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House Financial Institutions and Consumer Credit Subcommittee Hearing Examines Decline in New Bank/Credit Union Charter Applications
In an afternoon hearing on March 21 entitled “Ending the De Novo Drought: Examining the Application Process for De Novo Financial Institutions,” Members of the House Financial Services Financial Institutions and Consumer Credit Subcommittee met to examine the impact that the Dodd-Frank Act has had on the creation of new or “de novo” financial institutions. According to a majority staff memorandum released in advance of the hearing, the number of new, or “de novo,” bank and credit union charters has declined to historic lows since the passage of the Dodd-Frank Act. From 2010 to 2016, there were only five new bank and 16 new credit union charters granted. In comparison, between 2000 and 2008, 1,341 new banks and 75 new credit unions were chartered.
Three of the witnesses – each of whom appeared on behalf of a banking industry group – generally agreed that the Dodd-Frank Act has, to some extent, had a “chilling impact” on the creation of new banks:
- Kenneth L. Burgess, speaking on behalf of the American Bankers Association noted, among other things, that “in the five years since Dodd-Frank was enacted, the pace of lending was half of what it was several years before the financial crisis. Some banks have stopped offering certain products altogether, such as mortgage and other consumer loans.”
- Keith Stone, representing the National Association of Federally-Insured Credit Unions, noted that “[t]he compliance requirements in a post-Dodd-Frank environment have grown to a tipping point where it is nearly impossible for many smaller institutions to survive, much less start from scratch.”
- Patrick J. Kennedy, Jr., appearing on behalf of the Subchapter S Bank Association, noted that “[m]any banks exited the mortgage loan business because of the complexity and uncertainty resulting from Dodd Frank, the CFPB and related rulemaking.”
The fourth witness, Sarah Edelman, offered an alternative explanation for the decline in new bank applications to the FDIC. Ms. Edelman—who is currently the director of housing finance at the Center for American Progress—testified as to her belief that the “decline” in “[t]he number of new bank applications to the FDIC . . . is largely the result of macroeconomic factors, including, historically low interest rates reducing the profitability of new banks, as well as investors being able to purchase failing banks at a discount following the financial crisis.”
In December of last year, the FDIC released a handbook entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions, which provides an overview of the business considerations and statutory requirements that de novo organizers face as they work to establish a new depository institution and offers guidance for navigating the phases of establishing an insured institution. Rather than establish new policy or offer guidance, the Handbook instead “seeks to address the informational needs of organizers, as well as feedback from organizers and other interested parties during recent industry outreach events.” Comments were due February 20. Additional resources are available through an FDIC website dedicated to applications for deposit insurance.
Members of the House Financial Services Committee Weigh in on Rollout of the DOL Fiduciary Rule
On March 17, GOP members of the House Financial Services Committee sent a letter to Acting Labor Secretary Ed Hugler expressing their support for the Department of Labor’s (DOL’s) proposal to delay the implementation of its Fiduciary Rule from April 10 until June 9. The letter asserts, among other things, that a delay is “necessary to review the rule’s scope and assess potential harm to investors, disruptions within the retirement services industry, and increases in litigation, as required by the Presidential Memorandum signed by President Trump on February 3, 2017.” The GOP Members also note that they “have long been concerned with the DOL Fiduciary Rule's impact on retail investors and the U.S. capital markets,” and, have therefore “advocated that the expert regulator—the Securities and Exchange Commission (SEC)—should craft an applicable rule.”
Later that day, House Democrats sent their own letter to the Acting Labor Secretary expressing opposition to the DOL’s proposed 60-day delay of its Fiduciary Rule. Specifically, the Democratic members contend that “the rule is reasonable and workable for advisers,” because, among other reasons, “the DOL provided appropriate relief that mitigates industry concerns and compliance costs.”
House Financial Services Committee Holds Hearing to Consider the “Unconstitutional Structure of the CFPB”
On March 21, the Oversight and Investigations Subcommittee of the House Financial Services Committee held a hearing entitled “The Bureau of Consumer Financial Protection's (CFPB's) Unconstitutional Design.” The majority staff memorandum issued prior to hearing stated that its purpose was to: (i) “examine whether the structure of the [CFPB] violates the Constitution,” and (ii) consider potential “structural changes to the Bureau to resolve any constitutional infirmities.”
