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23–874 PDF 2017

S. HRG. 114–634 

REDUCING THE BURDEN OF FEDERAL 

REGULATIONS ON COMMUNITY BANKS 

AND SMALL BUSINESSES 

FIELD HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

AND ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

APRIL 9, 2015 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 

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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED FOURTEENTH CONGRESS 

DAVID VITTER, Louisiana, Chairman 

BENJAMIN L. CARDIN, Maryland, Ranking Member 

JAMES E. RISCH, Idaho 

MARCO RUBIO, Florida 

RAND PAUL, Kentucky 

TIM SCOTT, South Carolina 

DEB FISCHER, Nebraska 

CORY GARDNER, Colorado 

JONI ERNST, Iowa 

KELLY AYOTTE, New Hampshire 

MICHAEL B. ENZI, Wyoming 

MARIA CANTWELL, Washington 

JEANNE SHAHEEN, New Hampshire 

HEIDI HEITKAMP, North Dakota 

EDWARD J. MARKEY, Massachusetts 

CORY A. BOOKER, New Jersey 

CHRISTOPHER A. COONS, Delaware 

MAZIE K. HIRONO, Hawaii 

GARY C. PETERS, Michigan 

ZAK BAIG, Republican Staff Director 

ANN JACOBS, Democratic Staff Director 

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C O N T E N T S 

OPENING STATEMENTS

Page 

Gardner, Hon. Cory, a U.S. Senator from Colorado ............................................. 1 

Buck, Hon. Ken, a U.S. Representative from Colorado ........................................ 3 

Coffman, Hon. Mike, a U.S. Representative from Colorado ................................. 4 

WITNESSES

Panel 1 

Davidson, Jay, First American State Bank, Denver, CO ..................................... 5 

Reyher, Dave, Colorado East Bank & Trust, Denver, CO .................................... 10 

Propst, Koger, ANB Bank, Denver, CO ................................................................. 16 

Kelly, David, FirstBank, Denver, CO .................................................................... 20 

Panel 2 

O’Donnell, Mike, Colorado Lending Source, Denver, CO ..................................... 34 

Gagliardi, Tony, National Federation of Independent Business, Denver, CO .... 41 

Hays, Jr., Roger, Premier Employer Services, Inc., Denver, CO ......................... 48 

Childears, Don, Colorado Bankers Association, Denver, CO ............................... 52 

ALPHABETICAL LISTING

Buck, Hon. Ken 

Testimony .......................................................................................................... 3 

Childears, Don 

Testimony .......................................................................................................... 52 

Prepared statement .......................................................................................... 55 

Coffman, Hon. Mike 

Testimony .......................................................................................................... 4 

Davidson, Jay 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 8 

Gagliardi, Tony 

Testimony .......................................................................................................... 41 

Prepared statement .......................................................................................... 44 

Gardner, Hon. Cory 

Opening statement ........................................................................................... 1 

Hays, Jr., Roger 

Testimony .......................................................................................................... 48 

Prepared statement .......................................................................................... 50 

Kelly, David 

Testimony .......................................................................................................... 20 

Prepared statement .......................................................................................... 22 

O’Donnell, Mike 

Testimony .......................................................................................................... 34 

Prepared statement .......................................................................................... 38 

Propst, Koger 

Testimony .......................................................................................................... 16 

Prepared statement .......................................................................................... 18 

Reyher, Dave 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 12 

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REDUCING THE BURDEN OF FEDERAL 

REGULATIONS ON COMMUNITY BANKS 

AND SMALL BUSINESSES 

THURSDAY, APRIL 9, 2015 

COLORADO STATE CAPITOL, 

DENVER, CO. 

The Committee met, pursuant to notice, at 1:35 p.m., at the Colorado State Capitol, 200 East Colfax Avenue, Hon. Cory Gardner, 

presiding. 

Senator Present: Cory Gardner. 

Representatives Present: Ken Buck and Mike Coffman. 

OPENING STATEMENT OF HON. CORY GARDNER, A U.S. 

SENATOR FROM COLORADO 

Senator GARDNER. All right. Thank you, everyone, for joining us 

today for today’s Senate Committee hearing. I’ll call this hearing 

of the Small Business Committee of the United States Senate to 

order. I’m pleased with everybody that is here today. Welcome to 

the U.S. Senate Small Business Committee’s field hearing on the 

fabulous subject of Reducing the Burden of Federal Regulations on 

Community Banks and Small Businesses. 

I’m very pleased to be joined by Representative Buck and Representative Coffman, as well as our expert witnesses from around 

the State. Thank you to all of you and each of you for being here. 

We’re going to have two panels testifying today. We’ll start with 

opening statements, and then we’ll move on to a question-and-answer period. For the first panel we’ll focus on Dodd-Frank issues 

and other federal regulations burdening community banks in Colorado and throughout the country. Then we’ll do another round of 

opening statements and Q & A for the second panel to discuss the 

effect of financial regulations on small businesses’ access to capital, 

as well as those broader federal regulations that are affecting small 

businesses, impeding job creation and economic growth. 

I thought that it was important, though, today to lay out a couple 

of things that are happening in this country. Really, the narrative 

that we’re hoping to draw out today is talking about our financial 

institutions. Community banks around the State and around the 

country are shrinking at an accelerating rate, at least partially due 

to financial regulations that negatively affect small businesses, 

among other groups, because community banks devote a disproportionate amount of their portfolios, their resources, to small business 

lending. This comes at a time when small businesses are already 

reeling, of course, from many other areas of federal regulation. 

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Just to lay some of the groundwork, the consolidation in the 

banking industry, as many of you know, has occurred since the 

1980s. The number of community banks has fallen dramatically. 

The overall number of banks today is less than half the number 

that existed in 1984, according to the FDIC. From 1984 to 2011, 

the number of banks with assets less than 25 million declined by 

96 percent. That’s a 96 percent decline. Meanwhile, larger banks 

grew 11-fold in size over the same period, raising their share of industry assets from 27 percent in 1984 to 80 percent in 2011. 

And right here in Colorado we see a similar trend. In 1994, Colorado had 307 federally insured banks. We now have half that number, with 148 operating in the State. At the same time, the market 

share of the three largest institutions increased from 34 percent in 

1994 to 46 percent in 2014. Many of the regulations that we’ll be 

talking about today weren’t focused on Main Street banks in Burlington or Main Street banks in Grand Junction, but were focused 

on other areas. So the Wall-Street-driven regulations are affecting 

Main Street banks. It has nothing to do with crisis. 

So that’s what this hearing is about. It’s about making sure that 

we get back to a country and state that is able to meet the needs 

of its people, its businesses, its communities in a way that reflects 

the passions of our communities. We’ll talk about compliance costs 

falling disproportionately on small institutions. We’ll talk about 

consolidation and the effect it has on small institutions’ access to 

capital. We will talk about the share of money that banks, small 

banks, community banks, are providing to small businesses, which 

the White House website describes small businesses in this country 

as providing two out of every three jobs created. That’s a significant impact that is being borne by some of the smallest of our communities and some of our greatest assets of this country. 

So I hope that you’ll have an opportunity, as well as me, to engage, to have a good back-and-forth discussion about the issues 

that matter and solutions to the challenges that we have laid out 

today. 

And I want to thank all of you again for being in this committee 

hearing. It’s great to be back in the state legislature. This is a 

unique experience for me. I was always in the minority in the state 

legislature, so I never held a gavel. This is new territory for us all. 

Thanks again to the witnesses for being here. Thanks to the audience for your participation today and for your feedback. We’d love 

to continue to hear your thoughts on today’s subject and beyond. 

Again, I hope that this field hearing provides an opportunity for 

the Small Business Committee, for Congressman Coffman and Congressman Buck to take back to Washington, D.C., to accomplish 

things that we need to in order to get our economy back on track 

and to address the vital role that all the institutions represented 

here today, from credit unions to banks, really do perform in our 

community. 

So thank you very much for the opportunity to be here. 

And I will turn it over to Congressman Buck. 

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OPENING STATEMENT OF HON. KEN BUCK, A U.S. 

REPRESENTATIVE FROM COLORADO 

Representative BUCK. Thank you, Senator. I appreciate that. 

First of all, it’s a great honor to be under a gold dome where a legislative body knows how to balance the budget. 

Senator GARDNER. Cool. 

Representative BUCK. And I must mention that I do have a favorite legislator. My wife, Perry, is right over there. I usually get 

in trouble naming favorites, but not in this case. I’d get in trouble 

if I didn’t. 

One of the honors of being a congressman is to have the opportunity to go around the Fourth Congressional District and listen to 

stories from various people and their concerns. And I have heard 

over and over again concerns of small business people and the regulatory burden that they face. It’s not just the tax burden; it’s not 

just the rising energy cost. But the regulatory burden is hitting so 

many businesses so hard. 

I was with a group of bankers a couple months ago. They told 

me about one banker who had one compliance officer five years 

ago, and he now has four compliance officers. They explained to 

me, compliance officers don’t make money, they don’t help the community, they don’t help loan money to businesses in the community 

that need it. It’s overhead, and it’s overhead that’s caused by the 

Federal Government. 

I was out on the eastern plains near Burlington, visited with a 

group of business people. A gentleman had a greenhouse. He was 

telling me that OSHA came out to do an audit. And he had a bottle 

of Windex, and he didn’t have a spec sheet for the bottle of Windex. 

He was fined for not having a spec sheet for a bottle of Windex. 

I talked to an owner of a mid-sized to large construction company, and he told me that they were audited by the Department 

of Labor. And the Department of Labor wanted to see the Christmas list for the employee Christmas function. And then they wanted to see a list of the people who didn’t attend the Christmas function. Then they were fined because they didn’t go to the people that 

didn’t attend and ask them if they felt included at the Christmas 

party, or the holiday party. 

It’s that kind of regulatory burden that we put on job creators 

that’s causing us problems. And one of the biggest problems that 

I find in talking to business people and bankers is that they have 

no certainty. They don’t know what’s going to happen three, four, 

five years from now. And they can’t make investment decisions 

without knowing what the interest rate is going to be. They can’t 

make investment decisions without knowing what their healthcare 

costs are or what their management costs are. It goes right down 

the line. 

If we can’t, as a government, create more certainty so that business people can grow, we will never deal with the $18.3 trillion 

debt that we now have. And that’s something that, as a country, 

is, in my opinion, the greatest threat to our national security. 

We’ve got to be able to deal with that, got to bring certainty. 

I thank the panel and Senator Gardner. 

Senator GARDNER. Thank you, Congressman Buck. 

Congressman Coffman. 

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OPENING STATEMENT OF HON. MIKE COFFMAN, A U.S. 

REPRESENTATIVE FROM COLORADO 

Representative COFFMAN. Thank you, Senator Gardner, for holding this important hearing on the regulatory burdens facing Colorado’s community banks and small businesses. 

I would also like to extend a warm welcome to a couple folks 

from my district: Papa Dia, a branch manager of KeyBank, located 

in Aurora, Colorado, an immigrant from Senegal and a leader in 

my community; and Mel Tewahade from Infinity Wealth, also located in Aurora, Colorado, a strong leader in the Ethiopian community in my district. Both of these men are distinguished leaders. 

And finally, I would like to thank our witnesses for making the 

trip to the capitol today to testify. 

