Patrick McHenryChairman

By Paul Sperry, for Investor’s Business Daily
http://news.investors.com/ArticlePrint.aspx?id=593669

Job-killing bank regulations threaten to wipe out all the gains in private-sector employment since the recovery began, the industry warns. Washington, however, is hiring thousands more bureaucrats to enforce the rules.

Signed into law last year, the Dodd-Frank Act is the biggest rewrite of financial regulations since the New Deal. It was intended to rein in Wall Street "excesses." But the banking industry says burdensome red tape is hurting economic growth and jobs in a still-sluggish labor market.

"The level of real GDP could be 2.7% less by the year 2015 than would otherwise be the case for the United States," said Stephen Wilson, outgoing chairman of the American Bankers Association. "This could result in 2.9 million fewer jobs being created.”

By comparison, the economy has created 1.78 million private jobs since the recovery officially began in June 2009.

Wilson says Dodd-Frank has resulted in more than 5,230 pages of proposed and final rules, which laid end-to-end would exceed the height of New York's Empire State Building — five times over.

Only a fourth of the rules have gone into effect so far, he says; yet the law in its first year has already imposed almost 20 million hours of paperwork on U.S. businesses. It took an estimated 5.5 million man-hours, in contrast, to build every iPhone sold.

Dodd-Frank compliance costs for the financial industry already top $12 billion. That is expected to swell as the remaining 77% of required rules are finalized.

Also, price controls imposed by Dodd-Frank will result in a 45% loss in debit card interchange revenue for banks, Wilson pointed out. Banks have laid off workers to raise revenue to meet higher capital reserves mandated under the law.

"In the end," he said, "it means fewer loans get made, slower job growth and a weaker economy.

Wilson, who also runs a small bank in Ohio, made the remarks last month during a speech on international finance in Tokyo.

The new regulatory regime, however, is a boon for lawyers and government workers.

A Government Accountability Office study this summer concluded that implementing Dodd-Frank rules would require 2,850 additional federal employees just through fiscal 2012 (which ends Sept. 30) — at a cost to taxpayers of $1.3 billion.

The Consumer Financial Protection Bureau will command the bulk of new hires and funding. Created by Dodd-Frank, the watchdog agency started with a staff of 1,225 and a budget of $330 million.

Patrice Ficklin, who heads CFPB's Office of Fair Lending, says she's hiring lawyers, statisticians, analysts and enforcement agents. These are high-paying jobs. In fact, the CFPB has hired at least a dozen employees at salaries of more than $225,000 a year.

The White House denies the financial regulations it championed are costing companies revenue and slowing hiring. It cites, for example, higher corporate profits.

"If you look at corporate profits, it's hard to make the case that regulations have caused companies to be scared about (hiring) or (that they're) hurting their job growth," argued Alan Krueger, President Obama's top economist.

"I think the main reason (for weak hiring) is that the companies feel that they could satisfy the demand that they face with the workers that they have," Krueger added in a recent CNBC interview. "Until they are more confident that consumers are coming back at a greater clip — that the demand will be there — I think we'll continue to see job growth at the kind of moderate pace that we've seen.

But analysts note that hiring still lags consumer spending. And they say profits are up mainly because businesses have slashed payrolls and other costs.

Even Rep. Barney Frank, D-Mass., admits the regulation he co-sponsored has cost jobs in the financial sector. But he says it's a "reasonable price" to pay to bring "greedy" bankers to heel. "If you lock up drug dealers," he said in a recent interview, "you're going to have fewer jobs.

U.S. Chamber of Commerce official David Hirschmann says employers remain uneasy about Dodd-Frank.

"Instead of creating jobs, the law has created uncertainty for job creators," he said. "The economic statistics bear that out.

Hirschmann added: "We are simply not going to see American companies spending capital until they can begin to navigate their way through this tangled web of regulation.

Dodd-Frank Hits Small Firms By forcing banks to increase the capital they have on hand to cover losses, Dodd-Frank has reduced capital available for small-business loans. This in turn has slowed hiring.

