H. Rept. 112-390 - 112th Congress (2011-2012)
February 08, 2012, As Reported by the Agriculture Committee

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House Report 112-390 - SMALL BUSINESS CREDIT AVAILABILITY ACT




[House Report 112-390]
[From the U.S. Government Printing 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.

           *       *       *       *       *       *       *