign, how many documents you had to read. I bought my first
house in 1989, and it was a chore, as a banker, for me to get
through it all. I only hope I can stay in my house forever now.
Mr. KELLY. And one final question from a consumer
standpoint. That thick regulation, the thick amount of the loan
closing package that you have right now, do the majority of
your customers when they are signing those loan document
papers, do they understand what they are signing or are they
relying on an attorney who in most cases is not representing
them but representing someone else? Do they understand what is
in all those regulations that they are signing that is supposed
to protect them?
Mr. MITCHELL. Absolutely not. Absolutely not. It is not any
clearer about what they are signing. In fact, it is even more
cumbersome for them now. We do mortgage loans. And I was
sharing with someone before the hearing, the unfortunate thing
is we are seriously--we have done mortgage loans for 81 years.
We are seriously thinking about getting out of the mortgage
business. And that would be a tragedy, because we do a lot of
lending for minority customers.
Mr. KELLY. Thank you, Mr. Mitchell, and I yield back the
balance of my time, Mr. Chairman.
Chairman RICE. Representative Hahn?
Ms. HAHN. Thank you, Mr. Chairman, Ranking Member Chu.
Thank you for holding this hearing today.
And although I was not in Congress when Dodd-Frank passed,
I do believe that our second great recession in 2008 really
required Congress to step in and protect the consumer. And
there may be unintended consequences from Dodd-Frank that hurt
access to capital for our small businesses. But I think at this
point, I do not think we should be throwing out the baby with
the bathwater. I think we should work together to fix some of
those provisions that would help our small lenders. But, you
know, while some of you think the recession is over and the
crisis has passed, I will tell you I represent people in my
district who did lose their homes and who lost their jobs and
have not recovered yet. So I am not convinced that we need to
ease regulations as yet. We know what happened before when
there were no regulations, and certainly the banks and the
mortgage lenders took advantage of people.
I was going to ask Ms. Gordon, you touched on it a little
bit, but I do worry that the lobbying effort underway to reform
Dodd-Frank is coming from big banks under the guise of helping
small banks. In fact, the legislation that passed through the
Senate Banking Committee earlier this year is very broad and
would lift major regulations off of big banks. Honestly, and
again, you touched on it, but who do you think will benefit
more from the Senate Banking Committee's Dodd-Frank reform
legislation--small community banks or big banks?
Ms. GORDON. Absolutely the big banks. We will just take as
an example the question of exemptions from the qualified
mortgage requirement for loans held in portfolio. And as we
know, loans held in portfolio, the incentives tend to be
aligned better than for loans that are sold into the secondary
market and securitized. The community banks represented at this
table already have that exemption and there is a proposal out
there to raise the threshold of asset size for that exemption.
I will note something interesting there which I think when
we are changing these definitions, if we do broaden some of
these definitions, it might make sense to look less at asset
size per se than actually at what kind of business the
institution engages in. The FDIC has some criteria they look at
about what kinds of business you are doing so that folks doing
that kind of bread and butter business, lending to small
businesses, lending to families, can be defined that way as
opposed to businesses doing something more complex and up there
in the derivatives market or something.
Ms. HAHN. Thank you.
Ms. GORDON. Can I add one thing about loan closings? Which
is, the CFPB just undertook a big study of loan closings
because they were very concerned about that thick package of
closing documents. And to their surprise, as well as frankly
mine, they found that only a handful of those documents had to
do with federal regulatory requirements. The vast majority,
more than half of those documents, are required by the banks
themselves. So if they want to get rid of them, that is
actually in their control. It turned out not to be in the
CFPB's control.
Ms. HAHN. Thank you for that.
Mr. Eagerton, I am a big supporter of credit unions. I am a
member of the ILWU Credit Union back in my hometown, and I have
worked very closely with my credit unions who I give great
credit to for being really the community banks in most of our
communities.
One of the things I think we can do to help credit unions
is to lift this arbitrary cap that was not a result of Dodd-
Frank but it was a result of Congress in the 1990s putting this
arbitrary cap on how much our credit unions could lend. And I
think I have been a big advocate of raising that cap, and I
know Ranking Member Chu and I are both co-sponsors on the
Credit Union Small Business Jobs Creation Act, which would lift
that cap. I know the big banks are very opposed to that, but I
would like to see that happen because I think that would do
more than lifting regulations to allowing our credit unions to
really get in there and make those loans.
Could you just tell us what that would mean if Congress
passed the bill on raising that arbitrary cap?
Mr. EAGERTON. Well, first, let me start with this. I think
that is an excellent idea. Most credit unions today are capped
at 12.25 percent of their assets.
Ms. HAHN. Right. Right.
Mr. EAGERTON. So by raising that cap, you would allow
credit unions to continue to do member business loans. What
most credit unions find today is that just as soon as they get
the program up and running, get the staff hired, they have to
stop because they meet that cap. So I think that is an
excellent idea.
Ms. HAHN. Thank you very much. Mr. Chairman, I yield back.
Chairman RICE. Thank you, Ms. Hahn.
Mr. Hanna?
Mr. HANNA. Thank you.
Ms. Gordon, I take these gentlemen at their word. I mean,
and I also think that part of the issue that was never really
addressed was the fact that borrowers are also complicit in
their own problems. And the bigger the loan application, the
more complex, the less likely it is that people actually
understand what they are doing, especially when they are
anticipating that the value of the property as you indicated
was going to go up 10 percent a year and it actually did not.
And why would it, right? Things do not grow to the sky.
What I want to say, too, is what I have noticed is that
because of consolidations on economies of scale as you had
mentioned are so obvious in the banking business and seem to
work so well, and I take your points about banks at the lower
end needing to be more efficient, maybe look to bigger banks to
see what they should be doing, what I see is that the role of
smaller banks is even more critical now than it has ever been
because with this consolidation, larger banks are less willing,
and frankly it is not profitable for them to do the kind of
banking that Mr. Kelly spoke of. And what I see is a reduction
in the willingness and the capacity of people to borrow, not
just because they are increasing their loan requirements but
because it is just simply not worth it for banks to do a
100,000, 200,000 loan. The internal costs are so great.
So I would suggest that what Mr. Mitchell and Mr. Eagerton
do and what Mr. Lux spoke about, that we should find ways to
reduce burdens on smaller banks because the entrepreneurs, as
Mr. Mitchell and Eagerton pointed out, at the lower end, that
is where the growth is. I mean, it is a small guy that gets
big. And frankly, that is what we want.
And I do not mean to make a statement here too much, but I
wonder what anybody thinks about that, especially you, Mr.
Mitchell. I mean, you are a small bank. Mr. Eagerton is a small
bank. What do you think of that?
Mr. MITCHELL. Well, I think you are absolutely right. As
Ms. Hahn spoke of, you know, I think larger banks do want to
try to benefit from an effort that really should be tightly
geared towards community banks. We do not want to throw the
baby out with the bathwater, but the bathwater needs to be
drained significantly because it is pretty dirty. So you are
absolutely right. You cannot expect a trillion dollar
institution to focus on $100,000 loans. And as you reduce the
number of community banks, what you end up with is fewer larger
banks that cannot focus on $100,000 loan. So you are absolutely
right.
Mr. HANNA. And to your point about minorities, that speaks
exactly to that.
Go ahead, Ms. Gordon. I am sorry.
Ms. GORDON. I mean, you are posing a very, very important
question, which is if there is a problem with regulatory
burden, do you address it by exempting the smaller
institutions, thereby giving them potentially a competitive
advantage in the marketplace? Or do you address it by getting
rid of those regulations all together, which leaves the small
institutions still subject to the same disadvantages relative
to large ones that they have been for a long time? And I have
been very interested to hear from a lot of small institutions
that do not seem to realize which exemptions they have. Not
only are small institutions exempted from a number of these
rules, but a number of these rules do not apply to the smallest
loans. And there I think you have real questions about how this
is working.
