[Senate Hearing 114-634]
[From the U.S. Government Publishing Office]
S. Hrg. 114-634
REDUCING THE BURDEN OF FEDERAL
REGULATIONS ON COMMUNITY BANKS
AND SMALL BUSINESSES
=======================================================================
FIELD HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
APRIL 9, 2015
__________
Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED FOURTEENTH CONGRESS
----------
DAVID VITTER, Louisiana, Chairman
BENJAMIN L. CARDIN, Maryland, Ranking Member
JAMES E. RISCH, Idaho MARIA CANTWELL, Washington
MARCO RUBIO, Florida JEANNE SHAHEEN, New Hampshire
RAND PAUL, Kentucky HEIDI HEITKAMP, North Dakota
TIM SCOTT, South Carolina EDWARD J. MARKEY, Massachusetts
DEB FISCHER, Nebraska CORY A. BOOKER, New Jersey
CORY GARDNER, Colorado CHRISTOPHER A. COONS, Delaware
JONI ERNST, Iowa MAZIE K. HIRONO, Hawaii
KELLY AYOTTE, New Hampshire GARY C. PETERS, Michigan
MICHAEL B. ENZI, Wyoming
Zak Baig, Republican Staff Director
Ann Jacobs, Democratic Staff Director
C O N T E N T S
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Opening Statements
Page
Gardner, Hon. Cory, a U.S. Senator from Colorado................. 1
Buck, Hon. Ken, a U.S. Representative from Colorado.............. 3
Coffman, Hon. Mike, a U.S. Representative from Colorado.......... 4
Witnesses
Panel 1
Davidson, Jay, First American State Bank, Denver, CO............. 5
Reyher, Dave, Colorado East Bank & Trust, Denver, CO............. 10
Propst, Koger, ANB Bank, Denver, CO.............................. 16
Kelly, David, FirstBank, Denver, CO.............................. 20
Panel 2
O'Donnell, Mike, Colorado Lending Source, Denver, CO............. 34
Gagliardi, Tony, National Federation of Independent Business,
Denver, CO..................................................... 41
Hays, Jr., Roger, Premier Employer Services, Inc., Denver, CO.... 48
Childears, Don, Colorado Bankers Association, Denver, CO......... 52
Alphabetical Listing
Buck, Hon. Ken
Testimony.................................................... 3
Childears, Don
Testimony.................................................... 52
Prepared statement........................................... 55
Coffman, Hon. Mike
Testimony.................................................... 4
Davidson, Jay
Testimony.................................................... 5
Prepared statement........................................... 8
Gagliardi, Tony
Testimony.................................................... 41
Prepared statement........................................... 44
Gardner, Hon. Cory
Opening statement............................................ 1
Hays, Jr., Roger
Testimony.................................................... 48
Prepared statement........................................... 50
Kelly, David
Testimony.................................................... 20
Prepared statement........................................... 22
O'Donnell, Mike
Testimony.................................................... 34
Prepared statement........................................... 38
Propst, Koger
Testimony.................................................... 16
Prepared statement........................................... 18
Reyher, Dave
Testimony.................................................... 10
Prepared statement........................................... 12
REDUCING THE BURDEN OF FEDERAL
REGULATIONS ON COMMUNITY BANKS
AND SMALL BUSINESSES
----------
THURSDAY, APRIL 9, 2015
Colorado State Capitol,
Denver, CO.
The Committee met, pursuant to notice, at 1:35 p.m., at the
Colorado State Capitol, 200 East Colfax Avenue, Hon. Cory
Gardner, presiding.
Senator Present: Cory Gardner.
Representatives Present: Ken Buck and Mike Coffman.
OPENING STATEMENT OF HON. CORY GARDNER, A U.S. SENATOR FROM
COLORADO
Senator Gardner. All right. Thank you, everyone, for
joining us today for today's Senate Committee hearing. I'll
call this hearing of the Small Business Committee of the United
States Senate to order. I'm pleased with everybody that is here
today. Welcome to the U.S. Senate Small Business Committee's
field hearing on the fabulous subject of Reducing the Burden of
Federal Regulations on Community Banks and Small Businesses.
I'm very pleased to be joined by Representative Buck and
Representative Coffman, as well as our expert witnesses from
around the State. Thank you to all of you and each of you for
being here.
We're going to have two panels testifying today. We'll
start with opening statements, and then we'll move on to a
question-and-answer period. For the first panel we'll focus on
Dodd-Frank issues and other federal regulations burdening
community banks in Colorado and throughout the country. Then
we'll do another round of opening statements and Q & A for the
second panel to discuss the effect of financial regulations on
small businesses' access to capital, as well as those broader
federal regulations that are affecting small businesses,
impeding job creation and economic growth.
I thought that it was important, though, today to lay out a
couple of things that are happening in this country. Really,
the narrative that we're hoping to draw out today is talking
about our financial institutions. Community banks around the
State and around the country are shrinking at an accelerating
rate, at least partially due to financial regulations that
negatively affect small businesses, among other groups, because
community banks devote a disproportionate amount of their
portfolios, their resources, to small business lending. This
comes at a time when small businesses are already reeling, of
course, from many other areas of federal regulation.
Just to lay some of the groundwork, the consolidation in
the banking industry, as many of you know, has occurred since
the 1980s. The number of community banks has fallen
dramatically. The overall number of banks today is less than
half the number that existed in 1984, according to the FDIC.
From 1984 to 2011, the number of banks with assets less than 25
million declined by 96 percent. That's a 96 percent decline.
Meanwhile, larger banks grew 11-fold in size over the same
period, raising their share of industry assets from 27 percent
in 1984 to 80 percent in 2011.
And right here in Colorado we see a similar trend. In 1994,
Colorado had 307 federally insured banks. We now have half that
number, with 148 operating in the State. At the same time, the
market share of the three largest institutions increased from
34 percent in 1994 to 46 percent in 2014. Many of the
regulations that we'll be talking about today weren't focused
on Main Street banks in Burlington or Main Street banks in
Grand Junction, but were focused on other areas. So the Wall-
Street-driven regulations are affecting Main Street banks. It
has nothing to do with crisis.
So that's what this hearing is about. It's about making
sure that we get back to a country and state that is able to
meet the needs of its people, its businesses, its communities
in a way that reflects the passions of our communities. We'll
talk about compliance costs falling disproportionately on small
institutions. We'll talk about consolidation and the effect it
has on small institutions' access to capital. We will talk
about the share of money that banks, small banks, community
banks, are providing to small businesses, which the White House
website describes small businesses in this country as providing
two out of every three jobs created. That's a significant
impact that is being borne by some of the smallest of our
communities and some of our greatest assets of this country.
So I hope that you'll have an opportunity, as well as me,
to engage, to have a good back-and-forth discussion about the
issues that matter and solutions to the challenges that we have
laid out today.
And I want to thank all of you again for being in this
committee hearing. It's great to be back in the state
legislature. This is a unique experience for me. I was always
in the minority in the state legislature, so I never held a
gavel. This is new territory for us all.
Thanks again to the witnesses for being here. Thanks to the
audience for your participation today and for your feedback.
We'd love to continue to hear your thoughts on today's subject
and beyond. Again, I hope that this field hearing provides an
opportunity for the Small Business Committee, for Congressman
Coffman and Congressman Buck to take back to Washington, D.C.,
to accomplish things that we need to in order to get our
economy back on track and to address the vital role that all
the institutions represented here today, from credit unions to
banks, really do perform in our community.
So thank you very much for the opportunity to be here.
And I will turn it over to Congressman Buck.
OPENING STATEMENT OF HON. KEN BUCK, A U.S. REPRESENTATIVE FROM
COLORADO
Representative Buck. Thank you, Senator. I appreciate that.
First of all, it's a great honor to be under a gold dome where
a legislative body knows how to balance the budget.
Senator Gardner. Cool.
Representative Buck. And I must mention that I do have a
favorite legislator. My wife, Perry, is right over there. I
usually get in trouble naming favorites, but not in this case.
I'd get in trouble if I didn't.
One of the honors of being a congressman is to have the
opportunity to go around the Fourth Congressional District and
listen to stories from various people and their concerns. And I
have heard over and over again concerns of small business
people and the regulatory burden that they face. It's not just
the tax burden; it's not just the rising energy cost. But the
regulatory burden is hitting so many businesses so hard.
I was with a group of bankers a couple months ago. They
told me about one banker who had one compliance officer five
years ago, and he now has four compliance officers. They
explained to me, compliance officers don't make money, they
don't help the community, they don't help loan money to
businesses in the community that need it. It's overhead, and
it's overhead that's caused by the Federal Government.
I was out on the eastern plains near Burlington, visited
with a group of business people. A gentleman had a greenhouse.
He was telling me that OSHA came out to do an audit. And he had
a bottle of Windex, and he didn't have a spec sheet for the
bottle of Windex. He was fined for not having a spec sheet for
a bottle of Windex.
I talked to an owner of a mid-sized to large construction
company, and he told me that they were audited by the
Department of Labor. And the Department of Labor wanted to see
the Christmas list for the employee Christmas function. And
then they wanted to see a list of the people who didn't attend
the Christmas function. Then they were fined because they
didn't go to the people that didn't attend and ask them if they
felt included at the Christmas party, or the holiday party.
It's that kind of regulatory burden that we put on job
creators that's causing us problems. And one of the biggest
problems that I find in talking to business people and bankers
is that they have no certainty. They don't know what's going to
happen three, four, five years from now. And they can't make
investment decisions without knowing what the interest rate is
going to be. They can't make investment decisions without
knowing what their healthcare costs are or what their
management costs are. It goes right down the line.
If we can't, as a government, create more certainty so that
business people can grow, we will never deal with the $18.3
trillion debt that we now have. And that's something that, as a
country, is, in my opinion, the greatest threat to our national
security. We've got to be able to deal with that, got to bring
certainty.
I thank the panel and Senator Gardner.
Senator Gardner. Thank you, Congressman Buck.
Congressman Coffman.
OPENING STATEMENT OF HON. MIKE COFFMAN, A U.S. REPRESENTATIVE
FROM COLORADO
Representative Coffman. Thank you, Senator Gardner, for
holding this important hearing on the regulatory burdens facing
Colorado's community banks and small businesses.
I would also like to extend a warm welcome to a couple
folks from my district: Papa Dia, a branch manager of KeyBank,
located in Aurora, Colorado, an immigrant from Senegal and a
leader in my community; and Mel Tewahade from Infinity Wealth,
also located in Aurora, Colorado, a strong leader in the
Ethiopian community in my district. Both of these men are
distinguished leaders.
And finally, I would like to thank our witnesses for making
the trip to the capitol today to testify.
When I was a small business owner in the 1990s with an
Aurora-based company, I can remember having accounts with a
community bank that was later taken over by an interstate
bank--I won't give the name--but how the decisions could no
longer be made by the officers at that bank--they were
outsourced--and how impersonal that relationship became and,
ultimately, how I had to leave that bank to join another
community bank.
