The Financial CHOICE Act recently passed the House of Representatives. The bills passage reflects the broader trend of undoing many provisions of Dodd Frank. But what impact will these changes have on commercial lending?
The Trump administration and Republicans in general argue that the Dodd-Frank Act, passed in 2010, has stifled the growth of small businesses. The Financial CHOICE Act (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs), takes aim at what Republicans claim are the onerous provisions of Dodd-Frank. Whether or not the Financial CHOICE Act becomes law, these developments represent a broader trend to undo financial regulations implemented in the wake of the great recession.
The Bill allows banks to opt out of Dodd Frank regulations if they have enough cash on hand. It eliminates restrictions on proprietary trading ( i.e. banks trading on their own investments). The bill limits the purview and reach of the Consumer Financial Protection Bureau by putting it under the authority of the executive branch. It changes the terms of bank stress tests and according the author of the bill it eliminates the possibility of future government bail-outs to banks that are deemed “to big to fail.” It would be easy to discuss the nuances of each of these provisions, but it is more worthwhile to consider what the broader trend of undoing Dodd-Frank and other financial regulations will mean for small business lending.
The impact of regulations has more to do with individual bank examiners than regulations themselves
An article on Forbes, points out that it is the overall culture of bank examiners and not specific regulations which has the greatest impact on banks willingness to lend to smaller businesses. Bank examiners may deem a loan risky, even if it is performing well. This results in an immediate cost to banks by forcing them to increase their cash reserves. This additional expense forces the bank to increase its lending standards to prevent similar costs in the future. Many small business owners cannot meet these higher standards, leading to a decline in small business lending. Repealing specific regulations wont change the fact that regulators themselves are not incentivized to increase the number of loans issued to small businesses.
The provisions of the Financial CHOICE Act and further efforts to repeal Dodd-Frank will likely only minimally impact commercial lending. It is important to note that the decline in lending to smaller businesses has more to do with the shock of the recession than any specific regulations. The decline in small business lending was observed prior to the passage of Dodd-Frank. Conditions in the economy, rather than specific regulations, seem to be greater factors in determining the of banks to lend to smaller businesses.
It is difficult to tell whether the lighter regulatory burden imposed by the Financial CHOICE Act will have any discernible effect on commercial lending.
Dodd-Frank may have compounded the preexisting decline in small business lending by traditional banks, but repealing it will likely to do little to reverse this trend. The risk averse culture at banks and regulatory agencies is probably the main reason for the decline in small business lending.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.