COMMUNITY BANKS 

AND CREDIT 

UNIONS

Impact of the DoddFrank Act Depends 

Largely on Future 

Rule Makings

Report to Congressional Requesters

September 2012

GAO-12-881

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-881, a report to

congressional requesters

September 2012

COMMUNITY BANKS AND CREDIT UNIONS

Impact of the Dodd-Frank Act Depends Largely on 

Future Rule Makings

Why GAO Did This Study

The Dodd-Frank Act includes 

numerous reforms to strengthen 

oversight of financial services firms 

and consolidate certain consumer 

protection responsibilities within CFPB. 

To help minimize its regulatory burden

on small institutions, including 

community banks and credit unions, 

the act exempts such institutions from 

several of its provisions. However, the 

act also contains provisions that 

impose additional requirements on 

small institutions. Although no 

commonly accepted definition of a 

community bank exists, the term often 

is associated with smaller banks.

Historically, community banks and 

credit unions have played an important 

role in providing credit to small 

businesses and other local customers. 

This report examines (1) the significant 

changes community banks and credit 

unions have undergone in the past 

decade and the factors that have 

contributed to such changes, and (2) 

Dodd-Frank Act provisions that 

regulators, industry associations, and 

others expect to impact community 

banks and credit unions, including their 

small business lending. GAO analyzed 

regulatory and other data on 

community banks and credit unions; 

reviewed academic and other relevant 

studies; and interviewed federal 

regulators, community banks, credit 

unions, state regulatory and industry 

associations, academics, and others.

CFPB, federal banking regulators, and 

the Securities and Exchange 

Commission provided technical 

comments on this report, which GAO 

incorporated as appropriate. CFPB and 

the National Credit Union 

Administration generally agreed with 

the report. 

What GAO Found

While the number of community banks and credit unions has declined in recent 

years, they have remained important lenders to small businesses and other local 

customers. From 1985 through 2010, the number of banks under $10 billion in 

assets and credit unions declined by over 50 percent to 7,551 and 7,339, 

respectively. The decline resulted largely from consolidations, which were 

facilitated by changes in federal law that made it easier for banks and credit 

unions to expand geographically. Another factor that may have contributed to 

consolidations is economies of scale, which refer to how an institution’s size is 

related to its costs. Although the existence of economies of scale in banking has 

been subject to debate, some recent research suggests that banks can save 

costs by expanding. Despite the decline in their number, community banks and 

credit unions have maintained their relationship-banking model, relying on their 

relationships with customers and local knowledge to make loans. Such 

institutions can use their relationship-based information to make loans to small 

businesses and other borrowers that larger banks may not make because of their 

general reliance on more automated processes. About 20 percent of lending by 

community banks can be categorized as small business lending (based on a 

commonly used proxy), compared to about 5 percent by larger banks. 

Community banks and credit unions also play an important role in rural areas, 

using relationship-based lending to serve customers with limited credit histories.

Although the Dodd-Frank Wall Street Reform and Consumer Protection Act’s 

(Dodd-Frank Act) reforms are directed primarily at large, complex U.S. financial 

institutions, regulators, industry officials, and others collectively identified 

provisions within 7 of the act’s 16 titles that they expect to have positive and 

negative impacts on community banks and credit unions. Industry officials told us 

that it is difficult to know for sure which provisions will impact community banks 

and credit unions, because the outcome largely depends on how agencies 

implement certain provisions through their rules, and many of the rules 

implementing the act have not been finalized. Thus, regulators and industry 

officials also have noted that the full impact of the Dodd-Frank Act on these 

institutions is uncertain. Nonetheless, some regulators and industry officials 

expect some of the act’s provisions to benefit community banks and credit unions 

and other provisions to impose additional requirements on community banks and 

credit unions that could affect them disproportionately relative to larger banks. 

GAO analyzed a number of the Dodd-Frank Act provisions that regulators, 

industry officials, and others expect to impact community banks and credit 

unions. Several of the act’s provisions, including its deposit insurance reforms, 

exemption from Section 404(b) of the Sarbanes-Oxley Act, and the Bureau of 

Consumer Financial Protection’s (CFPB) supervision of certain nonbanks, could 

reduce costs and/or help level the playing field for community banks and credit 

unions. Other provisions, such as the act’s mortgage reforms, may impose 

additional requirements and, thus, costs on generally all banks and credit unions, 

but their impact will depend on, among other things, how the provisions are 

implemented. Finally, industry officials generally told us that it is too soon to 

determine the Dodd-Frank Act’s overall impact on small business lending and 

identified only one provision that contains a data collection and reporting

requirement as potentially having a direct impact on such lending.

View GAO-12-881. For more information, 

contact Lawrance Evans at (202) 512-8678 or 

evansl@gao.gov. 
Page i GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Letter 1 

Background 4

Community Banks and Credit Unions Have Declined in Number 

but Remain Important for Small Businesses and Agriculture 7

Many Dodd-Frank Act Provisions May Affect Community Banks 

and Credit Unions, but the Full Extent of Their Impact Is 

Uncertain 19

Agency Comments and Our Evaluation 67

Appendix I Scope and Methodology 69

Appendix II Provisions of the Dodd-Frank Act Expected by Federal Regulators, 

State Regulatory Associations, and Industry Associations to Impact 

Community Banks and Credit Unions 72

Appendix III Comments from the Bureau of Consumer Financial Protection 78

Appendix IV Comments from the National Credit Union Administration 81

Appendix V GAO Contacts and Staff Acknowledgments 82

Tables

Table 1: Prudential Regulators and Their Basic Functions 5

Table 2: Numbers of Banks by Asset Class, 2011 5

Table 3: Numbers of Credit Unions by Asset Class, 2011 6

Table 4: Change in Quarterly Insurance Assessments Primarily Due 

to the Change in the Assessment Base 24

Table 5: Number of Banks with $10 Billion or Less in Total Assets 

and Number of These Banks Holding Derivatives from 

2007 through 2011 55

Contents
Page ii GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Table 6: Dodd-Frank Act Provisions Expected by Federal 

Regulators, State Regulatory Associations, and Industry 

Associations to Impact Community Banks and Credit 

Unions 73

Figures

Figure 1: Return on Assets at Large Banks, Community Banks, and 

Credit Unions from 2002 through 2011 11

Figure 2: Efficiency at Large Banks, Community Banks, and Credit 

Unions from 2002 through 2011 13

Figure 3: Small Business Lending at Large Banks and Community 

Banks from 2002 through 2011 15

Figure 4: Credit Union Small Business Loans as a Percentage of All 

Loans from 2002 through 2011 17

Figure 5: Loans as a Percentage of Total Assets at Banks and Credit 

Unions from 2002 through 2011 18
Page iii GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Abbreviations

CFPB Bureau of Consumer Financial Protection

CFTC Commodity Futures Trading Commission

DIF Deposit Insurance Fund

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer 

Protection Act

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve System

FHFA Federal Housing Finance Agency

HMDA Home Mortgage Disclosure Act

JOBS Act Jumpstart Our Business Startups Act

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

OTC over-the-counter

OTS Office of Thrift Supervision

QM qualified mortgage

QRM qualified residential mortgage

RMBS residential mortgage-backed securities

SBA Small Business Administration

SEC Securities and Exchange Commission 

TILA Truth in Lending Act

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

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Page 1 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

United States Government Accountability Office

Washington, DC 20548

September 13, 2012

The Honorable Olympia Snowe

Ranking Member

Committee on Small Business and Entrepreneurship

United States Senate

The Honorable Mark Kirk

United States Senate

In 2008, the U.S. financial system and broader economy faced the most 

severe financial crisis since the Great Depression. The crisis threatened 

the stability of the financial system and contributed to the failure of 

numerous financial institutions, including some large, complex financial 

institutions. For example, 414 banks and 90 credit unions failed between 

2008 and 2011, with such failures peaking in 2010. In response to the 

crisis, Congress passed the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), which became law on July 

21, 2010.1 The act includes numerous reforms to strengthen oversight of 

financial services firms and consolidate certain consumer protection 

responsibilities within the Bureau of Consumer Financial Protection, 

commonly known as the Consumer Financial Protection Bureau (CFPB).2

Although the Dodd-Frank Act exempts small institutions, such as 

community banks and credit unions, from several of its provisions, and 

authorizes federal regulators to provide small institutions with relief from 

certain regulations, it also contains provisions that will impose additional 

restrictions and compliance costs on these institutions.3

 

1

Pub. L. No. 111-203, 124 Stat. 1376 (2010). 

Historically, 

2

Title X of the Dodd-Frank Act, also called the Consumer Financial Protection Act of 2010, 

creates CFPB as a new executive agency to enforce certain existing federal consumer 

protection laws and promulgate new rules regarding federal consumer financial laws.

3

Although no commonly accepted definition of a community bank exists, the term often is 

associated with smaller banks (e.g., under $1 billion in assets) that provide relationship 

banking services to the local community and have management and board members who 

reside in the local community. In this report, we generally define community banks as 

banks (insured depository institutions that are not credit unions) with under $10 billion in 

total assets. We also include in our analysis federally insured credit unions with under $10 

billion in total assets. We use under $10 billion in total assets as our criterion because the 

Dodd-Frank Act exempts small institutions from a number of its provisions based on that 

threshold.

 
 

Page 2 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

community banks and credit unions have played an important role in 

serving their local customers, including providing credit to small 

businesses.

This report examines

• the significant changes community banks and credit unions have 

undergone in the past decade, and the factors that have contributed 

to such changes; and

• Dodd-Frank Act provisions that regulators, industry associations, and 

others expect to impact community banks and credit unions, including 

their small business lending.

To examine changes in community banks and credit unions, we analyzed 

data from SNL Financial, a private financial database that contains 

publicly filed and financial reports, including Consolidated Reports on 

Condition and Income (Call Reports) submitted to the Federal Deposit 

Insurance Corporation (FDIC), Thrift Financial Reports submitted to the 

Office of Thrift Supervision (OTS), and 5300 Call Reports (Call Reports) 

submitted to the National Credit Union Administration (NCUA).4 We used 

SNL Financial data to identify changes in the total number, profitability, 

lending activities, expenses, and other metrics of community banks and 

credit unions from 2002 through 2011.5

 

4

The Dodd-Frank Act eliminated OTS, which chartered and supervised federally chartered 

savings institutions and savings and loan companies. Rule-making authority previously 

vested in OTS was transferred to the Office of the Comptroller of the Currency (OCC) for 

savings associations and to the Board of Governors of the Federal Reserve System 

(Federal Reserve) for savings and loan holding companies. Supervisory authority was 

transferred to OCC for federal savings associations, to FDIC for state savings 

associations, and to the Federal Reserve for savings and loan holding companies and 

their subsidiaries, other than depository institutions. The transfer of these powers was 

completed on July 21, 2011, and OTS was officially dissolved 90 days later (Oct. 19, 

2011).

We reviewed the SNL Financial 

data and found the data to be sufficiently reliable for our purposes. We 

5

Call Reports are a primary source of financial data used for the supervision and 

regulation of banks and credit unions. They consist of a balance sheet, an income 

statement, and supporting schedules. Every national bank, state member bank, insured 

state nonmember bank, and federally insured credit union is required to file a consolidated 

Call Report, normally as of the close of business on the last calendar day of each calendar 

quarter. The specific reporting requirements depend on the size of the institution and 

whether it has any foreign offices. As of March 31, 2012, savings associations no longer 

filed Thrift Financial Reports and instead were required to file Call Reports.
 

Page 3 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

also reviewed and analyzed relevant academic, regulatory, and industry 

studies. We interviewed officials from FDIC, the Board of Governors of 

the Federal Reserve System (Federal Reserve), the Office of the 

Comptroller of the Currency (OCC), and NCUA, and the Small Business 

Administration (SBA); officials from two state regulatory associations 

(Conference of State Bank Supervisors and National Association of State 

Credit Union Supervisors); representatives of industry associations, 

including the American Bankers Association, Credit Union National 

Association, Independent Community Bankers of America, and National 

Association of Federal Credit Unions; and academics to obtain their 

perspectives on industry changes.

To assess the Dodd-Frank Act’s impact on community banks and credit 

unions, we reviewed the act and related materials, including relevant 

congressional hearings; comment letters on proposed rules; and studies 

and analyses prepared by federal and state regulators, industry 

associations, law firms, and academics. We used Call Report and other 

data compiled by SNL Financial to assess the extent to which community 

banks and credit unions may be subject to or otherwise impacted by 

various Dodd-Frank Act provisions. We reviewed the SNL Financial data 

and found the data to be sufficiently reliable for our purposes. To help 

identify Dodd-Frank Act provisions applicable to community banks and 

credit unions and assess their impact on those institutions, we 

interviewed the federal agencies, state regulatory and industry 

associations, and others identified above, and CFPB. We discussed 

public comments that some regulators received about proposed rules, but 

regulators generally do not disclose how they will respond to such 

comments until after the rules are finalized. In addition, based on 

demographic factors, we interviewed four state banking and credit union 

associations, and we randomly selected and interviewed 12 community 

banks and credit unions to obtain information on the Dodd-Frank Act’s 

provisions. Our interviews with this small sample of institutions provided 

further insights on the expected impact of the Dodd-Frank Act, but the 

responses are not generalizable to the population of community banks 

and credit unions. Although we analyzed the impact of a number of 

specific Dodd-Frank Act provisions on community banks and credit 

unions, assessing the extent to which these provisions or their related 

regulations should apply to such institutions was beyond the scope of our 

work. Appendix I contains additional information on our scope and 

methodology.

We conducted this performance audit between February and September 

2012, in accordance with generally accepted government auditing 
 

Page 4 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

In the banking industry, the specific regulatory configuration for a banking 

institution depends on the type of charter the institution chooses. 

Depository institution charter types include:

• commercial banks, which originally focused on the banking needs of 

businesses but over time have broadened their services;

• thrifts, which include savings banks, savings associations, and 

savings and loans, and were originally created to serve the needs—

particularly the mortgage needs—of those not typically served by 

commercial banks; and

• credit unions, which are member-owned cooperatives run by memberelected boards with an historical emphasis on serving people of 

modest means.

These charters may be obtained at the state or federal level. State 

regulators charter institutions and participate in their oversight, but all 

institutions that offer federal deposit insurance have a prudential 

regulator. The prudential regulators—which generally may issue 

regulations for and take enforcement actions against industry participants 

within their jurisdiction—are identified in table 1.

Background 
 

Page 5 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Table 1: Prudential Regulators and Their Basic Functions

Agency Basic function

Office of the Comptroller of the Currency Charters and supervises national banks and federal thrifts

Board of Governors of the Federal 

Reserve System

Supervises state-chartered banks that opt to be members of the Federal Reserve System, 

bank holding companies, thrift holding companies, and the nondepository institution 

subsidiaries of those institutions

Federal Deposit Insurance Corporation Supervises FDIC-insured state-chartered banks that are not members of the Federal 

Reserve System, as well as federally insured state savings banks and thrifts; insures the 

deposits of all banks and thrifts that are approved for federal deposit insurance; and 

resolves all failed insured banks and thrifts and certain nonbank financial companies

National Credit Union Administration Charters and supervises federally chartered credit unions and insures savings in federal 

and most state-chartered credit unions

Source: GAO.

As shown in table 2, almost 7,400 (about 99 percent) of all banks had 

less than $10 billion in assets in 2011 and thus fell within our definition of 

a community bank. The majority of community banks have $250 million or 

less in total assets. Although community banks comprise the vast majority 

of all banks, they held in aggregate about 20 percent of the industry’s 

total assets (about $2.8 trillion) in 2011.

Table 2: Numbers of Banks by Asset Class, 2011

Asset size

Number of 

banks

Percentage of 

total banks

Community Banks

< $100 million 2,504 33%

$100 - $250 million 2,418 32

$250 million - $1 billion 1,907 25

$1- $10 billion 556 7 

Large Banks

> $10 billion 109 1 

Total 7,494 100%

Source: GAO analysis of SNL Financial data.

Note: Community banks can be defined based on a number of criteria, but for the purpose of this 

report, we use size (less than $10 billion in assets) as the sole criterion to distinguish community 

banks from their larger counterparts.

Similarly, table 3 shows that the vast majority of credit unions (over 99 

percent) had $10 billion or less in total assets in 2011. Furthermore, 

around 80 percent of the credit unions had $100 million or less in total 

assets.
 

Page 6 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Table 3: Numbers of Credit Unions by Asset Class, 2011

Asset size

Number of credit 

unions

Percentage of total 

credit unions

Small Credit Unions

< $5 million 1,676 24%

$5 - $20 million 1,936 27

$20 - $100 million 2,080 29

$100 million - $1 billion 1,219 17

$1- 10 billion 180 3 

Large Credit Unions

> $10 billion 3 0 

Total 7,094 100%

Source: GAO analysis of SNL Financial data.

Note: We use under $10 billion in total assets as our criteria for a small credit union, because the 

Dodd-Frank Act exempts small institutions from a number of its provisions based on that threshold. 

The Dodd-Frank Act made important and fundamental changes to the 

structure of the U.S. financial system to strengthen safeguards for 

consumers and investors and to provide regulators with better tools for 

limiting risk in the major financial institutions and the financial markets. 

According to the Financial Stability Oversight Council, the core elements 

of the act are designed to build a stronger, more resilient financial 

system—less vulnerable to crisis, more efficient in allocating financial 

resources, and less vulnerable to fraud and abuse.6

 

6

Financial Stability Oversight Council, Financial Stability Oversight Council 2011 Annual 

Report (Washington, D.C.: July 26, 2011).

Under the DoddFrank Act, federal financial regulatory agencies are directed or have the 

authority to issue hundreds of regulations to implement the act’s reforms. 

The Dodd-Frank Act directs agencies to adopt regulations to implement 

the act’s provisions and, in some cases, gives the agencies little or no 

discretion in deciding how to implement the provisions. However, other 

rule-making provisions in the act are discretionary in nature, stating that 

(1) certain agencies may issue rules to implement particular provisions or 

that the agencies may issue regulations that they decide are “necessary 

and appropriate,” or (2) agencies must issue regulations to implement 

particular provisions but have some level of discretion as to the substance 

of the regulations. As a result, the agencies may decide to promulgate 
 

Page 7 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

rules for all, some, or none of the provisions, and often have broad 

discretion to decide what these rules will contain. Many of the provisions 

in the Dodd-Frank Act target the largest and most complex financial 

institutions, and regulators have noted that much of the act is not meant 

to apply to community banks. As such, the act directs regulators in a 

number of areas to consider whether to exempt small banks and credit 

unions. However, the act is comprehensive and far-reaching and will 

impact smaller institutions, specifically those that undertake activities 

thought to be precipitating factors in the 2007 through 2009 financial 

crisis. 

The number of community banks and credit unions has declined in recent 

decades, as smaller institutions have expanded, merged with, or been 

purchased by larger institutions. The trend of consolidation in banks and 

credit unions has been facilitated by statutory and regulatory changes and 

may have resulted, in part, from advantages in efficiency at larger 

institutions. However, community banks and credit unions still play an 

important role in the economy. Community banks and credit unions 

allocate more of their lending to small businesses and rural areas than 

large banks, which research suggests is due to their focus on 

relationship-based lending.

The number of community banks and credit unions has continued to 

decline significantly since at least the mid-1980s. According to FDIC 

research presented in 2012, the number of banks with less than $10 

billion in assets declined from 17,997 to 7,551, or by about 58 percent, 

between 1985 and 2010.7

 

7

Richard Brown, Chief Economist, FDIC, “Community Banking by the Numbers” (paper

presented at FDIC’s Future of Community Banking Conference, Feb. 16, 2012). FDIC 

plans to issue additional research on the community banking sector by the end of 2012.

Similarly, according to NCUA annual reports, 

the number of federally insured credit unions declined from 15,045 to 

7,339, or by about 51 percent, between 1985 and 2010. Despite the 

decline in the number of credit unions, our analysis of Census data found 

that membership in credit unions doubled over the same period. Our 

analysis of SNL Financial data shows that the number of community 

Community Banks 

and Credit Unions 

Have Declined in 

Number but Remain 

Important for Small 

Businesses and 

Agriculture 

Changes in Regulation and 

Other Factors Have Led to 

the Consolidation of Many 

Community Banks and 

Credit Unions
 

Page 8 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

banks and credit unions declined further in 2011, to 7,385 and 7,094, 

respectively.8

The decline in the number of community banks and credit unions has 

resulted largely from consolidations, in which two or more institutions 

generally merge into one larger institution. In their 2012 research, FDIC 

staff found that of the banks that exited the market between 1985 and 

2010, 16 percent failed but 80 percent merged with another financial 

institution or consolidated within a single holding company. FDIC staff 

also found that the smallest banks (those with less than $100 million in 

assets) experienced the largest decline in number, decreasing by 81 

percent. Consistent with a pattern of consolidation and expansion, the 

number of midsize banks (those with $250 million to $1 billion in assets) 

and large banks (those with over $10 billion in assets) increased by 47 

percent and 197 percent, respectively.

