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Regulate This: Dodd-Frank’s Effects on Community Banks and Credit Unions

January 6, 2016

by J. Andrew Zalucky


When people spout idle talk of how “de-regulation got us into the mess of 2008” and how the government needs to sort things out to stop the “evil banksters” from wrecking the economy again, it makes me wonder if they’ve actually looked how regulations impact the economy. And though it’s still very early to make any decisive determination about the bill’s effects, a recent study of Dodd-Frank shows the results are mixed, at best.

The study, conducted by the Government Accountability Office (GAO) reviewed a year’s worth of Federal Register releases, and examined nine of the law’s rules in terms of their effect on community banks and credit unions. Keep in mind, community banks and credit unions were often cited by activists (like those from Occupy Wall Street) as alternatives to the large institutions bailed out during the financial crisis.

As it turns out, many of types of rules and regulations that these same people call for actually put strain on these same small banks and credit unions (emphasis my own):

Some credit union, community bank, and industry association representatives said several of the mortgage-related rules have increased their overall compliance burden, such as increases in staff and training. Additionally, some said these rules had begun to adversely affect some lending activities, such as mortgage lending to customers not typically served by larger financial institutions, even though CFPB provided exemptions or other provisions to reduce such impacts.

Increased staff and training costs money. Large, powerful institutions are uniquely-placed to absorb this cost of doing business. Smaller business are not. Thus, rules passed down through the central government tend to benefit big business. I cannot emphasize this enough. And this isn’t just limited to money resources, it deals with technology and staffing as well. Take for instance the effect of the new Escrow rules:

Representatives from both national associations (ICBA and CUNA) stated that setting up and monitoring escrow accounts is burdensome and that some community banks and credit unions do not have adequate technology or staff to support it.

Implementation takes time, training and might even require bringing in third-party vendors for help. Again, what business are in an ideal position to do this? Large business with ties to the government. Who benefits? Large business with ties to the government.

True, there may be some exemptions in the bill (after the government learned from its broad-brush approach with Sarbanes-Oxley). Even so:

Representatives from credit unions, community banks, and industry associations we interviewed said several of these new rules…in some cases, have begun to affect mortgage lending.
Representatives from some community banks and credit unions as well as industry associations we interviewed stated that the ATR/QM (ability to repay and qualified mortgage -JAZ) rule has negatively affected mortgage lending, particularly for mortgages that do not meet the criteria for qualified mortgages.
Representatives from ICBA and one state credit union association told us that the exemptions available to small servicers are too narrow. Although the rules exempt small servicers from certain provisions, they require all servicers to respond to written notices of errors received from borrowers, and all servicers generally must not make the first notice or filing for foreclosure unless the borrower is more than 120 days delinquent, among other provisions. Representatives from several industry associations we interviewed said that community banks and credit unions had to expand resources to meet these requirements.
Credit unions and community banks tend to serve customers and communities in ways that large institutions do not. This includes services like microloans, low APR credit cards and even financial literacy training. Though the rules talked about here pertain specifically to mortgage lending, the impact of increased regulatory burdens can hurt an institution’s ability to conduct other services as well.
"Hey, can we get some of that bailout money to pay for all these consultants?"

“Hey, can we get some of that bailout money to pay for all these consultants?”

And according to National Association of Federal Credit Unions (NAFCU), the effect has been even worse than that:
Since the second quarter of 2010, the number of credit unions has decreased by more than 17 percent (more than 1,280 institutions). Specifically, 96 percent were smaller institutions with assets of less than $100 million.

So, one more time. The shuttering of over 1280 smaller institutions leaves that market share open for those who are able to comply with the new rules. Who is in such a position? Large business with ties to the government. Those bankers who you so viciously condemn are not burdened by these regulations, they benefit from them.

Though I agree with what the CFPB is trying to do, in principle, it’s clear that the exemptions for smaller institutions are not enough to prevent an undue rise in their cost of doing business. I understand that there should be rules around disclosure to make sure consumers know what they’re getting into (e.g. “Yes your balloon mortgage looks nice now…but…well.”). But these need to be either written in a way that doesn’t hurt smaller institutions, who disproportionately help those with lesser-incomes, or not written by the state at all.

And one more thing. Many of Dodd-Frank’s rules have not even been implemented yet. Expect more of this in the future.

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