When I was a small business owner in the 1990s with an Aurorabased company, I can remember having accounts with a community 

bank that was later taken over by an interstate bank—I won’t give 

the name—but how the decisions could no longer be made by the 

officers at that bank—they were outsourced—and how impersonal 

that relationship became and, ultimately, how I had to leave that 

bank to join another community bank. 

So I think it’s a problem that, in my view, is an overreaction by 

the Congress of the United States, a regulatory overreaction, in 

terms of passing Dodd-Frank. And the problems that it has imposed on smaller financial institutions is to the benefit, quite 

frankly, I think, of large financial institutions in this country. The 

notion of too big to fail—too big to exist, from my point of view. If 

the institution is so large it presents a systemic risk to the economy, and somehow we’re supposed to protect it, I think it’s problematic. 

The passage of Dodd-Frank was a massive change in law, hundreds of pages long with thousands of pages of complicated regulations. Community banks are now forced to spend millions of dollars 

on regulatory compliance costs instead of using those resources for 

lending. Although banking regulation may have started with good 

intentions, ill-fitting rules harming small banks and their customers must be changed. 

There are some in the administration and Congress who are unwilling to make any changes to Dodd-Frank, no matter how small. 

Dodd-Frank is almost five years old. It is hard for me to believe 

that such a major law is perfect. It is now time to make some commonsense changes to help our small businesses and community 

bankers. 

I look forward to hearing from our witnesses today. Thank you 

very much. 

Senator GARDNER. Thank you, Congressman Coffman. 

Now I am pleased to introduce our first panel of Colorado experts 

that will discuss the state of community banking in Colorado and 

the federal regulations they’re subject to. 

Once I introduce you, please give your opening statement, and 

then I’ll introduce the next witness. 

Jay Davidson is the founder, chairman, and CEO of First American State Bank. He brings more than 25 years of experience in the 

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ognized by numerous industries and public organizations for his expertise. 

Jay, go ahead and give your testimony. 

STATEMENT OF JAY DAVIDSON, FIRST AMERICAN STATE 

BANK, DENVER, CO 

Mr. DAVIDSON. Thank you. It’s an honor to be here, and I appreciate the representatives’ involvement in this very important issue. 

I’m a relatively small bank, with a little less than 3 million, in 

Greenwood Village. Started in 1995, 20 years ago. I’ve got to say 

that the environment in which we exist has changed dramatically 

over the years. It’s become much—it’s become much more difficult 

for us to do what we do best, which is, in our case, lend to independent business people. The job creators in our nation are not getting funds that they need to grow their business. 

And so my testimony is not about poor banks. I don’t feel sorry 

for major banks, and I don’t think anybody else does. But I do feel 

sorry for the independent business person, the consumer, the person who can’t get a job. And I think that’s something that you can 

address particularly, and you do have weight in your roles as senators and representatives to make a difference. 

I’d like to point out that commercial banking has declined dramatically since 1990. In 1990, there were 15,335 commercial banks 

in the United States. Today there are 6,570. That’s a 57 percent 

decline. I might also add as an addendum that only one de novo 

bank has been chartered in the past seven years. One. And it’s normally five to ten in any particular year in a normal recovery. 

That’s one in five years. People aren’t starting banks. There’s reasons for that. 

The smaller community banks have a unique role to play, and 

that is that we have the ability to understand the small business 

person, the independent business person. The large guys can do it, 

can certainly make those loans, but they’ve got to spend an inordinate amount of time doing it. They’d probably rather focus on the 

hundred-million-dollar loans or a lot of volume with consumer lending. 

But we independent banks, community banks, focus predominantly on the independent business person. This is the person that 

creates over 60 to 65 percent of the new jobs that exist in the 

United States, that are created in the United States. We have an 

inordinate effect upon jobs creation and people’s well-being, because I think you feel better when you have a good job, a good-paying job, and you contribute to society. I don’t think you feel well 

when you’re getting welfare or a handout. I think most Americans 

want to work. 

I might also add, the largest banks have become larger. In 1990, 

the ten largest banks controlled 33 percent of the deposits in the 

nation. Today, that ten control 81 percent. Too big to fail, that’s 

really done very well. It’s made the big boys even bigger. And that’s 

fine. We’ll all get our market share. That’s not bothering me at all. 

But we are creating a systemic risk in our nation that can’t be handled by anybody, even somebody as good as the Fed Reserve or the 

OCC. They can’t handle what’s going to come down the pike when 

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one of these gigantic guys goes under. And it’s going to happen 

eventually. 

So I just want to include that this information that I just read 

into the testimony is from SNL Financial. And I want to conclude— 

make a statement on their conclusion. 

Smaller community banks play an essential and important role 

in our economy by servicing the small- to medium-sized business 

that adds jobs to our local economy. These same banks provide 

flexible financing for opportunities to help nurture the entrepreneurial endeavors in the local community. Increased regulatory 

burden is placing a large cost and time burden on the smaller community banks and has the potential to stifle economic growth in 

these communities. 

And everything we’ve seen indicates that growth is stifled, that 

we are not—our economy is not growing and we are not recovering 

from the Great Recession. GDP has been sitting at 2.4 percent for 

about two years. It should be at 8 or 9 percent. We’re not increasing the productivity of our nation of products and services. The 

Labor Participation Rate is sitting at 62 percent. 38 percent of the 

people out there that could work are not working. You tell me that 

it’s only a 4 percent differential between 2005. Well, that’s 8 million people without work. And I hear, at least, statistics that unemployment is 6 percent. Excuse me. You’ve got to add that 4 percent 

in. It’s 10 percent. And we’re seven years into this recovery, and 

we’re not going anywhere. 

And I’d submit to you the reason we’re not going anywhere is 

that—I’m not—I’ve got to be real careful here because they regulate me. And I respect what they’re doing. They’ve got a difficult 

job. But the Fed has two jobs. The Federal Open Market Committee, they determine monetary policy. The FOMC determined 

that they would stimulate the economy by creating vast amounts 

of money, unheard of, 4.5 trillion in the past five years. Unheard 

of printing of money. And they reduced the interest rates to near 

zero. This is very stimulative. 

Why isn’t the economy coming around? Because, on the other 

hand, the regulatory agencies are shutting the banks down from 

lending. I can’t lend when I have to hold a 13, 14, 15 total riskbased capital ratio. I can’t lend when I have to hold a 6, 7, 8, 9, 

10 leverage ratio. I can’t lend when my CRE 1 and 2 ratios are at 

300 percent of capital. 

I don’t know how the other fellows are going to talk to this issue, 

and they may not even speak to it. But I think this is the major 

problem: Regulatory overreaction. And honestly, they have a really 

difficult job. In fact, it’s almost an impossible job. They can’t prevent the next recession, but people think they can. It’s impassable 

what’s being put on them. 

So they are overreacting to the stimulus that they saw in the 

subprime markets. They came in and changed the way that we do 

banking, commercial banking on commercial real estate lending, 

and caused this liquidity crunch that we’re facing today. 

So I think that is one of the main reasons that we’re not seeing 

an expansion of the economy. That’s why I say it’s not us poor 

banks. We’ll get through this thing. But it really is sad that we 

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can’t do what we started our banks to do, which is lend to the independent business person and the individuals. 

Thank you very much for this opportunity. 

[The prepared statement of Mr. Davidson follows:] 

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Senator GARDNER. Thank you very much, Mr. Davidson. We appreciate your words today. 

And I notice that the minority leader of the House, Brian 

DelGrosso, is here. I appreciate his participation as well. 

We will go to Dave Reyher next, the president of Colorado East 

Bank and Trust, an independent community bank serving Eastern 

Colorado—and Central Colorado as well—families and farms. Dave 

started his career in banking in 1982 and understands firsthand 

the community banks in small, rural communities. 

STATEMENT OF DAVE REYHER, COLORADO EAST BANK & 

TRUST, DENVER, CO 

Mr. REYHER. Thank you, Senator Gardner. It’s my pleasure to be 

here to testify on the reduction of the burden of federal regulations 

on community banks and small businesses. 

Colorado East Bank & Trust was founded in the early 1990s, and 

we currently operate under the community bank model. What the 

community bank model means is we know our customers much better than any federal regulator, any bureaucrat that creates some 

of these rules we’re operating under today. With this knowledge of 

our customers came the ability for us to custom tailor products and 

services that best met the needs of our customers. That’s been 

taken away, slowly and slowly. We are now facing a 

commoditization of our business unlike any other. And I’ll speak to 

that in a moment. 

There was a recent survey of community banks. There was a 

hundred community banks that were surveyed by KPMG, and senior executives and CEOs from these banks responded to a number 

of questions. One of those was—when asked which of the following 

are the most significant barriers facing your bank over the next 12 

months, 32 percent indicated that the regulatory and legislative 

pressures are the most significant barriers. Interestingly, only 8 

percent responded there was a lack of creditworthy borrowers. 

There was a similar survey done by the Independent Community 

Bankers of America; 6500 surveys were sent out, and 519 bankers 

responded. Some of the results from that indicated that lenders 

who are participating in consumer lending, which includes multifamily residential real estate loans, home equity lines of credit, and 

consumer lending—that there were 9 percent of those banks that 

were considering getting completely out of that product line. Of 

those respondents that indicated that they were getting out of that 

product line, they indicated that they were just going to stop making loans. 

When asked what factors prevented them from making loans, 

those that are in the category of residential real estate lending, 73 

percent indicated that the regulatory burdens of new rules and requirements were preventing them from making these loans. 

So there’s two clear conclusions to the results of these surveys. 

Lenders are leaving the markets because of the regulatory risk of 

needing to comply with all of these new rules and regulations and 

the severe consequences of noncompliance, which includes civil 

money penalties, regulatory consent orders and, in extreme cases, 

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actly the opposite and, in some cases, have had very negative effects on the customers. 

Sadly, as a result of the increased regulatory scrutiny in our industry and the new regulations that have been brought to the 

table, we are slowly seeing, as I mentioned before, commoditization 

of the products and services that we can offer to our customers. 

Gone are the days of taking care of our customers on a personal, 

one-on-one basis. The cookie-cutter approach to lending today in 

particular has led to less credit being available, not only in smaller 

communities, but to small businesses and consumers nationwide. 

I look forward to taking part in the rest of the hearing today and 

answering any questions. Thank you. 

[The prepared statement of Mr. Reyher follows:] 

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Senator GARDNER. Thank you, Mr. Reyher. 

Koger Propst is the president of ANB Bank. He brings more than 

30 years of experience in community banking, advocating for the 

role independent banks play in our communities. He serves in various roles in banking and community organizations, most recently 

having served as the past chair of the Colorado chapter of the Nature Conservancy and the immediate past chair of the Colorado 

Bankers Association. 

Koger, thank you very much for joining us today. 

STATEMENT OF KOGER PROPST, ANB BANK, DENVER, CO 

Mr. PROPST. Thank you. 

ANB Bank is a privately held community bank headquartered in 

Colorado, and our bank focuses on small businesses and commercial banking. And we serve customers both in metropolitan areas, 

as well as small communities throughout the State. 

The prescriptive regulations that Basel III and Dodd-Frank impose substitute regulator judgment for, as Dave was talking about, 

the commonsense lending that our bank and other community 

banks provide. There are numerous vexing issues in both of those, 

and I certainly support the comments about mortgage lending, but 

I will not comment on those today. 

Today I’ll comment on Basel III capital requirements. And essentially, through those capital requirements, regulators are picking 

winners and losers on who the banks should lend to. And they do 

that by assigning risk weightings. And those risk weightings require us to put more capital to support certain types of loans and 

less in others. 

