Dodd-Frank Revisited ~ More Harm Than Good?

At the founding of our nation, Senators and Representatives drafted legislation with a quill pen. Not surprising, the bills introduced and considered in Congress were fairly succinct. The advent of new technology, such as the typewriter, allowed U.S. lawmakers to more efficiently write legislation, which frequently resulted in a higher word count than what could otherwise be accomplished in long hand.

Today’s technology makes that job even easier, and the legislative payload has increased dramatically over the past 240 years. In an era when everyone is expected to do more with less, Congress has succeeded in producing a sizable amount of legislation, while simultaneously reducing the time allotted for deliberation of those bills and amendments.


Take Dodd-Frank for example. The final legislation surpassed 2,300 pages, yet was passed in record time. By contrast, the Federal Reserve Act of 1913 was all of 32 pages. Twenty years later, Congress passed the landmark Glass-Steagall Act, amounting to just 37 pages. In 1994, when I had the honor of serving as Senate Banking Committee counsel to Senator Bill Roth, Congress adopted the Reigle-Neal Interstate Banking and Branching Efficiency Act. That measure totaled 60 pages and was a result of years of thoughtful deliberation and committee hearings.

Dodd-Frank, by contrast, took just a matter of months to draft, debate and pass both chambers of Congress. Further, despite its massive size and scope, the legislation marked an unprecedented delegation of authority to the regulators, requiring the promulgation of another 400 rules on a wide range of issues. Five years following its enactment, tens of thousands of pages of new regulations have been added to the books compliments of Dodd-Frank, with more on the way.

While not so good for banks and other financial institutions, the measure has been a boon for lawyers and accountants. But how did the consumers fare, the very group the legislation was supposed to protect?

Today, there are fewer banks than there were six years ago, and only two de novo banks have been chartered since passage of Dodd-Frank. The remaining institutions have found it increasingly difficult to survive and prosper in this more costly regulatory environment. Indeed, many of the smaller community banks have had no choice but to be purchased by larger institutions who can better afford the increased compliance costs. The end result is fewer smaller banks, larger big banks, and a decrease in consumer choice.

Another consequence of Dodd-Frank has been a notable decrease in innovation among regulated entities. Still gun-shy from the 2008 financial crisis, financial regulators have attempted to extinguish risk from the marketplace that might adversely impact individual borrowers as well as other lenders and investors. Generally, that has meant sticking with the old ways and taking an extremely cautious approach with regard to innovative products and services.

The result has been to drive financial innovation outside the regulated rails of traditional banking to the largely unregulated FinTech companies in Silicon Valley and elsewhere, often outside of the United States. A better policy would be for federal financial regulators to encourage the adoption of new technologies that have the potential to benefit consumers and ultimately attract new customers, and additional capital, to those banks.

Taking heed of then-White House chief of staff Rahm Emanuel’s advice to “never let a good crisis go to waste,” Dodd-Frank included a grab-bag of largely partisan amendments that had been earlier discounted but were brought back to life as part of the comprehensive financial reform package. Unfortunately, very few of these provisions had any relation to the financial crisis that they purported to address.

And just in case Congress missed anything, Dodd-Frank created the Consumer Financial Protection Bureau with virtually unlimited authority to regulate financial products and services with almost no Congressional oversight or budgeting constraints. More often than not, the CFPB has taken a “one-size-fits-all” approach that actually reduces innovation and consumer choice in the financial marketplace.

Dodd-Frank also established the Financial Stability Oversight Council with broad discretion to designate certain financial firms as “systematically important.” So far, American International Group, GE Capital, Prudential, and Met Life have been branded as “SIFIs” and are subject to enhanced oversight and regulatory requirements. So much so that GE and Met Life are selling off or restructuring their assets – perhaps not the outcome the regulators had intended.

And while punishing their success, Dodd-Frank has done little to penalize or discourage failure. Despite the fact that Fannie Mae and Freddie Mac were responsible for approximately three quarters of the sub-prime mortgages then on the books, the GSEs remain largely untouched nearly a decade after the housing crisis. Today, Fannie and Freddie remain “too big to fail.”

Studies have consistently shown that Dodd-Frank has done much more harm to, than good for, the U.S. economy. A report by the U.S. General Accounting Office noted that an “increased compliance burden” among community banks and credit unions has “begun to adversely affect some lending activities such as mortgage lending to customers not typically served by larger financial institutions.” Another report from the Federal Reserve Bank of Dallas has concluded that many of these community financial institutions may be “too small to succeed.”

There have been multiple attempts in the House and Senate to correct the unintended (and some of the intended) consequences of Dodd-Frank. Indeed, six House Financial Services Committee bills dealing with Dodd-Frank were signed into law last year. In addition, Senate Banking Committee Chairman Richard Shelby (R-AL) has championed regulatory reform legislation that would change a key Dodd-Frank threshold for enhanced prudential standards and the CFPB’s qualified mortgage rule, among other reforms.

Unfortunately, while there continues to be some bipartisan support in Congress for providing relief to small banks and for raising the $50 billion threshold for regional banks, the political climate is likely to grow increasingly more divided as we draw closer to the election, making such changes difficult. Fortunately however, the 2016 election provides all of us an opportunity to voice our opinion and influence the direction of financial services policy going forward.

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2 Comments

  • JC, good review of another DC “law of unintended consequences”. I have had the pleasure of applying for a couple refinancing mortgages since Dodd Frank – the process is ridiculous. I have had to chase down credit minutia that has taken days – when I would ask the bank why such things were necessary since I already had a mortgage with them that I was paying on time and that this payment would be lower, they would simply say “Dodd Frank”. No doubt this law is preventing many credit worthy home owners from getting through the system or discouraging them from even starting down that road. This can’t be a benefit for the housing industry, the economy or the individual potential home owner – only as you say the lawyers, accountants and other compliance people. And since only big banks can comply you have added aggravation of awful customer service from some distant call center!

  • As a 30 year (former) banker, my view of the Dodd-Frank bill is that it unnecessarily impacted community banks, the very institutions that were actually lending after October 2008, unlike the big banks that caused the problem. When passed, the bill was 5,000 pages – more than all existing financial legislation on the books at that time. Not surprised community banks are having challenges surviving. The compliance work to keep current with the bill is overwhelming for small bank compliance departments!