Charles Stones, president of the Kansas Bankers Association, used strong language to communicate his concern for the banking industry in light of additional regulations coming into effect. Stones was one of several people to testify at a field hearing August 23 in Kansas City, conducted by U.S. Rep. Dennis Moore (D-Kan.) chairman of the subcommittee on oversight and investigations for the House Financial Services Committee. Stones said a preponderance of new rules is going to drive many banks out of business:
Traditional banks feel the burden of regulation. For the typical small bank, more than one out of every four dollars of operating expense goes to pay the costs of government regulation. The passage of the recent financial reform legislation, which includes a new consumer financial protection bureau, will certainly add to the regulatory burden now faced by banks. In addition, the past year has seen a multitude of new regulations, from RESPA to Reg E. These new regs are taking a toll on banks, especially traditional community banks. For instance, the new RESPA rules are causing many banks, especially in rural areas to reconsider their participation in residential real estate lending. The question is: who will pick up the slack in these areas if the local community bank exits that market?…
These new regulations and laws are putting, and will continue to put, a huge amount of pressure on the earnings of banks. From exponential increases in FDIC premiums to the new laws and regs mentioned above, one consultant put it very succinctly, “Banks will have a harder time making money in the future.” This will inevitably drive banks to consolidate. Again, who will fill the void in small town Kansas if the current local bank decides it can no longer make a fair profit, and closes? It is time for Washington to realize that traditional banks have economic value in this country. It is not enough to say the words, it is time that policies, laws, rules and regulations begin to demonstrate that fact. Actions speak louder than words.”
Stone took particular aim at the Consumer Financial Protection Bureau and Reg E:
We believe that the CFPB will actually hurt consumers. A study by David Evans and Joshua Wright showed that “Under plausible yet conservative assumptions the CFPB would increase the interest rates consumer pay by at least 160 basis points, reduce consumer borrowing by at least 2.1 percent, and reduce the net new jobs created in the economy by 4.3 percent. The unintended consequences will hurt everybody while only protecting a very small few.
Evans is Lecturer, University of Chicago Law School; executive director, Jevons Institute for Competition, Law and Economics; and visiting professor, University College London. Wright is assistant professor, George Mason University Law School and Department of Economics.
And this is only the start… the unintended consequence of new very strict RESPA rules will likely be the departure of many small banks in rural areas from the residential real estate market. The result will be that many consumers will be unable to secure credit purchasing a home in rural areas of Kansas from a local bank. They will be forced to go out of market, if they can. Most non-bank lenders are unfamiliar with rural area and the low volume makes rural areas unattractive to those types of lenders.
August 15 was the last day a bank could charge an overdraft fee on a debit card or ATM transaction by an existing customer if that customer didn’t opt in to the bank’s overdraft program. New rules are a reaction to cries from consumer groups that the overdraft fees have been excessive.
Currently, the new rules apply only to debit card or ATM withdrawals that exceed the account balances, but the FDIC on August 11 proposed additional rules restricting overdraft practices involving checks.
Many of the financial experts have been encouraging customers not to opt-in. They say that instead, they should work with their bank to set up an automatic sweep of funds from their savings account into their checking account in the event they overdraw their checking account.
Banks can no longer cover debit card or ATM withdrawals that exceed account balances if the customer did not opt in or make some other arrangement with the bank. That means some customers could be caught unaware at the checkout counter of a grocery story or other retailer when trying to make a big purchase when they only have little money in their account.
The new federal regulations are particularly discriminatory against smaller banks which typically lack the software for its ATMs to operate on a real-time basis. For example, a bank customer could go to a bank, visit with a teller at the window and withdraw nearly all the funds in his account. An hour or two later, that same customer would likely be able to go to an ATM and use his ATM card to withdraw an equal amount of money, far exceeding his actual balance. This is possible because many banks use ATM software that is updated in “batches” every few hours, or sometimes once a day. That means the balances reported by the ATM can be different from the actual balance of the account. Banks using this older technology are prohibited by law from charging the customer any kind of an overdraft fee if the customer did not opt in.
I have yet to see any good statistics on how many banks operate with this older technology. For many of those banks, the cost to upgrade is prohibitive.
I also haven’t seen any good statistics yet showing how effective banks have been in getting customers to opt-in. Have most customers opted in, or have most ignored the notices from their bank and fallen out of the system? Eventually, this information will come to light.
For a long time industry observers have suggested that the banking industry is poised to move toward the public utilities model. There are enough policy-makers and elected officials who believe the payments system is similar enough to the sewer and electric systems, that banking really should be treated like a utility.
I think you can make an argument that we are headed in that direction. Sheila Bair’s interest in creating a small dollar loan product is a big step. The FDIC, a government agency, is devising a product for the industry to offer. Notwithstanding the merits of the product, why is it appropriate for the government to create financial products?
