Boulder banker Patrick O’Brien sees both good and bad in the Dodd-Frank regulations enacted in 2010 to help prevent a repeat of the financial crisis of 2007-2008.
O’Brien, Boulder market president for Denver-based Guaranty Bank and Trust Co., said the law — known officially as the Dodd-Frank Wall Street Reform and Consumer Protection Act — helped rein in excesses in the consumer-lending and derivatives markets.
But it also created a burden on community banks facing heightened regulations, red tape and costs of doing business, and it has harmed some particularly vulnerable consumers, making it almost impossible for them to get a loan.
“The most impact for a bank like ours, a community bank, has been really on the consumer protection side and the mortgage side of our platforms,” O’Brien said. “The results of the Dodd-Frank Act certainly instituted a significant amount of additional underwriting rigor with all of our jumbo loans.”
Community bankers overall seem to embrace certain aspects of Dodd-Frank, but they’re also eagerly awaiting word of how the law might be reformed under President Donald Trump, who last week signed an executive order directing the Treasury Secretary to consider how the law should be reformed.
“We don’t believe the Dodd-Frank Act should be repealed in whole or that it will be,” said Amanda Averch, director of communications for the Colorado Bankers Association, a trade group representing the state’s banks. “We believe that particular provisions in the Act should be targeted.”
One area that CBA has identified for reform is Dodd-Frank’s rigid underwriting standards that leave bankers with little flexibility. That underwriting rigor applies to jumbo loans made on primary residences, first mortgage loans, home-equity lines of credit and other consumer installment loans.
Banks must be much more diligent about consumer-protection components of the law, including disclosures, compliance and monitoring related to customers’ income, collateral and loan-to-value ratios.
“The Act really tightened up the underwriting,” O’Brien said.
Averch said the regulations have hurt low-income consumers, small businesses, rural residents and those recently retired, many of whom can’t qualify for a loan even though a banker might have “complete confidence in their ability” to repay a loan.
“Regulations from the CFPB [Consumer Financial Protection Bureau] dictate that the borrowers have to meet government-imposed standards that they can’t meet,” she said. “We believe in targeted, not wholesale, Dodd-Frank Act reform. What we want reformed most are those issues that hurt our customers.”
O’Brien said that some tighter underwriting can be good thing — increasing the caliber of loan analysis, for example — but Dodd-Frank takes too much power out of bankers’ hands and also vastly increased regulatory oversight, forcing banks to add additional workers focused on compliance.
“I saw the impact being in the regulatory oversight bucket,” O’Brien said. “That would include just the amount and the depth of regulatory examination and review. It became more thorough, more detailed.
“It did increase the safety and soundness of the banking system,” he added. “It increased the systematic monitoring of our portfolios.”
And although O’Brien said that Dodd-Frank “has been fairly effectively absorbed from the community-bank perspective,” some changes are warranted.
“Some changing would be a reasonable level of oversight by the regulatory authorities,” he said. “We’re hopeful that maybe some of the compliance requirements could moderate and result in maybe a faster process for consumers and business applicants.”
O’Brien would like to shift some personnel currently focused on compliance to other roles that would help the bank grow.
“The results of the reform could also enable the banks to mobilize the staffing who’s currently dedicated to compliance and monitoring to more origination and outbound efforts and help the banks grow.”
He added: “I’m hopeful for a little bit more simplicity around the underwriting process and the ongoing compliance because it has increased labor hours on bank staff.”
Mark Driscoll, Colorado market president for First National Bank and vice chair of the Colorado Bankers Association, said he’d like to see some relief on qualified mortgages and the ability-to-repay rule, or ATR.
The CFPB — created by Dodd-Frank — defines a qualified mortgage as “a category of loans that have certain, more stable features that help make it more likely that you’ll be able to afford your loan. … If a lender loans you a Qualified Mortgage it means the lender met certain requirements and it’s assumed that the lender followed the ability-to-repay rule.”
But Driscoll said the provision makes it extremely difficult to lend to low- to moderate-income people attempting to purchase a home.
“The first thing that we’d like to see a little bit of a relief on is the qualified mortgage, ability-to-repay rule,” he said, expressing hope that it could be made “a little less onerous so that we can do portfolio loans, low-to-moderate-income loans.”
Portfolio loans are those retained by a bank, rather than resold.
“There’s not a lot of flexibility to do loans to low- to moderate-income people,” Driscoll said.
Driscoll referenced another reform being proposed by Rep. Scott Tipton, R-Colorado. The Taking Account of Institutions with Low Operation Risk (TAILOR) Act would “ensure federal regulatory agencies tailor regulations to fit the business model and risk profile of the financial institution, rather than impose overly burdensome, one-size-fits-all regulations on community banks and credit unions,” according to Tipton’s website.
Driscoll said as currently written, Dodd-Frank is “so big and so all-encompassing that it puts banks under a certain amount of regulation when it’s a very low-risk bank.”
He also said the CFPB should be “run more like a normal government agency, with its director appointed and subject to dismissal by the president and with its budget going through the normal budgetary process.
The CFPB is challenging a federal court ruling from October 2016 that it’s structure is unconstitutional because the president was unable to fire the agency’s director at will.
Overall, Driscoll agreed with O’Brien that some provisions of Dodd-Frank have “made the industry better and more secure.”
But, he added, “We need good, prudent regulation in our business. It just goes too far.”
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