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Warren: Dodd-Frank Rules Aren't Hurting Small Banks Very Much

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 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.

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 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."

James Ballentine, the head lobbyist for the ABA, responded that "anyone who believes that community banks are better off as a result of this avalanche of new regulation is off the mark."

"This week's hearings are a clear indication that there are thoughtful members willing to work in a bipartisan manner to help community banks," he said in a statement e-mailed to American Banker. "We look forward to working with them."

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 borrower 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.

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I am so sad and so very disappointed by Sen. Warren's latest comments about community banks. Over the past 4 years I have been one of her biggest champions - in fact I may be the only supporter she has in the banking space. Although I've never talked to her about bank profitability, I have repeatedly explained the importance of community banks, how they work and how they are paying a very heavy price for something they didn't cause.

I have been laughed at, been called naive, clueless and stupid when I have said in public and in front of banker groups that she understands community banks and will help us. When I recently told Chairman Hensarling about our "relationship" and that she "promised" to help community banks, he almost laughed out loud. I guess he knew more than I did in January.

While I may not agree with many of her ideas about what's best for the country, I have spread the word wide and far about her support for community banks and the need to get some regulatory relief. I've defended her against scurrilous attacks against her character, her integrity and her purpose. I've been as high on her as possible and sung her praises to the Heavens.

In short, I've believed her and in her when it comes to community banking issues. The day she was sworn into office in January, 2013 I was there. She gave me a big hug (as she always does when we meet), looked me in the eye and said, "You tell all those community bankers out there I'm working hard for them."

And then there was this past Thursday.

The real story about community bank "profitability" is found in its steadily declining ROA and ROE numbers, the banks' increasing efficiency ratios and the steady decline of community bank numbers. It's there in these n

We're losing one community bank a day because of the regulatory avalanche. 34 have disappeared in Oklahoma over the past 4 years, and Texas, Kansas, Missouri and other states show this same pattern.

24 percent of banks in Oklahoma are no longer in the real estate mortgage business. These loans are not available in many Oklahoma communities because the cost and risks that accompany such loans when you only make a few of them in a year are simply too great for the bank and much too great to be passed on to the customer. Because of these costs and risks many bankers have chosen simply to get out of the business.

Our portfolio bill shifts the entire risk of loss to the bank, not the taxpayer. Sen. Warren apparently objects to it because "big banks" will be able to take advantage of making such loans too. So what? Why is making a home loan and assuming all of the risk of non-payment by keeping it in your bank's portfolio a bad thing? It makes more mortgage credit available to consumers. Isn't that the point?

As I said, I'm just sad - not angry or anything remotely related to anger. I'm just disappointed that "politics" in its most basic form has apparently become more important for my "Champion" than helping small banks help their communities.
Posted by rogerbeverage | Sunday, February 15 2015 at 10:12AM ET
I agree with GMahler. She's no fool and didn't get to where she is today without knowing how to use a lot of smoke and mirrors. She has a fundamental disagreement with capitalism in general and will use any means possible to advance her agenda. She will spin this into more populist rhetoric that in actuality is 180 degrees from the truth.
Posted by cooperpop | Friday, February 13 2015 at 4:50PM ET
Liz Warren is acting a bit more like Lizzie Borden from up in MASS...and we know how that went. She talks about better profits for the community banking "industry." Well, I'll bet if you split out the banks less than $1B, which is the majority in number, you'll find lesser profits because they don't have the scale to hire the legion of compliance people necessary to follow the new rules. Arguing against the QM rule seems petty and shows a lack of understanding of handling credit risk. She hates ALL banks, not just the big ones, and would probably work to nationalize the industry. She's scary bad.
Posted by Mr Drysdale123 | Friday, February 13 2015 at 1:53PM ET
I'm offended that she thinks I'm being used by large banks to do their bidding. Like most legislators and regulators who have never done anything but lecture others, she has a fundamental lack of business understanding, and the law of unintended consequences.
Posted by mrauh | Friday, February 13 2015 at 12:20PM ET
Banks - big banks, medium banks, and even little banks - are favorite whipping boys. Senator Warren is no fool, and she is trying to ride that wave of economic disenchantment and populism to national office. Do not underestimate her. The industry needs to do everything it can to convince the little guy that bankers are in their corner.
Posted by GMahler | Friday, February 13 2015 at 10:04AM ET
Someone please copy and paste the first 6 comments here and turn them in as a separate column. Spot on.
Posted by mrsmy2cents@gmail.com | Friday, February 13 2015 at 9:11AM ET
When reality gets in the way of rhetoric, simply ignore reality and double-down on the rhetoric. Ask any borrower whether the DFA rules have helped them or have the rules made it nearly impossible to jump through a lender's every hoop?
Posted by George M | Friday, February 13 2015 at 8:13AM ET
I haven't always agreed with Senator Warren's liberal leanings, but I did think she was fairly intelligent. However, for someone who is supposed to be intelligent she has taken a rather uninformed and less than intelligent stance here. Does she really believe that community banks are unaffected by Dodd Frank, a bill that by itself was thicker than all other previous banking bills combined? Does she really believe that an improving economy with fewer losses and lower loan loss accruals don't have something to do with improving profits? Does she really believe that a low interest rate environment and lower cost of funds don't have something to do with improving profits? Does she really think that consumer's ability to obtain mortgages have not been affected? Mortgages originated at my bank are down by more than 40%? Does she really think that retailers passed the interchange fee reduction on to the consumers? Does she really think that adding an enormous banking bill onto the back of community banks is not significantly more costly to keep up with. Like many politicians Senator Warren sees no problem with continuing to stack regulation upon regulation on top of community banks and complying with a bunch more is no big deal. By the way what's wrong with community banks profits being up 7%? Last time I checked banks are a for profit business and a vibrant community banking industry is good for our communities and our country.
Posted by B Bexley | Friday, February 13 2015 at 8:12AM ET
It would be so much more helpful if Senator Warren, instead of focusing solely on bank profits, would look at how the typical clients of community banks, like small businesses and entrepreneurs, are not getting credit, all because of silly equity requirements that distort the allocation of bank credit. Unfortunately, her constituency might have too many bank bashers for her to do that.

http://subprimeregulations.blogspot.com/2015/02/america-who-do-your-current-bank.html
Posted by Per Kurowski | Friday, February 13 2015 at 7:07AM ET
Senator Warren appears to be using community banks as human shields to guard the Dodd-Frank Act from needed reforms. Community banks' earnings are up because their losses are down, not because business is booming. Every business day another community bank disappears from America, not a sign of industry health.
Posted by WayneAbernathy | Thursday, February 12 2015 at 6:23PM ET
When she claimed to be Native American and accepted $350,000 from Harvard to teach ONE (1) law course, I realized she is the biggest clown and fake in Washington. And that's saying a lot.
Posted by bigdog1 | Thursday, February 12 2015 at 5:04PM ET
Let's go down the list of what Ms. Warren thinks doesn't hurt. Losing interchange income (the exemption just doesn't work), spending twice as much for compliance management, watching the CFPB create innane rules, and losing the ability to decide based on your faith in an individual to make them a loan that will be challenging, but you believe they can buy that house and make it work. Cancer may not hurt much when you are first diagnoised, but you know it will be unpleasant, time consuming and expensive before you recover. That is, if you recover.
Posted by pdf70101862 | Thursday, February 12 2015 at 4:00PM ET
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