U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

52–261 PDF 2009

FULL COMMITTEE HEARING ON 

THE IMPACT OF FINANCIAL REGULATORY 

RESTRUCTURING ON SMALL BUSINESSES 

AND COMMUNITY LENDERS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

SEPTEMBER 23, 2009 

Small Business Committee Document Number 111-046 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

PARKER GRIFFITH, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

STANDING SUBCOMMITTEES 

Subcommittee on Contracting and Technology 

GLENN NYE, Virginia, Chairman 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

KURT SCHRADER, Oregon 

DEBORAH HALVORSON, Illinois 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

PARKER GRIFFITH, Alabama 

AARON SCHOCK, Illinois, Ranking 

ROSCOE BARTLETT, Maryland 

W. TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

GLENN THOMPSON, Pennsylvania 

Subcommittee on Finance and Tax 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

W. TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

PARKER GRIFFITH, Alabama 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

Subcommittee on Regulations and Healthcare 

KATHY DAHLKEMPER, Pennsylvania, Chairwoman 

DAN LIPINSKI, Illinois 

PARKER GRIFFITH, Alabama 

MELISSA BEAN, Illinois 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

LYNN WESTMORELAND, Georgia, Ranking 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

Subcommittee on Rural Development, Entrepreneurship and Trade 

HEATH SHULER, North Carolina, Chairman 

MICHAEL MICHAUD, Maine 

BOBBY BRIGHT, Alabama 

KATHY DAHLKEMPER, Pennsylvania 

ANN KIRKPATRICK, Arizona 

YVETTE CLARKE, New York 

BLAINE LUETKEMEYER, Missouri, Ranking 

STEVE KING, Iowa 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

(IV) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1 

Graves, Hon. Sam .................................................................................................... 2 

WITNESSES 

Harris, Mr. Robert R., Managing Director, Harris, Cotherman, Jones, Price 

& Associates, Vero Beach, Florida and Vice Chair, American Institute Of 

Certified Public Accountants ............................................................................... 3 

Loy, Mr. Trevor General Partner, Flywheel Ventures, Santa Fe, New Mexico. 

On behalf of The National Venture Capital Association .................................. 5 

Hirschmann, Mr. David T., President And CEO, Center For Capital Markets 

Competitiveness, U.S. Chamber Of Commerce ................................................. 7 

Anderson, CRMS, Mr. Mike, Essential Mortgage Company, Baton Rouge, 

Louisiana. On behalf of The National Association Of Mortgage Brokers ....... 9 

Robinson, Mr. J. Douglas, Chairman and CEO, Utica National Insurance 

Group, New Hartford, New York. On behalf of Property Casualty Insurers 

Association of America ......................................................................................... 10 

Macphee, MR. James D., CEO, Kalamazoo County State Bank, Schoolcraft, 

Michigan. On behalf of Independent Community Bankers Of America .......... 25 

Roberts. Mr. Austin, CEO, Bank of Lancaster, Kilmarnock, Virginia. On 

behalf of The American Bankers Association .................................................... 26 

Hampel, Mr. Bill, Senior Vice President, Research and Policy Analysis & 

Chief Economist, Credit Union National Association ....................................... 28 

Moloney, Mr. John, President & CEO, Moloney Securities Co., Inc., Manchester, Missouri. On behalf of The Securities Industry and Financial Markets Association .................................................................................................... 30 

Donovan, Ms. Dawn, CEO, Price Chopper Employees FCU, Schenectady, New 

York. On behalf of The National Association of Federal Credit Unions ......... 32 

(V) 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 41 

Graves, Hon. Sam .................................................................................................... 43 

Harris, Mr. Robert R., Managing Director, Harris, Cotherman, Jones, Price 

& Associates, Vero Beach, Florida and Vice Chair, American Institute Of 

Certified Public Accountants ............................................................................... 45 

Loy, Mr. Trevor General Partner, Flywheel Ventures, Santa Fe, New Mexico. 

On behalf of The National Venture Capital Association .................................. 54 

Hirschmann, Mr. David T., President And CEO, Center For Capital Markets 

Competitiveness, U.S. Chamber Of Commerce ................................................. 70 

Anderson, CRMS, Mr. Mike, Essential Mortgage Company, Baton Rouge, 

Louisiana. On behalf of The National Association Of Mortgage Brokers ....... 79 

Robinson, Mr. J. Douglas, Chairman and CEO, Utica National Insurance 

Group, New Hartford, New York. On behalf of Property Casualty Insurers 

Association of America ......................................................................................... 92 

Macphee, MR. James D., CEO, Kalamazoo County State Bank, Schoolcraft, 

Michigan. On behalf of Independent Community Bankers Of America .......... 100 

Roberts. Mr. Austin, CEO, Bank of Lancaster, Kilmarnock, Virginia. On 

behalf of The American Bankers Association .................................................... 114 

Hampel, Mr. Bill, Senior Vice President, Research and Policy Analysis & 

Chief Economist, Credit Union National Association ....................................... 135 

Donovan, Ms. Dawn, CEO, Price Chopper Employees FCU, Schenectady, New 

York. On behalf of The National Association of Federal Credit Unions ......... 144 

Moloney, Mr. John, President & CEO, Moloney Securities Co., Inc., Manchester, Missouri. On behalf of The Securities Industry and Financial Markets Association .................................................................................................... 158 

Statements for the Record: 

The Impact of the Consumer Financial Protection Agency on Small Business . 173 

National Association of Small Business Investment Companies ......................... 201 

(VI) 

(1) 

FULL COMMITTEE HEARING ON 

THE IMPACT OF FINANCIAL REGULATORY 

RESTRUCTURING ON SMALL BUSINESSES 

AND COMMUNITY LENDERS 

Wednesday, September 23, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 1:00 p.m., in Room 

2360, Rayburn House Office Building, Hon. Nydia M. Vela ́zquez 

[Chair of the Committee] Presiding. 

Present: Representatives Vela ́zquez, Moore, Dahlkemper, 

Schrader, Clarke, Ellsworth, Bright, Halvorson, Graves, Westmoreland, Luetkemeyer, and Coffman. 

Chairwoman VELA ́ ZQUEZ. I call this hearing to order. 

One year ago this month, we saw the largest bankruptcy in 

United States’ history when Lehman Brothers filed for Chapter 11. 

The following weeks were a whirlwind of activity. The FDIC seized 

Washington Mutual, selling the company’s banking assets to 

JPMorgan Chase. Wachovia was acquired by Wells Fargo and Merrill Lynch, by Bank of America. Attempting to provide relief to our 

teetering financial system, Congress passed and President Bush 

signed into law the $700 billion TARP legislation. 

Since then, it has become evident that the problems leading up 

to this crisis did not accumulate overnight. In fact, flaws in our 

risk management systems, both governmental regulations and private mechanisms, had been growing for decades. 

In coming weeks, Congress and the administration will examine 

options for strengthening our regulatory structure. This is long 

overdue; the gaps in the system have grown too large to be ignored. 

We cannot count on current regulations to prevent another crisis. 

While considered by many an issue for the financial services industry, how we address those gaps will be critical for all small 

businesses. It is imperative that as we look at alternatives for updating our financial regulations, we carefully consider how these 

changes might affect entrepreneurs. 

Small businesses rely on the healthy functioning of our financial 

systems in order to access capital. New rules governing how financial institutions extend credit will directly affect entrepreneurs 

seeking loans at affordable rates. The biggest challenge facing 

small firms right now is access to affordable capital. We must be 

careful that regulatory changes do not exacerbate the current capital shortage and undercut our recovery as it begins to take hold. 

2 

Likewise, financial regulatory reform could unintentionally touch 

sectors of the small business community that we do not think of 

as financial institutions. Businesses that allow customers to pay for 

goods and services after delivery are essentially extending credit. 

Congress and the administration must be careful not to define the 

term ′′credit′′ too broadly. Otherwise, businesses like home builders, 

physicians, and others may face new rules that were not meant for 

them. 

Small businesses come in all shapes and sizes and there are 

many in the financial sector. Community banks and credit unions 

could see their business models profoundly affected by many of the 

proposed changes. Small firms in the financial sector often face 

higher compliance costs than their larger competitors. Several proposals would result in small lenders answering to a new regulatory 

entity. 

I expect some of our witnesses today will testify that small lenders bear less responsibility for the recent turmoil and, therefore, 

should not carry the brunt of new regulations. This argument 

seems to at least carry some credibility. The committee should consider it carefully as we proceed. 

As both lenders and borrowers, small businesses have much at 

stake when it comes to regulatory reform. The financial crisis of 

last year and the recession it triggered have hit small firms hard. 

As much as anyone, entrepreneurs want these problems fixed so 

that financial markets can again play their vital role in promoting 

commerce. 

Numerous strategies have been floated for restoring transparency and stability to our financial systems. Depending on how 

they are crafted, these proposals could touch every sector of the 

American economy. For these reasons, we have invited representatives from a range of industries to testify. It is my hope that their 

testimony will add important perspectives to our discussion. 

On that note I would like to take the opportunity to thank all 

the witnesses for taking time out of your busy schedule to be with 

us here today. 

And I yield to the ranking member, Mr. Graves, for an opening 

statement. 

[The statement of Chairwoman Vela ́zquez is included in the appendix.] 

Mr. GRAVES. Thank you, Madam Chair, and I would like to 

thank you for holding this important hearing on the debate that is 

going to occur about restructuring the regulatory oversight of 

America’s financial sector. Given the fact that the financial services 

sector contributed more than a third of corporate profits in this 

country during the last decade, it is a significant debate. 

No one can question that the events affecting Wall Street last 

year had consequences on the overall American economy. Once 

credit becomes unavailable, the modern economy comes to a grinding halt. Consumers and businesses do not buy, manufacturers do 

not sell, and unemployment skyrockets. 

Any reform to the financial regulatory process must meet two 

key objectives. First, it must provide for an efficient operation of 

the financial markets; and second, small businesses, the prime generator of new jobs in the economy, must have access to capital. 

3 

Competitive markets need full information to operate properly. 

To the extent that regulatory reform improves the information 

available to all parties that use the financial markets, it will be 

beneficial. That benefit must be weighed against the cost of providing information. 

Much of the focus on financial regulatory reform proposals address either protecting consumers or preventing one or a group of 

institutions from creating systemic risk leading to the collapse of 

capital and the credit markets. However, little has been said on the 

impact that such regulatory oversight might have on the access to 

capital for small businesses. If the regulatory reform inhibits the 

ability of small businesses to obtain credit or access needed capital, 

the regulation will have an adverse long-term consequence on the 

ability of the economy to grow. 

A famous philosopher once said that ′′Those who cannot remember the past are condemned to repeat it.′′ Whatever the outcome of 

the debate on restructuring the regulation of the financial sector, 

we cannot repeat the mistakes of the past. Given the fact that financial panics have periodically occurred in this country going back 

to 1837, achieving a regulatory restructuring that ensures Congress does not repeat the mistakes of the past will be one of our 

most difficult tasks. 

I again would like to thank the Chairwoman for holding this important hearing, and I yield back. 

[The statement of Mr. Graves is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Now I welcome Mr. Robert Harris, the 

Managing Director of Harris, Cotherman, Jones, Price & Associates 

in Vero Beach, Florida. He is also the Vice Chair for the American 

Institute of Certified Public Accountants, the national professional 

association of certified public accountants. The AICPA has more 

than 330,000 members. 

Welcome, sir. And you have 5 minutes to make your statement. 

STATEMENT OF ROBERT R. HARRIS 

Mr. HARRIS. Chairwoman Vela ́zquez, Ranking Member Graves, 

members of the committee. My name is Robert R. Harris and I am 

Vice Chairman with the American Institute of Certified Public Accountants. I am a CPA and a partner in the CPA firm of Harris, 

Cotherman, Jones, Price & Associates. We are located in Vero 

Beach, Florida, and are a small firm with 11 CPAs. My firm’s clients are primarily small businesses and individuals. We do financial planning and tax service for most of these clients. 

I am here today representing the American Institute of CPAs. 

AICPA is the national professional association of CPAs with more 

than 360,000 CPA members in business, industry, public practice, 

government, education, student affiliates, and international associates. 

As a result of the economic crisis precipitated by the subprime 

lending, the administration and Congress felt that financial regulatory restructuring was necessary. The administration called for a 

new regulatory scheme that encompasses strong vibrant financial 

markets operating under transparent fairly administered rules that 

protect America’s consumers and our economy from the devastating 

breakdown that we have witnessed in recent years. 

4 

The administration also said that to accomplish this goal it 

would be necessary to seek a careful balance that will allow our 

markets to promote innovation while discouraging abuse. To this 

end, Congress is looking at a number of financial activities with an 

eye towards how to appropriately and adequately regulate those activities. 

The AICPA supports the goal of enhanced consumer protection, 

but we believe that it is critical to consider the plan’s effect on 

small business to ensure that it does not stifle the innovation, creativity and inventiveness of the American entrepreneur that has 

driven our economic engine. 

In this context, I would like to discuss The Consumer Financial 

Protection Act of 2009, H.R. 3126, which would create the Consumer Financial Protection Agency, or CFPA, and its effect on 

small business from the point of view of a CPA. 

The stated aim of the consumer protection bill is to protect consumers by consolidating financial consumer protection in one agency. This would be a safeguard against consumers getting inappropriate loans that they could not afford repay. But the bill is much 

broader than protecting consumers when they borrow money. 

