Negative Impact of the Dodd-Frank Act

In November 2008, I wrote a column in Hoosier Banker magazine declaring that, because of the passage of the Troubled Asset Relief Program (TARP), banks would pay a price, which I dubbed the “Financial Institutions Punishment Act of 2009.” Unfortunately I was close to the truth: The Dodd-Frank Act (DFA) was enacted in July 2010.

Banks throughout the country, both large and small, fought many provisions of DFA during the nearly year-long debate prior to its enactment. While many DFA provisions have resulted in implemented regulations affecting larger banks, few provisions of concern to community banks have been implemented … until now.

Several provisions directly impacting community banks were made public within the last couple of weeks, with more yet to come. In fact Comptroller of the Currency Tom Curry indicated in an interview in yesterday’s American Banker that most regulations related to DFA would be released by mid-year. He added that new capital requirements should be out by then, too.

Let us hope that community banks have not been lulled to sleep. The dreaded DFA regulatory morass, forewarned by analysts, will at last show up on the doorsteps of community banks. These same regulations also will apply to large banks, but those institutions already have been dealing with the Volcker rule, so-called living wills and other examples of regulatory overreach. Plus large banks can designate their sizable legal and compliance staffs to address these issues.

The spawn of DFA — the Consumer Financial Protection Bureau — recently released its Ability to Repay and Qualified Mortgage Standards, Loan Originator Compensation Requirements, Mortgage Servicing Final Rules, and High-Cost Mortgages Rule. Additionally the agencies have jointly released the final rule on appraisals for higher-risk mortgages. Furthermore we expect to see new Real Estate Settlement and Procedures Act and Truth in Lending Act rules in the coming months.

No doubt I have missed some of the new rules, but the point is that many new regulations will soon be raining down on community banks. Also, mortgage lending is becoming more complex for all participants, including for borrowers. Let’s hope the regulators get it right. The housing sector is too important to our economy to get it wrong. Banks have known for three years that the Financial Institutions Punishment Act — I mean the Dodd-Frank Act — was going to change how they do business.  I doubt, however, that many customers understood how these rules would impact them.

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