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85–741 2014

REGULATORY LANDSCAPE: BURDENS ON SMALL 

FINANCIAL INSTITUTIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT 

AND REGULATIONS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

DECEMBER 3, 2013 

Small Business Committee Document Number 113–045 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. David Schweikert ........................................................................................... 1 

Hon. Yvette Clarke .................................................................................................. 7 

WITNESSES 

Hester Peirce, Senior Research Fellow, Mercatus Center, George Mason University, Arlington, VA .......................................................................................... 2 

Linda Sweet, President and CEO, Big Valley Federal Credit Union, Sacramento, CA, testifying on behalf of the National Association of Federal 

Credit Unions ....................................................................................................... 4 

B. Doyle Mitchell, Jr., President and Chief Executive Officer, Industrial Bank, 

Washington, DC, testifying on behalf of the Independent Community Bankers of America ....................................................................................................... 5 

Adam J. Levitin, Professor of Law, Georgetown University Law Center, Washington, DC ............................................................................................................. 8 

APPENDIX 

Prepared Statements: 

Hester Peirce, Senior Research Fellow, Mercatus Center, George Mason 

University, Arlington, VA ............................................................................ 28 

Linda Sweet, President and CEO, Big Valley Federal Credit Union, Sacramento, CA, testifying on behalf of the National Association of Federal 

Credit Unions ................................................................................................ 37 

B. Doyle Mitchell, Jr., President and Chief Executive Officer, Industrial 

Bank, Washington, DC, testifying on behalf of the Independent Community Bankers of America ......................................................................... 58 

Adam J. Levitin, Professor of Law, Georgetown University Law Center, 

Washington, DC ............................................................................................ 65 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

Wall Street Journal Article: Tally of U.S. Banks Sinks to Record Low ....... 75 

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(1) 

REGULATORY LANDSCAPE: BURDENS ON 

SMALL FINANCIAL INSTITUTIONS 

TUESDAY, DECEMBER 3, 2013 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND

REGULATIONS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. David Schweikert 

[chairman of the subcommittee] presiding. 

Present: Representatives Schweikert, Rice, Clarke, and Chu. 

Chairman SCHWEIKERT. I have received a request from Mr. 

Luetkemeyer of Missouri to participate in today’s hearing. Without 

objection, Mr. Luetkemeyer, welcome. And as you all know, Mr. 

Luetkemeyer has an interesting banking background. 

Good morning. The hearing will come to order. I have already 

struck the gavel. 

Complaints with federal regulations create costs for all businesses but those costs are particularly burdensome for small businesses. The burdens are higher because small businesses do not 

have the capacity, compliance staff, the ability to do regulatory arbitrage as larger organizations do. For the past several years it has 

been difficult for small businesses and financial institutions. Many 

have been forced to close their doors or merge with others. And 

many times larger financial institutions have acquired those. For 

those institutions that have survived, the regulatory burden have 

required staff to spend more time on compliance than on helping 

customers. If this trend continues, banking customers and credit 

union members will have less choice when it comes to accessing financial services. 

Regulations can play an important role in preserving the health 

of the financial service sector. They can ensure that banks have 

sufficient resources to protect depositors and customers so they can 

continue to serve the needs of their communities. However, it is not 

adding layers of regulation that makes institutions safer. It is 

smarer regulation that does not arbitrarily add costs without adding benefits. 

Today we will hear from a distinguished panel of experts who 

will discuss the current regulatory burden and tell us what effects 

these rules are having on their businesses. 

And with that I would like to yield to Ms. Chu. Would you like 

to do the opening statement for the democrats? 

When Ms. Clarke shows up we will roll that in. 

SBREP-219 with DISTILLER

2 

In a previous life I spent a lot of time on Dodd-Frank, before 

being moved around on committees, and we have had this great 

question. I am hoping actually we partially hear this from the 

panel. How much it is preparing for the new regulatory environments, how much it is actually complying with, how much is it just 

getting definitions and mechanics, and how much of it is also now 

coming from rule sets that may be being promulgated through the 

CFPB? And are the mechanics coming from that sort of a ‘‘one size 

fits all’’? So if you are a small regional credit union, is it appropriate to in many ways face some of the same rule sets that a 

money center financial institution will face? 

Why don’t we now go into testimony? As all of you know, or 

hopefully know, you have five minutes each. You will see the clock 

light up. When you see yellow, just talk faster. 

I would like to introduce Ms. Peirce. Our first witness today is 

Hester Peirce, senior research fellow for the Mercatus Center at 

George Mason University where she focuses her work on financial 

regulation. Prior to joining the Mercatus Center, Hester worked for 

the Senate Banking Housing and Urban Affairs Committee. She 

also serves as a staff attorney for the Securities Exchange Commission under Paul Atkins and has a law degree from Yale, which we 

will not hold that against her. 

Ms. Peirce, thank you for being here. You have five minutes. 

Share with the Committee. 

STATEMENTS OF HESTER PEIRCE, SENIOR RESEARCH FELLOW, GEORGE MASON UNIVERSITY; LINDA SWEET, PRESIDENT AND CEO, BIG VALLEY FEDERAL CREDIT UNION; B. 

DOYLE MITCHELL, JR., PRESIDENT AND CEO, INDUSTRIAL 

BANK; ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER. 

STATEMENT OF HESTER PEIRCE 

Ms. PEIRCE. Thank you, Chairman. It is a real honor to be here 

today. I think this is a very important topic that we are talking 

about. It is important for all of us to have a financial system that 

is healthy, dynamic, and that has variety in it. We all benefit from 

having a range of financial institutions from the smallest ones to 

the largest ones. They meet different types of consumers and small 

businesses’ and large businesses’ needs. 

Unfortunately, the regulatory scheme that we are putting in 

place and that we have been putting in place over a number of 

years and decades is endangering this variety and we are moving 

more towards a system where we are going to end up with several 

very large financial institutions and that is going to leave needs 

unmet and small businesses and consumers will find it much harder to get their financial needs met. So today what I want to talk 

about is several ways in which this is happening. First, the regulatory system is just designed with large financial institutions in 

mind. Second, the regulatory burdens just fall more heavily on 

small financial institutions. It is much more difficult for them to 

deal with the regulations coming out. And third, the administrative 

procedures that are in place for agencies to take consequences of 

SBREP-219 with DISTILLER

3 

their actions into consideration, they are just not spending enough 

time and they are not taking those processes seriously enough. 

Small financial institutions serve a very important function in 

the community. They often serve rural communities and small 

businesses get a lot of their loans from small financial institutions, 

so they definitely fill a niche, and they do this through relationship 

lending, which is getting to know their consumers in the context 

of the local community and understanding what financial products 

and services they need. 

Unfortunately, the regulatory system is set up to not accommodate that relationship lending well. Instead, it is set up, for example, you can take the new Consumer Bureau, which views financial 

products and services in a plain vanilla lens, and so for them it is 

easy if they can deal with a large financial institution that offers 

standardized products, and they can go in and they can say, okay, 

these are the terms that we want you to offer those products according to. Well, for a smaller financial institution that is dealing 

with consumers and small businesses based on their individual 

facts and circumstances, that standardized model does not work as 

well. And just more generally, when financial regulators sit down 

to write regulations, they are thinking of the big, multinational 

bank. They are not thinking of a small bank down the street from 

them. 

And so what that means is that we end up with regulations that 

just work better for large institutions. So, for example, when the 

U.S. regulators go over to Switzerland to write the capital regulations, they are not thinking of small banks. They are thinking of 

international banks. Then they come back to the U.S., the put the 

regs out, and they realize, oh, this does not work as well for small 

financial institutions, and so they make some accommodations, but 

it is after the fact accommodations. 

And then another area is Dodd-Frank created a new system of 

identifying the biggest and most systemically important financial 

institutions, and in doing that it is sending the message that the 

government stands behind these large financial institutions. The 

smaller financial institutions are left to fend for themselves, so 

there is definitely now an understanding in the country that there 

are certain financial institutions that the government is really concerned about making sure that they survive, and that is just not 

a healthy system. 

The other issue with regulation is that just dealing with the 

mass of regulations that comes down is much more burdensome for 

a small financial institution that cannot afford to hire an army of 

consultants and lawyers and does not have a lot of regulatory staff, 

and so it just becomes much more burdensome for them to sort 

through regulations and figure out what those regulations mean for 

them. 

And then finally, I will just say that there are administrative 

processes that regulators can use to make federal rules. One of 

these is using economic analysis. Unfortunately, financial regulators have shown themselves to be very loathe to use economic 

analysis to try to figure out what the problem is, to look at different alternatives, and to look at the costs and benefits, and that 

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4 

would help them to identify unintended consequences of regulations. 

So I just want to thank you and just mention in closing that the 

Mercatus Center has done a survey on small banks, and the message that we are getting is loud and clear that the regulations are 

really an overwhelming burden for them. Thank you. 

Chairman SCHWEIKERT. All right. Thank you, Ms. Peirce. 

I would like now to introduce our second witness, Linda Sweet. 

Ms. Sweet is president and CEO of Big Valley Federal Credit 

Union located in Sacramento, California. Linda has been with Big 

Valley for 40 years and president and CEO for 25. Big Valley Federal Credit Union was founded in 1953 and has 56 million in assets. Big Valley serves residents of Gold River, California and employees of Safeway grocery stores, Pepsi, and Automotive 

Aftermarket Services, Inc. Ms. Sweet is testifying on behalf of the 

National Association of Federal Credit Unions. Thank you for being 

here. You have five minutes. 

STATEMENT OF LINDA SWEET 

Ms. SWEET. Thank you. 

Good morning, Chairman Schweikert, Ranking Member Clarke, 

and members of the Subcommittee. My name is Linda Sweet, and 

I am testifying this morning on behalf of the National Association 

of Federal Credit Unions. I serve as president and CEO of the Big 

Valley Federal Credit Union in Sacramento, California. 

NAFCU and the entire credit union community appreciate the 

opportunity to discuss the regulatory burden credit unions face. 

The overwhelming tidal wave of new regulations in recent years is 

having a profound impact on credit unions and their 97 million 

members. Credit unions are some of the most highly regulated of 

all financial institutions facing restrictions on who they can serve 

and their ability to raise capital. 

There are many consumer protections already built into the Federal Credit Union Act. This is why during the debate on Wall 

Street Reform, NAFCU opposed credit unions being included under 

the Consumer Financial Protection Bureau rulemaking authority. 

We are still concerned about this today. Unfortunately, while credit 

unions did not cause the financial crisis and actually helped blunt 

the crisis by continuing to make loans, they are still firmly within 

the regulatory reach of the Dodd-Frank Act. The impact of this 

growing compliance burden is demonstrated in the declining number of credit unions, dropping by more than 800 institutions since 

2009. A main reason for this decline is increasing costs and complexity of regulatory compliance. Many smaller institutions simply 

cannot keep up. 

A 2012 NAFCU survey of our members found that 94 percent of 

respondents had seen their compliance burdens increase since the 

passage of the Dodd-Frank Act in 2010. A 2013 survey found that 

over 70 percent of respondents have had noncompliant staff members take on compliance-related duties, thus not serving members. 

At my credit union, I have seen our compliance costs skyrocket. 

These increased costs have resulted in the inability to provide the 

quality of service our members expect. Now we are often slower to 

offer services and there are some that we are forced to cut back. 

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5 

In order to truly comply with a rule, a credit union employee must 

read the regulation in its entirety, interpret the law and its intent, 

write or rewrite the credit union’s policy and procedures, and identify which supervisor is assigned the responsibility for monitoring, 

complying, and reporting back to management on the necessary information. 

Keep in mind that this is required by each regulation. For most 

small credit unions, a single employee may be the only handling 

regulatory compliance. Megabanks have entire teams dedicated to 

compliance. NAFCU has called on Congress in a five-point plan to 

provide broad-based regulatory relief to help credit unions of all 

sizes, especially smaller credit unions like mine. A number of provisions in this plan have been introduced as part of the regulatory 

relief for Credit Union Act introduced by Representative Gary Miller. We urge the Subcommittee members to support this legislation. 

In conclusion, the overwhelming tidal wave of new rules and regulations has hampered the ability of credit unions to serve their 

members, and relief should be extended to the entire industry. 

Thank you for the opportunity to testify today, and I welcome 

any questions that you may have. 

Chairman SCHWEIKERT. Thank you, Ms. Sweet. 

Our third witness is Mr. Doyle Mitchell, Jr., president and CEO 

of Industrial Bank located here in Washington, D.C. It is a pleasure to have you here. I have come across your name in a number 

of articles. 

Industrial Bank was founded by Mr. Mitchell’s grandfather in 

1934 and is currently the sixth largest African-American owned 

bank in the country, with 370 million in assets. Mr. Mitchell has 

worked at Industrial Bank since 1994. Mr. Mitchell is testifying on 

behalf of the Independent Community Bankers of America. Thank 

you for joining us today. You have five minutes. 

STATEMENT OF B. DOYLE MITCHELL, JR. 

Mr. MITCHELL. Thank you, Chairman Schweikert, and good 

morning. Also, Ranking Member Clarke and members of the Subcommittee. 

My name is B. Doyle Mitchell, Jr., and I am president and CEO 

of Industrial Bank. As you indicated in Washington, D.C., founded 

in 1934 at the height of the Great Depression by my grandfather. 

We are the oldest and largest African-American commercial loan 

bank in the Washington metropolitan area. We employ over 120 individuals, and today I do testify on behalf of 7,000 community 

banks represented by Independent Committee Bankers of America, 

so I do thank you for convening this hearing. 

In addition to being a member of ICBA, I am also the chairman 

of the National Bankers Association. That is a trade association for 

the nation’s minority and women-owned banks. There is an important segment of community banks like mine that were founded to 

serve minority communities in historically underserved areas often 

ignored by other institutions. 

In order to reach their full potential as a catalyst for entrepreneurship, economic growth, and most importantly job creation, 

community banks must have regulations that are calibrated to our 

size, our low-risk profile, and our traditional business model. ICBA 

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6 

has developed its plan for prosperity, a platform of legislative recommendations that will provide meaningful relief for community 

banks. The plan for prosperity is attached to my written testimony 

in addition to a list of the 23 bills that have been introduced in the 

House and the Senate that incorporate plan provisions. 

I would like to use this opportunity to highlight the single bill 

that best captures the full scope of the plan. That is the CLEAR 

Relief Act, H.R. 1750, introduced by Representative Blaine 

Luetkemeyer, a former community banker and member of this 

Committee, as well as the Financial Services Committee. 1750 has 

almost 90 co-sponsors with strong bipartisan representation. A 

Senate companion bill has similar bipartisan support. Key provisions of 1750 would provide relief for new mortgage rules that 

threaten to upend the economics of community bank mortgage 

lending which we do and drive further industry consolidation. Specifically, 1750 recognizes the overriding incentive of a lender to ensure that loans held in portfolio with full credit exposure are well 

underwritten and affordable. Under 1750, the community bank 

loans held in portfolio will be granted qualified mortgage status, or 

QM as it is called, which shields the lender from heightened liability exposure under the CFPB’s new ability to repay rules. If my 

bank holds a loan in portfolio, it is in our best interest to ensure 

that the borrower has the ability to repay. Withholding QM status 

for loans held in portfolio and exposing the lender to litigation risk 

will not make loans safer, nor will it make underwriting more conservative; it will merely detour community banks from making 

such loans and curb access to credit. 

By the same token, 1750 would exempt community banks, bank 

loans held in portfolio for new escrow requirements for higher 

priced mortgages. Again, portfolio lenders have every incentive to 

protect their collateral by ensuring the borrowers make tax and insurance payments. For low volume lenders in particular, the escrow requirement is expensive and impractical. And again, it will 

detour lending to borrowers who have no other options. 

Another provision of 1750 will raise the threshold for the CFPBs 

small service exemption from 5,000 to 20,000 loans. Community 

banks have a strong personalized servicing record and no record of 

abusive practices. To put the 20,000 threshold in perspective, consider that the five largest servicers have an average portfolio of 

over 6.8 million loans. 

Other provisions of 1750 will provide relief from unworkable new 

appraisal requirements, Sarbanes-Oxley internal control 

esthestation, redundant privacy notices and other expensive requirements intended for large, complex banks. 1750 provides 

strong, clear, legislative response to the threat of mistargeted regulation to the community banking charger without compromising 

safety and soundness or vital consumer protections. 

I encourage you to reach out to the bankers, community bankers 

in your districts and ask them whether 1750 would help them better serve their community. Your co-sponsorship would be greatly 

appreciated by community banks and ICBA. Thank you again for 

the opportunity to testify today. 

Chairman SCHWEIKERT. Thank you, Mr. Mitchell. And there is 

always that request for co-sponsorship, isn’t there? 

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7 

I would actually like to hand the mic over to Ranking Member 

Clarke to do her opening statement and introduce her witness. 

Ms. CLARKE. I thank you, Mr. Chairman, and I thank the members of the panel for being here with us this morning. And I think 

it is prudent to take a moment to remember why Dodd-Frank was 

implemented in the first place. For those who might be experiencing selective amnesia, five years ago widespread malfeasance 

brought our nation to the brink of financial collapse. Were it not 

for swift congressional action on behalf of the American people, we 

would be living in a very different American today. And the American people have overwhelmingly supported this action. According 

to a survey conducted by the Center for Responsible Lending, 83 

percent of those surveyed, including 75 percent of republicans, favored tougher regulation for financial institutions. Dodd-Frank has 

been a lightning rod for critics and supporters alike throughout its 

debate, and even as it has stood as the law of the land for the past 

three years. 

