COLUMBIA, S.C. (Legal Newsline) - More provisions of the Dodd-Frank Act go into effect for mortgage lenders Jan. 21. And, like other regulations stemming from the legislation intended to prevent another financial crisis, small community banks and credit unions are bracing for their impact.
"Every dollar a bank has to spend on an attorney or regulatory compliance officer is ten less dollars it can give to a young couple trying to buy their first home, or a business owner trying to get a small business loan," said South Carolina Attorney General Alan Wilson. "It prevents you from getting money to the people who need it the most"
The new mortgage provisions about to go into effect add new layers of regulation to community banks which make mortgage loans: they'll have to issue periodic disclosures to debtors regarding their mortgage loans, and impose various requirements regarding the imposition and cancellation of force-placed hazard insurance, handling of payoff amount requests, and other topics related to mortgage servicing; revisions to regulations that govern the tying of compensation of mortgage loan originators to the types of loans they originate; and new rules governing real estate appraisals, including the establishment of nationwide minimum standards for registered appraisal management companies, and ensuring the independence of these companies from the mortgage lender.
"When I talk to people about the impact of Dodd-Frank, the first thing I say is it's unconstitutional - the way it was passed, the way it was implemented, and even some of the provisions in it," Wilson said. "But before you get to the constitutional aspects of it, you have to look at the economic repercussions or consequences of Dodd-Frank. Forget the policy; you look at how it affects real people. What it does is it costs small community banks, banks people deal with in the real world."
Community banks and financial system observers have long cried out that the Dodd-Frank Act is imposing regulations that are becoming increasingly unfair for smaller institutions.
"Dodd-Frank takes a concept of 'too big to fail,' that we all learned from the 2008 financial crisis that basically says if a bank is too big to fail, the government should stand it up," Wilson said. "(It) enshrines the concept that some banks are too big to fail; it gives them a legal status, a 'most favored nation' status. What happens to investors, who normally would invest in smaller institutions, they look at those that have the tacit backing of the federal government and they say, 'I'm going to put my money in the too-big-to-fail bank.'"
With decreased outside investment, and increased regulatory costs, many small community banks are being faced with difficult choices, the attorney general said.
"What it does is chase scarce resources and capital from the smaller community banks and chases it to the big banks on Wall Street," he said. "It causes local community banks to either shutter their doors or to consolidate with other banks and become larger, and it destroys the small-town community bank."
The Credit Union National Association (CUNA) has also raised objections to the Dodd-Frank Act and the Consumer Financial Protection Bureau's interpretation of its provisions.
"The most significant impact of the legislation on credit unions was and is the creation/imposition of the Consumer Financial Protection Bureau," said Pat Keefe, spokesperson for the credit union organization. "While only credit unions with more than $10 billion in assets are directly supervised by the agency (and that totals four credit unions), credit unions are subject to CFPB rules, which are enforced by a credit unions' prudential regulator ... and state regulatory agencies for state-chartered credit unions."
He said in an email that credit unions have watched as more and more regulations have been put in place, negatively impacting finances of institutions which are not-for-profit entities.
"Since its creation, CFPB has been promulgating a tide of regulations - most of which have been mandated by statute," Keefe said. "From our point of view, many of these are unnecessary for credit unions - which is a point we repeatedly make to the agency.
Because of the non-for-profit business structure, credit unions should not be hamstringed by regulatory strictures mandated under Dodd-Frank, he said.
"CUNA opposes provisions not required by statute and, in general, opposes many of the provisions with regard to servicing overall," Keefe said, " because credit unions do not seek to mislead their members or take advantage of them in the mortgage servicing process, and credit unions already comply with a number of regulations designed to protect consumers from abuses in this area."
And yet, the credit unions find themselves being painted with the same brush as the sub-prime mortgage shops that they feel have a greater responsibility in causing the 2006 mortgage meltdown and 2008 crisis.
In a letter to the CFPB, Jared Ihrig, CUNA Senior Assistant General Counsel wrote, "Key federal policymakers have assured credit unions that their business model of putting consumers first would not be jeopardized and abuses in the financial marketplace would be regulated to the extent community banks and credit unions already are. Credit unions worked hard throughout the financial crisis as they continue to do today to meet their members' needs for loans and attractive savings products. They should not now be punished, needlessly, through additional regulations that should be reserved for those who intentionally took advantage of consumers in the mortgage servicing process."
The American Bankers Association is also closely watching the implementation of the Dodd-Frank Act.
In a publication for its members, the ABA writes, "This legislation represents an unprecedented rewrite of the legal regime covering mortgage finance issues. The reforms are so comprehensive that they will require full-scale transformation of mortgage lending systems and processes. Some banks will evaluate whether to continue to make mortgages, because these changes will require burdensome implementation efforts and increased regulatory guidance from federal agencies."
Both the industry groups and outside observers agree what isn't known about the Dodd Frank Act will continue to impact the financial industry. Only about half of the reforms and changes laid out in the 2,300 page document have been implemented, according to John Berlau, senior fellow for finance and access to capital at the Competitive Enterprise Institute.
Even among the new rules that have been enacted, the ABA warns its members, "Under many provisions, regulators are afforded wide latitude in defining the shape and scope of the rules, so much detail is left undetermined."