Community bankers seek relief from overregulation

Anxiety in the heart of a person causes dejection, but a good word will turn it into joy. — Proverbs 12:25

SPENCER — At 2 p.m. on July 12, Bob Fisher, president and CEO of Tioga State Bank, began his testimony to the U.S. House of Representatives Financial Services Committee’s subcommittee on financial institutions and consumer credit. The bank president, representing the Independent Community Bankers of America (ICBA), presented key provisions of the organization’s “Plan for Prosperity,” which addresses community-banking overregulation. It’s not clear whether Fisher was exhibiting anxiety at the hearing, but he was determined to put in a good word for community banking.

The ICBA represents more than 5,700 banks of all sizes and charter types. Its members have 52,000 branches nationwide; employ 765,000 people; and hold $4.9 trillion in assets, $3.9 trillion in deposits, and $3.3 trillion in loans to consumers, small businesses, and the agricultural community. Community banks comprise 99.5 percent of all U.S. banks, provide 50 percent of all small-business loans, help to create two of three jobs across the country, and make 82 percent of all agricultural loans. Nearly one of every five U.S. counties is served exclusively by a community bank.

“The role of community banks is to be a catalyst for entrepreneurship, economic growth, and job creation,” Fisher says during an interview in his Spencer office. “Instead of focusing on community investment and community building, our industry is overwhelmed with paperwork, compliance, and examinations. If we reduce the unsustainable growth of the regulatory burden and streamline the process, bankers can focus on allocating their limited capital and labor resources … [more] productively. Let me share one example of the growing regulatory burden. U.S. bank regulators require financial institutions to report financial information which is published in quarterly Call Reports. When I joined the bank 25 years ago, the reports included approximately 30 pages of data. (According to the Dallas Fed, the reports comprised four pages in the 1950s.) Today, the report is 72 pages with 728 pages of instructions.”

Another concern for Fisher is that government tends to create legislation without considering the differences in banks or industry trends. “Across the nation’s banking landscape, the mega banks are getting bigger while at the same time the industry continues a … [decades-long] consolidation,” notes Tioga State Bank’s CEO. “The combined assets of the country’s largest banks now top $11 trillion. The pace of regulation has increased since the financial collapse of 2008, and legislators and regulators have focused their attention on large, international banks such as Chase, Citibank, Bank of America, and Wells Fargo, which they define as SIFIs (systematically important financial institutions). Unfortunately, the regulations often don’t distinguish between the SIFIs and the non-SIFIs, which are the community banks. When it comes to legislation and regulation, the rule seems to be that one-size-fits-all. And when there is an attempt to distinguish between the sizes of banks, the threshold in Dodd-Frank was set arbitrarily rather than tailored with a set of systemic indicators. The best practices for megabanks aren’t necessarily the best practices for community banks.” 

Fisher’s reference to consolidation in the industry is borne out by numbers from the Federal Reserve Bank of Minneapolis. In 1980, the U.S. boasted nearly 16,000 banks. Today the number has fallen to fewer than 6,000. 

Compliance burden

“The cost of compliance falls disproportionately on the smaller banks,” says Fisher. “Tioga State Bank has hired two, full-time employees dedicated to ensuring compliance and reporting. That costs the bank $150,000 annually. If truth be told, however, every employee spends time complying with … [myriad] regulations, a cost that’s difficult to measure. Just since 2010 and the enactment of Dodd-Frank (which runs to 849 pages) and the creation of the CFPB (Consumer Financial Protection Bureau), our costs have risen. It’s clear that the cost of compliance is helping to drive the consolidation in the industry.”

The Dallas Fed confirms that the Dodd-Frank Act and other banking regulation since 2008 have made it more difficult for financial institutions to operate and have kept new banks from forming. The Boston Consulting Group, in a report released this year, finds that since 2011 the number of rule changes that banks must track has tripled to an average of 200 revisions per day. Since 2008, the number of banks has declined 28 percent while total assets have increased from just over $11 trillion to $16 trillion.

