- ICBA will continue to warn regulators that overly conservative safety and soundness and compliance exams are having an adverse impact on the ability of community banks to lend and are impairing their ability to support economic growth. To prevent unnecessary bank failures, the examiners must exercise appropriate restraint. Overall, there needs to be a more flexible supervisory approach to community banking.
- ICBA will resist efforts by the regulators to impose hard concentration limits on any type of lending.
- Examiners should exercise more flexibility with regard to those banking institutions that have been deferring TruPS dividends for up to five years to preserve capital.
- Examiners should take a longer term view of real estate held by banks as collateral for loans and should not demand aggressive write-downs and reclassifications of loans based on forced sale values of real estate during illiquid or dysfunctional markets. Community banks should be allowed flexibility regarding appraisal requirements on properly underwritten performing loans and not be required by examiners to obtain unnecessary and expensive subsequent appraisals.
- Community banks are concerned that certain restrictions or practices that apply to the largest banks will come down to their level as “best practices.” Examiners should not apply large bank practices to community banks that operate according to a different, less complex, and more conservative business model.
- Community banks that have proper and balanced controls in place should be able to provide payment processing services for customers engaged in legal, higher-risk activities such as payday lending. It is beyond the scope of the supervisory process to prohibit or discourage community banks from providing these services. ICBA opposes a supervisory process that places community banks at a competitive disadvantage to larger institutions due to inconsistent oversight.
- ICBA supports legislation that would reform the appellate process for agency decisions or actions and allow bankers to appeal to an independent council or ombudsman office an adverse determination made by an examiner in an exam report.
Community Banks and Zealous Examiners. Community banks continue to encounter zealous and overly conservative examiners who are requiring write-downs or reclassification of performing loans due to the value of collateral irrespective of the income or cash flow of the borrowers and are demanding that banks increase their capital significantly above the minimum regulatory levels established for well-capitalized banks. Examiners continue to criticize the use of certain types of non-core funding such as Federal Home Loan Bank advances and brokered deposits including CDARs reciprocal deposits. Regulatory agreements that limit a bank’s ability to declare dividends harm shareholders and make it more difficult for the bank to raise capital. Compliance exams have become more difficult as examiners are scrutinizing a wide range of loans and disclosures for fair lending, UDAP and Truth-in-Lending violations. Overall, there needs to be a more flexible approach to the supervision of community banks.
ICBA Will Continue to Caution Regulators About Excessively Conservative Exams. ICBA leadership and staff have repeatedly met with the heads of the banking agencies to caution them that overly conservative exams could result in an adverse impact on the ability of community banks to lend and therefore impair their ability to support economic growth. Community banks are significant small business lenders, and any contraction of commercial lending will impede economic recovery efforts. To prevent unnecessary bank failures, the examiners must exercise restraint. ICBA will continue to monitor community bank examinations and communicate its concerns to regulators. ICBA will also resist any effort by the regulators to impose hard concentration limits on any type of lending, including CRE, agricultural, or residential mortgage lending. In addition, examiners should exercise more flexibility towards those banks that have been deferring their TruPS dividends for up to five years to preserve capital.
Long Term View of Real Estate Values. Examiners should take longer term view of real estate held by banks as collateral and should not demand aggressive write-downs and reclassifications of loans based on forced sales of real estate that occur during illiquid or dysfunctional markets. Also, community banks should be allowed flexibility regarding appraisal requirements. Too often, examiners have required banks to obtain expensive subsequent appraisals on loans that have been properly underwritten and that continue to perform.
Applying “Best Practices” to Community Banks. Community banks are concerned that certain restrictions or practices that apply to the largest banks will come down to their level, through the examination process, as encouraged or expected “best practices.” Examiners should not apply large bank practices to community banks since community banks operate from a different, less complex and more conservative business model. Examiners also should not criticize community banks in their final written examination reports for not complying with “best practices” unless the criticism involves a violation of bank policy or regulation. Industry “best practices” should be transparent enough and sufficiently known throughout the industry before they are cited in an examination report.
Higher-Risk Payment Processing. Community banks that provide payment processing services for customers engaged in higher-risk activities such as payday lending should perform proper risk assessments, conduct due diligence to determine if customers are operating in accordance with applicable law, and maintain systems to monitor these relationships on an ongoing basis. Regulators and law enforcement should not prohibit or discourage community banks from serving these customers provided adequate and balanced controls are in place. The indiscriminate targeting of community banks offering these services places community banks at a competitive disadvantage with the large banks.
Appeals Process for Exams Should be Reformed. ICBA supports legislation that would reform the way bankers can seek a review of an agency decision or action resulting from an exam including a classification of a loan, an exam rating, or the adequacy of loan loss reserve provision. Currently, bankers can seek review of these actions or decisions internally or through the ombudsman’s office. However, these appeals are usually not successful. Furthermore, community bankers often choose not to appeal out of fear of retaliation. ICBA supports legislation that would allow bankers to appeal to an independent council or ombudsman office and that would prohibit any sort of retaliation against the bank for exercising its right of appeal.