Bankers, business owners and trade associations in New York continue to cope with uncertainty created by the massive federal financial restructuring bill signed into law last summer.
“The industry is still grappling with the law, trying to understand the full impact,” said John Tolomer, president and CEO of The Westchester Bank. Headquartered in Yonkers with a branch in White Plains, the bank primarily serves small and mid-sized businesses in Westchester County and the Hudson Valley.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is very broad and complex legislation designed in response to the financial crisis. Introduced by retiring Senate Banking Committee Chairman Christopher Dodd of Connecticut, the 2,300-page document puts in place a sweeping new financial services regime.
The act commissions 60 studies, 93 reports and 533 rules, and creates a Consumer Financial Protection Bureau and a Financial Stability Oversight Council. Eleven regulatory agencies are in the process of adopting the act”™s rules, aimed at ending policies such as “too big to fail,” increasing transparency and accountability on Wall Street, and reforming credit rating agencies”™ supervision.
New law a ”˜job killer”™
While some claim it provides needed oversight for the financial services industry, business owners have described the law as a “job killer” that creates excessive taxes and government bureaucracy and threatens access to low-cost credit. According to a survey conducted by Capital Market Risk Advisors Inc., a risk management, risk governance and litigation support boutique in Manhattan, only 37 percent of institutional investors thought the financial reform bill would “make the system safer.”
Thomas J. Crane, owner of Crane Wealth Management Group LLC in New City, felt a better solution would be to enforce existing regulations rather than create a slew of new ones.
Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce, agreed. “Many argued that it was a lack of regulation that got us into this (financial) mess,” he said. “While the crisis highlights some regulatory gaps that needed to be filled, the much larger problem is that regulators didn”™t know how to enforce the rules already on the books. They didn”™t understand what they were regulating. They lacked the expertise.
Consolidating the bureaucracy?
“So what did Congress do? Did it consolidate and modernize this bureaucracy? No. Instead, it created two brand new regulators, each with a half-billion-dollar budget, for starters. It granted additional powers to each of the existing agencies that failed to anticipate the last crisis in the hopes that more money, power and bureaucracy will magically help them prevent the next one.”
Donahue warned that “American free enterprise ”“ indeed, the American Dream ”“ is being overwhelmed by a tsunami of government regulations.
“The more than 100,000 regulations issued over many decades are like plaque that slowly and silently accumulates in the arteries,” he said. “They are depriving our economic system of the needed oxygen to grow and expand. Eventually they will silence the heartbeat of our economy.”
Crane said ambiguity created by financial reform, coupled with federal tax cuts, could result in inflation and trigger potentially negative drops in stock and bond values, In addition, he said, only a portion of the provisions included in the act actually became effective when the bill was signed. Regulatory agencies have to write the rules that govern the act”™s implementation. “Consequently, it may be weeks, months or even years before consumers understand how the changes will work, and even longer before their economic consequences are fully known,” he said.
Compliance reviews begin
In the meantime, financial institutions are conducting compliance and risk management program reviews to make sure they”™re ready to comply with the act”™s potential new requirements, and more specifically, oversight by the new CFPB.
In addition to banks and credit unions, the CFPB”™s rule-making authority applies to mortgage firms, auto finance companies and other “non-bank” financial institutions as well as indirect lenders, such as auto dealerships. That could make the CFPB one of the most powerful federal regulatory agencies, as well as result in significant compliance and operating costs for institutions of all sizes and types.
Karen Kerrigan, president and CEO of Washington, D.C.-based Small Business & Entrepreneurship Council, said the financial reform law includes hundreds of new regulations that will have unintended consequences for entrepreneurs, consumers and smaller players in the financial services industry.
“Similar to the health care bill, no one really understands the details of the legislation or the consequences of creating hundreds of new rules that could potentially overlap, conflict or promote dysfunctional conduct by the government or the private sector,” Kerrigan said. “But we do know one outcome for sure ”“ the costs and consequences of such regulation on a massive scale will ultimately be borne by consumers and small businesses in the form of higher costs and less flexible/innovative choices in products and services.”
Legislation has its bright spots
There are some bright spots. Chris Walters, manager of legislative affairs for the National Federation of Independent Business, which has chapters in New York, said his organization successfully lobbied for several key protections for small businesses.
For example, the NFIB and other business groups won passage of an amendment that aims to make sure that small firms that allow their customers to pay in installments won’t be treated like banks and subject to the regulatory authority of the new CFPB. And the NFIB also obtained an amendment requiring regulators to consider what impact any new regulations will have on small business before adopting them.
Congress has already repealed a section of the act. But even though analysts expect the reform agenda to shift somewhat with a Republican House in the 112th Congress, there”™s no indication the full law will be rescinded.
Westchester Bank President Tolomer said he “wouldn”™t even try to guess” what the new Congress might do, although he agreed the greater transparency the law requires could result in higher banking fees for customers.
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