Hill, McHenry: CHOICE Act Will Help Community Banks, Fintech Startups

Hill, McHenry: CHOICE Act Will Help Community Banks, Fintech Startups
From left to right: Lee Watson, Shelly Loftin, U.S. Rep. French Hill and U.S. Rep. Patrick T. McHenry. (Sarah Campbell-Miller)

The priorities of two congressmen supporting the Financial CHOICE Act are to offer community banks on “off ramp” from post-recession Dodd-Frank regulations, better define systemically important banks and bring accountability as well as transparency to the Consumer Financial Protection Bureau.

House Finance Committee Member Rep. French Hill, R-Arkansas, and Committee Vice Chairman Rep. Patrick McHenry, R-North Carolina, discussed the bill Friday when they served on a panel hosted by the Venture Center at the Little Rock Regional Chamber of Commerce.

Shelly Loftin, chief administrative officer at Bear State Bank, and Venture Center President and CEO Lee Watson were also panelists.

All of the panelists agreed on one thing: Lifting burdensome regulations will encourage established financial institutions to invest in and partner with financial technology companies that will help them innovate and become more competitive.

The congressmen’s Creating Hope & Opportunity for Investors, Consumers & Entrepreneurs Act has passed the House and is awaiting a vote in the Senate.

Hill said he believes members of both houses, on both sides of the partisan aisle, can agree on the three priorities he named.

The act offers regulatory relief for banks that hold Tier 1 capital at a threshold of 10 percent. Supporters believe this will be attractive for institutions that have less than $10 billion in assets - community banks - while larger Wall Street players will not attempt to meet that requirement.

As for defining systemically important financial institutions - sometimes called "too big to fail" - Hill said there is support for increasing the existing $50 billion threshold or basing that definition on a bank’s activities. SIFIs have additional regulatory costs, and McHenry said that is driving consolidation of “regional and super regional” banks.

As for the Consumer Financial Protection Bureau, Hill said it has a worthy goal of making sure the unregulated parts of the financial services industry, outside the depository institutions, have some oversight. But as originally created, he said, it “added a new layer of regulatory oversight to something that is already regulatorily overseen, in detail.”

Hill called the CFPB redundant and said the CHOICE Act seeks to hold it to a budget, make the director “firable” and limit the agency’s authority so that it can only enforce laws passed by Congress.

Bear State Bank’s Loftin spoke twice during the panel to share her institution’s experience with existing regulations.

Bear State has partnered with a couple of financial technology startups, and Loftin said it has made a lot of progress in the past year meeting regulatory requirements. But she said the bank still has more hurdles to clear.

“Of course, you get greeted with smiles and pats on the back. The regulators are really excited to hear about the innovative experiences that you’re going to try to create for your customers,” Loftin said.

“So you have this idea of how you can enhance your value in the community, then you start dealing with mountains and mountains of paperwork and obstacles that exist because the product you’re trying to implement doesn’t exist,” she continued. “And, instead of that being welcomed with open arms and ‘hey, let’s figure this out or let’s see where and how this will fit,’ it’s more ‘we’re not familiar with it; good luck with that.”’

Loftin also said the current regulatory burden means banks like hers have more employees focused on compliance than on new products and services.

Another topic being debated in Washington, the congressmen said, is the regulation of
fintech startups.

McHenry said he is working on separate legislation that redistributes regulators to offices of financial innovation where the startups can go for guidance.

Hill said Loftin’s issue could also be addressed by altering the information technology exam required by Dodd-Frank that scrutinizes vendor relationships to better embrace relationship with fledgling businesses.

He also said he didn’t see a need for financial technology companies to obtain charters like banks, as federal law still applies to them.

Another explanation Hill offered at the panel is how the CHOICE Act would bring the industry back to relying on "microprudential" leadership - executives and directors - to run safe and sound banks, make a profit, return some profit to shareholders, add capital and serve their communities.

This is a direct rebuke of the "macroprudentialism" of Dodd-Frank, which gave regulators more influence over banking activities, even at small institutions.

The CHOICE Act seeks to change that, but keeps new rules for large banks that would prevent another Recession, Hill said.

McHenry added that the CHOICE Act would also repeal the Volcker Rule, part of the Dodd-Frank reforms that restricts investments by banks. McHenry said the Volker Rule had discouraged banks from investing in venture funds that fuel startups.

The panel was also asked how the CHOICE Act will affect the Jumpstart Our Business Startups Act of 2012 and how effective it had been.

McHenry said he wrote the section of the JOBS Act that addresses investment crowdfunding, but the Securities & Exchange Commission spent four years writing 700 pages of regulations based on his 11-page section.

McHenry said he believes that what he intended, embracing crowdfunding, will not come to fruition in the current regulatory climate. In the CHOICE Act, there is a standalone item with bipartisan support to address that obstacle for entrepreneurs, he said.

McHenry also said the JOBS Act had been helpful in some ways, especially by creating a private offering provision and an initial public offering process that is less costly for small businesses.