‘For some reason, some Republicans in Congress are still waging an all-out battle to delay, defund, and dismantle these commonsense new rules.” That was, in a recent weekly address, President Obama’s all-or-nothing defense of the 2,600-page Dodd-Frank financial-“reform” law rammed through Congress in 2010, just after Obamacare. Yet almost by the day, even members of the president’s own party are coming to realize Dodd-Frank is actually too tough on smaller financial institutions while institutionalizing too-big-to-fail protections for large ones.
Take this exchange last Friday on HBO’s Real Time with Bill Maher, not a place where you expect a conservative or libertarian critique of regulation. Certainly not from a Democratic officeholder. Yet listen (at 37:55; HBO subscription required) to the exact words of Montana’s outgoing Democratic governor Brian Schweitzer:
Banks that actually did their job like in Montana — where we didn’t have banks go upside down, because they made you bring your financials in and they’d only loan you money if they understood your business plan — now, they are the ones that are being penalized. They now have more regulation on them, and it’s more difficult for them to make the loans. The very banks that were doing their job are having a tougher time because of the banks that are too big to fail.
Fellow panelist Representative Darrell Issa (R., Calif.), the panel’s conservative voice, replied with a grin to Schweitzer, “I knew there was something I liked about you.”
But remarkable as his words were in such a prominent liberal venue, Schweitzer is far from the only community-banking advocate, and not even the only Democrat, criticizing Dodd-Frank. The proposed rule that will implement Dodd-Frank’s Section 941, which provides stringent criteria for a “qualified residential mortgage” and was criticized in the first debate by Mitt Romney, also has attracted opposition from “bipartisan groups of 160-plus members of the House of Representatives and 40 members of the Senate,” according to real-estate columnist Ken Harney of Inman News.
That and a similar regulation are now being revised by the Consumer Financial Protection Bureau (CFPB) and other bank regulators, and the final rules have been delayed until 2013, causing great uncertainty in the mortgage market. Senator Kay Hagan (D., N.C.) offered the following about the “qualified residential mortgage” rule: “The strict, inflexible restrictions proposed by banking regulators could put home ownership out of reach for many credit-worthy American families.” Illustrating the broad-based opposition to this rule, at the press conference where she made that statement, Hagan and other lawmakers were flanked not just by groups representing banks and credit unions, but also by the NAACP and National Urban League, among other groups standing united in opposition to the rule as drafted.
Section 941 also shows the flip side of Dodd-Frank’s failure, its protections for too-big-too-fail financial institutions. Dodd-Frank harms just about every business except for the two main entities that we can fairly say did the most to get us into this mess: Fannie Mae and Freddie Mac. The “qualified mortgage” rule actually tilts the playing field toward them and the big banks they partner with by deliberately exempting all mortgages bought by Fannie and Freddie from its strictures, saying they are de facto “qualified.” Incredibly, the proposed rule suggests a 20 percent down payment for most mortgages, but no specific down payment for those bought by Fannie and Freddie.
The circular rationale of Dodd-Frank’s regulators is that there is no risk Fannie and Freddie loans will bring down a financial institution since those loans are taxpayer-guaranteed. But all this really means is that the qualified-mortgage regulation simply diverts even more risk to taxpayers, setting the stage for another crisis.
There has also been bipartisan opposition to Dodd-Frank’s Durbin amendment, a particularly regressive set of debit-card price controls that benefit some of the nation’s wealthiest retailers at the expense of consumers. The rules about what banks may charge merchants to process debit cards has resulted in the virtual extinction of free no-minimum-balance checking accounts, a key banking option for the poor. Legislation to repeal it has attracted Democratic co-sponsorship, including even Obama’s own handpicked chairman of the Democratic National Committee, Debbie Wasserman Schultz. Kind of hard for Obama and his supporters to claim she is a Wall Street shill.
Yet the Obama administration refuses to concede that any provision of the law needs to be repealed or eased. The closest to any relief from Dodd-Frank they’ve offered was Obama’s April signing of the Jumpstart Our Business Startups (JOBS) Act, which loosens some of Dodd-Frank’s provisions for young companies going public.
And by the law’s design, bipartisan opposition from Congress can only do so much to stop it. Bureaucracies in Dodd-Frank, including the CFPB, the Financial Stability Oversight Council, and the Orderly Liquidation Authority, are specifically designed to operate without accountability to Congress. The CFPB, for instance, bypasses congressional oversight by getting its funding directly from the Federal Reserve, another government entity not regarded as a paragon of transparency and accountability. To top it off, Obama denied the Senate even minimal say over the CFPB by installing its director, Richard Cordray, via an illegal “recess” appointment in January while the Senate was actually in pro forma session.
This is why my organization, the Competitive Enterprise Institute, along with the 60 Plus Association and a Texas community bank, the State National Bank of Big Spring, have filed a lawsuit to restore oversight over Dodd-Frank as required by the U.S. Constitution. Even Democrats are recognizing that until Dodd-Frank is reined in, the American economy will never be restored to its full potential.
— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.