VOL. 127 | NO. 113 | Monday, June 11, 2012
SPECIAL EMPHASIS: Office, Industrial and Retail Real Estate
Dodd-Frank Could Have ‘Dire Impact’ On Economy
By Sarah Baker
As banks nationwide are feeling the pressure of regulatory change like the Dodd-Frank Wall Street Reform and Consumer Protection Act, commercial real estate lending standards by community banks will likely remain stringent for the foreseeable future.
The 2,500-page-act was written into law by President Obama in 2010, yet many of the rule-making processes are still under development. With 2012 being an election year, the uncertainty with local lending is expected to continue.
Any institution with assets between $10 billion and $50 billion under Dodd-Frank is required to get reappraisals every year on all of its products. Major regional institutions that fall under that $10 billion benchmark in Memphis include First Tennessee Bank and Regions Financial Corp.
But as the result of examiners overriding appraisals and deeming loans nonaccrual – despite the borrower never missing a payment and being financially able – the city’s regional banks and bank community had to write down $253 million in capital in 2010 because of the ratio of lending to capital.
That was the message Will Taylor, Memphis branch manager with Vining Sparks, said in February at the Memphis Area Association of Realtors Commercial Property Forecast Summit. It translated to the drying up of $2.5 billion worth of opportunity to lend in the commercial arena from the banks located in the region.
“With Dodd-Frank as it is, I would say that based upon our commercial mortgage-backed security track record funding (ranking third in nationwide defaults in 2010), the ability to access liquidity for most projects will be nonexistent,” Taylor said. “Unless this kind of legislation is repealed, it is going to have dire impact on the kind of economic zone that Memphis sits on.”
Taylor said there aren’t a lot of incentives in terms of regulatory perception to make a loan these days because of the chance of having to write off actual capital investment.
The interagency supervisory guidelines issued in 2006 required additional risk monitoring of CRE lending whenever loans reach certain thresholds – 100 percent of capital for loans secured by construction and land acquisition activities and 300 percent of capital for loans secured by total non-owner-occupied CRE, including construction and land acquisition activities.
Fed board member Elizabeth A. Duke said in January at the 2012 Bank Presidents Seminar of the California Bankers Association that although these thresholds were never intended to be a one-sized-fits-all approach, she hears from banks that “they are now widely regarded as such.”
“They are turning around having to use 300 percent of their capital to make you a loan and the average market rate would be like 5.5, 7 percent,” Taylor said. “They can use zero percent of their capital and go purchase securities, Fannie Mae and Freddie Mac, and use less than 20 percent of their capital.”
There are no current bank-wide stress testing requirements within Dodd-Frank for banks with assets less than $10 billion – which applies to local community banks such as Bank of Bartlett, Magna, Independent Bank, First Alliance and Triumph Bank, to name a few. The only expectations are those contained in existing guidance, such as for interest rate risk or for commercial real estate concentrations.
And because the community banks don’t have economies of scale, the cost impact of certain regulations could hit their bottom lines pretty hard. Taylor said for every page of Dodd-Frank, the local/regional banks have to hire three people.
“As things happened in Washington and we have 2,250 pages of a document, it actually has made the bigger banks larger,” Taylor said. “I would predict that within the next five years, you will see no regional banks in this community, they will all be super regionals or super banks like the JPMorgans, Goldmans and Bank of Americas.”
Layne McGuire, senior manager with Dixon Hughes Goodman LLP, said regulations like the Credit Card Act and Unfair and Deceptive and Abusive Practices affect community banks disproportionately because they have smaller compliance functions.
“They’re struggling to figure out what applies to them, and how they’re going to meet those demands if a regulation does,” McGuire said. “Because there’s so much subjectivity in that, things like that really do impact community bankers probably even more than some of the larger banks.”
McGuire recently completed a training program through the Christian Brothers University Barrett School of Banking, where the Dodd-Frank Act and its impact on community banks was the main topic of conversation.
“Everybody understands that regulation is needed, but there’s just that fear about the unintended consequences with keeping the cost under control,” McGuire said. “Making sure that you’ve got effective risk management, but you’re not stifling basically good lending. That you don’t have people backing away from good commercial and real estate lending out of fear of regulations.”
But McGuire said Tennessee’s community banking sector weathered the economic crisis fairly well compared to other markets.
“I think the biggest challenge in Memphis is just trying to understand or getting a comfort level that the economy is in recovery,” she said. “Bankers want to lend. I think especially the community bankers, they really want to see their local markets expanding and doing well, so it’s just balancing those opportunities with the regulatory environment.”