Although controversy and crisis have swirled around the Trump Administration during its early days in office, some regional bankers are nonetheless optimistic about regime change and what it means for their business model.
Many community bankers have lamented the 2010 Dodd-Frank Act. Designed to regulate large banks and thus prevent a repeat of the 2007-2008 financial crisis, there have been unintended consequences for smaller financial institutions as well. Now, some are hopeful that banking reform is on the horizon.
“Regardless of what people think of the election outcome, I think the results offer a significant opportunity for reform,” said Noah Wilcox, president and CEO of Grand Rapids State Bank.
Wilcox was a participant at an early April gathering among community bankers, Treasury Secretary Steven Mnuchin, President Donald Trump, Vice President Mike Pence and other key administration officials. Wilcox left that meeting optimistic that the administration understands the strains Dodd-Frank has placed on community banks.
“Community banks didn’t cause the financial crisis. We need a tiered regulatory system,” said Wilcox. “Treasury is looking to fix (Dodd-Frank)… Community banks have never had more capital on Capitol Hill.”
Among community bankers’ complaints about Dodd-Frank is the qualified mortgage provision. While intended to prevent banks from making risky mortgage loans, it also limits the ability of banks to lend to community members who may not fit lending criteria but are viewed by the local bank as risk-worthy.
Willard Ogren, a 63-year veteran in the industry and president and CEO of Security State Bank headquartered in Iron River, called Dodd-Frank a “tremendous impediment to community banking.” He stated, “Compliance is a huge burden.”
Ogren, with strong community roots in Northwestern Wisconsin, has conducted business with a small-town handshake and a borrower’s word that the funds would be repaid, despite the fact that the borrower might not fully meet credit-worthy status in the eyes of federal regulators. It’s a way of doing business that can be costly for the lender.
“If you get too many unsecured loans in your portfolio, you tip the scale,” said Ogren. “Then they (regulators) want you to place more money in reserve.”
There’s also the cost of regulatory compliance staff. Wilcox noted that while large banks have entire divisions of personnel devoted to regulatory issues, community banks simply don’t have the personnel to compete. Further, even maintaining a small regulatory compliance staff can be a drain on a small bank’s resources.
Another concern, in addition to cost, is the time now required of consumers to close a mortgage loan.
“We used to be able to close a loan in three to four weeks,” said Ken Johnson, president and CEO of North Shore Bank. “Now it takes five or six.”
He added that Dodd-Frank was a bill of good intentions at the outset but 11th hour changes in its language meant a number of provisions, which have since proven to be problematic, were added.
“At the end of the day, it really hurt consumers,” he said.
President Trump signed an executive order calling for review of financial institution regulation. In mid-May, Mnuchin responded in testimony before the Senate Banking Committee. There, he outlined two key recommendations he plans to make to the president. The first would exclude banks with less than $10 billion in assets from Dodd-Frank rules. The second would raise the regulatory bar to $50 billion in assets for tighter regulatory scrutiny.
Mnuchin told the Senate panel his reforms weren’t aimed at letting big banks off the regulatory hook but rather focused on increasing access to capital for small businesses and homeowners.
The treasury secretary’s proposed changes echo recommendations made by banking organizations.
The Independent Community Bankers of America (ICBA) has issued its “Plan for Prosperity,” which outlines an agenda for reform. Areas addressed by the plan includem zcxv increasing access to capital, regulatory relief, mortgage reform, bank oversight/examination and community bank tax relief.
While the community bankers’ agenda may resonate within the industry, there are those opposed to loosening banking regulation. Some consumer groups oppose lifting any of the regulations imposed by Dodd-Frank, saying that doing so once again creates the opportunity for financial meltdown.
But advocates for reform maintain there’s currently a great deal of Congressional support – at least for community banks. The Financial Choice Act, crafted by Republicans as a repeal and replace to Dodd-Frank, offers regulatory relief for community financial institutions, as well as aiming to end “too big to fail” for larger banks.
The Choice Act appears to have strong support in the House and the support of the Trump Administration, but may not make it through the Senate, where the votes of eight Democrats would be needed to land the bill on the president’s desk.
Regardless of whether the Choice Act clears legislative hurdles, however, relief could still come through the Administration or other Congressional action. Locally, community bankers hope that some sort of reform or repeal of Dodd-Frank takes place.
“There are pieces of Dodd-Frank that are probably working,” said Johnson. “But at the end of the day, community banks didn’t cause (the financial crisis) but the industry and its consumers are paying the price.”
Wilcox noted that community banks make about 50 percent of the loans that drive economic growth, and reform will give community banks more latitude in such lending. “Loan demand is incredibly strong and employment numbers are good,” he said of the current climate.
Politics, however, will play an enormous role in the regulatory debate.
“Republicans want to tear up Dodd-Frank. Democrats want regulatory relief for community banks but none for large banks,” said Wilcox. “I don’t think the general public knows or cares about regulatory relief, but if they knew how (regulation) adversely affects them, they might call their representative.”