WASHINGTON — Credit unions and community bankers took to the Senate on Tuesday to urge policymakers to provide regulatory relief, but it appears any significant change is a long way off.
At a Senate Banking Committee hearing, regulators indicated they were open to crafting new exemptions for smaller institutions, but pushed back against persistent complaints that credit unions and community banks are being held to the same standards as the largest institutions.
Credit unions continued to warn, however, that the continuing build-up of regulations is threatening to drive many out of business.
"Many credit unions are saying enough is enough when it comes to the over-regulation," said Linda McFadden, president and chief executive of $154 million XCEL Federal Credit Union in Bloomfield, N.J., on behalf of the National Association of Federal Credit Unions. "While NAFCU and its member credit unions take safety and soundness extremely seriously, the regulatory pendulum post-crisis has swung too far in the environment of over-regulation that threatens to stifle economic growth."
Below are two takeaways from the hearing, which covered specific problems with Dodd-Frank measures, as well as the cumulative impact of increased regulation.
Officials Push Back on Concerns About Regulatory Exam 'Creep'
Sen. Mark Warner, D-Va., raised concerns that small institutions end up being forced to comply with additional measures even when they are officially exempted from the provisions.
"One of the things that I constantly hear is that even when you put the exemption in place for a smaller institution what ends up being kind of an industry-wide or regulatory-wide best practice that may apply to the larger institution in effect trickles down into the smaller institution," he said. "How do we guard against this examination creep, which is clearly not the legislative intent, yet still ends up happening under the guise of best practices?"
But regulators said that they work hard to avoid unfair or inappropriate treatment during the exams process.
"Where there is a bright line, it needs to be observed. We've tried to make it very, very clear," said Doreen Eberley, director of risk management supervision at the Federal Deposit Insurance Corp. "Part of it's outside of our control. There are outsiders that talk about the worry or regulatory creep, and put a concern, really, in the institutions' minds that this going to happen to them and they need to be prepared."
Maryann Hunter, deputy director of the division of banking supervision and regulation at the Fed, said that the agency is careful to monitor how new regulations are being implemented across the banking system.
"One of the things that the staff here does is look at what we call a horizontal review. So, if we put in place a practice, especially if we're hearing from bankers that this trickle-down effect is happening, we will look across examinations across all 12 districts to see how much variation are we seeing in how the standards are being applied," she said. "If we're seeing a high level of variation or seeing some outliers, we're then going back and retraining examiners or communicating better with bankers about expectations, as well as our own staff so that we can narrow that range of variability."
She added that the Fed is looking at separate curriculums for large and small bank examiners "so we can take out anything that might confuse where these boundaries are, in terms of what's expected of community banks."
Larry Fazio, the director of examination and insurance for the National Credit Union Administration, touted the agency's streamlined exam plan for the credit unions below $10 million of assets.
"Before the new program, NCUA had spent as much as 100 exam hours in credit unions of this asset size," he said. "This decreased examination burden reflects a reduced scope aimed at focusing on the most pertinent areas of risk in small credit
unions-lending, recordkeeping, and internal control functions."
FDIC Raises Questions About Collins Fix Additions in House
The House is poised to vote as soon as this evening on legislation to clarify the Fed's mandate to establish capital standards for insurers, known as the Collins amendment of the Dodd-Frank Act. The measure sailed through the Senate earlier this year, following requests from the Fed for the fix.
But House leaders have added several additional provisions to the bill, including exemptions for collateralized loan obligations under the Volcker Rule and for end-users from margin requirements under swaps rules. A third measure alters the calculation for certain "points and fees" under the Consumer Financial Protection Bureau's qualified mortgage rule by excluding some costs.
Sen. Sherrod Brown, D-Ohio, a sponsor of the Collins fix, pressed FDIC's Eberley on the FDIC's views about the provisions, and later called the added measures "extraneous." Even if the bill passes the House, it's not clear the Senate would approve the new version of the legislation.
Eberley said that the agency does not have an official position on the "points and fees" bill, but warned that some of its effects remain unknown.
"I think it's something that you need to study the impact of what it would do," she said, noting that it could potentially raise consumer costs and create conflicts of interest for lenders.
She also said that the CLO exemption under the Volcker Rule is no longer necessary, and that she would be "cautious" about the proposal because of "potential unintended consequences."
"I don't think it's necessary at this point," she added. "I think that the regulatory process has provided the relief, if you will. So new collateralized loan obligations that are being underwritten are conforming to the rule of the exemption that already exists in the rule for a CLO that's composed solely of loans. Existing obligations that are outstanding largely mature before the end of the conformance period, as the Fed has described it."