Tom Boyle of State Bank of Countryside in La Grange, Ill., says Dodd-Frank is "handicapping our ability to meet the credit needs" of small firms. "The consequences are real," Boyle said. "It means fewer loans get made. It means slower job growth.

Product marketer K&M of VA Inc., for one, wanted to expand this year but for the first time had trouble getting a line of credit. Owner Mike Bucci blames the new bank law. So does American Business Group, an Orlando, Fla.-based company that matches small-business buyers and sellers. If buyers can't access a loan thanks to Dodd-Frank, CEO Jessica Hadler Baines told IBD, "then the other option is to close the business down, putting more workers into unemployment.

The credit crunch could worsen if Dodd-Frank drives smaller banks out of business as predicted.

"Dodd-Frank and the related burdens are threatening not just our industry but our very banks," ABA's Wilson said. "The most conservative estimates predict that by the end of the decade, there will be 1,000 fewer banks in the United States.

That means fewer financial jobs in a sector that has already lost hundreds of thousands of workers.

The Committee on Financial Services held a field hearing on “Regulatory Reform: Examining How New Regulations are Impacting Financial Institutions, Small Businesses and Consumers in Illinois” earlier today.

At this hearing, representatives from community financial institutions and small businesses explained how new financial regulations are affecting the ability of financial institutions to extend credit and stimulate job growth.  The Committee also explored the effect of stringent federal bank examinations—examinations that some financial institutions contend may be overzealous—on economic recovery.  

The Dodd-Frank Act directed federal financial agencies to promulgate more than 400 new rules.  Many financial institutions have expressed concern that the cumulative weight of these new rules— layered upon outdated, unnecessary, and duplicative regulations—will substantially raise compliance costs, thereby forcing financial institutions to curtail lending and investment activities that further economic growth. 

As evidence of increased compliance costs resulting from the Dodd-Frank Act, financial institutions point to the 2010-2011 edition of the Bureau of Labor and Statistics’ Occupational Outlook Handbook, which states that “increasing financial regulations will spur employment growth both of financial examiners and of compliance officers” by 31 percent over the years 2008-2018.  A recent PricewaterhouseCoopers survey estimated that regulatory changes will likely depress revenues, increase operating costs, and squeeze community bank profits.  In that survey, nearly 90 percent of banking industry leaders cited over-regulation as the biggest threat to business.

In light of these findings, critics have called on the Financial Stability Oversight Council (FSOC) to eliminate outdated or duplicative regulations and to perform cost-benefit analyses on new regulations before they are finalized.  In an August 2010 speech, Treasury Secretary Tim Geithner agreed that such efforts may be necessary:  “[W]e will eliminate rules that did not work.  Wherever possible, we will streamline and simplify.”  Deputy Treasury Secretary Neal Wolin echoed those sentiments before the Senate Banking Committee, testifying that “over the years, our financial system has accumulated layers upon layers of rules, which can be overwhelming.  That is why alongside our efforts to strengthen and improve protections through the system, we seek to avoid duplication and to eliminate rules that do not work.”  Despite the Administration’s stated interest in streamlining and simplifying regulations, in testimony before the Committee on October 6, 2011, Secretary Geithner conceded that the FSOC has not yet “made much progress” on this initiative.

In addition to their concern that existing and pending regulations will increase the costs of banking and credit, small business owners and bankers from across the country are also worried that federal financial examinations are inhibiting lending.  While some believe that low lending levels result from a lack of demand from creditworthy borrowers, many bankers claim that overly stringent federal examinations have stifled lending to creditworthy borrowers that would have otherwise been able to obtain loans.  In particular, bankers have said that the examiners’ application of mark-to-market accounting rules, loan classification guidelines, collateral valuation policies, and loss reserve requirements have contributed to stagnant economic growth.  Since the 110^th Congress, the Financial Services Committee has held hearings to examine the “mixed messages” that federal regulators are said to be sending financial institutions:  while officials in Washington urge banks to “lend more,” field examiners are applying restrictive standards that make lending more difficult.  This hearing provided an opportunity to further explore how regulators can balance the competing goals of ensuring that the institutions they oversee are operated in a safe and sound manner while permitting them to fulfill their function as financial intermediaries between savers and borrowers.

