Federal Legislative Priorities – Winter/Spring 2017
As the 115th Congress begins its work, the Independent Bankers Association of Texas (IBAT) remains focused on reasonable changes to statutes which have resulted in significant burden and expense to community banks and their customers. Community banks neither participated in nor profited from the excesses and bad behaviors that precipitated the financial crisis, yet are paying a disproportionately high price in attempting to deal with the legislative and regulatory aftermath. Further, the cumulative effect of the myriad “enhancements” to regulatory oversight has negatively impacted the ability of community banks to meet the financial needs of their customers, and serve as an economic catalyst in their respective communities.
While there has clearly been incremental—and appreciated—progress made in addressing issues of concern, there remains much to be done. Further, there were a number of significant bills introduced in the last Congress to address a variety of pressing issues, with some progressing further than others. Among the priority issues facing the community banking sector in the 115th Congress are:
The business models of community banks and the global financial giants could not be more divergent. While there is clearly more regulatory scrutiny on the systemically important entities, all banks regardless of risk profile or business activities must adhere to basically the same set of rules and regulatory expectations.
IBAT has long pushed for a recognition of the unique business model of community banks, and the positive contributions these institutions make in meeting the needs of small business borrowers, working with low- to moderate-income customers, contributing to their communities and creating jobs and economic activity. Further, while simpler to do so, rather than setting arbitrary asset thresholds we encourage Congress to focus on business activities and risk profiles when determining appropriate regulatory treatment of various categories of banks.
As Congress contemplates a variety of financial reform proposals, we are hopeful that they will recognize the importance of moving quickly and decisively to allow community banks to get back to the business of banking and meeting the needs of their customers.
Mortgage Lending Reform
Abuses in the mortgage lending and securitization process clearly contributed to the economic crisis. Sadly, a number of community banks and their customers have been negatively impacted, especially in the area of “in-portfolio” mortgages, or those kept on the books of the bank rather than being sold into the secondary market. These loans generally would not qualify for the secondary market for a variety of reasons, but allow for a borrower to purchase a home and the bank to retain both the entirety of the risk and a much needed earning asset.
IBAT believes that “in portfolio” loans should be granted safe harbor qualified mortgage (QM) status regardless of the qualifications of the borrower, payment structure or pricing. Further, appraisal and escrow requirements for these unique mortgage loans should be a decision made by the borrower and lender rather than arbitrary, complex and expensive government mandates.
Reasonable changes for treatment of in-portfolio mortgage loans will again allow community banks to serve their customers who wish to buy a home, especially in rural communities.
Community banks spend a disproportionate amount of time and resources attempting to comply with an ever-increasing level of regulatory scrutiny in the consumer compliance area. IBAT strongly believes that consumers should be treated fairly, but also is of the opinion that the present environment is counterproductive and indeed is making credit and banking services less accessible to those the government is purporting to protect. Further, this is clearly a result of a “one size fits all” regulatory framework in which egregious behavior by some of the larger institutions has created a tremendously difficult environment for smaller banks.
Many community banks simply do not have the resources to comply with the regulatory expectations in the areas of CRA, fair lending and HMDA as they have evolved. We would submit that a community bank should have the opportunity to correct a violation of consumer protection law or shortcoming in a compliance management system or protocol prior to a formal (and public) order being issued.
A much more robust level of regulatory scrutiny is apparent regarding fair lending. Sadly, the result in many circumstances has been that many banks have simply stopped making small loans to individuals, thus pushing these customers into the realm of high cost and frequently predatory lenders. Regulatory restrictions on the availability of overdraft programs has further limited opportunities for those seeking short term credit.
We are particularly concerned that proposed data collection on small business loans mandated by Section 1071 of the Dodd-Frank Act will potentially have a similar effect on small business lending and should be repealed. Community banks control a shrinking percentage of the overall banking assets in this country (roughly 10%), yet make almost half of the small business loans under $1 million. These loans do not “fit in a box,” and each is unique in its own way. In addition to the extra burden to comply with these requirements, comparisons will simply not be possible.
“Balance” would appear to be key as these areas are addressed, with a focus on cost/benefit and minimizing unintended consequences.
Regulatory Enhancements and Revisions
Short of outright repeal, the CFPB should be governed by a board rather than a single individual and should be subject to the Congressional appropriations process to ensure appropriate oversight, accountability and equitable regulatory response. Further, community financial institutions should be exempted from CFPB rules unless there is appropriate justification for inclusion.
The determination of capital adequacy under Basel III is unnecessarily complex and cumbersome. Community banks should be exempted. They should have the ability to elect whether to be subject to this standard or a more appropriate and simplified process.
Further, recent accounting standards regarding loan impairment (CECL), as well as others, are adding significant costs and burdens to community banks and other small businesses with questionable benefits.
Reciprocal deposit arrangements should not be considered brokered deposits. These arrangements allow for small banks to provide additional deposit insurance coverage to compete with the implicit government guaranty of deposits in the SIFIs. Further, community banks should have the option of paying a deposit insurance premium surcharge to provide full coverage for transaction accounts, further mitigating the movement of funds to the perceived “Too Big to Fail” banks.
Other Issues of Importance
- Subchapter S offers benefits to allow smaller banks to remain viable and compete with tax advantaged credit unions and farm credit system lenders. We support raising the limit on shareholders from 100 to 500, allowing Sub S banks to issue preferred stock, making dividends on those shares tax deductible and allowing those dividends to be treated as ordinary income for tax purposes. Further, we support an LLC structure for banks.
- Data security breaches continue to be a significant and costly problem for all banks. We are supportive of requiring the same Gramm-Leach-Bliley standards banks must adhere to for all entities that handle sensitive customer data.
- The ongoing proliferation of “Patent Assertion Entities,” or “patent trolls,” continues to be a source of frustration and expense. IBAT strongly supports the very simple fix of exempting “end users”—those who simply purchase software or a product from a third party—from any liability for alleged patent infringement.
- We continue to strongly oppose efforts by some in the credit union industry to expand field of membership and business lending authority, whether by legislation or regulatory fiat. Further, regulatory restrictions on the conversion of a credit union to a bank charter are significant and inappropriate.
- Lenders under the Farm Credit System umbrella are also competing directly with our banks in a number of markets, and are straying from their purpose as well with loans to large entities and dubious ties to either agriculture or rural development. Tax-advantaged GSEs should not be competing with the private sector outside of their stated mission.
- The Durbin Amendment, setting government price controls on debit card interchange, has resulted in fewer low cost account options and no meaningful savings for consumers. Durbin should be repealed.
- The Volcker Rule has limited the ability of community banks to manage interest rate and commodity risks through hedging strategies. Community banks should be carved out from these restrictions.
December 27, 2016