The Case for Tiered Regulation

Community banks are the lifeblood of small-town America—and they are slipping away. Each week, it seems, I read that another community bank has been sold or is contemplating a merger because of costly and complex compliance requirements. I doubt this was legislators’ intent when they passed the Dodd-Frank Act in the aftermath of the financial crisis. However, this has been the result. For me, the definition of frustration has been witnessing Congress’ inability to act to save our community financial institutions.

Even more frustrating is that Congress has ignored the logical solution to fixing the problem—tiered regulation—even though it has widespread support from industry leaders and numerous banking associations.

The proposal to vary regulation based on institution size is supported by both community banks and their larger competitors. Wells Fargo (WFC) chairman and chief executive John Stumpf wrote in BankThink last year, “We need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy.”

Many people would not expect tiered regulation to draw support from a big bank executive like Stumpf. But the idea has won backers from a number of disparate camps. In fact, policymakers including Sen. Elizabeth Warren, Federal Reserve Chair Janet Yellen, Federal Reserve Board Governor Daniel Tarullo, Federal Reserve Bank of Kansas City President Esther George and Conference of State Bank Supervisors’ President John Ryan have joined banks of all sizes in calling for a reprieve from the sweeping regulations that have unnecessarily burdened community banks since the crisis. Even Barney Frank, former chairman of the House Financial Services Committee and co-author of the regulatory reform bill, recently said that he would be sympathetic to exempting community banks from specific rules intended for the largest institutions.

Tiered regulation has good reason for generating such broad support. Regulators have churned out 9,800 detailed rules and regulations over last seven years, according to calculations by the Independent Community Bankers of America. Many of these new regulations are in direct response to the meltdown of the financial industry beginning in 2007 and the resulting Dodd-Frank Act. But Main Street institutions did not cause this crisis. The new rules frequently have very little to do with mitigating risks in a community bank. However, they add a tremendous administrative and financial burden to these institutions.

A proposed bill called the Community Lending Enhancement and Regulatory Relief Act, or the CLEAR Relief Act, offers a solid first step toward tiered regulation. The bill contains bipartisan solutions to relieve community banks from certain unnecessary requirements. A few key changes include the following:

• Any mortgage originated and held in portfolio for at least three years by a lender with less than $10 billion in assets would receive “qualified mortgage” status under the Consumer Financial Protection Bureau’s ability-to-repay rules.
• Any first-lien mortgage held by a lender with less than $10 billion in assets would be exempted from any escrow requirements.
• Mortgages under $250,000 would be exempted from the independent appraisal requirement.
• Financial institutions would not be required to provide an annual privacy notice to their customers if their privacy policies have remained unchanged.
• Community banks with less than $10 billion in assets would be exempted from the Sarbanes-Oxley 404(b) internal-controls assessment mandates, which require a publicly held company's auditors to verify management's judgments of their internal controls. The exemption threshold would be adjusted annually to account for any growth in banking assets.
• The Securities and Exchange Commission would be required to conduct a cost-benefit analysis of new or amended accounting principles.

The bill currently has more than 160 co-sponsors consisting of members from both sides of the aisle. Yet its passage appears doubtful. The reasons as to why are unclear. In my own experience, legislators generally agree that something must be done to provide regulatory relief to community banks.
In an era in which bipartisan consensus is extremely rare, I implore Congress to take this opportunity to pass the CLEAR Relief Act.  Passage of this bill would be a tremendous step forward in freeing our nation’s community banks from needless compliance burden and allowing them to once again be the economic engines of their local communities for years to come.

Rob Braswell is president and chief executive of the Community Bankers Association of Georgia and the former banking commissioner for the state of Georgia.