[House Report 112-390]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 112-390
======================================================================
SMALL BUSINESS CREDIT AVAILABILITY ACT
_______
February 8, 2012.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Lucas, from the Committee on Agriculture, submitted the following
R E P O R T
[To accompany H.R. 3336]
[Including cost estimate of the Congressional Budget Office]
The Committee on Agriculture, to whom was referred the bill
(H.R. 3336) to ensure the exclusion of small lenders from
certain regulations of the Dodd-Frank Act, having considered
the same, report favorably thereon with an amendment and
recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Credit Availability
Act''.
SEC. 2. CLARIFICATION OF SWAP DEALER DEFINITION.
Section 1a(49)(A) of the Commodity Exchange Act (7 U.S.C. 1a(49)(A))
is amended by striking all that follows clause (iv) and inserting the
following flush language:
``provided however, in no event shall an insured
depository institution or an institution chartered and
operating under the Farm Credit Act of 1971 be
considered to be a swap dealer to the extent that it
enters into a swap--
``(I) with a customer that is seeking to
manage risk in connection with an extension of
credit by the institution to, on behalf of, or
for the benefit of, the customer; or
``(II) to offset the risks arising from a
swap that meets the requirement of subclause
(I).''.
SEC. 3. EXCLUSIONS FROM FINANCIAL ENTITY DEFINITION.
Section 2(h)(7)(C)(ii) of the Commodity Exchange Act (7 U.S.C.
2(h)(7)(C)(ii)) is amended to read as follows:
``(ii) Exclusion.--Such definition shall not
include an entity that is a small bank, savings
association, farm credit system institution,
non-profit cooperative lender controlled by
electric cooperatives, or credit union if the
aggregate uncollateralized outward exposure
plus aggregate potential outward exposure of
the entity with respect to its swaps does not
exceed $1,000,000,000.''.
SEC. 4. EFFECTIVE DATE.
The amendments made by this Act shall take effect as if they had been
included in subtitle A of title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
SEC. 5. IMPLEMENTATION.
The amendments made by this Act shall be implemented--
(1) without regard to--
(A) chapter 35 of title 44, United States Code; and
(B) the notice and comment provisions of section 553
of title 5, United States Code; and
(2) through the promulgation of an interim final rule.
Brief Explanation
H.R. 3336 amends Section 1a(49)(A) of the Commodity
Exchange Act (CEA) to clarify the ``swaps in connection with
loans'' exemption included in the definition of ``swap
dealer.'' The bill clarifies that farm credit system
institutions, in addition to insured depository institutions,
may qualify for exemption. In addition, it clarifies that the
exemption applies when a swap is done in connection with an
extension of credit, and that any swaps the farm credit system
institution or insured depository institution enters into to
offset the risks associated with the swaps provided in
connection with an extension of credit, will not be considered
swap dealing. In addition, H.R. 3336 amends Section
2(h)(7)(C)(ii) to direct the Commodity Futures Trading
Commission (CFTC) to exempt from the definition of ``financial
entity'' small banks, savings associations, farm credit system
institutions, non-profit cooperative lenders controlled by
electric cooperatives and credit unions if their aggregate
uncollateralized outward exposure plus aggregate potential
outward exposure with respect to their swaps does not exceed
$1,000,000,000.
Purpose and Need
Section 1a(49)(A)(iv) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (P.L. 111-203) (the Dodd-Frank Act)
provides that ``in no event shall an insured depository
institution be considered to be a swap dealer to the extent it
offers to enter into a swap with a customer in connection with
originating a loan with that customer.'' It is common for
banks, for example, to lend at variable rates to commercial
customers, and in connection with that loan, provide an
interest rate swap so that the customer is able to achieve a
fixed rate on the loan. The ``swaps in connection with loans''
exemption included in the swap dealer definition was intended
to permit banks to continue providing this service to their
customers without being designated as swap dealers. Congress
recognized that the efficiency created by pairing these
transactions facilitates the flow of credit.
H.R. 3336 extends the exemption to farm credit institutions
that provide similar services to their customers but that do
not fall within the definition of ``insured depository
institution.'' In addition, the bill clarifies that the
exemption is to be applied when the institutions enter into
swaps in connection with an extension of credit, and that it is
not limited to a swap that is provided exactly at the point of
origination and only when the credit extended to the customer
is a loan. This clarification is intended to accommodate common
transactions between small and mid-size banks and farm credit
institutions and their customers whereby the swap may be
provided before or after the credit is originated, and when the
credit may be in the form of a guarantee, or letter of credit,
for example, rather than just a traditional loan.
