Reg relief = cost savings, right? Not so fast
With Congress moving closer to passing a bill to reform provisions of the Dodd-Frank Act, banks are hoping for a reduction in compliance costs after years of increased regulatory spending brought on by the financial crisis.
Skyrocketing compliance costs for community banks were a key reason senators of both parties helped pass the legislation championed by Senate Banking Committee Chairman Mike Crapo, R-Idaho. The bill seeks to ease requirements on mortgage underwriting, disclosures, capital and other areas. (House members are still considering the regulatory reforms.)
But some bankers still question whether those changes will translate into actual cost savings for their bottom line.
"This bill is a lot bigger in picture than in having real teeth to it," said Chad McClung, the president and CEO of the $110.4 million-asset Colfax Banking Co. in Louisiana. "I'm not sure I can say that we will cut compliance costs, but we will not experience the increase in compliance costs that we otherwise would have."
Some experts think compliance costs actually will rise in the short term, assuming the bill ultimately becomes law, as banks implement the changes.
"There will be a temporary increase in compliance," said Pam Perdue, chief regulatory officer at Continuity, a compliance management firm, and a former senior examiner at the Federal Reserve Bank of Kansas City. "It's the change itself, not whether it's getting more lenient or stricter, because financial firms still have to retool their processes, and update their policies and procedures."
Compliance costs for community banks hit $5.4 billion in 2016, up from $5 billion in 2015, and $4.5 billion in 2014, according to economists at the Federal Reserve Bank of St. Louis.
McClung said the biggest victory in the Senate bill for small banks by far is an exemption from the Consumer Financial Protection Bureau's ability-to-repay requirements for loans held on bank balance sheets. The legislation automatically defines on-balance-sheet loans as "qualified mortgages" for banks with less than $10 billion assets.
The CFPB's qualified mortgage rules accounted for roughly 8% of overall compliance costs, according to Fed data.
Small banks had been clamoring for changes ever since the CFPB in 2013 proposed eliminating balloon loans, which do not amortize and leave a large "balloon" payment when the loan comes due.
Colfax and other small banks that rely heavily on balloon loans for profits applied to become community development financial institutions. CDFIs got a complete exemption from restrictions on balloon loans, which long have been a bread-and-butter product for many community banks.
"In the past, Joe from the down the street could come in and get a loan even if he had a couple of hiccups on his credit, because we were willing to take a chance on him," McClung said. "But the way they wrote the QM rule, there was a basket of people out there that didn't fit into the government's model of how you had to document their ability to repay."
McClung said is still waiting for the final language in the reg relief bill to determine whether Colfax will get a complete exemption from QM or if the bank has to continue applying for CDFI status.
"I'm very hopeful that this QM relief will be a complete exemption from no restrictions to balloon periods and maturities and you don't have to document these eight approval criteria so we can go back to underwriting our own way," he said.
But the regulatory relief provision in the Senate bill with the broadest impact may be the exemption from reporting requirements for Home Mortgage Disclosure Act data for banks that originate fewer than 500 home loans a year. The change will reduce compliance costs for roughly 5,400 institutions, or 85% of all banks, according to estimates from the Federal Reserve.
"This will be a cost savings for smaller institutions," said Warren Traiger, senior counsel at Buckley Sander. "In addition to eliminating the responsibility to compile and report [on HMDA], it also means that if there are any errors, there would be no obligation to resubmit [the data], which also can be expensive."
HMDA compliance is expensive, and banks that have not yet automated the HMDA process could see real savings.
"It potentially will reduce the burden with respect to compliance with certain laws," said Steve Kaplan, a partner at Mayer Brown. "But it in no way changes the compliance responsibility of big institutions."
However, many lawyers are advising banks to continue to collect HMDA data for their own internal use so they can run a fair-lending analysis or in case they need it for supervisory exams.
"How are you going to monitor your performance if you don't have the data?" Traiger said. "Even if this data doesn’t have to be reported, most institutions will continue to maintain it in a machine-ready format to do monitoring of lending performance."
Other changes in the reg relief bill will have a smaller impact on compliance costs, observers said. For example, raising the appraisal threshold for commercial mortgages to $400,000 will help small banks broadly, but will result in more cost savings to the consumer than to the bank.
The Senate reg relief bill also would eliminate the three-day waiting period, when extending a second credit offer with a lower APR, under the new mortgage disclosure regime combining the Truth in Lending and Real Estate Settlement Procedures acts.
More than 20% of compliance-related expenses in 2016 were attributed to the new disclosure regime, known as TRID, but the majority of costs for staffing and technology have already been spent.
"Everybody has spent their money on TRID, so removing the three days isn't going to save any costs," said McClung. "There are some small victories that will be less annoying."
Generally, compliance costs are likely to remain elevated in the future because of Bank Secrecy Act and anti-money-laundering efforts that increasingly make up a big chunk of bank expenditures.
"Every bank is going to be different in how they are impacted," said Peter Dugas, managing principal at Capco's Center for Regulatory Intelligence and a former deputy Treasury assistant secretary in the Obama administration. The Senate bill "does provide some relief, but it doesn't go far enough to the extent that many institutions would like to see."
"If you look at a bank that is $10 billion in assets versus $100 million, they have different operating models, so it's hard to determine the monetary effect because each one is so distinct," he said.