Small Banks Sweat as Trump’s Consumer Bureau Rollback Leaves Compliance Gaps

The Friday Fax That Froze the Lobby

First came the email with the subject line “Regulation Sunset Notice.” Then came the silence inside the glass-walled boardroom of First Heritage Community Bank in Sioux Falls, South Dakota. On the screen, the Consumer Financial Protection Bureau’s logo had vanished from the federal registry overnight, replaced by a terse footnote: “Enforcement authority rescinded 12 a.m. EST.”

For president and third-generation banker Carla Olson, the timing felt like a punchline. She had just hired two compliance officers to handle the CFPB’s new small-business lending data rule. Now the rule—and the funding for those salaries—was in limbo.

“We budgeted for referees who just got kicked out of the game,” Olson said, tapping a manicured nail against a print-out of the payroll ledger. “We’re still on the field, but nobody’s watching.”

A Bureau Left Hollow

Since 2011, the CFPB has acted as the chief cop for consumer finance, returning more than $19 billion in refunds and canceled debts. Under the first Trump administration, its budget was slashed and its directorship left vacant for six months. A second Trump term, according to transition memos reviewed by this correspondent, plans to fold the bureau into the Treasury Department and strip its standalone litigation powers.

The draft order, labeled “Schedule F-Adjacent,” would fire roughly 800 attorneys, investigators, and data scientists within 100 days. Their desks, according to one aide, will be “pushed into the hallway” so career staff cannot re-enter.

Why Small Banks Care

Community banks actually liked the CFPB—at least the part that wrote clear, nationwide rules. Without it:

• Each state can craft its own mortgage disclosure forms, tripling paperwork.
• Private lawsuits replace federal enforcement, exposing banks to class-action roulette.
• Fintech apps, already regulated more loosely, gain a further cost edge.

“We can’t lobby 50 attorneys general,” sighed Luis Martinez, CEO of $600-million Sunshine Bancorp in Tampa. His legal team penciled in an extra $1.3 million for compliance software if the bureau disappears.

Midnight Regs and Mortgage Chaos

The most immediate headache is the Qualified Mortgage rule, set for revision in April. CFPB staffers had spent 18 months negotiating a 3-percentage-point fee cap. Without the bureau, the patchwork of state mini-QM standards could push community banks out of rural markets entirely.

“Picture a farm couple in Nebraska who suddenly can’t get a mortgage because their bank can’t price the risk,” said Jelena McWilliams, former FDIC chair and now counsel at Cravath. “That’s not theory. That’s next summer.”

The Investors React

On the morning the rescission memo leaked, the KBW Regional Banking Index dropped 2.4 percent while money-center banks gained. Analysts chalked up the divergence to legal exposure: megabanks have armies of in-house counsel; small banks don’t.

“Markets hate uncertainty, but they hate uneven uncertainty even more,” noted Isaac Boltansky of Compass Point.

What Happens Next

Senate Banking Committee staffers say a bipartisan cohort of 14 community-bank senators have drafted a “Save Local Lending” letter urging the White House to keep the bureau’s rule-writing desk intact, even if enforcement is pared back. The letter is circulating this week.

Meanwhile, back in Sioux Falls, Carla Olson has frozen all new hires. The two compliance officers she onboarded? They’re now reassigned to answering customer phones. “I told them, ‘Welcome to community banking—wear the headset with pride.’”