Sep 18, 2015 - 2:45pm

Dodd-Frank Socks Main Street with Devastating One-Two Punch

Executive Director, Strategic Communications


In the blue corner, Dodd-Frank. In the red corner, Main Street.
In the blue corner, Dodd-Frank. In the red corner, Main Street.

The Dodd-Frank law was supposed to mend our financial system and strengthen our economy, while protecting small financial institutions from overly burdensome rules. Instead, five years later, lawmakers say there’s little evidence of increased financial stability or consumer protections – and the American economy is still sputtering along.

And what of those supposed protections for small businesses?

“Today, the small guys who did not create the problems are the ones who are suffering,” Rep. Tom Rice (R-S.C.), chairman of the House Small Business Committee’s subpanel on economic growth, tax and capital access, said during a hearing this week about Dodd-Frank. “The losers in this equation are small businesses – both the everyday Main Street business that has trouble getting a loan and the local bank that has to hire compliance officers instead of getting capital into the hands of local small businesses.”

In other words, Dodd-Frank has hit Main Street with a crippling one-two punch. For starters, small financial institutions like community banks and credit unions have been disproportionately affected by new rules, which has prompted many to either close their doors or merge with large banks. Meanwhile, the entry of new small banks has plummeted since Dodd-Frank took effect.

Second, that heightened burden on community banks and credit unions trickles down and affects the entire small business community, Rice said, as those small financial firms are the most common source of loans for Main Street entrepreneurs. With fewer small banks to choose from, and with those that are still around more concerned with regulatory compliance than underwriting new loans, access to capital has dried up for many small businesses.

Democrats on the panel acknowledged the very same problems with the law.

“While this legislation was primarily directed at the largest financial firms, we often hear that small banks are impacted, primarily due to the high cost for compliance,” Judy Chu (D-Calif.), the ranking Democrat on the subcommittee, said during her opening remarks.

Still, Dodd-Frank’s devastating impact is best told through the voices of small bankers.

“The exponential growth of regulation in recent years is suffocating community banks’ ability to serve their small business customers,” Doyle Mitchell, president and chief executive of Industrial Bank in Washington, D.C., told members of the subcommittee. “Compliance has become a major distraction for community bank managers. Any community banker will tell you that their job has fundamentally shifted from lending and serving customers to struggling to stay on top of ever-changing rules and guidance.”

Added Scott Eagerton, president of Dixies Federal Credit Union in South Carolina: “As expected, the breadth and pace of CFPB rulemaking is troublesome, and the unprecedented new compliance burden placed on credit unions has been immense.”

Eagerton noted that attempts by lawmakers to shield the smallest credit unions from unnecessary regulatory burdens in the law have fallen short, pushing his industry to what he described as “a tipping point.” He cited studies showing that the number of credit unions in the U.S. has dropped by more than 17 percent since 2010, and that of those that went under, “96 percent of those were smaller institutions like mine.”

“Unfortunately, small credit unions like mine are disappearing post Dodd-Frank at an alarming rate as they cannot keep up with the new regulatory burdens,” he concluded.

Dodd-Frank’s impact becomes all the more disquieting against the backdrop of our nation’s recent decline in entrepreneurship.  Research shows that the country’s rate of new business creation dropped by more than 30 percent during the recession and has been excruciatingly slow to bounce back. Moreover, the growing consensus among top economists is that those young businesses represent the most reliable, consistent source of job creation.

Small financial banks aren’t the only ones that have observed the law’s backlash; academic experts have taken note, too. Marshall Lux, a senior fellow at the John F. Kennedy School of Government at Harvard University, testified before the panel that the recent accumulation of regulations under Dodd-Frank has been particularly hard on small financial firms, resulting in a credit shortage for the private sector and stunted economic growth.

“Small businesses clearly play a critical role in bringing about heightened U.S. economic growth, and community banks today are, and for many years have been, essential sources of credit for these firms,” Lux said. “Unfortunately, regulatory pressures, such as those brought about by Dodd-Frank, are undermining the competitiveness of community banks, preventing new community banks from forming, and curbing their ability to lend.”

Lux concluded that “this trend merits action” from Congress, later clarifying that “a broader effort to simplify and streamline U.S. bank regulation is best suited to curb this troubling trend that threatens the ability of American small businesses to access capital.”

It’s up to Congress to do more than listen to these observations. Hopefully lawmakers will take the next step by actually removing some of these roadblocks that are inhibiting the growth of America’s Main Street businesses.

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About the Author

About the Author

J.D. Harrison
Executive Director, Strategic Communications

J.D. Harrison is the Executive Director for Strategic Communications at the U.S. Chamber of Commerce.