The Consumer Financial Protection Bureau would be strengthened – not weakened – if its leadership structure were changed to a bipartisan commission, argues Roland E. Brandel in the American Banker.

Calling the vesting of the bureau’s enormous power in a single person a “serious flaw,” the highly acclaimed consumer financial services lawyer writes:

“A single director, no matter how intelligent, how well educated, how experienced, how well-meaning, and how well supported by staff, research and studies, faces limitations every human faces with respect to each of such qualifications.  If the ultimate policy powers of the bureau are vested in a commission, one that consists of persons also highly qualified, important policy decisions will be informed by the multiple bases of differing experience, education and values of those commissioners.  A give and take of those commissioners should result in decisions superior to those that would be made by a single director.”

Making sure proposed rules first benefit from differing points of view is especially important given that “[l]ittle the bureau will do as it fulfills its consumer protection mandate will be free of costs to consumers,” Brandel points out.

Republicans on the Financial Services Committee have worked to change the CFPB’s leadership structure so there will be accountability and transparency at this massive and powerful government bureaucracy.  Legislation to place the CFPB under the management of a bipartisan commission was introduced by Chairman Spencer Bachus earlier this year and then incorporated into legislation sponsored by Rep. Sean Duffy that passed the House of Representatives 241-173.

But Republicans can’t – and don’t – take credit for the idea.  Democrats in the House actually sponsored and voted to approve legislation that put the CFPB under the direction of a bipartisan commission back in 2009.  Now, they claim a bipartisan commission would be a “knife in the ribs” to the CFPB.

Virtually all independent agencies are led by bipartisan panels rather than a single director.  This includes the Consumer Product Safety Commission, which was the model Professor Elizabeth Warren used for the creation of the CFPB.   These agencies were established with bipartisan commissions to ensure their rules are fair, consistent and balanced, and to promote certainty and continuity.  With a single director model, decisions and policies set by the director can be quickly and unilaterally reversed by a new director whenever there is a change in the CFPB’s leadership.

A bipartisan commission makes the CFPB more accountable, replicates the structure of other federal agencies charged with consumer or investor protection, and promotes continuity and predictability in rulemaking.  The Senate should join the House in this act of common sense.

Obama Administration officials are frantically trying to convince the public that the 400 new regulations tucked inside the 2,300-page Dodd-Frank Act are having absolutely no impact on small town and mid-sized banks.  None.  Whatsoever.  So just move on, OK? Nothing to see here.

But, what are community bankers saying? A much different story in congressional testimony and in statements to their local newspapers:

One community banker from Illinois said, “The Dodd-Frank Act will add an additional, enormous burden, has stimulated an environment of uncertainty, and has added new risks that will inevitably translate into fewer loans to small businesses.”

While community banks did not cause the crisis, they have to comply with the 2,300 page Dodd-Frank Act.  Michael Martin, CEO of Lordsburg’s Western Bank, said “We’re small business people. We have to understand and comply with the regulations just like Wells Fargo. We don’t have 70 attorneys on staff to figure it out.”

While Republicans continuously warned of the disproportionate impact these regulations would have on “too small to save” community banks, Democrats relied on illusionary exemptions in the bill. Make no mistake about it: community banks are being placed at a disadvantage due to the 400 new regulations stemming from the Dodd-Frank Act.

Following is a roundup of community bankers -- on the record -- regarding the impact of the Dodd-Frank Act:

Michael Martin, CEO of Lordsburg’s Western Bank: “We’re small business people. We have to understand and comply with the regulations just like Wells Fargo. We don’t have 70 attorneys on staff to figure it out.”

