Connecticut banks and financial institutions aren’t the only ones facing new burdens from the Dodd-Frank financial reform law. The Connecticut Banking Department is also feeling the pressure with added duties and new oversight responsibilities.
Beginning July 1, for example, the federal government will transfer to the state, regulation of investment advisers with assets under management between $25 million and $100 million.
That will increase the number of advisers under Connecticut’s purview 35 percent, said Connecticut Banking Commissioner Howard Pitkin. Currently, the state oversees about 474 advisers with assets below $25 million.
“It’s certainly going to be a test,” said Pitkin, who was recently reappointed by Gov. Dannel P. Malloy to his position as the state’s chief banking regulator. “Any time you get an increase in workload, your immediate reaction is that you need more people. But given the budgetary constraints, we are going to have to deal with it and change the way business is done.”
Federal lawmakers decided to punt oversight of investment advisers with assets under management of up to $100 million to states in order to free up time for the Securities and Exchange Commission to go after much bigger fish.
Pitkin said investment adviser examinations are done within the securities division, and the new oversight responsibilities will involve more complex examinations.
The banking department may also have more oversight over hedge funds, Pitkin said.
For investment advisers in Connecticut, the change could mean they will be getting more scrutiny. Under the SEC, smaller investment advisers would sometimes fly under the radar, but that may not be the case on the state level.
The Dodd-Frank law will force the banking department to increase its compliance inspections, Pitkin said, and new rules are coming out all the time that require the department to stay on its toes and adapt.
For example, Pitkin said he expects his office will have to enforce higher capital standards among banks. There are also new rules coming out of the consumer protection agency that will likely require greater oversight and regulations on the mortgage industry.
“The overall effect is that we may need to change how we use our resources,” Pitkin said. “Right now managers and examiners currently stay in their assigned division. They may not be able to do that when all the regulations are rolled out. We are going to have to put resources where they are needed.”
Besides new burdens on his office, Pitkin also raised concerns about the impact of financial reform laws on community banks.
Pitkin said compliance exams are becoming increasingly expensive for small lenders, which is putting their earnings under significant stress. And the financial reform law is only adding to that burden, Pitkin said.
“The need for small community banks to run a compliance exam has gotten far too expensive,” Pitkin explained. “Small banks can’t afford to hire people to keep up with added burdens.”
The Hartford Business Journal recently reported that industry experts believe earnings pressure related, in part, to new financial reform requirements will cause a spate of mergers and acquisitions among banks in Connecticut in the coming years.
In addition to added compliance burdens, new federal restrictions on overdraft fees and a new proposed cap on the “swipe fees” banks charge retailers and restaurants for accepting debit-cards will put further pressure on their bottom lines, Pitkin said.
“We are telling banks they have to find ways to become more profitable, yet they are not going to have that noninterest income,” Pitkin said.
Â
SBA enters re-fi loans
Connecticut businesses for the first time have the opportunity to refinance a commercial property through an SBA loan.
The Obama Administration has released new regulations regarding the SBA 504 Debt Refinance Program, which will allow companies to refinance a commercial property loan.
The new provision is part of the Small Business Jobs Act of 2010 and will expire in September 2012. It expands the SBA’s 504 loan program, which has typically been available for businesses to finance fixed assets acquisitions.
Mark Cousineau, president of Connecticut Community Investment Corp. (CTCIC), the state’s largest SBA 504 lender, anticipates there will be significant demand for the new product.
“Our lending partners will hopefully use the option as a way to solve collateral issues for borrowers with devalued commercial real estate whose mortgage loans have maturing balloon payments,” Cousineau said.
SBA 504 refinancing loans will be structured like a traditional 504 loan. A bank or third party lender provides at least 50 percent of the loan, the CTCIC 504 provides up to 40 percent of the loan, and the small business borrower must provide equity of at least 10 percent, Cousineau said.
And the equity may be drawn from the existing asset valuation, rather than new cash injection. Borrowers will be able to refinance up to 90 percent of the current appraised property value or 100 percent of the outstanding mortgage, whichever is lower, plus eligible refinancing costs.
Â
Â
Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.