The CFPA, as introduced, would cover most CPAs because its 

scope of authority includes tax return preparation, tax advice, financial planning, and pro bono financial literacy activities. The accounting profession’s pro bono financial literacy programs, ′′360 Degrees of Financial Literacy′′ and FeedthePig.org, which are designed to teach consumers and young people how to make smart 

decisions would be covered by the bill. Our own Lisa Baskfield, a 

CPA from Minnesota, was recently awarded the civilian service 

medal for providing pro bono financial access to more than 2,000 

armed services members. Her advice would have been covered 

under this bill. 

Many of the members are affiliated with CPA firms that are 

small businesses and will be adversely affected by the bill, and 

many of their clients are small businesses, sole proprietorships and 

partnerships. It is impossible to separate the advice and tax service 

given to these small businesses from the advice and tax services 

given to the owners. They both are covered by the bill—thus, both 

would be covered by this bill. 

Additionally, any person who provides a material service to a 

covered person such as a financial institution is included in the definition of a covered person. My practice of forensic accounting 

would subject me to the CFPA when I do a financial audit of a 

lender making consumer loans even though I do not have direct 

dealings with the consumers and provide no services to consumers. 

As a CPA, I can tell you that CPAs are heavily and effectively 

regulated by three sources. State boards of accountancy, the Internal Revenue Service, and the AICPA. This regulatory structure 

protects consumers first with the first rule being, service the public 

interest. The bill consolidates the enforcement of a number of Federal consumer protection laws into one Federal agency; however, it 

adds another layer of regulation to the accounting profession without consolidating any of our regulation. 

This regulation would be costly because the assessment that 

would be levied by CFPA, and it will take significant time from our 

5 

ability to serve our clients because we would be subject to periodic 

examinations by the agency. These are all costs that will ultimately 

be borne by our clients, the very consumers that this bill is supposed to protect. And it will do so without any commensurate benefit. 

CPAs are asking for an exemption only for the customary and 

usual CPA services and volunteer or pro bono financial education 

activities. We are not asking for an exemption when CPAs are offering consumer financial products, such as a loan or investment 

products. 

In fact, areas of potential abuse, such as refund anticipation 

loans, are covered by other provisions of the bill. We are encouraged by recent press reports that Chairman Frank is considering 

exempting professional services from the reach of the bill. 

We appreciate the opportunity to testify today on the impact of 

the bill that will have effect on thousands of CPA firms that are 

small businesses and their clients, many of whom are also small 

business. 

Chairwoman VELA ́ ZQUEZ. Thank you Mr. Harris. 

[The statement of Mr. Harris is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness, Mr. Trevor Loy, is a 

venture capital investor in Santa Fe, New Mexico. Mr. Loy is testifying on behalf of the National Venture Capital Association, which 

represents the U.S. venture capital industry and is comprised of 

more than 450 member firms. 

STATEMENT OF TREVOR LOY 

Mr. LOY. Thank you, Chairman Vela ́zquez, Ranking Member 

Graves, and members of the committee. Thank you for the opportunity to be part of this important discussion today. 

I would like to begin by talking about risk and the difference between entrepreneurial risk and systemic financial risk. 

Entrepreneurial risk involves making calculated and informed 

bets on people and innovation and is critical to building small businesses. Systemic financial risk involves a series of complex financial interdependencies between parties and counterparties operating in the public markets. The venture industry and the small 

business community are heavily dependent on embracing entrepreneurial risk, but we have virtually no involvement in systemic risk. 

Let me explain why. 

The venture capital industry is simple. We invest in privately 

held small businesses created and run by entrepreneurs. These entrepreneurs grow the business using their own personal funds as 

well as the capital from ourselves and our outside investors, known 

as LPs or limited partners. We invest cash in these small businesses to purchase equity, i.e., stock, and we then work closely 

alongside the entrepreneurs on a weekly basis for 5 to 10 years 

until the company is sold or goes public. When the company has 

grown enough so that it can be sold or taken public, the VC exits 

our investment in the company and the proceeds are distributed 

back to our investors in our funds. 

When we are not successful, we lose the money we invested, but 

that loss does not extend to anyone else beyond our investors. Even 

when we lose money on investments, it does not happen suddenly 

6 

or unexpectedly. It takes us several years to lose money and the 

investors in our funds all understand that time frame and the risk 

when they sign up. 

Debt, known as leverage, which contributed to the financial meltdown, is not part of our equation. We work simply with cash and 

with equity. We do not use debt to make investments or to increase 

the capacity of the fund. Without debt or derivatives or 

securitization or swaps or other complex financial instruments, we 

don’t expose any party to losses in excess of their committed capital. 

In our world, the total potential loss from a million dollar investment is limited to a million dollars. There is no multiplier effect 

because there are no side bets, unmonitored securities, or derivatives traded, based on our transactions. There are no 

counterparties tied to our investments. 

Nor are venture firms interdependent with the world’s financial 

system. We do not trade in the public markets and our investors 

cannot withdraw capital during the 10-year life of a fund, nor can 

they publicly trade their partnership interest in the fund. 

The venture capital industry is also much smaller than most people realize. In 2008, U.S. venture capital funds held approximately 

$200 billion in aggregate assets and invested just $28 billion into 

start-up companies. That is less than 0.2 percent of the U.S. gross 

domestic product. Yet, over 40 years, this model has been a tremendous force in U.S. economic growth, building industries like 

biotech, semiconductor and software. Now we are increasingly helping to build renewable energy and other green-tech sectors. 

Companies that were started with venture capital since 1970 today account for 12.1 million jobs and $2.9 trillion in revenues in 

the U.S. That is nearly 21 percent of the U.S. GDP, but it grew 

from our investments of less than 0.2 percent of GDP. 

My main point, therefore, is that harming our industry will prevent a major part of the future American economy from growing 

out of businesses that are today’s small businesses; and that is the 

risk that you should be concerned about. 

Now, we do recognize the legitimate need for transparency and 

we simply ask that you customize the regulatory approach to fit 

what we do. Today, VCs already provide information to the SEC. 

That information, submitted on what is called Form D, should already be sufficient to determine the lack of systemic risk from venture capital firms. This filing process could easily be enhanced to 

include information that would provide greater comfort to our regulators. An enhanced Form D—let’s call it Form D-2, could answer 

questions on our use of leverage, trading positions, and 

counterparty obligations, allowing regulators to then exempt from 

additional regulatory burdens firms like ours that don’t engage in 

those activities and, therefore, don’t pose systemic risks. 

In contrast, formally registering as investment advisers under 

the current act, as the current proposals require, has significant 

burdens without any additional benefits. And let me be clear, registering as an advisor with the SEC is far from simple, and it is 

not just filling out a form. The word ′′registration′′ in that context 

might sound like registering your vehicle, telling the motor vehicle 

department what kind of car it is and who you are and where you 

7 

live. It might conjure up images of things like smog checks and our 

proposal for the Form D-2 is equivalent to that. 

But actually the word ′′registration′′ in the SEC context comes 

with a lot of other requirements. To continue my analogy with your 

car, it is equivalent to having to hire a full-time driver, plus a compliance officer who rides in the front seat to make sure that driver 

is operating the car correctly, plus a mechanic who lives at your 

house to fix the car and works only on your car, plus providing the 

government with information about every place you drive. 

Moving back to the actual world of SEC registration involving examinations, complex programs overseen by a mandatory compliance officer, it will demand significant resources which promise to 

be costly from both a financial and human resources perspective. 

My own firm believes it will be one-third of our entire annual budget. 

Your support has not gone unnoticed by us and we appreciate it. 

We cannot afford another situation where the unintended consequences of well-intentioned regulation harms small businesses 

and the economic growth that we drive. We look forward to working with the committee on that goal. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Loy. 

[The statement of Mr. Loy is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Mr. David 

Hirschmann. He is the President and CEO of the Center for Capital Markets Competitiveness in the U.S. Chamber of Commerce. 

The U.S. Chamber of Commerce is the world’s largest business federation, representing 3 million businesses. 

Welcome. 

STATEMENT OF DAVID T. HIRSCHMANN 

Mr. HIRSCHMANN. Thank you, Chairwoman Vela ́zquez, Ranking 

Member Graves, members of the committee. I really think this is 

a very timely hearing. 

Today, what I would like to do is talk specifically about an issue 

of great concern to many of our members, especially our small business members, the proposed Consumer Financial Protection Agency. 

The U.S. Chamber supports the goal of enhancing consumer protection. In fact, the Capital Markets Center that I run was founded 

3 years ago before the financial crisis to advocate for comprehensive reform and modernization of our regulatory structure, including strong consumer protection. 

Consumers, including small businesses, need reforms that will 

ensure clear disclosure, better information; they need vigorous enforcement against predatory practices and other consumer frauds, 

and we need to close the gaps in current regulation. However, the 

proposed Consumer Protection Agency is the wrong way to enhance 

protections. It will have significant unintended consequences for 

consumers, small businesses, and for the overall economy. 

Today, the Chamber will release a study that examines the impact of CFPA on small business access to credit. The study is authored by Thomas Durkin, an economist who spent more than 20 

years at the Federal Reserve Board. My remarks draw on the findVerDate Aug 31 2005 15:44 Dec 09, 2009 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52261.TXT DARIEN
8 

ings of that study to make the following points. [The study is included in the appendix] 

Small businesses, including those that we traditionally count on 

to be the first to add jobs in the early stages of an economic recovery, need access to credit to survive, meet expenses, and grow. 

Small businesses often have difficulty obtaining commercial credit 

and, therefore, turn to consumer credit and consumer financial 

products to supplement their short-term capital needs. The CFPA 

will reduce the availability and increase the costs of consumer credit. As users of consumer credit products, small businesses will see 

the same result despite being fundamentally different than the average consumer. 

The proposed CFPA will likely restrict, and in many cases eliminate, small business access to credit and increase the cost of credit 

they would be able to obtain. This CFPA ′′credit squeeze′′ could result in business closures, fewer start-ups, and slower growth, ultimately costing a significant number of jobs that would be lost or 

simply not created. 

Finally, the CFPA will only exacerbate the weaknesses of our 

current regulatory system without enhancing consumer protections. 

In 2006, 800,000 businesses created new jobs in this country; 

642,000 of them had fewer than 20 employees. Small businesses 

generally have trouble borrowing money. Either they can’t borrow 

or they cannot borrow as much as they need, and almost certainly 

they cannot secure long-term financing available to larger companies. 

To supplement the reduced access to traditional loans, small 

businesses rely extensively on consumer lending products, and they 

use them as a source of credit very differently than consumers. In 

other words, personal credit is the lifeline that sustains small businesses, particularly start-ups. 

Many of the products that small businesses rely on may be considered to some as fringe products, but they are the very products 

that small business owners use to meet their short-term capital 

needs. As one example, auto title loans provide small business owners immediate access to cash and no upfront fees or prepayment 

penalties, and therefore can be useful meeting short-term business 

expense. 

However, the CFPA in its approach failed to recognize the difference between small businesses and average consumers both in 

terms of need and sophistication and their appetite for risk. As proposed, the CFPA will likely reduce the availability of these products and increase their costs. It will make it harder for financial 

firms to meet the needs of small businesses. The CFPA will create 

considerable new risks to lenders in terms of regulatory fines and 

litigation risks from extending credit to small businesses. 

H.R. 3126 is the wrong approach. It simply adds a new government agency on top of an already flawed regulatory structure. 

As one example, rather than streamline consumer protections to 

eliminate gaps, regulatory arbitration, and create uniform national 

standards for key issues like disclosure, the legislation would foster 

a complex and confusing patchwork of 51-plus States regulation in 

addition to new Federal rules. 

9 

As we begin to see signs of economic recovery, we need to be especially careful to fully understand the impact of a new regulatory 

layer on small businesses, both as consumers and as providers of 

financial products. We look forward to working with the members 

of the committee on the modernization of our regulatory structure 

and appreciate your holding this hearing today. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Hirschmann. 

[The statement of Mr. Hirschmann is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Mr. Mike Anderson. He is the President of the Essential Mortgage Company in 

Baton Rouge, Louisiana. Mr. Anderson is a 30-year veteran in the 

mortgage industry. He is testifying on behalf of the National Association of Mortgage Brokers, which represents the interests of 

mortgage brokers and home buyers. 

STATEMENT OF MIKE ANDERSON, CRMS 

Mr. ANDERSON. Thank you. I have a little opening statement: 

Small businesses in the financial service arena are under tremendous risk and we need your help. 

Good afternoon, Chairwoman Vela ́zquez and Ranking Member 

Graves and members of the committee. I am Mike Anderson. I am 

a Certified Residential Mortgage Specialist and Vice Chairman of 

the Government Affairs Committee of the National Association of 

Mortgage Brokers. I am also a practicing mortgage broker in the 

State of Louisiana, with over 30 years of experience. I would like 

to thank you for the opportunity to testify today. 

We applaud this committee’s response to the current problems in 

our financial markets. We share a resolute commitment to a simpler, clearer, more uniform and valid approach relative to financial 

products, most specifically with regard to obtaining mortgages and 

to protecting consumers throughout the process. NAMB has several 

areas of concern with the CFPA. 

It is impossible to have one large agency develop and maintain 

comprehensive consumer protections. Consumer protection needs to 

exist at the State level, closer to the consumers. As proposed, the 

CFPA will favor big business. It will choose winners and losers, 

and the losers will be the small businesses and consumers. 