More importantly, the borrower needs and local community 

needs are put aside for a judgment made by a regulator at a point 

in time, in a faraway place, in Washington, D.C., than what’s happening in local communities. And I would add that probably the 

biggest winner of it is the Federal Government. Federal government debt requires zero percent capital for us to support, so there 

is a strong encouragement to put our money there instead of local 

municipalities or local borrowers. 

I want to hit a couple things really quickly within Basel III. One 

is called high volatility commercial real estate. The goal was good. 

The goal was to say that there was a lot of speculative lending and 

that more capital should be required. Unfortunately, it casts a very 

wide net and it’s very punitive if you go outside of that. And I want 

to hit a couple or three examples of those. 

One is—and this is certainly not speculative lending—but we 

often partner with SBA and organizations like Colorado Lending 

Source to provide financing for small business owners to be able to 

buy their own business instead of renting it. We do that through 

a combined loan program and we’ll lend up to 90 percent. That 90 

percent, however, triggers this HVCRE lending and actually causes 

us to have to keep 50 percent more capital. Arguably, that means 

we’ve got to charge 50 percent more to those folks. So it’s highly— 

it creates great discouragement to help them. 

Another one would be, as we look at these, there’s a certain 

amount of equity that has to come in. Oftentimes we’ll partner 

with local EDCs or nonprofits who will put credit enhancements in 

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place to make up the difference because the community has decided 

they want this type of business or this type of activity to occur. We 

cannot count their credit towards the down payment. And in fact, 

again, it can trigger the HVCRE and, again, 50 percent higher capital requirements. 

And then a final note on HVCRE is that even if, in Yuma, Colorado, for example, someone has owned a piece of property for generations, we cannot give value towards the value of the property. 

We have to go to the old cost. The cost might have been impossible 

to determine. That means the borrower has to not only come up 

with the land they’re putting in, but excess cash. Again, very limiting and has nothing do to with the goal of trying to solve the 

original sort of speculative lending problems. 

Two other things within the capital that I think are troubling. 

Small businesses rely heavily on lines of credit. Our bank provides 

those. And under the capital guidelines, we have to set aside 20 to 

50 percent capital for unused lines. That means we earn no money 

on the unused line, but we have to use scarce resources to support 

it. That causes you to think really hard, as a bank, whether you’re 

going to give that line of credit to that small business, because it’s 

extremely expensive to do it. As we all know, it’s the lifeline for 

that small business. Again, it discourages. 

And then the final one that I want to mention is past-due borrowers. If a loan goes 90 days past due, again, the capital, in addition to normal loan reserve, increases for problem assets. We have 

to increase our capital to 150 percent, so, again, 50 percent more. 

What’s the reality of that? The reality is when our borrowers need 

us most, when we’re in difficult economic times and they need a 

bank to work with, we have regulator incentive to get them out of 

the bank because it costs us dramatically. 

Again, these are all things kind of just trapped in capital that 

haven’t been thought through, and they need to be reopened and 

considered. 

I would just make one comment on the overall weight of the regulatory burden. These are just minor examples of things that need 

to be fixed that are suffocating community banks. The losers of this 

assault—certainly we heard the stats on community banks, but it’s 

not just them. It’s the communities and the borrowers they serve. 

I thank you for having this hearing. 

[The prepared statement of Mr. Propst follows:] 

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Senator GARDNER. Thank you, Mr. Propst. 

David Kelly, who we’re looking to next, is the chief risk officer 

for FirstBank, where he is responsible for the development and implementation and ongoing management of all enterprise risk management processes for the company. This includes developing the 

company’s Dodd-Frank Act stress-testing practices and implementing FirstBank’s enterprise risk management practices. 

Make sure you get close to the mic. And thanks for your testimony. 

STATEMENT OF DAVID KELLY, FIRSTBANK, DENVER, CO 

Mr. KELLY. Senator Gardner, thank you for having this communication. And Representatives Coffman and Buck, thank you for 

being here as well. 

This is an important topic. I will try to be brief. You have a copy 

of my written testimony, and that goes into more detail. I’m going 

to hit the high points because my colleagues here have briefly 

touched on there is a dramatic impact to the community, but also 

to small banks, banks of all sizes, but more disproportionate in 

smaller institutions. 

I think Representative Buck previously mentioned talking to 

someone who had to hire additional compliance officers. The 

amount of volume of regulatory change that’s happened since the 

crisis, even pre Dodd-Frank—so I go back to 2008, when the crisis 

was there, through 2014—I highlighted about 15 regs that have 

taken effect, not all on mortgage lending, but throughout every aspect of banking, including safety and soundness and the like. They 

come in at a higher volume really fast. They have more complexity 

to them. 

For example, the Truth-In-Lending Act implementation of Regulation Z. In 2008, the Government Printing Office had 248 pages, 

the regulation, commentary, and all its appendices. As of 2014, 

that stood at 988 pages. That’s the actual reg, the commentary, 

and all the appendices. It’s not the preamble. There’s thousands of 

pages in its preamble to all these new rules that we have to have 

people read through and figure out how do we implement that 

within our organization and what are the pitfalls to doing that. 

The complexity has definitely grown throughout this time as 

well. And depending on the regulator, you have a lot more 

prescriptiveness coming into the regulations, which are basically 

dictating business practices and trying to account for the maybe 

problem practices that could have been dealt with by regulatory enforcement action. But they want to make sure it doesn’t happen 

anywhere, so they put restrictive rules into regulations such that 

you have to follow them. And it has caused a lot of companies to 

have to reconfigure business practices, and all those who didn’t 

have any real problems with their practices. 

If you look at the background of FirstBank, they are predominantly a mortgage lender, or predominantly a real estate lender. 

We had about 10,000 mortgages outstanding in 2009. We’ve got 

24,500 today. Throughout the crisis in 2014, we had 179 total foreclosures. That’s entering foreclosure; not all of them went through 

foreclosure. 

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We didn’t change any of our underwriting practices as a result 

of the economic downturn. We had to change as a result of the regulatory burden. I often get asked, how much does it cost to implement a reg? I would have to hire a full-time person just to go 

through that to figure that out. It’s not the single reg by itself that 

actually creates burden; it’s the cumulative impact of all the regs. 

And I think today there is no thought to cumulative impact. 

Dodd-Frank was put into place. It attacked everything that was 

wrong as part of the crisis. If there was a problem here, put a fix 

to it. Problem here, put a fix. Every little thing that was thought 

to be a problem, they put a fix in. But when you add all that up, 

it’s a huge impact. We go back and look at the time we spent processing mortgage loans. I can give you an example of this. Between 

2010 and 2014, for a hundred-thousand-dollar or less transaction, 

consumer loan transaction, we’re spending 67 percent more time on 

that transaction than we were pre crisis. For a mortgage loan, 

same dollar amount, we’re spending 44 percent more time; 47 percent more time for a mortgage transaction over 250,000. 

This is not changing any of our underwriting standards. It’s all 

the additional disclosures and documentation that we have to ask 

from our borrowers. And small business borrowers actually do get 

impacted on the consumer mortgage side as well. If you are a small 

business owner and your business is growing, I can’t give you credit today for the trends in the industry. I have to look at historically 

what’s happened. If I do want to give you credit for that, I can’t 

just take your word for it. I have to have you go hire a CPA to certify that what you’re telling me is accurate so that I can give you 

credit for it. 

That does add cost to the small business owner, either through 

that additional expense or by having to delay your financing until 

your tax returns catch up to where we can underwrite you for. And 

the interest rate environment can change completely. Small businesses are impacted there. 

There’s technology that goes along with all of these changes 

today, and there’s quality control practices that we must have. So 

throughout this whole process you have to have resources to show 

that you are doing things right, that it’s not going to trip you up. 

A lot of these rules that Congress enacted double the liability for 

some of these, from a civil liability perspective, and brought in 

technical compliance to help manage that civil liability. 

So you have to be very careful about how you go about it. It’s 

no wonder that large or small bank institutions have re-thought 

whether they should continue in this line of business and some of 

them have exited the lines of business, reducing credit that it 

needs. 

Again, it is the cumulative impact of all of the regs that are the 

biggest item that needs to be addressed. But, absent that, I will cut 

my commentary off. 

Thank you for your time. I look forward to your questions. 

[The prepared statement of Mr. Kelly follows:] 

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Senator GARDNER. Thank you, Mr. Kelly. 

Probably what we’ll do is just go to the roundtable part of this 

discussion. I’ll ask a question, and Congressman Buck and Congressman Coffman can jump in with a question at any time. That 

way, you don’t have to suffer listening to one of us. 

I’ll start with you, Mr. Davidson, just talking a little bit about 

the numbers that you cited, the banking numbers, 15,000 reduced 

to 6,000 today. What does banking look like in Colorado in another 

20 years? 

Mr. DAVIDSON. If this trend continues—and I hope it doesn’t, 

with your help—but if this trend continues, you’ll see a few very 

large banks and you won’t see community banks, I don’t believe. 

That’s the broad sense. 

Senator GARDNER. In your mind, this consolidation is being driven by regulatory burden? 

Mr. DAVIDSON. I think predominantly by regulatory burden. I’ll 

give you an example. My grandfather started—bought a bank in 

1903. It truly was a one-horse bank, up in North Dakota. It’s still 

in the family. I kind of hoped that when I started this bank, I’d 

pass it on to my kids. I don’t want to do that anymore. 

Representative COFFMAN. Let me ask Jay Davidson a question, 

but I’d like everybody in the panel to reflect on this. 

First, going back to my small business days, if I didn’t know my 

bankers, I would never have been in business, because there was 

a crucial relationship of someone who believed in my business 

model. And if you commoditize that—Dave, I think you said, Mr. 

Reyher, there’s no way that they could have taken that crucial relationship and could have made that decision. So the 20 jobs that 

I created for my small business would not have existed. 

But community banks have a concentration in commercial real 

estate, and I think they’ve been penalized, by that concentration, 

under Dodd-Frank. I know that in talking to community bankers, 

that if they are performing loans, that they would require a down 

payment because of that. I wonder if, Jay, you could speak to that. 

Mr. DAVIDSON. Yeah. The ratio is called CRE 1 and 2, Commercial Real Estate Number 1 and 2; 1 is the speculative land lending, 

which is dangerous, I will admit. That’s what brought down a lot 

of banks during this last recession. The other one is CRE 2, which 

is a performing loan, a cash-flowing business, an office, an industrial space, a multi-family residence. But that cash flow made cash 

flow throughout this downturn. 

In 2006 or 2007, the regulators advised us banks that are heavy 

commercial real estate lenders that they were going to provide 

guidance, and that guidance was 300 percent of capital for CRE 

lending. I’m in the 600 percent. I’m one of the outliers. I don’t 

think I really am, because most of Colorado lending is commercial 

real estate. You can’t go find an industry like you could in Detroit. 

And I know a lot of my compatriots here do a lot of C&I lending. 

We’re born and raised and bred for CRE lending, commercial real 

estate lending. 

Well, when these guidelines became hard and fast rules one year 

later, we had no time to adjust. This was the beginning of what I 

call the second liquidity crisis, Congressman. All of us banks immediately tried to sell our commercial real estate loans, get them out 

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of there. We had to increase our capital ratio. The best way to do 

that is certainly not to raise capital in a down market; it’s to get 

rid of assets and increase your capital ratio. Well, that created a 

liquidity crisis because nobody wanted to buy anybody else’s loans. 

