Fallout From Financial Reform

I recently met with an executive of a larger credit union, and I've been contemplating some of what I heard about the impact of the financial reforms being enacted by Congress on his core business of community lending.

In today's Wall Street Journal, Sarah Wallace, the CEO of First Federal Savings & Loan in Ohio has this story about a loan application:

"Recently, a couple came to us wanting to refinance their home. They were paying a relatively high interest rate (by today's standards) to a competing institution. They had reasonably good equity in their residence and owned a couple of rental properties, also with good equity. One borrower worked in the construction field and had experienced a reduction in income over the past couple of years, causing some recent slow payments on their credit report. After verifying the income and assets of the borrowers, an idea not new to us, we decided to deny the loan."

Making this kind of loan, given the equity cushions and their overall credit history, is foursquare in the charter of community banks and credit unions. The CEO characterizes declining this loan NOT as a credit decision, but as a compliance decision! Meaning, that she felt in the post-reform, process and compliance oriented environment her bank would have been criticized or called to task for making what might be a fundamentally sound loan. This is a perfect example of how what's going in the Capitol hurts Main Street and the ordinary citizen.

Through the heavy lobbying of the ABA, community banks and credit unions will be cast into the same regulatory net as the money center banks that were co-partners in creating the global financial meltdown. The compliance staffing and consultant costs for credit unions and community banks will increase post-legislation, for no fundamental reason. At the same time, the government will take a share of some of their profit streams, like interchange payments from the payment networks for their private label credit cards.

What will be the results? Probably the end of free checking and free debit cards (to access your own money), an increase in fees, a decline in profitability, and reduced levels of financial services access to new earners and families. It's another in what will be one long Excedrin headache for the beleaguered consumer.