Since I arrived at the Independent Community Bankers of America in 2003, the conversation about the mixing of banking and commerce has heated up, come to a head, disappeared and then resurfaced. It is a persistent issue that keeps those in the banking and business community debating, repeatedly. First it was Walmart’s quest for banking powers through the industrial loan company charter. Now it’s fintech.
The issue is back in the forefront with Social Finance’s application for deposit insurance to charter SoFi Bank, as well as acting Comptroller of the Currency Keith Noreika’s suggestion that the government should re-examine the historic separation of banking and commerce in federal law and regulation.
Commentators who say we should do away with that historic separation should be aware that the community banking industry will once again fight tooth and nail against such a move. We fiercely and successfully opposed Walmart’s 2006 bid. More than a decade later, the core principle remains the same.
Allowing nonbank corporate conglomerates to own banks not only violates the U.S. policy of maintaining the separation of banking and commerce. It also jeopardizes the impartial allocation of credit, creates egregious conflicts of interest, and results in a dangerous concentration of commercial and economic power. It also extends the federal safety net to commercial interests, which is counter to the principles upon which the Federal Deposit Insurance Corp. was created.
The Independent Community Bankers of America’s main objection to the SoFi application for federal deposit insurance is that the ILC charter would allow the fintech company to avoid the legal prohibitions and restrictions under the Bank Holding Company Act (BHCA).
The BHCA contains a comprehensive framework for the supervision of bank holding companies and their nonbank subsidiaries. Regulation under the BHCA entails consolidated supervision of the holding company by the Federal Reserve and restricts the activities of the holding company and its affiliates to those that are closely related to banking, such as extending credit and servicing loans, or performing appraisals of real estate and personal property.
Because of a loophole in the law, companies that own ILCs are not subject to BHCA supervision. As a result, a company that owns an FDIC-insured ILC can engage in non-banking commercial activities and not be subject to consolidated supervision.
Over the years, both Federal Reserve and Treasury Department officials have expressed concerns about the lack of BHC consolidated supervision for ILCs and their parents. Under the previous administration, a 2012 Government Accountability Office report about institutions exempt from the BHCA, like ILCs, said Fed and Treasury officials “contend that the exemptions represent gaps in the current regulatory structure that pose risks to the financial system.” According to the report, those officials said “the lack of consolidated supervision of institutions that are federally insured” was “a supervisory ‘blind spot.’”
The report also cited comments from Fed officials that if Congress did not close the ILC loophole, “the number and size of ILCs could grow to much higher levels then they had reached prior to the financial crisis.”
“Furthermore, Federal Reserve officials noted that maintaining these exemptions resulted in differing regulatory oversight, raising questions about whether the exemptions provide an unfair competitive advantage,” the report said.
The dangers of mixing commerce and banking were also noted in the Obama Treasury’s 2009 report on regulatory reform proposals that preceded the extended debate over the Dodd-Frank Act.
The precedent supporting a wall between banking and commerce was also set by legislation, most recently by the ILC moratorium (which expired in 2013) that was imposed by Dodd-Frank. Let’s also not forget that in 1999 Congress debated the issue of mixing banking and commerce as it considered the Gramm-Leach-Bliley Act. Congress decided not to expand the safety net for commercial firms any further. Lawmakers heeded the lessons of the 1980s and the banking collapse of the early 1930s, recognizing that the system of deposit insurance was created for the protection of depositors of regulated banks and not for the protection of commercial firms.
As this hotly debated issue is revived once more as a result of industry innovation, the benefits of mixing banking and commerce continue to be a grand illusion.
Mixing banking and commerce wasn’t a good idea in 1929, 1999, 2006 and 2009, and it’s still not a good idea in 2017. Sometimes, the more things change, the more they stay the same.
This op-ed first ran in American Banker on August 17, 2017
Heading Off New Data-Collection Rules
With members of Congress back in their districts this week for the Independence Day recess, ICBA’s regulatory relief initiative remains in full swing. The House has passed Chairman Jeb Hensarling’s comprehensive Financial CHOICE Act regulatory relief bill, the community bank-focused CLEAR Relief Act is picking up bipartisan support in the House and Senate, and the Treasury Department has released a report advocating comprehensive community bank regulatory relief.
Two outstanding articles in The Economist detail how ICBA and community bankers are using their sterling reputation
to overhaul excessive regulatory burdens and how those efforts are paying off
with Treasury’s report. But our job as community banking advocates is not limited to rolling back the glut of regulations that have accumulated over many years. It is to replace our one-size-fits-all system with an order of tiered and proportionate rules appropriate to the size and risk profile of regulated institutions.
