WASHINGTON — Sen. Elizabeth Warren on Thursday called into question the need for regulatory relief for small institutions, noting that they have continued to be profitable despite new rules under the Dodd-Frank Act.
While most lawmakers of both political parties typically equate helping community banks and credit unions with apple pie and baseball in terms of their support, Warren signaled she has a different view. The Massachusetts Democrat warned that large banks are using smaller institutions for political cover to make changes to the 2010 financial reform law.
"We've heard a lot today about how smaller banks are being smothered by unnecessary regulation, supposedly because of Dodd-Frank rules, like the new mortgage rules that went into effect in the first quarter of 2014," she said during the second Senate Banking Committee hearing this week on regulatory relief for small banks and credit unions.
Though Warren reserved her most barbed comments for bankers, credit union executives also voiced a number of concerns related to many of the same rules bankers balked at.
Credit union executives said the QM rule, for example, has forced them to reconsider making certain loans.
"When QM first rolled out, we automatically got to the conclusion that we were not going to do non-qualified [mortgages] because the risk was too great. As we dug and dug and dug, we determined that we couldn't back away from that market, because if we did it was going to be a substantial portion of our business," said Ed Templeton, president and chief executive of SRP Federal Credit Union, on behalf of the National Association of Federal Credit Unions. "But what we did have to do was lop off - for back of a better phrase - the outliers, the people that were on the fringe that until then we would take the risk on."
Warren, who has previously shown support for community banks and discussed the need for tiered regulation, noted that bank earnings were up more than 7% in the third quarter of 2014, the most recent data available, compared with a year before. She added that community banks have actually seen earnings growth of more than 11% over the same period, even after the Consumer Financial Protection Bureau's ability-to-pay rule went into effect last year.
"In other words, the banking industry did substantially better after the mortgage rules went into effect in January of 2014. Why are they making more money since the rules went into effect and are doing better than the big banks?" she asked Daniel Blanton, chief executive of Georgia Bank & Trust and the chairman-elect of the American Bankers Association.
Blanton acknowledged that the figures were accurate, but underscored that the new mortgage rules still continue to make life more difficult for smaller institutions.
"I don't think it's because of the regulations that the banks are doing better. It is tangling up our process to do mortgages, it's making it much more difficult, it's costing us quite a lot," he said. "Your statistics on the profit side of our industry are right; we've done very well. But if you go back and average over the last 10 years, it has been a very difficult process, and just now we're beginning to get some efficiencies and come back into the market and be successful."
Warren also zeroed in on a popular industry proposal discussed by Blanton and others that would allow banks and credit unions to count all loans held in portfolio as QM loans, noting that it would help financial institutions of all sizes.
"The financial performance of the community banks shows that Congress and the regulators, I think, have done a pretty good job of tailoring the rules to protect community banks," Warren said. "We should be very skeptical of regulatory relief bills that are promoted as helping small banks, but are pushed by ABA lobbyists for big banks."
The Portfolio Lending and Mortgage Access Act, introduced last term by Rep. Andy Barr, R-Ky., had 55 co-sponsors, including four Democrats. Warren noted that part of the problem with the bill is that it wouldn't be centered on helping the smallest institutions.
"If Congress passed this bill that the American Bankers Association wants, how many community bank mortgages would be eligible for QM that aren't currently eligible and how does that stack up against the number of mortgages held by Well Fargo, Citibank, JPMorgan and the other giants that would become eligible under this change in the rules?" Warren added.
To be sure, others, including Sen. Bob Corker, R-Tenn., and some of the industry representatives at the hearing, signaled support for the measure.
"If the QM rules were revised to allow portfolio loans to be counted as QM, that is consumer protection," said John Buhrmaster, president of the First National Bank of Scotia and chairman of the Independent Community Bankers of America. "We've had people that are not meeting those QM standards that are being forced to go to other places that don't follow the proper rules — and never will."
The legislation would build on other changes to the QM rule that the CFPB announced last month, which would expand an exception for small lenders with under $2 billion of assets. Under the plan, lenders that originate less than 2,000 loans — excluding loans held in portfolio — would not have to comply with QM's debt-to-income requirement, though they would have to follow other QM restrictions. (The current figure for the exemption is 500 loans, which the CFPB agreed is too low.)
Sen. Sherrod Brown, D-Ohio, added his own concerns about the push to automatically qualify loans as QM, noting that banks are still permitted to make non-QM loans under the rule — it's just that they assume additional legal liability for doing so.
"I think the discussion that a number of you had about the QM rule providing legal liability protection shifts the burden to the borrow even if the lender knew they couldn't pay back the loan," he said. "Putting aside even the expansion of the rule from 500 to 2,000, nobody's stopping from youdoing that loan — the hand of big government is not telling you that you can't do it — it's just saying that you just don't get the legal protection afforded by QM."
Still, the pushback by progressive Democrats on the panel is unlikely to deter Chairman Richard Shelby, R-Ala., from moving forward on regulatory relief efforts and broader changes to Dodd-Frank.
Asked after the hearing whether he thinks Warren's argument about profitability negates the need for legislation, Shelby said "absolutely not."
"I want all banks and financial institutions to be profitable. But there's been years when they haven't been — they've got to build their capital up, we want them to do that and we want them to operate and have access to the people with financial products," he said in an interview with American Banker.