More than 100 Louisiana-based banks could be freed from a range of federal regulations if Congress passes a major rollback of banking rules put in place in the wake of the 2008 financial crisis.
Local bankers and industry lobbyists say the rules imposed by the 2010 Dodd-Frank Act have weighed on community lenders, saddling them with extensive paperwork and placing a drag on lending to homebuyers and local businesses. Industry leaders say those increased compliance costs and headaches come despite the fact that smaller banks don’t pose the systemic risk to the U.S. economy that larger banks do, and largely weren’t behind the housing crisis to begin with.
“We’re not taking the same kind of balance sheet risks the big banks are taking,” said Business First Bank President and CEO Jude Melville, who recently took his Baton Rouge-based, $1.2 billion-asset bank public. “We’re loaning money to people we know in our communities.”
But many Democrats and watchdogs worry the proposed regulatory changes will undermine important protections designed to prevent another mortgage-driven financial crash and strip a number of key protections for consumers. An array of advocacy groups have peppered Congress with letters opposing the move.
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The bill passed the U.S. Senate in February with bipartisan support, including the backing of Louisiana Republican Sens. Bill Cassidy and John Kennedy.
“Our bill rolls back the burdensome rules and regulations that were placed disproportionately on community banks and credit unions by Dodd-Frank,” said Kennedy, a member of the Senate Banking Committee, after it cleared the Senate.
The bill is currently held up in the House of Representatives, where key Republicans — including influential Financial Services Chairman Jeb Hensarling, R-Texas — are pushing to put even more Wall Street regulations on the chopping block.
Senators worry any major additions to the bill could endanger the delicate compromise that carried it through the Senate with the backing of 13 Democrats. The chamber’s rules and Republicans’ narrow Senate majority mean continued support from at least some Democrats is essential to passing legislation.
The bill would raise the threshold at which midsized banks face tighter federal oversight to $250 billion in assets from the current $50 billion mark. That provision has attracted much attention but wouldn’t affect any Louisiana banks, the largest of which, IberiaBank, holds $27.8 billion in assets, representing more than a third of the total assets held by Louisiana-chartered banks.
But Louisiana bank leaders told The Advocate this week they see plenty to like in the proposed rollback. Increases in the amount of information banks must collect under the Home Mortgage Disclosure Act (HMDA) would be halted for smaller banks, while all institutions besides IberiaBank would be exempted from qualified mortgage rules that determine to whom banks can offer mortgages. In addition, banks in rural areas would be able to write certain mortgages without appraisals and a handful of institutions would benefit from less frequent exam cycles.
Ken Hale, president and CEO of the Bank of Montgomery, estimates regulations that have proliferated since the financial crisis cost his bank around $400,000 a year. For instance, he hires an outside firm to make sure the bank complies with HMDA requirements, and he’s added several staffers to handle back-of-the-house paperwork.
“When a new regulation comes in, we either have to hire new staff, hire an outside firm, or we have to have other staff members take up the slack,” said Hale, who also serves as chairman of the Louisiana Bankers Association. “If you’re at JPMorgan Chase, you just hire a few more attorneys and they take care of it.”
Preston Kennedy, president and CEO of the Bank of Zachary, tells a similar story. Since 2010, he’s hired one new lender, compared with five back-of-the-office staffers to handle paperwork, and he’s rearranged the bank’s operations several times to keep up with the rules.
“That’s resources that instead of making loans, is doing paperwork,” said Kennedy, who is also chair-elect of the Independent Community Bankers of America. “It’s frustrating to us because we’d certainly rather be out there, loans on the street. That’s how we survive.”
But critics of the rollback say the same regulations help ensure banks don’t take on too much bad debt — a key underlying contributor to the 2008 crisis — and ensure homebuyers wind up with what proponents say are fairer, less risky loans.
“Support for this bill is support for stripping back and weakening the regulatory safeguards passed in response to the disastrous 2008 financial crisis,” Americans for Financial Reform, a progressive nonprofit which advocates for stricter Wall Street regulation, wrote in a letter to members of Congress.
“This really is a rollback of essential Dodd-Frank protections,” said Scott Astrada, director of federal advocacy at the Center for Responsible Lending, a nonprofit advocacy group.
Small banks and credit unions could benefit from targeted regulatory relief, Astrada said, but the proposal goes far beyond that, gutting a range of key rules designed to prevent out-of-control or predatory lending and to provide regulators with better data to spot potential trouble in the mortgage markets. Instead of focusing on helping small community lenders, Astrada said, the bill guts a wide swath of federal rules and would be a boon for some of the biggest banks in the world.
The expanded level of data that federal regulators collect about mortgages — including borrowers’ age, credit scores and the interest rates banks charge them — has provided a far more detailed look at the health of the mortgage market. That’s on top of details of a borrower’s race, ethnicity and ZIP code that lenders have been required to report since 1975.
Although small banks have complained loudly about the cost of compiling and reporting the added data, civil rights groups and consumer advocates say the added information has been critical to spotting potentially discriminatory lending practices.
The pending bill would only require lenders that close more than 500 mortgages per year to report those added details. That would exempt about 85 percent of banks and most Louisiana-chartered institutions — though it would still cover the majority of mortgages, which are underwritten by large lenders.
A common thread among industry leaders is criticism of the qualified mortgage rule, which determines to whom banks can offer mortgages. The rule aimed to tamp down on predatory lending and make sure banks weren’t writing bad loans, which before and during the financial crisis were often repacked as securities and sold off, a practice that greatly exacerbated the crisis when people defaulted on their mortgages.
Community bankers say they don’t need the federal government telling them whether they should issue a mortgage. Unlike large lenders that bundle mortgages together and quickly resell them on the markets, Louisiana community bankers say they keep most of their loans, giving them a strong incentive not to make risky bets.
“In most rural areas, for most community banks, real estate lending is kind of our bread and butter,” said Hale. “If I hold (a mortgage) for twenty or thirty years, I’m going to make damn sure you can pay for it.”
The proposed rollback of regulations comes at a time of continued consolidation of community banks, generally defined as institutions with less than $1 billion in assets.
From 1993 to the third quarter of 2017, the number of community banks in Louisiana declined by 53 percent, according to the most recent installment in a series of industry-backed studies done by the University of New Orleans. That drop was actually smaller than in the rest of the country, where the number of small banks fell by 60 percent during the same period.
UNO finance professor Kabir Hassan, author of the studies on the U.S. and local banking landscape, pointed to a confluence of factors — relaxed interstate banking rules in the early 1990s, the creation of bank holding companies, declines in core banking profits because of low interest rates, and others — to explain the trend.
And rural bank leaders say they’re struggling to recruit talent and keep up with technological trends while wrapping their arms around regulations.
Of 119 institutions chartered in the state, only IberiaBank holds more than $10 billion in assets. Eight more have between $1 billion and $10 billion, while the rest are community banks with less than $1 billion. Those community banks control around 41 percent of the total assets held by Louisiana-chartered banks, according to an analysis from LSU finance professor Brian Andrews.
Andrews said the cost of complying with regulations eats up a larger percentage of a smaller bank’s budget — even though they pose a smaller risk to the U.S. economy if they failed.
“We are holding smaller banks to similar standards as larger banks, and that does not make sense given the cost-benefit of compliance,” he said.