[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]




 
  HOW RED TAPE AFFECTS COMMUNITY BANKS AND CREDIT UNIONS: A GAO REPORT

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           FEBRUARY 27, 2018

                               __________

 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
 
 
 
                                 _________ 
 
                     U.S. GOVERNMENT PUBLISHING OFFICE
                    
 28-711                      WASHINGTON : 2018      
 
 
 
 
 
                               

            Small Business Committee Document Number 115-059
              Available via the GPO Website: www.fdsys.gov
                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                      RALPH NORMAN, South Carolina
                           JOHN CURTIS, Utah
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

               Kevin Fitzpatrick, Majority Staff Director
      Jan Oliver, Majority Deputy Staff Director and Chief Counsel
                     Adam Minehardt, Staff Director
                     
                     
                            C O N T E N T S

                           OPENING STATEMENTS

Hon. Steve Chabot................................................     1
Hon. Nydia Velazquez.............................................     2

                                WITNESS

Mr. Michael Clements, Director, Financial Markets and Community 
  Investment, United States Government Accountability Office, 
  Washington, DC.................................................     4

                                APPENDIX

Prepared Statement:
    Mr. Michael Clements, Director, Financial Markets and 
      Community Investment, United States Government 
      Accountability Office, Washington, DC......................    19
Question and Answer for the Record:
    Question from Hon. John Curtis to Mr. Michael Clements and 
      Answer from Mr. Michael Clements...........................   120
Additional Material for the Record:
    CUNA - Credit Union National Association.....................   121
    ICBA - Independent Community Bankers of America..............   123
    NAFCU - National Association of Federally-Insured Credit 
      Unions.....................................................   127


  HOW RED TAPE AFFECTS COMMUNITY BANKS AND CREDIT UNIONS: A GAO REPORT

                              ----------                              


                       TUESDAY, FEBRUARY 27, 2018

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2:18 p.m., in Room 
2360, Rayburn House Office Building, Hon. Steve Chabot 
[Chairman of the Committee] presiding.
    Present: Representatives Chabot, King, Luetkemeyer, Kelly, 
Blum, Comer, Curtis, Velazquez, Evans, Lawson, Adams, and 
Schneider.
    Chairman CHABOT. Good afternoon. The Committee will come to 
order. I want to apologize for running a little bit behind but 
we had votes on the floor, which in unavoidable, and we got 
over here as quickly as we could.
    Our economy is seeing a resurgence. Congress passed and the 
President signed a historic tax bill into law, and hardworking 
Americans are starting to see the results in their paychecks. 
We are also getting people back to work with the unemployment 
rate continuing to trend downward. Economic progress is being 
made.
    However, we continue to hear from Main Street companies 
across the Nation that access to capital remains a challenge 
for them. Unfortunately, research shows that small business 
lending took a nose-dive during the Great Recession. And while 
recent progress has been made, lending has not returned to pre-
recession levels. Around here, we like to say that capital is 
the life blood of the small business ecosystem. When acquiring 
capital, it is challenging the Nation's small business, which 
create two out of every three new private sector jobs are left 
in a holding pattern.
    A stagnant lending environment hits our smallest firms the 
hardest because of their reliance on commercial lending to 
finance their projects. The local community bank and the 
neighborhood credit union play an outsized role in lending to 
small businesses. This relationship between the entrepreneur 
and the small financial institution is critically important.
    When the mortgage meltdown in the mid to late 2000s 
triggered a financial crisis, these small financial 
institutions did not play a significant role in the crash. 
However, as a result of the crisis, Congress enacted the Dodd-
Frank law, which was intended to improve oversight of the 
Nation's largest banks.
    Unfortunately, many of these requirements and regulations 
have trickled down to the Nation's smallest financial 
institutions. A one-size-fits-all regulatory framework is not 
sustainable for America's smallest businesses. To gain a 
clearer picture of this financial regulatory environment, I 
asked the GAO, the Government Accountability Office, to examine 
the red tape that impacts community banks and credit unions. 
The results of this examination is what we are here to discuss 
today.
    GAO has finalized the report and they are ready to share it 
with us. I am looking forward to hearing about the specific 
rules and regulations that are impacting these smaller 
financial institutions. Additionally, I am interested to learn 
more about the tools available to financial regulators to 
reduce burdens.
    Overly burdensome red tape is a real threat to 
entrepreneurs, start-ups, and small businesses. That is why I 
introduced H.R. 33, the Small Business Regulatory Flexibility 
Improvements Act, last year. H.R. 33 was included in a larger 
regulatory package, H.R. 5, that passed the House in a 
bipartisan manner last January. I encourage the Senate to move 
this legislation forward as soon as possible.
