After five years it’s clear: Frank-Dodd not working

U.S. Representative 3rd District Congressman Scott Tipton
U.S. Representative 3rd District Congressman Scott Tipton

It’s been five years since President Barack Obama signed the Dodd-Frank Act into law, making this an opportune time to look back at the effects this misguided legislation has had on the financial services industry, especially on community banks and credit unions in Colorado.

Dodd-Frank was supposed to lift the economy out of 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 rewrote the playbook for small banks across the nation that had nothing to do with the 2008 financial crisis. Prior to passage of
Dodd-Frank, these banks could rely on their unique knowledge of their communities to provide character loans to small businesses. Now, they’re inundated with new rules and regulations that have created an unbearable compliance burden that eats up capital previously used for community lending.

According to one calculation,  Dodd-Frank Act has imposed 61 million paperwork burden hours — at $24 billion in compliance costs – with the hardest hit being small financial firms. During a visit to First Colorado National Bank, a locally owned bank with a $50 million portfolio in Delta, I heard first-hand how much of a toll this law has taken on banks that constitute the economic lifeblood of small communities. Instead of hiring tellers and loan officers, these banks are hiring compliance staff to keep up with new regulations. It’s disappointing to hear small bankers no longer feel like they run their banks, but that the federal government runs their banks 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 Federal Deposit Insurance Corp., 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: Burdensome regulation spawned from the Dodd-Frank Act hurts communities nationwide.

Community banks aren’t alone in suffering under Dodd-Frank. Consumers are 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 would require that regulations be tailored to take into account the size, business model and risk profile of an institution so small banks can continue to provide vital service to communities in rural areas where access to capital remains a challenge to economic growth. To ease the cost and burden of regulatory compliance, I have also introduced legislation to make additional well-managed community banks eligible for a longer examination cycle of 18 months rather than 12 months.

With five years under our belt to evaluate the effects of the Dodd-Frank Act, it’s obvious 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’s 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 banks and banking products.

U.S. Rep. Scott Tipton, a Republican, represents Colorado’s 3rd District and serves on the House Committee on Financial Services. Reach Tipton through the Web site at