Patrick McHenryChairman

Just one day after the Financial Services Committee held its second hearing in as many weeks on the shaky finances of the Federal Housing Administration (FHA), the Government Accountability Office (GAO) announced it has added the FHA to its list of “High Risk” government programs. Every two years, GAO identifies programs that are at “high risk due to their greater vulnerability to fraud, waste, abuse and mismanagement or the need for transformation” to become more effective or efficient.

Chairman Hensarling quickly put out a statement saying the designation “reinforces everything our committee has been saying about the FHA for some time now – it is a high risk to taxpayers, it is a high risk to the mortgage insurance market and it represents a high risk to our economy.” 

This week’s hearing with Commissioner Carol Galante came amid growing concerns that the FHA will require a taxpayer-funded bailout and that FHA has strayed far from its historical mission of helping first-time homebuyers, low- and moderate-income families and higher risk borrowers who are otherwise creditworthy. Today, the FHA has expanded its role to offer insurance to millions of Americans, using many of the same practices employed by subprime lenders at the height of the housing boom-turned-bust. As a result, the FHA is potentially hurting those it was designed to help.

Watch the recap of this week's hearing below. 

The bipartisan JOBS Act, which originated in the Financial Services Committee and was passed by Congress earlier this year, is working to boost the economy.  A report in the Charlotte Observer notes that provisions of the act are helping community banks to trim regulatory costs and save money – money that can be pumped back into local economies, start small businesses and create jobs. 

At a time when the over-regulation and red tape of the Dodd-Frank Act is driving up their expenses, community banks are getting some much needed relief thanks to the JOBS Act.

Read the Charlotte Observer report below:

Small banks use law to cut regulatory costs

Published in the Charlotte Observer
Oct. 22, 2012

Two Charlotte-area community banks are joining their peers around the country in saving money through a new law intended to boost startups and small businesses.

They’ve been able to trim or avoid regulatory costs at a time when the ongoing implementation of the Dodd-Frank financial reform law has generally driven up their expenses.

“It is a small piece of good news in an otherwise bleak landscape,” said B.T. Atkinson, a partner at law firm Bryan Cave LLP, which represents community banks. He said banks would be able to save, on average, about $250,000.

Signed into law April 5, the Jumpstart Our Business Startups Act passed with broad bipartisan support in both houses of Congress. It’s generally intended to make it easier for small companies to raise money.

Several provisions apply specifically to community banks. The primary one deals with the maximum number of investors a bank may have if it wishes to remove its registration with the Securities and Exchange Commission – a move that saves money and time. The maximum was raised from 300 investors to 1,200 – making many more banks eligible to deregister.

As of last week, nearly 100 banks around the country had filed to deregister with the Securities and Exchange Commission, according to data compiled by SNL Financial. Five of them were based in North Carolina, tying the state for second-most behind Virginia.

Blueharbor Bank, based in Mooresville, announced the decision to do so in August as a way to cut down on the legal and accounting expenses that come with being registered.

“We just saw that as an opportunity to help cut some costs and try to be good stewards of our shareholders’ resources,” CEO Jim Marshall said, saying the bank will be able to save the equivalent of a mid-level executive’s salary per year. “We have 18 employees, so that’s a nice savings.”

In the past, many community banks kept their shareholder counts low to avoid having to register. But Marshall said his bank felt it was more valuable to have a greater number of local shareholders, so Blueharbor decided to keep its minimum investment low.

The tradeoff was the greater regulatory cost – which has now been taken away.

“This JOBS Act allowed us to have the best of both worlds right now,” Marshall said.

On the flip side, for banks that have not registered with the SEC, the JOBS Act raised the threshold for having to register from 500 investors to 2,000.

That’s allowing Charlotte-based NewDominion Bank to bring a number of local business people into the fold without exceeding the cap as the bank works on a $30 million capital raise.

In the bank’s initial offering, it had 374 shareholders – already close to the former threshold, Chief Operating Officer Marc Bogan said. In its current capital raise, to comply with the old standard, the minimum investment would have had to be about $250,000. Now, NewDominion can gain shareholders who put in around $10,000.

“They get to be a part of helping build a bank in their community,” Bogan said.

After an initial surge of banks deregistering with the SEC under the JOBS Act, the pace has slowed in recent months, SNL Financial said.

But Atkinson of Bryan Cave said he believes a number of small banks are still weighing their options and may wade in at the start of the next fiscal year.

Some Washington politicians and supposed media “fact checkers” have been falling over themselves the last few days busily defending the Dodd-Frank Act.  But rather than rely on what the politicians and Beltway pundits think, Republicans on the House Financial Services Committee actually did something quite remarkable by Washington standards:  we asked small town community bankers, financial institutions and small business operators what THEY think about the Dodd-Frank Act.  After all, they are the ones who have to live under Dodd-Frank’s more than 400 new regulations.