Mr. HANNA. These gentlemen know their numbers. They are not
sitting here dumb. They are telling you what it is costing
them. They are telling you it is a burden. So they may not be
aware of everything, but they are certainly aware of the fact
that they spend $75,000 or $100,000 when they used to spend
nine. Twenty? That is what they look at. I am sure you are
correct.
Ms. GORDON. No, that is absolutely true. But I have heard
from banks come and tell me, ``I cannot do this kind of loan,
that kind of loan, or that kind of loan.'' And that is what
their risk officers or their lawyers are telling them, and it
is just not right.
Mr. HANNA. But your point was a good one, that perhaps some
loans should be looked at differently by the federal
government.
Ms. GORDON. Absolutely. And I----
Mr. HANNA. I mean, in a way you are on their side.
Ms. GORDON. Exactly. I completely agree that they should be
exempted from a number of these roles.
Mr. HANNA. My time is expired. Thank you.
Mr. MITCHELL. If I may, while we are not examined by CFPB,
we are still subject to the rules that they write. So the
exemptions are not as clear as you may anticipate that they
are. We would not be here if that was the case.
Chairman RICE. Thank you, sir.
Mr. Payne?
Mr. PAYNE. Thank you, Mr. Chairman. I would like to thank
you for having this hearing and also our ranking member, Ms.
Chu.
Mr. Mitchell, it is good to meet you, and thank you for
those kind words in reference to my father. In your testimony,
you recommend reforming Regulation D of an accredited investor.
And your recommendation will change the definition to now
include the value of the primary residence in determining if a
person's net worth has met the million dollar requirement to be
an accredited investor. Can you tell us why this would be
beneficial to small businesses and how it could increase access
to capital?
Mr. MITCHELL. Yes, sir. Number one, community banks, and
particularly minority banks, we are always seeking capital as
in the case of City National.
Mr. PAYNE. Right.
Mr. MITCHELL. And what the rules say, as they stand now, it
limits the pool of those investors that we can go to for
capital. And so by including the residence in the net worth
calculation, it opens up the pool to just more individuals
without us having to go through a number of steps, a number of
hoops to offer capital to those investors.
Mr. PAYNE. So it would be critically beneficial to them?
Mr. MITCHELL. Absolutely. Absolutely.
Mr. PAYNE. And it would make a world of change in reference
to them being able to be accredited?
Mr. MITCHELL. Absolutely. In a private offering, which is a
small offering of capital, it just opens up the pool to a
number of other people.
Mr. PAYNE. Thank you. I know you mentioned the bank in my
town, City National, on several occasions, and my father, and
now I, have struggled to help maintain viability in that
community because of the work that they do on the ground, every
single day, for people who necessarily cannot walk into other
institutions and even get someone to speak to them at all.
Mr. MITCHELL. Fortunately, they have just completed their
recapitalization and they are on solid ground for the future
under the direction of the NBA chairman, Preston Pinkett.
Mr. PAYNE. And Mr. Pinkett will sit on my forum at the
Congressional Black Caucus tomorrow, and if you are in town, we
are going to make sure we invite you as well.
Mr. MITCHELL. Thank you very much.
Mr. PAYNE. My second question is to Mr. Mitchell as well
since, you know, I am referencing your testimony, but all
panelists can answer. Mr. Mitchell, in your testimony you
recommend community banks be excluded from the small business
data collection requirement under Section 1071 of the Dodd-
Frank. However, we know that there is discrimination in small
business lending and the collecting of this data in one place
would specifically help women- and minority-owned small
businesses. Representative Chris Van Hollen and I have recently
led a letter to the CFPB director outlining the importance of
this requirement. Eight-two members have joined us on this
letter and I hope we can get several more on this Committee on
it because it is undoubtedly important. You mentioned privacy
concerns; however, we know that Section 1071 regulations will
be formatted similarly to the HMDA, which explicitly prohibits
institutions from including information that will identify the
applicant or borrower, such as their name, date of birth, or
social security number. Can you tell the Committee why the ICBA
believes that community banks should be excluded from this
extremely important regulation?
Mr. MITCHELL. Well, it goes back to the fact that community
banks, we actually care about our customers, and I think when
you look at most of the discrimination in lending and predatory
practices in lending, it has been systemically present in
larger institutions. Community banks, we are here to make
loans. We want to make loans. And since we are part of the
community, our reputations are at stake if we engage in those
practices. So while there is a clear need to try to outlaw
discrimination at any level, I do not think it is necessary for
community institutions. HMDA is a very tedious--while
necessary, it is a very tedious requirement. And the data
points of HMDA have grown so much it is almost impossible for
institutions to comply on an ongoing basis. I mean, we spend a
lot of time on money on HMDA data collection and ensuring its
accuracy, and I see this as another form of that.
Mr. PAYNE. Thank you. I was going to try to get other
members on the panel, but I will yield back.
Chairman RICE. Thank you, Mr. Payne.
Mr. Luetkemeyer?
Mr. LUETKEMEYER. Thank you, Mr. Chairman. I am not a member
of the Subcommittee. I am just here today as an interested,
concerned member of Congress with regards to this particular
issue. As a former bank regulator, as a former banker, I have
got some insights into this that certainly give me pause when I
look at the title of the hearing today: How Dodd-Frank is
Crippling Small Lenders Access to Capital.
I see every day in talking to all the folks in my world
that the banks and the credit unions are impacted in a way by
these regulations that absolutely is cutting off credit to
every day folks to be able to live their lives the way they
would like to with regards to buying homes, financing cars,
providing educational opportunities for the kids, as well as
business opportunities for themselves.
Mr. Lux, you made the comment a while ago that Dodd-Frank
shrinks access by scope. Can you elaborate on that just a
second?
Mr. LUX. Sure. If it is okay I would like to just make a
general statement, and I will----
Mr. LUETKEMEYER. Very quickly. I have got five minutes and
you talk very slowly. I need my time.
Mr. LUX. Okay. You will get your time back.
Simply put, Dodd-Frank needs to be streamlined. Someone
needs to take a hard look at this 856-page document and look at
the implications of it. The only thing I would like to say is
it is a gift to academics because my second paper was on the
growth of mortgage finance in light of Dodd-Frank and the paper
that we will be authoring in the fall will be how the
underbanked have grown.
Mr. LUETKEMEYER. Very good. Thank you.
Mr. Mitchell, I know that we have a deadline coming up
here, and you made mention of it a minute ago with TRID. I am
one of the guys who has been harping on CFPB to try and have
some forbearance there, and they pay lip service to it but they
will not put anything in writing. I am very concerned about
this. For them, it is an opportunity to go after people doing a
legitimate job of doing the best they can and getting caught in
this timeframe here. Can you explain your concerns about it? Or
do you have concerns about it at all? I know you mentioned it a
minute ago.
Mr. MITCHELL. Yeah. We have a lot of concerns about it. In
fact, we had an expert title attorney come and speak to our
lenders about the upcoming requirements. And while we are
actually trying to shorten the amount of time from application
to closing, she, in no uncertain terms, said that it would add
15 days easy to the process as the paperwork is very difficult.
Settlement companies are still trying to get their hands around
the requirements. And that is pretty scary.
Mr. LUETKEMEYER. Mr. Eagerton, would you like to comment on
that as well?
Mr. EAGERTON. Well, the CFPB qualified mortgage rule, that
basically hampers our business. We are not real comfortable
with that. I can remember 20 years ago making my first mortgage
loan. Thinking back, that guy probably had a 45 percent DTI. I
still see him every month. He makes his payment on time. No
issues. I understand that there is some opposition at the table
that says we may or may not be exempt, but that is a very wide
line between us and the regulators. So I think that is part of
it. And I also would like to see the CFPB have a five-person
bipartisan panel as opposed to just one person.
