Community lenders this week asked lawmakers to grant some regulatory relief, arguing the Dodd-Frank Act and other supervisory actions are pushing them to the brink of extinction.
Testifying before the House Financial Institutions Subcommittee, bankers and credit unions said their compliance burden is too high.
"Compliance is almost all I do now," testified Samuel Vallandingham, senior vice president of First State Bank in West Virginia, on behalf of the Independent Community Bankers of America. "Many days I feel like I'm not a banker anymore."
He was seconded by William Grant, chairman of First United Bank & Trust in West Virginia.
"While community banks pride themselves in being flexible in meeting any challenge, there is a tipping point beyond which community banks will find it impossible to compete," said Grant, who testified on behalf of the American Bankers Association. "Over the last decade, the regulatory burden has multiplied tenfold. And not surprisingly, more than 1,500 community banks have disappeared."
Bankers received a largely sympathetic hearing from lawmakers on both sides of the aisle. While Republicans need no urging to blast Dodd-Frank, even Democratic supporters of the law acknowledged that small banks are facing a challenging environment.
"I'm a strong supporter of Dodd-Frank. I'm also a strong supporter of small financial institutions because in so many communities that's all they have," said Democratic Rep. David Scott. "And so as we move forward we have to, I think, dance with sort of a delicate balance here."
But the industry's arguments were challenged by Adam Levitin, a Georgetown law professor who studies financial regulation. He said that while there are regulations that could be eliminated, most of the Dodd-Frank Act does not apply to small banks.
He also argued that forces larger than overregulation—including the advantages large banks get from their geographic reach and lower cost of funding—are driving the consolidation in the industry.
"Focusing on community banks' regulatory burdens is nibbling around the edges," Levitin said. "It will not change the fundamental position of the community banking business."
Scott, a Georgia Democrat, noted that financial institutions with under $10 billion in assets were exempted from numerous requirements under Dodd-Frank. And he pressed the industry witnesses to provide specific examples of new burdens imposed on small banks by the two-year-old law.
In response, the industry witnesses cited a provision that they say could require small banks to register as municipal advisors with the Securities and Exchange Commission, as well as new mortgage rules, including the law's requirement that banks retain some of the risk when they securitize loans.
"Ultimately, if I were to have to retain a portion of those credits, it would limit how many loans I could make," Vallandingham said. "My institution's very active in mortgage lending. We service over 6,000 loans, and it certainly would impede our ability to serve that market."
The small bank witnesses added that the problem is not just Dodd-Frank, but the cumulative impact of rules implemented over many years, many of which have outlived their usefulness.
