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Banks’ Market Morass

The passage of the Dodd-Frank Act was intended to reign in a run-away financial services industry following the market troubles of 2007. However, experts at the Heritage Foundation recently questioned whether these regulations were too burdensome on small banks, leading to a lack of credit for small town America.

James R. Hamby, Chief Executive Officer of Vision Bank in Oklahoma, said that traditional financing was based upon the four “C’s” of credit: character, capacity, collateral, and credit. “In any regulation you will look at today you will never see the word character used once,” he said. “It’s like it’s a forbidden or discriminatory term, but the old saying is if a person has good character it doesn’t matter how bad the deal is they’ll find a way to pay you and if they do not have character it does not matter how good the deal is, they’ll find a way to take advantage of you.”

“Now I don’t know how many of you know what a character loan is but a character loan is what it sort of implies, is a loan based on the borrower’s reputation rather than necessarily his 50-year balance sheet,” said the Honorable C. Boyden Gray, a founding partner of Boyden Gray and Associates. In other words, character loans are made based on intangibles rather than an analysis of debt-to-income or whether sufficient collateral is available.

Under the current legislation it is considered discriminatory to provide a white male with a different interest rate than a black female with the same credit rating, one speaker noted. The Heritage speakers cast the legislation as overburdensome.

“But I want to tell you now we have ten times, already before Dodd-Frank’s completed, we have over ten times more regulations than we did ten years ago,” said Hamby. “It’s staggering.”

“Fifty of those rules were in the last two years before Dodd-Frank,” he continued. “And with Dodd-Frank there are now 4,000 pages of proposed rules and more than 4,000 pages of final rules.”

Diane Katz, a research fellow at Heritage, outlined actions by the Consumer Financial Protection Bureau (CFPB), which was created by the Act:

“To date the CFPB has issued eight final rules. One among them new strictures on cash transfers, will entail 7.7 million hours of compliance. Another nine rules are pending, seven of which are intended to overhaul mortgage lending. The Bureau has also solicited comments on education loans, overdraft protection programs, payday loans, credit card plans and prepaid cards–all which will lay the groundwork for yet more regulation.”

“The newly minted Consumer Financial Protection Bureau has jurisdiction over non-bank institutions and plans to weed out predatory practices,” reported the Washington Post on September 12. “The agency reviews compliance with federal consumer financial laws such as the Fair Credit Act.”

“Taken together these unparalleled powers, the Bureau’s approach to regulation and enforcement can be expected to chill the availability of financial products and services,” argued Katz at the event.

Whereas once the banking industry used to be seen as the go-to place for credit, some Americans are finding that alternative financial services serve them better. According to a new report by the Federal Deposit Insurance Corporation, 17 million adults operate without a checking or savings account, reports Danielle Douglas for the Washington Post.

“Released Wednesday, the study found that 821,000 households opted out of the banking system from 2009 to 2011 and that the so-called unbanked population grew to 8.2 percent of U.S. households,” reports Douglas.

“Minorities, the unemployed, young people and lower-income households are least likely to have accounts.”

Also, “A growing number of consumers without bank accounts are turning to prepaid cards, with nearly 18 percent of households, up from 12 percent in 2009, reporting the use of such products,” reports Douglas. Thus, these new regulations will affect those consumers already wary of using banks. Ironically, the FDIC report (pdf) notes that approximately one in five of those using alternative financial services do so because they see banks as not providing small-dollar loans.

“Notably, a relatively large proportion of households that use [alternative financial services] credit, about one in five, do so because they perceive that banks do not provide small-dollar loans;” states the report, continuing, “17.5 percent of households that used pawn shops and 20.0 percent of households that used payday loans did so primarily because they thought they could not get small-dollar loans from a bank.” The FDIC called the unbanked population a missed market opportunity for bankers.



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