Since Republicans assumed the majority on the Financial Services Committee in January 2011, the Committee has held 62 hearings on the Dodd-Frank Act and received testimony from more than 300 witnesses. 

Here are some of their voices:

“The regulatory costs are overwhelming in our industry right now…Virtually everyone in our bank now is involved to some extent or another in complying with regulations, and so it has taken away from their ability and their resources to work with both existing customers and also to go out and solicit new customers, helping other people get businesses off the ground.” John A. Klebba, President and Chief Executive Officer, Legends Bank

“Among some of the provisions of the Dodd-Frank Act, the new CFPB perhaps carries the most risk for community banks. We are already required to spend significant resources complying with consumer protection rules. Every hour I spend in compliance is an hour that could be spent with a small business owner or a consumer.” Greg Ohlendorf, President and Chief Executive Officer, First Community Bank and Trust

“And I charge you with this, 40 years ago I did not see problems in banks and banks falling like flies, and yet the level of regulation and the cost of regulation was far, far less than it is today. As I see it from my standpoint, we will see community banks continue to decline. We simply cannot afford the high costs of federal regulation. And as one banker I will tell you this, my major risks are not credit risks, risks of theft, risks of some robber coming in with a gun in my office; my number one risk is federal regulatory risk. And I have a greater risk of harm to my bank, my stockholders from the federal government than I have anything else in this whole world. That is obscene. ” Les Parker, Chairman, President and Chief Executive Officer, United Bank of El Paso de Norte

“Over the last several years, banks have faced increased regulatory costs and will face hundreds of new regulations with the Dodd-Frank Act. These pressures are slowly but surely strangling the traditional community banks, and handicapping their ability to meet the credit needs of their communities.” Matthew H. Williams, Chairman and President, Gothenburg State Bank

“There’s no question that the current regulatory and examination environment is an impediment to the flow of credit that will create jobs and advance the economic recovery.”  Mr. Marty Reinhart, President, Heritage Bank

“As one who has worked in community banks for over four decades, I maintain that despite policymakers’ good intentions in implementing regulations, they
are ultimately detrimental to banks’ ability to grow and create capital in other communities and to build communities through job creation. Without community banking, we will no longer be the America that created the largest economy in the world. We have already lost over 11,000 community banks since 1985; we cannot afford to lose anymore.” Ignacio Urrabazo, Jr., President, Commerce Bank

“There is no doubt that the increasing amount of new laws and regulations that credit unions face have become overwhelming. As the credit union president, I spend many hours reading each new law and regulation. I can’t afford to hire lawyers to interpret them for me. Most of these laws and regulations are created to address a problem caused by organizations other than credit unions. Yet, the regulators continue to impose the same requirements on small credit unions as they do on the largest financial institutions in the country. This just doesn’t make sense.” Maria Martinez, President and Chief Executive Officer, Border Federal Credit Union

“The greatest challenge facing many credit unions is cumulative impact of the rapidly growing number of regulatory burdens in the wake of the financial crisis. While any one single regulation may not be particularly burdensome, the layering of new regulation on top of old and outdated regulation can completely overwhelm small financial service providers like credit unions. Unfortunately, every dollar spent on compliance, whether stemming from a new law or outdated regulation, is a dollar that could have been used to reduce cost or provide additional services or loans to members. It is with this in mind that NAFCU continues to urge the Committee to move forward with legislation that will provide regulatory relief from outdated laws and regulations for credit unions.” Ed Templeton, President and Chief Executive Officer, SRP Federal Credit Union

“And I totally support the idea that there should be smart—you have to have regulation.  But we are regulating community banks particularly down to the point where there is barely room to breathe. That is not how you get the economy going. And that is not how you lend money out.” Tim Zimmerman, President and Chief Executive Officer, Standard Bank

“The amount, intensity and uncertainty of new Federal regulations, chiefly the Dodd-Frank Act, have forced banks to allocate an enormous amount of time and resources to compliance, and away from our primary mission of serving our customers.” Todd Nagel, President, River Valley Bank

“To community banks like mine, regulation is a disproportionate expense, burden, and a real opportunity cost. My compliance staff is half as large as my lending staff. This is out of proportion to our primary business: lending in our communities to support the local economy.” Salvatore Marranca, President and Chief Executive Officer, Cattaraugus County Bank

