Where The Real Reforms Need To Occur
The Dodd-Frank Act just passed its first anniversary, but for our industry there wasn't much to celebrate. Originally christened "The Restoring American Financial Stability Act of 2010," the Act was passed by the U.S. House of Representatives on Dec. 11, 2009, by a vote of 223 to 202. It passed the U.S. Senate on May 20, 2010 by a vote of 59 to 39. Later, the conference committee voted to name the bill after Rep. Barney Frank (D-MA) and Sen. Chris Dodd (D-CT), who proposed it. This Act represents the most comprehensive financial regulatory reform measures since the Great Depression. It contains 259 mandated rules and another 188 suggested rules, in addition to 63 reports and 59 studies.
So now, financial institutions that did nothing wrong, that are operating in the best interests of members, are being laden with increased scrutiny and regulation. All of us in the financial industry know there were many culprits in the credit crisis. I worry about the future of a nation that refuses to acknowledge the true causes of the crisis, justifying actions by filing lawsuits against other wrongdoers. In reality, every check of the system failed to restrain the excess and greed or to correct the delusional optimism.
There are many to blame: well-paid executives of very large financial institutions; credit rating agencies; subprime mortgage makers, whether mortgage brokers or Wall Street players; home buyers with appetites for houses they could ill afford; so-called sophisticated investors; politicians who encouraged government-sponsored enterprises to buy subprime mortgages; regulators who couldn't keep pace, and, well, you get the idea.
Although the government is focusing on the larger institutions, we will all incur increasing regulatory requirements and higher taxes to pay for oversight. As an example, SEC Chairman Mary Shapiro warned lawmakers on July 21, 2011 that the SEC needs "significant additional resources" over its $1.8-billion annual budget to proceed with its Dodd-Frank responsibilities. Full implementation would require 770 new staff members, many of whom need to be experts in derivatives, hedge funds, data analytics, and credit ratings.
Shapiro stated that "unless the budget is increased, many of the issues which the Dodd-Frank Act seeks will not be adequately addressed, as the SEC will not be able to build out the technology and hire industry expertise and other staff desperately needed to oversee and police these new areas of responsibility."
Need Even More Staff
Even more staff will be needed for the new Consumer Financial Protection Bureau (CFPB), yet another government organization that attempts to protect the consumer. I am concerned that these excessive costs won't help those with true needs, but will instead be validation for those who simply believe they are entitled.
Although the intent may be to offer protection to consumers, savvy individuals will still find ways to beat the system. An example, just ask a credit union loan officer who scratches his or her head in wonder as prime borrowers give up the keys of an underwater dwelling only to buy another home at today's low market prices. It's interesting: four years ago, more than a third of homeowners had no idea of the type of mortgages they held.
So, why should the remaining two-thirds and those who don't have home mortgages have to pay for the mistakes of others? A 2006 Mortgage Asset Research Institute study revealed that 60% of those who applied for liar loans overstated their income by more than half.
Such loans comprised up to half of all new mortgages in 2006, for subprime borrowers and homebuyers with high credit scores combined. At least I'm confident that credit unions didn't grant the lion's share, if any, of these loans.
It's critical to differentiate consumer protection from consumer financial responsibility. We teach college students how to run corporations more efficiently and cost effectively. And we teach the finer points of business finance and marketing, but we don't teach business consequences or financial responsibility to the consumer. Up to now, consumer protection laws have already cost the industry billions of dollars. Now, consumers are angry because they are losing free checking and other fees are being charged. We are naive to think that CUs, banks or any corporation will not come up with ways to get that money back. The stockholders demand it and indirectly so do the regulators.
My father came to this country from Cuba with three dollars in his pocket. My family was raised to work hard and to get the best education possible. Nowhere else in the world is information and education so accessible and affordable if you really want it and work for it. I believe there are some parts of the Dodd-Frank Act that are vital, such as the mandatory clearing of derivatives; but additional government review and regulation will impose a huge burden, and it will halt economic recovery (legal and financial consulting industries aside). Ultimately, it will hurt average Americans, who are, ironically, the ones the Act is attempting to protect!
Common sense needs to prevail when it comes to choices in life. Real reform needs to come from restructuring our education system to include focusing on values that include the integral roles played by consumers, such as financial literacy. Of course, that's something credit unions are already doing!
Emily Hollis is president of ALM First. For info: www.almfirst.com.