NOBLE — First State Bank Chairman and CEO Kim King illustrates how new mortgage lending regulations will affect her business by placing a slim stack of papers next to an unopened package of 500 sheets of blank copy paper on her cluttered desk.
“This is how much paper a loan application used to take,” she says, gesturing toward the smaller stack of papers.
“And this is how much it's going to take now,” she says, pointing to the inch-and-a-half thick ream of paper.
King grew up at First State Bank in Noble, which her parents purchased in 1969. Her first job was mowing the grass in front of the bank when she was 13 years old. Today, she and her mother still own 96 percent of the bank, which she believes is the only home-owned bank in Cleveland County. King regularly runs into people on Main Street in Noble who have borrowed from the bank to buy a home.
“When people think of a banker, they think of somebody who is ultrarich — that these are the people who should take on all of the new regulations, but that's not always how it is,” King said.
Paying the price
With about $60 million in deposits, First State Bank is among hundreds of small community banks in Oklahoma that are being affected by tens of thousands of pages of new lending regulations that are part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in the wake of the 2008 financial crisis.
While the laws are geared at curbing some predatory lending practices that are thought to have sparked the financial crisis, community banks in the state say they are being lumped in with the large Wall Street banks.
Bankers say they are concerned that the new federal regulations will clamp down on the availability of credit for consumers and lead to more consolidation of smaller banks as they struggle to keep up with new and complicated compliance procedures, said Roger Beverage, president and CEO of the Oklahoma Bankers Association.
“Washington's typical response to a problem is that one size fits all, when in fact, it does not,” Beverage said. “Community banks didn't have anything to do with the collapse of the economy in 2008, but they are paying a very steep price for the sins of others and, ultimately, it is the consumers who will pay.”
More rules ahead?
More than two years after the passage of the historic Dodd-Frank act, the Consumer Financial Protection Bureau is still crafting and implementing new rules related to mortgage lending and other reforms from the 2,300-page bill.
“Two years later — we've still got rules coming out by the truckload,” said Dudley Gilbert, Oklahoma Banking Department deputy commissioner. “We spend about as much time as the banks do trying to figure out what the new rules say.”
The state Banking Department is tasked with regulating about 200 state-chartered banks, savings and loans, credit unions and trusts in Oklahoma — many of them small institutions in rural parts of the state.
Most of the new federal mortgage lending requirements are slated to go into effect in January.
Rising risks for banks
Under the proposed “ability to repay” rule, lenders would have to determine a borrower's ability to repay a loan using detailed requirements for creditworthiness.
Many community bankers say the requirements don't take into account traditional ways they have determined how to lend money, such as the character of the borrower, said Craig Buford president and CEO of the Community Bankers Association of Oklahoma. The association represents about 90 community banks in the state.
“Mortgage lending for community banks has historically been our bread and butter,” Buford said.
“A lot of these loans are not going to qualify for the Fannie Mae market — they're not cookie-cutter loans. Community banks have historically done a great service by taking these loans and keeping them in-house.”
The new mortgage lending regulations also include an expansion of the Homeownership and Equity Protection Act of 1994. The law requires greater disclosures to borrowers for higher-interest loans and gives homeowners greater legal remedies to get out of their mortgage if the lender doesn't follow the proper procedures.
“I think a lot of the banks will just decide not to do these loans altogether because the risk is too great — it's not a cost-effective way to make money,” King said.
“When I make a loan to someone, I want to make a loan that they can repay.”
Like many community banks, Citizens Bank of Edmond services all of its mortgages in-house instead of selling them on the secondary market.
New regulations will mean more paperwork and additional steps that Citizens Bank must take before it lends money.
More importantly, the new regulations may limit the type and amount of credit the bank is able to give borrowers, said Jill Castilla, executive vice president for Citizens Bank.
“It's important that banks be regulated and consumers should be protected, but sometimes that protection can result in limitations on what the banks can offer to customers,” Castilla said.
More mergers ahead?
Beverage is concerned that more banks in the state will merge in the coming years to gain the benefit of economies of scale in the face of more federal regulations.
“I anticipate seeing a lot more consolidation over the next three to five years — but I hope that more bankers are going to continue to reach the conclusion that it is in their best interests to keep fighting in this war,” he said.
In the past 12 months, the Oklahoma State Banking Board has approved the mergers or acquisition of three state-chartered banks in Oklahoma, all small community banks in rural parts of the state.
“Some of what we have seen are some of the smaller community banks that seem to be getting out of the business because it's just the regulatory climate that makes it that much more difficult to operate,” Gilbert said.
In the most recent deal, the Banking Board on Wednesday approved Wewoka-based Security State Bank's acquisition of First State Bank in Fairfax. The family-owned bank is the only locally held bank in Fairfax in Osage County, said Marty Hanson, president and CEO of First State Bank in Fairfax.
Additional regulations were one of the family's primary reasons for selling the bank, Hanson said.
“From our perspective, it's become increasing difficult for small rural banks to be competitive and the big driver of that is a lot of the new regulations,” Hanson said.
At a glance
New rules for lending affect banks
The Consumer Financial Protection Bureau has developed new rules that will affect mortgage lending for small banks in the state.
Most of the new rules will go into effect in January 2014.
The Ability-to-Repay rule will require mortgage lenders to go to greater lengths to document and verify a borrower's ability to repay a loan.
Balloon payments will prohibited, with some exceptions.
Coverage of the Homeownership and Equity Protection Act of 1994 will be expanded. The law requires greater disclosures to borrowers for high-interest loans.
When people think of a banker, they think of somebody who is ultrarich — that these are the people who should take on all of the new regulations, but that's not always how it is.”
Chairman and CEO, First State Bank in Noble