Fed Gov. Duke Applauds Differentiation of Community Banks in Post-Crisis Regulations

The differentiation of community banks in post-financial crisis regulations is appropriate, said Fed Gov. Elizabeth Duke. In remarks at a University of Georgia seminar, she said that community bankers have been successful in making the case against one-size-fits-all regulation. She noted that most of the regulations required by the Dodd-Frank Act are primarily directed at large systemically important banks. Also, many of the Act’s provisions specifically exempt community banks. For example, banks with less than $10 billion in total assets were exempted from a number of the debit interchange restrictions, and early studies indicate that those exemptions are working.

Community Banks. In addition, formal stress testing was required only for banks with total assets of $10 billion or more. In implementing these requirements for the larger banks, the bank regulatory agencies specifically indicated that capital stress testing would not be required for community banks. This does not mean that community banks are exempted from prudent risk management, cautioned the Fed Gov., but rather that smaller banks should think about the negative shocks that could affect their business in the future and tailor their risk-management procedures to the risks and complexities of their individual business models.

CFPB. The Consumer Financial Protection Bureau recently released final rules defining qualified mortgages that include safe harbors for mortgages that meet specific loan term and pricing criteria, including certain balloon loans made by community banks in rural or underserved areas. At the same time, they issued a new proposal that contains additional community bank exceptions, as well as a question about the treatment of loans to refinance balloon payments on mortgages that community banks may already have on their books.

Noting that smaller institutions have already demonstrated that they generally do a good job of servicing the loans they originate and that the investments necessary to meet the requirements would be unduly onerous for institutions that service a small number of loans, the CFPB also exempted most community banks from many of the provisions of new servicing requirements.

Governor Duke emphasized that such exceptions are especially important because Federal Reserve research has shown that community banks are important lenders in the mortgage market and those mortgage loans represent a significant portion of community bank lending, Also community banks are quite responsible in their practices.