The Consumer Financial Protection Bureau, the agency whose 

responsibility it is to protect consumers from unfair, deceptive, and 

abusive financial products, was created by Title X of Dodd-Frank 

and remains one of the provisions under the most scrutiny. Since 

beginning operations, the CFPB has secured more than $750 million for consumers who were subjected to deceptive practices, imposed penalties on companies to deter future activity, and warned 

others to clean up their deceptive practices. While the CFPB’s primary responsibility is to regulate financial products, it is clear that 

small financial institutions were not the cause—and I repeat, were 

not the cause—of the recent financial calamity. 

Small businesses use these products as well in the form of personal credit cards and home equity loans to finance their businesses. Therefore, it is important that the CFPB balance the need 

to regulate abusive practices without adversely affecting the credit 

market for small businesses. 

Understanding that small financial institutions were not the 

cause of the financial crisis, Congress took steps to shield small 

community banks, merchants, and retailers from the extreme and 

extra scrutiny by the CFPB. Additionally, the CFPB must conduct 

small business advisory review panels, becoming only the third 

agency to be required to do so. These protections were put in place 

with the small business community in mind and to assure that the 

engines of our national economy would be able to power us to a full 

recovery without undue burden. The CFPB is vitally important to 

improving the integrity of our financial apparatus and it is important that the CFPB ensure its integrity, while ensuring that small 

business community is allowed to thrive with little interruption. 

Today, as we have heard, experts and stakeholders are looking 

at the state of the CFPB’s regulatory activities. 

I want to again thank each and every one of you for coming and 

lending your expertise at today’s discussion, and I would like to 

take this opportunity now to introduce to everyone Professor 

Levitin. 

It is my pleasure to introduce Adam Levitin. Mr. Levitin is a professor at the Georgetown University Law Center in Washington, 

D.C., where he teaches courses on bankruptcy, commercial law, and 

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8 

consumer finance. He has previously served as a scholar in residence at the American Bankruptcy Institute and is a special counsel to the Congressional Oversight Panel supervising TARP. Before 

joining the Georgetown faculty, Professor Levitin practiced law at 

Weil, Gotshal and Manges, and served as a law clerk for the U.S. 

Court of Appeals in the Third Circuit. Professor Levitin holds a 

J.D. from Harvard Law School and degrees from Columbia University and Harvard College. I would like to welcome Professor 

Levitin. 

STATEMENT OF ADAM J. LEVITIN 

Mr. LEVITIN. Good morning, Chairman Schweikert, Ranking 

Member Clarke, members of the Committee, and Representative 

Luetkemeyer. Thank you for inviting me to testify today. I want to 

emphasize that I am testifying today solely as an academic, not as 

a member of the Consumer Financial Protection Bureau’s Consumer Advisory Board or on behalf of the CFPB. 

There have been lots of new financial regulations since 2008, and 

not all of it is perfect, but a lot of it, much of it was long overdue, 

especially for mortgages, credit cards, and bank capital regulation. 

The implementation of this new regulation is still in process, and 

I think that makes it really too early to judge the regulation at this 

point. That said, I think it is possible to offer some early observations. 

First, there obviously are some compliance costs with new regulation, and these costs are going to be harder for small businesses 

to amortize over their operations than for large banks. But it is important that we remember to weigh the compliance costs against 

regulatory benefits, and those benefits include more transparent 

and efficient markets, and more transparent and efficient markets 

can result in cheaper capital for small businesses of all sorts and 

for greater spending power for consumers who are the customers 

of small businesses. 

It is also hard to see the new regulations materially affecting the 

competitive landscape. We hear quite a bit about increased compliance costs for small businesses and small financial institutions, 

and I do not doubt that for a second, but I would note that we have 

no hard data about the actual extent of the changes and compliance costs. And I think that is an important thing that we would 

want to know before proceeding with any changes in regulation, 

particularly because some of the regulations actually help level the 

playing field between large institutions and small institutions. 

Right now, large financial institutions have a major advantage in 

the financial services marketplace. In part, this is because they 

have this too big to fail benefit that they are understood as being 

guaranteed implicitly by the United States Government, and I do 

not think that is a function of Dodd-Frank in any way; that is a 

function that neither this Congress nor any other Congress is every 

going to let the financial system collapse. This is just a reality we 

have to work with. 

But we can try and level the playing field between small institutions and large institutions. And some of the recent regulations actually have that effect. The recent regulations, like the Credit Card 

Act, Dodd-Frank Act, and the new capital requirements under 

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Basel III, they actually put most of the burden on big banks. And 

this makes sense because while we have around 14,000 depositories and credit unions in the United States, most of the assets 

in the financial services space are controlled by about 100 banks. 

So we have lots of very, very small financial institutions but most 

of the action is happening with large banks. The small banks play 

a very important role in their communities, particularly with 

sources of small business credit, but it is important not to lose 

sight of the big picture on them. 

So let me just take you through the impact of a few of the recent 

regulations. 

The Credit Card Act of 2009. Well, 85 percent of credit cards are 

issued by 10 banks. Most banks do not issue credit cards. Only 

about half of credit unions issue credit cards of any sort. So most 

of the regulatory burden of the Credit Card Act is falling on a very 

small number of banks. 

The Durbin Amendment to the Dodd-Frank Act, dealing with 

interchange fees on debit cards only applies to—the key provision 

of the Durbin Amendment only applies to banks with over 10 billion in assets at the holding company level. That is just over 100 

banks. Most banks are not subject to the key provision of the Durbin Amendment. 

The Consumer Financial Protection Bureau has examination authority only over the largest banks in the country, only over about 

100 banks. Again, banks with over 10 billion in assets. Smaller financial institutions, be they banks or community banks or credit 

unions, continue to be examined by their regular prudential examiners. 

And the CFPB has actually been very solicitous about taking 

care of small banks and understanding that there are special concerns there. So, for example, the qualified mortgage rulemaking 

creates a safe harbor to the Dodd-Frank ability to repay rule. It 

has several carve-outs for smaller financial institutions, and the result of this is that at least in the current market, about 95 percent 

of mortgages that are being made today would comply with the QM 

requirement. Similarly, the Basel III capital requirements, 95 percent of financial institutions already apply with those according to 

the FDIC. So all in all, I think it is too early to judge the effect 

of recent financial regulatory reforms, but at least at first glance 

I think there is good reason to think that the costs do not outweigh 

the benefits and I think we should wait and see until we have more 

information before trying to change the regulatory scheme that we 

have in place now. Thank you. 

Chairman SCHWEIKERT. Thank you, Professor. 

I am going to actually go to Mr. Rice first, then back to the ranking member because I have a whole diatribe of questions. So, Mr. 

Rice, five minutes. 

Mr. RICE. Let me get my glasses here. 

Professor Levitin, does Dodd-Frank solve the problem that 

caused the financial collapse? 

Mr. LEVITIN. I am not sure we would agree on what the problem is. I think there are kind of two problems that are key, and 

I think Dodd-Frank goes a long way to addressing them but maybe 

does not do everything. The two key problems were one, just too 

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much leverage in the financial system as a whole; and secondly, 

the spark, that is the powder keg, and then the spark that lit it 

was with mortgages. 

Dodd-Frank, I think, solves the mortgage problem. The ability to 

repay requirement in Title XIV of Dodd-Frank means that we really should not see mortgages as a systemic problem in the future. 

Mr. RICE. When does that take effect? 

Mr. LEVITIN. That takes effect in January 2014, I believe is the 

effective date. I think January 22nd maybe. 

Mr. RICE. Yeah. 

Mr. Mitchell, that requirement that he is speaking of, this mortgage requirement where all mortgages are under this microscope, 

how is that going to affect your lending practices? 

Mr. MITCHELL. Actually, it will probably decrease. It will decrease the amount of mortgages that we will make. We hold some 

mortgages in portfolio. It takes away a lot of flexibility of mortgage 

banks to look at individual circumstances, and we have to strictly 

standardize. If you have a 44 percent debt-to-income ratio and not 

a 43 percent debt-to-income ratio, then we will not make the loan. 

And there will be a lot of people that will not get home mortgage 

financing. 

Mr. RICE. Okay. So you are saying that a loan that you would 

have made prior to this new regulation taking into effect you will 

no longer make? 

Mr. MITCHELL. Quite a few. Yes. 

Mr. RICE. And what people, what borrowers are affected by 

that? Is this the wealthy people that are affected by that or is this 

the middle income people? 

Mr. MITCHELL. No, sir. No, sir. It is probably lower middle income and low and moderate income individuals. 

Mr. RICE. So what you are doing is you are preventing access 

to capital to lower and middle income people? 

Mr. MITCHELL. There is no question about it. And the end effect is that it will have a negative effect on the rebounding housing 

market itself. 

Mr. RICE. How is Dodd-Frank going to affect your business lending? 

Mr. MITCHELL. Well, you know, Dodd-Frank, all in all, has 

added quite a few costs to our bank, particularly in man-hours. We 

have not had necessarily to hire more individuals, although you do 

spend more money on consultants to help you decipher all the new 

regulations. But the man-hours have gone through the roof. And 

that is a lot of time not spent with our clients—our small business 

clients and our retail clients. 

Mr. RICE. Ms. Sweet, I want to ask you the same questions I 

asked him. 

This new mortgage requirement, how is this going to affect your 

day-to-day lending? 

Ms. SWEET. It is the same as what he is speaking of. We have 

done mortgages for probably 25 years. Our membership is used to 

us where we know them, we are able to provide all of those loans 

and services to them. Under this new rule we are going to be passing most of our loans to a third party. We have started doing that 

and the feedback that we are getting is why can we not stay with 

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you? Our fees were much lower on our last home loan and we do 

not have the loan with you any longer. That becomes an issue for 

us. It is a difficult situation to put our membership in. To put the 

consumer into another mortgage lender is very difficult. 

Mr. RICE. Did you portfolio lend? Did you keep loans? 

Ms. SWEET. We did. 

Mr. RICE. Did you keep that more for the higher income people 

or more for the lower income people? 

Ms. SWEET. I would say a little of both. We have sold loans 

about 10 years ago but we portfolioed most of them. Under the new 

act it is difficult because the debt-to-income ratio, we were very 

much able to look at the member individually. Under this, the set 

of rules are very specific. 

Mr. RICE. Okay. Is this going to hurt more people borrowing if 

they are high income people or low income people? 

Ms. SWEET. If they are low income people. 

Mr. RICE. So there is going to be more competition for the high 

income, high net worth borrower and the low income people are 

going to be shot out by this law? 

Ms. SWEET. Yes. In fact, as a good example, we could have done a mortgage loan around $350,000 mortgage loan, and in California 

that is reasonable for about $2,500 in fees and costs. And that included everything. 

Mr. RICE. I am confused. I thought we were trying to protect the 

middle class here. 

Thank you very much, Ms. Sweet. My time has expired. 

Chairman SCHWEIKERT. Thank you, Mr. Rice. 

Ranking Member Clarke. 

Ms. CLARKE. Thank you, Mr. Chairman. I would like to yield 

to Ms. Chu at this time. 

Chairman SCHWEIKERT. Ms. Chu. 

Ms. CHU. Thank you so much. 

The Consumer Financial Protection Bureau is one of the few 

agencies that is required to conduct small business review panels, 

and so Professor Levitin, in your testimony you stated that CFPB’s 

outreach to smaller financial institutions is particularly important. 

How did CFPB engage with the small entities as it was formulating these new mortgage disclosure regulations? 

Mr. LEVITIN. Well, I want to emphasize I am speaking on only 

my own behalf. I do not know the full extent of the Agency’s contact with small institutions, but what I have seen when the CFPB 

has advisory board meetings in various locations, top CFPB staff 

attends these meetings and they make a point when they are in 

places like Jackson, Mississippi or St. Louis, Missouri, to go and 

meet with the local bankers on their own time. They make a point 

that they are going to have breakfast with the community bankers 

and the credit unions in that area and talk face-to-face. The officers 

of these financial institutions with the very top leadership of the 

CFPB, not intermediated by any trade associations, and find out 

what are their concerns. And they are listening to them, that when 

they come back from these meetings and they are talking with the 

advisory board, it is very clear that they have been listening and 

they want to understand what the concerns are of small financial 

institutions. It is not that they are going to agree with them at 

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every point, but they are going to listen to them. And the CFPBs 

see small financial institutions as really being very important within the U.S. financial system. 

Ms. CHU. In fact, let us talk specifically about the qualified 

mortgage rule that was made earlier this year. The CFPBs created 

four different pathways for a mortgage to quality to gain this QM 

status. Can you talk about these four pathways, including the 

small creditor definition and how they result in a broad qualified 

mortgage definition? Was the CFPB required to create a small 

creditor definition? 

Mr. LEVITIN. Absolutely not. The CFPB was directed by Congress on a fixed time table to adopt regulations implementing the 

statutory ability to repay requirement. The CFPB in its implementing regulation, this QM regulation, included a safe harbor for 

small financial institutions that have no more than $2 billion of assets—and that is actually not that small of an institution—and 

originate no more than 500 first lien mortgage loans in a year. 

There is also now, more recently this October, the CFPB added another exception, a time limited exception for balloon mortgages that 

applies to I believe—I cannot remember the exact scope of who it 

applies to, but it is for smaller financial institutions on a broader 

definition, giving them two years more transition time for balloon 

mortgages. 

Ms. CHU. In fact, the Bureau estimates that more than 95 percent of the mortgage loans being made in the current market will 

be qualified mortgages. What is your opinion about how the market 

will react given that 95 percent of mortgages would be considered 

qualified mortgages as of January 2014? 

Mr. LEVITIN. I think that there has been a lot of unnecessary 

panic in the market about QM. As you stated, in both the Bureau’s 

estimate and private estimates, such as Mark Zandi of Economy.com, who was one of Senator McCain’s campaign advisors in 

2008, they estimate that 95 percent of mortgages being originated 

today would qualify as QM. If that is correct, I do not think that 

we are going to see very much of a change in the availability of 

credit in the market. And let me emphasize, it is possible to make 

a mortgage loan that is not QM. It is not illegal. Actually, the penalty for having a non-QM loan is very, very limited. It creates a 

limited defense in a foreclosure. It is not a defense to foreclosure, 

so it creates a set-off right in foreclosure and it is a set-off right 

that may actually only be for about $1,000, depending on how one 

interprets the statute. It may also include legal fees. 

Ms. CHU. A moment ago you referred to this two-year transition 

for balloon loans to gain qualified mortgage status. Was the CFPB 

required to put in place this two-year transition period? 

Mr. LEVITIN. No. This was something the CFPB did on its own 

volition because the CFPB was concerned about the effect of the 

ability to repay requirement on small financial institutions. It has 

not given small financial institutions everything that they have 

wanted, but the CFPB has really been thinking about the needs of 

small financial institutions and trying to be accommodating to 

small financial institutions while still being faithful to its legal 

duty to implement the statute as Congress wrote it. 

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Ms. CHU. Okay, thank you. I see my time has come back and 

I yield back. 

Chairman SCHWEIKERT. Thank you, Ms. Chu. 

Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

It is kind of interesting. This morning in the Wall Street Journal, 

the story below the fold, tally of U.S. banks sinks to record low. 

And it is a great article that talks about a number of small banks 

that have gone down now to below 7,000 in this country. It talks 

about the one bank in the last three years that has actually had 

a new charter; otherwise, all new charters are basically stopped as 

a result of—in this article it talks about the regulatory burden that 

a lot of small institutions are facing. One example was United 

Southern Bank of Kentucky that had to hire 15 different people 

while basically maintaining its same size just to be able to comply 

with the extra cost. As a result of that it is interesting to hear 

some of the comments this morning. 

Mr. Mitchell, I appreciate you being here. I missed some of your 

testimony. Also, you mentioned the FDIC study that came out last 

fall, and that study talked about banks under 100 million probably 

would not be able to survive any longer because of the increased 

cost and being unable to spread it out. I think Mr. Levitin and Ms. 

Sweet, Ms. Peirce, all made that comment, unable to spread those 

costs out over a smaller amount of people. 

So can you talk just a little bit this morning about the amount 

of costs? You mentioned a while ago you did not hire any people, 

but you did have a percentage of cost, the number of hours that 

it cost you to comply? Mr. MITCHELL. Well, let me first of all say that $360, $370 million in total assets, I am having a lot of conversations with a number of my peers that are also feeling that at our size we may be 

too small to survive. And so there is a lot of merger and acquisition 

conversation going on among institutions our size, not just at the 

$100 million and lower thresholds. 

Our cost is probably measured in man-hours, and I do not have 

exact figures in that. I do know it is over 200 man-hours that we 

have spent probably this year, additional man-hours on compliance 

and coming up to speed with new compliance regulations and so 

forth. And we do not rely just on ourselves; we rely on consultants 

and so forth. So the pressure on revenues in projecting for next 

year and the increase in man-hours just takes away an inordinate 

amount of time from what we would really like to be doing. 

Mr. LUETKEMEYER. You know, the title of the hearing today 

is ‘‘Regulatory landscape: burdens on small financial institutions.’’ 

