WASHINGTON — Federal Deposit Insurance Corp. Chairman Sheila Bair's last scheduled address to the American Bankers Association turned heated.

Although Bair and the ABA have often been at loggerheads over regulatory reform, the distance between the two was never more apparent, with the FDIC chief delivering some blunt responses to the trade group's relentless criticism of the Dodd-Frank Act.

"Is the constant engagement with the industry going to be [about] regulations you don't like? Are there ever times when you can acknowledge what regulators have done that have helped the stability of the industry, what the FDIC has done, what frankly Dodd-Frank did?" Bair said at one point Wednesday.

Bair's prepared remarks for the trade group's Washington summit were characteristically direct, challenging the ABA's view that Dodd-Frank should be overturned.

"As this historical era unfolds, public opinion as to the role played by the banking industry seems unlikely to be neutral," she said. "It is far more likely that banks will come to be viewed either as a group that supported the restoration of free enterprise and public responsibility in the American economy, or as a group that mainly looked out for its own short-term interests and resisted reforms that could have restored a sense of confidence and fairness in our financial markets."

But the room grew tense during the question-and-answer period.

Bankers argued that Dodd-Frank was hamstringing their operations, while also voicing objections to the FDIC's recent guidance on overdraft protection, which requires banks it supervises to engage customers who meet an annual minimum of overdraft payments about alternative options.

"The only thing that the new regulations are doing for us is increasing our costs," one banker said.

But Bair drew a vocal reaction when she said the regulatory reform law focused mostly on large institutions.

"Dodd-Frank is almost completely targeted at large financial institutions," Bair said.

In response, many in the audience grumbled, with some exclaiming, "No."

Bair said small banks were exaggerating the negative effects of the law.

She acknowledged concerns about a provision that would restrict debit interchange fees, which she has warned lawmakers could hurt small banks.

Bair sounded frustrated that many bankers want to repeal the entire law even though many provisions benefit community banks, including a permanent increase in the deposit insurance limit to $250,000, lower assessments for smaller institutions and temporary blanket coverage for transaction checking accounts.

"Do you want to repeal it? Do you want to go to $100,000? … You want your premiums to go back up again?" Bair asked. "Is that what you want? … You don't want [the transaction account coverage] anymore? OK, that's amazing."

Bair appeared stunned when many in the crowd indicated yes.

"I can't believe this. You want your assessments to go back up, you want your deposit insurance coverage to go down, to get rid of Durbin?" she said.

One executive said that the time it takes to train staff to incorporate new regulations detracts from product innovation.

"We are taking all of our attention away from providing banking services to our communities and our customers, so that we can train" employees "over and over again about new regulations," he said.

But Bair said some of the regulatory developments could in fact help. She noted the stated intentions of the new Consumer Financial Protection Bureau to simplify mortgage disclosures as a potential benefit for small institutions.

But the audience's reaction reflected general opposition throughout the industry to the creation of the CFPB in the first place. While the new bureau can only enforce rules for large institutions, it can write rules for the industry across the board.

On simplifying disclosures, Bair said, "I think the consumer agency will help you on that."

Again, bankers throughout the room bristled at the statement.

Bair continued, saying institutions should engage regulators on many of these new ideas.

"I think the consumer agency has reached out to you and said over and over again that they want to simplify these disclosures," she said. "So why don't you work with them … to see if that can happen?"

She said small banks are essentially afraid of consequences from the law that are unrealistic.

"Some of this is theoretical. You have fears of what could happen, when people are really trying to ensure that it will not happen," she said.

She even suggested the ABA, which has both small and large banks as members, is somewhat to blame for the disconnect, since the trade group fought passage of the law at every point in the legislative process.

"I think it's really difficult for a trade association to represent all" of its "institutions. It seems to me that large institutions … they're really facing the brunt of this," she said. "The community banks are not. But I think the community banks agitate for the repeal of Dodd-Frank, even though that would raise their premiums and reduce their deposit insurance coverage."

Bair emphasized that while with the FDIC she has tried to assist community banks.

"I think my tenure at the FDIC has shown that I am not the enemy of community banks — just the opposite," she said. "But I do think there may be some cross purposes between the large institutions and the small institutions about what's going on with regulation right now. I would encourage you to think for yourselves."

Much of the ABA audience's displeasure, however, concerned a regulatory change not associated with Dodd-Frank. Echoing concerns raised by the industry for some time, bankers said the overdraft restrictions constrain a product customers want, and it is not the banks themselves that are overdrawing accounts.

"Our customers are writing the checks," a banker said, to applause from the audience.

Bair said there were alternatives to overdraft protection which could benefit customers. "It would be much lower cost for you to set up a line of credit for them," she said.

But that comment triggered audible objections from the audience. "If you don't want to do it you don't want to do it," Bair said.

To be sure, Bair did find agreement among the audience with some of her remarks. The address drew applause when suggesting the agency would not frown on brokered deposit use at healthy banks.

She stressed that the agency is focused on looking out for the community bank sector.

"We have been advocates for community banks. We think that's consistent with the public interest," she said.

"I have time and time again spoken against too big to fail. We opposed a lot of bailouts. … I extolled the lending that the community banks have done quarter after quarter when we do the Quarterly Banking Profile.

After the speech, Matt Williams, president of the $110 million-asset Gothenburg State Bank in Nebraska and the ABA's vice chairman, said in an interview that community banks, which did not "cause" the problems associated with the crisis, "feel we are subjected to a lot of undue criticism right now."

He added that while bankers do not dislike all of Dodd-Frank, "we are the easy target to be captured by regulation like Dodd-Frank."

During Bair's speech, Williams said, it came across that "she is an advocate, but not necessarily for banking. She's an advocate for a social agenda that leads us into some other directions," said Williams, the vice chairman of the ABA. "That said there was an area of misunderstanding and disagreement that went on in there. I do not believe the bankers would, if they had a choice, really want all of Dodd-Frank repealed."

Camden Fine, president of the Independent Community Bankers of America, argued that Bair does look out for community banks.

He cited her past support for a moratorium that stopped Wal-Mart Stores Inc. from opening a bank. He also praised the deposit insurance changes in Dodd-Frank, which the FDIC pushed for and community banks supported, and said Bair supported an effort to have bank regulators consult on any new rule-writing by the CFPB.

"During Dodd-Frank she more times than not advocated for the small banks in the sense that she was trying to deflect unnecessary and over-burdensome regulation off of the small banks," Fine said. "We didn't win every battle and we're in staunch opposition to the interchange proposal, but even the FDIC wrote a letter critical of" that proposal.

He added that the ICBA and FDIC do not always agree, saying the agency overreached with the overdraft guidance.

Still, Fine said, "Her door has always been open to the community bank point of view. Not only I but the hundreds of leadership of banks of ICBA, including our volunteer chairmen over the past five years … have enjoyed very good relations with Chairman Bair."

FDIC officials said it is not surprising that regulators and the industry would fail to see eye to eye. They noted that the FDIC in particular takes a conservative approach in times of industry uncertainty when banks are closing and it is protecting the Deposit Insurance Fund.

"I don't think there is a problem in the relationship between the industry and the agency. We are the primary contact on the ground for most banks in the country. That being said, I don't think there is anything wrong with an exchange about important issues," said Paul Nash, Bair's deputy for external affairs. "It is the job for regulators to set rules of the road to let industry compete within those rules, and then the job of the industry to incorporate those rules into their business. Certainly, the two sides are going to have opinions about that process that don't always line up as the same."