July 22 is the seventh anniversary of the enactment of the Dodd Frank Act (the federal law that imposed sweeping government oversight on the banking industry), and we have had ample time to see whether these changes are working as Congress intended. When writing this law, lawmakers thought if they cast a wide enough net with tens of thousands of pages of rules, they could better protect consumers and small businesses. Experience has shown that in many ways this has not been the case.
In the wake of the financial crisis, it was clear that stronger regulatory oversight was necessary. While some of the law’s provisions have helped stabilize our financial system, many others were crafted without a clear relationship to the real problems that led to the crisis. As a result, consumers, small business, many communities and the overall economy have suffered the consequences of many of these misguided regulations.
Since the passage of Dodd-Frank, traditional banks have been forced to spend countless millions of dollars in time, new employees, consultants and expensive computer systems just to decipher the new laws and comply with them. As a direct result, there are community banks that have been forced to stop offering mortgages and small dollar loans altogether, and many others have curbed other banking services to lessen their risks and remain in compliance. In fact, data from the Federal Reserve Bank of St. Louis shows that compliance costs disproportionately affect community banks. The compliance expense as a percentage of total expenses is two to three times greater for banks under $250 million in assets than for banks greater than $1 billion in assets.
It now takes longer for customers to obtain even the most basic financing from a regulated financial institution. Borrowers with blemished credit reports are all but prevented from obtaining credit, and far fewer low-income customers have access to the most basic banking services. This has opened up the floodgates to under-regulated, nontraditional lenders that are dominating the home mortgage and consumer and small business lending markets on the Internet with higher rates and fees and dubious terms — a recipe for disaster.
Not only has Dodd-Frank made it more difficult for consumers and small businesses to obtain banking products and services, it also has made it more difficult for them to protect their personal information. Imagine the privacy concerns consumers will face beginning next year when lenders must provide the Consumer Financial Protection Bureau (CFPB) even more borrower data, such as their age, credit score, unique loan identifier, property value, points and fees paid, loan term, prepayment penalty, and interest rate. Soon, small businesses will face similar privacy concerns, as the CFPB is gearing up to collect and publicly disclose personal data on the race, gender and ethnicity of small business loan applicants.
Since Dodd-Frank’s enactment, consumers also have fewer choices due to the significant drop in the number of banks serving Illinois. When it became law in 2010, there were 610 FDIC-insured banks and thrifts in Illinois. Today, there are 466 banks and thrifts in Illinois, a 24 percent decline in less than seven years. Not surprisingly, many banks have sought out mergers or acquisitions to bulk up in size in order to spread the risks and excessive costs of doing business today.
We urge Congress and President Trump to make the necessary changes that will help alleviate the oppressive regulatory burdens imposed by Dodd-Frank. Enact practical, real world reforms that give consumers and small businesses more choices by giving banks more leeway to serve them. This must be done for communities and our economy to thrive.