Since the Dodd-Frank financial reform law was passed more than a year and a half ago, I’ve heard from a number of community bankers who identify the creation of the CFPB as their single greatest concern arising from the law.  To be sure, their concerns have merit.  The CFPB’s power will not be limited to the biggest financial institutions. The rules they write have the potential to stifle product innovation and increase regulatory costs on community banks.  All of this without any oversight from Congress.

But, as in almost every story, there is some potential for good.  The naming of a Director for the CFPB means that the most abusive and unregulated entities providing financial services to consumers are now subject to the bureau’s rulemaking authority.  Payday lenders, private student lenders and other financial intermediaries who have been preying on the poor, unadvised and unsuspecting of our society will soon be reined in by the CFPB’s authority. 

The unscrupulous behavior of these entities has done more harm than good in the name of providing “service” to consumers.  If the CFPB can provide any assistance in ending or limiting the abuses they perpetuate then I believe we all have reason to celebrate.

As this takes shape community banks have an opportunity to distinguish themselves.   We know what it means to serve customers, understanding their financial needs and seeking solutions to help them meet their goals.  Community banks are built on the bedrock of long-term relationships, not short –terms profits.   

Only time will tell what the future holds for the CFPB and how the agency intends to implement “tiered regulation” and resist  the temptation to promulgate rules to fit all institutions as Director Cordray has promised. But as the banking industry looks to the uncertain future, we have the power to influence our lawmakers and the CFPB itself to enhance the bureau’s potential to do good. 

The recent appointment of Robert Cordray is the subject of a recent Op Ed IBAT is currently distributing to publications around the state.

Unfortunately the community banks of this country are thrown under the bus by just being a bank.  They have been unable to disassociate themselves from extra costs and lost credibility resulting from the scarred reputation of the bigger banks. Today the community banks are subject to the same increased regulatory burden, increasing capital and general public disdain as the larger bank. It’s time for community banks to disassociate themselves from the big banks in the eyes of the public, the legislatures and the regulatory community. They must seek regulation under a different set of expectations, consistent with their size, capabilities and ability to compete consistent with community opportunities.

Smith, a former Chairman and CEO of Security Pacific Corp., now founder and director of a community bank in Newport Beach, California, “gets it.” Having made a living in a “too big to fail” bank and now having to survive and compete with Security Pacific’s acquiring institution, Bank of America, Smith conveys the mounting uncertainty of the future of community banks in a post Dodd-Frank era.

What’s perplexing to me is the inability of so many of Smith’s community banker comrades to recognize the reality of the financial service marketplace today. For more than 100 years, community banks and big banks have coexisted serving different market segments with virtually the same product mix.  Community banks relied on the larger banks for traditional correspondent relationships seeking help with loan participations and clearing needs. And while some of these relationships still exist today, most have gone by the wayside with the emergence of community “bankers banks” and other larger community bank correspondent relationships. Today, the systemically important to big to fail institutions have come to rely on community banks for one thing and one thing only…their credibility and grassroots relationships with lawmakers.

Make no mistake; the big banks are taking a ride on the community bank advocacy bus in Washington and throughout state legislatures all across the country. They hide like thieves in the night behind the goodwill and unified message of the community banks proclaiming “one industry voice” as the only means to a successful legislative and regulatory end. And look where that has gotten us…a “one size fits all,” over-regulated world and a growing public perception that a bank is a bank, all of us out for personal enrichment and public deception.

In his bestselling book, “Good to Great,” Jim Collins says this about the philosophy of great companies:

They start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats. And they stick with that discipline—first the people, then the direction—no matter how dire the circumstances.

The same rings true for industry success. It is time community bankers to throw the “too big to fail” off our bus. Community bankers should finally unite as one and support only those organizations whose philosophies and advocacy match precisely their needs and is not conflicted by having to serve two masters. Or as Smith concludes:

The community banks should work to convey a message that they should and must stand alone if they are to remain. They must be divorced from the larger banks both in reputation and regulation if not name.