ICBA’s “Plan for Prosperity” focuses on regulatory relief, mortgage reform, consumer protection, bank oversight, tax relief, and agriculture and rural America. 

“Under regulatory relief, government needs to bar the concept of arbitrary disparate impact and require discriminatory intent for fair-lending violations,” opines Fisher. “Today, lenders must consider factors such as race and national origin even though our practices are neutral in the treatment of different groups. Ally Financial paid a $98 million fine back in 2013 for allegedly discriminating in charging [predatory-] interest rates on auto loans, even though the company gathered no information about a borrower’s race or ethnicity. The [U.S.] Justice Department, through “regression analysis,” determined that discrimination occurred based on matching the surnames of [235,000] borrowers [who were assumed to be African-American, Hispanic, and Asian Pacific/Islanders] and ZIP codes, even though no one ever filed a complaint.” The CFPB has never released the methodology it uses to determine whether unintentional discrimination has occurred. In the case of Ally, the CFPB had to mail 420,000 letters to Ally borrowers to coax at least 235,000 to take the settlement money. As of last year, the CFPB had already collected $220 million in settlements from several auto lenders with additional cases pending.”

Community bankers are also pushing for mortgage reform. 

“Under HMDA (Home Mortgage Disclosure Act), financial institutions are required to maintain, report, and publicly disclose information about mortgages,” continues Fisher. “Starting in 2018, the data fields lenders must report in connection with every loan will double, and the requirement will be extended to collecting data on small-business loans … (HMDA gathered 16.3 million records in 2016 from 6,762 financial institutions.) … In the area of appraisals, when I first entered banking, we did our own appraisals. Regulators now require us to use independent appraisers, which is an added cost and creates a problem because these appraisers are not always readily available in rural areas … Closing a mortgage is not friendly to trees: The process is complex and costly. My grandfather showed me his closing form for an installment loan from his tenure at the bank, which totaled one-quarter of one page. Today, the documents-package can be four-inches thick, and it’s doubtful whether consumers even read the … [verbiage] let alone understand it. Some ICBA members have stopped offering mortgages because of the onerous rule requirements.”

Oversight

Fisher next turns to bank oversight. “I shared with the subcommittee that the trend toward more regulatory exams was suffocating the community banks and inhibiting their ability to serve their customers,” opines Fisher. “The regulators have gotten to the point where they are micromanaging our businesses. We have duplication with multiple, oversight agencies examining the same data. Clearly the process could be streamlined with agencies alternating their exams … Earlier, I mentioned the 72-page quarterly Call Reports that have become increasingly burdensome. Why not have the community banks issue a short report in the first and third quarters and file the long report in the second and fourth quarters? … The CRA (Community Reinvestment Act) requires exams that are frequent and sometimes intrusive and even unnecessary. The CRA dates back to 1977 and was an attempt to prevent ‘redlining,’ an alleged practice in poor to moderate-income neighborhoods where lending institutions refused to offer home loans based on race and ethnic composition. The term refers to the practice of marking a [restricted] area on a map in red. In the internet age when your customers can be anywhere, it’s difficult and time-consuming to monitor the CRA requirements. Speaking for Tioga State Bank, I know that 95 percent of our loans are made in the area we serve, and 90 percent of the dollars are reinvested in the area.”

According to the Office of the Comptroller of the Currency (OCC), “CRA is designed to encourage banks to help rebuild and revitalize communities through sound lending and good business judgment.” The Act is supposed to provide a framework for depository institutions and community organizations to work together. CRA and the OCC’s regulations mandate that OCC consider a bank’s compliance record before approving banking activities such as applications for a new charter, opening or relocating branches, mergers and consolidations, and similar corporate activities. The OCC is required to prepare a written performance report including its rating of each bank at the end of every evaluation. The report and evaluation are available to the public. In addition, the OCC publishes its evaluation schedule in advance to allow community groups, civic organizations, government, and other members of the public to express their views about a bank’s performance. Over three decades of interviewing bankers, this reporter has determined that CRA often serves as a piggy bank for community activists and others in need of easy money. Poor reviews can slow or halt a bank’s business plans. The result is often a decision to expend funds as a cost of doing business rather than argue that CRA encourages loosened lending standards or is simply an act of government-condoned bank robbery.

