How Dodd-Frank Destroys The Rule Of Law

DecisionIn the July 23, 2015 Wall Street Journal, former Senator Phil Gramm, wrote about the “double whammy” effect of Dodd-Frank (here). First, it “…has hit the banking industry hard, hurting the recovery.” But second and worse, “…is its effect on the rule of law.”

Dodd-Frank’s Negative Impact On The Banking Industry.  Here are some snippets from the article:

A Mercatus Center surveyfound that while community banks have hired 50% more compliance officers to deal with Dodd-Frank, overall industry employment has increased only 5% and remains below precrisis levels.

Industrial, consumer and mortgage finance continue to flee the banking system, as the American Bankers Association reported this week that the law’s regulatory burden has led almost half of banks to reduce offerings of financial products and services.

New financial-services technology, such as online and mobile payment systems, has continued to blossom, but almost exclusively outside the banking system. The massive resources of, and talent in, banks have been sidetracked, rather than being employed to make loans and boost the economy.

Although not mentioned directly in the article, the increased need to hire compliance officers has resulted in giving an upper hand to the Big Banks, who can better afford the financial impact on their bottom line.

In a recent Forbes article (here), author Scott Beyer wrote:

It has been 5 years since Dodd-Frank’s passage, and over that time, the 2,300-page bill has been a living monument to the downsides of regulation. Quickly passed in 2010 after the financial crisis, and without bipartisan support, the bill’s mix of legal uncertainty and market distortion has worsened what it aimed to solve. By capping the amount that banks can charge retailers for debit swipes, Dodd-Frank forced many to cover for the losses by ending free checking for low-end clients. Added compliance costs made firms reduce customer service. And these expenses perpetuated America’s centralized banking model, encouraging consolidations and yet greater market share for the “Big 5.” Just as well, stricter lending standards and capital reserve requirements have accelerated the decline of community banks. Because these smaller firms have historically been a great source for lending and entrepreneurship, this is a loss for America’s cities and towns.

Dodd-Frank’s Negative Impact On the Rule Of Law.  Sen. Gramm complains that:

…Dodd-Frank has empowered regulators to set rules on their own, rather than implement requirements set by Congress. This has undermined a vital condition necessary to put money and America back to work—legal and regulatory certainty.

The real culprit, he notes, is Dodd-Frank’s demon seed, the omnipotent Consumer Finance Protection Bureau, or as they prefer to call themselves, using Hooveresque terms, “the Bureau”.

Back in the pre-CFPB days,

…the powers Congress granted to regulators were fairly limited and generally implemented by bipartisan commissions.

Major decisions were debated and voted on in the clear light of day. Precedents and formal rules were knowable by the regulated. And regulators generally had to be responsive to Congress, which controlled agency appropriations. These checks and balances, while imperfect, did promote general consistency and predictability in federal regulatory policy.

Now, we have a mega-agency, run by a single individual with no accountability to Congress or the people it serves. “And the CFPB’s funding is automatic, virtually eliminating any real ability for elected officials to check its policies. Consistency and predictability are being replaced by uncertainty and fear.”

Over the years the Federal Trade Commission and the courts defined what constituted “unfair and deceptive” financial practices. Dodd-Frank added the word “abusive” without defining it. The result: The CFPB can now ban services and products offered by financial institutions even though they are not unfair or deceptive by long-standing precedent.

Regulators in the Dodd-Frank era impose restrictions on financial institutions never contemplated by Congress, and they push international regulations on insurance companies and money-market funds that Congress never authorized. The law’s Financial Stability Oversight Council meets in private and is made up exclusively of the sitting president’s appointed allies.

Dodd-Frank does not say what makes a financial institution systemically important and thus subject to stringent regulation. The council does. Banks so designated have regulators embedded in their executive offices to monitor and advise, eerily reminiscent of the old political officers who were placed in every Soviet factory and military unit.

Dodd-Frank’s Volcker rule prohibits proprietary trading by banks. And yet, despite years of delay and hundreds of pages of new rules, no one knows what the rule requires—not even Paul Volcker.

ConclusionLest one think that Sen. Gramm is overstating his case, we need only look at a single Oregon example to realize how correct he is, and how unpredictable regulation can be with Big Brother the CFPB overseeing state law from Washington DC.

In Oregon, we have a law regulating the activities of mortgage loan originators or “MLOs”; these are the mortgage brokers and mortgage bankers operating in this state. As with most licensing laws, there are certain exceptions, i.e. “carve-outs” for persons the Oregon Legislature determines may engage in MLO activity without obtaining a MLO license. These exceptions can be found in ORS 86A.203(2).

Of interest is the text of one exemption:

An individual who, as a seller during any 12-month period, offers or negotiates terms for not more than three residential mortgage loans that are secured by a dwelling unit that did not serve as the individuals residence, unless the United States Consumer Financial Protection Bureau expressly determines *** that the definition of loan originator in section 1503 of Title V of the Housing and Economic Recovery Act of 2008, P.L. 110-289, includes an individual whose activities are described in this paragraph; [Underscore mine. ~PCQ]

Section 1503 of Title V is part of the federal SAFE Act, a banking law that requires, among other things, that all MLOs must be registered on a national database. So according to Oregon statute ORS 86A.203(2), created by our state legislature, one exempted from the state MLO laws can lose their exemption if the CFPB determines otherwise. To put a fine point on this, an Oregon exemption to an Oregon law, can be overruled – not by Oregon lawmakers who wrote ORS 86A.203, not by Congress, who enacted the SAFE Act – but by an independent federal bureau, beholden to no one, and run by a single person, who is appointed by the President.

So much for checks and balances. Perhaps the 2016 elections will right this ship.  ~PCQ