    Again, I want to thank the GAO for joining us today and for 
the work that they put into this report. In order for small 
businesses, entrepreneurs, and start-ups to create the next 
great American product or service, the flow of appropriate and 
prudent capital must be as free as possible of regulatory red 
tape.
    I would now like to yield to the ranking member for her 
opening remarks.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. Bear with me, I am 
under the weather. A decade ago our nation faced one of the 
greatest economic downturns in history, and stared into the 
abyss of another Great Depression. Countless Americans lost 
their homes. Credit markets, including small business lending, 
froze, and millions of jobs evaporated. After taking 
extraordinary steps to stand the losses and stabilize the 
economy, Congress enacted the Dodd-Frank Act in July 2010 to 
address the loopholes that caused the collapse.
    The law established strong new standards for the regulation 
of large leverage financial institutions. It also made the 
protection of consumers seeking mortgages and credit products a 
top priority. While the new safeguards were directed primarily 
at the largest financial services firms, we often hear that 
small banks were indirectly affected by higher compliance 
costs.
    It is also undeniable that small lenders bear less 
responsibility for the financial crisis, and therefore, should 
not carry the brunt of new regulations. For these reasons, 
significant efforts were made to mitigate any new regulatory 
burden on small banks.
    First, many Dodd-Frank provisions apply only to 
institutions with over $10 billion in assets, exempting over 98 
percent of all banks in the U.S.
    Second, regulations created by the Consumer Financial 
Protection Bureau, or CFPB, that do apply to small financial 
institutions are subject to the Regulatory Flexibility Act and 
the Small Business Regulatory Enforcement Fairness Act. 
Together, Dodd-Frank and the creation of the CFPB have put us 
on a path to restore accountability and stability in our 
financial system, giving regulators the tools to prevent 
harmful bailouts and establish new rules to protect consumers 
from abusive financial practices.
    Data from federal regulators also points to a more vigorous 
business lending market. The Federal Reserve has found lending 
standards for small firms have eased considerably since the 
recession, while loan balances at community banks have 
increased over 7 percent in the past year alone.
    Credit unions have also been striving. Long portfolios grew 
nearly 3 percent in the third quarter of 2017, resulting in 
year over year growth of 10.5 percent. While the small business 
lending environment appears to be robust, critics of Dodd-Frank 
continue to point to complying costs as approved of onerous 
regulations. But as the GAO concluded, much of these costs stem 
from a misunderstanding of the rules, not the rules themselves.
    Equally important, the GAO found in its survey that the 
regulations serve important public benefits, such as enhancing 
transparency and preventing discrimination. While regulations 
implemented under the act will ultimately impact many facets of 
the financial industry, the economy has been improving at a 
greater pace since its passage. Private employers have created 
12 million jobs and unemployment has been greatly reduced.
    The housing market is also recovering, as small business 
credit has returned to pre-recession levels in many sectors. As 
both lenders and borrowers, small businesses have much at stake 
when it comes to financial regulatory reform. The Dodd-Frank 
Act touches on all aspects of the financial industry, and has 
the potential to make the entire system more stable and safer 
for small firms and the economy to grow and create jobs. While 
we must always be aware of how new regulations impact the small 
firms, under no circumstances can we return to the conditions 
that led to the 2008 crisis.
    In that regard, I look forward to hearing the 
recommendations of GAO, and having a full discussion about 
small lenders' experience, and how we can ensure the law works 
to protect and preserve our small business sector.
    Thank you, and I yield back.
    Chairman CHABOT. Thank you very much. The gentlelady yields 
back. And if committee members have opening statements 
prepared, we would ask that they be submitted for the record.
    And I will just take a moment to explain our timing lights, 
et cetera. They are pretty simple. The green light will be on 
for 4 minutes, and then the yellow light will be on for a 
minute, that is 5 minutes, and the red light will come on and 
we would ask you to kind of keep within that, but since we have 
one witness, if you take a little more time, I think we will be 
okay with that. And we will then followup with 5 minutes 
questioning going back and forth for each side.
    And so I would now like to introduce our witness today, it 
is Mr. Michael Clements, who is a director within the financial 
markets and community investment group at the U.S. Government 
Accountability Office. During his extensive tenure at GAO, he 
studied financial regulations within the Securities and 
Exchange Commission, the Federal Reserve System, and their 
Federal Deposit Insurance Corporation. Additionally, he has 
worked on broadband, communications, and telecommunications 
issues for GAO.
    Mr. Clements hails from the great State of Ohio, and has an 
undergraduate degree from that fine institution in southern 
Ohio, the University of Cincinnati, which happens to be in my 
district. Additionally, he has two graduate degrees from the 
Ohio State University as well.
    I want to thank you for being here today, and you are 
recognized for 5 minutes, Mr. Clements.