Mr. LUETKEMEYER. You know, CFPB is a figment of our
creation of Dodd-Frank here, and to me it is the most dangerous
agency in Washington because it is unaccountable. There is no
oversight, in my mind, anyway. And once the director is
appointed, he is there for his term. They are making rules and
regulations without very little oversight or impact. They
refuse to accept comments from the outside, and so in
discussing this TRID issue, for example, with the director, I
mean, we are supposed to take him at his word that he is going
to behave in a responsible manner, and I look at this as an
opportunity to go after institutions. And it is very concerning
to me, especially from the standpoint that I recently had--
yesterday had somebody in my office who owns a business. The
CFPB went after them from the standpoint that within their
document, one of their operational documents that they had to a
customer, is a phrase. And CFPB fined them $10 million because
they are anticipating doing a rule down the road that this
phrase would no longer be compliant with. All of you now are
going to have to have a crystal ball sitting on your desk, or
be clairvoyant, to know what CFPB may do in the future. This is
how far we have gone. This is how far over the top this agency
has become. This is the environment that has been fostered by
Dodd-Frank, and it is doing more than crippling access to
capital for our people; it is crippling the economy.
I appreciate you being here today. Thank you very much for
your testimony.
Chairman RICE. Thank you, Mr. Luetkemeyer.
Mr. Brat?
Mr. BRAT. Thank you very much, Mr. Chairman. Thank you for
holding this hearing today. I think it is very interesting. I
did my Ph.D. in economic growth, and part of the subtitle of
this hearing, we have not talked much about economic growth.
And so I think that is interesting to bring up now in some
respects.
The people of my District Virginia 7 say Dodd-Frank is a
huge burden on their businesses. I have a small business short-
term lender in Culpepper, Virginia, that expects to be driven
out of business by the expected CFPB rule. Chairman Rice and
Ranking Member Chu, I have a letter from that constituent,
Brandon Payne, as well as testimony he provided to members of
the CFPB Small Business Advisory Review Panel, and I would like
to request that this be inserted into the hearing record.
Chairman RICE. Without objection.
Mr. BRAT. Thank you very much.
Mr. Payne's check cashing provides valued service to people
without other options. CFPB is trying to eliminate this market,
and I think we have heard similar testimony from the folk with
us here today. The gentlemen in business here, I mean, I hear
Ms. Gordon at the end of the table from the government and the
regulators saying that they are trying to make your life
easier. And you guys in economics are called the data points;
right? So it does not get any more real. You are the data. What
do you have to say to the government in terms of them making
your life easier? It seems to me you are giving Ms. Gordon some
very clear testimony on how the regulations are hurting people,
and yet, we are kind of talking by each other. And so there has
to be some give and take. And so I will pose that question to
you in a minute.
I want to get to the economic growth piece also. In Econ
101, you get a nice graph at the beginning of your textbook
that has got robots on it and pizza down on the other. Right?
One is an investment good and one is a consumer good. And that
is your first chart you learn because it has to do with
economic growth. And so as a society, you can either invest in
robots and grow in the future, or have a pizza party. And this
country has been having a pizza party for a few decades now and
our growth rate is suffering because of it.
I think on that graph you can also juxtapose, instead of
having robots and pizza, you can have robots and three-ring
binders. And so when I studied economic growth, growth in its
simplest form and at the cross-country level is usually a
function of capital stock, human capital, education. You can
measure that in some ways. R&D you can throw in there,
something like that. And technology. And you can throw labor in
there. Right?
So growth is caused by those things. Now, I am trying to
get the government to understand, and maybe you guys can help
me make this argument, but when you are hiring employees to
read through three-ring binders and do all the regulatory
burden, you are not hiring someone else with human capital that
can help you get capital and technology, et cetera, to grow the
economy and grow your firm. I think that is about as
straightforward a way as I can put it.
And then the expert on regulation says what you guys should
be doing. I wrote you should be, you know, if you small
business people were more clever, you would be doing more
marketing and technology and taking risks, et cetera. And so
that is our guidance from the regulators, is that you guys, you
know, you should be doing more marketing and technology and
taking risks. But I am trying to show this tradeoff, that if
you are constantly buying three-ring binders and people to go
through three-ring binders day after day after day, you cannot
hire the person in marketing, and you cannot hire the person in
technology, and you are going to be reluctant to take risks.
So Mr. Mitchell and Mr. Eagerton, can you tell us how
profound is the impact on your businesses when you have to pay
for this regulatory thing? And speak to Ms. Gordon and the
regulators so they get a sense of, hey, this is real. There is
a real tradeoff that is hurting us, and we are going to go out
of business.
Mr. MITCHELL. I will speak very briefly. As an econ major--
--
Mr. BRAT. Oh, good.
Mr. MITCHELL. I certainly appreciate your analogy. And the
extension of credit and the multiplier effect is what makes the
economy go. It is not really actually rocket science that small
businesses create most of the jobs. And small businesses get
most of their credit from small and community financial
institutions. It is pretty much as simple as that.
Mr. BRAT. Yep. Pretty simple.
Mr. MITCHELL. And the amount of time that we spend on
compliance is tremendous. One hundred twenty people, a third of
their job is compliance, and that does not produce loans and
move the multiplier effect----
Mr. BRAT. So they are not moving. Right.
Mr. MITCHELL.--to grow the economy.
Mr. BRAT. Do you buy that, Mr. Eagerton?
Mr. EAGERTON. I agree with him 100 percent. And, you know,
compliance is just, really, the pendulum has swung way too far
for our institution. We do not have a three-ring binder, but
what we have is we have a boardroom. And so I will assign three
staff members to go in and look at the Dodd-Frank Act. They
come out a week later and they go, ``Here is a stack.'' It is
800 pages. I am sure you have seen it. But, ``Here is a stack
that is going to affect our institution and this is what we
need to do about it.''
So during that time, understand that I have a staff of
basically 20 people. Okay? So for that week, they are basically
out of commission. And then they are going to come back with a
plan of action of what we are going to do. I really feel like
we are getting away from helping people and making sure that we
make the loans that Washington agrees with. And I think that
needs to change.
Mr. BRAT. Thank you guys very much. Thank you.
Chairman RICE. Thank you, Mr. Brat.
They have called for votes. Do you have anything you want
to add?
We have been talking about babies and bathwater. And I want
to finish this up just looking at what is swimming around in
our bathwater right now, the graphs I started out with, the big
banks are still getting bigger, small bank formations are at
80-year lows. Net business startups are at 80-year lows.
Homeownership is at 50-year lows. Workforce participation is at
30 year lows. We are in a bad spot, and I think Dodd-Frank, and
just general banking regulation, has a lot to do with that. I
think we vastly diminished access to capital in this country
and we need to deal with it or it bears poorly for our economy.
Thank you for being here. Thank you to the witnesses. Thank
you for those who came and participated in the audience. The
meeting is adjourned.
[Whereupon, at 2:33 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Introduction
Good afternoon, Chairman Rice, Ranking Member Chu and
Members of the Subcommittee. My name is Scott Eagerton and I am
testifying today on behalf of the National Association of
Federal Credit Unions (NAFCU). I serve as the President and CEO
of Dixies Federal Credit Union, headquartered in Darlington,
South Carolina. I have over 20 years of financial industry
experience, including the last 10 years in my current role.
Dixies Federal Credit Union was founded on August 25, 1947.
Originally serving employees of the Dixie Cup and Plate
Company, Dixies is now a community credit union serving 7,000
members in Florence and Darlington counties with nearly $42
million in assets.
