The wave of new banking regulations that Congress created to deter and punish Wall Street's misdeeds is landing with much greater impact on the almost 7,000 community banks than on the too-big-to-fail lenders.

Community banks didn't cause the financial crisis; they played by the rules. Because of their time-tested business model, one based on customer relationships rather than transaction volumes, community banks aren't a threat to the financial system. Yet they are being forced to pay a penalty in regulatory costs - to comply with rules aimed at preventing bad behavior on Wall Street.

Congress has added insult to injury for community banks while rewarding the real villains in the economic collapse. Megabanks benefit from what Bloomberg View calculated is an $83 billion annual taxpayer subsidy, the value of implicit guarantees by the U.S. Treasury.

Perversely, Federal Deposit Insurance Corp. data show that large banks have both the lowest credit quality and the lowest cost of funds in the industry. Community banks rank the highest in both categories even though they have had to compete for years against the megabanks' access to cheaper money in pricing loans. In addition, community banks must compete against the big lenders' lower comparative costs in handling regulatory paperwork.

Community banks should be putting their capital to work in the small towns, rural communities and middle-class urban enclaves they know well. Instead, they are focusing too many resources on time-consuming compliance measures.

Community banks are the source of almost 60 percent of all small-business loans of less than $1 million, as well as mortgage and consumer loans tailored to the needs of their local communities. In contrast, small-business loans represent less than 5 percent of the total domestic lending of large banks with more than $50 billion in assets.

Here are five steps Congress can take now to rebalance the regulatory burden and give Main Street businesses greater access to loans:

• Exempt small banks from certain mortgage rules. Provide "qualified mortgage" safe-harbor status for all home loans originated and held in portfolio by community banks and exempt these banks from mandatory requirements to maintain cumbersome escrow accounts.

• Cut red tape in small-business lending. Waive the new requirement to report information on every new small-business loan application. It falls disproportionately on community banks that lack the back-office expertise and resources to comply.

• Prevent regulators from proposing new rules before they have determined that costs won't exceed benefits. This step must recognize the disproportionately higher cost of compliance on small banks. It must also ensure new rules are consistent with existing regulations, written in plain English and easy to interpret.

• Waive certain audit rules. Increase to $350 million from $75 million the market-capitalization threshold requiring outside auditing of internal controls. Bank examiners continually monitor these systems at smaller banks. Waiving the audit requirement for small, publicly traded local banks would reduce their expenses substantially without creating more risk for investors, taxpayers or the deposit-insurance system.

• Eliminate the annual requirement on no-change privacy notices. Mailing annual notices on privacy policies serves little purpose when no changes have been made. Keep the notification requirement for those years when changes are made.

None of these changes would alter the already significant regulatory tools that provide appropriate oversight of community banks. But it would be a failure of logic and lawmaking if the new wave of banking regulations that are meant to stop Wall Street excesses instead resulted in cutting off one of Main Street's economic lifelines.

Camden R. Fine is president and chief executive officer of the Independent Community Bankers of America. He wrote this for Bloomberg News.

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