STATEMENT OF MICHAEL CLEMENTS, DIRECTOR, FINANCIAL MARKETS AND 
 COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY 
                    OFFICE, WASHINGTON, D.C.

    Mr. CLEMENTS. Chairman Chabot, Ranking Member Velazquez, 
and members of the committee. I am pleased to be here today to 
discuss our recent reports addressing regulatory burdens 
encountered by depository institutions and the processes to 
mitigate those burdens, including our report on community banks 
and credit unions that the committee is releasing today.
    My statement highlights two key topics from our reports. 
First, the regulatory burdens that community banks and credit 
unions identified as most significant. And, two, the 
requirements for financial regulators to assess the burdens 
associated with their regulations. Our work highlights the need 
for financial regulators to improve their analyses of 
regulatory burden.
    In the way of background, community banks and credit unions 
are generally small entities, most with assets less than $1 
billion, that serve limited geographic areas. These 
institutions focus on traditional depository activities, 
namely, taking deposits and making loans. And, most 
importantly, for this committee, community banks allocate a 
greater portion of their assets to small business loans than 
large depository institutions.
    Moving to our first key topic, the regulatory burdens that 
community banks and credit unions identified as most 
significant. Like all depository institutions, community banks 
and credit unions are subject to a variety of regulations. 
These regulations include safety and soundness reviews, to 
among other things, protect the Federal Deposit Insurance Fund. 
Consumer compliance reviews to ensure that institutions adhere 
to relevant consumer protection statutes, such as truth in 
lending. And Bank Secrecy Act Anti-Money Laundering, known as 
BSA/AML reviews, to help safeguard the financial system from 
use by criminal enterprises and terrorists.
    While these regulations have public interest benefits, they 
also impose burdens on depository institutions. In our 
interviews and focus groups with over 60 community banks and 
credit unions, the institutions identified three prominent 
regulatory burdens.
    One, mortgage transaction reporting under the Home Mortgage 
Disclosure Act. Two, mortgage disclosure and closing 
requirements under the Truth in Lending Act, and Real Estate 
Settlement Procedures Act. And, three, BSA/AML recordkeeping 
and reporting requirements.
    Among other things, the institutions characterized these 
regulations as complex and time consuming. For example, the 
institutions noted that identifying terrorism financing under 
BSA/AML was not a core competency for their staff. Moving to 
our second key topic, the requirements for financial regulators 
to assess the burdens associated with their regulations.
    The Regulatory Flexible Act, or RFA, requires regulators to 
examine burdens on small entities during the rulemaking 
process. Among other things, regulators must consider 
regulatory alternatives that will achieve the statutory 
objectives while minimizing burdens. We identified a variety of 
weaknesses in the regulators' RFA activities, including limited 
evaluation of economic effects and alternative regulatory 
approaches and missing information on the cumulative economic 
impact of regulations.
    The Economic Growth in Regulatory Paperwork Reduction Act, 
or EGRPRA, and RFA require regulators to conduct retrospective 
reviews, these are a look back. EGRPRA requires certain 
financial regulators to assess every 10 years whether their 
regulations are outdated, unnecessary, or unduly burdensome. 
RFA requires regulators to review within 10 years certain rules 
to determine if they should be continued without change, 
amended, or rescinded.
    Here again, we found weaknesses in the regulators' 
activities, including a lack of policies and procedures for 
conducting retrospective reviews and analyses lacking 
quantitative data. The weaknesses we identified can hinder the 
financial regulators' ability to lessen burdens on community 
banks and credit unions.
    To conclude, financial regulations provide public interest 
benefits, but they also impose burdens on depository 
institutions. However, financial regulators are required to 
assess these burdens on small depository institutions. While we 
identified weaknesses with the regulators' processes, we also 
provided 20 recommendations that should help the regulators 
improve their processes, and thereby mitigate, where 
appropriate, burdens on small depository institutions.
    Chairman Chabot, Ranking Member Velazquez, and members of 
the committee, this completes my prepared statement. I would be 
pleased to respond to any questions you may have at this time.
    Chairman CHABOT. Thank you very much. And I will begin by--
I recognize myself for 5 minutes to kick off the questions 
here. Which regulations did you find particularly burdensome to 
community banks and credit unions, and how do these regulations 
in turn adversely impact, or how could they adversely impact 
small businesses?
    Mr. CLEMENTS. The three regulations that where we saw a 
consensus on from the 60-plus institutions we interviewed were, 
one, the Home Mortgage Disclosure Act requirements. The second 
was mortgage disclosure and closing requirements, and then 
finally the BSA/AML requirements.
    In general, the institutions described all of those as sort 
of time-consuming to take care of, they are complex. At times, 
if there is any change to the regulation, what needs to happen 
then is the institution needs to retrain its staff, it may need 
to upgrade its computer systems to handle new forms, and those 
are the types of burdens that were reported to us.
    Chairman CHABOT. Okay. Thank you. And just a second part of 
the question then. So how would those, in all likelihood, 
adversely impact or waste time for or make it tougher for them 
to get a loan or whatever the ramifications might be for small 
business, if these regulations are kind of affecting the 
financial institutions and banks and credit unions? How would 
the, you know, small businesses going in to get a loan, how 
would they be affected by that?
    Mr. CLEMENTS. In some of our past work, the institutions 
have mentioned that is a hindrance to their ability to do that. 
We have ongoing work for you now that is going to look 
empirically at testing whether regulatory burdens are 
influenced and how they influence the levels of small business 
lending, and we hope to get that work to you in several months.
    Chairman CHABOT. Okay. Thank you. How is it that Dodd-
Frank, which was supposedly targeted at the so-called too big 
to fail financial institutions, the big guys, how has it 
affected the smaller community banks and credit unions, and 
then of course, small businesses as a result of that across the 
country, would you say?
    Mr. CLEMENTS. I would mention the two mortgage-related 
burdens that were cited. One, the changes in the Home Mortgage 
Disclosure Act, and then also the closing and mortgage 
disclosure within Truth in Lending Real Estate Procedures Act. 
Those were two things affected by Dodd-Frank. There are 
exemptions on both of those, but some of the institutions did 
mention those as being burdens.
    Chairman CHABOT. Okay. Thank you. What are the principal 
flaws--and I am just going to give you a couple of them, and I 
will go one by one. What are the principal flaws in the CFPB 
would you say at this point? What kinds of things did you pick 
