Having heard industry trade groups describe the challenges they are facing in a heightened regulatory environment, members of the House Financial Services Committee entertained testimony last week from federal and state regulators about the measures they are taking to reduce the negative impact of new rules and regulations on small, community-based banks and lending institutions.
On April 15, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit conducted a hearing to provide an overview of the current regulatory climate and how it affects the ability of community financial institutions to provide financial services or products to consumers. A week later on April 23, the subcommittee reconvened to hear testimony from regulators on the efforts they are taking to tailor regulations, policies and supervisory activities to the particular risks of community banking organizations, as well as how they communicate new requirements to these entities and coordinate with other agencies.
Maryann Hunter, deputy director of the Division of Banking Supervision and Regulation at the Federal Reserve Board, said the Fed scales supervisory rules and guidance “in a way that applies the most stringent requirements to the largest, most complex banking organizations that pose the greatest risk to the financial system.”
“We recognize that the cost of compliance can be disproportionally greater on smaller institutions versus larger institutions, as community banks have fewer staff available to help comply with additional regulations,” Hunter testified. “Therefore, we carefully consider the need to establish new requirements to safeguard the safety and soundness of the financial system against the burden on banks to implement new requirements.”
Along these lines, the Fed adopted a new consumer compliance examination framework for community banks in January 2014, Hunter said. The program bases examination intensity on an individual community bank’s risk profile, weighed against the effectiveness of the bank’s compliance controls.
In addition, the Fed revised its consumer compliance examination frequency policy to lengthen the time frame between on-site consumer compliance and Community Reinvestment Act examinations for many community banks with less than $1 billion in total consolidated assets.
“We have also been investigating ways that would allow for more supervisory activities to be conducted off-site, which can improve efficiency and reduce burden on community banks,” Hunter said.
Doreen R. Eberley, director of the division of risk-management supervision at the Federal Deposit Insurance Corp. (FDIC), said the FDIC is “keenly aware of the impact that its regulatory requirements can have on smaller institutions, which operate with fewer staff and other resources than their larger counterparts.”
“As the primary federal regulator for the majority of community banks, the FDIC pays particular attention to the impact its regulations may have on smaller and rural institutions that serve areas that otherwise would not have access to banking services, and the input community bankers provide regarding such impact,” Eberley testified.
The FDIC ensures that every examiner is trained as a community bank examiner through a “rigorous,” four-year program that teaches examination concepts, policies and procedures, Eberley said.
“As a result, on the way to becoming commissioned examiners, they gain a thorough understanding of community banks. These examiners are knowledgeable and experienced in local issues of importance to community bankers and serve as a first-line resource to bankers regarding supervisory expectations,” she said.
Toney Bland, senior deputy Comptroller at the Office of the Comptroller of Currency (OCC), said the OCC has built its supervision around local field offices where a local Assistant Deputy Comptroller (ADC) is charged with supervising a portfolio of community banks.
“Each ADC reports up to a District Deputy Comptroller who, in turn, reports to me,” Bland testified. “Our community bank examiners are located in over 60 communities throughout the United States, close to the banks they supervise.”
Of course, the most anticipated testimony came from the Consumer Financial Protection Bureau (CFPB), which is gearing up for the implementation of the new TILA-RESPA Integrated Disclosures (TRID) rule on Aug. 1. The CFPB has been under fire for imposing what many consider to be the most sweeping regulatory change ever made to the mortgage transaction process, and many real estate and settlement service providers are urging the bureau to either postpone the implementation deadline, or at a minimum, hold all industry players harmless for a few months with a lenient enforcement period.
So far, however, the CFPB has not acquiesced to these suggestions. David Silberman, associate director of Research, Markets and Regulations at the CFPB, stressed that the bureau firmly believes that “the responsible lending that is the hallmark of community banks and credit unions did not cause the financial crisis.”
“These institutions play a vital role in many communities and in our economy. Their traditional model of relationship lending has been beneficial for many people, especially in rural areas and small towns across this country,” Silberman said. “The bureau is committed to ensuring our rules and regulations are tailored and balanced, so that as we fulfill our mandate to protect consumers, we are mindful of the impact of compliance on financial institutions and responsive to their concerns.”
The CFPB, Silberman said, engages in “rigorous evaluation” of the effects of proposed and existing regulations on consumers and financial institutions throughout its rulemaking process, and maintains steady dialogue with consumer advocates and industry participants.
To support the implementation of and industry compliance with its rules, the bureau has published plain-language compliance guides and video presentations summarizing them, and it has actively engaged in discussions with industry about ways to achieve compliance, he said.
Since the CFPB finalized the TRID rule in November 2013, it has made a point “to engage directly and intensively with financial institutions and vendors through a formal regulatory implementation project, including focused efforts on the needs of smaller institutions,” Silberman said.
Summarizing the CFPB’s TRID implementation program to date, Silberman noted that the bureau’s efforts have included interagency coordination; the publication of a “readiness guide,” plain-language guides, checklists and other resources; the publication of a few minor amendments to the rule in response to industry requests; several free webinars to address frequently asked questions; and unofficial oral guidance from staff members in response to more than 600 regulatory interpretation inquiries.
“The bureau’s work supporting implementation of the integrated disclosure rule does not end with the effective date of the Integrated Disclosure rule,” Silberman said. “We expect to continue working with industry, consumers and other stakeholders to answer questions, provide guidance and evaluate any issues industry and consumers experience as the integrated disclosure rule is implemented.”
Providing the state regulator perspective was Charles G. Cooper, commissioner of the Texas Department of Banking, who said community banks benefit most when federal and state agencies work together to implement new rules and regulations. But finding a “right-sized” regulatory balance does not necessarily mean fewer regulations, but rather that regulations are appropriately targeted, properly balanced and prudently implemented, Cooper said.
“Establishing a new definitional approach for identifying community banks is essential to creating a regulatory framework that supports the community bank relationship lending model,” Cooper testified. “Providing legal authority to state regulators to process criminal background checks through the Nationwide Multi-State Licensing System and Registry for all non-depository financial service providers is a necessary step toward creating a dynamic, effective regulatory system that works well for non-depository institutions and their consumers. And, in order for the dual-banking system to maintain its strategic advantages, state and federal regulators must remain committed to a culture of collaboration.”