Nobody wanted commercial real estate. 

I think we’re still feeling the effects of that activity today. We’re 

still being held to a 300 percent of capital CRE 2 level. 

Representative COFFMAN. Mr. Reyher. 

Mr. REYHER. Yes. Representative Congressman, I find it interesting that you talked about that personal relationship that you 

had with your banker. You would never have had a shot without 

that. I think all three of my—the other three of my compatriots 

here, that’s one of the things that they find that kind of drives 

them to be a banker. It’s that personal relationship; it’s that community bank model. 

One of the things that I found today in our report is that you 

have long-established customers within these community banks. 

And a simple deal that years ago used to take an hour, an hour 

and a half, now takes a day or a day and a half to get done. And 

if it’s got any complexity at all to it, it’s 30 days to 60 days before 

this can get done, by the time you figure out all of your appraisal 

requirements, all of the disclosures that have to be filled out today. 

And these, on top of everything with the folks that we’re doing 

business with today, they’re not wait-around kind of people. 

They’re, I got a deal, let’s get it done. Unfortunately, we’re the ones 

sitting across the desk from a disgruntled customer, not the bureaucrat in Washington, D.C., who dreamed this stuff up. So that’s 

a problem. It’s definitely impacting the availability of credit to 

these folks. No doubt about it. 

Representative COFFMAN. Koger. 

Mr. PROPST. Two quick comments. One, in both of these, the 

other CRE—I mean, the limits that Jay was talking about, the 300 

percent, number one, that was guidance, and so you could go above 

it. But the problem with guidance says you’re okay till you’re not. 

So as soon as the regulators said you weren’t, that’s what caused 

the crisis that Jay was talking about. 

The second piece is that as we layer all these regulations and requirements that Dave was talking about, the world is moving faster, and we’re driving it out of a regulated industry into shadow 

banking. If you look at jumbo mortgages and all those sorts of 

things, the shadow banking is coming in and solving the problems 

that the regulated entities can’t. I’m not sure that’s good for our 

economy as well. 

Mr. KELLY. I will echo the comments that have all been made. 

I’ve heard that with my term on the CBA and with a number of 

other institutions. And our institution has seen different type underwriting standards throughout the crisis and afterwards. There 

is definitely higher expectations on how you handle credit transactions. Something Koger just mentioned triggered something else, 

another thought. But it’s regulatory guidance. 

You talk about small business trying to make it, and they’re 

making it in an industry that is one of these higher-risk industries, 

and they get basic banking service now being shut out. Are you 

going to loan to somebody that you can’t hold a deposit relationship 

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with? Aren’t you afraid that they’re going to club you over the head 

with it? The Bureau for Consumer Financial Protection, I think, 

yesterday issued a new lawsuit for debt collection practices and 

bring-in payment process. It’s no longer sufficient that we just 

know our customers; we have to know our customers’ customers. If 

there’s a sense they might be violating a law, any law, state or federal, we’re now held accountable for it. 

Yes, we have the credit side, and we have a lot more that goes 

along with that too. But the operation side can also prohibit the 

banking businesses. 

Representative COFFMAN. Just a follow-up on that. Getting into 

Q & A as to what the Federal Government thinks is a desirable 

business and what isn’t, absent any violations of law, absent any 

violation of regulations, it’s a pretty insidious thing for, essentially, 

the government to say, we don’t like this industry. 

Mr. KELLY. I agree with that in some respects. They are making 

that statement. And, unfortunately, everybody gets swept up in 

what’s called the risk because we just don’t want the liability that 

goes along with banking. But even over the years, any other highrisk industry that you bank, there’s always going to be a segment 

that’s problematic. The problem is they come in with a huge hammer that just flattens the whole industry. It’s too much of a penalty 

for us to sit there and make them, so it’s easier for us to say no. 

Then they do go to the Strato Bank. They have to find those services somewhere. 

Senator GARDNER. Congressman Buck. 

Representative BUCK. Thank you, Senator. 

All of you talked about regulatory burden that you face, the 

amount of cost that it takes to comply with these areas. None of 

you mentioned the penalties that are associated with the audits of 

those regulations. And I’ve heard from bankers that they have been 

penalized because a staple was on the left-hand side. There are 

very significant things in audits. I’m wondering what your experience is. I’ll put it in context first. 

These audits are done by the executive branch of the Federal 

Government, the same executive branch with a secretary of state 

who has an email server in the basement, in violation of federal 

law; the same Federal Government that the president appointed to 

recess appointments to the NLRB, and the Supreme Court, I believe, remanded its decision and determined that those were unconstitutional; the same Federal Government that the president has 

issued executive orders on immigration and those orders are now 

delayed in the courts; the same executive branch that has negotiated, in my opinion, a horrible deal with Iran and is avoiding the 

treaty obligations by not presenting it, or having no intention to 

present it, to the United States Senate. 

That, to me, is ironic that that executive branch would audit 

more banks, banks that really bring business and jobs in this country, and then fine you and penalize you. I’m wondering what your 

thoughts are on penalties associated with these regulations. 

Mr. PROPST. I’ll jump in on that. The one thing I would say is 

we are—or our primary regulator is the Federal Reserve in the 

State of Colorado. And we have found our regulators to be extremely professional, and we have not had any issues with them. 

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Unfortunately, I think the challenge for them is they have to implement the rules. And it’s the rules and the laws and the regulations that are coming along. I know probably not everyone has had 

good experiences with the regulators, and I can’t speak to that. 

But what I would say is that the penalties have increased dramatically, if you step out of line. The reason we’re all putting so 

much emphasis on this is because the cost of failure is extremely 

high. 

Mr. KELLY. I’ll go ahead and add on to that. We are also regulated by the Federal Reserve in the State. Our regulators are very 

reasonable. What I think you do see, though, sometimes is that, especially into the crisis, the pendulum did go too far, not only from 

the congressional side in the passage of Dodd-Frank and some of 

that stuff, but from the regulator side. 

And then you’re in a state where the field examiner is always 

concerned about being second-guessed. They’re looking at an institution, and that institution might happen to fail down the road. 

Then they’re going to get their auditor in there and they want to 

make sure they have everything checked off. Maybe we’re doing everything fine, but I want you to do it slightly different or document 

it more times so I can check this box off so I can make sure that, 

just in case, somewhere down the road, if their institution has 

problems, I won’t have a problem. That’s kind of the environment 

that they’re in. 

The penalties they have gone back to, I believe, not only with 

some of the congressional changes recently from Dodd-Frank, but 

even before, found new ways to raise penalties or to institute old 

penalties against new wrongdoing as a punishment. That’s when 

you see them come out in enforcement action. It’s, oh, better not 

be doing that, we have to put more resources to make sure you’re 

documenting everything. 

Senator GARDNER. Thank you. 

I’ll ask another question to Mr. Propst or Mr. Reyher. As we talk 

about mortgage rules impacting mortgage customers, some who 

may have an established customer history, others who may not, 

what is happening in small town banks, financial institutions, 

mortgage lending institutions, to some of the regulations, and what 

happens to the customer who doesn’t have established credit, on 

the mortgage lending side? 

Mr. REYHER. I’ll try to give a very brief example of that. So a lot 

of our banks are in very small communities. Many of these, we’re 

the only bank in town. We’re looked upon as the place to go for a 

loan, including the 1–4 family residency. So let’s just say a retired 

couple walks in that’s lived in that community for their entire life. 

They’ve banked at that bank. They have a good relationship with 

the bank and they’ve handled their business in a sparkling manner. 

So counter that with somebody new moves to town, walks in and 

says, I’d like a 1–4 family loan. You have no history with that person. But you have to judge those two the same. So what that creates is a cookie cutter. We have these set guidelines because you 

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er on this retired couple and you’re willing to give them a chance, 

just as Congressman Coffman mentioned. 

But if you give that one a chance and you don’t give this one a 

chance, Senator Buck, then you go to the Department of Justice. 

That’s not a fun place to be, I understand. And the fines are just 

astronomical. They start out at a million bucks and go up. 

So that’s the issue. That’s the problem with the community 

banks, cutting off credit to those that most need it. 

Senator GARDNER. Mr. Propst. 

Mr. PROPST. I’ll hit a couple things. There are some qualifying 

standards, so qualifying mortgages. Essentially, that would mean 

anything that the GSEs would buy. If you go outside that, you have 

a liability back to your customer, if something ever goes wrong, 

that says you should not have made that loan, you should have 

qualified it. The bank can be liable for three years of interest. Because of that, there’s a number of community banks that said you 

have to qualify that risk and they said, we’re out of business. 

I will tell you, in our bank, we continue to do that, but we don’t 

know what that risk is. But we felt like we could not cut off our 

small business customers. 

There’s a second piece called the ability to repay, which is what 

David was referencing, saying that there are certain things—and, 

frankly, it’s patterned after FHA, which is also ironic, in that FHA 

had 30-day foreclosure rates up in the mid-teens. An organization 

like FirstBank was under 1 percent. Yet, you can tell me which 

way we got to be underwriting, but I can tell you which way we 

are today. 

If you violate that, that’s actually a violation of law, penalties 

and all the other things. So, for us, we primarily do accommodate 

mortgage loans, which means we lend to people that don’t fit in the 

rest of it. We do small loans, we do other—any lender of small 

business is for their house because, for a business, it’s all one. Your 

mortgage, your personal, your business is all together. 

We actually had a deal the other day, because we can underwrite 

commercial loans the way we underwrite them, we approved a million and a half dollars of credit. We could not approve their mortgage loan. 

Senator GARDNER. They got to apply for credit, but they didn’t 

qualify? 

Mr. PROPST. They’re still stuck in a high rate mortgage loan. We 

couldn’t do it because of ability to repay. 

Just one last quick comment. The QM and ATR rules have had 

a perverse impact on the market. If you look at what’s occurred, 

it used to be the GSEs, the loans under 417, 417,000, were less expensive than the jumbo loans. Because of the regulations and all 

the burden, the extra cost, like what David referenced, those rates 

are higher. And we’re not seeing jumbo loans. So the wealthy people are getting loans that are less expensive than what’s going 

through what’s supposed to be the low-cost provider of the GSEs. 

At least they have—anyway, I won’t go there. 

But that’s what’s occurred in the market, is that Dodd-Frank is 

actually—and the reason that’s occurring is because shadow banks 

are filling that need. You get a whole bunch of the TIC loans and 

others coming in. 

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Senator GARDNER. Give me an example of what a 0.5 percent, 

less interest rate, would mean to the life of an average loan. 

Mr. PROPST. You’re going to assume I’m a banker. Well, if you 

take a $200,000 loan, it’s a thousand dollars a year. 

Senator GARDNER. On a 30-year loan? 

Mr. PROPST. Yeah. 

Senator GARDNER. With a lower-income recipient, okay. 

Mr. PROPST. Yes. They’re paying it off. 

Senator GARDNER. Yes, Congressman Coffman. 

Representative COFFMAN. To all of you, so these—so, obviously, 

there’s some, I think, regulations in the minor loans that existed. 

You see it in Dodd-Frank, CRA loan, Community Reinvestment, 

and the like. 

But let me ask you this. We had a financial crisis in 2008, late 

in 2008. Dodd-Frank was a reaction to that financial crisis, in my 

view. But I wonder maybe if you could tell me, in your view, what 

actions the Federal Government should have taken in response to 

the financial crisis, obviously, going forward, to ensure that it 

didn’t happen again to the extent that it did, where there wasn’t 

the issue of systemic risk. 