Two key statutory and regulatory changes have facilitated consolidation 

by removing regulatory barriers to geographic and membership 

expansion by banks and credit unions, respectively. First, the Riegle-Neal 

Interstate Banking and Branching Efficiency Act of 1994 authorized 

interstate mergers between banks starting in June 1997, regardless of 

whether the transaction would be prohibited by state law.9 Previously, 

most banks that wanted to operate across state lines had to establish a 

bank holding company and, with certain restrictions, acquire or charter a 

bank in each state in which they wanted to operate. With the advent of 

interstate branching, banks that previously were not permitted to expand 

across state lines could do so by acquiring existing banks, and some 

multistate bank holding companies could consolidate their operations into 

a single bank with multistate branches.10

 

8

For this objective, our analysis of SNL Financial data includes commercial banks, savings 

banks, savings institutions, and credit unions.

Second, after the passage of the 

Credit Union Membership Access Act in 1998, NCUA revised its 

regulations to make it easier for federal credit unions to qualify for 

9

Pub. L. No. 103-328, 108 Stat. 2338 (1994).

10Section 613 of the Dodd-Frank Act further reduced restrictions on interstate branching. 

Before the passage of the Dodd-Frank Act, states could opt not to allow national banks 

and out-of-state banks to open new branches. The Dodd-Frank Act allows national and 

out-of-state banks to open branches in any state, only restricted by the laws that apply to 

in-state banks. 

Changes in Regulation
 

Page 9 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

community charters that allowed people to qualify for membership in a 

credit union based on their geographic location (e.g., such as a county) 

rather than based on their employer or affiliation in an organization.11 As a 

result, community-chartered credit unions were able to expand, according 

to one expert we interviewed, by consolidating with other local credit 

unions, whose members resided in their geographic area. As we 

previously reported, the total number of federally chartered credit unions 

declined from 2000 through 2005, but the number of federal communitychartered credit unions more than doubled.12

Another factor that may have contributed to consolidation is economies of 

scale, which refer to how a bank’s or credit union’s scale of operations, or 

size, is related to its costs. Increasing returns to scale are created when 

an increase in size leads to a less than proportionate increase in cost 

and, therefore, a decline in average cost. Banks and credit unions that 

can take advantage of economies of scale can generate revenues at 

lower costs by increasing their size through expansion and consolidation. 

For example, a bank could reduce the average cost in its technology 

investment by increasing the volume of its goods and services, and 

thereby increase its profitability. Importantly, the existence of economies 

of scale in banking has been subject to debate. Studies using data from 

the 1980s failed to find scale economies beyond very small banks, but 

later studies have found scale economies in various sized banks.13 For 

example, a 2009 study covering all commercial banks from 1984 to 2006 

found that banks had increasing returns to scale throughout the 

distribution of banks, and the authors concluded that industry 

consolidation had been driven, at least in part, by scale economies.14

 

11Pub. L. No. 105-219, 112 Stat. 913 (1998). By federal statute, credit unions may not 

serve the general public.

Similarly, in a 2008 study of credit union consolidation presented at 

FDIC’s Mergers and Acquisitions of Financial Institutions Conference, 

12GAO, Credit Unions: Greater Transparency Needed on Who Credit Unions Serve and 

on Senior Executive Compensation Arrangements, GAO-07-29 (Washington, D.C.: Nov. 

30, 2006).

13See, for example, Loretta J. Mester, “Optimal Industrial Structure in Banking,” Handbook 

of Financial Intermediation, Arnoud Boot and Anjan Thakor, eds. (2008). 

14David C. Wheelock and Paul W. Wilson, “Do Large Banks have Lower Costs? New 

Estimates of Returns to Scale for U.S. Banks,” Working Paper 2009-054E, Federal 

Reserve Bank of St. Louis, Revised (May 2011).

Economies of Scale
 

Page 10 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

researchers found that smaller and less profitable credit unions were 

more likely to merge with other credit unions, and that the assets of a 

small credit union might be used more efficiently if the credit union were 

acquired and its assets were absorbed into a larger institution.15

The results of our analysis are consistent with research finding that larger 

banks generally are more profitable and efficient than smaller banks, 

which may reflect increasing returns to scale.16 For example, in a 2004 

study that compared performance between smaller and larger banks, 

FDIC staff found that smaller banks earned more on their assets than 

larger banks but that the earnings did not translate into a higher return on 

assets because smaller institutions also had higher costs.17 Our analysis 

of SNL Financial data also found that community banks and credit unions 

generally have lower rates of return on their assets.18 As shown in figure 

1, banks with more than $10 billion in assets had higher rates of return on 

their assets than community banks and credit unions from 2002 through 

2006.19

 

15John Goddard, Donal McKillop, and John Wilson, Consolidation in the US Credit Union 

Sector: Determinants of the Hazard of Acquisition (2008), accessed June 15, 2012, 

However, returns on assets at large banks declined sharply in 

2007 and turned negative in 2008 and 2009, coinciding with the financial 

crisis. During this period, returns on assets at community banks were 

higher than at large banks—declining but remaining positive. From 2010 

through 2011, returns on assets increased more quickly at large banks 

than at community banks and credit unions. Returns on equity at 

community banks, credit unions, and large banks have followed a trend 

www.fdic.gov/bank/analytical/cfr/Goddard_McKillop_Wilson.pdf. 

16NCUA officials noted that while banks and credit unions often collect the same data, 

comparisons between the two are limited because of differences in organizational 

structure and regulation. Specifically, credit unions operate as not-for-profit institutions and 

have limited fields of membership. 

17Tim Critchfield, Tyler Davis, Lee Davison, Heather Gratton, George Hanc, and Katherine 

Samolyk, “The Future of Banking in America, Community Banks: Their Recent Past, 

Current Performance, and Future Prospects,” FDIC Banking Review, vol. 16, no. 3 (2004).

18Return on assets and return on equity are both measures of bank profitability. Return on 

assets represents the income banks earned per dollar of loan or investment, while return 

on equity represents the income earned per dollar of capital. Differences between a 

bank’s return on equity and return on assets depend on the bank’s use of leverage, which 

can be measured by its capital ratio.

19We adjusted each bank’s and credit union’s total assets in each year for inflation to 2011 

dollars using the U.S. gross domestic product deflator.
 

Page 11 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

similar to that of returns on assets, with large bank earning higher returns 

on equity than small financial institutions from 2002 through 2006. 

Moreover, the gap in returns on equity between large and small financial 

institutions was greater than the gap in returns on assets before the 

financial crisis. In their 2004 study, FDIC staff also found that smaller 

institutions tend to have higher capital ratios than large banks, which also 

leads to lower returns on equity at a given level of earnings.20

Figure 1: Return on Assets at Large Banks, Community Banks, and Credit Unions 

from 2002 through 2011

Our analysis also indicates that community banks and credit unions have 

generated revenues at higher average costs than large banks since 

 

20For a given return on assets, lower capital ratios imply higher returns on equity because 

leverage magnifies returns on equity.
 

Page 12 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

2002.21 As of the end of 2011, large banks earned $1.71 per dollar of 

operating costs, while community banks earned $1.27 and credit unions 

earned $1.09. We also found that larger community banks and credit 

unions were more efficient than smaller institutions by this measure, 

suggesting that those institutions may have benefited from some 

economies of scale. As shown in figure 2, the difference in efficiency 

between community banks and credit unions and large banks generally 

remained consistent between 2002 and 2010. However, recent declines 

in revenue per dollar of overhead cost at large banks, along with gains in 

efficiency at community banks, decreased the difference in 2011. 

Although community banks with less than $100 million in assets were the 

least efficient in each year between 2002 and 2011, they (unlike the other 

banks) experienced an overall increase in their efficiency over the period. 

These measures of efficiency and profitability also can be influenced by 

other factors outside of economies of scale, such as increased 

competition. In April 2011, an OCC official testified that declines in net 

interest margins have played a major role in decreasing community bank 

profits.22

 

21Operating expenses as a percentage of operating revenues is a standard measure of 

bank efficiency in the literature. For clarity, we have provided the inverse of this measure, 

operating revenues per dollar of operating costs, so that a higher number indicates greater 

efficiency. 

22The State of Community Banking: Opportunities and Challenges, Before the Senate 

Committee on Banking, Housing, and Urban Affairs, 112th Cong. (2011) (statement of 

Jennifer Kelly, Senior Deputy Comptroller for Midsize and Community Bank Supervision, 

OCC). 
 

Page 13 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Figure 2: Efficiency at Large Banks, Community Banks, and Credit Unions from 

2002 through 2011

Some research suggests that one area in which large banks are able to 

take advantage of economies of scale is regulatory compliance, which 

contributes to their advantage in terms of operational efficiency. Federal 

regulators and state regulatory association and industry officials that we 

interviewed stated that regulatory compliance costs are not regularly 

tracked in Call Reports, and these costs have not been studied recently in 

the research literature. Thus, information on economies of scale in this 

area is limited. However, in a 1998 study, Federal Reserve staff reviewed 

statistical studies that empirically examined possible economies of scale 

in regulatory compliance at banks, noting that “if regulatory costs exhibit 

economies of scale, smaller banks would face higher average costs in 

complying with regulations than larger banks.”23

 

23Gregory Elliehausen, “

The studies found 

The Cost of Banking Regulation: A Review of the Evidence,” Staff 

Study 171, Federal Reserve (Washington, D.C.: April 1998).
 

Page 14 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

statistical evidence that indicated economies of scale in compliance costs 

for several regulations, which suggested that smaller banks, relative to 

larger banks, have a cost disadvantage that may discourage the entry of 

new firms into banking, may stimulate consolidation of the industry into 

larger banks, and may inhibit competition among institutions in markets 

for specific financial products. Additionally, several experts that we spoke 

with said that smaller institutions are disproportionately affected by 

increased regulation, because they are less able to absorb additional 

costs. 

Our analysis suggests that community banks have done more small 

business and agricultural lending as a percentage of their total lending 

than large banks over the past decade. To examine small business 

lending, we used business loans of $1 million or less as a proxy for small 

business loans at banks, though these loans were not necessarily made 

to small businesses. As shown in figure 3, our analysis of SNL Financial 

data found that about 18 percent of total lending at community banks was 

small business loans, compared to about 5 percent at larger banks in 

2011. Figure 3 also shows that while the difference between small 

business lending at community banks and large banks has remained 

fairly consistent over the past decade, small business lending as a 

percentage of total lending declined at both community banks and large 

banks by about 2 percent from 2002 through 2011. Despite allocating less 

of their lending to small business loans, banks with more than $10 billion 

in assets still made about 45 percent of all small business loans in 2011, 

while accounting for about 1 percent of the total number of banks.

Compared with Larger 

Banks, Community Banks 

and Credit Unions Allocate 

More of Their Lending to 

Small Businesses and 

Agriculture 
 

Page 15 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Figure 3: Small Business Lending at Large Banks and Community Banks from 2002 

through 2011

Community banks also have done significantly more agricultural lending 

as a percentage of total lending than large banks, with the smallest 

community banks allocating the highest percentage of lending to 

agricultural loans. Our analysis found that banks with less than $100 

million in assets had allocated about 14 percent of their lending to 

agricultural loans on average from 2002 through 2011, while banks with 

over $10 billion in assets had allocated less than 1 percent of their loans 

to agriculture on average. In a 2003 study, Federal Reserve staff also 

found that community banks played an important role in rural areas 

generally, where they represented a much higher percent of branches 

and deposits than in urban areas.24

 

24The Role of Community Banks in the U.S. Economy,” Federal Reserve Bank of Kansas 

City, Economic Review, Second Quarter (2003).

The study found that community 

banks represented nearly 58 percent of bank branches and 49 percent of 
 

Page 16 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

total deposits in rural areas, compared to 24 percent of branches and 

around 14 percent of deposits in urban areas.

Some credit unions also make small business and agricultural loans, but 

differences in regulation and structure make comparisons to banks 

difficult. We found that small business lending at credit unions with less 

than $10 billion in assets increased from about 2 percent to about 7 

percent of their total lending from 2002 through 2011.25 A recent study 

conducted on behalf of SBA found that credit union lending may have 

offset some of the decrease in small business lending at banks.26 We 

recently reported that such loans can be risky for credit unions and have 

contributed to the failure of a number of credit unions.27 Specifically, we 

reported that our analysis of NCUA and its Office of Inspector General’s 

data indicated that member business loans contributed to 13 of the 85 

credit union failures from January 2008 to June 2011. The Credit Union 

Membership and Access Act of 1998 contains a provision that limits 

business lending by credit unions to the lesser of 12.25 percent of total 

assets or 175 percent of net worth.28

 

25We used business lending data compiled by SNL Financial as a proxy for small 

business lending for credit unions. Business lending at credit unions is referred to as 

member business lending because credit unions are owned by their depositors, or 

members, and credit unions may extend credit only to their members. One expert noted 

that nearly all member business lending is done to small businesses. 

 Experts and credit union officials told 

us that smaller credit unions may not be able to engage profitably in small 

business lending due in part to the lending cap. To engage in such 

lending, these officials told us a credit union has to develop business 

lending expertise and resources and may need to hire additional staff, but 

the cap may not allow them to make the volume of loans needed to cover 

these costs. Larger credit unions are able to make more loans under the 

cap and thus are better able to develop the necessary resources. Our 

analysis found that small business lending increased much more 

26James Wilcox, The Increasing Importance of Credit Unions in Small Business Lending, 

prepared for the SBA, Office of Advocacy, 2011.

27GAO, National Credit Union Administration: Earlier Actions Are Needed to Better 

Address Troubled Credit Unions, GAO-12-247 (Washington, D.C.: Jan. 4, 2012).

28Credit unions designated as low income are exempt from the 12.25 percent statutory 

cap on member business loans. A low-income credit union is one that serves 

predominantly low-income members as defined in NCUA regulations. A recent NCUA 

initiative streamlined the process for federal credit unions to receive a low-income 

designation.
 

Page 17 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

dramatically at credit unions with at least $100 million in assets from 2002 

through 2011. Figure 4 shows that small business lending at these large 

credit unions increased from about 2 percent of total loans in 2002 to 

nearly 8 percent in 2011. While most credit unions do little or no 

agricultural lending, some credit unions have been chartered specifically 

to provide agricultural credit, and industry officials told us that these 

institutions play key roles in their communities.

Figure 4: Credit Union Small Business Loans as a Percentage of All Loans from 

2002 through 2011

Research has indicated that community banks and credit unions have 

advantages over larger banks in providing small business loans and loans 

in rural areas because of their direct relationships with and knowledge of 

individual customers. The 2003 study by Federal Reserve staff found that 

community banks have focused on “relationship banking,” basing lending 

decisions on personal knowledge of their customers and an 

understanding of their local economies. The study contrasted this 

approach to that of large banks, which often rely on data, credit scoring, 
 

Page 18 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

and centralized decision making. FDIC staff noted that relationship 

lending gives community banks the ability to lend to borrowers without 

long credit histories, because it allows them to use nonstandard 

information to make profitable loans to customers who are seen as high 

risk by large banks. Experts we spoke with noted that small businesses 

often do not have audited financial statements and other data that may be 

used by large banks in credit scoring models. One expert stated that 

loans to small business and rural residents tend to have nonstandard 

terms and require knowledge of the personal or professional history of the 

business or person seeking the loan. As shown in figure 5, we found that 

loans make up a slightly greater proportion of their total assets, which 

suggests that community banks and credit unions may be more focused 

on traditional lending services than large banks.

Figure 5: Loans as a Percentage of Total Assets at Banks and Credit Unions from 

2002 through 2011
 

Page 19 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

The Dodd-Frank Act’s reforms are directed primarily at large, complex 

U.S. financial institutions, and the act exempts small institutions, including 

community banks and credit unions, from several of its provisions. 

However, federal regulators, state regulatory associations, and industry 

associations collectively identified provisions within 7 of the act’s 16 titles 

that they expect to impact community banks and credit unions. (See app. 

II for the Dodd-Frank Act provisions identified by the above entities.) We 

analyzed the impact of a number of these Dodd-Frank Act provisions and, 

in brief, found that:

• some provisions, including the depository insurance reforms and 

CFPB supervision of nonbank providers of financial services and 

products, have benefited or may benefit community banks and credit 

unions;

• certain of the act’s mortgage reforms are expected to impose 

additional costs on community banks and credit unions, but their 

impact depends on future rule makings;

• the act’s risk retention provision for securitizations is expected to 

initially have a limited impact on community banks and credit unions; 

and

• other provisions, including those covering proprietary trading, 

remittance transfers, and executive compensation, are expected to 

impose additional requirements on community banks and credit 

unions, but their impact depends partly on future rule makings.

Industry officials told us that determining which provisions will affect small 

institutions is difficult, because the impact may depend on how agencies 

implement certain provisions through their rules, and many of the rules 

needed to implement the act have not been finalized.29

 

29According to Davis Polk & Wardwell (a law firm that has been tracking the 

implementation of the Dodd-Frank Act), 119 of the 398 rulemakings required under the 

Dodd-Frank Act, about 30 percent, had been finalized as of July 2, 2012.

For the same 

reason, regulators and industry officials have noted that the full impact of 

the Dodd-Frank Act on community banks and credit unions is uncertain. 

Nonetheless, regulators and industry officials have noted that they expect 

that some of the act’s regulations will increase regulatory requirements on 

community banks and credit unions and disproportionately affect them 

Many Dodd-Frank Act 

Provisions May Affect 

Community Banks 

and Credit Unions, 

but the Full Extent of 

Their Impact Is 

Uncertain 
 

Page 20 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

relative to larger banks because of their size. Moreover, some industry 

officials have expressed concern that the reforms targeting only large 

banks eventually will be applied to small institutions in varying degrees, 

for example, through industry best practices. In our interviews with 

officials from community banks and credit unions, several told us that they 

may reduce certain business activity or exit certain lines of business as a 

result of the new regulations. However, some also have cited benefits of 

particular provisions for smaller institutions.

As recognized by federal regulators, industry officials, and others, the 

Dodd-Frank Act contains several provisions to help minimize certain 

regulatory requirements on small institutions. For example, the act 

includes provisions that generally exempt (1) small bank holding 

companies from certain leverage and risk-based capital requirements, (2) 

small banks and credit unions from supervision by CFPB, (3) small debit 

card issuers from the debit interchange fee standards, and (4) small 

financial institutions from disclosure and reporting requirements for 

incentive-based compensation arrangements.30

CFPB, FDIC, the Federal Reserve, OCC, and NCUA have undertaken 

various efforts to reach out to community banks and credit unions outside 

of the examination process, in part to understand challenges being raised 

for them by the Dodd-Frank Act. Examples of such outreach efforts 

include the following:

The Dodd-Frank Act also 

provides federal agencies with the authority to provide small institutions 

with relief from certain regulations. For example, the act and certain of the 

federal consumer financial laws provide CFPB with the authority to 

exempt covered persons or transactions from certain CFPB rules, and it 

directs the Commodity Futures Trading Commission (CFTC) and the 

Securities and Exchange Commission (SEC) to consider exempting small 

banks and credit unions from their swap clearing requirements.

• CFPB has created the Office of Small Business, Community Banks, 

and Credit Unions, to help it incorporate the perspectives of these 

institutions in its policy-making process, communicate relevant policy 

 

30These exemptions are based on specific asset thresholds, and the exemptions do not 

use the same asset threshold. For example, the exemption from CFPB supervision 

applies to banks and credit unions with $10 billion or less in assets, and the exemption 

from disclosure and reporting requirements for incentive-based compensation 

arrangements applies to financial institutions with less than $1 billion in assets.
 

Page 21 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

initiatives to them, and work with them to identify areas for regulatory 

streamlining. According to CFPB officials, CFPB has convened three 

small business panels in conjunction with SBA’s Chief Counsel for 

Advocacy and the Office of Management and Budget’s Office of 

Information and Regulatory Affairs.31

• FDIC has held roundtable discussions with community banks in each 

of its regions and a community bank conference. It is researching a 

variety of issues involving community banks and expects to issue its 

study by the end of 2012. In 2009, FDIC established the FDIC 

Advisory Committee on Community Banking to provide it with advice 

and guidance on policy issues affecting community banks, and the 

committee’s meetings have included discussions of the Dodd-Frank 

Act.

• In October 2010, the Federal Reserve formed the Community 

Depository Institutions Advisory Council to provide the agency with 

direct insight and information from community bankers about 

supervisory matters and other issues of interest to community banks. 

In a recent testimony, a Federal Reserve official noted that the agency 

expects these ongoing discussions to provide a useful and relevant 

forum for improving its understanding of the effect of legislation, 

regulation, and examination activities on small banking 

organizations.32

• OCC has conducted a variety of outreach activities, including Meet 

the Comptroller events, chief executive officer roundtables, and 

teleconferences on topical issues. In preparation for the transfer of 

federal savings associations to OCC supervision, OCC presented 

numerous programs for thrift executives around the country to provide 

information and perspective on OCC’s approach to supervision and 

regulation. OCC also has chartered advisory committees for federal 

 

31Section 1100G of the Dodd-Frank Act requires CFPB to convene panels to seek direct 

input from small businesses before proposing certain rules.

32The State of Community Banking: Opportunities and Challenges. Before the 

Subcommittee on Financial Institutions and Consumer Protection of the Committee on 

Banking, Housing, and Urban Affairs, U.S. Senate (2011) (statement of Maryann F. 

Hunter, Deputy Director of Division of Banking Supervision and Regulation, Board of 

Governors of the Federal Reserve System). 
 

Page 22 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

savings associations with mutual charters and minority-owned 

institutions similar to those OTS had chartered.

