A Tiny Texas Bank Challenges Dodd-Frank

The Economist:

Into this mess has stepped Mr Purcell, who, notwithstanding the size of his institution ($260m in deposits, making it the 177th-largest bank in Texas), has suddenly turned into a rather important banker in America. On June 21st his bank became a plaintiff in a legal challenge brought with two free-market entities in Washington, DC, the Competitive Enterprise Institute and the 60 Plus Association, arguing that Dodd-Frank is unconstitutional.

Mr Purcell’s business model, common among Texas rural banks, was to keep loans on its books, internalising both their returns and their risks. In practice, this meant making small loans (under $60,000) at relatively high rates (7%, because small loans suffer from diseconomies of scale) with short terms (five years, to protect the bank against interest-rate risk) and final “balloon” payments that are usually rolled over. This approach differs radically from that of the major banks, which syndicated mortgages through Fannie Mae and Freddie Mac. The bank has not repossessed a home in seven years, or cost taxpayers a penny, but balloon payments and high rates are targeted under Dodd-Frank, which grants regulators wide discretion to decide what is “abusive”. Mr Purcell has stopped issuing mortgages and, because of other Dodd-Frank rules, processing international remittances.