History has demonstrated that thoughtful legislation can accelerate and even pivot the direction in which our country's economy moves. However, we are reminded frequently that unintended consequences can arise out of the best of intentions. Not only do the benefits often not reach their intended recipients but, at times, previously unforeseen issues emerge as a result.
The Federal National Mortgage Association ("Fannie Mae") and The Federal Home Loan Mortgage Corporation ("Freddie Mac") were created with the laudable goal of increasing home ownership. These institutions were granted regulatory and capital advantages that, combined with their implicit U.S. government guarantee, allowed them to dominate competition from the private market. Fannie Mae and Freddie Mac began pursuing non-traditional mortgage loan programs — moving into the subprime and Alt-A market segments characterized by lower credit quality. By the eve of the financial crisis, they had extended 39% of the $4.6 trillion of those mortgages then in existence — loans that subsequently resulted in large scale defaults and borrowers losing their homes.
In 2010, the government eliminated the federal [student loan] guarantee program and began exclusively originating loans directly to students, with the promise of reducing the cost of the program to taxpayers. College education debt outstanding at that time was $811 billion. By the end of 2015, that figure had grown to $1.3 trillion. In fact, student loans are the fastest growing category of consumer debt, now ranking as the second largest, after mortgage loans. The average student debt at graduation has risen by 56% over the past 10 years, from $18,550 to $28,950. Ninety-day delinquency rates have risen sharply from 6.4% to 11.6% over the past decade — a harbinger of higher losses, whose cost will ultimately be borne by taxpayers. At the same time, increased debt burdens are contributing to lower rates of household formation and home ownership as well as reduced business start-ups among the generation of recent college graduates.
Beyond these unintended results, there are other areas in which it is difficult to understand whether the benefits of public policy have reached the intended recipients.
The Small Business Administration's ("SBA") 7(a) guaranteed loan program is intended to expand access to capital for small businesses, yet only about a third of the country's commercial banks participate in it and the number declined by 13% between 2012 and 2015. Since the recession, the SBA has attempted to simplify program requirements and streamline processes in order to boost borrower participation. Commercial loans under $1 million are deemed by the government to be "small business" in nature. Despite program improvements, SBA-backed loans under $1 million are 40,047 units or 41.3% below their 2007 pre-recession levels. The SBA program remains too cumbersome for many banks to use in extending credit to small businesses. It is hardly surprising that credit availability as measured by CRA data for loans under $1 million remains 34.9% below 2007 levels, a decline of nearly $115 billion.
The Durbin Amendment, included in the Dodd-Frank legislation, imposed price controls on the interchange fees that banks could charge retailers, with the expectation that annual savings — which a recent academic study estimated at up to $8 billion per year — would be passed on to consumers and smaller merchants. Researchers found that, despite the creation of such "savings," there was no evidence that consumers and small businesses saw any of it. Instead, the study concluded, big-box retailers were the real winners.
The collective goal of all stakeholders in the financial system — the banking industry, the regulators, the legislators, and the public — should be to foster a safer and more productive environment in order to create a fair, equitable, growth-oriented, yet transparent system that promotes the expansion of the overall economy and the betterment of businesses and consumers alike. As we do this, we must also be keenly cognizant of the absolute imperative that the most disadvantaged members of society not be left behind in the wake of these efforts.
Robert Wilmers is the chairman and chief executive of M&T Bank in Buffalo, N.Y. This article was adapted from his annual letter to shareholders.
Corrected March 14, 2016 at 11:48AM: The following is an excerpt from Robert Wilmers' annual letter to M&T shareholders.