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Why Community Banks Keep Throwing in the Towel

The First National Bank of Wyoming has been doing business in Delaware for more than 100 years. The $307 million-asset bank (named after the town where it is based, not the Western state) recently announced that it will be acquired by WSFS Bank, Delaware’s largest indigenous bank. In an article about the deal recently appearing in the Wilmington News Journal, the President and CEO of FNB Wyoming, Joseph Chippie, cited the cost of complying with government regulations.

"Larger banks," the article noted, "can hire more lawyers and accountants to ensure all regulations are being followed, without making a dent in their bottom line, but it is a big expense for banks with fewer than 100 employees."

I would argue that the cost of compliance makes a dent in the bottom line of all banks, regardless of size.

In an annual letter to shareholders last year, M&T Chairman and CEO Robert Wilmers reported that the cost of regulatory compliance for his bank (current asset size: $83 billion) had nearly doubled since 2003 to $95.1 million in 2011.

I have been dealing with banking laws and regulations for 45 years and have witnessed firsthand the exponential growth in federal regulation of banks. The sheer quantity of the regulations is bad enough, but the complexity often confuses banks and their customers and increases the cost of compliance.

To illustrate the depth of the problem, here are some of the laws and regulations that come into play in a fairly common transaction, a consumer residential mortgage. Some of those quoted also apply to other types of banking transactions. All of them predate the Dodd-Frank Act of 2010, which has only made things worse.

Pursuant to the Bank Secrecy Act, banks must have in place a customer identification program. The program must include elements specified in the regulations. By the way, the manual used by bank examiners to test compliance with the Act is more than 300 pages in length.

The FDIC Act requires the federal regulators to promulgate standards for real estate lending. They have issued regulations implementing this requirement and bank boards are required to approve policies that, at a minimum, incorporate these standards.

Under a federal law known as the Secure and Fair Enforcement for Mortgage Licensing Act, or Safe Act, bank personnel involved in the origination of residential mortgage loans must be licensed and banks are required to have in place procedures necessary to ensure compliance with the act.

Where the collateral for a loan consists of a building, pursuant to the Flood Disaster Protection Act and implementing regulations of the banking agencies, inquiry must be made to FEMA as to whether the property is located in a flood plain. This inquiry must be made in all cases – even if the subject property is located high on a hill. Depending on the result of the inquiry, the bank must take certain steps.

The Truth-in-Lending Act and Regulation Z impose a number of requirements specific to consumer mortgage transactions. In its entirety, together with official commentary and illustrative appendices, the regulation consumes 476 pages in the U.S. Government Printing Office’s rendition of it in title 12 of the Code of Federal Regulations. (This number will increase as more regulations mandated by Dodd-Frank Act are finalized.)

The Equal Credit Opportunity Act and Regulation B apply to all loans, including commercial loans, but contain some provisions that apply only to real estate secured consumer loans.

The Fair Housing Act also applies, as does the Home Mortgage Disclosure Act and Regulation C. Then there is The Real Estate Settlement Procedures Act and Regulation X. The Homeowners Equity Protection Act Protection Act applies to mortgages with higher rates of interest and if private mortgage insurance is required, the Home Owners Protection Act comes into play.

Is it any wonder that consumers stagger out of mortgage loan closings with an arm full of disclosures and other documents that they have not read and, in most cases, have neither the time nor the inclination to read them?

Now that we have a new federal agency devoted to providing consumer financial protections, we can be sure that the flow of new regulations will continue unabated, causing more community banks to throw in the towel.

William M. Aukamp is of counsel to the Wilmington firm of Werb & Sullivan.


(6) Comments



Comments (6)
Excellent article and what is worse is that almost all of the aforementioned regulations have been rewritten a number of times over the years. The most changes to regulations by the CFPB are only the most recent changes. How many times have HMDA, Flood and CRA been reinterpreted by the regulators or Congress, which requires revamping of already complicated processes. As to statements that bankers need to report on supposed "bad" actors, I'm a banker and a former regulator, believe me community banks do "tell" on bad actors; however, they generally have little or no proof just an overall understanding that "bad" actions are likely taking place. It's incumbent upon good regulators and law enforcement to seek out bad actors. That isn't easy in a society where legal proof is required to support regulatory and legal action.
Posted by bwilliams | Tuesday, March 11 2014 at 11:37AM ET
Politicians and reguilators know very well that increased regulation favors the large banks. It is much easier for a regulator to be responsible for a few megabanks, than monitor all of the rest of us.
Posted by PTO | Wednesday, January 22 2014 at 8:28AM ET
This article makes a valid point. Regardless of the merit of any of the regulations, there is a point where the mass of requirements will begin to smother the smallest businesses. Congress and regulators need to take this into account when issuing new laws and regulations but they do not. The proof of this is the Volcker Rule. 881 pages to say no short term trading for speculative profit (as distinct from investing to earn income from liquid assets) and no investing in hedge and VC funds. 81 pages to say that would be bizarre. 8 pages would be more than is needed. The OCC's rule covering permitted investments for national banks is only a few pages long. If this trend continues we should expect to see a 1000 page regulation on bathroom breaks coming soon.
Posted by gsutton | Thursday, December 12 2013 at 12:22PM ET
My point with community bankers is that their silence was almost as bad as participating in the irresponsible behavior. I have been a both a large bank and community bank CEO and have helped many fellow bankers be more consumer oriented and customer friendly without being "bad". I worked with ABA and CBA to stop bad deceptive behaviors but that was decades ago.
In the last decade, many community bank CEO's were aware of the bad mortgage lending and did nothing. When you are silent, you are flying with the crows and you get shot with the crows.
Posted by frankarauscher | Wednesday, December 11 2013 at 3:12PM ET
Good article that is real...not like Frank........ who suggests that banks and bankers are inherently evil...with people who think like this its no wonder that the Washington control onslaught continues...God help our economy and the historical role of the community bank if this kind of thinking doesn't stop
Posted by Rhsmith999 | Wednesday, December 11 2013 at 2:20PM ET
The author is correct in his laments! However, in most regulations the barn door is being closed after the horses are gone. Most of these laws and regs came into effect because of "bad actors". Many in the industry knew these bad actions were occurring and remained silent. They did not use their trade organizations or even pick up the phone to discuss the topics with other decision makers. The approach was "we are making money so let's keep doing it". The industry knew that a culture of deception, greed, irresponsibility, and incompetence was creeping in to it.

No more whining! If you were silent, then you contributed to the situation! It is time for some banking leaders to stand up, really acknowledge the bad culture, and take some actions. A great opportunity is bank payday lending. the ABA and CBA are representing all of you bankers and stating that it is a "Good Thing"! If you all think that payday lending is a good thing, then you deserve no relief from regulations whether they are onerous or not. You can "throw in the towel" as the article hints OR you can call your reps at the ABA and CBA and start with them.
Posted by frankarauscher | Wednesday, December 11 2013 at 1:57PM ET
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