As you are aware, NAFCU is the only national organization
exclusively representing the federal interests of the nation's
federally insured credit unions. NAFCU-member credit unions
collectively account for approximately 70 percent of the assets
of all federal credit unions. The overwhelming tidal wave of
new regulations in the wake of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank) is having a
profound impact on all credit unions and their ability to serve
their 101 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, regardless of size, 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 over 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
6,100 federal 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 Dodd-Frank, including all
rules promulgated by the Consumer Financial Protection Bureau
(CFPB).
Lawmakers and regulators readily agree that credit unions
did not participate in the reckless activities that led to the
financial crisis, so they 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.
Today's hearing is important and the entire credit union
community appreciates your interest in the effects of Dodd-
Frank on small businesses such as credit unions.
Dodd-Frank and Its Impact on Credit Unions
During the consideration of financial reform, NAFCU was
concerned about the possibility of overregulation of good
actors such as credit unions, and this is why NAFCU was the
only credit union trade association to oppose the new CFPB
having rulemaking authority over credit unions. Unfortunately,
many of our concerns about the increased regulatory burdens
that credit unions would face under the CFPB have proven true.
The CFPB's primary focus should be on regulating the
unregulated bad actors, not creating new regulatory burdens for
good actors like credit unions that already fall under a
prudential regulator. As expected, the breadth and pace of CFPB
rulemaking is troublesome, and the unprecedented new compliance
burden placed on credit unions has been immense. While it is
true that credit unions under $10 billion are exempt from the
examination and enforcement from the CFPB, all credit unions
are subject to the rulemakings of the agency and are feeling
this burden. While the CFPB has the authority to exempt certain
institutions, such as credit unions, from agency rules, they
have unfortunately been reluctant to use this authority on a
broad scale.
The impact of the growing compliance burden is evident as
the number of credit unions continues to decline, dropping by
more than 17% (1,280 institutions) since the 2nd quarter of
2010; 96% of those were smaller institutions like mine, below
$100 million in assets. A main reason for the decline is the
increasing cost and complexity of complying with the ever-
increasing onslaught of regulations. Many smaller institutions
simply cannot keep up with the new regulatory tide and have had
to merge out of business or be taken over.
This growing demand on credit unions is demonstrated by a
2011 NAFCU survey of our membership that found that nearly 97%
of respondents were spending more time on regulatory compliance
issues than they did in 2009. A 2013 NAFCU survey of our
membership found that 93% of respondents had seen their
compliance burden increase since the passage of Dodd-Frank in
2010. At Dixies FCU our compliance costs have risen five-fold
since 2009, from about $20,000 a year to $100,000 annually. In
addition to adding a full-time employee, non-compliance staff
including myself, are regularly needed to help with the
compliance workload, taking us away from our normal day-to-day
duties serving our members. Many credit unions find themselves
in the same situation.
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 forced to take time away
from serving members to spend time on compliance issues. Every
dollar spent on compliance, is a dollar taken away from member
service, additional loans, or better rates.
Unfortunately, consumers are the ones who suffer the most.
As credit unions increasingly reassign staff resources to
compliance work, there is a proportional decline in member
service.
July 21, 2015, marked the five year anniversary of the
Dodd-Frank Act becoming law. The legislation was supposed to
restore the U.S. economy, end ``too-big-to-fail'' and promote
financial stability. Since enactment, we have witnessed large
banks grow and small banks and credit unions disappear. A law
that was meant to eliminate the risky activities of the biggest
banks on Wall Street nearly halted the time-tested undertakings
on Main Street. In my testimony today, I will describe the
current challenges my credit union and the industry faces in
the wake of Dodd-Frank and describe ways that Congress and the
regulators can help.
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Growing Regulator Budgets in the Wake of Dodd-Frank
The budget of the National Credit Union Administration
(NCUA) is funded exclusively by the credit unions it regulates
and insures. Every single dollar spent by NCUA starts as a
dollar from a credit union somewhere in the United States, and
any NCUA expenditure has a direct impact on the daily
operations of all regulated and insured credit unions--it's a
dollar that could otherwise be used to make a loan to a member
or provide a new service. In the current regulatory
environment, every dollar becomes that much more important as
credit unions of various sizes and complexities expend
significant financial and human resources to bring their
systems and procedures into compliance with new requirements.
Accordingly, NCUA's budget process is of the utmost and
ever-increasing importance to NAFCU's membership, the credit
union industry, and Congress. Bipartisan legislation, the
National Credit Union Administration Budget Transparency Act,
H.R. 2287, has been introduced by Representatives Mick Mulvaney
and Kyrsten Sinema to require greater transparency and credit
union input during NCUA's budget process. NAFCU views this
legislation as crucial because credit unions currently have no
ability to formally comment or have input on any part of NCUA's
budget--every dollar of which they ultimately fund.
Part of this increased cost, both for the agency and for
credit unions, has been the move in the financial reform era to
12-month exam cycles for credit unions which NCUA made in 2008
and continues today. NCUA had refined its supervision and
examination process in 2001, and, in doing so, developed a
Risk-Focused Examination (RFE) approach. Under this approach,
eligible federal credit unions that were healthy and posed
minimal risks had an examination completed every 12 to 24
months, with a target completion frequency of 18 months. During
this time, Dixies' averaged an exam abut every 18 months, with
the exam averaging about a week. Under the new 12-month
examination regime established in 2008, we now have four full
time staff members who spend two weeks preparing for the exam,
two weeks working with examiners and at least, two weeks
following the exam. The cost in wages for that exam was
approximately $30,000.
The financial crisis is now over. We believe NCUA should
use the authority they already have and return to an 18-month
exam cycle for healthy and well-run credit unions. This simple
step will help with costs both at the agency and at credit
unions and be a step forward to reducing regulatory burden.
Overwhelming Regulatory Burdens on Credit Unions in the Wake of
Dodd-Frank
Credit unions are proud of their long track record of
helping the economy grow and making loans when other lenders
have left various markets. This was evidenced during the recent
financial crisis when credit unions kept making auto, home, and
small business loans when other lenders cut back.
Although credit unions continue to focus on members' needs,
the increasing complexity of the regulatory environment is
limiting their ability and taking a toll on the industry. While
NAFCU and its member credit unions take safety and soundness
extremely seriously, the regulatory pendulum post-crisis has
swung too far towards an environment of overregulation that
threatens to stifle economic growth. As NCUA and the CFPB work
to prevent the next financial crisis, even the most well
intended regulations have the potential to regulate our
industry out of business.
Unfortunately, credit unions like Dixies often become the
victim of poor planning and execution by the regulators; new
regulation on top of new regulation has hindered Dixies'
business and our ability to retain top talent. For example,
every time the CFPB changes or updates a mortgage-related rule,
several costs are incurred. Most compliance costs do not vary
by size, resulting in a greater burden on smaller credit unions
like mine. Like large institutions with compliance and legal
departments, with each change our small staff is required to
update our forms and disclosures, reprogram our data processing
systems, and retrain our staff. Unfortunately, these regulation
revisions never seem to occur all at once. If all of the
changes were coordinated and were implemented at one time,
these costs would be significantly reduced and a considerable
amount of our resources that were utilized to comply could have
been used to benefit our members instead.
In 2015 alone, we have seen this occur four times already.
We have had staff departures due directly to these
frustrations. Most of our staff has indicated that they do not
want to participate in real estate lending because of the
constant changes and regulatory uncertainty. Through August of
this year, Dixies FCU spent more than $20,000 for systems
upgrades and software licenses; this does not even include the
man hours spent setting up and learning how to operate the new
software. For that we joined a credit union service
organization (CUSO) to help with compliance and training of our
compliance officers. The cost for membership and training was
roughly an additional $7,500. During these times of regulatory
adjustment, it is nearly impossible to make mortgage loans;
this hurts our members as well as the overall business.
