Local bankers complain of being buried by regulatory paperwork.

The relationship between bankers and federal regulators has never been a warm one. But over the last couple years, as laws passed in the wake of the savings and loan crisis of the late 1980s have begun taking effect, that relationship has become downright frosty.

Los Angeles-area bankers said they are groaning under the weight of a growing mountain of paperwork imposed on them by the federal government. Many of the executives questioned whether the laws that were intended to benefit consumers are really doing so.

The situation is prompting a fight in Congress over whether or not the banking industry should be deregulated and, if so, to what extent. And that fight may have a profound effect on the industry this year.

"It's gotten so bad that you'll find small banks that only have 12 employees, and eight of them are just there to comply with all the regulations," said Dominick Albano, a spokesman with the California Bankers Association, a San Francisco-based trade group.

While Albano's numbers might be somewhat exaggerated (none of the L.A. County small banks contacted by the Business Journal reported the need for such heavy staffing to comply with federal regulations), there is little question that the cost of compliance is getting higher. Most local bank and thrift companies have at least three full-time employees devoted exclusively to keeping the institution in line with federal laws.

Three heavy laws

The most onerous requirements imposed on financial institutions in recent years are mandated by two pieces of federal legislation passed in reaction to the multibillion-dollar taxpayer bailout of the savings and loan industry. Those pieces of legislation are the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, and the Federal Deposit Insurance Corp. Insurance Act of 1991, or FDICIA. Another federal law frequently criticized by local bankers is the Community Reinvestment Act of 1977, or CRA (see story on page 9A).

Although all these laws were passed several years ago, regulators have only recently put into place the enforcement mechanisms for FIRREA and FDICIA. That is a primary reason local bankers said they are facing a harsher regulatory environment today than they were two or three years ago.

Several industry experts said small banks and thrifts are being the hardest hit by the regulations.

"Almost everyone has a certain fixed cost associated with meeting the standards," said John Getzelman, CEO and president of Pasadena-based Community Bank. "The small banks simply have less revenues to meet those fixed costs."

The nation's financial institutions together spent about $17.6 billion complying with federal regulations in 1991, according to the Federal Financial Institutions Examination Council, a coalition of federal regulatory agencies based in Washington, D.C.

Small players get hit

Comparatively small institutions, such as Community Bank, which had about $679 million in assets as of the end of 1994, have to take a large chunk out of their profits to pay the regulatory compliance price tag. Getzelman said his bank spent between $500,000 and $1 million last year to comply with federal regulations.

"It's still the intent of some consumer advocates to put more and more regulations on banks, presumably to protect the consumer," said David Burgess, vice president of policy analysis with the California Bankers Association. "But these regulations cost money that gets translated into higher fees for consumers. So the end result is, consumers are not being helped by them."

Both houses of Congress are currently studying legislation intended to dismantle some of the more burdensome federal regulations. Major targets of these deregulation efforts are the truth-in-lending and truth-in-savings laws, which require banks to provide customers with voluminous disclosures of potential fees and charges whenever the customers apply to take out a loan or open a new account.

"They made it cumbersome and time consuming and expensive for us to open a bank account," said Steve Carpenter, chairman and CEO of Encino-based California United Bank, which has 97 employees at five Southern California branch offices. As a community bank, California United has customers who are already familiar with the bank and its various fees and charges, Carpenter said. Therefore, they don't need the kind of disclosures required by federal law, he asserted.

Monitoring loans

"The unknown depositor in the middle of a major city, probably his rights are being protected by these laws," Carpenter speculated. "But I don't have that kind of customer."

Another piece of regulatory reform being considered by Congress would exempt small banks - those with less than $250 million in assets - from the CRA, which was intended to ensure that all segments of a given community are being' served by banking institutions. Under the CRA, banks and thrifts are required to track demographic or geographic characteristics of their loan recipients to ensure that lenders aren't discriminating against borrowers in low-income areas. Complying with that requirement can be very costly to small banks that don't have the technological mechanisms in place to do the required tracking.

Not everyone agreed that the regulatory burden faced by bankers is unnecessarily harsh. Although congressional Republicans tend to support the deregulatory measures now under consideration, many Democrats remain staunchly opposed. One such opponent is Rep. Maxine Waters, D-Los Angeles, who sits on the powerful House Committee on Banking, Finance and Urban Affairs.

"We feel (the banking reform act) is a Trojan Horse to get consumers out of the way in the guise of regulatory relief," said Patrick Lacefield, a spokesman for Waters. "There's a reason these regulations are in place, and that is that the banks weren't able to police their own act."

Lacefield said bank profits are running at record highs, proof that the regulatory burdens are not excessive. Disclosure laws such as those being targeted by the reform acts are needed to protect consumers, he said.