The U.S. Senate passed the Dodd-Frank financial industry reform bill today, a sweeping piece of legislation that will bring about the biggest changes to the financial industry since the 1930s. It isn't everyday that a 2,300-page bill makes its way all the way through the marbled halls of the Capitol, especially one that is expected to result in at least 243 new formal rulemakings by at least 11 federal agencies, including some new entities. One writer has determined that at least 27 of the new regulations to be implemented apply directly to community banks. And therein lies the rub. On its face, the Dodd-Frank legislation contemplates changes in the regulatory scheme, enhanced oversight in a number of areas including consumer finance and derivatives, and a means for dealing with systemic risk, which translated would appear to mean "big banks." Upon closer inspection, however, this bill contains plenty of oomph when it comes to community banks, and no amount of public pronouncements and posturing can apply enough makeup to hide that fact. The rulemaking process, which will begin as soon as President Obama's pen hits the parchment, will be cumbersome, complicated, and hotly debated as the law's changes are phased in over the next twelve years-that's right, twelve years before the law fully takes effect in some instances. While much of the legislation is aimed at large financial institutions and the risk they pose to the U.S. and global financial system, community banks will also be affected by the legislation in a number of ways. Community bankers were successful in obtaining exemption from supervision by the newly-created Consumer Financial Protection Bureau, and they also succeeded in being penalized less than larger banks when it comes to deposit insurance premiums. Smaller banks also won a victory when it comes to grandfathering the capital treatment of trust preferred securities. All banks, however, must now follow new minimum underwriting standards for home mortgages that will require such things as income verification, credit history, and employment status. Additionally, commission payments can no longer be made to mortgage brokers that push borrowers towards higher-priced loans, a practice that contributed significantly to the decline in portfolio quality in banks across the country. Community banks have a history of prudent lending, which in part has been based on knowing their customers. With the bill's changes, community banks may fear regulatory reprisal in cases where they may give a customer with a long-standing relationship the benefit of the doubt in a close case, based on what they know from experience about that customer or that customer's business. Additionally, the changes the bill effects in how interchange fees in connection with electronic transactions are handled has been estimated to potentially reduce interchange fee income by 75%. The likely result is that banks will be forced to choose between increasing fees on customer accounts or refraining from providing electronic banking services, a reality that could put community banks at a competitive disadvantage to larger banks that can more easily absorb the reduction in income. Increased compliance responsibilities are another aim of the legislation that will affect community banks. Only minor differences exist between the compliance demands on the part of community banks and large banks. This will likely increase the cost of doing business, which may have to be passed on to consumers or absorbed by smaller banks, which may again put smaller banks at a disadvantage. In a separate piece, we discussed the impact of the bill on interstate banking. Community banks undoubtedly are going to be impacted by the elimination on restrictions to interstate branching that the Riegle-Neal Act compromise provided when it was passed in 1994. The road ahead for our industry will be filled with many more potential hazards, but community banks have always risen to the challenges they've faced, and we believe they will do so this time, too. As always, the banking lawyers at Dickinson, Mackaman, Tyler & Hagen, P.C., with their decades of combined experience working with community banks across Iowa and the region, stand at the ready to help Iowa's community bankers steer a clear path on the road to success.
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