Tired of Regulatory Change? – Stay Tuned!

It appears to be inevitable that the financial regulatory reform bill will pass.  The House passed the bill on June 30, by a vote of 237-192.  The Senate appears to have the necessary votes to pass their version of the bill – perhaps today.  President Obama said he plans to sign the bill next week.

The New York Times reported the following summary today:

“To reduce the odds of a future crisis, the Democratic plans would take three basic steps. First, regulators would receive more authority to monitor everything from mortgages to complex securities. This is meant to keep future financial time bombs, like the no-documentation loans and collateralized debt obligations of the past decade, from becoming rife. Second, financial firms would be forced to reduce the debt they take on and to hold more capital in reserve. This is the equivalent of requiring home buyers to make larger down payments: more capital will give firms a bigger cushion when investments start to go bad. Finally, if that cushion proves insufficient, the government would be allowed to seize a collapsing financial firm, much as it can already do with a traditional bank. Regulators would then keep the firm operating long enough to prevent a panic and slowly sell off its pieces.”

But there’s more . . . lots more.  The new legislation established a new regulatory agency – the Consumer Financial Protection Bureau (CFPB).  The sole mission of the CFPB is to protect consumers.  From whom?  Bankers!  The CFPB will serve as a “cop” according to the Consumer Federation of America.  You read that right.  In the past, consumer regulations were meant to inform intelligent consumers about a transaction or account.  The times have changed.  Now the government assumes consumers are ignorant and they need protection – not just information.

According to the Baltimore Business Journal, these new requirements will strike small, community banks hard.  It will add many more regulatory compliance requirements to an already heavy burden.

Now, bankers say, they are facing as many as 30 new regulations.

Among the changes: They will have to provide regulators with reams of new information about loans to small businesses and other customer transactions. They will be required to disclose more information to consumers about mortgages and other loans. And banks will see limits on how much they can charge retailers for processing debit card transactions, reducing a significant revenue stream.

“It will be a new world for community banks,” said Kathleen Murphy, CEO of the Maryland State Bankers Association. The new rules will be on top of 50 regulations already imposed on banks in the past two years, bankers say.

The burden of complying with a new financial regulatory reform bill could push some of the nation’s community banks to merge or sell to larger institutions, the head of the Maryland State Bankers Association said.  Ouch!

This new bill weighs in at over 2,500 pages.  (Here’s an 11 page summary of the Senate’s version of the bill.)  It promises to most changes to our nation’s banking system since the New Deal in the 1930s.  And it comes at a tough time for community banks.

My only advice is to hang in there and be ready for change.  In fact, we’re suggesting a new title for Compliance Officers: “Change Officers”.

David Dickinson

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