Chairwoman Rep. Ann Wagner (R-Mo.) introduced the proceeding by describing the CFPB as a “an unconstitutional behemoth” with a 'Washington knows best' mindset,” that “side-steps accountability to Congress and the President.” Three of the four witnesses called to testify before the panel shared the general position that the CFPB is unconstitutional as currently structured.
- The Honorable Theodore Olson , a partner at Gibson, Dunn & Crutcher LLP and lead counsel for PHH in its suit against the CFPB, shared his personal opinion that the Bureau, “[m]ore than any other administrative agency ever created by Congress,” is “far outside of our constitutional structure, holds the potential for tyrannical governance, and obscures the lines of governmental accountability. [T]he CFPB’s structure is the product of aggregating some of the most democratically unaccountable and power-centralizing features of the federal government’s administrative state.” Particularly with respect to the President, Mr. Olson noted that “by preventing the President from removing the head of the Bureau except for very limited circumstances,” the President is effectively “stripped of the power to faithfully execute the laws in these circumstances.”
- Professor Saikrishna Prakash, a Law Professor at the University of Virginia School of Law questioned the Bureau’s constitutionality, characterizing the Director of the CFPB as “the second most powerful officer in the government for he serves under no one’s supervision, enjoys a vast budget not subject to the appropriations process, and exerts enormous influence over several prominent aspects of the economy.”
- Adam White, a Research Fellow with the Hoover Institution similarly urged Congress to reform the CFPB while also cautioning against allowing the “CFPB’s original structure to . . . become the new benchmark for the next generation of ‘independent agencies.’”
Meanwhile, offering several arguments in support of the Bureau’s current structure was Brianne Gorod – a public interest attorney who has helped prepare briefing in the PHH v CFPB matter on behalf of “current and former members of Congress, who were sponsors of Dodd-Frank” and “participated in drafting it,” and “serve or served on committees with jurisdiction over the [CFPB].” (See, e.g., Motion for Leave to Intervene in Support of the CFPB). Ms. Gorod argued, among other things, that “the President’s ability to remove the Director [of the CFPB] only for cause does not ‘impede the President’s ability to perform his constitutional duty[,]’” but rather, to the contrary, “provides the Executive with substantial ability to ensure that the laws are ‘faithfully executed.’” For this reason and others, Ms. Gorod argued that “the CFPB’s leadership structure . . . is consistent with the text and history of the Constitution, as well as Supreme Court precedent.”
Credit Union Trade Association Submits Letter in Support of Proposed CFPB Exemption
On March 5, Credit Union National Association (CUNA) President Jim Nussle submitted a letter to Rep. Roger Williams (R-Texas), supporting his introduction of H.R. 1264—the Community Financial Institution Exemption Act. The bill, referred to the House Financial Services Committee on February 28, provides an exemption from rules and regulations of the CFPB for community financial institutions with under $50 billion in assets. “The rules are, in large part, implemented to address abuses perpetrated by the large institutions and other previously nonregulated providers, and not small institutions like credit unions and small banks,” Nussle wrote. “While we believe that the statute presently provides the CFPB authority to exempt credit unions under $50 billion from its rulemaking, the bureau has been unwilling to effectively use the exemption authority.”
Securities-Related Bills Advanced Through Committees in Both Senate and House
On March 9, the Senate Banking Committee and the House Financial Services Committee introduced and advanced five securities-related bills out of committee. The bills—listed below—now await scheduling for consideration by each chamber in full.
- S. 327 / H.R. 910 - Fair Access to Investment Research Act of 2017. This legislation will direct the SEC to provide a safe harbor for certain investment fund research reports.
- S. 444 / H.R. 1219 - Supporting America’s Innovators Act of 2017. This legislation will amend the Investment Company Act of 1940 by expanding “the limit on the number of individuals who can invest in certain venture capital funds before those funds must register with the SEC as ‘investment companies.’”
- S. 462 / H.R. 1257 - Securities and Exchange Commission Overpayment Credit Act. This legislation will require the SEC to refund or credit excess payments made to the Commission under a 10-year statute of limitations.
- S. 484 / H.R. 1366 - U.S. Territories Investor Protection Act of 2017. This legislation will amend the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States.
- S. 488 / H.R. 1343 - Encouraging Employee Ownership Act. This legislation will increase the threshold for disclosures required by the SEC relating to compensatory benefit plans.
