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Financial Regulation and Payments Update: July 31, 2015

Last week saw the fifth anniversary of Dodd-Frank and there was a great deal of commentary from opponents of the act, not least from us here at the Competitive Enterprise Institute.

To start off with, here’s the assessment of House Financial Services Committee Chairman Jeb Hensarling (R-Texas):

Too-big-to-fail institutions have not disappeared. Big banks are bigger, small banks are fewer, and the financial system is less stable. Meanwhile, the economy remains in the doldrums.

Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.

Before Dodd-Frank’s passage, former Sen. Chris Dodd said that “no one will know until this is actually in place how it works.” Today we know. The law he co-wrote with former Rep. Barney Frank is gradually turning America’s largest financial institutions into functional utilities and taking the power to allocate capital—the lifeblood of the U.S. economy—away from the free market and delivering it to political actors in Washington.

At CEI, we agree. In a paper issued last week I concentrated on Dodd-Frank’s harmful effect on Main Street:

Many of the rules issued under Dodd-Frank have harmed some of the poorest Americans, who have seen their insurance made more expensive, their banking choices reduced, and their bank fees increased. Many have been forced out of the banking system altogether, only to face the alternatives, such as prepaid debit cards and payday loans, more difficult to access. When legal choices are restricted, people turn to illegal ones. Loan sharks and racketeers could soon make a comeback, thanks to Dodd-Frank’s “consumer protection” provisions.

CEI’s board chairman, Prof. Todd Zywicki, also recently testified before the House Financial Services Committee on Dodd-Frank’s legacy. He also concentrated on the effects of Dodd-Frank on the consumer:

Dodd-Frank imposed a regime that instead has led to higher prices, less innovation, and less choice in consumer credit products, while doing little to improve consumer protection. By taking away preferred choices for consumers, such as mortgages, bank accounts, and credit cards, Dodd-Frank and other laws have increased consumer dependence on less preferred products like payday loans, pawn shops, and check cashers. Most tragic of all, low-income and younger consumers—who already had the fewest choices—are those who have suffered the most from Dodd-Frank’s regulatory onslaught.

At CEI, we suggest that part of the answer to these problems is greater competition in the banking sector, which will require substantial reform to Dodd-Frank. John Berlau outlines that here.

Over at the American Action Forum, Ben Gitis, Andy Winkler, and Sam Batkins reviewed the costs of Dodd-Frank so far, and looked at what was yet to come down the pipeline from the law, five years after it was enacted:

Dodd-Frank is now five after imposing more than $24 billion in costs and 61 million paperwork burden hours. As time passes, the law becomes more expensive as regulatory agencies like CFPB and FHFA grow with the mission to implement burdensome rules. Meanwhile, small financial services firms continue to struggle as the law restricts the availability of financial products. With about 21 percent of the law still left to implement, one can only expect the costs to continue to rise. 

At the Mercatus Center, Patrick McLaughlin and Oliver Sherouse looked at the extent of the law and concluded it might well be the biggest law ever:

The statute, which itself was 848 pages long, directed dozens of regulatory agencies to revise or create new regulations addressing the financial system in the United States. Those agencies responded with hundreds of new rules that will govern financial markets, on a scale that vastly exceeds any previous regulation of financial markets, and dwarfs the regulations that accompanied all other legislation enacted during the Obama administration…

The extraordinary output of regulation set in motion by Dodd-Frank should, five years after its enactment, give us pause. Such a large and sudden addition of regulation of the financial sector has doubtless increased the complexity of financial regulation, and it is remarkable that such vast changes were accomplished in a relatively short timeframe, for better or worse. Whether this increased government involvement in the financial sector will prevent future crises or exacerbate them remains to be seen.

Turning to the most egregious creation of Dodd-Frank, the Consumer Financial Protection Board, Credit Union Times editor Heather Anderson drew attention to the arbitrary nature of its enforcement powers:

CFPB Director Richard Cordray said the bureau will not issue any regulations that define exactly what actions or practices violate the law.

So how will a bank, credit union or other financial services provider know if it has violated the law?

Like Citibank, Discover Bank and others, the institutions will know when the CFPB issues an enforcement action or consent order. The CFPB has also said that even if a financial services provider complies with all consumer financial protection laws, it could still be charged with violating UDAPP…

A recent consent order from the CFPB cited collection activities that included calls to work numbers, the disclosure of consumer debts to non-liable third parties and calls to consumers after being notified they were represented by legal counsel.

What is considered excessive? Five calls? 25 calls? What constitutes debt disclosure to third parties? What if legal counsel doesn't accept or return calls?

The CFPB has not issued specific regulation or guidance on the matter. That means some snot nosed millennial at the CFPB who doesn't think he needs to repay his student loans, and was probably never disciplined by his parents, could use subjective measures to determine if your credit union's collection practices caused substantive injury, and there's nothing you can do about it.

While another editor considered this complaint “over-sized,” he agreed with the fundamentals:

With the blanket authority to declare any financial product or service to be “abusive,” the highly-partisan, and ideologically-driven CFPB Director Richard Cordray has the unprecedented ability to distort the marketplace, and to arbitrarily punish political adversaries. Ms. Anderson's concluding warning is as true, as it is chilling – the CFPB could pursue credit unions for violations of UDAAP based upon commonplace lending and collection practices.

As a good example of the CFPB’s wide-ranging power, the Bureau has inserted itself into the Federal Reserve’s little-noticed but far-reaching attempts to create a faster payments system by demanding certain consumer “protections” without acknowledging the trade-offs involved:

The [CFPB’s] Guiding Principles do not acknowledge the inevitable tradeoffs that must occur for them to implemented, while implicitly and explicitly assuming that payment system members rather than consumers will take on the responsibility of compliance. While the CFPB’s goals of protecting consumers in the payments ecosystem are commendable, the potential for this policy to stifle innovation is significant…

 Another example is the “transparency” principle’s requirement that costs be disclosed: it is unclear whether interchange rates or the fees charged by a mobile wallet provider to a credit card issuer would be required to be disclosed, and if so, whether those fees could be accurately disclosed to consumers in a useful way. These types of ambiguities can negatively impact the development of innovative payment system technologies.

Finally, in the latest example of authorities deputizing payments companies to choke off financial oxygen to businesses they are trying to shut down, a Federal judge has slapped down Cook County Sherriff’s Office’s intimidation of Visa and Mastercard in order to pressure them into cutting off payments services to classified ad web site Backpage:

“[Sherriff] Dart did not directly threaten the companies with an investigation or prosecution,” explains the judge. “But by writing in his official capacity on Sheriff’s Department letterhead, requesting a ‘cease and desist,’ invoking the legal obligations of ‘financial institutions’ to cooperate with law enforcement, and requiring ongoing contact with the companies… it could reasonably be inferred that Dart brought the weight of his office to bear on his ‘request’.”…

 “These companies had worked with Backpage for more than a decade, and they terminated their relationships because of Dart’s letters,” explains the order.

We can only hope that other federal judges will agree that similar intimidation of banks constitutes the sort of coercive behavior by authorities that the USA was set up to guard against.