Bankers say financial reform will be felt at home

    The United States Senate passed a financial reform bill two weeks ago meant to dramatically alter the way business is conducted on Wall Street. Local bankers say the reverberations of the legislation, known as the ?Dodd-Frank Wall Street Reform and Consumer Protection Act,? will be felt in small-town Iowa.

    Steve Schlabaugh, Washington branch manager of US Bank, said he has not yet been briefed on the legislation by his superiors in the company. One piece of the legislation gives regulators greater authority to dismantle troubled firms in the case of an emergency. The purpose of the new law is to avoid bankruptcy or publicly funded bailouts, which AIG received in 2008. Schlabaugh said he is not worried about such provisions because he believes US Bank is on ?very solid footing.?

    Keith Lazar, president and CEO of Washington State Bank, said the bank regulations are meant to address the issue of having financial institutions that are ?too big to fail.? Lazar remembers similar talk of banks being ?too big to fail? in the early 1980s. He remarked that there was an incident in 1984 in which Continental Bank (then known as Continental Illinois) in Chicago became insolvent and was later rescued by an infusion of money from the Federal Deposit Insurance Corporation (FDIC). At the time, it was the largest bank failure in American history.

    Since Continental Bank?s failure more than two decades ago, independent banks have borne the brunt of legislation aimed to curb bank failures, said Lazar.

    ?Independent banks are not the problem, but we bear the costs,? he said. ?We are carrying the brunt of this, and yet we were not the ones who caused it. The large metropolitan banks are the ones that caused the collapse.?

    Lazar commented that independent banks operate very differently from those on Wall Street. For instance, he said his lenders do not work on commission. He said that when lenders work on commission, the underwriting standards, or the process by which loan eligibility is determined, are compromised. 

    ?The foundation of community banks is trust and long-term relations,? said Lazar. ?If you talk to any bank around Washington, it?s all about trust. If we misrepresent our intent, and a consumer thinks we?re hiding something, that tarnishes our reputation. We have worked hard to educate borrowers about what they?re signing. Bigger banks just want to reach their quotas.?

    Lazar said he does not like the idea of more red tape tripping up the financial sector. Another part of the legislation would require mortgage lenders to assess a borrower?s ability to repay a loan before making one. Lazar said there are other regulations not included in this bill that will regulate mortgage lending even further.

    ?Our bank has always looked at the borrower?s ability to pay,? said Lazar. ?Outside of this bill will be new regulations. For us to make a loan, the documents total 150-160 pages. It?s getting way overdone. That leads not to simplicity but more confusion.?

For the full story, see the July 27 edition of The Washington Evening Journal