The Dodd-Frank Act was designed to rectify the financial crisis of 2008, stabilize the American economy, and prevent another economic disaster. Unfortunately, the law is not perfect. Reform is favorable over repeal, as long as it strives for the same goals that inspired the original bill.
Lawmakers designed the bill to protect both consumers and the banks, but these protections resulted in a lot of unintended consequences.
For example, one of these protective measures, the “ability to repay” (ATR) provision, requires lenders to measure a borrower’s ability to pay the interest and principal over the life of the loan, rather than just the lower rate introductory period. While the ATR is very important, and a step in the right direction, there isn’t enough guidance associated with it, which can pose difficulties for potential borrowers in procuring the funds they need.
The issue, in many cases, is a lack of static rules from the Consumer Financial Protection Bureau (CFPB) that would allow the banks to determine the borrower’s ability to repay. High-priced mortgage rules are also an inhibiting factor for banks and consumers. Correspondingly, banks are issuing loans for small businesses, homes, refinancings, and other options far less frequently than they used to. Community banks especially are unable to authorize the loans, hampering the opening of new businesses and job creation.
Alternatively, the retail banking side now has more consumer protection. Key to these protections are permanent increases in the Federal Deposit Insurace Corp.’s (FDIC) insurance premiums, higher capital requirements, and the Volcker Rule, which forbids banks from making speculative investments that go against the interests of the consumer. In the interest of greater transparency, registered investment companies are now subject to new rules requiring more thorough and in-depth recordkeeping.
Banks must hire extra employees and devote significant business hours to comply with the stringent recordkeeping and reporting regulations. These new employees do not bring in more money for the bank, so employing them results in a net loss for the banks.
Many bank CEOs have expressed concerns over what they consider to be the onerous nature of the new regulations. However, many others have decided to lean into the changes without complaint.
Among the most efficient and lauded consumer protections are those intended to prevent deceptive loan tactics, especially those that deal with the prepaid cards and payday loans that caused an abundance of debt throughout the country.
The DOL’s fiduciary rule, for example, is designed for consumer protection by making it much more difficult for brokers and other types of advisors to take advantage of clients. All financial professionals who serve in any sort of advisory role are now legally required to adhere to “impartial conduct standards.” These standards require reasonable rates and actions that serve the best interest of the clients.
The fiduciary rule applies to those financial advisors working with retirement assets like a Roth IRA, a traditional IRA, or a 401(k). This is not the final version of the rule, so expect the specifics of its protections to evolve over time. Whatever its final form, the fiduciary rule is an example of a consumer protection that likely would not have come about without the Dodd-Frank Act.
Preventing another financial near-collapse is of the utmost importance. While there is always room for improvement, the foundation of the law is good for consumers, and if anything, it should simply be revised rather than repealed.
Tyler Harrison is the founder of EfficientPlan, an investment advisory firm focused on corporate 401(k) plans and fiduciary services.