Craig Reeves, President of First National Bank of New Mexico in Clayton: “We’re being penalized for things none of us ever thought about doing…I was penalized for not lying” about the credit worthiness of potential borrowers.

Greg Ohlendorf, President of First Community Bank and Trust: “What we have to understand is we’re already overburdened with regulation. We have significant numbers of regs that we need to comply with today, and it seems like just one more isn’t going to change the deck a whole lot, but the consistent piling on of additional regulation is very, very stunning. It’s punishing.”

Albert Kelly, Jr, CEO, SpiritBank: “This new bureaucracy [the Consumer Financial Protection Bureau]--expected to hire over 1,200 new staff--will certainly impose new obligations on community banks--banks that had nothing to do with the financial crisis and already have a long history of serving consumers fairly in a competitive environment. Thus, the new legislation will result in new compliance burdens for community banks and a new regulator looking over their shoulders."

Jim MacPhee, CEO of Kalamazoo County State Bank (Michigan): "We weren't part of the subprime (mortgage) meltdown. Why throw more regulations at us?"

Leslie Andersen, president of Nebraska's Bank of Bennington: “Big banks have whole departments that focus on compliance. Small banks can't afford to do that."

Thomas Boyle, Vice Chairman, State Bank of Countryside (Illinois): “Each new regulation… adds another layer of complexity and cost of doing business. The Dodd-Frank Act will add an additional, enormous burden, has stimulated an environment of uncertainty, and has added new risks that will inevitably translate into fewer loans to small businesses.”

Tommy Whittaker, president of The Farmers Bank (Tennessee): "The cumulative burden of hundreds of new or revised regulations may be a weight too great for many smaller banks to bear.”

Daryl Byrd, president and chief executive, IberiaBank: "I think you're going to see a lot of consolidation.”

Guy Williams, chairman, Gulf Coast Bank & Trust: “There are some banks that don't have enough employees to read the bill. If you assigned everyone a chapter, it would never get read….We want to help local businesses succeed. That's why we're in the business."

Wes Sturges, chief executive, Charlotte's Bank of Commerce: "The other thing we'll have to deal with - and we're not sure how - is the Dodd-Frank bill. For a little bank like ours with 19 people, that could be a full-time job for somebody to make sure we comply with the provisions of the bill.”

Brad Quade, regional president, Johnson Bank (Milwaukee branch): “We are going to have to invest a lot more money into people and resources to manage the heavier compliance load.  Right now it’s requiring a great deal of additional resources to get our arms around what the expense will be going forward.”

Steve Steiner, senior vice president, North Shore Bank: “Obviously, the smaller you are, the larger the burden that places on you. We will have to take some combination of actions to compensate for this loss of revenue. It will mean we are losing money on every transaction that a customer of ours does with a debit card. Through some combination of pricing and cost reduction, we will have to offset that somehow.”

Greg Ohlendorf, President and CEO, First Community Bank and Trust (Illinois): “Many community banks complain that the required capital level goalpost is unpredictable and regulators simply keep moving it further, making it nearly impossible to satisfy capital demands in a difficult economy and capital market place. As a result, bankers are forced to pull in their horns and pass up sound loan opportunities in order to preserve capital. This is not helpful for their communities and for overall economic growth.”

Mark Sekula, Executive Vice President, Chief Lending Officer, Randolph-Brooks Federal Credit Union (Texas): “With a slew of new regulation emerging from the Dodd-Frank Act, such relief from unnecessary or outdated regulation is needed now more than ever by credit unions. Further, while we acknowledge that taken on its own, Section 1071 [requiring banks to collect additional data from small business borrowers] is a well-intentioned provision, when added with other laws and regulations, this new compliance burden is just another drop in the new and growing overall cost of compliance bucket emerging for credit unions from Dodd-Frank.”