“The bigger banks can absorb it, the smaller banks can’t. I would not be surprised to see half of the community banks in this country go out of business if we don’t give some relief from Dodd-Frank for them. I think that Dodd-Frank is a terrible piece of financial legislation. It didn’t address any of the causes of the crisis that we just went through. It won’t prevent the next crisis. It’s heaped volumes and volumes of regulations. What they’re missing here is that when you require banks to capitalize for a depression, it’s going to be awfully hard to get this economy moving. Loan growth has almost been non-existent for the past three years. It’s hurting the people who need the money the most. It’s hurting small business. I think it is impeding economic growth.” Bill Issac, Former FDIC Chairman and Chairman of Fifth Third Bancorp

“Each new rule requires significant time and money and builds upon volumes of existing regulations. This is putting an enormous strain on our staffs, and for community banks, which are disproportionately affected due to their more limited resources, diminishing revenue streams, and with limited access to capital—it is becoming a nearly insurmountable burden. When you add to this the more than two dozen proposals established under Dodd-Frank for a whole new class of regulation – mostly to be issued by yet another regulator– combined with the uncertainty and legal risks—it is plain to see how difficult it can be to achieve the right balance between satisfying loan demands and regulatory demands.” William Bates, Jr., Executive Vice President and General Counsel, Seaway Bank and Trust Company

“Community banks have been the life blood of this country, and they’re responsible for more small business successes than any other resources including government programs. What’s troubling to me and to my bank is the impact of government regulation that has been based not upon common sense but on politics.” George Hansard, President, Pecos County State Bank

“If Dodd-Frank is allowed to stand and proliferate as a monster regulatory overhaul, only the largest institutions will be able to navigate its requirements, and the community institution model will continue to diminish. The cost of regulatory compliance is simply staggering. I’m not talking about efforts to keep an institution out of trouble; I’m talking about a well-meaning community institution that has no intention of being unfair to members of their own town. These smaller institutions spend a disproportionate amount of money and time to just meet the reporting and manpower requirements of this new regulatory overkill.” Cliff McCauley, Executive Vice President, Correspondent Banking, Frost Bank

“Most banks in the Midwest did not participate in the underwriting practices that contributed to the recent recession. Sadly, however, we are paying for the past through costly new regulatory burdens, anxious examiners, and customers that are unwilling to borrow. These remedies are hitting all hearts of our financial statements, as costs are going up, opportunities to earn revenue have been curtailed, and the amount and cost of capital we need is increasing.” G. Courtney Haning, Chairman, President and Chief Executive Officer, Peoples National Bank

“The challenge is they’re estimating it could result in over 5,000 pages of regulations.  There already is a fairly significant compliance burden, which in smaller institutions like ours and others is difficult as every other cost is rising. Part of the challenge, as well, is because of the uncertainty of what will those regulations end up being?” Dorothy Savarese, President, Cape Cod Five Cents Savings Bank

“We know that there will always be regulations that control our business – but the reaction to the financial crisis has layered on regulation after regulation that does nothing to improve safety or soundness and only raises the cost of providing credit to our customers. As a banker, I feel like Mickey Mouse as the Sorcerer’s Apprentice in Disney’s famous cartoon Fantasia. Just like Mickey with bucket after bucket of water drowning him, new rules, regulations, guidances, and requirements flood in to my bank page after page, ream after ream. With Dodd-Frank alone, there are 3,894 pages of proposed regulations and 3,633 pages of final regulations (as of April 13) and we’re only a quarter of the way through the 400-plus rules that must be promulgated. While community banks pride themselves on being flexible and meeting any challenge, there is a tipping point beyond which community banks will find it impossible to compete.” William Grant, Chairman, President and Chief Executive Officer, First United Bank & Trust

“But the role of community banks in advancing and sustaining the recovery is jeopardized by the increasing expense and distraction of regulation drastically out of proportion to any risk posed by community banks. We didn’t cause the recent financial crisis, and we should not bear the weight of new, overreaching regulation intended to address it.” Samuel Vallandingham, Vice President and Chief Information Officer, First State Bank

“Once again, community banks will suffer for the problems created by big banks and investment houses. Dodd-Frank, while attempting to "fix" the financial services industry, has come up short in correcting the problems that created today's economic uncertainty. Thousands of pages of new compliance requirements stemming from this legislation and from the Consumer Protection Act will continue to burden many financial institutions dedicated to serving local communities and supporting Main Street businesses.” “Some community banks will find it financially impossible to operate independently and competitively while complying with the host of expected regulations, and that will lead to consolidation among smaller banks. And that will mean hardships for many small businesses that depend on their neighborhood bank. Many of our small business customers tell us that they left large banking institutions because of their inability to obtain credit and the high service fees charged by these banks. Few deals were sealed with a handshake -- one of the hallmarks of community banking.” Douglas C. Manditch, Chairman and CEO, Empire National Bank

One of the most significant accomplishments of the Financial Services Committee during the 112^th Congress is passage of the JOBS Act.  The Jumpstart Our Business Startups Act (JOBS Act) removes government barriers to job creation and economic activity. The JOBS Act, comprised of six bills that originated in and were originally approved by the Committee, is designed to help startups and entrepreneurs get off the ground, access capital and create jobs.  These initiatives all received strong bipartisan support in Congress and from the President’s Jobs Council and the business community. 