There has been some discussion already about the QM situation, 

but something has not been discussed about that yet and that is 

the liability exposure that if you make the loan or if you do not 

make the loan—I know that Mr. Levitin made the comment a while 

ago that 95 percent of the loans that are processed are going to be 

made. In the Financial Services Committee, a couple months ago, 

that number was 50 percent of the loans were being made. And I 

think that is probably closer if you talk to the small banks of this 

country about the effect of QM and what it is going to be because 

not only because of the rules and the way it is structured, but beSBREP-219 with DISTILLER

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cause of the liability exposure. Will you make or will you not make 

that loan? Can you talk a little bit about the lateral exposure that 

you look at and that you see with the QM situation and making 

loans? 

Mr. MITCHELL. Most community banks, until they are absolutely sure, and that takes a team of lawyers to be able to tell you 

as far as certainty what your liability exposure is going to be, are 

not going to make those loans until we are absolutely certain exactly what the exposure is. We would just tend to stay away from 

it. That is why it makes sense to extend the review period before 

it is implemented so everybody can understand exactly what it is. 

I question that 95 percent of the loans are going to be made, and 

in particular, we serve underserved markets, and I can assure you 

that number is going to be much lower in underserved markets. 

Mr. LUETKEMEYER. Well, again, that number was given in testimony in the Financial Services Committee a couple months ago, 

so it is not my number; it is somebody else’s number. 

Mr. MITCHELL. Yes. 

Mr. LUETKEMEYER. From the Committee. 

So just a quick comment with regards to—I know you are a small 

business with 370 employees. 

Mr. MITCHELL. One twenty. 

Mr. LUETKEMEYER. One twenty, excuse me, 120. You have $370 billion in assets. There we go. 

Healthcare plan. Obamacare is still a concern, even for you. 

What are you doing to implement that? How is that costing out 

your program? 

Mr. MITCHELL. Well, from what I was told by the HR department, it does not affect us right now. I think we are over the 

threshold of number of employees limit. 

Mr. LUETKEMEYER. Okay. You have your own. Are you selfinsured? 

Mr. MITCHELL. No, we are not self-insured but we do offer 

healthcare benefits to our employees. 

Mr. LUETKEMEYER. Okay, all right. Well, I have some other 

questions with regards to that. I think it is important to understand that you are dealing with an environment with which you 

are not the problem. As a small business, as a small bank, you are 

not systemically important. Although you are important to the community that you are in, you are not systemically important from 

the standpoint that the overall financial risk to the whole system, 

yet you are now a part of the solution which you fall under these 

rules and regulations. And so it is frustrating for me to see that 

the CFPB is making some rules and regulations. 

I had a group of bankers come to my office about a month or two 

ago and they had been to CFPB to talk about rules and regulations, and the CFPB told them they were the 42nd group to be 

there to complain about these rules and regulations, and yet nothing is being done and they are not listened to. So it is disappointing 

to hear that from them. Hopefully, CFPB will get on board. 

I appreciate your testimony this morning. Thank you very much. 

I yield back. 

Chairman SCHWEIKERT. Thank you, Mr. Luetkemeyer. 

Ranking Member Clarke. 

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Ms. CLARKE. Thank you, Mr. Chairman. 

Mr. Mitchell, as I stated in my opening statement, Dodd-Frank 

was necessary because we came to the verge of a complete economic collapse three years ago. That said, very few things in this 

world are perfect, especially legislation. There are always unintended consequences, including federal regulations upon introduction. However, federal regulations can be tweaked and improved to 

adjust for these imperfections. 

What would you recommend as a perfecting tweak, and if there 

was a potential small business institution carve-out, what would 

you suggest? Or is it your opinion that we should return to the deregulated era that caused the financial collapse? 

Mr. MITCHELL. Well, I think we are on the same page in many 

respects. However, I have been in the banking industry since 1984. 

I have been president for 20 years. And even before Dodd-Frank, 

you had bankers in our industry complaining that there was already too much regulation, particularly on community banks. 

While Dodd-Frank may have been targeted towards large banks, it 

actually applies to all of us. And that is the difficulty and the frustration the community banks and particularly minority banks 

share. 

My tweak would be that community banks should be exempt 

from Dodd-Frank overall. In particular, if there is another opportunity, then I think H.R. 1750 is a great start. 

Ms. CLARKE. Let me open that question to the rest of the panel 

and get your take on it. Professor Levitin, Ms. Sweet, Ms. Peirce. 

Mr. LEVITIN. Again, I think it is a little too early to tell, and 

I agree with you. We cannot assume that legislation is perfect but 

the implementing regulations for Dodd-Frank, many of them have 

not even gone into effect yet. It is just too early to tell what the 

effects are going to be. I want to address in particular that 50 percent number that Mr. Luetkemeyer cited. That comes out of core 

logic and they were basing that on 2011 mortgage origination activity. A lot of that activity in 2011 would not have qualified for QM 

because it was streamlined refinancing. In other words, without 

full documentation. That is a cheap thing, a relatively cheap thing 

to fix. It was not about debt-to-income ratios. If you carve out even 

in 2011 the streamlined refinancing, you get up to around 75 percent of 2011. The market has shifted again and the 95 percent 

number is based on what is going on in 2012–2013, but I think 

again it is just too early to be stepping away from regulatory implementations that we do not even know what their effect is. 

Ms. CLARKE. Ms. Sweet, do you agree that it is too early to step 

away and we do not know what the effect would be particularly for 

small institutions? 

Ms. SWEET. I think we have already felt an enormous amount 

of effect from the regulation. And I do not think it is too soon to 

tell. We also do not have the funds, the resources, the budget to 

make sure whether we comply with the regulation or not, so it 

takes an enormous amount of my time away from our members, especially the ones that are underserved, the ones who are confused 

and scared and need me. Often, I am behind closed doors trying to 

read piles of regulations to see if, in fact, we are exempt or if we 

are not, what is necessary to comply with that regulation. The cost 

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also that we do hire consultants for these regulations, it is impossible to know specifically all the answers once I read them. We hire 

attorneys for their opinions, and who is hurt is our members. And 

I know that was the reason for the regulation, was to protect. I do 

understand why many of these regulations were put into place, to 

protect the underserved or protect the person who has no idea and 

they are signing contracts they do not know what they are doing. 

And it is very important to have those regulations. However, when 

you see an organization such as credit unions that have never had 

those kinds of problems, it just seems so unnecessary to spend that 

kind of money and put it toward the regulation when it could be 

put toward the minority groups, to the underserved, to the immigration groups that are in California. 

And I can give you an example. Just a few weeks ago, and I believe part of the underserved, is the senior citizens. They are afraid 

are they going to lose their medical care? Is their social security 

going to be decreased? Can they survive? And often they have one 

of their family members that are ill that they are trying to deal 

with an enormous amount of problems. I see that they do need us 

as an entity that they have trusted for 40, 50 years. 

And as I said, a few weeks ago, a lady came into our office saying, ‘‘I have one of your members. I have driven her here. She 

needs your help. Someone took all of her money.’’ My staff went to 

the car, pulled me up a history of the account, and in six months 

her whole account had been drained. I looked through that history 

and found through an investigation that she put her granddaughter on with the agreement that her granddaughter would 

drive her car to help her to doctors’ appointments, use her ATM 

card for doctor appointment costs, and for food. Her granddaughter 

took all of that. The car. We saw hotel bills, pizza parlors, an excessive amount of costs, $11,000 was drained from her account and 

she was on social security. Had I not had the time to spend with 

her in the car, this could not have been even noticed. And that is 

a bit of the underserved. It is not just a minority group. It is often 

seniors who have nowhere else to turn. And luckily, the end of that 

story is we turned it over to the Elder Financial Abuse Department. They found the car. We closed the ATM card and we have 

helped the woman to a positive result. 

Ms. CLARKE. Ms. Peirce, did you want to add anything to what 

has been said? 

Ms. PEIRCE. I think that Ms. Sweet and Mr. Mitchell tell the 

story very powerfully, but I do think that we should reopen DoddFrank, because while the intentions were good, the philosophy behind it is bad. It is taking away lending decisions from local institutions that know their customers and giving it to folks at the 

CFPB whose intentions are good but who do not know the circumstances on the ground. 

Ms. CLARKE. Thank you. 

Mr. Chairman, I want to ask just one more question. 

Professor Levitin, considering the hundreds of smaller banks 

that have failed since the near collapse five years ago, do you believe that Basel III capital requirements are sufficient to prevent 

future failures and help shore up vulnerable institutions? 

SBREP-219 with DISTILLER

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Mr. LEVITIN. Basel III is a mess. I think that is the polite way 

to address it. It is overly complicated. It is still gameable. And I 

think the critical problem with Basel III is it just basically does not 

get capital levels high enough. It is very complicated to implement 

and yet in the end the capital levels really do not go high enough 

under Basel III. So I do not think Basel III really makes our financial system that much stronger. 

I would note though that we have lots of smaller financial institutions failing well before any of the current regulations when in 

place. We have an incremental change but there is a fundamental 

problem in the economics of smaller financial institutions which is 

they do not have the economies of scale necessary to compete in a 

lot of areas with larger financial institutions, particularly credit 

cards. That is just an economy of scale business. You cannot compete if you are small. And it is easy to point the finger at regulations as being the problem, but regulations are really not the key 

problem. The key problem is one of the economic model. And we 

like to celebrate that we have lots of small financial institutions in 

the United States, but it is also notable that no other country has 

anywhere close to 14,000 financial institutions. Even 1,000 would 

be a huge number for any other country. 

Ms. CLARKE. Thank you, Mr. Chairman. I yield back. 

Chairman SCHWEIKERT. Thank you, Ms. Clarke. 

Ms. CLARKE. And I thank our panelists. 

Chairman SCHWEIKERT. A handful of questions for myself. 

Mr. Luetkemeyer, I would actually like to put this article from 

last night’s Wall Street Journal into the record just sort of as a 

benchmark for discussion. 

So without objections, it is placed for the record. 

I would like to do actually a handful of quick discussions and 

make sure I am doing some follow up here. 

Ms. Sweet, you had started to discuss your credit union and your 

history of actually doing home loans, home mortgage loans. 

Ms. SWEET. Yes. 

Chairman SCHWEIKERT. So first, you are in California, so it 

would be first deeds of trust? 

Ms. SWEET. It would be. Or second mortgages and home equity 

lines of credit. 

Chairman SCHWEIKERT. Now, your cost structure, because a 

lot of your historic population for your credit union where grocery 

store workers. If it were a couple years ago, I walk in and I am 

going to get my $350,000 loan, which for those of us in Arizona 

seems appallingly high, but you are in California. What was my 

cost of that loan and what happens to me today if I walk in today 

and ask for that same loan? What is my cost? 

Ms. SWEET. A couple of years ago that probably would have cost 

you around $2,500 and that would have covered your appraisal, 

your title search, credit report, and all the fees, all the hard costs 

that go into that loan. Today that is going to cost our members 

about $6,000 to $6,200. Many of our members are not getting those 

loans. Also, the qualifications, some of them do not comply with the 

regulations and the mortgage companies or the banks, they are 

very tight. They are very set within their standards, and the cost 

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of that loan is just astronomical for these people, our members who 

cannot afford that. So most of them have decided to rent. 

Chairman SCHWEIKERT. And just to make sure, give me what 

would be an average, or typical demographic of your clients, your 

customers, actually your members because as a credit union, who 

would that be? Who are you serving on that loan? 

Ms. SWEET. As far as their positions, most of our members have 

been there for many, many years. So you have the elderly. We 

know their children, their children’s children, and they may have 

started out to be either family members of or worked for Safeway 

either as a checker, a bagger, in the Milk department, unionized 

workers often. And the demographics now I see a huge portion, 

maybe it is the baby boomers, a huge portion of senior citizens. We 

are also seeing a very large portion of minorities, California being 

very close to Mexico. We have a great deal of Hispanic groups. We 

would like to serve that group more and their needs are being underserved. It is very costly and the remittance rule is one of the 

things that we were going to and we are ready to implement, and 

we are very happy to implement. 

Chairman SCHWEIKERT. And none of us has actually spoken of 

some of those costs of the mechanics of, as you refer to it, the remittances rule, which is a function of Dodd-Frank and what that 

is doing. And that may be a whole another discussion and a whole 

another hearing. 

Professor Levitin, first off, you get a gold star from me on your 

comments about Basel III. I tried to become an expert on Basel 2- 

1⁄2 and Basel III and partially coming from sort of a financial 

world, I can find places where I can run a freight train through it. 

I wanted to touch two things. One, part of your testimony is we do 

not actually have enough data of actual experience of regulatory 

environment affecting small institutions, fully enforced to truly understand them. Am I treating that fairly? 

Mr. LEVITIN. I think so. 

Chairman SCHWEIKERT. Second of all, on your QM comment, 

my concern is that we have passing information. Mr. Mitchell’s institution can do a non-QM loan if he keeps it on his books, but if 

he needs to manage certain capital calls, where is the secondary 

market for a non-QM loan? Where does he take those packages of 

loans and sell them today? 

Mr. LEVITIN. It is not clear. Well, right now we just do not 

know because QM is not in place, but at this point it does not appear that there is a secondary market for non-QM loans. That may 

change. 

Chairman SCHWEIKERT. So one of our solutions here is on the 

positive side is do we have to come back and rebuild a more robust, 

private secondary market to package inquire? Because right now it 

would almost be a level of misfeasance if Mr. Mitchell’s institution 

produces those loans, puts them on the books. 

Mr. LEVITIN. He can get stuck in a liquidity bind very easily. 

And certainly, there is the whole related issue of GSE reform. I am 

happy—— 

Chairman SCHWEIKERT. God forbid we go there because we 

will spend all day. 

SBREP-219 with DISTILLER

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Mr. LEVITIN. I am happy to talk at length about that. I have 

another testimony but it is not an easy issue. 

Chairman SCHWEIKERT. Thank you, Professor. 

Ms. Peirce, we were actually back and forth in testimony. I 

would like to try to help everyone sort of understand what you see 

from your research of rules that are in effect, rules that are coming, rules that we are not sure of because right now it is call your 

lawyer. Just as an example here of would an institution write a 

non-QM loan and put it on their books for fear of what happens 

tomorrow? From some of your research, what are you finding out 

there in sort of the command and control regulatory environment 

we are putting on small institutions today? 

Ms. PEIRCE. Well, I think that you are right to kind of segregate it between what is happening and what is coming down the 

road, but I think a lot of what is the problem is that there are 

mortgage regulations that are coming in place in January. People 

have been saying, look, we are not ready. So even if we might be 

able to adjust to these, we need more time and they are not getting 

the time. So there is that problem. And then there is the problem 

of the uncertainty about what is going to happen down the road. 

The Consumer Bureau has been focused on putting rules in place 

that they had to put in place, but what is going to come after that, 

I think people have a lot of uncertainty about that. And then there 

is just the existence of the change in the regulators’ kind of state 

of mind and the examination change which is already affecting 

small banks. And I think they are already feeling the change in the 

way that examiners are coming in and looking at what they are 

doing. 

Chairman SCHWEIKERT. Okay. Thank you, Ms. Peirce. 

Mr. Mitchell, I had a couple of questions for you, just because I 

do not think we have communicated it much. Tell me about your 

institution here in D.C. What would be the typical demographic of 

the customers you serve? 

Mr. MITCHELL. Typically, it is in low and moderate income 

neighborhoods. We are a CDFI under the Treasury Department, 

mostly African-Americans. That is changing a lot by virtue of the 

fact that we are doing more commercial real estate lending and the 

demographics of Washington are changing. 

Chairman SCHWEIKERT. Now, also, you were the president of 

the Association of the Smaller Banks. 

Mr. MITCHELL. Chairman of the National Bankers Association, 

which makes up a lot of minority owned and specialty institutions 

and just small, minority and women-owned institutions. 

Chairman SCHWEIKERT. Because Professor Levitin actually 

touched on it, I am curious from your chairmanship there, your 

presidency. Do you see any Cascade effect in sort of a Basel III environment which was really meant for I truly believe more money 

center banks getting down to our neighborhood and community institutions? 

Mr. MITCHELL. It definitely is cascading down to community 

banks like ours, but Basel III, just by the nature of the Committee 

itself is really for international banks, multinational and international institutions and much larger institutions. 

SBREP-219 with DISTILLER

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Chairman SCHWEIKERT. If you had to talk right now and 

share, saying the staff difference in time. So if it were a couple of 

years ago you were making the argument that your employees 

were working with customers; today they are doing regulatory compliance. How much of that is also them having to reach out to consultants and outside to try to find out if you are operating in the 

proper manner? 

Mr. MITCHELL. Well, it depends on the employee, but if I had 

to average it out among 120 employees, I would probably say everybody is probably spending 10 percent more time on regulatory and 

legislative issues. And that is a lot when you talk about 120 employees. 

Chairman SCHWEIKERT. Ms. Sweet, you actually touched on 

something very similar of what has happened to some of your cost 

structure of how many outside lawyers and consultants you are 

now using. Can you give us a window into what that is and that 

cost? 

Ms. SWEET. I would say just on the CFPB, for our consultants 

and legal opinions and other costs that are associated with that 

compliance is close to $50,000. To us that is enormous. Attorney 

fees is just astronomical. Our legal staff, it is a legal firm for credit 

unions. They now have a complete segment of their attorneys dealing with regulatory compliance. When I started with that firm 25 

years ago, regulatory compliance was never what we would contact 

them for. So it is an enormous amount of money just from us that 

could have gone to our membership, that could have lowered those 

interest rates on loans and given higher dividends on savings accounts. 

