[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
THE IMPACT OF FINANCIAL REGULATORY
RESTRUCTURING ON SMALL BUSINESSES
AND COMMUNITY LENDERS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 23, 2009
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 111-046
Available via the GPO Website: http://www.access.gpo.gov/congress/house
----------
U.S. GOVERNMENT PRINTING OFFICE
52-261 PDF WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP,
Washington, DC 20402-0001
HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
DENNIS MOORE, Kansas
HEATH SHULER, North Carolina
KATHY DAHLKEMPER, Pennsylvania
KURT SCHRADER, Oregon
ANN KIRKPATRICK, Arizona
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
DAN LIPINSKI, Illinois
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
BRAD ELLSWORTH, Indiana
JOE SESTAK, Pennsylvania
BOBBY BRIGHT, Alabama
PARKER GRIFFITH, Alabama
DEBORAH HALVORSON, Illinois
SAM GRAVES, Missouri, Ranking Member
ROSCOE G. BARTLETT, Maryland
W. TODD AKIN, Missouri
STEVE KING, Iowa
LYNN A. WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
BLAINE LUETKEMEYER, Missouri
AARON SCHOCK, Illinois
GLENN THOMPSON, Pennsylvania
MIKE COFFMAN, Colorado
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Karen Haas, Minority Staff Director
.........................................................
(ii)
STANDING SUBCOMMITTEES
______
Subcommittee on Contracting and Technology
GLENN NYE, Virginia, Chairman
YVETTE CLARKE, New York AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon W. TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama
______
Subcommittee on Finance and Tax
KURT SCHRADER, Oregon, Chairman
DENNIS MOORE, Kansas VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona STEVE KING, Iowa
MELISSA BEAN, Illinois W. TODD AKIN, Missouri
JOE SESTAK, Pennsylvania BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, Pennsylvania, Chairman
HEATH SHULER, North Carolina MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama
(iii)
Subcommittee on Regulations and Healthcare
KATHY DAHLKEMPER, Pennsylvania, Chairwoman
DAN LIPINSKI, Illinois LYNN WESTMORELAND, Georgia,
PARKER GRIFFITH, Alabama Ranking
MELISSA BEAN, Illinois STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama MIKE COFFMAN, Colorado
______
Subcommittee on Rural Development, Entrepreneurship and Trade
HEATH SHULER, North Carolina, Chairman
MICHAEL MICHAUD, Maine BLAINE LUETKEMEYER, Missouri,
BOBBY BRIGHT, Alabama Ranking
KATHY DAHLKEMPER, Pennsylvania STEVE KING, Iowa
ANN KIRKPATRICK, Arizona AARON SCHOCK, Illinois
YVETTE CLARKE, New York GLENN THOMPSON, Pennsylvania
(iv)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Graves, Hon. Sam................................................. 2
WITNESSES
Harris, Mr. Robert R., Managing Director, Harris, Cotherman,
Jones, Price & Associates, Vero Beach, Florida and Vice Chair,
American Institute Of Certified Public Accountants............. 3
Loy, Mr. Trevor General Partner, Flywheel Ventures, Santa Fe, New
Mexico. On behalf of The National Venture Capital Association.. 5
Hirschmann, Mr. David T., President And CEO, Center For Capital
Markets Competitiveness, U.S. Chamber Of Commerce.............. 7
Anderson, CRMS, Mr. Mike, Essential Mortgage Company, Baton
Rouge, Louisiana. On behalf of The National Association Of
Mortgage Brokers............................................... 9
Robinson, Mr. J. Douglas, Chairman and CEO, Utica National
Insurance Group, New Hartford, New York. On behalf of Property
Casualty Insurers Association of America....................... 10
Macphee, MR. James D., CEO, Kalamazoo County State Bank,
Schoolcraft, Michigan. On behalf of Independent Community
Bankers Of America............................................. 25
Roberts. Mr. Austin, CEO, Bank of Lancaster, Kilmarnock,
Virginia. On behalf of The American Bankers Association........ 26
Hampel, Mr. Bill, Senior Vice President, Research and Policy
Analysis & Chief Economist, Credit Union National Association.. 28
Moloney, Mr. John, President & CEO, Moloney Securities Co., Inc.,
Manchester, Missouri. On behalf of The Securities Industry and
Financial Markets Association.................................. 30
Donovan, Ms. Dawn, CEO, Price Chopper Employees FCU, Schenectady,
New York. On behalf of The National Association of Federal
Credit Unions.................................................. 32
(v)
?
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 41
Graves, Hon. Sam................................................. 43
Harris, Mr. Robert R., Managing Director, Harris, Cotherman,
Jones, Price & Associates, Vero Beach, Florida and Vice Chair,
American Institute Of Certified Public Accountants............. 45
Loy, Mr. Trevor General Partner, Flywheel Ventures, Santa Fe, New
Mexico. On behalf of The National Venture Capital Association.. 54
Hirschmann, Mr. David T., President And CEO, Center For Capital
Markets Competitiveness, U.S. Chamber Of Commerce.............. 70
Anderson, CRMS, Mr. Mike, Essential Mortgage Company, Baton
Rouge, Louisiana. On behalf of The National Association Of
Mortgage Brokers............................................... 79
Robinson, Mr. J. Douglas, Chairman and CEO, Utica National
Insurance Group, New Hartford, New York. On behalf of Property
Casualty Insurers Association of America....................... 92
Macphee, MR. James D., CEO, Kalamazoo County State Bank,
Schoolcraft, Michigan. On behalf of Independent Community
Bankers Of America............................................. 100
Roberts. Mr. Austin, CEO, Bank of Lancaster, Kilmarnock,
Virginia. On behalf of The American Bankers Association........ 114
Hampel, Mr. Bill, Senior Vice President, Research and Policy
Analysis & Chief Economist, Credit Union National Association.. 135
Donovan, Ms. Dawn, CEO, Price Chopper Employees FCU, Schenectady,
New York. On behalf of The National Association of Federal
Credit Unions.................................................. 144
Moloney, Mr. John, President & CEO, Moloney Securities Co., Inc.,
Manchester, Missouri. On behalf of The Securities Industry and
Financial Markets Association.................................. 158
Statements for the Record:
The Impact of the Consumer Financial Protection Agency on Small
Business....................................................... 173
National Association of Small Business Investment Companies...... 201
(vi)
FULL COMMITTEE HEARING ON
THE IMPACT OF FINANCIAL REGULATORY
RESTRUCTURING ON SMALL BUSINESSES
AND COMMUNITY LENDERS
----------
Wednesday, September 23, 2009
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
[Chair of the Committee] Presiding.
Present: Representatives Velazquez, Moore, Dahlkemper,
Schrader, Clarke, Ellsworth, Bright, Halvorson, Graves,
Westmoreland, Luetkemeyer, and Coffman.
Chairwoman Velazquez. I call this hearing to order.
One year ago this month, we saw the largest bankruptcy in
United States' history when Lehman Brothers filed for Chapter
11. The following weeks were a whirlwind of activity. The FDIC
seized Washington Mutual, selling the company's banking assets
to JPMorgan Chase. Wachovia was acquired by Wells Fargo and
Merrill Lynch, by Bank of America. Attempting to provide relief
to our teetering financial system, Congress passed and
President Bush signed into law the $700 billion TARP
legislation.
Since then, it has become evident that the problems leading
up to this crisis did not accumulate overnight. In fact, flaws
in our risk management systems, both governmental regulations
and private mechanisms, had been growing for decades.
In coming weeks, Congress and the administration will
examine options for strengthening our regulatory structure.
This is long overdue; the gaps in the system have grown too
large to be ignored. We cannot count on current regulations to
prevent another crisis.
While considered by many an issue for the financial
services industry, how we address those gaps will be critical
for all small businesses. It is imperative that as we look at
alternatives for updating our financial regulations, we
carefully consider how these changes might affect
entrepreneurs.
Small businesses rely on the healthy functioning of our
financial systems in order to access capital. New rules
governing how financial institutions extend credit will
directly affect entrepreneurs seeking loans at affordable
rates. The biggest challenge facing small firms right now is
access to affordable capital. We must be careful that
regulatory changes do not exacerbate the current capital
shortage and undercut our recovery as it begins to take hold.
Likewise, financial regulatory reform could unintentionally
touch sectors of the small business community that we do not
think of as financial institutions. Businesses that allow
customers to pay for goods and services after delivery are
essentially extending credit. Congress and the administration
must be careful not to define the term "credit" too broadly.
Otherwise, businesses like home builders, physicians, and
others may face new rules that were not meant for them.
Small businesses come in all shapes and sizes and there are
many in the financial sector. Community banks and credit unions
could see their business models profoundly affected by many of
the proposed changes. Small firms in the financial sector often
face higher compliance costs than their larger competitors.
Several proposals would result in small lenders answering to a
new regulatory entity.
I expect some of our witnesses today will testify that
small lenders bear less responsibility for the recent turmoil
and, therefore, should not carry the brunt of new regulations.
This argument seems to at least carry some credibility. The
committee should consider it carefully as we proceed.
As both lenders and borrowers, small businesses have much
at stake when it comes to regulatory reform. The financial
crisis of last year and the recession it triggered have hit
small firms hard. As much as anyone, entrepreneurs want these
problems fixed so that financial markets can again play their
vital role in promoting commerce.
Numerous strategies have been floated for restoring
transparency and stability to our financial systems. Depending
on how they are crafted, these proposals could touch every
sector of the American economy. For these reasons, we have
invited representatives from a range of industries to testify.
It is my hope that their testimony will add important
perspectives to our discussion.
On that note I would like to take the opportunity to thank
all the witnesses for taking time out of your busy schedule to
be with us here today.
And I yield to the ranking member, Mr. Graves, for an
opening statement.
[The statement of Chairwoman Velazquez is included in the
appendix.]
Mr. Graves. Thank you, Madam Chair, and I would like to
thank you for holding this important hearing on the debate that
is going to occur about restructuring the regulatory oversight
of America's financial sector. Given the fact that the
financial services sector contributed more than a third of
corporate profits in this country during the last decade, it is
a significant debate.
No one can question that the events affecting Wall Street
last year had consequences on the overall American economy.
Once credit becomes unavailable, the modern economy comes to a
grinding halt. Consumers and businesses do not buy,
manufacturers do not sell, and unemployment skyrockets.
Any reform to the financial regulatory process must meet
two key objectives. First, it must provide for an efficient
operation of the financial markets; and second, small
businesses, the prime generator of new jobs in the economy,
must have access to capital.
Competitive markets need full information to operate
properly. To the extent that regulatory reform improves the
information available to all parties that use the financial
markets, it will be beneficial. That benefit must be weighed
against the cost of providing information.
Much of the focus on financial regulatory reform proposals
address either protecting consumers or preventing one or a
group of institutions from creating systemic risk leading to
the collapse of capital and the credit markets. However, little
has been said on the impact that such regulatory oversight
might have on the access to capital for small businesses. If
the regulatory reform inhibits the ability of small businesses
to obtain credit or access needed capital, the regulation will
have an adverse long-term consequence on the ability of the
economy to grow.
A famous philosopher once said that "Those who cannot
remember the past are condemned to repeat it." Whatever the
outcome of the debate on restructuring the regulation of the
financial sector, we cannot repeat the mistakes of the past.
Given the fact that financial panics have periodically occurred
in this country going back to 1837, achieving a regulatory
restructuring that ensures Congress does not repeat the
mistakes of the past will be one of our most difficult tasks.
I again would like to thank the Chairwoman for holding this
important hearing, and I yield back.
[The statement of Mr. Graves is included in the appendix.]
Chairwoman Velazquez. Now I welcome Mr. Robert Harris, the
Managing Director of Harris, Cotherman, Jones, Price &
Associates in Vero Beach, Florida. He is also the Vice Chair
for the American Institute of Certified Public Accountants, the
national professional association of certified public
accountants. The AICPA has more than 330,000 members.
Welcome, sir. And you have 5 minutes to make your
statement.
STATEMENT OF ROBERT R. HARRIS
Mr. Harris. Chairwoman Velazquez, Ranking Member Graves,
members of the committee. My name is Robert R. Harris and I am
Vice Chairman with the American Institute of Certified Public
Accountants. I am a CPA and a partner in the CPA firm of
Harris, Cotherman, Jones, Price & Associates. We are located in
Vero Beach, Florida, and are a small firm with 11 CPAs. My
firm's clients are primarily small businesses and individuals.
We do financial planning and tax service for most of these
clients.
I am here today representing the American Institute of
CPAs. AICPA is the national professional association of CPAs
with more than 360,000 CPA members in business, industry,
public practice, government, education, student affiliates, and
international associates.
