René Jones, CEO of M&T Bank, argues that alternative lenders should be held to the same regulatory standards as traditional banks.
Jones said in his annual letter to shareholders that regulators’ ability to make real change through new regulations and policies is ‘fundamentally limited’ as long as nonbanks function under new set of circumstances.
His remarks centered on regulations governing community reinvestment, but he also referenced rules governing cryptocurrency, cybersecurity, money laundering, mergers, and fraud.
According to Jones, banks no longer have a monopoly in any commercial loan area. Nonetheless, alternative lenders are not required to meet the standards of the Community Reinvestment Act, a 45-yeard-old federal statute that requires banks to serve low- and moderate-income neighborhoods.
“A regulatory schema affecting only 40% of a major industry is profoundly out of date.”
René Jones
As a result, he contended, there is a “vicious spiral” in which the increasing number of regulatory initiatives pulls more financial activity away from “the regulated playing field, making it even more likely that future policy efforts will be equally less effective.”
Jones’ remarks are the latest salvo in a decades-long debate overextending CRA laws to nonbanks. Illinois and New York both extended their state-level CRA to non-depository lenders last year. (M&T is headquartered in Buffalo, New York.) The federal CRA framework, however, remains unchanged.
Meanwhile, the move in commercial lending to nonbanks, which was already underway prior to the epidemic, has accelerated in the last two years.
According to a December analysis by Autonomous Research, which reviewed data from the Federal Reserve’s Flow of Funds report, nonbanks have increased loan outstanding by 14% since the end of 2019, compared to 1% growth at banks.
Nonbanks’ gains are most pronounced in commercial and industrial lending, residential mortgage lending, and commercial lending, according to Autonomous.
Jones stated in his letter that online lenders “bypass the duty” that M&T and other banks have, and that banks “incur both the obligations and costs” of being CRA-compliant.
If banks do not achieve those requirements, they face three hazards, according to Jones: a prohibition on company expansions, a bad reputation if their CRA ratings are low, and blocked mergers and acquisitions.
Jones said that because the financial system “is shifting underneath us,” reforms must be done.
“Regulators who set important social goals – whether drawing the unbanked into the formal financial system or ensuring mortgage access for all neighborhoods – find their understanding of this shift far exceeds the reach that their authorizing legislation affords them.”
René Jones
Information from American Banker