07.23.15

VIDEO: Lankford Calls For Dodd-Frank Reforms at 5-Year Anniversary, Discusses Regulatory Relief Proposal

WASHINGTON, DC – Senator James Lankford (R-OK) delivered a speech Wednesday on the floor of the U.S. Senate about the five-year anniversary of the Dodd–Frank Wall Street Reform and Consumer Protection Act, often referred to as Dodd-Frank, and the dire need for reform. During today’s Senate Appropriations Committee hearing, Lankford discussed a framework proposal for traditional bank regulatory relief legislation that could be offered as a bill in the coming months.

Dodd-Frank is a massive law consisting of nearly 400 new rules and regulations that are squeezing lending capacity and dampening economic growth. Its’ mandates and requirements are especially burdensome on community banks that must direct resources away from service and towards regulatory compliance. Lankford maintains that instead of Dodd-Frank fixing the “too big to fail” problem, it has instead created “too small to succeed.” In addition, the law did nothing to deal with one of the major catalysts of the financial crisis, Fannie Mae and Freddie Mac, leaving the taxpayers bearing the risk of $5 trillion in mortgage assets. 

Dodd-Frank’s Impact on Oklahoma:

  • Since the end of the First Quarter, 2010, Oklahoma has seen 33 community banks disappear through acquisition and mergers. 
  • 29 of those 33 community banks that “disappeared” were under $100 million in total assets.  When asked, the most frequent reason given for selling was the increasing cost of compliance and the inability to properly serve bank customers and the communities in which the banks operate.
  • In Oklahoma, 24 percent of the state’s commercial banks no longer offer real estate mortgage loans to their customers because of the litigation and regulatory risk they face under the new “Ability to Repay” and “Qualified Mortgage” rules prepared and implemented by the Consumer Financial Protection Bureau.  (There are many reasons the borrower does not qualify under the new rules, but the main reason is because they have “seasonal” income.  This would include all farmers, ranchers, small business owners and others who are not “employed” and who receive a regular paycheck.)

Lankford’s Traditional Bank Regulatory Relief Proposal:

  • Exempt traditional banks from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations.
  • Exempt traditional banks from schedules on the Call Report, including schedules related to trading assets and liabilities, regulatory capital requirement calculations, and derivatives.
  • Eliminate requirements for traditional banks to refer "possible fair lending violations to Justice" if judged to be de-minimus or inadvertent. 
  • Exempt traditional banks, if applicable, from stress testing requirements under section 165(i)(2) of the Dodd-Frank Act.
  • Require only an 18 month examination cycle as opposed to a 12 month cycle for traditional banks.

A traditional bank that would be eligible for this regulatory relief are defined as those with zero trading assets or liabilities; no derivative positions other than interest rate swaps and foreign exchange derivatives; total notional of all derivatives exposures – including cleared and non-cleared derivatives – of less than $3 billion; and have a simple leverage ratio of least 10%.  

CLICK HERE to view the video

Transcript of the speech:

Mr. President, I come to wish a happy birthday message today. Happy birthday to the fifth birthday for the Dodd-Frank regulations. Where are we as a nation with this wonderful five-year-old running around our nation right now pushing that birthday cake across every bank and financial institution across this country, and exactly how is that going? Let me get a chance to share a couple things. 

Everyone in this nation remembers extremely well 2008, the financial collapse that happened. Lehman brothers closing down causing this panic. Fannie and Freddie rules finally reaping what the nation assumed would happen at some point from all these very low rates and pushing out and encouraging people that can't afford to pay back a loan what would really occur. The rise of a conversation, something called too big to fail that we had never heard before, suddenly grows up and we move as a nation in 2009 from trying to regulate financial institutions to actually running financial institutions. The regulations were considered too small and institutions that were big were determined that big business means that big government needs to run it. 

Mr. President, I would have to say there's not a lot about the efficiency of Washington, D.C. that we would look across the fruited plains saying this is working so well in Washington, D.C., we should run every big company as well. In the days of government shutdowns and $18 trillion in debt and slow decision-making, there's a great need for private businesses to be pushed to be able to do things efficiently, to be able to manage our economy effectively. Clearly there is a need for regulations, but I would also say clearly the United States government should not step into businesses and run them instead just regulate the boundaries. 