Chairman SCHWEIKERT. Ms. Sweet, as sort of a neighborhood 

credit union, let us say I am an employee at the auto parts manufacturer, or Safeway, I do not have a lot of credit history. I would 

have been able to come and open my account at the neighborhood 

credit union and have you issue me a debit card, credit card, and 

begin to become what many of us refer to as bankable. I will share 

to anyone that cares, this is one of my fixations ever since I was 

county treasurer in Maricopa, of the amount of my population that 

was underbanked, almost unbankable because of lack of credit history, not because they were dodging a collection issue from an exwife. 

I know, there are always giggles on that one but it is the data. 

Ms. SWEET. Yes. 

Chairman SCHWEIKERT. Today is there more of a barrier for 

you to work with that underbanked individual? I am trying to understand my cost structure of how do I take in some communities 

20, 25 percent of my population that is underbanked, how do I 

make that more robust? Is this cost structure, regulatory structure 

we are talking about now hurting that population? 

Ms. SWEET. It is enormously hurting the population. The time 

and resources that are spent trying to either identify the intent of 

the regulation. That time and money could be spent on education. 

We have very young people coming into financial institutions that 

have no credit whatsoever and they have never had a checking account. Our staff needs to take time with them and educate them, 

help them through the process and help them understand what is 

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important to get them started and what is it going to take to get 

that credit report, because some day they may get married, have 

families, want the home, want the new car. It is important to educate all of our members so that their finances are set in place. And 

there are glitches in that, whether it is divorce or death or something, that we are there for them. Credit unions, community banks 

often are the people that we are willing and able outside of a lot 

of these regulatory timeframes to sit down with people and help 

them through their concerns. 

Chairman SCHWEIKERT. Thank you. 

And last one—and I appreciate your patience. 

Professor, and this may not be the place to do it, this may be 

something you and I should talk about over a cup of coffee. 

If I came to you and said you could have an A and a B regulatory 

environment—A is what we are doing and B would be one where 

we approach Mr. Mitchell’s institution and say, if you hold 15 percent true equity capital—not operating but equity capital—at that 

point all we ask from you is a single touch audited financials. Because if we look back at multiple financial events over the last century, it was small institutions that had equity, had capital on their 

books, survived. My father’s favorite saying was ‘‘for every complicated problem there is a simple solution that is absolutely 

wrong.’’ In this case, is holding equity capital the ultimate buffer? 

Mr. LEVITIN. There is really no replacement for capital if you 

are worried about an institution’s solvency. And the Basel rules, 

the existing ones and the ones that are coming in place, both play 

games. But if you just went with a very simple, just plain common 

equity, I do not know what the right percentage is. I cannot say 

that it is 15 percent, but if you went with just a simple plain common equity level, yeah, I think that would be an easy way to figure 

out. It would be easy to implement and if you put it high enough 

that I think would—— 

Chairman SCHWEIKERT. So there may be an elegant solution 

that is sort of an A and a B? 

Mr. LEVITIN. Well, it will have effects on what kind of assets 

financial institutions hold. Because if you are not doing riskweighted assets, that is going to really change what kind of lending 

is done. 

Chairman SCHWEIKERT. Liquidity score. All right. Professor, 

thank you. 

Ranking Member Clarke. 

Ms. CLARKE. Mr. Mitchell, section 1070 of Dodd-Frank requires 

information gathering regarding loans made to women and minority-owned businesses. Critics have cited this section as being prohibitively expensive and an undue burden to small financial institutions. 

So I have a two-part question for you. How is this a prohibitively 

expensive burden, and in a cost benefit analysis, does this regulation not give us a better idea of how we can assist these small businesses gain capital access? 

Mr. MITCHELL. I think it does have a benefit. However, if you 

look at HMDA regulations, which is pretty much the same thing 

as it applies to mortgages, the number of different data points and 

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rately compiled, many institutions even now get it wrong and the 

penalties are very high. So it can be very expensive. It is definitely 

very expensive. 

Ms. CLARKE. So then I am going to apply another question to 

that. 

What would you see as probably an alternative to be able to get 

at the goal of trying to basically preserve this space in banking for 

these institutions? 

Mr. MITCHELL. Well, number one in the community banking 

space, we care about our customers. I mean, all over the country, 

not just urban community banks, but rural community banks. We 

are there because we know the community, we want to serve the 

community, we want to see the community developed, we want to 

provide access to capital in the community. We are part of those 

communities. So we just do business differently. And I do not think 

you see discrimination problems at community banks. That is really the long and short of it. And I think larger institutions, they operate in ways that larger institutions operate. I think there is evidence that they have been discriminatory but I do not think that 

is necessarily true across all the board for large institutions. They 

do what they do and they focus on larger customers and larger 

deals. And so the individuals fall through the cracks for one reason 

or another, and that is exactly why they tend to standardize a lot 

of their credit processes for smaller businesses and individuals. 

Ms. CLARKE. I want to open up the question to the other members of the panel. 

We are just trying to figure out if Section 1070 of Dodd-Frank 

is prohibitively expensive and burdensome, and in terms of costbenefit analysis, is it worth it? Does anyone else have a take on 

that? Professor Levitin? 

Mr. LEVITIN. Well, if you are concerned about discriminatory 

lending, if you want to make sure that there really is equal credit 

opportunity in the United States, the only way that we can really 

police that is if there is data available. The Home Mortgage Disclosure Act creates that data for mortgage lending but we do not have 

comparable data for other types of lending. There is a cost to gathering that data, and it is really just a question of do you think that 

the costs of gathering that data are worth the benefits of being able 

to police discriminatory lending? In my mind it is an easy question 

but I imagine someone could disagree on that. 

Ms. PEIRCE. Yeah. I would be one of those people who would 

disagree. 

My concern is that data collection often sounds like an easy thing 

but it does end up being a really big cost on the institutions that 

have to do it. I think the best thing that we can do in terms of preventing discriminatory lending is to make sure that we have that 

diversity in our financial system, and that is the concern that I 

have. You know, when these smaller institutions decide I am not 

a banker anymore. I am just a regulatory compliance person so I 

am going to shut my institution down, that is when we are going 

to see people who we would want to be able to get loans not be able 

to get the loans that they would otherwise have gotten. 

Ms. CLARKE. Did you want to add anything, Ms. Sweet? 

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Ms. SWEET. I do. I believe that there is an area of this that we 

need to look at. We have, as credit unions we have our NCUA, 

which is our regulatory examination process. And during that there 

are all types of compiling of information and reporting to them on 

a quarterly basis and then annually them coming in and examining 

us which takes about now through all the regulations through the 

years about 90 days to get through that. So there is already in 

place—I do not believe we need new regulators. I do not believe we 

need new regulations. We are compiling that data and have for 

quite some time and it is examined already. 

Ms. CLARKE. So I am just wondering, part of the challenges 

that we face as a legislative body is sort of working from the outside in. It always amazes me the level of consultation. In other 

words, living vicariously through institutions like yours. That 

ought to take place so that we have an informed process. It does 

not take place often enough. And so I just wanted to just to share 

with colleagues that I think it benefits us in the long run. These 

‘‘one size fits all’’ solutions, the unintended consequences oftentimes are not really worth it. Even if there is the fear that these 

regulations will be burdensome and it shocks the culture of the institutions that we are trying to preserve, then we are defeating the 

purpose that we are all seeking. 

I am rambling right now but it just amazes me that we would 

not have done a fear analysis and have a strong and robust conversation with the diversity of institutions that we are trying to 

regulate here so that we do not create a crisis by trying to avert 

a crisis. 

With that, Mr. Chairman, I yield back. 

Chairman SCHWEIKERT. Thank you, Ms. Clarke. 

Mr. Rice? 

Mr. RICE. Thank you, Mr. Chairman. And I would certainly like 

to associate myself with the comments Ms. Clarke just made. I do 

believe that we need to take a very close look at this law. 

Mr. Mitchell, something you said earlier peaked my curiosity. 

You were talking about discriminatory lending practices and you 

indicated, I think, that the standardization of lending criteria by 

big banks led to some of that. Is that right? 

Mr. MITCHELL. No, not necessarily. I just think that there was 

discrimination with some of the larger institutions. The point I was 

trying to make is that community banks by nature is we do a lot 

of creative personalization in trying to make loans. 

Mr. RICE. And why do you do that? Why do you have to do creative personalization? 

Mr. MITCHELL. Because you know, I think we more so want to 

make loans then we want to decline them. 

Mr. RICE. And does not this law—in an effort to standardize 

these loans, does it not take away your ability to do exactly that? 

Mr. MITCHELL. Absolutely. 

Mr. RICE. And that disproportionately affects who? 

Mr. MITCHELL. Low and moderate income individuals 

Mr. RICE. Right. So what we are doing is we are actually, probably expanding income disparity, expanding access to capital—disbanding incomes and access to capital with this law. And is this 

not exactly the opposite of what this law was supposed to do? 

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Mr. MITCHELL. I believe so. 

Mr. RICE. I think this law is fundamentally flawed. Perhaps 

more so. I think it threatens our economy perhaps more than most 

because I believe America is built on innovation and competitiveness, and we complete with people around the world, not just in 

this country. And everybody is trying to complete. And we needed 

if we are better by small degrees. It is not vast things. It is small 

degrees. And I think that this law makes us let competitive. One 

of the big things that American has had as an advantage is access 

to capital. 

A disproportionate amount of the jobs in this country are created 

by small businesses. And a disproportionate amount of those jobs 

are created by startup businesses. Now, when you are looking to 

make a loan, I am going to go to Mrs. Peirce now because I have 

not picked on you yet. 

Do you think when a small bank is looking to make a loan to a 

small business startup, is it going to be easier to more complicated 

under Dodd-Frank? 

Ms. PEIRCE. Certainly more complicated. It is definitely more 

complicated. Of course, I mean, the regulators are coming and they 

are looking more closely, and so what I had one small banker say 

to me is look, I can know that a business is going to pay back a 

loan, but I will not make that loan because I know that I am going 

to have to explain it to a regulator later and I will not be able to 

because I will not be able to say—the regulator is not going to meet 

the small businessman and is not going to know the same things 

I know about that person. And so it is impossible to justify it so 

I just will not do it. 

Mr. RICE. All right. And I guess this is not an area where you 

are really qualified, but in small businesses, the jobs that are created, are those jobs, do you think, going to higher income people 

or lower income people? 

Ms. PEIRCE. Well, you are right to say that I am probably not 

qualified to answer that but my guess is that those would mostly 

be lower income people. 

Mr. RICE. So that is another aspect of this law that attacks the 

middle class. 

Ms. PEIRCE. Yeah. I mean, when you put constraints on the 

ability of people to get capital, it has follow-on effects in the economy. 

Mr. RICE. If you look at areas where America has succeeded in 

competing worldwide, and we have for decades, but if you look at 

our infrastructure which is other countries are coming up and our 

infrastructure I would argue is declining or perhaps crumbling. 

When you look at our educational system, certainly other countries 

have lifted themselves, and perhaps we have been stagnant or fallen behind. And now you look at our access to capital which is just 

one more area where we are making this country less competitive. 

I think this law, the federal regulatory environment does more to 

stifle innovation and job creation than anything else, and I think 

this is a huge addition to the federal regulatory environment and 

I certainly think we need to rethink the entire law, but if not that, 

as much of it as we can. Thank you very much. 

Chairman SCHWEIKERT. Sorry, Mr. Rice. 

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Mr. LUETKEMEYER. Thank you, Mr. Chairman. I appreciate 

the deference to allow me to be here today and to participate in 

this hearing. I certainly appreciate everybody’s great testimony. 

I just have a few comments. Ms. Sweet, in your testimony this 

morning, written testimony, you made the comment that one of 

every two dollars lent to small businesses comes from community 

banks. And I think that is a very, very significant figure. I think 

that is important that we understand the role that the banks play 

in the communities that they are in. 

We talked about that a little bit at length here in the last couple 

of minutes but I think it needs to be reinforced that this is a tremendous role that they have. They are the hands-on, if you will, 

institutions within the communities that they serve. 

Mr. Mitchell made the comment a few minutes ago about—and 

I noticed in your testimony also you made comments to the effect 

that the small community banks tailor the products to fit their individual needs, and I thought Mr. Mitchell did a good job explaining it. They have the ability to do that where the big banks sometimes, that is where they get themselves in compliance problems, 

have a standardized way of looking at things and if it does not fit, 

you do not get the loan, where the other institutions seem to be 

able to make those adjustments on the fly. 

Would you like to comment just a little bit more and elaborate? 

I know you went into it a little bit just now but I think it is important to reinforce that point. 

Ms. PEIRCE. Certainly. I think that is one of the beauties of the 

system that we have. There is nothing wrong if a big bank wants 

to make only standardized loans, that is fine as long as we have 

a system that allows these smaller institutions to come in and fill 

the gap. And that is the situation that we have had, but I think 

the more that you put in a regulatory framework that is designed 

with these big banks in mind, you leave out the smaller institutions. And what we are seeing in the survey that the Mercatus 

Center conducted is that a lot of people are saying we are just 

going to try to stay away from the consumer business altogether 

because it is too dangerous for us to be there. So while we would 

like to make those loans, we just will not make them anymore. 

Mr. LUETKEMEYER. Did you say in your survey that there was 

an intimidation factor by the regulators with regards to how punitive they are sometimes with the way that they enforce the rules? 

Ms. PEIRCE. Yeah. I think one of the comments that sort of 

struck me was that you can be trying to do everything right and 

you make a mistake and the consequences are so high of that mistake. And so because there are so many rules to keep track of it 

is really difficult to stay on the right side of the line. 

Mr. LUETKEMEYER. I think this is one of the comments that 

was made and I had a long discussion with the FDIC chairman 

with regards to this. Mr. Mitchell, you made comment in your testimony to the FDIC study last fall, and you made the comment with 

regards to HMDA. This has been just a nightmare for the institutions to comply with. I think Ms. Sweet made a comment about it 

a minute ago as well. What has been your experience with regards 

to regulators and HMDA? I mean, all this is, for those who do not 

know what is going on is just box-checking. You check a box to 

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make sure that you total individual this statement. You hand them 

this piece of paper. You make sure—if you go down the list there 

are about 25 different things, and if you miss one box the whole 

loan, the whole loan is considered in violation versus one boxed fail 

check. What is your experience with that? 

Mr. MITCHELL. Well, first of all, I think HMDA could be simplified, and I think there are small business reporting requirements that need to be something that can be complied with and be 

relatively simple to achieve the objectives with not much expense. 

But with respect to HMDA, I speak to bankers all the time and 

all bankers have problems with HMDA because it is a lot of boxchecking. And if you make a mistake with one field, you know, 

there could be 16 or 20 different fields just for one loan, and if you 

make a mistake with one field, you have made a mistake for that 

entire loan. We are administratively pretty well run when it comes 

to compliance and we continue to struggle with HMDA. 

Mr. LUETKEMEYER. From my experience in talking with security bankers, you are not alone. It seems like everybody—and this 

is something I have talked with the regulators about is having 

some deference here with regards to trying to comply with all these 

things. And I will give you a quick example. 

In Missouri, over about a two and a half year period, FDIC had 

civil penalties for 160 to 180 violations. And during the same period of time, the fail/uncomfortable had a total I think of five. So 

we had a long discussion of ‘‘look, what is going on here?’’ 

Now, he used to be a regulator himself. This is not the way that 

this is supposed to be enforced. Tell us what is going on. I think 

they are trying to take a look at this but the point I am trying to 

make is it seems to be an intimidation factor. Sometimes also with 

regulators it makes it very difficult for these kinds of banks to exist 

because they do not have the power to back. Would that be a fair 

statement? 

Mr. MITCHELL. There is no question about it. 

Mr. LUETKEMEYER. Thank you. 

And again, Mr. Chairman, I appreciate your deference and I appreciate the opportunity to be with you. Thank you. 

Chairman SCHWEIKERT. Mr. Luetkemeyer, it was fun having 

you on the Committee with your background. 

Ms. Clarke, okay to close up? 

Chairman SCHWEIKERT. I am going to share just the old danger of when they hand me a microphone and there is no clock on 

me. This is a Small Business Oversight Subcommittee But the reality for all of you, what you do, whether it be helping organize the 

regulatory environment as a community banker, as a community 

credit union, as someone trying to work on public policy? The access to capital is the lubricant that runs this engine of an economy. 

We spend a lot of time talking about you as small businesses and 

your clients and the cost of the clients. But there is that next tier 

out and that is when your clients are those small businesses. The 

person coming in, trying to buy a piece of real estate and the cascade effect that has. Or trying to find access to capital. Ranking 

Member Clarke and I were just kibitzing a bit on the ideas of the 

flexibility for our small community banks and neighborhood credit 

unions to be able to also be the alternative to a check-cashing store 

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or a title loan or those things, but that is a very different view in 

a regulatory environment. There has got to be a way to create lots 

of competition, lots of access to capital for things that grow our 

economy. And it is helping that part of our population that is 

underbanked, but also the person who is starting a business. For 

many of us we keep saying access to capital is going to be very different by the end of this decade, if we do not screw it up. But yet 

I see what is coming out of the regulatory environment on equity 

crowdfunding and it breaks my heart because this egalitarian idea 

is going to be crushed if the rule moves forward where it is. I see 

that happening in our community banks and our credit unions of 

you are just going to move up the food chain and income and status. And once again, we were going to leave more and more of our 

brothers and sisters there underbanked and left in the cold. 

