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Tuesday, July 13, 2010

The Dodd-Frank Bill Has Enormous Consequences for Community Banks

The pending Dodd-Frank Act will dramatically and negatively affect all banks – large and small. Some industry trade groups have said that community banks are relatively better off in the Dodd-Frank Act. So why doesn’t it feel that way? There is plenty of pain to go around and long-term unintended consequences are inevitable.

Here are some impacts, with a future post to discuss the many changes concerning the FDIC:

5,000 Pages Of New Regulations
Congress consistently underestimates the complexity and volume of the regulations resulting from new laws. Based on the number of pages of regulations resulting from previous laws, the Dodd-Frank Act will result in more than 5,000 pages of new regulation for traditional banks. This is in addition to the 50 new or expanded regulations affecting banks over the last two years.

Consumer Financial Protection Bureau Rules Apply to All Banks
All banks – large and small – will be required to comply with rules and regulations set by the CFPB, including rules that identify what the bureau considers to be “unfair, deceptive, or abusive.” The CFPB can require community banks to submit whatever information it decides it needs and the CFPB can examine community banks at its discretion on a “sampling basis.” CFPB will result in fewer and more expensive loans, as documented in this study.

Loss of Interchange Income on Debit Transactions
Small banks have an exemption from the Fed-determined interchange fee to be set for large banks, but market share will always flow to the lowest priced product, even if those lower prices are mandated. We expect that retailers in the market will seek to reduce their costs which will compress rates overall. It also means a loss of revenue that supports free transactions and other valuable services, or both.

New Capital Standards – Elimination of Trust Preferred Securities
All banks – including community banks – will be prohibited from using trust preferred securities to raise Tier 1 capital at their holding companies going forward. This will eliminate a popular source of capital that often is downstreamed to a bank. In addition, the agencies will be imposing more onerous capital rules on banks, large and small, and will force all banks to maintain higher levels of capital than expected in the past.

Significant New Disclosures and Reporting Requirements
Reporting burdens increase greatly, as the CFPB can require banks to report “the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” All banks will have to ask a business customer whether it is a women-owned, minority-owned, or small business, maintain records of the responses, and submit the information to the CFPB each year. The Dodd-Frank Act also requires 20 new HMDA reporting obligations. These and other reporting requirements will add considerable compliance costs to every bank’s bottom line.

Pre-emption Weakened and State Attorneys General Given More Power
The standard for preemption is modified for national banks and changed significantly for federal thrifts. This will create uncertainty, lead to years of litigation, and place banks at greater risk of having to comply with a patchwork of state laws. All banks will be affected. Read a detailed report on pre-emption here.

As written, the legislation will impose new costs and regulatory burdens on traditional banks that will make it more difficult for them to serve their communities and make more loans. I urge you to send a letter to your Senators to stop this bill from moving forward until a balanced and sensible approach is considered.

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