up on or are in your report?
    Mr. CLEMENTS. We made a couple of recommendations in a 
couple of reports to CFPB. One in terms of the mortgage 
disclosure and closing requirements that fell within what is 
called Truth in Lending Act, Real Estate Procedures Act, 
integrated disclosure. And the idea here was to put all the 
forms within one form, make it easier for the consumer.
    Sometimes what we have seen is that the institutions find 
some guidance confusing, and so what we have recommended to 
CFPB was, do an evaluation of that guidance, make it clear for 
the institutions so it is a little easier. Again, it is the 
framework of saying, what you are doing is a good idea, but we 
need to reduce the burden on the institution so we can still 
achieve the statutory goal, but keep the burden as small as 
possible on institutions. So that would be an example for CFPB, 
and one of our recommendations.
    Chairman CHABOT. Okay. How about the BSA, the Bank Secrecy 
Act?
    Mr. CLEMENTS. The concerns here, again, are the time of 
doing it, the complexity of it. Institutions, especially 
smaller ones, the decision of whether to file a suspicious 
activity report, sometimes that can be confusing for them. 
Again, the burdens they have described is continually 
increasing, what is being asked for, and again what that 
requires, training of staff, at times, upgrading their systems. 
Those are sort the burdens that they are encountering in that 
environment.
    Chairman CHABOT. Okay. And in the short time I have left, 
how about the Home Mortgage Disclosure Act. Were there any 
particular areas there that were of concern or that you 
noticed?
    Mr. CLEMENTS. Again what the institutions were mentioning 
to us was the timeframe of doing the reviews, the complexity of 
it, whether a transaction should be reported or not. There are 
also concerns about if there was an error made, the extent to 
which the whole set of data would need to be resubmitted. And 
the FFIEC has made some adjustments to that, which should 
reduce some of those burdens.
    Chairman CHABOT. Thank you very much, my time is expired. 
The ranking member is recognized for 5 minutes.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Clements, isn't 
it true that 90 percent of community banks that have less than 
$10 billion in assets are excluded from Dodd-Frank 
requirements?
    Mr. CLEMENTS. I don't know the exact number, but there are 
various levels for different rules that banks would be exempted 
from, but I don't know whether they are 90 percent.
    Ms. VELAZQUEZ. Well, small community banks, those with $1 
billion or less in assets, right, do not have to comply with 
Dodd-Frank. And then when those of us on the Financial Services 
Committee passed Dodd-Frank, we exempted from those 
requirements banks with assets of less than $10 billion. So 90 
percent of all community banks are exempted.
    But let me ask you, to what extent are home data essential 
to the enforcement of fair lending laws and regulations? Are 
there viable alternatives to the home data?
    Mr. CLEMENTS. There are certain public interest benefits to 
those data. I think, the institutions we talked to, also CFPB 
has mentioned things such as allowing local officials to 
allocate dollars for community development, but also, as you 
mentioned, to ensure, to monitor and detect and prevent 
discriminatory lending practices. Clearly, that is a benefit 
and was mentioned relatively frequently.
    The regulators we spoke to really don't know of comparable 
data that exists that would be as efficient. So in their view, 
it is an efficient data source to serve those two purposes.
    Ms. VELAZQUEZ. Thank you. In a letter to Secretary Mnuchin, 
Congressman Royce and I raised the need for law enforcement to 
provide feedback to financial institutions on effectiveness of 
their SARs. GAO concluded the same, and recommended as much. 
How would implementing a process to provide financial 
institutions with feedback improve compliance?
    Mr. CLEMENTS. Well, there were certainly concerns among the 
institutions we talked to, lack of understanding, what the data 
are being used for. That was a common theme that we have heard 
during our interviews and focus groups.
    Ms. VELAZQUEZ. So what is needed to facilitate greater 
communication from FinCEN, is a better relationship between law 
enforcement and financial institutions? Do you have any 
recommendations?
    Mr. CLEMENTS. It was not in the scope, so we did not do 
that.
    Ms. VELAZQUEZ. Okay. An area of regulation that was cited 
as burdensome was mortgage lending. In your discussions with 
financial institutions, did they identify specific aspects of 
the mortgage rules that were particularly burdensome, if so, 
which ones?
    Mr. CLEMENTS. So within the closing, the mortgage 
disclosure, there are two closing processes, I think a couple 
of things that came out. One is what they view as just 
complexity and the time to do the forms. A lot of this was a 
combination of a variety of forms from Truth in Lending, Real 
Estate Procedures Act, that put it into an integrated form. So 
what the requires is new training for their staff, upgrades of 
the computer systems to be able to file the forms. That is one 
problem.
    They also cited some of the timeframes that are required, 
the 3-day timeframes, which they believe could extend closing 
times. And, finally, they had concerns with perhaps being 
responsibile for third party fees that may change. So, for 
example, if an appraisal fee changed, that they may be 
responsible for that. Those were three main concerns that they 
expressed, at least in terms of that closing process.
    Ms. VELAZQUEZ. Okay. Mr. Chairman, I yield back.
    Chairman CHABOT. Thank you. The gentlelady yields back. The 
gentleman from Utah, Mr. Curtis, is recognized for 5 minutes.
    Mr. CURTIS. Thank you, Mr. Chairman.
    Mr. Clements, thank you for being here today and being with 
us. As a former small business owner, I am aware of the 
difficulty of complying with some of these regulations and 
having the staff to meet those compliances. And I find that 
sometimes strategies to--rather than hire the staff to help you 
know if you need to comply to just over-comply.
    Are you seeing any evidence of that with our community 
banks, that that is, because they don't have the staff they are 
actually over-complying with some of these regulations?
    Mr. CLEMENTS. We certainly found that in the case of the 
TRID, the integrated disclosure. In fact, what we found was 
they were doing things they really didn't need to do, part of 
that was driven by what we thought was unclear guidance from 
CFPB in terms of what they needed to do. And so, again, that 
fell within our recommendation to CFPB. Evaluate your guidance. 
Rethink about it and come out with better guidance so that the 
businesses do understand what they need to do and what they 
don't need to do, because we don't want to have them doing 
extra work.
    Mr. CURTIS. Yeah. Is it--I am told that sometimes these 
investigators are--they have quite a bit of leeway in what they 
go forward and what they look at, and that sometimes the less 
experienced ones are assigned to the smaller institutions in 
almost a training capacity. And is it possible that in some 
cases we are actually asking more of these smaller banks, and 
is there--is that discretion a problem in the case of the 
investigators?
    Mr. CLEMENTS. A number of the institutions have mentioned 
that they thought they were being asked or being held out to a 