Taxes

In the area of tax relief, Fisher, representing the ICBA, argued for new tax credits or deductions for community banks as a better way to encourage lending to low- and middle-income individuals as well as businesses, farmers, and ranchers. In addition to encouraging more lending, the credits or deductions would help to offset the competitive advantage enjoyed by tax-exempt credit unions and tax-subsidized Farm Credit System lenders. The ICBA also sought changes to the Subchapter-S section of the tax code to allow for more shareholders and to permit holding both common and preferred shares in IRAs. Furthermore, the organization sought creation of an LLC-option for community banks to allow pass-through treatment without the limitations of a Sub-S organization. ICBA favors the permanent repeal of the estate tax, because it jeopardizes the succession of family-owned banks. Finally, Fisher encouraged the subcommittee to consider issuing a tax credit to offset the bank’s expense of complying with the Bank Secrecy Act (BSA). “This is my personal pet-peeve,” intones Fisher. “BSA compliance represents a significant expense in terms of both direct and indirect costs. Whatever the benefits of the ACT, this is purely a government, law-enforcement function. Let me share one example of how Tioga State Bank has to comply. Every day the bank reviews all of its financial transactions to identify any money-laundering activity. The threshold of $10,000, which was established in the 1970s, hasn’t been raised. Why shouldn’t the government bear the cost or at least compensate us for acting as their agents by allowing us tax credits?”

In the area of agriculture and rural America, ICBA is advocating for the creation of tax incentives to encourage more agricultural and residential-mortgage lending in rural area. Specifically, ICBA supports U.S. House Bill H.R. 2205, which amends the IRS code to exclude gross-income interest received by a lender from real-estate loans secured by agricultural real estate or by a leasehold mortgage on agricultural real estate.

Fisher’s background

At age 50, Fisher is the fifth generation of his family to steer the bank, which was founded in 1864. Tioga State Bank has 11 offices and serves the Southern Tier of New York and northern Pennsylvania. Current stockholders number in the mid-20s with the Fisher family holding the majority interest in the holding company. The bank’s assets total about $475 million and 2017 revenue is projected to be in the $4.5 million range. In recent years, the bank’s focus has shifted more from the residential side to the commercial side: The current ratio percentage is about 65/35. In October, the SBA regional director announced that Tioga State Bank was ranked the top small-community lender in the Southern Tier. Fisher lives in Owego with his wife and family. The couple has three children.

Fisher summarizes his thinking: “ICBA and Tioga State Bank would love a two-tiered regulatory system,” he stresses. “It should be focused on the complexity of the bank being supervised and how financially interconnected the bank is in the economy. Our business model is pretty simple, and one that … [hasn’t changed] for the past 150-plus years. We take deposits from the local market and lend those back out in the local market. Our business model looks a lot like the … [one] portrayed [by Jimmy Stewart] in ‘It’s a Wonderful Life.’

“The regulatory burden continues to grow,” continues Fisher. “Whenever a bad player in the market does something wrong/bad, a new law or regulation is added to the many laws we already have to live with. I’m not saying all the regulations are bad, but nothing is ever … [deleted]. When I … [and my staff are] focused on regulatory compliance …, [we’re] not focused on … [our] main mission of taking deposits and making loans, … [which in turn] creates a positive economic impact on the communities we serve. Those dollars and time spent on … [regulatory compliance] could be better spent on increased lending activities and helping the local economy.”

Whether Fisher’s testimony will sway the Beltway legislators is unclear. In the meantime, he is still enjoying his role at the bank. “I’m happy to come to work,” affirms the CEO; “it’s rewarding. Every day I get to see the positive impact Tioga State Bank has on our customers and the community, and I get to work with an outstanding staff.”               

