Community banks are the source of almost 60 percent of all small-business loans of less than $1 million, as well as mortgage and consumer loans tailored to the needs of their local communities. Large banking organizations with more than $50 billion in assets hold almost 40 percent of outstanding small loans to businesses, according to the Federal Reserve, but loans to small businesses aren’t a significant portion of large-bank lending. Small-business loans represent less than 5 percent of the large banks’ total domestic lending.
Lawmakers should rethink the regulations aimed at the megabanks. Here are five steps Congress can take now to rebalance the regulatory burden and give Main Street businesses greater access to loans:
n Exempt small banks from certain mortgage rules. Provide “qualified mortgage” safe-harbor status for all home loans originated and held in portfolio by community banks, including balloon mortgages and interest-only loans, and exempt these banks from mandatory requirements to maintain cumbersome escrow accounts for the same class of loans.
n Cut red tape in small-business lending. Waive the new requirement to report information on every new small-business loan application. It falls disproportionately on community banks that lack the back-office expertise and other resources to comply.
n Require cost-benefit analyses by regulators. Prevent regulators from proposing new rules before they have determined that costs won’t exceed benefits. This step must recognize the disproportionately higher cost of compliance on small banks, and ensure new rules are consistent with existing regulations, written in plain English and easy to interpret. More broadly, new rules should reduce the threat to society of future crises, and the resulting economic damage from a recession and high unemployment.
n Waive certain audit rules. Increase to $350 million from $75 million the market-capitalization threshold requiring outside auditing of internal controls. Bank examiners continually monitor these systems at smaller banks. Waiving the audit requirement for publicly traded local banks would reduce their expenses substantially without creating more risk for investors, taxpayers or the deposit-insurance system.