So I think it's a problem that, in my view, is an
overreaction by the Congress of the United States, a regulatory
overreaction, in terms of passing Dodd-Frank. And the problems
that it has imposed on smaller financial institutions is to the
benefit, quite frankly, I think, of large financial
institutions in this country. The notion of too big to fail--
too big to exist, from my point of view. If the institution is
so large it presents a systemic risk to the economy, and
somehow we're supposed to protect it, I think it's problematic.
The passage of Dodd-Frank was a massive change in law,
hundreds of pages long with thousands of pages of complicated
regulations. Community banks are now forced to spend millions
of dollars on regulatory compliance costs instead of using
those resources for lending. Although banking regulation may
have started with good intentions, ill-fitting rules harming
small banks and their customers must be changed.
There are some in the administration and Congress who are
unwilling to make any changes to Dodd-Frank, no matter how
small. Dodd-Frank is almost five years old. It is hard for me
to believe that such a major law is perfect. It is now time to
make some commonsense changes to help our small businesses and
community bankers.
I look forward to hearing from our witnesses today. Thank
you very much.
Senator Gardner. Thank you, Congressman Coffman.
Now I am pleased to introduce our first panel of Colorado
experts that will discuss the state of community banking in
Colorado and the federal regulations they're subject to.
Once I introduce you, please give your opening statement,
and then I'll introduce the next witness.
Jay Davidson is the founder, chairman, and CEO of First
American State Bank. He brings more than 25 years of experience
in the banking, private business, and corporate sectors, and
he's been recognized by numerous industries and public
organizations for his expertise.
Jay, go ahead and give your testimony.
STATEMENT OF JAY DAVIDSON, FIRST AMERICAN STATE BANK, DENVER,
CO
Mr. Davidson. Thank you. It's an honor to be here, and I
appreciate the representatives' involvement in this very
important issue.
I'm a relatively small bank, with a little less than 3
million, in Greenwood Village. Started in 1995, 20 years ago.
I've got to say that the environment in which we exist has
changed dramatically over the years. It's become much--it's
become much more difficult for us to do what we do best, which
is, in our case, lend to independent business people. The job
creators in our nation are not getting funds that they need to
grow their business.
And so my testimony is not about poor banks. I don't feel
sorry for major banks, and I don't think anybody else does. But
I do feel sorry for the independent business person, the
consumer, the person who can't get a job. And I think that's
something that you can address particularly, and you do have
weight in your roles as senators and representatives to make a
difference.
I'd like to point out that commercial banking has declined
dramatically since 1990. In 1990, there were 15,335 commercial
banks in the United States. Today there are 6,570. That's a 57
percent decline. I might also add as an addendum that only one
de novo bank has been chartered in the past seven years. One.
And it's normally five to ten in any particular year in a
normal recovery. That's one in five years. People aren't
starting banks. There's reasons for that.
The smaller community banks have a unique role to play, and
that is that we have the ability to understand the small
business person, the independent business person. The large
guys can do it, can certainly make those loans, but they've got
to spend an inordinate amount of time doing it. They'd probably
rather focus on the hundred-million-dollar loans or a lot of
volume with consumer lending.
But we independent banks, community banks, focus
predominantly on the independent business person. This is the
person that creates over 60 to 65 percent of the new jobs that
exist in the United States, that are created in the United
States. We have an inordinate effect upon jobs creation and
people's well-being, because I think you feel better when you
have a good job, a good-paying job, and you contribute to
society. I don't think you feel well when you're getting
welfare or a handout. I think most Americans want to work.
I might also add, the largest banks have become larger. In
1990, the ten largest banks controlled 33 percent of the
deposits in the nation. Today, that ten control 81 percent. Too
big to fail, that's really done very well. It's made the big
boys even bigger. And that's fine. We'll all get our market
share. That's not bothering me at all. But we are creating a
systemic risk in our nation that can't be handled by anybody,
even somebody as good as the Fed Reserve or the OCC. They can't
handle what's going to come down the pike when one of these
gigantic guys goes under. And it's going to happen eventually.
So I just want to include that this information that I just
read into the testimony is from SNL Financial. And I want to
conclude--make a statement on their conclusion.
Smaller community banks play an essential and important
role in our economy by servicing the small- to medium-sized
business that adds jobs to our local economy. These same banks
provide flexible financing for opportunities to help nurture
the entrepreneurial endeavors in the local community. Increased
regulatory burden is placing a large cost and time burden on
the smaller community banks and has the potential to stifle
economic growth in these communities.
And everything we've seen indicates that growth is stifled,
that we are not--our economy is not growing and we are not
recovering from the Great Recession. GDP has been sitting at
2.4 percent for about two years. It should be at 8 or 9
percent. We're not increasing the productivity of our nation of
products and services. The Labor Participation Rate is sitting
at 62 percent. 38 percent of the people out there that could
work are not working. You tell me that it's only a 4 percent
differential between 2005. Well, that's 8 million people
without work. And I hear, at least, statistics that
unemployment is 6 percent. Excuse me. You've got to add that 4
percent in. It's 10 percent. And we're seven years into this
recovery, and we're not going anywhere.
And I'd submit to you the reason we're not going anywhere
is that--I'm not--I've got to be real careful here because they
regulate me. And I respect what they're doing. They've got a
difficult job. But the Fed has two jobs. The Federal Open
Market Committee, they determine monetary policy. The FOMC
determined that they would stimulate the economy by creating
vast amounts of money, unheard of, 4.5 trillion in the past
five years. Unheard of printing of money. And they reduced the
interest rates to near zero. This is very stimulative.
Why isn't the economy coming around? Because, on the other
hand, the regulatory agencies are shutting the banks down from
lending. I can't lend when I have to hold a 13, 14, 15 total
risk-based capital ratio. I can't lend when I have to hold a 6,
7, 8, 9, 10 leverage ratio. I can't lend when my CRE 1 and 2
ratios are at 300 percent of capital.
I don't know how the other fellows are going to talk to
this issue, and they may not even speak to it. But I think this
is the major problem: Regulatory overreaction. And honestly,
they have a really difficult job. In fact, it's almost an
impossible job. They can't prevent the next recession, but
people think they can. It's impassable what's being put on
them.
So they are overreacting to the stimulus that they saw in
the subprime markets. They came in and changed the way that we
do banking, commercial banking on commercial real estate
lending, and caused this liquidity crunch that we're facing
today.
So I think that is one of the main reasons that we're not
seeing an expansion of the economy. That's why I say it's not
us poor banks. We'll get through this thing. But it really is
sad that we can't do what we started our banks to do, which is
lend to the independent business person and the individuals.
Thank you very much for this opportunity.
[The prepared statement of Mr. Davidson follows:]
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Senator Gardner. Thank you very much, Mr. Davidson. We
appreciate your words today.
And I notice that the minority leader of the House, Brian
DelGrosso, is here. I appreciate his participation as well.
We will go to Dave Reyher next, the president of Colorado
East Bank and Trust, an independent community bank serving
Eastern Colorado--and Central Colorado as well--families and
farms. Dave started his career in banking in 1982 and
understands firsthand the community banks in small, rural
communities.
STATEMENT OF DAVE REYHER, COLORADO EAST BANK & TRUST, DENVER,
CO
Mr. Reyher. Thank you, Senator Gardner. It's my pleasure to
be here to testify on the reduction of the burden of federal
regulations on community banks and small businesses.
Colorado East Bank & Trust was founded in the early 1990s,
and we currently operate under the community bank model. What
the community bank model means is we know our customers much
better than any federal regulator, any bureaucrat that creates
some of these rules we're operating under today. With this
knowledge of our customers came the ability for us to custom
tailor products and services that best met the needs of our
customers. That's been taken away, slowly and slowly. We are
now facing a commoditization of our business unlike any other.
And I'll speak to that in a moment.
There was a recent survey of community banks. There was a
hundred community banks that were surveyed by KPMG, and senior
executives and CEOs from these banks responded to a number of
questions. One of those was--when asked which of the following
are the most significant barriers facing your bank over the
next 12 months, 32 percent indicated that the regulatory and
legislative pressures are the most significant barriers.
Interestingly, only 8 percent responded there was a lack of
creditworthy borrowers.
There was a similar survey done by the Independent
Community Bankers of America; 6500 surveys were sent out, and
519 bankers responded. Some of the results from that indicated
that lenders who are participating in consumer lending, which
includes multi-family residential real estate loans, home
equity lines of credit, and consumer lending--that there were 9
percent of those banks that were considering getting completely
out of that product line. Of those respondents that indicated
that they were getting out of that product line, they indicated
that they were just going to stop making loans.
When asked what factors prevented them from making loans,
those that are in the category of residential real estate
lending, 73 percent indicated that the regulatory burdens of
new rules and requirements were preventing them from making
these loans.
So there's two clear conclusions to the results of these
surveys. Lenders are leaving the markets because of the
regulatory risk of needing to comply with all of these new
rules and regulations and the severe consequences of
noncompliance, which includes civil money penalties, regulatory
consent orders and, in extreme cases, potential closure of that
bank. The second thing is the rules and regulations that were
meant to protect customers have done exactly the opposite and,
in some cases, have had very negative effects on the customers.
Sadly, as a result of the increased regulatory scrutiny in
our industry and the new regulations that have been brought to
the table, we are slowly seeing, as I mentioned before,
commoditization of the products and services that we can offer
to our customers. Gone are the days of taking care of our
customers on a personal, one-on-one basis. The cookie-cutter
approach to lending today in particular has led to less credit
being available, not only in smaller communities, but to small
businesses and consumers nationwide.
I look forward to taking part in the rest of the hearing
today and answering any questions. Thank you.
[The prepared statement of Mr. Reyher follows:]
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Senator Gardner. Thank you, Mr. Reyher.
Koger Propst is the president of ANB Bank. He brings more
than 30 years of experience in community banking, advocating
for the role independent banks play in our communities. He
serves in various roles in banking and community organizations,
most recently having served as the past chair of the Colorado
chapter of the Nature Conservancy and the immediate past chair
of the Colorado Bankers Association.
Koger, thank you very much for joining us today.
STATEMENT OF KOGER PROPST, ANB BANK, DENVER, CO
Mr. Propst. Thank you.
ANB Bank is a privately held community bank headquartered
in Colorado, and our bank focuses on small businesses and
commercial banking. And we serve customers both in metropolitan
areas, as well as small communities throughout the State.
The prescriptive regulations that Basel III and Dodd-Frank
impose substitute regulator judgment for, as Dave was talking
about, the commonsense lending that our bank and other
community banks provide. There are numerous vexing issues in
both of those, and I certainly support the comments about
mortgage lending, but I will not comment on those today.
Today I'll comment on Basel III capital requirements. And
essentially, through those capital requirements, regulators are
picking winners and losers on who the banks should lend to. And
they do that by assigning risk weightings. And those risk
weightings require us to put more capital to support certain
types of loans and less in others.
