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May 23 2018

Consumers, Small Banks to Gain Relief from Bi-Partisan Roll Back of Dodd-Frank Banking Regulations

by Patrice Lee Onwuka

In a rare show of bi-partisanship, conservatives and progressives worked together to pass important legislation that eases regulations on community banks and financial institutions. This is good for small lenders that have struggled to survive under heavy-handed Obama-era regulations and for consumers who will also benefit from some reforms.

Yesterday, 258 members of the House of Representatives passed legislation to roll back some provisions of the 2010 Dodd-Frank financial regulatory bill. Over 40 Democrats crossed the aisle to join Republicans in voting for a bill that cut harmful regulations for small and mid-sized lenders. 

While this doesn't go as far as dismantling the Consumer Financial Protection Agency (CFPB) and all of the regulations that made up the Dodd-Frank bill, it cuts red tape on banking institutions that have suffered under the added regulations.

The Wall Street Journal lays out what's in the bill, but here are some key reforms:

  • Raises the asset threshold of banks that will no longer be subject to stringent regulations such as annual stress tests, from $50 billion to $250 billion.

  • Exempts banks with assets of less than $10 billion from regulations that prohibit banks from making certain kinds of speculative investments (Volker Rule). Some experts posit that because of this rule, businesses saw their access to capital disappear while consumers see their cost of credit rise.

  • Eases financial reporting for small banks with regulators, examinations, and releases them from some capital rules provided they maintain a relatively high ratio of equity to assets.

  • Exempts small lenders from reporting detailed data on borrowers to federal regulators 

Help for consumers: 

  • Allows consumers to place and remove freezes on their credit files for free.

  • Increases the length of time a consumer reporting agency must include a fraud alert in a consumer's file.

  • Extends protections for tenants facing foreclosure and for financial industry employees who report exploitation of senior citizens.

  • Makes it easier for people who default on student loans from private-sector lenders to be wiped from a borrower’s credit report. 

  • Directs a federal watchdog (Government Accountability Office) to report on the accuracy and security of consumer reporting agencies and consumer reports.

Dodd-Frank harmed small, mid-sized and community banks

Democratic Senate Heidi Heitkamp explained it well, 

"Dodd-Frank was designed to prevent too-big-to-fail. And it became too small to succeed. And you’ve seen since Dodd-Frank the bigger institutions have gotten bigger and the smaller institutions have consolidated."

Dodd-Frank regulations were passed in 2010 in response to the financial crisis to reign in Wall Street firms and ensure the financial crisis would not happen againDodd-Frank had negative impacts on small and mid-sized banks though, making them less competitive and leading to a decline in the smaller lending institutions. One estimate finds that one in five U.S. banks have disappeared since Dodd-Frank was enacted and almost no new banks have been formed.

According to a study by Mercatus90 percent of banks reported higher compliance costs. As a result, small banks reported eliminating or planning to discontinue certain products and services such as residential mortgages, mortgage servicing, home equity lines of credit, and overdraft protection.

Congress passed regulations on the financial industry in response to the financial crisis based on panic and fear. Those regulations didn't necessarily crisis-proof our financial systembut it did hobble our small lenders and community banks. We're glad this Congress is correcting the mistakes of the past. 

 

Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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