Small banks lobby against regulatory overhaul provisions

The financial regulatory overhaul making its way through Congress is aimed squarely at the big banks given most of the blame for the credit crisis that brought the economy to its knees.

But the country’s small banks are lobbying against dozens of requirements in the legislation, saying they would unfairly burden thousands of institutions that for the most part had nothing to do with subprime mortgages or the complex securities backed by such loans.

Although small banks would be exempt from much of the overhaul, the provisions that would apply would make it harder for community bankers to serve their customers and to expand lending, financial industry groups say.

The proposed rules could overload many community and independent banks, said Nancy E. Sheppard, chief executive of Western Independent Bankers, a trade group in San Francisco.

As a result, she said, the massive overhaul would create difficulties for two segments of the banking industry: the “too big to fail” and the “too small to comply.”

Consumer groups dismiss such objections, saying the exemptions in the legislation mean the small fry are already getting off easy.

Lawmakers are expected to start work Thursday to reconcile the Senate’s version of the legislation with the House’s. Their goal is to deliver the final measure to President Obama for his signature by the Fourth of July.

Both versions would assign regulators to monitor and control the “systemic risk” to the economy posed by the banking system. The Senate version would specifically limit that new oversight to the 30 or so banks in the country with at least $50 billion each in assets.

Both bills also would create a regulatory body charged with protecting consumers from abuse at the hands of financial companies. But the new regulator would not inspect banks with less than $10 billion in assets.

That means only 105 of nearly 8,000 U.S. banks and thrifts would be subject to routine oversight by the consumer protector, including only four of the 132 banks based in Los Angeles, Orange, Ventura, San Bernardino or Riverside counties.

The House bill, however, would let the new agency refer violations of consumer laws to bank regulators, and step in to enforce the laws if the main regulator did not. And the Senate bill would allow the agency to keep all banks from forcing customers to have their unresolved complaints heard by an arbitrator instead of by a judge.

The arbitration proposal made it to a list circulated by the American Bankers Assn. of 30 significant concerns for community banks in the Senate version of the legislation. Consumer groups back the measure, saying arbitration is often rigged in favor of the industry.

Other overhaul provisions of concern to small banks include more extensive disclosures to consumers about mortgages, a mandate to form special committees to monitor risks and a requirement that banks retain a 5% ownership stake on loans they sell to be packaged into securities.

Small banks say they would also be harmed by caps on debit-card transaction fees paid by retailers and by restrictions on the trading of derivatives. The industry fears the latter would bar relatively simple “swaps” designed to protect banks from sudden changes in interest rates.

The opposition to parts of the overhaul comes as small banks already are dealing with intense regulatory scrutiny in the wake of the financial crisis and a wave of failures of community banks.

C.G. Kum, chief executive of First California Bank in Westlake Village, said accounting changes required by the legislation would erase billions of dollars of capital backing small banks, causing still more failures.

Although small banks would be exempt from the cap on debit card fees, he said, merchants are unlikely to accept debit cards issued by community banks unless they cut their fees to match those at the big banks.

Kum also said a proposed requirement to collect extensive data on small-business lending could cause banks such as First California to make fewer such loans. In addition, he said, the proposed new rules on home lending are so stringent that First California recently delayed a plan to start offering jumbo mortgages.

“We don’t have the ability to absorb the incremental costs as readily as a big bank can,” he said.

Travis Plunkett, legislative director for the Consumer Federation of America, said such complaints were misplaced. Small banks, he said, would be better served bolstering their current standing as the industry’s good guys than joining the megabanks in battling reform.

Even if most small banks treat their customers well, he said, some have engaged in questionable practices, such as charging steep or hidden fees for overdraft protection or making high-cost loans against a borrower’s pending tax refund or paycheck.

That makes it important, Plunkett said, not to create loopholes that might allow shenanigans to occur at small banks.

“Regulatory gaps,” he said, “will be always be exploited by the predators and bottom feeders.”

scott.reckard@latimes.com