Nearly a decade after the federal government established legislation aimed at tightening financial rules for how banks operate, many bankers are still seeking relief from what they see as unequal regulations.
They are hoping that will change this year.
The federal government established the Dodd-Frank Act in 2010 in response to the 2008 economic crisis in an effort to tighten the rules for lending in order to protect consumers.
However, bankers say the comprehensive law requires many banks to increase staffing or spend more time ensuring they understand and are following the regulations. This, they say, can come at the expense of providing better customer service and hinders their ability to lend, hurting the consumer.
Often it requires banks to hire outside consultants to understand and study the compliance issues and complete the paperwork required to meet the regulations.
Small banks want relief from what they describe as unfair policies that create an inappropriate definition of risk under a one-size-fits-all approach. From the perspective of those who work for community or regional banks, the big Wall Street banks are the ones that played a role in the financial downturn of 2008, not smaller banks.
“I don’t know if it [Dodd-Frank] would be dismantled; there’s a lot of momentum,” said Craig Best, president and CEO of Peoples Security Bank & Trust, headquartered in Scranton, with several locations in the Greater Lehigh Valley.
CURB LENDING ABILITY
The Regional Bank Coalition, a Washington, D.C.-based organization comprised of 18 regional banks from around the nation, said the improperly tiered regulatory framework has reduced regional banks’ capital to lend by $20 billion over five years.
Under Dodd-Frank, regulators oversee regional banks with assets of at least $50 billion in the same category as giant Wall Street money center banks with trillions in assets, the coalition said.
And community banks – those holding $10 billion in assets or below – say they also are affected.
An article from 2016 by Ron Nichols, president and CEO of the American Bankers Association, discussed the impact Dodd-Frank has on community banks.
For smaller banks with fewer assets across which to spread fixed compliance costs, Dodd-Frank has too often sounded a death knell, Nichols wrote. Through its many asset-size thresholds, Dodd-Frank attempts to keep community banks in a tight box, where natural growth leads to cascading increases in regulation.
SAME PLAYING FIELD
“The unintended consequence of having a floor at $10 billion is from a competitive standpoint; we are all lumped into the same basket,” said Gary Olson, president and CEO of ESSA Bank & Trust in Stroudsburg. “Between the implementation of the regs by the regulators and what really happened, we are all affected by Dodd-Frank. Every bank was greatly impacted by Dodd-Frank.”
According to data from a study commissioned by the coalition and completed by three academics specializing in banking and finance issues, Pennsylvania has not captured gross domestic product, job and wage growth because of Dodd-Frank.
The study derived these numbers by examining the effect of Dodd-Frank on regional bank lending and growth in the years before and after its passage, according to the coalition.
IMPACT ON THE ECONOMY
As an example, the study showed Pennsylvania missed $64.6 billion in gross domestic product, 757,900 jobs and $28 billion in wages each year. Without the regulatory burden on regional banks, those numbers are the expected growth that Pennsylvania would have seen.
Following the implementation of Dodd-Frank, all banks with more than $50 billion in assets were deemed as Systemically Important Financial Institutions and required to adhere to additional and more stringent financial regulations – the same as banks with trillions of dollars in assets.
With more resources allocated to regulation compliance, regional banks were and continue to be limited in their ability to lend – a negative consequence for Pennsylvania’s economy, according to the coalition.
While published reports say Republicans have made limited progress on President Trump’s pledge to dismantle the Dodd-Frank Act, key parts of the financial law could change this year and are attracting bipartisan support.
“I don’t think there’s going to be any wholesale change in Dodd-Frank,” said Dave Freeman, president and CEO of QNB Bank. “I’d be very happy if there were some changes.”
Some changes to Dodd-Frank would bring relief, bankers say.
“I think there is a lot of bipartisan support in the bills being passed,” Best said.
Freeman said there is legislation pending that would exempt small banks from some Dodd-Frank rules, however, the Senate has yet to pass a bipartisan bill.
CURTAILED MORTGAGE OPTIONS
Best said Peoples Security has chosen not to offer any mortgage loans that do not meet Dodd-Frank regulations.
“We feel there is too much exposure,” he said. “What that’s created is there are some loans we would have made that we can’t now. So we have customers who want to refinance our mortgages, and we can’t because they don’t meet the regulatory requirements of Dodd-Frank.”
Naturally, such restrictions hinder a bank’s ability to lend.
“I think the difficulty is when you are using regulations that impact the whole industry,” Freeman said. “They are easier for larger banks to comply [with]. Most of the community banks, we have to treat our customers well or we won’t be successful.”
Focusing on compliance takes time away from focusing on customer needs, bankers say.
“That’s always the challenge to write regulations that protect the customer but also don’t overburden the banks,” Freeman said. “Certainly, we’ve incurred some cost and it runs rampant throughout the organization. We strive to have the regulations affect our customers as little as possible.”
The regulatory requirements under Dodd-Frank create more paperwork and compliance costs for banks, Best said. Peoples Security hires companies that specialize in compliance to help them adhere to the regulations.
“We pay thousands of dollars a year in outside consultants to make sure we are following Dodd-Frank,” Best said.
Peoples Security has $2.2 billion in assets, and Best said he is hopeful that one bill gets passed that would reduce the paperwork requirements for banks with assets below $10 billion.
That bill, HR 4607, the Comprehensive Regulatory Review Act, is at the House of Representatives level, Best said.
“I think the United States has the best banking systems in the world,” Best said. “Every bank plays a role. We are close to our customers.”
LOTS OF TIME AND EFFORT
Olson said much of this regulatory reform still has a long way to go.
“We are out here waiting for something to happen and for the most part, nothing has happened,” Olson said.
However, two elements that are of most concern to him about Dodd-Frank are what will happen to the Consumer Financial Protection Bureau, the federal agency that oversees banks and their compliance with regulations, and what will happen to the mortgage business under the TILA-RESPA Integrated Disclosure Rule.
The CFPB treats all banks the same, regardless of size.
“We are a community bank; we are different from the big banks that caused [the crisis],” Olson said. “For us, all it does is add to our costs. We’ve got the resources but it’s a lot of time and effort. We want to make sure our customers are going to be successful.”
LENGTHIER MORTGAGE PROCESS
Olson said he is unsure whether banks will get any regulatory relief from Congress regarding the mortgage regulations put into place under Dodd-Frank.
The time it takes to go through the mortgage process with a customer has lengthened under the TRID Rule, he said.
The rule sets limits on mortgages and makes it difficult for some customers to get loans that they might otherwise have gotten, Olson said.
“I would like to see some regulations that make it easier to get to closing,” Olson said.
Also, once the loan is approved, there is a three-day wait period, which Olson said is unnecessary, as it further delays the customer’s ability to move into a home.