Credit Unions Need Regulatory Relief Post Dodd-Frank
Regulatory burden is the top challenge facing credit unions
today. Finding ways to cut-down on burdensome and unnecessary
regulatory compliance costs is the only way for credit unions
to thrive and continue to provide their member-owners with
basic financial services and the exemplary service they need
and deserve. It is also a top goal of NAFCU.
Ongoing discussions with NAFCU member credit unions led to
the unveiling of NAFCU's initial ``Five-Point Plan for
Regulatory Relief'' in February 2013, and a call for Congress
to enact meaningful legislative reforms that would provide much
needed assistance to our nation's credit unions. The need for
regulatory relief is even stronger in 2015, which is why we
released an updated version of the plan (Appendix A) for the
114th Congress.
The 2015 plan calls for relief in five key areas: (1)
Capital Reforms for Credit Unions, (2) Field of Membership
Improvements for Credit Unions, (3) Reducing CFPB Burdens on
Credit Unions, (4) Operational Improvements for Credit Unions,
and (5) 21st Century Data Security Standards.
Recognizing that there are also a number of outdated
regulations and requirements that no longer make sense and need
to be modernized or eliminated, NAFCU also compiled and
released a document entitled ``NAFCU's Dirty Dozen'' list of
regulations to remove or amend in December of 2013 that
outlined twelve key regulatory issues credit unions face that
should be eliminated or amended. While some slight progress was
made on several of these recommendations, we have updated that
list for 2015 to outline the ``Top Ten'' (Appendix B)
regulations that regulators can and should act on now to
provide relief. This list includes:
1. Improving the process for credit unions seeking
changes to their field of membership;
2. Providing more meaningful exemptions for small
institutions;
3. Expanding credit union investment authority;
4. Increasing the number of Reg D transfers allowed;
5. Additional regulatory flexibility for credit
unions that offer member business loans;
6. Updating the requirement to disclose account
numbers to protect the privacy of members;
7. Updating advertising requirements for loan
products and share accounts;
8. Improvements to the Central Liquidity Facility
(CLF);
9. Granting of waivers by NCUA to a federal credit
union to follow a state law; and
10. Updating, simplifying and making improvements to
regulations governing check processing and fund
availability.
NAFCU continues the flight and looks forward to working
with Congress to address the many legislative and regulatory
challenges faced by the credit union industry today.
Regulators Must Be Held Accountable for Cost and Compliance
Burden Estimates
One of the biggest contributors to regulatory burden for
credit unions is the fact that cost and time burden estimates
issued by regulators such as NCUA and CFPB are often grossly
understated. Unfortunately, there often is never any effort to
go back and review these estimates for accuracy once a proposal
is final. We believe Congress should require periodic reviews
of ``actual'' regulatory burdens of finalized rules and ensure
agencies remove or amend those rules that vastly underestimate
the compliance burden. A March 2013, survey of NAFCU's
membership found that over 55% of credit unions believe
compliance cost estimates from NCUA and CFPB are lower than the
actual costs incurred when the credit union actually has to
implement the proposal.
We believe Congress should use their oversight authority to
require regulators to provide specific details on how they
determined their assumptions in their cost estimates when
submitting those estimates to OMB and publishing them in
proposed rules. It is important that regulators be held to a
standard that recognizes burden at a financial institution goes
well beyond additional record keeping.
For example, several of NAFCU's members have told us that
they have had to spend over 1,000 staff hours to train and
comply with all of the requirements of the CFPB's Qualified
Mortgage (QM) rules. The CFPB is not the only regulator with
inaccurate estimates. NCUA's 2014 submission to OMB estimates
the time to complete the Call Report to be 6.6 hours per
reporting cycle. A recent NAFCU survey of our members found
that many spend between 40 to 80 hours or more to complete a
call report. Something is amiss. That's a number of hours of
regulatory burden that are not being recognized on just one
form. More needs to be done to require regulators to justify
that the benefits of a proposal outweigh its costs.
Regulatory Coordination is Needed
With numerous new rulemakings coming from regulators,
coordination between the agencies is more important than ever
and can help ease burdens. Congress should use its oversight
authority to make sure that regulators are coordinating their
efforts and not duplicating burdens on credit unions by working
independently on changes to regulations that impact the same
areas of service. There are a number of areas where
opportunities for coordination exist and can be beneficial.
For example, NAFCU has been on the forefront encouraging
the Financial Stability Oversight Council (FSOC) regulators to
fulfill their Dodd-Frank mandated duty to facilitate rule
coordination. This duty includes facilitating information
sharing and coordination among the member agencies of domestic
financial services policy development, rulemaking,
examinations, reporting requirements and enforcement actions.
Through this role, the FSOC is effectively charged with
ameliorating weaknesses within the regulatory structure and
promoting a safer and more stable system. It is extremely
important to credit unions for our industry's copious
regulators to coordinate with each other to help mitigate
regulatory burden. We urge Congress to exercise oversight in
this regard and consider putting into statute parameters that
would encourage the FSOC to fulfill this duty in a thorough and
timely manner.
The CFPB Can Provide Relief to Credit Unions
NAFCU has consistently maintained that the tidal wave of
the Bureau's new regulations, taken individually, and more so
in their cumulative effect, have significantly altered the
lending market in unintended ways. In particular, the ability-
to-repay, qualified mortgage, and mortgage servicing rules have
required credit unions of various sizes and complexities to
make major investments, and incur significant expenses. Taken
all together, these regulations have made credit unions rework
nearly every aspect of their mortgage origination and servicing
operations.
One area where the CFPB could be the most helpful to credit
unions would be to use its legal authority under Section 1022
of Dodd-Frank to exempt credit unions from various rulemakings.
Given the unique member-owner nature of credit unions and the
fact that credit unions did not participate in many of the
questionable practices that led to the financial crisis and the
creation of the CFPB, subjecting credit unions to rules aimed
at large bad actors only hampers their ability to serve their
members. While the rules of the CFPB may be well-intentioned,
many credit unions do not have the economies of scale that
large for-profit institutions have and may opt to end a product
line or service rather than face the hurdles of complying with
new regulation. While the CFPB has taken steps, such as their
small creditor exemption, more needs to be done to exempt all
credit unions.
Credit unions are also further hampered by the fact that
the CFPB does not have one consistent definition of ``small
entities'' from rule to rule. We are pleased that the CFPB
makes an effort to meet its obligations under the Small
Business Regulatory Enforcement Fairness Act (SBREFA). However,
we believe that the Bureau must do more to address the concerns
of smaller financial institutions in its final rulemaking, so
that new rules do not unduly burden credit unions.
Under SBREFA, the CFPB is required to consider three
specific factors during the rulemaking process. First, the
agency is to consider ``any projected increase in the cost of
credit for small entities.'' Second, the CFPB is required to
examine ``significant alternatives to the proposed rule which
accomplish the stated objective of applicable statutes and
which minimize any increase in the cost of credit for small
entities.'' Third, the CFPB is to consider the ``advice and
recommendations'' from small entities (5 U.S.C. Sec. 603(d)).
This directive serves an important function. When Congress
passed the Dodd-Frank Act, it expected the newly established
CFPB to be a proactive regulatory body. NAFCU believes the
decision to subject the CFPB to SBREFA was a conscious decision
to help ensure that regulations, promulgated with large
entities in mind, do not disproportionately impact small
financial institutions that were not responsible for the
financial crisis.
