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What You Really Need to Know About the Financial Choice Act

What You Really Need to Know About the Financial Choice Act

Craig Donofrio — Break It Down

Art by Eli Miller

Art by Eli Miller

It’s been called the smasher of small banks, an anti-Robin Hood that robs from the little guys and gives to Wall Street. It’s strangling your charming local Bailey Bros. Building & Loan community bank and keeping your small business from getting off the ground. It’s the Dodd-Frank Wall Street Reform and Consumer Protection Act, at least as told by its most vociferous critics.

Dodd-Frank was passed back in 2010 on the heels of the Great Recession, a regulatory overhaul meant to keep the financial services industry in check and avoid another financial meltdown. Major components include: stress tests to evaluate whether megabanks can withstand a hypothetical financial crisis, maximum limits on credit card swipe fees imposed on businesses, and the establishment of the Consumer Financial Protection Bureau, an independent watchdog agency to guard against predatory financial practices.

Now, Republicans are pushing to replace Dodd-Frank with the Financial Choice Act, the brainchild of Rep. Jeb Hensarling, chairman of the House Financial Services Committee. Key components of the bill include: scrapping a proposal that all retirement advisers act in their clients’ best interest*, removing rules that prohibit banks from engaging in “risky” short-term investments, rolling back regulations on your not-so-friendly neighborhood payday and car title loan businesses, and weakening the CFPB by allowing the President to both fire the director for any reason and directly appoint the deputy director.

While the nation was focused on James Comey’s testimony, the Financial Choice Act sailed through the House on June 8. As the Senate gears up to vote on the bill, Republicans are doing their best to sour the public on Dodd-Frank. But is there any truth to the talking points? Let’s take a look at the rhetoric.

Claim #1: Small banks can’t lend to small businesses because of Dodd-Frank

In a press conference after the Financial Choice Act passed the house, House Speaker Paul Ryan said that Dodd-Frank’s regulations and associated expenses make it harder for community banks (defined by the Federal Reserve and Dodd-Frank as banks with assets under $10 billion) to lend to small business owners who rely on loans from such institutions. “Big business can get big loans from big banks. But everybody else doesn't get their money that way,” he said. “These entrepreneurs, these small businesses, they go and get credit from the community bank, and that's where job growth comes from.”  

The rub here is that most Dodd-Frank regulations kick in when assets reach $10 billion (and if you’re confused by “small” and “community” banks, know that even the Fed, the FDIC, and the OCC use those descriptors interchangeably). According to a 2015 report by the Center for American Progress, 89.1 percent of all banks in the U.S. have assets of less than $1 billion, and another 9.2 percent have assets between $1 billion and $10 billion. So, it’s reasonable to assume when politicians talk about community banks on Main Street, they’re referring to banks with less than $1 billion in assets.

Even so, we asked Mohammad Kabir Hassan, an economics professor at University of New Orleans and former bank consultant, a hypothetical question: If a guy went to his community bank and asked for a $100,000 loan before and after Dodd-Frank, how much more difficult would it be to get that loan post-Dodd-Frank?

Quite simply, it wouldn’t be tougher just because of Dodd-Frank’s regulations. The current scenario “is the same thing, really,” as prior to 2010, said Hassan. While it does cost community banks more money in overhead and federal compliance costs to loan $100,000 than it would for a huge bank to loan the same amount, that’s the way it’s always been. “It’s the scale of operation. It’s the simple economics of it. It’s not Dodd-Frank,” said Hassan.

Myth-o-Meter: Big fat myth. Smaller banks have always spent more to obtain and retain small business customers—and they’re still loaning.

Claim #2: Dodd-Frank is shutting down small banks

Hensarling echoed Ryan’s claims that Dodd-Frank is overly burdensome for small banks. “The big banks are bigger,” he said. “The small banks are fewer. We’re losing a community bank or credit union a day.”

It is true that small banks have been dying since Dodd-Frank passed. But the total number of banks in the U.S. has been on a steady decline since 1984, according to data from the Federal Reserve Bank of St. Louis

While there is a marked decline in all banks post-recession and post-Dodd-Frank, there’s no clear line tying that precipitous drop to Dodd-Frank. In a study, the Federal Reserve Bank of Richmond notes that small banks began to get bought out or fold into larger banks after the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which removed restrictions on interstate banking, allowing big banks to cross state borders and open branches directly across from your Bailey Bros. Building & Loan. 

However, there is speculation that regulation can be a driving force for community banks to merge into bigger banks. According to a 2013 Bloomberg article,community banks choosing to go over that $10 billion threshold do so aggressively, merging with other banks in order to have more capital to ease the burden of new regulatory costs.

A study from the Mercatus Center claimed rising compliance costs due to Dodd-Frank were a significant burden on small banks and were a possible reason for why practically no new banks are forming, but the Federal Reserve Bank of Richmond researched the claim and couldn’t determine if those compliance costs were a driving factor.

In Hassan’s opinion, Dodd-Frank has “in part and indirectly” contributed to the lack of new community banks, though he also blames “unfair competition from big banks,” like their enormous advertising budget and ability to offer cheaper products due to scale.

Myth-o-Meter: Half myth. There is no clear evidence that Dodd-Frank is (or isn’t) behind local bank closures.

Claim #3: Dodd-Frank only helps Wall Street

This leads to the idea that Dodd-Frank, while it was supposed to hit Wall Street fat cats and trillion-dollar banks, instead blasted away at local banks. “Ostensibly, they aimed it at Wall Street, but instead, Main Street got hit,” Hensarling said last month. The general idea in this argument is that Dodd-Frank not only did nothing to Wall Street, it acted as a favor to it, and Hensarling isn’t alone in that opinion. During the 2012 elections, Mitt Romney said Dodd-Frank was “the biggest kiss that’s been given to New York banks I’ve ever seen.”

There’s some truth to this one, but not in the way you might think.

“Dodd-Frank is a supporter of big banks in this country,” says Hassan, noting that big banks had enough lobbying power to swing some regulations and terms in their favor. But the Financial Choice Act “is no different than what has passed recently. It does nothing to break up the big banks,” he says.

Myth-o-Meter: Mostly myth. Dodd-Frank didn’t exactly dismantle the financial service industry giants in favor of friendly, small town banks, but the Financial Choice Act won’t do that either.

One thing both supporters of the Financial Choice Act and supporters of stricter financial industry regulation can agree on is that big banks are indeed hurting Main Street.

Since independent community banks are becoming less of a fixture in the financial industry, it becomes harder for the average person to get a small business loan simply because those loans are harder to find now. Such small potatoes financing just isn’t as profitable for the big banks, which continue to gobble up smaller and regional banks that are generally more friendly to mom-and-pop loans. Citing data from the Biz2Credit Small Lending Index, Hassan says community banks approved 48 percent of all small business loans, versus a paltry 13 percent of small business loans approved by big banks.

When it comes to saving small banks with this new legislation, Hassan is equally skeptical, if not cynical. “Everyone is paying lip service, but no one is doing anything. No one is putting up a support mechanism so these small banks survive,” he says. “The American Bankers Association, they’re the largest lobbying group in Capitol Hill. They have enough power to buy anything. … Why don’t they hire people from community banks [to lobby for smaller banks]? They’re not doing it. The Community Banking Association, too—what the hell are they doing? They have to get into this game or they can’t change it.”

*An earlier version of this article mistakenly indicated this rule applied to a broader set of financial professionals than just retirement advisers. 

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