It only took Kim Kardashian 72 days to realize that her union with Kris Humphries was not a marriage made in heaven. As we begin this New Year, let’s resolve that we have tied the knot with the too big to fail for far too long and vow instead to pull our own wagon by bifurcating and advancing our own legislative and regulatory agenda and pursuing and preserving our own good name.

Those words, spoken in response to a question posed by an ABC news correspondent about Bank of America’s decision to begin charging a $5.00 monthly debit card fee by our 44th President, sent shock waves throughout the banking community this week.  And, well, it should have.

He went on to say, “This is exactly why we need this Consumer Finance Protection Bureau that we set up that is ready to go,” Obama said.  “This is exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening.  You can stop it because if you say to the banks, ‘You don’t have some inherent right just to – you know get a certain amount of profit.  If your customers are being mistreated, that you have to treat them fairly and transparently.”

Now let me say at the outset that I don’t have any warm fuzzy feelings about too big to fail Bank of America.  Every time they are held out for their lame-brained treatment of the consuming public (remember this summer’s robo-signing incident?) it hurts all banks, including community banks.  But, if you believe in our free enterprise system, then you must admit that B of A has the right to model and price their product offerings any way they want.

Senior Democratic Senator Dick Durbin from the land of Lincoln, whose infamous interchange amendment prompted the fee to begin with, couldn’t wait to pile on.  He used the announcement to offer this suggestion to B of A customers in a personal privilege speech to his colleagues on the Senate floor.  “Vote with your feet.  Get the heck out of that bank.” Is this the brave new world of civility and discourse we live in?  Did a United States Senator call, from the floor of the Senate, no less, for a run on an American financial institution?

President Obama showed a modicum of political savvy as he later followed his advisors and backed away from his earlier comments.  When asked in a subsequent news conference whether government has the right to dictate how much profit American companies make he responded, “I absolutely do not think that.  Now (B of A) has the right, but it’s not good practice.  It’s not necessarily fair to consumers.”

A couple of observations.  First, Obama has shown his true colors and zest for creating the Consumer Financial Protection Bureau (CFPB) in the first place.  Short of this country having a nationalized banking system, he wants bank product and price regulated, and he is willing to use the bully pulpit to suggest so.  That is precisely what the industry feared when the new agency was constructed in Dodd-Frank.  Only after speaking to Secretary Geithner and Acting CFPB Director Raj Date was our President reminded that the CFPB’s mission is in fact, not to regulate product and price, but to ensure financial products and fees are clearly disclosed to consumers in plain English.

Second, just what did our fearless leader and trial lawyer Senator expect would happen when they craftily inserted debit fee interchange price controls in Dodd-Frank?  The banking industry warned that such limitation would dramatically affect debit card usage and likely result in higher fees for consumers.

I certainly do not suggest that all banks will follow Bank of America’s lead and impose a monthly fee on their debit customers.  I only opine that there is inherent danger when government gets in the way of free enterprise and attempts to create winners and losers.

Our leaders should spend less time trying to interject public policy into free markets and concentrate instead on truly enabling financial institutions to fail, regardless of size, something they attempted to do in the financial reform legislation.

Bank of America doesn’t need their help in driving consumers to other financial institutions.  They seem to be doing a pretty good job of doing that all by themselves.

Let me see if I can help out the media with this “problem.”  First, if you have a true creditworthy borrower who is seeking funds to expand their established, cash flowing profitable business, call me.  I can put him or her in touch with about 6000 independent community banks that would love to have a good earning asset on their books.

Second, call Christopher “I am now a lobbyist for the motion picture industry” Dodd and Barney Frank.  They, by virtue of their so called Financial Reform legislation, have created such trepidation and doubt and red tape that many community banks are hesitant to lend to marginal customers.  Their Dodd-Frank legislation has so empowered the federal regulatory agencies (including new ones) to conduct “witch hunts” on the industry.  In this economic environment, Congress has blamed the regulators for the financial crisis for not being “tough” enough.  The regulators in turn have unleashed their wrath on the industry with a “we’re going to getcha” mentality.  Community bankers are scared to death to lend.  You would be too if you had already been judged guilty until you could prove yourself innocent.