More importantly, the borrower needs and local community
needs are put aside for a judgment made by a regulator at a
point in time, in a faraway place, in Washington, D.C., than
what's happening in local communities. And I would add that
probably the biggest winner of it is the Federal Government.
Federal government debt requires zero percent capital for us to
support, so there is a strong encouragement to put our money
there instead of local municipalities or local borrowers.
I want to hit a couple things really quickly within Basel
III. One is called high volatility commercial real estate. The
goal was good. The goal was to say that there was a lot of
speculative lending and that more capital should be required.
Unfortunately, it casts a very wide net and it's very punitive
if you go outside of that. And I want to hit a couple or three
examples of those.
One is--and this is certainly not speculative lending--but
we often partner with SBA and organizations like Colorado
Lending Source to provide financing for small business owners
to be able to buy their own business instead of renting it. We
do that through a combined loan program and we'll lend up to 90
percent. That 90 percent, however, triggers this HVCRE lending
and actually causes us to have to keep 50 percent more capital.
Arguably, that means we've got to charge 50 percent more to
those folks. So it's highly--it creates great discouragement to
help them.
Another one would be, as we look at these, there's a
certain amount of equity that has to come in. Oftentimes we'll
partner with local EDCs or nonprofits who will put credit
enhancements in place to make up the difference because the
community has decided they want this type of business or this
type of activity to occur. We cannot count their credit towards
the down payment. And in fact, again, it can trigger the HVCRE
and, again, 50 percent higher capital requirements.
And then a final note on HVCRE is that even if, in Yuma,
Colorado, for example, someone has owned a piece of property
for generations, we cannot give value towards the value of the
property. We have to go to the old cost. The cost might have
been impossible to determine. That means the borrower has to
not only come up with the land they're putting in, but excess
cash. Again, very limiting and has nothing do to with the goal
of trying to solve the original sort of speculative lending
problems.
Two other things within the capital that I think are
troubling. Small businesses rely heavily on lines of credit.
Our bank provides those. And under the capital guidelines, we
have to set aside 20 to 50 percent capital for unused lines.
That means we earn no money on the unused line, but we have to
use scarce resources to support it. That causes you to think
really hard, as a bank, whether you're going to give that line
of credit to that small business, because it's extremely
expensive to do it. As we all know, it's the lifeline for that
small business. Again, it discourages.
And then the final one that I want to mention is past-due
borrowers. If a loan goes 90 days past due, again, the capital,
in addition to normal loan reserve, increases for problem
assets. We have to increase our capital to 150 percent, so,
again, 50 percent more. What's the reality of that? The reality
is when our borrowers need us most, when we're in difficult
economic times and they need a bank to work with, we have
regulator incentive to get them out of the bank because it
costs us dramatically.
Again, these are all things kind of just trapped in capital
that haven't been thought through, and they need to be reopened
and considered.
I would just make one comment on the overall weight of the
regulatory burden. These are just minor examples of things that
need to be fixed that are suffocating community banks. The
losers of this assault--certainly we heard the stats on
community banks, but it's not just them. It's the communities
and the borrowers they serve.
I thank you for having this hearing.
[The prepared statement of Mr. Propst follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Gardner. Thank you, Mr. Propst.
David Kelly, who we're looking to next, is the chief risk
officer for FirstBank, where he is responsible for the
development and implementation and ongoing management of all
enterprise risk management processes for the company. This
includes developing the company's Dodd-Frank Act stress-testing
practices and implementing FirstBank's enterprise risk
management practices.
Make sure you get close to the mic. And thanks for your
testimony.
STATEMENT OF DAVID KELLY, FIRSTBANK, DENVER, CO
Mr. Kelly. Senator Gardner, thank you for having this
communication. And Representatives Coffman and Buck, thank you
for being here as well.
This is an important topic. I will try to be brief. You
have a copy of my written testimony, and that goes into more
detail. I'm going to hit the high points because my colleagues
here have briefly touched on there is a dramatic impact to the
community, but also to small banks, banks of all sizes, but
more disproportionate in smaller institutions.
I think Representative Buck previously mentioned talking to
someone who had to hire additional compliance officers. The
amount of volume of regulatory change that's happened since the
crisis, even pre Dodd-Frank--so I go back to 2008, when the
crisis was there, through 2014--I highlighted about 15 regs
that have taken effect, not all on mortgage lending, but
throughout every aspect of banking, including safety and
soundness and the like. They come in at a higher volume really
fast. They have more complexity to them.
For example, the Truth-In-Lending Act implementation of
Regulation Z. In 2008, the Government Printing Office had 248
pages, the regulation, commentary, and all its appendices. As
of 2014, that stood at 988 pages. That's the actual reg, the
commentary, and all the appendices. It's not the preamble.
There's thousands of pages in its preamble to all these new
rules that we have to have people read through and figure out
how do we implement that within our organization and what are
the pitfalls to doing that.
The complexity has definitely grown throughout this time as
well. And depending on the regulator, you have a lot more
prescriptiveness coming into the regulations, which are
basically dictating business practices and trying to account
for the maybe problem practices that could have been dealt with
by regulatory enforcement action. But they want to make sure it
doesn't happen anywhere, so they put restrictive rules into
regulations such that you have to follow them. And it has
caused a lot of companies to have to reconfigure business
practices, and all those who didn't have any real problems with
their practices.
If you look at the background of FirstBank, they are
predominantly a mortgage lender, or predominantly a real estate
lender. We had about 10,000 mortgages outstanding in 2009.
We've got 24,500 today. Throughout the crisis in 2014, we had
179 total foreclosures. That's entering foreclosure; not all of
them went through foreclosure.
We didn't change any of our underwriting practices as a
result of the economic downturn. We had to change as a result
of the regulatory burden. I often get asked, how much does it
cost to implement a reg? I would have to hire a full-time
person just to go through that to figure that out. It's not the
single reg by itself that actually creates burden; it's the
cumulative impact of all the regs. And I think today there is
no thought to cumulative impact.
Dodd-Frank was put into place. It attacked everything that
was wrong as part of the crisis. If there was a problem here,
put a fix to it. Problem here, put a fix. Every little thing
that was thought to be a problem, they put a fix in. But when
you add all that up, it's a huge impact. We go back and look at
the time we spent processing mortgage loans. I can give you an
example of this. Between 2010 and 2014, for a hundred-thousand-
dollar or less transaction, consumer loan transaction, we're
spending 67 percent more time on that transaction than we were
pre crisis. For a mortgage loan, same dollar amount, we're
spending 44 percent more time; 47 percent more time for a
mortgage transaction over 250,000.
This is not changing any of our underwriting standards.
It's all the additional disclosures and documentation that we
have to ask from our borrowers. And small business borrowers
actually do get impacted on the consumer mortgage side as well.
If you are a small business owner and your business is growing,
I can't give you credit today for the trends in the industry. I
have to look at historically what's happened. If I do want to
give you credit for that, I can't just take your word for it. I
have to have you go hire a CPA to certify that what you're
telling me is accurate so that I can give you credit for it.
That does add cost to the small business owner, either
through that additional expense or by having to delay your
financing until your tax returns catch up to where we can
underwrite you for. And the interest rate environment can
change completely. Small businesses are impacted there.
There's technology that goes along with all of these
changes today, and there's quality control practices that we
must have. So throughout this whole process you have to have
resources to show that you are doing things right, that it's
not going to trip you up. A lot of these rules that Congress
enacted double the liability for some of these, from a civil
liability perspective, and brought in technical compliance to
help manage that civil liability.
So you have to be very careful about how you go about it.
It's no wonder that large or small bank institutions have re-
thought whether they should continue in this line of business
and some of them have exited the lines of business, reducing
credit that it needs.
Again, it is the cumulative impact of all of the regs that
are the biggest item that needs to be addressed. But, absent
that, I will cut my commentary off.
Thank you for your time. I look forward to your questions.
[The prepared statement of Mr. Kelly follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator Gardner. Thank you, Mr. Kelly.
Probably what we'll do is just go to the roundtable part of
this discussion. I'll ask a question, and Congressman Buck and
Congressman Coffman can jump in with a question at any time.
That way, you don't have to suffer listening to one of us.
I'll start with you, Mr. Davidson, just talking a little
bit about the numbers that you cited, the banking numbers,
15,000 reduced to 6,000 today. What does banking look like in
Colorado in another 20 years?
Mr. Davidson. If this trend continues--and I hope it
doesn't, with your help--but if this trend continues, you'll
see a few very large banks and you won't see community banks, I
don't believe. That's the broad sense.
Senator Gardner. In your mind, this consolidation is being
driven by regulatory burden?
Mr. Davidson. I think predominantly by regulatory burden.
I'll give you an example. My grandfather started--bought a bank
in 1903. It truly was a one-horse bank, up in North Dakota.
It's still in the family. I kind of hoped that when I started
this bank, I'd pass it on to my kids. I don't want to do that
anymore.
Representative Coffman. Let me ask Jay Davidson a question,
but I'd like everybody in the panel to reflect on this.
First, going back to my small business days, if I didn't
know my bankers, I would never have been in business, because
there was a crucial relationship of someone who believed in my
business model. And if you commoditize that--Dave, I think you
said, Mr. Reyher, there's no way that they could have taken
that crucial relationship and could have made that decision. So
the 20 jobs that I created for my small business would not have
existed.
But community banks have a concentration in commercial real
estate, and I think they've been penalized, by that
concentration, under Dodd-Frank. I know that in talking to
community bankers, that if they are performing loans, that they
would require a down payment because of that. I wonder if, Jay,
you could speak to that.
Mr. Davidson. Yeah. The ratio is called CRE 1 and 2,
Commercial Real Estate Number 1 and 2; 1 is the speculative
land lending, which is dangerous, I will admit. That's what
brought down a lot of banks during this last recession. The
other one is CRE 2, which is a performing loan, a cash-flowing
business, an office, an industrial space, a multi-family
residence. But that cash flow made cash flow throughout this
downturn.
In 2006 or 2007, the regulators advised us banks that are
heavy commercial real estate lenders that they were going to
provide guidance, and that guidance was 300 percent of capital
for CRE lending. I'm in the 600 percent. I'm one of the
outliers. I don't think I really am, because most of Colorado
lending is commercial real estate. You can't go find an
industry like you could in Detroit. And I know a lot of my
compatriots here do a lot of C&I lending. We're born and raised
and bred for CRE lending, commercial real estate lending.
Well, when these guidelines became hard and fast rules one
year later, we had no time to adjust. This was the beginning of
what I call the second liquidity crisis, Congressman. All of us
banks immediately tried to sell our commercial real estate
loans, get them out of there. We had to increase our capital
ratio. The best way to do that is certainly not to raise
capital in a down market; it's to get rid of assets and
increase your capital ratio. Well, that created a liquidity
crisis because nobody wanted to buy anybody else's loans.