Before I address our overall concerns, I must first extinguish the 

false allegations targeted at mortgage brokers for many years. First 

of all, brokers do not create loan products. We do not underwrite 

the loan or approve the borrower for the loan. We do not fund the 

loan. We provide consumers with an array of choices and permit 

them to choose the loan payments that fit their particular needs 

and to provide an on-time closing. 

We are regulated. State-regulated mortgage brokers and lenders 

comply with State and Federal consumer protection laws, including 

State predatory lending laws. Federally chartered banks are preempted from these predatory lending laws. 

And lastly, we did not receive any TARP funds. 

The typical mortgage broker of today exists as an origination 

channel for consumers who wish to purchase or refinance their 

home. Mortgage brokers typically employ anywhere from 2 to 50 

people, and they serve communities big and small, urban and rural 

10 

in all 50 States, truly classifying them as a valuable small business 

entity. 

In order for the CFPA to be effective, it must act prudently when 

promulgating and enforcing rules to ensure that real protections 

are afforded to consumers and not merely provide the illusion of 

protection that comes from incomplete or unequal regulation of 

similar products services or providers, whereas financial reform is 

to provide transparency, clarity, simplicity, accountability, and access in the market for consumer financial products and to ensure 

the markets operate fairly and efficiently. 

It is imperative that the creation of new disclosures or the revision of the antiquated disclosures be achieved through an effective 

and even-handed approach and consumer testing. It is not the who, 

but the what that must be addressed to ensure true consumer protection and success with this initiative. 

There should be no exemptions from consumer protections 

whether the CFPA is created or not. The Federal Government 

should not—and I repeat, should not—pick winners and losers, 

which is where we believe the Federal reform is heading. 

We are very supportive of the concepts of the proposed single, integrated model disclosure for mortgage transactions that combine 

those currently under TILA and RESPA. Consumers will greatly 

benefit from a uniform disclosure that clearly and simply explains 

critical loan terms and costs. 

Therefore, NAMB strongly encourages this committee to consider 

imposing a moratorium on the implementation of any new regulations or disclosures issued by HUD and the Federal Reserve Board 

for at least a year until financial modernization has become law. 

This will help to avoid consumer confusion and minimize the increased cost and the unnecessary burden borne by industry participants to manage and administer multiple significant changes to the 

mandatory disclosures over a short period of time. 

NAMB strongly supports the concept of mandating a comprehensive review of the new and existing regulations, including the 

Home Value Code of Conduct, the HVCC. Too often in the wake of 

our current official crisis we have seen new rules promulgated that 

do not effect measured balance and effective solutions to the problems facing our markets and consumers— 

Chairwoman VELA ́ ZQUEZ. Mr. Anderson, time has expired. You 

will have an opportunity during the question-and-answer period. 

Mr. ANDERSON. Thank you. 

[The statement of Mr. Anderson is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Mr. J. Douglas 

Robinson. He is the Chairman and CEO of Utica National Insurance Group in New Hartford, New York. Utica National is among 

the top 100 property casualty insurance organizations in the country. He is testifying on behalf of the Property Casualty Insurers of 

American, which has over 1,000 members. 

STATEMENT OF J. DOUGLAS ROBINSON 

Mr. ROBINSON. Chairwoman Vela ́zquez, Ranking Member 

Graves, and members of the committee, thank you for the opportunity to testify. 

11 

I am J. Douglas Robinson, Chairman and Chief Executive Officer 

of the Utica National Insurance Group, a group led by two mutual 

insurers headquartered near Utica, New York. Utica National provides coverages primarily for individual and commercial risks with 

an emphasis on specialized markets, including public and private 

schools, religious institutions, small contractors, and printers. 

My company markets its products through approximately 1,200 

independent agents and brokers. Our 2008 direct written premiums were more than $632 million. I am testifying today on behalf of the Property Casualty Insurers Association of America, 

which represents more than 1,000 U.S. insurers. 

We commend President Obama and Congress for working to ensure that the financial crisis we experienced last fall is never repeated. Achieving this goal requires a focus on fixing what went 

wrong with Wall Street without imposing substantial new one-sizefits-all regulatory burdens on Main Street, small businesses, and 

activities that are not highly leveraged nor systemically risky. 

My company insures small businesses like bakeries, child care 

centers, auto service centers, and funeral homes. These Main 

Street businesses should not bear the burden of an economic crisis 

they did not create. Home, auto, and commercial insurers did not 

cause the financial crisis, are not systemically risky and have 

strong and effective solvency and consumer protection regulation at 

the State level. We are predominantly a Main Street, not a Wall 

Street, industry with less concentration and more small business 

competition than other sectors. 

Property casualty insurers have not asked for government handouts. Our industry is stable and continues to provide critical services to local economies and communities. 

However, small insurers are concerned about being subject to administration proposals intended to address risky Wall Street banks 

and securities firms, but that apply broadly to the entire financial 

industry. 

Specifically, we are concerned about the following: 

The proposed Consumer Financial Protection Agency does not 

adequately exclude insurance from its scope. An exclusion should 

be added for credit, title, and mortgage insurance, which are generally provided by and to relatively small businesses. Protection 

should be added for insurance payment plans which are already 

well regulated by State insurance departments. 

The proposed new Office of National Insurance is given too much 

subpoena and preemption power without adequate due process or 

limits on its scope and its ability to enter into international insurance agreements. It also needs a definition of ′′small insurer′′ to 

prevent excessive reporting requirements. 

Systemic risk regulation needs to be modified to reduce government backing of large firms at the competitive expense of small financial providers. Leveraged Wall Street behemoths must not be 

made bigger through government bailouts and consolidation. Government shouldn’t forget or harm Main Street in addressing systemic risk regulation. 

Resolution costs of systemically risky firms should be paid for by 

firms with the greatest systemic risk. Bank regulators should not 

be allowed to resolve systemic risk failures by reaching into the asVerDate Aug 31 2005 15:44 Dec 09, 2009 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52261.TXT DARIEN
12 

sets of small insurance affiliates whose losses would then be 

charged to other innocent small competitors through State guaranty funds. 

Finally, congressionally proposed repeal of the McCarran-Ferguson Act would significantly reduce insurance competition, primarily harming smaller insurers that would not otherwise have access to loss data and uniform policy forms necessary to compete effectively, and that would ultimately harm consumers. 

The cost of new regulations almost always disproportionately affects small business who can least afford the necessary legal and 

compliance requirements. The property casualty industry is 

healthy and competitive and the current system of regulating the 

industry at the State level is working well. Should the Congress 

fail to address the issues we have identified, the consequences on 

consumers and the economy could be quite harsh, imposing an especially large burden on small insurers and small businesses. 

Thank you. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Robinson. 

[The statement of Mr. Robinson is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. And we have four votes right now, so 

the committee will stand in recess for approximately 30 minutes 

and will reconvene right after. 

[Recess.] 

Chairwoman VELA ́ ZQUEZ. The committee is called to order. 

I want to address my first question to Mr. Hirschmann, Mr. Harris, and Mr. Anderson. 

In determining the impact of a new consumer protection authority, structure and details are key. For example, the manner in 

which the term ′′credit provider′′ is defined will be especially critical. 

So how can Congress define these terms in a way that minimizes 

the impact for small businesses? 

Mr. Hirschmann? 

Mr. HIRSCHMANN. I think you are exactly right. Both the scope 

of the bill, as originally drafted—and we recognize that Chairman 

Frank has indicated that he is working on that issue—as well as 

the terms. Many of the key terms were so ill defined and the powers that were granted to the proposed agency are so significant 

that it really leaves that up to the new regulator to decide; and we 

can’t afford to do that. 

So I don’t have an answer for you on how to specifically define 

credit, but clearly you need to target it to the specific firms that 

are providing direct credit and not indirectly to those who are providing material support or indirectly the way the original bill contemplated. 

Chairwoman VELA ́ ZQUEZ. Mr. Harris. 

Mr. HARRIS. I would concur with that. 

We were providing a service or even those who are providing a 

trade or business that is not just purely loaning of money is where 

we would get into it. I mean, I cannot think of one client I have— 

virtually, other than a restaurant—that would not be one who does 

not provide credit of some sort. A doctor’s office—and doctors’ offices even for people who are on Medicare, you have copays; and 

13 

the copays are billed to those people after they have seen the doctor. So then the doctors have substantial accounts receivable. 

Are they credit providers? I don’t think that was ever the intent. 

Chairwoman VELA ́ ZQUEZ. Mr. Anderson? 

Mr. ANDERSON. I guess we really have to define who is the creditor on behalf of the mortgage brokers. I mean, we are truly not 

the creditor, and yet we do perform a function, taking loan applications from applicants and explaining loan terms and giving them 

disclosures. 

So until we define who really is the creditor, that is all I can answer on that. 

Chairwoman VELA ́ ZQUEZ. Mr. Hirschmann, Mr. Harris, the financial crisis wreaked havoc on consumers. We all know that. And to 

that end, several Members of the House, including Representative 

Minnick, are proposing an alternative consumer protection council, 

one that will coordinate regulatory actions across several State jurisdictions. 

What is your take on this idea? 

Mr. HIRSCHMANN. We have not yet seen the details, but we do 

think that consumer protection should be an important part of the 

overall regulatory reform; and so we welcome alternatives, particularly alternatives that build on the current structure that requires 

better coordination among existing regulators, that provide for better disclosure to consumers and tougher enforcement against predatory practices. 

Mr. HARRIS. I think AICPA would concur with that. We are talking about in our area—of course, we believe that products should 

be in and certain services should be out. 

Chairwoman VELA ́ ZQUEZ. Mr. Loy, in your testimony you touch 

on the distinction between hedge funds and venture capitalists. 

Given the role that hedge funds play in this debate, can you elaborate on that distinction and talk about differences about how VCs 

and hedge funds should be regulated? 

Mr. LOY. Thank you. So I think I would begin by saying it is 

easier to define it by what is similar. There is really only one similarity between a hedge fund and a venture capital fund, and that 

is the legal structure that we use. We typically are organized as 

limited partnerships and they are typically organized as limited 

partnerships and the investors become the limited partners. 

Beyond that, hedge funds are associated with trading in the public markets. They typically—in addition to the capital that investors put into the hedge fund, they borrow, in other words, they use 

leverage, several multiples of that capital that the investors have 

put in, to make a broader set of investments. 

They often invest for fairly short periods of time, and I know that 

can range based on their strategy. But it can be as short as a few 

hours, typically in the days or weeks; some hedge funds may be for 

a few months. And so they are also bringing the capital in up front 

from the investors and the investors have the ability typically to 

pull their money in and out. 

And then, lastly, a lot of hedge funds particularly trade in these 

off-balance-sheet securities, derivatives. 

14 

Beyond that, I would be clear to say that I not an expert on 

hedge funds, so I am not going to comment on how they should be 

or should not be regulated. 

But what I will comment on is for venture capitalists. We use the 

same legal structure, but the similarities end there. Our investors 

put money in as limited partners, but do not have the ability to 

take money out for 10 years. We do not use leverage at all, so the 

money that investors put in our fund in cash is the money that we 

have available. 

On top of that we invest only in stock, not in credit. We expect 

each investment we make to hold that investment for 5 to 10 years. 

And the last difference is that we work very closely operationally 

with the businesses, the small businesses, to help them grow. 

Hedge funds, I think, more typically have a distance between them 

in that regard. 

So all I can say is that the current advisor act in the contemplated regulations for hedge funds are clearly designed for 

hedge funds and, for example, require a compliance officer in a firm 

to report periodically on the public market trading positions of that 

hedge fund. 

If we were to be—right now we are encompassed in the same 

regulation—we would similarly be required to hire a chief compliance officer to tell the SEC about our public market trading positions, even though our fund agreements do not even allow us to 

trade in the public market. So this very expensive person would sit 

there and fill out a form that said zero or N/A every month. 

Chairwoman VELA ́ ZQUEZ. But in the sense that hedge funds borrow big money and try to exploit inefficiencies in the market, 

wouldn’t you say that there is an element of risk that we don’t see 

in venture capitalists? 

Mr. LOY. Again, I would rather comment on the venture capital 

piece. 

Chairwoman VELA ́ ZQUEZ. Can we touch on the private equity 

firms? 

Mr. LOY. Sure. 

Chairwoman VELA ́ ZQUEZ. They are another unique financial entity. Do you have any position as to how they should be regulated? 

Mr. LOY. I don’t. I think that that is up to the expertise of the 

people on this and other committees. 

I do think that there are substantial differences in the types of 

investing and the types of leverage that they use. Again, they use 

the same legal structure as us, but there are significant differences 

beyond that. 

Chairwoman VELA ́ ZQUEZ. Thanks. 

Mr. Harris, in your testimony, you said that CPAs should be— 

should not be exempt from activities that are not customary and 

usual. And the vagueness of the phrase ′′not customary and usual′′ 

could create the exact kind of problems that you are seeking to 

avoid. 

How do you recommend that legislators implement this distinction? 

Mr. HARRIS. CPAs have a very close relationship with their clients, and there are a lot of questions that go back and forth on a 

routine basis. And so many of these are small clients and they rely 

15 

upon us for all kinds of advice, both tax advice for the company 

and the individual. 

When I am talking with a doctor who happens to be set up in 

a form—an entity which is a partnership or a PA, I can’t help but 

talk to him about both at the same time. That is where our biggest 

problem is. 

