Office of the Ombudsman
Dodd-Frank legislation and Mortgage Reform
During the first half of 2012, the FDIC Office of the Ombudsman heard from a number of community bankers about the perceived regulatory burden of the Dodd-Frank legislation. Chief among their concerns is the creation of the new Consumer Financial Protection Bureau (CFPB) and the burden of mortgage reform, including compensation restrictions for mortgage originators.
During my many years with the FDIC, I have witnessed a steady increase in federal consumer protection laws that have required banking resources to ensure compliance. Each time a consumer law creates a new challenge, bankers tend to overcome the challenge and continue to operate successfully. For most bankers, treating the customer right is common practice, and adjustments to comply with new regulations are minor. For a few bankers, more effort is required. However, I have never known a bank to fail because of a federal consumer protection law, and nothing in the Dodd-Frank legislation raises this prospect. I say this to temper the dialogue rather than discourage important conversations among bankers, lawmakers, and regulators over how best to resolve the continuing challenges in the U.S. economy.
In fact, I encourage bankers to avail themselves of all avenues for feedback to lawmakers and regulation writers. One avenue is the FDIC Office of the Ombudsman. Bankers who contact us can rest assured that we share your concerns anonymously with Acting FDIC Chairman Martin Gruenberg. Also, the Small Business Regulatory Enforcement Fairness Act requires the CFPB to meet with small businesses, including community banks, when proposing a rule that will significantly affect these businesses. This requirement offers community bankers yet another opportunity to provide valuable feedback to regulators.
Parts of the Dodd-Frank legislation have already positively affected community banks. For example,
- The legislation changed the assessment base from deposits to assets, which lowered FDIC deposit insurance premiums for most community banks, collectively saving these institutions billions of dollars during the most recent quarter.
- The legislation gives the FDIC more flexibility to raise the Deposit Insurance Fund to required levels, allowing the FDIC to spread the financial burden for banks over a longer period.
- Section 335 of the legislation permanently increased the standard maximum deposit insurance amount from $100,000 to $250,000. (Congress had previously made this increase temporary and scheduled it to return to $100,000 on January 1, 2014.) Community bankers had pushed for an increase in insurance coverage for years.
- Dodd-Frank provides unlimited coverage for noninterest-bearing transaction accounts, separate from the standard maximum deposit insurance amount, until December 31, 2012. Many argue this coverage has allowed community banks to attract more deposits and has resulted in lower depositor losses when an FDIC-insured institution has failed. However, it also increased the cost of resolving some bank failures, which FDIC-insured institutions absorb through FDIC deposit insurance premiums.
- Dodd-Frank lifted the prohibition on paying interest on transaction accounts, a restriction that community banks had objected to for years.
- The legislation provides the FDIC with broad authority to orderly liquidate systemically important financial firms. This authority will restore market discipline and promote an understanding among shareholders and unsecured creditors that they, not taxpayers, are at financial risk. More information on the FDIC’s systemic resolution efforts can be found at www.fdic.gov/regulations/reform/index.html.
- Dodd-Frank gives the CFPB responsibility for supervising nonbank financial institutions, providing a more even playing field for community banks and more protection for consumers.
I would ask community bankers to acknowledge these aspects of the Dodd-Frank legislation that have already benefited their institutions, inform legislators and regulators of areas that may be of concern, and remain committed to helping creditworthy borrowers so that our economy can continue to recover.