As a result of the economic crisis precipitated by the
subprime lending, the administration and Congress felt that
financial regulatory restructuring was necessary. The
administration called for a new regulatory scheme that
encompasses strong vibrant financial markets operating under
transparent fairly administered rules that protect America's
consumers and our economy from the devastating breakdown that
we have witnessed in recent years.
The administration also said that to accomplish this goal
it would be necessary to seek a careful balance that will allow
our markets to promote innovation while discouraging abuse. To
this end, Congress is looking at a number of financial
activities with an eye towards how to appropriately and
adequately regulate those activities.
The AICPA supports the goal of enhanced consumer
protection, but we believe that it is critical to consider the
plan's effect on small business to ensure that it does not
stifle the innovation, creativity and inventiveness of the
American entrepreneur that has driven our economic engine.
In this context, I would like to discuss The Consumer
Financial Protection Act of 2009, H.R. 3126, which would create
the Consumer Financial Protection Agency, or CFPA, and its
effect on small business from the point of view of a CPA.
The stated aim of the consumer protection bill is to
protect consumers by consolidating financial consumer
protection in one agency. This would be a safeguard against
consumers getting inappropriate loans that they could not
afford repay. But the bill is much broader than protecting
consumers when they borrow money.
The CFPA, as introduced, would cover most CPAs because its
scope of authority includes tax return preparation, tax advice,
financial planning, and pro bono financial literacy activities.
The accounting profession's pro bono financial literacy
programs, "360 Degrees of Financial Literacy" and
FeedthePig.org, which are designed to teach consumers and young
people how to make smart decisions would be covered by the
bill. Our own Lisa Baskfield, a CPA from Minnesota, was
recently awarded the civilian service medal for providing pro
bono financial access to more than 2,000 armed services
members. Her advice would have been covered under this bill.
Many of the members are affiliated with CPA firms that are
small businesses and will be adversely affected by the bill,
and many of their clients are small businesses, sole
proprietorships and partnerships. It is impossible to separate
the advice and tax service given to these small businesses from
the advice and tax services given to the owners. They both are
covered by the bill--thus, both would be covered by this bill.
Additionally, any person who provides a material service to
a covered person such as a financial institution is included in
the definition of a covered person. My practice of forensic
accounting would subject me to the CFPA when I do a financial
audit of a lender making consumer loans even though I do not
have direct dealings with the consumers and provide no services
to consumers.
As a CPA, I can tell you that CPAs are heavily and
effectively regulated by three sources. State boards of
accountancy, the Internal Revenue Service, and the AICPA. This
regulatory structure protects consumers first with the first
rule being, service the public interest. The bill consolidates
the enforcement of a number of Federal consumer protection laws
into one Federal agency; however, it adds another layer of
regulation to the accounting profession without consolidating
any of our regulation.
This regulation would be costly because the assessment that
would be levied by CFPA, and it will take significant time from
our ability to serve our clients because we would be subject to
periodic examinations by the agency. These are all costs that
will ultimately be borne by our clients, the very consumers
that this bill is supposed to protect. And it will do so
without any commensurate benefit.
CPAs are asking for an exemption only for the customary and
usual CPA services and volunteer or pro bono financial
education activities. We are not asking for an exemption when
CPAs are offering consumer financial products, such as a loan
or investment products.
In fact, areas of potential abuse, such as refund
anticipation loans, are covered by other provisions of the
bill. We are encouraged by recent press reports that Chairman
Frank is considering exempting professional services from the
reach of the bill.
We appreciate the opportunity to testify today on the
impact of the bill that will have effect on thousands of CPA
firms that are small businesses and their clients, many of whom
are also small business.
Chairwoman Velazquez. Thank you Mr. Harris.
[The statement of Mr. Harris is included in the appendix.]
Chairwoman Velazquez. Our next witness, Mr. Trevor Loy, is
a venture capital investor in Santa Fe, New Mexico. Mr. Loy is
testifying on behalf of the National Venture Capital
Association, which represents the U.S. venture capital industry
and is comprised of more than 450 member firms.
STATEMENT OF TREVOR LOY
Mr. Loy. Thank you, Chairman Velazquez, Ranking Member
Graves, and members of the committee. Thank you for the
opportunity to be part of this important discussion today.
I would like to begin by talking about risk and the
difference between entrepreneurial risk and systemic financial
risk.
Entrepreneurial risk involves making calculated and
informed bets on people and innovation and is critical to
building small businesses. Systemic financial risk involves a
series of complex financial interdependencies between parties
and counterparties operating in the public markets. The venture
industry and the small business community are heavily dependent
on embracing entrepreneurial risk, but we have virtually no
involvement in systemic risk. Let me explain why.
The venture capital industry is simple. We invest in
privately held small businesses created and run by
entrepreneurs. These entrepreneurs grow the business using
their own personal funds as well as the capital from ourselves
and our outside investors, known as LPs or limited partners. We
invest cash in these small businesses to purchase equity, i.e.,
stock, and we then work closely alongside the entrepreneurs on
a weekly basis for 5 to 10 years until the company is sold or
goes public. When the company has grown enough so that it can
be sold or taken public, the VC exits our investment in the
company and the proceeds are distributed back to our investors
in our funds.
When we are not successful, we lose the money we invested,
but that loss does not extend to anyone else beyond our
investors. Even when we lose money on investments, it does not
happen suddenly or unexpectedly. It takes us several years to
lose money and the investors in our funds all understand that
time frame and the risk when they sign up.
Debt, known as leverage, which contributed to the financial
meltdown, is not part of our equation. We work simply with cash
and with equity. We do not use debt to make investments or to
increase the capacity of the fund. Without debt or derivatives
or securitization or swaps or other complex financial
instruments, we don't expose any party to losses in excess of
their committed capital.
In our world, the total potential loss from a million
dollar investment is limited to a million dollars. There is no
multiplier effect because there are no side bets, unmonitored
securities, or derivatives traded, based on our transactions.
There are no counterparties tied to our investments.
Nor are venture firms interdependent with the world's
financial system. We do not trade in the public markets and our
investors cannot withdraw capital during the 10-year life of a
fund, nor can they publicly trade their partnership interest in
the fund.
The venture capital industry is also much smaller than most
people realize. In 2008, U.S. venture capital funds held
approximately $200 billion in aggregate assets and invested
just $28 billion into start-up companies. That is less than 0.2
percent of the U.S. gross domestic product. Yet, over 40 years,
this model has been a tremendous force in U.S. economic growth,
building industries like biotech, semiconductor and software.
Now we are increasingly helping to build renewable energy and
other green-tech sectors.
Companies that were started with venture capital since 1970
today account for 12.1 million jobs and $2.9 trillion in
revenues in the U.S. That is nearly 21 percent of the U.S. GDP,
but it grew from our investments of less than 0.2 percent of
GDP.
My main point, therefore, is that harming our industry will
prevent a major part of the future American economy from
growing out of businesses that are today's small businesses;
and that is the risk that you should be concerned about.
Now, we do recognize the legitimate need for transparency
and we simply ask that you customize the regulatory approach to
fit what we do. Today, VCs already provide information to the
SEC. That information, submitted on what is called Form D,
should already be sufficient to determine the lack of systemic
risk from venture capital firms. This filing process could
easily be enhanced to include information that would provide
greater comfort to our regulators. An enhanced Form D--let's
call it Form D-2, could answer questions on our use of
leverage, trading positions, and counterparty obligations,
allowing regulators to then exempt from additional regulatory
burdens firms like ours that don't engage in those activities
and, therefore, don't pose systemic risks.
In contrast, formally registering as investment advisers
under the current act, as the current proposals require, has
significant burdens without any additional benefits. And let me
be clear, registering as an advisor with the SEC is far from
simple, and it is not just filling out a form. The word
"registration" in that context might sound like registering
your vehicle, telling the motor vehicle department what kind of
car it is and who you are and where you live. It might conjure
up images of things like smog checks and our proposal for the
Form D-2 is equivalent to that.
But actually the word "registration" in the SEC context
comes with a lot of other requirements. To continue my analogy
with your car, it is equivalent to having to hire a full-time
driver, plus a compliance officer who rides in the front seat
to make sure that driver is operating the car correctly, plus a
mechanic who lives at your house to fix the car and works only
on your car, plus providing the government with information
about every place you drive.
Moving back to the actual world of SEC registration
involving examinations, complex programs overseen by a
mandatory compliance officer, it will demand significant
resources which promise to be costly from both a financial and
human resources perspective. My own firm believes it will be
one-third of our entire annual budget.
Your support has not gone unnoticed by us and we appreciate
it. We cannot afford another situation where the unintended
consequences of well-intentioned regulation harms small
businesses and the economic growth that we drive. We look
forward to working with the committee on that goal.
Chairwoman Velazquez. Thank you, Mr. Loy.
[The statement of Mr. Loy is included in the appendix.]
Chairwoman Velazquez. Our next witness is Mr. David
Hirschmann. He is the President and CEO of the Center for
Capital Markets Competitiveness in the U.S. Chamber of
Commerce. The U.S. Chamber of Commerce is the world's largest
business federation, representing 3 million businesses.
Welcome.
STATEMENT OF DAVID T. HIRSCHMANN
Mr. Hirschmann. Thank you, Chairwoman Velazquez, Ranking
Member Graves, members of the committee. I really think this is
a very timely hearing.
Today, what I would like to do is talk specifically about
an issue of great concern to many of our members, especially
our small business members, the proposed Consumer Financial
Protection Agency.
The U.S. Chamber supports the goal of enhancing consumer
protection. In fact, the Capital Markets Center that I run was
founded 3 years ago before the financial crisis to advocate for
comprehensive reform and modernization of our regulatory
structure, including strong consumer protection.
Consumers, including small businesses, need reforms that
will ensure clear disclosure, better information; they need
vigorous enforcement against predatory practices and other
consumer frauds, and we need to close the gaps in current
regulation. However, the proposed Consumer Protection Agency is
the wrong way to enhance protections. It will have significant
unintended consequences for consumers, small businesses, and
for the overall economy.
Today, the Chamber will release a study that examines the
impact of CFPA on small business access to credit. The study is
authored by Thomas Durkin, an economist who spent more than 20
years at the Federal Reserve Board. My remarks draw on the
findings of that study to make the following points. [The study
is included in the appendix]
Small businesses, including those that we traditionally
count on to be the first to add jobs in the early stages of an
economic recovery, need access to credit to survive, meet
expenses, and grow. Small businesses often have difficulty
obtaining commercial credit and, therefore, turn to consumer
credit and consumer financial products to supplement their
short-term capital needs. The CFPA will reduce the availability
and increase the costs of consumer credit. As users of consumer
credit products, small businesses will see the same result
despite being fundamentally different than the average
consumer.
The proposed CFPA will likely restrict, and in many cases
eliminate, small business access to credit and increase the
cost of credit they would be able to obtain. This CFPA "credit
squeeze" could result in business closures, fewer start-ups,
and slower growth, ultimately costing a significant number of
jobs that would be lost or simply not created.
Finally, the CFPA will only exacerbate the weaknesses of
our current regulatory system without enhancing consumer
protections.
In 2006, 800,000 businesses created new jobs in this
country; 642,000 of them had fewer than 20 employees. Small
businesses generally have trouble borrowing money. Either they
can't borrow or they cannot borrow as much as they need, and
almost certainly they cannot secure long-term financing
available to larger companies.
To supplement the reduced access to traditional loans,
small businesses rely extensively on consumer lending products,
and they use them as a source of credit very differently than
consumers. In other words, personal credit is the lifeline that
sustains small businesses, particularly start-ups.
Many of the products that small businesses rely on may be
considered to some as fringe products, but they are the very
products that small business owners use to meet their short-
term capital needs. As one example, auto title loans provide
small business owners immediate access to cash and no upfront
fees or prepayment penalties, and therefore can be useful
meeting short-term business expense.
However, the CFPA in its approach failed to recognize the
difference between small businesses and average consumers both
in terms of need and sophistication and their appetite for
risk. As proposed, the CFPA will likely reduce the availability
of these products and increase their costs. It will make it
harder for financial firms to meet the needs of small
businesses. The CFPA will create considerable new risks to
lenders in terms of regulatory fines and litigation risks from
extending credit to small businesses.
H.R. 3126 is the wrong approach. It simply adds a new
government agency on top of an already flawed regulatory
structure.
As one example, rather than streamline consumer protections
to eliminate gaps, regulatory arbitration, and create uniform
national standards for key issues like disclosure, the
legislation would foster a complex and confusing patchwork of
51-plus States regulation in addition to new Federal rules.