Where we believe that CPAs should come under the act would 

be when they are involved in selling some form of a product. So, 

for instance, my client comes to me and says, I need some help. We 

say we believe you need a loan and we recommend that you go to 

the bank and talk to the bank. That would be exempt. 

However, if we said, But by the way, we will make you that loan, 

in that case we should come under the act, where there is a product involved. 

Chairwoman VELA ́ ZQUEZ. Can we use like the example of H&R 

Block? 

Mr. HARRIS. Who are not CPAs? Yes. 

Chairwoman VELA ́ ZQUEZ. But they do accounting. And also they 

make refund anticipation loans. So that part should be regulated. 

Mr. HARRIS. We totally agree with that, and if there is a CPA 

doing that, we believe that is a product and, in fact, should be regulated. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

Mr. GRAVES. In all the debate, when it came to the bailouts and 

everything that took place, we had a lot of talk about financial institutions being too big to fail. And my question to each of you is 

there—in our capitalist society, such a thing as an institution that 

is too big to fail? And if one of the very large financial institutions 

did fail, how would that affect you or your business or your clients, 

whatever the case may be? 

Mr. Harris? 

Mr. HARRIS. I have listened quite a bit to Mr. Geithner and Mr. 

Bernanke on that issue, and I happen to concur with them. There 

are some institutions which are too big to fail and would have 

brought the world financial markets to a standstill if they did. 

I also understand what happened with those that did fail and 

what their limitations were at time. It would have a tremendous 

effect—it is already having a tremendous effect, because right now 

most small businesses are having a difficult time borrowing money 

with the same entities that did not fail. But because they are having to go from a leveraged model to a much lower leveraged model 

than they were practicing—and those are major banks that we all 

know that are still here today, that may be owned by someone else. 

I can give a perfect example of a public hospital that I sit on the 

board of; and we were forced to liquidate our endowment fund to 

pay off our bonds because we couldn’t get the line of credit to secure those bonds that we could always get with no problem. We 

had the money to do it, but it will put the hospital in a very tenuous situation in the event we continue to lose money because of 

Medicare cuts. And I happen to live in an area which is a very high 

Medicare area. 

So it is already having that effect. I can tell you it has had that 

effect just on what has occurred to small business. Lines of credit 

16 

and letters of credit are virtually impossible to get for small business. 

Mr. GRAVES. Mr. Loy? 

Mr. LOY. What I would say we do: We invest in companies that 

often don’t exist; we help them start. 

We have been using a phrase of ′′too small to fail.′′ These are the 

companies that, a very small proportion of which are going to grow 

up to be the next Google, Cisco, Apple, Genentech, FedEx, 

Starbucks, et cetera. And we are concerned about the opposite 

problem, which is the situation where we are creating a problem, 

where it is too hard for those companies to get really big, particularly on the IPO side, so they are choosing to sell out early in order 

to get some money back to the investors. 

And typically when other companies are acquired by companies— 

including, increasingly, overseas companies—they are not going to 

grow up to be the drivers of 12.1 million jobs that represent the 

last 20 years of venture investing. 

In terms of the impact of the Lehman-led crisis or another one— 

Mr. Harris’ example is actually an interesting one; he mentioned 

that in order to get liquidity for their bond fund, they had to liquidate their endowment—the largest source of capital for our industry is actually endowments and foundations and pension funds; 

and we have seen a dramatic drop in their willingness or ability 

to provide capital to our industry because they are repurposing it 

away from higher risk, higher reward, but highly illiquid and longterm investments to short-term liquidity needs. 

I would characterize it as much as a timing problem at any moment in time. The capacity and willingness to fund things for 5 or 

10 years, while they grow up to be the next generation drivers of 

job creation, are seriously at risk. Even as it is, adding more burdens onto us is sort of why we are particularly concerned at this 

critical moment. 

Mr. HIRSCHMANN. The right to fail in an orderly fashion has been 

one of the key strengths of our economy. Obviously, when everything fails at one time, it requires extraordinary steps. 

But I think one of the things we need to be careful about is not 

to design our system so that there is an implied backstop by the 

Federal Government against the two largest mutual fund companies, the two largest hedge funds, the two largest private equity 

firms, or the two largest of anything. We need to be able to have 

the information at the regulator level to understand systemic risk, 

but not set anybody up to be permanently protected against failure. 

We can make them fail in a more orderly fashion so they don’t 

burn down the neighborhood, but nobody should be insulated 

against failure. 

Mr. ANDERSON. I love your question. 

I don’t know if you saw the Wall Street Journal a couple of days 

ago where it shows that 52 percent of all loan originations and closings happen by the top three companies, where if you look at that 

2 years ago, one of them was down to like 4 percent. That is dangerous. That is why I said in my opening remarks that the small 

businesses are at risk. 

Do we want loan origination for home mortgages to be controlled 

by three companies in America? There have been an awful lot of 

17 

choices for mortgages—a lot of small mortgage bankers who have 

done a phenomenal job, who never ever participated in the 

subprime or pay option ARMs that got us in this mess to begin 

with. But a lot of these small companies can’t get warehouse lines 

of credit. 

We did a very good job. My company, personally, we had the second lowest FHA delinquencies in the State of Louisiana, and we 

are at risk. So is a company too big to fail? I don’t think so. 

Mr. ROBINSON. Congressman, it is hard to come up with the 

number as to how large is a company that is too big to fail. I think 

more important is, how much it is leveraged, how interconnected 

it is; and in our business, how you manage your accumulations or 

how much stuff do you have out there that could cause a problem. 

For example, as far as leveraging goes, our company is a mutual 

company. The only way we can raise capital is through operations. 

We do not issue stock. In our business, one of the leverage measures is premium-to-capital or premium-to-surplus, which is a proxy 

for how many policies you write and how much exposure you have. 

In our business three-to-one, three times your capital, is probably 

the upper limit. Two-to-one is much better. My company is one-toone because we are pretty conservative. I am told some banks get 

up to 30-to-1. The question really is, what is your leverage ratio? 

I think that is one point that is more important than absolute size. 

Another question is how interconnected you are. What is the 

counterpart of your risk if either the counterpart or yourself has a 

problem? 

In our industry rarely reinsure one another. When we buy reinsurance, kind of like laying off a bet, we go to the worldwide market. So there is not much interconnectivity in our industry, but it 

is something I believe you can measure. 

And finally, there is what we call ′′accumulations′′. That is, how 

many houses do you insure on the beach and how many businesses 

on an earthquake fault line and so on. You need to be able to measure precisely that and report that to regulators to make sure that 

you haven’t overextended yourself. 

I think if you look at those three items instead of absolute size, 

you could come up with a much better result. 

Mr. GRAVES. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Mrs. Dahlkemper. 

Mrs. DAHLKEMPER. Thank you, Chairwoman Vela ́zquez and 

Ranking Member Graves for convening this critical hearing on the 

impact of financial and regulatory restructuring on small businesses and community lenders. And thank you to the panel of witnesses for joining us today. 

While it is clear from the recent economic crisis that we must impose greater oversight, transparency and accountability in the financial sector, we must also ensure that our financial regulatory 

restructuring does not negatively impact the ability of financial institutions to continue to provide the American people, our small 

businesses and our communities with access to capital. Ensuring liquidity in the market will continue to promote economic recovery. 

In my district in Pennsylvania, local businesses are reeling as a 

result of banks not lending. So we have to enact balanced reform, 

but still allow for a healthy flow of capital. However, we must also 

18 

ensure that consumers are protected and adequately informed in 

their financial choices and that they are ensured a variety of financial products that carry better disclosed and understood risk. 

Mr. Anderson, I do have a couple questions for you. In your testimony, you mentioned a host of Federal regulations that mortgage 

brokers must comply with. 

Which Federal agencies are charged with enforcing these regulations? 

Mr. ANDERSON. Well, we have got RESPA; that is number one, 

under HUD. 

We have the Truth in Lending Act. I mean that has to do with 

your disclosures, your good faith and truth in lending. All of this, 

mortgage brokers, banks savings and loans, we all operate under 

that umbrella. 

Also in our States, individual States, we have to adhere to the 

same policies; and some of our States have predatory lending laws. 

In Louisiana, we just passed a law that there are no prepayment 

penalties, which is a good thing. 

So we are all under the same umbrella, and we have to comply 

with our own State lending laws. And we have got the Safe Licensing Act, which is for everybody. 

Mrs. DAHLKEMPER. Let me ask you, because there are a number 

of agencies: Do you think it would be better, in your view, to combine enforcement under one agency or entity, rather than having 

to deal with a number of different agencies? 

Mr. ANDERSON. I don’t know if that is going to create a bottleneck. I am not sure. 

We feel that we need to slow down, maybe look at this further. 

We are all for—the National Association of Mortgage Brokers is all 

for simpler, easier disclosures. I think if we look at what happened 

in the past with the subprime and all of those other loans, I think 

we—I relate it to the pharmaceutical industry. 

If you take Vioxx, what happened to Vioxx? It was banned. We 

didn’t go after the pharmacists or the drugstores on the corner. We 

went after the manufacturer. And I think if we control the manufacturer, that is, the product—if the product caused the foreclosure 

crisis, we need to eliminate that product. 

Mrs. DAHLKEMPER. Let me ask you then a question that goes 

along with that, because it has been reported that mortgage brokers who processed the subprime loans are now counseling individuals who are indebted by those loans regarding their restructuring. 

So does your association promote standards by which brokers 

evaluate the financial suitability of loan products by prospective 

borrowers? Or do you just rely upon the lenders, underwriters for 

that? 

Mr. ANDERSON. Well, the way the National Association of Mortgage Brokers operates, we have a very strong code of ethics. We do 

not have a fiduciary responsibility to the borrowers. We counsel the 

borrowers. We do not underwrite the loans. 

And I will give a prime example where the mortgage broker got 

blamed, and that was with Fannie Mae and Freddie Mac. And we 

know what happened there. I can tell you, I have done a lot of 

loans, and Fannie Mae and Freddie Mac had an automated underVerDate Aug 31 2005 15:44 Dec 09, 2009 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52261.TXT DARIEN
19 

writing system and they would approve borrowers at 100 percent 

financing with a 65 percent debt-to-income ratio before taxes. 

Now, can the mortgage broker turn that borrower down when it 

was approved by Fannie Mae and Freddie Mac? If we did take that 

approach, if I would turn somebody down for that, I could be sued 

because—for discrimination or what have you. And those are the 

mistakes that happened. 

Mrs. DAHLKEMPER. So what is your role then in this? 

Mr. ANDERSON. The role of a mortgage broker is to offer the 

products, just like an insurance broker. 

Why do you go do a insurance broker? Because they represent a 

whole host of carriers. The mortgage broker does the same thing; 

we represent a whole host of carriers of lenders and banks across 

the country. We service a lot of small, rural areas. And the mortgage broker has done a phenomenal job. There is equal blame 

across the board for banks, mortgage brokers— 

Mrs. DAHLKEMPER. So you don’t have any financial stability 

standards that you, as an association, apply? 

Mr. ANDERSON. I mean, we have a strong code of ethics. 

Mrs. DAHLKEMPER. Thank you. 

My time is up. I yield back. 

Chairwoman VELA ́ ZQUEZ. Would the gentlewoman yield? 

Mrs. DAHLKEMPER. Yes. 

Chairwoman VELA ́ ZQUEZ. Mr. Harris, if you provided bad advice 

to a customer or client, would you be liable? 

Mr. HARRIS. Oh, yes. 

Chairwoman VELA ́ ZQUEZ. Mr. Anderson, if you sell a product that 

is inappropriate, that is not a good product, are you liable? 

Mr. ANDERSON. That is a hard question. I mean— 

Chairwoman VELA ́ ZQUEZ. My guess is that that is the core of her 

question when she asked ′′regulators.′′ 

There is not such a regulator who would come in and examine 

and do any regulating examination of your activities? 

Mr. ANDERSON. No. We are regulated. We are examined; on a 

State level, we are examined. 

Chairwoman VELA ́ ZQUEZ. We are talking about the Federal Government and Federal legislation that is pending before—that is 

being considered now, that is being worked by Chairman Frank. 

So the question is consolidating Federal regulation so that it has 

uniformity with the mortgage brokers industry. 

Mr. HARRIS. Madam Chairwoman, if I could also comment because I answered you with a very simple answer when I said, ′′Oh, 

yes.′′ 

Not only to our client, but if we provide bad tax advice and in 

the end, as the result of an IRS audit, the IRS can and will fine 

us significantly. We also face criminal penalties from the IRS. 

Chairwoman VELA ́ ZQUEZ. Okay. 

Mr. Westmoreland. 

Mr. WESTMORELAND. Thank you, and I want to thank the Chairlady for having this hearing. I—this is my third term in Congress, 

and I want to congratulate her in having this, because this is the 

first hearing we have had, I think—at least that I have been associated with in my committees—that really we get to hear the uninVerDate Aug 31 2005 15:44 Dec 09, 2009 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52261.TXT DARIEN
20 

tended consequences of what a proposed piece of legislation can 

bring into different entities that are so important to our economy. 

So I want to thank her for doing that, because unintended consequences are things that happen when we pass legislation hastily 

up here. 

Mr. Anderson, I want to say that I know that the mortgage brokers—I come from a real estate background, the building business—that you all were very big proponents of the SAFE Act that 

was passed in 2008 that basically licensed brokers, mortgage brokers, which had not been the case. So you have been a proponent 

of regulation that you thought was necessary for your industry. 

