The Republican overhaul of the Dodd-Frank banking law moving toward a House floor vote is a Washington cage fight, with Democrats and Republicans sharply divided. But one section of it seems to meet with widespread approval: regulatory relief for small banks.
Known as community banks for their local focus, these institutions are mother-and-child figures on Capitol Hill, inspiring love and support on both sides of the often miles-wide aisle. There’s far-ranging agreement on the need to lighten the government-imposed burden on the smaller lenders.
Last fall, Sen. Elizabeth Warren, D- Massachusetts, one of the finance industry’s most fiery detractors, tweeted her support for helping them, saying “she supports targeted relief for small lenders.”
“It’s unfair to community banks” to impose many of the same strictures that Dodd-Frank loads onto large banks, said Mike Mayo, an independent bank analyst. “They have fewer resources” than the big players.
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Whether the small lenders will get what they want is another question. The Dodd-Frank revamp legislation, passed last month by the House Financial Services Committee on a party-line vote, may make it through the GOP-controlled House. But it faces a much tougher test in the Senate, where the Republican majority is not as commanding. And if the measure fails, so will small banks’ hopes for a less onerous regulatory load.
To community banks, Dodd-Frank imposes “rigid, inflexible rules” that hinder them from giving local borrowers the money “to purchase or improve a home, or start or grow a small business,” wrote Camden Fine, president of the Independent Community Bankers of America, their trade group.
Indeed, a 2014 survey of 200 small lenders by the Mercatus Center at George Mason University showed that higher regulatory compliance costs had prompted 6 percent of them to stop offering home loans. What’s more, Mercatus indicated, Dodd-Frank has forced many small lenders into mergers, shrinking consumer choices.
These institutions provide most of the nation’s small-business, commercial real estate and agricultural loans, accounting for almost one-quarter of U.S. bank lending, a Harvard Kennedy School study found. Technically, a community bank is one that’s local in scope, not affiliated with a major institution and holding between $1 billion and $10 billion in assets, according to the Federal Deposit Insurance Corp.
The legislation headed for a House vote, called the Financial Choice Act, aims to soften the 2010 financial reform law, passed in the wake of the financial crisis and Great Recession. Republican lawmakers say Dodd-Frank has hindered the nation’s economic expansion and the bank lending needed to fuel it.
Crafted by Jeb Hensarling, R-Texas, the committee’s chairman, the overhaul bill dismantles key portions of the Obama-era bid to prevent future bank problems from doing the near-crippling harm to the financial system that happened in 2008.
The House bill would let banks opt out of Dodd-Frank if they hold a sufficient amount of cash in reserve, and it would schedule federal stress tests of major banks every other year, instead of annually.
It also would curb the power of the Dodd-Frank-created Consumer Financial Protection Board, which is set up as independent agency not under congressional supervision. For small banks, the CFPB pullback would be a special boon because they have fewer staffers to combat its complaints.
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The Hensarling bill also would loosen restrictions on mortgage lending that are harder for community banks to meet, make raising equity capital easier for more of them and reduce the amount of data they need to report. In addition, the measure would repeal the so-called Durbin Amendment, authored by Sen. Dick Durbin, D- Illinois, which caps the fees banks can charge merchants to swipe debit cards.
Even while objecting to many of Hensarling’s provisions, Democrats called for paring the bill back to aid solely the smaller lenders. “Focus just on the small banks,” said Ed Perlmutter, D-Colorado, during the committee hearing. “We can make those improvements.”
Not everyone shares the view that community banks are sanctified establishments that deserve special protection from Dodd-Frank’s mandates. The sector’s critics point out that far from suffering, small bank earnings rose 10.5 percent in this year’s first quarter, by the FDIC’s count.
“Dodd-Frank raised compliance costs by only a minimal amount, and small banks have been merging for years before it” was enacted, said Katy Milani, program director at the Roosevelt Institute, a liberal-leaning think tank. “So I have a hard time buying into their narrative.”
Real or exaggerated, the woes of small banks may not get addressed if the Dodd-Frank revamp is stymied.
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