Congress Should Protect Consumers from Harmful Finance Regulations

Speaking at a press conference Tuesday alongside House Minority Leader Nancy Pelosi (D-CA) and Sen. Elizabeth Warren (D-MA), Rep. Maxine Waters (D-CA) made a series of outlandish claims regarding the current state of financial regulation. After criticizing the Republican use of the Congressional Review Act to overturn a burdensome new regulation, Rep. Waters went further, attacking the GOP for pushing a myth of “overregulation” that “too many folks have bought into”.

Given that many in her own party agree with the supposed falsehood, Rep. Waters remarks were particularly head-scratching. Instead of exposing a Republican myth used to remove protections for consumers, Waters pushed forward some unfounded myths of her own.

Myth 1) Regulation does not hurt community banks

In her speech, Rep. Waters made a point to dismiss the growing concern that regulations are destroying community banks. She shouldn’t be so quick to do so.

The Dodd-Frank Act has been utterly devastating to small banks. Since its passage in 2010, over 1,708 U.S banks, or one in five, have disappeared. This is at a rate of one per day. A Mercatus Center study found that in just four years since the passage of Dodd-Frank, the number of community banks shrank by 14 percent.

While some have outright failed, others have merged to avoid the increased compliance costs. A 2013 survey found that community banks were increasingly considering mergers as a result of the growing regulatory costs. As Rob Nichols, the president and CEO of the American Bankers Association, wrote in Politico, “the wave of new regulations that have been imposed on community banks is an enormous driver of decisions to sell to a larger bank.”

Increased regulations have also prevented a rebound in banking investment and start-ups. Since Dodd-Frank, virtually no new banks have been formed. While a struggling economy no doubt plays a role, the sluggish growth is historically unprecedented. From 2010 to 2016, there were only five new bank charters granted. This is compared to 1,341 new banks chartered between 2000 and 2008.

Increased regulations may not tell the whole story, but they have undoubtedly played a role in the demise of small banks.  Whereas larger institutions can employ armies of compliance officers, attorneys, and accountants, community banks have buckled under the weight of the increased costs and paperwork.

Nor is this a partisan matter; even some of her fellow Democrats have signed onto legislation that eases the regulatory burden on smaller banks. Rather than a Republican myth, it is an unfortunate reality that has crushed a vital American industry.

Myth 2) Dodd-Frank is “the best thing that ever happened to consumers”

According to Rep. Waters, Dodd-Frank has not only left community banks unscathed, but it is “the best thing that ever happened to consumers.” Never mind all the innovative products that have improved our standard of living, a 2,300-page piece of legislation is the real hero. In reality, Dodd-Frank has been just the opposite.

My colleague Iain Murray has written extensively on the ways that Dodd-Frank and the agency it created, the Consumer Financial Protection Bureau (CFPB), hurts consumers, entrepreneurs and middle class investors. Some particular highlights include:

  • Qualified mortgage (QM) rules. The QM rules have imposed huge new costs and liabilities on many small banks and credit unions by making it incredibly easy to sue for overestimating a borrower’s “ability to pay,” a standard that is inherently subjective. Unsurprisingly, many smaller banks have simply stopped issuing new mortgages, leaving responsible middle income borrowers to suffer.
  • The Durbin Amendment. A last minute addition to Dodd-Frank, the Durbin Amendment is a cap on debit card interchange fees. This was supposedly meant to return money to consumers through merchants charging lower prices, but survey after survey has shown that they simply kept the reduced costs as a windfall. As a result, bank fees have risen, debit card reward programs were slashed, and free checking has been halved. Overall, an estimated one million people have been forced out of the banking system as a result of increased fees.
  • Payday lending. As if forcing a million people out of formal bank accounts wasn’t enough, the CFPB has looked to further punish the most vulnerable through killing off low-dollar short-term loans. Rather than consulting the academic research into the effects of payday loans, showing there to be no harmful, and even some beneficial, effects, they have relied on the specious argument that consumers aren’t capable of making their own financial decisions. Prohibiting products that are in replacement of those that the CFPB had also made unavailable is barely “consumer protection.”

If destroying banks, limiting product choice, and forcing the most vulnerable out of formal financial services is the “best thing that ever happened to consumers,” then there isn’t much hope for the future. As Murray has written further, “If consumers need protection, it’s from the CFPB.”

Myth 3) Prior to the CFPB, there was no consumer protection

While the previous falsehoods pushed by Rep. Waters may be matters of research and debate, her claim that there were no statutes concerning consumer protection before the CFPB is blatantly false. To create the new agency, Dodd-Frank transferred enforcement of 22 federal statutes specifically focused on consumer protection from other jurisdictions to the CFPB. These statutes were spread over seven agencies charged with rulemaking and enforcement for consumer protection. To claim that there was no consumer protection prior to the CFPB is simply untrue. Given the CFPB’s record, however, it would be almost certainly be preferable.

Far from a myth, overregulation from Dodd-Frank and the CFPB has taken an enormous toll on community banks, small businesses and consumers alike. Fortunately, the Financial CHOICE Act, which passed the House last month, will provide much needed regulatory relief to America’s financial services sector. In order to tackle the issue of overregulation, the Senate should follow suit and pass the CHOICE Act