July 21 marks the two-year anniversary of the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, yet many Main Street banks in Arkansas are still grappling with its ramifications.
The 2,300-page major overhaul was devised to put an end to the “too big to fail” banks at the epicenter of the Great Recession. The law alters capital requirements, mortgage lending, commercial lending, debit card fees, bank compliance, insurance protections, derivatives trading and financial industry regulatory oversight. It also creates a new omnipotent consumer bureau to monitor and influence banking practices and non-bank providers of financial products. There are or will be another 5,000 pages of regulations and rules to sift through.
In the two years since it was signed in response to the financial meltdown caused by big banks in 2008-2009, Arkansas bankers remain puzzled by the federal law’s impact and are concerned about its yet unknown reach.
“There’s still a mystery on the capital reporting and still many rules to work out,” said Susie Smith, COO for Little Rock-based Metropolitan National Bank. “Most banks have spent a great deal of time in the last year putting into effect the interchange rules, overdraft rules, mortgage rules and getting a handle on a bunch of other paperwork.”
While the focus of the law was aimed at mega-banks and Wall Street firms, small banks in Arkansas are being crushed by the requirements.
Bruce Maloch is a regional president for Magnolia-based Farmers Bank & Trust Co., an independent community bank with offices in Magnolia, Camden, Malvern and Texarkana. His bank, which had no ties to the world financial meltdown, has steered significant manpower to aspects of Dodd-Frank — time that he said could be better spent with customers in the community.
“In our bank, we had one officer in charge of both loan review and compliance. That officer has already been assigned to full-time compliance, and we will employ a separate loan review officer. We’ll also hire a separate person in our operations division to assist with Dodd-Frank compliance,” Maloch said. He noted that personnel in other departments have been consumed reading and researching regulations to guard against breaking the law.
Additionally, many banking experts have expressed caution regarding the still mysterious Consumer Financial Protection Bureau (CFPB), which will have broad powers over banks with little Congressional or executive branch oversight. The CFPB could develop rules and regulations for community banks with little opportunity for input or pushback from those being regulated.
It’s hard to get a handle on how far-reaching the new law extends to the community bank level. For starters, there are copious complaints about the capital ratios that must be maintained.
Smith and Maloch both contend that the levels of capital that Dodd-Frank forces them to maintain will impact mortgage lending and commercial lending — the bread and butter of community banks — because it will increase their costs, make credit less available or more expensive to customers, and reduce the number of consumers who qualify.
“We’ll have to keep more capital in place,” Smith said. “Higher capital means higher cost for loans.”
“The higher capital requirements limit our a
bility to consider acquisitions,” Maloch said, noting another complication caused by the capital provision. “When Farmers acquired Malvern’s Southern State Bank in 2007, we issued some Trust Preferred Securities which are a component of capital. Under Dodd-Frank, banks over $500 million can no longer issue these securities; this further limits our ability to raise capital.”
The new law also complicates debit card transaction fees. Maloch said that the “Durbin Amendment” limited interchange fees on debit card purchases and was meant to apply primarily to big banks. However, market forces will affect competition with the big bank cap, and smaller banks will cut costs to remain a viable option to local customers.
The fee limits established may cover the cost of the next incremental debit card swipe, but they don’t cover all of the cost of equipment, fraud losses, etc. This will either decrease bank income or cause banks to charge higher fees elsewhere, he said.
Smith said mortgage service providers have been hammered by the Dodd-Frank changes. Wall Street, not Arkansas, was the player in the mortgage-backed securities crisis that crashed the economy, but the new law has completely re-written the rules for mortgage lenders. “I think the mortgage servicers are up against absolutely impossible expectations on their processing,” she contends.
Consensus among bankers throughout the state is that Dodd-Frank has and will do much more harm than good for local banks. Still, bankers can point to some positives in the new law.
“One positive is that checking customers have become more focused on their overdraft fees,” Smith said. “If they read those statements they can see what they’re paying and hopefully that will be a prompt for them to curtail their overdraft fees. When you make the disclosure understandable, it’s a good thing.”
Maloch said the permanent hike of the FDIC insurance limit to $250,000 from $100,000 is a positive. “Although banks pay an insurance premium to support this fund and premiums will be higher to insure a greater amount, premiums under Dodd-Frank will be calculated on a bank’s assets and not just deposits,” he said. “Large banks that have easier access to funding besides deposits will now have to bear a greater portion of the FDIC cost.”
Maloch also argued that the bill’s efforts to simplify disclosures and make certain disclosures more uniform are also a positive outcome of the law.
Smith thinks there will eventually be a pendulum swing of regulation back to the middle. She said it will have to happen to keep local banking afloat. “We’ll see some lessening of these rules in time so that grassroots lending won’t be curtailed.”
She also said she wouldn’t be surprised by smaller banks forming “cooperatives” to share resources, which could present opportunities for third party vendor services.
It’s a trend Maloch thinks is also inevitable.
“With the regulatory burdens of Dodd-Frank, some smaller banks will look for a friendly acquirer. Others will have to utilize services of third-party providers of loan review, compliance and audit functions,” Maloch said. “There are existing firms specializing in these services, and I believe smaller banks will have to rely upon them to navigate the choppy waters ahead.”