Legislative Changes to Dodd-Frank and the CFPB
NAFCU also supports measures to bring greater
accountability and transparency to the CFPB by making
structural improvements to the agency. A key element of this
reform would be to enact H.R. 1266, the Financial Product
Safety Commission Act of 2015, which would replace the sole
director of the agency with a bipartisan five-person commission
(as was initially proposed for the agency). Such a move should
help improve CFPB rulemaking by ensuring debate and discussion
about proposals that can incorporate multiple viewpoints. It
can also help address the issue of streamlining the issuance of
new rules, by establishing a public meeting agenda.
There are also a number of other areas where reforms can be
made to provide relief to credit unions:
Qualified Mortgages
The Qualified Mortgage Rule (QM) is a prime example of a
well-intentioned regulation with unintended consequences. QM
and the associated ability-to-repay rule were meant to protect
borrowers from mortgages they could not afford. However,
because the rule was written in a one-size-fits-all manner it
has significantly limited access to a variety of mortgage
products that could be tailored to individual borrowers. For
example, we no longer offer non-QM loans at Dixies FCU. In
addition to pressure from our examiners urging us to strictly
limit any home loan, we decided the liability risk simply
wasn't worth it. This has resulted in our mortgage portfolio
shrinking from 60% prior to the crisis to 30% today. Despite a
strong track record, we are making fewer mortgage loans in
north eastern South Carolina today, than we did before Dodd-
Frank due to this regulatory pressure.
Given the unique member-relationship credit unions have,
many make good loans that work for their members that don't fit
into all of the parameters of the QM. NAFCU would support the
changes below, whether made legislatively or by the Bureau, to
the QM standard to make it more consistent with the quality
loans credit unions are already making. Further, credit unions
should have the freedom to decide whether to make loans within
our outside of the standard without pressure from regulators.
Loans Held in Portfolio
NAFCU supports legislation exempting mortgage loans held in
portfolio from the QM definition as the lender already assumes
risk associated with the borrower's ability-to-repay. Credit
unions have historically been portfolio lenders, providing
strong incentives to originate quality loans that are properly
underwritten. Additionally, credit union charge off rates are
incredibly low compared to market averages, suggesting that
loans held in portfolio are less likely to become delinquent or
to into default.
Points and Fees
NAFCU strongly supports bipartisan legislation (H.R. 685)
to alter the definition of ``points and fees'' under the
``ability-to-repay'' rule. H.R. 685 has passed the House and
awaits Senate action. Under the bill, affiliated title charges
and escrow charges for taxes and insurance would be exempted
from the calculation of ``points and fees,'' Under current law,
points and fees may not exceed three percent of a loan amount
for a loan to be considered a qualified mortgage. Services
provided to the consumer, our members, from an affiliated
company count against the three percent cap. Unaffiliated
services do not count against that cap. Oftentimes, when
affiliated services are used, the consumer can save closing
costs on their mortgage. However, the current definition does
not recognize this consumer advantage.
In addition to the exemptions provide for in H.R. 685,
NAFCU supports exempting from the QM cap on points and fees
that double counting of loan officer compensation, lender-paid
compensation to a correspondent bank, credit union or mortgage
brokerage firm, and loan level price adjustments which is an
upfront fee that the Enterprises charge to offset loan-specific
risk factors such as a borrower's credit score and the loan-to-
value ratio.
Making important exclusions from the cap on points and fees
will go a long way toward ensuring many affiliated loans,
particularly those made to low- and moderate-income borrowers,
attain QM status and therefore are still available in the
future.
40-year Loan Product
Credit unions offer the 40-year product their members often
demand. To ensure that consumers can access a variety of
mortgage products, NAFCU supports mortgages of duration of 40
years or less being considered a QM.
Debt-to-Income Ratio
NAFCU supports Congress directing the CFPB to revise
aspects of the `ability-to-repay' rule that dictates a consumer
have a total debt-to-income (DTI) ratio that is less than or
equal to 43 percent in order for that loan to be considered a
QM. This arbitrary threshold will prevent otherwise healthy
borrowers from obtaining mortgage loans and will have a
particularly serious impact in rural and underserved areas
where consumers have a limited number of options. The CFPB
should either remove or increase the DTI requirements on QMs.
Regulation E
As NAFCU outlined in our ``Top Ten'' list of regulations to
eliminate or amend in order to better serve credit union
customers, the requirement to disclose account numbers on
periodic statements should be amended in order to protect the
privacy and security of consumers.
Under Regulation E Sec. 205.9(b)(2), credit unions are
currently required to list a member's full account number on
every periodic statement sent to the member for their share
accounts. Placing both the consumer's full name and full
account number on the same document puts a consumer at great
risk for possible fraud or identity theft.
NAFCU has encouraged the CFPB to amend Regulation E to
allow financial institutions to truncate account numbers on
periodic statements. This modification is consistent with 12
C.F.R. Sec. 205.9(a)(4), which allows for truncated account
numbers to be used on a receipt for an electronic fund transfer
at an electronic terminal. This change is also consistent with
Sec. 605(g) of the Fair Credit Reporting Act that states, ``no
person that accepts credit cards or debit cards for the
transaction of business shall print more than the last 5 digits
of the card number or the expiration date upon any receipt.''
NAFCU believes that by adopting this change, the CFPB will
allow financial institutions to better protect the security and
confidentiality of consumer information.
Compromised accounts are not only dangerous for consumers,
but can be extremely costly for credit unions. In the past year
alone data breaches have cost the credit union industry
millions of dollars. According to feedback from our member
credit unions, in 2013 each credit union on average experienced
$152,000 in loses related to data breaches. The majority of
these costs were related to fraud losses, investigations,
reissuing cards, and monitoring member accounts. At Dixies, we
have had to purchase a new cyber security insurance policy and
spend thousands on addressing card fraud issues.
As the recent high-profile data breaches at some of our
nation's largest retailers have highlighted, criminals are
willing to go to great extremes to obtain consumer's sensitive
financial information. Credit unions understand the importance
of steadfastly protecting their member's confidential account
information, which is why we strongly suggest this regulatory
update.
Until Congress passes new legislation, such as H.R. 2205,
the Data Security Act of 2015, to ensure other third parties,
such as merchants, who have access to consumer's financial
information, have effective safeguards in place to protect
consumer information, the CFPB should consider this minor
modification to Regulation E. This change would go a long way
in keeping sensitive financial information out of the hands of
criminals and reduce the increasing fraud costs borne by credit
unions and other financial institutions.
Remittances
The Dodd-Frank Act added new requirements involving
remittance transfers under the Electronic Fund Transfer Act
(EFTA) and directed the CFPB to issue final rules amending
Regulation E to reflect these additions. Under this mandate,
the Bureau, released a series of final rules concerning
remittances, all of which became effective on October 28, 2013.
In February 2012, the CFPB issued its first set of final
rules on remittances. These rules required, among other things,
remittance service providers, including credit unions, to
provide a pre-payment disclosure to a sender containing
detailed information about the transfer requested by the
sender, and a written receipt on completion of the payment.
Following the release of the February 2012, final rule, the
CFPB issued on August 20, 2012, a supplemental final that
provided a safe harbor for determining whether a credit union
is subject to the remittance transfer regulations.
Specifically, a credit union that conducts 100 or fewer
remittances in the previous and current calendar years would
not be subject to the rules.
In May 2013, the Bureau modified the final rules previously
issued in 2012, to address substantive issues on international
remittance transfers. This final rule eliminated the
requirement to disclose certain third-party fees and taxes not
imposed by the remittance transfer provider and established new
disclaimers related to the fees and taxes for which the
servicer was no longer required to disclose. Under the rule,
providers may choose, however, to provide an estimate of the
fees and taxes they no longer must disclose. In addition, the
rule created two new exceptions to the definition of error:
situations in which the amount disclosed differs from the
amount received due to imposition of certain taxes and fees,
and situations in which the sender provided the provider with
incorrect or incomplete information.