• NCUA officials told us that to assist credit unions in complying with the 

Dodd-Frank Act, they have posted articles on their website, conducted 

a webinar with the CFPB director, and issued letters to credit unions 

on any rule changes.

As presented below, we analyzed a number of the Dodd-Frank Act 

provisions that regulators, industry officials, and others expect to impact 

community banks and credit unions. While several of these provisions 

have been implemented through finalized rules, most have not. The 

impact of those provisions will depend, in part, on how they are 

implemented by federal agencies through their regulations. As the act’s 

impact on individual banks and credit unions will depend on their 

organizational form, mix of activities, or other factors, our analysis 

focused on assessing, where data were available, which of these 

institutions may be subject to the selected provisions. As part of our 

analysis, we also document industry and other views on the potential 

impact of the provisions and the status of regulations needed to 

implement the provisions. As noted above, assessing whether such 

provisions or their related regulations should apply to community banks 

and credit unions was beyond the scope of our work.

Some of the Dodd-Frank Act provisions that we analyzed have benefited 

or may benefit community banks or credit unions, such as by reducing 

costs. 

The Dodd-Frank Act’s depository and share insurance reforms have 

reduced costs for community banks and increased consumer confidence 

to the benefit of community banks and credit unions. Title III of the DoddFrank Act includes several provisions reforming the Deposit Insurance 

Fund (DIF) and National Credit Union Share Insurance Fund.33 For 

example, section 331 revised the method used to calculate DIF 

assessments.34

 

33DIF insures deposits at banks and the National Credit Union Share Insurance Fund

insures deposits, referred to as shares, at credit unions. 

Section 335 permanently increased the standard deposit 

34DIF assessments are insurance assessments collected from its member depository 

institutions. 

Some Provisions Have 

Reduced Costs or Provided 

Other Benefits

Depository and Share 

Insurance Reforms
 

Page 23 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

and share insurance coverage amount from $100,000 to $250,000. 

Section 343 provided temporary unlimited deposit and share insurance 

coverage for non-interest-bearing transaction accounts, such as 

consumer checking accounts.

Section 331 required FDIC to redefine the DIF assessment base, 

generally basing it on average consolidated total assets rather than 

domestic deposits, on which it was previously based. According to FDIC, 

the change in the assessment base shifted some of the overall 

assessment burden from community banks to the largest institutions, 

which rely less on domestic deposits for their funding than smaller 

institutions, but without affecting the overall amount of assessment 

revenue collected. As shown in table 4, after the rule became effective on 

April 1, 2011, DIF assessments for community banks (those with less 

than $10 billion in assets) decreased in aggregate by $342 million, (33 

percent) from the first to second quarter of 2011.35 According to FDIC, 

this rule has resulted in a sharing of the DIF assessment burden that 

better reflects each group’s share of industry assets. Officials from 

industry associations told us that they viewed this change as positive for 

community banks overall. In addition, officials from the two community 

bank state associations told us that assessments likely have decreased 

for their member institutions. Also, officials from five community banks 

told us that their assessments have either decreased or stayed about the 

same, but officials from three community banks told us that that their 

assessments had increased (one of these banks has between $1 billion 

to $10 billion in assets).

 

3576 Fed. Reg. 10,672 (Feb. 25, 2011). For more information on this rule, see GAO, 

Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analyses and 

Coordination, GAO-12-151 (Washington, D.C.: Nov. 10, 2011).
 

Page 24 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Table 4: Change in Quarterly Insurance Assessments Primarily Due to the Change 

in the Assessment Base 

Dollars in millions

Asset size group

First quarter

2011 assessments

Second quarter 

2011 assessments

Percentage 

change

Less than $100 million $51 $33 -36

$100 million - $250 million 147 96 -35

$250 million - $500 million 160 104 -35

$500 million - $1 billion 180 123 -32

$1 billion - $10 billion 499 340 -32

Total of less than $10 

billion $1,037 $695 -33

Over $10 billion 2,423 2,836 17

Total of asset size groups $3,460 $3,531 2 

Source: FDIC.

Note: According to FDIC officials, at the same time the new assessment base was implemented, 

other assessment changes also were implemented that had a minor effect on the quarterly change in 

total assessments and the distribution of assets (e.g., a new large bank pricing scorecard and 

changes in bank ratings, assets, and capital during the quarter).

Section 335 made permanent the temporary increase of the maximum 

deposit and share insurance amounts from $100,000 to $250,000. 

Beginning in October 2008, the deposit and share insurance coverage 

had been increased temporarily to $250,000 to help consumers maintain 

confidence in the banking system and the marketplace.36 These 

increases were made permanent and effective in August and September 

2010, respectively.37

 

36The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 

3765, temporarily increased the deposit and share insurance amount from $100,000 to 

$250,000 from October 3, 2008, through December 31, 2009. The Helping Families Save 

Their Homes Act of 2009, Pub. L. No. 111-22, 123 Stat. 1632, extended the temporary 

increase through December 31, 2013, and the Dodd-Frank Act made the increase 

permanent. 

According to FDIC, the higher insurance coverage 

level should help community banks attract and retain core deposits. 

Industry associations and officials from the community banks and credit 

unions we spoke with generally viewed the increase in insurance 

coverage as beneficial to community banks and credit unions.

3775 Fed. Reg. 53,841 (Sept. 2, 2010); 75 Fed. Reg. 49,363 (Aug. 13, 2010).
 

Page 25 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Section 343 provided temporary unlimited deposit and share insurance 

coverage for non-interest-bearing transaction accounts from December 

31, 2010, through December 31, 2012.38 According to FDIC, the 10.7 

percent increase in insured deposits during 2011 was primarily 

attributable to growth in non-interest-bearing transaction account 

balances receiving temporary coverage.39

Section 989G of the Dodd-Frank Act eliminates an audit requirement for a 

number of small community banks and bank holding companies that are 

However, according to an 

NCUA official, non-interest-bearing transaction accounts typically are held 

by businesses for payroll and accounts payable and, therefore, are less 

common at credit unions than at banks. Although this insurance program 

was designed to be a temporary response to financial instability, several 

industry associations representing banks are advocating for this provision 

to be extended. In addition, officials from two state associations 

representing community banks we spoke with said they expect the 

termination of the coverage to have a negative or very negative impact on 

their member institutions. In contrast, officials from the two state 

associations representing credit unions said they expect the termination 

would have no impact. But the responses from the individual community 

banks and credit unions were more mixed. Officials from five of the eight 

community banks and two of the four credit unions we spoke with said 

that they expect the termination of the coverage to have a negative or 

very negative impact on their institution. Officials from the other three 

community banks and two credit unions said that the termination would 

have no impact on their institution or it was too soon to determine the 

impact.

 

38Temporary unlimited insurance coverage for non-interest-bearing transaction accounts 

initially was provided for federally insured banks through FDIC’s Transaction Account 

Guarantee program. The temporary unlimited insurance coverage for non-interest-bearing 

transaction accounts differs from the Transaction Account Guarantee program in that it 

applies to all insured depository institutions with non-interest-bearing accounts, it does not 

cover low interest negotiable order of withdrawal accounts, and FDIC does not charge a 

separate assessment for the insurance of non-interest-bearing transaction accounts. The 

Transaction Account Guarantee program expired on December 31, 2010, and section 343 

for federally insured banks became effective on that same date. Section 343 was effective 

for federally insured credit unions on July 21, 2010. 75 Fed. Reg. 69,577 (Nov. 15, 2010). 

39FDIC, FDIC Quarterly, vol. 6, no. 1 (2012).

Exemption from Section 404(b) 

of the Sarbanes-Oxley Act
 

Page 26 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

public companies.40 In response to numerous corporate failures arising 

from corporate mismanagement and fraud, Congress passed the 

Sarbanes-Oxley Act of 2002 to help protect investors, in part by improving 

the accuracy, reliability, and transparency of corporate financial reporting 

and disclosures.41 Specifically, section 404(a) of the Sarbanes-Oxley Act 

requires a public company’s management to assess and report on the 

effectiveness of its internal controls over financial reporting. In turn, 

section 404(b) requires an independent auditor to attest to and report on 

management’s assessment. Under SEC rules, non-accelerated filers 

(generally defined as public companies with a public float under $75 

million) have been required to comply with section 404(a) for fiscal years 

ending on or after December 15, 2007.42

Section 989G of the Dodd-Frank Act amended the Sarbanes-Oxley Act to 

exempt non-accelerated filers from section 404(b).

However, before the passage of 

the Dodd-Frank Act, these filers were not required to comply with section 

404(b) for fiscal years ending before June 15, 2010. SEC had provided 

such issuers with several extensions to the compliance dates in response 

to concerns about compliance costs and management’s preparedness.

43

 

40Credit unions are member-owned cooperatives, rather than public companies, and so 

are not subject to section 404 of the Sarbanes-Oxley Act of 2002, which was amended by 

section 989G of the Dodd-Frank Act.

Using SNL Financial 

data, we found that around 630 publicly traded financial institutions, 

including community banks and bank holding companies, identified 

41Pub. L. No. 107-204, 116 Stat. 745 (2002).

42Although the term non-accelerated filer is not defined in SEC rules, it refers to a 

reporting company that does not meet the definition of either an “accelerated filer” or a 

“large accelerated filer” under Exchange Act Rule 12b–2. The public float is the aggregate 

market value of the issuer’s outstanding voting and nonvoting common equity held by 

nonaffiliates of the issuer. An accelerated filer generally is a public company that, among 

other things, had at least $75 million but less than $700 million in public float as of the last 

business day of its most recently completed second fiscal quarter, and filed at least one 

annual report with SEC. A large accelerated filer generally is a public company that, 

among other things, had a public float of $700 million or more as of the last business day 

of its most recently completed second fiscal quarter and filed at least one annual report 

with SEC. 

43SEC amended its rules and forms to conform them to section 404(c) of the SarbanesOxley Act of 2002, as added by section 989G of the Dodd-Frank Act. Section 404(c) 

provides that section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any 

audit report prepared for an issuer that is neither an accelerated filer nor a large 

accelerated filer as defined in Rule 12b–2 under the Securities Exchange Act of 1934. See

75 Fed. Reg. 57,385 (Sept. 21, 2010).
 

Page 27 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

themselves as non-accelerated filers.44 These financial institutions may 

qualify for the exemption and not have to incur the audit-related costs to 

comply with section 404(b). In a 2009 survey, which included 99 public 

companies with a public float under $75 million, SEC’s Office of Economic 

Analysis found that these companies had incurred a median (average) 

annual cost of $157,500 ($259,004) to comply with section 404(b) 

following reforms SEC made in 2007.45 In our prior work, we found that 

smaller public companies faced disproportionately higher costs (as a 

percentage of revenues) in complying with section 404.46

Unlike large banks, community banks and credit unions generally have 

not, on average, experienced a significant decline in their debit 

interchange fees as a result of the Federal Reserve’s implementation of 

section 1075 of the Dodd-Frank Act. Debit cards can be used to make 

noncash purchases at merchants. When a consumer uses a debit card to 

make a purchase, the merchant does not receive the full purchase 

amount. Part of the amount (called the merchant discount fee) is 

deducted and distributed among the merchant’s bank, debit card issuer, 

and payment card network processing the transaction. Historically, the 

majority of the merchant discount fee was paid from the merchant’s bank 

to the debit card issuer in the form of an interchange fee. Debit card 

interchange fees are established by card networks and ultimately paid by 

merchants to debit card issuers for each electronic debit transaction.

 

44We also found other banks and bank holding companies that identified themselves as 

non-accelerated filers but were traded on the Over-the-Counter Pink market. We excluded 

these companies, because the data did not allow us to determine whether they were 

subject to reporting requirements under the federal securities laws.

45SEC, Office of Economic Analysis, Study of the Sarbanes-Oxley Act of 2002 Section 404 

Internal Control over Financial Reporting Requirements (Washington, D.C.: September 

2009). The study noted that these companies voluntarily complied or were required to 

comply in the past as accelerated filers and must continue to do so because their float had 

not since dropped below $50 million. The study noted that to the extent that these factors 

affect companies’ experience with section 404(b) compliance, care should be taken when 

extrapolating the results to non-accelerated filers that had yet to comply.

46See GAO, Sarbanes-Oxley Act: Consideration of Key Principles Needed in Addressing 

Implementation for Smaller Public Companies, GAO-06-361 (Washington, D.C.: Apr. 13, 

2006). In addition, pursuant to section 989I of the Dodd-Frank Act, GAO is required to 

conduct a study on the impact of the section 404(b) amendments under the Dodd-Frank 

Act on smaller issuers and to submit a report not later than 3 years after the date of 

enactment of the act.

Debit Interchange Fee 

Provision
 

Page 28 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

In July 2011, the Federal Reserve adopted Regulation II (Debit Card 

Interchange Fees and Routing) to implement section 1075 of the DoddFrank Act.47 Regulation II establishes standards for assessing whether 

debit card interchange fees received by issuers are reasonable and 

proportional to the costs incurred by issuers for electronic debit 

transactions. The rule sets a cap on the maximum permissible 

interchange fee that an issuer may receive for an electronic debit 

transaction at $0.21 per transaction, plus 5 basis points multiplied by the 

transaction’s value.48 The fee cap became effective on October 1, 2011. 

However, the rule exempts from the fee cap issuers that have, together 

with their affiliates, less than $10 billion in assets, and transactions made

using debit cards issued pursuant to government-administered payment 

programs or certain reloadable prepaid cards. In addition, Regulation II 

prohibits issuers and card networks from restricting the number of 

networks over which electronic debit transactions may be processed to 

less than two unaffiliated networks.49

Initial data collected by the Federal Reserve indicate that card networks 

largely have adopted a two-tiered interchange fee structure after the 

implementation of Regulation II, to the benefit of exempt issuers. 

According to the Federal Reserve, over 14,300 banks, credit unions, 

savings and loans, and savings banks qualified for an exemption from the 

debit card interchange fee cap during 2011.

The rule further prohibits issuers 

and networks from inhibiting a merchant from directing the routing of an 

electronic debit transaction over any network allowed by the issuer.

50

 

4776 Fed. Reg. 43,394 (July 20, 2011).

Data collected by the 

Federal Reserve from 16 card networks show that all but 1 network 

provided a higher interchange fee, on average, to exempt issuers than 

nonexempt issuers after the rule took effect. The data also show that the 

average interchange fee received by exempt issuers declined by $0.02, 

or around 5 percent, after the rule took effect—declining from $0.45 over 

48An issuer also is allowed to receive an upward adjustment of 1 cent to its interchange 

transaction fee, if the issuer, among other things, develops, implements, and updates 

policies and procedures reasonably designed to identify and prevent fraudulent electronic 

debit transactions. See 76 Fed. Reg. 43,478 (July 20, 2011).

49The prohibition on network exclusivity, which applies to all issuers regardless of size, 

took effect on April 1, 2012, with respect to most types of debit cards.

50Institutions that qualified for the exemption during 2011 were those institutions that had, 

together with affiliates, assets of less than $10 billion as of December 31, 2010.
 

Page 29 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

the first three quarters of 2011 to $0.43 in the fourth quarter of 2011.51

During the same period, the interchange fee as a percentage of the 

average transaction value for exempt issuers declined from 1.16 percent 

to 1.10 percent.52 In comparison, the average interchange fee received by 

issuers subject to the fee cap (nonexempt issuers) declined from $0.50 to 

$0.24, or by 52 percent, between the two periods. Our analysis of SNL 

Financial data shows that interchange fee income received by around 

6,450 exempt banks increased, in aggregate, on a quarterly basis after 

the rule became effective, but the data do not allow us to determine why 

fee income increased, such as because of an increase in transaction 

volume. The aggregate interchange fee income reported quarterly by 

these banks from the second quarter of 2011 through the first quarter of 

2012 was about $532 million, $547 million, $575 million, and $585 million, 

respectively.53

Although Regulation II has had a limited impact on exempt issuers to 

date, concerns remain about the potential for their interchange fees or fee 

income to decline over the long term. For example, industry officials and 

others have noted that (1) some merchants may steer customers to 

lower-cost payment options, even if networks maintain a two-tiered fee 

structure, (2) the prohibition on network exclusivity and routing restrictions 

may lead networks to lower their interchange fees, in part to encourage 

merchants to route debit card transactions through their networks, or (3) 

economic forces may cause networks not to maintain a two-tiered fee 

structure that provides a meaningful differential between fees for exempt 

 

51The Federal Reserve collected data from 16 payment card networks. Eight networks 

reported a decline in their average interchange fee per transaction for exempt issuers—

ranging from $0.01 to $0.04—after the rule took effect. Three networks reported no 

change in their average interchange fee for exempt issuers. Five networks reported an 

increase in their fee for exempt issuers—ranging from $0.01 to $0.03—after the rule took 

effect.

52The interchange fee as a percentage of the average transaction value is calculated by 

dividing the total interchange fees by the value of settled purchase transactions.

53The totals include both debit and credit card interchange fee income reported by banks 

that were exempt from the debit interchange fee cap. Credit card interchange fees are not 

subject to the Regulation II limitations. The reporting of bank card and credit card 

interchange fees in Call Reports is required only if that amount exceeds $25,000 or 3 

percent of other noninterest income. As a result, not all banks report a value for this 

variable. In addition, savings institutions historically did not report interchange fee income 

in their Thrift Financial Reports. Finally, the totals exclude interchange fee income 

reported by credit unions. Although credit unions report their interchange fee income, they 

aggregate that income with other sources of operating income.
 

Page 30 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

and other issuers. Some merchants and others have noted that major 

card networks have adopted a two-tiered fee structure and have an 

incentive to maintain that structure to attract exempt issuers.54 According 

to Federal Reserve officials, the agency plans to collect data annually that 

analyze the rule’s impact on exempt issuer fees. It also plans to survey 

exempt issuers in 2012 to determine how much it cost them to comply 

with the network exclusivity prohibition and whether any merchants are 

refusing to accept their debit cards.

According to some regulators and industry officials, subjecting certain 

nonbank providers of financial services or products (nonbanks) to federal 

consumer protection laws and CFPB supervision may benefit community 

banks and credit unions by helping to level the regulatory playing field. 

Although community banks and small credit unions are not supervised by 

CFPB, they generally are subject to its regulations. CFPB’s 

implementation of the Dodd-Frank Act’s mortgage-related and other 

provisions are expected to impose additional requirements on community 

banks and credit unions. However, the impact of these regulations will 

depend on how CFPB implements such provisions and exercises its 

exemption authority. The Dodd-Frank Act established CFPB and 

authorized it to supervise certain nonbank financial companies and large 

banks and credit unions with over $10 billion in assets and their affiliates 

for consumer protection purposes. Before the Dodd-Frank Act, 

responsibility for administering and enforcing consumer financial laws for 

these entities was spread across several federal agencies. The act 

transferred supervisory and enforcement authority over a number of 

consumer financial institutions and services, as well as rule-making and 

 

54A number of merchant associations have brought a lawsuit against the Federal Reserve, 

alleging that it failed to follow the intent of Congress regarding the amount of an 

interchange fee that an issuer could charge or receive.

CFPB Provisions May Help 

Level the Regulatory 

Playing Field but also May 

Result in Additional 

Compliance Requirements
 

Page 31 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

enforcement authority (for those institutions it supervises) over many 

previously enacted consumer protection laws, to CFPB.55

To promote consistent enforcement of consumer protection laws, sections 

1024, 1053, and 1054 of the Dodd-Frank Act provided CFPB with 

authority to supervise, examine, and take enforcement action against 

nonbanks, such as payday lenders and mortgage lenders and servicers.56

Before the passage of the Dodd-Frank Act, there was no federal program 

to supervise nonbanks for compliance with consumer financial protection 

laws. The Federal Trade Commission had enforcement authority, but did 

not have the supervisory authority to regularly examine these entities or 

impose reporting requirements on them with respect to consumer 

financial protection law.

57

 

55Section 1021 of the Dodd-Frank Act established the following goals for CFPB: (1) ensure 

that consumers have timely and understandable information to make responsible 

decisions about financial transactions, (2) protect consumers from unfair, deceptive, or 

abusive acts or practices, and from discrimination, (3) reduce unwarranted regulatory 

burdens due to outdated, unnecessary, or unduly burdensome regulations, (4) promote 

fair competition by enforcing the federal consumer financial laws consistently, and (5) 

ensure that markets for consumer financial products and services operate transparently 

and efficiently to facilitate access and innovation.

Nonbanks were primarily supervised by state 

regulators, whose authority and level of supervision varied. Under the 

Dodd-Frank Act, CFPB is authorized to supervise, based on statutory 

56Section 1024 of the Dodd-Frank Act authorizes CFPB to supervise certain entities and 

individuals that engage in offering or providing a consumer financial product or service 

and their service providers that are not covered by sections 1025 or 1026 of the act. 

Specifically, section 1024 applies to those entities and individuals who offer or provide 

mortgage-related products or services and payday and private student loans as well as 

larger participants of other consumer financial service or product markets as defined by a 

CFPB rule, among others, plus their service providers. Section 1025 authorizes CFPB to 

supervise, with respect to consumer finance laws, large insured depository institutions and 

credit unions with more than $10 billion in total assets and all their affiliates (including 

subsidiaries), as well as service providers for such entities. Under section 1026, CFPB 

has the authority to require reports, as necessary, from banks and credit unions under $10 

billion, and CFPB, at its discretion, may include its examiners on a sampling basis in 

examinations conducted by their prudential regulator for these entities. Under sections 

1026 and 1061(c), CFPB has supervisory authority over a service provider to a substantial 

number of smaller depository institutions. 