This is a free market but suddenly in 2009 the United States government goes to running General Motors. We start running individual banks and insurance companies. We've got to be able to shift out of that and be able to find a way in the days ahead for that never to occur again.

I would say multiple things about this. Now five years into Dodd-Frank, 400 new rules in the process of being promulgated literally 12,500 pages of regulations that have now been spun out. 12,500 pages of regulation just dealing with 271 rule makings. So here's what we're up against: 271 rule-making deadlines passed. Of those 271 rule-making deadlines, 192 of them have been met with finalized rules and rules have been proposed that would meet 46 more. Rules have not been proposed to be met and 33 passed rule-making requirements. Of the 390 total rule making requirements, 247 of them have been met with finalized rules and rules that have been proposed to meet 60 more. What am I trying to say with all that? There is a lot coming out of this and there’s a lot more still to come. 

I would just challenge any person in this room and any person across America, if you’re having to run your business and as you started to run your business a government regulator walked in with 12,500 pages and said I need someone in your company to know all of these regulations, you would not respond with a smile and happy birthday to them. You'd respond with great frustration and say why are you walking into my company with 12,500 pages of new regulations? There are previous regulations stacked on top of that and say here's an additional stack of 12,500 pages that you need to know and follow. This is the fruit of the Dodd-Frank regulations. 

I would say that there are a lot of things that we need to discuss with this bill. Let me just highlight a few of those. First, let's just get some common agreement. Can we all agree that the community banks, the smallest banks across America, most of them in rural communities, did not cause the financial collapse of 2008? In fact, they didn't even contribute to the financial collapse in 2008. The smallest community banks across the country are vital accesses to capital for farmers, small businesses, main street folks and folks that just do deposits of their savings and checking accounts. These are small-community banks. More than 1,200 U.S. counties with a combined population of 16 million Americans, without those community banks they would be severely limited to any kind of access to banking. 

Big banks tend to focus on the biggest loans and in big towns. Small community and traditional banks, they focus on smaller communities. In my state in Oklahoma, you go to every small town and you're going to find a school, a gas station, a church and a bank. And often that bank is a very small community bank. They know everybody in town and everybody knows them, but the rules change for them after Dodd-Frank, and it wasn't because that bank caused anything. 

Regardless of the laws in any area, and we can have a great conversation with a lot of the issues with Dodd-Frank. Financial reform was to contain systemic risk in the financial sector of very large companies which would called too big to fail, which I refer to often as the "Too big to be free" now because the federal government is stepping in to try to run all these companies and say you can't have a free market in that area. We're going to have to run you instead. These small-bank failures are not a threat to the economy. They weren't supposed to be a target of Dodd-Frank but they most certainly are. All of these banks now suffer the consequences. 

A study by the federal reserve bank of Minneapolis found that for banks that have less than $15 million in assets hiring two additional personnel reduces the profitability by 45 bases points, resulting in a third of these banks becoming unprofitable. Why would I raise that? Because there’s a whole host of regulators that say hire one or two additional new compliance people and you can keep up with the 12,500 additional pages that have been rolled out. These small-community banks can't keep up with that. 

Mercada Center surveyed 200 banks with less than $10 billion in assets. 83% found that the regulatory compliance costs increased by more than five percent and the median number of compliance staff increased from one to two. They all had to add additional folks. Not additional folks to make more loans. Not additional folks to greet more customers as they walked through the doors. Additional folks in the back office simply filling out forms and turning it in. 

Government figures indicate that the country is losing on average one community bank or credit union a day now. Alternatively in the last five years regulators have approved only one new bank as opposed to an average of 170 new banks per year before 2010. Let me run that past you again. We've approved one new bank in the last five years since Dodd-Frank. 