Nobody wanted commercial real estate.
I think we're still feeling the effects of that activity
today. We're still being held to a 300 percent of capital CRE 2
level.
Representative Coffman. Mr. Reyher.
Mr. Reyher. Yes. Representative Congressman, I find it
interesting that you talked about that personal relationship
that you had with your banker. You would never have had a shot
without that. I think all three of my--the other three of my
compatriots here, that's one of the things that they find that
kind of drives them to be a banker. It's that personal
relationship; it's that community bank model.
One of the things that I found today in our report is that
you have long-established customers within these community
banks. And a simple deal that years ago used to take an hour,
an hour and a half, now takes a day or a day and a half to get
done. And if it's got any complexity at all to it, it's 30 days
to 60 days before this can get done, by the time you figure out
all of your appraisal requirements, all of the disclosures that
have to be filled out today.
And these, on top of everything with the folks that we're
doing business with today, they're not wait-around kind of
people. They're, I got a deal, let's get it done.
Unfortunately, we're the ones sitting across the desk from a
disgruntled customer, not the bureaucrat in Washington, D.C.,
who dreamed this stuff up. So that's a problem. It's definitely
impacting the availability of credit to these folks. No doubt
about it.
Representative Coffman. Koger.
Mr. Propst. Two quick comments. One, in both of these, the
other CRE--I mean, the limits that Jay was talking about, the
300 percent, number one, that was guidance, and so you could go
above it. But the problem with guidance says you're okay till
you're not. So as soon as the regulators said you weren't,
that's what caused the crisis that Jay was talking about.
The second piece is that as we layer all these regulations
and requirements that Dave was talking about, the world is
moving faster, and we're driving it out of a regulated industry
into shadow banking. If you look at jumbo mortgages and all
those sorts of things, the shadow banking is coming in and
solving the problems that the regulated entities can't. I'm not
sure that's good for our economy as well.
Mr. Kelly. I will echo the comments that have all been
made. I've heard that with my term on the CBA and with a number
of other institutions. And our institution has seen different
type underwriting standards throughout the crisis and
afterwards. There is definitely higher expectations on how you
handle credit transactions. Something Koger just mentioned
triggered something else, another thought. But it's regulatory
guidance.
You talk about small business trying to make it, and
they're making it in an industry that is one of these higher-
risk industries, and they get basic banking service now being
shut out. Are you going to loan to somebody that you can't hold
a deposit relationship with? Aren't you afraid that they're
going to club you over the head with it? The Bureau for
Consumer Financial Protection, I think, yesterday issued a new
lawsuit for debt collection practices and bring-in payment
process. It's no longer sufficient that we just know our
customers; we have to know our customers' customers. If there's
a sense they might be violating a law, any law, state or
federal, we're now held accountable for it.
Yes, we have the credit side, and we have a lot more that
goes along with that too. But the operation side can also
prohibit the banking businesses.
Representative Coffman. Just a follow-up on that. Getting
into Q & A as to what the Federal Government thinks is a
desirable business and what isn't, absent any violations of
law, absent any violation of regulations, it's a pretty
insidious thing for, essentially, the government to say, we
don't like this industry.
Mr. Kelly. I agree with that in some respects. They are
making that statement. And, unfortunately, everybody gets swept
up in what's called the risk because we just don't want the
liability that goes along with banking. But even over the
years, any other high-risk industry that you bank, there's
always going to be a segment that's problematic. The problem is
they come in with a huge hammer that just flattens the whole
industry. It's too much of a penalty for us to sit there and
make them, so it's easier for us to say no. Then they do go to
the Strato Bank. They have to find those services somewhere.
Senator Gardner. Congressman Buck.
Representative Buck. Thank you, Senator.
All of you talked about regulatory burden that you face,
the amount of cost that it takes to comply with these areas.
None of you mentioned the penalties that are associated with
the audits of those regulations. And I've heard from bankers
that they have been penalized because a staple was on the left-
hand side. There are very significant things in audits. I'm
wondering what your experience is. I'll put it in context
first.
These audits are done by the executive branch of the
Federal Government, the same executive branch with a secretary
of state who has an email server in the basement, in violation
of federal law; the same Federal Government that the president
appointed to recess appointments to the NLRB, and the Supreme
Court, I believe, remanded its decision and determined that
those were unconstitutional; the same Federal Government that
the president has issued executive orders on immigration and
those orders are now delayed in the courts; the same executive
branch that has negotiated, in my opinion, a horrible deal with
Iran and is avoiding the treaty obligations by not presenting
it, or having no intention to present it, to the United States
Senate.
That, to me, is ironic that that executive branch would
audit more banks, banks that really bring business and jobs in
this country, and then fine you and penalize you. I'm wondering
what your thoughts are on penalties associated with these
regulations.
Mr. Propst. I'll jump in on that. The one thing I would say
is we are--or our primary regulator is the Federal Reserve in
the State of Colorado. And we have found our regulators to be
extremely professional, and we have not had any issues with
them. Unfortunately, I think the challenge for them is they
have to implement the rules. And it's the rules and the laws
and the regulations that are coming along. I know probably not
everyone has had good experiences with the regulators, and I
can't speak to that.
But what I would say is that the penalties have increased
dramatically, if you step out of line. The reason we're all
putting so much emphasis on this is because the cost of failure
is extremely high.
Mr. Kelly. I'll go ahead and add on to that. We are also
regulated by the Federal Reserve in the State. Our regulators
are very reasonable. What I think you do see, though, sometimes
is that, especially into the crisis, the pendulum did go too
far, not only from the congressional side in the passage of
Dodd-Frank and some of that stuff, but from the regulator side.
And then you're in a state where the field examiner is
always concerned about being second-guessed. They're looking at
an institution, and that institution might happen to fail down
the road. Then they're going to get their auditor in there and
they want to make sure they have everything checked off. Maybe
we're doing everything fine, but I want you to do it slightly
different or document it more times so I can check this box off
so I can make sure that, just in case, somewhere down the road,
if their institution has problems, I won't have a problem.
That's kind of the environment that they're in.
The penalties they have gone back to, I believe, not only
with some of the congressional changes recently from Dodd-
Frank, but even before, found new ways to raise penalties or to
institute old penalties against new wrongdoing as a punishment.
That's when you see them come out in enforcement action. It's,
oh, better not be doing that, we have to put more resources to
make sure you're documenting everything.
Senator Gardner. Thank you.
I'll ask another question to Mr. Propst or Mr. Reyher. As
we talk about mortgage rules impacting mortgage customers, some
who may have an established customer history, others who may
not, what is happening in small town banks, financial
institutions, mortgage lending institutions, to some of the
regulations, and what happens to the customer who doesn't have
established credit, on the mortgage lending side?
Mr. Reyher. I'll try to give a very brief example of that.
So a lot of our banks are in very small communities. Many of
these, we're the only bank in town. We're looked upon as the
place to go for a loan, including the 1-4 family residency. So
let's just say a retired couple walks in that's lived in that
community for their entire life. They've banked at that bank.
They have a good relationship with the bank and they've handled
their business in a sparkling manner.
So counter that with somebody new moves to town, walks in
and says, I'd like a 1-4 family loan. You have no history with
that person. But you have to judge those two the same. So what
that creates is a cookie cutter. We have these set guidelines
because you cannot discriminate against that person, even
though it's not overt discrimination. But maybe the debt-to-
income ratio is a little higher on this retired couple and
you're willing to give them a chance, just as Congressman
Coffman mentioned.
But if you give that one a chance and you don't give this
one a chance, Senator Buck, then you go to the Department of
Justice. That's not a fun place to be, I understand. And the
fines are just astronomical. They start out at a million bucks
and go up.
So that's the issue. That's the problem with the community
banks, cutting off credit to those that most need it.
Senator Gardner. Mr. Propst.
Mr. Propst. I'll hit a couple things. There are some
qualifying standards, so qualifying mortgages. Essentially,
that would mean anything that the GSEs would buy. If you go
outside that, you have a liability back to your customer, if
something ever goes wrong, that says you should not have made
that loan, you should have qualified it. The bank can be liable
for three years of interest. Because of that, there's a number
of community banks that said you have to qualify that risk and
they said, we're out of business.
I will tell you, in our bank, we continue to do that, but
we don't know what that risk is. But we felt like we could not
cut off our small business customers.
There's a second piece called the ability to repay, which
is what David was referencing, saying that there are certain
things--and, frankly, it's patterned after FHA, which is also
ironic, in that FHA had 30-day foreclosure rates up in the mid-
teens. An organization like FirstBank was under 1 percent. Yet,
you can tell me which way we got to be underwriting, but I can
tell you which way we are today.
If you violate that, that's actually a violation of law,
penalties and all the other things. So, for us, we primarily do
accommodate mortgage loans, which means we lend to people that
don't fit in the rest of it. We do small loans, we do other--
any lender of small business is for their house because, for a
business, it's all one. Your mortgage, your personal, your
business is all together.
We actually had a deal the other day, because we can
underwrite commercial loans the way we underwrite them, we
approved a million and a half dollars of credit. We could not
approve their mortgage loan.
Senator Gardner. They got to apply for credit, but they
didn't qualify?
Mr. Propst. They're still stuck in a high rate mortgage
loan. We couldn't do it because of ability to repay.
Just one last quick comment. The QM and ATR rules have had
a perverse impact on the market. If you look at what's
occurred, it used to be the GSEs, the loans under 417, 417,000,
were less expensive than the jumbo loans. Because of the
regulations and all the burden, the extra cost, like what David
referenced, those rates are higher. And we're not seeing jumbo
loans. So the wealthy people are getting loans that are less
expensive than what's going through what's supposed to be the
low-cost provider of the GSEs. At least they have--anyway, I
won't go there.
But that's what's occurred in the market, is that Dodd-
Frank is actually--and the reason that's occurring is because
shadow banks are filling that need. You get a whole bunch of
the TIC loans and others coming in.
Senator Gardner. Give me an example of what a 0.5 percent,
less interest rate, would mean to the life of an average loan.
Mr. Propst. You're going to assume I'm a banker. Well, if
you take a $200,000 loan, it's a thousand dollars a year.
Senator Gardner. On a 30-year loan?
Mr. Propst. Yeah.
Senator Gardner. With a lower-income recipient, okay.
Mr. Propst. Yes. They're paying it off.
Senator Gardner. Yes, Congressman Coffman.
Representative Coffman. To all of you, so these--so,
obviously, there's some, I think, regulations in the minor
loans that existed. You see it in Dodd-Frank, CRA loan,
Community Reinvestment, and the like.
But let me ask you this. We had a financial crisis in 2008,
late in 2008. Dodd-Frank was a reaction to that financial
crisis, in my view. But I wonder maybe if you could tell me, in
your view, what actions the Federal Government should have
taken in response to the financial crisis, obviously, going
forward, to ensure that it didn't happen again to the extent
that it did, where there wasn't the issue of systemic risk.