57The Federal Trade Commission has enforcement authority over most nonbank entities 

for numerous consumer protection statutes, including, for example, the Truth in Lending 

Act, 15 U.S.C. §§ 1601-1666j and the privacy provisions of the Gramm-Leach Bliley Act, 

15 U.S.C. §§ 6801-6809. The Commission generally retains its enforcement authority 

under the Dodd-Frank Act, although in some instances its authority may be concurrent 

with CFPB’s enforcement authority. 

CFPB Supervision of Nonbanks
 

Page 32 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

factors that focus on risk to consumers, nonbanks engaged in the 

residential mortgage industry, private education lending, and payday 

lending. For other financial services or product markets, CFPB’s authority 

applies only to a “larger participant.”58 CFPB’s supervisory authority also 

covers nonbanks that it has reasonable cause to determine are engaging, 

or have engaged, in conduct that poses risks to consumers with regard to 

the offering or provision of consumer financial products or services.59 In 

January 2012, CFPB launched its nonbank supervision program, under 

which it examines such entities for, among other things, compliance with 

federal consumer financial laws.60 According to CFPB, nonbanks will be 

identified for examination based on risks to consumers, including 

consideration of the company’s asset size, volume of consumer financial 

transactions, extent of state oversight, and other relevant factors.61

Regulators and industry representatives expect CFPB supervision of 

nonbanks to benefit community banks and credit unions by leveling the 

regulatory playing field. For example, in 2011, an FDIC official testified 

that CFPB will likely reduce the unfair competitive advantage that 

nonbanks have long enjoyed as under-regulated—and often unregulated 

and unsupervised—financial services providers.62

 

58In February 2012, CFPB issued a proposed rule defining a larger participant in certain 

consumer product and finance markets. 77 Fed. Reg. 9,592 (Feb. 17, 2012). In its 

proposal, CFPB proposed to define larger participants in the markets for consumer debt 

collection and consumer reporting. CFPB intended that this proposal and subsequent 

initial rule would be followed by a series of rule makings covering additional markets for 

consumer financial products and services. In July 2012, CFPB issued a final rule to define 

larger participants in a consumer reporting market as a nonbank-covered person with 

more than $7 million in annual receipts resulting from consumer reporting activities. 77 

Fed. Reg. 42,874 (July 20, 2012). 

Industry officials have 

59In May 2012, CFPB proposed a rule establishing the procedures by which it may subject 

a nonbank to this authority. 77 Fed. Reg. 31,226 (May 25, 2012).

60CFPB’s supervision program has two parts that operate under common procedures and 

shared staff. The large bank supervision program began operations in July 2011 and 

focuses on compliance at banks, thrifts, and credit unions with assets over $10 billion, 

their affiliates, and certain service providers.

61Implementing Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic 

Risk. Before the Senate Banking Committee, 112th Cong. (2012) (statement of Richard 

Cordray, Director, CFPB).

62The State of Community Banking: Opportunities and Challenges. Before the 

Subcommittee on Financial Institutions and Consumer Protection of the Committee on 

Banking, Housing, and Urban Affairs, U.S. Senate (2011) (statement of Sandra L. 

Thompson, Director of Risk Management Supervision, FDIC).
 

Page 33 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

testified that community banks and credit unions did not engage in 

abusive lending practices and were not the cause of the financial crisis, 

and urged CFPB to focus its efforts on regulating nonbanks as many of 

the problems that led to the financial crisis began outside the regulated 

banking industry.63

The Dodd-Frank Act grants broad rule-making authority to CFPB, but 

requires it to coordinate with other federal agencies to ensure consistency 

in its regulation of consumer products and services. Although CFPB does 

not directly supervise community banks and small credit unions, its 

regulations generally apply to all banks and credit unions (and most 

nonbanks). According to CFPB, its rule-making activities have focused on 

two main areas: implementing protections required by the Dodd-Frank Act 

and streamlining inherited regulations. Pursuant to the Dodd-Frank Act, 

CFPB has proposed or finalized various regulations involving the 

mortgage market and international money transfers (discussed below). In 

December 2011, CFPB issued a notice requesting public comment on 

how to streamline existing regulations implementing federal consumer 

financial laws.

Officials from half of the 16 state associations, 

community banks, and credit unions we interviewed told us that they 

expect CFPB supervision of nonbanks to have a positive impact. Officials 

from three of these entities expect CFPB supervision to have no impact, 

three thought it was too soon to tell, and two thought it could have a 

negative impact.

64

Section 1022 of the Dodd-Frank Act permits CFPB to exempt any class of 

product or institution, including small institutions, from its regulations 

issued under Title X of the act. In issuing any such exemption, CFPB 

must take into account several factors, including the existing provisions of 

law applicable to the consumer financial product or service and the extent 

to which such provisions provide consumers with adequate protections. 

Furthermore, other federal consumer financial laws provided CFPB with 

 

63The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses, Before 

the House Committee on Financial Services, 112th Cong. (2011) (statements of Albert 

Kelly, Chairman and Chief Executive Officer, Spiritbank on Behalf of the American 

Bankers Association; James D. MacPhee, Chief Executive Officer, Kalamazoo County 

State Bank, on Behalf of the Independent Community Bankers of America; and John P. 

Buckley, Jr. President and Chief Executive Officer, Gerber Federal Credit Union, on behalf 

of the National Association of Federal Credit Unions).

6476 Fed. Reg. 75,825 (Dec. 5, 2011).

CFPB Rule Making
 

Page 34 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

varying degrees of exemption authority, generally with respect to classes 

of transactions where certain conditions are met. In a recent testimony, 

the CFPB Director said that when it is appropriate to treat smaller 

institutions differently from larger institutions, CFPB will consider doing 

so.65 Similarly, CFPB staff told us that they will need to determine how 

much regulatory relief the agency will provide small institutions on a ruleby-rule basis.66 For example, in early July 2012, pursuant to sections 

1032(f), 1100A, and 1098 of the Dodd-Frank Act, CFPB proposed a rule 

to integrate mortgage disclosures required by two different mortgagelending-related statutes into one form.67 In the proposed rule, CFPB is 

considering exempting small entities (including some banks and credit

unions with $10 billion or less in assets) from electronic data retention 

requirements to reduce their burden. In addition, CFPB is seeking 

comment on how much time industry needs to make any changes 

required in implementing the rule and whether small entities should have 

more time.68

While many consumer protection and mortgage reforms are not yet 

finalized, CFPB staff told us that they are in the process of proposing 

several additional regulations to provide guidance to the mortgage 

industry in implementing new reforms under the Dodd-Frank Act. As 

mandated by the statute, most of these rules are due in final form by 

January 21, 2013. However, industry representatives and others have 

expressed concern about the potential impact of CFPB regulations on 

community banks and credit unions. In congressional testimony and our 

interviews, industry representatives have said that they are hopeful that 

 

65Implementing Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic 

Risk, Before the Senate Banking Committee, 112th Cong. (2012) (statement of Richard 

Cordray, Director, CFPB).

66The Dodd-Frank Act also requires CFPB to comply with the Small Business Regulatory 

Enforcement Fairness Act panel process. This act requires CFPB to convene a Small 

Business Review Panel before proposing a rule that may have a significant economic 

impact on a substantial number of small entities. See Pub. L. No. 104-121, tit. II, 110 Stat. 

847, 857 (1996) (as amended by Pub. L. No. 110-28, § 8302 (2007)).

6777 Fed. Reg. 51,116 (Aug. 23, 2012).

68Pursuant to the Small Business Regulatory Enforcement Fairness Act, CFPB must 

convene a panel to obtain feedback from small business representatives before proposing 

rules that may affect them. Throughout the proposed rule to integrate mortgage 

disclosures, CFPB discussed how it is addressing issues considered by this panel, 

including the timing of implementation.
 

Page 35 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

CFPB will be able to consolidate and simplify rules for all financial 

institutions. They also have noted that CFPB has conducted outreach 

efforts to obtain input on CFPB’s activities. However, industry 

representatives expressed concern that the numerous new regulations 

from CFPB will impose additional regulatory burden and compliance costs 

on small institutions, potentially causing them to exit certain lines of 

business. Specifically, they cited concerns about the additional time, 

resources, and effort it would take their institutions to address new 

regulatory requirements. In particular, they were concerned about having 

to comply with numerous regulations issued around the same time by 

CFPB. Industry representatives also were concerned that the 

standardization of processes through CFPB regulations could reduce the 

ability of community banks and credit unions to offer differentiated 

products to better serve their communities. In congressional testimony 

and our interviews, community bank and credit union associations and 

representatives have emphasized that they believe these entities have a 

long history of serving customers fairly. Some commented that it is their 

opinion that CFPB regulations should not apply to them as they did not 

engage in the types of abuses that prompted the passage of the DoddFrank Act. Credit union representatives added that credit unions are 

owned by their members and, thus, have a strong incentive to treat their 

consumers well.

The Dodd-Frank Act’s mortgage reform provisions are expected to 

impose additional costs on a large percentage of community banks and 

credit unions. However, the full cost to these entities will depend on the 

extent to which CFPB (and other agencies where appropriate) exercises 

its authority, where available, to exempt small institutions from any of its 

regulations and how it implements specific provisions that provide more 

limited relief to small institutions, particularly those operating in rural or 

underserved communities. The act’s mortgage reforms include (1) 

additional origination and servicing requirements; (2) minimum standards 

for mortgage loans (including determining a borrower’s ability to repay the 

loan); (3) limits on charges for mortgage prepayments; (4) expanding the 

definition of “high-cost mortgages” and protections that apply to such 

loans; (5) new disclosure requirements; (6) establishing various appraisal 

standards; and (7) requiring additional data elements to be reported 

under the Home Mortgage Disclosure Act (HMDA) reporting 

Mortgage Reforms Are 

Expected to Impose 

Additional Costs, but Their

Impact Depends on Future 

Rule Makings
 

Page 36 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

requirements.69 The Dodd-Frank Act’s mortgage reforms generally seek 

to address substandard residential mortgage lending practices that 

contributed to spikes in foreclosures and the 2007 through 2009 financial 

crisis. A key challenge in implementing these reforms is balancing the 

goals of protecting consumers from abuse and maintaining broad access 

to credit. Authority for implementing these reforms generally was 

transferred from the Federal Reserve to CFPB in July 2011.70

The Dodd-Frank Act’s mortgage reforms could apply to and impact the 

vast majority of community banks and credit unions, given their 

involvement in mortgage lending. On the basis of our analysis of SNL 

Financial data, over 97 percent of community banks and over 70 percent 

of credit unions held residential mortgage loans in 2011. Over the past 5 

years, community banks within different asset-sized categories generally 

dedicated about 30 percent of their lending portfolios to mortgage lending. 

However, mortgage lending by credit unions was more varied by asset 

size. As a percentage of a credit union’s total lending portfolio in 2011, 

mortgage lending comprised, on average, over 50 percent for credit 

unions holding more than $100 million in assets, about 44 percent for 

those with $20 million to $100 million in assets, about 26 percent for 

CFPB has 

the rule-making authority for most of these regulations, and in other cases 

agencies are jointly responsible for rule making. While federal agencies 

have proposed a number of rules to implement the act’s mortgage 

reforms, most of the required rules have not been finalized.

 

69The Home Mortgage Disclosure Act of 1975 (HMDA), Pub. L. No. 94-200, 89 Stat. 1124, 

requires certain creditors to collect, disclose, and report data on the personal 

characteristics of mortgage borrowers and loan applicants (for example, their ethnicity, 

race, and gender), the type of loan or application (for example, if the loan is insured or 

guaranteed by a federal agency), and financial data such as the loan amount and 

borrowers’ incomes. Institutions that provide mortgage lending, have over $41 million in 

assets, and have a home office or branch office in a metropolitan statistical area must 

report HMDA data. The purposes in collecting these data are to aid in determining 

whether financial institutions are serving the housing needs of their communities, 

identifying areas where additional investment is needed, and identifying possible 

discriminatory lending patterns. 

70In July 2011, pursuant to the Dodd-Frank Act, rulemaking, supervision, and enforcement 

authority for consumer protection laws were generally transferred to CFPB. This includes 

responsibility for implementing the Truth in Lending Act (TILA) and the Home Ownership 

Equity Protection Act, which are among the primary federal laws governing consumer 

credit, including mortgage lending. TILA was intended to provide consumers with more 

information about the costs of credit, and the Home Ownership Equity Protection Act 

amended TILA to regulate and restrict certain “high cost” mortgage loans. 
 

Page 37 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

those with $5 million to $20 million in assets, and about 7 percent for 

those with less than $5 million in assets.

Although the Dodd-Frank Act’s mortgage reforms may affect the majority 

of community banks and credit unions, precisely how or to what extent 

the reforms will affect these institutions is uncertain. Many of the reforms 

have not yet been implemented; therefore, data do not exist to assess 

their impact. However, some regulators and industry representatives 

expect the potential cumulative effect of the mortgage reforms to increase 

the regulatory burden for smaller institutions, potentially leading them to 

decrease certain mortgage lending activities or, at the extreme, exit the 

mortgage business. In our interviews with state associations, community 

banks, and credit unions, officials from 9 of the 16 entities told us that 

they expected the act’s mortgage reforms to decrease their or their 

member institutions’ lending, but officials from seven of the entities told us 

it was too soon to determine the reforms’ potential impact. Some officials 

also told us that the mortgage reforms may reduce community banks’ and 

credit unions’ advantage not only in serving niche markets (e.g., rural 

communities) by standardizing mortgage terms but also in making loans 

based on “soft information” by increasing the cost of providing these 

loans. Evaluating these concerns is difficult, especially given the CFPB’s 

regulatory flexibility. As discussed in the previous section, the Dodd-Frank 

Act and federal consumer financial protection laws provide CFPB with 

varying amounts of exemptive authority with regard to particular 

transactions and circumstances. In addition, the Dodd-Frank Act’s 

provisions that establish minimum standards for mortgage underwriting 

(“ability-to-repay” provision), additional escrow requirements, and 

appraisal standards provide some exceptions and regulatory relief for 

small institutions. These particular provisions were identified by regulators 

and industry representatives as potentially having a significant impact on 

community banks and credit unions.

Sections 1411 and 1412 of Title XIV of the Dodd-Frank Act amended the 

Truth in Lending Act (TILA) by prohibiting creditors from making mortgage 

loans without regard to consumers’ ability to repay them and establishing 

standards for making a reasonable and good faith determination based 

on verified and documented information. This reform was enacted to 

address the loosening of underwriting standards, which was partly 

responsible for the dramatic increase in mortgage delinquencies and 

foreclosures beginning in 2006. A creditor can meet the ability-to-repay 

requirement by satisfying certain underwriting factors, or the creditor may 

also be presumed to have satisfied the ability-to-repay requirement and 

receive some protection from liability if it originates a “qualified mortgage” 

Ability-to-Repay and Escrow 

Provisions
 

Page 38 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

(QM) as defined by criteria in the Dodd-Frank Act and implemented by 

CFPB. In other sections of subtitle B of Title XIV, the act sets steeper 

penalties for noncompliance with the requirements and allows consumers 

to cite ability-to-repay violations as a set off in foreclosures.

In a 2011 report, we examined five of the nine QM criteria specified in the 

Dodd-Frank Act for which sufficient data were available and generally 

found that most mortgages likely would have met the individual criteria for 

each year from 2001 through 2010.71

Within subtitle E of Title XIV, sections 1461 and 1462 of the Dodd-Frank 

Act amended TILA to expand escrow requirements for certain types of 

mortgage loans to enhance consumer protection.

However, we noted that the impact 

of the full set of QM criteria was uncertain, partly because data limitations 

made analysis of the other four criteria difficult and partly because CFPB 

could establish different criteria in developing final regulations. Consumer 

and industry groups indicated that the criteria specified in the act would 

likely encourage sound underwriting, but could also restrict the availability 

of and raise the cost of mortgage credit for some homebuyers. Provisions 

in the act and proposed regulations attempt to address some of these 

issues, in part by providing exemptions for certain loan products in certain 

locales, such as rural areas.

72 Before the DoddFrank Act, regulations issued under TILA required that creditors establish 

escrow accounts for taxes and insurance for higher-priced residential 

mortgage loans.73

 

71GAO, Mortgage Reform: Potential Impacts of Provisions in the Dodd-Frank Act on 

Homebuyers and the Mortgage Market, 

The Dodd-Frank Act substantially codified these 

GAO-11-656 (Washington, D.C.: July 19, 2011).

72The act generally requires that mandatory escrow accounts be established for 

mortgages secured by a first lien on a customer’s primary residence if (1) the escrow 

account is required by federal or state law; (2) the mortgage is made, guaranteed, or 

insured by a state or federal government lending or insurance agency (e.g., the Federal 

Housing Administration or the Department of Veterans Affairs); or (3) the mortgage is a 

close-ended “higher priced” mortgage loan.

73On July 30, 2008, the Federal Reserve published a final rule amending Regulation Z 

(TILA) to establish new regulatory protections for consumers in the residential mortgage 

market. 73 Fed. Reg. 44,522 (July 30, 2008). Among other things, the final rule defined a 

class of higher-priced mortgage loans that are subject to additional protections, including 

mandatory escrow accounts for certain loans. Different aspects of the rule were to be 

effective as of October 2009 and April 2010; however, in August 2009 the Federal 

Reserve published a proposed rule to amend this Regulation Z requirement due to 

concerns about the rate used in determining whether a loan is higher-priced. No final 

action had been taken on this rule prior to the Dodd-Frank Act.
 

Page 39 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

requirements and lengthened the time during which a mandatory escrow 

account established for a higher-priced mortgage loan must be 

maintained from 1 to 5 years. In addition, the act established additional 

disclosure requirements for escrow accounts.

Both the ability-to-repay and escrow provisions may provide some relief 

to creditors operating in predominantly rural or underserved communities. 

As discussed previously, smaller banks generally have higher levels of 

agricultural loans as a percentage of their total lending portfolios. In 

addition, some credit unions are chartered specifically to serve 

agricultural communities. Community banks and credit unions may make 

balloon loans to help ensure access to credit in rural or underserved 

communities where consumers may be able to obtain credit only from 

these institutions offering such loans and to hedge against interest rate 

risk. Section 1412 of the Dodd-Frank Act defines a balloon payment as a 

scheduled payment that is more than twice as large as the average of 

earlier scheduled payments. Under this provision, CFPB may by 

regulation allow some creditors, including those operating in 

predominantly “rural or underserved” areas, to make balloon-payment 

QMs that meet certain criteria. In other cases, balloon-payment loans 

may not be considered QMs, and creditors making these loans would not 

be protected from certain liabilities. The act provides a similar exemption 

from mandatory escrow requirements for similar types of creditors. To 

qualify for these exemptions, in both cases, creditors must operate in 

predominately rural or underserved areas, be under total annual asset 

and mortgage loan origination limits to be set by CFPB (initially set by the 

Federal Reserve, see following discussion), and retain their mortgage 

loans in their portfolios. The intent behind these exemptions is to preserve 

access to credit for consumers located in rural or underserved areas, 

where creditors may originate balloon loans to hedge against interest rate 

risk or higher-priced mortgages, but in volumes too small to justify the 

expense of establishing and maintaining escrow accounts for loans held 

in portfolio.

Before the transfer of rule-making authority for TILA to CFPB, the Federal 

Reserve proposed rules to implement both the ability-to-repay and 

escrow requirements. In May 2011, the Federal Reserve proposed 

regulations for compliance with the ability-to-repay provisions.74

 

7476 Fed. Reg. 27,390 (May 11, 2011). 

Its 
 

Page 40 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

proposal provided a definition for a QM and, in accordance with the act, 

proposed that creditors with under $2 billion in assets operating 

predominantly in “rural or underserved” areas may make a balloonpayment QM that meets certain conditions. Due to the lack of available 

data, the agency requested comment on how to set a mortgage loan 

origination limit.75 In March 2011, the Federal Reserve proposed rules for 

implementing the act’s escrow requirements.76 With respect to the 

exemption, the agency proposed a threshold of no more than 100 total 

mortgage loan originations a year and chose not to propose an asset-size 

threshold. In both rules, the Federal Reserve defined “underserved” areas 

as counties where not more than two creditors may make five or more 

mortgages a year and “rural” areas as counties classified by the U.S. 

Department of Agriculture as representing the most remote rural areas—

where access to the resources of more urban communities and mobility is 

limited.77

In their comment letters on these proposed rules, community bank and 

credit union associations supported the intent of the reforms but were 

concerned about regulatory burden. One community bank association 

noted that the additional requirements could lead to an economic 

environment where only larger creditors would continue doing business, 

as they generally are better equipped to absorb increased regulatory 

costs. Industry representatives added that community banks and credit 

unions had not engaged in the abusive lending practices or substandard 

underwriting practices the mortgage provisions sought to address. For 

example, a community bank association noted that community banks 

have provided balloon loans in small communities for decades without 

problems and that these types of loans may be the only available credit 

 

75In its proposed rule, the Federal Reserve requested comment on whether the mortgage 

loan origination limit should be set by the aggregate principal amounts of relevant loans 

extended by the creditor and its affiliates or by the total number of such loans.