So I appreciate this discussion, it is a big discussion. My fear is 

we do not spend enough time trying to also come up with a mechanical solution. There is also a lot of folklore about what we went 

through in 2008, what caused the cascade. We discuss community 

banks. Well, if community banks’ real estate portfolios had not collapsed in value, how many of them would be here today? And was 

that from their poor underwriting or was it at the top of the pyramid that collapsed that came down through much larger institutions. 

So there is lots of data, and a lot of bad data out there that we 

make these decisions on. 

So as we wrap up today—I think I make senior staff nervous 

when I go off script like that—but with that I ask unanimous consent that members have five legislative days to submit statements 

and supporting materials for the record. Also, as witnesses, do be 

prepared that there may be some questions that come your way 

that we will ask you to respond to. 

And without objection, this hearing is adjourned. 

[Whereupon, at 11:41 p.m., the Subcommittee was adjourned.] 

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Introduction 

Good morning Chairman Schweikert, Ranking Member Clarke 

and Members of the Subcommittee. My name is Linda Sweet and 

I am testifying this morning on behalf of the National Association 

of Federal Credit Unions (NAFCU). I serve as President and CEO 

of Big Valley Federal Credit Union in Sacramento, California. Big 

Valley was founded in 1953 as Safeway Sacramento Employees 

Federal Credit Union and serves Safeway stores as far as Nevada 

and most of northern California. 

Over the years, Big Valley merged with four small credit unions 

unaffiliated with Safeway and therefore has a diverse field of membership. Three of our nine full time employees make up our management team that consists of a former branch manager of a large 

bank, a former employee of one of the largest credit unions in California, and the CEO of a credit union we merged with. Opening 60 

years ago with only $50.00 on deposit, Big Valley has grown to $56 

million in assets and serving more than 7,000 members with two 

branch locations. In my 40 years with Big Valley, 25 as the President/CEO, I have watched the industry go from helping people with 

their financial needs and life goals, to a point now where I have 

limited member interaction due to the unprecedented regulatory 

onslaught my credit union has faced since the financial crisis. 

NAFCU is the only national organization exclusively representing the interests of the nation’s federally chartered credit 

unions. NAFCU member credit unions collectively account for approximately 68 percent of the assets of all federally chartered credit unions. NAFCU and the entire credit union community appreciate the opportunity to discuss the regulatory burden that our nation’s credit unions face. The overwhelming tidal wave of new regulations in recent years is having a profound impact on credit unions 

and their ability to serve some 96 million member-owners nationwide. 

Historically, credit unions have served a unique function in the 

delivery of essential financial services to American consumers. Established by an Act of Congress in 1934, the federal credit union 

system was created, and has been recognized, as a way to promote 

thrift and to make financial services available to all Americans, 

many of whom may otherwise have limited access to financial services. Congress established credit unions as an alternative to banks 

and to meet a precise public need—a niche that credit unions still 

fill today. 

Every credit union is a cooperative institution organized ‘‘for the 

purpose of promoting thrift among its members and creating a 

source of credit for provident or productive purposes.’’ (12 USC 

1752(1)). While nearly 80 years have passed since the Federal 

Credit Union Act (FCUA) was signed into law, two fundamental 

principles regarding the operation of credit unions remain every bit 

as important today as in 1934: 

• credit unions remain wholly committed to providing their 

members with efficient, low-cost, personal financial service; 

and, 

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• credit unions continue to emphasize traditional cooperative 

values such as democracy and volunteerism. 

Credit unions are not banks. The nation’s approximately 6,700 

federally insured credit unions serve a different purpose and have 

a fundamentally different structure than banks. Credit unions exist 

solely for the purpose of providing financial services to their members, while banks aim to make a profit for a limited number of 

shareholders. As owners of cooperative financial institutions united 

by a common bond, all credit union members have an equal say in 

the operation of their credit union—‘‘one member, one vote’’—regardless of the dollar amount they have on account. Furthermore, 

unlike their counterparts at banks and thrifts, federal credit union 

directors generally serve without remuneration—a fact epitomizing 

the true ‘‘volunteer spirit’’ permeating the credit union community. 

America’s credit unions have always remained true to their original mission of ‘‘promoting thrift’’ and providing ‘‘a source of credit 

for provident or productive purposes.’’ In fact, Congress acknowledged this point when it adopted the Credit Union Membership Access Act (CUMAA - P.L. 105–219). In the ‘‘findings’’ section of that 

law, Congress declared that, ‘‘The American credit union movement 

began as a cooperative effort to serve the productive and provident 

credit needs of individuals of modest means ... [and it] continue[s] 

to fulfill this public purpose.’’ 

Credit unions have always been some of the most highly regulated of all financial institutions, facing restrictions on who they 

can serve and their ability to raise capital. Furthermore, there are 

many consumer protections already built into the Federal Credit 

Union Act, such as the only federal usury ceiling on financial institutions and the prohibition on prepayment penalties that other institutions have often used to bait and trap consumers into high cost 

products. 

Despite the fact that credit unions are already heavily regulated, 

were not the cause of the financial crisis, and actually helped blunt 

the crisis by continuing to lend to credit worthy consumers during 

difficult times, they are still firmly within the regulatory reach of 

several provisions contained in the Dodd-Frank Act, including all 

rules promulgated by the Consumer Financial Protection Bureau 

(CFPB). The breadth and pace of CFPB rulemaking is troublesome 

as the unprecedented new compliance burden placed on credit 

unions has been immense. 

The impact of this growing compliance burden is evident as the 

number of credit unions continues to decline, dropping by more 

than 800 institutions since 2009. While there are a number of reasons for this decline, a main one is the increasing cost and complexity of complying with the ever-increasing onslaught of regulations. Many smaller institutions cannot keep up with the new regulatory tide and have to merge out of business or be taken over. 

Credit unions didn’t cause the financial crisis and shouldn’t be 

caught in the crosshairs of regulations aimed at those entities that 

did. Unfortunately, that has not been the case thus far. Accordingly, finding ways to cut-down on burdensome and unnecessary 

regulatory compliance costs is a chief priority of NAFCU members. 

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As evidenced by today’s hearing, it is clearly a priority of the Subcommittee. We appreciate your focus on this important issue. 

Growing Regulatory Burdens for Credit Unions 

A 2011 NAFCU survey of our membership found that nearly 97% 

of respondents were spending more time on regulatory compliance 

issues than they did in 2009. A 2012 NAFCU survey of our membership found that 94% of respondents had seen their compliance 

burdens increase since the passage of the Dodd-Frank Act in 2010. 

Furthermore, a March 2013 survey of NAFCU members found that 

nearly 27% had increased their full-time equivalents (FTEs) for 

compliance personnel in 2013, as compared to 2012. That same survey found that over 70% of respondents have had non-compliance 

staff members take on compliance-related duties due to the increasing regulatory burden. This highlights the fact that many non-compliance staff are being forced to take time away from serving members to spend time on compliance issues. 

At Big Valley FCU, I have seen our compliance costs steadily 

climb from year-to-year, and skyrocket over the last few. Unfortunately, this is the same at many credit unions. A recent survey of 

NAFCU members found that of those credit unions that are increasing their education budgets for next year, 84% cited increasing compliance burdens as the most important factor for this increase. Furthermore, it must be noted that new regulations also 

impact many of the vendors credit unions deal with (such as those 

providing forms, etc.), and the same NAFCU survey found that 

over 70% of responding credit unions have seen increased vendor 

costs stemming from new regulations. 

These increased costs at Big Valley have resulted in the inability 

to provide the quality of service our members have grown accustomed to. Now, we are often slower to offer services that our members want and there are some services we have been forced to cut 

back on. For example, in many cases we are unable to offer a member a mortgage product that we were once able to. We have actually started to outsource many of our mortgages because we cannot 

afford a loan officer with the qualifications that new CFPB regulations require. In addition to requiring a member to turn elsewhere 

for a product we once offered them, they are faced with increased 

costs that often rise to several thousands of dollars. That certainly 

seems like an unintended and unnecessary cost to the consumer 

that the new agency was meant to protect. 

The thousands of pages of new mortgage regulation and guidelines from the CFPB is a prime example of the growing compliance 

burden our nation’s credit unions face. Covering everything from 

the scope of coverage under the Home Ownership and Equity Protection Act, comprehensive changes to mortgage origination and 

servicing, amended rules associated with the Truth in Lending Act 

and Financial Institutions Reform, Recovery, and Enforcement Act, 

changing requirements for escrow accounts and issuing rules under 

Dodd-Frank relative to what constitutes a ‘‘qualified mortgage’’— 

the breadth and pace of new requirements are daunting. A timeSBREP-219 with DISTILLER

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frame of under 12 months to implement the rules should cause serious pause for lawmakers and regulators. Even if the mortgage 

proposals are well intended, they come with a significant burden 

particularly to smaller institutions that have trouble just keeping 

up to be sure that they stay compliant with all of the new rules. 

That is why NAFCU has urged a delay in the implementation date 

of the new rules. Furthermore, we believe that CFPB Director 

Richard Cordray should be very specific about what he means 

when he promises flexibility for the first few months of 2014 in relation to ‘‘good faith’’ compliance efforts with the mortgage rules 

slated to take effect in January. The CFPB must work closely with 

the NCUA to ensure that (1) the NCUA has a clear understanding 

of what ‘‘good faith effort’’ means; and (2) the NCUA communicates 

with credit unions their exam expectations in regard the mortgage 

rules. 

While some may argue that the directive aspects of the ‘‘rule’’ 

itself are far less than thousands of pages, they do not recognize 

the extent of what it takes to be compliant. In order to fully comprehend and comply with the ‘‘rule’’ a credit union employee must 

read the regulation in its entirety, interpret the law and its intent, 

write or rewrite the credit union’s policies and procedures, and 

identify which supervisor is assigned the responsibility for monitoring, compiling and reporting back to management on the necessary information. Management then either audits or hires an 

outside audit firm, whichever is required by the law, to verify that 

the regulation is followed. Keep in mind that this is required of 

each and every regulation, in addition to the employee handling all 

other daily responsibilities. For most small credit unions, that employee is the only person handling the same regulatory issues that 

a megabank must comply with. While the CFPB was created under 

the guise of ‘‘leveling the playing field’’ with unregulated entities, 

a survey of NAFCU members this fall found that only 4% of responding credit unions have seen a positive impact from CFPB regulating the unregulated. 

For small institutions who are just trying to keep up, the everincreasing amount of time consumed by compliance is daunting. 

The NCUA has changed the examination process over the years, 

which has resulted in the transformation from 3 to 5 days of helpful input and teamwork, to a process that now requires months of 

preparation. The examination time at Big Valley, from start to finish, takes roughly 90 days. Regulatory requirements have also 

shortened the time between examinations which then condenses 

the time to prepare for other regulatory audits; CPA audit, BSA 

audit, ACH audit and Risk audit also take months to prepare for. 

Furthermore, it seems that these exams are taking longer due to 

the large number and complexity of regulations and not because of 

the increasing size or complexity of the credit union. 

The 5300 Call Report requirements by the NCUA have increased 

from a few hours every 6 months to three weeks of compiling and 

reporting data every quarter. Each quarter’s instructions must be 

reviewed, as there are often changes that are vague, open to interpretation, and requiring clarification. Compiling the data is mostly 

a manual process because the 5300 Call Report requirements 

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change faster than a data processor can reprogram the computer 

systems to search and assemble the required data. 

The ever-increasing regulatory burden on credit unions stems not 

just from one single onerous regulation, but a compilation and 

compounding of numerous regulations—one on top of another— 

stemming from a number of federal regulators. A number of these 

regulations may be worthwhile and well-intentioned, but they are 

often issued with little coordination between regulators and without elimination or removal of outdated or unnecessary regulations 

that remain on the books. It was with this in mind that former 

NAFCU President and CEO Fred Becker wrote then Treasury Secretary Timothy Geithner in his role as Chairman of the Financial 

Stability Oversight Council (FSOC) in June of 2012. In this letter, 

NAFCU urged the FSOC to focus on its duty to facilitate regulatory 

coordination under the Dodd-Frank Act. A copy of this letter is attached to this testimony (Attachment A). 

In testimony before a House Financial Services Subcommittee in 

May of 2012, NAFCU Board Member and witness, Ed Templeton 

noted that it is not any single regulation, but the panoply of the 

regulatory regime of numerous regulators, each operating ‘‘within 

their own lanes’’ and with minimal, if any, interagency coordination, that not only helps create, but also significantly magnifies today’s undue regulatory burden on credit unions and other small financial institutions. 

It is important to make clear that the tsunami of regulatory burden is impacting all credit unions and hampering the industry’s 

ability to serve our nation’s 96 million credit union members. 

NAFCU believes that any relief efforts should not bifurcate the industry by asset size and would not support such an approach. Providing broad-based relief will help credit unions of all sizes, especially smaller institutions like Big Valley FCU, as we have limited 

compliance resources and don’t have the economy of scale of larger 

institutions. All credit unions need regulatory relief and we hope 

that this Subcommittee can help provide it. 

Areas Where Credit Unions Need Regulatory Relief 

In early February of this year, NAFCU was the first credit union 

trade association to formally call on the new Congress to adopt a 

comprehensive set of ideas generated by credit unions that would 

lead to meaningful and lasting regulatory relief for our industry. 

As part of that effort, NAFCU sent a five-point plan for regulatory 

relief to Congress to address some of the most pressing areas 

where credit unions need relief and assistance (Attachment B). 

There are number of provisions in this plan that have been introduced as part of the Regulatory Relief for Credit Unions Act of 2013 

(H.R. 2572), by Representative Gary Miller (R-CA). NAFCU and its 

member credit unions appreciate this opportunity to outline our 

ideas for meaningful and lasting regulatory relief for our industry. 

The five points outlined in our plan include: 

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1. Administrative Improvements for the Powers of the NCUA 

NAFCU believes that Congress should take steps to strengthen 

and enhance the National Credit Union Administration (NCUA). 

First, the NCUA should have authority to grant parity to a federal credit union on a broader state law, if such a shift would allow 

them to better serve their members and continue to protect the National Credit Union Share Insurance Fund (NCUSIF). This is a 

parity issue that will enable federally chartered credit unions to 

adequately serve their members in instances where a state law is 

more conducive to the lending needs and environment in that particular state. It is important to note that this does not simply mean 

that a federal credit union can default to a state law. The NCUA 

would need to approve any such shift on a case-by-case basis, ensuring that safety and soundness concerns are addressed. It also 

must be recognized that in many instances a federal rule addressing an issue that has arisen in a particular state or region simply 

does not exist. Without the ability to instead use the state law, federal credit unions could be hamstrung in trying to serve their member-owners. We are pleased that this provision was included in the 

Regulatory Relief for Credit Unions Act of 2013 (H.R. 2572). 

Second, the NCUA should have the authority to delay the implementation of a CFPB rule that applies to credit unions, if complying with the proposed timeline would create an undue hardship. 

Furthermore, given the unique nature of credit unions, the NCUA 

should have authority to modify a CFPB rule for credit unions, provided that the objectives of the CFPB rule continue to be met. 

Since the modified rule would be substantially similar to the original rule, and achieve the same goal, the argument that this would 

undermine the CFPB’s intentions is not valid. Granting NCUA this 

authority would help address one major issue facing the CFPB. Unfortunately, the CFPB has been given the impossible task for writing one rule that will work well for both our nation’s largest banks 

and the smallest credit unions. Such a provision is also included in 

H.R. 2572. 

An example of where this is necessary is the CFPB’s new remittance transfer rule. As part of a regulatory relief package in the 

109th Congress (H.R. 3505 / P.L. 109–351), Congress explicitly 

granted all credit unions the ability to offer remittance services to 

anyone in their field of membership in an effort to draw the 

unbanked and under-banked into the system by familiarizing them 

with credit unions. NCUA could very likely tailor this new rule 

while maintaining the CFPB’s intent. The NCUA has already had 

this type of authority in the past in conjunction with other regulators, and has this authority now with tailoring Truth in Savings 

to the unique nature of credit unions. 

NAFCU is seriously concerned about the remittance transfer rule 

and has taken every opportunity to educate the CFPB on the position of credit unions and how the new rule will likely impact the 

marketplace. The overly broad definition of ‘‘remittance transfer’’ 

used in the rule imposes new requirements on all international 

electronic transfer of funds services, and not just transmissions of 

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money from immigrants in the U.S. to their families abroad—which 

are in fact conventional remittances. In fact, a September 2013 survey of NAFCU members found that nearly 25% of respondents will 

cease offering remittance services because of the new rule. 

Third, the NCUA and the CFPB should be required to conduct 

a look-back cost-benefit analysis on all new rules after three years. 

The regulators should be required to revisit and modify any rules 

for which the cost of complying was underestimated by 20% or 

more from the original estimate at the time of issuance. Credit 

unions did not cause the financial crisis yet all credit unions are 

subject to the same CFPB rules as larger for-profit mega banks. As 

a result, credit unions find themselves drowning in regulatory burden stemming from the CFPB and NCUA. It should be noted that 

many credit unions only have one or two people dedicated full-time 

to compliance issues, yet they have to comply with the same CFPB 

rules as mega banks that have an army of lawyers to work on 

these issues. 

