[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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