Cong. French Hill: Congress Has Opportunity To Save Community Banks

by Talk Business & Politics staff ([email protected]) 65 views 

Editor’s note: Second District Congressman French Hill, R-Little Rock, is the author of this guest commentary. He is a member of the House Committee on Financial Services, the Subcommittee on Capital Markets and Government-Sponsored Enterprises and the Subcommittee on Oversight and Investigations.

Community banks and credit unions are vital to economic development, job creation and the overall financial stability of the communities they serve. Everyone agrees that our nation’s community banks and credit unions did not cause or contribute to the 2008 financial crisis. Yet, they are bearing much of the brunt of the regulatory fallout, largely as a result of the 2010 Dodd-Frank Act.

The explosion of some 400 new regulations under Dodd-Frank, in addition to an extensive web of existing regulations, has greatly increased compliance costs and paperwork burdens and undermined the relationship banking model that gives our community institutions a competitive advantage.

While consolidation has been a trend in the industry, the overly burdensome regulatory regime post-Dodd-Frank has exacerbated it, and on average, one community institution closes each day. According to the Federal Deposit Insurance Corporation (FDIC), there were over 4,000 fewer banks at the end of 2014 than in 2010. A recent study from Harvard University’s Kennedy School for Business and Government found that the market share of community banks is declining twice as fast after Dodd-Frank and attributes this decline, as well as the acceleration in bank consolidations, largely to regulatory burden. Despite what Sen. Elizabeth Warren, D-Mass., may say, community financial institutions are not “doing better than ever.”

EXCESSIVE REGULATORY COSTS
Community banks have a long history of tailoring their products and services to meet the needs of their customers, and they require the flexibility to be able to serve the unique needs of their communities. The Washington-knows-best, one-size-fits-all mentality is systematically ending the competitive advantage of our thousands of locally focused, relationship-driven community banks – creating a new class of “too small to succeed,” while legitimizing “too-big-to-fail.”

I have heard from community bankers across Arkansas struggling to deal with the cost, complexity, uncertainty and sheer volume that makes up this massive regulatory burden. As a former founder, chairman and CEO of an Arkansas community bank, I have experienced these negative impacts firsthand. Excessive regulatory costs and the pernicious effects of the Federal Reserve’s interest rate policies have reduced the growth and availability of capital, and healthy bank capital is what facilitates lending to American families and businesses. In other words, these regulations are not just affecting the bank’s bottom line – they are harming the customers these banks serve by removing choice and access to affordable credit and causing overall harm to the communities they serve.

Smaller institutions have a much harder time absorbing regulatory costs than larger institutions due to economies of scale, as larger institutions are able to spread costs over a greater asset base. According to industry experts, the cost of regulatory compliance as a percentage of operating costs is about two-and-one-half times greater for small banks. As a result, many of these costs, or “regulatory taxes,” are passed along to the customer in the form of increased fees and more limited credit or product availability. Other regulations have caused consumers to lose access to services they previously enjoyed at their local banks, like free checking and overdraft protection.

LOAN APPROVAL RATES DROP
New Qualified Mortgage (QM) rules from the Consumer Financial Protection Bureau (CFPB) have also made it more difficult for low- and middle-income borrowers to qualify for a mortgage. A 2013 Federal Reserve Board report found that one out of every five consumers who borrowed money to purchase a home in 2010 would not meet the underwriting requirements for a QM. Loan approval rates have significantly decreased due to these new, “check-the-box” underwriting standards, with one Arkansas bank noting a greater than 40% decrease in loan approvals. Mortgage documents that previously totaled 15 to 20 pages now exceed 250. It is not surprising that community banks are exiting residential lending altogether due to the complexity and uncertainty in the QM – now earning the nickname “Quitting Mortgages” – regulations.

Across the industry, community banks provide the majority of agricultural loans, over half of the small business loans and account for almost half of the commercial real estate lending. Regulations that reduce a bank’s ability to extend credit reduce opportunities for the creation of new businesses and jobs, and unfortunately, small business lending has decreased since Dodd-Frank. In addition, according to the FDIC, almost one out of every five U.S. counties has no physical banking offices other than those operated by community banks. Who will serve these markets when the local institution shutters its doors?

This Congress has a real opportunity to find common ground and provide relief to these institutions that are so valuable to small communities across Arkansas and America. I am proud to serve on the House Committee on Financial Services, and my priority is working toward a more commonsense, streamlined regulatory system that does not unduly burden community banks. Making the CFPB more transparent and accountable, requiring cost-benefit analyses of the impacts of regulations, focusing on business characteristics instead of arbitrary thresholds and redefining the rural banking market to reflect reality are just a few places to start.

I look forward to working with my colleagues on solutions to save our community banks, and thereby preserve consumer choice and competitive pricing.