Independent banker optimistic about a regulatory overhaul
Six years after the passage of the Dodd-Frank Wall Street Reform Act, the Independent Bankers Association of Texas is feeling optimistic: Congressional Republicans are getting ready to substantially overhaul the law, peeling back many of the layers that imposed burdens on small and large banks alike. The group’s president and CEO, Chris Williston, sat down to talk about small banks’ suddenly rosier future.
Q: The Federal Deposit Insurance Corp. recently released data showing that community banks enjoyed very healthy profits in 2016 — even better than the larger banks. What does that tell you about the health of your constituents?
A: We’re blessed to be in Texas. But if you go to other pockets of the country, it’s not been as robust. That being said, what’s hidden in those numbers is all the things that we’ve not been able to do, because of regulation, for our customers. More specifically, if you look at the suburban and rural banks compared to the major metropolitan banks, you’re going to see very different numbers. And a lot of that has to do not only with loan opportunities, but very restrictive mortgage rules, which is the sweet spot for a lot of these rural banks. They just can’t make those loans to their customers. Or small-dollar loans, less than a thousand dollars, because they don’t meet requirements from the federal government.
Q: Your group has focused on a separate regulatory approach for small banks versus large banks. Is there then a need for rules tailored to rural banks versus urban banks?
A: We would like to have bifurcation not based on size or location, but based on business model. If you’re basically taking in loans and deposits, and not doing exotic things like hedging and underwriting municipal bonds, and all the things that the large guys like to do, then we would like to see bifurcation based on business model and risk to the system, and we don’t pose that risk. See, those mortgage rules apply just as much to JPMorgan Chase as they do to the First State Bank of Muleshoe, Texas. They know the family, and they’d like to make the loans, but they can’t do it based on federal mortgage guidelines.
Q: Has Financial Services Committee Chairman Jeb Hensarling, R-Dallas, told you when he expects to file his financial reform bill?
A: My understanding is that he’s going to be introducing it in the next couple of weeks, and that he wants to have a hearing and a markup by the end of the month, early April at the latest, and have it on the House floor by summer. And that’s what he’s told industry as far as when we need to gear up and provide the grass-roots support.
Q: Your association has talked about how Dodd-Frank didn’t fix the too-big-to-fail issue among the biggest banks. Are there some pieces of the law that you think should be kept, or strengthened, to make sure the problem doesn’t get worse?
A: If you asked Jeb what needs to change, he’d say that we haven’t fixed the too-big-to-fail crisis, and if we have another meltdown, whether or not there’s going to be a government backstop for those folks. And that’s one of his priorities, to redefine exactly where he’s going to go, to provide some orderly dissolution to those folks if in fact they get into trouble again. And people who think DoddFrank is going to be repealed, it’s just a pipe dream. Just like Obamacare or any bill that comes out of Congress, there are just going to be unintended consequences. Those are the things that we want to address: mortgage rules, which are just absolutely killing the ability for us to serve our customers in the mortgage area. If you do something wrong, you’re going to get sued, and you’re going to lose your whole portfolio.
Q: You mentioned small-dollar loans. In Texas, there’s been an effort to crack down on payday lenders that are viewed as predatory. Is that a space that your members could operate in in a way that’s not abusive?
A: Absolutely. The problem with any small-dollar loans is that by the time you apply an interest rate, you look at the annual percentage rate, and it’s still a high number. But a lot of our folks would like to do loans under $1,500. Particularly in the rural areas, a lot of those folks come in and they just want burial insurance for their loved ones. And we can make those, but they kind of have to be off balance sheet, they just do it out of their pocket, because the regulators are so restrictive. If I do it for this person, I’ve got to do it for another person at the same rate. So they’ve taken the character component out of lending. I’ve known this person forever, I know his family, I want to help them, but unless they can prove the ability to repay and all the other things they’re now required to do, I can’t make the loan, and I think that’s unfortunate.
Q: Your group has protested some of the fair lending rules. Do you think they have a good goal? Because we’ve had such inequities in the past.
A: Oh, absolutely, and let me just tell you right now, any community bank can’t withstand any kind of a challenge that they’re favoring one borrower over another. So we embrace fair lending. The problem has been the regulatory approach to fair lending. They just come in and look at surnames. My name might be Jay Martinez, but I’m an Anglo. They don’t look at the underlying borrower. They have got to fit in a particular box based on their credit score and what have you, they have to make everybody the same deal. And that’s good, but it removes that character component.
Q: But what if that character component is a proxy for, “I know this person, they’re in my social circle,” but that might exclude other communities that don’t have access to the circles that bankers have? A:
That’s a fair question, and the answer is, “possibly.” First of all, you don’t have a lot of people living in rural communities, the folks that are coming into those community banks pretty much know their customer. And that’s been the sweet spot for what a community bank is. Generally, you’re not a number, you’re a name with us. So it might be the case that some people might be disenfranchised because I don’t know you, but under the laws, basically, if this person meets the qualifications, they’re likely to get the loan, because there is such emphasis on fair lending.
Q: It sounds like there’s a lot of cybersecurity among members. Is that because people have been breached, or is it just an abundance of caution? A:
We’ve been blessed, knock on wood. I think most of the banks are so concerned about that because of protecting their customers’ accounts and their privacy. Candidly, if a bank gets breached, it will be hard for them to survive, that’s just such a black cloud over them, I think we’ve gone over and above the necessary requirements to make sure that customer information is protected. Where the fraud continues to be is wire transfers and those kinds of things to foreign countries, and they’ve put very restrictive procedures in place that are going to preclude that. Sometimes that makes the customer mad, because they did authorize it. And it still could happen. Every day we’re hearing stories about fraud that’s been prevented because we’re following policies and procedures to the letter of the law.