Thomas Boyle, Vice Chairman, State Bank of Countryside (Illinois): “We strongly believe that our communities cannot reach their full potential without the local presence of a bank – a bank that understands the financial and credit needs of its citizens, business, and government. However, I am deeply concerned that this model will collapse under the massive weight of new rules and regulations…Banks are working every day to make credit and financial services available. Those efforts, however, are made more difficult by regulatory costs and second-guessing by bank examiners. Combined with the hundreds of new regulations expected from the Dodd-Frank Act, these pressures are slowly but surely strangling traditional community banks, handicapping our ability to meet the credit needs of our communities. The consequences are real. Costs are rising, access to capital is limited, and revenue sources have been severely cut. It means that fewer loans get made. It means a weaker economy. It means slower job growth.” 

Treasury Secretary Timothy Geithner offered a revealing insight into the Obama Administration’s attitude about regulations on Thursday when he testified before the Financial Services Committee.

After Oversight and Investigations Subcommittee Chairman Randy Neugebauer told the Secretary he is worried about the cumulative impact that the Dodd-Frank Act’s 400 regulations will have on the economy, Secretary Geithner responded:  “I think you are too worried about the cumulative impact of these financial reforms on the basic business of finance in the United States.”

As the exchange with Rep. Neugebauer continued, Secretary Geithner conceded the new Dodd-Frank rules being drafted by regulators will burden the private sector with increased costs, but that – according to the Secretary – is their point:

“Now they have consequences.  They will raise costs of business for
financial institutions.  That is their objective, in some ways, or that is
the necessary outcome of that stuff.”

That’s an amazing admission from the Secretary.  The “objective” of these regulations, he says, is to “raise costs” for businesses.  Not only is that “their objective,” but it is “the necessary outcome”.  That will indeed “have consequences” – fewer jobs.

Whether it’s Obamacare, Dodd-Frank or the EPA, one thing this Administration is good at is creating more of “that stuff,” to use Secretary Geithner’s colloquial term.  The website of the President’s Office of Information and Regulatory Affairs shows there are 4,257 new regulatory actions in the works, of which at least 219 will have an economic impact of $100 million or more.  

Officials in the Obama Administration may not be worried about the cumulative impact all these Dodd-Frank regulations are having, but job creators certainly are – and with good cause.

• Gordon Logan, founder and CEO of Sport Clips Haircuts, told POLITICO his men’s salon franchise could have added more than 50 locations were it not for Dodd-Frank Act regulations.
• ‘Colorado bankers say regulations are killing off business loans,’ reads a headline from the Denver Post.
• A recent column in the Washington Times points out that the Treasury Department estimates businesses will have to set aside more than $2 trillion in working capital to comply with new regulations on derivatives. 
• New Mexico’s chief financial regulator says Dodd-Frank regulations will have a profound effect on the economy – “and not for the good.”
• “No other President has burdened businesses and individuals with a higher number and larger cost of regulations in a comparable period,” reports the Heritage Foundation.
• Employment at regulatory agencies is up 13% since President Obama took office, but private sector jobs are down by more than 5%.
  

Outside Washington, D.C., there is growing concern about the regulatory burden imposed by the Dodd-Frank Act and the harmful effect it will have on jobs.

Cynthia Richards, New Mexico’s Financial Institutions Division director, tells the Albuquerque Journal that the Dodd-Frank Act is “onerous,” “costly,” “confusing,” and “difficult to implement.”

“When we see this act fully implemented we’re going to see across the nation the effect on competitiveness and the profound effect on the economy, and not for the good.”

Richards explains the Dodd-Frank Act “is largely to protect banks that are too big to fail,” but it is smaller, community banks that will be impacted the most by its regulations.  “I’m overwhelmed with the concern smaller banks have with this act.”

Read the story here.

In a separate article, the Journal reports that small banks that survived the financial crisis “are not so sure they can survive the new federal regulations” put in place by Dodd-Frank. 

One local banker says complying with regulations will cost his bank $500,000 per year.  Others noted that community banks did not cause the crisis and do not have the vast amount of compliance resources that Wall Street firms do.

“We’re small business people. We have to understand and comply with the regulations just like Wells Fargo. We don’t have 70 attorneys on staff to figure it out.”