That means, in part, heading off dangerous standards before they can be implemented. And that’s precisely what we’re going to have to do with the small-business data-collection and -reporting requirements that the Consumer Financial Protection is advancing now.
The mandatory reporting requirements under Section 1071 of the Dodd-Frank Act will require community banks and other institutions to collect and report vast quantities of information regarding small-business loan applications. Think the Home Mortgage Disclosure Act for your entire small-business portfolio—it’s not pretty, is it? This paperwork burden will disproportionately harm community banks, waste critical resources and further restrict lending, while offering little benefit to regulators and the financial system.
The CFPB recently launched its process for implementing these reforms with a request for public input
. ICBA will work directly with the CFPB to exempt community banks from any reporting rules it issues, and a bipartisan group of 72 members of Congress recently called on the bureau
to approve a community bank exemption. Meanwhile, we are working diligently in Congress to repeal the plan’s statutory authority. Wiping out the Section 1071 authority is a core provision in ICBA’s Plan for Prosperity
and is being advanced in the CHOICE Act
, Rep. Blaine Luetkemeyer’s CLEAR Relief Act
and legislation that will soon be reintroduced by Rep. Robert Pittenger (R-N.C.).
While ICBA continues working with Congress to advance a repeal, legislators need to hear directly from community bankers on the importance of this policy. Community bankers can do their part by using ICBA’s Be Heard grassroots website
to call on their lawmakers to support the CLEAR Relief Act.
This data-collection rulemaking poses the threat of significant new burdens on community banks at a time when they are already absorbing numerous other regulatory requirements. We simply cannot allow it to further bind community banks and our local economies in additional layers of red tape.
Small Enough to Jail, Strong Enough to Resist
A documentary premiering this week in New York features a community bank that not only stood up for what’s right against overwhelming opposition—but also had the courage to share its story.
“Abacus: Small Enough to Jail”
tells the saga of the Sung family, who run Abacus Federal Savings Bank in New York City’s Chinatown. The film follows the community bank’s defense against criminal indictment for mortgage fraud brought by Manhattan District Attorney Cyrus Vance Jr. After a five-year legal battle that cost them millions of dollars, the Sung family was finally and fully vindicated.
The Sungs are a stand-up family that bleeds community banking. They have dedicated their careers to meeting the needs of underserved populations in their communities. President and CEO Jill Sung has taken up this banner as chairman of ICBA’s Minority Bank Council and as a member of our Policy Development Committee and Mutual Bank Council.
Yet the Sungs’ story shows the very cynical side of what the community banking industry faces from regulatory agencies and law enforcement. In Wall Street’s own backyard, Abacus was the only U.S. bank indicted for mortgage fraud related to the 2008 financial crisis. When prosecutors faced the prospect of targeting the large and risky financial firms that precipitated the worst economic calamity since the Great Depression—they instead chose to pick on a community bank they thought they could push around.
Boy, did they choose the wrong family to mess with! In a modern retelling of David slaying Goliath, the Sungs were exonerated after waging a scrappy and honorable challenge to the powerful Manhattan DA. Not only that, but the Sungs have displayed immense courage in telling their story to the world. It is a tale we can all learn from, and I strongly commend the Sungs for sharing it. As the film is rolled out across the country
in the coming weeks and months, culminating in a television premiere this September on PBS’s “Frontline,” community bankers and the American public will have many opportunities to witness this story for themselves.
Jill Sung herself attended the recent ICBA Capital Summit in Washington. After a screening of the documentary’s trailer, she was asked to stand and be recognized. After rising from her table, she was immediately joined by the entire ballroom of community banker colleagues, who rose to their feet in a standing ovation. As we community bankers face massive challenges—excess regulation, overzealous enforcement, relentless consolidation—we must continue standing together in solidarity to ensure we can continue meeting the needs of our customers, communities and underserved populations.
Taking Pride in Successful Capital Summit
Community bankers have many reasons to stand proud after last week’s seminal ICBA Capital Summit in Washington. More than 1,000 community bankers from across the country received the royal treatment in the White House and on Capitol Hill while advocating vitally important policy reforms in meetings with key policymakers.
Among the many high-profile activities:
- More than 100 community bankers attended a White House meeting with President Donald Trump, Vice President Mike Pence, National Economic Council Director Gary Cohn and Small Business Administration chief Linda McMahon.