7676 Fed Reg. 11,598 (Mar. 2, 2011). On the same date, the Federal Reserve issued a 

final rule implementing part of section 1461 that amended Regulation Z to provide a 

separate, higher threshold for determining when the escrow requirement applies to higherpriced mortgage loans that exceed the maximum principal obligation eligible for purchase 

by Freddie Mac, or “jumbo” loans. The final rule was effective on April 1, 2011. 76 Fed. 

Reg. 11,319 (Mar. 2, 2011). 

77The Economic Research Service of the U.S. Department of Agriculture maintains “urban 

influence codes” that reflect factors such as counties’ relative population sizes, degrees of 

urbanization, access to larger communities, and commuting patterns. 
 

Page 41 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

option for consumers in rural communities. They also noted that many 

balloon loans would fall under the definition of higher-priced loans and, 

therefore, would be covered by the mandatory escrow requirement. In our 

interviews with state associations, community banks, and credit unions, 

officials from 8 of the 16 entities expected the ability-to-repay provisions 

to decrease their or their member institutions’ mortgage lending, four 

thought the provisions would have no impact, and four thought it was too 

soon to tell.

For both of the proposed rules, a state regulatory association and several 

industry associations emphasized the importance of the exemptions for 

small institutions, but disagreed with how “underserved” and “rural” areas 

were defined and, in turn, proposed that their definitions be expanded. 

They said the proposed definitions were too narrow and complicated, and 

would exclude many community banks and credit unions that should be 

covered. A state regulatory association and industry associations also 

supported expanding these exemptions to cover all creditors holding 

loans in portfolio, maintaining that these institutions have an incentive to 

ensure higher standards of underwriting and retain the risk associated 

with consumers failing to pay taxes and insurance. With respect to the 

escrow requirements, industry representatives suggested increasing the 

proposed threshold of 100 loans.

As of August 2012, CFPB has not finalized either rule. In early June 2012, 

CFPB reopened the comment period for the proposed ability-to-repay 

rule. In particular, CFPB requested additional data on mortgage lending 

underwriting criteria and loan performance, as well as estimates of 

litigation costs and liability risks associated with claims alleging ability-torepay requirement violations. CFPB expects to issue final rules for the 

ability-to-repay provisions and the escrow requirements by the end of this 

year. According to the Dodd-Frank Act, these provisions become effective 

18 months after rule-making authority was transferred to CFPB (that is, 

January 21, 2013) if implementing regulations have not been issued. 

Where implementing regulations are issued by the deadline, the statutory 

provisions take effect when the rules take effect. In some cases, 

implementing rules must take effect within 12 months of issuance.

Subtitle F of Title XIV established additional appraisal requirements for 

mortgage lending. Among other provisions, section 1471 establishes 

Appraisals
 

Page 42 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

additional requirements for “higher risk” mortgages.78 Section 1472 of the 

act amends TILA to require that appraisers be independent to reduce any 

conflicts of interests. It declared the Home Valuation Code of Conduct, 

the previous standard for appraisal independence for loans purchased by 

Fannie Mae and Freddie Mac (the enterprises), to no longer be in effect 

but codified several of the code’s provisions.79

CFPB, FDIC, the Federal Reserve, the Federal Housing Finance Agency 

(FHFA), OCC, and NCUA are jointly responsible for implementing the 

act’s appraisal provisions. Section 1471 of the act provides the rulemaking agencies discretion in exempting certain loans from its 

requirements.

The intent of section 1472 

is to better ensure that real estate appraisals used to support creditors’ 

decisions are based on the appraiser’s independent judgment, free of any 

influence from parties that may have an interest in the transaction. Among 

other requirements, section 1472 (1) prohibits coercion and bribery to 

influence the value of an appraisal, (2) prohibits appraisers from having a 

financial interest in property they are appraising, (3) prohibits a creditor 

from extending credit if it knows that a violation of appraisal 

independence has occurred, (4) mandates that the parties involved in the 

transaction report appraiser misconduct to state appraiser licensing 

authorities, and (5) mandates the payment of reasonable and customary 

compensation for appraisals.

80

 

78Section 1471 defines a “higher risk” mortgage as one that is not a “qualified mortgage” 

(to be defined by CFPB pursuant to section 1412) and whose annual percentage rate 

exceeds average rates (specified in the act) for a comparable transaction. This report 

section focuses primarily on section 1472. However, Subtitle F of Title XIV of the act

includes other appraisal provisions. For example, section 1473 includes amendments 

relating to the Appraiser Subcommittee of the Federal Financial Institutions Examination 

Council, appraisal independence monitoring, appraisal management companies, 

automated valuation models, and broker price opinions. For additional GAO work relating 

to the Dodd-Frank Act appraisal provisions, see GAO, Residential Appraisals: 

Opportunities to Enhance Oversight of an Evolving Industry, GAO-11-653 (Washington, 

D.C.: July 13, 2011) and Real Estate Appraisals: Appraisal Subcommittee Needs to 

Improve Monitoring Procedures, GAO-12-147 (Washington, D.C.: Jan. 18, 2012).

In their August 2012 proposed rule, the agencies sought 

79The Dodd-Frank Act stated that the Home Valuation Code of Conduct ceased to be 

effective as of the date the Federal Reserve issued interim final rules covering appraiser 

independence. Dodd-Frank Act § 1472(a) (codified at 15 U.S.C. § 1639e(j)). The Federal 

Reserve issued that rule on October 28, 2010. 75 Fed. Reg. 66,554. 

80The act allowed rule-making agencies to jointly exempt, by rule, a class of loans from 

the requirements of this provision if the agencies determine that the exemption is in the 

public interest and promotes the safety and soundness of creditors. 
 

Page 43 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

comment on whether the final rule should provide an exemption for 

certain appraisal requirements for higher-risk mortgage loans made in 

rural areas.81 They also sought comment on whether the final rule should 

define “rural” areas as proposed in the ability-to-repay rule.82 In October 

2010, the Federal Reserve issued an interim final rule implementing 

section 1472.83

In their comment letters on the interim final rule, several bank and credit 

union associations supported the intent and key aspects of the rule.

The Federal Reserve included a safe harbor for 

compliance with prohibitions on conflicts of interest for employees and 

affiliates of creditors holding less than $250 million in assets. According to 

our analysis of SNL Financial data, about 65 percent of community banks 

and about 90 percent of credit unions held less than $250 million in 

assets in 2011. The agency noted that without allowances for staff and 

other limitations of smaller creditors, smaller creditors may decrease their 

lending, which could reduce credit availability and harm many consumers. 

Further, the agency stated that the federal banking agencies have long 

recognized that small institutions may be unable to achieve strict 

separation between valuation and loan underwriting staff, and the rule 

provides special guidance taking this limitation into account. Specifically, 

the interim final rule provides that the appraiser can be employed or 

affiliated with the creditor as long as (1) their compensation does not 

depend on the value of the appraisal and (2) the appraiser does not 

participate in the decision as to whether to make a loan or not.

84

 

8177 Fed. Reg. 54,722 (Sept. 5, 2012).

However, both a banking and a credit union association suggested that 

the safe harbor be expanded to include institutions with less than $1 

billion in assets and that hold their loans in portfolio. Specifically, they 

82On August 15, 2012, the rule-making agencies issued a proposed rule for implementing 

section 1471. They sought comment as to whether higher-risk mortgage loans made in 

rural areas should be exempt from the requirement that creditors obtain two appraisals 

prior to extending a higher-risk mortgage loan to finance a consumer’s acquisition of 

property. In the proposed rule, the agencies requested any data to be submitted 

supporting whether exempting any classes of higher-risk mortgage loans from the 

additional appraisal requirement would be in the public interest and promote safety and 

soundness of creditors. Comments on the proposed rule are due in October 2012.

8375 Fed. Reg. 66,554 (Oct. 28, 2010). 

84One national credit union association did not support the rule due to its requirement that 

credit unions report violations of the rule, suggesting that the requirement would require 

credit unions to become experts in rules, laws, and standards regarding appraisers.
 

Page 44 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

noted that many smaller community banks are predominately portfolio 

creditors and often make lending decisions based on long-term 

relationships and experience in their communities, which would extend to 

any valuation activity. CFPB, FDIC, the Federal Reserve, FHFA, OCC, 

and NCUA share responsibility for jointly issuing any further final rules on 

appraisal requirements under section 1472, as well as implementing 

section 1471 and other appraisal provisions.

The Dodd-Frank Act’s risk retention provision for securitizations, found in 

section 941 of the act, is expected to have a limited initial impact on 

community banks and credit unions largely because of the limited nature 

of their current involvement in securitizations. However, as we recently 

reported, the implications of section 941 with respect to residential 

mortgage lending will depend on a variety of regulatory decisions and 

potential changes in the mortgage market that could affect the availability 

and cost of mortgage credit and the viability of a private mortgage 

securitization market.85 In turn, such market changes could affect 

community banks and credit unions. As discussed in the previous section, 

our analysis of SNL Financial data found that over 97 percent of

community banks and over 70 percent of credit unions held residential 

mortgage loans in 2011. To securitize residential mortgage loans, lenders 

may, in some cases, sell their loans to third parties, generating funds that 

they can use to make more loans. The third parties, or securitizers, 

bundle mortgages and sell them as investment products, called 

residential mortgage-backed securities (RMBS). Securitizers include 

investment banks, commercial banks, mortgage companies, and real 

estate investment trusts.86

 

85See 

Types of RMBS sold in the secondary market 

are (1) Ginnie Mae-RMBS backed by cash flows from federally insured or 

guaranteed mortgages, (2) enterprise RMBS backed by mortgages that 

meet the criteria for purchase by the enterprises, and (3) private-label 

RMBS, which are backed by mortgages that may not meet some aspect 

GAO-11-656. 

86Real estate investment trusts are companies that own income-producing real estate and 

in some cases engage in the financing of real estate. To qualify as a real estate 

investment trust, a company must have most of its assets and income tied to real estate 

investment and must distribute at least 90 percent of its taxable income to shareholders 

annually in the form of dividends. For more detailed information on securitization 

processes, see GAO-11-656. 

Risk Retention Provision 

Initially May Have a 

Limited Impact
 

Page 45 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

of enterprise underwriting criteria.87

Section 941 of the Dodd-Frank Act requires, in part, that mortgage 

securitizers retain a financial exposure of no less than 5 percent of the 

credit risk of any securitized residential mortgage that is not a “qualified 

residential mortgage” (QRM)—that is, one that does not meet certain 

underwriting criteria to be defined by the rule-making agencies (FDIC, the 

Federal Reserve, OCC, SEC, FHFA, and the Department of Housing and 

Urban Development).

Securitization typically is less 

expensive for lenders than raising funds directly, and it transfers some or 

all of the credit and interest rate risk from the lender to the investors. At 

the height of the mortgage boom, as demand for securitization of 

mortgage loans grew, lenders and securitizers were increasingly 

compensated based on loan volume rather than loan quality, contributing 

to a decline in underwriting standards.

88 The requirement mandates that securitizers of 

RMBS have an economic stake in the assets included in the 

securitizations they sponsor and, thus, an incentive to help ensure that 

lenders originate well-underwritten mortgages. In addition to the 

securitization of loans that meet the QRM criteria, the act exempts

securitizations of government-insured or government-guaranteed 

mortgages (and certain other assets) from the risk retention requirement 

(excluding mortgages backed by the enterprises, which are currently in 

government conservatorship).89

 

87Government-insured or government-guaranteed mortgages primarily serve borrowers 

who may have difficulty qualifying for mortgages. The Federal Housing Administration and 

the Department of Veterans Affairs operate the two main federal programs that insure or 

guarantee mortgages. Fannie Mae and Freddie Mac (the enterprises) purchase 

mortgages that meet specified underwriting criteria from approved lenders. Most of the 

mortgages are made to prime borrowers with strong credit histories. The enterprises 

bundle the mortgages into securities and guarantee the timely payment of principal and 

interest to investors in the securities. On September 6, 2008, the enterprises were placed 

under federal conservatorship because of concern that their deteriorating financial 

condition and potential default on $5.4 trillion in outstanding financial obligations 

threatened the stability of financial markets.

Although the purpose and scope of the 

88The Dodd-Frank Act’s risk retention requirement also applies to securities backed by 

other asset classes, such as commercial loans, commercial real estate mortgage loans, 

credit cards, and automobile loans.

89In addition to mortgages backed by the enterprises, this section of the act also does not 

apply the exemption for government-insured or government-guaranteed mortgages to 

mortgages backed by Federal Home Loan Banks, which form a system of regional 

cooperatives that support housing finance through advances and mortgage programs, 

among other activities. 
 

Page 46 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

QM and QRM provisions are somewhat different, they could be expected 

to work together by increasing lenders’ and securitizers’ exposure to the 

risks that are associated with mortgages whose features and terms may 

put borrowers at a higher risk of default and foreclosure.

Section 941 requires the rule-making agencies to jointly prescribe 

regulations for the risk retention requirement. The Dodd-Frank Act 

requires that in crafting the risk retention regulations, the rule-making 

agencies must specify, among other things,

• criteria for QRMs, taking into consideration underwriting and product 

features that historical loan performance data indicate result in a lower 

risk of default;90

• permissible forms of risk retention and the minimum duration for 

meeting the requirement;

• whether credit risk is to be allocated from securitizers to loan 

originators; and

• the possibility of permitting a lower risk retention requirement (less 

than 5 percent) for any non-QRM that meets underwriting standards 

that the agencies develop in regulations.

Federal banking and other agencies issued a proposed rule for the risk 

retention requirement in April 2011 but have not finalized the rule.91

 

90The Dodd-Frank Act specifies that the QRM definition cannot be broader than the QM 

definition described previously (i.e., the QRM criteria can be more restrictive than the QM 

criteria but not less restrictive). 

In the 

proposed rule, the agencies established criteria for QRMs, including that 

the mortgage, if made in connection with a purchase, must have a loan9176 Fed. Reg. 24,090 (Apr. 29, 2011). FDIC, the Federal Reserve, OCC, SEC and, in 

cases of residential mortgage assets, the Department of Housing and Urban Development

and FHFA, are responsible for jointly prescribing the risk retention rules. The Chairperson 

of the Financial Stability Oversight Council is tasked with coordinating the risk retention 

rule-making effort.
 

Page 47 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

to-value ratio of 80 percent or less.92

In the proposed rule, the agencies, pursuant to the Regulatory Flexibility 

Act, estimated that the proposed requirement would not have a significant 

impact on a substantial number of small banking institutions (as defined 

by SBA as those with assets less than or equal to $175 million), at least 

under current market conditions.

The agencies also proposed that the 

full guarantee provided by the enterprises would satisfy the risk retention 

requirement for securitizations sponsored by the enterprises while they 

are under conservatorship with the capital support of the U.S. Department 

of the Treasury. Although the Dodd-Frank Act places the responsibility for 

retaining risk on securitizers, it permits the agencies to require lenders to 

share the risk retention obligations. The proposed rule permits but does 

not require a securitizer to allocate a portion of its risk retention 

requirement to any lender that contributed at least 20 percent of the 

underlying assets to the asset pool underlying a securitization transaction.

93 Based on their analysis of Call Report 

data for the third quarter of 2010, FDIC, the Federal Reserve, and OCC 

identified over 6,200 small banking organizations under their supervision, 

of which 329 originated loans for securitization.94

 

92The proposed rule also established other QRM criteria, including: (1) the debt to income 

ratio must be 36 percent or less; (2) the loan term must not exceed 30 years; (3) the loan 

cannot include negative amortization or payment deferral features; (4) points and fees 

cannot exceed 3 percent of the total loan amount; (5) the borrower can neither be 30 or 

more days past due on any debt obligation at the time of the loan nor have been 60 or 

more days past due on any debt obligation within the preceding 24 months; and (6) the 

originator must incorporate into the mortgage documents certain requirements regarding 

policies and procedures for servicing the mortgage.

FDIC and OCC noted 

that they were aware of only six small banking organizations that 

sponsored securitizations. The regulators also noted that the small banks 

making securitized loans usually sell their loans to the enterprises, which 

retain credit risk through agency guarantees; thus, the banks would not 

be allocated credit risk under the proposed rule. In the proposed rule, for 

the purposes of their Regulatory Flexibility Act analysis, regulators 

estimated that most RMBS are collateralized by a pool of mortgages with 

93The Regulatory Flexibility Act generally requires that an agency, in connection with a 

notice of proposed rulemaking, prepare and make available for public comment an initial 

regulatory flexibility analysis that describes the impact of the proposed rule on small 

entities or certify that the rule will not have a significant economic impact on a substantial 

number of small entities (defined in regulations promulgated by SBA to include banking 

organizations with total assets of less than or equal to $175 million).

94In its analysis, the Federal Reserve included over 2,400 small bank holding companies.
 

Page 48 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

aggregated balances of at least $500 million. Accordingly, under the 

proposed rule, a securitizer could allocate a portion of the risk retention 

requirement to a small banking organization only if the bank originated at 

least 20 percent ($100 million based on the above estimate) of the 

securitized mortgages. According to the regulators, only one small 

banking organization reported an outstanding principal balance of over 

$100 million in assets sold and securitized as of September 30, 2010. 

Using SNL Financial data, we expanded this analysis to include banks 

with less than $10 billion in total assets (our definition of “community 

bank”) at year-end 2011. We found that over 890 of these banks 

originated loans for securitization, of which 9 reported an outstanding 

principal balance of over $100 million in assets sold and securitized, 

primarily residential mortgages.95

In our 2011 report, we reported that many industry stakeholders and 

consumer groups noted that the implications of the proposed risk 

retention rule depend on a variety of regulatory decisions and potential 

changes in the mortgage market.

NCUA officials said that there is limited 

Call Report data on credit unions’ securitization of mortgage loans and 

stated that credit unions that do securitize mortgage loans usually sell 

their loans to the enterprises. Therefore, under the proposed rule, such 

credit unions would not be allocated credit risk because it has been 

transferred to the enterprises. Also, under the proposed rule, the 

enterprises would be required to retain the risk (and while under 

conservatorship, the enterprise guarantee would satisfy the risk retention 

requirement).

96

 

95This analysis does not include data for thrift institutions. This finding assumes that no 

portion of the assets originated by these banks was sold to the enterprises or 

securitizations that qualify for an exemption from the risk retention requirements under the 

proposed rule. OCC officials commented that because no private-label RMBS transactions 

closed in 2011, none of the 2011 securitization activity would have been in residential 

mortgages sold to a securitizer, where the securitizer might have attempted to allocate the 

risk retention back to the lender. They noted that the residential mortgages were either 

government-insured mortgages or sold to the enterprises. 

These include decisions on the 

characteristics of QRMs that would be exempt from the risk retention 

requirement, the forms of risk retention that would be allowed, the 

percentage that securitizers would be required to hold, and the risksharing arrangements between securitizers and lenders. They noted that 

these factors could affect the availability and cost of mortgage credit and 

96See GAO-11-656. 
 

Page 49 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

the future viability of the private-label RMBS market, which could impact 

all institutions involved in mortgage lending. In addition, several mortgage 

industry representatives indicated that smaller lenders, such as 

independent mortgage companies and small community banks, could 

lack sufficient capital resources to share risk retention obligations or hold 

non-QRMs that were not securitized on their balance sheets. As we 

reported, a few mortgage and securitization market participants told us 

that large lenders had the financial capacity to share risk retention 

obligations with securitizers or hold non-QRMs on their balance sheets, 

giving them an advantage over smaller lenders that could ultimately 

reduce competition in mortgage lending. Finally, a number of market 

participants noted that even if lenders were not required to share risk in 

the manner prescribed by the Dodd-Frank Act, securitizers could be 

expected to take steps to transfer the cost of risk exposure by paying 

lenders less for the mortgages they sold or requiring additional collateral 

to ensure the underwriting quality of the mortgages. But others noted that 

creditors would pass this cost on to borrowers and that the cost would 

likely be marginal.

In our interviews with state associations, community banks, and credit 

unions, officials from 8 of the 16 entities said that the QRM proposed rule 

would have a negative impact on community banks and credit unions and 

may cause them to decrease their mortgage lending. Five said that it was 

too soon to discern the impact of the proposed QRM rule, and three said 

the rule would have no impact. One bank noted that the risk retention 

requirement would likely curtail the availability of securitizers because of 

tighter guidelines for them and limit the bank’s potential market. Officials 

from several banks and credit unions said that the risk retention 

requirement would not have any impact on their institution because they 

did not securitize any of their mortgage loans. One bank official said that 

his bank sells its loans in the private market and that its portion of the 

securitization is less than 20 percent; thus, the bank would not be 

affected by the provision as proposed.

A number of provisions are expected to impose additional costs or other 

requirements on certain community banks or credit unions. However, the 

extent to which these small institutions will be affected is largely 

uncertain, in part because the rules implementing the provisions have not 

been finalized.

