The General Accounting Office recently published the results of a required regulatory analysis to determine what impact the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is having on financial institutions. The results were published in the report “Dodd-Frank Regulations: Impacts on Community Banks, Credit Unions and Systemically Important Institutions.”
The report examined nine of the roughly 260 Dodd-Frank rules that had been written and finalized as of last October. It concluded the rules have resulted in an increase in the compliance burden on community banks and credit unions, as well as “moderate to minimal initial reductions in the availability of credit.” More specifically, these institutions are facing higher costs in terms of staff, training and time required for regulatory compliance and updates to compliance systems.
Lending impacts
According to the GAO report, there has been a decline in some specific business activities at affected financial institutions, including loans that are not qualified mortgages. This is due to fears among institutions of litigation, or concerns that they might not be able to sell these loans into the secondary markets, the report states.
“The GAO takes seriously the input we’ve received from industry officials about their increased regulatory and compliance costs,” said Lawrance Evans, director, financial markets and community investment for the GAO. “We want to minimize any undue regulatory burden on community banks and credit unions.”
The report confirmed the fears of many in the community banking and credit union industries.
“During the regulatory implementation of the law, we have consistently warned of the serious costs to credit unions and consumers from the hundreds of rules emanating from the Dodd-Frank Act,” said Elizabeth Eurgubian, deputy chief advocacy officer for the Credit Union National Association.
“The GAO report confirms that Dodd-Frank regulations have increased compliance burdens on credit unions,” added National Association of Federal Credit Union President and CEO B. Dan Berger. He said the methodology of the study fails to capture the full impact of “these crushing regulatory burdens.”
Nearly 1,300 credit unions — or 17% of all credit unions — have vanished since 2010, the year when Dodd-Frank was signed into law, according to Berger, and nearly all of them had assets under $100 million so the impact of the act seems to be hitting small community banks especially hard.
Paul Merski, executive vice president of congressional relations and the chief economist for the Independent Community Bankers of America, said the GAO report may be too premature to truly gauge the full impact of Dodd-Frank on the community banking industry.
“It contains a lot of anecdotal information on the negative consequences of the act on community banks, but this is to be expected,” Merski said. “You can’t add layer upon layer of new regulations onto the industry and not expect there to be a negative impact.”
John Barrickman, president of New Horizons Financial Group, which consults with community banks, said the report overlooks or downplays the impact the current regulatory environment is having on community banks’ expectations for the future and their willingness to lend money.
“The report doesn’t address the two biggest issues in the industry right now: forced consolidation, especially of community banks with less than $1 billion in assets, and the difficulty in attracting qualified board members,” Barrickman said. “Many community banks think the only way they can survive is to sell or merge, and some have concerns about the very survival of the community banking model.”
No definitive conclusions
Evans cautioned against drawing any definitive conclusions about the relationship between Dodd-Frank regulatory requirements and consolidation among community banks and credit unions.
“There hasn’t been any type of analysis done to make such a definitive statement,” he said. “It’s one thing to point to trends but another to attribute them to a specific factor like the Dodd-Frank regulations. There are many different factors that can lead to industry consolidation, like economic and market forces and rules other than Dodd-Frank, such as the Bank Secrecy Act and anti money laundering regulations.”
Evans added that between 1985 and 2010 the number of credit unions in the U.S. fell by half — from more than 15,000 to about 7,300 — while the number of community banks fell from approximately 18,000 to about 7,500.
Dodd-Frank isn’t the only piece of legislation that has introduced new rules and regulations affecting community banks and credit unions.
According to the ICBA’s recently released 2014 Community Bank Lending Survey, nearly three-quarters of community banks say regulatory burdens are preventing them from making more residential mortgage loans. About 78% of those banks said they have increased the number of staff members over the past five years who are dedicated to working on lending compliance.
Freelance writer Don Sadler contributed to the writing and research of this article.
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