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Community banks feel the pressure of big bank regulations

Howard Bank CEO Mary Ann Scully. (The Daily Record/Maximilian Franz)

Howard Bank CEO Mary Ann Scully. (The Daily Record/Maximilian Franz)

Right up front, Howard Bank CEO Mary Ann Scully is clear about one thing: She thinks banking should be a regulated industry. But since the recession, Scully has been feeling the regulatory pressures suited for big banks mounting on small community banks like hers.

In general, Scully has seen an uptick in financial institution letters from federal regulatory agencies this year. Since January there have already been about 58 FILs released that applied to Howard Bank, up from 36 letters last year. FILs are sent from regulators to draw up a new policy or alert banks about the clarification of a policy. About 30 of the 58 letters sent this year have been for new policies, said Scully.

“These aren’t short releases,” said Scully. “We’re talking about literally 3,000 pages of information.”

Small bank, big bank regulations

When the FDIC makes a significant policy change, the amendment goes through a comment period for a few months and then the agency makes changes based on feedback. The Maryland banking industry – both the Maryland Bankers Association and individual banks – often send comment letters to the FDIC on pending proposals. Last year, the MBA and six Maryland community banks sent comment letters to the FDIC in response to proposed rule that would streamline the way the regulatory agency evaluates bank capital.

“They’re trying to listen,” said Scully, who is on the FDIC’s community advisory board.

Robert DeAlmeida, CEO of Hamilton Bank, said he would also welcome some regulatory relief.

“You have to adhere to all the rules and regulations of a larger bank,” he said. “You can’t say as a community bank that you’re sheltered by it.”

A lot of those regulations have to do with best practices. For example, banks of all sizes are required to do stress tests. While the tests for larger banks are slightly more rigorous than the ones for Hamilton Bank, DeAlmeida questions whether it’s the right approach to take with smaller banks.

“I think the stress test is good and gives insight, but community banks don’t have the same sophistications,” he said.

In a low interest rate environment, regulators are also focusing on concentration of lending, to make sure there isn’t a bubble and that management and boards are comfortable with their bank’s lending practices.

Policy changes for mortgage lending have led to a lot of paperwork changes. Howard Bank is warning mortgage applicants that it’s going to take them longer to go through the process and they may have to restart.

“These are standard documents and now the standard documents are going to change,” said Scully. “It’s not just the documents, it’s the way you interact with your client.”

Fallout from Wells Fargo

With allegations about Wells Fargo’s unethical sales practices leading to millions of potentially unauthorized accounts, the potential for regulatory relief seems further away for community banks.

“I think we were really making progress in getting regulatory relief for community banks,” said DeAlmeida. “I just feel that now it could slow that down. Especially the fact that banks sell trust and integrity and Wells Fargo kind of broke that promise with their customers. If you’re a legislator, you’re wondering how widespread this is.”

While the Consumer Financial Protection Bureau is looking at sales practices at big banks, such as Citibank and Bank of America, Scully can see the bureau’s regulations trickling down to the small banks.

“I know, because I’ve seen everything that was supposed to be for the bigger banks trickle down to the community banks,” Scully said. “The scariest thing that could happen would be if someone says we can’t appropriately reward our employees for doing the right thing.”

Howard Bank does offer incentives to employees for making sales, but “our top motivation is to make sure the customer is happy,” she said.

Cybersecurity at banks

Regulators are also cracking down on cybersecurity and making sure banks are prepared for any potential hacks and have an action plan in place.

Hamilton Bank does tests to prepare for such attacks and DeAlmeida said his top priority has been IT and cybersecurity at the bank.

“All of us try to prepare for it,” said DeAlmeida. “Pretty much all regulators require an action plan.”

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