Other Provisions May 

Impose Additional Costs or 

Other Compliance 

Requirements, but Their 

Impact Depends Partly on 

Future Rule Makings 
 

Page 50 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Few community banks may be directly affected by the Dodd-Frank Act’s 

proprietary trading prohibitions, but the federal regulators’ proposed rules 

implementing this provision would create additional compliance 

responsibilities for community banks. Section 619 of the Dodd-Frank Act, 

also known as the Volcker Rule, amends the Bank Holding Company Act 

to prohibit banking entities from engaging in proprietary trading and 

having ownership interests in hedge funds and private equity funds 

(covered funds).97 The provision’s prohibitions are designed to restrain 

risk-taking and reduce the potential for federal support of entities covered 

by the provision. To implement the provision, four agencies proposed a 

joint rule that was published in the Federal Register in November 2011.98

The restrictions and prohibitions in section 619 were to be effective the 

earlier of either a year after the issuance of final rules or July 21, 2012. As 

final rules have not yet been issued, the prohibitions became effective on 

July 21, 2012. Banking and nonbank entities covered by the provision 

generally will have 2 years to bring existing activities into conformance.99

 

97This section’s prohibitions apply to banking entities and do not apply to credit unions. 

The section does not prohibit nonbank financial companies supervised by the Federal 

Reserve from engaging in proprietary trading or having ownership interests in a covered 

fund. However, the provision allows the Federal Reserve or other agencies to impose 

additional capital charges and quantitative limits on nonbank financial companies 

supervised by the Federal Reserve that are engaged in those activities. OCC officials 

noted that no such nonbank entities have been designated as of August 13, 2012.

The act defines proprietary trading as the purchase or sale of securities, 

derivatives, commodities futures, or options on these instruments 

(covered positions) for the trading account of a banking entity or nonbank 

financial entity, as opposed to on behalf of a customer. The act further 

defines a trading account as any account used principally with the intent 

to profit from short-term price movements. The proposed rule implements 

statutory exemptions from the prohibition on proprietary trading for certain 

government securities, and for hedging, market-making, and underwriting 

activities. The proposed rule also provides guidance on the types of 

9876 Fed. Reg. 68,846 (Nov. 7, 2011). The responsible rule-making agencies are OCC, 

the Federal Reserve, FDIC, and SEC. CFTC also has rule-making authority under section 

619 of the Dodd-Frank Act and proposed a substantively similar rule in February 2012. 

The rules proposed by SEC and CFTC will not apply to community banks, as these 

agencies are not the primary financial regulatory agency for banks. 

99The Federal Reserve, Statement of Policy Regarding the Conformance Period for 

Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund 

Activities, 77 Fed. Reg. 33,949 (June 8, 2012). See also the Federal Reserve’s 

conformance period final rule, which was issued in February 14, 2011, 76 Fed. Reg. 

8,265.

Prohibitions against 

Proprietary Trading and 

Ownership of Certain Funds
 

Page 51 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

interests that are considered to be ownership interests in hedge funds, 

which commonly are understood to be investment vehicles that engage in 

active trading of securities and other financial contracts, and private 

equity funds, which commonly are understood to be funds that use 

leverage or other methods to invest in companies or other less-liquid 

investments.

Our analysis found that few community banks may be affected by the 

proposed rule’s prohibitions, but data on proprietary trading and 

involvement with covered funds at community banks are limited. Thus, 

the exact number of institutions that may be affected by the proposed rule

is unknown. Using SNL Financial data, we found that about 1 percent of 

banks with more than $100 million and less than $10 billion in assets 

reported having financial instruments that may fall under the definition of 

a covered position in their trading accounts at the end of 2011. In 

previous analysis conducted on proprietary trading in July 2011, we found 

that most proprietary trading has been conducted by the largest bank 

holding companies.100 However, because banks with less than $100 

million in total assets or less than $2 million in trading assets are not 

required to report their trading assets in Call Reports by the type of 

financial instrument, not all community banks involved in proprietary 

trading may be captured in the data.101

Despite the small percentage of community banks that may be affected 

by the Dodd-Frank Act’s proprietary trading and covered fund 

prohibitions, the proposed rules could have an impact on community 

banks due to their compliance requirements. The proposed rules have a 

tiered compliance program, which was not expressly part of the act but 

could apply to all banks. Under the proposed rules, banks that do not 

engage in any covered trading or fund activities must ensure that their 

existing investment policies and procedures include measures that are 

Further, Call Reports do not 

require banks to report ownership stakes in covered funds, so we could 

not estimate the number of community banks that may be affected by this 

prohibition.

 

100GAO, Proprietary Trading: Regulators Will need More Comprehensive Information to 

Fully Monitor Compliance with New Restrictions When Implemented, GAO-11-529 

(Washington, D.C.: July 13, 2011). 

101Other banks that report total average trading assets of less than $2 million in each of 

the four preceding quarters also are not required to provide a breakdown of their trading 

assets by type of financial instruments. 
 

Page 52 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

designed to prevent them from becoming engaged in prohibited activities 

in the future, for example, by limiting their authorized investments to those 

exposures exempt from the prohibition.

102 Banks engaging in covered 

activities under the proposed rules must establish a six-part compliance 

framework to demonstrate that their activities are allowed by one of the 

rules’ exemptions.103

Although the impact of the proposed rules’ compliance requirements on 

community banks still is unknown, industry associations have expressed 

concern that the rules will impose an undue burden on small banks. As 

part of the proposed rules, the regulators considered the impact of the 

rules on small entities in accordance with the Regulatory Flexibility Act, 

and concluded that the compliance requirements in the proposed rule 

would not result in a significant economic impact on a substantial number

of small entities. However, one industry association expressed concerns 

in its comment letter that the proposed rule will adversely affect 

Specific exemptions also have additional 

compliance requirements. For example, to use the exemption for riskmitigating hedging, banks must be able to demonstrate that their hedging 

positions are reasonably correlated with specific risks. Our analysis of 

SNL Financial data on over-the-counter (OTC) derivatives found that 

about 15 percent of community banks held derivatives for purposes other 

than trading, such as hedging risk. The extent to which the risk mitigating 

hedging provision may affect community banks will depend on the 

requirements or standards that the regulators establish for demonstrating 

that a hedge is reasonably correlated with specific risks and whether such 

correlations must be on a transaction or portfolio basis. The proposed rule 

did not include any specific exemptions from the compliance 

requirements for small institutions, so if the proposed rules were adopted, 

these banks may have to expand their compliance frameworks to 

accommodate any additional hedging requirements imposed by the rule. 

 

102Banks currently are required to have investment policies that identify acceptable 

instruments for purchase. The Supervisory Policy Statement on Investment Securities and 

End-User Derivatives Activities (63 Fed. Reg. 20,191 (Apr. 23, 1998)) specifies that banks 

should identify, measure, monitor, and control the risks of investment activities as a matter 

of sound banking practice. This includes maintaining policies that set limits on the 

purchase of securities and other investment vehicles. These policies can be used to 

identify instruments that the bank may purchase, such as U.S. Treasuries, municipal 

obligations, and Government Sponsored Enterprise debt, that are exempt from the 

proposed Volcker Rule. 

103Banks with more than $1 billion in covered positions or covered fund activities must 

also meet minimum standards in the compliance program. 
 

Page 53 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

community banks. The association noted that it would be costly for banks 

with no covered activities to amend their compliance policies and 

procedures, but did not estimate the anticipated increase in compliance 

costs for these institutions. The industry association also recommended 

that community banks that occasionally engage in interest rate swaps to 

hedge their interest rate risk be able to do so without meeting the 

compliance requirements for that exemption because these requirements 

are more extensive. However, the level of compliance burden may be 

relatively small for most community banks, given that the proprietary 

trading provisions do not apply to types of exposures that comprise the 

investment portfolio of most of the smaller community banks. 

The Dodd-Frank Act’s swap provisions under Title VII may impose 

additional costs on the fraction of community banks currently using 

swaps, but CFTC and SEC have taken steps to help minimize the burden. 

A swap is a type of derivative that involves an ongoing exchange of one 

or more assets, liabilities, or payments for a specified period.104 Unlike 

exchange-traded derivatives, swaps traditionally have been traded in the 

OTC market and generally have not been cleared through 

clearinghouses.105 Financial and nonfinancial firms use swaps and other 

OTC derivatives to hedge risk, speculate, or for other purposes, but the 

market is dominated by a limited number of dealers.106 According to the 

Financial Stability Oversight Council, OTC derivatives, with the exception 

of credit risk transfer products, generally were not a central cause of the 

recent financial crisis but were a factor in the propagation of risks, as their 

complexity and opacity contributed to excessive risk taking and a lack of 

clarity about the ultimate distribution of risks.107

 

104A derivative is a financial instrument created from, or whose value depends upon, the 

value of one or more separate assets or indexes of asset values.

105A derivatives clearinghouse or similar organization enables each party to a derivatives 

transaction to substitute the credit of the clearinghouse for the credit of the parties, 

provides for the settlement or netting of obligations from the transaction, or otherwise 

provides services mutualizing or transferring the credit risk from the transaction. 

106Dealers participate in the derivatives market by quoting prices to, buying derivatives 

from, and selling derivatives to end users and other dealers.

107Financial Stability Oversight Council, Financial Stability Oversight Council 2011 Annual 

Report (Washington, D.C.: July 26, 2011).

Swap Provisions
 

Page 54 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Title VII of the Dodd-Frank Act establishes a new regulatory framework 

for swaps to reduce risk, increase transparency, and promote market 

integrity in the financial system. The act authorizes CFTC to regulate 

“swaps,” and SEC to regulate “security-based swaps” (hereafter 

collectively referred to as swaps).108

As shown in table 5, Call Report data aggregated by FDIC show that 

1,101 of the 7,250 community banks (15 percent) held derivatives in 

2011. According to industry officials, community banks typically use 

swaps to manage their exposure to interest rate risk or to help customers 

meet their risk management needs. Indeed, banks with $10 billion or less 

in total assets held nearly $88.8 million (notional amount) in derivatives at 

year-end 2011, of which $82.4, nearly 93 percent, was interest rate 

derivatives. Table 5 also shows that a considerably higher percentage of 

larger community banks hold derivatives than smaller community banks, 

but the use of derivatives within each asset-size class increased over the 

past 5 years. In 2011, for instance, over 50 percent of banks with over $1 

billion to $10 billion held derivatives, but around 3 percent of banks with 

less than $100 million in assets held derivatives. In contrast to community 

banks, federally chartered credit unions have been prohibited by NCUA 

from engaging in derivatives, except through a pilot program.

Among other things, Title VII (1) 

provides for the registration and regulation of swap dealers and major 

swap participants; (2) imposes clearing and trade execution requirements 

on swaps, subject to certain exceptions; and (3) creates record-keeping 

and real-time reporting regimes. CFTC and SEC are continuing to 

implement Title VII through their rule makings. According to Davis Polk, 

CFTC, SEC, and other regulators have finalized 43 of the 90 rules 

required under Title VII (as of July 2, 2012).

109 In view of 

the Dodd-Frank Act’s clearing requirements and its pilot program 

experience, NCUA is reconsidering whether to permit credit unions to 

engage in derivatives to hedge risk.110

 

108Swaps include interest rate swaps, commodity-based swaps, and broad-based credit 

swaps. Security-based swaps include single-name and narrow-based credit swaps and 

equity-based swaps.

109Although permitted by law, NCUA currently allows only a limited number of credit 

unions, on a case-by-case basis, to engage in such transactions under an investment pilot 

program. 

11076 Fed. Reg. 37,030 (June 24, 2011).
 

Page 55 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Table 5: Number of Banks with $10 Billion or Less in Total Assets and Number of These Banks Holding Derivatives from 2007 

through 2011

2007 2008 2009 2010 2011

Reporting 

institutions Number Percentage Number Percentage Number Percentage Number Percentage Number Percentage

Less than $100 million in total assets 

Reporting 

banks 3,440 3,131 2,845 2,622 2,416 

Reporting 

banks with 

derivatives 67 2 82 3 86 3 95 4 84 3 

$100 million to $1 billion in total assets 

Reporting 

banks 4,425 4,499 4,495 4,368 4,284 

Reporting 

banks with 

derivatives 632 14 663 15 663 15 702 16 723 17

Over $1 billion to $10 billion in total assets 

Reporting 

banks 549 561 565 560 550 

Reporting 

banks with 

derivatives 264 48 273 49 295 52 290 52 294 53

All banks with $10 billion or less than total assets 

Reporting 

banks 8,414 8,191 7,905 7,550 7,250 

Reporting 

banks with 

derivatives 963 11 1,018 12 1,044 13 1,087 14 1,101 15

Source: GAO analysis of FDIC’s Banking Quarterly Profile, Fourth Quarter 2007 through Fourth Quarter 2011.

Community bank and other industry officials have raised concerns about 

the potential for Title VII provisions or related regulations to impede the 

ability of community banks to use swaps. One concern is that community 

banks entering into swaps with customers could be required to register as 

swap dealers, unless they qualify for an exemption, and therefore be 

subject to capital, margin, business conduct, and other regulations. CFTC 

and SEC finalized their rule defining, among other things, a swap 
 

Page 56 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

dealer.111 The final rule excludes persons engaged in a de minimis

amount of swap-dealing activity from the definition of a swap dealer.112

Another concern raised by industry officials is that community banks, 

unless exempted, could be required to clear their swaps through a 

clearinghouse, which would impose additional costs on them. Title VII 

requires those swaps that CFTC or SEC determines must be cleared to 

be cleared through a clearinghouse, but provides an exception from the 

clearing requirement to end-users that are not financial entities and use 

these swaps to hedge or mitigate commercial risk. CFTC and SEC are 

required to consider whether to except, among others, small banks and 

credit unions from the definition of financial entity and thereby provide 

Based on our analysis of SNL Financial data, we identified over 1,000 

community banks that held OTC derivatives at year-end 2011. The data 

provided a snapshot of the notional amount of a bank’s derivatives 

activity, but did not indicate the value of derivatives entered into in the 

previous year, which is needed to determine whether any of the banks we 

analyzed met the definition of a swaps dealer. However, the bank with the 

highest notional amount of OTC derivatives held around $4.1 billion, 

which is considerably below the de minimis amounts set by CFTC and 

SEC for CFTC-regulated swaps and SEC-regulated credit default swaps. 

In addition, as directed by the Dodd-Frank Act, CFTC and SEC’s rule 

excludes from the swap dealer definition banks that enter into a swap with 

a customer in connection with originating a loan with that customer and 

meet other conditions specified under the rule.

 

111See 77 Fed. Reg. 30,596 (May 23, 2012).The Dodd-Frank Act instructed CFTC and 

SEC to exempt from designation as a dealer a person that engages in a de minimis

quantity of swap or security-based swap dealing in connection with transactions with or on 

behalf of his or her customers.

112The rules provide for a phase-in of the de minimis thresholds to facilitate orderly 

implementation of swap dealer and security-based swap dealer requirements. The initial 

swap dealer and security-based swap dealer de minimis thresholds are, for the preceding 

year, no more than $8 billion in aggregate gross notional amount of dealing activity in 

CFTC-regulated swaps, $8 billion in notional amount of dealing activity for security-based 

swaps that are credit default swaps, and $400 million for other types of security-based 

swaps for security-based swap dealers. After the phase-in period ends and if CFTC or 

SEC have not otherwise determined to change the respective threshold amounts, the 

swap dealer de minimis threshold will be $3 billion in notional amount of dealing activity for 

all CFTC-regulated swaps, and the security-based swap dealer de minimis thresholds will 

be $3 billion in notional amount of dealing activity for security-based swaps that are credit 

default swaps, and $150 million in notional amount of dealing activity for other securitybased swaps.
 

Page 57 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

them with an exception from the mandatory requirement. In July 2012, 

CFTC adopted a final rule that exempts banks, savings associations, farm 

credit system institutions, and credit unions with total assets of $10 billion 

or less from the definition of “financial entity,” making such “small financial 

institutions” eligible for the end-user exception.113 As noted above, 

community banks’ derivatives activities are limited largely to interest rate 

derivatives, which are regulated by CFTC. In December 2010, SEC 

proposed rules that would allow small banks and credit unions to use the 

end-user exception from mandatory clearing created by the Dodd-Frank 

Act.114

Even if community banks were provided with an exception from the 

mandatory swap clearing requirements, community bank officials are 

concerned that their noncleared swaps could be subject to margin 

requirements set by CFTC, SEC, or prudential regulators.115 According to 

an industry association, margin requirements could make it difficult or 

impossible for many community banks to continue using swaps. CFTC 

and the prudential regulators have issued proposed regulations for 

noncleared swaps.116 CFTC’s proposal would not impose margin 

requirements on nonfinancial entities.117

 

11377 Fed. Reg. 42,560 (July 19, 2012).

The prudential regulators’ 

proposal would impose margin requirements on nonfinancial entities but 

categorize them as lower-risk, requiring the dealer to collect margin from 

a nonfinancial entity only when the dealer’s exposure to the entity 

exceeded whatever credit limit the dealer has established for that 

11475 Fed. Reg. 79,992 (Dec. 30, 2010).

115Futures clearinghouses use initial and variation margin as a key part of their risk 

management programs. Initial margin serves as a performance bond against potential 

future losses. If a party fails to meet its obligation to pay variation margin, resulting in a 

default, the other party may use initial margin to cover most or all of any loss based on the 

need to replace the open position. Variation margin entails marking open positions to their 

current market value each day and transferring funds between the parties to reflect any 

change in value since the previous time the positions were marked. This process prevents 

losses from accumulating over time and thereby reduces both the chance of default and 

the size of any default should one occur.

116CFTC has proposed regulations for noncleared swaps (see 76 Fed. Reg. 23,732 (Apr. 

28, 2011)). Also, the prudential regulators have jointly proposed corollary noncleared 

margin rules (76 Fed. Reg. 27,564 (May 11, 2011)).

117CFTC requested public comments on whether counterparties that are small financial 

institutions using derivatives to hedge their risks should be treated in the same manner as 

nonfinancial entities for purposes of the margin requirements.
 

Page 58 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

particular customer, after evaluation of the customer’s particular financial 

repayment capacity.118

According to FDIC staff, under long-standing banking agency guidance 

that predates the Dodd-Frank Act, a dealer bank engaging in an interest 

rate or other derivative with a community bank would not be expected to 

collect margin as long as the dealer bank’s exposure to the community 

bank was below the credit exposure limits that the dealer bank had 

established under its credit assessment processes and procedures. FDIC 

staff noted that the joint margin rule proposed by the prudential regulators 

reiterates this long-standing interagency safety and soundness guidance 

and that the proposed rule would effectively maintain the status quo with 

respect to commercial banks that are end-users of interest rate or other 

derivatives.119

Section 1073 of the Dodd-Frank Act imposes new requirements on 

remittance transfers (typically money transferred from consumers to their 

families or friends in other countries) that likely will increase costs for 

community banks and credit unions, but it also provides some temporary 

regulatory relief.120 This provision established new consumer protections 

for remittance transfers, including most electronic wire transfers sent by 

consumers in the United States to individuals and businesses in other 

countries. In February 2012, CFPB issued a final rule to implement 

section 1073 and provided a 1-year implementation period, making the 

rule effective in February 2013.121

 

118The prudential regulators requested public comments on whether counterparties that 

are small financial institutions using derivatives to hedge their risks be treated in the same 

manner as nonfinancial end users for purposes of the margin requirements.

The rule generally requires transfer 

providers to provide disclosures and receipts to consumers who provide 

the exact price of the remittance transfer, exchange rate, amount of 

currency to be delivered, and date of the funds’ availability. In addition, 

the rule generally provides that consumers have 30 minutes to cancel a 

119Under the proposed rule, most community banks would fall under the category of “lowrisk financial end users.” Under the proposal, such users would be required to post an 

initial margin only when the initial margin requirement, as calculated by the dealer, 

exceeds the lesser of $15 million or 0.1 percent of the dealer’s capital.

120Section 1073 of the act amended the Electronic Fund Transfer Act (15 U.S.C. 1693 et 

seq.).

12177 Fed. Reg. 6,194, 6,208 (Feb. 7, 2012).

Remittance Transfer Provision
 

Page 59 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

transaction after payment and the ability to dispute errors related to the 

transfer.122 NCUA analysis of Call Report data estimated that about 10 

percent of all credit unions offered remittance services in the fourth 

quarter of 2011. Although comparable data on remittance services do not 

exist for community banks, a recent Federal Reserve study found that 

most U.S. depository institutions process international wire transfers on 

behalf of their customers.123

Industry associations have questioned the ability of institutions that use 

open networks to make remittance transfers, such as community banks 

and credit unions, to continue to provide such services because of their 

difficulty in complying with the rule’s disclosure requirements.124 These 

associations suggested that open network transfer providers be given 

regulatory relief. In addition, two industry associations commented that 

the final rule does not level the playing field for consumer financial

products, as it favors remittance transfer providers that use closed 

networks, such as nonbank institutions. In the February final rule, CFPB 

noted that it does not plan to provide an exemption for open network 

transfers, because the Dodd-Frank Act clearly covers these types of 

transfers.125

 

122For example, if the remittance amount delivered is less than the amount stated on the 

disclosure and this error is successfully disputed, the provider (such as a bank or credit 

union), at no additional charge, must either refund the consumer or transfer to the 

recipient the portion of the funds that were not received.

However, insured depository institutions, including 

community banks and credit unions, are provided with a temporary 

123Report to the Congress on the Use of the Automated Clearinghouse System for 

Remittance Transfers to Foreign Countries, Federal Reserve (July 2011). The United 

States is the largest estimated source of international remittances. Historically, consumers 

have largely chosen to send remittance transfers through nonbank money transmitters, 

such as Western Union. Although less common, individuals may also send remittances 

using services provided by depository institutions, such as banks and credit unions. Banks 

and credit unions typically transmit funds through an open network, such as international 

wire transfers and automated clearing house transactions. 