Anxiety in the heart of a person causes dejection, but a good word will turn it into joy. — Proverbs 12:25

SPENCER — At 2 p.m. on July 12, Bob Fisher, president and CEO of Tioga State Bank, began his testimony to the U.S. House of Representatives Financial Services Committee’s subcommittee on financial institutions and consumer credit. The bank president, representing the Independent Community Bankers of America (ICBA), presented key provisions of the organization’s “Plan for Prosperity,” which addresses community-banking overregulation. It’s not clear whether Fisher was exhibiting anxiety at the hearing, but he was determined to put in a good word for community banking.

The ICBA represents more than 5,700 banks of all sizes and charter types. Its members have 52,000 branches nationwide; employ 765,000 people; and hold $4.9 trillion in assets, $3.9 trillion in deposits, and $3.3 trillion in loans to consumers, small businesses, and the agricultural community. Community banks comprise 99.5 percent of all U.S. banks, provide 50 percent of all small-business loans, help to create two of three jobs across the country, and make 82 percent of all agricultural loans. Nearly one of every five U.S. counties is served exclusively by a community bank.

“The role of community banks is to be a catalyst for entrepreneurship, economic growth, and job creation,” Fisher says during an interview in his Spencer office. “Instead of focusing on community investment and community building, our industry is overwhelmed with paperwork, compliance, and examinations. If we reduce the unsustainable growth of the regulatory burden and streamline the process, bankers can focus on allocating their limited capital and labor resources … [more] productively. Let me share one example of the growing regulatory burden. U.S. bank regulators require financial institutions to report financial information which is published in quarterly Call Reports. When I joined the bank 25 years ago, the reports included approximately 30 pages of data. (According to the Dallas Fed, the reports comprised four pages in the 1950s.) Today, the report is 72 pages with 728 pages of instructions.”

Another concern for Fisher is that government tends to create legislation without considering the differences in banks or industry trends. “Across the nation’s banking landscape, the mega banks are getting bigger while at the same time the industry continues a … [decades-long] consolidation,” notes Tioga State Bank’s CEO. “The combined assets of the country’s largest banks now top $11 trillion. The pace of regulation has increased since the financial collapse of 2008, and legislators and regulators have focused their attention on large, international banks such as Chase, Citibank, Bank of America, and Wells Fargo, which they define as SIFIs (systematically important financial institutions). Unfortunately, the regulations often don’t distinguish between the SIFIs and the non-SIFIs, which are the community banks. When it comes to legislation and regulation, the rule seems to be that one-size-fits-all. And when there is an attempt to distinguish between the sizes of banks, the threshold in Dodd-Frank was set arbitrarily rather than tailored with a set of systemic indicators. The best practices for megabanks aren’t necessarily the best practices for community banks.” 

Fisher’s reference to consolidation in the industry is borne out by numbers from the Federal Reserve Bank of Minneapolis. In 1980, the U.S. boasted nearly 16,000 banks. Today the number has fallen to fewer than 6,000. 

Compliance burden

“The cost of compliance falls disproportionately on the smaller banks,” says Fisher. “Tioga State Bank has hired two, full-time employees dedicated to ensuring compliance and reporting. That costs the bank $150,000 annually. If truth be told, however, every employee spends time complying with … [myriad] regulations, a cost that’s difficult to measure. Just since 2010 and the enactment of Dodd-Frank (which runs to 849 pages) and the creation of the CFPB (Consumer Financial Protection Bureau), our costs have risen. It’s clear that the cost of compliance is helping to drive the consolidation in the industry.”

The Dallas Fed confirms that the Dodd-Frank Act and other banking regulation since 2008 have made it more difficult for financial institutions to operate and have kept new banks from forming. The Boston Consulting Group, in a report released this year, finds that since 2011 the number of rule changes that banks must track has tripled to an average of 200 revisions per day. Since 2008, the number of banks has declined 28 percent while total assets have increased from just over $11 trillion to $16 trillion.

