In the aftermath of one of the biggest financial meltdowns in U.S. history, Sen. Christopher Dodd and the Senate Banking Committee have been working diligently to craft a response to many of the causes of the meltdown with a bill entitled: “Restoring American Financial Stability,” proposing, among other things, to create a new Consumer Financial Protection Bureau.
On the other side of the Capitol, the House has already passed its own version of financial reform, and both sides are continuing to push their versions forward. As of this writing, the full Senate is negotiating and debating this financial regulatory reform legislation.
Clearly, a response to the financial crisis was warranted, and prevention of many of the corporate “bad behaviors” that contributed to this unprecedented situation was necessary.
However, many, if not most, of those bad behaviors did not involve community banks. At Windsor Federal and at thousands of other community banks around the country, we have always believed that adherence to sound business practices — a common sense approach, if you will — is the best way to avoid trouble and excessive risk. For example, when many mortgage originators around the country were accepting loan applications that had no verified details — “stated only” in industry parlance — most community banks were still requiring verification to ensure the quality of our loans were as strong as possible. In other words, we avoided the sub-prime’s because it didn’t make business sense to take that type of risk.
Community banks are highly regulated entities that “play by the rules” and are important sources of credit to businesses and consumers alike. In fact, there are more than 8,000 community banks in the United States. Because we are deeply rooted in our cities and towns, we know our customers, we know our local businesses, and we can make sound financial decisions that contribute positively to the growth of the communities we are involved in. Community banks are in business for the long-term, and we run our businesses with a broad horizon in mind.
One thing that we can’t do, however, is compete with organizations — “non-bank entities” as they are called — that get to play by a different set of rules. Just as both teams in a sports contest have the same rules to follow — and the same penalties if they don’t — we need all players to have the same rules, and the same resulting responses from regulators if they are not.
According to Comptroller of the Currency John Dugan, poor credit underwriting was a key factor in the recent financial crisis, and “nearly 60 percent of non-prime mortgage loans and foreclosures in the ‘Worst 10’ markets were from originators not supervised by any federal banking agency.” There is a prime example of who the culprits were, and why they need oversight.
Simply stated, the referee needs to be able to apply the rules to all teams equally, which the current version of the proposed Senate bill does not address. If it does not, community banks will be at a competitive disadvantage, adding to our already substantial regulatory overhead, and could even lead to multiple sets of examiners reaching separate conclusions without being coordinated.
We applaud the intentions of Senator Dodd and the Senate Banking committee, and we hope that they will address the need for common standards — and penalties — for banks and non-banks alike, to help make the playing field level. We also hope that they will embrace the idea that “examining the un-examined” — in other words, non-bank entities — will lead to stronger controls and preventions than adding to an already burdensome regulatory structure.
Mark Griffin is president and CEO of Windsor Federal Savings, a community bank based in Windsor.
