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CEO Jon Winick Investor’s Business Daily-3/16/18

Dodd-Frank Reform Is Urgent For U.S. Small Businesses And Consumers

Dodd-Frank Reform Is Urgent For U.S. Small Businesses And Consumers

President Trump’s regulatory rollbacks are a defining element of his agenda, and this week’s Senate vote to send the Dodd-Frank Act reform bill to the House could spark one of the most significant legislative battles of his first term.

The centerpiece of the controversial bill is the loosening of lending restrictions on small banks, a measure needed to protect the marketplace from domination by only the largest global banks. But growing resistance to the reforms — rooted in generic and unwarranted antipathy to all banks — threatens to derail the legislation and significantly reduce lending options for U.S. small businesses and consumers.

Small business lending in the U.S. was strong in 2017, but that could easily change by the time Election Day arrives in November. In the last 14 months, the Trump Administration has quietly ramped up the regulatory pressure on community and commercial banks across the nation.

According to Clark Street Capital’s Regulatory Pendulum Survey with senior-level bank executives, not a single respondent reported a positive change in the regulatory and compliance burden in the past year. Nearly half said the burden increased, and roughly 85% said it had either increased or no change. Bank executives noticed “a change in tenor” but said, “regulators are harsher than ever” with “compliance standards (that are) impossible to meet.”

In particular, the role of the field examiner has taken on new importance at thousands of small banks. Field examiners travel the country to scrutinize anything and everything about a bank’s operations, and contrary to expectations under a new Republican president, they’re slowing down the lending process for small business and consumers. In many cases, they take odd positions on vague regulations and border on being obstructionists.

More than 80% of agricultural loans and 50% of small business loans come from community banks — all of which are now forced to spend significantly more resources and bring on non-revenue producing staff to address scrutiny of internal audit and credit examination departments. And with new requirements forthcoming, such as the expansion of Home Mortgage Disclosure Act data collection, the increased burden is taking its toll.

For all but a few banks, consumer lending has become so toxic since Dodd-Frank that many have abandoned it completely.

This creates monopolies, with the largest global banks increasingly dominating the marketplace. They’re driving smaller competitors out and forcing them to sell or merge. Since 2010, the number of commercial banks in the U.S. plummeted from 6,623 to 4,888. Meanwhile, only 15 banks hold more than 50% of U.S. banking assets. This situation has opened a niche for non-bank mortgage lenders, which are susceptible to the same liquidity issues that caused widespread chaos during the 2008-2009 financial crisis, according to the Federal Reserve.

Few people have sympathy for banks of any kind, but the harsher burdens placed on small banks — comprising 99.5% of all U.S. banks  — are setting the nation up for an economic disaster.

That’s why a compromise on an updated Dodd-Frank bill, sponsored by Sen. Mark Crapo, R-Idaho, and Sen. Mark Warner, D-Va., is so critical. The main purpose is to provide relief for smaller banks by waiving requirements for mortgage qualification and creating exemptions on arduous data collection processes.

The bill has just passed the Senate with relative ease, but there are more than 100 amendments in the House, of which 80% come from Democrats wary of changing Dodd-Frank at all. House Republicans aren’t making it any easier, pushing for more control before they offer their support. It’s possible the bill will be watered down and meaningless by the time it’s passed.

No one wants a repeat of 2008-2009, but cynicism towards all banks is going to backfire and harm consumers and small businesses. Their best protection is fair competition with abundant choice, not over-regulation of the fewer and fewer banks willing to lend. It’s never good when the vast majority of an industry, especially one so fundamental as banking, is controlled by a select few elites.

In spite of the underwhelming results in the first year of the Trump administration, bank executives remain optimistic that the situation will improve during the remaining three years. Still, it’s disturbing that more than one-in-four survey respondents expect it to worsen.

The president’s team must roll up those sleeves and go to work in the House, where logic and bipartisanship don’t always go hand-in-hand. The outcome could go a long way in determining the health of the U.S. economy this year, and consequently, this November’s election.

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