- House Financial Services Committee Chairman Jeb Hensarling (R-Texas) addressed the full crowd moments before his panel took up and later passed his comprehensive Financial CHOICE Act reform bill.
- Treasury Secretary Steven Mnuchin joined me on stage for a policy discussion in which he reiterated the administration’s support for community bank regulatory and tax relief.
- Community bankers engaged in advocacy meetings with more than 300 members of Congress.
- At one of the meetings, the Kansas delegation joined Sen. Jerry Moran (R-Kan.) for the formal signing and introduction of his CLEAR Relief Act regulatory relief bill.
Washington really did lay out the red carpet for the community banking industry. It truly was an amazing week. And for me, personally, it was a very significant week, in which I announced my plans to retire next year. Effective May 5, 2018—my 15th anniversary—I will retire as your ICBA president and CEO.
At the summit, ICBA announced that former ICBA Chairman Rebeca Romero Rainey will be my successor. Rebeca is chairman and CEO of Centinel Bank of Taos, N.M. She is a career community banker with many years of distinguished service to ICBA and the nation’s community bankers. She will join ICBA as president-elect in January 2018 and become president and CEO upon my retirement. By selecting Rebeca, ICBA’s leadership has ensured that our association will be in very capable hands—not only now, but for a generation to come.
Until then, I look forward to continuing to lead this great association over the next year. After a historic week in Washington, I have never been more encouraged and optimistic about the future of our beloved industry. I plan to thank many of you in person over the coming year for the great privilege of serving you as ICBA president. And I pledge that before I depart, we will deliver meaningful regulatory relief to community banks nationwide.
White House Shows Commitment to Community Banks
As much as I enjoyed being with my fellow community bankers in San Antonio last week at ICBA’s national convention, it was nice to get back to Washington to advance the cause of community banking. The return trip was especially pleasant due to the new and refreshing attitude toward community bank regulation that now exists in the nation’s capital.
While Congress develops ICBA-advocated legislative fixes, President Donald Trump has also taken action on our industry’s excessive regulatory burden. The president has already signed executive orders directing federal agencies to establish task forces to identify and eliminate unnecessary red tape, requiring agencies to identify two federal regulations to eliminate for every new rule they issue, and ordering a Treasury Department review of regulations implemented following the 2008 financial crisis.
Together, these efforts show a clear commitment to meaningful relief of the burdens plaguing community banks. This commitment—and a remarkable understanding of what community banks face on a daily basis—was affirmed during President Trump’s recent meeting with community bankers
at the White House. At that meeting, ICBA Chairman Rebeca Romero Rainey, ICBA Chairman-Elect R. Scott Heitkamp and ICBA Vice Chairman Timothy K. Zimmerman had the opportunity to share—face to face with the president—real-world examples of how regulatory burdens get between community bankers and consumers, harming economic growth.
During the meeting, President Trump—along with Treasury Secretary Steven Mnuchin, National Economic Council Chairman Gary Cohn and White House Chief of Staff Reince Priebus—showed a sound understanding of the complex regulations we’re facing. He knew exactly the kinds of restrictions that hamper small-business and mortgage lending, and he pledged to continue working on behalf of tiered and proportional regulation.
“Community banks are the backbone of small business in America,” President Trump said. “We are going to preserve our community banks.”
I could not be more pleased. ICBA strongly supports the efforts of President Trump and Congress—including House Financial Services Committee Chairman Jeb Hensarling (R-Texas)—to roll back community bank overregulation. We will continue working closely with policymakers to advance meaningful relief, but we will need maximum participation by community bankers from coast to coast to get it done.
Please make your voices heard on behalf of regulatory relief by signing ICBA’s Plan for Prosperity petition
and encouraging your employees and directors to sign on as well. As I said
at convention, we have a great opportunity to advance regulatory relief—but we have to see it all the way through to the end
. By right-sizing regulation and allowing community banks to focus more on lending and investing in local communities, we can get America’s economy going again.
What do community banks have in common with astronauts, fighter pilots and football stars? More than you might think.
At next month’s ICBA Community Banking LIVE®
national convention, community bankers from across the nation will get to see for themselves. Fighter pilot Carey Lohrenz, astronaut twins Mark and Scott Kelly, and former NFL great Drew Bledsoe will address the gathering with presentations on leadership, teamwork and overcoming adversity—concepts that are very familiar to community bankers.
