This week marks the fifth anniversary of the Dodd-Frank Act — a sweeping overhaul of financial regulation. Five years in, we’re at a good point to turn and evaluate how the law is working so far.
No law passed by Congress is perfect, and the evidence is clear the Dodd-Frank requires some tweaking to make it work better. As a result of Dodd-Frank’s mortgage rules, many community banks are getting out of the home loan business altogether or drastically cutting back — often in the rural and underserved areas that most need credit.
And the Dodd-Frank caps on what banks can charge retail stores to process debit card transactions have forced many banks to end free checking because retailers didn’t want to pay their fair share.
Here in Florida, we have seen banks cut lending positions and customer service staff in order to hire compliance officers. We have also seen consolidations in the banking industry because efficient compliance requires economies of scale and it is becoming more and more difficult to operate as a smaller institution. Furthermore, we have had no new banks opening in part because of the restrictive operating environment.
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And none of these examples take into account the hidden costs of complying with more than 10,000 of pages of Dodd-Frank regulations that affect community banks. A new regulation or a bill in Congress may not come with a price tag, but banks have to hire new staff and outside contractors to help it navigate a world with so many new regulatory landmines — and those costs function as a hidden federal tax on bank customers.
All of this limits banks’ ability to fully serve their customers, restricts the number of product offerings available and even prohibits U.S. banks from competing with equal footing with other institutions on a global scale. By reevaluating Dodd-Frank, there may be opportunities to ensure our banks are able to provide the products and services customers desire and also be more competitive in the financial world.
Fortunately, there are a number of proposals on Capitol Hill to fix some of the problems. Bipartisan measures in both houses of Congress would allow mortgages to receive the legal protections of “Qualified Mortgage” status if banks keep the loans on their own books rather than selling them on the secondary market. When banks hold loans in portfolio, they also hold the risk. As a result, these loans are properly underwritten and closely scrutinized by regulators to make sure they’re safe.
Another issue in Dodd-Frank is that the thresholds for what banks get extra regulatory scrutiny were set too low. Many community and midsize banks are finding themselves forced to conduct expensive and unnecessary stress testing — taking time away from and raising costs for their customers — and many banks with traditional business models are being captured by the regulatory regime designed for the largest, internationally active banks with complex operations.
A bill from Sen. Richard Shelby of Alabama would raise those thresholds, and a new bill — introduced by Rep. Scott Tipton of Colorado and championed by the Alliance of State Bankers Associations — would require regulators to carefully tailor rules to the different kinds of banks they supervise.
These fixes, and especially Rep. Tipton’s bill, would go a long way toward replacing the one-size-fits-none regulatory regime of Dodd-Frank with a more flexible approach that aligns with the different business models, customer bases, risk profiles and asset sizes of America’s 6,400 banks.
There are other Dodd-Frank provisions that need tweaking. However, some in Congress are treating Dodd-Frank as holy writ, opposing any change to the law. No law is perfect, though. The best way to celebrate Dodd-Frank’s fifth birthday might be to make the minor changes that will help the financial reform it ushered in work in the real world.
Fixing Dodd-Frank would help ensure the law does what was intended — building a more stable financial system that supports the health of banks and their communities.
Alex Sanchez is president and CEO of the Florida Bankers Association.