124Remittance transfer methods generally are described as closed network and open 

network systems. Closed network providers, such as Western Union, transfer remittances 

through a network of agents or other partners that help collect funds domestically and 

disburse funds abroad. Open network providers, such as banks and credit unions, may 

collect funds domestically and use the network to transfer remittances to an unaffiliated 

institution to disburse the funds abroad. In addition, national laws, individual contracts, and 

rules of various messaging, settlement, or payment systems may constrain certain parts of 

transfers sent through an open network system. 

12577 Fed. Reg. 6,208 (Feb. 7, 2012).
 

Page 60 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

statutory exemption that allows them to provide estimated disclosures for 

certain information, including exchange rates and foreign fees and taxes, 

in certain circumstances rather than exact pricing. This exemption expires 

on July 21, 2015, but CFPB may extend the exemption for an additional 5 

years. In addition, to reduce the compliance burden for institutions that 

provide remittance services outside of their normal course of business, 

CFPB has excluded from disclosure requirements those institutions that 

provide 100 or fewer remittance transfers per year.126

Officials from 5 of the 12 community banks and credit unions we spoke 

with said their institutions offer remittance services, and officials from two 

of the four state associations we spoke to said that they have members 

that offer remittance services. Of this group, officials from five of the 

entities expect that the new remittance transfer rule to decrease their (or 

their member institutions’) remittance transfer business. In particular, one 

credit union official told us that his institution may exit this line of business 

due to the increased disclosure requirements.

Subtitle E of Title IX of the Dodd-Frank Act will provide investors with 

more input on executive compensation practices, but may impose 

additional compliance requirements on certain publicly traded community 

banks and publicly traded companies that hold community banks. 

According to the Dodd-Frank Act’s legislative history, Subtitle E of Title IX 

is intended to address executive compensation practices that promoted 

excessive risk taking.127

 

12677 Fed. Reg. 50,244 (Aug. 20, 2012). 

The title contains a number of provisions 

intended to provide shareholders with greater influence over, and insight 

into, the activities of publicly traded companies. For example, section 951 

requires shareholder advisory votes on executive compensation and 

“golden parachutes.” Section 953 requires disclosure of pay versus 

performance and the ratio between the chief executive officer’s total 

compensation and median total compensation for other employees. 

Section 954 requires listed companies to develop and implement 

127U.S. Senate, Committee on Banking, Housing, and Urban Affairs, “The Restoring 

American Financial Stability Act of 2010,” Rep. 111-176, 111th Congress, 2d Sess. (Apr. 

30, 2010).

Executive Compensation 

Provisions
 

Page 61 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

clawback policies for incentive-based compensation.128 Based on our 

analysis of SNL Financial data, we identified approximately 200 publicly 

traded community banks and approximately 1,200 community banks held 

by public companies, some of which may be affected by these 

provisions.129

Section 951 amends the Securities Exchange Act of 1934 to require 

public companies subject to the proxy rules to conduct a separate 

shareholder advisory vote on compensation for executives (“say-on-pay”) 

at least every 3 years and a vote on the frequency of these votes at least 

every 6 years (“say-on-frequency”).130 The amendment also requires a 

shareholder advisory vote on whether to approve certain golden 

parachute compensation arrangements in connection with a business 

combination.131

SEC issued a final rule implementing section 951, which became effective 

in April 2011.

Section 951 provides that SEC may exempt an issuer 

from the advisory voting requirements. In determining whether to make an 

exemption, SEC is to take into account, among other considerations, 

whether the requirements disproportionately burden small issuers.

132

 

128Clawbacks are recovery by the company of amounts paid to an employee based on 

materially inaccurate financial statements or performance criteria. This is money that the 

executive would not have received if the accounting was done properly and to which the 

executive was not entitled.

In commenting on the proposed rule, two industry 

129OCC staff commented that these numbers will likely be lower because of the Jumpstart 

Our Business Startups Act of 2012 (JOBS Act), Pub. L. No. 112-106, 126 Stat. 306. With 

the exception of section 956, all of sections in Title IX, subtitle E of the Dodd-Frank Act, 

are amendments to the Securities Exchange Act of 1934. Banks and bank holding 

companies must be registered under the Securities Exchange Act for these provisions to 

apply. The JOBS Act provides relief from the Securities Exchange Act’s registration 

requirements for banks and bank holding companies. 

130The JOBS Act further amended the Securities Exchange Act of 1934 to provide that 

emerging growth companies—issuers with less than $1 billion in total annual gross 

revenues—are not required to seek advisory votes related to executive compensation. 

131Section 951 requires disclosure of any agreements or understandings that the person 

making a proxy or consent solicitation has with named executive officers of the acquiring 

issuer concerning any type of compensation that is based on or relates to the acquisition, 

merger, consolidation, sale, or other disposition of all or substantially all of the assets of 

the issuer and the aggregate total of all such compensation that may be paid or become 

payable to or on behalf of such executive officer. 

13276 Fed. Reg. 6,010 (Feb. 2, 2011). 
 

Page 62 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

associations recommended that community banks be exempted from the 

rule because they believe it will add significant burdens. While SEC did 

not exempt community banks from the rule, it extended the compliance 

date for the say-on-pay and say-on-frequency advisory votes for smaller 

reporting companies and newly public companies that qualify as smaller 

reporting companies, so that they will not be required to comply until the 

first annual or other shareholder meeting occurring on or after January 

21, 2013.133

Section 953(a) requires public companies subject to the proxy rules to 

provide disclosure about pay versus performance, and section 953(b) 

requires reporting companies to disclose the ratio between the chief 

executive officer’s total compensation and the median total compensation 

for all other company employees.

According to SEC, this deferral served, in part, to allow those 

companies to better prepare for implementation of the rules.

134

Section 954 prohibits securities exchanges from listing securities of 

issuers that have not developed and implemented incentive-based 

compensation clawback policies. In addition, it prohibits exchanges from 

listing securities of issuers that have not disclosed incentive-based 

compensation policies. According to the Dodd-Frank Act’s legislative 

history, the purpose of this provision is to prevent executives from 

retaining compensation that they were awarded erroneously.

An industry association commented 

that the provision would require complex financial calculations and 

potentially expand the universe of persons subject to executive 

compensation disclosure requirements. In addition, the association 

suggested that SEC should exempt community banks from this provision, 

in light of SEC’s recognition that the compensation arrangements at 

smaller reporting companies generally are less complex than at other 

public companies. SEC has not yet proposed a rule to implement this 

provision.

135

 

133SEC generally defines smaller reporting companies as those with a public float of less 

than $75 million.

An 

industry association has commented that this provision could make it 

more difficult for community banks to attract and retain qualified officers 

134Section 953(a) amends section 14 of the Securities Exchange Act of 1934. In addition, 

the JOBS Act further amended the Securities Exchange Act of 1934 to provide that 

emerging growth companies are not required to make these disclosures.

135See S. REP. NO. 111-176 (2010).
 

Page 63 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

and could make privately held community banks reluctant to become 

publicly traded companies. The industry association suggested that SEC 

should exempt community banks from this provision. SEC has not yet

proposed a rule to implement this provision.

The Dodd-Frank Act’s incentive-based compensation provision, section 

956, will require a small percentage of community banks and credit 

unions to report incentive-based compensation. Specifically, section 956 

requires that financial institutions with $1 billion or more in total assets 

disclose the structures of all incentive-based compensation arrangements 

to their federal regulators.136 The required disclosures will be used to 

determine whether the compensation structure provides excessive 

compensation, fees, or benefits, or could lead to a material financial loss 

to the institution, which section 956 also requires the regulators to 

prohibit. According to our analysis of SNL Financial data, most community 

banks and credit unions would not be subject to this provision. Our 

analysis indicates that, as of year-end 2011, around 7 percent of 

community banks and around 3 percent of credit unions have between $1 

billion and $10 billion in assets and, therefore, could be subject to the 

provision.137

The responsible rule-making agencies jointly issued a proposed rule to 

implement section 956 in April 2011, but a final rule has yet to be issued 

as of August 2012.138

 

136Depending on the final rule and its implementation, subsidiaries of certain financial 

institutions with less than $1 billion in consolidated assets could also be affected.

Under the proposed rule, financial institutions with 

$1 billion or more in assets would be required to report incentive 

compensation arrangements annually to their appropriate regulators. 

However, pursuant to section 956, specific compensation to individuals 

will not be disclosed. Incentive compensation arrangements that 

encourage inappropriate risks through excessive compensation or pose a 

risk of material financial loss to an institution would be prohibited. 

Incentive compensation would be considered excessive when amounts 

paid are unreasonable or disproportionate to, among other things, the 

amount, nature, quality, and scope of services performed. In addition, 

137Under the proposed rule, total consolidated assets are calculated using the average of 

the total assets reported in a bank’s or credit union’s four most recent Call Reports. 

138FDIC, the Federal Reserve, FHFA, OCC, OTS, NCUA, and SEC issued the proposed 

rule to implement section 956. 76 Fed. Reg. 21,170 (Apr. 14, 2011). 

Incentive-Based Compensation 

Provision
 

Page 64 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

larger financial institutions—such as banks with $50 billion or more in 

assets and credit unions with $10 billion or more in assets—would be 

subject to additional incentive compensation rules. Incentive 

compensation would be deemed to lead to material financial loss unless 

the arrangement fulfills certain requirements, including balancing risk and 

financial rewards and involving effective risk management and strong 

corporate governance.

In their comment letters, industry associations suggested changes to the 

proposed rule to benefit community banks and credit unions. One industry 

association suggested that the final rule be phased in over a longer time 

period for institutions with assets between $1 billion and $10 billion. 

Another industry association suggested that institutions with $15 billion or 

less in assets with few incentive compensation arrangements should be 

required to disclose incentive-based compensation plans once every 2 

years, rather than annually, to relieve excessive disclosure requirements 

for smaller institutions. Also, several industry associations commented 

that the definition of excessive incentive compensation was overly broad 

and should be narrowed. Of the 12 banks and credit unions we 

interviewed, three of these institutions had more than $1 billion in assets 

and may be subject to this rule, and officials from all three of these 

institutions told us that they offer incentive compensation. Two officials 

expect the proposed rule, if adopted, to have no impact on their 

institutions, and the other official said that it was too soon to judge what 

the impact would be.

Section 975 of the Dodd-Frank Act requiring the registration of municipal 

advisors may or may not affect the majority of community banks, 

depending on how SEC interprets “municipal advisor” in its final rule. 

Section 975 amended section 15B of the Securities Exchange Act to 

require municipal advisors, who previously were largely unregulated, to 

register with SEC like investment advisers. Before the Dodd-Frank Act, 

some municipal advisors were involved in, among other abuses, “pay-toplay” scandals—that is, influencing the award of business through political 

contributions—and recommended unsuitable investments to small 

municipalities. Section 975 also authorizes the Municipal Securities 

Rulemaking Board to develop professional standards, continuing 

education requirements, and business conduct requirements for 

municipal advisors. SEC proposed a rule to implement section 975 but 

Required Registration of 

Municipal Advisors
 

Page 65 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

has not yet finalized the rule.139

The definition of “municipal advisor” in the proposed rule could cover 

many community banks. SEC noted in the proposed rule that the 

statutory definition of a “municipal advisor” in the Dodd-Frank Act is 

“broad and includes persons that traditionally have not been considered 

to be financial advisors.

The proposed rule requires institutions 

that meet the definition of a “municipal advisor” to submit registration 

documents to SEC detailing their organizational structure, business 

activities, and other information. Further, the proposed rule would require 

employees at institutions that meet the definition of a municipal advisor to 

register with SEC.

140

The proposed rule noted that while some types of financial advisors were 

exempted in the statutory language, banks were not included in the 

exemptions. The proposed rule also notes that every bank account of a 

municipal entity is comprised of funds held by or on behalf of a municipal 

entity. Thus, if the rule is finalized as proposed, community banks that 

provide advice to municipal entities with respect to traditional depository 

services could be considered municipal advisors. If community banks 

providing such advice to municipal entities are included in the definition of 

municipal advisors, community banks and the individual employees that 

provide these services would need to register with SEC, who may be a 

new regulator for many community banks.

” The rule identifies three general types of 

municipal advisors: (1) financial advisors that provide advice to municipal 

entities with respect to their issuance of municipal securities and 

municipal financial products, (2) investment advisers that advise 

municipal pension funds and other municipal entities on the investment of 

funds held by or on behalf of municipal entities, and (3) third-party 

marketers and solicitors.

We used SNL Financial data to estimate the number of community banks 

with deposits from municipal entities and found that around 82 percent of 

banks with less than $10 billion in assets had deposits from municipal 

 

13976 Fed. Reg. 824 (Jan. 6, 2011). In September 2010, SEC issued an interim final 

temporary rule establishing a temporary registration program to comply with section 975’s 

requirement that municipal advisors register by October 1, 2010. 75 Fed. Reg. 54,465 

(Sept. 8, 2010). SEC subsequently extended the expiration date for this temporary rule, 

and it will now expire on September 30, 2012. 76 Fed. Reg. 80,733 (Dec. 27, 2011). 

14076 Fed. Reg. 824, 828.
 

Page 66 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

entities at the end of 2011. In the proposed rule, SEC analyzed the 

anticipated initial compliance burden for the registration requirement, and 

estimated that the institutions would spend 6.5 hours completing the 

registration, on average, and individuals would spend 3 hours, on 

average. 

In the proposed rule, SEC sought comment on whether the definition of a 

municipal advisor should exclude banks to the extent that the bank 

provides advice to a municipal entity about traditional banking products, 

such as deposit accounts. Industry associations commented that banks 

should be explicitly exempted in the proposed rule because their activities 

are already supervised by federal and state banking regulators. However, 

SEC noted that federal and state banking regulators supervise banks for 

safety and soundness purposes and not the quality of the investment 

advice they provide to their municipal entity clients. SEC also received 

several comment letters from members of Congress who noted that it was 

not the intent of Congress to include traditional banking in the definition of 

municipal advice. SEC is reviewing the comments it has received as it 

develops a final rule, and SEC staff commented that the agency expects 

to implement its new oversight responsibilities for municipal advisors after 

careful consideration of the comments received.

Regulators and industry officials have noted that the full impact of the 

Dodd-Frank Act on community banks and credit unions remains 

uncertain. Industry officials also have noted that it generally is too soon to 

determine the act’s overall impact on community banks’ and credit unions’ 

ability to lend to small businesses. According to our analysis of SNL 

Financial data, almost 90 percent of community banks and about onethird of credit unions held loans to small businesses in 2011. Although 

any provision in the Dodd-Frank Act that affects these institutions could 

impact their customers (including small businesses), officials from federal 

agencies, state regulatory associations, and industry associations we 

interviewed identified only one provision in the Dodd-Frank Act 

(discussed below) that may directly impact community banks’ and credit 

unions’ ability to lend to small businesses. As discussed above, 

community banks are important lenders to small businesses. Over the 

past decade, community banks have done more small business lending 

as a percentage of their total lending than large banks, although large 

banks have done more small business lending overall. Small business 

lending by credit unions with less than $10 billion in assets has increased 

over the past decade from 2 percent to about 7 percent of their total 

lending.

Too Early to Determine the 

Impact of the Dodd-Frank 

Act on Community Banks’ 

and Credit Unions’ Small 

Business Lending
 

Page 67 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Although a number of provisions may ultimately impact lending by smaller 

institutions, section 1071 was the only Dodd-Frank Act provision identified 

by regulators and industry representatives as potentially having a direct 

impact on small business lending by community banks and credit unions. 

Section 1071 amends the Equal Credit Opportunity Act to require 

financial institutions to collect and report information concerning credit 

applications made by women-owned, minority-owned, and small 

businesses. The provision serves, among other purposes, to facilitate the 

enforcement of fair lending laws. CFPB expects to undertake action to 

implement section 1071 in June 2013.

Industry officials and others have expressed concerns about section 

1071. According to industry and regulatory officials, the reporting 

requirements will increase the costs associated with small business 

lending. Industry officials also have noted that the reporting requirements 

could lead community banks and credit unions to develop standardized 

criteria for their small business lending to avoid being criticized or 

penalized by regulators for being discriminatory. They added that such 

standardization could then result in less lending to small businesses. 

Officials from 12 of the 16 state associations, community banks, and 

credit unions we spoke with expect this provision to negatively affect their 

institutions or member institutions, and four officials said it was too soon 

to tell how this provision would affect their institutions.

We also asked officials from the 16 state associations, community banks, 

and credit unions if they expected the Dodd-Frank Act generally to impact 

the amount of small business lending conducted by their institutions. 

Officials from 11 of these entities told us it was too soon to tell, although 

two officials said the Dodd-Frank Act would have no impact. Officials from 

three of the entities said that they expected the act to decrease their small 

business lending. In our interviews, industry officials also said that the 

Dodd-Frank Act provisions cumulatively could increase their compliance 

and other costs and adversely affect their competitiveness in the small 

business lending market.

We provided a draft of this report to CFPB, FDIC, the Federal Reserve, 

OCC, NCUA, SBA, and SEC for review and comment. CFPB and NCUA 

provided written comments that we have reprinted in appendices III and 

IV. CFPB and NCUA generally agreed with our report. In addition, CFPB, 

FDIC, OCC, and SEC staff provided technical comments, which we have 

incorporated, as appropriate. The Federal Reserve and SBA did not 

provide any comments.

Agency Comments 

and Our Evaluation
 

Page 68 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

In its comment letter, CFPB generally agreed with the report’s analysis of 

the role played by community banks and credit unions in the economy 

and discussion of CFPB’s responsibilities in implementing Dodd-Frank 

Act reforms. CFPB further elaborated on the status of its rule makings 

related to mortgage reforms and efforts to seek input from small 

businesses, community banks, and credit unions about the impacts and 

potential alternatives for its rule-making initiatives. 

Although generally agreeing with our report, NCUA commented on a 

finding that we cited from a GAO report issued in January 2012.141

We are sending copies of this report to CFPB, CFTC, FDIC, the Federal 

Reserve, NCUA, OCC, SBA, SEC, interested congressional committees, 

members, and others. This report will also be available at no charge on 

our website at 

NCUA 

noted that it does not believe there is sufficient evidence to suggest that 

member business loans pose a higher risk to credit unions or that a key 

driver in credit union failures is commercial loans. In our prior report, our 

analysis of NCUA’s and its Office of Inspector General’s data indicated 

that member business loans contributed to 13 of the 85 credit union 

failures from January 2008 to June 2011. 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. Key contributors to this report are listed in appendix V. 

Lawrance L. Evans, Jr.

Acting Director, Financial Markets and Community Investment

 

141See GAO-12-247.
Appendix I: Scope and Methodology

Page 69 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Our objectives in this report were to examine (1) significant changes that 

community banks and credit unions have undergone in the past decade, 

including the factors that have contributed to such changes, and (2) the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) provisions that regulators, industry associations, and others 

expect to impact community banks and credit unions, including their small 

business lending.1

To address our first objective, we reviewed and analyzed studies by

regulators, industry associations, and academics. We conducted 

searches of social science, economic, and federal research databases, 

including EconLit, Fed-in-Print, Google Scholar, and JSTOR, to identify 

relevant studies on community banks and credit unions, including their 

lending to small businesses. To help us identify relevant studies, we also 

relied on federal agencies, including the Board of Governors of the 

Federal Reserve System (Federal Reserve), Federal Deposit Insurance 

Corporation (FDIC), Office of the Comptroller of the Currency, National 

Credit Union Administration (NCUA), and Small Business Administration;

state regulatory associations (the Conference of State Bank Supervisors

and National Association of State Credit Union Supervisors); industry 

associations (the American Bankers Association, Credit Union National 

Association, Independent Community Bankers of America, National 

Association of Federal Credit Unions, National Federation of Independent 

Business, and Main Street Alliance); and academic or other experts.2

 

1

Although no commonly accepted definition of a community bank exists, the term often is 

associated with smaller banks (e.g., under $1 billion in assets) that provide relationship 

banking services to the local community, and have management and board members who 

reside in the local community. In this report, we generally define banks (insured depository 

institutions that are not credit unions) with under $10 billion in total assets as community 

banks. We also include in our analysis federally insured credit unions with under $10 

billion in total assets. We use under $10 billion in total assets as our criterion because the 

Dodd-Frank Act exempts small institutions from a number of its provisions based on that 

threshold. 

Although we found these studies to be sufficiently reliable for the 

purposes of our report, the results should not necessarily be considered 

as definitive, given the potential methodological or data limitations 

contained in the studies individually and collectively. Moreover, the 

studies investigating economies of scale and consolidation generally 

address the relationship in a manner that limits the ability to make 

definitive causal claims. In addition, we analyzed data from SNL 

2

The Main Street Alliance is a national network of state-based small business coalitions.