But we see unintended consequences all the time up here. The 

credit card act that we passed with the consumer protection stuff 

in there, there has been an unintended consequence that people 

that actually really need a credit card and actually need some 

short-term credit are not able to get it. 

And when we passed some housing legislation—and, Mr. Anderson, I will address this to you—I think it has some unintended consequences. And, sure, we made bad loans and we had all different 

types—as Mr. Loy said, derivatives. We were selling programs that 

nobody even knew what they were. They just knew they were making a bunch of money doing it. 

But right now, if I understand it correctly from some of my 

friends still in the real estate business and still in the mortgage 

business, there are some loans in some States that you can’t even 

offer people. Because of some of the regulations that have been put 

on as far as what credit scores are, additional points and fees that 

are added to these things, that came from some of the regulation 

that we passed trying to help the situation, have actually hindered 

it. 

Can you comment on that? 

Mr. ANDERSON. Yes, we have—if I can use the term, ′′we have 

had our hands tied.′′ And there are many, many States out there, 

and we are one of them, that we enjoyed a very low foreclosure 

rate. And the restrictions, I will tell you that there is no question— 

my firm is also part of the largest real estate firm in the Gulf 

south, and I will tell you that there is no question that the pendulum has swung so far this way now that the credit is tightening, 

we depleting the pool of eligible borrowers to buy these properties, 

and we have got to be careful. We have got to, somehow, come back 

in the middle somewhere. 

We know the subprime loans were bad, and you are right. People 

made an awful lot of money from Wall Street on down. There is 

no question, plenty of blame to go around. 

But get back to the safe mortgage product, but the credit score 

restrictions; and I tell you all, of all the loans that have a done in 

my 31-year career, if anyone can tell me the difference between a 

619 and a 620 credit score, I would like to know what that is. Or 

a 679 and a 680. The difference is nothing on the credit. 

The difference is, one borrower is going to pay an extra 1.5 to 2 

points; and on an investment property—and I see it every day, 

every day, somebody with an 832 credit score putting 20 percent 

down can’t get a mortgage. That is pretty sad. 

21 

Mr. WESTMORELAND. And Mr. Anderson, with the little bit of 

time that I have left, I know that some of our returning veterans 

who have been in theater and fought and defended our country, a 

lot of times our National Guard members and Reserve officers 

leave great paying jobs to go serve our country. And when they 

come back, sometimes their credit score has been hurt, or the 

spouse maybe has done something. 

I understand that some of these restrictions are making it harder 

and harder for our military to be able to get it. Because if I understand it correctly from some of the news today, some of these credit 

scores are being lowered 10, 20, 30, 40, even 50 points, without 

anyone knowing it, just because of the reduction in the credit market. 

Mr. ANDERSON. You are absolutely right. 

Guys, I have seen credit scores drop 30, 40 points—and I am not 

kidding you—for a $12 medical collection that they had no idea 

that they had. I mean, it is amazing. We are just set on this number of a credit score. 

There are so many factors that you have to look at. I mean, it 

seems like we are going back 20 or 30 years which—there is nothing wrong with that concept, but people have to qualify. But just 

using a number and a credit score, that is creating some problems. 

Mr. WESTMORELAND. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Madam Chair. You know, it 

seems as though the approach that the Financial Services Committee is taking is that we have got a problem out here, and/or 

they think they have got a problem, and we are going to use a big 

patch on it. And it seems like having a sprained ankle and cut the 

leg off to solve our problem. 

I think sometimes when we have a problem, we have to see what 

the problem is and then go back and fix that problem and not have 

the unintended consequence, what Congressman Westmoreland 

was talking about. 

Too often it appears to me in this situation that this piece of legislation is so broad it is going to provide an umbrella over anything 

when anybody has any sort of a monetary transaction. I think you 

gentleman have helped to define where we ought to be going this, 

and it is the big guys that have stumbled along and not done 

things the way they should have; and a lot of other folks are being 

caught in this net. 

So I guess my comment is, have I identified this correctly? Do 

you think basically we need to be looking at the too-big-to-fail-guys 

that really were—the problem seems to originate from? Are there 

some small players in this that have got enough blame to go 

around, and we can play with them too? 

Mr. Robinson? 

I don’t think you guys had any problems. We only had one insurance company, and that was the investment portion of that that 

was the problem versus the insurance company; is that right? 

Mr. ROBINSON. That is correct, Congressman. 

If there is a common thread that I could recommend that might 

answer some of these questions, it is, how broad a measure would 

22 

be needed to cover all kinds of problems. It is answering a simple 

question like, Who underwrites the risk and who prices it? Because 

you could have somebody saying, Well, I thought the loan originator was. Well, I thought they were. 

Well, who is? Whether it is a credit default swap or a mortgage. 

And I think as we try to solve these issues—and there is no question that there are issues to be solved—that instead of perhaps 

picking a number to define too-big-to-fail, say, All right, you are 

big; what are your exposures and how much capital do you have 

to handle what statisticians would call the tail events—things that 

you don’t think happen? 

And if they cannot answer those questions clearly and they perhaps have no idea, then that might aim you towards the real root 

cause of the issue. And that might be a good step, I would recommend. 

Mr. LUETKEMEYER. Okay. 

Mr. HIRSCHMANN. I think you are right to identify the scope of 

the proposed CFPA as one of the problems. 

There are a couple of other issues, including, it separates out 

consumer protection from safety and soundness regulation. So you 

might have one regulator telling you to go left and the other telling 

you to go right with no way to reconcile the differences. That clearly will impact the availability of credit, particularly for small firms. 

The other is the ill definition of all the terms. For example, it 

sets up a new, vaguely defined abuse standard. What our study reveals is that a product that might seem to be abusive for one individual consumer in a particular financial condition might be the 

lifeline for a small business to meet their payroll that week and 

perfectly appropriate for the small business. 

It is hard to imagine how a Federal regulator could anticipate 

those differences and make sure we don’t accidentally cut off the 

vital lifeline for small businesses. 

Mr. LUETKEMEYER. My time is going to run out here. Quickly, 

with Mr. Hirschmann and Mr. Loy and Mr. Harris, quick answers. 

I know we are going to have some bankers in the next section. 

I was curious about access to credit. I think that really impacts 

small businesses in small communities and suburbs of our cities. 

Have you had any comments or problems with some of the members of Chambers of Commerce with regard to access to credit that 

you would like to comment on—particular industries, in particular? 

Mr. HIRSCHMANN. Access to credit is a significantly enhanced 

problem in this crisis. What our study finds is that even before the 

crisis, half of the smallest firms had access-to-credit problems. It is 

clearly magnified. 

I don’t know whether you point—obviously, you don’t want banks 

to make loans that are being given to inadequate—people that 

don’t have adequate credit. 

On the other hand, you want to make sure that the small businesses have credit. That is why this secondary credit market, the 

ability of small firms to rely on their personal credit, especially 

when they are starting a business, is vital to start-ups and vital 

to creating new jobs in this country. 

Mr. LOY. I would agree, with a caveat. 

23 

Most of the businesses that we fund are so raw, they are pure 

garage start-ups, they are not eligible for credit. So we don’t use 

credit, or companies don’t, until they have grown into larger entities. And it is at that stage where, historically, we have been able 

to bring in credit provider to scale the job creation. 

That now is not happening, so we are having to supply more and 

more equity to later-stage start-ups, and that is causing us to not 

have as much ability to invest in the brand-new things. There is 

a falloff in seed-stage company creation because the capital that we 

have, that was supposed to be for that, is filling the role that debt 

used to play for our larger companies. 

Chairwoman VELA ́ ZQUEZ. Time has expired. 

Ms. Fallin. 

Ms. FALLIN. Thank you, Madam Chair. I am sorry I couldn’t be 

here for all the hearing, but what I have heard is very interesting; 

and I will talk about what I am hearing in my home State of Oklahoma. 

I am hearing from businesses that lines of credit are hard to 

come by, that they are seeing sometimes double-increased rates on 

their interest rates. I am hearing that their lines of credit have 

been, many times, cut in half to where they do not have the lines 

of credit. And I am hearing from some of our business owners that 

when they do want to take equity out of their businesses, they can’t 

take it out of their businesses to expand their product. 

My question would be, what has changed over the last 2 to 3 

years that has caused this market to tighten up? And what are the 

problems associated that have caused those things? 

And in this new Consumer Financial Protection Act, do you think 

that will help the situation where more money will be available 

and the credit will start flowing? Or are we reaching too far, and 

it is going to cause the market to contract? 

Mr. HARRIS. I will say that it is very hard—I refer to smaller 

businesses and some are public institutions—hospitals, private 

schools—who are suffering because they can’t get their loans. 

The problem is—the community banks are wonderful, and they 

serve a tremendous need for smaller clients, and they have come 

through for the clients and the small businesses. The community 

banks have been very good. 

The problem we see in that area is when you get to $2 and $3 

or $4 and $15 or $18 million, which are still small entities in small 

towns, who have these kinds of lines of credit or letters of credit 

to secure bonds, public bonds that have been issued. The big banks 

are the ones who can no longer make those loans, and as a result— 

we are seeing in a number of private institutions—they are having 

to try to figure out a way to pay off the bonds with far more expensive capital. And it is not a positive thing; it is not good for them. 

And what you are hearing at your home is the same as I am 

hearing all across the country. 

Mr. LOY. I was just in Oklahoma last week for 3 days looking 

at seed-stage start-ups to invest in, coming out of your research 

universities. Some really exciting things, particularly in the energy 

arena. 

Ms. FALLIN. I hope you put the money there. 

24 

Mr. LOY. We are looking and we want to, precisely for that reason. We don’t provide credit; we provide investment equity capital. 

But because these start-ups cannot get a home equity loan to finance their start-up, they are needing $500,000 from us; and it is 

getting harder and harder for us to provide that for the reasons I 

just said. 

And the potential for this regulation would be disproportionately 

felt on the smallest firms that provide that earliest stage of capital. 

So there is a good chance that entire swath of $500,000 to $1 million of seed-stage capital, if we are forced to follow hedge funds regulation, the cost of that will drive the firms who do that out of 

business. 

Ms. FALLIN. Can I ask, also, another question? 

I am hearing from our local bankers that the fee increases to recapitalize FDIC is causing them not to have as much capital and 

loans to put out into the marketplace. And they have told me, like 

in my State, that $37 million has gone out in fee increases which 

they could be lending out to our small businesses and even to those 

who are wanting to have mortgages. And they are concerned about 

another fee increase on those small bankers that will once again 

drive capital and take it out of the marketplace. 

Are you seeing that back in your individual organizations and 

States, that it is taking the capital out of the marketplace, lending 

ability? 

Mr. HIRSCHMANN. It is certainly something we hear from our 

small banking members. 

If you go to any local Chamber across the country, you will find 

a small banker on the board, and it is particularly one—so whether 

those fees are necessary, clearly you have to keep FDIC moving. 

We are going through a very exigent period here. The real question is, do you want to add fees on top of that even further through 

the Consumer Financial Protection Agency? It is clearly the wrong 

time to add unnecessary fees, particularly when they won’t produce 

the intended result. 

Mr. ROBINSON. Congresswoman, perhaps there is a parallel in 

the financial services—noninsurance financial service area you that 

might consider. 

I mentioned earlier about underwriting, or identifying the risk, 

underwriting it and pricing it properly. And you do the best job you 

can, whether it be a house on a beach or a subprime mortgage or 

whatever. And then, when the hurricane comes or the collapse happens, management meetings happen that say, We are not going to 

do that again. 

And then we have to recast our expectations, and that usually 

results in underwriting tightening up, which could mean change in 

credit score or unwillingness to put out lines of credit. 

Also, a bad result could result in an organization being overleveraged. We have too much out there and so we have to pull back. 

Ms. FALLIN. Thank you, Madam Chairwoman. 

Chairwoman VELA ́ ZQUEZ. With that, let me take this opportunity 

to thank all of you for participating. You have given very insightful 

information. The members of the panel are excused. 

And I will ask the members of the second panel to please come 

forward and take your seats. Thanks. 

25 

Chairwoman VELA ́ ZQUEZ. Our first witness is Mr. James D. 

MacPhee, the CEO of Kalamazoo County State Bank in 

Schoolcraft, Michigan, founded in 1908. Mr. MacPhee is testifying 

on behalf of the Independent Community Bankers of America. 

ICBA represents 5,000 community banks of all sizes and charter 

types throughout the United States. 

Thank you. You will have 5 minutes. 

STATEMENT OF JAMES D. MacPHEE 

Mr. MACPHEE. Thank you, Chairman Vela ́zquez and Ranking 

Member Graves. I am pleased to represent the 5,000 members of 

the Independent Community Bankers of America at this timely and 

important hearing. 

Just over one year ago, due to the failure of some of the Nation’s 

largest firms to manage their high-risk activities, key elements of 

the Nation’s financial system nearly collapsed. Community banks 

and small businesses, the cornerstone of our local economies, have 

suffered as a result of the financial crisis and the recession sparked 

by megabanks and unregulated financial players. 

In my State of Michigan, we face the Nation’s highest unemployment rate of 15.2 percent. Yet community banks like mine stick to 

commonsense lending and serve our customers and communities in 

good times and bad. 

The bank has survived the Depression and many recessions in 

our more than 100-year history, and it proudly serves the community through the financial crisis today—without TARP money, I 

might add. 

