Regulatory Inconsistencies Are Killing Community Banks

Community bankers have never been shy about expressing our frustrations with the multitudes of regulatory requirements we face on a daily basis. From the seemingly endless paperwork to the redundant disclosures that often cause more confusion than they resolve, regulatory hurdles can be truly overwhelming, and we don't mind telling people about it.

But you know it's really bad when the regulators themselves can't even get their own policies straight. And with so many mandates coming from so many different Washington regulators, that's exactly what is happening. The regulations from Washington are not only seemingly endless, they are also often contradictory.

Take, for example, new fair lending rules from the U.S. Department of Housing and Urban Development. The rules make lenders liable for lending policies that have a disparate impact on a group of borrowers even in the absence of any intention to discriminate. The idea is to ensure lenders make credit available to underserved communities and are not discriminating against some borrowers.

I understand the principle of fair lending. Nevertheless, the new rules are a complete, 180-degree turn from the Consumer Financial Protection Bureau's new standards on "qualified mortgages". The QM rule lays out requirements for how lenders must establish borrowers' ability to repay a loan. Banks are given a safe harbor for what is considered a prime loan. While the CFPB has taken positive steps to help prevent the standards from cutting off mortgage credit when they take effect next year, the rule will effectively shrink the credit box in an effort to bolster the safety and soundness of the housing sector.

Following the housing and financial crises, I understand this sentiment as well. But the policy priorities of restricting credit to minimize potential losses and of boosting lending to ensure equitable access to credit are directly at odds, and lenders are stuck in a regulatory Catch-22. Together, the rules could expose community banks making only QM loans to disparate impact legal actions. In a recent letter to the CFPB and HUD, the Independent Community Bankers of America and several other trade groups representing financial institutions requested guidance to ensure our members do not violate one regulation while trying to comply with another.

This frenzied approach to policymaking is not simply exasperating to community bankers and other financial services professionals. It's not just another laughable example of regulatory overreach or big government fumbling. These conflicting principles have real consequences for lenders and borrowers alike.

Excessive regulatory compliance inhibits the ability of community banks and others to devote resources to their businesses. It requires staff to spend more of their time on meeting regulatory guidelines than on working with customers and driving community development. And community banks are not in a position to go on a hiring spree to meet every new regulation that comes down the pike. As the Federal Reserve Bank of Minneapolis recently reported, increasing staff by two employees would cause 33% of banks with less than $50 million in assets to become unprofitable.

Instead of driving community banks out of business with strict and conflicting regulatory standards, policymakers should support the kind of relationship lending that defines the community banking business model. For many community banks, and other financial institutions, the regulatory environment has reached a tipping point.

Camden R. Fine is president and CEO of the Independent Community Bankers of America.