As we begin to see signs of economic recovery, we need to
be especially careful to fully understand the impact of a new
regulatory layer on small businesses, both as consumers and as
providers of financial products. We look forward to working
with the members of the committee on the modernization of our
regulatory structure and appreciate your holding this hearing
today.
Chairwoman Velazquez. Thank you, Mr. Hirschmann.
[The statement of Mr. Hirschmann is included in the
appendix.]
Chairwoman Velazquez. Our next witness is Mr. Mike
Anderson. He is the President of the Essential Mortgage Company
in Baton Rouge, Louisiana. Mr. Anderson is a 30-year veteran in
the mortgage industry. He is testifying on behalf of the
National Association of Mortgage Brokers, which represents the
interests of mortgage brokers and home buyers.
STATEMENT OF MIKE ANDERSON, CRMS
Mr. Anderson. Thank you. I have a little opening statement:
Small businesses in the financial service arena are under
tremendous risk and we need your help.
Good afternoon, Chairwoman Velazquez and Ranking Member
Graves and members of the committee. I am Mike Anderson. I am a
Certified Residential Mortgage Specialist and Vice Chairman of
the Government Affairs Committee of the National Association of
Mortgage Brokers. I am also a practicing mortgage broker in the
State of Louisiana, with over 30 years of experience. I would
like to thank you for the opportunity to testify today.
We applaud this committee's response to the current
problems in our financial markets. We share a resolute
commitment to a simpler, clearer, more uniform and valid
approach relative to financial products, most specifically with
regard to obtaining mortgages and to protecting consumers
throughout the process. NAMB has several areas of concern with
the CFPA.
It is impossible to have one large agency develop and
maintain comprehensive consumer protections. Consumer
protection needs to exist at the State level, closer to the
consumers. As proposed, the CFPA will favor big business. It
will choose winners and losers, and the losers will be the
small businesses and consumers.
Before I address our overall concerns, I must first
extinguish the false allegations targeted at mortgage brokers
for many years. First of all, brokers do not create loan
products. We do not underwrite the loan or approve the borrower
for the loan. We do not fund the loan. We provide consumers
with an array of choices and permit them to choose the loan
payments that fit their particular needs and to provide an on-
time closing.
We are regulated. State-regulated mortgage brokers and
lenders comply with State and Federal consumer protection laws,
including State predatory lending laws. Federally chartered
banks are preempted from these predatory lending laws.
And lastly, we did not receive any TARP funds.
The typical mortgage broker of today exists as an
origination channel for consumers who wish to purchase or
refinance their home. Mortgage brokers typically employ
anywhere from 2 to 50 people, and they serve communities big
and small, urban and rural in all 50 States, truly classifying
them as a valuable small business entity.
In order for the CFPA to be effective, it must act
prudently when promulgating and enforcing rules to ensure that
real protections are afforded to consumers and not merely
provide the illusion of protection that comes from incomplete
or unequal regulation of similar products services or
providers, whereas financial reform is to provide transparency,
clarity, simplicity, accountability, and access in the market
for consumer financial products and to ensure the markets
operate fairly and efficiently.
It is imperative that the creation of new disclosures or
the revision of the antiquated disclosures be achieved through
an effective and even-handed approach and consumer testing. It
is not the who, but the what that must be addressed to ensure
true consumer protection and success with this initiative.
There should be no exemptions from consumer protections
whether the CFPA is created or not. The Federal Government
should not--and I repeat, should not--pick winners and losers,
which is where we believe the Federal reform is heading.
We are very supportive of the concepts of the proposed
single, integrated model disclosure for mortgage transactions
that combine those currently under TILA and RESPA. Consumers
will greatly benefit from a uniform disclosure that clearly and
simply explains critical loan terms and costs.
Therefore, NAMB strongly encourages this committee to
consider imposing a moratorium on the implementation of any new
regulations or disclosures issued by HUD and the Federal
Reserve Board for at least a year until financial modernization
has become law. This will help to avoid consumer confusion and
minimize the increased cost and the unnecessary burden borne by
industry participants to manage and administer multiple
significant changes to the mandatory disclosures over a short
period of time.
NAMB strongly supports the concept of mandating a
comprehensive review of the new and existing regulations,
including the Home Value Code of Conduct, the HVCC. Too often
in the wake of our current official crisis we have seen new
rules promulgated that do not effect measured balance and
effective solutions to the problems facing our markets and
consumers--
Chairwoman Velazquez. Mr. Anderson, time has expired. You
will have an opportunity during the question-and-answer period.
Mr. Anderson. Thank you.
[The statement of Mr. Anderson is included in the
appendix.]
Chairwoman Velazquez. Our next witness is Mr. J. Douglas
Robinson. He is the Chairman and CEO of Utica National
Insurance Group in New Hartford, New York. Utica National is
among the top 100 property casualty insurance organizations in
the country. He is testifying on behalf of the Property
Casualty Insurers of American, which has over 1,000 members.
STATEMENT OF J. DOUGLAS ROBINSON
Mr. Robinson. Chairwoman Velazquez, Ranking Member Graves,
and members of the committee, thank you for the opportunity to
testify.
I am J. Douglas Robinson, Chairman and Chief Executive
Officer of the Utica National Insurance Group, a group led by
two mutual insurers headquartered near Utica, New York. Utica
National provides coverages primarily for individual and
commercial risks with an emphasis on specialized markets,
including public and private schools, religious institutions,
small contractors, and printers.
My company markets its products through approximately 1,200
independent agents and brokers. Our 2008 direct written
premiums were more than $632 million. I am testifying today on
behalf of the Property Casualty Insurers Association of
America, which represents more than 1,000 U.S. insurers.
We commend President Obama and Congress for working to
ensure that the financial crisis we experienced last fall is
never repeated. Achieving this goal requires a focus on fixing
what went wrong with Wall Street without imposing substantial
new one-size-fits-all regulatory burdens on Main Street, small
businesses, and activities that are not highly leveraged nor
systemically risky.
My company insures small businesses like bakeries, child
care centers, auto service centers, and funeral homes. These
Main Street businesses should not bear the burden of an
economic crisis they did not create. Home, auto, and commercial
insurers did not cause the financial crisis, are not
systemically risky and have strong and effective solvency and
consumer protection regulation at the State level. We are
predominantly a Main Street, not a Wall Street, industry with
less concentration and more small business competition than
other sectors.
Property casualty insurers have not asked for government
handouts. Our industry is stable and continues to provide
critical services to local economies and communities.
However, small insurers are concerned about being subject
to administration proposals intended to address risky Wall
Street banks and securities firms, but that apply broadly to
the entire financial industry.
Specifically, we are concerned about the following:
The proposed Consumer Financial Protection Agency does not
adequately exclude insurance from its scope. An exclusion
should be added for credit, title, and mortgage insurance,
which are generally provided by and to relatively small
businesses. Protection should be added for insurance payment
plans which are already well regulated by State insurance
departments.
The proposed new Office of National Insurance is given too
much subpoena and preemption power without adequate due process
or limits on its scope and its ability to enter into
international insurance agreements. It also needs a definition
of "small insurer" to prevent excessive reporting requirements.
Systemic risk regulation needs to be modified to reduce
government backing of large firms at the competitive expense of
small financial providers. Leveraged Wall Street behemoths must
not be made bigger through government bailouts and
consolidation. Government shouldn't forget or harm Main Street
in addressing systemic risk regulation.
Resolution costs of systemically risky firms should be paid
for by firms with the greatest systemic risk. Bank regulators
should not be allowed to resolve systemic risk failures by
reaching into the assets of small insurance affiliates whose
losses would then be charged to other innocent small
competitors through State guaranty funds.
Finally, congressionally proposed repeal of the McCarran-
Ferguson Act would significantly reduce insurance competition,
primarily harming smaller insurers that would not otherwise
have access to loss data and uniform policy forms necessary to
compete effectively, and that would ultimately harm consumers.
The cost of new regulations almost always
disproportionately affects small business who can least afford
the necessary legal and compliance requirements. The property
casualty industry is healthy and competitive and the current
system of regulating the industry at the State level is working
well. Should the Congress fail to address the issues we have
identified, the consequences on consumers and the economy could
be quite harsh, imposing an especially large burden on small
insurers and small businesses.
Thank you.
Chairwoman Velazquez. Thank you, Mr. Robinson.
[The statement of Mr. Robinson is included in the
appendix.]
Chairwoman Velazquez. And we have four votes right now, so
the committee will stand in recess for approximately 30 minutes
and will reconvene right after.
[Recess.]
Chairwoman Velazquez. The committee is called to order.
I want to address my first question to Mr. Hirschmann, Mr.
Harris, and Mr. Anderson.
In determining the impact of a new consumer protection
authority, structure and details are key. For example, the
manner in which the term "credit provider" is defined will be
especially critical.
So how can Congress define these terms in a way that
minimizes the impact for small businesses?
Mr. Hirschmann?
Mr. Hirschmann. I think you are exactly right. Both the
scope of the bill, as originally drafted--and we recognize that
Chairman Frank has indicated that he is working on that issue--
as well as the terms. Many of the key terms were so ill defined
and the powers that were granted to the proposed agency are so
significant that it really leaves that up to the new regulator
to decide; and we can't afford to do that.
So I don't have an answer for you on how to specifically
define credit, but clearly you need to target it to the
specific firms that are providing direct credit and not
indirectly to those who are providing material support or
indirectly the way the original bill contemplated.
Chairwoman Velazquez. Mr. Harris.
Mr. Harris. I would concur with that.
We were providing a service or even those who are providing
a trade or business that is not just purely loaning of money is
where we would get into it. I mean, I cannot think of one
client I have--virtually, other than a restaurant--that would
not be one who does not provide credit of some sort. A doctor's
office--and doctors' offices even for people who are on
Medicare, you have copays; and the copays are billed to those
people after they have seen the doctor. So then the doctors
have substantial accounts receivable.
Are they credit providers? I don't think that was ever the
intent.
Chairwoman Velazquez. Mr. Anderson?
Mr. Anderson. I guess we really have to define who is the
creditor on behalf of the mortgage brokers. I mean, we are
truly not the creditor, and yet we do perform a function,
taking loan applications from applicants and explaining loan
terms and giving them disclosures.
So until we define who really is the creditor, that is all
I can answer on that.
Chairwoman Velazquez. Mr. Hirschmann, Mr. Harris, the
financial crisis wreaked havoc on consumers. We all know that.
And to that end, several Members of the House, including
Representative Minnick, are proposing an alternative consumer
protection council, one that will coordinate regulatory actions
across several State jurisdictions.
What is your take on this idea?
Mr. Hirschmann. We have not yet seen the details, but we do
think that consumer protection should be an important part of
the overall regulatory reform; and so we welcome alternatives,
particularly alternatives that build on the current structure
that requires better coordination among existing regulators,
that provide for better disclosure to consumers and tougher
enforcement against predatory practices.
Mr. Harris. I think AICPA would concur with that. We are
talking about in our area--of course, we believe that products
should be in and certain services should be out.
Chairwoman Velazquez. Mr. Loy, in your testimony you touch
on the distinction between hedge funds and venture capitalists.
Given the role that hedge funds play in this debate, can you
elaborate on that distinction and talk about differences about
how VCs and hedge funds should be regulated?
Mr. Loy. Thank you. So I think I would begin by saying it
is easier to define it by what is similar. There is really only
one similarity between a hedge fund and a venture capital fund,
and that is the legal structure that we use. We typically are
organized as limited partnerships and they are typically
organized as limited partnerships and the investors become the
limited partners.
Beyond that, hedge funds are associated with trading in the
public markets. They typically--in addition to the capital that
investors put into the hedge fund, they borrow, in other words,
they use leverage, several multiples of that capital that the
investors have put in, to make a broader set of investments.
They often invest for fairly short periods of time, and I
know that can range based on their strategy. But it can be as
short as a few hours, typically in the days or weeks; some
hedge funds may be for a few months. And so they are also
bringing the capital in up front from the investors and the
investors have the ability typically to pull their money in and
out.
And then, lastly, a lot of hedge funds particularly trade
in these off-balance-sheet securities, derivatives.
Beyond that, I would be clear to say that I not an expert
on hedge funds, so I am not going to comment on how they should
be or should not be regulated.
But what I will comment on is for venture capitalists. We
use the same legal structure, but the similarities end there.
Our investors put money in as limited partners, but do not have
the ability to take money out for 10 years. We do not use
leverage at all, so the money that investors put in our fund in
cash is the money that we have available.
On top of that we invest only in stock, not in credit. We
expect each investment we make to hold that investment for 5 to
10 years. And the last difference is that we work very closely
operationally with the businesses, the small businesses, to
help them grow. Hedge funds, I think, more typically have a
distance between them in that regard.
