Dodd-Frank regulations loom

Financial institutions may be allocating more of their own funds to ensure they remain in compliance with new regulations instated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The legislation, passed and signed in 2010 and known as the Dodd-Frank Act, creates new regulations for financial institutions in hopes of reforming factors that led to the Great Recession of 2008.

The nearly 400 rules in the act will likely result in financial institutions, such as banks and mortgage companies, hiring a regulatory compliance agent and possibly attorneys and independent consultants, said Billy Seitz, a managing consultant in regulatory compliance with BKD LLP’s Kansas City office.

“Small, local consultants may not have the expertise, so many look for larger, regional consultants,” Seitz said, noting the Springfield BKD office often refers local clients to Seitz as well as regulatory compliance experts at its St. Louis office.  

The Missouri Bankers Association also offers its members regulatory compliance information as well as educational events.

“Because the regulations are coming and other legal developments, we are feeling the effect now, and we’ll get the full effect after January 2014,” said Kevin Thornburg, MBA general counsel, adding regardless of size, banks will most likely need to hire more regulatory compliance officers.

Seitz said there is a shortage of qualified compliance professionals, creating a possible problem for financial institutions looking to hire more compliance officers.

Also, more regulations on the types of loans and the terms of loans – including interest rates – will reduce many financial institutions’ revenue, Thornburg said. “Roughly two-thirds of a bank’s income is interest,” he said. “With less revenue and a higher cost to ensure compliance with regulatory requirements, typically banks need to get bigger. When you’re making less in each relationship, banks will make that up in volume.”

With revenue cut and more resources necessary for more compliance officers, Thornburg said community banks will likely consolidate and smaller banks will merge.

While consumer protection from complicated and misleading lending practices is the goal of the Dodd-Frank Act, Seitz said the act will also affect secondary markets, such as investors who buy mortgages. Effects will come as lenders pinpoint which type of home loans to offer actual and potential customers. “Over time, consumers and small businesses are going to find that banks are much more restricted, consumers and small business are going to have to fit in boxes to stay within best practices,” Thornburg said. “If you don’t fit in the box, you’re not going to get a loan – and if you do, it’s going to cost a lot more.”

January is not the finish line for new regulations under Dodd-Frank, Seitz said.

There are other discussions being held, including new or enhanced regulations on the credit score of loan applicants; the age of applicants; pre-payment penalties; introductory rate periods; any non-employee payments; loan-originator identifier; and the channels of application (in-person, email, mail).