higher standard. It is difficult to test it. What we did do, is 
we looked at 28 examination reports and tried to find out, were 
the small institutions being granted the acceptance they were 
allowed to be, and we did end up finding that.
    Mr. CURTIS. You say they were?
    Mr. CLEMENTS. Yes, we did not find any evidence where these 
28, now, I am not saying that there could not be cases where--
--
    Mr. CURTIS. Is there a pattern of assigning the new guys to 
the smaller institutions?
    Mr. CLEMENTS. That I don't know.
    Mr. CURTIS. That would be interesting to find out and may 
help us understand that complaint.
    Mr. CLEMENTS. We would be happy to look at that and submit 
something for the record.
    Mr. CURTIS. As I understand it, in Section 1002 of Dodd-
Frank, it explicitly gives the CFPB the authority to exempt 
credit unions from certain regulations and smaller 
institutions. Do you know if they are taking advantage of that?
    Mr. CLEMENTS. Again, that is one I don't know.
    Mr. CURTIS. Okay. It has been told to me that we are losing 
a number of these smaller institutions, and that concerns me, 
especially in rural parts of our country, where, as you 
mentioned, the types of loans that they are doing are so 
important for the economy. Do you have any data on exactly how 
many of these smaller institutions we are losing, or is there 
any information you have on that?
    Mr. CLEMENTS. We are aware of the general trend, for 
example, that have been reported on and the decreased number. 
We did not do that for this report. We have ongoing work for 
the chairman that is actually looking at whether regulatory 
burden is contributing to closure of branches and institutions. 
And, again, we should have that within the next couple of 
months.
    Mr. CURTIS. Yeah. Thank you. That would be actually very 
interesting. And is it fair to say that that would 
disproportional impact rural America?
    Mr. CLEMENTS. If that is where most of the smaller 
institutions are. I should mention, we have also a report we 
released yesterday on de-risking, so this is related to the 
BSA/AML, where we did find that institutions are considering 
BSA/AML compliance in decisions to offer services, and in fact, 
what we also found was in communities or counties where money 
laundering was seen as a greater risk, in fact, they were 
losing depository institutions at a faster rate than other 
areas.
    Mr. CURTIS. Very interesting. And the consumer is the loser 
in that scenario. So, okay. Thank you very much. I yield my 
time.
    Chairman CHABOT. Thank you. The gentleman yields back. The 
gentlelady from North Carolina, Ms. Adams, who is the ranking 
member of the Subcommittee on Investigations, Oversight and 
Regulations, you are recognized for 5 minutes.
    Ms. ADAMS. Thank you, Mr. Chairman, and thank you Ranking 
Member Velazquez for hosting the hearing today and, thank you, 
Mr. Clements, for your testimony. Some complaints by 
respondents suggest that there is a real misunderstanding of 
how the regulations apply. How could such simple things like 
outreach from regulators reduce the compliance burden on small 
community leaders?
    Mr. CLEMENTS. I think one of the cases where we heard this 
was in the case of the TRID, the integrated disclosure where 
the institutions simply did not understand requirements that 
were being asked of them, and what types of transactions needed 
to be reported. And what we found was that the guidance was not 
necessarily clear to them. And, again, what we are recommending 
to CFPB is to go back, evaluate that guidance, and prove it 
such that the institutions do understand what their obligations 
are.
    There was confusion, for example, there are various 
timeframes within the closing process, 3-days. Some of them 
thought, well, if there was a change, I need to go all the way 
back to the beginning. Well, no, not necessarily. But, again, 
there was confusion based upon unclear guidance from CFPB.
    Ms. ADAMS. Thank you. You found that participants in one 
focus group said that regulators should better communicate how 
the information that institutions submit contribute to law 
enforcement's successes in preventing or prosecuting crimes. 
This is not the first time that we have heard such a 
recommendation in this committee.
    Could you elaborate on this particular issue and whether it 
was something that you detailed for the relevant agencies 
involved?
    Mr. CLEMENTS. Again, I think we did hear concerns about 
institutions not understanding why they were being asked to 
collect information, how that information was being used. We 
don't have a recommendation in that area to rise to the level 
for this report, but we acknowledge that there needs to be a 
better understanding of what is happening, how those data are 
being used.
    Ms. ADAMS. Okay. So you don't have any recommendations?
    Mr. CLEMENTS. We do not have a recommendation in this 
particular report related to communication.
    Ms. ADAMS. All right. Well, thank you very much.
    Mr. Chair, I yield back.
    Chairman CHABOT. The gentlelady yields back. Thank you very 
much. And the gentleman from Mississippi, Mr. Kelly, who is the 
chairman of the Subcommittee on Investigations, Oversight, and 
Regulations is recognized for 5 minutes.
    Mr. KELLY. Thank you, Mr. Chairman. And I guess my first 
question is, with the CFPB did--in your report or in your 
findings, did you find that the availability of smaller loans--
I am from a very rural area of my State, and so we deal with a 
lot of small banks.
    And did you find that the availability of small loans to 
consumers has been reduced because of the--larger companies 
don't take those small loans, it is easier to take big loans 
with lots of margin rather than to take those $40,000 or 
$50,000 home mortgages. Did you find that in any of the report 
or any of the things that did you?
    Mr. CLEMENTS. A number of the institutions mentioned that 
they had decreased lending, I can't say whether it was for 
small loans or not, that I am unsure about. Again, we do have 
some work ongoing for the chairman, looking at the extent that 
regulatory burden is contributing to any type of change in 
small business lending.
    Mr. KELLY. Let me just--I would really hope that you would 
look at that because what happens is big companies like to--
like to take that business, the lucrative, the stuff that is 
good, but they like to leave out the availability to lower 
people who can't get it anywhere else. And when the small banks 
go away or the small credit unions, those opportunities are no 
available because the big businesses don't need that to stay in 
business.
    Second, I want to talk about small banks. I have seen the 
regulations, are I think are five 5-inch binders or something 
like that when printed out, and did your findings find that 
small banks or those smaller banks, even those under the $10 
billion limit, they still have to go through and make sure that 
it doesn't apply to them. Did you find that they were able to 
afford the staff, the professional staff, which would mean 
lawyers and accountants and all kind of other things, did you 
find that they had the ability, without raising costs, to be 
able to do those things for their customers and retain the 
customer base that they had?
    Mr. CLEMENTS. Again, with our interviews and focus groups, 
I think those were the concerns, that either increasing the 
staff, finding qualified staff, perhaps also doing outsourcing, 
those were concerns that were raised to us among some of the 