So all I can say is that the current advisor act in the
contemplated regulations for hedge funds are clearly designed
for hedge funds and, for example, require a compliance officer
in a firm to report periodically on the public market trading
positions of that hedge fund.
If we were to be--right now we are encompassed in the same
regulation--we would similarly be required to hire a chief
compliance officer to tell the SEC about our public market
trading positions, even though our fund agreements do not even
allow us to trade in the public market. So this very expensive
person would sit there and fill out a form that said zero or N/
A every month.
Chairwoman Velazquez. But in the sense that hedge funds
borrow big money and try to exploit inefficiencies in the
market, wouldn't you say that there is an element of risk that
we don't see in venture capitalists?
Mr. Loy. Again, I would rather comment on the venture
capital piece.
Chairwoman Velazquez. Can we touch on the private equity
firms?
Mr. Loy. Sure.
Chairwoman Velazquez. They are another unique financial
entity. Do you have any position as to how they should be
regulated?
Mr. Loy. I don't. I think that that is up to the expertise
of the people on this and other committees.
I do think that there are substantial differences in the
types of investing and the types of leverage that they use.
Again, they use the same legal structure as us, but there are
significant differences beyond that.
Chairwoman Velazquez. Thanks.
Mr. Harris, in your testimony, you said that CPAs should
be--should not be exempt from activities that are not customary
and usual. And the vagueness of the phrase "not customary and
usual" could create the exact kind of problems that you are
seeking to avoid.
How do you recommend that legislators implement this
distinction?
Mr. Harris. CPAs have a very close relationship with their
clients, and there are a lot of questions that go back and
forth on a routine basis. And so many of these are small
clients and they rely upon us for all kinds of advice, both tax
advice for the company and the individual.
When I am talking with a doctor who happens to be set up in
a form--an entity which is a partnership or a PA, I can't help
but talk to him about both at the same time. That is where our
biggest problem is.
Where we believe that CPAs should come under the act would
be when they are involved in selling some form of a product.
So, for instance, my client comes to me and says, I need some
help. We say we believe you need a loan and we recommend that
you go to the bank and talk to the bank. That would be exempt.
However, if we said, But by the way, we will make you that
loan, in that case we should come under the act, where there is
a product involved.
Chairwoman Velazquez. Can we use like the example of H&R
Block?
Mr. Harris. Who are not CPAs? Yes.
Chairwoman Velazquez. But they do accounting. And also they
make refund anticipation loans. So that part should be
regulated.
Mr. Harris. We totally agree with that, and if there is a
CPA doing that, we believe that is a product and, in fact,
should be regulated.
Chairwoman Velazquez. Mr. Graves.
Mr. Graves. In all the debate, when it came to the bailouts
and everything that took place, we had a lot of talk about
financial institutions being too big to fail. And my question
to each of you is there--in our capitalist society, such a
thing as an institution that is too big to fail? And if one of
the very large financial institutions did fail, how would that
affect you or your business or your clients, whatever the case
may be?
Mr. Harris?
Mr. Harris. I have listened quite a bit to Mr. Geithner and
Mr. Bernanke on that issue, and I happen to concur with them.
There are some institutions which are too big to fail and would
have brought the world financial markets to a standstill if
they did.
I also understand what happened with those that did fail
and what their limitations were at time. It would have a
tremendous effect--it is already having a tremendous effect,
because right now most small businesses are having a difficult
time borrowing money with the same entities that did not fail.
But because they are having to go from a leveraged model to a
much lower leveraged model than they were practicing--and those
are major banks that we all know that are still here today,
that may be owned by someone else.
I can give a perfect example of a public hospital that I
sit on the board of; and we were forced to liquidate our
endowment fund to pay off our bonds because we couldn't get the
line of credit to secure those bonds that we could always get
with no problem. We had the money to do it, but it will put the
hospital in a very tenuous situation in the event we continue
to lose money because of Medicare cuts. And I happen to live in
an area which is a very high Medicare area.
So it is already having that effect. I can tell you it has
had that effect just on what has occurred to small business.
Lines of credit and letters of credit are virtually impossible
to get for small business.
Mr. Graves. Mr. Loy?
Mr. Loy. What I would say we do: We invest in companies
that often don't exist; we help them start.
We have been using a phrase of "too small to fail." These
are the companies that, a very small proportion of which are
going to grow up to be the next Google, Cisco, Apple,
Genentech, FedEx, Starbucks, et cetera. And we are concerned
about the opposite problem, which is the situation where we are
creating a problem, where it is too hard for those companies to
get really big, particularly on the IPO side, so they are
choosing to sell out early in order to get some money back to
the investors.
And typically when other companies are acquired by
companies--including, increasingly, overseas companies--they
are not going to grow up to be the drivers of 12.1 million jobs
that represent the last 20 years of venture investing.
In terms of the impact of the Lehman-led crisis or another
one--Mr. Harris' example is actually an interesting one; he
mentioned that in order to get liquidity for their bond fund,
they had to liquidate their endowment--the largest source of
capital for our industry is actually endowments and foundations
and pension funds; and we have seen a dramatic drop in their
willingness or ability to provide capital to our industry
because they are repurposing it away from higher risk, higher
reward, but highly illiquid and long-term investments to short-
term liquidity needs.
I would characterize it as much as a timing problem at any
moment in time. The capacity and willingness to fund things for
5 or 10 years, while they grow up to be the next generation
drivers of job creation, are seriously at risk. Even as it is,
adding more burdens onto us is sort of why we are particularly
concerned at this critical moment.
Mr. Hirschmann. The right to fail in an orderly fashion has
been one of the key strengths of our economy. Obviously, when
everything fails at one time, it requires extraordinary steps.
But I think one of the things we need to be careful about
is not to design our system so that there is an implied
backstop by the Federal Government against the two largest
mutual fund companies, the two largest hedge funds, the two
largest private equity firms, or the two largest of anything.
We need to be able to have the information at the regulator
level to understand systemic risk, but not set anybody up to be
permanently protected against failure.
We can make them fail in a more orderly fashion so they
don't burn down the neighborhood, but nobody should be
insulated against failure.
Mr. Anderson. I love your question.
I don't know if you saw the Wall Street Journal a couple of
days ago where it shows that 52 percent of all loan
originations and closings happen by the top three companies,
where if you look at that 2 years ago, one of them was down to
like 4 percent. That is dangerous. That is why I said in my
opening remarks that the small businesses are at risk.
Do we want loan origination for home mortgages to be
controlled by three companies in America? There have been an
awful lot of choices for mortgages--a lot of small mortgage
bankers who have done a phenomenal job, who never ever
participated in the subprime or pay option ARMs that got us in
this mess to begin with. But a lot of these small companies
can't get warehouse lines of credit.
We did a very good job. My company, personally, we had the
second lowest FHA delinquencies in the State of Louisiana, and
we are at risk. So is a company too big to fail? I don't think
so.
Mr. Robinson. Congressman, it is hard to come up with the
number as to how large is a company that is too big to fail. I
think more important is, how much it is leveraged, how
interconnected it is; and in our business, how you manage your
accumulations or how much stuff do you have out there that
could cause a problem.
For example, as far as leveraging goes, our company is a
mutual company. The only way we can raise capital is through
operations. We do not issue stock. In our business, one of the
leverage measures is premium-to-capital or premium-to-surplus,
which is a proxy for how many policies you write and how much
exposure you have.
In our business three-to-one, three times your capital, is
probably the upper limit. Two-to-one is much better. My company
is one-to-one because we are pretty conservative. I am told
some banks get up to 30-to-1. The question really is, what is
your leverage ratio? I think that is one point that is more
important than absolute size.
Another question is how interconnected you are. What is the
counterpart of your risk if either the counterpart or yourself
has a problem?
In our industry rarely reinsure one another. When we buy
reinsurance, kind of like laying off a bet, we go to the
worldwide market. So there is not much interconnectivity in our
industry, but it is something I believe you can measure.
And finally, there is what we call "accumulations". That
is, how many houses do you insure on the beach and how many
businesses on an earthquake fault line and so on. You need to
be able to measure precisely that and report that to regulators
to make sure that you haven't overextended yourself.
I think if you look at those three items instead of
absolute size, you could come up with a much better result.
Mr. Graves. Thank you, Madam Chair.
Chairwoman Velazquez. Mrs. Dahlkemper.
Mrs. Dahlkemper. Thank you, Chairwoman Velazquez and
Ranking Member Graves for convening this critical hearing on
the impact of financial and regulatory restructuring on small
businesses and community lenders. And thank you to the panel of
witnesses for joining us today.
While it is clear from the recent economic crisis that we
must impose greater oversight, transparency and accountability
in the financial sector, we must also ensure that our financial
regulatory restructuring does not negatively impact the ability
of financial institutions to continue to provide the American
people, our small businesses and our communities with access to
capital. Ensuring liquidity in the market will continue to
promote economic recovery.
In my district in Pennsylvania, local businesses are
reeling as a result of banks not lending. So we have to enact
balanced reform, but still allow for a healthy flow of capital.
However, we must also ensure that consumers are protected and
adequately informed in their financial choices and that they
are ensured a variety of financial products that carry better
disclosed and understood risk.
Mr. Anderson, I do have a couple questions for you. In your
testimony, you mentioned a host of Federal regulations that
mortgage brokers must comply with.
Which Federal agencies are charged with enforcing these
regulations?
Mr. Anderson. Well, we have got RESPA; that is number one,
under HUD.
We have the Truth in Lending Act. I mean that has to do
with your disclosures, your good faith and truth in lending.
All of this, mortgage brokers, banks savings and loans, we all
operate under that umbrella.
Also in our States, individual States, we have to adhere to
the same policies; and some of our States have predatory
lending laws. In Louisiana, we just passed a law that there are
no prepayment penalties, which is a good thing.
So we are all under the same umbrella, and we have to
comply with our own State lending laws. And we have got the
Safe Licensing Act, which is for everybody.
Mrs. Dahlkemper. Let me ask you, because there are a number
of agencies: Do you think it would be better, in your view, to
combine enforcement under one agency or entity, rather than
having to deal with a number of different agencies?
Mr. Anderson. I don't know if that is going to create a
bottleneck. I am not sure.
We feel that we need to slow down, maybe look at this
further. We are all for--the National Association of Mortgage
Brokers is all for simpler, easier disclosures. I think if we
look at what happened in the past with the subprime and all of
those other loans, I think we--I relate it to the
pharmaceutical industry.
If you take Vioxx, what happened to Vioxx? It was banned.
We didn't go after the pharmacists or the drugstores on the
corner. We went after the manufacturer. And I think if we
control the manufacturer, that is, the product--if the product
caused the foreclosure crisis, we need to eliminate that
product.
Mrs. Dahlkemper. Let me ask you then a question that goes
along with that, because it has been reported that mortgage
brokers who processed the subprime loans are now counseling
individuals who are indebted by those loans regarding their
restructuring.
So does your association promote standards by which brokers
evaluate the financial suitability of loan products by
prospective borrowers? Or do you just rely upon the lenders,
underwriters for that?
Mr. Anderson. Well, the way the National Association of
Mortgage Brokers operates, we have a very strong code of
ethics. We do not have a fiduciary responsibility to the
borrowers. We counsel the borrowers. We do not underwrite the
loans.
And I will give a prime example where the mortgage broker
got blamed, and that was with Fannie Mae and Freddie Mac. And
we know what happened there. I can tell you, I have done a lot
of loans, and Fannie Mae and Freddie Mac had an automated
underwriting system and they would approve borrowers at 100
percent financing with a 65 percent debt-to-income ratio before
taxes.
Now, can the mortgage broker turn that borrower down when
it was approved by Fannie Mae and Freddie Mac? If we did take
that approach, if I would turn somebody down for that, I could
be sued because--for discrimination or what have you. And those
are the mistakes that happened.
Mrs. Dahlkemper. So what is your role then in this?
Mr. Anderson. The role of a mortgage broker is to offer the
products, just like an insurance broker.
Why do you go do a insurance broker? Because they represent
a whole host of carriers. The mortgage broker does the same
thing; we represent a whole host of carriers of lenders and
banks across the country. We service a lot of small, rural
areas. And the mortgage broker has done a phenomenal job. There
is equal blame across the board for banks, mortgage brokers--
Mrs. Dahlkemper. So you don't have any financial stability
standards that you, as an association, apply?
Mr. Anderson. I mean, we have a strong code of ethics.
Mrs. Dahlkemper. Thank you.
My time is up. I yield back.
Chairwoman Velazquez. Would the gentlewoman yield?
