This Latin phrase might be more relevant to community bankers than they realize. Translated to “first, do no harm,” it is widely affiliated with the Hippocratic Oath that guides how physicians approach their profession. The policymakers who form the regulatory framework for our industry—who craft policies designed to influence how community banks do business—could learn a lot from it.
The community banking industry’s advocacy regimen for less restrictive regulatory policies is pretty straightforward. Simply put, the cost in time and treasure of over-regulation is choking off community banks’ ability to attract and sustain capital to serve their customers and communities. While getting policymakers to stem the relentless heartbeat of regulation is a perpetual challenge, the problem of excess paperwork and red tape is easy to grasp.
But what is sometimes lost in the policymaking shuffle is that not only is the stream of regulations from Washington seemingly endless, it is often contradictory. Community banks are under the knife to obey safety-and-soundness guidelines that restrict access to credit and, at the same time, to dutifully throw out life-saving sustenance to underserved communities. Case in point is the current effort to define a qualified mortgage. If defined too narrowly, community banks will be forced to cut off credit to avoid the risk of litigation while facing the unintended consequences of disparate impact in the name of fair lending. The policy priorities of strict credit guidelines to minimize potential losses and of opening up the lending spigot to ensure equitable access to credit are at odds, and community banks are stuck in the middle. There is a joke in there somewhere about clowns to the left and jokers to the right, but I’m not going to make it.
But I will say that this schizophrenic approach to policymaking has negative consequences. Despite entreaties to ensure equal access to credit, the alphabet soup of regulations hampers the ability of community banks to devote their resources to making loans. Additionally, words from Washington to reach out to underserved borrowers who pose “reasonable” risks often fall on deaf ears to the examiners who come to town to open up the books. In other words, you’re damned if you do and damned if you don’t.
So what’s the secret? How can policymakers promote lending decisions that do not pose excess risk but also support loans to homebuyers who might not be perfect on paper? Well, here’s one way: Support the relationship lenders out there who meet face-to-face with borrowers to determine their qualifications and potential risks. Instead of driving these folks out of business with strict standards that don’t mesh with their business model, let’s encourage the community bank system of symbiotic relationships with customers and communities.
In other words, before Washington policymakers develop their diagnosis and prognosis on how to restore health to our nation’s financial system, maybe they should step back first and figure out what not to do. Maybe doing no harm should be their first priority.