Wednesday, May 25, 2011

Where to?

Last night I attended a reception for a graduating class of budding female entrepreneurs who are part of the Innovate El Paso program.  The program is designed to identify women with post graduate degrees and dreams of owning and growing their own businesses.  During the course of the reception, I saw an acquaintance who runs her own consulting firm, and she asked me how the mortgage business was going. She was surprised when I told her that the Dodd Frank regulations are shutting down the independent loan originators.  "At the end of this process, people are getting to be getting their mortgage loans through major banks--Wells Fargo, Chase, BofA, and a few others if everything keeps on as it is today," I told her.

She looked a little smug and asked, "Well what about the community bank?" naming one particularly strong local bank where both she and I have relationships. 

"They have already closed their mortgage department because they don't want the liability of all of the new regulations," I responded.

The bank we were referring to is locally-owned in El Paso and has posted on its website that it has just won a 1st place ranking from SNL Financial as the single best-performing community bank in the nation.  There were 764 other bank holding companies competing in the same category, and this was the first time that an El Paso bank had taken the award.  Selection criteria required that the bank be well run, follow sound banking principles, and provide safe and secure loans.  (I might add from personal experience that they also provide excellent customer service.)  And yet, they have decided that they will not be offering any more mortgage loans.

A lot of people in this country are returning to community banks after seeing the major banks feast on TARP money at tax payer expense.  HuffPost Business has set up a web page called Move Your Money which encourages Americans to switch their accounts from the banking giants to the small community banks. The campaign has the support of leftist anti-corporate activists including Michael Moore.  A May 6, 2011 article by Mary Bottari from the Center for Media and Democracy appearing on HuffPost Business recounts how the AFL-CIO is pulling its accounts from M&I Bank in protest of political donations that M&I made to Governor Scott Walker.   Protests are planned in Ohio against JP Morgan Chase CEO Jamie Dimon when he travels to Columbus for the annual shareholders meeting.  Dimon's primary crime in Ohio appears to be his own lavish bonuses and Chase's political support of Republican John Kasich.

The supreme irony of the Move Your Money campaign and all of the harping about the evils of banking giants is that the same leftist leadership that is encouraging Americans to abandon mega banks also stands in support of the Dodd Frank bill which will kill many of the community banks that the activists purport to love.  According to a May 20, 2011, article in "Investor's Business Daily,"  by Paul Sperry,  the American Banker's Association is predicting that the Dodd Frank Act and its enforcement agency, the Consumer Financial Protection Bureau, will drive more than 1000 banks out of business by the end of this decade.  Elizabeth Warren, the de facto head of the agency which officially takes power July 21, 2011, has announced that "Change is coming. We will build a strong enforcement arm.  More than half of our budget will be committed to establishing supervision and meaningful enforcement."  Banks will have approximately 20 new reporting mandates under the Home Mortgage Disclosure Act, and they will also be required to collect and report data to the CFPB on applications for business credit made by minority-owned businesses.  The data received by CFPB will be reviewed with an advisory board which will include inner-city activists who will look for evidence of discrimination.

ABA Chairman Steven Wilson states of the new regulations, that they are "bad news for community banks already collapsing under mountainous regulatory burdens."  The costs of complying with the massive new regulations, examinations, fines and enforcement is simply so great that many small banks will be forced to close their doors.  Since the community banks tend to lend money more aggressively than their larger counterparts, their demise will cut off additional sources of capital to small business owners.

In January, the Wall Street Journal ran a very interesting piece by Todd Zywicki, who is co-editor of the University of Chicago's Supreme Court Economic Review, entitled, "Dodd-Frank and the Return of the Loan Shark." Zywicki's piece details how the credit card rules enacted in the 2009 CARD (Card Accountability Responsibility and Disclosure) Act have restricted the availability of credit cards to many lower-income Americans and forced them to go to payday lenders, pawn shops and loan sharks since they can no longer access credit through more traditional means.  Zywicki quotes the CFO of Advance America, a national pay day chain as saying, "We believe that we're starting to see a benefit of a general reduction in consumer credit, particularly subprime credit cards."  Zywicki also quotes a letter from Chase CEO Jamie Dimon which went out to shareholders in the spring of 2010, "In the future, we will no longer be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client's risk profile changes."

And Zywicki says that as the Durbin Amendment takes effect, the situation will only worsen for low income Americans who will not qualify for free checking. "Financial products that cater to unbanked consumers--check cashers, pawn shops, purveyors of nonbank prepaid credit cards--can expect to benefit from the Durbin Amendment, just as payday lenders have prospered as a result of credit-card regulations."

All of this begs the question, what will happen to these people who are making a mass exodus to community banks if their banks are forced to close down because of regulations imposed by Dodd Frank and the CFPB?  Remember that banks do not have to offer accounts to customers and credit history is a factor that is considered when opening a bank account.  If the customer has suffered a job loss or had some major credit problems between moving their accounts from the banking giants to the smaller bank and the closure of their new bank, will they be able to simply turn around and reopen an account with a major bank?  Will the major banks become more selective about whom they accept as depositors?  Granted, Dodd Frank contains some legislation to force banks to accept currently non-banked consumers, but those efforts will be extremely targeted.  That means that the next consumer exodus may utlimately be to the mattress store for a tried and true money storage system.

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