The financial crisis, as you know, was not caused by well-capitalized, highly regulated commonsense community banks. Community 

banks are relationship lenders and do the right thing by their customers. Therefore, financial reform must first do no harm to the 

reputable actors like community banks and job-creating small businesses. 

For their size, community banks are enormous small business 

lenders. While community banks represent about 12 percent of all 

bank assets, they make 31 percent of the small business loans less 

than $1 million. Notably half of all small business loans under 

$100,000 are made by community banks. 

While many megabanks have pulled in their lending and credit, 

the Nation’s community banks are lending leaders. According to an 

ICBA analysis of the FDIC’s second quarter banking data, community banks with less that $1 billion in assets were the only segment 

of the industry to show growth in net loans and leases. 

The financial crisis was driven by the anti-free-market logic of allowing a few large firms to concentrate unprecedented levels of our 

Nation’s financial assets, and they became too big to fail. Unfortunately, a year after the credit crisis was sparked, too-big-to-fail institutions have gotten even bigger. Today, just four megafirms control nearly half of the Nation’s financial assets. This is a recipe for 

a future disaster. 

Too-big-to-fail remains a cancer on our financial system. We 

must take measures to end too-big-to-fail by establishing a mechanism to declare an institution in default and appoint a conservator 

or receiver that can unwind the firm in an orderly manner. The 

26 

only way to truly protect consumers, small businesses, our financial 

system, and the economy is to enact a solution to end too-big-tofail. 

To further protect taxpayers, financial reform should also place 

a systemic risk premium on large, complex financial firms that 

have the potential of posing a systemic risk. All FDIC-insured affiliates of large, complex financial firms should pay a systemic risk 

premium to the FDIC to compensate for the increased risk they 

pose. 

ICBA strongly supports the Bank Accountability and Risk Assessment Act of 2009, introduced by Representative Gutierrez. In 

addition to a systemic risk premium, the legislation would create 

a system for setting rates for all FDIC-insured institutions that is 

more sensitive to risk than the current system and would strengthen the deposit insurance fund. 

ICBA strongly opposes reform that will result in a single Federal 

bank regulatory agency. A diverse and competitive financial system 

with regulatory checks and balances will best serve the needs of 

small business. 

Community bankers agree that consumer protection is the cornerstone of or financial system. However, ICBA has significant concerns with the proposed Consumer Financial Protection Agency. 

Such a far-reaching expansion of government can do more harm 

than good by unduly burdening our Nation’s community bankers, 

who did not engage in the deceptive practices targeted by the proposal. It could jeopardize the availability of credit and choice of 

products, and shrink business activity. 

In conclusion, to protect and grow our Nation’s small businesses 

and economy, it is essential to get financial reform right. The best 

financial reforms will protect small businesses from being crushed 

by the destabilizing effects when a giant financial institution stumbles. Financial reforms that preserve and strengthen the viability 

of community banks are key to a diverse and robust credit market 

for small business. 

Thank you. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. MacPhee. 

[The statement of Mr. MacPhee is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Mr. Austin Roberts, the CEO of the Bank of Lancaster, Virginia. The Bank of Lancaster was founded in the northern neck of Virginia in 1930. Mr. 

Roberts is testifying on behalf of the American Bankers Association. ABA is the trade group and professional association representing the Nation’s banking industry. 

STATEMENT OF AUSTIN ROBERTS 

Mr. ROBERTS. Chairwoman Vela ́zquez, Ranking Member Graves, 

members of the committee, my name is Austin Roberts. I am Vice 

Chairman, President and CEO of the Bank of Lancaster, which is 

headquartered in Kilmarnock, Virginia. I am pleased to be here on 

behalf of the ABA. 

Small businesses, including banks, are certainly suffering from 

the severe economic recession. This is the not the first recession 

faced by banks. Many banks have survived the ups and downs of 

the economy; mine has survived those for the last 80 years. In fact, 

27 

most banks have been in their communities for decades and intend 

to continue to be there for decades. 

We are not alone, however. In fact, there are more than 2,500 

banks, 31 percent of the banking industry, that have been in business for more than a century; 5,000 banks have served their communities for more than half a century. These numbers tell a dramatic story about the staying power of banks and their commitment to the communities they serve. 

The success of small entrepreneurial businesses are very important to my bank. My bank’s focus and those of my fellow bankers 

throughout the country is on developing and maintaining long-term 

relationships with these and other customers. 

In this severe economic environment, it is natural for businesses 

and individuals to be more cautious. Businesses are reevaluating 

their credit needs, and as a result, loan demand is also declining. 

Banks, too, are being prudent in underwriting, and our regulators 

are demanding it. In fact, in some cases, overly restrictive rules 

and examinations are hampering the banks’ ability to make new 

loans. 

While a great deal of attention is rightfully being paid to the administration’s regulatory proposal, I would like to share with you 

other issues that banks like mine are facing. 

First, the most important threat is the very high premiums being 

paid by banks to the FDIC. For example, my bank paid $75,000 in 

premiums in 2008. This year we will pay $550,000 in premiums, 

with the possibility of it even going to $700,000. 

There is no question that the industry fully backs the financial 

health of the FDIC, but such large expenses have a very strong 

dampening effect on bank lending. ABA has detailed options in a 

letter to FDIC Chairman Bair that meet the funding needs without 

creating a financial burden on banks that could reduce bank lending and hurt the economic recovery. 

Second, ABA is continuing to hear from bankers that regulators 

are demanding increases in capital and that banks improve the 

quality of their capital. With capital markets still largely unavailable, especially for community banks, the only course of action in 

the short run is to reduce lending in order to improve the bank’s 

capital ratio. 

Third, the recession has strained the ability of some borrowers 

to perform, which often leads the examiners to insist that a bank 

make a capital call on their borrower, impose an onerous amortization schedule or obtain additional collateral. These steps can set in 

motion a death spiral where the borrower has to sell assets at fire 

sale prices to raise cash, which then increases the write-downs that 

the banks have to make, and the cycle goes on and on. 

These actions are completely counter to the notion of working 

with customers to make sure that credit is available to them or 

working with borrowers that may even be in distress. 

There is much more included in my written testimony that details the difficulties that have arisen in the past year, but I want 

to take a moment to mention one idea that ABA has to increase 

capital to community banks in areas most hard hit by recession. 

Banks in these areas are doing everything they can to make credit 

28 

available, but it is against the significant headwinds of losses from 

problem loans. 

The idea, which the ABA shared in a letter to Secretary Geithner 

2 days ago, would be to modify Treasury’s existing capital assistance program to help well-managed, viable community banks access capital. These banks would match any investment the Treasury makes with private equity. In this way, a relatively small sum of money, say, $5 billion in- vested by Treasury, matched by $5 billion in private equity, would 

bring all small banks’ capital to levels significantly higher than 

regulators require to be well capitalized. Having additional capital 

will provide a cushion for these banks to meet the credit needs of 

their communities rather than reducing lending to meet regulatory 

capital requirements. 

I want to thank you for the opportunity to present these views 

on challenges ahead for banks that serve small businesses, and I 

am happy to answer any questions. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Roberts. 

[The statement of Mr. Roberts is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Bill Hampel, the 

Senior Vice President of Research and Policy Analysis for the Credit Union National Association. CUNA provides many services to 

credit unions, including representation, information, public relations, and business development. 

Welcome. 

STATEMENT OF BILL HAMPEL 

Mr. HAMPEL. Thank you. Chairwoman Vela ́zquez, Ranking Member Graves, and other members of the committee, thank you very 

much for the opportunity to testify at today’s hearing on behalf of 

the Credit Union National Association, which represents over 90 

percent of our Nation’s 8,000 State and Federal credit unions, the 

State leagues, and their 92 million members. I am Bill Hampel, the 

Chief Economist. 

Credit unions did not contribute to the recent financial debacle, 

and their current regulatory regime, coupled with their cooperative 

structure, militates against credit unions ever contributing to a financial crisis. 

As Congress considers regulatory restructuring, it is important 

that you not throw out the baby with the bathwater. Regulatory restructuring should not just mean more regulation. There needs to 

be recognition that in certain areas, such as credit unions, regulation and enforcement is sound and regulated entities are performing well. 

Credit unions have several concerns in the regulatory restructuring debate. These include the preservation of the independent 

regulator, the development of the CFPA, and the restoration of 

credit unions’ ability to serve their business-owning members. 

First, it is critical that Congress retain an independent credit 

union regulator. Because of credit unions’ unique mission, governance, and ownership structure, they tend to operate in a low-risk, 

member-friendly manner. Applying a bank-like regulatory system 

to this model would threaten the benefits that credit unions provide their members. 

29 

There is some logic for consolidating bank regulators where competition can lead to lax regulation and supervision, but that condition does not exist for credit unions which have only one Federal 

regulator, the National Credit Union Administration. The general 

health of the credit union system proves that our system works 

well. 

Considering the CFPA, consumers of financial products, especially those provided by currently unregulated entities, do need 

greater protection. CUNA agrees that a CFPA could be an effective 

way to achieve that protection, provided that the agency does not 

impose redundant or unnecessary regulatory burdens on credit 

unions. In order for a CFPA to work, consumer protection regulation must be consolidated and streamlined to lower costs and improve consumer understanding. 

CUNA strongly feels that the CFPA should have full authority 

to write the rules for consumer protection, but for currently regulated entities, such as credit unions, the examination and enforcement of those regulations should be performed by the prudential 

regulator that understands their unique nature. Under this approach, the CFPA would have backup examination authority. 

CUNA urges Congress to take the difficult step of preempting 

State consumer protection laws if establishing a CFPA. We are confident that by creating a powerful Federal agency with the responsibility to regulate consumer protection law, with rigorous congressional oversight, more than adequate consumer protection will be 

achieved. And if the CFPA is sufficiently empowered to ensure nationwide consumer protection, why should any additional State 

rules be necessary? 

Conversely, if the proposed CFPA is not expected to be up to the 

task, why even bother establishing such an agency in the first 

place? 

Finally, because they are already significantly regulated at the 

State level, we don’t believe that certain types of credit life and 

credit disability insurance should be under the CFPA. 

As Congress considers regulatory restructuring legislation, 

CUNA strongly urges Congress to restore credit unions’ ability to 

properly serve the lending needs of their business-owning members. There is no economic or safety and soundness rationale to cap 

credit union business lending at 12.25 percent of assets. 

Before 1998, credit unions faced no statutory limit on their business lending. The only reason this restriction exists is because the 

banking lobby was able to leverage the provision when credit 

unions sought legislation to permit them to continue serving their 

members. 

The credit union business lending cap is overly restrictive and 

undermines America’s small businesses. It severely limits the ability of credit unions to provide loans to small businesses at a time 

when these borrowers are finding it increasingly difficult to obtain 

credit from other types of financial institutions, as was described 

by Mr. Hirschmann from the U.S. Chamber in the previous panel. 

It also discourages credit unions that would like to enter the business lending market from doing so. 

We are under no illusion that credit unions can be the complete 

solution to the credit crunch that small businesses face, but we are 

30 

convinced that credit unions should be allowed to play a bigger 

part in the solution. 

Eliminating or expanding the business lending cap would allow 

more credit unions to generate the portfolios needed to comply with 

NCUA’s regulatory requirements and would expand business loans 

to many credit union members, thus helping local communities and 

the economy. Credit unions would do this lending prudently; the 

loss rate on business loans at credit unions is substantially below 

that of commercial banks. 

A growing list of small business and public policy groups agree 

that now is the time to eliminate the statutory credit union business cap for credit unions. And in July, Representatives Kanjorski 

and Royce introduced H.R. 3380, the Promoting Lending to America’s Small Business Act, which would increase the credit union 

business lending cap to 25 percent of total assets and change the 

size of a loan to be considered a business loan. We estimate that 

credit unions could safely and soundly lend an additional $10 billion in small loans in the first year after enactment of such a bill. 

Madam Chairwoman, thank you very much for convening this 

hearing, and I look forward to answering the committee’s questions. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

[The statement of Mr. Hampel is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. We have three votes, so the committee 

will stand in recess and reconvene after these votes. 

[Recess.] 

Chairwoman VELA ́ ZQUEZ. The committee is called to order. 

Our next witness is Mr. John Moloney. He is President and CEO 

of Moloney Securities in Manchester, Missouri. Mr. Moloney began 

his career in brokerage over 30 years ago. In the mid-1990s, Mr. 

Molony formed Moloney Securities. He is the Chairman of SIFMA’s 

Small Firms Committee and serves on FINRA’s Advisory Board for 

small brokerage. 

Thank you and welcome. 

STATEMENT OF E. JOHN MOLONEY 

Mr. MOLONEY. Thank you. Good afternoon, Chairwoman 

Vela ́zquez, and Ranking Member Graves is not here, but the rest 

of the committee. Thank you for the opportunity to testify before 

you on behalf of SIFMA on how changes to the financial regulatory 

system could affect small broker-dealers. 

SIFMA and its small member firms applaud your efforts to be 

the advocate on behalf of small businesses. Small businesses are 

the backbone of the U.S. economy and small broker-dealers are instrumental in serving individual investors and entrepreneurs on 

Main Street. 

I will forgo the statistics for the industry and my company. They 

are in my written testimony. The only thing want to add is—the 

last line I have here is that my firm, like the overwhelming majority of broker-dealers, was not a TARP recipient. 

