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A Not So Happy Anniversary: Dodd-Frank Turns Two This Week

This week marks the second anniversary of the Dodd-Frank law, but unless one of the law’s newly created agencies just hired you, there is no reason to celebrate. The mammoth, 2,300 page law is chock full of rules and regulations that will hamper economic growth for years to come. Diane Katz of the Heritage Foundation highlights a few provisions that are especially

Unchecked authority of the Consumer Financial Protection Bureau (CFPB). Unparalleled powers were granted to the CFPB, including consolidated and expanded regulatory authority over credit and debit cards, mortgages, student loans, savings and checking accounts, and most every other consumer financial product and service. Because the statute sets bureau funding as a fixed proportion of the Federal Reserve’s budget, it is not subject to congressional control. Moreover, its status within the Fed effectively precludes presidential oversight.

Orderly Liquidation Authority. Dodd–Frank expands government authority to seize control of firms that regulators designate as failing. Unlike bankruptcy, the process is not directly supervised by a court, and it allows only very limited judicial review, thereby inviting abuse and possibly violating constitutional protections against the taking of private property.

The Volcker Rule. As proposed, this rule would effectively bar banks from investing their own funds, in most cases. Lower earnings will undoubtedly increase service fees paid by consumers. The regulation remains in flux—exacerbating the regulatory uncertainty—in large part because Congress was so vague on the particulars and regulators are unfamiliar with the complex derivatives market.

The Durbin Amendment. Dodd–Frank empowered the Federal Reserve to regulate the fees that financial institutions may charge retailers for processing debit card purchases. The statute calls for such “interchange” fees to be “reasonable” and “proportional” to the cost of processing debit card transactions—both rather arbitrary measures. The loss of revenue from price controls on debit-card processing is prompting financial institutions to hike fees on a variety of other credit instruments. Consumers are also likely to face higher interest rates and reduced credit options.

Qualified mortgage rules. Under Dodd–Frank, the portion of a mortgage loan that a lender can securitize is limited unless the mortgage is “qualified,” i.e., deemed to be low risk. In setting this standard, regulators have severely limited the mortgages that would meet the criteria for “qualified.” The result: Home loans will be costlier and harder to obtain, particularly for moderate-income borrowers.

Heritage went on to report that banks and consumers are facing hardship as a result of Dodd-Frank, despite full implementation being years away. Community banks are now restricting their growth to avoid hitting a threshold that leads to the law’s most stringent rules. And consumers now find that fewer large banks are offering free checking, with 60% fewer of these banks offering free checking since 2009. The Dodd-Frank law is also responsible for one of Obama’s most blatant violations of the Constitution, making a recess appointment to the Consumer Financial Protection Bureau when the Senate was not on recess. Given past history, it’s hard to imagine Dodd-Frank aging well.

This post was authored by editorial intern Kyle Bonnell.

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