But it seems to me that what these professions have most in common is an embrace of the uncertain, the unknown. Each of us must take risks in order to excel—it’s part of the job description. Now, I’ve never piloted an F-14 Tomcat, docked at the International Space Station or thrown a come-from-behind touchdown pass into double coverage, but I know what it feels like to put my business on the line to help someone else’s succeed. Community bankers know what it means to take a chance, to have skin in the game. That is what makes the industry so exciting and provides hope for the future of our local communities.
Of course, just like Carey Lohrenz and the Kelly brothers and Drew Bledsoe, community bankers have a strong support system on their side. It might not be the U.S. Navy or NASA or the New England Patriots, but our nation’s nearly 6,000 community banks are independent collections of strong, dependable and community-oriented professionals. From the frontline to the boardroom, community bankers are committed to growth at the local level, which allows them to stake out new opportunities and innovations that move local communities forward.
But the community banking team doesn’t end there. In fact, community bankers have ICBA and an entire industry of colleagues on which they can rely. And a large representation will be in attendance at next month’s convention, along with more than 60 education sessions and hundreds of innovative solutions in the Expo.
So for community bankers looking to draw on the strength, education and experience of ICBA and a couple thousand of your closest friends, I encourage you to join us in San Antonio
. In addition to the education, entertainment and networking, you’ll be able to tell everyone back home what you have in common with fighter pilots and Super Bowl quarterbacks—without even having to leave the inner atmosphere. Of course, those who depend on you for a small-business loan, home mortgage or even just old-fashioned financial advice might have already reached their own conclusions.
Take a Stand for Financial CHOICE
As the new Congress gath
ers in Washington and prepares to take on crushing government overreach, ICBA is well positioned with our revamped Plan for Prosperity
. This comprehensive regulatory relief platform includes an aggressive set of policies that would immediately unload a massive amount of burden that is stifling community bank lending and innovation.
While ICBA is set to hit the ground running in the new year to educate lawmakers and advance this pro-growth agenda, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) is doing the same.
Chairman Hensarling’s soon-to-be-introduced Financial CHOICE Act—the primary vehicle in this Congress for rolling back excessive financial regulation—likewise takes a comprehensive approach to regulatory relief. As you know, ICBA strongly supported the bill during the last Congress and has provided input into the new version as well.
The ICBA-advocated bill, which won committee passage during the last Congress, includes many of our Plan for Prosperity
provisions, such as reforms to rules on mortgage lending, the structure of the Consumer Financial Protection Bureau, the call report and small-business data collection. It also would repeal the costly Durbin Amendment government price controls on debit card interchange fees—another top ICBA priority.
Financial regulations are limiting access to credit for consumers, homebuyers, small businesses and farmers, while fueling consolidation that has shrunk the number of banks from more than 18,000 30 years ago to roughly 6,000 today. Quite simply, government rules are harming the people they are supposed to help and are in desperate need of a complete overhaul.
As we did in the last Congress, ICBA will strongly support Chairman Hensarling’s forthcoming bill, as should all community bankers who want to roll back decades of excessive regulation capped off by many misguided policies that have taken effect in recent years. I call on all community bankers from coast to coast to join us in supporting this important legislation and urging Congress to pass it as soon as possible.
A New Source of Legal Trolling
If community bankers didn’t get their fill of legal mischief from the patent trolls, there’s a whole new game in town keeping lawyers busy. Predatory plaintiff’s attorneys have found a new source of legal exploitation to hound community banks and other small businesses with legal threats: the Americans with Disabilities Act. Unlike the patent troll problem that ICBA fought all the way through Congress, however, this new crop of law firms is relying not on flimsy patent claims, but on detailed arguments that are already making headway in the courts.
In recent months ICBA has heard from a growing chorus of community bankers who have received aggressive demand letters alleging that their websites are not in compliance with the ADA’s online accessibility standards. The letters threaten legal action against community banks that do not modify their websites to meet the law firms’ interpretations of the ADA.
Of course, accessibility is not the goal here. Community banks are second to none in their support of the ADA, and they work hard to ensure that individuals with disabilities can access their services. No, these bullying letters are about one thing—money.
How do I know? Well, for one thing, these demand letters errantly claim that the Justice Department is using existing international guidelines as a baseline requirement for website accessibility. However, the DOJ hasn’t confirmed that these guidelines are in use. In fact, the department isn’t planning to finalize its own set of standards until 2018!