H.R. 1312 - The Small Business Capital Formation Enhancement Act. The House Financial Services Committee also approved a sixth bill, which seeks to amend the Small Business Investment Inventive Act of 1980 to require an annual review by the SEC of any findings set forth in the annual government-business forum on capital formation.
President Trump Hosts “National Economic Council” Listening Session with CEOs of Small and Community Banks
On March 9, President Trump met with 11 community bank CEOs at the White House seeking the bankers’ input on which regulations may be crimping their ability to lend to consumers and small businesses. The meeting included representatives from the Independent Community Bankers of America (ICBA), and the American Bankers Association (ABA), as well as nine bank executives from across the country. Treasury Secretary Steven Mnuchin, National Economic Council Chairman Gary Cohn, and White House Chief of Staff Reince Priebus also were present.
The President started the meeting by noting that “[n]early half of all private-sector workers are employed by small businesses” and that “[c]ommunity banks are the backbone of small business in America” before announcing his commitment to “preserving our community banks.” Following the President’s brief opening remarks, the attendees had the opportunity to introduce themselves and share specific examples of how excessive regulatory burdens affect their ability to serve their customers, make loans and create jobs at the local level. Proposals, such as the ICBA’s Plan for Prosperity, also were discussed.
Following the meeting, ABA President and CEO Rob Nichols released a statement “commend[ing] President Trump for meeting with community bankers to hear the challenges they face serving their clients.” He described the meeting as “an important step” toward re-examining the “highly prescriptive rules” that have created a “regulatory environment” in which “mortgages don’t get made, small businesses don’t get created and banks find it more difficult to make the loans that drive job creation.” The ICBA also issued a post-meeting Press Release, in which their Chairman, Rebeca Romero Rainey, explained that among the items discussed at the meeting was the ICBA’s “Plan for Prosperity”—a “pro-growth platform to eliminate onerous regulatory burdens on community banks” that “includes provisions to cut regulatory red tape, improve access to capital, strengthen accountability in bank exams, incentivize credit in rural America and more.” The ICBA Chairman also confirmed that the Association “looks forward to continuing to work with President Trump, his administration and Congress to advance common-sense regulatory relief that will support communities nationwide.”
Also weighing in was House Financial Services Committee Chairman Jeb Hensarling (R-TX), who issued a press release praising the President for “listening to the concerns of community bankers who have been buried under an avalanche of burdensome regulations as a result of Dodd-Frank.” Chairman Hensarling also took the opportunity to tout the Financial CHOICE Act, his bill that would make sweeping amendments to the Dodd-Frank Act. According to Chairman Hensarling, GOP members on the Financial Services Committee are “eager to work with the President and his administration this year to fulfill the pledge to dismantle Dodd-Frank and unclog the arteries of our financial system so the lifeblood of capital can flow more freely and create jobs.”
Flood Insurance Takes Center Stage on Hill this Week
On March 9, the Housing and Insurance Subcommittee held a hearing to examine the National Flood Insurance Program (NFIP) and, according to a memo released by the Subcommittee, “provide an opportunity to review the current government flood insurance model, the technological changes since 1968 that could improve the NFIP, and how the private sector could develop a private flood insurance market that compliments the current NFIP model.” With the current NFIP program set to expire on September 30, the hearing comes as Congress is in the process of drafting a proposal to reauthorize and overhaul the program.
Roy Wright—a top FEMA official and the only witness slated to testify at the hour-long hearing—answered questions and, according to the written statement submitted prior to his appearance, discussed “a number of opportunities [that] should be explored that could provide for the growth of the private market for flood insurance.” Wright stated, among other things, that “improving the nation’s overall flood resiliency will depend on finding an appropriate balance between reducing risk to the taxpayer through a greater private sector role while sustaining a robust and affordable federal program.”
Following the hearing, the Financial Services Committee issued a press release highlighting key takeaways, including:
- “The National Flood Insurance Program is in need of significant reform. The program runs an estimated annual deficit as high as $1.5 billion and already is $24.6 billion in the red to taxpayers, with no foreseeable way to ever repay them.”
- “Instead of reducing taxpayer risk to deadly floods, the federal government has spent more than $200 billion on flood recoveries since 2000 in addition to the NFIP. Meanwhile, customer dissatisfaction with how the NFIP operates, approves flood maps, and pays claims has remained high and keeps on growing with each new storm.”
