Readying for reform | Maine banks brace for a federal banking overhaul
Photo/Tim Greenway
Chris Pinkham, head of the Maine Bankers Association, says many bankers describe the new financial reforms as a "compliance nightmare"
On July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial reform bill since the 1930s, aimed at avoiding a repeat of the 2008 financial meltdown and upping consumer protection.
Legislators say the changes will add needed accountability and transparency to financial institutions, prevent them from engaging in risky and deceptive practices that forced a federal bailout, and aid consumers through a new consumer protection bureau. Components of the law that will affect both large and community banks include tightening capital requirements; supplying additional reporting and data tracking to regulators; and requiring new disclosures for consumers to ensure they understand a product or service they’re signing up for, particularly mortgages.
But banks in Maine are concerned the influx of new regulations will exhaust their existing resources, requiring them to hire new staff, pay for new software and training, and outsource complicated compliance work. Other changes to overdraft policies and debit interchange fees — money merchants pay to banks to process debit card transactions — will mean lost revenue for banks. All this ultimately could affect consumers through higher fees.
The law asks regulators to promulgate at least 250 new rules, though little of that has been done yet, and conduct other studies over the next six to 18 months that could result in additional rules. The 2,319-page law is expected to result in 5,000 new pages of regulations for banks, though not all of that will be applicable to Maine’s 28 community banks. Even so, the effect is expected to be significant.
“Most banks think that initially it will be a fairly large compliance nightmare,” says Chris Pinkham, executive director of the Maine Bankers Association.
Some banks are anticipating their cost of doing business will increase by as much as 9%. “It ranges from 1 to 9%, with 6% being the average” anecdotally in the industry, says Dick Roy, chief banking officer at Mechanics Savings Bank in Auburn.
Bruce Nickerson, chief financial officer at Bangor Savings Bank, says the bank is preparing for around $1 million in additional expenses, which is about 6% of the bank’s $16 million-$17 million in net income, some of which the bank has already incurred. “A number of things Dodd-Frank is asking are things that some banks, particularly the larger ones like us and Camden National — we’ve already gone down the path of investing in,” especially in risk management and fraud. “Depending on where someone is in the process, they could well see 6% or more.”
And though the thrust of the law came from the bad behavior of large, national financial institutions, the new rules designed to rein in those firms will also impact community banks, in some ways unfairly, those in the industry say. “Congress thinks it’s better for the consumers, and you can argue it could be. But there are only a few bad apples,” Pinkham says.
Scales of impact
Chief among bankers’ concerns are the time and staff it will take to read and understand the new regulations, develop new processes to meet them and buy or upgrade software and train employees. Banks will also have to do more to prove they’re complying with the new rules, such as preparing for audits, and tracking and reporting more data to federal regulators.
Andrea Shaw, vice president and chief compliance officer at Gorham Savings Bank, says she’s already spending three to five hours a week keeping up with developments on new regulations, and very few have been finalized. “Are we going to have enough resources in-house, time and talent, or the dollars to outsource it?” she wonders. “I think the impact is going to be on the mid-size, smaller institutions from a resources perspective.”
It’s still too early for Gorham Savings to put a number on how much complying with the new regulations will cost, she says. “While the bill has become law, a lot of it will be implemented through rulemaking, and it’s hard to estimate a cost … when you have absolutely no idea what the rules are going to be,” Shaw says. “We’re pretty sure there’s a tsunami coming, but we don’t know how big it’s going to be or what things are going to look like afterwards.”
The time banks have to implement new regulations can vary, ranging from six months to a year, Shaw says, and the process doesn’t just involve the institution. For example, new requirements related to the mortgage application process would mandate updated software the bank uses for mortgage origination. The bank’s software vendor would have to complete the updates before Gorham Savings could finish implementing the new rules.
Dodd-Frank’s Title XI, the Mortgage Reform and Anti-Predatory Lending Act, replaces the contested Home Valuation Code of Conduct, which took effect May 1, with a similar measure that requires independent appraisers operate separately from an underwriter or a mortgage origination officer. Nickerson says Bangor Savings Bank has already hired three full-time and one part-time employee in independent appraisal, and may need to add more.
“In Maine, we feel pretty good about what our process was, we didn’t have the escalating values, and you could argue our process was sound to begin with,” he says. “It’s an example of a national process imposed on an entire banking system, irrespective of what processes already existed within certain states.”
A major part of the Dodd-Frank act is Title X, which establishes a new, independent regulatory entity, the Bureau of Consumer Financial Protection. Working with the bureau will be “a new learning curve” for banks accustomed to dealing with the Federal Reserve Board, the Federal Deposit Insurance Corp. and other regulatory bodies, says Shaw of Gorham Savings. “We have a history with them, we can anticipate how they’re going to interpret something, and it helps us to prepare.”
The new bureau could spell the end of some bank practices, including overdraft services, where banks charge a fee when a customer overdraws from an account using a debit card. In 2008, more than 35% of bank revenue nationally came from overdraft fees, totaling more than $24 billion, according to global law firm Nixon Peabody. The practice has already been tagged as abusive, and some banks have begun to require customers to opt in to an overdraft service.
Customers may benefit from the added transparency, but they’ll likely end up paying for that lost revenue, says Nickerson. Bangor Savings charges in the low $30 range per overdraft, which Nickerson says is consistent with the market, but he worries banks like his and others will be forced to add fees onto other services, like checking. “We may find ourselves back in the future: There used to be a fee, then free checking came along because subsidizing it were the overdraft folks,” he says.
Banks will also see a drop in another source of noninterest income: debit interchange fees. Dodd-Frank requires regulators to draft rules that limit interchange fees to levels “reasonable” and “proportional” to the transaction by April 21, 2011, with the change becoming effective July 21. The law applies to banks with more than $10 billion in assets, in theory exempting all Maine community banks, but market powers will likely force smaller banks to adhere to the lower fees in order to stay competitive.
“Every bank will be looking at how to pass on the cost — loan pricing, fees for loans and deposits will be where it ends up,” says Roy of Mechanics Savings. “Higher costs, like everything else, will be passed onto the consumer in the end.”
Requirements pressuring all banks to keep more capital could lead banks like Mechanics Savings to restrict how much they lend, Roy says.
And the effect won’t only be monetary. New reporting and disclosure requirements will force consumers to sign more paperwork, creating longer and more complicated processes that could hurt customers’ morale. “We have to minimize disruption on the quality of the experience to the borrower or the depositor, so they don’t feel like, ‘Banks … make it hard to do business, I’ll just go to a credit union,’” Nickerson says.
Banks will also explore other ways to lower costs while staying competitive.
“A lot of small banks will take the lead from other banks, including us. We won’t be the first to increase fees; we’ll be watching very carefully,” says Roy. “We’ll be looking at ways to be more efficient, and we won’t pass along costs if we don’t have to.”
Mindy Woerter, Mainebiz E-news editor, can be reached at mwoerter@mainebiz.biz.
Most Recent
Most Recent
Comments