A much needed reprieve – but with conditions.
By Don Andrews
America is like no other country. Rooting for the underdog is an American pastime, and there is a sensibility that people who are honest and work hard should reap the benefit of their efforts. Even bankruptcy laws were designed with the idea of giving people a second chance rather than sending them to debtor’s prison. Second chance and opportunity permeate our culture and our common law. In S.2155 — the Economic Growth, Regulatory Relief and Consumer Protection Act — community banks were given that second chance.
Given the contentious and disagreeable times we live in, it is notable that relief for community banks, as laid out in S.2155, was truly a bi-partisan effort. There was a legitimate sense on both sides of the aisle that if we lost community banks, we would not only be destroying the engine of our local economies but also an important part of our identity. As such, S.2155 was designed to correct some of the unintended consequences of the Dodd-Frank Act and to reverse the loss of thousands of smaller banks that once dotted the American landscape. But, there is a more practical business reason that Congress had to step in: community banks make the majority of our small business loans and play a vital role in pushing our economy forward.
Since the signing of S.2155, community bankers have expressed an opinion that their concerns are finally being heard in Washington. S.2155 eliminated many of the more obvious limitations of Dodd-Frank and its one-size-fits-all approach. Banks under $3 billion in deposits (a hefty percentage of community banks) now are rewarded for being well-managed and well-capitalized, and they are examined on an 18-month cycle. Rural mortgage portfolios of less than $400,000 are eligible for appraisal exemptions, and there are Home Mortgage Disclosure Act exemptions for banks that originate fewer than 500 closed-end mortgage loans or open-end lines of credit and have “satisfactory” Community Reinvestment Act ratings. Capital rules were simplified and agencies are required to establish a leverage ratio between 8 and 10 percent to be deemed “well-capitalized.” Banks under $5 billion can now submit a short-form call report that is designed to reduce redundancy in reporting. There are exemptions from the Volcker Rule for banks under $10 billion in trading assets, and mandatory stress tests have been eliminated for banks in the $10 billion to $50 billion range.
In short, the changes effected in S.2155 are what community banks consider to be “low-hanging fruit” and are designed to eliminate over-reporting, redundancy and “make-work,” all of which have put increased strain on banks with fewer resources from which to draw. While the changes are a good start, Congress will need to continue to listen to both bank and consumer groups to ensure they strike the proper balance between consumer protection and over-regulation.
It is easy to find accounts of S.2155 that place it as either a sign of the breakdown of the economic order along partisan lines, or a liberation from regulation. Neither perspective is accurate. After years of calling for help, community banks have realized some relief in areas where it was most needed — redundant regulations that imposed form over substance and did not provide any further protection for the consumer. At the same time, community banks would be unwise to believe that their regulatory obligations have been legislated out of existence. As early as the next round of examinations, it will become quite clear that regulators will have no sympathy for banks that have not attended to the basic blocking and tackling of risk assessment, compliance reviews, documentation, record retention and testing. Anyone who reads S.2155 carefully understands that Congress expects banks to be well-capitalized, well-run and serious about their regulatory responsibilities. As such, there is a greater need than ever for risk and compliance professionals who truly understand the business of banking, consumer protection and fiduciary responsibility to their communities.
It would be wonderful to believe that Congress will continue to act in a bi-partisan manner to provide much needed oversight to banking regulation. Whether this happens or not, banks should expect that their regulators have not taken their eyes off the nature of their responsibilities and should continue to invest in thoughtful controls, practices and personnel.
Don Andrews is a partner in Reed Smith’s financial industry group and heads the firm’s global risk management and compliance practice.