People don't want to go into banking. And this is having the effect that we all said that it would have, and that is when Dodd-frank passes, the focus on too big to fail would really mean that you're too small to succeed. That the smallest banks in communities all across the country now cannot keep up with the compliance costs and they will sell out to larger and larger banks. And you know what Dodd-Frank has created? Dodd-Frank has created more megabanks. And it's pushing more and more smaller banks to sell out. 

Since the end of the first quarter of 2010, Oklahoma, my state, has seen 33 community banks disappear through acquisition or merger. 33 of those. 29 of those 33 community banks that disappeared were under $100 million in total assets. When asked the most frequent reason why they were selling, it was the increasing cost of compliance. They could not keep up because they had to have so many compliance people. In Oklahoma, 24% of the state's commercial banks no longer offer real estate mortgage loans it to their customers because of the litigation and regulatory risk they face under the new ability to repay and qualified mortgage rules. Now, let me run that past you again because a lot of people don't realize what's happening. The smallest community banks are selling out. They're disappearing. 

At the same time, 24% of the banks in my state now no longer offer home loans. That means in these small towns across America, you can't walk into the bank and get a home loan. You've got to drive into some other town or in some other place and to try to go get a home loan now not because that bank can't do a home loan. They're a bank. That's what they do. It's because of new Dodd-Frank regulations that make them so scared to function and operate through the 12,500 pages, they've just decided I don't have enough staff and enough people and my neighbor, that community banker's neighbor that I sold them their home, and their dad their home and maybe their grandfather their home in this community, I can no longer do a mortgage for them anymore. That's absurd. 

I would hope that no one would say that was the purpose of Dodd-Frank, but I would tell you this five-year-old that's running around, that's the consequences. That's really happening all across our nation. These new rules continue to push out the possibility of just doing normal, traditional banking. Savings accounts, checking accounts, home loans, car loans. Dodd-frank ironically favors the largest banks over community banks. And I find that the ultimate irony based on the way that it was sold. Not to mention the fact that as a banker now, if you have a problem with one of the regulators and you want to appeal and say how are we going to actually get through this problem? You know who you appeal to now? Literally a person in the next cubicle from the previous person that gave you the instructions. There's no place that they can go. There's no judicial review. There is no opportunity to say this regulation that you've given me is onerous or the decision that you made based on this regulation is onerous. You want to disagree? You disagree with the person in the next cubicle. And then that same group of people will come then, inspect your bank next year, and what do you think happens? I've got to tell you we're in a bad spot. This is not about big city bankers. This is about small towns. This is about small-town loans. This is about home loans for individuals in rural areas, and these are real consequences to a lot of families. So how do we solve this now? This is what we have. Have had for five years, still continues to grow, still continues to get worse. What happens now? 

Let me run some solutions, Mr. President. Number one, I would say this, we've got to deal with one of the big animals in the middle of the creation of Dodd-Frank and that is the Consumer Financial Protection Bureau. The CFPB was created to be like a fourth branch of government. It is completely autonomous. Its funding comes from the Federal Reserve. It does not have to report to congress. None of its staff had to report to congress nor turn anything over. No requirement for transparency. They only in a cursory manner come by and visit congress every quarter and do a report, but are not required to turn anything over. They have access to every piece of every bit of consumer finance. They're reaching in to do car loans. They're reaching into credit cards, they're reaching into home loans. They can reach in and effect and create regulations in any area they choose to with no accountability. We have to be able to resolve this. Not to mention the fact that CFPB is completely redundant to other agencies that already exist to do this oversight, that this adds yet another layer on every bank and on every consumer financial institution. But they're unaccountable. So let's do a couple of basic things. 

One is one of the proposals that came today out of the appropriations committee. That’s to move them from a director to a five-member board. I’d say that’s pretty reasonable, so that we don't have one person managing all consumer finance for the entire country and one person who is completely unaccountable. Separating them out from there appropriations, rather than getting their appropriations from the Federal Reserve directly from the normal appropriations process, like every other agency including independent agencies. There's no reason to have them be isolated and be separate. 