The creation of a Consumer Financial Protection Bureau as part of the Dodd-Frank Act is another huge step in the direction of “utilitizing” the industry. Some press accounts have referred to CFPB as the most powerful financial regulatory body ever created, with unbelievably little accountability. The truth is, we really don’t know what this agency is going to look like or what it will do, but certainly its potential is ominous. It is not crazy to believe that it will evaluate financial products for the purpose of telling financial services organizations which products they should offer and which they should discontinue. They may also have a thing or two to say about product pricing. All this sounds an awful lot like the way public utilities are regulated.
Since it is the largest institutions which will be hit hardest by the CFPB, I see them as being most vulnerable to being neutered into utilities. Certainly our country can function with a utility-like financial services sector, but we will lose innovation, creativity and fresh ideas. If the people working in financial services have to worry more about pleasing regulators than customers, then it’s all over.
A functioning financial services sector isn’t good enough; we need a thriving financial services sector. If the banks thrive, the economy thrives and the whole country thrives. Sure regulators have a role; they need to stem abuses, but they don’t need to suck the creativity out of the whole system. Because, frankly, I expect more from my bank than I do from my water company.
I am interested in the Small Business Lending Fund Act of 2010, which the U.S. House of Representatives passed on June 17, because it contains a provision that will allow banks with less than $10 billion in assets to amortize losses or write-downs on commercial real estate loans over a 10-year period. I have written about the need for such legislation.
One commentator noted that the provision won’t do much good because the bill, H.R. 5297, says banks don’t qualify if they show up on the FDIC’s problem bank list. You end up on the list if you have a CAMELS rating of 4 or 5.
Clearly, some clarifying work is going to have to be done on the legislation in the Senate, or in the rule-writing process once the bill is passed. For example, there must be hundreds of banks that would have a better CAMELS rating if they could amortize their losses on CRE over 10 years. If a bank does not have to take an immediate 100 percent hit when it gets a piece of property back after the borrower defaults, that bank may well qualify for a better rating on capital and assets quality. The composite rating would improve and the bank would come off the problem list. If regulators don’t reconsider a bank’s condition in light of 10-year amortization, then I venture to guess that almost no banks that need the program will qualify to use it.
FDIC Chair Sheila Bair made a very interesting point in her speech to bankers in Orlando earlier this month when she noted that extensive consumer protection laws applied to the banking industry spawned the shadow banking sector. She noted that the buttoned-down practices of traditional banks allowed no room for questionable practices, so those questionable practices emerged outside the ranks of traditional banking.
“The regulatory reforms put in place after the last crisis actually helped push risk-taking outside of traditional banking and into the shadow banking system,” she said. “This created gaps between regulatory jurisdictions; weakened consumer protection; and led to the problems with subprime and nontraditional mortgages, and risky securitization structures.”
Bair then goes on to make the case that increased consumer protections should not be focused on the traditional banking sector, but on the shadow sector. Here is what she said:
But it’s time we leveled the playing field for all market players. We need strong rules that apply — and that are enforced — across the board for banks and nonbanks. And it is just as important to ensure that the burden of this regulation does not fall on the mainstream lenders who were not the cause of the problem.
The bankers welcomed this message. But I think it is worth considering whether this problem can ever be solved. When lawmakers passed tougher consumer protection laws and applied them to banks, they thought they were applying the law to all the relevant parties. They didn’t think they were leaving anyone out. Well, since the laws were passed, new industry sectors emerged to get around the laws. Is this cycle breakable? If new, broader laws are passed this time around, what is to stop the emergence of still more niche sectors?
It will be a daunting task to come up with an examination and enforcement regime for non-banks sufficient to match the level of supervision currently applied to banks. Keep in mind that the non-bank sector is much larger than the bank sector. My point is, even if you accomplish this herculean task, new kinds of businesses that skirt the rules are likely to emerge. It is a vicious cycle.
I am not saying government shouldn’t try to protect consumers, but I suspect there will always be weak spots. Universal oversight that prevents all companies from offering any products that could be deemed questionable simply seems impossible to me.
Regulatory focus on Real Estate Settlement Procedures Act compliance has revealed a strange quirk, reported Rose Oswald Poels, senior vice president and counsel at the Wisconsin Bankers Association. She spoke as part of a panel that addressed the WBA’s annual executives conference earlier this week in Milwaukee.
Based on conversations she has had with bankers who have been examined for RESPA compliance already this year, Oswald Poels said examiners from the FDIC and OCC are cracking down on situations where fees at closing change after the fees have been provided in a good faith estimate. Resolution of discrepancies, however, seem to reward the wrong party.
“When you generate a GFE within three days of application, it is deemed to be a binding GFE,” Oswald Poels explained. “HUD’s opinion is that basically any fee you disclose on that GFE should not have to change from the time of application to the time of closing.
“That means you have to have good conversations with service providers like title companies and appraisers,” she said.
