Banking in the Big Bend: New Wall Street reforms could impact Main Street banks

By EMILY JO CURETON

FAR WEST TEXAS – Big changes might be in store for small banks. According to a Sentinel/International survey of local financiers and community bank advocates, sweeping financial reforms that took effect this summer are expected to drive up mortgage down payments, raise interchange fees on debit cards and levy a high cost of compliance on small lenders. The end result could be cuts in interest-based bank income and accordingly, inflation of fee-based income, such as service charges on deposit accounts or the end of free checking.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act most notably created the much cussed and discussed Consumer Financial Protection Bureau, (CFPB), which aims to consolidate regulatory oversight and prohibit unfair lending practices. CFPB will now trump, but not replace traditional state and national regulators like Texas State Department of Banking, the Office of the Comptroller of the Currency (OCC), the FDIC and the Federal Reserve Board (FRB).

The Dodd-Frank reforms exempt institutions with fewer than $500 million in assets from many regulatory and capital assessment provisions, which the agency hopes will actually help level the playing field.

Elizabeth Warren, an advisor to President Obama who organized the new CFPB, said this: “The bankers I have talked with are not looking to Washington to solve their problems. But they are looking for a market that allows them to compete. They are looking for a regulatory structure that doesn’t require an army of lawyers, and a level playing field that lets customers see the true cost of a product”.

Marfa National Bank President Chip Love worried that the measures missed the mark:

“All this financial re-reform is based on the notion that if the consumer had better information then they would have made better decisions,” he said, “Our experience is that when people come in to borrow money they just want their money, but the people that I’ve dealt with, we explain it where they understand it. I never feel like the customer doesn’t understand what they are doing”.

“I wish regulations addressed too big to fail. Normally you pay with your economic life if you do your job wrong. Somebody like us, if we messed up, we’ll be closed in an instant. They’ll close us before lunch,” Love said.

A worrisome thought at on a recent morning, when a fleet of Office of the Comptroller of the Currency (OCC) regulators was camped out in the bank’s conference room.

Granted, this sort of number crunching powwow is old hat for banks of any size.

As West Texas National Bank Alpine branch President David Rogers put it, “Having regulations is nothing new, the banking industry might be one of the most regulated industries ever”.

“We are highly regulated. I can’t sneeze without asking for permission,” Love joked and then seriously pointed out that many of the fiscal woes since 2007 resulted from unregulated, uninsured lenders like brokerages and investment capital firms, or from mega-banks, all a far cry from community outfits with less than $1 billion in assets.

“All the sudden there are a whole class of smaller mortgages that people won’t get. The national mortgage companies aren’t interested in a lot of the properties we have out here. It’s harder to place those types of mortgages,” Love said.

According to the Independent Community Bankers of America stance on Dodd Frank, “Such a high down-payment requirement [20 percent for home mortgages] will be particularly hard for qualified first-time and lower income borrowers to meet, exacerbating a still fragile housing market and hampering the economic recovery”.

The CPFB will also scrutinize concentrations of credit to ensure banks aren’t putting all their eggs in one basket, like say, the housing market. Still, this could be problematic for far West Texas, where loan consumption tends clump up in certain markets.

In the wake of “too big to fail”, banks are getting even bigger and with beefed up regulations, those without adequate resources to comply could prove “too small to succeed”. While West Texas National Bank and TransPecos both have offices specifically dedicated to compliance; homegrown Big Bend Banks and Fort Davis State Bank do not.

Since 2008, a slew of mergers have led to a mind-boggling concentration of capital in a few hands.  Bank of America now takes in over a $1 trillion in deposits. The largest five banks in the country control over a third of the assets, triple the amount they had fifteen years ago, according to the FDIC.

Also since 2008, nearly 400 banks have failed, most of them community or regional operations with less than $1 billion dollars in assets, including Sanderson State Bank of Sanderson.

“We as a country have a concentration in deposit dollars and control with huge banks that are out of touch with America. It doesn’t matter how many pictures of families and family pets they have in their ads,” TransPecos Banks CEO Dub Sutherland said dryly, “I think anything that hurts community banking ultimately hurts small businesses in America”.

Fort Davis State Bank Vice President Zach Dean erred on the side of optimism, “I feel like there’s always going to be a place for community banking. I think banks are going to have to be more creative in their products. Our whole model is changing on us. I think we are going to have to become more creative on ways to generate income”.

Rogers was hesitant to make any assessments as to how it will all play out, as bankers and regulators alike are still trying to sink their teeth in to the practical applications of the bulky new regs, but one small bank near Houston has already opted to throw in the towel rather than deal with Dodd-Frank.

Main Street Bank, a $257 million Kingwood outfit with reasonable profit margins, will soon forfeit its charter and be reconfigured as an investment capital firm, free from costly government oversight. In the meantime it has become an aptly named, extremist poster-child for the exasperation echoing throughout community bank coffers.