Bankers’ Hours column: Banking isn’t really changing all that much
Is banking really being deregulated under the new administration? Will it be easier for everybody to borrow money, from home-buyers to business owners? Will the plethora of paperwork connected to getting many types of loans be reduced or streamlined?
The answers, in order: Not really. No. Probably not.
It’s become something of an urban legend that, now that the Democrats are out of power, qualifying for virtually any kind of institutional (bank) loan will be simpler, and lenders will return to “common sense underwriting.”
A new approach to granting credit is very unlikely. Although some documentation requirements may become less strict, basic underwriting philosophy is pretty much “common sense,” and always has been. There was a departure from those criteria for certain mortgage products in the early years of this century, but the basic guidelines for Fannie Mae and Freddie Mac loans haven’t really changed much since the 1980s and aren’t likely to see much tinkering now, or in the near future. (Although lenders are paying more attention to them than they were in, say, 2004.)
In granting business and development loans, banks aren’t going to behave like venture capitalists. Cash flow and business history will continue to be paramount; the bank business model is ponying up after a concept is a proven winner.
There will be a new atmosphere in the banking business, but it’ll make bankers a lot happier than it will borrowers, and there won’t necessarily need to be a rewrite of statutes and regulations. Surprisingly, alterations in regulatory oversight often come from administrative and attitudinal changes, not the rewriting or elimination of regs.
In the late ’80s, the so-called Savings and Loan Crisis hit; hundreds of S&Ls were closed down. In 1989, the Financial Reform Recovery and Enforcement Act was passed by Congress, to assure that another banking meltdown would never again happen. And it worked, just like Versailles Treaty after World War One assured that there would never be another global conflict.
I was associated with a group that purchased a failed S&L from the Resolution Trust Corp. in 1990, the federal entity that oversaw the disposition of failed banks and their assets. So, in the early ’90s examiners hit the bricks with a charge to crack down on those sleazy Savings and Loan executives. The bank we bought was in Colorado, our investment group was located in south Florida, which, naturally entailed travel back and forth. At one of our early federal bank exams, one of the examiners wrote us up for not including boarding passes with our airline ticket receipts. The reason: It was alleged that we could have purchased tickets, gotten a refund, and pocketed the cash.
This example shows that regulators have great power, and have had for many years. But they generally only use it to its fullest extent when orders come down from the top, i.e. the FDIC and Congress, to do so. During the second Bush administration when the Gathering Storm of the Great Meltdown of 2008 was on the horizon, banking overseers had all of the statutes, regulations and tools to reign in the tide of toxic mortgages that led to the financial crisis.
There’s been plenty of criticism of the Son of FIRREA, the Dodd-Frank Act. And there certainly will be some tinkering with it, but it’s very unlikely that it’ll be stricken from the books. Banks, especially the TBTF’s (Too Big to Fail) have learned to live with it very nicely. And the big guys seem to be actually cozying up to the CFPB (Consumer Financial Protection Bureau), an agency that answers to practically nobody, and has been viewed as the reincarnation of Freddie Krueger by most small and mid-sized institutions.
The reason for this is that money center banks have spent billions in infrastructure and personnel to comply with the oversight and multitude of regs promulgated by the bureau, and now they can get back to making a lot of money, which they’re managing to do quite efficiently. And this billion plus dollar investment by big banks is generating an unintended benefit for them: It’s little known, but true, that small institutions — so-called “community banks” — constitute some of the toughest competition that the big banks face. It’s also true that a major commitment to compliance is an exponentially bigger drag on resources and capital of the little guys than on their mega-bank competitors: advantage, TBTF. Finally, over-regulation and the risk of government fines and lawsuits are a great deterrent to investors contemplating chartering a new bank, so maybe the big bank branch on the corner doesn’t have to worry about a pesky startup down the street.
Despite rhetoric about getting rid of the CFPB and rolling back Dodd-Frank, the new administration hasn’t done much of anything. The CFPB director didn’t get fired, he resigned. The administration appointed their own guy to run it, and its most egregious and punitive mandates will cease. However, about the only noteworthy development has been the rescinding by Congress of the CFPB regulation that consumer credit card holders have the right to sue an issuer, rather than being compelled to submit to arbitration in the event of a dispute. How many of us card holders have been concerned about that? Not many, but it’s been hailed as a great victory for banks. The big ones that is, who have very deep pockets and are targets for class action litigation.
So, here’s what 2018 looks like from this corner: Bankers will relax a bit, as regulators, in response to direction from on high, will ease up a bit. Securing a home loan, for example, probably won’t be appreciably easier. Nor will the standards for business loans loosen up much. There might be one upside for borrowers in a change in perception by bankers. A bit of the fear factor will recede when they’re sitting in the hallowed halls of Loan Committee, and maybe, if not get chalk on their shoes, at least run down the sideline, instead of going out of bounds.
Because, let me assure you, a lot of brave bankers have been, well, nervous, in recent years.
And, yes, we all kept those boarding passes until our next exam.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.