Quite frankly, the CFPB is completely redundant to all other areas, there's no reason for them to have redundant activities and authorities. Those should be cleared as well. To make sure every bank when they're making a decision, they can make a decision based on they know who their regulator is. Not to think this regulator is going to say one thing, but what is the CFPB going to say when they come in next. Not to have a regulator come in and say, “Well this is not our regulation, but the CFPB has put this regulation down and so we're going to follow theirs as well.” That's absurd. Clear lines of authorities and responsibilities should be delineated. We can do this. It shouldn't be hard and it shouldn't even be controversial. 

Second thing. We need to reform Fannie and Freddie. Community banks did not cause the problems in 2008. Quite frankly, Fannie and Freddie did. Community banks have had this major push down on 12,500 pages of regulations. Guess how much reform has happened to Fannie and Freddie. Zero. So the organization that actually was the problem has gotten off Scot free because now they're making money again and everyone is looking the other way to say, “Well they're doing okay, we'll leave them alone,” and the organization that didn't cause the problem has faced tons of regulations. There are major reforms that need to happen with Fannie and Freddie. It's about time this congress actually engages and stops saying you know what, they're in the black, let's leave them alone. 

Did you realize, Mr. President, the government funds 71% of new mortgages now through the GSE's and the Federal Housing Administration compared to 32% just ten years ago. Let me run that past you again. Ten years ago, the federal taxpayer backed 32% of the loans. Now it's 71%. Dodd-Frank was supposed to be about trying to get the too big to fail issue out and to get the federal taxpayer out of having to back up every loan across America and business. Instead it's increasing the size of banks and its increasing the exposure of the federal taxpayer to every mortgage in America. We got to turn that around.

Number three, congress has to provide the authority for federal banking regulators to differentiate the applicability of rules and regulations to various banks based on the banks' operating model and risk profile. If it's a traditional bank, leave them alone. They're a traditional community bank. In fact, FDC Commissioner, Tom Mahoney, had a great plan, a great set of ideas that I would bring to this body and say we should seriously consider. That is to separate banks not based on their size but on activity. If they're a traditional bank doing traditional banking things that would mean a couple of things. One is, there at least 10% capitalization. The second would be, is that they're not involved in complicated derivatives. If they are involved in complicated derivatives, they going to have heavy oversight. If they're not, they’re a traditional bank, and they are well capitalized. Banking regulations have always been about safety and soundness. If this bank is well capitalized and not involved in complicated derivatives, why are we there ever day trying to manage every aspect of this bank? Allow them to be a traditional bank. I don't care how big they're grow if they're in traditional banking model. We literally have banks around the country now that are around about $10 billion in size that are worried they can't get any bigger. Literally businesses saying I can't grow because if I grow I spring into a whole new set of regulations that I can't afford more staff to actually do that. This is silly. 

If it's a traditional bank and they're in good safety and soundness, let them do loans. Let them actually engage with their customers in their community and not have to look over their shoulders all the time. Chairman Shelby has actually laid out a proposal on the Financial Regulatory Improvement Act. It's a great place to start. A lot of small aspects, a lot of commonsense ideas and bipartisan ideas that he's been able to stack all together and put in one piece. It's a good idea to be able to help provide regulatory relief in these areas. 

I think it's a fair question to say are we financially better off as a nation now than we were five years ago. Now that this five-year-old toddler is walking around called Dodd-Frank, what's happened? There are some banks better capitalized. That's a good thing, but quite frankly we could increase capital requirements without going through 12,500 pages of regulations. We have made it harder to get a loan, unless it's a government loan, like a small business administration loan, and we've literally pushed the loan profile out of private institutions into Fannie and Freddie, into FHA, into the small business administration, and now we have record exposure to the federal taxpayer. We've also made fees higher for the banks as they're more and more challenged to know what to do, and we have half as many banks now offering free checking as we had just five years ago. That's a consequence the consumer understands and a consequence of Dodd-Frank. 

We have fewer banks, we have bigger banks and we have a lot more complication. And in a day when America needs more capital access, we have one bank in five years that says I want to join that market. Mr. President, I wish I could say happy birthday to Dodd-Frank, but I'm not sure this set of financial regulations are making a lot of Americans happy right now. And it is time we come back and revisit this bill. With that I yield back.”

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