As we enter the new year, the future of a federal agency long pilloried by many community banking advocates for imposing new compliance restrictions on small lenders remains uncertain.
The Consumer Financial Protection Bureau (CFPB) — a controversial symbol of Obama-era financial reform — is currently at the center of much internal debate. The agency was created in 2010 with the stated mission of reining in abusive banking practices that are blamed for sparking the Great Recession.
In the course of fulfilling that mission the agency has helped return more than $12 billion to millions of defrauded consumers. But the CFPB has also faced criticism for creating a new class of bank that is “too small to succeed” under a burdensome new regulatory regime.
Established in the wake of the financial crisis with passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB set out a series of new guidelines for lenders, with the goal of limiting unscrupulous lending practices.
While the law included a provision for exempting smaller financial institutions from some of its regulations, critics have maintained that the safety valves don’t go far enough, leaving many community lenders on the hook for compliance issues that would have skirted over them in the past.
One area of considerable controversy has been the CFPB’s oversight of mortgage lending. In 2013, the agency issued several mortgage rules placing additional compliance burdens on home lenders. The new rules were ultimately modified to exempt creditors that operate in rural and underserved areas; but Scott Olson, executive director of the Community Home Lenders Association, says that even with such concessions the extra burden on small lenders may have the result of limiting consumer choice.
“Unfortunately, there is a growing recognition that the cost and compliance burden of a myriad of new mortgage rules is a major factor causing lender consolidation – with smaller lenders selling to larger lenders or exiting the mortgage business altogether,” said Olson. “Consolidation of community lenders means less competition.”
A new set of changes to the Home Mortgage Disclosure Act requirements that went into effect on January 1, 2018, adds dozens more new data points that lenders must now track.
More recently the CFPB announced its intention to require reporting on small business loans by directing financial institutions to compile 13 separate data points, including the amount of funding sought and approved, the type and purpose of the financing, as well as the location and most recent annual revenue of the applicant.
Proponents of the CFPB say claims that additional oversight have been a death knell for the community banking sector are overblown.
“Some doomsayers sound a frequent refrain that new regulations are killing the banks and choking off access to credit,” former director Cordray said last year.
On the contrary, he countered, community banks are more profitable than ever.
Indeed, according to the FDIC’s Quarterly Banking reports, net income at community banks has been growing at a steady clip since 2015. The 12-month growth rate in loan balances at community banks was 7.8 percent in the second quarter of 2017, compared to 3 percent at non-community banks.
Still, there is ample evidence that provisions of Dodd-Frank have added precipitously to the compliance costs incurred by small banks. Studies show that nine out of ten banks saw increased compliance costs over the last five years, in some cases doubling or even tripling their compliance budgets.
A survey of 200 small banks by the Mercatus Center in 2013 found that nearly three quarters of banks blame the CFPB for negatively impacting their business activities, and that more than a quarter anticipate engaging in a merger or acquisition in the near future.
“It’s hard to imagine that remote parts of the country are going to be served by these larger consolidated banks,” Marshall Lux, of Boston Consulting Group told the Financial Times. “If the trend continues, we’re going to see fewer community banks and more substitutions that would not be under the same scrutiny.”
President Trump has done little to hide his disdain for the agency created by his predecessor and launched by Sen. Elizabeth Warren. But the administration has promised to take “a common sense approach…that will empower consumers to make their own financial decisions and facilitate investment in our communities.”
That will likely mean rolling back enforcement efforts and streamlining staff. At the end of last year, the CFPB released its 2018 regulatory agenda, which includes “identifying and addressing outdated, unnecessary or unduly burdensome regulations.”
By any measure the CFPB is destined to be reined in under the Trump administration. That has critics of Dodd Frank rejoicing. But it may be too soon to tell what the overall impact will be on community bank.
For starters, some of the more controversial aspects of the agency’s mandate will require legislative action to modify.
House Republicans are working towards that by promoting passage of the Financial CHOICE Act, which was introduced by Rep. Jeb Hensarling (R-Texas) with the goal of creating a fairer environment for community banks to compete in. The bill passed the House over the summer and is now being considered in the Senate.
BancAlliance members can read the bill and stay abreast of its progress by clicking here.