The second provision modifies the exemption for small
financial institutions from the definition of financial entity
for the purpose of the clearing exemption in Section
723(a)(7)(C)(ii). Financial entities are prohibited from
qualifying for the end-user exception. Congress authorized the
regulators to provide an exemption from the definition of
``financial entity'' for small banks, credit unions and farm
credit institutions, including those with $10 billion or less
in assets. The $10 billion asset test is not an explicit
requirement, but a test for the regulators to consider.
Congress provided for this exemption in recognition that many
community banks and farm credit system institutions enter into
simple derivative transactions to manage the interest rate risk
inherent to the business of banking--taking deposits and making
commercial loans. The bank's ability to hedge its exposure to
interest rate risk enhances the stability of the bank, and
ensures that it can continue to provide credit to businesses at
rates that are competitive with their much larger bank
competitors. It is important to note that because this
exemption only avails a small financial institution from
designation as a ``financial entity,'' there are still criteria
that they will need to meet in order to qualify for the
clearing exception--most importantly, they must be hedging
commercial risk and they cannot be speculating or engaging in
any non-hedging swaps activity. In addition, a small financial
institution would need to notify the CFTC how it will satisfy
its financial obligations to its counterparties for uncleared
swaps, and if a publicly traded institution, it would need the
approval of its Board.
In the CFTC's proposed rule ``End-User Exception to
Mandatory Clearing of Swaps,'' the CFTC did not propose to
provide an exemption as authorized by Congress. In order to
ensure that small financial institutions are afforded the
relief that Congress intended, H.R. 3336 requires the CFTC to
exempt small financial institutions that have exposure that is
less than $1 billion in current uncollateralized exposure plus
potential future exposure. Collectively, small banks engage in
only a fraction of the swaps activity in the U.S. banking
system. In fact, 25 of the largest bank holding companies hold
99.86% of the total notional held by all banks in the U.S.,
leaving only .14% of the total notional spread across the
remaining 1,046 banks.
In addition, the exposure metric is the same metric the
CFTC proposed to use in designating Major Swap Participants
(MSPs), except that the CFTC proposed that a Major Swap
Participant would not be designated as such unless they reach
$2 billion in each applicable category of swaps, and $6 billion
in interest rate swaps for non-hedges. For all categories of
swaps, including hedges, a Major Swap Participant would not be
designated as such unless they reach $5 billion in current
uncollateralized exposure or $8 billion in current
uncollateralized exposure plus potential future exposure. The
exposure test in the discussion draft would apply to all
categories of swaps cumulatively.
This bill is necessary to ensure that small and mid-size
financial institutions can continue to provide important
hedging tools to small businesses, and that the banks
themselves can continue to use swaps to hedge their own
interest rate risk. The bill acknowledges and upholds the
important relationship between risk management tools and the
flow of credit in the economy. At the same time, there are
important safeguards in place to prevent any small financial
institution from engaging in speculative or highly risky
activity, or to engaging in swaps to a level that their
positions could pose a threat to the financial system.
Section-by-Section
Section 1 is the short title, ``Small Business Credit
Availability Act''.
Section 2 amends the Commodity Exchange Act to clarify that
insured depository institutions and Farm Credit institutions
shall not be swap dealers to the extent the institution enter
into swaps with customers seeking to manage risk in connection
with an extension of credit by the institution.
Section 3 amends the Commodity Exchange Act to exclude from
the definition of financial entity small banks, savings
associations, farm credit system institutions, non-profit
cooperative lender controlled by electric cooperatives and
credit unions with aggregate uncollateralized outward exposure
plus potential outward swap exposure less than $1 billion.
Section 4 is the effective date of the amendments made by
this bill.
Section 5 excludes the amendments made by this bill from
the requirements of the Paperwork Reduction Act and from notice
and comment requirements of the Administrative Procedure Act.
Committee Consideration
I. HEARINGS
In the 112th Congress, the Committee has held seven
hearings, four Full Committee and two General Farm Commodities
and Risk Management Subcommittee hearings to examine the
implementation of Title VII of the Dodd-Frank Act and one Full
Committee hearing to examine legislative proposals related
thereto, including a discussion draft of H.R. 3336. The
Committee took testimony from witnesses that represented a
broad spectrum of participants in the derivatives markets.