Hell, even the Department of Justice has gotten into the game.  Examiners looking at hundreds of loans on the books might discover a fair lending discrepancy in a rate charged one borrower vs. another for almost identical loans.  Forget about the fact that one of the borrowers might have a lower FICO score than the other…Justice Department referral.

Want to solve the so-called credit crunch and get this country moving again?  Find a few members of Congress with the backbone to reverse the horrible trend of over regulating the innocent and set their sights on the big bank abusers.  It is ludicrous to think that the same regulatory rules should apply to a 100 mm community bank and a 100 billion mega bank. 

If something is not done soon to reverse this horrible regulatory overkill trend, I’ll show you a real credit crunch when all the independent community banks throw in the towel and sell, leaving all the small business and consumer credit decisions to the big banks.

Watch the third edition of IBAT’s monthly video blog (vlog): The Corner Office.

YouTube blocked? Download the video file.

• Legislative Update;
• Texting Kills Campaign;
• Congratulations to IBAT Leadership Division President Angie Brown and outgoing President Gary Wells;
• IBAT Annual Convention; and
• IBAT Salary Survey.

Watch IBAT President & CEO Chris Williston’s first vlog to IBAT Members.

 Having been on the forefront of the financial reform debate in Congress for the past sixteen months, this August has been a welcome reprieve from the many trips to our Nation’s Capital and hours spent on the phone with Texas Congressmen and staffers.  It is also gratifying to know that it is more difficult for Congress to do more harm when not in session.  But more important than that, the lull has provided time to step back and reflect on recent legislative events, retool for future sessions and reconnect with IBAT members all across Texas.

There is a recurring theme that I hear from community bankers when asked about their thoughts on the recently passed Dodd/Frank Act.  That is, they don’t know what they don’t know.  Most all can see both the immediate benefits and the detrimental impact the Act will have on non-interest income and expense.  Almost all gird for what they can already see…more and more government regulation and intrusion to serve their customers and communities in ways they are accustomed.  Perhaps most disconcerting of all, they question the relevance of their institution once an onslaught of new consumer rules are promulgated by an empowered oversight agency that is yet to be created.

The number one strategic issue facing community bank CEO’s today is compliance.  That has been supported in survey after survey IBAT has conducted over the past six years.  When asked what circumstances might likely lead to the sale of their bank, the price offered is always listed first.  Sadly, the cost and burden of compliance is number two.  Not competitive or capital pressures, but the cost and certainty of compliance today and the uncertainty of additional compliance tomorrow.

Community banks today already spend nearly twenty five cents on every dollar on compliance costs.  It is estimated that the industry will spend nearly 50 billion dollars in 2010 on such compliance.  Every dollar spent on compliance not only raises the cost of lending and services rendered to the very people such rules are designed to protect, but diverts precious capital that can be used for credit availability.  All the while government bureaucrats wonder why this economy is slow to recover.

I am not confused about what we must do if we are to sustain community banking as we know it today and to create an environment that will attract shareholders to invest more capital in existing institutions or new investors to charter community based financial institutions.  First and foremost we must bifurcate this industry to create by legislation different rules and regulations for bona fide community banks vis a vis the large non traditional institutions.  Second, we must engage and be uncompromising in communicating our concerns as new consumer rules are being created.  And finally, we must provide new tools and assistance to our member institutions that will help all cope and reduce the overall cost of compliance.

In other words, we must create certainty in this uncertain financial world; certainty that someone is available to help with real solutions so community bankers can continue doing what they do best…serving local communities by helping local folks realize their dreams rather than the uncertainty of acquiring more resources and generating more paperwork to serve the government.

This is our challenge.  The future of community banking is dependent upon our leadership and action.

Assertions were made that the final bill was made worse by the industry being divided relative to positions important to community banks, and had the industry only spoken clearly with “one voice” a far better outcome would have likely been achieved.  To both I say, “hogwash.”

Big banks and community banks aren’t a house divided; they are two different houses.  However, when placed under the same roof, they do become the proverbial house divided.