Jay. 

Mr. DAVIDSON. Let me try and start a short conversation on that. 

I think you have to go way back to the 1990s and a very well-intentioned effort on the part of Barney Frank, of Frank-Dodd fame, to 

get everybody into a new home. It’s really a great thing. It feels 

really good. They just forgot that there are certain underwriting 

standards that all bankers meet. Nobody sitting here at this table 

would ever write a subprime loan and hold it on its books. We 

never did. 

So I, sadly, have to say, Congress has to take a little bit of the 

blame here. Stay out of our business. You know, Fannie and 

Freddie bought the risk off these banks and did all the subprime 

deals, and we created the Great Recession. This is horrendous that 

we’re seven years into this so-called recovery and we’re not recovered yet. And there’s no indication that we’re going to be recovered 

anytime soon. That was the genesis of this issue, in my humble 

opinion. 

Senator GARDNER. Any more questions? 

Representative COFFMAN. See if anybody else would like to comment on that question. 

Mr. REYHER. I don’t totally disagree. I will say that our bank— 

we don’t do near the volume of Fannie residential mortgages, but 

we might have had two foreclosures in that total period of time. 

Smaller banks, community banks did a good job of underwriting 

their business. The bad actors are the ones who caused this. What 

could we have done? Maybe we need to go after those more aggressively. 

Mr. PROPST. Just a quick comment on that. The GSEs were the 

number one purchasers of subprime, at one point held a trillion 

dollars. If you look at—one of the things that happened in the crisis is that banks became—everybody was a bank. So all the investment houses were banks; Fannie and Freddie were banks. So we 

lost that battle right away. 

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Then when Dodd-Frank came along, it was aimed at what do 

they know how to regulate as banks. Community banks did not 

solve the issue. But all those ills that were talked about were all 

thrown into Dodd-Frank and targeted towards regular banks and 

not—there hasn’t been—GSEs have had nothing done. And a lot of 

the others that came in—maybe the bureau is going after some 

now, but it really didn’t have any. 

To me, that’s the big mistake, is that they piled regulation after 

regulation, because the regulators know us. They don’t know the 

others. 

Mr. KELLY. I don’t know that I can answer that because you can’t 

really stop the next crisis that’s going to come. It’s going to come 

in some way, shape, or form. To be honest, in my opinion, government sometimes interferes too much and likes to see the economy 

always going, and the economy sometimes needs to rest. 

When interest rates started to move, the last part of the last decade, up, the mortgage market completely disconnected from the interest rate. That’s because too much capital was going in there. It 

wasn’t coming from the regulating institutions; it was coming from 

outside. But when you have that much money flowing into it, the 

yields are not sufficient to the risk that’s aligned with it. And the 

investors need to be held accountable for the risk that they take 

on by buying those securities. Unfortunately, when you get into a 

lot of other public policy, you hold those securities, whether it’s foreign governments or retirement funds or what. 

I think Dodd-Frank was an overreach because it didn’t take 

enough time to really analyze the true impact to do a well-thoughtout response. That massive piece of legislation that was 2,000 

pages really passed Congress within a one-year time period. It 

dwarfs anything that passed, from a lender perspective, prior to 

that time. There’s got to be fixes that come to it. I think you will 

find reasonable ways to do that. I encourage you to do that. 

Representative COFFMAN. I think that the problem—one of the 

problems I see is that the members of Congress who had their fingerprints all over putting individuals into homes that they couldn’t 

afford—those loans, securitized and misrated dramatically, were 

the catalyst for the collapse in 2008. So you had those same members that pushed for that in charge of finding a solution, and they 

refused to acknowledge government’s culpability that got us into 

that place in 2008. So the solution was never going to face the actual problem. 

And I think there was a commission created by Congress in 

2009, and the minority report reflected, I think, what was the actual cause of the crisis, and the majority report did not. 

Senator GARDNER. Thank you. 

If there are no further questions from the members here, then 

I wish to thank the first panel for their participation. Thanks for 

coming all the way to the capitol to share your thoughts and wisdom. 

We’ll welcome the next panel to join us. 

[Representative Coffman was absent for the remainder of the 

proceedings.] 

Senator GARDNER. Mike O’Donnell, Tony Gagliardi, Roger Hays, 

and Don Childears, come on up. 

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Mike O’Donnell is the executive director of Colorado Lending 

Source, a nonprofit organization providing lending resources to Colorado small businesses. Colorado Lending Source has partnered 

with more than 3,000 small businesses since it was founded 25 

years ago. That’s the official bio. 

The unofficial bio, of course, is that Mike O’Donnell is a fine resident of Yuma County, Colorado. And our daughters were in tai 

kwon do class together. 

Mr. O’Donnell, welcome to the panel. Thank you for being here. 

STATEMENT OF MIKE O’DONNELL, COLORADO LENDING 

SOURCE, DENVER, CO 

Mr. O’DONNELL. Thank you, Senator. I appreciate the opportunity. My name is Mike O’Donnell. I’m the executive director of 

Colorado Lending Source. We’re a mission-based nonprofit economic development organization. This is our 25th year here in Colorado. Our mission is to foster the economic growth of diverse 

small businesses within our communities, which really means that 

we help small businesses access capital, grow, and add jobs to the 

State. This last year we assisted more than 200 small businesses, 

working with 53—partnering with 53 different community banks to 

provide debt financing to assist with about $274 million worth of 

credit here in the State of Colorado. And those projects will create 

just a little bit less than 2,000 jobs in the State, which is great. 

We’ve always been an active lender under the SBA 504 loan program. And as the last Great Recession began to unfold, we expanded our operations to become an SBA-approved lender service 

provider, which means that we assist, currently, 40 local community lenders, help process SBA guaranteed loans. We also borrow 

some funds ourselves to make loans, under our Main Street loan 

program, to small businesses unable to secure funding anywhere 

else in the State. 

We recently expanded our direct lending activities to become one 

of the nation’s newest SBA Community Advantage lenders, which 

allows us to provide smaller loans to businesses unable to secure 

financing through the community banking system. And the source 

of the funding for our Community Advantage loans is that we’ve 

gone out to community banks ourselves to borrow money from 

them so that we can turn around and break that up and make 

loans to small businesses. So that’s our process for that. 

I’ve been with the organization for almost 15 years, as you can 

probably tell from my Eastern Colorado accent here. Although our 

organization is based in Denver, I myself reside in southern Yuma 

County, about six miles east of the rural town of Kirk, with a population of just 59 people. So I very much appreciate the opportunity 

to be here today too. 

Community banks play a critical role in providing capital to 

small businesses. Closures, ongoing consolidations and excessive 

regulation negatively impact small businesses in many, many 

ways. It shouldn’t be surprising that the number of business startups in the United States has been falling consistently over the last 

few decades, just as the number of community banks has been declining. 

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The FDIC only began reporting on the performance of community 

banks in the quarterly banking profile reports during 2014. The 

FDIC defines community banks as those institutions that provide 

traditional relationship-based banking services in their local communities. 

During the second quarter of 2014, the FDIC recognizes that we 

had 6,163 community banks in the United States. These represented 93 percent of all FDIC-insured institutions that are responsible for assets totaling $2 trillion. That was just 13 percent 

of the industry assets. So these community banks accounted for 45 

percent of all the business loans to small businesses in the United 

States. So if you look at these numbers the other way around, the 

big banks that control 87 percent of all of the money in the banking 

system only account for 55 percent of small business loans. 

Because the big banks don’t carry the weight when it comes to 

small business lending, being more interested probably in a profitable transaction than a relationship with a client, it’s really the 

community banks that have a pivotal role to play in access to capital for small businesses. 

Really, without a vibrant community banking system, not so 

many loans would be made to small business. It’s really as simple 

as that. Big banks don’t appear to be interested in picking up the 

slack as the number of community banks in the United States has 

fallen. 

And we’ve heard the numbers before from other panelists. But 

back in 1980, according to the Federal Reserve, we had more than 

12,000 community banks in the country. And the FDIC says we 

have 6,163 now, and they only hold 13 percent of the assets. Back 

in 1980, those banks had 30 percent of all of the assets in the country. So it very much had a concentration, as you would expect. 

During that same time frame, business start-ups had been declining steadily, reaching a national tipping point in 2008 when the 

number of business closings began outnumbering the number of 

start-ups each year. This is a trend that continues even since the 

Great Recession has ended. In Colorado, because of the special economic boost this State receives by being the destination of choice 

for a large, highly educated influx of entrepreneurial-minded 

Millenials, Colorado’s own tipping point didn’t really occur until 

early last year when more businesses started closing than opening 

in the State. 

New business creation is vitally critical to a healthy, vibrant 

economy for two primary reasons: job creation and innovation. Contrary to popular belief, it is not established small businesses or big 

businesses that create jobs, but it’s the new and young businesses 

that drive job creation in the United States. New and young companies are creating nearly all of the net new jobs in the United 

States. It’s not the big companies; it’s not the existing small businesses. It’s new small businesses. Without new jobs and innovation, the nation will face significant competitive challenges in the 

decades ahead. 

Economist Enrico Moretti’s research reports that every job generated through innovation creates five other jobs, three of which 

are nonprofessional jobs. Even jobs generated by non-innovative 

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new businesses have a multiplier effect with regard to consumer 

spending, taxation receipts and, thus, the quality of life. 

It’s always been the case that small businesses account for nearly half of private sector output and employment in the U.S. Coming 

out of the Great Recession, however, job creation by small businesses has lagged and continues to lag, while new business formation rates continue to fall. While experts won’t directly suggest that 

these trends are driven by weaker borrowing or limited access to 

small business loans, it doesn’t take a degree in astronomical 

science to realize—or even aeronautical science—to realize that 

businesses need adequate credit to succeed and grow. 

Big businesses just don’t seem very interested in providing much 

of the capital, and certainly not to early stage or start-up companies. 

I had a conversation last week with the owner of a six-monthold and pretty profitable small business located in Boulder, Colorado. The owner was only looking for a $20,000 loan to help him 

add some employees to grow his business a little more quickly. The 

large bank he spoke with told him to come back in four years, if 

he was still around. 

It’s challenging for community banks to pick up the slack for the 

big banks because they are now so hamstrung by regulations. And 

most of them would not be able to assist these individual businesses because of the paperwork burden and the perception by the 

regulators that lending to early stage and start-up businesses is intrinsically risky and should be avoided. A community bank runs 

the risk of being adversely impacted by regulators who better know 

than they, the bank’s owners, how the capital of community 

banks—how much they should have, hold, reserve, and allocate. 

The facts bear this out. The volume of small business loans made 

within the banking system dropped significantly between 2008 and 

2012, as you would expect, but it’s barely recovered through today. 

Small business loans at the end of 2014 are still 17 percent below 

the peak reached prior to the recession. And while small commercial and industrial loans grew 3.4 percent from 2013 to 2014, according to the Federal Reserve, this modest improvement does not 

provide strong assurances about the health of lending in this space. 

In contrast, the lending to larger businesses bounced back quickly, 

and loans outstanding are now more than 24 percent higher than 

pre-recession levels. 

