Trick or Trump: The Radical Impact on Community Banks and Their Consumers

Saturday (April 29) marks the 100^th day of the Trump Presidency. The benchmark has historically been used to review promises made and kept, as well as where progress has occurred and where it is yet to happen. For community banks and the small businesses and individuals they support, four markers are of particular importance—small business lending, mortgage rates, interest rate risk, and regulations. Let’s look at all four to get a sense of where the country is, and where we may be headed in the second half of 2017.

Economically, the U.S. has seen some real, measurable changes. Almost immediately following the inauguration, the market responded. Mortgage rates, bonds, and the dollar rose significantly. Stocks rallied after an election night selloff. The Federal Reserve has raised the benchmark interest rate three times since December 2015. Mortgage rates began in 2016 with a decline for the first few weeks, but have been raised as much and as recently as one-quarter of a percentage point in March 2017.

Many voters are still awaiting a repeal of Dodd-Frank. As of February, President Trump signed an order for the Secretary of the Treasury to review the act with an eye to how it is potentially hindering economic growth, but to date; no changes have been made. The full text of the Financial CHOICE Act, the Republican response to the Dodd-Frank Act, was released by the House Financial Services Committee on April 19 with a committee hearing on the bill scheduled for April 26. Currently, the timing of his proposed income tax reductions remains nebulous.

So what progress has been made as we approach this 100-day benchmark? Certainly, none of these issues are clear cut. Progress is being pursued and in some cases, made – albeit slower than initially expected.

Small Business Lending

President Trump has been meeting with community bankers across the country. Ostensibly, he is working to assess the regulatory reforms and other steps that could boost lending to small businesses and consumers. He has argued on behalf of small businesses, in some cases to the shared benefit of community banks, and in others to its potential detriment. He has continued to pledge to "streamline" or "eliminate" Dodd-Frank to enable small businesses to borrow more readily.

In its “A Blueprint for Growth” newsletter released in February 2017, the American Bankers Association made a call on Congress and the administration to enact policies that will grow the economy through small business growth by increasing funding for key Small Business Administration (SBA) loan programs and elimination of regulations that dictate business lending decisions

On the contrary, President Trump has challenged the SBA to look creatively at how to enable non-bank lenders to apply to become SBA lenders and add additional loan products. He proposes that providing guarantees to loan products that serve the middle class would ease regulations on small businesses and put capital in the hands of those that need it most. This move can have minimal impacts on community banks depending on the structure of their loan portfolio, as some are not actively pursuing SBA loans due to strict compliance requirements and required expertise within management.

Mortgage Rates

For first time home buyers, especially, the housing market is feeling a bit rough, though perhaps not prohibitively so. Prices are high, supply is low, and interest rates are consistently increasing. The good news is that rates are still relatively stable and likely will remain that way. Federal Reserve Chair Janet Yellen states that the Fed expects the economy to continue to grow at a moderate pace and that gradual interest-rate increases will get our economy where the Fed feels it should be.  In addition, global markets are relatively ‘warm’ and economic prospects are optimistic. For community banks, the biggest challenges will be outside (non-bank) lending competitors, reticence on the part of buyers to take on a mortgage, and increasingly strict mortgage requirements. Consumers will have more options to obtain mortgages although interest rates will be higher in comparison to even 2016 alone.

Interest Rate Risk

As we noted, it’s likely that the Fed will increase benchmark rates again before the end of 2017 if the economy remains healthy. While these rate hikes could have a detrimental impact on consumers trying to get a mortgage, community banks stand to generate a profit through interest earned on loan portfolios.

Deregulations

Perhaps the biggest question mark for community banks at this point in the Trump administration is the state of deregulations—Dodd-Frank in particular. Dodd-Frank was created in 2010 as a response to the financial crisis in 2008. The act increases the amount of capital banks must hold in their reserve, requires banks to keep a large portion of their assets invested in liquidity-heavy items, requires banks with over $50 billion in assets to submit to annual stress tests and created the Consumer Financial Protection Bureau, known as the CFPB. On one hand, less stringent regulations could lower the cost of compliance for community banks, which allows them to compete with big banks. On the other, it could increase the chances of another bailout for major banks. For small banks still working to recover from the bailout, due to increased regulatory costs and changes in their products and services, the risks could outweigh the possible benefits.

In addition to the uncertainty, many of the regulations are determined at the state level, and outcomes could be determined by which party holds the power in the House.

Although we are unsure about what the future holds, one thing remains true: changes to the banking industry are coming. To keep the trust of its consumers and their standing as a support to their communities, community banks need to be proactive about monitoring and preparing to react quickly and accurately to the change.

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