How do the revised rules in the Bipartisan Budget Act of 2015 affect you and your business?
Since the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010, bankers have been sounding the alarm over the impacts of new regulations on their ability to conduct business. Now, a new report indicates some of their concerns may be justified.
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In Colorado, banks now employ 1.2 compliance officers for every lending officer, according to the Colorado Bankers Association.
Integrating marijuana businesses into the banking world is likely to make the matter worse. For instance, in years past, when a bank employee happened to notice the smell of marijuana coming off a cash deposit, he or she would have to fill out a suspicious-activity report. Now, bank employees are required to smell every cash deposit, according to Don Childears, president of the bankers association.
“This has become a huge issue for us,´ said Bruce Alexander, president and chief executive of Denver-based Vectra Bank and former director of the Denver branch of the Federal Reserve Bank of Kansas City. “Compliance touches us on a number of fronts.”
Dodd-Frank began creating new rules for banks when it was first passed in the wake of the 2008 financial crisis, and has not slowed down. Early on, the law mandated the creation of the Consumer Financial Protection Bureau to help educate consumers and prevent them from borrowing more than they could afford or taking on high-risk loans, some of the issues that brought on the recession.
In January, for instance, a new rule issued by the Consumer Financial Protection Bureau concerning “qualified mortgages” went into effect. It calls for stricter documentation of the borrower’s ability to pay, which is intended to prevent mortgages being made to borrowers who are unable to make the payments, a problem that contributed to the financial crash that triggered the recession in 2008.
This is only the beginning, Childears said. Regulators are about one-third of the way through adopting the rules set forth by the Dodd-Frank Act, which includes 398 regulations that must be implemented, he said.
By the time all the regulations called for in Dodd-Frank are in effect, there will be “thousands and thousands of pages” of new rules, Childears said.
The costs of adhering to these rules are adding up for banks, said Alexander. Institutions must analyze new rules, rewrite existing policies, fill out new reports and monitor the way loans are underwritten as they never have before, he said.
“The complexity of having to comply with all of that is huge,” he said.
Even the way lenders are compensated has changed, Alexander said. Vectra Bank, which holds about $2.3 billion in assets, is part of a holding company called Zions Bancorp. The holding company hired a third-party consultant to help deal with the changes in compensation at an expense of $2.3 million, he said.
Zions has had to hire more than 100 people in the last calendar year, Alexander said, and Vectra Bank itself has had to add 15 to 20 staff members in the past three years to keep up with compliance changes. Vectra can use some of the infrastructure of its holding company to help its own staff, which means it must share in a percentage of the cost to maintain the employees hired by Zions.
The impact is felt most by community banks, said Alexander. Those banks with less than $1 billion in assets that are still owned and operated locally do not have the same capital levels as do large banks to make the new hires needed to keep up with new compliance requirements.
“The first thing to remember about community banks is that they’re small businesses just like any other,´ said Barbara Walker, executive director of the Independent Bankers of Colorado. Small banks in the state have had to double or triple their compliance staffs in some cases, Walker said. While that may mean adding just a few people, that cost adds up for a small bank.
The extra cost is causing some banks to withdraw from some markets such as mortgage lending, which forces customers back to large banks that Dodd-Frank was meant to rein in, Walker said.
However, community banks are coming up with solutions, Walker said. Denver-based Bankers’ Bank of the West was formed to cater specifically to community banks, providing low-cost services including help with compliance.
An older piece of banking regulation, the Bank Secrecy Act, has been imposing rules on banks for years, but with new developments in federal banking rules pertaining to marijuana that are especially pertinent in Colorado, there now is an extra regulatory burden.
The Bank Secrecy Act was passed in 1970 to help detect and prevent money laundering. Specific to the legalization of marijuana, this act matters because it requires banks to fill out paperwork and other tasks if they believe that a customer is engaging in illegal activity. The Federal Deposit Insurance Corp., the federal regulator for banks, still classifies providing banking services to marijuana businesses as illegal.
Last month, the U.S. Department of Justice and the Financial Crimes Enforcement Network issued guidance that banks would not be prosecuted for serving marijuana businesses in states where marijuana had been legalized, something that many considered a “green light” for marijuana banking.
Instead, the guidance “made that light redder than ever,” Childears said. Banks still cannot accept deposits or otherwise provide services to marijuana businesses because the FDIC does not allow it. In order to change this, Congress will have to pass legislation, said Childears.
But with the guidance, the DOJ and FinCEN added an extra regulatory burden to banks, said Childears. Now banks’ suspicious-activity reports, which they must fill out when they notice something they think may be connected to illegal activity, must be broken down into three separate reports. Banks were also given 24 new “red flags,” that they must keep an eye out for, Childears said.
“Banks must more closely review transactions, which requires lots of staff,” he said.
Molly Armbrister can be reached at 970-232-3139 or firstname.lastname@example.org. Follow her on Twitter at @MArmbristerNCBR.