From tax reform to regulatory re-alignment, the new administration in Washington, D.C. has signaled its intent to significantly alter the way that businesses and consumers are governed.
In fact, one key area of federal oversight — the regulation of the financial services and lending industry — has already seen the first signs of change with a presidential executive order that begins the process of reviewing and scaling back rules put in place after the 2008 financial crisis.
It is widely expected that the administration and Congress will move to relax financial oversight, especially when it comes to the Dodd-Frank Act, which has increased reporting requirements and compliance for financial institutions of all sizes.
Of course, the prospect of financial deregulation has broad implications for banks and their compliance efforts, but businesses of all sizes, across industries, will also feel the effects, and could benefit from a new regulatory approach that promises to make it easier and less costly to access a variety of lending options.
Small and mid-sized companies, which have long turned to local community banks for lending and other financial solutions, may be among the biggest winners in a new regulatory environment, since proposed alterations to Dodd-Frank could spark a resurgence in the community banking sector. To understand just how financial deregulation could occur, and how it might affect your business, here is a closer look at key changes that are under discussion:
Restructuring of the Consumer Financial Protection Bureau (CFPB)
Created under Dodd-Frank, the CFPB has been frequently criticized for protecting consumers at the expense of banks, rather than finding a balance between the interests of the two — and rather than recognizing that consumers and businesses are the ultimate beneficiaries of strong banks that have an ability and motivation to lend.
Under the CFPB, mortgage banking has seen an outsized degree of regulation and oversight, which has ultimately pushed many community banks out of business or to the sidelines. Creating a more balanced approach on the part of the CFPB should free up banks from a cost perspective, encouraging a renewed interest not only in mortgage lending but in the development and issuance of business loans – loans that could help small and mid-sized businesses expand and succeed.
According to research from Harvard’s Kennedy School of Government, community banks have been particularly hard hit by Dodd-Frank regulatory requirements. Between 2010, when Dodd-Frank was signed into law, and 2015, the share of U.S. commercial banking assets held by community banks declined at more than twice the rate that it did between 2006 and 2010 — a time period which included the start of the financial crisis. In 1994, community banks made up more than 40 percent of banking assets; by 2015 that number was approximately 20 percent.
As the research suggests, this has led to a decline in small business lending volume. Restructuring the CFPB’s role should reverse this trend, meaning that your business may be able to access more affordable loans from a greater number of institutions.
Adopting additional elements of the financial choice act of 2016
The Choice Act is a useful guide to the kinds of regulatory changes that are under consideration. The Administration has indicated support for many elements of Choice Act, a good number of which would modify Dodd-Frank.
In addition to reforming the CFPB by limiting its authority and establishing independent oversight of its activities, the Choice Act would change the Dodd-Frank capital and liquidity standards for banking organizations that choose to maintain high levels of capital. The Act would also provide specific regulatory relief for community banks.
Envisioning more community banks
As mentioned, the reorganization of the CFPB and other regulatory changes proposed in the Choice Act should have a dramatic impact on the community banking sector. With deregulation, local banks that scaled back lending because they lacked the compliance resources of large institutions, and those that were unable to meet the extreme capital requirements of Dodd-Frank, will be able to offer competitive loans.
With relaxed financial rules, states will likely lower capital requirements for new community banks to start up, and with new banks entering the marketplace for the first time since 2008, small and mid-sized companies should see more lending options and better rates.
In the coming months, you would be well-advised to keep a close watch on the move toward deregulation, because it could mean good things for your company’s bottom line.
Frank Gonzalez, CPA/CFF, Managing Principal of MBAF’s Miami office and principal-in-charge of the Audit Department at MBAF, where he leads the Financial Institutions and SEC practices, also contributed to this article.
Tony Argiz is the Chairman and CEO of MBAF, one of the top 40 public accounting firms in the nation. A nationally recognized practitioner in litigation support services, Argiz has extensive knowledge and experience in practices involving audits, business planning, economic damages, fraud examinations, valuations and litigation cases.
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