- “The private sector can and should play a more meaningful role in flood insurance.”
Flood Insurance Market Parity and Modernization Act. Earlier in the week, on March 8, legislation intended to accelerate development of the private flood instance market was introduced in both Houses of Congress. In the Senate, Sens. Dean Heller (R-NV) and John Tester (D-MT) reintroduced the Flood Insurance Market Parity and Modernization Act (S. 563), which has been referred to the Committee on Banking, Housing and Urban Affairs. Meanwhile, in the House, Rep. Dennis Ross (R-FL.) and Rep. Kathy Castor (D-FL) announced the introduction of H.R. 1422–the House version of the Flood Insurance Market Parity and Modernization Act.
Flood Insurance Fairness Act. On March 7, Reps. Carlos Curbelo (R-Fla) and Charlie Crist (D-Fla) introduced the Flood Insurance Fairness Act (H.R.1401), a bill intended to “ensure fairness in premium rates for coverage under the National Flood Insurance Program for residences and business properties.” The bill has been referred to the House Committee on Financial Services. As explained by Rep. Crist in a press release, “[b]y extending relief to more Florida properties–including rentals and businesses–we can better protect the financial well-being of middle class families across the state.” A June 2015 version of the bill was previously introduced by Rep. Curbelo during the 114th Congress.
House Financial Services Committee Approves Budget Views and Estimates for FY2018
On March 1, the House Financial Services Committee met in open session and voted, along party lines, to approve its Budget Views and Estimates for Fiscal Year 2018. Among other things, the plan calls for advancing “legislative proposals—including the Financial CHOICE Act—to replace the failed aspects of the Dodd-Frank Act with free-market alternatives that end bailouts, restore market discipline, ensure that the financial system is more resilient, pare back unnecessary and burdensome regulations, encourage capital formation and economic growth, and protect consumers by preserving financial independence and consumer choice.” In addition, the Committee intends to advance legislation to place the non-monetary policy activities of the independent agencies within the Committee’s jurisdiction on the appropriations process. The Committee voted down, along party lines, a series of amendments submitted by the Democratic members.
Congressmen Send Letter Urging Fed to Delay Rulemaking Until New Vice Chairman is Confirmed
On February 23, several GOP members of the House Financial Services Committee sent a letter to Fed Chair Janet Yellen in response to Chair Yellen’s recent Congressional testimony that the Fed may advance a pending rulemaking “pertain[ing] to the stress tests and what is called the Stress Capital Buffer.” Among other things, the letter urged that, “[a]bsent an emergency, the Federal Reserve should neither propose nor adopt any new rules until the U.S. Senate confirms a [Fed] Vice Chairman for Supervision.” The GOP lawmakers also cautioned that, should the Fed adopt rules prior to the confirmation of the Vice Chairman for Supervision, they intend to “work with [their] colleagues to ensure that Congress scrutinizes the Federal Reserve’s actions—and, if appropriate, overturns them—pursuant to the Congressional Review Act.”
GOP Lawmakers Reintroduce House Version of the “TAILOR” Act
On February 22, Congressman Scott Tipton (R-CO) and eight GOP cosponsors reintroduced the Taking Account of Institutions with Low Operation Risk (TAILOR) Act (H.R. 1116), a bill intended to “provide smaller community banks and credit unions relief from onerous regulatory compliance burdens” by “requiring federal regulatory agencies to tailor regulations to fit the business model and risk profile of institutions instead of imposing one-size-fits-all mandates across the board.” According to Rep. Tipton, the various provisions contained within the measure are ultimately intended to provide a means of reducing “often unworkable” compliance costs that community and independent banks and credit unions face when forced to adhere to "regulations designed and intended for big banks.”
In a February 17 press release, the American Bankers Association (ABA) “strongly supported” the bill, which it anticipates would effectively “address the huge flow of new regulations that have made it more difficult for banks to meet the needs of consumers and small businesses as well as local and regional economies.”
The TAILOR Act received bipartisan support when it was previously introduced before the 114th Congress. The June 2015 version of the bill—which was substantially similar to the current iteration—received bipartisan support and was twice approved by the House Financial Services Committee. And, as previously covered on InfoBytes, a companion Senate-version of the TAILOR Act (S. 366) was introduced earlier this month by Sen. Mike Rounds (R-SD).