Things change over time, and if you go back far enough, differences can be dramatic. I cite the regulatory environment for community banks as an example.
In August of 1993, we ran a story about the bank regulatory agencies publishing an interagency policy statement on credit availability. The statement describes an effort to “eliminate impediments to loans to small- and medium-sized businesses.” An OCC official explained that well-run banks would be allowed to create a special loan bucket for character loans. Bankers would be allowed to make these loans “with minimal documentation requirements.” The OCC official told bankers at a meeting I attended that examiners would not look at any of the loans in the bucket as long as they were current.
What a difference three decades can make! Earlier this year, the Consumer Financial Protection Bureau finalized an update of the Equal Credit Opportunity Act’s Section 1071 with respect to loans to small businesses. The update is almost 900 pages long. Whereas regulators in 1993 were concerned about impediments to lending, believed in character loans, and actually sought to reduce reg burden, now they are requiring banks to collect data that has nothing to do with creditworthiness. This is a far cry from the 1993 guidance, which says banks should take into account the “general reputation and good character” of a borrower when making lending decisions.
While regulators in the early 1990s acknowledged the negative impact of reg burden on lending, regulators today seem indifferent to the burden of Section 1071 implementation on smaller banks. The cost of the software and training associated with Section 1071 compliance doesn’t seem to matter to regulators at the CFPB, even though the practical impact of that cost is going to mean less lending to small- and medium-sized businesses. Community banks make most of the small business loans in this country and the new Section 1071 rules are going to hit them hardest.
While the courts cannot turn the clock back, they offer community banks a ray of hope. A bank and two associations have filed suit against the CFPB asking the court to at least put Section 1071 on hold until the Supreme Court rules on the constitutionality of the CFPB’s funding, a question which is pending in another case. Banks which are being required to spend money now to prepare to comply with 1071 will not get those funds back if the update is nullified because the CFPB’s funding is declared unconstitutional.