A Whole New Regulatory World For Community Banking

From the beginning, Dodd-Frank has drawn the criticism that instead of doing what it was supposed to and targeting banks that were too big to fail, instead it targeted thousands of community banks and credit unions and rendered them, in effect, too small to survive. It has been, according to banking advocates, a law that needed revision since it was first passed.

And that revision has come — as of last week, Congress voted to loosen the strictures of Dodd-Frank, particularly in regards to how it treated small and medium-sized banks. The bill increases the threshold from $50 billion in assets first to $100 billion, and then to $250 billion, before a bank is statutorily required to face higher regulatory scrutiny, stress tests and capital requirements. The legislation also offers some relief to large — but not massive — financial institutions like American Express, which will no longer be classified as “systemically important” and thus subject to stricter oversight.

The bill also exempts some loan originators, including small lenders, from certain disclosure requirements under the Home Mortgage Disclosure Act.

All in all, as a result of the the Economic Growth, Regulatory Relief and Consumer Protection Act passed last week with a vote by the House, the number of banks under close scrutiny will fall from 38 to 12, with nearly all regional banks exempt from stricter regulatory oversight. The biggest of the big banks — JPMorgan Chase, Goldman Sachs, Bank of America, Wells Fargo and Citigroup — will be largely unaffected by the legislation due to their size.

A Contentious Effort

Though dramatic headlines might have led one to believe otherwise, the bill passed last week on in its way to President Trump’s desk, where it will almost certainly be signed, does not repeal or unwind Dodd-Frank — it simply loosens its strictures for small and medium-sized institutions. The rather moderate aim of the bill explains why it emerged from both the House and the Senate with bi-partisan support — though Republican support for the bill was much, much greater.

Paul D. Ryan, the House Speaker and Wisconsin Republican, said the bill’s passage was a step toward “freeing our economy from overregulation.”

“Our smaller banks are engines of growth,” he said in a statement. “By lending to small businesses and offering banking services for consumers, these institutions are and will remain vital for millions of Americans who participate in our economy.”

Democrats who voted against the bill were, perhaps unsurprisingly, less enthusiastic for the bill and what its passage means.

“It’s a bad bill under the guise of helping community banks,” Representative Nancy Pelosi of California, the Democratic minority leader, said during debate on the House floor on Tuesday. “The bill would take us back to the days when unchecked recklessness on Wall Street ignited an historic financial meltdown.”

On Twitter, the reaction was less muted.

“For years, armies of bank lobbyists & executives have groaned about how financial rules are hurting them,” Ms. Warren wrote on Twitter ahead of the House vote. “But there’s a big problem with their story — banks are making record profits. Congress has done enough favors for big banks — the House should reject the #BankLobbyistAct.”

Advocates of the change noted that while these points are very dramatic, they also tend two conflate two things that are very different: massive multi-national banks with trillions in assets — on whom restrictions and increased scrutiny remains — and community banks and credit unions who are no one’s definition of the “big banking lobby.”

Big banks, small bank advocates claim, have been making record profits — despite regulations that are bigger than ever. Small banks, on the other had, have been closing by the score for ten years.

The Beginning Of A New Era

“The Main Street banks and credit unions that people depend on, they’ve been suffering, they’ve been suffering for years under the weight, the load, the volume, the complexity and cost of heavy Washington bureaucratic red tape,” Representative Jeb Hensarling of Texas, the Republican chairman of the House Financial Services Committee, said of the bill’s passage.  He also noted that he hoped this would be the beginning of a great push toward deregulation, particularly of small banks.

And there are signs that may be the direction the regulatory story is flowing. Within 24 hours of the Dodd-Frank reform bill passing the house, Comptroller of the Currency Joseph Otting called for national banks and federal savings associations to step into the short-term, small-dollar installment loan market.

“Consumers should have more choices that are safe and affordable, and banks should be part of that solution,” Otting said in a statement.

The OCC primarily oversees large banks. That means that if other financial institutions want to push into small-dollar lending — regional banks, small banks and credit unions — they would need approval from their respective regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

But as of last Thursday, the National Credit Union Administration proposed a new rule to loosen some of the regulations on small-dollar loan programs, which would make it easier for credit unions to offer these loans — and while there is no official announcement that the FDIC will be following suit for the small banks it regulates, experts believe such a move is imminent with its fellow regulators moving in that direction.

And all of this, one banking advocate told PYMNTS on the condition of anonymity, bodes well for community banks — which, after nearly a decade battling on the outskirts, might actually have a chance to get back to what they do best.

“I think when you are looking at credit unions and smaller banks, what you see is the financial institutions that are closest to the communities they serve. I think we are seeing a changing mindset that the law needs to get out of the way of that and let community institutions do what they do best — serve their communities.”