Impact of Dodd-Frank & CFPB On Lending

Laws such as Dodd-Frank and regulations such as the new Basel III capital requirements are restricting GDP growth just when we need the opposite. Putting a lid on banking may restrict losses to Treasury but, unfortunately, over-regulation results in decreased money supply, decreased GDP and deceased tax revenue.

Here’s my take on Dodd-Frank’s impact on lending. Strictly my own opinions. Please chime in if you disagree. This is a very important discussion.

The Dodd-Frank Wall Street Reform and Consumer Protection Act became law two years ago. It created two entities the Financial Stability Oversight Council and the Consumer Financial Protection Bureau (CFPB) but did so in a manner which gave these entities unlimited and unchecked power.

CFPB is not subject to intervention from Congress because Dodd-Frank skirted the “power of the purse” by going around Congress and funding CFPB directly (up to $400 million/year) from the Federal Reserve. Neither Congress not the President (the folks determining fiscal policy) can stop this. Congress is deprived of its fiscal authority and the President can remove the head of CFPB only under strictly limited circumstance. One more thing – Dodd-Frank limited courts’ reviews of CFPB’s legal interpretations.

The attitude of CFPB may be part of what is making lenders wary of lending and holding back economic growth.

CFPB director Richard Corday told Congress this past January that he believes it is “probably not useful” to try to define in advance what an “abusive” lending practice is. Instead, he intends to use his enforcement powers to retroactively punish lenders based on his view of the “facts and circumstances” of each case.

To me, this is Alice in Wonderland insane. The attitude is “We are not going to tell you what the rules are but once we decide what they are we reserve the right to hold you retroactively responsible.”

The Constitutionality of Dodd-Frank is being questioned in this lawsuit. The plaintiffs are represented by former White House counsel Boyden Gray. Gray’s thinking was presented in this WSJ opinion piece on June 21.

CFPB has reviewed some large mortgage lenders and will soon let them knew what unspecified rules they broke, if any.

The irony is that one of the authors of Dodd-Frank (Barney Frank) defended the unsafe HUD mandated subprime lending practices of Fannie Mae and Freddie Mac. In July 2008, Frank said, “I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under.”

Two months later Fannie and Freddie were taken over by the Treasury Department.

Frank had defended forcing Fannie and Freddie to buy subprime loans with this statement in September 2003: “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.”

In the Wonderland that is Washington we had government-mandated subprime from Fannie Mae, a defense of this when questioned, an enormous hit to the economy when this explodes, blame placed on the lenders who made the mandated subprime loans, and a new set of not-yet-ready-for-definition rules to punish the miscreants for past violations of future rules.

The situation created by Dodd-Frank is close to worst case. The regulating entities CFPB and the Financial Stability Oversight Council have unchecked power. That dog don’t hunt.

To be clear, I am by no means suggesting that government mandated subprime was the only factor to cause the mortgage mess. It was however the single most important factor in the destruction of Fannie and Freddie. The government did not mandate the unsafe and unwise practices of entities such as Washington Mutual.

People have been asking “Why aren’t lenders lending?” A better question might be “Why, faced with possible penalties from an unchecked entity which can make up rules tomorrow which can be applied yesterday, is anyone lending at all?”

$XLF, $BAC, $WFC, $C, $JPM