In the aftermath of the financial crisis that began in fall 2008, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Containing the most comprehensive financial regulatory reform measures since the Great Depression, the Dodd-Frank Act changed the oversight and supervision of banking institutions, created a new agency responsible for enforcing compliance with consumer financial laws called the Bureau of Consumer Financial Protection and imposed more stringent regulatory capital requirements on large and small banks.
Many in the banking industry and opponents in Congress claim that the Dodd-Frank Act created a credit crunch and harmed our economy. They contend that the additional layers of complex regulations increased costs to banks, particularly small banks, leading to reduced income and limited potential growth. In turn, this drove capital away and reduced financial resources available to lend to small businesses.
Their argument continues as follows. Because small businesses create new jobs, limiting their ability to borrow money slowed the creation of jobs. It also slowed economic growth, thereby reducing banks’ income and diminishing their ability to make loans to small businesses. The economy as a whole suffered due to the new regulations.
Evidence to the Contrary
It is true that many small banks lack the ability of larger banks to hire personnel necessary to deal with the additional regulations created under the Dodd-Frank Act. Also, the implementation of the appropriate safeguards required by the regulations does result in increased costs, which may put some additional burden on smaller banks.
There is evidence, however, that the Dodd-Frank Act and the creation of the new regulations have not caused banks to slash their small business lending. Instead, the financial crisis and the resulting credit crunch already existed, and the financial crisis was caused by the lack of financial industry regulation, not the implementation of the new regulations.
In testimony presented to the House of Representatives Subcommittee on Economic Growth, on June 16, 2011, William Daily, legislative and policy director for the Main Street Alliance, a national network of small business owners, testified as follows.
“Credit dried up because of the financial crisis itself, which could have been averted or at least mitigated had the stabilizing measures contained in Dodd-Frank been in effect before the crisis. To blame Dodd-Frank for the crisis-induced credit crunch confuses cause and effect, especially as the new law is not yet even fully implemented.”
Daily stated that the underlying uncertainties in the economy — due to high unemployment and sluggish demand by consumers — caused reduced credit and lending. Now, almost two years later, unemployment is beginning to turn around and consumer demand is increasing as the economy is growing, albeit at a slow pace.
Small Business Protection
Furthermore, several provisions of the Dodd-Frank Act actually aid small businesses. The Bureau of Consumer Financial Protection will shield small businesses from abusive lending practices, deceptive credit arrangements and fraudulent mortgage schemes. It also will promote a level playing field in lending by regulating lenders so that small banks will be able to compete with larger banks on more equal terms.
Creating limits on proprietary trading will encourage banks to restore the focus on providing economically productive lending rather than on trying to steer customers toward proprietary products.
The Dodd-Frank Act also has provisions which restore parity to credit and debit contracts and debit interchange fees to give small businesses the freedom to make decisions about forms of payment and ensure that debit interchange fees are set at reasonable levels. In addition, the Act will increase the overall stability of local economies by providing a regulatory framework and reducing the uncertainty of bank lending practices.
While it remains to be seen whether the Dodd-Frank Act will benefit small businesses in the long run or detract from their ability to create jobs, there is little doubt that it will reduce deceptive practices of predatory shadow lenders by guarding against the creation of circumstances which helped lead to the financial crisis in the first place.
Oren D. Saltzman, Esq., is managing member of the law firm of Adelberg, Rudow, Dorf & Hendler LLC (www.AdelbergRudow.com), which has offices in Baltimore and Howard County. He can be reached at 410-539-5195.