Wells Fargo scandal strikes fear into smaller rivals

Community banks and credit unions are worried about being ensnared in new legislative and regulatory actions because of the scandal at Wells Fargo.

The Independent Community Bankers of America (ICBA) and the National Association of Federal Credit Unions (NAFCU) are both urging Congress and federal regulators to avoid unleashing new rules in response to the misbehavior at Wells, where employees created fake accounts for customers to meet sales targets.

{mosads}Camden Fine, president and CEO of the ICBA, said he expects Congress to pursue legislation that would create a whole new series of regulations for consumer banking products. 

“And those regulations will be indiscriminate,” Fine said. “It won’t matter whether it’s Wells Fargo or Citigroup or the little $50 million bank in Ashland, Mo. It’s not going to make any difference,” he said.  

Fine said the behavior of Wells and its response to the scandal are proof that the bank has become too big to manage. Rep. Maxine Waters (Calif.), the top Democrat on the Financial Services Committee, made that same argument last week during a hearing with Wells Fargo CEO John Stumpf. 

“It’s going to fall on the industry,” Fine said. “And what’s insane about that is those kind of regulations fall most heavily on the community banks because they don’t have the personnel to keep dealing with wave after wave of regulations.” 

Community banks and credit unions say their businesses have suffered since the passage of the Dodd-Frank financial reform law in 2010, as they have had to bear the brunt of new rules that were passed after the near-collapse of the financial system in 2008.

Carrie Hunt, executive vice president of government affairs and general counsel for the NAFCU, said that the recent problems at Wells Fargo prove that a sweeping law like Dodd-Frank doesn’t cure all evils in the banking industry. 

Credit unions worry that, after Wells Fargo, they will once again get hit with a new batch of rules, despite not having been the source of the problem.

“That is a fear we certainly wouldn’t want to come to fruition,” Hunt said. 

The regulations already passed under Dodd-Frank “have been extremely problematic for credit unions and other community-based financial institutions,” Hunt said.

“We unfortunately now have demonstrable data that shows that some of these regulations that do just paint this broad brush actually have a negative effect,” she said. 

Credit unions and community banks have been working for years to change a number of regulations, especially those affecting the mortgage business, Fine said. 

Hunt argued that any new consumer protections should target what happened at Wells Fargo.

“Any solution needs to be extremely targeted toward what actually occurred, and you have to take each situation into account and can’t just have a big broad brush with regulation,” she said. 

Community banks also are worried that the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, which have vowed to take a closer look at consumer practices across and beyond the banking industry, will issue more rules that weigh on the industry. 

“They will be looking at new examination procedures and new regulations covering consumer account openings and product offerings and again they won’t differentiate between a very small bank or one of these internationally multitrillion-dollar banks,” Fine said. 

The banks and credit unions aren’t alone in their concern. 

Lawmakers on Capitol Hill are voicing similar worries, saying at a House Financial Services hearing that this recent banking scandal will affect credit unions and community banks while they fight to chip away at regulations already burdening their businesses. 

“This scandal has painted a bad picture for the entire banking sector, and, frankly, the institutions in my district that are community banks and credit unions, they don’t have your culture,” said Rep. Andy Barr (R-Ky.) at a hearing with Stumpf. 

“But now they have a tarnished reputation because they’ve been swept into this with you,” he said. 

Barr told the Wells chief that some in Congress are fighting for regulatory relief for community banks and credit unions “that frankly represent competition to big banks like you.”

“So what I worry about are these small community banks and credit unions that are now going to have to deal with the ramifications of the bad acts of your institution,” he said. 

Rep. Bruce Poliquin (R-Maine) said he is concerned that the scandal will hurt small banks and credit unions in his district that employ thousands of people.

“But you know what happens, is that when this happens it flows downhill,” he told Stumpf.  

“I don’t know where this is going to go, but I will tell you this: The probability will be high that your organization and the actions of you in your organization — this systemic pattern of misbehavior and gross mismanagement and what looks like fraud — is going to find its way to the community banks and the folks that rely on them in rural Maine.”