Mrs. Dahlkemper. Yes.
Chairwoman Velazquez. Mr. Harris, if you provided bad
advice to a customer or client, would you be liable?
Mr. Harris. Oh, yes.
Chairwoman Velazquez. Mr. Anderson, if you sell a product
that is inappropriate, that is not a good product, are you
liable?
Mr. Anderson. That is a hard question. I mean--
Chairwoman Velazquez. My guess is that that is the core of
her question when she asked "regulators."
There is not such a regulator who would come in and examine
and do any regulating examination of your activities?
Mr. Anderson. No. We are regulated. We are examined; on a
State level, we are examined.
Chairwoman Velazquez. We are talking about the Federal
Government and Federal legislation that is pending before--that
is being considered now, that is being worked by Chairman
Frank.
So the question is consolidating Federal regulation so that
it has uniformity with the mortgage brokers industry.
Mr. Harris. Madam Chairwoman, if I could also comment
because I answered you with a very simple answer when I said,
"Oh, yes."
Not only to our client, but if we provide bad tax advice
and in the end, as the result of an IRS audit, the IRS can and
will fine us significantly. We also face criminal penalties
from the IRS.
Chairwoman Velazquez. Okay.
Mr. Westmoreland.
Mr. Westmoreland. Thank you, and I want to thank the
Chairlady for having this hearing. I--this is my third term in
Congress, and I want to congratulate her in having this,
because this is the first hearing we have had, I think--at
least that I have been associated with in my committees--that
really we get to hear the unintended consequences of what a
proposed piece of legislation can bring into different entities
that are so important to our economy.
So I want to thank her for doing that, because unintended
consequences are things that happen when we pass legislation
hastily up here.
Mr. Anderson, I want to say that I know that the mortgage
brokers--I come from a real estate background, the building
business--that you all were very big proponents of the SAFE Act
that was passed in 2008 that basically licensed brokers,
mortgage brokers, which had not been the case. So you have been
a proponent of regulation that you thought was necessary for
your industry.
But we see unintended consequences all the time up here.
The credit card act that we passed with the consumer protection
stuff in there, there has been an unintended consequence that
people that actually really need a credit card and actually
need some short-term credit are not able to get it.
And when we passed some housing legislation--and, Mr.
Anderson, I will address this to you--I think it has some
unintended consequences. And, sure, we made bad loans and we
had all different types--as Mr. Loy said, derivatives. We were
selling programs that nobody even knew what they were. They
just knew they were making a bunch of money doing it.
But right now, if I understand it correctly from some of my
friends still in the real estate business and still in the
mortgage business, there are some loans in some States that you
can't even offer people. Because of some of the regulations
that have been put on as far as what credit scores are,
additional points and fees that are added to these things, that
came from some of the regulation that we passed trying to help
the situation, have actually hindered it.
Can you comment on that?
Mr. Anderson. Yes, we have--if I can use the term, "we have
had our hands tied." And there are many, many States out there,
and we are one of them, that we enjoyed a very low foreclosure
rate. And the restrictions, I will tell you that there is no
question--my firm is also part of the largest real estate firm
in the Gulf south, and I will tell you that there is no
question that the pendulum has swung so far this way now that
the credit is tightening, we depleting the pool of eligible
borrowers to buy these properties, and we have got to be
careful. We have got to, somehow, come back in the middle
somewhere.
We know the subprime loans were bad, and you are right.
People made an awful lot of money from Wall Street on down.
There is no question, plenty of blame to go around.
But get back to the safe mortgage product, but the credit
score restrictions; and I tell you all, of all the loans that
have a done in my 31-year career, if anyone can tell me the
difference between a 619 and a 620 credit score, I would like
to know what that is. Or a 679 and a 680. The difference is
nothing on the credit.
The difference is, one borrower is going to pay an extra
1.5 to 2 points; and on an investment property--and I see it
every day, every day, somebody with an 832 credit score putting
20 percent down can't get a mortgage. That is pretty sad.
Mr. Westmoreland. And Mr. Anderson, with the little bit of
time that I have left, I know that some of our returning
veterans who have been in theater and fought and defended our
country, a lot of times our National Guard members and Reserve
officers leave great paying jobs to go serve our country. And
when they come back, sometimes their credit score has been
hurt, or the spouse maybe has done something.
I understand that some of these restrictions are making it
harder and harder for our military to be able to get it.
Because if I understand it correctly from some of the news
today, some of these credit scores are being lowered 10, 20,
30, 40, even 50 points, without anyone knowing it, just because
of the reduction in the credit market.
Mr. Anderson. You are absolutely right.
Guys, I have seen credit scores drop 30, 40 points--and I
am not kidding you--for a $12 medical collection that they had
no idea that they had. I mean, it is amazing. We are just set
on this number of a credit score.
There are so many factors that you have to look at. I mean,
it seems like we are going back 20 or 30 years which--there is
nothing wrong with that concept, but people have to qualify.
But just using a number and a credit score, that is creating
some problems.
Mr. Westmoreland. Thank you, Madam Chair.
Chairwoman Velazquez. Thank you.
Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Madam Chair. You know, it seems
as though the approach that the Financial Services Committee is
taking is that we have got a problem out here, and/or they
think they have got a problem, and we are going to use a big
patch on it. And it seems like having a sprained ankle and cut
the leg off to solve our problem.
I think sometimes when we have a problem, we have to see
what the problem is and then go back and fix that problem and
not have the unintended consequence, what Congressman
Westmoreland was talking about.
Too often it appears to me in this situation that this
piece of legislation is so broad it is going to provide an
umbrella over anything when anybody has any sort of a monetary
transaction. I think you gentleman have helped to define where
we ought to be going this, and it is the big guys that have
stumbled along and not done things the way they should have;
and a lot of other folks are being caught in this net.
So I guess my comment is, have I identified this correctly?
Do you think basically we need to be looking at the too-big-to-
fail-guys that really were--the problem seems to originate
from? Are there some small players in this that have got enough
blame to go around, and we can play with them too?
Mr. Robinson?
I don't think you guys had any problems. We only had one
insurance company, and that was the investment portion of that
that was the problem versus the insurance company; is that
right?
Mr. Robinson. That is correct, Congressman.
If there is a common thread that I could recommend that
might answer some of these questions, it is, how broad a
measure would be needed to cover all kinds of problems. It is
answering a simple question like, Who underwrites the risk and
who prices it? Because you could have somebody saying, Well, I
thought the loan originator was. Well, I thought they were.
Well, who is? Whether it is a credit default swap or a
mortgage.
And I think as we try to solve these issues--and there is
no question that there are issues to be solved--that instead of
perhaps picking a number to define too-big-to-fail, say, All
right, you are big; what are your exposures and how much
capital do you have to handle what statisticians would call the
tail events--things that you don't think happen?
And if they cannot answer those questions clearly and they
perhaps have no idea, then that might aim you towards the real
root cause of the issue. And that might be a good step, I would
recommend.
Mr. Luetkemeyer. Okay.
Mr. Hirschmann. I think you are right to identify the scope
of the proposed CFPA as one of the problems.
There are a couple of other issues, including, it separates
out consumer protection from safety and soundness regulation.
So you might have one regulator telling you to go left and the
other telling you to go right with no way to reconcile the
differences. That clearly will impact the availability of
credit, particularly for small firms.
The other is the ill definition of all the terms. For
example, it sets up a new, vaguely defined abuse standard. What
our study reveals is that a product that might seem to be
abusive for one individual consumer in a particular financial
condition might be the lifeline for a small business to meet
their payroll that week and perfectly appropriate for the small
business.
It is hard to imagine how a Federal regulator could
anticipate those differences and make sure we don't
accidentally cut off the vital lifeline for small businesses.
Mr. Luetkemeyer. My time is going to run out here. Quickly,
with Mr. Hirschmann and Mr. Loy and Mr. Harris, quick answers.
I know we are going to have some bankers in the next section.
I was curious about access to credit. I think that really
impacts small businesses in small communities and suburbs of
our cities.
Have you had any comments or problems with some of the
members of Chambers of Commerce with regard to access to credit
that you would like to comment on--particular industries, in
particular?
Mr. Hirschmann. Access to credit is a significantly
enhanced problem in this crisis. What our study finds is that
even before the crisis, half of the smallest firms had access-
to-credit problems. It is clearly magnified.
I don't know whether you point--obviously, you don't want
banks to make loans that are being given to inadequate--people
that don't have adequate credit.
On the other hand, you want to make sure that the small
businesses have credit. That is why this secondary credit
market, the ability of small firms to rely on their personal
credit, especially when they are starting a business, is vital
to start-ups and vital to creating new jobs in this country.
Mr. Loy. I would agree, with a caveat.
Most of the businesses that we fund are so raw, they are
pure garage start-ups, they are not eligible for credit. So we
don't use credit, or companies don't, until they have grown
into larger entities. And it is at that stage where,
historically, we have been able to bring in credit provider to
scale the job creation.
That now is not happening, so we are having to supply more
and more equity to later-stage start-ups, and that is causing
us to not have as much ability to invest in the brand-new
things. There is a falloff in seed-stage company creation
because the capital that we have, that was supposed to be for
that, is filling the role that debt used to play for our larger
companies.
Chairwoman Velazquez. Time has expired.
Ms. Fallin.
Ms. Fallin. Thank you, Madam Chair. I am sorry I couldn't
be here for all the hearing, but what I have heard is very
interesting; and I will talk about what I am hearing in my home
State of Oklahoma.
I am hearing from businesses that lines of credit are hard
to come by, that they are seeing sometimes double-increased
rates on their interest rates. I am hearing that their lines of
credit have been, many times, cut in half to where they do not
have the lines of credit. And I am hearing from some of our
business owners that when they do want to take equity out of
their businesses, they can't take it out of their businesses to
expand their product.
My question would be, what has changed over the last 2 to 3
years that has caused this market to tighten up? And what are
the problems associated that have caused those things?
And in this new Consumer Financial Protection Act, do you
think that will help the situation where more money will be
available and the credit will start flowing? Or are we reaching
too far, and it is going to cause the market to contract?
Mr. Harris. I will say that it is very hard--I refer to
smaller businesses and some are public institutions--hospitals,
private schools--who are suffering because they can't get their
loans.
The problem is--the community banks are wonderful, and they
serve a tremendous need for smaller clients, and they have come
through for the clients and the small businesses. The community
banks have been very good.
The problem we see in that area is when you get to $2 and
$3 or $4 and $15 or $18 million, which are still small entities
in small towns, who have these kinds of lines of credit or
letters of credit to secure bonds, public bonds that have been
issued. The big banks are the ones who can no longer make those
loans, and as a result--we are seeing in a number of private
institutions--they are having to try to figure out a way to pay
off the bonds with far more expensive capital. And it is not a
positive thing; it is not good for them.
And what you are hearing at your home is the same as I am
hearing all across the country.
Mr. Loy. I was just in Oklahoma last week for 3 days
looking at seed-stage start-ups to invest in, coming out of
your research universities. Some really exciting things,
particularly in the energy arena.
Ms. Fallin. I hope you put the money there.
Mr. Loy. We are looking and we want to, precisely for that
reason. We don't provide credit; we provide investment equity
capital. But because these start-ups cannot get a home equity
loan to finance their start-up, they are needing $500,000 from
us; and it is getting harder and harder for us to provide that
for the reasons I just said.
And the potential for this regulation would be
disproportionately felt on the smallest firms that provide that
earliest stage of capital. So there is a good chance that
entire swath of $500,000 to $1 million of seed-stage capital,
if we are forced to follow hedge funds regulation, the cost of
that will drive the firms who do that out of business.
Ms. Fallin. Can I ask, also, another question?
I am hearing from our local bankers that the fee increases
to recapitalize FDIC is causing them not to have as much
capital and loans to put out into the marketplace. And they
have told me, like in my State, that $37 million has gone out
in fee increases which they could be lending out to our small
businesses and even to those who are wanting to have mortgages.
And they are concerned about another fee increase on those
small bankers that will once again drive capital and take it
out of the marketplace.
Are you seeing that back in your individual organizations
and States, that it is taking the capital out of the
marketplace, lending ability?
Mr. Hirschmann. It is certainly something we hear from our
small banking members.
If you go to any local Chamber across the country, you will
find a small banker on the board, and it is particularly one--
so whether those fees are necessary, clearly you have to keep
FDIC moving.
We are going through a very exigent period here. The real
question is, do you want to add fees on top of that even
further through the Consumer Financial Protection Agency? It is
clearly the wrong time to add unnecessary fees, particularly
when they won't produce the intended result.
