“The assumption [lawmakers] seem to have is that everybody in business is a crook, so we’re going to regulate you to death,” said Barbara Lang, CEO of the D.C. Chamber of Commerce. “It’s going to have a huge impact on businesses.”

Criticized by some as too weak, others as too far-reaching, the 2,300-page law, signed July 21 by President Barack Obama, is filled with new rules on everything from consumer mortgages to bank capital and liquidity to credit card swipe fees. The full impact of the law will take years to play out as federal agencies translate lawmakers’ language into actual regulations.

Whatever the outcome, it’s clear banks will have to spend a lot of money complying with the law — and they will no doubt pass those costs on to businesses and consumers. The net effect: It will probably be harder to get credit from a bank, and the cost of loans and other bank services will go up, experts say.

Lack of credit already is a key challenge for local businesses, Lang said. And a further reduction could mean that fewer projects get done and fewer companies hire and expand.

At least in the near term, while bankers are still trying to determine exactly where the new regulatory lines will be drawn, they are likely to be extra cautious out of fear they might inadvertently overstep the line, said Bert Ely, a banking and monetary policy consultant in Alexandria.

For example, he said, it’s likely that a suitability test will be a part of the new regulations — that is, bankers would be responsible for verifying that a loan is “suitable” for a given consumer. If a borrower winds up defaulting, the bank could get sued for selling an unsuitable product.

“It shifts the risk back to the bankers,” he said, which could make them more reluctant to take a chance on potentially risky borrowers — at least until banks have a clear sense of how regulators will enforce the rules.

“It discourages lending,” said Doyle Mitchell, CEO of D.C.-based Industrial Bank, which focuses on the minority community. “It hurts community banks tremendously. I’ve never seen anything like it.”

Tighter underwriting standards would be particularly hard for businesses on the margins, Mitchell said. “If there are credit applications that are on the borderline, its going to make it tougher for us to tip those applications to the approval side.”

While many in the local business community regularly proclaim that “banks aren’t lending,” those claims often are overstated. While many large banks have reduced lending, most local banks have actually increased their lending over the past year, according to data from the Federal Deposit Insurance Corp. And because lending represents the lion’s share of profits at local banks, healthy institutions would be reluctant to pull back on lending for an extended period.

If there is a significant credit clampdown, it could be a boon for more expensive financing options, like factoring companies and asset-based lenders, which cater to companies that don’t qualify for bank funds. There also could be a resurgence of more informal lending agreements between private parties, Ely said, which is akin to loan sharking.

The new rules will be especially hard on smaller community banks with less than $500 million in assets — which includes 27 of the 41 locally based banks, said Mike Clarke, CEO of Reston-based Access National Bank, which has $636 million in assets.

The cost of complying with reams of new regulation and disclosure rules could put a lot of pressure on those institutions, and many will feel compelled to either grow or sell to a larger institution, he said.

“We’ve determined that, because of this and other elements of the landscape, that we’re going to have to grow [to remain competitive],” Clarke said. “We’ll need more of a platform to afford the compliance burden.”

However, in some ways the new rules are kinder to community banks than to large institutions, which will face more stringent oversight under the Consumer Financial Protection Bureau, the watchdog agency that will regulate mortgages, credit cards and other consumer products.

It’s not just banks and credit unions impacted by the rules. Local hedge funds and private equity companies, including D.C.-based private equity giant The Carlyle Group, also will be affected. Managers of those often opaque and secretive funds will be required to register with regulators.

There also are new limits on the money these funds can raise from bank holding companies, said Winthrop Brown, a banking and regulatory attorney in Milbank, Tweed, Hadley & McCloy LLP’s D.C. office.

Ultimately, many banks will have to off-load their private equity holdings, though the rules won’t go into effect for several years and will impact new private equity funds more than existing funds, Brown said.

Whichever camp of critics prove to have the best foresight, the effect could be less private equity money flowing to businesses.

Font: The Business Review (Albany)