U.S. Rep. Scott Tipton: Examining Dodd-Frank’s first five years
July 24, 2015
This week marked five years since President Obama signed the Dodd-Frank Act into law, making this an opportune time to look back at the impact this misguided legislation has had on the financial services industry, especially on how it has impacted community banks and credit unions in Colorado. Dodd-Frank was supposed to lift the economy out of a recession, promote financial stability and end the "too big to fail" phenomenon. In actuality, the legislation has created more market uncertainty, escalated costs for consumers, and accelerated the failure rate of small Main Street banks.
The 2,300 page bill re-wrote the playbook for small banks across the nation that had nothing to do with the 2008 financial crisis. Prior to the passage of Dodd-Frank, these banks could rely on their unique knowledge of their communities to provide character loans to small businesses. Now they are inundated with new rules and regulations that have created an unbearable compliance burden that eats up capital previously used for community lending.
The regulatory burden under Dodd-Frank Act has imposed 61 million paperwork burden hours — at $24 billion in compliance costs — according to one calculation, with the hardest hit being small financial firms. During a visit to First Colorado National Bank, a locally-owned bank with a $50 million dollar portfolio in Delta, I heard first-hand how much of a toll this law has taken on banks that are the lifeblood of small communities' economies. Instead of hiring tellers and loan officers, these banks are hiring compliance staff in order to keep up with new regulations. It is disappointing to hear that small bankers no longer feel like they run their bank, but that the federal government runs their bank for them.
Unfortunately, this is a trend that isn't exclusive to Colorado. The ever-increasing regulatory burden on community banks across the United States has forced them to either fail or consolidate. At year-end 2010, when Dodd-Frank was enacted, there were 7,657 banks in the United States. By the end of 2014, that number had dropped to 6,509. This regulatory regime has also stifled new bank entry into the financial sector. Before Dodd-Frank was enacted, there was on average 170 new banks approved per year. According to statistics from the FDIC, in the five years since the passage of Dodd Frank, there have been only two new banks approved. These disheartening statistics highlight what has become today's reality: over burdensome regulation spawned from the Dodd-Frank Act is negatively impacting communities nationwide.
Community banks are not alone in being impacted by Dodd-Frank, consumers are being hurt as well. The increased number of bank failures and consolidations means less choice and fewer options for consumers. The banks that remain are forced to pass their rising costs on to consumers in the form of less favorable interest rates and higher collateral requirements. Free checking has also largely become a thing of the past, with only 39 percent of banks offering free checking two years after Dodd-Frank's enactment compared to 75 percent of banks that offered it before the legislation passed. As it stands now, the U.S. has about 68 million underbanked consumers and an additional 26 million unbanked consumers. Raising the cost of banking will only add to these numbers and ensure that lower-income and younger people will not have access to traditional banking products and services.
To help address these challenges, I have introduced two reform solutions to provide relief to community banks and encourage economic growth on Main Street. The TAILOR Act, H.R. 2896, would require that regulations be tailored to take into account the size, business model and risk profile of an institution is needed so small banks can continue to provide a vital service to communities in rural areas where access to capital continues to be a challenge to economic growth. To ease the cost and burden of regulatory compliance, I have also introduced legislation (H.R. 1553) to make additional well-managed community banks eligible for a longer examination cycle of 18 months, rather than the current 12-month cycle.
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With five years under our belt to evaluate the impact of the Dodd-Frank Act, it is obvious that the legislation has not fulfilled its intended purpose. Until the law can be repealed and replaced with sensible reforms that focus on the actual causes of our most recent financial crisis, it is time to revisit this legislation with commonsense changes to ensure community banks operate under a manageable compliance regime, small businesses have the capital they need to grow, and consumers have a choice when it comes to their bank and banking products.
Congressman Scott Tipton represents Colorado's 3rd District and is a member of the House Committee on Financial Services.