There are many instances where the regulator is off base in 

terms of projecting the compliance cost for credit unions. While 

some examples may seem insignificant, it is the cumulative effect 

of layering requirements on top of requirements that creates an environment where a credit union simply cannot keep up. For example, the CFPB recently expanded their survey of credit card plans 

being offered by financial institutions to include credit unions. The 

survey purports that the ‘‘Public reporting burden for this collection of information is estimated to average 15 minutes per response, including the time to gather and maintain data in the required form and to review instructions and complete the information collection.’’ Feedback from NAFCU members indicates that it 

takes more than 15 minutes just to read the survey instructions, 

so the idea that the entire process of reviewing and completing the 

survey could take a total of 15 minutes defies common sense. 

In a March 2013 survey of NAFCU members, over 55% of respondents said that compliance cost estimates from the NCUA/ 

CFPB were lower than the credit unions actual cost (That is, the 

cost was greater than the estimate from the regulator). In the instances where the compliance costs were underestimated, the costs 

were off by more than 25% over a quarter of the time. Relief on 

this matter is also an important part of H.R. 2572. 

Fourth, new examination fairness provisions should be enacted 

to help ensure timeliness, clear guidance and an independent appeal process free of examiner retaliation. NAFCU supports the bipartisan ‘‘Financial Institutions Examination Fairness and Reform 

Act’’ (H.R. 1553) introduced on April 15, 2013 by Representatives 

Shelley Moore Capito and Carolyn Maloney and is hopeful that the 

issues this bill seeks to address are given consideration moving forward. Credit unions must have adequate notice of and proper guidance for exams, the right to appeal to an independent administrative law judge during the appeal process, and be assured that they 

are protected from examiner retaliation. 

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ment for membership, and (2) permanently removing the CLF borrowing cap so that it may meet the current needs of the industry. 

II. Capital Reforms for Credit Unions 

NAFCU believes that capital standards for credit unions should 

be modernized to reflect the realities of the 21st century financial 

marketplace. 

First, the NCUA should, with input from the industry, study and 

report to Congress on the problems with the current prompt corrective action (PCA) system and recommended changes. 

Second, a risk-based capital system for credit unions that more 

accurately reflects a credit union’s risk profile should be authorized 

by Congress. We ask that Congress amend current law to make all 

credit unions subject to risk-based capital standards, and direct the 

National Credit Union Administration (NCUA) to consider risk 

standards comparable to those of FDIC-insured institutions when 

drafting risk-based requirements for credit unions. Credit unions 

need this flexibility to determine their own risk and to leverage all 

their resources to provide the best financial services possible to 

their membership. Such a proposal is a key element of H.R. 2572. 

Third, the NCUA should be given the authority to allow supplemental capital accounts for credit unions that meet certain standards. NAFCU applauds Reps. Peter King and Brad Sherman for introducing bipartisan legislation, the Capital Access for Small Businesses and Jobs Act (H.R. 719), that would improve the ability of 

credit unions to serve their members by enhancing their ability to 

react to market conditions and meet member demands. We would 

urge members of this Subcommittee to consider supporting this legislation. 

Under current law, a credit union’s net worth ratio is determined 

solely on the basis of retained earnings as a percentage of total assets. Because retained earnings often cannot keep pace with asset 

growth, otherwise healthy growth can dilute a credit union’s regulatory capital ratio and trigger nondiscretionary supervisory actions 

under prompt corrective action (PCA) rules. Allowing credit unions 

access to supplemental capital would help address this issue. 

Finally, given that very few new credit unions have been chartered over the past decade, including only 1 new credit union this 

year, and in order to encourage the chartering of new credit unions, 

the NCUA should be authorized to further establish special capital 

requirements for newly chartered federal credit unions that recognize the unique nature and challenges of starting a new credit 

union. 

III. Structural Improvements for Credit Unions 

NAFCU believes there should be improvements to the Federal 

Credit Union Act to help enhance the federal credit union charter. 

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First, Congress should direct the NCUA, with input from the industry, to study and report back to Congress suggested changes to 

outdated corporate governance provisions in the Federal Credit 

Union Act as several parts haven’t been updated to reflect modern 

day corporate governance since the advent of credit unions and the 

Acts in 1934. Congress, upon receiving the report, should ensure 

this mundane yet important issue receives the consideration it deserves. For example, the FCUA currently requires a two-thirds vote 

to expel a member who is disruptive to the operations of the credit 

union, at a special meeting at which the member in question himself has the right to vote. NAFCU does not believe that this is in 

line with good governance practices, and feels that the FCUA 

should be amended to provide federal credit union boards flexibility 

to expel members based on just cause (such as illegal behavior, 

harassment or safety concerns). Given more flexibility in statute, 

the NCUA would be able to work with credit unions on a case-bycase basis on a number of different issues pertaining to corporate 

governance. 

Second, a series of improvements should be made to the field of 

membership (FOM) restrictions that credit unions face. This should 

include expanding the criteria for defining ‘‘urban’’ and ‘‘rural’’ for 

FOM purposes and also allowing the federal credit unions that convert to community charters to retain their current select employee 

groups (SEGs). 

Finally, Congress should clarify that all credit unions, regardless 

of charter type, should be allowed to add underserved areas to 

their field of membership. 

IV. Operational Improvements for Credit Unions 

Credit unions stand willing and ready to assist in our nation’s 

economic recovery. Our industry’s ability to do so, however, is severely inhibited by antiquated legislative restrictions. 

First, Congress should show America that they are serious about 

creating jobs by modifying the arbitrary and outdated credit union 

member business lending (MBL) cap. This can be done by raising 

the current 12.25% limit to 27.5% for credit unions that meet certain criteria. We are pleased to see legislation introduced in the 

form of H.R. 688, the Credit Union Small Business Jobs Creation 

Act, by Representatives Ed Royce (R-CA) and Carolyn McCarthy 

(D-NY) which would do just that. We would urge members of this 

Subcommittee to consider supporting this important legislation. 

An alternative approach to H.R. 688, would be raising the outdated ‘‘definition’’ of a MBL from last century’s $50,000 to a new 

21st century standard of $250,000, with indexing for inflation to 

prevent future erosion. Furthermore, MBLs made to non-profit religious organizations, made for certain residential mortgages (such 

as non-owner occupied 1–4 family residential mortgages), made to 

businesses in ‘‘underserved areas’’ or made to small businesses 

with fewer than 20 employees should be given special exemptions 

from the arbitrary cap. 

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Second, requirements to mail redundant and unnecessary privacy 

notices on an annual basis should be removed, provided that the 

credit union’s policy has not changed and additional sharing of information with outside entities has not been undertaken since the 

distribution of the previous notice. At Big Valley FCU, unnecessary 

notices cost our institution several thousand dollars a year. 

NAFCU appreciates the work of Reps. Blaine Luetkemeyer (R-MO) 

and Brad Sherman (D-CA) in introducing the Eliminate Privacy 

Notice Confusion Act (H.R. 749) to address this issue. As you may 

remember, this bill passed the House under suspension of the rules 

on March 12. We thank the House for its support and are pleased 

to see that similar legislation has been introduced in the Senate in 

the form of S. 635. 

Third, credit unions should be given greater authority and flexibility in choosing their investments, such as: allowing credit unions 

to invest in investment grade securities up to 10% of assets; granting credit unions the ability to purchase mortgage servicing rights 

for investment purposes; and raising the investment limit in Credit 

Union Service Organizations (CUSOs). These small steps would 

allow credit unions to better balance and manage their investment 

options. Investment relief is also included in H.R. 2572. 

Fourth, the NCUA should be given greater flexibility in how it 

handles credit union lending, such as the ability to establish longer 

maturities for certain loans. Currently, most loans are statutorily 

capped at 15-year maturities. Allowing the NCUA to grant longer 

maturities for certain types of loans will allow credit unions to better offer the loan products that their members desire. 

Fifth, Congress should clarify that Interest on Lawyers Trust Accounts (IOLTAs) at credit unions are fully insured. We are pleased 

that this proposal has also been included in H.R. 2572. Furthermore this issue has been recently addressed by legislation introduced by Representatives Ed Royce (R-CA) and Ed Perlmutter (DCO) in the form of the Credit Union Share Insurance Fund Parity 

Act (H.R. 3468) which was unanimously reported out of the House 

Committee on Financial Services on November 14, 2013. To the extent the FDIC is required to fully insure IOLTA accounts, it is essential for the NCUA’s share insurance fund to be treated identically in order to maintain parity between the two federal insurance 

programs. Congress passed a change to the Dodd-Frank law to 

clarify the FDIC’s ability in this area, but failed to provide parity 

to credit unions in its last minute action. We urge Congress to correct this mistake and ensure continued parity. The Federal Credit 

Union Act states that funds held at a credit union are not protected 

by the share insurance fund unless the person or persons the funds 

belong to are also members of the credit union. Furthermore, many 

states require funds held by an attorney for clients to be held in 

accounts with federal insurance. In addition, IOLTA accounts often 

contain funds from many clients, some of whom may have funds in 

excess of the standard $250,000 share insurance limit. IOLTA 

funds are constantly withdrawn and replenished with new funds 

from existing and new clients. Accordingly, it is impractical to require attorneys to establish multiple IOLTAs in different credit 

union to ensure full share insurance coverage. 

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Lastly, Congress should make sure that the NCUA has practical 

requirements on how credit unions provide notice of their federallyinsured status in any advertising. 

V. 21st Century Data Security Standards 

Credit unions are being adversely impacted by ongoing cyber-attacks against the United States and continued data breaches at numerous merchants. The cost of dealing with these issues hinders 

the ability of credit unions to serve their members. It should be 

noted that these breaches are often not just the national breaches 

that make the evening news, but often are localized breaches that 

can have a devastating impact on a credit union and its members. 

A 2011 NAFCU survey of our membership found that these local 

breaches are often the most costly breaches to an institution. These 

breaches have led to increased costs to credit unions such as higher 

insurance costs, higher software costs, higher security costs, higher 

card reissuance costs and higher staffing costs to deal with data 

breaches. 

Congress needs to enact new 21st century data security standards that include: 

• the payment of costs associated with a data breach by 

those entities that were breached; 

• establishing national standards for the safekeeping of all 

financial information; 

• requiring merchants to disclose their data security policies 

to their customers; 

• requiring the timely disclosure of entities that have suffered a data breach; 

• establishing enforcement standards for provisions prohibiting merchants from retaining financial data; 

• requiring the timely notification of the account servicer if 

an account has been compromised by a data breach; and, 

• requiring breached entities to prove a ‘‘lack-of-fault’’ if they 

have suffered from a data breach. 

Additional Areas Where Relief is Needed 

In addition to the five major areas outlined above, there are 

other areas where Congress should act to provide relief for credit 

unions and other financial institutions: 

• Dodd-Frank Act Thresholds: The thresholds established in 

the Dodd-Frank Act should be raised and indexed. The Act established $10 billion as an arbitrary threshold for financial institutions being subject to the Durbin interchange price cap 

and the examination and enforcement of the CFPB. We believe 

that raising such a threshold would still accomplish the same 

objectives, while not penalizing the number of ‘‘good actors’’ 

that have found themselves above the arbitrary $10 billion line 

but below mega-bank status. As the very least, the $10 billion 

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line should be indexed for inflation on an annual basis—going 

back retroactively to its establishment. 

• Patent Reform: Despite the enactment of the Leahy-Smith 

American Invents Act in 2011, many credit unions find themselves targets of patent trolls and their frivolous lawsuits and 

demand letters. NAFCU supports efforts to curb these practices, such as H.R. 3309, the Innovation Act, which was recently reported out of the House Judiciary Committee by an 

overwhelming bipartisan margin. 

• E-SIGN Act: Passed in 2000, the E-SIGN Act requires financial institutions to receive consumer consent electronically 

before electronic disclosures can be sent to members. Credit 

unions cannot accept their member’s consent to receive e-statements over the phone or in person, but must instead direct the 

member to their own personal computers to consent electronically, adding an unnecessary hurdle in this otherwise straightforward process. This outdated provisions is a burden for financial institutions and consumers and should be stricken. 

• CFPB Document Access: While Dodd-Frank excludes financial institutions with $10 billion or less in assets from the 

examination authority of the CFPB, the new agency is provided with unlimited access to financial reports concerning covered persons issued by other regulators. Since the reports are 

drafted by federal agencies as part of their examination procedures, access by the CFPB to the reports essentially amounts 

to an examination in itself, even for those institutions with assets of $10 billion or less. NAFCU does not believe that this 

is the result Congress intended, and asks that this broad language be narrowed appropriately. 

• Appraiser Independence: Section 1472 of the Dodd-Frank 

Act imposes mandatory reporting requirements on credit 

unions and other lenders who believe an appraiser is behaving 

unethically or violating applicable codes and laws, with heavy 

monetary penalties for failure to comply. These provisions 

would impose a significant burden on each credit union to essentially serve as a watchdog for appraisers violating their own 

professional practices, and should therefore be optional. If reporting continues to be compulsory, NAFCU asks that Congress amend the severe penalties of up to $10,000 or $20,000 

per day which we believe to be excessive. 

• SAFE Act Definition of ‘‘Loan Originator’’: The S.A.F.E. 

Mortgage Licensing Act of 2008 required financial institutions 

to register any ‘‘loan originator.’’ While the intent was to record 

commissioned originators that perform underwriting, regulators have interpreted the definition very broadly to include 

any employee accepting a loan application, and even call center 

staff or credit union volunteer board members. NAFCU asks 

that Congress narrow the meaning of what it means to ‘‘take’’ 

an application and to ‘‘offer’’ or ‘‘negotiate’’ terms, which would 

help prevent credit unions from going through a burdensome 

process to unnecessarily register individuals not involved in 

underwriting loans. 

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• SEC Broker-Dealer Exemption: while the Gramm-LeachBliley Act allows for an exemption for banks from broker-dealer and investment adviser registration requirements with the 

SEC, no similar exception for credit unions is included, even 

though federal credit unions are permitted to engage in securities-related activities under the FCUA as regulated by NCUA. 

We ask that credit unions be treated similarly to banks under 

these securities laws. This would ensure they are not dissuaded from providing services that consumers demand, thereby putting their members at a disadvantage. 

Conclusion 

Credit unions are suffering under an ever-increasing regulatory 

burden. This burden is hampering their ability to serve our nation’s 96 million credit union members. A NAFCU survey of our 

members indicates that 94% of respondents have seen this burden 

increase since the passage of the Dodd-Frank Act in 2010—despite 

the fact that everyone agreed during the financial reform debate 

that credit unions were good actors and did not cause the crisis. 

This is why, during the debate on Wall Street reform, NAFCU opposed credit unions being included under the CFPB rulemaking 

and why we still have concerns about them being subject to it 

today. 

While many of the rules placed on credit unions are time consuming and burdensome, no single regulation is creating the unbearable regulatory overburden that is leading to industry consolidation, rather it is the tidal wave of new rules and regulations 

coming from multiple regulators—often with little or no coordination between them. The burden is compounded as old and outdated 

regulations are not being removed or modernized at the same pace. 

This regulatory tsunami has hampered all credit unions ability to 

serve their members and any relief effort should not attempt to 

split the industry. 

NAFCU was the first to call on Congress to provide such relief 

this past February and our five-point plan, outlined in my testimony, provides a good road map to start on any relief package for 

credit unions. 

NAFCU appreciates your time and thanks the Subcommittee for 

the opportunity to testify before you here today on these important 

issues to credit unions and ultimately our nation’s economy. I welcome any questions you may have. 

Attachment A: NAFCU letter to Secretary Geithner on 

FSOC’s role to reduce regulatory compliance burden; June 

27, 2012. 

Attachment B: NAFCU letter to Chairman Johnson, Chairman Hensarling, Ranking Member Crapo and Ranking Member Waters calling on Congress to provide credit union regulatory relief; February 12, 2013. 

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1FDIC Community Banking Study, December 2012, Page 3–5. (http://www.fdic.gov/regulations/resources/cbi/study.html) 

Chairman Schweikert, Ranking Member Clarke, and members of 

the subcommittee, my name is Doyle Mitchell, and I am President 

and CEO of Industrial Bank, a $350 million asset bank 

headquartered in the District of Columbia. Industrial Bank was 

founded in 1934, in the depth of the Great Depression, and is the 

oldest and largest African American-owned commercial bank in the 

metropolitan Washington, D.C. area. We have over 120 employees, 

I testify today on behalf of the nearly 7,000 community banks represented by the Independent Community Bankers of America. 

Thank you for convening this hearing on the ‘‘Regulatory Landscape: Impact on Small Financial Institutions.’’ 

In addition to being a member of ICBA, I am also the Chairman 

of the National Bankers Association, a trade association for the nation’s minority and women-owned banks. While many community 

banks serve rural areas and small towns, there is also an important segment of community banks like mine that serve urban areas 

and that were founded to serve minority communities that were 

historically and many times currently, ignored by other financial 

institutions. 

America’s 7,000 community banks are playing a vital role in ensuring the economic recovery is robust and broad based, reaching 

communities of all sizes and in every region of the country. The recent FDIC Community Banking Study showed that in one out of 

every five counties in the United States, the only physical banking 

offices are those operated by community banks.1 Community banks 

provide 60 percent of all small business loans under $1 million, as 

well as customized mortgage and consumer loans suited to the 

unique characteristics of their local communities. Federal Reserve 

data shows that while overall small business lending contracted 

during the recent recession, lending by a majority of small community banks (those of less than $250 million in assets) actually increased, and small business lending by banks with asset sizes between $250 million and $1 billion declined only slightly. By contrast, small business lending by the largest banks dropped off 

sharply. The viability of community banks is linked to the success 

of our small business customers in the communities we serve, and 

we don’t walk away from them when the economy tightens. 

