Weekly Column #4: Dodd-Frank’s Eroding Power and You

By Kristi Waterworth

The year was 2007 and America was celebrating a high financial point by spending every last nickel it could find on everything under the sun. Housing prices soared, so much so that a big part of the market was priced out of purchasing, and in some areas, homes were under contract in a matter of hours for amounts way over their asking price.

It was a non-stop PAR-TAY, especially if you were in the banking, insurance, and real estate sector. Then, one day in June, I went to a closing with my buyer and it all came crashing down. My banker was never, ever late, so this alone alarmed me that morning. Was he injured? Some kind of family emergency? 

When he showed up a half hour late, it was much, much worse. The unimaginable had happened.

The bank let everyone go an hour before. This would be his last closing as a representative of a financial institute I had closed hundreds of loans with. Then the dominos started falling rapid-fire -- first one bank, then another, then another. 

Every day my partner and I would roll into the office to hear that another person in our professional network was out of a job. 

Every day another small- or medium-sized bank was closing. 

I closed my last deal in August of that year. There was simply not enough business for both myself and my partner to maintain a serviceable income. I left everything to her and bought a farm with my savings because it was suddenly clear that tomorrow wasn’t guaranteed.

How All That Relates to Dodd-Frank

Of course, I was part of the problem when it came to the issues within the great banking machine. I didn’t ask questions, I just let my lenders do what they do. I encouraged zero down home loans without asking how this might affect my buyers in the long run. I ran away to the farm when the sky started falling.

But the government, slow as it was to do it, passed HR 4173, also known as the Dodd-Frank Wall Street Reform and Consumer Protection Act.

See, part of what went wrong back then was that banks were investing in high risk financial instruments that were nearly impossible to trace to their origin, but also placing bets that those instruments would fail (in this case, that meant that the borrowers behind the exotic mortgages that were being sold would default).

When the market crashed suddenly, the banks that could have taken the economy down with them were on the verge of collapse because of huge losses to these dangerous bets. This is where the whole “too big to fail” controversy started.

This behavior, among other things, related to how Dodd-Frank addressed the issue of how banks could gamble with funds. Big banks were suddenly required to hold more hard money in reserve and those exotic derivatives that the banks had lost so badly on were suddenly subject to regulation through centralized exchanges.

(Are you still awake? I know, it’s a bit much.)

The Birth of the Consumer Financial Protection Bureau

The other major thing (for our purposes) that Dodd-Frank did was establish the Consumer Financial Protection Bureau. Now there was an agency that would work toward better and more transparent mortgages for consumers at every education level. This is why you have those fancy loan estimate forms today that spell everything out. They’re actually really great, so don’t take that as sarcasm.

It was largely because of Dodd-Frank’s new regulations that our economy is climbing out of the toilet. The real estate market has rallied in just the last few years, freeing a lot of people from underwater mortgages and allowing others with impossibly complicated loan terms to finally refinance into something reasonable.

Obviously, the best possible move our government could make at this point, when the Feds are ready to raise rates because we’re doing so well, is to start killing the very legislation that helped make all this projected prosperity possible.

The First Round of Dodd-Frank Modifications

If you go digging around the Internet for information about what happened in March and May with Dodd-Frank, you’ll find a lot of articles saying “it was nothing! Don’t worry!” I know because I did that very thing before I started writing this column. The only thing I can assume is that either those people don’t understand what has been done because they lack the background, or they weren’t a functioning adult during the depths of the recession.

What has been done is terrifying. The scariest provisions that were under attack in March and were signed into law in May included the required yearly stress testing of individual banks with $50 billion or more in assets and re-allowing banks worth less than $10 billion to engage in proprietary trading (these were some of the exact same transactions that crashed the economy before).

Both of these types of regulations made it possible to rein in sometimes highly fraudulent activity from less-than-sober bank VPs that seemed to thrive in the chaos that was swirling around them. It gave us, as a people, a way to check the power that the banking community had managed to grab by saying, “Wait, dude, that’s… that’s going to wreck everything.”

But even that isn’t as scary to me as what may be coming, even though there’s now an open door for a complete reenactment of the steps leading up to what they like to call “The Great Recession” (trust me, it wasn’t that great. 2/10, would not buy again).

Dodd-Frank and the CFPB

What scares me most, and what I think is going to be a big mistake if they do it, is the potential dismantling of the Consumer Finance Protection Bureau. As a financial writer, I defer to these guys four times a day -- they’re everything when it comes to making high finance easy to understand. 

The Bureau has been instrumental in getting many different types of financial documents translated into more palatable language, it has made sure to call out problems where they happen to be, and it hasn’t been noticeably influenced by banking lobbyists (yet). 

Basically, the CFPB is Batman. It’s the hero that the American people need, but I’m not going to judge whether or not they deserve it. That’s going to be left to history to decide. 

So long as it can continue to remain a consumer-centric entity that’s not swayed by all the garbage that some anti-regulation folks want to throw at it, the however many tens or hundreds of thousands of people that have already been protected from financial instruments that could easily explode in their faces (one day we’ll talk about the pay-option ARM) will have some layer of insulation between themselves and potential trouble.

Don’t dismantle the CFPB, U.S. Government. Don’t kill Batman.