Five years after the Dodd-Frank Act was signed into law, consumers continue to celebrate rules that require banks to disclose more fees and take less risk.
But don’t expect local bankers to be busting out the bubbly. This is one anniversary they’d rather forget.
President Barack Obama talked about the need for financial reform on July 21, 2010, when he signed the legislation formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act.
"For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy," he said. "Unscrupulous lenders locked consumers into complex loans with hidden costs."
But clamping down on the bad guys led federal officials to enact what the American Bankers Association describes as "an avalanche of regulation," critics charge. Banks across the country, including those doing business in northeast Indiana, are still struggling to absorb costs of complying with the 398 new rules spelled out over thousands of single-spaced pages.
"It’s a challenge for a small community bank," said Michael Zahn, president and CEO of First Federal Savings Bank in Huntington. "It’s broad, and there are so many elements to Dodd-Frank."
First Federal increasingly has to hire outside consultants to help it navigate particularly tricky requirements. All employees, not just designated staffers, deal with compliance issues now, Zahn said.
iAB Bank has added a compliance component to every job description in the bank, said Karen Cameron, executive vice president.
The Fort Wayne-based bank has established a compliance council, which meets on a regular basis, and two risk management teams, one made up of executives and the other of board members. Even tellers receive ongoing training on new rules they need to follow as Dodd-Frank’s various requirements are clarified by federal regulators.
Cameron was at a loss Monday to estimate how much of a hit the bank’s bottom line has taken now that employees have their heads down as they busily cross T’s and dot I’s.
Several things have suffered, she said: "Running the daily operations. Sales coaching. Keeping our heads up and looking around for new business."
Zahn estimated his bank’s annual cost of meeting all the new requirements at "easily more than $100,000."
First Federal, which has $275 million in assets, is near the smaller end of the spectrum of Indiana-based banks. At the other end is Evansville-based Old National Bank, which has $12 billion in assets.
Old National’s annual Dodd-Frank-related costs are in the millions, President and CEO Bob Jones said Monday.
The cost of keeping up with new rules and training staffers to comply is about $2 million to $3 million a year, he said. On top of that, the bank’s revenue has fallen by $8 million to $12 million before taxes because Dodd-Frank allows federal regulators to limit how much banks can charge retailers for processing credit and debit transactions, he said.
The American Bankers Association, a Washington-based industry group, warned of the likely result.
"Ultimately, the cost of over-regulation will be felt by bank customers in the form of restricted credit and fewer services and products available," ABA officials said.
Jones sees some good in Dodd-Frank.
Old National has benefited from going through stress testing, he said. The process tests whether banks have enough money to keep lending in an economic downturn and allows executives to more accurately forecast capital needs to board members.
Jones believes serious reform was necessary after the financial meltdown fueled by subprime lending – or approving home loans for borrowers who had no realistic ability to pay them back.
But, he said, "Congress painted all of us with a broad brush, and I think that’s grossly unfair."
iAB’s Cameron sees value in transparency, including notifying borrowers of fees and other fine-print clauses in home loans, for example.
But she worries that the blizzard of documents people sign at loan closings might overwhelm them, leading to consumers absorbing less information rather than more.
Zahn got a little philosophical when considering banking in the post-Dodd-Frank Act era.
"The rules are the rules, so we have to adhere to that and manage it as efficiently as we can," he said.
But that doesn’t mean the bitter medicine goes down easily.
"If we didn’t have those additional costs," he said, "then, of course, we’d be more profitable than we are."