LOUISVILLE, Ky. (June 1, 2018) — With rare bipartisan support, Congress has rolled back elements of the 2010 Dodd-Frank banking regulations that impeded economic recovery by constraining community bank lending. As a result, federal regulators will restore to bankers some of the lending discretion that was lost in Dodd-Frank Wall Street Reform and Consumer Protection Act’s regulatory overreach. The clear winners are Kentucky’s consumers, communities, and economy.
Dodd-Frank regulations failed to distinguish community banks, who played no role in the 2008 crisis, from the operationally complex Wall Street banks that did. The Kentucky Bankers Association accurately predicted that Dodd-Frank would force banks, especially those serving rural Kentucky, to curtail lending due to prohibitive compliance costs for any mortgage that did not fit Dodd-Frank’s dictates. Dodd-Frank effectively eliminated mortgage loans that considered a banker’s personal knowledge of a borrower’s creditworthiness, even though such relationship-based loans were known to have far less risk of default than those dictated by Dodd-Frank’s one-size-fits-all mechanical underwriting system.
The resulting harm to homebuyers, job creation and rural communities was ultimately shared by their banks. As predicted, a longer trend of reduction in the number of banks accelerated, with the number of community banks shrinking at twice the rate since Dodd-Frank’s enactment as before. In Kentucky, mergers and sales have resulted in 35 fewer state-chartered banks in Kentucky since 2010.
By 2011, the KBA was working with Kentucky’s lawmakers in Washington and other state banking associations to address these issues, which many in both parties agreed to be an unintended consequence of Dodd-Frank that was slowing economic recovery. Seven years later, that work culminated in S. 2155, aptly named the Economic Growth, Regulatory Relief & Consumer Protection Act. It was signed into law May 24.
Several provisions of the act directly benefit Kentucky homebuyers:
- Any mortgage a bank is willing to hold in its own portfolio will be deemed a Qualified Mortgage, which restores the practice of relationship-based lending and helps more individuals qualify for mortgages.
- Fewer requirements for appraisals on mortgages under $400,000 in rural areas will reduce closing costs and speed up closing times by several days.
- Consumers will no longer have 3-day waiting period requirement if a bank extends a second offer of credit with a lower rate.
Kentucky banks will also see some relief from the high cost of complying with ineffectual overregulation, which results in more funds available for community lending and philanthropy. For Kentucky banks that have sustained their communities for decades with such philanthropy, Dodd-Frank’s forced reallocation of such funds to regulatory compliance costs has been especially painful.
The story of the eight-year battle to win this small measure of regulatory relief for community banks contains profiles in courage and cowardice, the usual K Street skullduggery, and unrelenting grassroots persistence. A book would be needed to tell it, and Kentuckians would figure prominently in the telling.
Without Mitch McConnell as Senate Majority Leader, this regulatory relief would never have seen its first vote. He gave our industry his word that he would give the bill precious floor time if we could deliver enough votes for passage, and he kept his word in the face of myriad pressures. Getting those votes put state banking associations into advocacy overdrive, acutely aware that Senate changes in November could lay waste to a finely crafted compromise with moderate Democrats in states carried by President Trump. Credit for that compromise goes to S.2155 sponsor Sen. Mike Crapo, R-Idaho.
The centerpiece of S.2155 for community bankers was the mortgage portfolio lending provision that allows bankers to determine risks for mortgages they will keep in-house. That provision had its way paved by U.S. Rep. Andy Barr and the Portfolio Lending & Mortgage Access bill he had passed in the House.
Ultimately, the advocacy of individual bankers with individual legislators made the difference, and the passage of this bill was the work of hundreds of bankers across the U.S. In Kentucky, that effort was led by our KBA presidents of the past decade and current President Tim Barnes of Hometown Bank, supported by KBA’s political consultant of 30 years John Cooper.
Perhaps no single banker in the U.S. did more to secure this regulatory relief than Central Bank’s Luther Deaton. His long-time working relationships with our Kentucky federal legislators and his position on the American Bankers Association’s board made him a bridge between the industry’s state and federal advocacy efforts that was critical to the final twists and turns on the bill’s road to passage.
Kentucky’s bankers celebrate this regulatory relief for restoring some facets of traditional community banking that we and our communities have sorely missed.
Ballard Cassady is president/CEO of the Kentucky Banking Association.