Rules to implement an obscure provision of a law passed in 2010 — The Dodd-Frank Act, intended to corral the risky behavior of financial institutions considered too big to fail — are now under consideration by the Consumer Financial Protection Bureau.
As a 41-plus-year veteran of the community banking industry who has unexpectedly landed in the world of academia, I am troubled by Section 1071 of DFA on multiple levels.
Sadly, community banks have been the collateral damage of this massive bill, and their cost of compliance with an ever-increasing level of federal regulation has increased significantly. While neither participating in nor profiting from the inappropriate behavior that led to the 2008 financial meltdown, these local banks have been caught in a vise that has substantially changed their business model and ability to serve customers.
Unfortunately, a number of these small banks have opted to throw in the towel. Based upon publicly available Federal Deposit Insurance Corporation data, there were 7,839 banks nationwide at the end of June 2010, just before Dodd-Frank became law. As of Sept. 30, that number was 4,923, an alarming 37.2% decline. The industry continues to consolidate as the big get bigger and the small go away. Communities nationwide continue to feel the effects of losing locally owned community banks.
Why does this matter to you, your community and the economic vitality of this country? I’m part of a team of researchers at Texas Tech University, with Bailey Allen and Drew Winters, that recently published “A Comment on Implementing Section 1071 of the Dodd Frank Act,” detailing the outsized engagement of community banks in the small-business lending space. The study details the concentration of small business and agriculture loans in community banks, the decline in this type of lending as banks increase in size and, importantly, the disparate impact on smaller banks in meeting the proposed reporting requirements.
Perhaps most telling is the data from the Paycheck Protection Program. An excerpt from the study above states:
“Data from the Small Business Administration (SBA) on this critical lifeline show the importance of smaller banks in supporting the borrowing needs of small businesses and, by extrapolation, would indicate that the reporting burden of section 1071 would fall disproportionately. The SBA recently reflected in their PPP approvals through May 31, 2021, that $799.83 billion was made in PPP loans. Banks less than $10 billion in size accounted for $335.28 billion or 41.9 percent of PPP loans.
This is important when you consider that FDIC data indicates that banks $10 billion and under represent approximately 12 percent of the industry assets. Regardless of how we examine community bank lending, it is abundantly clear that community banks play an outsized role in the small-business lending space and make a disproportionately large percentage of these loans in a variety of categories.”
Banks undergo extensive examination on all aspects of their operations, but especially on consumer and mortgage lending activity, which is thoroughly analyzed to determine evidence of any hint of discriminatory treatment. These are cookie-cutter loans; that is, they can be easily analyzed to determine any potential for favoritism or unfair treatment.
Small-business loans are the polar opposite, and each is unique and requires careful, time-consuming, and not always by-the-numbers analysis to determine the potential for success. A beauty parlor is not a mechanic shop, is not a lawn service, is not a dentist’s office. This is why the large banks steer away from small business lending.
Many of these small business loans are relationship-driven and require knowledge and experience used by community and rural bankers every day to supply needed capital for the small businesses in their communities. Large banks driven by efficiency tend to make cookie-cutter loans to consumers by formulaic approach, or they focus on the multi-million-dollar requests that provide more bottom-line revenue for roughly the same amount of work.
Small businesses are the primary creators of new jobs in the U.S. and primarily drive economic growth and vitality in communities across the country. Community banks are the engine that drives small businesses. We will all be impacted if either of these sectors is diminished or extinguished.
Mike Mauldin is director of the Excellence in Banking program at Texas Tech University. He wrote this column for The Dallas Morning News.