This whole demand letter charade is merely an attempt to intimidate letter recipients—primarily small businesses that can be pushed around—into reaching a settlement that is profitable for these law firms. It is a simple money grab that exploits a moment of legal ambiguity to profit off community banks and other local businesses.
Well, ICBA isn’t standing for it! We’ve already called on the DOJ
to intervene in these coercive letters by releasing interim guidelines, and we’ll take this issue to the new Congress when it convenes next month. Meanwhile, we’ve released our own guidance
to help community bankers deal with them. First and foremost, community bankers cannot ignore these letters—you should work with your own lawyers and vendors to develop a plan. While these demand letters might rest on a questionable legal basis, they represent real and tangible threats that must be dealt with seriously.
I know firsthand that community bankers are committed to ADA compliance and accessibility, but community bankers who receive these letters should contact legal counsel, work your network, keep us informed and review your website to provide adequate accessibility. While the DOJ gets its act together on these accessibility standards, we must work together to fight this scourge of intimidation from firms using trolling tactics not to improve accessibility for the disabled, but merely to line their own pockets.
Evaluating the Psychology of Money
Rarely do I pause to share recommended reading, but a new feature in this month’s Independent Banker magazine is worth it. The “Psychology of Money” feature
in the December issue is some of the finest journalism on banking and finance that I’ve come across in some time—and I’m proud to say it came from ICBA.
The feature story from writer Kelly Pike probes how irrational emotions and biases drive our relationship with money, and how community banks can use that information to serve their customers and better their business. The story also examines various banking offerings and how customers react depending on what’s happening inside their mind.
For instance, relationship bankers can be a lifeline of support to customers who are dealing with financial stress, family problems and even fraudulent schemes that feed on their emotions. Meanwhile, incentive offers can fall flat when customers believe they’re too good to be true.
“Money can make people do strange things,” one Kentucky community banker says in the piece. That is certainly an understatement.
The newest issue of Independent Banker
is online and in the mail, so I encourage you to take a look when you have a spare moment. It’s always good to see community banking through different lenses to gain a new perspective. One thing is for sure: you’re not going to find this kind of content anywhere else.
A Matter of Responsibility
A hallmark of community banking is accountability. Community bankers are held accountable to their customers because they live and work in the same neighborhoods. As locally based institutions with a stake in the prosperity of their communities, community bankers simply can’t afford to take advantage of their customers.
So Wells Fargo’s failure to take responsibility for fraudulently opening 2 million unwanted consumer bank accounts has been particularly disturbing for the community banking industry.
The megabank’s leadership has repeatedly blamed the widespread fraud on the 5,300 employees it fired as its $185 million settlement was announced—a fine that is nothing more than a rounding error for the $2 trillion-asset institution. Chairman and CEO John Stumpf refuses to concede that the scandal stemmed from failed leadership and a poisoned corporate culture. And even fellow banking industry representatives have responded by merely condemning dishonest or unethical behavior at “any bank, anywhere, any time.”
Any bank? Suddenly this massive breach of trust isn’t about Wells Fargo, but the banking industry in its entirety? Absolutely Not! No! This isn’t about “any” bank or all banks. This isn’t about universal condemnations of wrongdoing. And this certainly isn’t about community banks, who remain, as always, accountable for their actions.
What this whole sordid mess is about, however, is the massive negative consequences not just on American consumers, but the local banks that had nothing to do with it. Community bankers have seen time and time again how the consequences of megabank misdeeds rain down hardest not on the perpetrators, but on us!
Again and again, Washington responds to the largest banks’ bad behavior by rolling out new regulations that fall disproportionately hard on the smallest banks. While we fight and scrap and claw for exemptions and carve-outs, the truth is that community banks always get roped in to new regulatory burdens that take our attention away from our customers and toward red tape. Meanwhile, the large banks that incited the response have the resources to hire teams of lawyers to manage their compliance.
No, no, no—not again. We WILL NOT get dragged into this mess! Community banks are NOT Wells Fargo!
ICBA is doing its utmost to ensure Washington and the American public make a clear distinction between community banks and systemically risky institutions. We take responsibility for exclusively representing community banks, not the megabanks that make our members’ lives more difficult. Therefore, we will be with you—the community banker—every step of the way, ensuring that your name is not tarnished by this scandal. Because #WeAreNotWells
As we’ve told Congress again and again, we need a system of tiered and proportional regulation based on size and risk, which will ensure appropriate standards on the largest banks while allowing local banks to continue serving their communities. In doing so, we can fix what’s wrong with our banking system by strengthening what’s right with it—community banks.