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Banking on regulatory relief

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Posted: Wednesday, June 6, 2018 12:00 am

When the stock market plunged 3,600 points in the fall of 2008, triggering a financial crisis, everyone started pointing fingers.

There was plenty of blame to go around. But the crux of the problem was that big banks were passing out mortgages to anyone with a heartbeat, and then making huge bets that those debts would be repaid.

When those debts came due, too many people couldn’t pay, and banks lost billions. Markets spiraled, jobs disappeared and savings vanished. For several years, the economy trudged through a recession.

In response to all this, Congress passed the Dodd-Frank Act in 2010, a 2,300 page law aimed at reining in the worst impulses of banks.

But according to Lee Garrett, executive vicempresident and chief lending officer at Liberty First Bank in Monroe, the law had unintended consequences for smaller banks like Liberty First.

He said it lumped smallerbanks, which often offer straightforward products to smaller communities, with larger banks offering exotic instruments to bigger consumers.

Those regulations have had a particular strain on mortgage lending and general compliance for smaller banks following the passage of Dodd-Frank.

However, a recent bill passed through Congress with bipartisan support aimed at easing the regulatory burden on smaller banks like Liberty First by modifying a few of the rules for banks of a certain size.

“We’re thrilled to get regulatory relief on rules that make us have a similar infrastructure to much larger banks,” Garrett said.

The new law will affect smaller banks in two major ways, according to Garrett.

First is that they will not be subjected to “exams” as frequently. Current law requires all banks to undergo stress tests that simulate how the banks would cope should a recession hit tomorrow.

Right now the banks have to do these every year; the new law will lengthen the exam period for smaller banks to 18 months or two years.

The practical outcome of this change is it will allow the bank to lend more money, since the primary way banks pass stress tests is having more money in their reserves. Less frequent tests mean more opportunities to lend.

The second benefit Garrett cites has to do with the Home Mortgage Disclosure Act, which was a law passed in 1975 aimed at preventing discriminatory lending, a problem that has plagued Americans for generations.

HMDA requires banks to report dozens of data points to federal authorities on every person they consider for mortgages.

That number was originally 30 points, but jumped to 70 last year.

The new law rolls back that number to 30 for banks like Liberty First that originate less than 500 mortgages a year.

Garrett understands why the rules are needed, but thinks all the essentials can be covered in the original 30.

“It’s a lot of work to report all that data,” Garrett said, “It makes us think about it, but we’re ultimately going to lend to qualified buyers in all parts of our community anyway.”

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