Frank Sorrentino used to do a lot of mortgages.
But since the passage of the Dodd-Frank Act seven years ago, he has mostly shied away. Rules have been tightened so far as to make home loans uneconomic, says the chairman and chief executive of ConnectOne, a bank with $3.7bn in assets based in Englewood Cliffs, New Jersey.
“Community banks used to be able to cut through the complex data to do prudent lending, based on character,” he says. “Now that’s been taken away.”
It is a familiar complaint. Many executives running community banks — normally defined as those with less than $10bn of assets — are crying out for relief from rules laid down since the crisis. If the new administration of President Donald Trump is serious about easing the flow of credit, they say, then it should start by helping out the 6,000 or so banks that support much of the grassroots growth in the world’s largest economy.
For too long, these small banks have been caught up in a complex web of regulation designed to rein in trillion-dollar banks such as Citigroup and Bank of America, says Cam Fine, head of the Independent Community Bankers of America, a lobby group. He is pushing what he calls a “plan for prosperity”, aiming to reshape many of the standards now applied to banks that had nothing to do with the crisis.
Community banks used to be able to cut through the complex data to do prudent lending, based on character. Now that’s been taken away
It is high time for a sense of proportion, says Scott Shay, chairman of New York-based Signature Bank, which has grown into an organisation with $39bn of assets since the former Salomon Brothers M&A banker started it from a 12th floor office on Fifth Avenue, a block away from JPMorgan Chase, 17 years ago.
Too many provisions targeting the megabanks have “trickled down”, he says, citing the requirement for banks of all sizes to certify that they are not violating the Volcker ban on proprietary trading — even if they are doing nothing close.
“These are just wasted monies that don’t need to be spent,” he says.
Many executives say a reprieve cannot come soon enough in mortgages, the $9tn market that was the epicentre of the 2008-09 crisis.
Under the so-called “ability to repay” rule, for example, banks must determine that the borrower can handle repayments over the long term, based on an analysis of employment, credit history, obligations and debt-to-income ratio, among other factors. If the banks do not, then the loan may be deemed unenforceable in foreclosure proceedings.
The rule was designed to counter sharp practices in the run-up to the mortgage crisis, when the likes of Countrywide, New Century and IndyMac made billions of dollars of loans that went bad. But critics say it has created a tedious, box-ticking approach.
“Ridiculous,” fumes Preston Kennedy, president and chief executive of Bank of Zachary, a three-branch bank based in Baton Rouge, Louisiana. “As if we didn’t consider a person’s ability to repay in the first place!”
On top of that there was a complete rewriting of disclosure rules, addressing what information banks are required to provide to borrowers. Again, this was supposed to deal with pre-crisis abuses, when lenders promised a low rate or low fees at the outset to win a borrower’s business, then jacked up the charges right before closing.
But community bankers complain of overkill.
“I’m not sure [the rewrite] accomplished one thing,” says Denny Hudson, chief executive of Seacoast, a bank with $4.5bn in assets based in Port St Lucie, Florida. “Every single document changed.”
Mr Fine of the ICBA and others note that hundreds of small banks have folded or been swallowed up by bigger rivals in recent years. Some were laid low by bad loans and some by sluggish regional economies, but all were squeezed by new rules.
One was New Traditions National Bank, a lender with $500m in assets that sold itself to Old Florida in 2012. (Orlando-based Old Florida was bought in turn by IberiaBank, the biggest bank in Louisiana, in 2015.)
“To get to the next level, we’d have to have hired 10 additional people just to keep up with all the regulation,” says David Dotherow, a former New Traditions chief executive who is trying to raise $30m of capital to start a bank from scratch in Winter Park, north of Orlando.
The pendulum swung too far, he says.
“There were a lot of sound banks out there that ran themselves conservatively and efficiently, and were able to assess the risks they were putting on their books,” he says.
“All we did was add additional layers of regulation that ultimately hurt small businesses and individuals. That’s what banks do when they get too much regulation; they just don’t provide loans.”