ICBA policy recommendations

It has been a busy year on Capitol Hill, and ICBA has issued a number of white papers to bolster its lobbying efforts in support of community banks. Here’s a look at some of what ICBA is recommending, and why.

By Alan Keller

There’s a lot at stake for community banks in the 115th Congress, and ICBA wants to ensure that the community bank voice is heard. As part of that effort, ICBA has issued a series of white papers on critical topics. These white papers have been broadly covered in the media and distributed on Capitol Hill and to the Trump administration. The goal is to inform the debate with in-depth analysis and a practical perspective about what works in the real world of economic decision-making.

Below is a summary of the ICBA white papers issued to date in 2017.

ICBA Principles for Tax Reform
The 115th Congress presents the best opportunity in a generation to restructure, modernize and simplify a complex, inefficient and distorted tax code. ICBA supports tax reform. The tax code determines the nature of our economy, and tax reform requires fundamental choices about our economic future. This white paper is intended to inject the community banker voice into this critical effort.

While covering a range of topics, the focus of the paper is preserving the current-law interest deduction for business borrowers. The paper argues that community bank credit is a critical source of capital for small businesses, small farms and ranches. Increasing the after-tax cost of debt financing by altering the interest deduction would put the brakes on new investment opportunities and the economic growth potential they carry. Small businesses that rely on debt for working capital (such as accounts receivable and inventory) would face a threat to their viability.

Other topics covered in ICBA’s white paper include:

  • The need for lower marginal tax rates for corporations, businesses and individuals to spur business investment, hiring and consumer purchasing.
  • Modernization of Subchapter S by increasing the shareholder threshold, allowing preferred shares and allowing individual retirement account (IRA) investments. These changes will help Subchapter S community banks meet regulator demands for higher capital.
  • Parity in the taxation of financial services providers. Credit unions and Farm Credit System lenders are becoming the equivalent of banks and should be taxed equivalently.
  • Permanent repeal of the estate tax as a threat to the intergenerational transfer of many community banks. Many community banks have been held and operated within families for as many as four generations.
  • A call to preserve the mortgage interest deduction. Any change to it would abruptly reduce home values. Community banks would disproportionately bear the impact of collateral devaluation because they are more likely than other lenders to hold the mortgages they make in portfolio.
  • Preservation of the current-law tax exemption for interest earned on municipal debt. Community banks support their communities by investing in state and local government debt.

ICBA Principles for GSE Reform and a Way Forward
This white paper outlines ICBA’s approach to housing government-sponsored entity (GSE) reform. Its approach is simple: Use what’s in place today and is working, and focus reform on aspects of the system that are not working or that put taxpayers at risk.

The current GSE secondary-mortgage market structure has worked well for community banks by providing direct and equitable access, not competing at the retail level and permitting community banks to retain mortgage-servicing rights on the loans they sell.

ICBA strongly supports secondary market reform measures that will prevent or significantly reduce the risk of devastating market failures that have hobbled our economy in the past. Reforms that would break up Fannie Mae and Freddie Mac or sell off their assets to large Wall Street firms would further concentrate mortgage lending and the secondary market in a small number of mega firms. This would significantly increase the risk of another market failure.

ICBA’s white paper provides a roadmap for reform that will preserve the role of community bank mortgage lenders, restore the safety, soundness and financial stability to the GSEs, and ensure that Wall Street and the megabanks do not effectively capture the secondary market system to the detriment of borrowers and communities.

It will take time to reach consensus on the many critical features of comprehensive reform legislation. Pending completion of that effort, the Federal Housing Finance Agency (FHFA), which regulates the GSEs, should protect taxpayers from another bailout. ICBA urges FHFA to require both GSEs to develop and implement capital restoration plans, start to retain earnings and, over time, build capital to a level that adequately supports their operations and protects US taxpayers.

Community Bank Regulatory Relief: A Roadmap to Economic Growth & Prosperity

The purpose of this white paper is to describe what is unique about American community banks, survey the regulatory environment in which they operate, identify regulatory barriers and recommend solutions that will allow them to serve as engines of economic growth and prosperity for generations to come. These solutions include:
Strengthening community bank mortgage lending by reforming the “qualified mortgage” rule, unnecessary escrow requirements, costly appraisal and application mandates, and more.

  • Easing commercial lending rules, such as data-collection and rural-credit mandates, to mitigate the negative impact on small businesses and farms.
  • Reforming punitive Basel III capital rules and refocusing them on the largest financial firms.
  • Addressing growth-inhibiting burdens stemming from the Consumer Financial Protection Bureau, Bank Secrecy Act, quarterly call report and examination environment.
  • Reviewing the credit union industry’s tax and regulatory exemptions to promote a level playing field in the financial services industry.

This white paper was submitted to the Treasury Department and discussed by community bankers in Treasury meetings as the agency prepared a report mandated by President Trump’s executive order to review financial regulations. The final Treasury report issued in June, “A Financial System that Creates Economic Opportunities,” reflects many of the recommendations made in ICBA’s white paper.

Alan Keller
(alan.keller@icba.org) is ICBA vice president, legislative policy.

Further reading

To read the white papers discussed here, as well as other related material, visit the Advocacy section of icba.org.