Jay.
Mr. Davidson. Let me try and start a short conversation on
that. I think you have to go way back to the 1990s and a very
well-intentioned effort on the part of Barney Frank, of Frank-
Dodd fame, to get everybody into a new home. It's really a
great thing. It feels really good. They just forgot that there
are certain underwriting standards that all bankers meet.
Nobody sitting here at this table would ever write a subprime
loan and hold it on its books. We never did.
So I, sadly, have to say, Congress has to take a little bit
of the blame here. Stay out of our business. You know, Fannie
and Freddie bought the risk off these banks and did all the
subprime deals, and we created the Great Recession. This is
horrendous that we're seven years into this so-called recovery
and we're not recovered yet. And there's no indication that
we're going to be recovered anytime soon. That was the genesis
of this issue, in my humble opinion.
Senator Gardner. Any more questions?
Representative Coffman. See if anybody else would like to
comment on that question.
Mr. Reyher. I don't totally disagree. I will say that our
bank--we don't do near the volume of Fannie residential
mortgages, but we might have had two foreclosures in that total
period of time. Smaller banks, community banks did a good job
of underwriting their business. The bad actors are the ones who
caused this. What could we have done? Maybe we need to go after
those more aggressively.
Mr. Propst. Just a quick comment on that. The GSEs were the
number one purchasers of subprime, at one point held a trillion
dollars. If you look at--one of the things that happened in the
crisis is that banks became--everybody was a bank. So all the
investment houses were banks; Fannie and Freddie were banks. So
we lost that battle right away.
Then when Dodd-Frank came along, it was aimed at what do
they know how to regulate as banks. Community banks did not
solve the issue. But all those ills that were talked about were
all thrown into Dodd-Frank and targeted towards regular banks
and not--there hasn't been--GSEs have had nothing done. And a
lot of the others that came in--maybe the bureau is going after
some now, but it really didn't have any.
To me, that's the big mistake, is that they piled
regulation after regulation, because the regulators know us.
They don't know the others.
Mr. Kelly. I don't know that I can answer that because you
can't really stop the next crisis that's going to come. It's
going to come in some way, shape, or form. To be honest, in my
opinion, government sometimes interferes too much and likes to
see the economy always going, and the economy sometimes needs
to rest.
When interest rates started to move, the last part of the
last decade, up, the mortgage market completely disconnected
from the interest rate. That's because too much capital was
going in there. It wasn't coming from the regulating
institutions; it was coming from outside. But when you have
that much money flowing into it, the yields are not sufficient
to the risk that's aligned with it. And the investors need to
be held accountable for the risk that they take on by buying
those securities. Unfortunately, when you get into a lot of
other public policy, you hold those securities, whether it's
foreign governments or retirement funds or what.
I think Dodd-Frank was an overreach because it didn't take
enough time to really analyze the true impact to do a well-
thought-out response. That massive piece of legislation that
was 2,000 pages really passed Congress within a one-year time
period. It dwarfs anything that passed, from a lender
perspective, prior to that time. There's got to be fixes that
come to it. I think you will find reasonable ways to do that. I
encourage you to do that.
Representative Coffman. I think that the problem--one of
the problems I see is that the members of Congress who had
their fingerprints all over putting individuals into homes that
they couldn't afford--those loans, securitized and misrated
dramatically, were the catalyst for the collapse in 2008. So
you had those same members that pushed for that in charge of
finding a solution, and they refused to acknowledge
government's culpability that got us into that place in 2008.
So the solution was never going to face the actual problem.
And I think there was a commission created by Congress in
2009, and the minority report reflected, I think, what was the
actual cause of the crisis, and the majority report did not.
Senator Gardner. Thank you.
If there are no further questions from the members here,
then I wish to thank the first panel for their participation.
Thanks for coming all the way to the capitol to share your
thoughts and wisdom.
We'll welcome the next panel to join us.
[Representative Coffman was absent for the remainder of the
proceedings.]
Senator Gardner. Mike O'Donnell, Tony Gagliardi, Roger
Hays, and Don Childears, come on up.
Mike O'Donnell is the executive director of Colorado
Lending Source, a nonprofit organization providing lending
resources to Colorado small businesses. Colorado Lending Source
has partnered with more than 3,000 small businesses since it
was founded 25 years ago. That's the official bio.
The unofficial bio, of course, is that Mike O'Donnell is a
fine resident of Yuma County, Colorado. And our daughters were
in tai kwon do class together.
Mr. O'Donnell, welcome to the panel. Thank you for being
here.
STATEMENT OF MIKE O'DONNELL, COLORADO LENDING SOURCE, DENVER,
CO
Mr. O'Donnell. Thank you, Senator. I appreciate the
opportunity. My name is Mike O'Donnell. I'm the executive
director of Colorado Lending Source. We're a mission-based
nonprofit economic development organization. This is our 25th
year here in Colorado. Our mission is to foster the economic
growth of diverse small businesses within our communities,
which really means that we help small businesses access
capital, grow, and add jobs to the State. This last year we
assisted more than 200 small businesses, working with 53--
partnering with 53 different community banks to provide debt
financing to assist with about $274 million worth of credit
here in the State of Colorado. And those projects will create
just a little bit less than 2,000 jobs in the State, which is
great. We've always been an active lender under the SBA 504
loan program. And as the last Great Recession began to unfold,
we expanded our operations to become an SBA-approved lender
service provider, which means that we assist, currently, 40
local community lenders, help process SBA guaranteed loans. We
also borrow some funds ourselves to make loans, under our Main
Street loan program, to small businesses unable to secure
funding anywhere else in the State.
We recently expanded our direct lending activities to
become one of the nation's newest SBA Community Advantage
lenders, which allows us to provide smaller loans to businesses
unable to secure financing through the community banking
system. And the source of the funding for our Community
Advantage loans is that we've gone out to community banks
ourselves to borrow money from them so that we can turn around
and break that up and make loans to small businesses. So that's
our process for that.
I've been with the organization for almost 15 years, as you
can probably tell from my Eastern Colorado accent here.
Although our organization is based in Denver, I myself reside
in southern Yuma County, about six miles east of the rural town
of Kirk, with a population of just 59 people. So I very much
appreciate the opportunity to be here today too.
Community banks play a critical role in providing capital
to small businesses. Closures, ongoing consolidations and
excessive regulation negatively impact small businesses in
many, many ways. It shouldn't be surprising that the number of
business start-ups in the United States has been falling
consistently over the last few decades, just as the number of
community banks has been declining.
The FDIC only began reporting on the performance of
community banks in the quarterly banking profile reports during
2014. The FDIC defines community banks as those institutions
that provide traditional relationship-based banking services in
their local communities.
During the second quarter of 2014, the FDIC recognizes that
we had 6,163 community banks in the United States. These
represented 93 percent of all FDIC-insured institutions that
are responsible for assets totaling $2 trillion. That was just
13 percent of the industry assets. So these community banks
accounted for 45 percent of all the business loans to small
businesses in the United States. So if you look at these
numbers the other way around, the big banks that control 87
percent of all of the money in the banking system only account
for 55 percent of small business loans.
Because the big banks don't carry the weight when it comes
to small business lending, being more interested probably in a
profitable transaction than a relationship with a client, it's
really the community banks that have a pivotal role to play in
access to capital for small businesses.
Really, without a vibrant community banking system, not so
many loans would be made to small business. It's really as
simple as that. Big banks don't appear to be interested in
picking up the slack as the number of community banks in the
United States has fallen.
And we've heard the numbers before from other panelists.
But back in 1980, according to the Federal Reserve, we had more
than 12,000 community banks in the country. And the FDIC says
we have 6,163 now, and they only hold 13 percent of the assets.
Back in 1980, those banks had 30 percent of all of the assets
in the country. So it very much had a concentration, as you
would expect.
During that same time frame, business start-ups had been
declining steadily, reaching a national tipping point in 2008
when the number of business closings began outnumbering the
number of start-ups each year. This is a trend that continues
even since the Great Recession has ended. In Colorado, because
of the special economic boost this State receives by being the
destination of choice for a large, highly educated influx of
entrepreneurial-minded Millenials, Colorado's own tipping point
didn't really occur until early last year when more businesses
started closing than opening in the State.
New business creation is vitally critical to a healthy,
vibrant economy for two primary reasons: job creation and
innovation. Contrary to popular belief, it is not established
small businesses or big businesses that create jobs, but it's
the new and young businesses that drive job creation in the
United States. New and young companies are creating nearly all
of the net new jobs in the United States. It's not the big
companies; it's not the existing small businesses. It's new
small businesses. Without new jobs and innovation, the nation
will face significant competitive challenges in the decades
ahead.
Economist Enrico Moretti's research reports that every job
generated through innovation creates five other jobs, three of
which are nonprofessional jobs. Even jobs generated by non-
innovative new businesses have a multiplier effect with regard
to consumer spending, taxation receipts and, thus, the quality
of life.
It's always been the case that small businesses account for
nearly half of private sector output and employment in the U.S.
Coming out of the Great Recession, however, job creation by
small businesses has lagged and continues to lag, while new
business formation rates continue to fall. While experts won't
directly suggest that these trends are driven by weaker
borrowing or limited access to small business loans, it doesn't
take a degree in astronomical science to realize--or even
aeronautical science--to realize that businesses need adequate
credit to succeed and grow.
Big businesses just don't seem very interested in providing
much of the capital, and certainly not to early stage or start-
up companies.
I had a conversation last week with the owner of a six-
month-old and pretty profitable small business located in
Boulder, Colorado. The owner was only looking for a $20,000
loan to help him add some employees to grow his business a
little more quickly. The large bank he spoke with told him to
come back in four years, if he was still around.
It's challenging for community banks to pick up the slack
for the big banks because they are now so hamstrung by
regulations. And most of them would not be able to assist these
individual businesses because of the paperwork burden and the
perception by the regulators that lending to early stage and
start-up businesses is intrinsically risky and should be
avoided. A community bank runs the risk of being adversely
impacted by regulators who better know than they, the bank's
owners, how the capital of community banks--how much they
should have, hold, reserve, and allocate.
The facts bear this out. The volume of small business loans
made within the banking system dropped significantly between
2008 and 2012, as you would expect, but it's barely recovered
through today. Small business loans at the end of 2014 are
still 17 percent below the peak reached prior to the recession.
And while small commercial and industrial loans grew 3.4
percent from 2013 to 2014, according to the Federal Reserve,
this modest improvement does not provide strong assurances
about the health of lending in this space. In contrast, the
lending to larger businesses bounced back quickly, and loans
outstanding are now more than 24 percent higher than pre-
recession levels.
