There is a single mortgage lending document that comes with 1,000 pages of instructions banks are required to follow.
“Banks are the most heavily regulated industry in the nation,” said Amanda Averch, director of communication for The Colorado Bankers Association. “[The association] is aware that the cost of compliance has become a much heavier burden in the past decade, and that’s due to the increase in regulations that stem from the Dodd-Frank Act put in place following the economic downturn in 2008.”
Congress, in May, passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which provides amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as changes other post-recession regulatory requirements.
In addition to establishing new consumer protections, the legislation modifies different securities- and investment company-related requirements. It also includes regulatory relief for thousands of small and medium-sized banks, such as freeing them from the “stress tests” that measured their ability to survive an economic downturn.
However, banks and credit unions are awaiting guidance from regulatory agencies about implementation of the changes, said Robin Roberts, president and CEO of Pikes Peak National Bank, in an email.
“It remains to be seen whether the changes will reduce the compliance burden on banks, especially small banks,” she said.
And while the Republican-backed bill has received bipartisan support, some Democrats still question making changes to Dodd-Frank so soon.
“It’s a bad bill under the guise of helping community banks,” said Rep. Nancy Pelosi, D-California, during a debate about the bill on the House floor in May. “The bill would take us back to the days when unchecked recklessness on Wall Street ignited an historic financial meltdown.”
The New York Times reported May 22 that several Democrats believe banks don’t need any relief as they are posting record profits.
In the first quarter of 2018, the combined net income of commercial banks and savings institutions in the United States reached $56 billion, which is a 27.5 percent increase from the prior year, according to a report released in May by the Federal Deposit Insurance Corporation.
Though in recent years, Roberts says, banks have required additional resources to remain compliant compared to before the financial crisis.
“The Dodd-Frank ‘reform’ created myriad new rules and regulations to be implemented across the spectrum of bank operations,” she said.
Banks started having to hire compliance-related personnel to manage the risk or outsource the task to third parties.
“We know that compliance burden and cost has been a driving factor in consolidation in the industry,” Averch said. “Obviously, that is a much heavier burden for a smaller bank than for a larger bank which can spread out that cost.”
Some banks stopped offering certain products or services due to compliance issues.
“In some cases, the costs associated with the additional compliance have caused banks to leave the mortgage lending space altogether,” Averch said. “It just becomes too costly and burdensome, so banks have stopped making mortgage loans, and the customer is who suffers the most when that happens because they have less options.”
Banks also had to increase compliance training and resources for employees.
“Banks have increased the costs of products and/or services to compensate for the compliance costs associated with providing them,” Roberts said. “Increased regulatory burden is a real cost of doing business, which is then passed on to consumers.”
Prices of financial products go up in relation “to the risk of the product and the compliance required to manage it.”
“For example, the Dodd-Frank ‘reform’ affected residential mortgage lending in a serious and expensive way,” Roberts said. “From disclosures to licensing to nearly every step of the mortgage underwriting process, Dodd-Frank instituted new rules.”
Most home buyers who financed via a mortgage have dealt with a residential appraisal.
“Prior to Dodd-Frank, residential appraisals ran a consumer about $350 to $400 per appraisal,” Roberts said. “Today, those same appraisals run $550 to $700 per appraisal.”
She says inflation hasn’t increased the cost of appraisals but compliance with additional rules and regulations has.
“Banks are businesses, just like businesses in other industries,” Roberts said. “If government regulations increase the cost to provide a product or service, the cost of that product or service will increase. This is true with any business affected by governmental actions related to its products and services.”
Compliance also affects customers through regulations that require banks to gather personal information about their customers, such as deposit activity or their personal background information when applying for a loan.
“If you are a bank customer and have ever asked yourself, ‘Why does my bank need that information about me?’ You can probably thank a bank regulation for the perceived invasion of your privacy,” Roberts said. “On the other hand, increased bank compliance gives consumers the sense that government rules and regulations are protecting them from unsafe, predatory and/or deceptive practices.”
Roberts believes bank compliance increases consumers’ comfort level in the safety of their deposits, the long-term value of their real estate holdings, and the stability of the local and national economy.
“Increased bank compliance helps consumers feel confident that terrorist acts are not being funded through money laundering activities and that whole areas of a city are not being intentionally left out of any bank’s lending activities,” she said.
From a governmental perspective, bank regulations provide a framework in which all banks must operate, regardless of size or location.
“It makes it possible for governmental agencies to measure safety and soundness across the banking sector,” Roberts said, noting, however, that the government doesn’t take into account the cost of compliance implementation or the necessity of regulations for some banks rather than others.
“As a result, increased regulatory burden can reduce consumer choice because smaller banks will eliminate products or services if they can’t reasonably navigate the compliance requirements and/or increase the cost of products and services for consumers,” Roberts said.
Jenifer Waller, the chief operating officer for The Colorado Bankers Association, said banks face “excessive regulation in today’s regulatory environment.”
“It makes it very easy to have a simple oversight of missing a check mark on a box or something very small, and that is what the majority of bank violations are,” she said. “It’s something very small and technical that really has no impact on the consumer.”
Adding regulations that benefit consumers aren’t the problem, Waller said.
“It’s when over-regulation makes it hard for us to meet the needs of consumers that we have a challenge, and that was the situation we were in after Dodd-Frank,” she said. “We are really hoping the passage of the regulation reform bill helps ease and tweaks those [regulations], so we can meet the needs of our customers in our communities.”
When something like the most recent financial crisis happens, the response is often, “the government needs to do something about this,” Roberts said.
“The result, then, is increased laws and regulations that eventually cost consumers more money with questionable results in preventing a catastrophe in the future,” she said. “Blanket regulation across any industry will frequently have the unintended consequence of higher costs and less choice for the people who use those products and services.”