So the increasing competitive banking landscape, the high cost of 

regulation and compliance, and the limited resources available represent major challenges for community banks. The current regulatory burden is a key factor affecting community banking, with 

employees now wearing more hats and doing more jobs for basically the same return, which has its own issues related to internal 

controls in the banks. But, regardless, regulations are likely here 

to stay in some way, shape, or form, even though these do hamper 

the ability of community lenders to be responsive to the financing 

needs of small businesses. 

As a result, the community banks aren’t able to make as many 

loans to early stage and start-up businesses today as they probably 

were able to do in years past. But they certainly do a much better 

job than big banks. 

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So, in conclusion, if the community banking system continues to 

experience closures and consolidations, the true cost to the United 

States will be in ongoing declining small business start-up rates, 

stifled innovation, and lethargic job growth. And this is something 

that should concern everyone. It certainly concerns me. 

Thank you, Senator. 

[The prepared statement of Mr. O’Donnell follows:] 

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Senator GARDNER. Thank you, Mr. O’Donnell, for your testimony. 

If anyone is wondering where Kirk is, it’s just southeast of Joes. 

Tony Gagliardi is the Colorado state director for the NFIB, National Federation of Independent Business, and an advocate for 

small business owners. Tony has decades of experience working 

with small businesses and trade associations, supporting their priorities, and understanding firsthand what small businesses are 

struggling with under the burden of excessive government regulations and that what we could be doing to help decrease regulations 

on small businesses will help them succeed. 

Mr. Gagliardi, thank you very much. 

STATEMENT OF TONY GAGLIARDI, NATIONAL FEDERATION OF 

INDEPENDENT BUSINESS, DENVER, CO 

Mr. GAGLIARDI. Thank you, Senator. On behalf of the National 

Federation of Independent Business, I appreciate the opportunity 

to submit, for the record, testimony before your committee. 

NFIB is the nation’s leading small business advocacy association, 

representing members in Washington, D.C., and all 50 capitals. 

Founded in 1943 as a nonprofit, nonpartisan organization, NFIB’s 

mission is to promote and protect the right of its members to own, 

operate, and grow their businesses. NFIB represents over 350,000 

independent business owners who are located throughout the 

United States. 

Now, I’d like to clarify that my comments will apply across the 

board concerning regulations, everything from banking to the way 

an independent business owner cleans their windows in the business. 

Overzealous regulation is a perennial cause of concern for small 

business owners and is particularly burdensome in times like these 

when the nation’s economy remains sluggish. According to NFIB’s 

most recent Small Business Economic Trends survey, government 

requirements and red tape was the most frequent answer when 

NFIB members were asked to identify the single biggest problem 

facing their business. The uncertainty caused by future regulation 

negatively affects a small business’ ability to plan for future 

growth. While regulation is necessary, it must be pragmatic and 

sensible. 

Unfortunately, the regulatory burden on small business has only 

grown. A study by Nicole and Mark Crain for the U.S. Small Business Administration Office of Advocacy in 2010 found that the total 

cost of regulation on the American economy is $1.75 trillion per 

year. A 2014 update to this study, commissioned by the National 

Association of Manufacturers, found the cost impact now sits at $2 

trillion. If that number is not staggering enough, the study reaffirmed that small businesses bear a disproportionate amount of 

the regulatory burden. 

While the American public and small business owners hear daily 

about the thousands of new jobs being created, most of these jobs 

are part-time, lower-wage positions. Job growth in America remains stagnant. Small businesses create over two-thirds of the net 

new jobs in this country, yet the NFIB Research Foundation’s most 

recent edition of Small Business Economic Trends revealed, in the 

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crease employment. Reducing the regulatory burden would go a 

long way toward giving entrepreneurs the confidence they need to 

expand their workforce in a meaningful way. 

Our solutions to ease the burden of excessive regulations start 

with clarifying the indirect costs of regulation. The Regulatory 

Flexibility Act requires agencies to conduct small business analysis 

for any regulation that would impose a significant economic impact 

on a substantial number of small entities, and the bill only requires 

agencies to consider those small agencies that are directly impacted 

by a new regulation. Consequently, regulators may ignore foreseeable indirect impacts a new regulation may have on a small business. Regulatory agencies often proclaim indirect benefits for regulatory proposals but fail to analyze and make publicly available the 

indirect costs to consumers, such as higher energy costs, lost jobs, 

and higher prices. 

NFIB believes agencies should be required to make public and to 

take into account, for procedural purposes, a reasonable estimate 

of indirect impact. Congress should hold these agencies accountable 

for providing a balanced statement of costs and benefits in public 

regulatory proposals. 

Increased small business input in the regulatory process. Complying with regulations has a disproportionate burden on small 

businesses, as few small companies have employees devoted to 

compliance. Typically, the business owner is the janitor, the HR 

manager, and the greeter. To help alleviate this burden, it is critical that agencies only issue rules that are necessary and have considered the impact on small businesses. 

Currently, the Small Business Regulatory Enforcement Fairness 

Act requires covered federal agencies to conduct a Small Business 

Advocacy Review panel before publishing a proposed rule. These 

panels include representatives of the regulated small entities and 

provide an opportunity for small businesses to collaboratively work 

with the regulators to find alternatives that minimize any potential 

burden on small businesses. Unfortunately, these panels only apply 

to EPA, OSHA, and the Consumer Financial Protection Bureau. 

NFIB believes these panels, which work well when agencies engage 

in the process, should be expanded to cover all agencies issuing 

rules that affect small businesses as a means to require these agencies to evaluate the burdens their rules place on small employers. 

NFIB strongly supports H.R. 527, the Small Business Regulatory 

Flexibility Improvements Act, which passed the House of Representatives in February. This legislation directly addresses indirect cost impact and would give small businesses a greater voice in 

the process. 

Conclusion: Agency focus on compliance. NFIB is concerned that 

many agencies have shifted from an emphasis on small business 

compliance assistance to an emphasis on enforcement. Unfortunately, the evidence in this area is plentiful. As an example, 

OSHA’s fiscal year 2016 budget request. The agency proposed hiring 60 new full-time equivalent staff for enforcement, with no additional request for compliance assistance. This would bring the total 

number of enforcement FTE to 1,601, while they have only 254 

FTEs devoted to compliance assistance. 

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Likewise, the Department of Labor’s Wage and Hour Division requested 300 full-time equivalent positions for additional enforcement staff and support. That represents 63 percent of the division’s 

overall increase request and 94 percent of the new hires they want 

to make with this increased funding. None of the increase will go 

to compliance assistance. Small businesses rely on compliance assistance from agencies because they lack the resources to employ 

specialized staff devoted to regulatory compliance. 

Congress can help by stressing to the agencies that they need to 

devote adequate resources to help small businesses comply with the 

complicated and vast regulatory burdens they face. Additionally, 

Congress should pass legislation waiving fines and penalties for 

small businesses the first time they commit a non-harmful error on 

regulatory paperwork. Because of lack of specialized staff, mistakes 

in paperwork will happen. If no harm is committed as a result of 

the error, the agencies should waive penalties for first-time offenses and, instead, help owners to understand the mistake they 

made. 

With employment at pre-recession levels, Congress needs to take 

steps to address the growing regulatory burden on small businesses. The proposed reforms previously listed are a good starting 

point. 

Thank you for holding this important hearing. And I am happy 

to answer any questions. 

[The prepared statement of Mr. Gagliardi follows:] 

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Senator GARDNER. Thank you, Mr. Gagliardi. 

Roger Hays is the president of Premier Employer Services, an organization providing human resource and administrative services 

to small businesses. In this role, Roger helps small and mid-size 

businesses navigate government regulations on a daily basis. 

STATEMENT OF ROGER HAYS, JR., PREMIER EMPLOYER 

SERVICES, INC., DENVER, CO 

Mr. HAYS. Thank you, Senator. I appreciate your inviting me. 

Representative Buck, thank you for being here. 

As you said, I own a company in Centennial, Colorado, by the 

name of Premier Employer Services. And what we do is help midand small-sized companies deal with HR regulation because, truthfully, what I’ve found over 18 years in this industry is that no one, 

outside of myself, starts a business to become an employer. 

People start a business because they have found a better way to 

manufacture the product or they have found a way to do a service 

or to provide a service that they think is more cost-effective. It’s an 

economical service. They can do it better than anybody else out 

there on the market. They do not start a business to become an 

employer. 

But as that business gets going and they have to hire someone 

to help them either with sales or in-house, they find out that they 

no longer have any time to actually do what it is they started their 

business to do, because most people run two businesses at once. 

You run the business that you started, and then you also run an 

employment office. As an employer, you spend an enormous 

amount of time dealing with regulations that come from the Federal Government, state governments, and local governments. 

Very quickly, if your business is successful and you’re good at 

what you wanted to do, you’re swamped, you’re overrun by all 

these regulations. What we’ve seen is bureaucrats had to work in 

a vacuum. They come up with these really great ideas to solve 

problems that don’t really exist a lot of times. They think, well, this 

isn’t too onerous. This one regulation it wouldn’t take somebody 

very long to comply with, maybe four or five hours a month to comply with the full regulation. 

The problem is there’s a whole bunch of paragraphs, there’s a 

whole bunch of different agencies, and there’s only one small employer. As all these different agencies start to pump out all these 

different regulations, that one small business owner very quickly 

gets swamped. They can’t keep up with it. One regulation by itself 

might not be so bad. But the fact that we’ve got thousands and 

thousands of regulations coming out of Washington every year that 

affect small businesses, it becomes almost impossible for them to 

keep up. 

So what we do at my company is we contract with these small 

businesses and we take over that difficult part of being the employer. That’s not why they started their business. So we help them 

with regulations, human resource rules, OSHA issues, workers’ 

compensation, benefits, health insurance. So I’ve been exposed to 

this difficulty that small businesses have in terms of operating 

under this onslaught of regulation on a daily basis, which really 

makes me fun at Christmas parties. But it does help the business, 

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because they are not there to just spend all of their time filling out 

documents. 

If we can somehow figure out a way to go through the process 

and get rid of all the redundant and repetitive and ridiculous regulations that are in the books and then slow down the onslaught 

from folks at the Department of Labor, the EEOC, and those locations, it would really help small businesses out, not just in Colorado, but across the country. This is a problem that isn’t just local, 

unfortunately. We operate in 18 different states. The bulk majority 

of our work is here in Colorado. It isn’t just the Federal Government these folks have to answer to; it’s also the state government. 

So when you have all of the regulations coming out of D.C., then 

you have the regulations coming out of this building at a high rate 

of speed, then you’ve got local city and county regulations, a lot of 

small employers just don’t survive. I’ve had a number of clients 

over the years who have either just completely given up and sold 

their business or just shut down because it has become so difficult 

for them to just operate in the environment. They get worn out and 

give up. It’s not what they wanted to do. The profit margin is pretty low. It really begins to go. 

So what we’re seeing, as some of the other folks have already testified, is fewer and fewer people decide to get into business. The entrepreneur rate is dropping rapidly. Now, it’s a dichotomy for me 

because the more regulations that come out of D.C., the busier I 

get. But I’m also noticing fewer and fewer new start-up companies 

in certain segments here in Denver because they just don’t want 

to deal with it. It’s easier to keep working where they’re at than 

go try to start a business; whereas, 10, 15, 20 years ago, when I 

first got into this business, people were starting businesses left and 

right. It was a very hot time. It’s not the case anymore. It’s just 

become too difficult, too costly. 

I appreciate the time here. I’m happy to answer any questions. 

And thank you so much. 

