H.R. 3336: Small Business Credit Availability Act

H.R. 3336

Small Business Credit Availability Act

Date
April 25, 2012 (112th Congress, 2nd Session)

Staff Contact
Communications

Floor Situation

On Wednesday, April 25, 2012, the House is scheduled to consider H.R. 3336, the Small Business Credit Availability Act, under a suspension of the rules requiring a two-thirds majority vote for approval.  H.R. 3336 was introduced by Rep. Vicky Hartzler (R-MO) on November 3, 2011, and was referred to the Committee on Agriculture, which reported the bill as amended on January 25, 2012, by voice vote.

Bill Summary

H.R. 3336 would exclude banks and farm credit institutions from being defined and regulated as “swap dealers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act when they enter into a swap with a customer that is managing or seeking to offset risk in connection with an extension of credit by the institution. The bill would also exempt small banks, savings associations, farm credit system institutions, non-profit cooperative lender controlled by electric cooperatives and credit unions with aggregate uncollateralized outward exposure less than $1 billion 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 to subject those institutions to clearing requirements when entering into swap transactions.

Background

According to Committee Report 112-390, the Dodd-Frank Wall Street Reform and Consumer Protection Act provided an exemption to ensure that banks would not be defined and regulated as “swap dealers” when providing variable rates to customers and providing a rate swap so that the customer is able to achieve a fixed rate on the loan. This exemption, known as the “swaps in connection with loans” exemption, was established to allow banks to continue providing these services to customers without being designated and regulated as swap dealers.  Under the law, this exemption would be extended 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 would clarify that the exemption is to be applied when the institutions enter into swaps 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.

Under the Dodd-Frank Act “End-users” are companies that use derivatives to hedge their business risk associated with their day-to-day operations. Because end-users’ swap and security-based swap transactions do not pose a systemic risk to the financial system, Congress did not intend that end-user derivatives transactions would be subject to the margin and capital requirements of Title VII of the Dodd-Frank Act. 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. 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 would require the CFTC to exempt small financial institutions that have exposure that is less than $1 billion in current uncollateralized exposure plus potential future exposure. According to the Committee Report, “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.”

Cost

According to CBO, any change in discretionary spending to implement the legislation, which would be subject to the availability of appropriated funds, would not be significant.