So the increasing competitive banking landscape, the high
cost of regulation and compliance, and the limited resources
available represent major challenges for community banks. The
current regulatory burden is a key factor affecting community
banking, with employees now wearing more hats and doing more
jobs for basically the same return, which has its own issues
related to internal controls in the banks. But, regardless,
regulations are likely here to stay in some way, shape, or
form, even though these do hamper the ability of community
lenders to be responsive to the financing needs of small
businesses.
As a result, the community banks aren't able to make as
many loans to early stage and start-up businesses today as they
probably were able to do in years past. But they certainly do a
much better job than big banks.
So, in conclusion, if the community banking system
continues to experience closures and consolidations, the true
cost to the United States will be in ongoing declining small
business start-up rates, stifled innovation, and lethargic job
growth. And this is something that should concern everyone. It
certainly concerns me.
Thank you, Senator.
[The prepared statement of Mr. O'Donnell follows:]
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Senator Gardner. Thank you, Mr. O'Donnell, for your
testimony.
If anyone is wondering where Kirk is, it's just southeast
of Joes.
Tony Gagliardi is the Colorado state director for the NFIB,
National Federation of Independent Business, and an advocate
for small business owners. Tony has decades of experience
working with small businesses and trade associations,
supporting their priorities, and understanding firsthand what
small businesses are struggling with under the burden of
excessive government regulations and that what we could be
doing to help decrease regulations on small businesses will
help them succeed.
Mr. Gagliardi, thank you very much.
STATEMENT OF TONY GAGLIARDI, NATIONAL FEDERATION OF INDEPENDENT
BUSINESS, DENVER, CO
Mr. Gagliardi. Thank you, Senator. On behalf of the
National Federation of Independent Business, I appreciate the
opportunity to submit, for the record, testimony before your
committee.
NFIB is the nation's leading small business advocacy
association, representing members in Washington, D.C., and all
50 capitals. Founded in 1943 as a nonprofit, nonpartisan
organization, NFIB's mission is to promote and protect the
right of its members to own, operate, and grow their
businesses. NFIB represents over 350,000 independent business
owners who are located throughout the United States.
Now, I'd like to clarify that my comments will apply across
the board concerning regulations, everything from banking to
the way an independent business owner cleans their windows in
the business.
Overzealous regulation is a perennial cause of concern for
small business owners and is particularly burdensome in times
like these when the nation's economy remains sluggish.
According to NFIB's most recent Small Business Economic Trends
survey, government requirements and red tape was the most
frequent answer when NFIB members were asked to identify the
single biggest problem facing their business. The uncertainty
caused by future regulation negatively affects a small
business' ability to plan for future growth. While regulation
is necessary, it must be pragmatic and sensible.
Unfortunately, the regulatory burden on small business has
only grown. A study by Nicole and Mark Crain for the U.S. Small
Business Administration Office of Advocacy in 2010 found that
the total cost of regulation on the American economy is $1.75
trillion per year. A 2014 update to this study, commissioned by
the National Association of Manufacturers, found the cost
impact now sits at $2 trillion. If that number is not
staggering enough, the study reaffirmed that small businesses
bear a disproportionate amount of the regulatory burden.
While the American public and small business owners hear
daily about the thousands of new jobs being created, most of
these jobs are part-time, lower-wage positions. Job growth in
America remains stagnant. Small businesses create over two-
thirds of the net new jobs in this country, yet the NFIB
Research Foundation's most recent edition of Small Business
Economic Trends revealed, in the next three months, only 12
percent of the respondents plan to increase employment.
Reducing the regulatory burden would go a long way toward
giving entrepreneurs the confidence they need to expand their
workforce in a meaningful way.
Our solutions to ease the burden of excessive regulations
start with clarifying the indirect costs of regulation. The
Regulatory Flexibility Act requires agencies to conduct small
business analysis for any regulation that would impose a
significant economic impact on a substantial number of small
entities, and the bill only requires agencies to consider those
small agencies that are directly impacted by a new regulation.
Consequently, regulators may ignore foreseeable indirect
impacts a new regulation may have on a small business.
Regulatory agencies often proclaim indirect benefits for
regulatory proposals but fail to analyze and make publicly
available the indirect costs to consumers, such as higher
energy costs, lost jobs, and higher prices.
NFIB believes agencies should be required to make public
and to take into account, for procedural purposes, a reasonable
estimate of indirect impact. Congress should hold these
agencies accountable for providing a balanced statement of
costs and benefits in public regulatory proposals.
Increased small business input in the regulatory process.
Complying with regulations has a disproportionate burden on
small businesses, as few small companies have employees devoted
to compliance. Typically, the business owner is the janitor,
the HR manager, and the greeter. To help alleviate this burden,
it is critical that agencies only issue rules that are
necessary and have considered the impact on small businesses.
Currently, the Small Business Regulatory Enforcement
Fairness Act requires covered federal agencies to conduct a
Small Business Advocacy Review panel before publishing a
proposed rule. These panels include representatives of the
regulated small entities and provide an opportunity for small
businesses to collaboratively work with the regulators to find
alternatives that minimize any potential burden on small
businesses. Unfortunately, these panels only apply to EPA,
OSHA, and the Consumer Financial Protection Bureau. NFIB
believes these panels, which work well when agencies engage in
the process, should be expanded to cover all agencies issuing
rules that affect small businesses as a means to require these
agencies to evaluate the burdens their rules place on small
employers.
NFIB strongly supports H.R. 527, the Small Business
Regulatory Flexibility Improvements Act, which passed the House
of Representatives in February. This legislation directly
addresses indirect cost impact and would give small businesses
a greater voice in the process.
Conclusion: Agency focus on compliance. NFIB is concerned
that many agencies have shifted from an emphasis on small
business compliance assistance to an emphasis on enforcement.
Unfortunately, the evidence in this area is plentiful. As an
example, OSHA's fiscal year 2016 budget request. The agency
proposed hiring 60 new full-time equivalent staff for
enforcement, with no additional request for compliance
assistance. This would bring the total number of enforcement
FTE to 1,601, while they have only 254 FTEs devoted to
compliance assistance.
Likewise, the Department of Labor's Wage and Hour Division
requested 300 full-time equivalent positions for additional
enforcement staff and support. That represents 63 percent of
the division's overall increase request and 94 percent of the
new hires they want to make with this increased funding. None
of the increase will go to compliance assistance. Small
businesses rely on compliance assistance from agencies because
they lack the resources to employ specialized staff devoted to
regulatory compliance.
Congress can help by stressing to the agencies that they
need to devote adequate resources to help small businesses
comply with the complicated and vast regulatory burdens they
face. Additionally, Congress should pass legislation waiving
fines and penalties for small businesses the first time they
commit a non-harmful error on regulatory paperwork. Because of
lack of specialized staff, mistakes in paperwork will happen.
If no harm is committed as a result of the error, the agencies
should waive penalties for first-time offenses and, instead,
help owners to understand the mistake they made.
With employment at pre-recession levels, Congress needs to
take steps to address the growing regulatory burden on small
businesses. The proposed reforms previously listed are a good
starting point.
Thank you for holding this important hearing. And I am
happy to answer any questions.
[The prepared statement of Mr. Gagliardi follows:]
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Senator Gardner. Thank you, Mr. Gagliardi.
Roger Hays is the president of Premier Employer Services,
an organization providing human resource and administrative
services to small businesses. In this role, Roger helps small
and mid-size businesses navigate government regulations on a
daily basis.
STATEMENT OF ROGER HAYS, JR., PREMIER EMPLOYER SERVICES, INC.,
DENVER, CO
Mr. Hays. Thank you, Senator. I appreciate your inviting
me.
Representative Buck, thank you for being here.
As you said, I own a company in Centennial, Colorado, by
the name of Premier Employer Services. And what we do is help
mid- and small-sized companies deal with HR regulation because,
truthfully, what I've found over 18 years in this industry is
that no one, outside of myself, starts a business to become an
employer.
People start a business because they have found a better
way to manufacture the product or they have found a way to do a
service or to provide a service that they think is more cost-
effective. It's an economical service. They can do it better
than anybody else out there on the market. They do not start a
business to become an employer.
But as that business gets going and they have to hire
someone to help them either with sales or in-house, they find
out that they no longer have any time to actually do what it is
they started their business to do, because most people run two
businesses at once. You run the business that you started, and
then you also run an employment office. As an employer, you
spend an enormous amount of time dealing with regulations that
come from the Federal Government, state governments, and local
governments.
Very quickly, if your business is successful and you're
good at what you wanted to do, you're swamped, you're overrun
by all these regulations. What we've seen is bureaucrats had to
work in a vacuum. They come up with these really great ideas to
solve problems that don't really exist a lot of times. They
think, well, this isn't too onerous. This one regulation it
wouldn't take somebody very long to comply with, maybe four or
five hours a month to comply with the full regulation.
The problem is there's a whole bunch of paragraphs, there's
a whole bunch of different agencies, and there's only one small
employer. As all these different agencies start to pump out all
these different regulations, that one small business owner very
quickly gets swamped. They can't keep up with it. One
regulation by itself might not be so bad. But the fact that
we've got thousands and thousands of regulations coming out of
Washington every year that affect small businesses, it becomes
almost impossible for them to keep up.
So what we do at my company is we contract with these small
businesses and we take over that difficult part of being the
employer. That's not why they started their business. So we
help them with regulations, human resource rules, OSHA issues,
workers' compensation, benefits, health insurance. So I've been
exposed to this difficulty that small businesses have in terms
of operating under this onslaught of regulation on a daily
basis, which really makes me fun at Christmas parties. But it
does help the business, because they are not there to just
spend all of their time filling out documents.
If we can somehow figure out a way to go through the
process and get rid of all the redundant and repetitive and
ridiculous regulations that are in the books and then slow down
the onslaught from folks at the Department of Labor, the EEOC,
and those locations, it would really help small businesses out,
not just in Colorado, but across the country. This is a problem
that isn't just local, unfortunately. We operate in 18
different states. The bulk majority of our work is here in
Colorado. It isn't just the Federal Government these folks have
to answer to; it's also the state government.
So when you have all of the regulations coming out of D.C.,
then you have the regulations coming out of this building at a
high rate of speed, then you've got local city and county
regulations, a lot of small employers just don't survive. I've
had a number of clients over the years who have either just
completely given up and sold their business or just shut down
because it has become so difficult for them to just operate in
the environment. They get worn out and give up. It's not what
they wanted to do. The profit margin is pretty low. It really
begins to go.
So what we're seeing, as some of the other folks have
already testified, is fewer and fewer people decide to get into
business. The entrepreneur rate is dropping rapidly. Now, it's
a dichotomy for me because the more regulations that come out
of D.C., the busier I get. But I'm also noticing fewer and
fewer new start-up companies in certain segments here in Denver
because they just don't want to deal with it. It's easier to
keep working where they're at than go try to start a business;
whereas, 10, 15, 20 years ago, when I first got into this
business, people were starting businesses left and right. It
was a very hot time. It's not the case anymore. It's just
become too difficult, too costly.