Mr. Robinson. Congresswoman, perhaps there is a parallel in
the financial services--noninsurance financial service area you
that might consider.
I mentioned earlier about underwriting, or identifying the
risk, underwriting it and pricing it properly. And you do the
best job you can, whether it be a house on a beach or a
subprime mortgage or whatever. And then, when the hurricane
comes or the collapse happens, management meetings happen that
say, We are not going to do that again.
And then we have to recast our expectations, and that
usually results in underwriting tightening up, which could mean
change in credit score or unwillingness to put out lines of
credit.
Also, a bad result could result in an organization being
overleveraged. We have too much out there and so we have to
pull back.
Ms. Fallin. Thank you, Madam Chairwoman.
Chairwoman Velazquez. With that, let me take this
opportunity to thank all of you for participating. You have
given very insightful information. The members of the panel are
excused.
And I will ask the members of the second panel to please
come forward and take your seats. Thanks.
Chairwoman Velazquez. Our first witness is Mr. James D.
MacPhee, the CEO of Kalamazoo County State Bank in Schoolcraft,
Michigan, founded in 1908. Mr. MacPhee is testifying on behalf
of the Independent Community Bankers of America. ICBA
represents 5,000 community banks of all sizes and charter types
throughout the United States.
Thank you. You will have 5 minutes.
STATEMENT OF JAMES D. MacPHEE
Mr. MacPhee. Thank you, Chairman Velazquez and Ranking
Member Graves. I am pleased to represent the 5,000 members of
the Independent Community Bankers of America at this timely and
important hearing.
Just over one year ago, due to the failure of some of the
Nation's largest firms to manage their high-risk activities,
key elements of the Nation's financial system nearly collapsed.
Community banks and small businesses, the cornerstone of our
local economies, have suffered as a result of the financial
crisis and the recession sparked by megabanks and unregulated
financial players.
In my State of Michigan, we face the Nation's highest
unemployment rate of 15.2 percent. Yet community banks like
mine stick to commonsense lending and serve our customers and
communities in good times and bad.
The bank has survived the Depression and many recessions in
our more than 100-year history, and it proudly serves the
community through the financial crisis today--without TARP
money, I might add.
The financial crisis, as you know, was not caused by well-
capitalized, highly regulated commonsense community banks.
Community banks are relationship lenders and do the right thing
by their customers. Therefore, financial reform must first do
no harm to the reputable actors like community banks and job-
creating small businesses.
For their size, community banks are enormous small business
lenders. While community banks represent about 12 percent of
all bank assets, they make 31 percent of the small business
loans less than $1 million. Notably half of all small business
loans under $100,000 are made by community banks.
While many megabanks have pulled in their lending and
credit, the Nation's community banks are lending leaders.
According to an ICBA analysis of the FDIC's second quarter
banking data, community banks with less that $1 billion in
assets were the only segment of the industry to show growth in
net loans and leases.
The financial crisis was driven by the anti-free-market
logic of allowing a few large firms to concentrate
unprecedented levels of our Nation's financial assets, and they
became too big to fail. Unfortunately, a year after the credit
crisis was sparked, too-big-to-fail institutions have gotten
even bigger. Today, just four megafirms control nearly half of
the Nation's financial assets. This is a recipe for a future
disaster.
Too-big-to-fail remains a cancer on our financial system.
We must take measures to end too-big-to-fail by establishing a
mechanism to declare an institution in default and appoint a
conservator or receiver that can unwind the firm in an orderly
manner. The only way to truly protect consumers, small
businesses, our financial system, and the economy is to enact a
solution to end too-big-to-fail.
To further protect taxpayers, financial reform should also
place a systemic risk premium on large, complex financial firms
that have the potential of posing a systemic risk. All FDIC-
insured affiliates of large, complex financial firms should pay
a systemic risk premium to the FDIC to compensate for the
increased risk they pose.
ICBA strongly supports the Bank Accountability and Risk
Assessment Act of 2009, introduced by Representative Gutierrez.
In addition to a systemic risk premium, the legislation would
create a system for setting rates for all FDIC-insured
institutions that is more sensitive to risk than the current
system and would strengthen the deposit insurance fund.
ICBA strongly opposes reform that will result in a single
Federal bank regulatory agency. A diverse and competitive
financial system with regulatory checks and balances will best
serve the needs of small business.
Community bankers agree that consumer protection is the
cornerstone of or financial system. However, ICBA has
significant concerns with the proposed Consumer Financial
Protection Agency. Such a far-reaching expansion of government
can do more harm than good by unduly burdening our Nation's
community bankers, who did not engage in the deceptive
practices targeted by the proposal. It could jeopardize the
availability of credit and choice of products, and shrink
business activity.
In conclusion, to protect and grow our Nation's small
businesses and economy, it is essential to get financial reform
right. The best financial reforms will protect small businesses
from being crushed by the destabilizing effects when a giant
financial institution stumbles. Financial reforms that preserve
and strengthen the viability of community banks are key to a
diverse and robust credit market for small business.
Thank you.
Chairwoman Velazquez. Thank you, Mr. MacPhee.
[The statement of Mr. MacPhee is included in the appendix.]
Chairwoman Velazquez. Our next witness is Mr. Austin
Roberts, the CEO of the Bank of Lancaster, Virginia. The Bank
of Lancaster was founded in the northern neck of Virginia in
1930. Mr. Roberts is testifying on behalf of the American
Bankers Association. ABA is the trade group and professional
association representing the Nation's banking industry.
STATEMENT OF AUSTIN ROBERTS
Mr. Roberts. Chairwoman Velazquez, Ranking Member Graves,
members of the committee, my name is Austin Roberts. I am Vice
Chairman, President and CEO of the Bank of Lancaster, which is
headquartered in Kilmarnock, Virginia. I am pleased to be here
on behalf of the ABA.
Small businesses, including banks, are certainly suffering
from the severe economic recession. This is the not the first
recession faced by banks. Many banks have survived the ups and
downs of the economy; mine has survived those for the last 80
years. In fact, most banks have been in their communities for
decades and intend to continue to be there for decades.
We are not alone, however. In fact, there are more than
2,500 banks, 31 percent of the banking industry, that have been
in business for more than a century; 5,000 banks have served
their communities for more than half a century. These numbers
tell a dramatic story about the staying power of banks and
their commitment to the communities they serve.
The success of small entrepreneurial businesses are very
important to my bank. My bank's focus and those of my fellow
bankers throughout the country is on developing and maintaining
long-term relationships with these and other customers.
In this severe economic environment, it is natural for
businesses and individuals to be more cautious. Businesses are
reevaluating their credit needs, and as a result, loan demand
is also declining. Banks, too, are being prudent in
underwriting, and our regulators are demanding it. In fact, in
some cases, overly restrictive rules and examinations are
hampering the banks' ability to make new loans.
While a great deal of attention is rightfully being paid to
the administration's regulatory proposal, I would like to share
with you other issues that banks like mine are facing.
First, the most important threat is the very high premiums
being paid by banks to the FDIC. For example, my bank paid
$75,000 in premiums in 2008. This year we will pay $550,000 in
premiums, with the possibility of it even going to $700,000.
There is no question that the industry fully backs the
financial health of the FDIC, but such large expenses have a
very strong dampening effect on bank lending. ABA has detailed
options in a letter to FDIC Chairman Bair that meet the funding
needs without creating a financial burden on banks that could
reduce bank lending and hurt the economic recovery.
Second, ABA is continuing to hear from bankers that
regulators are demanding increases in capital and that banks
improve the quality of their capital. With capital markets
still largely unavailable, especially for community banks, the
only course of action in the short run is to reduce lending in
order to improve the bank's capital ratio.
Third, the recession has strained the ability of some
borrowers to perform, which often leads the examiners to insist
that a bank make a capital call on their borrower, impose an
onerous amortization schedule or obtain additional collateral.
These steps can set in motion a death spiral where the borrower
has to sell assets at fire sale prices to raise cash, which
then increases the write-downs that the banks have to make, and
the cycle goes on and on.
These actions are completely counter to the notion of
working with customers to make sure that credit is available to
them or working with borrowers that may even be in distress.
There is much more included in my written testimony that
details the difficulties that have arisen in the past year, but
I want to take a moment to mention one idea that ABA has to
increase capital to community banks in areas most hard hit by
recession. Banks in these areas are doing everything they can
to make credit available, but it is against the significant
headwinds of losses from problem loans.
The idea, which the ABA shared in a letter to Secretary
Geithner 2 days ago, would be to modify Treasury's existing
capital assistance program to help well-managed, viable
community banks access capital. These banks would match any
investment the Treasury makes with private equity.
In this way, a relatively small sum of money, say, $5
billion invested by Treasury, matched by $5 billion in private
equity, would bring all small banks' capital to levels
significantly higher than regulators require to be well
capitalized. Having additional capital will provide a cushion
for these banks to meet the credit needs of their communities
rather than reducing lending to meet regulatory capital
requirements.
I want to thank you for the opportunity to present these
views on challenges ahead for banks that serve small
businesses, and I am happy to answer any questions.
Chairwoman Velazquez. Thank you, Mr. Roberts.
[The statement of Mr. Roberts is included in the appendix.]
Chairwoman Velazquez. Our next witness is Bill Hampel, the
Senior Vice President of Research and Policy Analysis for the
Credit Union National Association. CUNA provides many services
to credit unions, including representation, information, public
relations, and business development.
Welcome.
STATEMENT OF BILL HAMPEL
Mr. Hampel. Thank you. Chairwoman Velazquez, Ranking Member
Graves, and other members of the committee, thank you very much
for the opportunity to testify at today's hearing on behalf of
the Credit Union National Association, which represents over 90
percent of our Nation's 8,000 State and Federal credit unions,
the State leagues, and their 92 million members. I am Bill
Hampel, the Chief Economist.
Credit unions did not contribute to the recent financial
debacle, and their current regulatory regime, coupled with
their cooperative structure, militates against credit unions
ever contributing to a financial crisis.
As Congress considers regulatory restructuring, it is
important that you not throw out the baby with the bathwater.
Regulatory restructuring should not just mean more regulation.
There needs to be recognition that in certain areas, such as
credit unions, regulation and enforcement is sound and
regulated entities are performing well.
Credit unions have several concerns in the regulatory
restructuring debate. These include the preservation of the
independent regulator, the development of the CFPA, and the
restoration of credit unions' ability to serve their business-
owning members.
First, it is critical that Congress retain an independent
credit union regulator. Because of credit unions' unique
mission, governance, and ownership structure, they tend to
operate in a low-risk, member-friendly manner. Applying a bank-
like regulatory system to this model would threaten the
benefits that credit unions provide their members.
There is some logic for consolidating bank regulators where
competition can lead to lax regulation and supervision, but
that condition does not exist for credit unions which have only
one Federal regulator, the National Credit Union
Administration. The general health of the credit union system
proves that our system works well.
Considering the CFPA, consumers of financial products,
especially those provided by currently unregulated entities, do
need greater protection. CUNA agrees that a CFPA could be an
effective way to achieve that protection, provided that the
agency does not impose redundant or unnecessary regulatory
burdens on credit unions. In order for a CFPA to work, consumer
protection regulation must be consolidated and streamlined to
lower costs and improve consumer understanding.
CUNA strongly feels that the CFPA should have full
authority to write the rules for consumer protection, but for
currently regulated entities, such as credit unions, the
examination and enforcement of those regulations should be
performed by the prudential regulator that understands their
unique nature. Under this approach, the CFPA would have backup
examination authority.
CUNA urges Congress to take the difficult step of
preempting State consumer protection laws if establishing a
CFPA. We are confident that by creating a powerful Federal
agency with the responsibility to regulate consumer protection
law, with rigorous congressional oversight, more than adequate
consumer protection will be achieved. And if the CFPA is
sufficiently empowered to ensure nationwide consumer
protection, why should any additional State rules be necessary?
Conversely, if the proposed CFPA is not expected to be up
to the task, why even bother establishing such an agency in the
first place?
Finally, because they are already significantly regulated
at the State level, we don't believe that certain types of
credit life and credit disability insurance should be under the
CFPA.
As Congress considers regulatory restructuring legislation,
CUNA strongly urges Congress to restore credit unions' ability
to properly serve the lending needs of their business-owning
members. There is no economic or safety and soundness rationale
to cap credit union business lending at 12.25 percent of
assets.
Before 1998, credit unions faced no statutory limit on
their business lending. The only reason this restriction exists
is because the banking lobby was able to leverage the provision
when credit unions sought legislation to permit them to
continue serving their members.