smaller community banks and credit unions.
    Mr. KELLY. I can tell you from being with my bankers and 
credit unions in my town, that many of them don't have the 
overhead to employ extra lawyers or extra people who are just 
compliance agents, and so the net cost is is that that has to 
passed on in one of two ways. That either means the bank has to 
eat it as zero margin, which means no profit, or they have to 
pass that on to the smaller consumers, which makes loans more 
expensive.
    Over the review, did you find out--although it is supposed 
to save money and save the consumer, did you find out whether 
it costs a consumer more or less to do all these rules and 
regulations by smaller banks?
    Mr. CLEMENTS. That was beyond the scope of this report. 
Again, I would refer back to the work that we are doing for the 
chairman, it will come out in a few weeks or a few months, 
sorry, that is looking at issues such as regulatory burden's 
impact on lending, impact on number of institutions, and also 
the profitability of institutions.
    Mr. KELLY. And the other thing, did you find any instances, 
because I have heard a couple, I think, from bankers where they 
felt like the CFPB was being punitive in just the charges that 
they levied, and even the amount and the ability to fight the 
rules and regulations and the interpretations by a huge agency, 
that it was easier just to surrender and pay the fine rather 
than to fight them with all the burdens, it would have cost 
them more to defend than it was to pay. Have you found that in 
any of the situations in which you investigated?
    Mr. CLEMENTS. I don't recall anybody mentioning that. 
Again, the burdens really came down to the time and the 
complexity of doing the work, and then having the trained staff 
and the constant need to upgrade computer systems and response 
to changes, are the main things we heard.
    Mr. KELLY. Okay. And then my final question is, do you 
believe that these regulations impact rural communities in a 
more unfavorable way than they do the urban and larger 
communities?
    Mr. CLEMENTS. I don't think we specifically looked at that, 
I guess what my comment there would be is, to the extent that 
smaller institutions are in more rural areas, and the 
regulations can have an outside affect on smaller institution, 
then that would be the case.
    Mr. KELLY. And you would agree to me that the regulations 
and rules, even if they don't apply to a smaller bank because 
they are under the size, that there is still a cost to go 
through and make sure that it does not apply to that bank, you 
still have to do the same work almost, at least to make sure it 
doesn't comply, which is not within the overhead of what you 
are used to doing.
    Is that true or false?
    Mr. CLEMENTS. They would have to do that at least once to 
understand whether they were subject to those rules or not. 
And, again, I think, going back to the CFPB example, if the 
guidance is clearer for them, it should be easier for them and 
there wouldn't be as much guess work whether something needs to 
be reported or whether they are responsible for that.
    Mr. KELLY. Mr. Chairman, my time is expired. Thank you.
    Chairman CHABOT. Thank you very much. The gentleman's time 
has expired. The gentleman from Iowa, Mr. King, is recognized 
for 5 minutes.
    Mr. KING. Thank you, Mr. Chairman. I appreciate this 
hearing. And, Mr. Clements, I appreciate your testimony.
    In listening to Mr. Kelly's question about a 5-inch binder 
for mortgage lending, I remember going into a local bank in my 
district before Dodd-Frank and they showed me about a 5-inch 
binder for mortgage lending, and they said, that is a small 
local bank, and they still are in business, by the way, and 
they said, we had to hire one personnel to get up to speed on 
Sarbanes-Oxley.
    And now here we are with Dodd-Frank. On top of that, I have 
not had them present to me the stack of that binder because I 
suspect that it is electronically housed and harder to measurer 
these days. But I wanted to make that comment into the record, 
and then ask you, did you find in the examination that you did, 
a particular advantage for either of the credit unions or the 
community banks, one over the other, once you compared their 
regulatory burden?
    Mr. CLEMENTS. No, I don't think that was the case. The 
concerns that were expressed to us in terms of some of the 
mortgage disclosures and the BSA/AML, the burdens tend to be 
pretty consistent. The concerns raised to us were pretty 
consistent--it was really a small institution, whether it was 
credit union or community bank issues.
    Mr. KING. If I were to ask them, they would probably say, 
we are facing the same regulations but not the same tax rate. 
And that is a different question, I understand.
    Mr. CLEMENTS. Yes.
    Mr. KING. But that also needs to be said. Do you agree with 
that?
    Mr. CLEMENTS. Those are beyond--we didn't look at the--we 
didn't look at the difference between those institutions.
    Mr. KING. When you are looking at these regulations, did 
you also evaluate the impact of them? Could you quantify what 
kind of inadvertent errors or what kind of customer 
victimization might have taken place had it not been for these 
regulations?
    Mr. CLEMENTS. No, it is very difficult to hypothetically 
say what would happen. Again, in terms of the impact, I would 
go back to our work coming up for the chairman, that looks at 
whether regulations are affecting lending, whether they are 
affecting availability of credit in terms of having branches, 
and the profitability of the institutions.
    What we are trying to do is empirically test that and move 
beyond what we are sort of being told, and look at the data and 
get to some answers to that.
    Mr. KING. And I think that, you know, within those 
limitations, I don't take issue with that. I would just say 
that the baseline would be laissez-faire, and then as we added 
regulations in each of these cycles, those prior to Sarbanes-
Oxley, Sarbanes-Oxley, Dodd-Frank, each of those components, 
would you agree, that every time that regulations are 
promulgated and implemented that it does cost somebody, as Mr. 
Kelly said, to comply?
    Mr. CLEMENTS. Each additional activity is going to involve 
some level of burden. It could be a one-time change, it could 
be ongoing. It depends upon what is being asked. If it is a 
matter of altering a form, you might need to change your 
computer system, you might need to do some training, but that's 
one time. If there is extensions of BSA/AML in terms of what 
you need to watch for, that could be ongoing. So it depends 
upon what is being asked.
    Mr. KING. Did you ever encounter a new regulation that once 
a company, a business was set up to comply with that 
regulation, that it actually got easier for them rather than 
another burden? Did it ever take some load off of business?
    Mr. CLEMENTS. We didn't--I don't think we heard that.
    Mr. KING. I have not encountered that either. In a way I am 
just setting this up because I thought I remembered it 
verbatim, but I looked it up. So I want to--looking back at 
James Madison's Federalist 62, and it is just important that we 
think about these things as the years of our civilization go on 
and the stack of regulations go up.
    He wrote then in Federalist 62, James Madison. It will be 
of little avail to the people that the laws are made by men of 
their own choice if the laws be so voluminous that they cannot 
be read or so incoherent that they could not be understood. And 
