Legislation currently before Congress has the potential to bolster community banks and the customers they serve, doing more than anything else to help community banks still struggling with the precipitous drop in real estate values.
This legislation would provide relief for real estate-related assets by allowing community banks to amortize losses on commercial real estate loans and "other real estate owned" (repossessed properties) over 10 years for regulatory capital purposes. Relief from fair value accounting is essential for community banks to survive, and ultimately thrive in today's economic climate.
The Communities First Act was introduced in the House in 2011 and provides a broad range of much-needed regulatory and tax relief for community banks and their customers. The current mark-to-market rules under U.S. generally accepted accounting principles for impaired loans and OREO, which require the immediate recognition of losses, hurts a bank's regulatory capital and related ratios. A decoupling of the U.S. GAAP from regulatory accounting practices will allow community banks to absorb real estate losses over a longer time horizon, bolster their required capital levels and ratios, allow them to work with borrowers without being pressured to foreclose, resume lending in the communities and reclaim their historical role as an important element of our country's economic engine.
Congress authorized a similar program in the 1980s for agriculture-based banks, which proved to be extremely successful. Reviews by the Federal Deposit Insurance Corp. show this program enabled more than 83% of the banks that participated to survive, resulting in more quality credit in rural areas, small towns and suburbs across America.
Regulatory, tax and paperwork requirements disproportionately burden community banks, which lack the scale of larger institutions over which to spread legal and compliance costs. The expense of over-regulation makes it harder for community banks to attract capital and to continue serving the needs of their customers. An amortization of such losses would go a long way toward stabilizing many community banks, ultimately allowing them to increase lending, create jobs, encourage individual savings and stimulate the economy. Reducing unnecessary and overly burdensome tax and regulatory rules on community banks is an effective means to boost economic activity.
This legislation is a critical component of the community banking agenda before Congress. It has the potential to stimulate a struggling community banking industry and deserves more national recognition. Consumers and small businesses need lending options that are currently not available to them; the Communities First Act provides a clear avenue to achieving that goal.
Carolyn Brown is the president and CEO of the Community Bankers Association of Georgia.