Financial overhaul feels bigger to small banks

McALLEN — Small South Texas banks fear the toughest overhaul of lending and high-finance rules since the Great Depression — aimed at the country’s "too big to fail" banks — may be needlessly targeting them as well.

Lawmakers say the new regulations will control Wall Street excesses that could set off another recession. But small community banks backed by less revenue and fewer resources than their larger counterparts worry the overhaul will limit their ability to lend and bring more compliance costs.

Jabier Rodriguez, president of Pharr-based Lone Star National Bank, said his bank will likely have to expand its compliance department, which is currently staffed by 25 employees.

"When you have regulation that’s got more than 1,500 pages of law … I wouldn’t be surprised if we have to get more people," Rodriguez said. "It depends on how much more complex it gets."

And more compliance costs will likely translate to less lending ability.

"That’s a little money that we could have used to take a risk on a business," Rodriguez said. "Quite frankly, it will be more cumbersome to get credit. You’ll have to be more meticulous."

Consumer advocates argue that the new federal laws are meant to protect consumers from all financial institutions, not just the larger ones. The legislation will tighten regulations on bad mortgages and credit access, adding safeguards for consumers.

"It’s just as inexcusable for (smaller) banks to complain," said Tom "Smitty" Smith, director of the Texas office of the activist group Public Citizen. "They are tantrums by the children that are told they can’t continue to injure the family with their irresponsible behaviors."

But Rodriguez said some new regulations are unnecessary because most small banks did not sell risky mortgages to home buyers.

"There have been widespread abuses by the big banks," said Rodriguez. "But we have nothing to do with it. We’ve always done plain-vanilla mortgages."

Small banks will have to comply with lending and credit rules written by the Consumer Financial Protection Bureau created within the Federal Reserve. The new law also creates an influential council of regulators that will be on the lookout for risks across the finance system.

"We already have the Federal Reserve, which blankets primary holding companies," Rodriguez said. "We have so many layers of supervision …do we have to have this? I don’t think it was absolutely necessary."

Overwhelmed with a bevy of new laws, firms have been poring over the massive bill, anxious to assess its most immediate impact. Credit rating firms, for instance, say they will no longer allow the issuers of debt-backed securities to put their ratings for them in public sale documents, wary of a provision in the law that makes it easier to sue ratings agencies.

"There’s just so much to go through," said Darryl Lemke, Bank of South Texas president. "The small banks are the ones that are going to be hit."

Carlos Garza, president of McAllen-based Inter National Bank, said he hopes the new legislation will ultimately benefit banks that are less than $10 million in size.

"Supposedly, we’ll be getting a lower (Federal Deposit Insurance Corp.) insurance premium, but we’ll see. That cost has really risen," Garza said. "But the devil’s in the details. We haven’t seen the details."

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The Associated Press contributed to this report.

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Ana Ley covers business and general assignments for The Monitor. She can be reached at (956) 683-4428.