I appreciate the time here. I'm happy to answer any
questions. And thank you so much.
[The prepared statement of Mr. Hays follows:]
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Senator Gardner. Thank you, Mr. Hays.
Don Childears will give his testimony next. He's been with
Colorado Bankers Association since 1975, serving as president
and CEO since 1980. He is actively engaged in the community,
holding various board roles in community and banking
organizations.
Mr. Childears, thank you very much for your time and
testimony today.
STATEMENT OF DON CHILDEARS, COLORADO BANKERS ASSOCIATION,
DENVER, CO
Mr. Childears. Thank you, Senator, and Representative Buck.
I am going to focus today on the solutions, or possible
solutions, to the glimpse that you've gotten today of many
problems with providing credit to small businesses and other
small business problems. Let me start off with a little bit of
perspective.
You've heard a lot of numbers today. Out of the 2,300-page
Dodd-Frank Act adopted five years ago, there would be just shy
of 400 rules to be written. Today, 58 percent of those rules
have been written. That's 231 separate rules. Another 24
percent have not yet been proposed, and all the deadlines have
passed. They should have been done some time ago. And another
18 percent are in process. To date, with 58 percent of the
rule-making done, we have 20,000 pages of new regulations that
have been imposed on the banking industry, in addition to all
the rules that we had before.
Twenty thousand pages is about six-and-a-half feet of
paper. We project that by the end of the rule-making to
implement all of Dodd-Frank, we will top 30,000 pages of rules,
and that will take us to the ten-foot mark.
So that gives you a little perspective on the volume that
we're dealing with. You've had other glimpses of the complexity
of the rules that we're dealing with. I think there are three
broad categories of solutions that we're dealing with here. One
is improving access to home loans, because that, in fact, is a
source of credit for most small businesses; secondly is
removing impediments to serving customers; and thirdly is
eliminating the distortions that government makes in the
marketplace.
Let me start off with the home loans. Without home loans,
most Americans would not be able to purchase a home or, in
fact, to finance a small business, because that's where their
credit comes from. As potential solutions in this area, I want
to focus on one, but there are a number of others that are
detailed in the written testimony that I have provided. By the
way, by all of these there are bill numbers, in the written
testimony, that reflect the concepts I'm talking about.
But the first one is to basically treat loans that are held
in a bank's portfolio as automatically complying with the
qualifying mortgage regulation. You heard references to that
earlier this afternoon. The QM regulation, as we call it,
effectively keeps banks from lending to lots of people that we
believe are creditworthy, that we know and are glad to lend to.
But government regulation basically stands in the way.
There are a number of different issues that that creates
for a variety of different constituencies. It affects low
income, small businesses, rural populations, recently hired,
newly employed, and I can go on and on. Each of those has a
slightly different twist as to how they have trouble getting in
compliance with the government regulations, even though we're
glad to lend to them.
But there is one common solution. That is, if the bank
makes the loan and keeps it in its loan portfolio and keeps 100
percent of the risk on that, with no risk going to any other
party, then we think it should be deemed compliant with that
regulation. So that is a major step in terms of easing credit
both for homeownership and for the use of credit in financing
small businesses.
Now, in the written testimony I provided, there are a
variety of others that deal with the definition of rural areas,
which has, oddly enough, become a significant complication in
this area; mortgage servicing; escrows for home mortgages; and
a variety of other topics. But I just wanted to focus on that
one.
Now I want to move to the second category of impediments to
serving customers. The key to dealing with the consolidation of
the banking industry, where we have fewer and fewer providers
all the time, is to stop treating all banks alike, imposing the
one-size-fits-all regimen on the entire industry that ranges
from a little $15 million bank to a $2.2 trillion bank. Quite a
variety there. There is a big difference not only in the size,
but in the complexity of these institutions. And right now
we're effectively seeing one-size-fits-all imposed on the
entire industry. And the worst culprit in this is actually
beyond Dodd-Frank. It's the Basel III capital accords
international agreement that sets capital standards for banks.
In this area, I would say that Congress can first reduce
unnecessary and redundant paperwork. It could do a review and
reconciliation of existing regulations. Specifically, it could
eliminate unnecessary currency transaction report filings,
could provide greater accountability by law enforcement for the
use of Bank Secrecy Act data that we provide, and eliminate
redundant privacy policy notices that have to be provided.
The second thing I focused on in that general area is to
create a more balanced and transparent approach to bank exams
and regulation. And again we've got legislation that's
identified in the written testimony. We believe Congress should
encourage the regulators to expand the number of banks, not
contract the number of banks, so we have more providers, more
competition, which benefits all the customers in the end run.
There should also be an independent appeals mechanism. When
a bank regulatory agency has harsh treatment for a bank that
the bank thinks is unjust, you get to appeal to the very same
people who made the original decision. So it effectively is no
appeal. We believe there should be an independent external
appeal system that we think will bring about better
accountability of the regulators themselves.
The third broad category in this area is to urge regulators
to reform the entire Basel III capital requirements. You heard
the discussion earlier today about high-volatility commercial
real estate. I've given you another example. There are winners
and losers in society chosen by the capital levels that are
established in the Basel III capital requirements. And we don't
think that that's government's role, is to say that this
industry is favored, so it should get more credit and cheaper
credit and this industry we don't like, so it should not get as
much credit or have to pay more for it.
The last one is to limit the burdensome trickle down where
we take the processes applied to very large, complex banks and
apply them to the smallest institutions. And very specifically,
we think that Congress should remove arbitrary regulatory
thresholds set by dollar amounts that don't correspond to a
bank's risk or business model. We think that the way the
regulators ought to look at it is, in fact, the business model
and the amount of risk in that bank's lending activities.
So that leads me to the next item, which is to enact a
requirement for the regulators to actually mold their
regulations to fit the business model and risk profile of the
entity, the bank, that they are regulating. And we've written
an entire bill on that that I am sharing with you in the next
week or so.
Lastly, the banking industry's ability to serve customers
is affected by a variety of forces. Where the government has
gotten involved, we face what we regard as unfair tax-
subsidized competition from both the credit unions and the Farm
Credit system. Beyond that, we think you should encourage
regulators to create new bank charters so that there is more
competition. We think Congress should ensure that all
participants, banks and non-banks alike, are subject to the
same consistent rules and oversight for consumer protection and
safety and soundness of their institutions and the risk they
impose on the entire system.
Right now we've got a piper-paying system where the
regulated banks are treated one way, and that's with this
crushing regulatory burden, but we have a lot of other
financial intermediaries out there that are narrowly going
about their business, almost void of regulation many times. I
think their consumers are at significant risk.
The last one is to hold breached parties responsible for
the damages that their bank breaches. That is becoming a more
prevalent issue. We see daily breaches all the time. In 99
percent of the cases, the party that loses the data does not
suffer any significant financial costs. Those are borne by the
banking industry. We think they might be a little more
responsible if they had to pay the cost of reissuing cards and
covering the fraud losses of customers.
Several of these topics are in multi-topic bills, as
referenced in the written testimony. I note that there are six
of them that have already been bundled and passed out to the
House Financial Services Committee. So there is no shortage of
bill language to be worked upon. We just appreciate the
attention you're giving this issue and the direction in which
we're moving.
In general, we think banks are a significant backbone of
the economic fiber of hometowns across the country. And bankers
have a personal stake in not only the economic growth of their
community, but every other aspect of the community, the entire
vitality of that community.
So we appreciate the attention you're giving this issue.
And I'd just say thank you.
[The prepared statement of Mr. Childears follows:]
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Senator Gardner. Thank you, Mr. Childears.
And thanks to all the witnesses on the panel for your time
today.
I want to let everybody know that Congressman Coffman had
to leave early due to a previous doctor's appointment that he
had scheduled for today. So he apologizes that he had to leave
during the middle of the hearing.
We'll go back and forth a little bit. I appreciate both the
solutions and presenting the problems, again, that we have
today.
To Mr. O'Donnell or Mr. Childears--either one, feel free to
jump in on this--you talked a little bit about the income
verification rules and that they make it much harder to lend to
the small business owner that wants to take out a home equity
loan to help finance their business. Why is that the case and
why is a change to that regulation needed?
Mr. O'Donnell. Defer to Mr. Childears on that.
Mr. Childears. Okay. Basically, you have a mandate in the
Dodd-Frank Act, and the Consumer Financial Protection Bureau is
the rule-making entity for that. It's basically created a
third-party verification concept--and that is a concept that
was adopted in Dodd-Frank--that the lender can no longer accept
the word of the borrower on the income they have to pay back
the loan or the other resources they can bring to the loan, or
the entire transaction. We have to have a third party verify
that. And that's not just any third party; it's got to be one
that you can really rely upon.
So the typical boat that a small business is in is to get
that third-party verification. Since we can't accept their
books as verification of income for that home loan that's
financing their business, they then have to get a third party,
usually their accountant, to do a year-end review--it's kind of
short of an audit--which takes a lot of time and is a
frustration and a hassle and expensive, because I think for
lots of small businesses you're looking at a couple of thousand
dollars for that. Suddenly that CPA's liability is on the line.
Because they're signing that document, they're basically
asserting that this borrower has that much income.
So that is basically mandated by the Dodd-Frank Act and in
the rules written by the Consumer Financial Protection Bureau,
and we don't have any leeway around that.
Senator Gardner. Congressman Buck.
Representative Buck. Thank you, Senator.
Mr. Gagliardi, you mentioned that certainty was an
important factor in small businesses and job creation.
I want to ask each of you a few questions in the short time
we have. If you'd limit your answers, I'd sure appreciate it.
I just want to know whether we create more certainty or
less certainty with the Affordable Care Act.
Mr. Childears.
Mr. Childears. I am far from an expert on that topic. In
fact, we try to avoid it as much as we can. I think, from what
I hear from all sorts of banks and their customers, there is a
lot of uncertainty.
Representative Buck. Mr. Hays.
Mr. Hays. It definitely created a vast amount of
uncertainty.
Representative Buck. Mr. Gagliardi.
Mr. Gagliardi. As a full--having full standing in the
federal lawsuit against ObamaCare, we still, to this day, have
created enough uncertainty to bring business creation to a
standstill in hiring.
Representative Buck. Mr. O'Donnell.
Mr. O'Donnell. Congressman, there's definitely uncertainty
and challenges ahead for small businesses.
Representative Buck. Mr. Childears, same question as to
waters and U.S. EPA regulation.
Mr. Childears. Again, I don't know a lot about that. But I
think I'd have to give you the same response, that there is
uncertainty.
Representative Buck. Mr. Hays.
Mr. Hays. I would agree. It creates a lot--it is also
creating an enormous amount of uncertainty for small
businesses.
Representative Buck. Mr. Gagliardi.
Mr. Gagliardi. A very ridiculous idea.
Mr. O'Donnell. Again, water is, of course, an issue in
Colorado. Not every small business will be impacted by it in
the short term, but in the long run, yes.