The majority of financial service reform proposals before Congress do not impact smaller firms like mine. However, small firms 

are concerned that changes contemplated for large global financial 

service firms could cause disparate effects on small firm operations. 

31 

Because the investor confidence in these markets is important to 

all firms, regardless of size, a sound regulatory regime must contain several key elements. 

It must minimize systemic risk, promote safety and soundness of 

the regulated entities, promote fair dealing and investigator protection, be consistent from country to country where applicable, and 

be as effective and efficient as possible. Well crafted and thoughtful 

legislation is needed to avoid unintended consequences that the 

firms that I am representing did not cause. 

Congress should also include sunset provisions under the new 

laws and regulations so that they may achieve their desired effect 

and do not promote any undesired consequences. 

I would like to address two specific features of the financial service reforms that do affect my firm and my brokers. 

First, SIFMA has long advocated the modernization and harmonization of disparate regulatory regimes for brokers, dealers, investment advisors and other financial intermediaries. We welcome 

Treasury’s proposed legislation, which appears to acknowledge 

these important distinctions and which would give the SEC the authority to establish rules for a new uniform Federal fiduciary 

standard that supersedes and improves on existing standards and 

is applied only in the context of providing personalized investment 

advice to individual investors. 

Second, predispute arbitration clauses are vital to the securities 

arbitration system. Small investors benefit in particular, as arbitration allows them to pursue claims they could not afford to litigate and do it on a much more timely basis. Treasury has proposed 

giving the SEC the authority to prohibit predispute arbitration 

clauses in broker-dealer and investment advisory account agreements with retail clients if it studies these clauses and concludes 

that there is any harm on investors. SIFMA supports that provision. 

There are several issues that impact regulation of smaller firms 

that I would like to address. While each one may be insignificant, 

taken as a whole the cumulative effect can be quite devastating. 

For example, fees for financial audits of small firms will increase 

due to the SEC’s decision not to extend an exemption from small 

firms’ Sarbanes-Oxley audit requirements. FINRA has proposed to 

eliminate anti-money-laundering third-party exemption for small 

firms; this will increase AML audit costs. SIPC, FINRA, and the 

MSRB have proposed or implemented increased assessments to 

firms already. The cumulative impact of these and other changes 

drain limited resources from small firms and from their efforts in 

paying for the compliance training and customer service functions. 

Finally, SIFMA supports the small business community initiative 

to correct deficiencies in Reg X to eliminate outdated regulations, 

ensure agencies do not ignore the requirements of Reg X, and compel agencies to consider economic impacts on the rules of small 

business. 

Thank you, Madam Chairwoman and the rest of the committee 

for allowing me to present SIFMA’s views. We hope to continue the 

dialogue on the financial service regulatory reform and stand ready 

to assist any way we can. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Moloney. 

32 

[The statement of Mr. Moloney is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Our next witness is Ms. Dawn Donovan, the CEO of Price Chopper Employees Federal Credit Union in 

Schenectady, New York. Price Chopper has over 6,500 members 

with assets of $16 million. Ms. Donovan is testifying on behalf of 

the National Association of Federal Credit Unions. The Association 

of Federal Credit Unions was founded in 1967 to shape the laws 

under which Federal credit unions operate. 

Welcome. 

STATEMENT OF DAWN DONOVAN 

Ms. DONOVAN. Good afternoon, Chairwoman Vela ́zquez, Ranking 

Member Graves, and members of committee. My name is Dawn 

Donovan, and I am testifying today on behalf of the National Association of Federal Credit Unions, NAFCU. I serve as the President 

and CEO of Price Chopper Employees Federal Credit Union in 

Schenectady, New York. Our credit union has seven employees, approximately 4,500 members in six States and just over $19 million 

in assets. 

NAFCU and the entire credit union community appreciate the 

opportunity to participate in this discussion regarding financial 

regulatory restructuring and its impact on America’s credit unions. 

It is widely recognized that credit unions did not cause the current economic downturn; however, we believe we can be a important part of the solution. Credit unions have fared well in the current economic environment and as a result many have capital 

available. 

Surveys of NAFCU member credit unions have shown that many 

are seeing increased demand for mortgage and auto loans as other 

lenders leave the market. Additionally, a number of small businesses who have lost important lines of credit from other lenders 

are turning to credit unions for the capital that they need. Our Nation’s credit unions stand ready to help in this time of crisis and 

unlike other institutions have the assets to do so. 

Unfortunately, an antiquated and arbitrary member business cap 

prevents credit unions from doing more for America’s small business community. It is with this in mind that NAFCU strongly supports H.R. 3380, the Promoting Lending to America’s Small Businesses Act of 2009. This important piece of legislation would raise 

the member-business lending cap to 25 percent of assets, while also 

allowing credit unions to supply much-needed capital to underserved areas which have been among the hardest hit during the 

current economic downturn. 

NAFCU also strongly supports the reintroduction of the Credit 

Union Small Business Lending Act, which was first introduced by 

Chairwoman Vela ́zquez in the 110th Congress. 

As the current Congress and administration mull regulatory reform, NAFCU believes that the current regulatory structure for 

credit unions has served the 92 million American credit union 

members well. As not-for-profit member-owned cooperatives, credit 

unions are unique institutions in the financial services arena and 

make up only a small piece of the financial services pie. 

We believe that NCUA should remain the independent regulator 

of credit unions and are pleased to see the administration’s proVerDate Aug 31 2005 15:44 Dec 09, 2009 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52261.TXT DARIEN
33 

posal would maintain this independence as well as the Federal 

credit union charter. 

NAFCU also believes that the proposal is well intentioned in its 

effort to protect consumers from the predatory practices that led to 

the current crisis. We feel there have been many unregulated bad 

actors pushing predatory products onto consumers, and we applaud 

efforts to address this abuse. 

It is with this in mind that we can support the creation of the 

Consumer Financial Protection Agency, CFPA, which would have 

authority over nonregulated institutions that operate in the financial services marketplace. However, NAFCU does not believe such 

an agency should be given authority over regulated federally insured depository institutions, and opposes extending this authority 

to credit unions. 

As the only not-for-profit institutions that would be subject to the 

CFPA, credit unions would stand to get lost in the enormity of the 

proposed agency. Giving the CFPA the authority to regulate, examine, and supervise credit unions, already regulated by the NCUA, 

would add an additional regulatory burden and cost to credit 

unions. Additionally, it could lead to situations where institutions 

regulated by one agency for safety and soundness find their guidance in conflict with the regulator for consumer issues. Such a conflict will result in diminished services to credit union members. 

Credit unions already fund the budget for NCUA. As not-for-profits, credit unions cannot raise moneys from stock sales or capital 

markets. This money comes from their members’ deposits, meaning 

credit union members would disproportionately feel the cost burden 

of a new agency. 

However, NAFCU also recognizes that more should be done to 

help consumers and look out for their interests. We would propose 

that rather than extending the CFPA to federally insured depository institutions, each functional regulator create a new strengthened office on consumer protection. 

We were pleased to see the NCUA recently announce its intention to create such an office. Consumer protection offices at the 

functional regulators will ensure those regulating consumer issues 

have knowledge of the institutions they are examining and guidance on consumer protection. This is particularly important to credit unions as they are regulated and structured differently from others. 

We believe such an approach would strengthen consumer protection while not adding unnecessary regulatory burden. Part of 

avoiding that burden will be to maintain a level of Federal preemption so small institutions like mine, with members in several 

States, are not overburdened by a wide variety of State laws. 

In conclusion, while there are positive aspects to consumer protection and regulatory reform, we believe Federal credit unions continue to warrant an independent regulator handling safety and 

soundness and consumer protection matters. 

I thank you for the opportunity to appear before you on behalf 

of NAFCU and would welcome any questions that you may have. 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Donovan. 

[The statement of Ms. Donovan is included in the appendix.] 

34 

Chairwoman VELA ́ ZQUEZ. I am going to ask this question to everyone. I will ask everyone to answer, even though I anticipate the 

answers that you will provide—but just to be on the record. 

As you know, the President laid out five core elements for reform 

in his white paper, and these include stronger supervision of institutions, comprehensive supervision of financial markets, enhanced 

consumer protection, the creation of tools for financial crisis, and 

increasing international cooperation. 

In your opinion, which of these elements should be prioritized? 

Mr. MacPhee? 

Mr. MACPHEE. I think given what we have just come through in 

this country, and the lack of regulation on the unregulated—and 

oversight—and the dismal position that we found ourselves in 

when the smoke cleared in terms of the funding of our reserve for 

FDIC insurance, et cetera, I think oversight has to be the first priority. And I think the systemic risk in our whole system has to be 

priority. 

Chairwoman VELA ́ ZQUEZ. Mr. Roberts. 

Mr. ROBINSON. Madam Chair, I would think also that the issues 

surrounding systemic risk and surrounding those organizations 

that previously were unregulated or underregulated are the most 

important items to address among those items that you talked 

about. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Hampel. 

Mr. HAMPEL. I would agree with those comments. One thing the 

Congress needs to be concerned about is, right now there is a fervor to do regulatory reform because we are still in the latter stages 

of the crisis. And that is perhaps not the best time to make significant changes when we are so caught up in the moment. 

The risk is, if we wait too long, by the time we have had enough 

time to study it properly, there will not be sufficient impetus do 

it—extending some form of regulation to the currently unregulated. 

Chairwoman VELA ́ ZQUEZ. Mr. Moloney. 

Mr. MOLONEY. Again, I think the systemic element has to be 

dealt with as a high-priority item. 

I would also maybe go to the other end and start with the consumer protection and move up from there. Between those two, I 

think you can cover a lot of ground towards making it a more effective and fair playing field. 

Chairwoman VELA ́ ZQUEZ. Okay. 

Ms. Donovan. 

Ms. DONOVAN. Madam Chair, I would say our position would be 

the systemic risk. But also the regulation of the unregulated, pretty much as Mr. Hampel and the other members of this panel have 

said. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Roberts and Ms. Donovan, during times of financial duress, 

higher capital requirements can provide a cushion for lenders. But 

these increased levels can also restrict a bank or credit union’s 

ability to make loans to small firms. 

Can you talk about how higher capital requirements might impact your small business lending practices? 

Mr. ROBERTS. I think that is really a very good question. 

35 

In my testimony, I spoke about the fact that in 2008, my bank paid $75,000 in FDIC insurance. In 2009, that number could be 

anywhere between $550,000 and $700,000. 

When you start looking at those numbers, what in turn you see 

is, that means profitability. Money that is going to go into the capital of our organization is going to be reduced by $475,000 to about 

$600,000. In turn, what that relates to is capital to support loans, 

loans that might be available, supported by that capital, could be 

anywhere from $5 million to $7 million less. That is certainly going 

to impact our ability to lend to small businesses as well as customers as a whole. 

As those capital requirements get to be tighter, it certainly does 

provide an additional safety net, but one has to keep in mind that 

it is also going to restrict lending. 

Chairwoman VELA ́ ZQUEZ. And then there will be other people 

that will say that the risk to taxpayers and depositors goes down. 

Mr. ROBERTS. I would—my response to you is, I think there is 

a practical level of capital that can satisfy both sides of that particular equation. 

We talked earlier—I think at the prior panel—that some people 

were leveraged 30-to-1; that is probably too much. Is 5-to-1 too little? I would suggest that it is. I think there is a capital level that 

is a reasonable balance that continues funds able to be lent and 

still provides that safety to the taxpayer. 

Chairwoman VELA ́ ZQUEZ. Ms. Donovan? 

Ms. DONOVAN. Madam Chair, most credit unions today have sufficient capital. We have good capital on hand. Unfortunately, the 

artificial cap that is on member lending is what is refraining us 

from lending that out. 

I am a very small credit union, as I noted. We have hardly any 

member-business lending, very little. However, we do have the capital to lend to the small businesses in our community. And most 

credit unions do have that at this point. 

Chairwoman VELA ́ ZQUEZ. Okay. 

Mr. Moloney, up until the financial crisis, the economy experienced a decade of relatively solid growth, and during this time we 

saw an explosion of financial innovation and all of the products 

that went with it. 

Are you concerned that the proposed regulation might reverse 

this trend of financial innovation? 

Mr. MOLONEY. Good question. 

′′Yes′′ is the short answer, but I probably would like to also state 

that I think that it is very possible that with the creation of these 

innovative products, we may have gotten ahead of ourselves and 

had things that people really did not fully think out and sold to clients who didn’t have a clue. 

So maybe the answer is ′′yes.′′ I want to have that ability, but 

I also want to make sure that the people who are involved on the 

buying and the selling side of it know the products that they are 

dealing with. 

Chairwoman VELA ́ ZQUEZ. Mr. MacPhee and Mr. Hampel, addressing systemic risk will be an essential element of the reform 

proposal. As you noted in your testimony, community banks are 

smaller and are much less interconnected than larger international 

36 

institutions. Even so, community banks can still transmit risk into 

the financial system. 

In light of this, should community banks or all credit unions be 

subject to systemic regulation? 

Mr. HAMPEL. Well, Madam Chair, speaking for credit unions, my 

understanding of systemic risk is such that if even the largest 10 

credit unions were all to get into extreme difficulty at same time, 

it would not spread to the rest of the financial system. So I don’t 

think that credit unions could ever be the source of systemic risk, 

just by the nature of their size. 

