Again and again, when regulators implement a new Dodd-Frank regulation aimed at “Wall Street,” it is Main Street banks and credit unions that are forced to push the panic button. Amazingly, over the last couple weeks, it seems like some of Dodd-Frank’s biggest cheerleaders have suddenly heard Main Street’s alarm.
At House Financial Service Committee hearings this week on implementation of the Volcker Rule and the “qualified mortgage” rule from the Dodd-Frank “financial reform” law enacted in 2010, some of the most liberal members of Congress expressed concern about overreach. While praising most of the Volcker Rule at yesterday’s full-committee hearing, Ranking Member Maxine Waters still emphasized the need for “important relief to community banks..”
She added that “most of the Democratic members of this committee urge regulators to provide an exemption” for community banks holding trust-preferred securities. As I wrote last month, the Volcker Rule is forcing banks far away from Wall Street, such as Zions Bancorp in Utah, to sell these long-held debt securities at hundreds of millions of dollars — per bank — in losses. A letter to regulators signed by nearly all the Democratic members of the House committee noted that “hundreds of community banks” could be negatively impacted by Volcker.
Yet as Committee Chairman Jeb Hensarling pointed out in his opening statement, a witness invited by the Democrats at a previous hearing argued that “only a few banks” would be affected. Volcker isn’t the only new Dodd-Frank rule that hurts more than “a few” banks and hits them in locations far away from Wall Street.
When the Consumer Financial Protection Bureau unveiled its final “qualified mortgage” regulations last Friday, director Richard Cordray claimed it was “an erroneous myth that these new measures will bog people down in red tape.” The measures, he said, “are exactly what good community banks and credit unions have been doing for many, many years.”
Yet both a credit union leader and community banker refuted Cordray at a hearing the following Tuesday at the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. Daniel Weickenand, CEO of Orion Federal Credit Union in Memphis, Tenn., testified that “the breadth and pace of CFPB rulemaking is troublesome as the unprecedented new compliance burden placed on credit unions has been immense.”
Speaking on behalf of the National Association of Federal Credit Unions, Weickenand explained that under the new mortgage regulations, “a number of mortgage products sought by credit union members, and offered by credit unions, may disappear from the market.” He called for “Congressional action [that] would help open the spigot of mortgage lending that has been now shut off for a number of Americans,” and pointed to some bipartisan bills that would grant such regulatory relief.
Similarly Jack Hartings, a community banker in Ohio testifying on behalf of the Independent Community Bankers of America, stated,”There is no question that the new Qualified Mortgage (QM) rule will adversely impact my mortgage lending.” In fact, Jim Purcell, CEO of the State National Bank of Big Spring in rural west Texas that is co-plaintiff in CEI’s constitutional challenge to Dodd-Frank and the CFPB, has said that the CFPB’s mortgage regulations have already forced his bank to eliminate many types of stable mortgages.
Perhaps the testimony most revealing of the sea change even among supporters of Dodd-Frank came from Simon Johnson. Johnson. Johnson, a professor at the MIT Sloan School of Management and member of the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee, had been a cheerleader for the Volcker Rule and nearly every Dodd-Frank provision. Nevertheless, at the hearing on Wednesday, Johnson testified that the final Volcker Rule “imposes an additional cost on community banks” and called on regulators to “quickly adjust the rule to remove this requirement for community banks.”
Johnson’s arguments in his testimony and his new Bloomberg column that calls for exempting community banks from many Dodd-Frank rules will be examined in a future OpenMarket post. While CEI has supported many broad regulatory exemptions, they can be tricky and don’t always lessen the impact of regulations as much as advertised, since financial institutions and all businesses are interconnected. Nevertheless, a recognition by Johnson, Maxine Waters and other progressives of some of Dodd-Frank’s negative impact far away from Wall Street is most welcome.