The credit union business lending cap is overly restrictive
and undermines America's small businesses. It severely limits
the ability of credit unions to provide loans to small
businesses at a time when these borrowers are finding it
increasingly difficult to obtain credit from other types of
financial institutions, as was described by Mr. Hirschmann from
the U.S. Chamber in the previous panel. It also discourages
credit unions that would like to enter the business lending
market from doing so.
We are under no illusion that credit unions can be the
complete solution to the credit crunch that small businesses
face, but we are convinced that credit unions should be allowed
to play a bigger part in the solution.
Eliminating or expanding the business lending cap would
allow more credit unions to generate the portfolios needed to
comply with NCUA's regulatory requirements and would expand
business loans to many credit union members, thus helping local
communities and the economy. Credit unions would do this
lending prudently; the loss rate on business loans at credit
unions is substantially below that of commercial banks.
A growing list of small business and public policy groups
agree that now is the time to eliminate the statutory credit
union business cap for credit unions. And in July,
Representatives Kanjorski and Royce introduced H.R. 3380, the
Promoting Lending to America's Small Business Act, which would
increase the credit union business lending cap to 25 percent of
total assets and change the size of a loan to be considered a
business loan. We estimate that credit unions could safely and
soundly lend an additional $10 billion in small loans in the
first year after enactment of such a bill.
Madam Chairwoman, thank you very much for convening this
hearing, and I look forward to answering the committee's
questions.
Chairwoman Velazquez. Thank you.
[The statement of Mr. Hampel is included in the appendix.]
Chairwoman Velazquez. We have three votes, so the committee
will stand in recess and reconvene after these votes.
[Recess.]
Chairwoman Velazquez. The committee is called to order.
Our next witness is Mr. John Moloney. He is President and
CEO of Moloney Securities in Manchester, Missouri. Mr. Moloney
began his career in brokerage over 30 years ago. In the mid-
1990s, Mr. Molony formed Moloney Securities. He is the Chairman
of SIFMA's Small Firms Committee and serves on FINRA's Advisory
Board for small brokerage.
Thank you and welcome.
STATEMENT OF E. JOHN MOLONEY
Mr. Moloney. Thank you. Good afternoon, Chairwoman
Velazquez, and Ranking Member Graves is not here, but the rest
of the committee. Thank you for the opportunity to testify
before you on behalf of SIFMA on how changes to the financial
regulatory system could affect small broker-dealers.
SIFMA and its small member firms applaud your efforts to be
the advocate on behalf of small businesses. Small businesses
are the backbone of the U.S. economy and small broker-dealers
are instrumental in serving individual investors and
entrepreneurs on Main Street.
I will forgo the statistics for the industry and my
company. They are in my written testimony. The only thing want
to add is--the last line I have here is that my firm, like the
overwhelming majority of broker-dealers, was not a TARP
recipient.
The majority of financial service reform proposals before
Congress do not impact smaller firms like mine. However, small
firms are concerned that changes contemplated for large global
financial service firms could cause disparate effects on small
firm operations. Because the investor confidence in these
markets is important to all firms, regardless of size, a sound
regulatory regime must contain several key elements.
It must minimize systemic risk, promote safety and
soundness of the regulated entities, promote fair dealing and
investigator protection, be consistent from country to country
where applicable, and be as effective and efficient as
possible. Well crafted and thoughtful legislation is needed to
avoid unintended consequences that the firms that I am
representing did not cause.
Congress should also include sunset provisions under the
new laws and regulations so that they may achieve their desired
effect and do not promote any undesired consequences.
I would like to address two specific features of the
financial service reforms that do affect my firm and my
brokers.
First, SIFMA has long advocated the modernization and
harmonization of disparate regulatory regimes for brokers,
dealers, investment advisors and other financial
intermediaries. We welcome Treasury's proposed legislation,
which appears to acknowledge these important distinctions and
which would give the SEC the authority to establish rules for a
new uniform Federal fiduciary standard that supersedes and
improves on existing standards and is applied only in the
context of providing personalized investment advice to
individual investors.
Second, predispute arbitration clauses are vital to the
securities arbitration system. Small investors benefit in
particular, as arbitration allows them to pursue claims they
could not afford to litigate and do it on a much more timely
basis. Treasury has proposed giving the SEC the authority to
prohibit predispute arbitration clauses in broker-dealer and
investment advisory account agreements with retail clients if
it studies these clauses and concludes that there is any harm
on investors. SIFMA supports that provision.
There are several issues that impact regulation of smaller
firms that I would like to address. While each one may be
insignificant, taken as a whole the cumulative effect can be
quite devastating. For example, fees for financial audits of
small firms will increase due to the SEC's decision not to
extend an exemption from small firms' Sarbanes-Oxley audit
requirements. FINRA has proposed to eliminate anti-money-
laundering third-party exemption for small firms; this will
increase AML audit costs. SIPC, FINRA, and the MSRB have
proposed or implemented increased assessments to firms already.
The cumulative impact of these and other changes drain limited
resources from small firms and from their efforts in paying for
the compliance training and customer service functions.
Finally, SIFMA supports the small business community
initiative to correct deficiencies in Reg X to eliminate
outdated regulations, ensure agencies do not ignore the
requirements of Reg X, and compel agencies to consider economic
impacts on the rules of small business.
Thank you, Madam Chairwoman and the rest of the committee
for allowing me to present SIFMA's views. We hope to continue
the dialogue on the financial service regulatory reform and
stand ready to assist any way we can.
Chairwoman Velazquez. Thank you, Mr. Moloney.
[The statement of Mr. Moloney is included in the appendix.]
Chairwoman Velazquez. Our next witness is Ms. Dawn Donovan,
the CEO of Price Chopper Employees Federal Credit Union in
Schenectady, New York. Price Chopper has over 6,500 members
with assets of $16 million. Ms. Donovan is testifying on behalf
of the National Association of Federal Credit Unions. The
Association of Federal Credit Unions was founded in 1967 to
shape the laws under which Federal credit unions operate.
Welcome.
STATEMENT OF DAWN DONOVAN
Ms. Donovan. Good afternoon, Chairwoman Velazquez, Ranking
Member Graves, and members of committee. My name is Dawn
Donovan, and I am testifying today on behalf of the National
Association of Federal Credit Unions, NAFCU. I serve as the
President and CEO of Price Chopper Employees Federal Credit
Union in Schenectady, New York. Our credit union has seven
employees, approximately 4,500 members in six States and just
over $19 million in assets.
NAFCU and the entire credit union community appreciate the
opportunity to participate in this discussion regarding
financial regulatory restructuring and its impact on America's
credit unions.
It is widely recognized that credit unions did not cause
the current economic downturn; however, we believe we can be a
important part of the solution. Credit unions have fared well
in the current economic environment and as a result many have
capital available.
Surveys of NAFCU member credit unions have shown that many
are seeing increased demand for mortgage and auto loans as
other lenders leave the market. Additionally, a number of small
businesses who have lost important lines of credit from other
lenders are turning to credit unions for the capital that they
need. Our Nation's credit unions stand ready to help in this
time of crisis and unlike other institutions have the assets to
do so.
Unfortunately, an antiquated and arbitrary member business
cap prevents credit unions from doing more for America's small
business community. It is with this in mind that NAFCU strongly
supports H.R. 3380, the Promoting Lending to America's Small
Businesses Act of 2009. This important piece of legislation
would raise the member-business lending cap to 25 percent of
assets, while also allowing credit unions to supply much-needed
capital to underserved areas which have been among the hardest
hit during the current economic downturn.
NAFCU also strongly supports the reintroduction of the
Credit Union Small Business Lending Act, which was first
introduced by Chairwoman Velazquez in the 110th Congress.
As the current Congress and administration mull regulatory
reform, NAFCU believes that the current regulatory structure
for credit unions has served the 92 million American credit
union members well. As not-for-profit member-owned
cooperatives, credit unions are unique institutions in the
financial services arena and make up only a small piece of the
financial services pie.
We believe that NCUA should remain the independent
regulator of credit unions and are pleased to see the
administration's proposal would maintain this independence as
well as the Federal credit union charter.
NAFCU also believes that the proposal is well intentioned
in its effort to protect consumers from the predatory practices
that led to the current crisis. We feel there have been many
unregulated bad actors pushing predatory products onto
consumers, and we applaud efforts to address this abuse.
It is with this in mind that we can support the creation of
the Consumer Financial Protection Agency, CFPA, which would
have authority over nonregulated institutions that operate in
the financial services marketplace. However, NAFCU does not
believe such an agency should be given authority over regulated
federally insured depository institutions, and opposes
extending this authority to credit unions.
As the only not-for-profit institutions that would be
subject to the CFPA, credit unions would stand to get lost in
the enormity of the proposed agency. Giving the CFPA the
authority to regulate, examine, and supervise credit unions,
already regulated by the NCUA, would add an additional
regulatory burden and cost to credit unions. Additionally, it
could lead to situations where institutions regulated by one
agency for safety and soundness find their guidance in conflict
with the regulator for consumer issues. Such a conflict will
result in diminished services to credit union members.
Credit unions already fund the budget for NCUA. As not-for-
profits, credit unions cannot raise moneys from stock sales or
capital markets. This money comes from their members' deposits,
meaning credit union members would disproportionately feel the
cost burden of a new agency.
However, NAFCU also recognizes that more should be done to
help consumers and look out for their interests. We would
propose that rather than extending the CFPA to federally
insured depository institutions, each functional regulator
create a new strengthened office on consumer protection.
We were pleased to see the NCUA recently announce its
intention to create such an office. Consumer protection offices
at the functional regulators will ensure those regulating
consumer issues have knowledge of the institutions they are
examining and guidance on consumer protection. This is
particularly important to credit unions as they are regulated
and structured differently from others.
We believe such an approach would strengthen consumer
protection while not adding unnecessary regulatory burden. Part
of avoiding that burden will be to maintain a level of Federal
preemption so small institutions like mine, with members in
several States, are not overburdened by a wide variety of State
laws.
In conclusion, while there are positive aspects to consumer
protection and regulatory reform, we believe Federal credit
unions continue to warrant an independent regulator handling
safety and soundness and consumer protection matters.
I thank you for the opportunity to appear before you on
behalf of NAFCU and would welcome any questions that you may
have.
Chairwoman Velazquez. Thank you, Ms. Donovan.
[The statement of Ms. Donovan is included in the appendix.]
Chairwoman Velazquez. I am going to ask this question to
everyone. I will ask everyone to answer, even though I
anticipate the answers that you will provide--but just to be on
the record.
As you know, the President laid out five core elements for
reform in his white paper, and these include stronger
supervision of institutions, comprehensive supervision of
financial markets, enhanced consumer protection, the creation
of tools for financial crisis, and increasing international
cooperation.
In your opinion, which of these elements should be
prioritized? Mr. MacPhee?
Mr. MacPhee. I think given what we have just come through
in this country, and the lack of regulation on the
unregulated--and oversight--and the dismal position that we
found ourselves in when the smoke cleared in terms of the
funding of our reserve for FDIC insurance, et cetera, I think
oversight has to be the first priority. And I think the
systemic risk in our whole system has to be priority.
Chairwoman Velazquez. Mr. Roberts.
Mr. Robinson. Madam Chair, I would think also that the
issues surrounding systemic risk and surrounding those
organizations that previously were unregulated or
underregulated are the most important items to address among
those items that you talked about.
Chairwoman Velazquez. Thank you.
Mr. Hampel.
Mr. Hampel. I would agree with those comments. One thing
the Congress needs to be concerned about is, right now there is
a fervor to do regulatory reform because we are still in the
latter stages of the crisis. And that is perhaps not the best
time to make significant changes when we are so caught up in
the moment.
The risk is, if we wait too long, by the time we have had
enough time to study it properly, there will not be sufficient
impetus do it--extending some form of regulation to the
currently unregulated.
Chairwoman Velazquez. Mr. Moloney.
Mr. Moloney. Again, I think the systemic element has to be
dealt with as a high-priority item.
I would also maybe go to the other end and start with the
consumer protection and move up from there. Between those two,
I think you can cover a lot of ground towards making it a more
effective and fair playing field.
Chairwoman Velazquez. Okay.
Ms. Donovan.
Ms. Donovan. Madam Chair, I would say our position would be
the systemic risk. But also the regulation of the unregulated,
pretty much as Mr. Hampel and the other members of this panel
have said.
Chairwoman Velazquez. Thank you.
Mr. Roberts and Ms. Donovan, during times of financial
duress, higher capital requirements can provide a cushion for
lenders. But these increased levels can also restrict a bank or
credit union's ability to make loans to small firms.
Can you talk about how higher capital requirements might
impact your small business lending practices?
Mr. Roberts. I think that is really a very good question.