The JOBS Act was signed into law on April 5, 2012.

Information about the six bills that comprise the JOBS Act:

• H.R. 3606, the Reopening American Capital Markets to Emerging Growth Companies Act, introduced by Reps. Stephen Fincher and John Carney, makes it easier for more companies to access the capital markets by reducing the cost of going public for small and medium size companies. 
• H.R. 2940, introduced by Rep. Kevin McCarthy, removes the regulatory ban that prevents small, privately held companies from using advertisements to solicit investors.
• H.R. 2930, introduced by Rep. Patrick McHenry, removes SEC restrictions that prevent “crowdfunding” so entrepreneurs can raise equity capital from a large pool of small investors who may or may not be considered “accredited” by the SEC. 
• H.R. 1070, the Small Company Capital Formation Act, which was introduced by Representative Schweikert, makes it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration from $5 million to $50 million.
• H.R. 2167, the Private Company Flexibility and Growth Act, which was also introduced by Representative Schweikert, removes an impediment to capital formation for small companies by raising the shareholder threshold for mandatory registration with the SEC from 500 to 1,000 shareholders.  
• H.R. 4088, the Capital Expansion Act, which was introduced by Representative Ben Quayle, is a modified version of legislation previously approved by the Committee.  It raises the threshold for mandatory registration under the Securities Exchange Act of 1934 from 500 shareholders to 2,000 shareholders for all banks and bank holding companies and raises the shareholder deregistration threshold from 300 shareholders to 1,200 shareholders. 

The JOBS Act Will Help Get Americans Back To Work.  House Republicans have consistently offered solutions to create an environment that promotes job creation and allows our small businesses to grow. Republicans are focused on eliminating government barriers to an economic recovery. The JOBS Act will jumpstart our economy and restore opportunities for America’s primary job creators: our small businesses, startups and entrepreneurs.

Small Businesses Are The Engine Of Our Economy Yet Government Regulations Stand In Their Way.  Small businesses are the driving force for innovation and job growth in our economy. According to the Kauffman Foundation, startups have created nearly 40 million jobs since 1980 and the Small Business Administration reports that small businesses generate over 60% of new jobs . Unfortunately, government policies make it harder for small businesses to start up and grow. The World Bank’s annual “Doing Business” report found that the U.S. fell to number 13 in rankings for “ease of starting a business.” Government policies should encourage the entrepreneurial spirit that has defined our economic competitiveness. We must remember that one of the greatest assets of our economy is innovation; it continues to set the U.S. apart. Innovation goes hand in hand with individual freedom. Innovation must be allowed to thrive in order for an economic recovery to be achieved. 

Promoting Jobs By Facilitating Small Business Capital Formation.  Capital formation is essential for any lasting economic recovery.  Without access to capital, businesses cannot expand. Without regulatory certainty, capital disappears. We need to do everything we can to ensure that America remains a country of opportunity, where jobs are created, risks are taken, and startups and small businesses flourish without being stifled by costly regulations. The JOBS Act improves access to the capital markets for small companies.  Revitalizing the IPO market is important to maintaining our economic competitiveness, promoting American innovation and ensuring workers are hired and businesses can grow.

Rep. Barney Frank, Ranking Member of the Financial Services Committee, on Thursday responded to criticism that regulators have completed “less than half” of the 400 new regulations in the Dodd-Frank Act by blaming House Republicans for cutting the budgets of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

“It is true that when the Republicans took over the House, they cut the funding for two of the most important agencies that got new responsibilities.”  

-- Rep. Frank, CNBC’s “Closing Bell”
July 26, 2012

Here are the facts about funding:

SEC FUNDING*

Fiscal Year                  Budget
2007                            $   881,560,000
2008                            $   906,000,000
2009                            $   970,000,000
2010                            $1,118,753,000
2011                            $1,212,859,000
2012                            $1,363,276,000

CFTC FUNDING*

Fiscal Year                  Budget
2007                            $   97,981,000
2008                            $ 111,265,650
2009                            $ 146,000,000
2010                            $ 168,800,000
2011                            $ 202,269,650
2012                            $ 205,294,000

 *Source:  Congressional Research Service