[Senate Hearing 114-634]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 114-634

                          AND SMALL BUSINESSES


                             FIELD HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE


                             FIRST SESSION


                             APRIL 9, 2015


    Printed for the Committee on Small Business and Entrepreneurship


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                   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
                  Zak Baig, Republican Staff Director
                 Ann Jacobs, Democratic Staff Director
                            C O N T E N T S


                           Opening Statements


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

                                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

                          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.


    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.


    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 
    I thank the panel and Senator Gardner.
    Senator Gardner. Thank you, Congressman Buck.
    Congressman Coffman.

                         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.


    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 
    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 
    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 
    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:]
    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 


    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:]
    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.


    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 
    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:]

    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 


    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:]
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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 


    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 
    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 
    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:]

    Senator Gardner. Thank you, Mr. O'Donnell, for your 
    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.

                      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 
    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 
    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:]
    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.

                           DENVER, CO

    Mr. Hays. Thank you, Senator. I appreciate your inviting 
    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 
    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 
    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:]
    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 
    Mr. Childears, thank you very much for your time and 
testimony today.

                           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 
    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 
    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 
    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:]
    Senator Gardner. Thank you, Mr. Childears.
    And thanks to all the witnesses on the panel for your time 
    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 
    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 
    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 
    Representative Buck. Mr. Hays.
    Mr. Hays. I would agree. It creates a lot--it is also 
creating an enormous amount of uncertainty for small 
    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 
    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 
    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 
    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 
    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 
    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.]