The monstrosity commonly referred to as Dodd-Frank was the parting gift to the enormous financial institutions of America — we can call them “Big Money,” just like there’s “Big Oil” and “Big Data” — from two of the least savory characters in recent Congressional history. I’ll remind Gentle Reader that the competition along that scale is ferocious.
Specifically Barney Frank of Massachusetts — who claimed not to know his lover-boy was running a homosexual prostitution ring out of his apartment — and Chris Dodd of Connecticut, better known as a “Friend of Angelo” — who took a large below-market mortgage from Countrywide Home Loans at the same time that company was in the process of becoming the largest single purveyor of the toxic loans which later tanked the entire U.S. economy — gave to their patrons in Big Money the statute which bears their names.
Among its many objectionable features are many which do either or both of two things, namely vastly increase the cost of doing business to banks, or alternatively require banks to engage in what is essentially bad business. Just as an example of the latter, you cannot even send a notice of your intent to foreclose (let along actually start the foreclosure process) a residential mortgage until the borrower has been in continuous default for 120 days. I’ve studied the hell out of the statute and the regulations in question, and there’s no definition of “default.” But the Consumer Financial Protection Board’s policy is that “default” applies only to failure to pay principal or interest on the actual loan. If you’ve ever read through your own home loan or security documents, you’ll realize you as the borrower have many more obligations than just that. Like maintaining the property, or paying the real property taxes on it, or keeping it insured, or (for VA, FHA, and similar loans) occupying it as your principal place of residence. All of those obligations have very specific purposes, and are not just cooked up from thin air to oppress Joe Home Owner. Thanks to the CFPB, though, a bank now has to watch its borrower let the insurance on its collateral lapse, let the taxes go delinquent, and see the windows broken out, and its only option is to pay itself to protect its collateral.
So what Dodd-Frank has done in that specific instance boils down to requiring banks to give their borrowers four months of free principal and interest payments, as well as provide them insurance coverage, and pay their taxes.
And so forth. At any rate, as Todd Zywicki reports in The Washington Post, the entirely predictable effects of Dodd-Frank are now becoming measurable. Here’s a link to the article he’s referring to. When you artificially increase the costs of doing business across an entire industry, the smaller players in the industry have a harder time accommodating those increased costs, especially if the extent of the increase is not scaled to the size of the particular business. Regulatory compliance is among the classic examples of how this happens, and it is also the classic example of large industry players using government to squeeze out their smaller competitors.
In short, Dodd-Frank was no accident. A motivation for its provisions was certainly the Robin Hood desire to steal from “the rich” and give to “the poor,” as if you, from the perspective of Washington, can have any realistic notion of telling who is which. But another motivation was the desire of the two principal authors to bestow a gift on their patrons in Big Money. How seriously did Big Money take the threat of community banking? Well, over the 15 or so years preceding its enactment, our tiny little semi-rural county saw three community bank more or less run out of town several large regional banks. How could this be? Because the community banks knew their customers, knew whose family paid its bills, knew where the business growth was, which local businessmen knew their stuff and had a track record of making things work. And they could make their decisions locally, instead of having every penny-ante home improvement loan be referred for approval to Charlotte, North Carolina, or Jacksonville, Florida, or somewhere else hundreds of miles and a universe of economy away. In short, the community banks could leverage their superior knowledge in order to survive. Now, those same community banks have to comply with the same regulations that CitiGroup and Chase and Bank of America. Anyone want to speculate on who’s better able to absorb those costs?
Is community banking dying in the United States? It could be. Will that be a boon to local borrowers? For some, perhaps. But for many, many others, the borrowers whom Big Money is leery of, precisely because Big Money cannot know its customers as well as the community banks once did? They’ll simply be frozen out of the credit market. Which means that homes will not be built, businesses will not be started or expanded, jobs will not be created. Someone explain to me how this is a good thing for the country overall.