The Dodd-Frank Act was the most significant set of financial reforms since the New Deal. Many of the provisions are aimed at large, complex, systemically important financial institutions, and will not affect community banks at all. Other provisions will affect community banks. A GAO study last fall concluded that some provisions will help community banks, such as the supervision by the CFPB of certain nonbank lenders that competed unfairly with responsible community banks in the past, and changes to the calculation of deposit insurance premiums. Other provisions will inevitably result in some compliance costs for community banks, the GAO found, but how much will depend on the implementing regulations. Regulators should certainly make sensible exceptions, like the CFPB’s exception from the QM rule for some portfolio mortgages by community banks. The regulators should also recognize, however, that a patchwork of different rules for different lenders will inevitably be confusing to consumers, and is contrary to the intent that some rules should apply to all lenders.
Other provisions should apply equally to community banks. Community bank lending may be more “relationship lending” than lending by bigger banks, but no one walks into a community bank with a legal pad or a laptop and says “I need a loan. Do you want to be the party of the first part, or do you want me to be?” Community bank lending may be more tailored to the borrower, but no one’s lending is that tailored. All lenders use standard forms, and no lender’s standard forms should include predatory, equity-stripping provisions like what we saw in the last decade. Community banks were generally not guilty of some of the worst abuses of the last decade, and community banks remain more constrained by reputational concerns than are the biggest banks. But community bankers are not incapable of bad conduct. In the movie “It’s a Wonderful Life,” George Bailey was a community banker, but so was Mr. Potter.
There is litigation pending now against a New York community bank for mortgages the banks made to homeowners with lots of equity but problem credit. The mortgages had an interest rate that adjusted to almost 10 percent. If a homeowner was late with a payment, the rate went to 18 percent and stayed at 18 percent until the homeowner got completely caught up. Since an interest rate of 18 percent almost doubled the monthly payment, many homeowners found it hard to catch up. Almost half of the 5,000 homeowners who got the mortgages are losing their home.
The consolidation in the banking industry was not the result of onerous regulation of community banks, but of the deregulation of big banks by submissive politicians and regulators. More of the consolidation was the result of bigger banks buying smaller banks after interstate banking restrictions were relaxed than was the result of small bank failures.
Much of the advantage community banks have had in the past is their knowledge of local laws. The largest banks have succeeded in excusing themselves from many local or state laws they find inconvenient. Legislation introduced last week would exempt mortgages even from the requirements of state land title laws.
There are several ways Congress could help community banks compete with the biggest banks. For instance, Congress could limit ATM charges that are unrelated to the cost of transactions. Fees for using an ATM that is not your bank’s own may be $4 or $5, which is pretty stiff if you just need $40 in cash. ATM fees are unjustifiably profitable, and are a barrier for community banks in competing for customers. There’s a Bank of America cash machine just two blocks from here on Pennsylvania Avenue. Good luck with finding one for Prosperity Bank.
Most important, Congress should end the implicit subsidy for borrowing by too-big-to-fail banks. The ICBA has joined the chorus calling for ending too-big-to-fail because of the unfair competitive advantage too-big-to-fail banks have over community banks. Congress should pay attention.
So, I'm not seeing what you are saying about small community banks getting hurt more than big banks.