The Dodd-Frank bill was the blunt instrument which was designed to prevent another financial crisis that hit the country in 2008-09. In the years since, the regulatory approach to prevent a future disaster has brought a new financial nightmare to rural America that Congress is now trying to address.  

This week the U.S. Senate approved on a vote of 67-31 legislation, S. 2155, that looks to right-size regulations for small and community financial institutions. The bill was authored by U.S. Sen. Mike Crapo, R-Idaho, chair of the U.S. Senate Banking Committee, and found bipartisan support from a handful of Democrat senators in more rural states.

At the time of Dodd-Frank passage in 2010, John Blanchfield was policy director for agricultural banking for the American Bankers Association (ABA). The organization warned it would result in fewer banks and larger banks.  

“At the time it was heavily discounted by lawmakers and consumer right groups,” Blanchfield said. “In reality, we were exactly right.”

A recent report in the Wall Street Journal also detailed how small business lending in rural areas has dropped by half since 2004 and now account for less than 10% of total small business lending. This is exasperated by the closure of many rural bank branches. There are now 625 rural counties in the country without a community bank, explained Brian Depew, executive director at the Nebraska-based Center for Rural Affairs.

“There are 37 counties without a single bank, and 115 counties served by just one bank.”

At the end of 2010, FCIC insured banks and savings and loans institutions totaled 7,658. At the end of 2017, the number dropped to 5,680 banks, Blanchfield noted. And during that same time period, only 22 new banks were chartered, compared to the typical 100 to 150 new banks chartered each year.

“The banks had gotten larger and the total numbers smaller. That impact was disproportionately felt on Main Street, not Wall Street.”

Blanchfield said the biggest factor was the financial cost of complying with the new regulatory framework that was spelled out in Dodd-Frank. Although some banks failed, small and rural bank owners, managers and shareholders more often were faced with higher compliance costs which led them to sell their institutions.

“I did not realize I was running a compliance law firm,” one banker shared with Sen. Pat Roberts, R-Kan., who supported the bill on the Senate floor.

Blanchfield explained, “This legislation is a step toward designing bank regulations appropriate to the size of banks being regulated. Main street banks are unique and valuable, especially in rural America.”

He doesn’t think it’s going to “re-light up Main Street banking,” but it will allow smaller banks to have less costly examinations and regulatory compliance.

“In theory, it should free up both capital and human resources for these banks to do what they do which is make loans,” he said.

The biggest relief the bill offers for farmers is some flexibility in how it makes loans and address the shortage of appraisers. Senate Bill 2155 has a provision, (sec 103) which allows a bank to waive an appraisal in rural communities for mortgages under $400,000. 

“Rural community banks can’t afford to have a full-time appraiser,” Blanchfield said. He noted that many rural community banks stopped making home mortgage loans because of the regulatory burdens. He sees this as a way to support the banks on main streets to make home loans in the towns they’re doing business in.

“The Economic Growth, Regulatory Relief and Consumer Protection Act is important legislation that will make a significant difference to the future of rural America,” Sen. Jerry Moran, R-Kan., said of the bill. “And that means a bright future for the rest of rural America, because access to credit determines whether or not there’s a grocery store in town, a farmer or a rancher can borrow money to keep their business going, or a new couple can purchase a home.”

The House will now need to pass the bill before it can head to the President’s desk for approval. The House previously has attempted to rollback Dodd-Frank provisions, only to be left to die with inaction in the Senate. The Hill reported that House Speaker Paul Ryan won’t take up the Senate bill unless senators agree to negotiate with the House.