[The prepared statement of Mr. Hays follows:] 

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Senator GARDNER. Thank you, Mr. Hays. 

Don Childears will give his testimony next. He’s been with Colorado Bankers Association since 1975, serving as president and CEO 

since 1980. He is actively engaged in the community, holding various board roles in community and banking organizations. 

Mr. Childears, thank you very much for your time and testimony 

today. 

STATEMENT OF DON CHILDEARS, COLORADO BANKERS 

ASSOCIATION, DENVER, CO 

Mr. CHILDEARS. Thank you, Senator, and Representative Buck. 

I am going to focus today on the solutions, or possible solutions, 

to the glimpse that you’ve gotten today of many problems with providing credit to small businesses and other small business problems. Let me start off with a little bit of perspective. 

You’ve heard a lot of numbers today. Out of the 2,300-page DoddFrank Act adopted five years ago, there would be just shy of 400 

rules to be written. Today, 58 percent of those rules have been 

written. That’s 231 separate rules. Another 24 percent have not yet 

been proposed, and all the deadlines have passed. They should 

have been done some time ago. And another 18 percent are in process. To date, with 58 percent of the rule-making done, we have 

20,000 pages of new regulations that have been imposed on the 

banking industry, in addition to all the rules that we had before. 

Twenty thousand pages is about six-and-a-half feet of paper. We 

project that by the end of the rule-making to implement all of 

Dodd-Frank, we will top 30,000 pages of rules, and that will take 

us to the ten-foot mark. 

So that gives you a little perspective on the volume that we’re 

dealing with. You’ve had other glimpses of the complexity of the 

rules that we’re dealing with. I think there are three broad categories of solutions that we’re dealing with here. One is improving 

access to home loans, because that, in fact, is a source of credit for 

most small businesses; secondly is removing impediments to serving customers; and thirdly is eliminating the distortions that government makes in the marketplace. 

Let me start off with the home loans. Without home loans, most 

Americans would not be able to purchase a home or, in fact, to finance a small business, because that’s where their credit comes 

from. As potential solutions in this area, I want to focus on one, 

but there are a number of others that are detailed in the written 

testimony that I have provided. By the way, by all of these there 

are bill numbers, in the written testimony, that reflect the concepts 

I’m talking about. 

But the first one is to basically treat loans that are held in a 

bank’s portfolio as automatically complying with the qualifying 

mortgage regulation. You heard references to that earlier this 

afternoon. The QM regulation, as we call it, effectively keeps banks 

from lending to lots of people that we believe are creditworthy, that 

we know and are glad to lend to. But government regulation basically stands in the way. 

There are a number of different issues that that creates for a variety of different constituencies. It affects low income, small businesses, rural populations, recently hired, newly employed, and I 

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can go on and on. Each of those has a slightly different twist as 

to how they have trouble getting in compliance with the government regulations, even though we’re glad to lend to them. 

But there is one common solution. That is, if the bank makes the 

loan and keeps it in its loan portfolio and keeps 100 percent of the 

risk on that, with no risk going to any other party, then we think 

it should be deemed compliant with that regulation. So that is a 

major step in terms of easing credit both for homeownership and 

for the use of credit in financing small businesses. 

Now, in the written testimony I provided, there are a variety of 

others that deal with the definition of rural areas, which has, oddly 

enough, become a significant complication in this area; mortgage 

servicing; escrows for home mortgages; and a variety of other topics. But I just wanted to focus on that one. 

Now I want to move to the second category of impediments to 

serving customers. The key to dealing with the consolidation of the 

banking industry, where we have fewer and fewer providers all the 

time, is to stop treating all banks alike, imposing the one-size-fitsall regimen on the entire industry that ranges from a little $15 million bank to a $2.2 trillion bank. Quite a variety there. There is 

a big difference not only in the size, but in the complexity of these 

institutions. And right now we’re effectively seeing one-size-fits-all 

imposed on the entire industry. And the worst culprit in this is actually beyond Dodd-Frank. It’s the Basel III capital accords international agreement that sets capital standards for banks. In this 

area, I would say that Congress can first reduce unnecessary and 

redundant paperwork. It could do a review and reconciliation of existing regulations. Specifically, it could eliminate unnecessary currency transaction report filings, could provide greater accountability by law enforcement for the use of Bank Secrecy Act data 

that we provide, and eliminate redundant privacy policy notices 

that have to be provided. 

The second thing I focused on in that general area is to create 

a more balanced and transparent approach to bank exams and regulation. And again we’ve got legislation that’s identified in the 

written testimony. We believe Congress should encourage the regulators to expand the number of banks, not contract the number of 

banks, so we have more providers, more competition, which benefits all the customers in the end run. 

There should also be an independent appeals mechanism. When 

a bank regulatory agency has harsh treatment for a bank that the 

bank thinks is unjust, you get to appeal to the very same people 

who made the original decision. So it effectively is no appeal. We 

believe there should be an independent external appeal system that 

we think will bring about better accountability of the regulators 

themselves. 

The third broad category in this area is to urge regulators to reform the entire Basel III capital requirements. You heard the discussion earlier today about high-volatility commercial real estate. 

I’ve given you another example. There are winners and losers in society chosen by the capital levels that are established in the Basel 

III capital requirements. And we don’t think that that’s government’s role, is to say that this industry is favored, so it should get 

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more credit and cheaper credit and this industry we don’t like, so 

it should not get as much credit or have to pay more for it. 

The last one is to limit the burdensome trickle down where we 

take the processes applied to very large, complex banks and apply 

them to the smallest institutions. And very specifically, we think 

that Congress should remove arbitrary regulatory thresholds set by 

dollar amounts that don’t correspond to a bank’s risk or business 

model. We think that the way the regulators ought to look at it is, 

in fact, the business model and the amount of risk in that bank’s 

lending activities. 

So that leads me to the next item, which is to enact a requirement for the regulators to actually mold their regulations to fit the 

business model and risk profile of the entity, the bank, that they 

are regulating. And we’ve written an entire bill on that that I am 

sharing with you in the next week or so. 

Lastly, the banking industry’s ability to serve customers is affected by a variety of forces. Where the government has gotten involved, we face what we regard as unfair tax-subsidized competition from both the credit unions and the Farm Credit system. Beyond that, we think you should encourage regulators to create new 

bank charters so that there is more competition. We think Congress should ensure that all participants, banks and non-banks 

alike, are subject to the same consistent rules and oversight for 

consumer protection and safety and soundness of their institutions 

and the risk they impose on the entire system. 

Right now we’ve got a piper-paying system where the regulated 

banks are treated one way, and that’s with this crushing regulatory 

burden, but we have a lot of other financial intermediaries out 

there that are narrowly going about their business, almost void of 

regulation many times. I think their consumers are at significant 

risk. 

The last one is to hold breached parties responsible for the damages that their bank breaches. That is becoming a more prevalent 

issue. We see daily breaches all the time. In 99 percent of the 

cases, the party that loses the data does not suffer any significant 

financial costs. Those are borne by the banking industry. We think 

they might be a little more responsible if they had to pay the cost 

of reissuing cards and covering the fraud losses of customers. 

Several of these topics are in multi-topic bills, as referenced in 

the written testimony. I note that there are six of them that have 

already been bundled and passed out to the House Financial Services Committee. So there is no shortage of bill language to be 

worked upon. We just appreciate the attention you’re giving this 

issue and the direction in which we’re moving. 

In general, we think banks are a significant backbone of the economic fiber of hometowns across the country. And bankers have a 

personal stake in not only the economic growth of their community, 

but every other aspect of the community, the entire vitality of that 

community. 

So we appreciate the attention you’re giving this issue. And I’d 

just say thank you. 

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Senator GARDNER. Thank you, Mr. Childears. 

And thanks to all the witnesses on the panel for your time today. 

I want to let everybody know that Congressman Coffman had to 

leave early due to a previous doctor’s appointment that he had 

scheduled for today. So he apologizes that he had to leave during 

the middle of the hearing. 

We’ll go back and forth a little bit. I appreciate both the solutions 

and presenting the problems, again, that we have today. 

To Mr. O’Donnell or Mr. Childears—either one, feel free to jump 

in on this—you talked a little bit about the income verification 

rules and that they make it much harder to lend to the small business owner that wants to take out a home equity loan to help finance their business. Why is that the case and why is a change to 

that regulation needed? 

Mr. O’DONNELL. Defer to Mr. Childears on that. 

Mr. CHILDEARS. Okay. Basically, you have a mandate in the 

Dodd-Frank Act, and the Consumer Financial Protection Bureau is 

the rule-making entity for that. It’s basically created a third-party 

verification concept—and that is a concept that was adopted in 

Dodd-Frank—that the lender can no longer accept the word of the 

borrower on the income they have to pay back the loan or the other 

resources they can bring to the loan, or the entire transaction. We 

have to have a third party verify that. And that’s not just any third 

party; it’s got to be one that you can really rely upon. 

So the typical boat that a small business is in is to get that 

third-party verification. Since we can’t accept their books as 

verification of income for that home loan that’s financing their 

business, they then have to get a third party, usually their accountant, to do a year-end review—it’s kind of short of an audit—which 

takes a lot of time and is a frustration and a hassle and expensive, 

because I think for lots of small businesses you’re looking at a couple of thousand dollars for that. Suddenly that CPA’s liability is on 

the line. Because they’re signing that document, they’re basically 

asserting that this borrower has that much income. 

So that is basically mandated by the Dodd-Frank Act and in the 

rules written by the Consumer Financial Protection Bureau, and 

we don’t have any leeway around that. 

Senator GARDNER. Congressman Buck. 

Representative BUCK. Thank you, Senator. 

Mr. Gagliardi, you mentioned that certainty was an important 

factor in small businesses and job creation. 

I want to ask each of you a few questions in the short time we 

have. If you’d limit your answers, I’d sure appreciate it. 

I just want to know whether we create more certainty or less certainty with the Affordable Care Act. 

Mr. Childears. 

Mr. CHILDEARS. I am far from an expert on that topic. In fact, 

we try to avoid it as much as we can. I think, from what I hear 

from all sorts of banks and their customers, there is a lot of uncertainty. 

Representative BUCK. Mr. Hays. 

Mr. HAYS. It definitely created a vast amount of uncertainty. 

Representative BUCK. Mr. Gagliardi. 

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Mr. GAGLIARDI. As a full—having full standing in the federal 

lawsuit against ObamaCare, we still, to this day, have created 

enough uncertainty to bring business creation to a standstill in hiring. 

Representative BUCK. Mr. O’Donnell. 

Mr. O’DONNELL. Congressman, there’s definitely uncertainty and 

challenges ahead for small businesses. 

Representative BUCK. Mr. Childears, same question as to waters 

and U.S. EPA regulation. 

Mr. CHILDEARS. Again, I don’t know a lot about that. But I think 

I’d have to give you the same response, that there is uncertainty. 

Representative BUCK. Mr. Hays. 

Mr. HAYS. I would agree. It creates a lot—it is also creating an 

enormous amount of uncertainty for small businesses. 

Representative BUCK. Mr. Gagliardi. 

Mr. GAGLIARDI. A very ridiculous idea. 

Mr. O’DONNELL. Again, water is, of course, an issue in Colorado. 

Not every small business will be impacted by it in the short term, 

but in the long run, yes. 

Representative BUCK. Mr. Childears, EPA regulations concerning 

ozone, more certainty, less certainty? 

