Maryland banks still nurse hopes for Dodd-Frank changes

Maryland’s banking industry continues to seek reforms to the Dodd-Frank Wall Street Reform and Consumer Protection Act put in place after the Great Recession to right a troubled financial sector.

Smaller, regional banks have been adversely affected by the regulations, according to industry advocates like the Maryland Bankers Association, the Independent Community Bankers of America and the American Bankers Association.

The MBA understands the need for and support a strong regulatory environment that protects consumers and businesses’ interests and provides proper oversight, said CEO Kathleen Murphy; that’s why the association has never sought a full repeal of Dodd-Frank, she said.

“The challenge is when the pendulum moves too far,” Murphy said.

It becomes a particular problem for community banks, consumers and small businesses that rely on them for mortgage or business loans, Murphy said. Dodd-Frank’s Ability to Repay and Qualified Mortgage rules, which the MBA hopes will be modified, require lenders to accurately determine if a borrower can repay a mortgage and establish significant penalties and liabilities for failing to meet related requirements — laudable goals on their face, bankers say.

But the rules have also disqualified otherwise creditworthy borrowers from obtaining mortgages, she said.

The ICBA would like to see a legislative change to grant safe harbor from the qualified mortgage rules and an exemption from escrow requirements for all community banks held in portfolio, according to a recent summary of its advocacy agenda for Congress. The organization is also seeking the repeal of the Consumer Financial Protection Bureau’s authority to require lenders to collect and report data on all small business loan applications — another regulation that can bog down community banks, officials say.

Murphy said local community banks have had to essentially double the number of compliance staff needed to address the growing list of highly complicated regulatory issues laid out by Dodd-Frank. Some MBA members have exited the mortgage lending business altogether. This year, of the 100 FDIC-insured community banks with branches in Maryland, 58 were headquartered in the state, compared to 94 in 2009, Murphy said.

A portion of this shrinkage can be attributed to consolidation, she said, and indeed, consolidation in the banking industry has been widespread since the passage of Dodd-Frank.

In an analysis published in The Hill, Allison Nicoletti, assistant professor of accounting at the Wharton School of Business at the University of Pennsylvania, described results from a study of bright-line banking regulations, especially those related to thresholds outlined in Dodd-Frank.

For instance, banks with total assets exceeding $10 billion are subjected to company-run stress testing, as overseen by the CFPB, an agency established under Dodd-Frank, as well as restrictions on the extent of debit card interchange fees that they can charge.

The increase in associated regulatory costs can encourage banks to acquire other banks in order to reach an economy of scale. On the other hand, some banks wish to remain below the $10 billion threshold and do so by lowering the interest rate they pay on deposits in order to decrease asset growth.

In June, the U.S. House of Representatives passed legislation to roll back sections of Dodd-Frank. The Treasury Department has laid out its own framework for what it called broad regulatory relief. Federal Reserve Chair Janet Yellen has outlined ideas for modest reforms, while Sens. David Perdue, R-Georgia, and Claire McCaskill, D-Missouri, have introduced legislation that would address some of the concerns of community banks.

At a more local level, members of the MBA recently met with their congressional representatives to outline their desires for reform, which include having the CFPB work with the industry to improve  compliance with the new integrated Real Estate Settlement Procedures Act and Truth in Lending Act. The consolidated rule now regulates most closed-end consumer credit transactions secured by real property, which is posing a significant challenge for the real estate finance industry, Murphy said.

But enacting banking reforms is not easy. Many consumer advocates – pointing to scandals like Wells Fargo’s practice of signing up millions of customers for accounts they don’t want – say a vigorous CFPB is needed more than ever.

Ultimately, industry advocates say, they may be more successful in obtaining administrative reforms to Dodd-Frank than in gaining passage of changes through Congress.