Representative Buck. Mr. Childears, EPA regulations
concerning ozone, more certainty, less certainty?
Mr. Childears. I would guess that--my own personal opinion,
based upon what I hear, less certainty.
Mr. Hays. It's creating more problems.
Mr. Gagliardi. Less certainty.
Mr. O'Donnell. Again, less certainty.
Representative Buck. Mr. O'Donnell, I have a couple tough
questions for you. My chief of staff and former state senator
is from Wray. Senator Gardner is from Yuma. You are from Yuma
County. I'm just wondering, when the football teams play, do
you lean gray or do you lean red?
Mr. O'Donnell. Actually [unintelligible] which is a small,
six-person team.
Senator Gardner. I'm afraid that Liberty would probably
beat us both.
Mr. Hays, you talked a little bit about the regulations in
Congress, and I wanted to follow up on a couple of them. The
Department of Labor issued a fiduciary standard rule on small
business. Are you familiar with that?
Mr. Hays. Yes.
Senator Gardner. Can you explain what effect that will have
on small businesses?
Mr. Hays. They've been arguing back and forth on this since
2010. They put it off a couple of times, but it's coming back
this year. The Secretary of the Department of Labor has said
this is their number one priority, before the end of the Obama
administration, to get this rule out. And what they're doing is
they're rewriting the fiduciary rules to solve a problem that
they think exists, but it, in my opinion, does not yet really
exist.
They're going to rewrite the whole thing so that it can
really expand who is a fiduciary. And in that context, where it
relates to small businesses, it becomes kind of scary for a
small business owner because they're stepping into an area that
they don't know anything about, they normally don't deal with,
when it comes to 401(k) plans for small businesses. When those
regulations go up, they become more intense. And a lot of the
people that are currently in a fiduciary role, because it's
going to expand that group, a lot of those folks aren't going
to want to deal with a lot of smaller companies. It's just not
worth their time or energy because the risk is going to go up
so much.
The Department of Labor is trying to make it, in their
opinion, so that people who give advice to small businesses are
going to be held accountable if they give bad advice. Really, I
think, personally, from what we've seen in the PEO industry,
it's scaring small businesses and scaring the people that
advise them, to the point where we're looking at probably 30,
35 percent reduction in service offerings to those small
industries, which means, once again, the government is going to
actually go the other direction than what they're intending on
doing.
Rather than making this a safer place and making sure more
people can participate, fewer employees are going to have the
opportunity to participate in a 401(k) plan, save money for
retirement, because folks who just, depending on what the
bankers do, say, oh, it's just not worth our effort, there's
too much risk now, we're just going to walk away from it. So
the smaller businesses with three, four, five, ten folks,
they're not going to be able to offer 401(k) plans.
Senator Gardner. Thank you, Mr. Hays.
We talked in the first half with this panel about
regulations. I want to ask all four of you a question. We've
talked about the problem with the number of regulations. I
don't think anybody here is saying, let's do away with
regulations. We're not saying do away with regulations. We're
saying, have smaller, better, more effective, more efficient
regulations.
Is that correct, Mr. Childears?
Mr. Childears. Oh, I agree. Even I would say that about the
Dodd-Frank Act. There are good elements of it, there are some
that we're neutral on, but there are an awful lot that we think
are fair game.
Senator Gardner. Mr. Hays.
Mr. Hays. Absolutely. Most regulations that have come out,
we agree some of them are necessary. It's just that there are
so many redundant ones, so many that are so expensive and very
difficult and time-consuming for a small business to comply
with. It's not that we're saying get rid of all regulations, we
have kind of a wild west attitude, but let's be smart about the
regulations we pass. And let's get some input from those
businesses on, is this really necessary, and how much is this
going to cost you.
Senator Gardner. Mr. Gagliardi.
Mr. Gagliardi. Thank you, Senator. Regulation is necessary;
however, it must be balanced. And currently, as we sit here
today, there's over 3,400 pending regulations in the pipeline
in Washington, D.C. And business cannot survive with that type
of environment.
Senator Gardner. Mr. O'Donnell.
Mr. O'Donnell. I concur with my colleagues.
[Unintelligible] report that the [unintelligible] opposition of
rules serves no purpose other than sub-creation of rules.
Representative Buck. Thank you, Senator.
I guess this is really a supplement to the last question,
but I want to ask the question. I'll start with Mr. Childears.
Would America be better off if we repeal the verification with
the Consumer Financial Protection Bureau? And I ask that
because this is an agency that was set up as its own, in
effect, taxing authority, was able to create a budget without
congressional oversight. The appointments are not approved by
the United States Senate. It concerns me greatly that we have
an agency that could easily go broke. Some think that it has
gone broke, but it certainly could in the future.
I'm just wondering, I'd like to ask each of you, would
America be better off if we did not have a Consumer Financial
Protection Bureau?
Mr. Childears. I think the simple answer is yes. Our
consumer protection was appropriately carried out by the bank
regulatory agencies beforehand. It's not that they were shy
about imposing consumer protection restrictions on the banking
industry. They did that and did that well. But you hit the nail
on the head. You have an agency now that does not need to come
before Congress for appropriations. And it has a single
individual that determines every decision that comes out.
There's no board or council that weighs the merits of these
issues. You literally have one individual making all
determinations.
Representative Buck. Mr. Hays.
Mr. Hays. Any agency that does not have some sort of
oversight, somebody that--some kind of a trigger to keep them
in line, we'd be much better off without that.
Representative Buck. Mr. Gagliardi.
Mr. Gagliardi. There was sufficient regulation prior to it.
It was not needed.
Representative Buck. Mr. O'Donnell.
Mr. O'Donnell. I concur. It creates uncertainty. And again,
constant regulation on regulation, it's not appropriate.
Senator Gardner. And to Mr. Gagliardi, just talking about--
wrapping into the conversations we've heard from various people
in the financial institutions, the businesses, the
organizations that you represent, what do you hear from small
businesses when they're trying to get a loan, they're trying to
get capital they need to invest to grow their earnings? These
numbers that we're seeing, 15,000, 6,000, is that having an
effect on them? If so, what do you see the future of that
problem being?
Mr. Gagliardi. Thank you, Senator. What we find is--we
conduct a monthly--you heard me mention the Small Business
Economic Trends. That report is produced monthly, and it has
been produced monthly for over 35 years by the NFIB. We go out
to our membership, and this is one of the questions--the
availability of credit is one of the questions that we ask. And
I just happen to have the numbers out of the latest one.
Real briefly, 33 percent of the respondents say that their
credit needs are met; 53 percent said they do not want a loan,
they're not borrowing money. When we have customers coming
through the door, then the small business owner or the
independent business owner will be willing to take on the risk
of a loan. But until that time, borrowing still is at a low
rate. And then only 3 percent say that financing is a major
concern to them.
So, again, there are certain segments in the small business
community that still need access to capital. We see those as
high-tech industries that are having difficulty, through
traditional lending, getting that funding.
Representative Buck. Before Senator Gardner left the
people's house and went to the House of Lords, he was noted for
the REINS Act, which is the Regulations from the Executive In
Need of Scrutiny. And it requires Congress to address all
regulations that have more than a hundred-million-dollar impact
on America.
I'm just wondering, it has now passed again by this
Congress, the 2014 Congress, and sent over to the Senate. I'm
wondering whether you would be in favor of that act or opposed
to it.
Mr. Childears. I'd be in favor, but I don't know why you
put the threshold so high.
Mr. Hays. I agree.
Mr. Gagliardi. Absolutely. In fact, there was a 2011 paper
done by Susan Dudley, who was a former administrator of the
Office of Information and Regulatory Affairs, stressing the
importance.
Mr. O'Donnell. I'm definitely in favor of it, yes.
Senator Gardner. Mr. Childears, a question for you. This is
a comment that I had from somebody who was in a financial
institution here in Colorado. I want to clarify, this is a
story that he told me about rules that I'm not familiar with,
in terms of how they affect the day-to-day operations of this
particular bank.
But he talked about having some auditors or people who were
reviewing the books of the bank. And it dealt with the student
loans that the bank institution was offering. They offered
student loans to the community. But a lot of the students
couldn't qualify for the student loan on their own, so they
went out and they sought cosigners, trying to get cosigners for
the student loans.
So they had two different auditors in the bank around the
same time. One auditor came to them and took a look at the
student loans and felt that the bank was committing a violation
of going out and getting cosigners. I don't know if the word is
steering, but they felt that they were violating this in
getting too many people to cosign these student loans. The
second auditor that came in had said they weren't issuing
enough student loans, so there must be a problem.
Is that something that you're familiar with? Have you heard
of it?
Mr. Childears. I don't know the technicalities behind that,
but I hear anecdotes like that frequently. In fact, in the fair
lending area, which is frequently the source of stories like
that, we've got a great concern about a concept called
disparate impact, where regulators and the Department of
Justice basically look at the result of their lending and, if
they find a difference in treatment between various groups--and
they don't have to be protected classes, but just different
groups--then they can say that you basically have committed
discrimination, even though you had no intent to do so. It was
just by the nature of the way you extended credit to
individuals. And that causes us a lot of problems and worry,
and many of the anecdotes fall in that area.
Representative Buck. Mr. Gagliardi, one question. I'm
wondering what the effect, in the Affordable Care Act, of
setting, defining the workweek at 30 hours was.
Mr. Gagliardi. Thank you, Representative Buck, Congressman
Buck. That will result in loss of hours, slowness in hiring.
Hiring will basically come to an end. NFIB has been very active
in Congress, getting legislation to address that, restoring it
to a 40-hour workweek. It, again, leads to the uncertainty.
When we have uncertainty on Main Street, economic progress and
growth comes to a stop.
Representative Buck. How about setting the limit at 50
employees, avoid the employees who fall under the Affordable
Care Act, what is the effect of that?
Mr. Gagliardi. It still creates--Congressman Buck, it still
creates a great deal of uncertainty, because we know the way--
and present company excepted--we know the way Congress works,
that any time somebody gets a whim, that 50-employee threshold
now becomes 10. We've seen that in Colorado the last three
legislative sessions, that all of a sudden, regulation defining
or providing for, for instance, 15 or more employees is now
down to one, which, in some cases, put targets on the backs of
small business owners.
Representative Buck. I'll tell you, Mr. Gagliardi, you're
the first person I've had a conversation with who used the
words ``Congress'' and ``works'' in the same sentence.
Senator Gardner. Thank you.
Reflecting on my service in the minority state legislature,
this is the time of the hearing where my bills were defeated.
So I just want to thank you, Congressman.
I want to thank this panel for your testimony and time
today. Thanks to all of you for participating in this
afternoon's committee hearing.
Thanks to Congressman Coffman and Congressman Buck for
participating in this day.
With that, I will adjourn this Senate hearing of the Small
Business Committee.
[Whereupon, at 3:28 p.m., the hearing was adjourned.]
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