However, credit unions, because they are connected and users of 

the rest of the financial system, can be victims of the systemic risk 

of other institutions; and that is why we are interested in the issue. 

Chairwoman VELA ́ ZQUEZ. Okay. 

I have other questions, but I will— 

Mr. GRAVES. I will pass, Madam Chair, for now. 

Chairwoman VELA ́ ZQUEZ. Mr. Westmoreland? 

Mr. WESTMORELAND. Thank you, Madam Chair. 

Let me say—you know, the first panel we talked about unintended consequences. And, Mr. Roberts, you hit the nail on the 

head with your testimony about being the victims of somebody else 

doing some wrong things in the banking industry. 

You understand that our concern about some of these new agencies that are created, we don’t know what the rules and regs are 

going to be. And that is basically what has happened with some of 

the legislation that we have passed recently not knowing how the 

regulators are going to go out into these banks and enforce certain 

regulations that Congress really does not have any control over. 

Now, I know from talking to some of my independent bankers 

and community bankers that—how many sets of regulators, Mr. 

Roberts, does the typical bank have in Virginia? Are you in Michigan or Virginia? 

Mr. ROBERTS. I am in Virginia. 

Mr. WESTMORELAND. Virginia? 

Mr. ROBERTS. We are—again, with a dual banking system, we 

are a State-chartered bank that happens also to be a member of 

the Federal Reserve System. We are regulated by the Commonwealth of Virginia and we are also regulated by the Federal Reserve. 

Mr. WESTMORELAND. How many sets of regulators do you have 

come in? 

Mr. ROBINSON. We will have, in any particular year, at least two 

examinations. One would be a safety and soundness examination 

by either the State or the Federal Reserve. The second would be 

a consumer affairs examination that is solely looking at our adherence to consumer protection laws; that is done by the Federal Reserve. 

I think it was stated earlier in this testimony that I fully believe 

that the prudential regulator, the one who has responsibility for 

safety and soundness, ought to have responsibility for consumer affairs. 

I would also share with the committee, about 6 weeks ago we 

just completed a consumer affairs examination by the Federal Reserve. Prior to that examination, we received a questionnaire from 

37 

the Federal Reserve, probably 45-50 pages long, requesting a number of documents, as well as questions. We had 14 examiners come 

into our bank for 2 weeks to review all of those issues that they 

thought might have arisen through that pre-questionnaire. 

I would suggest to you that it was a very extensive, fully complete examination that is entirely separate from safety and soundness. 

Mr. WESTMORELAND. On top of that we had another knee-jerkreaction kind of thing in Congress actually before I got here, Sarbanes-Oxley. 

Could you tell me, due to that knee-jerk reaction, how much that 

costs the average bank? I know you said your FDIC premiums 

went from 75 to 5 and something. 

What kind of cost and what kind of audit does the SarbanesOxley law bring to the banking business? 

Mr. ROBINSON. We have done regular reviews of the cost of Sarbanes-Oxley at our bank. The cost, year in and year out, approaches $250,000 to $275,000. We have right at 2.5 million shares 

of stock outstanding. 

I have shared with my shareholders at annual meetings the cost 

is about 10 cents a share. If you are at a trading volume of 10 

times earnings, that is going to be a dollar a share. At 16 times 

earnings that is a $1.60 a share that takes place year in and year 

out. And I would suggest that my shareholders hardly see the benefit of that reaction. 

Mr. WESTMORELAND. Thank you. 

Mr. Moloney, when we talk about things being underregulated, 

we had the credit default swaps which, if I understand correctly, 

is a company that was offering insurance on something that they 

were selling that was not regulated to offer insurance, so they came 

up with a product called a credit default swap. 

Is that basically what that is in a common language? 

Mr. MOLONEY. It is an element that our firm was never involved 

with. 

Mr. WESTMORELAND. There is somewhere down the line with the 

credit default swap and all of these derivatives and stuff that, to 

me, somebody that was—these companies are regulated. The SEC 

or somebody should have caught this, and I don’t know if it was 

underregulation or the lack of enforcement in people wanting to expose some of these programs that were out there. 

But the problem that we are having—and I am in Georgia, and 

we have had more failed banks that anywhere else, and what is 

happening is—Mr. Roberts, you spoke of this—the regulators are 

coming in and changing the way some of these banks, that had a 

good business going on, are able to lend money, how much cash reserves they have got to have versus how much money they are able 

to lend; reduction in real estate portfolios that are performing assets, but they are wanting them reappraised, more cash put in the 

deal. And it is really a snowball effect. 

And Madam Chair, I will yield. I know I have taken more time 

than the light. But—I would like to have at least one more round 

of questioning, if that is possible, but I yield back to you. 

Chairwoman VELA ́ ZQUEZ. You can continue. 

Mr. WESTMORELAND. Thank you, ma’am. 

38 

From what I see, the problem is that—Mr. MacPhee, being a 

community bank, I would like to hear from you too. 

Because what it seems like, when we passed the TARP legislation, we were told that this was going to be used to free up the 

credit market. And it has had, to me, just the opposite effect on 

freeing up the credit market. 

It has already created a snowball effect of real estate values. 

What is going on in the marketplace; the banks that did get the 

TARP money are using this just to straighten up their books. And 

if you look at Goldman Sachs, and Bank of America talked about 

they made billions of dollars, they were able to buy these assets for 

10 to 20 cents on the dollar and then sell them for 30 or 40 cents 

on the dollar, so they really did have a value there. 

But to clean up their books and to do what some of these regulators were making them do, people were losing their retirement, 

they were losing their equity, they were losing all the cash that 

they had put in the deal, now that they can no longer get out. It 

has had just the reverse effect on that. 

And that is what concerns me about some of this big legislation 

that we are talking about is, some of these unintended consequences of possible rules and regs that can be written and enforced by some agencies that we really have no control over. 

Could you comment on some of that? 

Mr. MACPHEE. Yes, thank you. I am no expert on TARP. I do 

know that at the time that TARP was put into place and the institutions that were qualified for and took TARP, it was an important 

step in reassuring the public that the financial institution system 

in this country was going to go on. So I don’t fault them for that. 

I think that being from a community bank, we are a $77 million 

bank and have 13.7 percent to capital and 29 percent liquidity. It 

is not a model that you see very often today. When the others were 

paying out 75 percent in dividends and retaining 25 percent, our 

model was the opposite. We were paying out 25 percent and retaining 75 percent. 

I am not saying that we are right and they are wrong. But there 

was a happy medium in there. I think both the unregulated and 

the systemically risky, which I would define as those banks over 

$100 billion could wreak havoc on society again, and did need 

TARP money to survive. 

The community banks today, I can tell you, are willing and ready 

to loan. I have money. Unfortunately for me, I live in a State where 

the unemployment is so high that I am not seeing the loan value 

that you might see in other areas. 

Mr. WESTMORELAND. I will have you open up a branch in Georgia. We have borrowers down there. 

One thing for the credit union, you don’t belong to the FDIC, 

right? 

Ms. DONOVAN. Correct. We are regulated by the NCUA. 

Mr. WESTMORELAND. What kind of fees do you pay them for your 

deposits? 

Ms. DONOVAN. On average to NCUA, it might be a $1,000 or 

$1,500, what it might cost me. It does not seem like a lot of money, 

I am sure. However, I have seven employees including myself—six, 

39 

full-time; one, part-time—and we take care of all 4,500 members 

over the six States. 

In the whole scheme of things, it is a lot of money for us. My 

payroll is very slim. I take on many roles. 

Mr. WESTMORELAND. But do you have to pay a premium for what 

your deposits are, what they guarantee? They guarantee your deposits, right? 

Ms. DONOVAN. Correct. 

Mr. WESTMORELAND. So your fee for your deposits would be 1,500 

bucks? 

Ms. DONOVAN. Yes. 

Mr. HAMPEL. This year, credit unions will pay an insurance premium of 15 basis points of their insured shares, which is higher 

than what it normally is for credit unions, but it is because of 

losses, collateral damage credit unions have experienced. 

We typically fund our system by credit unions makeing deposits 

into the fund, and it is the earnings from those deposits that the 

insurance fund uses to operate. Probably, for the next several 

years, credit unions will be paying premiums of about 15 basis 

points. It is probably less than what FDIC-insured institutions will 

pay, but it is significant compared to what credit unions have historically paid. 

Mr. WESTMORELAND. Thank you. 

I yield back, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. MacPhee, I would like to ask my last question to you. It is 

regarding securitization that has been billed as one of the chief culprits in the financial crisis. At the same time it has been credited 

with increasing the availability of capital for small firms. 

To what degree does your bank take advantage of loan 

securitization, and do you believe it should be constrained going 

forward? 

Mr. MACPHEE. Our bank has basically used Fannie and Freddie 

secondary market for liquidity purposes and for helping out with 

our capital situation. 

We tend to retain most of our loans in our bank. We still do a 

5-year balloon mortgage for our customers, and I think—one of the 

things that we have to do as a community bank is, relationship 

banking rather than transactional banking. So the structure out 

there for most community bankers that I deal with, it is important 

to have securitization and collateralization and selling off to the 

secondary market to keep liquidity in the system. 

Chairwoman VELA ́ ZQUEZ. Mr. Roberts. 

Mr. ROBERTS. I would agree with you wholeheartedly that 

securitization has been a part of the problem that has been created 

in our economy. And I would agree with you wholeheartedly that 

securitization is one of those avenues that has allowed greater 

lending to take place. It has provided additional liquidity, additional funding to come into financial institutions that have allowed 

for continuing loans to take place. 

It would seem to me, however, that it has been a part of what 

has caused some systemic risk; and I think that we need to consider what regulations that we can put into place that would not 

allow the issues that have happened over the past 12 months to 

40 

happen again. But that does not mean throwing the baby out with 

the bathwater and stopping securitization. That has been a very 

important factor in the ability of this country to go forward. 

Chairwoman VELA ́ ZQUEZ. Very good. 

Does any other member wish to ask questions? 

Let me take this opportunity thank all of you. This has been very 

insightful, and as a member of the Financial Services Committee, 

it helps me to bring a different perspective into the debate. And so, 

for that, I really appreciate all your cooperation and being here 

today. Thank you. 

I ask unanimous consent that members will have 5 days to submit a statement and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 4:53 p.m., the committee was adjourned.] 

41 


52261.001
42 


52261.002
43 


52261.003
44 


52261.004
45 


52261.005
46 


52261.006
47 


52261.007
48 


52261.008
49 


52261.009
50 


52261.010
51 


52261.011
52 


52261.012
53 


52261.013
54 


52261.014
55 


52261.015
56 


52261.016
57 


52261.017
58 


52261.018
59 


52261.019
60 


52261.020
61 


52261.021
62 


52261.022
63 


52261.023
64 


52261.024
65 


52261.025
66 


52261.026
67 


52261.027
68 


52261.028
69 


52261.029
70 


52261.030
71 


52261.031
72 


52261.032
73 


52261.033
74 


52261.034
75 


52261.035
76 


52261.036
77 


52261.037
78 


52261.038
79 


52261.039
80 


52261.040
81 


52261.041
82 


52261.042
83 


52261.043
84 


52261.044
85 


52261.045
86 


52261.046
87 


52261.047
88 


52261.048
89 


52261.049
90 


52261.050
91 


52261.051
92 


52261.052
93 


52261.053
94 


52261.054
95 


52261.055
96 


52261.056
97 


52261.057
98 


52261.058
99 


52261.059
100 


52261.060
101 


52261.061
102 


52261.062
103 


52261.063
104 


52261.064
105 


52261.065
106 


52261.066
107 


52261.067
108 


52261.068
109 


52261.069
110 


52261.070
111 


52261.071
112 


52261.072
113 


52261.073
114 


52261.074
115 


52261.075
116 


52261.076
117 


52261.077
118 


52261.078
119 


52261.079
120 


52261.080
121 


52261.081
122 


52261.082
123 


52261.083
124 


52261.084
125 


52261.085
126 


52261.086
127 


52261.087
128 


52261.088
129 


52261.089
130 


52261.090
131 


52261.091
132 


52261.092
133 


52261.093
134 


52261.094
135 


52261.095
136 


52261.096
137 


52261.097
138 


52261.098
139 


52261.099
140 


52261.100
141 


52261.101
142 


52261.102
143 


52261.103
144 


52261.104
145 


52261.105
146 


52261.106
147 


52261.107
148 


52261.108
149 


52261.109
150 


52261.110
151 


52261.111
152 


52261.112
153 


52261.113
154 


52261.114
155 


52261.115
156 


52261.116
157 


52261.117
158 


52261.118
159 


52261.119
160 


52261.120
161 


52261.121
162 


52261.122
163 


52261.123
164 


52261.124
165 


52261.125
166 


52261.126
167 


52261.127
168 


52261.128
169 


52261.129
170 


52261.130
171 


52261.131
172 


52261.132
173 


52261.133
174 


52261.134
175 


52261.135
176 


52261.136
177 


52261.137
178 


52261.138
179 


52261.139
180 


52261.140
181 


52261.141
182 


52261.142
183 


52261.143
184 


52261.144
185 


52261.145
186 


52261.146
187 


52261.147
188 


52261.148
189 


52261.149
190 


52261.150
191 


52261.151
192 


52261.152
193 


52261.153
194 


52261.154
195 


52261.155
196 


52261.156
197 


52261.157
198 


52261.158
199 


52261.159
200 


52261.160
201 


52261.161
202 


52261.162
203 

Æ