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Key Federal Legislative Issues - Winter 2015
Community banks play a key role in the economic health and vitality of communities across Texas and the nation. We as an industry continue to fund a disproportionately large percentage of agriculture and small business loans, and provide a meaningful alternative to consumers who opt not to bank with a large or not-for-profit institution. In the midst of a fragile recovery from a serious recession, the important contributions community banking makes to the overall health and well-being of our economy on both a micro and macro basis are becoming clearer as are the vast differences between our business model and that of the largest banks. Our member banks did not participate in, nor profit from, the excesses that contributed to the meltdown in the financial services industry. Yet sadly, we are paying dearly for the inappropriate behavior of others in the form of artificially low interest rates, increasing competition from government subsidized and too-big-to-fail competitors, an unending avalanche of regulatory burden, nervous customers and anxious regulators. The present economic conditions and regulatory environment only exacerbate an already difficult competitive environment. Key issues for our industry in the 114th Congress include:
- Regulatory Burden;
- Credit Union Competition;
- GSE Reform;
- Overdraft Protection; and
- Business Method (Process) Patents.
One‐size‐fits‐all approach to regulating Wall Street and Main Street banks is killing community banking.
The passage of landmark banking legislation in the 111th Congress, along with legislative and regulatory responses to address the financial crisis, have had and will continue to have a significant effect on the community bank business model. Perhaps the most significant positive to come out of the debate on Dodd-Frank was the virtually universal acknowledgement that community banks are different, are important, and need to be treated as such. We are hopeful that this recognition will translate into pro-community bank action going forward.
In attempts to correct the bad behavior of other sectors of the financial services industry, community banking has frequently been “caught in the backwash.” Many of our banks are struggling mightily to keep up with the constant onslaught of new regulatory requirements and, in some cases, a much harsher examination protocol. The absorption of added compliance expense, not to mention the difficulty in attracting and compensating the necessary staff, is much more problematic for a smaller institution.
Ultimately, many of these institutions will simply opt to sell or merge with a larger entity as the cost of compliance continues to increase past the point of economic sustainability.
There is tremendous concern regarding the future, especially as the Consumer Financial Protection Bureau (CFPB) continues to implement its very broad Congressional mandate. We urge both the CFPB and the prudential regulators to carefully consider the impact of any new regulations, guidelines or directives (as well as the cumulative effect of many seemingly innocuous requirements) on the community banking sector prior to issuance. Any new regulatory initiatives should be measured and should not inadvertently increase regulatory burden and costs, disrupt the marketplace nor create disincentives for legitimate borrowers and lenders.
IBAT will continue working with the Independent Community Bankers of America (ICBA) and other interested parties to generate support for the “Plan for Prosperity,” a multi-faceted menu of community bank focused regulatory burden relief initiatives. We are clearly disappointed that significant progress was unattainable in the 113th Congress, but anticipate that a number of bills will be re-introduced soon to bring much needed reason to the community bank regulatory environment, and urge your support of these important initiatives. Included among these will be several initiatives to bring some reason to in-portfolio mortgage lending, an area especially impacted by recent Congressional and regulatory actions.
IBAT has long advocated a “bifurcated” industry, and we are hopeful that these initiatives will benefit “stick to the basics” community banks, and the customers and communities they serve. Implementation of a “two-tiered” regulatory system is critical for the ultimate survival of this important sector of the financial services industry. We are absolutely committed to ensuring a viable future for the community banking industry, and look forward to working with those who share in this passion.
Credit Union Competition
Nontraditional credit unions acting like banks, but not paying income taxes, disadvantages community banks.
The unbridled expansion of community and multiple common bond credit unions is of tremendous concern to IBAT. These tax exempt de facto banks are competing head-on with community banks, but with neither commensurate regulatory oversight nor the tax burden shouldered by our members. We fully expect a resurrection of their longstanding legislative initiative (H.R. 688 in the 113th Congress), which grants these tax-free institutions additional commercial lending authority, to be wholly unacceptable. Further, their efforts to access outside capital markets (H.R. 719 in the 113th Congress) are a further attempt to continue to enjoy freedom from both the taxation and regulatory oversight endured by the commercial banking sector.
Additionally, the onerous regulatory hurdles for credit unions to convert to another charter type are strongly opposed. We believe that all financial services entities should have the right to choose among charters based upon their business plans and the interests of their various stakeholders. The existing restrictions placed upon those credit unions attempting to convert to a different charter are inappropriate and unacceptable.
We urge Congress to thoughtfully consider the far-reaching public policy implications of fueling the credit union sector to be a tax-free banking industry. We also strongly encourage Congress to either tax and regulate the “nontraditional” credit unions which are operating in a manner indistinguishable from commercial banks or provide for a similar structure for community banks, with commensurate tax treatment.
Many Americans seek the advice and counsel of their community bankers when pursuing a mortgage. Pending reforms should consider the potential impact on community banks and their customers.
A number of proposals were introduced in the last Congress to reform the secondary mortgage market, specifically aimed at replacing Fannie Mae and Freddie Mac. The expansion of mission, necessity of a government bailout and continued level of untenable taxpayer liability clearly points to the need for reform. We urge lawmakers to carefully examine the ultimate impact of any changes on the unique circumstances of community banks, and take appropriate steps to ensure these banks can continue to provide a variety of mortgage products to their customers, including loans originated and sold into the secondary market.
Legislation or regulations limiting this popular consumer‐driven product could result in higher costs to consumers.
The majority of community banks offer some type of overdraft protection to their customers and are once again paying the price for the abuses of a few, primarily large banks. We support clear and concise disclosure and an opportunity to opt out of any program.
However, we strongly oppose any legislation (H.R. 1261 in the 113th Congress) or regulatory fiat mandating price controls, prohibition or limitation of fees for a service rendered, or arbitrary limitations on any transactions between a customer and their financial institution of choice.
Legislation or regulatory mandates limiting numbers of checks or other debits eligible for such programs could result in higher costs to consumers as they deal with returned check fees, negative credit score implications and possible criminal prosecution. Further, responsible usage of overdraft programs is a viable and more cost-effective option for short term credit needs than the alternatives available in the subprime marketplace. Consumers should be permitted to make an informed choice and not be constrained by a regulator’s notion of what is appropriate.
Business Method (Process) Patents
A proliferation of questionable patent claims by “patent trolls” has created uncertainty and raised costs for banks and other entities.
While Congress recently addressed a number of patent issues, there continues to be an inordinate number of community banks facing lawsuits of dubious quality with little or no legitimate nexus with the defendant’s business operations. These “nuisance” lawsuits result in banks and other entities being forced to pay substantial sums in meritless settlements and unnecessary legal costs, and have a detrimental impact on availability and cost of credit.
IBAT will continue to work with other stakeholders in an attempt to bring some reason to a continuing problem for financial institutions as well as other business entities.
January 15, 2015