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 70 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Financial, a private financial database that contains publicly filed and 

financial reports, including Consolidated Reports on Condition and 

Income (Call Reports) submitted to FDIC, Thrift Financial Reports 

submitted to the Office of Thrift Supervision, and 5300 Call Reports (Call 

Reports) submitted to NCUA. We used SNL Financial data to identify 

changes in the total number, profitability, lending activities (including 

small business lending), expenses, and other metrics of community banks 

and credit unions from 2002 through 2011. As regulators do not collect 

data specifically on small business lending, we created a proxy for small 

business lending using Call Report data on commercial real estate and 

commercial and industrial loans for under $1 million for community banks 

and member business lending by credit unions. As a result, what we 

characterize as small business lending also may include, to some degree, 

small loans to larger businesses. We analyzed the data for different asset 

classes of community banks (assets of $10 billion or more, $1 billion to 

$10 billion, $250 million to $1 billion, $100 million to $250 million, and less 

than $100 million) and credit unions (assets of $10 billion or more, $1 

billion to $10 billion, $100 million to $1 billion, $20 million to $100 million, 

$5 million to $20 million, and less than $5 million). We reviewed the SNL 

Financial data and found the data to be sufficiently reliable for our 

purposes, and we have relied on the data in our previous reports. We 

also interviewed the federal agencies and associations identified above 

and four academic and industry experts about trends in the community 

bank and credit union sectors and their causes.

To address our second objective, we reviewed the Dodd-Frank Act and 

related materials, including relevant congressional hearings; comment 

letters on proposed rules; and studies or analysis prepared by federal and 

state regulators, industry associations, law firms, and academics. To help 

us identify the Dodd-Frank Act provisions applicable to community banks 

and credit unions and assess their impact on such institutions, we 

interviewed and obtained documentation, when available, from the federal 

agencies, state regulatory associations, and industry associations 

identified above, and the Bureau of Consumer Financial Protection. 

Appendix II contains a table of the provisions identified collectively by 

these groups. We also analyzed a number of the Dodd-Frank Act 

provisions that regulators, industry officials, and others expect to impact 

community banks and credit unions. We used Call Report and other data 

compiled by SNL Financial to assess the extent to which community 

banks and credit unions may be subject to or otherwise affected by 

various Dodd-Frank Act provisions. We took steps to ensure consistency 

in data analyses for the various provisions within this reporting section 

and determined that any differences in data due to the date on which we 
Appendix I: Scope and Methodology

Page 71 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

downloaded them from SNL Financial did not have a material impact on 

our analysis.3

We conducted this performance audit between February and September 

2012, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Our review of the SNL Financial data also found the data to 

be sufficiently reliable for making judgments about the institutions likely 

impacted. To obtain further insights into the expected impact of the DoddFrank Act, we conducted semistructured interviews with a sample of four 

state associations and a sample of 12 community banks and credit 

unions. We interviewed two state banking associations and two credit 

union associations from Georgia, Illinois, Minnesota, and Pennsylvania, 

based on the number and uniformity of community banks and credit 

unions within the states. We randomly selected and interviewed eight 

community banks and four credit unions from California, Florida, 

Massachusetts, Michigan, Ohio, Oklahoma, South Dakota, Texas, 

Virginia, and Wisconsin. For selected associations and institutions that 

were unavailable to participate, we substituted other similar institutions. In 

conducting our interviews, we first sent structured questions by e-mail 

and then followed up with in-depth telephone interviews. These interviews 

were conducted, in part, to confirm whether the state-level bank and 

credit union associations and individual community banks and credit 

unions generally considered the same Dodd-Frank Act provisions 

identified by regulators, industry associations, and others as potentially 

impacting their institutions (or member institutions). These interviews also 

provided further insights on the expected impact of the Dodd-Frank Act, 

but their responses are not generalizable to the population of community 

banks and credit unions.

 

3

As SNL Financial data are updated continually, data downloaded on different dates may 

differ. 
Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State 

Regulatory Associations, and Industry 

Associations to Impact Community Banks and 

Credit Unions

Page 72 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

The following table lists the Dodd-Frank Act provisions that are expected 

to impact some or all community banks and credit unions. These 

provisions were identified primarily based on information we collected 

from federal regulators, state regulatory associations, and industry 

associations.1

As discussed in the report, some provisions or exemptions in the act are 

expected to have an indirect impact on community banks and credit 

unions. For example, section 1024 is expected to have an indirect impact 

on community banks and credit unions because it authorizes the Bureau 

of Consumer Financial Protection (CFPB) to supervise nonbank financial 

institutions. Before the Dodd-Frank Act, nonbank financial institutions 

generally were not subject to supervision at the federal level with respect 

to the federal consumer financial laws, and CFPB’s supervision is 

expected to help level the playing field between these institutions and 

regulated institutions, such as community banks and credit unions.

Industry officials also told us that it is difficult to identify all 

of the provisions that may impact small institutions because such 

outcomes may depend on how agencies implement certain provisions 

through their rules, and many rules have not been finalized. For the same 

reason, regulators and industry officials also have noted that enough time 

has not passed to assess the full impact of the Dodd-Frank Act on 

community banks and credit unions. In particular, the table identifies 

provisions that are expected to impact community banks and credit 

unions or a subset of these institutions. The table also includes provisions 

with explicit exemptions for community banks and credit unions or that 

provide regulators with the authority to exempt certain entities or financial 

products from a provision.

 

1

For some titles, we identified subtitles that included a number of sections that were 

expected to impact community banks and credit unions, but did not necessarily include 

every section within that subtitle in the table. 

Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State Regulatory 

Associations, and Industry Associations to Impact 

Community Banks and Credit Unions
Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State 

Regulatory Associations, and Industry 

Associations to Impact Community Banks and 

Credit Unions

Page 73 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Table 6: Dodd-Frank Act Provisions Expected by Federal Regulators, State Regulatory Associations, and Industry 

Associations to Impact Community Banks and Credit Unions

Title and subtitle Provisions expected to impact community banks and credit unions 

Title I—Financial Stability

Subtitle C—Additional Board of 

Governors Authority for Certain 

Nonbank Financial

Companies and Bank Holding 

Companies

Section 165, Enhanced supervision and prudential standards for nonbank financial companies 

supervised by the Board of Governors of the Federal Reserve System (Federal Reserve) and 

certain bank holding companies. Section 165(h)(2)(B) permits the Federal Reserve to require 

publicly traded bank holding companies with less than $10 billion in assets to establish a risk 

committee. 

Section 171, Leverage and risk-based capital requirements. This section requires federal banking 

agencies to establish minimum leverage and risk-based capital requirements on a consolidated 

basis for insured depository institutions, depository institution holding companies, and systemically 

important nonbanks. Section 171(b)(4)(C) exempts from capital deductions otherwise required by 

this section debt or equity instruments issued before May 19, 2010, by bank holding companies with 

less than $15 billion in assets and mutual holding companies. Moreover, section 171(b)(5)(C) 

exempts from section 171 bank holding companies subject to the Federal Reserve’s Small Bank 

Holding Company Policy Statement in effect on May 19, 2010.

Title II—Orderly Liquidation Authority

Title III—Transfer of Powers to the Comptroller of the Currency, the Corporation, and Board of Governors

Subtitle A—Transfer of Powers 

and Duties

Subtitle A of Title III abolishes the Office of Thrift Supervision and provides for the transfer of its 

functions and authorities to the Office of the Comptroller of the Currency (OCC), Federal Deposit 

Insurance Corporation (FDIC), and Federal Reserve. 

Subtitle C—Federal Deposit 

Insurance Corporation

Subtitle C of Title III contains provisions that make changes to the federal deposit insurance regime, 

including (1) redefining the assessment base against which deposit insurance premiums are 

calculated (section 331) and increasing the standard maximum deposit and share insurance amount 

from $100,000 to $250,000 (section 335). 

Section 334, Transition reserve ratio requirements to reflect new assessment base. This provision 

exempts banks with less than $10 billion in assets from the increase in the minimum reserve ratio.

Subtitle D—Other Matters Section 341, Branching. Section 341 permits any thrift that converts to a bank charter to continue to 

operate branches and agency offices in existence prior to the charter conversion.

Section 343, Insurance of transaction accounts. Section 343 provided temporary unlimited deposit 

and share insurance coverage for non-interest-bearing transaction accounts from December 31, 

2010, through December 31, 2012.

Title IV—Regulation of Advisers to Hedge Funds and Others

Title V—Insurance

Title VI—Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions

Section 613, De novo branching into states. Section 613 expands the de novo interstate branching 

authority of national and state banks by eliminating the requirement that a state expressly opt-in to 

de novo branching.

Section 619, Prohibitions on proprietary trading and certain relationships with hedge funds and 

private equity funds. This section prohibits banking entities from engaging in proprietary trading and 

private fund management activities, subject to certain exemptions.

Section 627 Interest-bearing transaction accounts authorized. This section eliminates the prohibition 

against the payment of interest on demand deposits (e.g., commercial checking accounts).
Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State 

Regulatory Associations, and Industry 

Associations to Impact Community Banks and 

Credit Unions

Page 74 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Title and subtitle Provisions expected to impact community banks and credit unions 

Title VII—Wall Street Transparency and Accountability

Title VII contains provisions that authorize Commodity Futures Trading Commission (CFTC) and 

Securities and Exchange Commission (SEC) to regulate the OTC derivative markets and subject 

various market participants to capital, margin, business conduct, and other requirements.

Subtitle A—Regulation of Overthe-Counter Swaps MarketsSection 721, Definitions. Section 721 amends the Commodity Exchange Act to require CFTC to 

exempt an entity that engages in de minimis derivatives from the swap dealer definition. 

Section 723, Clearing. This section provides CFTC with the authority to exempt from the mandatory 

clearing requirement community banks and credit unions with less than $10 billion in assets. 

Section 737, Position limits. This section provides CFTC with the discretionary authority to exempt 

community banks or credit unions, among other entities and transactions, from the position limits.

Subtitle B—Regulation of 

Security-Based Swap Markets

Section 761, Definitions under the Securities Exchange Act of 1934. Section 761 amends the 1934 

act to require SEC to exempt an entity that engages in de minimis quantity of security-based swap 

dealing from the swap dealer definition.

Section 763, Amendments to the Securities Exchange Act of 1934. This section amends the 1934 

act to authorize SEC to exempt from the mandatory clearing requirement community banks and 

credit unions with less than $10 billion in assets. The amendment also provides SEC with the 

discretionary authority to exempt entities from position limits.

Title VIII—Payment, Clearing, and Settlement Supervisor

Title IX—Investor Protections and Improvements to the Regulation of Securities

Subtitle C—Improvements to 

the Regulation of Credit Rating 

Agencies

Section 939A, Review of reliance on ratings. Section 939A requires federal banking and other 

agencies to review their regulations requiring the use of credit ratings with a goal of modifying those 

regulations by substituting for such use the standard of creditworthiness they deem appropriate.

Subtitle D—Improvements to 

the Asset-Backed Securitization 

Process 

Subtitle D of Title IX contains provisions that require federal agencies to jointly issue rules requiring 

a securitizer of an asset-backed security (other than a residential mortgage-backed security) to 

retain at least 5 percent of the credit risk in any asset that the securitizer, through the issuance of an 

asset-backed security, transfers, sells, or conveys to a third party.

Section 941, Regulation of credit risk retention. This section includes language providing regulators 

with the discretionary authority to exempt entities from the risk retention requirements.

Subtitle E—Accountability and 

Executive Compensation

Subtitle E of Title XI contains provisions that require additional executive compensation-related 

disclosures by public companies, including requiring such companies to hold a non-binding vote to 

approve the compensation of certain executives (Section 951).

Section 956, Enhanced compensation structure reporting. This section requires financial institutions 

to report incentive compensation to their regulator and prohibits incentive compensation that is 

“excessive” or “could lead to material financial loss” at an institution. Financial institutions with less 

than $1 billion in assets are exempted from this provision.

Subtitle G—Strengthening 

Corporate Governance

Section 971, Proxy access. Subsection 971(c) provides SEC with the authority to exempt certain 

issuers from the proxy access requirement.

Subtitle H—Municipal Securities Section 975, Regulation of municipal securities and changes to the board of the Municipal Securities 

Rulemaking Board. Section 975 amends section 15B of the Securities Exchange Act, 15 U.S.C. § 

78o-4, to require municipal advisors, who were largely unregulated, to register with SEC like other 

financial advisors. 

Subtitle I—Public Company 

Accounting Oversight Board, 

Portfolio Margining, and Other 

Matters

Section 989G, Exemption for nonaccelerated filers. Section 989G exempts smaller issuers from 

section 404(b) of the Sarbanes-Oxley Act, 15 U.S.C. § 7262(b). 
Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State 

Regulatory Associations, and Industry 

Associations to Impact Community Banks and 

Credit Unions

Page 75 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Title and subtitle Provisions expected to impact community banks and credit unions 

Title X—Bureau of Consumer Financial Protection

Subtitle A—Bureau of 

Consumer Financial Protection

Subtitle A of Title X contains provisions that create CFPB to regulate financial products or services 

provided by insured depository institutions, finance companies, mortgage lenders, and a broad 

range of nontraditional financial services entities, and provides CFPB with the authority to prevent 

covered institutions from engaging in unfair, deceptive, or abusive acts or practices in the provision 

of consumer financial products and services. 

Subtitle B—General Powers of 

the Bureau

Subtitle B of Title X contains provisions that provide CFPB the authority to prescribe rules and issue 

orders and guidance, as may be necessary or appropriate to enable the Bureau to administer 

federal consumer financial laws. 

Section 1022, Rule-making authority. Section 1022(b)(3) grants CFPB broad authority to exempt 

entities from the provisions of Title X or any rule under Title X. This could include community banks 

and credit unions.

Section 1024, Supervision of nondepository covered persons. Provides CFPB with supervisory and 

enforcement authority for federal consumer financial protection laws for certain nonbank institutions 

such as nonbank institutions that provide origination, brokerage, or servicing of residential real 

estate loans. 

Section 1025. Supervision of very large banks, savings associations, and credit unions. This 

provision generally excludes banks and credit unions with $10 billion or less in assets (other than 

affiliates of large banks) from CFPB supervision.

Section 1026, Other banks, savings associations, and credit unions. This section provides CFPB 

with certain authority over small banks and credit unions with less than $10 billion in assets. This 

authority allows CFPB to require reports, as necessary, from small banks and credit unions and 

CFPB, at its discretion, may include its examiners on a sampling basis in small banks and credit 

union examinations conducted by their prudential regulator. 

Subtitle C—Specific Bureau 

Authorities

Subtitle C of Title X contains sections that provide CFPB with the authority to prescribe rules 

identifying as unlawful, unfair, deceptive, or abusive acts or practices for a consumer financial 

product or service and to ensure that the features of any consumer financial product or service are

fully, accurately, and effectively disclosed to consumers. In addition, it requires the CFPB to 

establish reasonable procedures to provide a timely response to consumers to complaints against 

or inquiries concerning a financial institution.

Section 1032, Disclosures. This section includes a provision (section 1032(f)) that requires CFPB to 

combine disclosures required under the Truth in Lending Act (TILA) and sections 4 and 5 of the 

Real Estate Settlement Procedures Act of 1974 into a single disclosure. 

Subtitle G—Regulatory 

Improvements

Section 1071 Small business loan data collection. This section requires that lenders collect and 

report to CFPB certain women-owned, minority-owned, and small business loan data. In addition, 

this provision provides CFPB with the discretionary authority to exempt any financial institution from 

the data collection and reporting requirements.

Section 1073 Remittance transfers. This section requires disclosures to consumers that send money 

remittance transfers in accordance with rules to be prescribed by CFPB.

Section 1075 Reasonable fees and rules for payment card transactions. This section requires the 

Federal Reserve to prescribe regulations regarding any interchange transaction fee that an issuer 

may receive or charge for an electronic debit transaction. This provision includes an exemption for 

institutions with less than $10 billion in assets from the cap on debit card interchange fees.

Subtitle H—Conforming 

Amendments

Section 1094 Amendments to the Home Mortgage Disclosure Act of 1975 (HMDA). This section 

amends HMDA to expand the scope of information relating to mortgage loans to add a number of 

new data elements. 
Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State 

Regulatory Associations, and Industry 

Associations to Impact Community Banks and 

Credit Unions

Page 76 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Title and subtitle Provisions expected to impact community banks and credit unions 

Section 1098 Amendments to the Real Estate Settlement Procedures Act of 1974. This section 

requires CFPB to issue rules that combine two different mortgage loan disclosures, one required by 

the TILA and the other by the Real Estate Settlement Act. 

Title XI—Federal Reserve System Provisions

Title XII—Improving Access to Mainstream Financial Institutions

Title XIII—Pay it Back Act

Title XIV—Mortgage Reform and Anti-Predatory Lending Act

Subtitle A—Residential 

Mortgage Loan Origination 

Standards

Subtitle A of Title XIV contains provisions that establish certain origination standards to be applied 

by lenders in the underwriting of residential mortgage loans, including registration and licensing 

requirements for mortgage originators and a prohibition on steering and certain mortgage originator 

compensation.

Section 1405. Regulations. CFPB may, by rule, exempt from or modify disclosure requirements, in 

whole or in part, for any class of residential mortgage loans for which it determines that such 

exemption or modification is in the interest of consumers and in the public interest.

Subtitle B—Minimum Standards 

For Mortgages

Subtitle B of Title XIV contains provisions that establish minimum standards for mortgage loans.

Section 1411, Ability to Repay. This section amends the TILA to provide that no creditor may make 

a residential mortgage loan unless the creditor makes a reasonable and good faith determination 

based on verified and documented information that the consumer has the reasonable ability to 

repay the loan at the time the loan is consummated.

Section 1412, Safe Harbor and Rebuttable Presumption. This section provides the “qualified 

mortgage” criteria under which a creditor or assignee may presume the ability-to-repay requirements 

have been met. It also provides regulators with the authority to consider certain loans as qualified 

mortgages as long as they meet certain criteria, including balloon loans being extended by a lender 

that operates in a predominantly rural or underserved area. 

Section 1422, State attorney general enforcement authority. This section provides state attorneys 

general with increased enforcement authority for certain provisions of TILA including steering 

prohibitions; ability to repay; minimum standards for residential mortgage loans; appraisal 

independence; prompt crediting of mortgage payments; requests for payoff amounts; and property 

appraisal requirements.

Subtitle C—High-Cost 

Mortgages

Subtitle C of Title XIV contains provisions that expand the definition of high-cost mortgage, enhance 

existing protections regarding prepayment penalties and balloon payments, and prohibit certain 

practices.

Subtitle E—Mortgage Servicing Subtitle E of Title XIV contains provisions that require the establishment of escrow or impound 

accounts for the payment of taxes and insurance in connection with certain first lien mortgage loans.

Section 1461, Escrow and impound accounts relating to certain consumer credit transactions. This 

section includes a provision authorizing CFPB to exempt from the escrow requirements entities that 

operate in predominantly rural or underserved areas; have total annual mortgage loan originations 

that do not exceed a certain limit; retain their mortgage loan originations in portfolio; or meet any 

asset-size threshold and any other criteria established by CFPB. 

Section 1462, Disclosure notice for consumers who waive escrow services. This section amends 

TILA to add a requirement that creditors provide specified disclosures to consumers who waive 

escrow services.

Subtitle F—Appraisal Activities Subtitle F of Title XIV contains provisions regarding appraisals in connection with residential 

mortgage loans. 
Appendix II: Provisions of the Dodd-Frank Act 

Expected by Federal Regulators, State 

Regulatory Associations, and Industry 

Associations to Impact Community Banks and 

Credit Unions

Page 77 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Title and subtitle Provisions expected to impact community banks and credit unions 

Section 1471, Property appraisal requirements. This section provides regulators with discretionary 

authority to exempt, by rule, a class of loans from the appraisal requirements in this section if they 

determine that the exemption is in the public interest and promotes the safety and soundness of 

creditors.

Section 1472, Appraisal Independence Requirements. This section amends TILA by adding 

appraisal independence requirements. These requirements include, among other things, a 

description of acts or practices that violate appraisal independence, a list of actions that an 

appraiser can take at the request of an interested party but do not violate independence, and 

mandatory reporting of appraisers that do not comply with Uniform Standards of Professional 

Appraisal Practice to state appraiser certifying and licensing agencies. 

Title XV—Miscellaneous Provisions

Title XVI—Section 1256 Contracts

Source: GAO analysis of information collected from federal regulators (the Federal Deposit Insurance Corporation, the Federal 

Reserve, National Credit Union Administration, Office of the Comptroller of the Currency, and the Bureau of Consumer Financial 

Protection); state regulatory associations (Conference of State Bank Supervisors and National Association of State Credit Union 

Supervisors); and industry associations, including the American Bankers Association, Independent Community Bankers of America, 

Credit Union National Association, and National Association of Federal Credit Unions.
Appendix III: Comments from the Bureau of 

Consumer Financial Protection

Page 78 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Appendix III: Comments from the Bureau of 

Consumer Financial Protection
Appendix III: Comments from the Bureau of 

Consumer Financial Protection

Page 79 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions
Appendix III: Comments from the Bureau of 

Consumer Financial Protection

Page 80 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions
Appendix IV: Comments from the National Credit Union 

Administration

Page 81 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Appendix IV: Comments from the National 

Credit Union Administration
Appendix V: GAO Contacts and Staff 

Acknowledgments

Page 82 GAO-12-881 Impact of Dodd-Frank Act on Community Banks and Credit Unions

Lawrance L. Evans, Jr. (202) 512-8678 or evansl@gao.gov

In addition to the contact named above, Richard Tsuhara (Assistant 

Director), Allison Abrams, Jeremy Conley, Stuart Kaufman, Colleen 

Moffatt, Patricia Moye, Jennifer Schwartz, Seyda Wentworth, and Henry 

Wray made key contributions to this report.

Appendix V: GAO Contacts and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(250664)
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