NAFCU opposed the transaction size-based threshold for the
final rule's safe harbor. The CFPB relied on an institution
size-based threshold, rather than a transaction size-based
threshold, in its recently released mortgage rules, and NAFCU
urged the Bureau to adopt a similar approach for
differentiating between remittance transfer providers.
Additionally, NAFCU raised concerns with the final rule's
requirement of immediate compliance if an entity exceeds the
safe harbor's 100 transaction threshold. It encouraged the CFPB
to allow entities who exceed the safe harbor threshold a
realistic period in which to meet the standards of the final
rule.
NAFCU continues to raise concerns that the regulatory
burden imposed by the final rule leads to a significant
reduction in consumers' access to remittance transfer services.
At Dixies FCU we decided to avoid the headache of the new
burdens associated with the changes and simply run our members'
remittance transfers through a third party vendor. NAFCU has
heard from a number of its members that, because of the final
rule's enormous compliance burden, they have been forced to
discontinue their remittance programs.
HMDA Changes Going Beyond the Dodd-Frank Act
The Dodd-Frank Act transferred Home Mortgage Disclosure Act
(HMDA) rulemaking authority to the CFPB and directed the Bureau
to expand the HMDA dataset to include additional loan
information that would help in spotting troublesome trends.
Specifically, Dodd-Frank requires the Bureau to update HMDA
regulations by having lenders report the length of the loan,
total points and fees, the length of any teaser or introductory
interest rates, and the applicant or borrower's age and credit
score. However, in its proposal, the Bureau is also
contemplating adding additional items of information to the
HMDA dataset. NAFCU has urged the CFPB to limit the changes to
the HMDA dataset to those mandated by Dodd-Frank.
HMDA was originally intended to ensure mortgage originators
did not ``redline'' to avoid lending in certain geographical
areas. The HMDA dataset should be used to collect and provide
reasonable data for a specific reason. The Bureau contends that
it is going beyond Dodd-Frank's mandated changes to get ``new
information that could alert regulators to potential problems
in the marketplace'' and ``give regulators a better view of
developments in all segments of the housing market.'' These
open-ended statements could be applied to virtually any type of
data collection, and do not further the original intent of
HMDA. NAFCU urged the CFPB to amend the dataset to advance the
original purpose of HMDA, rather than using it as a vehicle to
``police'' its recent Qualified Mortgage rules.
The various mortgage-related regulations promulgated by the
CFPB have exponentially increased credit unions' regulatory
burden and compliance costs. Any additions to the HMDA dataset
will create even more operational expenses for credit unions.
Credit unions that collect and report HMDA data through an
automated system will have to work with their staffs and
vendors to update their processes and software. Those without
automated systems will experience particularly significant
implementation costs. The CFPB should eliminate unnecessary
regulatory burden and compliance costs by limiting the changes
to the HMDA dataset to those mandated by Dodd-Frank.
TILA/RESPA
Dodd-Frank directed the CFPB to combine the mortgage
disclosures under the Truth in Lending Act (TILA) and Real
Estate Settlement Procedures Act (RESPA). Under this mandate,
the Bureau, in November 2013, released the integrated
disclosures rule (TRID). This 1900-page rule requires a
complete overhaul of the systems, disclosures, and processes
currently in place for a consumer to obtain a mortgage. For
example, the rule mandates the use of two disclosures: the
three-page Loan Estimate (which replaces the Good Faith
Estimate an initial Truth in Lending Disclosure); and the five-
page Closing Disclosure (which replaces the HUD-1 and final
Truth in Lending disclosure). There are also a number of
stringent timing requirements and other substantive changes
lenders must follow. The rule is set to be effective October 3,
2015, but lenders are still feeling pressure to be compliant on
time as the CFPB has not indicated that they will provide a
safe harbor grace period, and has prohibited early compliance
so that institutions can test their systems. The sheer
magnitude of this rule, read in conjunction with the totality
of the other mortgage rules, has created a very burdensome
regulatory environment and many credit unions are finding it
difficult to continue lending. In addition to this new
disclosure, credit unions must comply with the current
disclosure requirements, which are extensive. After failed
attempts to obtain a legislative safe-harbor from TRID
compliance we asked for clear guidance from the regulators.
NCUA stated that they recognize that the TRID Rule poses
``significant implementation challenges'' for industry, and has
indicated that regulator will be sensitive to the good-faith
efforts of lenders to comply with the TRID rules in a timely
manner. While this is not the perfect solution, it will
hopefully lead to the industry and examiners working together
to ensure expectations are clear. We would also encourage
Congress to address this issue further by passing H.R. 3192,
the Homebuyers Assistance Act.
Legal Opinion Letters
In attempting to understand ambiguous sections of CFPB
rules, NAFCU and many of its members have reached out to the
CFPB to obtain legal opinion letters as to the agencies
interpretation if it's regulations. While legal opinion letters
don't carry the weight of law, they do provide guidance on
ambiguous section of regulations. Many other financial agencies
such as NCUA, FTC, FDIC and others issue legal opinion letters
so as to help institutions and other agencies understand
otherwise ambiguously written rules. The CFPB has declined to
do so. What they have done is set up a help line where
financial institutions can call for guidance from the agency.
While this is helpful, there are reports of conflicting
guidance begin given depending on who answers the phone. This
is not just unhelpful, but confusing when NCUA examines credit
unions for compliance with CFPB regulations.
NCUA's Risk-Based Capital Proposal: A Solution in Search of a
Problem
Credit unions are not immune to regulatory creep from the
Dodd-Frank Act. One of the central themes of Dodd-Frank was the
concept of higher capital requirements for riskier activities
for banks. Bank regulators would establish certain capital
levels institutions must retain, otherwise they would face
prompt corrective action from the regulator to restore the
institution to that level. The Federal Credit Union Act (FCUA)
requires the NCUA Board to adopt by regulation a system of
prompt corrective action for federally insured credit unions
that is ``comparable to'' the Federal Deposit Insurance Act.
The Federal Deposit Insurance Corporation mdernize4d its risk-
based capital system post Dodd-Frank in 2013.
Despite the fact that credit unions had a stellar track
record of performance during the financial downturn, in January
of 2014, the National Credit Union Administration (NCUA) Board
proposed a new risk-based capital system for credit unions. On
January 15, 2015, the National Credit Union Administration
(NCUA) Board, in a 2-1 vote, issued a revised risk-based
capital proposed rule for credit unions after a lot of industry
and Congressional concern was expressed regarding the first
proposal. We were encouraged to see that the revised version of
this proposal addresses some changes sought by our membership.
However, NAFCU maintains that this costly proposal is
unnecessary and will ultimately unduly burden credit unions and
the communities they serve.
A Costly Experiment for Credit Unions
While this proposal is only designed to apply to credit
unions over $100 million in assets, NAFCU and its member credit
unions remain deeply concerned about the real cost of this
proposal. NAFCU's analysis estimates that credit unions'
capital cushions (a practice encouraged by NCUA's own
examiners) will suffer over a $470 million hit if NCUA
promulgates separate risk-based capital threshold for well
capitalized and adequately capitalized credit unions (a ``two-
tier'' approach). Specifically, in order to satisfy the
proposal's ``well-capitalized'' thresholds, today's credit
unions would need to hold at least an additional $729 million.