In the following hearings, witnesses testified to the
importance of ensuring that smaller financial institutions can
continue to provide and use risk management tools that
facilitate the flow of credit throughout the economy:
Defining the Market: Entity and Product Classifications Under Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection
Act: March 31, 2011
Derivatives Reform: The View from Main Street: July 21, 2011
To review legislative proposals amending Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act: October 12,
2011
For example, on March 31st, Mr. Mark Cvrkel, Chief
Financial Officer of Susquehanna Bank in Pennsylvania
testified:
``Several community and regional banks have expressed
concern that the swap dealer definition in the CFTC's
proposed rule could capture hundreds of community and
regional banks that offer risk management products to
commercial customers. This would hamper the ability for
many smaller banks to compete with larger financial
institutions without any appreciable benefit in terms
of enhanced market oversight or reduction in systemic
risk . . . Community and regional banks are essential
to support the job creation at small and middlemarket
businesses that forms the foundation of any economic
recovery. . . . We urge caution against finalizing
rules that would place undue burdens on small banks
that had nothing to do with the financial crisis, do
not pose systemic risk and collectively engage in a
fraction of the derivatives traded by the large
dealers.''
On July 21st, 2011, Ms. Denise Hall, Senior Vice President
for Webster Bank in Connecticut testified:
``Congress recognized the low risk posed to the
system by small banks when it granted regulators
authority to exempt them from clearing requirements. It
is important that the Commission exercise this
authority. Subjecting small banks to such requirements
will be costly and will offer little or no risk-
reducing benefit to the financial system. The time and
expense associated with clearing for small banks could
serve to deter some community and regional banks from
using swaps to hedge risk. . . . Webster Bank shares
concerns expressed by a wide range of community and
regional banks that the swap dealer definition in the
CFTC's proposed rule could inadvertently encompass
hundreds of community and regional banks that offer
risk management products to commercial customers. Such
a broad swap dealer definition would result in many
small banks ceasing to offer derivatives products to
customers. . . . Such an outcome could significantly
harm community and regional banks, by making it more
difficult for them to compete with larger banks for
loans. The diminished competition that would result
from smaller banks' withdrawals from the swaps market
would ultimately result in customers paying more.''
On October 12, 2011, Mr. Douglass Williams, President and
Chief Executive Officer of Atlantic Capital Bank testified:
``While large buy-side firms and hedge funds may do
enough trading per year to justify these costs, smaller
banks may have no choice but to stop using derivatives.
If so, these banks would no longer be able to offer
customers the risk management products they need and
would have a more difficult time managing the basic
risks that are inherent in banking. These would be
unfortunate and entirely avoidable outcomes that would
have the effect of weakening the banking system and the
economy. We urge the Committee to prevent such outcomes
by passing the Small Business Credit Availability
Act.''
II. FULL COMMITTEE
The Committee on Agriculture met, pursuant to notice, with
a quorum present, on January 25, 2012, to consider H.R. 3336,
to ensure the exclusion of small lenders from certain
regulations of the Dodd-Frank Act, and other pending business.
Chairman Lucas offered an opening statement, as did Ranking
Member Peterson and Mrs. Hartzler.
By unanimous consent, the Subcommittee on General Farm
Commodities and Risk Management was discharged from further
consideration and the bill, H.R. 3336 was placed before the
Committee for consideration and without objection a first
reading of the bill was waived and it was opened for amendment
at any point. The Chairman offered an Amendment in the Nature
of a Substitute to the bill, and counsel provided a brief
explanation of the amendment.
Mr. Peterson was recognized to offer and explain an
amendment to expedite implementation by excluding the
amendments made by the bill from the requirements of the
Paperwork Reduction Act and from notice and comment
requirements of the Administrative Procedure Act. By a voice
vote the Peterson amendment was adopted.
There being no further amendments, the Peterson motion to
approve the Amendment in the Nature of a Substitute to H.R.
3336, as amended was adopted by a voice vote.
By a voice vote, the Peterson motion to report the bill
favorably to the House with the recommendation that it do pass
was adopted.
The Committee then moved onto other pending business, where
at the conclusion of the meeting, Chairman Lucas advised
Members that pursuant to the rules of the House of
Representatives that Members have 2 calendar days to file such
views with the Committee.
Without objection, staff was given permission to make any
necessary clerical, technical or conforming changes to reflect
the intent of the Committee.
Chairman Lucas thanked all the Members and adjourned the
meeting.
Reporting the Bill--Roll Call Votes
In compliance with clause 3(b) of rule XIII of the House of
Representatives, H.R. 3336 was reported by voice vote with a
majority quorum present. There was no request for a recorded
vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee on Agriculture's
oversight findings and recommendations are reflected in the
body of this report.
Budget Act Compliance (Sections 308, 402, and 423)
The provisions of clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives and section 308(a)(1) of the
Congressional Budget Act of 1974 (relating to estimates of new
budget authority, new spending authority, new credit authority,
or increased or decreased revenues or tax expenditures) are not
considered applicable. The estimate and comparison required to
be prepared by the Director of the Congressional Budget Office
under clause 3(c)(3) of rule XIII of the Rules of the House of
Representatives and sections 402 and 423 of the Congressional
Budget Act of 1974 submitted to the Committee prior to the
filing of this report are as follows:
February 6, 2012.
