“Regulation has actually been horrible for big business, but it’s been worse for small business. Dodd-Frank is a disaster.” — President Trump, Jan. 30, 2017
Community bankers and their customers have dealt with the heavy burden that many believe to be an over-regulated environment since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted. It’s been said that the only thing accomplished by the Dodd-Frank Act was limiting and restricting access to much-needed credit for consumers.
Long before he was elected, President Trump said he promised to do “a big number” on the Dodd-Frank Act. True to his word, on May 24 this year, he signed Senate Bill 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Many bankers, lawmakers, and consumers agreed that a change was needed. And given the reach and changes associated with the new act, many with ties to community banking seem to share an opinion on the positive changes.
“This hard-fought, long-awaited community bank regulatory relief legislation will put community banks in an enhanced position to foster local economic growth and prosperity,” Rebeca Romero Rainey, president of the Independent Community Bankers of America, told American Banker.
Mick Mulvaney, acting director of the Consumer Financial Protection Bureau (CFPB) echoed the sentiment: “I am pleased to see the long-overdue reforms to the regulations governing mortgage lending,” he said in a published statement. “These changes will allow community banks and credit unions to focus on making prudent loans to prospective homebuyers without being tied up in expensive and excessive red tape.”
What will change for community banks?
The most noticeable and talked-about change alters the criteria (asset size threshold) used to determine which banks are subject to enhanced prudential regulation. The new act automatically exempts banks with assets between $50 billion (Dodd-Frank’s former starting point) and $100 billion from enhanced regulation, except for the risk committee requirements.
Banks with between $100 billion and $250 billion in assets will still be subject to supervisory stress tests. The Fed also has discretion to apply other individual enhanced prudential provisions to these banks if it would better secure the bank’s safety and soundness. Banks under the asset threshold of $10 billion are going to be the ones to see real relief.
Some pieces of the new act that should relieve community bankers directly correlate with previous changes to the Truth in Lending Act that were unclear at the time. New changes have been made to the “ability to repay” portion of the qualified mortgage requirement. Although community banks must still assess a borrower’s financial resources and debt as part of the underwriting process, certain mortgages originated and serviced in-house by the bank will be considered qualified mortgages and, therefore, subject to less legal liability.
Additional changes abate stringent appraisal requirements in rural areas, where qualified appraisers are harder to find. Further, banks with assets under $10 billion in assets and that have originated 1,000 or fewer loans secured by a first lien will see a new exemption from escrow requirements. Probably most exciting is that banks under the $10 billion asset threshold that originate less than 500 mortgages a year would be exempt from the additional Home Mortgage Disclosure Act (HMDA) requirements set forth by Dodd-Frank.
Many smaller banks were grappling with the cost and the manpower that would be required to comply with the new HMDA rules. Other highlights include shortened call reports, capital simplification, and an abatement for stringent capital rules around highly volatile commercial real estate loans. Community bankers and commercial customers in the booming Middle Tennessee market have much to be happy about.
What should the bank do?
Responsibility for ensuring a positive compliance and safety and soundness culture rests with the bank’s employees. A top-down approach of stressing importance should be present in each institution. Banks should continue to be proactive in implementing the interagency guidance concerning a risk-based approach to administering an effective compliance management system, as well as ensuring a safe and sound loan portfolio. Each institution’s system should continue to focus on the products they offer to their customers, as well as the way they identify, manage, and even prevent potential problems regardless of the easement of some implementing regulation or enforcement.
Having an effective way to identify any potential issues and handle them internally — prior to regulatory oversight and constraints — can keep a bank out in front of potential regulatory overhauls.
As always, the KraftCPAs financial institutions industry team is available to help if you have questions or concerns about how your bank will be affected. Give us a call at (615) 242-7351.