On the other hand, to satisfy the proposal's ``adequately
capitalized'' thresholds, today's credit unions would need to
hold at least an additional $260 million. Despite NCUA's
assertion that only a limited number of credit unions will be
impacted, this proposal would force credit unions to hold
hundreds of millions of dollars in additional reserves to
achieve the same capital cushion levels that they currently
maintain. A majority of credit unions responding to a survey of
NAFCU members expect that this new proposal will force them to
hold more capital in the long run and almost as many also
believe it will slow their growth. The funds used to meet these
new onerous requirements are monies that could otherwise be
used to make loans to consumers or small businesses and aid in
our nation's economic recovery. The requirements in this
proposal will serve to restrict lending to consumers from
credit unions by forcing then to park capital on their books,
rather than lending to their members.
Impact Analysis
NCUA estimates that 19 credit unions would be downgraded if
the new risk-based proposal were in place today. NAFCU believes
the real impact is best illustrated with a look at its
implications during a financial downturn. Under the new
proposal, the number of credit unions downgraded more than
doubles during a downturn in the business cycle. Because the
nature of the proposal is such that, in many cases, assets that
would receive varying risk weights under the proposal are
grouped into the same category on NCUA call reports, numerous
assumptions must be made to estimate impact.
Under our most recent analysis, NAFCU believes 45 credit
unions would have been downgraded during the financial crisis
under this proposal. Of those 45, 41 of credit unions would be
well-capitalized today. To have avoided downgrade, the
institutions would have had to increase capital by $145
million, or an average $3.2 million per institution. As the
chart on the next page demonstrates, almost all of the credit
unions that would have been downgraded--95%--are well
capitalized or adequately capitalized today. This provides
strong evidence that NCUA's risk-based capital proposal is
unnecessary and unduly burdensome.
[GRAPHIC] [TIFF OMITTED] T6125.015
Legislative Change
NAFCU wants to be clear--we support an risk-based capital
system for credit unions that would reflect lower capital
requirements for lower-risk credit unions and higher capital
requirements for higher-risk credit unions. However, we
continue to believe that Congress needs to make statutory
changes to the Federal Credit Union Act in order to achieve a
fair system. Such a system should move away from the static
net-worth ratio to a system where NCUA joins the other banking
regulators in having greater flexibility in establishing
capital standards for institutions. We also believe that
capital reform must include access to supplemental capital for
all credit unions.
NAFCU has outlined a legislative solution that will
institute fundamental changes to the credit union regulatory
capital requirements in our Five-Point Plan for Regulatory
Relief. The plan, as it relates to capital reform:
Directs the NCUA to, along with industry
representatives, conduct a study on prompt corrective
action and recommend changes;
Modernizes capital standards to allow
supplemental capital, and direct the NCUA Board to
design a risk-based capital regime for credit unions
that takes into account material risks; and,
Establishes special capital requirements for
newly chartered federal credit unions that recognize
the unique nature and challenges of starting a new
credit union.
Recognizing that a number of questions remain regarding
NCUA's risk-based capital proposal, on June 15, 2015,
Representatives Stephen Fincher, Denny Heck and Bill Posey
introduced the Risk-Based Capital Study Act of 2015 (H.R.
2769). This NAFCU-backed legislation will stop NCUA from moving
forward with their second risk-based capital proposal until
completing and delivering to Congress a thorough study
addressing NCUA's legal authority, the proposal's impact on
credit union lending, capital requirements for credit unions
compared to other financial institutions and more. The agency
would not be able to finalize or implement the proposal before
120 days after the report goes to Congress. We urge members to
support this legislation.
Credit Unions Want to Help Small Businesses Recover
When Congress passed the Credit Union Membership Access Act
in 1998, it put in place restrictions on the ability of credit
unions to offer member business loans (MBLs). Congress codified
the definition of an MBL and limited a credit union's member
business lending to the lesser of either 1.75 times the net
worth of a well-capitalized credit union or 12.25 percent of
total assets.
As the country continues to recover from the financial
crisis, many credit unions have capital to help small
businesses create jobs. However, due to the outdated and
arbitrary MBL cap, their ability to help stimulate the economy
is hampered. Removing or modifying the cap would help provide
economic stimulus and create jobs without using taxpayer funds
to do so.
A 2011 study commissioned by the Small Business
Administration's (SBA) Office of Advocacy that looked at the
financial downturn found that bank business lending was largely
unaffected by changes in credit unions' business lending, and
credit unions' business lending can actually help offset
declines in bank business lending during a recession (James A.
Wilcox, The Increasing Importance of Credit Unions in Small
Business Lending, Small Business Research Summary, SBA Office
of Advocacy, No. 387 (Sept. 2011)). The study shows that during
the 2007-2010 financial crisis, while banks' small business
lending decreased, credit union business lending increased in
terms of the percentage of their assets both before and during
the crisis.
In June of 2015, the NCUA Board proposed changes to their
member business lending rules that would eliminate the
unnecessarily bureaucratic process currently in place for
credit union member business loans that requires credit unions
to seek NCUA approval (or a ``waiver'') for basic and routine
lending decisions. It is important to recognize that NCUA's
proposed MBL rule would provide regulatory relief, but does not
alter the statutory cap on credit union member business lending
established in the Federal Credit Union Act and is not an
attempt to circumvent Congressional intent. This statutory cap
imposes an aggregate limit on an insured credit union's
outstanding MBLs and the proposed rule does nothing to change
that. Second, NCUA's proposal does not alter the requirement
that credit unions have strong commercial lending underwriting
standards.
Credit unions ultimately need Congress to provide relief
from the arbitrary cap. A few bills have been introduced in
this Congress to do that:
Representatives Ed Royce and Greg Meeks introduced H.R.
1188, the Credit Union Small Business Jobs Creation Act. This
legislation would raise the arbitrary cap on credit union
member business loans from 12.25% to 27.5% of total assets for
credit unions meeting strict eligibility requirements.
Additionally, NAFCU supports legislation (H.R. 1133)
introduced by House Veterans Affairs Committee Chairman Jeff
Miller to exempt loans made to our nation's veterans from the
definition of a member business loan. We also support H.R.
1422, the Credit Union Residential Loan Parity Act, introduced
by Representatives Royce and Jared Huffman, which would exclude
loans made to non-owner occupied 1- to- 4 family dwelling from
the definition of a member business loan and legislation.
Furthermore, NAFCU also supports exempting from the member
business lending cap loans made to non-profit religious
organizations, businesses with fewer than 20 employees, and
businesses in ``underserved areas.''
Providing credit unions regulatory relief, and enacting
these MBL proposals, would help credit unions maximize their
ability to provide capital to our nation's small businesses.
Conclusion
The Dodd-Frank Act has had a significant impact on credit
unions, despite credit unions not being the cause of the
financial downturn. Unfortunately, small credit unions like
mine are disappearing post Dodd-Frank at an alarming rate as
they cannot keep up with the new regulatory burdens. While the
CFPB has tried to address the issue with limited exemptions,
they have not gone far enough. Many credit unions are saying
``enough is enough'' when it comes to the overregulation of the
industry. The compliance requirements in a post Dodd-Frank
environment have grown to a tipping point where it is hard for
many smaller institutions to survive. Those that do are forced
to cut back their service to members due to increased
compliance costs. Credit unions want to continue to aid in the
economic recovery, but are being stymied by this
overregulation. We need regulatory relief--both legislatively
and from the regulators.
We would urge members support for credit union relief
measures pending before the House and the additional issues
outlined in NAFCU's Five Point Plan for Credit Union Regulatory
Relief and NAFCU's ``Top Ten'' list of regulations to review
and amend. Additionally, Congress needs to provide vigorous
oversight of the CFPB and NCUA, particularly concerning their
proposed risk-based capital rule and be ready to step in and
stop the process so that the impacts can be studied further.
Finally, the subcommittee should also encourage regulators to
act to provide relief where they can without additional
Congressional action. We thank you for the opportunity to share
our thoughts with you today. I welcome any questions you might
have.
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