Pendulum swinging on banking reforms

From decades spent in banking to his more recent perch as a business professor at the University of Maryland, Clifford Rossi said he has watched the pendulum of banking regulation swing from one end to the other.

With Republicans in charge of Congress and the White House, the pendulum could swing back from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Passed in the aftermath of the banking crisis in the last decade, some criticize Dodd-Frank as going too far and smothering economic growth. In June the House of Representatives — voting almost entirely on party lines — passed the Financial CHOICE Act, which would repeal key aspects of Dodd-Frank. But critics say the CHOICE Act swings too far the other way and could put consumers at risk.

“Regulation is important,” Rossi said. “Getting the balance right is tough, because it’s politicized. I think there’s a happy medium somewhere in the middle.”

According to published reports, the CHOICE Act would undo a number of the Obama-era regulations in Dodd-Frank:

• Weaken the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, which oversees government controlled mortgage institutions Fannie Mae and Freddie Mac, by giving the president authority to fire their chiefs.

• Provide what Rossi called an “off-ramp” from regulations for banks that have a capital-to-asset ratio at or above 10 percent.

• Eliminate the Department of Labor’s fiduciary rule, which requires financial advisers to act in the best interests of their clients in matters related to retirement.

Rossi said he doubts that the CHOICE Act will clear the Senate, and he doubts that any bill will come out this year.

‘Added cost’

Bankers are keeping an eye on the regulatory debate in Washington, pointing out what they see as strengths and weaknesses of Dodd-Frank.

“From my perspective, Dodd Frank has some good provisions from a consumer standpoint as it relates to residential mortgages,” John M. Menard, senior vice president of CNB Bank at The Grand in Hagerstown, Md., wrote in an email.

“The integrated disclosure form known as ‘TRID’ combined the Truth in Lending Act and Real Estate Settlement Procedure Act disclosures into one form. After an initial adjustment period from the industry, I think the form does show a clearer picture to the borrower as to costs of obtaining credit. The closing disclosure, which replaced the HUD1 settlement sheet, is in many ways an enhancement to the borrower by allowing the borrower to compare the original estimates to the final costs.”

But, like other bankers, Menard said Dodd-Frank carries a cost.

“Some of the regulatory restrictions and compliance requirements put added cost to all banks,” he said. “But the smaller community banks, by the very nature of less human and monetary assets, are more severely impacted. Regulatory relief in these areas will help more community banks remain independent.”

Rossi, while noting that Dodd-Frank was “well intended,” goes further.

“The regulatory burden that was set in place by Dodd-Frank is enormous. … It has had a stifling effect (on lending). There’s no question,” he said.

He called the Consumer Financial Protection Bureau “a good idea gone bad” that has been a point of contention for banks. The CFPB director, he said, “has pretty much unilateral authority.”

The CFPB made news in July when it ruled that financial companies will no longer be allowed to force customers to use arbitration to settle group disputes, opening the companies to class-action lawsuits. Consumer advocates applauded the move. But the American Bankers Association issued a statement saying, “Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation.”

As lawmakers look to change Dodd-Frank, Rossi said they should act with finesse, lest they undo positive aspects of the act.

“All the things that precipitated the (banking) crisis are predicated on bad behavior, human behavior,” he said.

Federal deposit insurance guarantees essentially allowed some banks “to gamble with taxpayer money,” he said, and brakes need to be put on that kind of behavior.

‘Like snowflakes’

Rossi, an executive-in-residence and professor of the practice at UM’s Robert H. Smith School of Business, previously worked in the banking industry, most recently as managing director and chief risk officer for Citigroup’s Consumer Lending Group.

Part of the concern about Dodd-Frank, Rossi said, is that it treats all banks alike.

“Banks are like snowflakes,” he said. “They’re not like raindrops.”

Financial institutions vary not only by size, but by the makeup of their portfolios and the types of communities and customers they serve.

For example, Rossi said, Dodd-Frank provides for “stress tests” on a bank’s portfolio, in an effort to make sure it doesn’t fail. But preparing for and going through a stress test can be a costly venture for a bank, large or small.

“It takes armies of people to figure stuff out at the banks now,” he said.

‘No surprise’

As he looks at some of the reform proposals, Rossi said he favors the 10 percent off-ramp concept — to a point.

“The 10 percent is not risk-based,” he said. “There is the flaw.”

The rules, he said, need to efficiently take into account the risks the bank is taking.

He acknowledged that getting those rules in balance will be a tall order — as it has been in the past.

“This is a cyclical kind of thing. … I think we’re seeing the pendulum moving just a little bit,” he said.