In my testimony, I spoke about the fact that in 2008, my
bank paid $75,000 in FDIC insurance. In 2009, that number could
be anywhere between $550,000 and $700,000.
When you start looking at those numbers, what in turn you
see is, that means profitability. Money that is going to go
into the capital of our organization is going to be reduced by
$475,000 to about $600,000. In turn, what that relates to is
capital to support loans, loans that might be available,
supported by that capital, could be anywhere from $5 million to
$7 million less. That is certainly going to impact our ability
to lend to small businesses as well as customers as a whole.
As those capital requirements get to be tighter, it
certainly does provide an additional safety net, but one has to
keep in mind that it is also going to restrict lending.
Chairwoman Velazquez. And then there will be other people
that will say that the risk to taxpayers and depositors goes
down.
Mr. Roberts. I would--my response to you is, I think there
is a practical level of capital that can satisfy both sides of
that particular equation.
We talked earlier--I think at the prior panel--that some
people were leveraged 30-to-1; that is probably too much. Is 5-
to-1 too little? I would suggest that it is. I think there is a
capital level that is a reasonable balance that continues funds
able to be lent and still provides that safety to the taxpayer.
Chairwoman Velazquez. Ms. Donovan?
Ms. Donovan. Madam Chair, most credit unions today have
sufficient capital. We have good capital on hand.
Unfortunately, the artificial cap that is on member lending is
what is refraining us from lending that out.
I am a very small credit union, as I noted. We have hardly
any member-business lending, very little. However, we do have
the capital to lend to the small businesses in our community.
And most credit unions do have that at this point.
Chairwoman Velazquez. Okay.
Mr. Moloney, up until the financial crisis, the economy
experienced a decade of relatively solid growth, and during
this time we saw an explosion of financial innovation and all
of the products that went with it.
Are you concerned that the proposed regulation might
reverse this trend of financial innovation?
Mr. Moloney. Good question.
"Yes" is the short answer, but I probably would like to
also state that I think that it is very possible that with the
creation of these innovative products, we may have gotten ahead
of ourselves and had things that people really did not fully
think out and sold to clients who didn't have a clue.
So maybe the answer is "yes." I want to have that ability,
but I also want to make sure that the people who are involved
on the buying and the selling side of it know the products that
they are dealing with.
Chairwoman Velazquez. Mr. MacPhee and Mr. Hampel,
addressing systemic risk will be an essential element of the
reform proposal. As you noted in your testimony, community
banks are smaller and are much less interconnected than larger
international institutions. Even so, community banks can still
transmit risk into the financial system.
In light of this, should community banks or all credit
unions be subject to systemic regulation?
Mr. Hampel. Well, Madam Chair, speaking for credit unions,
my understanding of systemic risk is such that if even the
largest 10 credit unions were all to get into extreme
difficulty at same time, it would not spread to the rest of the
financial system. So I don't think that credit unions could
ever be the source of systemic risk, just by the nature of
their size.
However, credit unions, because they are connected and
users of the rest of the financial system, can be victims of
the systemic risk of other institutions; and that is why we are
interested in the issue.
Chairwoman Velazquez. Okay.
I have other questions, but I will--
Mr. Graves. I will pass, Madam Chair, for now.
Chairwoman Velazquez. Mr. Westmoreland?
Mr. Westmoreland. Thank you, Madam Chair.
Let me say--you know, the first panel we talked about
unintended consequences. And, Mr. Roberts, you hit the nail on
the head with your testimony about being the victims of
somebody else doing some wrong things in the banking industry.
You understand that our concern about some of these new
agencies that are created, we don't know what the rules and
regs are going to be. And that is basically what has happened
with some of the legislation that we have passed recently not
knowing how the regulators are going to go out into these banks
and enforce certain regulations that Congress really does not
have any control over.
Now, I know from talking to some of my independent bankers
and community bankers that--how many sets of regulators, Mr.
Roberts, does the typical bank have in Virginia? Are you in
Michigan or Virginia?
Mr. Roberts. I am in Virginia.
Mr. Westmoreland. Virginia?
Mr. Roberts. We are--again, with a dual banking system, we
are a State-chartered bank that happens also to be a member of
the Federal Reserve System. We are regulated by the
Commonwealth of Virginia and we are also regulated by the
Federal Reserve.
Mr. Westmoreland. How many sets of regulators do you have
come in?
Mr. Robinson. We will have, in any particular year, at
least two examinations. One would be a safety and soundness
examination by either the State or the Federal Reserve. The
second would be a consumer affairs examination that is solely
looking at our adherence to consumer protection laws; that is
done by the Federal Reserve.
I think it was stated earlier in this testimony that I
fully believe that the prudential regulator, the one who has
responsibility for safety and soundness, ought to have
responsibility for consumer affairs.
I would also share with the committee, about 6 weeks ago we
just completed a consumer affairs examination by the Federal
Reserve. Prior to that examination, we received a questionnaire
from the Federal Reserve, probably 45-50 pages long, requesting
a number of documents, as well as questions. We had 14
examiners come into our bank for 2 weeks to review all of those
issues that they thought might have arisen through that pre-
questionnaire.
I would suggest to you that it was a very extensive, fully
complete examination that is entirely separate from safety and
soundness.
Mr. Westmoreland. On top of that we had another knee-jerk-
reaction kind of thing in Congress actually before I got here,
Sarbanes-Oxley.
Could you tell me, due to that knee-jerk reaction, how much
that costs the average bank? I know you said your FDIC premiums
went from 75 to 5 and something.
What kind of cost and what kind of audit does the Sarbanes-
Oxley law bring to the banking business?
Mr. Robinson. We have done regular reviews of the cost of
Sarbanes-Oxley at our bank. The cost, year in and year out,
approaches $250,000 to $275,000. We have right at 2.5 million
shares of stock outstanding.
I have shared with my shareholders at annual meetings the
cost is about 10 cents a share. If you are at a trading volume
of 10 times earnings, that is going to be a dollar a share. At
16 times earnings that is a $1.60 a share that takes place year
in and year out. And I would suggest that my shareholders
hardly see the benefit of that reaction.
Mr. Westmoreland. Thank you.
Mr. Moloney, when we talk about things being
underregulated, we had the credit default swaps which, if I
understand correctly, is a company that was offering insurance
on something that they were selling that was not regulated to
offer insurance, so they came up with a product called a credit
default swap.
Is that basically what that is in a common language?
Mr. Moloney. It is an element that our firm was never
involved with.
Mr. Westmoreland. There is somewhere down the line with the
credit default swap and all of these derivatives and stuff
that, to me, somebody that was--these companies are regulated.
The SEC or somebody should have caught this, and I don't know
if it was underregulation or the lack of enforcement in people
wanting to expose some of these programs that were out there.
But the problem that we are having--and I am in Georgia,
and we have had more failed banks that anywhere else, and what
is happening is--Mr. Roberts, you spoke of this--the regulators
are coming in and changing the way some of these banks, that
had a good business going on, are able to lend money, how much
cash reserves they have got to have versus how much money they
are able to lend; reduction in real estate portfolios that are
performing assets, but they are wanting them reappraised, more
cash put in the deal. And it is really a snowball effect.
And Madam Chair, I will yield. I know I have taken more
time than the light. But--I would like to have at least one
more round of questioning, if that is possible, but I yield
back to you.
Chairwoman Velazquez. You can continue.
Mr. Westmoreland. Thank you, ma'am.
From what I see, the problem is that--Mr. MacPhee, being a
community bank, I would like to hear from you too.
Because what it seems like, when we passed the TARP
legislation, we were told that this was going to be used to
free up the credit market. And it has had, to me, just the
opposite effect on freeing up the credit market.
It has already created a snowball effect of real estate
values. What is going on in the marketplace; the banks that did
get the TARP money are using this just to straighten up their
books. And if you look at Goldman Sachs, and Bank of America
talked about they made billions of dollars, they were able to
buy these assets for 10 to 20 cents on the dollar and then sell
them for 30 or 40 cents on the dollar, so they really did have
a value there.
But to clean up their books and to do what some of these
regulators were making them do, people were losing their
retirement, they were losing their equity, they were losing all
the cash that they had put in the deal, now that they can no
longer get out. It has had just the reverse effect on that.
And that is what concerns me about some of this big
legislation that we are talking about is, some of these
unintended consequences of possible rules and regs that can be
written and enforced by some agencies that we really have no
control over.
Could you comment on some of that?
Mr. MacPhee. Yes, thank you. I am no expert on TARP. I do
know that at the time that TARP was put into place and the
institutions that were qualified for and took TARP, it was an
important step in reassuring the public that the financial
institution system in this country was going to go on. So I
don't fault them for that.
I think that being from a community bank, we are a $77
million bank and have 13.7 percent to capital and 29 percent
liquidity. It is not a model that you see very often today.
When the others were paying out 75 percent in dividends and
retaining 25 percent, our model was the opposite. We were
paying out 25 percent and retaining 75 percent.
I am not saying that we are right and they are wrong. But
there was a happy medium in there. I think both the unregulated
and the systemically risky, which I would define as those banks
over $100 billion could wreak havoc on society again, and did
need TARP money to survive.
The community banks today, I can tell you, are willing and
ready to loan. I have money. Unfortunately for me, I live in a
State where the unemployment is so high that I am not seeing
the loan value that you might see in other areas.
Mr. Westmoreland. I will have you open up a branch in
Georgia. We have borrowers down there.
One thing for the credit union, you don't belong to the
FDIC, right?
Ms. Donovan. Correct. We are regulated by the NCUA.
Mr. Westmoreland. What kind of fees do you pay them for
your deposits?
Ms. Donovan. On average to NCUA, it might be a $1,000 or
$1,500, what it might cost me. It does not seem like a lot of
money, I am sure. However, I have seven employees including
myself--six, full-time; one, part-time--and we take care of all
4,500 members over the six States.
In the whole scheme of things, it is a lot of money for us.
My payroll is very slim. I take on many roles.
Mr. Westmoreland. But do you have to pay a premium for what
your deposits are, what they guarantee? They guarantee your
deposits, right?
Ms. Donovan. Correct.
Mr. Westmoreland. So your fee for your deposits would be
1,500 bucks?
Ms. Donovan. Yes.
Mr. Hampel. This year, credit unions will pay an insurance
premium of 15 basis points of their insured shares, which is
higher than what it normally is for credit unions, but it is
because of losses, collateral damage credit unions have
experienced.
We typically fund our system by credit unions makeing
deposits into the fund, and it is the earnings from those
deposits that the insurance fund uses to operate. Probably, for
the next several years, credit unions will be paying premiums
of about 15 basis points. It is probably less than what FDIC-
insured institutions will pay, but it is significant compared
to what credit unions have historically paid.
Mr. Westmoreland. Thank you.
I yield back, Madam Chair.
Chairwoman Velazquez. Thank you.
Mr. MacPhee, I would like to ask my last question to you.
It is regarding securitization that has been billed as one of
the chief culprits in the financial crisis. At the same time it
has been credited with increasing the availability of capital
for small firms.
To what degree does your bank take advantage of loan
securitization, and do you believe it should be constrained
going forward?
Mr. MacPhee. Our bank has basically used Fannie and Freddie
secondary market for liquidity purposes and for helping out
with our capital situation.
We tend to retain most of our loans in our bank. We still
do a 5-year balloon mortgage for our customers, and I think--
one of the things that we have to do as a community bank is,
relationship banking rather than transactional banking. So the
structure out there for most community bankers that I deal
with, it is important to have securitization and
collateralization and selling off to the secondary market to
keep liquidity in the system.
Chairwoman Velazquez. Mr. Roberts.
Mr. Roberts. I would agree with you wholeheartedly that
securitization has been a part of the problem that has been
created in our economy. And I would agree with you
wholeheartedly that securitization is one of those avenues that
has allowed greater lending to take place. It has provided
additional liquidity, additional funding to come into financial
institutions that have allowed for continuing loans to take
place.
It would seem to me, however, that it has been a part of
what has caused some systemic risk; and I think that we need to
consider what regulations that we can put into place that would
not allow the issues that have happened over the past 12 months
to happen again. But that does not mean throwing the baby out
with the bathwater and stopping securitization. That has been a
very important factor in the ability of this country to go
forward.
Chairwoman Velazquez. Very good.
Does any other member wish to ask questions?
Let me take this opportunity thank all of you. This has
been very insightful, and as a member of the Financial Services
Committee, it helps me to bring a different perspective into
the debate. And so, for that, I really appreciate all your
cooperation and being here today. Thank you.
I ask unanimous consent that members will have 5 days to
submit a statement and supporting materials for the record.
Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 4:53 p.m., the committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]