Illustrative of the new regulatory requirements, one of the banks with which we deal sent me two typewritten pages outlining the information they now needed to have in my file. Our file with that bank will be three to four inches thick, possibly more. The loss in productivity that accompanies this request is just another part of the increasing burden–we had to take time to assemble the information and presumably someone, perhaps several some ones, will also have to take time to go over the details to see whether there is anything in our global picture that suggests our local loan should not be renewed. An additional impact of the Dodd-Frank Act, related to me by another banker, is that only the large banks will be able to write home mortgages because the smaller banks cannot afford to hire the additional people to keep up with the regulations. That will increase the costs of obtaining a mortgage and decrease the competition among banks for the mortgage business. One local bank with numerous branches stopped making relationship loans as well as development loans. All of this shuts down economic activity. Among other things, it lead to a dearth of available lots for building houses in our local community. That, of course, means that the price of a new house will be higher. Apparently higher prices and mounds of paperwork help protect the consumer if we are to believe the proponents of the Act.
What has happened to me and to small businesses across the country is very real and very basic. The Dodd-Frank Act, passed by Congress on near party-line votes when a single party controlled both bodies, was signed into law by President Obama and is still in full force. It has literally strangled many small businesses that would normally be the backbone of economic recovery and job growth. We can blame the Bush administration for the recession. We can offer spin about how the economy was just so much worse than anybody realized when President Obama took office. But I see evidence that much of the problem was the direct result of this particular legislative ineptitude. My personal experience and that of other investors that I know indicate that the Dodd-Frank Act should have been called the Economic Recovery Destruction Act and that this Act has been a major factor in stifling our economic recovery. It did so by denying access to capital to small businesses and making additional investment by them foolhardy if not impossible. In spite of what Senator Elizabeth Warren and other prominent Democrat leaders assert, the big banks love the Dodd-Frank Act because it forces their smaller competition out of the market and often completely out of business; the big banks can simply increase their fees to cover the additional personnel they need to hire. The big banks, thriving under this particular legislation, have all gotten bigger.
The problems experienced by me and thousands upon thousands of other small businesses could have been completely avoided by simply exempting small banks with assets below some fixed amount such as a billion dollars, or perhaps 100 million or some other number. We can only speculate as to why such an obvious solution was avoided. We do know that small banks do not make big political contributions, do not hire expensive lobbyists, and do not pay big speaker fees so would not have had an effective voice at the table. Exempting small banks was likely untenable because it would have enraged the big banks, the banks capable of paying a $250,000 speaking fee to a former Presidential candidate whose hacked emails asserted that the Dodd-Frank Act was a political necessity. The Act also provided a pot of gold for part of the swamp that still desperately needs draining. To this end, “speaking fees” have proved to be even more lucrative than cattle futures.
After using regulations to figuratively wrap most small investors in a straitjacket and encase their feet in buckets of concrete, our lawmakers remain surprised that these same investors don’t try to swim. Should we next use even more government intervention to help them swim with the new handicaps, or should we simply make the common sense changes that remove the handicaps? The House has now passed legislation to remove some provisions of the Dodd-Frank Act
(https://www.nytimes.com/2017/06/08/business/dealbook/house-financial-regulations-dodd-frank.html), but (as with most pending legislation) the Senate
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Bill to Erase Some Dodd-Frank Banking Rules Passes in …www.nytimes.comWASHINGTON — The House approved legislation on Thursday to erase a number of core financial regulations put in place by the 2010 Dodd-Frank Act, as … |
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has not brought the issue up for consideration. Potential changes are already bringing about the howls of Democrats, who remain certain (at least for political posturing) that Republicans are attempting to destroy the economy (and possibly dry up lucrative campaign contributions and big bank speaker fees). If you are in business, regulations do not ask whether you are Republican or Democrat; they apply equally to both. If you are a politician, seemingly without a clue as to the credit access small businesses need to function and prosper, your perspective appears to be different.
There can be a silver lining on the Dodd-Frank cloud—but it has absolutely nothing to do with help from the government. The banker referred to previously had so many loans made nonconforming by the Dodd-Frank Act that his bank was in serious trouble. He knew the loans were solid but they were now poison for the bank. Calling those loans would be devastating to the businesses that owed the money because those businesses would also no longer be able to qualify for a loan from any other bank. The win-win solution to this dilemma may seem obvious now, but it required creative thinking. Cds on deposit in his bank were drawing virtually no interest. For an increased return on their money, the banker convinced cd holders to fund a private lending firm, with their money to now be secured by mortgages. This fund was used to buy all of the nonconforming loans owned by the bank. Presto, the bank no longer had nonconforming loans and the new Loan Center, not subject to Dodd-Frank, became the major profit center for the banker (not for the bank, which still has to please legions of Dodd-Frank regulators). That bank and banker have survived, as did the businesses to whom the bank had loaned money.
I previously mentioned the impact of Dodd-Frank on another bank in our area, a bank with numerous branches but nevertheless not one of the huge banks. The first thing that bank did to meet the new requirements was to stop all relationship loans. Those were loans made to clients that had proven themselves over many years. Clients like me. The Dodd-Frank rules ignore equity and history and focus on income to expense ratios, mandating ratios that are unrealistic for most small businesses. At this point, creative solutions likely all involve private funding and small banks. If you have a small bank in your area, you would be doing everyone a favor to meet with the owner and spread the idea of private loan centers. Those loan centers can do well while still charging very reasonable competitive interest. If you are involved in agriculture, beware. Our main banker just returned from a week-long conference. Every regulator present said that agricultural loans were their current primary concern. Drops in cattle and commodity prices as well as drought have taken a severe toll on agricultural income which in turn may put banks with agricultural loans at risk. That in turn puts the borrower at risk. Barring legislative correction, the final chapters of the Dodd-Frank devastation have not yet been written.
Recap of the complete series on the Dodd-Frank Act:
Part three… Impact on one local bank
*** Gary A. Howie MSc, PhD *** is business owner/rancher and a Life & Liberty News contributor