ICBA’s “Plan for Prosperity” focuses on regulatory relief, mortgage reform, consumer protection, bank oversight, tax relief, and agriculture and rural America. 

“Under regulatory relief, government needs to bar the concept of arbitrary disparate impact and require discriminatory intent for fair-lending violations,” opines Fisher. “Today, lenders must consider factors such as race and national origin even though our practices are neutral in the treatment of different groups. Ally Financial paid a $98 million fine back in 2013 for allegedly discriminating in charging [predatory-] interest rates on auto loans, even though the company gathered no information about a borrower’s race or ethnicity. The [U.S.] Justice Department, through “regression analysis,” determined that discrimination occurred based on matching the surnames of [235,000] borrowers [who were assumed to be African-American, Hispanic, and Asian Pacific/Islanders] and ZIP codes, even though no one ever filed a complaint.” The CFPB has never released the methodology it uses to determine whether unintentional discrimination has occurred. In the case of Ally, the CFPB had to mail 420,000 letters to Ally borrowers to coax at least 235,000 to take the settlement money. As of last year, the CFPB had already collected $220 million in settlements from several auto lenders with additional cases pending.”

Community bankers are also pushing for mortgage reform. 

“Under HMDA (Home Mortgage Disclosure Act), financial institutions are required to maintain, report, and publicly disclose information about mortgages,” continues Fisher. “Starting in 2018, the data fields lenders must report in connection with every loan will double, and the requirement will be extended to collecting data on small-business loans … (HMDA gathered 16.3 million records in 2016 from 6,762 financial institutions.) … In the area of appraisals, when I first entered banking, we did our own appraisals. Regulators now require us to use independent appraisers, which is an added cost and creates a problem because these appraisers are not always readily available in rural areas … Closing a mortgage is not friendly to trees: The process is complex and costly. My grandfather showed me his closing form for an installment loan from his tenure at the bank, which totaled one-quarter of one page. Today, the documents-package can be four-inches thick, and it’s doubtful whether consumers even read the … [verbiage] let alone understand it. Some ICBA members have stopped offering mortgages because of the onerous rule requirements.”

Oversight

Fisher next turns to bank oversight. “I shared with the subcommittee that the trend toward more regulatory exams was suffocating the community banks and inhibiting their ability to serve their customers,” opines Fisher. “The regulators have gotten to the point where they are micromanaging our businesses. We have duplication with multiple, oversight agencies examining the same data. Clearly the process could be streamlined with agencies alternating their exams … Earlier, I mentioned the 72-page quarterly Call Reports that have become increasingly burdensome. Why not have the community banks issue a short report in the first and third quarters and file the long report in the second and fourth quarters? … The CRA (Community Reinvestment Act) requires exams that are frequent and sometimes intrusive and even unnecessary. The CRA dates back to 1977 and was an attempt to prevent ‘redlining,’ an alleged practice in poor to moderate-income neighborhoods where lending institutions refused to offer home loans based on race and ethnic composition. The term refers to the practice of marking a [restricted] area on a map in red. In the internet age when your customers can be anywhere, it’s difficult and time-consuming to monitor the CRA requirements. Speaking for Tioga State Bank, I know that 95 percent of our loans are made in the area we serve, and 90 percent of the dollars are reinvested in the area.”

According to the Office of the Comptroller of the Currency (OCC), “CRA is designed to encourage banks to help rebuild and revitalize communities through sound lending and good business judgment.” The Act is supposed to provide a framework for depository institutions and community organizations to work together. CRA and the OCC’s regulations mandate that OCC consider a bank’s compliance record before approving banking activities such as applications for a new charter, opening or relocating branches, mergers and consolidations, and similar corporate activities. The OCC is required to prepare a written performance report including its rating of each bank at the end of every evaluation. The report and evaluation are available to the public. In addition, the OCC publishes its evaluation schedule in advance to allow community groups, civic organizations, government, and other members of the public to express their views about a bank’s performance. Over three decades of interviewing bankers, this reporter has determined that CRA often serves as a piggy bank for community activists and others in need of easy money. Poor reviews can slow or halt a bank’s business plans. The result is often a decision to expend funds as a cost of doing business rather than argue that CRA encourages loosened lending standards or is simply an act of government-condoned bank robbery.