In order to reach their full potential as catalysts for entrepreneurship, economic growth, and job creation, community banks 

must have regulation that is calibrated to their size, lower-risk profile, and traditional business model. Working with community 

bankers from across the nation, ICBA has developed its Plan for 

Prosperity, a platform of legislative recommendations that will provide meaningful relief for community banks and allow them to 

thrive by doing what they do best—serving and growing their communities. By rebalancing unsustainable regulatory burden, the 

Plan, if adopted by Congress, will ensure that scarce capital and 

labor resources are used productively, not sunk into unnecessary 

compliance costs, allowing community banks to better focus on 

lending and investing that will directly improve the quality of life 

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in our communities. The Plan for Prosperity is attached to this testimony, as is a list of the 23 bills that have been introduced in the 

House and Senate to date that incorporate Plan for Prosperity provisions. 

New Rules Threaten Community Bank Mortgage Lending 

A primary focus of the Plan for Prosperity is mortgage lending 

regulatory relief. Every aspect of mortgage lending is subject to 

new, complex, and expensive regulations that will upend the economics of this line of business. These regulations are being enacted 

in response to the worst abuses of the pre-crisis mortgage market— 

abuses in which community banks did not engage. In particular, 

community bankers are deeply concerned by the Consumer Financial Protection Bureau’s (CFPB’s) new ‘‘ability-to-repay’’ rule which 

will expose lenders to litigation risk unless their loans meet the 

definition of ‘‘qualified mortgage’’ or ‘‘QM.’’ However, a staple of 

community bank mortgage lending, balloon loans, are explicitly excluded from QM status unless they are made in rural areas under 

an unreasonably narrow definition of ‘‘rural.’’ Many community 

banks are not willing to assume heightened litigation risk and will 

exit the mortgage lending business particularly in rural markets. 

While ICBA supports the CFPB’s amendments to the QM rule 

which make accommodations for community banks, they do not go 

far enough to preserve access to credit for community bank customers. 

The ‘‘ability to repay’’ rule is scheduled to take effect January 10, 

2014 and thousands of community banks, more than 50 percent, 

will not be prepared or are uncertain of their readiness to comply 

by that date. Even the most negligible regulatory change can require many months to change systems, update policies and procedures, revise underwriting requirements, and train staff. Bankers 

must ensure that vendors and suppliers are prepared as well. 

Changes of the magnitude of the ‘‘ability-to-repay’’ rule are particularly challenging for community banks given their limited staff and 

legal and compliance resources. Many community banks may be 

forced to suspend their mortgage lending until they become compliant. This would have a significant adverse impact on the recovering 

housing market. Other community banks may exit the mortgage 

business altogether. For this reason, ICBA is urging the CFPB to 

extend the mandatory compliance date and allow optional compliance for a period of 9 to 12 months. We hope that members of this 

committee will support that request. 

The CLEAR Relief Act 

In addition to this administrative extension request, ICBA is 

seeking legislative solutions, included in the Plan for Prosperity, 

that would simplify community bank compliance with the CFPB 

‘‘ability-to-repay’’ rule and other new mortgage and non-mortgage 

rules. While, as noted above, 23 bills have been introduced that 

embody Plan for Prosperity provisions, I would like to use this testimony to highlight the single bill that best captures the full scope 

of the Plan: the Community Lending Enhancement and Regulatory 

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Relief Act (CLEAR Relief Act, H.R. 1750), introduced by Rep. 

Blaine Luetkemeyer, a former community banker and current 

member of the Small Business Committee as well as the Financial 

Services Committee. The CLEAR Relief Act has over 80 cosponsors 

with strong bipartisan representation. A Senate companion bill has 

similar bipartisan support. The CLEAR Relief Act contains eight 

Plan for Prosperity provisions, including: 

Qualified Mortgage Status for Community Bank Portfolio Loans 

The CLEAR Relief Act solution to compliance with the ‘‘abilityto-repay’’ rule is simple, straightforward, and will preserve community bank mortgage lending: QM status for community bank loans 

held in portfolio, including balloon loans in rural and non-rural 

areas and without regard to their pricing. This provision would 

apply to all lenders with less than $10 billion in assets. When a 

community bank holds a loan in portfolio it holds 100 percent of 

the credit risk and has every incentive to ensure it understands the 

borrower’s financial condition and to work with the borrower to 

structure the loan properly and make sure it is affordable. Withholding safe harbor status for loans held in portfolio, and exposing 

the lender to litigation risk, will not make the loans safer, nor will 

it make underwriting more conservative. It will merely deter community banks from making such loans. 

Escrow Requirement Exemption for Community Bank Portfolio 

Mortgages 

The CLEAR Relief Act would exempt community bank loans held 

in portfolio from new escrow requirements for higher priced mortgages. This exemption would also apply to all lenders with less 

than $10 billion in assets. Again, portfolio lenders have every incentive to protect their collateral by ensuring the borrower can 

make tax and insurance payments. For low volume lenders in particular, an escrow requirement is expensive and impractical and, 

again, will only deter lending to borrowers who have no other options. 

Small Servicer Exemption 

The CLEAR Relief Act would raise the CFPB’s small servicer exemption threshold from 5,000 loans to 20,000. Community banks 

are deeply concerned about the impact of servicing standards that 

are overly prescriptive with regard to the method and frequency of 

delinquent borrower contacts. These rigid standards reduce community banks’ flexibility to use methods that have proved successful in holding down delinquency rates. Example of difficult and unnecessary requirements include new monthly statements; additional notices regarding interest rate adjustments on ARM loans; 

rigid timelines for making contacts that leave no discretion to the 

servicer; and restrictions on forced placed insurance. Community 

banks’ small size and local presence in the communities we serve 

make many of these requirements unnecessary. 

A higher exemption threshold would preserve the role of community banks in mortgage servicing, where consolidation has clearly 

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2Source: Office of Mortgage Settlement Oversight (www.mortgageoversight.com). 

harmed borrowers. Community banks above the 5,000 loan threshold have a proven record of strong, personalized servicing and no 

record of abusive practices. To put the 20,000 threshold in perspective, consider that the five largest servicers service hold an average 

portfolio of 6.8 million loans 2 and employ as many as 10,000 people 

each in servicing alone. 

Appraisal Exemption for Smaller Mortgages 

The CLEAR Relief Act would reinstate the Financial Institutions 

Reform, Recovery, and Enforcement Act (FIRREA) exemption for 

independent appraisals for loans of $250,000 or less. Appraisal 

standards have changed significantly over the past few years. First 

as a result of the Home Valuation Code of Conduct from Fannie 

Mae and Freddie Mac, and more recently as a result of the DoddFrank Act. These standards are well intentioned, having been designed to prevent abuses by unregulated mortgage brokers that 

contributed to the collapse of the housing market. However, they 

have made it nearly impossible for many community banks to use 

local appraisers and forced them to hire appraisal management 

companies at significant expense. The CLEAR Relief Act would 

provide relief from these costs, which are passed on to the borrower 

and increase the cost of credit. 

Modernize the Federal Reserve’s Small Bank Holding Company 

Policy Statement 

The CLEAR Relief Act requires the Federal Reserve to revise the 

Small Bank Holding Company Policy Statement—a set of capital 

guidelines that have the force of law. The Policy Statement, makes 

it easier for small bank holding companies to raise additional capital by issuing debt, would be revised to apply to both bank and 

thrift holding companies and to increase the qualifying asset 

threshold from $500 million to $5 billion. Qualifying bank and 

thrift holding companies must not have significant outstanding 

debt or be engaged in nonbanking activities that involve significant 

leverage. This will help ease capital requirements for small bank 

and thrift holding companies. This past November, the House Financial Services Committee passed out of committee a bill increasing to $1 billion, the Small Bank Holding Company Policy Statement. We applaud passage of this bill and urge House leaders to 

give this bill floor consideration. 

Relief from Accounting and Auditing Expenses for Publicly Traded Community Banks and Thrifts 

The CLEAR Relief Act would exempt from the internal control 

attestation requirements of Section 404(b) of the Sarbanes-Oxley 

Act banks with assets up to $10 billion. The current exemption 

threshold applies to companies with less than $75 million in market capitalization. Because community bank internal control systems are monitored continually by bank examiners, they should not 

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side audit firm for attestation work. This provision will substantially lower the regulatory burden and expense for small, publicly 

traded community banks without creating more risk for investors. 

Eliminate Redundant Privacy Notices 

The CLEAR Relief Act provides that a financial institution is not 

required to mail an annual privacy notice to its customers if it has 

not changed its privacy policies. Most community banks do not 

have the scale to automate the annual privacy notice mailings. For 

these banks, the mailings are a manual, labor intensive process. 

Eliminating this requirement when a bank has not changed it privacy policies, will conserve resources without putting consumers at 

risk or reducing their control over the use of their personal data. 

This provision of the CLEAR Relief Act is also contained in a 

separate bill introduced by Rep. Luetkemeyer, the Privacy Notice 

Confusion Elimination Act (H.R. 749), which passed the House in 

March. 

There are additional provisions of the CLEAR Relief Act. Together they provide a strong, clear legislative response to the 

threat of mistargeted regulation to the community bank charter. 

Closing 

I encourage you to reach out to the community bankers in your 

district. Ask them about the current regulatory environment and 

whether the CLEAR Relief Act, the Right to Lend Act, and the 

other Plan for Prosperity bills attached to this testimony would 

help them better serve their communities. We’re confident that 

they will agree with us. Your cosponsorship of the CLEAR Relief 

Act and the other Plan for Prosperity bills would be greatly appreciated by community bankers and ICBA. 

Thank you again for the opportunity to testify today. I hope that 

my testimony, while not exhaustive, gives you a sense of the sharply increasing resource demands placed on community banks by regulation and what’s at stake for the future of community banking. 

Left unaddressed, the increasing burden of regulation will discourage the chartering of new community banks and lead to further industry consolidation. Consolidation will lead to higher loan 

interest rates for borrowers, lower rates paid on deposits, and 

fewer product choices. A more concentrated industry, dominated by 

a small number of too-big-to-fail banks, will jeopardize the safety 

and soundness of the financial system and expose taxpayers to the 

risk of additional costly bailouts. That’s why it’s so important to 

enact the sensible regulatory reforms outlined above. We encourage 

Congress to consider ICBA’s Plan for Prosperity as a guide to 

achieving these reforms. 

Thank you again for the opportunity to testify today. 

Attachments 

• Plan for Prosperity Bills 

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Bills Containing ICBA Plan for Prosperity Provisions 

The Community Lending Enhancement and Regulatory Relief 

Act of 2013 (H.R. 1750) 

The Community Lending Enhancement and Regulatory Relief 

Act of 2013 (S. 1349) 

The Protecting American Taxpayers and Homeowners Act (H.R. 

2767) 

The Terminating Bailouts for Taxpayer Fairness Act of 2013 (S. 

798) 

The Portfolio Lending and Mortgage Access Act of 2013 (H.R. 

2673) 

The Financial Institutions Examination Fairness and Reform Act 

(H.R. 1553) 

The Financial Institutions Examination Fairness and Reform Act 

(S. 727) 

The Eliminate Privacy Notice Confusion Act (H.R. 749) 

The Privacy Notice Modernization Act (S. 635) 

The Municipal Advisor Oversight Improvement Act (H.R. 797) 

The Municipal Advisor Relief Act (S. 710) 

The Consumer Financial Protection Commission Act (H.R. 2402) 

The Responsible Consumer Financial Protection Regulations Act 

(H.R. 2446) 

The Consumer Financial Protection Safety and Soundness Improvement Act (H.R. 3193) 

Responsible Financial Consumer Protection Regulations Act (S. 

205) 

The Holding Company Registration Threshold Equalization Act 

(H.R. 801) 

The Holding Company Registration Threshold Equalization Act 

(S. 872) 

Mutual Community Bank Competitive Equality Act (H.R. 1603) 

The Financial Regulatory Responsibility Act of 2013 (S. 450) 

The SEC Regulatory Accountability Act (H.R. 1062) 

The Right to Lend Act (H.R. 2323) 

The S Corporation Modernization Act (H.R. 892) 

To enhance the ability of community financial institutions to foster economic growth and serve their communities (H.R. 3329) 

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Witness Background Statement 

Adam J. Levitin is a Professor of Law at the Georgetown University Law Center, in Washington, D.C., where he teaches courses 

in financial regulation, contracts, bankruptcy, and commercial law. 

Professor Levitin has previously served as the Bruce W. Nichols 

Visiting Professor of Law at Harvard Law School, as the Robert 

Zinman Scholar in Residence at the American Bankruptcy Institute, and as Special Counsel to the Congressional Oversight Panel 

supervising the Troubled Asset Relief Program (TARP). Professor 

Levitin currently chairs the Mortgage Committee of the Consumer 

Financial Protection Bureau’s Consumer Advisory Board. 

Before joining the Georgetown faculty, Professor Levitin practiced in the Business Finance & Restructuring Department of Weil, 

Gotshal & Manges, LLP in New York, and served as law clerk to 

the Honorable Jane R. Roth on the United States Court of Appeals 

for the Third Circuit. 

Professor Levitin holds a J.D. from Harvard Law School, an 

M.Phil and an A.M. from Columbia University, and an A.B. from 

Harvard College. In 2013 he was awarded the American Law Institute’s Young Scholar’s Medal. 

Professor Levitin has not received any Federal grants or any 

compensation in connection with his testimony, and he is not testifying on behalf of any organization. The views expressed in his testimony are solely his own. 

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1 NILSON REPORT, #1012, Feb. 2013, at 9. 

Mr. Chairman Schweikert, Ranking Member Clarke, Members of 

the Committee: 

Good morning. Thank you for inviting me to testify at this hearing. My name is Adam Levitin. I am a Professor of Law at the 

Georgetown University, where I teach courses in consumer finance, 

contracts, bankruptcy, and commercial law. I also serve on the 

Consumer Financial Protection Bureau’s statutory Consumer Advisory Board. I am here today solely as an academic who has written 

extensively on consumer finance and financial regulation and am 

not testifying on behalf of the CFPB or its the Consumer Advisory 

Board. 

In my testimony today, I focus on five areas where new regulatory changes affect small businesses or small financial institutions: 

1. The effect of the CARD Act on small business credit; 

2. The effect of the CFPB on small business credit 

3. The effect of the CFPB on small financial institutions 

4. The effect of the Durbin Interchange Amendment on small 

depositories; and 

5. The effect of the US implementation of the Basel III Capital Accords on small financial institutions. 

Neither the CARD Act nor CFPB nor Basel III is likely to have 

a major effect on smaller financial institutions; the Durbin Interchange Amendment actually makes small financial institutions 

more competitive vis- ́a-vis large banks. These changes in regulation 

will undoubtedly impose some compliance costs. Some of these will 

be one-time costs, and some will be recurring. And these costs may 

affect the competitive landscape in financial services. It is hard, 

however, to see any currently proposed regulations as having a material effect on the ability of smaller financial institutions to compete or on the availability of credit to small businesses. When 

weighed against the clear benefits of better consumer protection 

regulation, more competitive markets, and safer banks, the overall 

effect of the regulatory changes appears positive. 

I. The Effect of the CARD Act on Small Financial Institutions and Small Business Credit 

The Credit Card Accountability, Responsibility, and Disclosure 

Act of 2009 (the ‘‘CARD Act’’) is the first major statutory overhaul 

of the credit card market since the 1968 Truth in Lending Act. 

During the intervening four decades, the credit card market expanded and evolved dramatically, and the CARD Act was much 

needed legislation to rein in some of the more egregious billing 

‘‘tricks and traps’’ that had emerged in the credit card market. The 

credit card market is one dominated by large banks—roughly 85% 

of credit card lines outstanding is on cards issued by just ten large 

banks.1 Many smaller banks do not even offer credit cards. Accordingly, the brunt of the CARD Act’s regulatory burden has been 

born by a handful of megabanks. 

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2 CFPB, CARD Act Report: A review of the impact of the CARD Act on the consumer credit 

card market, Oct. 1, 2013, at 61, at http://files.consumerfinance.gov/f/201309—cfpb—card-actreport.pdf. 3Sumit Agrawal et al., Regulating Consumer Financial Products: Evidence from Credit Cards, 

Sept. 25, 2013, at http://ssrn.com/abstract=2330942. 4 CFPB, CARD Act Report: A review of the impact of the CARD Act on the consumer credit 

card market, Oct. 1, 2013, at 36, at http://files.consumerfinance.gov/f/201309—cfpb—card-actreport.pdf. 5Kathryn Kobe, Small Business GDP: Update 2002–2010, Jan. 2012, at http://www.sba.gov/ 

sites/default/files/rs390tot—0.pdf (the 46% figure is for 2010). 6 12 U.S.C. § 5481(5)(A). 

