Financial Services

Too Many Regs: ‘Death by a Thousand Paper Cuts’

YOUNGSTOWN, Ohio – Ten years after the Great Recession, community banks and credit unions still need to comply with regulations put into place in response to the financial crisis, with little to no relief, even as the economy seems to be humming along.

Although regulations are imposed with the best intentions – to maintain the security and the soundness of the financial institution – there are unintended consequences, executives say.

In 2017, the Credit Union National Association reported regulatory burdens cost credit unions $6.1 billion overall. Bill Fulk, vice president of lending at 7 17 Credit Union, estimates half of his time is spent on managing regulatory changes. Before the financial crisis, it was only 10%, he says.

A recent change to the Economic Growth, Regulatory Relief, and Consumer Protection Act added more work for Fulk in 2018, he explains. The revised law requires banks that receive more than 500 mortgage applications a year to do additional reporting for the Home Mortgage Disclosure Act.

“We were already providing that information on a compliance statement, but now because we hit that threshold, we need to send them a separate piece of paper,” Fulk says. “Something that sounds really simple and easy to do is significantly more complex.”

Fulk says the additional paperwork adds costs and is a duplication of efforts in the credit union’s back office operations.

“It’s all these little things. It’s like a death by a thousand paper cuts,” he says.

At Farmers National Bank, Carl Culp, chief financial officer, faces the same challenges as Fulk, as a good chunk of his time also is involved in managing compliance with regulations.

“Community banks are those under $10 billion in assets,” Culp begins. “We’re a little over $2 billion now. A lot of the bank regulations currently in place are designed to cover all banks, but some regulations, we think, need to be more tailored to the size of the bank, the risk profile, geographic location, all the business and services they provide.”

A regulation that will become another burden on Farmers is the Current Expected Credit Loss, a new way of accounting for losses on bank balance sheets. The practice goes into effect in 2020, and Culp says the bank has a group in the company working on it.

“It’s taking up time that could really better be spent on making new loans to customers and generating more investment in our community,” he says.

While it might seem that most regulations cause headaches for community banks and smaller credit unions, a law passed Sept. 29 is seen as a positive for financial institutions in the community.

Provisions of the Ohio Adult Protective Services laws were amended to require employees of financial institutions to report to county departments of Job and Family Services when they suspect an adult is being abused, neglected or exploited.

“When people come into our offices, we have a relationship with these individuals and sometimes you just know things aren’t right,” says Michael Kurish, president and CEO of Associated School Employees Credit Union. “They will be accompanied by somebody who is trying to exploit them, profit from them or they’ll say things that make you wonder what is happening back home.”

Protecting elderly customers from being financially abused, or exploited in any way, was something that employees were already doing, Kurish says. But now, if an employee makes a report and it is determined to be unfounded, the credit union isn’t at fault.

“When people see something like this they’re sometimes hesitant to act and sometimes that hesitation is enough to allow somebody to be injured in a fashion that could be avoided,” Kurish says. “So they’ve taken away liability.”

On top of new regulations, dictates put into place years ago remain and financial institutions are still expected to comply with them. The most burdensome is the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 with 2,300 pages and more than 400 rules. Fulk of 7 17 says he hasn’t seen any of these rolled back.

Too many regulations doesn’t just hurt the financial institutions, but also the consumer. One regulation that Fulk says affects members at 7 17 Credit Union is the timeframe it takes to process a mortgage application as specified by the Truth in Lending Act.

“Just over the past five years, the disclosure has changed half a dozen times,” he says. “The most recent requirement is every time there’s a change, you have to wait an additional three days for the consumer to close the mortgage. There could be many changes that can really elongate how long it takes to get that mortgage done.”

Gary Soukenik, president and CEO of 7 17, cites a Credit Union National Association study conducted in the seven years after 2008 that found there were 190 regulatory changes from 15 federal agencies.

“That equates to 27 a year and one every two weeks. To read them, there are over 6,000 pages,” he says. “We’re trying to keep up with that but at the same time serve our members, who are our No. 1 focus.”

Some financial institutions have been forced to close, unable to afford the cost of compliance with the regulations. This has resulted in less competition in the marketplace, according to Soukenik.

“When there’s less competition, the consumer doesn’t benefit as much,” he says. “Because the consumer benefits from greater competition in the marketplace, it drives the loan rates down and boosts up the savings rates.”

Although there have been plenty of regulatory changes in recent years, some actually provided relief to financial institutions, something not seen prior to 2016, Fulk says.

An example, adds Farmers’ Culp, is bank regulatory reports. Once performed on a quarterly basis, they can now be done semi-annually. And the federal examination cycle has been extended from once every 12 months to once every 18 months.

“Our hope is, over time, the regulators will do more of a risk-based approach to regulatory guidance and maybe scale back some of those things for community banks,” Culp says. “It would give us more time and resources to invest in our communities.”

Regulatory relief that Kurish of Associated School Employees saw in 2018 includes legislation that provides credit unions the ability to create a trust estate if one of its members passes away in order to serve surviving family members.

Other changes modernized regulations to allow compensation for credit union board members, election of directors with electronic balloting and quarterly board meetings.

“We’ve been asking since 2015 for these changes,” Kurish says. It’s taken the three years to explain why those needs are needed to enough legislatures to get them to change. Nothing changes in a vacuum.”

“There is a need for regulations. But we need regulations that are commensurate with the players who are providing a particular service,” he says. “You have to strike a proper balance between regulations. You could have too few, you could have too many.”

Published by The Business Journal, Youngstown, Ohio.