The Edmond Sun

December 23, 2013

Dodd-Frank reform law is changing how banks do business in Oklahoma

Uncertain forecast looms as community banks dwindle, consolidate, face new rules and regulations throughout the U.S.

Special to The Sun

OKLA. CITY — Oklahomans face paying more for loans of all types, including mortgages, and a harder time qualifying for them with the start of new federal regulations in January, state and banking officials say.

Most of the new regulations from the Consumer Financial Protection Bureau, implementing provisions of the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, will take effect Jan. 10, the Federal Deposit Insurance Corporation (FDIC) recently announced.

While Dodd-Frank’s financial reforms were primarily intended to ensure lenders don’t encourage consumers to take out mortgages they can’t repay — along with other protections — not all Oklahomans are convinced that Dodd-Frank’s benefits outweigh its heavy-handed regulatory process problems.

Oklahoma Attorney General Scott Pruitt said he does not believe most people are “equally attuned” to the law’s continuing negative economic impact on the decisions Oklahomans make when trying to get new loans for homes, cars and lines of credit.

“We know that because of Dodd-Frank, banks are having to spend more money on regulatory compliance than in the past,” Pruitt said. “It is already affecting people’s ability to access money to buy things in their hometowns.”

Pruitt describes the regulatory climate for community banks as “adverse and punitive,” although Oklahoma’s community banks did not cause the economic crisis of 2008-2009.

“I believe the status of community banks in 2014 will be about the same as it is now — they’re unsure about the regulatory climate, what their future holds and their ability to do business and do what they’ve always done, which is to provide money to the community,” he said.

It isn’t just the future of community banks that concerns Pruitt. He describes the Dodd-Frank law as “unconstitutional” because it gives too much power to the executive branch, the secretary of the treasury and goes against the check and balances inherent in the Constitution.

In September 2012, Oklahoma led South Carolina and other states’ attorneys general in a lawsuit against the federal government that was originally filed by the State National Bank of Big Spring (Texas) in June 2012.

By February 2013, eight more states had jumped on board to challenge Dodd-Frank’s provisions.

Although the case was dismissed in a federal court Aug. 2, a notice of appeal was filed the same day. Pruitt said he and the other attorneys general are asking for a schedule on when they can file their briefs and when oral arguments will be set. He hopes for a positive outcome in 2014.

“We’ll continue to fight hard because it matters to our economic future,” he said.

Roger Beverage, president and CEO of the Oklahoma Bankers Association, said the new mortgage lending regulations will probably negatively impact state banks and their ability to serve customers.

“There are about 3,000 pages of regulations that go into effect next month,” Beverage said. “It isn’t just the length of it, it is the complexity in the way those rules were written. If you make a mistake, you risk litigation.

“The one issue that keeps me awake at night is if Congress and Washington D.C. are going to do something to mess up the way banks operate in Oklahoma today.”

He said such challenges for the banking industry will mean that consumers will have to pay more for loans themselves or they won’t be able to get loans.

“There is an element of complexity and cost that will ultimately be borne by the consumer because more rules and regulations mean it costs the provider to follow through and the customer will end up paying more,” Beverage said. “So, that’s something I see continuing for all banks and credit unions. The cost is greater for small banking institutions because they have fewer resources.”

According to the “FDIC Community Banking Study,” a multidecade trend has reduced the number of FDIC-insured banks from nearly 18,000 to 7,357. It states that the number of banks with assets of less than $25 million declined by 96 percent while the largest banks with assets of greater than $10 billion grew “elevenfold in size over this period, raising their share of industry assets from 27 percent in 1984 to 80 percent in 2011.”

Beverage describes Oklahoma as a traditional community bank state with 229 FDIC-insured financial institutions, but 100 have less than $100 million in total assets and are considered smaller banking institutions.

“Many of these community banks are going to find it increasingly more difficult to remain in compliance with Dodd-Frank,” he said. “Big banks will continue to do the best they can to take care of their customers, but it will become increasingly more expensive. Our banks didn’t cause it (the recession), but we’re paying a huge price for the abuse of others.

“The reality of the unintended consequences means that people who have applied for credit lately will find it much more difficult to get or it is much more likely they will not get it under the newly revised rules and regulations. The message I’m trying to share is that people need to understand this results in bad things for consumers. It’s just nuts and that’s what we have to deal with.”

Despite all the unintended changes resulting from Dodd-Frank, Beverage said Oklahoma banks have done a good job of maintaining profitability and didn’t get caught up in the “speculation and crazy lending that went on during the first decade of the century.”

“I believe there will be further consolidation and the number of banks will get smaller,” he said. “Those that survive will get bigger because the larger the size of the bank, there is less of the problem. This just means there will be fewer opportunities for customers to get credit. Still, we’re blessed in Oklahoma with very strong and well-capitalized banks and they adapt pretty well.”

Jill Castilla, a fourth-generation banker and Executive Vice President and Chief Operating and Chief Credit Officer of Citizens Bank of Edmond, said many banks are scrambling to comply with the regulations coming in January.

“We’ve incorporated the new mortgage regulations already into our regular practices; however, more consumer-related regulatory changes are expected,” Castilla said. “In some rural areas, it may become more difficult for consumers to access financing if community banks decide to exit home mortgage lending. While some community banks will remove themselves from consumer real estate, we plan on growing our consumer real estate portfolio.”

She has high praise for Oklahoma Banking Commissioner Mick Thompson and other state leaders for being very vocal on state and federal levels about how federal legislation is impacting community banks.

“Our local delegation and almost everyone on the Hill sees community banks as the good guys, but in an attempt to address those who were responsible (for the economic downturn), community banks are roped into aggressive banking regulation and it becomes more burdensome for us,” Castilla said. “The regulations mildly hurt the bad guys they were intended for and disproportionately impact small community banks.”

She said recent surveys show that merger activity is expected to accelerate nationwide, partially due to Dodd-Frank challenges ahead and other issues such as succession planning with aging management.

“Hopefully, we’ll have young bankers who will be willing to go back to leadership roles in smaller, rural towns,” Castilla said. “I can hire very capable staff because of the location of our bank. A lot of smaller, rural banks don’t have the access to expertise and some just give up on the lending that is most impacted by increased regulations. Community banks are the fabric of the community and it is damaging for a community to lose access to lending at their bank.”

Citizens Bank of Edmond has been in business since 1901, has approximately 70 employees and $250 million in assets. The bank sponsors a large number of schools and other activities in Edmond and surrounding communities. The bank also encourages its employees to spend money in the local community.

“Our employees own one-third of the bank, my family owns one-third and the people in the community own stock that has been passed down for generations,” Castilla said. “Edmond is our hometown and we want the businesses around us to survive and thrive. Community bankers are scrappy and nimble and have been resilient through booms and busts.

“It would be a travesty for regulations to threaten their survival.”