Mr. CHILDEARS. I would guess that—my own personal opinion, 

based upon what I hear, less certainty. 

Mr. HAYS. It’s creating more problems. 

Mr. GAGLIARDI. Less certainty. 

Mr. O’DONNELL. Again, less certainty. 

Representative BUCK. Mr. O’Donnell, I have a couple tough questions for you. My chief of staff and former state senator is from 

Wray. Senator Gardner is from Yuma. You are from Yuma County. 

I’m just wondering, when the football teams play, do you lean gray 

or do you lean red? 

Mr. O’DONNELL. Actually [unintelligible] which is a small, sixperson team. 

Senator GARDNER. I’m afraid that Liberty would probably beat us 

both. 

Mr. Hays, you talked a little bit about the regulations in Congress, and I wanted to follow up on a couple of them. The Department of Labor issued a fiduciary standard rule on small business. 

Are you familiar with that? 

Mr. HAYS. Yes. 

Senator GARDNER. Can you explain what effect that will have on 

small businesses? 

Mr. HAYS. They’ve been arguing back and forth on this since 

2010. They put it off a couple of times, but it’s coming back this 

year. The Secretary of the Department of Labor has said this is 

their number one priority, before the end of the Obama administration, to get this rule out. And what they’re doing is they’re rewriting the fiduciary rules to solve a problem that they think exists, 

but it, in my opinion, does not yet really exist. 

They’re going to rewrite the whole thing so that it can really expand who is a fiduciary. And in that context, where it relates to 

small businesses, it becomes kind of scary for a small business 

owner because they’re stepping into an area that they don’t know 

anything about, they normally don’t deal with, when it comes to 

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401(k) plans for small businesses. When those regulations go up, 

they become more intense. And a lot of the people that are currently in a fiduciary role, because it’s going to expand that group, 

a lot of those folks aren’t going to want to deal with a lot of smaller 

companies. It’s just not worth their time or energy because the risk 

is going to go up so much. 

The Department of Labor is trying to make it, in their opinion, 

so that people who give advice to small businesses are going to be 

held accountable if they give bad advice. Really, I think, personally, 

from what we’ve seen in the PEO industry, it’s scaring small businesses and scaring the people that advise them, to the point where 

we’re looking at probably 30, 35 percent reduction in service offerings to those small industries, which means, once again, the government is going to actually go the other direction than what 

they’re intending on doing. 

Rather than making this a safer place and making sure more 

people can participate, fewer employees are going to have the opportunity to participate in a 401(k) plan, save money for retirement, because folks who just, depending on what the bankers do, 

say, oh, it’s just not worth our effort, there’s too much risk now, 

we’re just going to walk away from it. So the smaller businesses 

with three, four, five, ten folks, they’re not going to be able to offer 

401(k) plans. 

Senator GARDNER. Thank you, Mr. Hays. 

We talked in the first half with this panel about regulations. I 

want to ask all four of you a question. We’ve talked about the problem with the number of regulations. I don’t think anybody here is 

saying, let’s do away with regulations. We’re not saying do away 

with regulations. We’re saying, have smaller, better, more effective, 

more efficient regulations. 

Is that correct, Mr. Childears? 

Mr. CHILDEARS. Oh, I agree. Even I would say that about the 

Dodd-Frank Act. There are good elements of it, there are some that 

we’re neutral on, but there are an awful lot that we think are fair 

game. 

Senator GARDNER. Mr. Hays. 

Mr. HAYS. Absolutely. Most regulations that have come out, we 

agree some of them are necessary. It’s just that there are so many 

redundant ones, so many that are so expensive and very difficult 

and time-consuming for a small business to comply with. It’s not 

that we’re saying get rid of all regulations, we have kind of a wild 

west attitude, but let’s be smart about the regulations we pass. 

And let’s get some input from those businesses on, is this really 

necessary, and how much is this going to cost you. 

Senator GARDNER. Mr. Gagliardi. 

Mr. GAGLIARDI. Thank you, Senator. Regulation is necessary; 

however, it must be balanced. And currently, as we sit here today, 

there’s over 3,400 pending regulations in the pipeline in Washington, D.C. And business cannot survive with that type of environment. 

Senator GARDNER. Mr. O’Donnell. 

Mr. O’DONNELL. I concur with my colleagues. [Unintelligible] report that the [unintelligible] opposition of rules serves no purpose 

other than sub-creation of rules. 

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Representative BUCK. Thank you, Senator. 

I guess this is really a supplement to the last question, but I 

want to ask the question. I’ll start with Mr. Childears. Would 

America be better off if we repeal the verification with the Consumer Financial Protection Bureau? And I ask that because this is 

an agency that was set up as its own, in effect, taxing authority, 

was able to create a budget without congressional oversight. The 

appointments are not approved by the United States Senate. It concerns me greatly that we have an agency that could easily go 

broke. Some think that it has gone broke, but it certainly could in 

the future. 

I’m just wondering, I’d like to ask each of you, would America be 

better off if we did not have a Consumer Financial Protection Bureau? 

Mr. CHILDEARS. I think the simple answer is yes. Our consumer 

protection was appropriately carried out by the bank regulatory 

agencies beforehand. It’s not that they were shy about imposing 

consumer protection restrictions on the banking industry. They did 

that and did that well. But you hit the nail on the head. You have 

an agency now that does not need to come before Congress for appropriations. And it has a single individual that determines every 

decision that comes out. There’s no board or council that weighs 

the merits of these issues. You literally have one individual making 

all determinations. 

Representative BUCK. Mr. Hays. 

Mr. HAYS. Any agency that does not have some sort of oversight, 

somebody that—some kind of a trigger to keep them in line, we’d 

be much better off without that. 

Representative BUCK. Mr. Gagliardi. 

Mr. GAGLIARDI. There was sufficient regulation prior to it. It was 

not needed. 

Representative BUCK. Mr. O’Donnell. 

Mr. O’DONNELL. I concur. It creates uncertainty. And again, constant regulation on regulation, it’s not appropriate. 

Senator GARDNER. And to Mr. Gagliardi, just talking about— 

wrapping into the conversations we’ve heard from various people in 

the financial institutions, the businesses, the organizations that 

you represent, what do you hear from small businesses when 

they’re trying to get a loan, they’re trying to get capital they need 

to invest to grow their earnings? These numbers that we’re seeing, 

15,000, 6,000, is that having an effect on them? If so, what do you 

see the future of that problem being? 

Mr. GAGLIARDI. Thank you, Senator. What we find is—we conduct a monthly—you heard me mention the Small Business Economic Trends. That report is produced monthly, and it has been 

produced monthly for over 35 years by the NFIB. We go out to our 

membership, and this is one of the questions—the availability of 

credit is one of the questions that we ask. And I just happen to 

have the numbers out of the latest one. 

Real briefly, 33 percent of the respondents say that their credit 

needs are met; 53 percent said they do not want a loan, they’re not 

borrowing money. When we have customers coming through the 

door, then the small business owner or the independent business 

owner will be willing to take on the risk of a loan. But until that 

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time, borrowing still is at a low rate. And then only 3 percent say 

that financing is a major concern to them. 

So, again, there are certain segments in the small business community that still need access to capital. We see those as high-tech 

industries that are having difficulty, through traditional lending, 

getting that funding. 

Representative BUCK. Before Senator Gardner left the people’s 

house and went to the House of Lords, he was noted for the REINS 

Act, which is the Regulations from the Executive In Need of Scrutiny. And it requires Congress to address all regulations that have 

more than a hundred-million-dollar impact on America. 

I’m just wondering, it has now passed again by this Congress, 

the 2014 Congress, and sent over to the Senate. I’m wondering 

whether you would be in favor of that act or opposed to it. 

Mr. CHILDEARS. I’d be in favor, but I don’t know why you put the 

threshold so high. 

Mr. HAYS. I agree. 

Mr. GAGLIARDI. Absolutely. In fact, there was a 2011 paper done 

by Susan Dudley, who was a former administrator of the Office of 

Information and Regulatory Affairs, stressing the importance. 

Mr. O’DONNELL. I’m definitely in favor of it, yes. 

Senator GARDNER. Mr. Childears, a question for you. This is a 

comment that I had from somebody who was in a financial institution here in Colorado. I want to clarify, this is a story that he told 

me about rules that I’m not familiar with, in terms of how they affect the day-to-day operations of this particular bank. 

But he talked about having some auditors or people who were reviewing the books of the bank. And it dealt with the student loans 

that the bank institution was offering. They offered student loans 

to the community. But a lot of the students couldn’t qualify for the 

student loan on their own, so they went out and they sought cosigners, trying to get cosigners for the student loans. 

So they had two different auditors in the bank around the same 

time. One auditor came to them and took a look at the student 

loans and felt that the bank was committing a violation of going 

out and getting cosigners. I don’t know if the word is steering, but 

they felt that they were violating this in getting too many people 

to cosign these student loans. The second auditor that came in had 

said they weren’t issuing enough student loans, so there must be 

a problem. 

Is that something that you’re familiar with? Have you heard of 

it? 

Mr. CHILDEARS. I don’t know the technicalities behind that, but 

I hear anecdotes like that frequently. In fact, in the fair lending 

area, which is frequently the source of stories like that, we’ve got 

a great concern about a concept called disparate impact, where regulators and the Department of Justice basically look at the result 

of their lending and, if they find a difference in treatment between 

various groups—and they don’t have to be protected classes, but 

just different groups—then they can say that you basically have 

committed discrimination, even though you had no intent to do so. 

It was just by the nature of the way you extended credit to individuals. And that causes us a lot of problems and worry, and many 

of the anecdotes fall in that area. 

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Representative BUCK. Mr. Gagliardi, one question. I’m wondering 

what the effect, in the Affordable Care Act, of setting, defining the 

workweek at 30 hours was. 

Mr. GAGLIARDI. Thank you, Representative Buck, Congressman 

Buck. That will result in loss of hours, slowness in hiring. Hiring 

will basically come to an end. NFIB has been very active in Congress, getting legislation to address that, restoring it to a 40-hour 

workweek. It, again, leads to the uncertainty. When we have uncertainty on Main Street, economic progress and growth comes to a 

stop. 

Representative BUCK. How about setting the limit at 50 employees, avoid the employees who fall under the Affordable Care Act, 

what is the effect of that? 

Mr. GAGLIARDI. It still creates—Congressman Buck, it still creates a great deal of uncertainty, because we know the way—and 

present company excepted—we know the way Congress works, that 

any time somebody gets a whim, that 50-employee threshold now 

becomes 10. We’ve seen that in Colorado the last three legislative 

sessions, that all of a sudden, regulation defining or providing for, 

for instance, 15 or more employees is now down to one, which, in 

some cases, put targets on the backs of small business owners. 

Representative BUCK. I’ll tell you, Mr. Gagliardi, you’re the first 

person I’ve had a conversation with who used the words ‘‘Congress’’ 

and ‘‘works’’ in the same sentence. 

Senator GARDNER. Thank you. 

Reflecting on my service in the minority state legislature, this is 

the time of the hearing where my bills were defeated. So I just 

want to thank you, Congressman. 

I want to thank this panel for your testimony and time today. 

Thanks to all of you for participating in this afternoon’s committee 

hearing. 

Thanks to Congressman Coffman and Congressman Buck for 

participating in this day. 

With that, I will adjourn this Senate hearing of the Small Business Committee. 

[Whereupon, at 3:28 p.m., the hearing was adjourned.] 

Æ 

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