The Regulatory Burden Hurts Community Banks, Credit Unions, and Consumers, Too!

By Charles Bruen, President & CEO of First Entertainment Credit Union

Usually if you lock a dozen community bankers and a dozen credit union executives in a wrestling cage the inevitable result is a no-holds-barred tooth-and-nail competitive brawl. However, if you stand in the center of the ring and start cursing the crushing regulatory burden from the Dodd-Frank Wall Street Reform and Consumer Protection Act, they all link arms and harmoniously break out singing Kumbaya. The Dodd-Frank Act, and its meddlesome progeny the Consumer Financial Protection Bureau (CFPB), represent the massive regulatory overreach that both types of depository financial institutions’ leaders love to hate. And that avalanche of regulatory restrictions threatens their very ability to effectively serve their local customers and consumer members.

It has been said on many occasions and in many places – on Capitol Hill, to the regulatory agencies, in the media – that community banks and credit unions did not cause the 2008 financial crisis. However, these smaller financial institutions are nonetheless the ones paying the biggest price in disruption to their daily business and perhaps to their very survival. The cumulative complexities of the new compliance mandates pouring out of the CFPB and other regulators, which over just a few weeks this summer reached 3,000 pages of rules all at once, act like a succession of body-blows driving community banks and credit unions flat onto the operational mat. Some of them are beginning to wonder if they have the strength and stamina to get back up.

All of the intended interventions like the Durbin interchange price controls and the many unintended consequences from the Dodd-Frank Act are like a thousand cuts draining the resources away from serving consumers’ needs and toward serving regulators’ risk-avoiding fears. Also, many financial services industry analysts estimate that the cost of regulatory compliance is disproportionately two to three times larger relatively speaking for community banks and credit unions than it is for large banks. And those big banks are buckling under the load as well. Collectively banks and credit unions are spending hundreds of millions of dollars on compliance. That cost represents resources that could have been invested in serving local communities and helping the U.S. economy recover.

The challenge to understand and comply with all of these new and changed rules also acts as a huge distraction for senior management, legal counsel, and the staff compliance specialists. Time spent by executives and others chewing their fingernails worrying about the new rules is time not spent on strategic positioning in the marketplace, on improving consumer services, or on investing in small businesses. Those costs are counterproductive at best and debilitating at worst. The greater the regulatory burden placed on delivering consumer financial services products and services, the fewer of them that will ultimately be available for consumers. Many community bankers and credit union executives believe that these new rules mandated by the Dodd-Frank Act would flunk any rational cost vs. benefit analysis.

Community bank customers and credit union members certainly have received very little benefit to show for this barrage of bad news. If anything, post-Dodd-Frank Act they probably are paying more for products and receiving less service than before. The new and pending Dodd-Frank Act and CFPB rules threaten to make fewer consumers eligible for mortgage loans, to reduce the number of persons who qualify for consumer credit products, and to drive many smaller financial institutions out of the ring – reducing competition. When any activity gets overregulated, you get less of it. It is the financial services consumer who ultimately pays the final price in less availability and higher costs.

Although the community bankers and credit union executives are singing from the same songbook when it comes to the awful regulatory burden, little relief from that incredible weight is expected anytime soon. The CFPB is not even one-third of the way through its rulemaking “to-do list” and has thousands of pages of additional rules yet to come. The CFPB has also already drawn sharp lines in the sand declaring its expansive supervision and enforcement turf to include entire markets – like mortgage lending, credit reporting, and student lending, to name just a few among many.

In addition to the CFPB’s regulatory burdens, the federal banking regulators are proposing higher capital standards and the credit union regulator won’t be far behind them. In today’s low interest rate low-margin environment, it won’t be easy to earn enough to add significantly to capital cushions. In frustration some will achieve higher regulatory net worth targets only by shrinking the size of the institution. When their community financial institution is restrained in what it can do for them with its capital in a regulatory headlock the local customer will pay that price, too. It would seem that community banks and credit unions must figure out how to meet their customers’ financial needs with both hands pinned behind their backs and with a huge iron dumbbell labeled “regulatory burden” strapped to their chests. It hurts just to think about it.

Charles Bruen is the President & CEO of First Entertainment Credit Union, a financial institution serving entertainment and communications companies in Southern California.
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