Taxes

In the area of tax relief, Fisher, representing the ICBA, argued for new tax credits or deductions for community banks as a better way to encourage lending to low- and middle-income individuals as well as businesses, farmers, and ranchers. In addition to encouraging more lending, the credits or deductions would help to offset the competitive advantage enjoyed by tax-exempt credit unions and tax-subsidized Farm Credit System lenders. The ICBA also sought changes to the Subchapter-S section of the tax code to allow for more shareholders and to permit holding both common and preferred shares in IRAs. Furthermore, the organization sought creation of an LLC-option for community banks to allow pass-through treatment without the limitations of a Sub-S organization. ICBA favors the permanent repeal of the estate tax, because it jeopardizes the succession of family-owned banks. Finally, Fisher encouraged the subcommittee to consider issuing a tax credit to offset the bank’s expense of complying with the Bank Secrecy Act (BSA). “This is my personal pet-peeve,” intones Fisher. “BSA compliance represents a significant expense in terms of both direct and indirect costs. Whatever the benefits of the ACT, this is purely a government, law-enforcement function. Let me share one example of how Tioga State Bank has to comply. Every day the bank reviews all of its financial transactions to identify any money-laundering activity. The threshold of $10,000, which was established in the 1970s, hasn’t been raised. Why shouldn’t the government bear the cost or at least compensate us for acting as their agents by allowing us tax credits?”

In the area of agriculture and rural America, ICBA is advocating for the creation of tax incentives to encourage more agricultural and residential-mortgage lending in rural area. Specifically, ICBA supports U.S. House Bill H.R. 2205, which amends the IRS code to exclude gross-income interest received by a lender from real-estate loans secured by agricultural real estate or by a leasehold mortgage on agricultural real estate.

Fisher’s background

At age 50, Fisher is the fifth generation of his family to steer the bank, which was founded in 1864. Tioga State Bank has 11 offices and serves the Southern Tier of New York and northern Pennsylvania. Current stockholders number in the mid-20s with the Fisher family holding the majority interest in the holding company. The bank’s assets total about $475 million and 2017 revenue is projected to be in the $4.5 million range. In recent years, the bank’s focus has shifted more from the residential side to the commercial side: The current ratio percentage is about 65/35. In October, the SBA regional director announced that Tioga State Bank was ranked the top small-community lender in the Southern Tier. Fisher lives in Owego with his wife and family. The couple has three children.

Fisher summarizes his thinking: “ICBA and Tioga State Bank would love a two-tiered regulatory system,” he stresses. “It should be focused on the complexity of the bank being supervised and how financially interconnected the bank is in the economy. Our business model is pretty simple, and one that … [hasn’t changed] for the past 150-plus years. We take deposits from the local market and lend those back out in the local market. Our business model looks a lot like the … [one] portrayed [by Jimmy Stewart] in ‘It’s a Wonderful Life.’

“The regulatory burden continues to grow,” continues Fisher. “Whenever a bad player in the market does something wrong/bad, a new law or regulation is added to the many laws we already have to live with. I’m not saying all the regulations are bad, but nothing is ever … [deleted]. When I … [and my staff are] focused on regulatory compliance …, [we’re] not focused on … [our] main mission of taking deposits and making loans, … [which in turn] creates a positive economic impact on the communities we serve. Those dollars and time spent on … [regulatory compliance] could be better spent on increased lending activities and helping the local economy.”

Whether Fisher’s testimony will sway the Beltway legislators is unclear. In the meantime, he is still enjoying his role at the bank. “I’m happy to come to work,” affirms the CEO; “it’s rewarding. Every day I get to see the positive impact Tioga State Bank has on our customers and the community, and I get to work with an outstanding staff.”