The goofiest part of the arrangement, however, is that the GFE includes owner’s title insurance. In Wisconsin, she said, the borrower ususally doesn’t pay for that.
“It makes no sense, sellers commonly pay for it in Wisconsin,” she said. “But that means you have to know how much that owner’s title policy is at the time you issue a GFE. Most banks are discovering they don’t know so they take an educated guess and it turns out when they start to do their HUD closing documents that the difference in dollar amount throws them out of tolerance by more than 10 percent.” Any amount over 10 percent needs to be refunded by the bank to the borrower, even though the borrower didn’t pay for the title insurance.
“Does this make any sense?” Oswald Poels asked.
NPR’s Marketplace Morning Report had an interesting item this morning about how FDIC is considering charging higher fees for deposit insurance based on executive compensation models. The goal is to curb risk taking. The fees could be reduced if banks had clawback provisions for recovering bonuses paid on risky deals that wound up losing the bank money.
Reporter Nancy Marshall Genzer said, “the thinking is that bonuses based on quick profits encourage executives to take risks, and that’s what helped lead to the financial crisis.”
Listen to Genzer’s report here.
The FDIC is expected to vote on the proposal in its board meeting next Tuesday.
Here is an interesting take on the financial reform legislation passed by the House on Dec. 11. Most interesting is columnist David Reilly’s observation that the term “too big to fail” appears nowhere in the 1,200-page bill.
Reilly applauds the creation of a Consumer Financial Protection Agency, but in fact, this is the most troubling component of the bill. The new agency would have rule-making authority that will affect all banks; this is a disaster. If there is a problem in the banking industry it is not a lack of rules. There are segments of the financial services industry — mortgage banks and brokers, for example — that could certainly be regulated more closely, but traditional commercial banking already is highly regulated.
It is a good thing that banks with less than $10 billion will be exempt from exams conducted by the new agency; it also is good that CFPA will not be able to assess fees on community banks to fund itself. And it is good that rules will be enforced by existing bank regulators instead of CFPA directly. But all of these good things combined don’t come close to offsetting the potential harm CFPA will do. More rules simply mean banks will have less ability to offer credit and other products to consumers.
CFPA may start off as a small agency with limited jurisdiction, but like all government agencies and programs, it will grow. Count on it. Recall the Community Reinvestment Act, which was passed in 1977 as a very minimal piece of legislation. Today, CRA compliance is a huge responsibility for banks of all sizes, while it does very little good — if any — at the vast majority of banks. Furthermore, community groups still complain about inequitable allocation of credit.
The House passed the financial reform bill by only 21 votes. That means the support for this complicated bill is far from overwhelming. As the debate moves to the Senate, bankers need to remain engaged and work particularly hard to kill CFPA, or if Congress really wants a new agency, CFPA should have no jurisdiction whatsoever — rule-making or otherwise — over traditional commercial banks.
The House passed its regulatory reform bill, H.R. 4173, on Friday. The vote was 223-202. ICBA and ABA issued equivocal statements, the gravamen of which was the CFPA. Missouri Democrat Ike Skelton issued a statement explaining his vote against the legislation, including the following:
“We must focus tough regulations like a laser beam on Wall Street and other bad actors while not wrapping our home town banks into costly and complex sets of new rules…They are conservative with their money and did not cause last year’s economic mess. They and their customers ought not pay the price for Wall Street’s misdeeds any more than they, like all Americans, have already been asked to do.”
[snip]
“While the House bill is well-intentioned and I support much of it, the measure falls short in my goal to target Wall Street without disrupting Main Street banks and bank customers. In particular, the Consumer Financial Protection Agency, which is created under the legislation, would create a cumbersome set of new requirements for home town banks. These new rules are not fair to community banks and their small town customers, and the legislation could have been written to exclude them.”
Now attention shifts to the Senate, where Connecticut Senator Chris Dodd introduced reforms that are even more sweeping. One Midwestern banker claimed that Dodd’s bill “ought to be dead on arrival.” We’ll see.
Cramdown opponents in the U.S. Senate defeated the measure earlier this year, but Michigan Congressman John Conyers revived cramdown language as an amendment to H.R. 4173, the regulatory reform bill passed recently by the House Financial Services Committee. The bill is now being considered by the full House.
Conyers’s announcement prompted an about face from ICBA, which earlier this week was urging House members to pass H.R. 4173. Following the Conyers announcement ICBA wrote to House Speaker Pelosi, saying that ICBA would withdraw its support for H.R. 4173 if the amendment were adopted. ICBA president and CEO Camden Fine said:
“It troubles me to have to write this letter. We have been working with
Chairman Frank and the Members of the Financial Services Committee to enact
legislation that would rein in the nation’s too-big-to-fail banks and finally impose effective
regulation on the shadow banks that have so badly abused consumers. It would be
unfortunate if this amendment generated by another committee forced us to withdraw
our support. Please ask the Rules Committee to not make the amendment in order.”
