Community Bankers Achieve Vital Changes to Accounting Rules

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It took years of hard work, but community bankers once again showed they can make a positive impact on new regulations through engaged grassroots advocacy. The latest industry success came with the release of the Financial Accounting Standards Board’s final updated standard on credit losses.

This Current Expected Credit Loss standard is by no means perfect, requiring all banks to account for credit losses at the point of origination. But community bankers and ICBA have singlehandedly achieved numerous and important revisions to the standard that will make it more workable for Main Street institutions and avoid potentially disastrous consequences for our industry.

Key Concessions

Compared with what was originally proposed, FASB has completely departed from a standard that would have required complex modeling systems for institutions large and small. Instead, it now explicitly allows community banks to continue using their personal understanding of local markets to determine loan-loss reserves. That means community banks will be able to continue using qualitative factors, historical losses and spreadsheets to calculate their loan-loss reserves when the standard is implemented in 2020-21.

Federal regulators showed they are on board with this approach, announcing in formal guidance that community banks will be able to meet the new standards without complex models or third-party service providers. This is complete reversal from a year ago, when a regulator-led webinar suggested banks should consider investing in third-party modeling systems.

Years of Outreach

Why the change of heart? It’s due entirely to the tenacity of community bankers, our affiliated state associations, and ICBA, the only national trade association that stood up exclusively for our industry. ICBA led grassroots outreach on the standard since it was introduced nearly six years ago—including a 2011 petition signed by roughly 5,000 bankers. Meanwhile, ICBA community bankers have worked directly with FASB to explain the unique community bank business model, resulting in these important changes.

ICBA community bankers Greg Ohlendorf, Lucas White and Tim Zimmerman deserve special congratulations and thanks for their efforts. All three volunteered hundreds of hours of their precious time to work with FASB and communicate community banker concerns. Most recently, Zimmerman, ICBA’s vice chairman, has served as the sole community bank representative on FASB’s Transition Resource Group. The TRG will continue to play a key role in assuring the standard is implemented as intended, with the much-needed industry-advocated improvements.

Real-World Impact

The impact of these changes cannot be overstated. As originally proposed, FASB’s impairment proposal would have crippled community banks and their ability to serve local communities across the nation. Now, community banks will be able to continue accounting for loan losses in a more scalable manner, using their own systems and first-hand knowledge of their local customers and communities.

Indeed, the evolution of the CECL standard warrants congratulations all around. These changes simply could not have been achieved without the input of an entire industry of community bankers. Hats off to my community bank colleagues from coast to coast for fighting this important battle and accomplishing so much.

A Voice That Must Be Heard

“You say it again, and you say it again, and you say it again, and you say it again, and you say it again, and then again and again and again and again, and about the time that you’re absolutely sick of saying it is about the time that your target audience has heard it for the first time.”

Frank Luntz, political strategist

Community bankers aren’t the type to hold back an opinion, whether it’s offering advice to a small-business customer or weighing in on how to promote local economic activity. But in this age of short news cycles and even shorter attention spans, community bankers have to be willing to tell their story time and time again to connect with policymakers and the broader public.

The future of the industry depends on our ability to speak out passionately and directly. And with ICBA Community Banking Month and the countdown to the ICBA Washington Policy Summit underway, now is the time for community bankers to make their voice heard loud and clear. That’s why ICBA is offering a variety of resources to help community bankers spread the industry’s message.CheckOutInfographic

The ICBA Community Banking Month website offers resources that community bankers can use to espouse the benefits of community banking, including a custom news release and op-ed, sample social media updates, and an infographic. It also offers a custom letter to Congress that community bank customers can use to advocate on behalf of the industry to their lawmakers.

Meanwhile, community bankers can continue the industry’s push for regulatory relief and other important policy goals at this month’s ICBA Washington Policy Summit. Scheduled for April 24-27 in the nation’s capital, the summit allows community bankers to meet directly with their members of Congress and regulators to advance smarter banking policies.

