Sen. Elizabeth Warren Floats Two-Tiered Banking System Concept

During a hearing of the Senate committee on Banking, Housing and Urban Affairs on Thursday, Sen. Elizabeth Warren, D-Mass., reportedly floated the idea of a two-tiered bank regulatory system that would have small community banks operate under a different set of rules than the big Wall Street banks.

It is an idea that has been debated before. Some industry officials, including Julie Stackhouse, senior vice president of the Federal Reserve Bank of St. Louis, are of the opinion that the multitude of new regulations being imposed by the Consumer Financial Protection Bureau (CFPB), a la the Dodd-Frank Act, as well as other regulatory bodies are simply too cumbersome for small banks – mainly because of the extra labor involved, but also because it unnecessarily exposes them to additional penalties. Some warn that many small banks could be forced to close or merge as a result of high cost of complying with the new regulations.

This would be devastating to the U.S. economy, as small banks play a major role as lenders to small business. A Federal Deposit Insurance Corp. study released in December shows that although community banks make up about 95% of all banks, they issue about 46% of small loans to business, yet they account for only 14% of all banking assets.

Meanwhile, the Community Mortgage Lenders of America has drafted legislation that, if taken up by Congress, would exempt small lenders from having to comply with certain regulations imposed under the Dodd-Frank Act, providing they do not engage in predatory or abusive loan practices.

Under the Community Mortgage Lenders Act of 2013, small lenders would be exempt from the seven-day waiting period requirement; the three-day waiting period if terms improve for the consumer, new servicing rules targeting impersonal shops, auditing of third-party vendors, and CFPB examination authority (unless a referral comes from a state or federal regulator). What's more, they would be exempt from the additional capital requirements called upon by the voluntary global regulatory standard, Basel III.

The idea is to preserve the intent of the Dodd-Frank Act, as it applies to larger lenders, but give smaller lenders a break, as they were not the cause of the housing crisis that began in late 2007.


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