Legislators could have done so much more. Like you, I was hoping The Economic Growth, Regulatory Relief and Consumer Protection Act (the Act) would provide more regulatory relief for the nation’s smallest community banks.
There’s still cause for celebration, however. The Act has provisions related to capital requirements, financial reporting, and the Volcker Rule that reduce some of the complexities and compliance burdens that have hindered profitable growth.
Will the published regulations resemble the provisions? We’ll have to wait and see. In the meantime, I remain enthusiastic about the following:
Community Bank Leverage Ratio (Section 201)
Qualifying community banks with less than $10 billion in total assets (and that meet certain conditions) could avoid the time-consuming and overly complex calculations involved in risk-based capital calculations for capital adequacy purposes. The community bank leverage ratio capital adequacy percentage threshold should be between 8 and 10 percent.
Allowing More Banks to Accept Reciprocal Deposits (Section 202)
Certain not-well-capitalized banks will now be able to accept reciprocal deposits if the total reciprocal deposits of the institution do not exceed the lesser of $5 billion or 20% of its total liabilities.
Reciprocal deposits will be considered core deposits, meaning you can access broker deposits if you need them to grow, and you won’t have to include them in your call report. This is a big win for small community banks. Our Dashboard liquidity calculations will be reprogramed to take advantage of this provision.
Changes to the Volcker Rule (Sections 203 and 204)
A small number of our clients are engaged in complex trading. But for institutions that invest in hedge funds, private equity funds or engage in proprietary trading, the Act establishes an exemption from the Volcker Rule under these conditions:
- Must have total assets valued at less than $10 billion; and
- Must have trading assets and liabilities comprising not more than 5 percent of total assets.
Financial Reporting Requirements — Short Form Call Reports (Section 205)
Call reports are overly complex. Now, depository institutions with assets under $5 billion that meet additional criteria will have “reduced reporting requirements” for certain call reports. This simplification is long overdue and will in no way prevent regulators from discovering failing banks.
Small Bank Holding Company Policy Statement (Section 207)
The exemption from certain capital adequacy requirements will be extended to banks and savings and loan holding companies with less than $3 billion in consolidated assets, provided that the holding company meets certain other requirements. While this provision may not affect many of our clients, we must all applaud any changes that simplify capital calculations. Yet I wonder: How many institutions will stay just under the $3 billion mark to take advantage of this exemption?
Classifying High Volatility Commercial Real Estate Loans (Section 214)
To remedy what may have been a knee-jerk reaction in the first place, the Act applies higher risk weights and capital requirements only on HVCRE loans that are for the acquisition, development, or construction of real estate.
Residential Mortgage Lending
The Act also makes changes that could reduce the regulatory burden on residential mortgage lending for small institutions.
For example, under Section 104, banks and credit unions are exempted from certain Home Mortgage and Disclosure Act (HDMA) reporting requirements. According to the Congressional Research Service, lenders that have originated fewer than 500 closed-end mortgage loans in each of the preceding two years qualify for reduced reporting on those loans and lenders originating fewer than 500 open-end lines of credit in each of the preceding two years qualify for reduced reporting on those loans, provided they achieve certain Community Reinvestment Act compliance scores.
Additionally, safe harbor provisions within the Truth in Lending Act will loosen some of the requirements for a “qualified mortgage,” allowing you to approve more loans.
If the time and money you spend on compliance feels like an anchor on your business, you’re not alone.
The Minneapolis Federal Reserve found that one-third of small banks become unprofitable after hiring just two compliance employees to adhere to regulations. For other banks, loan compliance software can cost more than the profit from the loan.
We’re hoping that the published regulations will provide needed relief, so you can focus more of your resources on profitable growth.
For more information about the provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act , please contact a qualified compliance expert.