The CARD Act applies only to consumer credit cards; small business credit cards remain virtually unregulated. Accordingly, the 

CARD Act cannot be held responsible for the reduction in small 

business credit lines. Thus, a recent statutorily mandated study by 

the CFPB on the impact of the CARD Act notes that: 

[N]othing in the evidence reviewed suggests that the CARD 

Act was responsible for the reduction in credit access—which 

largely preceded the Act’s enactment—or that the CARD Act 

has retarded the pace of the recovery. The parallels between 

the consumer credit card market and the small business credit 

card market, and between the credit card market and other 

consumer credit markets, do not suggest that, in general, recovery in the card marketplace has been negatively impacted 

by the CARD Act.2

The CARD Act may have even helped small businesses by lowering their costs of credit and by enabling greater consumer purchasing power for goods and services. A recent study estimates that 

the CARD Act has saved US consumer $20.8 billion per year.3

Similarly, the CFPB concluded that ‘‘the CARD Act likely did not 

raise credit card costs for consumers.’’ 4 To the extent that the 

CARD Act has helped consumers by making credit markets more 

transparent and thus allowing markets to operate more efficiently, 

it also has helped small businesses in two ways. First, small businessmen are consumers themselves. And second, to the extent that 

better consumer protection laws result in a more competitive consumer protection market place and reduce the rents that can be extracted from consumers by financial institutions, it means that consumers will have more money left over that can be spent on goods 

and services in the real economy. This suggests that the CARD Act 

has actually had a positive impact on small businesses generally. 

II. CFPB and Small Business Credit 

Small businesses account for roughly half of private-sector employment and 46 percent of GDP.5 These small businesses—like 

any type of commercial enterprise—require credit to operate. As an 

initial matter, I want to underscore that the CFPB has no almost 

direct regulatory authority relating to small business credit. 

The CFPB’s organic authority is limited to products and services 

‘‘offered or provided for use by consumers primarily for personal, 

family, or household purposes’’.6 Most statutes administered by the 

CFPB, such as the Truth in Lending Act are similarly restricted. 

The sole areas in which the CFPB has jurisdiction are a pair of seldom-invoked provisions of the Truth in Lending Act prohibiting the 

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7 15 U.S.C. § 1642. 

8 15 U.S.C. § 1645. 

9 15 U.S.C. § 1691 et seq. 10 15 U.S.C. § 1691o–2. 11 78 Fed. Reg. 25818 (May 3, 2013) (amending Regulation Z to remove the requirement that 

card issuers consider consumers’ independent ability to pay for applicants who are at least 21 

years old and permitting issuers to consider in ability to repay income and assets which a consumer can reasonably expect to access, such as spousal income and assets); 78 Fed. Reg. 18795 

(Mar. 28, 2013) (amending Regulation Z to apply the limitation on the total amount of fees that 

a credit card issuer may require a consumer to pay solely to the fist year after account opening 

and not also prior to account opening). 12 12 C.F.R. § 1026.43(a)(1). Some rules, such as regulations relating to mortgage counseling, 

mortgage servicing, and compensation rules for arbitration and credit insurance do apply to 

home equity lines of credit, but the impacts are minor. Similarly, the application of the Home 

Owners Equity Protection Act rules (requiring additional disclosures for high-cost mortgages) 

also apply to high-cost equity lines of credit. 13Letter from Leonard J. Kennedy, General Counsel, Consumer Financial Protection Bureau 

to Chief Executive Officers of Financial Institutions under Section 1071 of the Dodd-Frank Act, 

April 11, 2011, at http://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf. 

issuance of unsolicited credit cards 7 and limiting liability of employees to card issuers for unauthorized business card usage 8 and 

the Equal Credit Opportunity Act (ECOA), which prohibits various 

discriminatory lending practices,9 and which was amended by the 

Dodd-Frank Act to include a data collection provision on small 

business lending.10 This means that the CFPB can engage in only 

very limited regulation of small business financial products, and 

then primarily to ensure against discriminatory lending, rather 

than to regulate the terms and conditions of financial products. 

Thus, the CFBP’s direct authority over small business credit is 

primarily to the extent that the small business credit is obtained 

as consumer credit. While this is commonly done, it is typically in 

contravention to representation made by the borrowers to their 

lenders. Still, many small businesses rely on consumer credit cards 

and home equity lines of credit for liquidity, use consumer deposit 

accounts, and make use of vehicles financed through consumer 

loans or leases. 

To date, however, CFPB rulemaking and enforcement has had 

little impact on any of these particular financial products in a way 

that would affect small businesses. The CFPB has done only minor 

rulemakings relating to credit cards (and these loosened pre-existing regulations);11 the CFPB’s major mortgage rulemaking regarding the ‘‘qualified mortgage’’ or QM exemption to the statutory ability-to-repay requirement does not apply to home equity lines of 

credit;12 and the CFPB has done no rulemakings in the deposit account or auto finance areas. Similarly, the CFPB has yet to engage 

in a rulemaking regarding data collection on small business lending, and has indicated that until such a rulemaking occurs, the reporting requirements do not go into effect.13

Instead, to the extent that the CFPB is affecting small business 

credit, it is only indirectly, to the extent that financial institutions 

are responding to CFPB regulation by changing their small business lending practices. To date, there is no evidence that this is occurring, much less that any such indirect effects are negative and 

outweigh any concomitant benefits. I make no attempt here to 

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14 57% of small business loans by dollar amount outstanding are on the books of depositories with less than $10 billion in assets. FDIC Statistics on Depository Institutions ($335 billion of 

$586 billion in small business credit outstanding is from institutions with less than $10 billion 

in assets) 15 12 U.S.C. § 5511(b)(3). 16 12 U.S.C. § 5513(b)(2)–(3). 17 12 U.S.C. § 5512(b)(2)(B). 18 12 U.S.C. § 5512(b)(2)(C). 19 5 U.S.C. §§ 603, 604. 20 5 U.S.C. §§ 603, 609; Executive Order 12866 of September 30, 1993. 21 5 U.S.C. § 603. 22 12 U.S.C. § 5512(d). 23 12 U.S.C. § 5512(b)(3)(A). 

selves and because better consumer protection laws leave more 

money in consumers’ pockets to spend on goods and services instead of on bank fees and interest. 

III. CFPB and Small Financial Institutions 

The creation of the CFPB has changed the regulatory landscape 

for consumer protection regulation, but the CFPB’s impact on small 

banks is limited, and the CFPB has shown a particular solicitude 

toward the concerns of smaller financial institutions, such as community banks and credit unions, which are the source of a disproportionate share of small business lending.14

The CFPB’s attention to small financial institutions is partially 

a matter of statute. The CFPB is required to identify and address 

‘‘unduly burdensome regulations,’’ which are a particular concern of 

smaller financial institutions.15 As part of these safeguards against 

unduly burdensome regulation, the CFPB is required to: 

• Consult with prudential regulators and State bank regulators in order to minimize the regulatory burden upon lending 

institutions.16

• Consult with the prudential regulators of small banks and 

credit when proposing regulations.17 The prudential regulators 

are permitted to formally object to the rules and their written 

objections must be included in the rule-making record, along 

with the Bureau’s response to their concerns.18

• Evaluate the potential impact of rules on small businesses 

under the Regulatory Flexibility Act.19

• Give small businesses a preview of new proposals and receive extensive feedback from small businesses before even giving notice to the broader public (under the Small Business 

Regulatory Enforcement Fairness Act).20

• Assess possible increases in the cost of credit for small entities and consider any significant alternatives that could minimize those costs.21

Assess the effectiveness of each rule within five years of implementation, including soliciting public comments on whether to 

change or eliminate the regulations.22

• Finally, the CFPB also has the authority to exempt any 

consumer financial services provider from its rules.23

The CFPB’s real attention to the concerns of smaller financial institutions is also a matter of agency culture. My observation from 

serving on the CFPB’s Consumer Advisory Board is that the CFPB 

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24 12 C.F.R. § 1026.43(e)(5); 1026.35(b)(2)(iii)(B)–(C) (exempting from the QM debt-to-income 

ratio requirement loans held in portfolio and made by creditors that originate less than 500 

mortgages annually and have less than $2 billion in net assets). 

is an agency that is deeply committed, from the top down, to working with small financial institutions. Institutionally, the CFPB understands that small financial institutions play an important role 

in consumer protection through fostering greater competition, particularly along the lines of providing better service and simpler 

products for consumers. Moreover, small financial institutions play 

a particularly important role in consumer finance in smaller and 

rural communities. Thus, the CFPB has created an important exemption from the ability-to-repay requirement for mortgages for 

smaller financial institutions.24

Because of the importance of small financial institutions to consumer finance, the CFPB has set up special community bank and 

credit union advisory boards—not required by statute—so that it 

gets regular feedback directly from small banks themselves, not 

simply from trade associations. When CFPB leadership travels outside of Washington, a routine and important part of the agenda are 

meetings with the officers of small financial institutions. 

The CFPB’s outreach to smaller financial institutions is particularly important because the CFPB does not have much formal direct contact with small depositories and credit unions. Of the 

roughly 14,000 depositories and credit unions in the United States, 

only around 111 of them (those with over $10 billion in net assets 

in the holding company) are subject to examination by the CFPB. 

The rest—all small depositories—are examined for consumer protection compliance by their prudential regulators: the FDIC, the 

Federal Reserve Board, the NCUA, and the OCC. 

While this spares smaller institutions the burden of having to 

deal with two separate examinations, it also means that there is 

no direct communication between the CFPB and these smaller institutions. Instead, what the CFPB expects in terms of regulatory 

compliance is communicated indirectly through the examiners from 

the prudential regulators. In theory, all of the examinations should 

be coordinated through the Federal Financial Institutions Examination Council, but it is possible, particularly as new regulations 

go into effect, that the lack of a direct communication channel 

through the examination process has made it harder for small financial institutions to understand what is—and is not—required of 

them. 

In short, the CFPB is an agency that is very attuned to the concerns of small institutions. This is not to say that the CFPB would 

or should always agree with these concerns, but it is clearly an 

agency that is listening with an open mind and trying to balance 

its statutory charges of consumer protection and access to financial 

services with the particular needs of smaller financial institutions. 

IV. Durbin Interchange Amendment 

The Durbin Interchange Amendment to the Dodd-Frank Act regulates the interchange or ‘‘swipe’’ fees that banks can charge on 

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25 15 U.S.C. § 1693o–2. 26 15 U.S.C. § 1693o–2(a)(6)(A). Smaller financial institutions are still subject to the Durbin 

Amendment’s routing exclusivity provision, but the Federal Reserve rulemaking currently in 

place does not meaningfully change pre-existing routing arrangements for most debit cards. 27 Robert J. Shapiro, The Costs and Benefits of Half a Loaf: The Economic Effects of Recent 

Regulation of Debit Card Interchange Fees, Oct. 1, 2013, at http://21353cb4da875d727aldccea4d4b51151ba804c4b0295d8d06a4.r8.cfl.rackcdn.com/SHAPIROreport.pdf. 28 Basel III is a non-binding set of coordinated principles agreed to by bank regulators from 

leading developed economies, in order to head off international arbitrage of regulatory capital 

standards, but there is room for variation in the actual national-level implementations, which 

are done via notice-and-comment rulemaking. 

debit card transactions.25 While parts of the Durbin Amendment apply to all financial institutions, depositories with less than $10 

billion in net assets are exempt from the Durbin Amendment’s cap 

on interchange fees.26 The result is to give smaller financial institutions a significant leg up against their larger competitors. 

The Durbin Amendment has also helped consumers and small 

businesses significantly. A recent study estimates that last year the 

Durbin Amendment saved consumers $5.8 billion in lower costs for 

goods and services and saved merchants $2.6 billion, which translates into roughly 38,000 new jobs.27 Taken as a whole, then the 

Durbin Amendment seems to have benefitted consumers, small 

businesses, and also small financial institutions. 

V. Basel III 

In the wake of the financial crisis, bank regulators globally recognized the need to craft more stringent capital requirements for 

depositories and their holding companies. One of the most fundamental lessons of the financial crisis is that capital is key. Sufficient capital is the only real guarantee that a bank can absorb 

losses. 

The third round of the Basel Capital Accords (Basel III) is an attempt to take this lesson to heart. Basel III creates a more detailed 

and demanding system of bank capital requirements for US banks 

and their holding companies. The Basel III rules are not perfect. 

They are too complex and too gameable because of a continued reliance on risk-weighting. They also still require too little capital and 

liquidity for banks. In particular, the leverage ratio—the bottom 

line and simplest measure of capital—is still far too low at 3%. 

The proposed US implementation of Basel III,28 which goes into 

effect as of January 1, 2015 for most banks and bank holding companies, generally requires more capital for banks. It also defines 

capital more stringently. These are both good things, and neither 

should affect financial institutions’ willingness to lend. Heightened 

capital requirements do not limit the amount of lending a bank can 

do—they are not reserve requirements. Instead, capital requirements merely require that banks be less leveraged. To the extent 

that a bank is less leveraged, it is less risky, which means that 

there is less chance that the public will be asked to pick up the tab. 

Greater capital requirements help move us away from the faux 

capitalism world of privatized gains and socialized losses. 

While Basel III was in reaction to the financial crisis, which was 

first and foremost a large bank crisis, it applies to all banks. This 

is the correct approach. While no individual small bank is likely to 

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29 Basel III did restrict the definition of what can qualify as capital and increased requirements for more finely tuned sub-ratios. In addition, Basel III creates the concept of a ‘‘capital 

conservation buffer’’ that will, after a phase in, be an additional 2.5% of risk-weighted assets. 

The capital conservation buffer is not a formal capital requirement—banks are not required to 

have a capital conservation buffer. The capital conservation buffer will function as a type of de 

facto capital requirement, however, because any bank that fails to have a capital conservation 

buffer will be subject to restrictions on dividends, share repurchases, and interest payments on 

preferred securities, and executive bonus payments. Basel III also caps the inclusion of mortgage 

servicing and deferred tax assets in capital. Both provisions are potentially burdensome, but not 

unduly so. 30 79 Fed. Reg. 55340, 55347 (Sept. 10, 2013). 

pose a systemic risk, small bank failures are still costly for the 

FDIC. Requiring greater capital makes these failures less likely. 

There will certainly be one-time cost of understanding the complicated new requirements and implementing proper compliance 

systems. Beyond that, however, it is hard to identify any provisions 

that are especially onerous on small banks,29 although it is notable 

that Basel III applies to small banks, but not to credit unions. 

The limited impact of Basel III on small banks is partially because Basel III left intact some key features of Basel I/II: the total 

risk-weighted capital ratio remains at 8%, and the leverage ratio 

remains at 4%. And key assets categories for smaller financial institutions, such as all residential mortgage loans and most commercial real estate loans retain the same risk-weighting. 

Basel III’s impact on small banks is also limited because the US 

Basel III rules contain numerous exceptions or exemptions for 

smaller financial institutions. Significantly, trust preferred securities (TruPS) and cumulative preferred stock issued before May 19, 

2010 may still count for Tier 1 capital for institutions with less 

than $15 billion in assets. Similarly, all institutions with less than 

$250 billion in assets may keep opt to continue their current regulatory capital treatment of accumulated other comprehensive income (AOCI), which would mean keeping available-for-sale securities on balance sheet without having to adjust regulatory capital 

levels based on the securities’ current market value. And bank 

holding companies with less than $500 million in assets are entirely exempt from Basel III (their depository subsidiaries must 

still comply). As a result, the FDIC estimates that 95% of insured 

depositories already have sufficient capital to comply with the final 

Basel III rules.30

Conclusion: The Multi-Tiered Financial Regulatory System 

The past five years have seen remarkable change in the regulation of the financial services industry, starting with the CARD Act 

of 2009 and continuing through the Dodd-Frank Act and subsequent and still on-going regulatory implementation. On the whole, 

this regulation addressed serious problems in our financial regulatory system, particularly in regard to consumer protection and 

bank safety-and-soundness. 

The new financial regulations, taken as a whole, are not perfect. 

In some areas regulation may have gone too far, in other areas not 

far enough, and in yet other areas, simply taken the wrong approach. I make no claim in this testimony that all the changes in 

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the financial regulatory system have been optimal. Instead, looking 

at the regulatory changes as a whole, what one sees is the emergence of four-tiered financial regulatory system: big banks and big 

non-banks; small banks; big non-banks; and small non-banks. 

In this four-tiered regulatory system, big banks are subject to 

stricter capital requirements; to examination and enforcement of 

consumer financial protection statutes by the CFPB; and to debit 

interchange fee caps. Small banks have looser capital requirements; have consumer protection examination and enforcement 

done by their prudential regulators instead of by CFPB; and are 

exempt from debit interchange fee caps. Small banks may also benefit from various exemptions to consumer financial protection statutes. Big non-banks may be subject to capital requirements (if systemically important) and may subject to CFPB examination (if defined by regulation as ‘‘larger participants’’ in their product market). Small non-banks are not subject to capital requirements or 

CFPB examination, although all non-banks are subject to CFPB 

enforcement. (Non-banks do not receive debit interchange fees.) 

The multi-tiered system has the effect of tilting the competitive 

playing field toward smaller financial institutions; whether they 

are banks or non-banks. Even with a tilted regulatory playing field, 

however, smaller financial institutions are still often at a competitive disadvantage to larger institutions because of the economies of 

scale that can exist in technology-heavy areas of financial services. 

There will be compliance costs from any changes in regulation, and 

some regulations will result in lower revenue for financial institutions. Ultimately, marginal changes in regulatory compliance costs 

are not what will determine the viability of smaller financial institutions, and no institution’s profitability should depend on being 

able to take advantage of consumers or the ability to gamble with 

federally insured deposits. Financial regulation has costs for financial institutions, but these costs should not obscure the real and 

valuable social benefits of consumer protection, competitive markets, and safe-and-sound banks. 

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