As ICBA Chairman Rebeca Romero Rainey said at last month’s ICBA Community Banking LIVE convention, each community bank has a unique story of how they serve their local communities and make an individualized impact on their customers. Our industry’s success depends on our ability to share that story—to the people in our communities, to the news media, to the policymakers who establish the laws we live by, and to the next generation of community bankers.

So let’s tap into that and tell the community banking story—again and again. While you might get tired of repeating the benefits of banking locally and the need for policymakers to allow this system to thrive, we owe it to our communities, our economy and the future of our industry to make sure our voices are truly heard.

Study Affirms Community Banks’ Small-Biz Leadership

It’s something ICBA and the community banking industry say all the time: community banks are the nation’s leading small-business lenders. And the numbers back it up. While community banks make up less than 20 percent of the banking system’s assets, they dole out more than half of its small-business loans.

Still, some small businesses continue to test their alternatives: megabanks, credit unions, and now online lenders. The latest set of numbers shows that these businesses should stick with a community bank.

According to a new study from seven Federal Reserve Banks, small businesses that apply for loans with community banks are the most successful and most satisfied.

Here’s what the study found:

  • Community banks were the most likely to make a loan, extending financing to 76 percent of loan applicants while large banks approved just 58 percent.
  • Community banks also had the highest satisfaction scores, with 75 percent reporting that they were satisfied with their overall experience, compared with scores of 56 percent for credit unions and 51 percent for large banks.
  • While online lenders had the second-highest rate of approval at 71 percent, just 15 percent of borrowers said they were satisfied with the experience.
  • Of the firms that were dissatisfied with their experience with online lenders, 70 percent cited high interest rates and 51 percent reported unfavorable repayment terms.

16.03.30_FRB_Small_Biz_StudyWith the amount of blood, sweat and tears that goes into launching a startup or expanding a small business, entrepreneurs should know that they have a partner in their local community bank. That is more important now than ever before, as demonstrated in a 2014 ICBA study that found that 41 percent of Millennials say they are very interested in starting up their own business.

So community bankers, let’s continue to spread the word about the importance of our industry in getting small businesses off the ground and taking our economy along with them. It’s an important message that everyone needs to hear, and now we have even more data to back it up.

Mortgage Relief Recognizes Community Banks’ Unique Role

It was a long time coming, but persistence paid off when the Consumer Financial Protection Bureau recently updated its mortgage regulations to ease unnecessary restrictions on many community banks. Under an interim final rule, the CFPB expanded Qualified Mortgage eligibility for balloon loans held in portfolio and exempted more rural lenders from escrow mandates.

That might sound a little complicated to the layman. But all it really means is that Washington regulators will allow many community bankers to keep doing what they’ve done for years—making mortgage loans that meet the unique needs of their customers and communities.

And that’s really the heart of the matter here. This isn’t an example of ICBA, our affiliated state associations and community bankers achieving some abstract policy goal. No, this is a case of policymakers acknowledging the benefit of a service that community bankers have offered for generations.

The case for reform has been overwhelming. According to the ICBA Community Bank Lending Survey released last year, three-quarters of respondents said regulatory burdens are keeping them from making more residential mortgage loans. Half of all rural banks said they did not qualify for the QM rule’s “rural” exception. That report followed the release of ICBA’s 2013 Community Bank Qualified Mortgage Survey, which found that less than half of those offering balloon loans would qualify for the QM rule’s balloon mortgage exception.

Ultimately, it was this hard evidence combined with dogged initiative that saw crucial reforms all the way through—from winning portfolio QM treatment for small creditors in the original rule, to achieving the CFPB’s expanded definition of “rural area,” to the additional relief that advanced last December in the FAST Act. In fact, we still want to take this even further and implement QM safe harbor treatment and escrow relief for all community bank loans originated and held in portfolio.

I’m thrilled that our persistence has paid off—that the concerns of ICBA have been heard and that thousands of community banks and the customers they serve will regain access to mortgage credit. And I’m thankful for all the hard work that community bankers and the state associations have put into their advocacy. But more than anything, I’m hopeful that this development reminds policymakers that community banks are and always have been in the business of serving local communities—something that Washington should be looking to promote, not regulate out of business.