Why Community Banks Keep Throwing in the Towel

The First National Bank of Wyoming has been doing business in Delaware for more than 100 years. The $307 million-asset bank (named after the town where it is based, not the Western state) recently announced that it will be acquired by WSFS Bank, Delaware’s largest indigenous bank. In an article about the deal recently appearing in the Wilmington News Journal, the President and CEO of FNB Wyoming, Joseph Chippie, cited the cost of complying with government regulations.

"Larger banks," the article noted, "can hire more lawyers and accountants to ensure all regulations are being followed, without making a dent in their bottom line, but it is a big expense for banks with fewer than 100 employees."

I would argue that the cost of compliance makes a dent in the bottom line of all banks, regardless of size.

In an annual letter to shareholders last year, M&T Chairman and CEO Robert Wilmers reported that the cost of regulatory compliance for his bank (current asset size: $83 billion) had nearly doubled since 2003 to $95.1 million in 2011.

I have been dealing with banking laws and regulations for 45 years and have witnessed firsthand the exponential growth in federal regulation of banks. The sheer quantity of the regulations is bad enough, but the complexity often confuses banks and their customers and increases the cost of compliance.

To illustrate the depth of the problem, here are some of the laws and regulations that come into play in a fairly common transaction, a consumer residential mortgage. Some of those quoted also apply to other types of banking transactions. All of them predate the Dodd-Frank Act of 2010, which has only made things worse.

Pursuant to the Bank Secrecy Act, banks must have in place a customer identification program. The program must include elements specified in the regulations. By the way, the manual used by bank examiners to test compliance with the Act is more than 300 pages in length.

The FDIC Act requires the federal regulators to promulgate standards for real estate lending. They have issued regulations implementing this requirement and bank boards are required to approve policies that, at a minimum, incorporate these standards.

Under a federal law known as the Secure and Fair Enforcement for Mortgage Licensing Act, or Safe Act, bank personnel involved in the origination of residential mortgage loans must be licensed and banks are required to have in place procedures necessary to ensure compliance with the act.

Where the collateral for a loan consists of a building, pursuant to the Flood Disaster Protection Act and implementing regulations of the banking agencies, inquiry must be made to FEMA as to whether the property is located in a flood plain. This inquiry must be made in all cases – even if the subject property is located high on a hill. Depending on the result of the inquiry, the bank must take certain steps.

The Truth-in-Lending Act and Regulation Z impose a number of requirements specific to consumer mortgage transactions. In its entirety, together with official commentary and illustrative appendices, the regulation consumes 476 pages in the U.S. Government Printing Office’s rendition of it in title 12 of the Code of Federal Regulations. (This number will increase as more regulations mandated by Dodd-Frank Act are finalized.)

The Equal Credit Opportunity Act and Regulation B apply to all loans, including commercial loans, but contain some provisions that apply only to real estate secured consumer loans.

The Fair Housing Act also applies, as does the Home Mortgage Disclosure Act and Regulation C. Then there is The Real Estate Settlement Procedures Act and Regulation X. The Homeowners Equity Protection Act Protection Act applies to mortgages with higher rates of interest and if private mortgage insurance is required, the Home Owners Protection Act comes into play.

Is it any wonder that consumers stagger out of mortgage loan closings with an arm full of disclosures and other documents that they have not read and, in most cases, have neither the time nor the inclination to read them?

Now that we have a new federal agency devoted to providing consumer financial protections, we can be sure that the flow of new regulations will continue unabated, causing more community banks to throw in the towel.

William M. Aukamp is of counsel to the Wilmington firm of Werb & Sullivan.