No one would argue the fact that the final bill that passed contained many harmful provisions to banks both large and small.  But to suggest that the best strategy for the entire industry was to disengage and oppose does a disservice to the very bank members they purportedly represent, and hides the true issue of the very real dilemma that any conflicted membership trade association has today…that is, it is impossible to serve two masters.  The truth is that many community bank friendly provisions of the measure could not be supported by these organizations lest they be seen as favoring one contingency of their membership over another.

This industry conflict was not newly discovered with the introduction of the Dodd/Frank financial reform bill.  It was recognized some thirty-six years ago when 254 forward looking, progressive community bankers organized the Independent Bankers Association of Texas.  They realized that, as the industry continued to evolve, the political and regulatory interests of the community banker would not be fairly represented, yielding instead to policy positions of the large national and regional banks.  After all, they concluded, the day would come when some large dues paying financial institution votes would be more equal than others.

And boy, were they spot on.  It has been played out hundreds of times in the halls of the Texas Legislature and United States Congress since that time and it will again.

I for one am proud to work for an organization where black is black and white is white.  We don’t have to second-guess positions on important pieces of legislation.  We do not have to look over our shoulder and wonder if we are picking winners and losers in our own ranks or disengage from the process because of conflicted interests.  We do speak forcefully with a single voice…the community bank voice.

IBAT’s founding fathers did not create this organization to sit idly by and watch the community bank franchise erode over time.  That commitment is shared by the many IBAT volunteer leaders who give selflessly of their time and talents and it is the cornerstone of the principles we embrace today and tomorrow.

I am not one to tear down someone else’s house to make mine look bigger.  I don’t have to.  A house divided cannot sustain itself over time.  It will collapse on its own.

I know what you must be thinking:  “Get a life,” right?  Fact is, financial reform legislation has been my life since it was first introduced in the House last summer.  Watching the men and women who hold all the cards in shaping the future of our industry and pretend to know something about the banking industry is comical.  Pretending that this bill will somehow prevent the next banking crisis is even more comical.  Not that it is really funny…because it is not.  It is sad.  But one has to laugh just a little bit to keep the senses from overloading with frustration and despair.

I am not even going to pretend that I know where things will finally end up for community banks when the final gavel is dropped and the bill is referred back to each respective chamber for a final vote.  At this writing, things are about as fluid as the BP oil gusher polluting our sacred Gulf.

This much I know is certain:  the final product will be encased with both sweet and sour ingredients for community banks, the consequences of which we will not really know for a very long time.

I have been at this game long enough to know that, as with any massive piece of legislation, it is unreasonable to expect that you can win on every issue in which you have a vested interest.  But IBAT is always in it to win.  After all, community bankers deserve to win, having entered the fray as innocent victims, not bad actors.  And we have won a share.  Of the 26 major issues we have been following, 15 have been resolved to our satisfaction, six have not and another five still hang in the balance.

Despite our important gains, it will be very difficult to stand up and support this final monstrosity with the souring smell lingering from the interchange debate…a debate where our elected officials have determined that the big box stores and other retailers should be given price consideration for riding along the payments railroad.  I can’t wait to get my rebate from Home Depot or Walmart, how about you?  The interchange issue is an issue that never received one hour of public hearings in the House or Senate until it was included in the Senate language.  I simply cannot remember a single federal issue that IBAT expended more time and money on, only to come up on the short end of the final resolution.

Consumers lose big time, too.  Just hide and watch as the industry has to reduce or eliminate lucrative rewards programs tied to debit card usage.  Just wait until such time the Starbucks down the street refuses to accept that debit card for that $3.95 cup of Joe because they have now set a $10.00 minimum purchase requirement.

I am certain that financial reform legislation will be passed in this Congress.  Chairmen Frank and Dodd have vowed to have a bill on the President’s desk before the first bottle rocket lifts off on July 4.

But the sausage making won’t stop there.  In many ways it will just be the beginning for us.  I remember the fallout from the infamous Gramm-Leach-Bliley bill passed many years ago.  We spent the last eight years cleaning up the intended and unintended consequences from that debacle, just as we will with this one.

I think I will stick with the ribs on the ol’ barbie this Independence Day.  I have had enough sausage for awhile.