just those words we should remember as we go forward growing 
this government, and what you have offered here is always, I 
think, an objective look at what we have.
    And I would pose to this committee that I put an amendment 
on the REINS Act here, I guess it would be last summer, the 
REINS Act. Are you familiar with that, Mr. Clements?
    Mr. CLEMENTS. No, I am not.
    Mr. KING. Just shortly, it is an act that was put together 
by a gentleman from--Jeffrey Davis from Kentucky--years ago, 
that requires that any regulation that is promulgated has to 
have an affirmative vote of Congress if it has more than $100 
million in impact on our economy. I put an amendment on there 
that required all the existing regulations, 10 percent a year 
be served up to Congress asking for an affirmative vote before 
they can continue as having the force and effect of law.
    And so I would just use this time to thank you for your 
testimony, but also make the case that I think we need to go 
deeper into this regulation and to find more ways to reduce 
regulation. And the best place that we can get these answers, 
aside from this GAO report, is to the people that are subject 
to the regulations and looking at their recommendation. And 
that is why I think that language and that amendment would be 
so important.
    Thank you, Mr. Clements. I appreciate your testimony. Thank 
you, Mr. Chairman. I yield back.
    Chairman CHABOT. Thank you. The gentleman yields back. And 
the chair appreciates the gentleman's reference to the 
Federalist Papers in this hearing room today. We haven't heard 
that in a while, and we appreciate it.
    The gentleman from Florida, Mr. Lawson, who is the ranking 
member of the Subcommittee on Health and Technology, is 
recognized for 5 minutes.
    Mr. LAWSON. Thank you, Mr. Chairman. Mr. Clements, welcome 
to the committee.
    I know you might have responded to this earlier. I haven't 
been up in Congress long, but ever since I have got up here in 
Congress, I had some of the community bankers tell me about 
Dodd-Frank.
    So the question I had is, we have heard on many occasions 
that the Dodd-Frank Act is the reason for many of the ill 
things that are facing our community banks. Can you explain how 
the act has had the opposite affect in reducing costs and 
increasing transparency?
    And I hate to have you to go back over it again, but I was 
caught right in the middle and didn't know, really, what to do. 
And I am trying to learn more and more about it as time go on, 
because community bankers was telling me back home all of the 
tremendous amount of paperwork and all of the stuff they had to 
do, which would distract them from what they are doing.
    So I just said if I don't get but one question in, I need 
to get that one in.
    Mr. CLEMENTS. In terms of the transparency, one of the 
things I would cite on the consumer side is more clarity on 
closing.
    It is easier for the consumer to get their closing document 
in one place. It is more plain English language for them. On 
the institution side, I believe Dodd-Frank made changes to the 
insurance rate for Federal Deposit Insurance, which provided 
some benefits to smaller institutions. Those would be two.
    Most of our work looked at what were the burdens facing 
institutions. So I think similar to what you are hearing, what 
we sort of heard were the burden side.
    Mr. LAWSON. Okay. And I looked in the staff report, which I 
was really concerned, and you might have already commented on 
that, too, and they were saying the majority claimed that Dodd-
Frank is harming small financial institutions and lending as to 
the economy; however, the facts telling a different story. They 
say that, you know, banks, credit unions and stuff are making 
profits, and so forth.
    So the word that we had coming from the commercial side, it 
doesn't seem to be panning out of what the staff did research 
on. That it is just the opposite.
    Could you tell me what is happening, the reason why staff 
would do research and say that everything is booming, they are 
making more profits, they already make more loans and 
everything, and it is not commensurate with what some of the 
institutions are saying. If it makes any sense.
    Mr. CLEMENTS. I don't think we have done work on that.
    Mr. LAWSON. You haven't done any work to determine how 
Dodd-Frank might be hurting the commercial banking interest?
    Mr. CLEMENTS. Well, the burdens we cited, there were three 
burdens.
    Mr. LAWSON. Right.
    Mr. CLEMENTS. As I mentioned, two burdens on the Dodd-Frank 
side. One would be the Home Mortgage Disclosure Act and some of 
the extra requirements there, and then also the mortgage 
disclosure and closing requirements were the two burdens that 
the community banks and credit unions that we interviewed, the 
focus groups, had mentioned.
    And, again, a lot of that was in terms of the time to do 
the work, the paperwork requirements, the complexity of it, 
which could lead to new training of staff, changes in computer 
systems. Those were the burdens that were cited.
    Mr. LAWSON. Okay. And then the $10 million question: Should 
Dodd-Frank be repealed all together?
    Mr. CLEMENTS. That is beyond the scope of what we did. It 
is really a policy question that I would defer to the Congress 
to make. We are providing you with information ultimately.
    Mr. LAWSON. Okay. And I guess even though there have been a 
vote already, you know, but I was just trying to--if it was 
really helping the consumer and it was a clash then between the 
consumer groups and the financial institutions. You know, but I 
was trying to find out where--maybe eventually I can ask the 
chairman--where did it hurt? I still haven't been able to 
ascertain how did it hurt the financial institutions other than 
what you stated earlier.
    And that is the only thing, because--well, I will tell you 
what, Mr. Chairman, then I yield back.
    Chairman CHABOT. Would the gentleman yield for--you have 
got a few minutes--or 30 seconds left?
    Mr. LAWSON. Yeah.
    Chairman CHABOT. I think what we hear a lot is that even 
though they weren't directly--as far as the legislation goes--
it wasn't suppose to affect them, as a practical matter, it 
does. Because many of them, there are best practices, they are 
concerned with how they are going to be, you know, what the 
regulation is going to be and the supervisory capacity. If 
there is basically a trickle-down effect on all the small guys, 
We better do this or we are going to get in some trouble.
    So all the smaller community banks and credit unions are 
complying with it even if, you know, technically, they may not 
have to, they virtually all do. That is my understanding.
    And you could talk to, probably, the folks in your 
district, hear from them directly, but that is what we have 
heard.
    Mr. LAWSON. Okay.
    Chairman CHABOT. Thank you very much. I appreciate the 
gentleman for yielding.
    The gentleman's time has expired.
    The gentleman from Missouri, Mr. Luetkemeyer, who is the 
vice chairman of this committee is recognized for 5 minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. And interesting 
discussion. You know, to answer some of the previous questions, 
I served as the chairman of the Financial Institutions 
Committee and the Financial Services Committee, so this is 
right square in the middle of my wheelhouse.
    And I can tell you that Dodd-Frank free checking was--75 
percent of the banks had free checking. Now, it is down to 37 
percent. Small loans to small businesses have dropped 15 