Hon. Frank D. Lucas,
Chairman, Committee on Agriculture,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3336, the Small
Business Credit Availability Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 3336--Small Business Credit Availability Act
H.R. 3336 would amend the definition of a swap dealer in
the Commodity Exchange Act to exclude banks and farm credit
institutions when they enter into a swap with a customer that
is managing or seeking to offset risk in connection with credit
issued by the institution. (A swap is a contract that calls for
an exchange of cash between two participants based on an
underlying rate or index, or on the performance of an asset.)
The bill also would exempt certain banking and lending
institutions from requirements that swaps be submitted for
clearing through a derivatives clearing organization that is
registered with the Commodity Futures Trading Commission
(CFTC). Under current law, the CFTC has the authority to decide
whether or not to subject those institutions to clearing
requirements when entering into swap transactions.
The CFTC has not finalized regulations regarding swap
dealers and clearing requirements for swap transactions. Based
on information from the CFTC, CBO expects that incorporating
the provisions of H.R. 3336 at this point in the regulatory
process would not require a significant increase in the
agency's workload. Therefore, CBO estimates that any change in
discretionary spending to implement the legislation, which
would be subject to the availability of appropriated funds,
would not be significant. Enacting H.R. 3336 would not affect
direct spending or revenues; therefore, pay-as-you-go
procedures do not apply.
H.R. 3336 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would impose no costs on state, local, or tribal governments.
The CBO staff contact for this estimate is Susan Willie.
The estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Performance Goals and Objectives
With respect to the requirement of clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, the
performance goals and objectives of this legislation are to
ensure the exclusion of certain regulations of the Dodd-Frank
Act.
Constitutional Authority Statement
The Committee finds the Constitutional authority for this
legislation in Article I, section 8, clause 18, that grants
Congress the power to make all laws necessary and proper for
carrying out the powers vested in Congress by the Constitution
of the United States or in any department or officer thereof.
Committee Cost Estimate
Pursuant to clause 3(d)(2) of rule XIII of the Rules of the
House of Representatives, the Committee report incorporates the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to sections 402 and 423 of the
Congressional Budget Act of 1974.
Advisory Committee Statement
No advisory committee within the meaning of section 5(b) of
the Federal Advisory Committee Act was created by this
legislation.
Applicability to the Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act (Public Law
104-1).
Federal Mandates Statement
The Committee adopted as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act (Public Law 104-4).
Earmark Statement Required by Clause 9 of Rule XXI of the Rules of
House of Representatives
H.R. 3336 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9(e), 9(f), or 9(g) of rule XXI of the Rules of the
House Representatives.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
COMMODITY EXCHANGE ACT
* * * * * * *
SEC. 1A. DEFINITIONS.
As used in this Act:
(1) * * *
* * * * * * *
(49) Swap dealer.--
(A) In general.--The term ``swap dealer''
means any person who--
(i) * * *
* * * * * * *
[provided however, in no event shall an insured
depository institution be considered to be a
swap dealer to the extent it offers to enter
into a swap with a customer in connection with
originating a loan with that customer.]
provided however, in no event shall an insured
depository institution or an institution
chartered and operating under the Farm Credit
Act of 1971 be considered to be a swap dealer
to the extent that it enters into a swap--
(I) with a customer that is seeking
to manage risk in connection with an
extension of credit by the institution
to, on behalf of, or for the benefit
of, the customer; or
(II) to offset the risks arising from
a swap that meets the requirement of
subclause (I).
* * * * * * *
SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR ACT OF
AGENT; COMMODITY FUTURES TRADING COMMISSION;
TRANSACTION IN INTERSTATE COMMERCE.
(a) * * *
* * * * * * *
(h) Clearing Requirement.--
(1) * * *
* * * * * * *
(7) Exceptions.--
(A) * * *
* * * * * * *
(C) Financial entity definition.--
(i) * * *
[(ii) Exclusion.--The Commission
shall consider whether to exempt small
banks, savings associations, farm
credit system institutions, and credit
unions, including--
[(I) depository institutions
with total assets of
$10,000,000,000 or less;
[(II) farm credit system
institutions with total assets
of $10,000,000,000 or less; or
[(III) credit unions with
total assets of $10,000,000,000
or less.]
(ii) Exclusion.--Such definition
shall not include an entity that is a
small bank, savings association, farm
credit system institution, non-profit
cooperative lender controlled by
electric cooperatives, or credit union
if the aggregate uncollateralized
outward exposure plus aggregate
potential outward exposure of the
entity with respect to its swaps does
not exceed $1,000,000,000.
* * * * * * *