A sharp increase in regulatory compliance expenses will likely spark a rise in community bank M&A, according to recently-released minutes from an April 13 Community Depository Institutions Advisory Council meeting.
The council, which provides community bank-focused input to the Federal Reserve Board, cited the Consumer Financial Protection Bureau’s recently finalized Section 1071 rule and the FDIC’s modernization of the Community Reinvestment Act as especially troubling for bankers.
“Some council members reported that community institutions are considering acquisitions in order to scale up and accommodate increased costs,” the minutes stated. “Many of the services provided by community development institutions, such as online banking and ATMs, do not generate any income. Limitations on fees will squeeze already-shrinking margins and prevent banks from continuing to offer or grow such services.”
Banks are managing rising costs by considering staff reductions and outsourcing. “Beyond staffing changes, Council members reported that depository institutions are closing facilities and moving staff to a hybrid work setup to economize and downsize,” the meeting minutes stated.
Finalized in May, Section 1071 requires lenders to collect and submit data on credit applications by women-owned, minority-owned and small businesses. Lenders will need to furnish data on loans made to small businesses with less than $5 million in the last fiscal year, submit Congressionally-required data points, and provide additional information typically included in lender files.
Council member Kim DeVore said M&A discussions have already been taking place throughout the community banking industry. DeVore, president and CEO of Jonah Bank of Wyoming, said Section 1071 implementation will likely make those discussions more frequent. Community banks will need to spend between $50,000 and $100,000 annually to comply with the rule, DeVore said. Banks that heavily rely on small business lending will likely opt to pay the compliance expenses while those with a smaller footprint might choose to exit the business line.
DeVore said M&A discussions are especially likely if the rule is implemented similarly to the Home Mortgage Disclosure Act requirements, which covers borrower data from 1-4 family mortgages. Though analyzing fair lending in HMDA is relatively simple, DeVore said, the task is harder for analyzing Section 1071 data and will require more expensive compliance software as small business lending considerations are far more complicated.
According to Wolters Kluwer, the proposed CRA modernization includes an additional type of assessment area based on mortgage and small business activity; new standards to measure loan distributions; and new tests related to retail lending, retail products and services, community development services and community development financing. According to the Advisory Council, the updated standards could force banks to adopt standardized loan structures.