percent as a result. This is not my numbers. These are Fed 
studies--or banking groups that have done these studies.
    Small banks, many of them no longer make home loans. They 
have got completely out of the business. So these costs are 
driving banks out of business, credit unions out of business. 
We are losing one institution a day in this country because of 
the rules, regulations, and costs affiliated to them that Mr. 
Clements has identified.
    If I have some extra time here, I can go into a lot more 
detail, but what it does, and the bottom line is, it costs 
access to credit for consumers, and the credit they do have is 
more expensive. And that has been documented.
    Mr. Clements, with regards to the EGRPRA, which is the 
requirement that all of the different agencies do a review of 
all their rules and regulations every 10 years. There is on the 
floor today, or will be shortly--well, we had the rule a while 
ago, and we will have a vote probably next week on the bill 
that actually changes it from 10 years down to 7. And it brings 
into this the CFPB and the credit union regulators.
    What was your finding with regards to that. I know that 
there is some information in here, but give me your impression 
of how the different agencies are complying with that rule.
    Mr. CLEMENTS. Sure. So EGRPRA applies to OCC, the Federal 
Reserve.
    Mr. LUETKEMEYER. Right.
    Mr. CLEMENTS. And FDIC. It does not apply to CFPB----
    Mr. LUETKEMEYER. Right.
    Mr. CLEMENTS.--which is one of the limitations we had noted 
in the report. We talked about the burdens we had heard about, 
2 of 3 were related to CFPB. Two other weaknesses that we had 
found within the EGRPRA analysis: One was a lack of 
quantitative data. So to some extent, the regulators looked at 
the comments they received. Either agreed with them or 
disagreed with them and moved on. But what we are suggesting, 
and we have recommended, is that they do more of a quantitative 
analysis. And again, we are basing the criteria on executive 
orders and OMB guidance.
    And the other thing we noticed was a lack of consideration 
of the cumulative effect of regulation. And we refer to that in 
our report in terms of bodies of regulation.
    Mr. LUETKEMEYER. Were they looking at the cost benefit 
analysis of those rules and regulations?
    Mr. CLEMENTS. I am sorry?
    Mr. LUETKEMEYER. Were they looking at the cost benefit 
analysis of those rules and regulations as they were putting 
them on the books? Were you reviewing that to see if they were 
doing that?
    Mr. CLEMENTS. I would have to get back with you on that. 
Off the top of my head, I don't know that.
    Mr. LUETKEMEYER. Okay. As you were going through this, I 
know one of the things you were looking at is the HMDA, that 
is, Home Mortgage Disclosure Act. And, you know, Mr. Kelly was 
talking about that and a couple other folks with regards to the 
size of the documentation that is now required whenever you 
close a home loan, and is actually, you know, driving a lot of 
the home loan lenders out of business.
    Did you look at the rules and regulations themselves to see 
how burdensome they were, how duplicative they were, how 
superfluous they were? What was the extent of your analysis of 
HMDA?
    Mr. CLEMENTS. For the most part, what we did is relied on 
the interviews and focus groups telling us what the concerns 
were. We did look at it, but we did not make an independent 
evaluation of, was that correct, was the level of regulation 
correct?
    Mr. LUETKEMEYER. So what analysis did you come up with with 
regards to that then?
    Mr. CLEMENTS. With the concerns that the institutions made 
to us were it was time consuming to do it, it is confusing to 
identify which transaction you might need to record. There are 
concerns about the error submission. So if there where was an 
error, and it hit some threshold, that the entire dataset 
needed to be resubmitted. Those are some of the concerns.
    And then there was the changes that had been implemented in 
terms of additional transactions that had to be reported such 
as lines of credit, and then also the addition of a fairly 
significant number of data fields.
    Mr. LUETKEMEYER. Did you look at the way that these HMDA 
rules and regulations are enforced? Did you look at the 
punitive nature by which the regulators are enforcing the rules 
on this particular act?
    Mr. CLEMENTS. No. Again, in terms of that, in respect to 
that question, we relied on what the community banks and credit 
unions were telling us.
    Mr. LUETKEMEYER. So how can you adequately analyze whether 
these rules and regulations are appropriate, whether somebody 
is doing a good job of promulgating and enforcing if you don't 
look at the ability to--if these folks are not doing a cost 
benefit analysis? If you are not looking at how they are 
enforcing them, either by whatever tactic they are using to 
force the bank to change what they have been doing, or if they 
are being so punitive as to fine them? I mean, none of that was 
part of your review or your study?
    Mr. CLEMENTS. In terms of what we did, we have heard that 
institutions have mentioned they were being held to standards 
that they were not required to be. What we did is we looked at 
28 examination work papers. Twenty, I believe, from community 
banks, and 8 from credit unions. We did not find an instance 
where they were being held to standards that they were not 
required to be held to.
    I am not implying that it doesn't happen. I am simply 
saying of those 28, we did not find evidence that they were 
being held to a different standard or something they were not 
required to be held to.
    Chairman CHABOT. The gentleman's time has expired.
    The gentleman from Pennsylvania, Mr. Evans, who is the 
ranking member of Subcommittee on Economic Growth Tax and 
Capital Access, recognized for 5 minutes.
    Mr. EVANS. I am going to shock you, Mr. Chairman, and yield 
back the balance of my time.
    Chairman CHABOT. Oh, the gentleman yields back. I am 
shocked, pleasantly shocked.
    We appreciate the gentleman's testimony here today. I just 
wanted to make sure that the gentlelady didn't want to go to a 
second round. And we will follow up on this. We are waiting for 
the--you said it would be a couple months before we get the 
follow up on this? Okay.
    So we appreciate your time. The committee will use today's 
conversation as we continue to examine all regulations 
impacting our Nation's smallest firms. And I would ask 
unanimous consent that members have 5 legislative days to 
submit statements and supporting materials for the record.
    Without objection, so ordered. If there is no further 
business coming before the committee, we are adjourned. Thank 
you very much.
    [Whereupon, at 3:13 p.m., the committee was adjourned.]
    
                 A P P E N D I X

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




         Question from Hon. John Curtis to Mr. Michael Clements


    Question: Is there a pattern of assigning the new guys to 
the smaller institutions?

    Answer: Federal banking regulators generally assign 
examiners to examine financial institutions based on various 
factors including size, geography, risk profile, and complexity 
of the financial institution. Newer, or less experienced 
examines are generally assigned to smaller, less complex 
financial institutions, and may be assigned to examine larger, 
more complex financial institutions as they obtain additional 
and specific training and examination experience.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]