WASHINGTON — It may be a while before the full impact of post-recession bank reform reaches small financial institutions across the country, but one thing is certain: compliance with the Dodd-Frank law demands resources — both time and money — to navigate the new regulatory landscape.
Small financial institutions do not have teams of attorneys and consultants to work on compliance and often drain resources that could have gone toward working with customers. That was the picture that emerged in the testimony of experts appearing Tuesday at a hearing of the House Small Business subcommittee on investigations, oversight and regulations.
Assuring compliance “takes an inordinate amount of time away from what we should be doing,” said B. Doyle Mitchell Jr., president and CEO of Washington-based Industrial Bank.
“Community banks should be exempt from Dodd-Frank overall,” Mitchell said. He estimated that his employees already devote an additional 10 percent of their workdays to regulatory issues, such as ensuring mortgage applications meet the strict requirements determined by the Consumer Financial Protection Bureau.
Similarly, Linda Sweet, president and CEO of Sacramento-based Big Valley Federal Credit Union, said her organization spends about $50,000 on compliance consultants and legal advice — money that could have gone back to customers as, for example, lower interest rates or dividend payouts.
“Our legal staff has a complete segment of their practice devoted to dealing with compliance,” said Sweet. Such specialties were not in as much demand when she started with the company 25 years ago.
Paul Merski, ICBA executive vice president and chief economist, said community banks are small businesses, and the brunt of compliance costs cut into their bottom line.
“The net interest margin for banks is very thin,” he said in an interview. “Each additional cost of compliance really cuts into their ability to remain profitable. There’s not much slack to pick up those extra costs.”
On the other hand, said Georgetown University Law Center Professor Adam Levitin, many portions of Dodd-Frank have not gone into effect yet and it is too early to assess the damage, if any, the law causes to small banks.
Furthermore, according to Levitin, there is insufficient evidence to make the case for a compliance burden.
“There is no hard data about extent of the impact of compliance costs,” he said.
Mitchell, who testified on behalf of the Independent Community Bankers Association, urged policymakers to pass the Community Lending Enhancement and Regulatory Relief Act, which would loosen the grip of many Dodd-Frank reforms on small financial institutions.
“Small financial institutions were not the cause of the recent financial calamity,” said committee ranking member Yvette Clarke, D-NY.