Following the tragedy of 9/11, the government quickly created strict new regulations for airlines and airports, basically making all travelers guilty until proven innocent. Although the vast majority of travelers never consider committing acts of terrorism, the toughened security measures were meant to ensure the few criminals in the group couldn’t hurt everyone else. The result of these regulations was increased airline costs, longer time in security lines, travel inconveniences and lots of bureaucratic red tape. Of course, the upside of those regulations is increased air travel safety and the prevention of loss of life.
Today the financial industry is facing a batch of regulations, much like the airline industry experienced. And some banking leaders in Utah worry that the latest round of large-scale regulations—those aimed at Wall Street—will impose all of the red tape without the benefit of increased financial security.
In July, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act—possibly the most influential set of financial rules since the Great Depression.
However, many Utah bankers believe they’re being unjustly punished for the bad behavior of the greedy banks that were “too big to fail.” Adding up to more than 2,300 pages, the regulations leave banking officials feeling they’ve been found guilty until proven otherwise. Results: increased banking costs, longer time for loan approval and lots of bureaucratic red tape.
Impacting Utah Banks
To say Utah Bankers Association President and CEO Howard Headlee is pessimistic about the regulations is an understatement. Headlee goes so far as to say “[Congress] has sown the seeds of the next financial crisis somewhere in this bill.”
He maintains that local banks had little or no role in the current crisis and, in fact, warned policy makers about the dangerous loans being sold by mortgage companies and predatory lenders. “The regulations are focused directly on banks and credit unions who had no role in the crisis. Congress has just slapped another set of handcuffs on us,” Headlee says. “The 90 percent of us who were doing it right will be subject to the changes because a small group of people weren’t acting prudently.”
One amendment, added to the regulations by Sen. Susan Collins (R. Maine), could force banks holding more than $250 billion in assets to meet stricter capital requirements. As an example, banks would not be able to include “trust-preferred securities” as part of the Tier 1 capital ratios. The inclusion of the amendment caused an uproar with Federal Reserve, Treasury Department and Wall Street officials, who tried to have the amendment removed.
“The focus on capital was really smart. It’s really the issue at hand. But Congress, with this bill, has taken several steps backward in regard to capital,” Headlee says. “I fully expected that amendment to come right back out the next week as a mistake.”
Consumers looking for mortgages will be hit hard by the new regulations. The new mortgage environment will make it tougher to get loan approvals and increase the waiting time for authorization. However, few, if any, interest-only mortgages or dangerous adjustable-rate and negative amortization mortgages will be approved. In fact, the mortgage loan process will become a generic, one-size-fits-all product that will make it hard for consumers who fall outside the income requirements or who don’t have sufficient funds for a down payment.
Back to Basics
Curtis Taylor, president and CEO of Heber Valley Bank, is worried that small banks valued between $100 million and $200 million will not survive the new regulations. With the added levels of bureaucracy and reporting, smaller banks won’t be able to keep up with increased costs. His own bank, valued at $250 million, is right on the edge of safety.
“The advantage that some of us have is that we’ve been around a really long time so we have a strong core depositor base,” Taylor says. “I still believe there’s a big segment of the community who want to come in and sit across from a banker they know and discuss their financial needs.”
His strategy for surviving the regulations is based on an old-fashioned business model that hasn’t failed him yet. Make customers a priority, keep funds in the community and don’t borrow funds.
Looking for a silver lining in the Act, Taylor is glad to see the Federal Deposit Insurance Corporation (FDIC) will keep the insurance amount per depositor at $250,000—up from the $100,000 initiated in the ‘80s.
“American enterprise has been creative and innovative and will continue to be,” Taylor says. “We’ll find a happy medium. We’ll find ways to deal with this successfully.”
What Consumers Can Expect
Although the regulations will take time to understand and implement (up to two years), Headlee says there are three things consumers are guaranteed to encounter once the regulations take effect.
First, consumers can expect higher costs and fees at financial institutions. Banks are required to comply with the new regulations and it will cost more money to be in compliance. With penalties and risks increasing for banks, loan officers will be much more cautious when issuing funds.
Second, in an ironic consequence, some banks will find it easier to merge with a larger bank, creating bigger banks and eliminating the smaller, local banks that have been working hard for two years to make the economy move forward.
Third, with Congress stepping in to create and implement hundreds of regulations, Headlee is concerned this move will promote uncertainty in financial institutions and among consumers—not a healthy environment when the country needs economic recovery and jobs.
“I’m not sure if the Congressmen who voted for this really understood the implications of all this. That’s a little unsettling,” Taylor says. “I’m concerned that the legislators will inadvertently add to the cost of business across the United States.”
Both Headlee and Taylor agree that it will take some time before the repercussions and consequences (both intended and unintended) of the Dodd-Frank Act will be completely understood. And although pessimistic, they both want to see the economy growing with consumer confidence and bank safety.
“We may see different costs, may see different rules, but we can get through this and we need to get through this to get the economy moving forward,” Headlee says. “Banks in Utah are gaining strength. We’re open for business. We need to make loans and get back on our feet.”
*Hear directly from Howard Headlee about the Dodd-Frank Wall Street Reform and Consumer Protection Act in a special article on page 33.