Friday, December 16, 2011
By CHARLES BOOTHE - Staff Writer
Larry Heaton, president and CEO of Franklin Community Bank, posed a question last year about new bank regulations.
That question was: Did the consumers really win?
More than 16 months later, the answer is, he said: The jury is still out.
It's still up in the air, Heaton said, because the job at hand has been "overwhelming the regulators. It is slowly filtering down, but they are behind their own schedule."
Looking at the sheer volume of paperwork involved helps explain the delay, he said, with 3,408 pages in the Dodd-Frank Act and 2,130 (and counting) pages of regulations written related to that act.
In fact, according to Davis Polk, an international law firm, as of Dec. 1, only 74 of the more than 300 proposed rules of Dodd-Frank have been finalized.
Heaton said the largest effect so far, prompted by the Durbin Amendment to Dodd-Frank that basically sets a cap on what percentage banks could charge per debit card transaction, was the fee that some large banks tried to impose on holders of debit cards.
Bank of America, for example, had planned to charge a $5 monthly fee on debit car holders, a move that was reversed after massive complaints.
"The banks reacted (to the Durbin Amendment) and the consumers reacted big time with an uproar," Heaton said. "Ultimately, the banks relented and backed off the change."
But that amendment only affected large banks, he said, with deposits of $10 billion or more. No banks that large are headquartered in this part of the state.
Heaton said it is safe to say that those large banks will be "looking elsewhere" in their revenue stream to recover any losses, just as any business would.
Although the law was intended to affect larger banks, some "unintended consequences" will filter down to smaller banks, he said.
Those consequences did filter down to small businesses, which were hurt because banks had been giving them a break on the fees paid for debit transactions that were under $10. That break was in many cases eliminated so some businesses enacted a minimum purchase to use a debit card.
A big concern Heaton has is that smaller banks will see costs rise in keeping up with compliance issues related to Dodd-Frank.
Franklin Community Bank has a compliance officer, but "it is taking more and more time" to monitor changes and make sure the bank is in compliance, he said.
According to the investment firm Boenning & Scattergood, which publishes a community bank quarterly, the impact of Dodd-Frank on smaller banks could be as much as an extra cost of more than $220,000 a year.
Most of that expense is directly related to hiring more compliance officers. The newly formed Consumer Financial Protection Bureau may also add more burdens with its oversight.
This is especially troubling in an industry that is already regulated by three different agencies, Heaton said, and the CFPB is yet another growth spurt in government bureaucracy.
As far as the mortgage market is concerned, Heaton said that the new requirement for all mortgage lenders to be licensed is an "overall good thing," but the housing market remains "fragile."
Freddie Mac and Fannie Mae, the two government sponsored entities that purchase mortgages from banks, are still up and running, he said, and banks are lending money for mortgages.
People may not realize that the government's so-called bank bailout when large banks were forced to accept $245 billion in TARP (Troubled Asset Relief Program) funding actually ended up being a good investment for taxpayers, Heaton said. Those banks have now paid back the $245 billion, plus another $13 billion in interest.
Banks are still lending, but the criteria for borrowing have changed.
"We are back to standards (qualifications for loans) that were in place historically up until about a decade ago," he said, referring to a time when borrowing was made much easier and a home buying "frenzy" followed with many purchasing homes they really could not afford and others buying homes to "flip" and make a quick profit.
That frenzy, in essence, led to the real estate "bubble" that started bursting in 2007 and led to the Wall Street crisis in September 2008.
"Expectations are more rigid for consumers now," Heaton said, "but they are not unreasonably rigid."
The value of real estate is also an issue now, he said, as homeowners don't have the equity in their homes they once had. Some homeowners are also "upside down" with their homes because the appraised value is less than what is owed.
"The banks are lending with the criteria we have to work with, and have no control over the downturn in property values," he said.
More and more people now are trying to hold onto their homes, lower their debts and maintaining a more stable financial position.
This is a "resetting of the public mindset" and people are now trying to live within their means and doing a better job of putting money aside, Heaton said. That in itself may be healthy, but one of the side effects is, of course, they are spending less, and that doesn't help the overall economy.
Heaton said, as he did more than a year ago, that the housing market created the crisis and it will eventually lead us out.
But a few things have to happen.
"People have to have jobs," he said. "and they have to feel confident in the jobs they do have."
The current inventory of houses must also decrease, he said, although Franklin County has not been hit nearly as hard as many other parts of the country where the number of houses on the market is far greater by percentage.
"Only when the inventory levels get absorbed will there be a stabilization in pricing," he said because it's a matter of supply and demand. A large supply and a low demand means lower prices.
Tax codes and the issues that surround them also need to be clarified, he said, to give people a sense of what they can expect.
"This has been an unusually long and harsh economic cycle and downturn," he said, adding that in technical terms the recession ended two years ago but the reality is far different.
As these new regulations are being written, Heaton said the banking industry is closely monitoring the progress and is trying to make sure that what ultimately is implemented is reasonable.
He along with other bankers and banking organizations are also seeking assistance from legislators.
"They (legislators) ... have a seemingly sympathetic ear to make sure it (regulation) doesn't get overdone," he said.
As has happened in the past, it is the "unintended consequences" of those regulations that can eventually hurt consumers. And the idea that the federal government should keep expanding and somehow solve all problems is just not going to work, Heaton said.