Michael Martin, CEO of Lordsburg’s Western Bank

 

“We’re being penalized for things none of us ever thought about doing…I was penalized for not lying” about the credit worthiness of potential borrowers.

Craig Reeves, President

First National Bank of New Mexico in Clayton

Read the story here.

The Fort Wayne Journal Gazette interviewed Century 21 President and CEO Rick Davidson who says uncertainty is holding the economy back and the tax hike proposed by President Obama will hurt small businesses:

Davidson said he is trying to stay optimistic about President Obama’s jobs bill proposal but said the commander-in-chief’s comments this week are cause for concern.

“The president talked about more taxes for Americans who make $1 million or more a year,” but that would penalize many small business owners if their operations are counted as income.

“Most of the job creation is going to come from small business,” Davidson said.

Actually, while the President talks about raising taxes on those who make $1 million or more a year, his plan would increase taxes on those who earn more than $200,000 a year – an even bigger hit to small businesses that create the majority of jobs in the U.S.

Read the story here.

Today’s American Banker includes a dead-on piece about how the Dodd-Frank Act, with its 2,300 pages and more than 400 regulations, is “regulatory overkill” with unintended consequences that hurt consumers and the economy.

“It's a fool's mission for our government to try to micro-manage our financial system — and for all the lip-service paid to balancing regulation and markets, that's precisely what Dodd-Frank purports to do.”

The Banker article notes the Dodd-Frank Act will result in higher consumer costs, fewer and bigger banks, fewer mortgages, and tighter credit.

Although promoted by its supporters as Washington’s response to the financial crisis, the article rightfully points out:

“…the law doesn't even try to address what many regard as key culprits in the financial crisis — the roles of Fannie Mae and Freddie Mac, the credit ratings agencies and the fact that our financial system is more consolidated than ever in the hands of a few too-big-to-fail banks.”

Read the article in full here.

Government doesn’t create jobs.  But it is the responsibility of government to create a fertile environment that enables the economy to grow, that allows businesses to expand and hire.  The Dodd-Frank Act – along with other Obama Administration policies such as the stimulus, Obamacare and threats of higher taxes – does the exact opposite.  All have created uncertainty and spawned a host of new regulations – at a time when America is already suffering through the longest sustained high unemployment rate since the Great Depression.  The country’s jobless rate has been above 9 percent for 27 of the last 28 months.

The answer to high unemployment isn’t still more gargantuan laws passed by Congress that are full of harmful regulations, it’s policies that break down barriers to business growth and hiring.  Earlier this week, the Subcommittee on Capital Markets and Government Sponsored Enterprises considered 5 bills that do just that.

As one job creator who testified at the Subcommittee’s hearing stated:

“I believe that all 5 bills being considered today are important for our country’s entrepreneurs and will help improve access to capital for startups.”

The Washington Post reports today on another failure of one of the Obama Administration’s foreclosure mitigation programs.

In an article headlined “HUD program to help struggling homeowners falling short,” the Post notes this is “the latest in a series of efforts that has left funds allocated by Congress unspent and has failed to help as many” borrowers as promised.

The Emergency Homeowners’ Loan Program, which the Post in an earlier article described as a $1 billion “give away” program, is estimated by the Obama Administration to lose 98 cents for every one dollar it spends because of the program’s high default rate.

The House passed legislation 242-177 earlier in March to terminate this failed $1 billion program.  H.R. 836, sponsored by Financial Services Committee Vice-Chairman Rep. Jeb Hensarling and Chairman Spencer Bachus, ends the program.  So far, the Senate has failed to take any action on this bill to terminate this costly program that is obviously not working.

The Congressional Budget Office estimated that passage of H.R. 836 would cut the federal budget deficit by $840 million.

As Rep. Hensarling asked when the bill was voted on by the House, “This nation is drowning in a sea of red ink…If we can’t terminate ineffective programs in order to save our children from bankruptcy and help create jobs, how are we going to make the tough decisions that are necessary to save the country from bankruptcy?”