Sandy Spring Bank’s director of regulatory management, Ed Nastalski, says the cost to implement regulatory changes has a bigger financial impact on smaller banks, such as his. (Jeffrey MacMillan/Capital Business)

L awmakers and regulators have spent the past four years drafting more than 200 new rules in an effort to clean up the financial industry.

Now as those new measures begin to kick in, local bankers say they are bracing for the impact.

“It’s one thing for rules to be issued and made final,” said Bert Ely, a banking industry consultant in Alexandria. “It’s another thing entirely for them to be implemented and enforced. There is going to be a lot of learning for the banks.”

More than a dozen Washington area banks and credit unions have merged with one another in recent years, citing heightened regulation as a factor. Others have done away with mortgage divisions and clamped down on consumer loans. At least one local bank has expanded its compliance team seven-fold to 35 full-time employees in four years.

“It creates a very confusing situation for the entire industry,” said Ronald D. Paul, chairman and chief executive of Eagle Bancorp in Bethesda. “Each new rule puts a whole different spin on swaps, on derivatives, on capital requirements. You have to constantly be adapting.”

The new rules coming into effect represent just about half of the 398 regulations that will eventually be in place as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation, which requires oversight from a number of federal agencies, seeks to hold banks more accountable in response to the worst financial crisis since the Great Depression.

Industry experts say the Dodd-Frank Act, combined with global Basel III requirements and rising interest rates, have made 2014 one big guessing game for banks.

“The United States has never had a piece of legislation that’s required so many new [banking] regulations,” said Wayne Abernathy, an executive vice president at the American Bankers Association. “That is no exaggeration.”

Among the most sweeping changes, area bankers say, are the Volcker Rule, which is aimed at preventing banks that receive deposit insurance from dabbling in riskier investments, and new mortgage lending requirements, both of which come into effect in the first part half of the year.

“A lot of things are in a state of flux,” Ely said. “There is still a lot of uncertainty with how regulations are going to be implemented.”

Even the people that banks hire to keep track of the new rules — who in some cases helped write the rules — are overwhelmed.

“Staying current with all of the changes in the law right now is a time consuming endeavor,” said Andrew Olmem, a financial services regulatory attorney at Venable who served on the Senate Banking Committee during the time Congress was writing the Dodd-Frank Act. “The Volcker rule is 800 pages. And it isn’t 800 pages of fluff. And that’s just one rule of several hundred required by Dodd-Frank.”

Effect on mortgages

At Burke & Herbert Bank in Alexandria, preparations for new mortgage rules began more than a year before they went into effect Jan. 10. The company updated its software systems, trained employees and alerted clients that mortgage requirements might change in the coming year.

“It was important to tell our customers, ‘We’re not singling you out. These rules are universal,’ ” said Christopher S. Reddick, who heads the bank’s mortgage unit. “We’ve been preparing for the new regulations for the better part of last year.”

Banks are now required to double-check all documentation — corroborating a borrower’s tax returns with the Internal Revenue Service, for example, or verifying salary figures with an employer. The extra documentation adds about a week to the overall mortgage process, Reddick said, adding that the bank is hiring new mortgage loan officers as well as a senior compliance officer.

“There are a bunch of rules, but as far as community banks are concerned, certainly the mortgage rules that went into effect in January have been among the most dramatic,” said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America.

To complicate matters for mortgage lenders, the Federal Reserve last month began scaling back its bond-buying program. That process is widely expected to push interest rates higher, though rates have declined so far this year on concerns about slowing economic growth.

In response, the Bank of Georgetown in the District and John Marshall Bank in Reston have reconfigured mortgages so that interest rates are adjusted every five years to guard against the prospect of rising rates.

A number of other banks, including Access National Bank in Reston, have shifted away from mortgages, choosing instead to focus on commercial lending, which so far has been largely untouched by Dodd-Frank rules. Many area banks say they are also fine-tuning their missions, honing in on either mortgage-lending, small-business loans or commercial real estate. It’s become less possible to do it all.

“Nobody is dabbling anymore,” Ely said. “You either do car loans or you don’t. Same with mortgages. Any form of lending — mortgages, car loans — has become riskier.”

Concern for smaller banks

Mostly, local bankers say, this is a time of extreme uncertainty. So far many of the new rules have centered on consumer-related affairs, targeting mortgage loans, pay-day lending and other matters that directly affect everyday Americans.

But, Ely says, there are indications that regulatory guidelines could eventually spill over into business lending, the bread-and-butter of many of the area’s community banks, including Eagle Bank and John Marshall Bank.

“Some examiners are starting to look at small-business lending as a variant of consumer lending,” Ely said. “Every thing is becoming more cookie-cutter, more formulaic.”

To keep up, Olney-based Sandy Spring Bank has hired an employee whose sole job is to track — and interpret — Dodd-Frank happenings.

In all, the $4.1 billion bank has allocated 15 percent more money toward compliance-related efforts in recent years, according to Ed Nastalski, director of regulatory management.

“For the bigger banks, these costs just roll off their backs,” he said. “They see it as the cost of doing business. But for smaller community banks, it’s harder to absorb.”

One of the early complaints about Dodd-Frank regulations hinged on the fact that small community banks and credit unions were being treated exactly the same as their multibillion-dollar Wall Street counterparts. Regulators have since addressed those concerns, banking experts say, tacking on exemptions for smaller banks.

So-called stress tests that gauge whether a bank can hold up in tough times, for example, are only required for companies with more than $10 billion in assets. (Banks larger than $50 billion face more strenuous guidelines.) Some executive compensation rules, meanwhile, apply only to banks larger than $1 billion.

“With the early rules, there was a lot of one-size-fits-all,” Abernathy said. “Regulators are doing a better job of scaling rules, of making them more tailor-made for a mid-size or smaller bank.”

Even so, smaller area banks say they have been impacted. In December, WashingtonFirst Bankshares sold off $2.7 million worth of high-risk securities for $700,000, a move the Reston-based company chalked up to the uncertainty regarding new Volcker Rule guidelines.

“Even medium-sized banks say, ‘We have XYZ in our portfolio, do we have to divest ourselves of that?’” said Micah S. Green, an attorney who leads the financial services practice at Patton Boggs.

Green said his firm is getting many calls from middle-market banks asking for help interpreting the Volcker Rule and what they should do about it.

And with nearly 200 Dodd-Frank measures still waiting to be drafted, area bankers say it’s largely impossible to predict what comes next.

“The general approach [for banks] has been to be cautious,” Ely said. “Even though Dodd-Frank has been around for four years, it’s only now starting to take off.”