When Regulators Pick Winners, Consumers Are the Losers
A welcomed theme in the recent election cycle was promise of a thoroughgoing review of unneeded regulations. Regulations that never were subjected to consumer cost-benefit analysis, or that pick winners and losers, or that are in a constant state of flux are prime candidates for repeal. Within the financial community many regulations have arrived as tentacles of Dodd Frank, but there already were many that needed to be aggressively pruned.
Under Dodd-Frank’s bumper crop of new regulations, Wall Street banks feel the shackles of the Volker rule, a requirement to tie up capital in unnecessarily high reserves that sidelines money that could have been loaned to credit-worthy businesses or consumers. Some regulations dissuade lenders from originating mortgages.
Mortgage regulations are also stringent in verifying the consumer’s ability to pay and ultra-picky about some non-risk factors such as income properties. Surprisingly, 3% down payments are being accepted on some new mortgages. The 3% down payment must be a symptom of Regulator’s Alzheimer Syndrome. Low equity stakes backing home mortgages were one factor leading to loan defaults during the great recession. Some consumers had too little skin in the game. Regulations are supposed to avert the “too big to fail” failures, not set the stage for the next avalanche.
Schizophrenic rules from Dodd Frank do not limit their impact to Wall Street banks. These regulations make life difficult for the more than 7,000 Credit Unions who are Main Street’s connection for loans, mortgages, checking and savings accounts used by 95 million members. Our neighbors deposit their cash in and take loans from local Credit Union branches. Regulations that affect Credit Unions affect our neighbors, including business members. Money spent chasing regulations is money that cannot be used to reduce loan rates or pay member dividends.
In 2014, the credit union industry incurred $6.1 billion in regulatory costs and suffered $1.1 billion in revenue losses due to regulations. That regulatory impact total was $1.7 billion higher than in 2010. About 25% of all staff time was devoted to regulatory compliance. That is a waste to productivity and cost to credit union members – that is, consumers.
Some complex regulations are applied to the financial industry. Substantial Credit Union staff effort is consumed in monitoring and compliance. The Right to Financial Privacy Act, the Military Lending Act, the Durbin Amendment, the Fair Lending Laws, Regulation E: Electronic Fund Transfer laws, the Telephone Consumer Protection Act, the Member Business Loan rules, the Bank Secrecy Act, and the Anti-Money Laundering laws, the new Mortgage Origination and Servicing Regulations – each demands staff time to monitor and enforce regulations. Beyond these specialized rules, Credit Unions are subject to the IRS and Department of Labor regulations generally applicable to businesses.
Credit Unions routinely face stiff competition from banks that dominate 90% the market and have grown in share, yet regulations unique to Credit Unions limit the amount of loans they can make to their own credit-worthy business members. No such cap applies to competitor banks and their customers. This cap on prudent lending by Credit Unions is one regulation that deserves quick review and repeal. The repeal would open opportunities for businesses to enjoy the generally lower loan rates charged by Credit Unions. Likewise, the Credit Union members would benefit from a greater volume and diversity of qualified borrowers.
As the quest for right-sizing the number and impact of regulations moves forward, it should emphasize leveling playing fields where regulators imposed permanent advantages for some competitors, i.e. picked the winners. When regulators pick winners, consumers lose the benefits of fair competition.