Small banks fear regulation ‘tidal wave’

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Advocates of small banks and credit unions are warning Congress that mounting regulations could force them out of business.

Rules intended to protect consumers from abuse by major Wall Street banks have ended up hurting smaller institutions, they said at a House Small Business subcommittee hearing on Tuesday.

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“The overwhelming tidal wave of new regulations in recent years is having a profound impact on credit unions and their ability to serve some 96 million member owners nationwide,” said Linda Sweet, head of the Big Valley Federal Credit Union in Sacramento, Calif.

Lawmakers on both sides of the aisle seemed open to possible fixes to blunt impacts on smaller institutions from the Consumer Financial Protection Bureau (CFPB) and other agencies.

“These one-size-fits-all solutions, the unintended consequences often times are not worth it,” said Rep. Yvette Clarke (D-N.Y.). “Even if there’s the fear that these regulations will be burdensome and it shocks the culture of the institutions that we’re trying to preserve, then we’re defeating the purpose that we’re all seeking.”

Rep. David Schweikert (R-Ariz.), head of the Investigations, Oversight and Regulations subcommittee, said that many of the regulations end up hurting consumers and making banks more fragile.

“It is not adding layers of regulations that is making institutions safer. It is smarter regulation that does not arbitrarily add costs without adding benefits,” he said.

New rules stemming from the Dodd-Frank Act are causing credit unions and smaller banks to divert energy from helping their clients, they say.

Sweet said that she has seen her compliance costs “skyrocket” in recent years.

Supporters of new regulations say that most of the regulatory burdens from Dodd-Frank, the international Basel 3 capital standards and rules on credit cards fall on large banks, not small ones. 

“Some of the regulations actually help level the playing field between large institutions and small institutions,” said Adam Levitin, a law professor at Georgetown University.

He added that there is “no hard data about the actual extent of the changes in compliance costs,” just anecdotal evidence.

The Dodd-Frank bill also included a number of provisions to safeguard smaller financial institutions.

The CFPB, for instance, is required to consult a panel of small business advocates before writing some new rules. Only two other agencies, the Environmental Protection Agency and the Occupational Safety and Health Administration, are required to consult those panels.

But bankers say that’s not enough.

In January, the CFPB’s regulations on mortgage lenders go into effect, which require financial institutions to make sure borrowers can pay back the mortgages they take out. Small lenders and their advocates in both parties say that they could force them out of the mortgage arena.

“It will decrease the amount of mortgages that we make,” B. Doyle Mitchell, president of the Washington-area Industrial Bank, said on Tuesday. “There will be a lot of people that won’t get home mortgage financing.”

Over the summer, Sen. Elizabeth Warren (D-Mass.), one of the most vocal advocates for financial reform in Congress and the architect behind the CFPB, suggested a two-tiered banking regulation for large and small institutions. 

Multiple legislative efforts to give regulatory relief to small banks and credit unions are currently working their way through Congress, though few have gained much traction.

Rep. Blaine Luetkemeyer’s (R-Mo.) Community Lending Enhancement and Regulatory (CLEAR) Relief Act, for instance, would exempt many small banks and their loans from regulations of Dodd-Frank and the 2002 Sarbanes-Oxley Act. That bill has 87 co-sponsors but has languished in the Financial Services Committee since April.

The Regulatory Relief for Credit Unions Act, introduced by Rep. Gary Miller (R-Calif.), which would allow credit unions to escape many federal regulations, has been sitting in the committee since June.

Without measures like those, some worry that small institutions could be made extinct.

“We’re moving towards a system where we’re going to end up with several very large financial institutions, and that is going to leave needs unmet. Small businesses and consumers are going to find it much harder to get their financial needs met,” said Hester Peirce, a senior research fellow at the George Mason University’s Mercatus Center, which supports free markets.

There are fewer banks in the country now than at any point since the Great Depression, according to analysis done by The Wall Street Journal.