Federal Legislative Priorities – Spring/Summer 2021
Challenges abound for community banks in Texas and across the nation. The Independent Bankers Association of Texas (IBAT) applauds the remarkable contributions of these banks and bankers who have stepped up to support their communities and customers in these difficult times.
The proportionately outsized level of participation in the Paycheck Protection Program by community banks has saved millions of jobs in thousands of communities across the country and allowed several small businesses who would have otherwise failed to continue to create economic value, serve their customers and provide meaningful employment for those who depend upon them. Further, we appreciate the actions of Congress and the regulators in recognizing the unique challenges of the pandemic and making significant accommodations in regulatory and accounting requirements and standards during these difficult times.
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. While simpler to set arbitrary asset thresholds, we encourage Congress to focus on business activities and risk profiles when determining appropriate regulatory treatment of various categories of banks.
Among the priority issues facing the community banking sector in the 117th Congress are:
- IBAT has consistently opposed the mixing of banking and commerce. Recent approvals and additional applications for FDIC insurance and access to the payments system through the chartering of an industrial loan corporation (ILC) by several fintech and commercial companies with a diverse array of other business lines are troubling. In addition to further tilting an already unlevel playing field to the detriment of community banks and the small businesses and individual customers we serve, such an arrangement would foster further consolidation and concentration in the industry, promote credit allocation, provide multiple avenues for consumer privacy risks and potentially create more risk to the FDIC fund. The FDIC should declare a moratorium on ILC insurance applications, and Congress should promptly close the ILC loophole. Additionally, the proposed “special payments charter” by the OCC further blurs the longstanding prohibition of the blending of banking and commerce, creates additional risks to the financial system and fosters the opportunity for consumer abuse. Further, we are in strong opposition to the creation of a “post office bank” and have significant concerns regarding inefficient government entry into a private sector function.
- We continue to strongly oppose efforts by the credit union industry to expand field of membership, business lending authority and raising capital from outside sources whether by legislation or regulatory fiat. The recent purchase of community banks by credit unions is clearly an indication that these business models have few, if any, differences. We are supportive of efforts to provide for rent parity between banks and credit unions operating on military bases. Further, regulatory restrictions on the conversion of a credit union to a bank charter are significant and inappropriate. It is time to seriously examine the tax-exempt status and regulatory treatment of this ever-expanding industry.
- IBAT supports extending tax credits and deductions for community bank lending to small business borrowers, consumers in underserved communities and farmers and ranchers. In addition to providing some level of parity in competing with credit unions, Farm Credit System lenders and others, the benefits would be significant to the constituencies served and provide a significant return on investment to the federal government.
- While there have been marked and appreciated improvements in the level of regulatory burden over the past several years, the expectation is that this trend will be reversed going forward. Many community banks simply do not have the resources to comply with the regulatory expectations, especially in the areas of CRA, fair lending and HMDA as they have evolved. “Regulatory burden” is frequently cited as a primary reason for selling a community bank. 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.
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 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.
A much more robust level of regulatory scrutiny was experienced regarding fair lending enforcement several years ago, and the signals are that such will be the new reality. Sadly, the result in many circumstances has been that banks 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 have 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. Community banks control a shrinking percentage of the overall banking assets in this country (roughly 10 percent) yet make nearly half of the small business loans under $1 million. These loans do not “fit in a box” and each is unique. In addition to the extra burden to comply with these requirements, meaningful 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.
- BSA/AML compliance continues to be a costly and aggravating burden for community banks. The Beneficial Ownership rule promulgated by FinCEN has been especially onerous and puts the financial institution in a “detective” role. IBAT was extremely gratified with the recent changes in the NDAA to appropriately shift this responsibility to the applicant/customer and require FinCEN to serve as the data repository. We believe that a significant increase in decades old reporting thresholds would also be appropriate.
- IBAT supports reasonable measures to allow a safe harbor for banks doing business with marijuana related businesses (MRB) in states where cannabis is legal. In the last Congress, we were supportive of the SAFE Banking Act (H.R. 1595) and initiatives in the Senate (S. 1200) to accomplish these objectives. We encourage reasonable actions by Congress to address these significant issues.
- 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. Further, we encourage Congress to take the necessary steps to counter ever-increasing threats in the cybersecurity space.
- 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.
- Lenders under the Farm Credit System umbrella are also competing directly with our banks in several markets and are straying from their purpose 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.
- Recent accounting standards regarding loan impairment (CECL) are adding significant costs and burdens to community banks with questionable, if not nonexistent, benefits. Community banks should be exempted from the onerous requirements of this “solution in search of a problem” in our sector of the industry. We were supportive of H.R. 3182 and S. 1564 in the last Congress requiring a study of this proposal.