Dodd-Frank after one year: How have financial markets fared, and what lies ahead? | submitted by Timothy S. Crisp

It’s now been over a year since President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. As its long, cumbersome title suggests, Dodd-Frank is a massive statute in scope and length (over 2,300 pages), and represents the broadest changes in the legal framework for financial institutions since the New Deal. It has already resulted in yet more thousands of pages of dense regulations, with thousands more pages yet to come as different provisions of the Dodd-Frank Act are phased in over the next six years.

Dodd-Frank was enacted in the aftermath of the most devastating economic collapse since the Great Depression, and its drafters had laudable intent – promoting financial market stability and preventing abusive consumer credit practices. However, the law remains very controversial, and some members of Congress have introduced new legislation seeking to repeal or reform all or part of Dodd-Frank, to prevent funding for implementation initiatives, and to otherwise impede its implementation.

Many financial institutions and trade associations remain concerned about the consequences of Dodd-Frank, including significant new and increased costs, burdens, and responsibilities for financial institutions. Some analysts believe financial institutions will have little choice but to pass along higher costs to their customers, and may not be able to offer the amount or extent of credit products that were previously available. The American Bankers Association predicts that Dodd-Frank’s compliance burdens will help drive over 1,000 banks out of business by 2020. Others believe that Dodd-Frank will benefit both financial institutions and their business and consumer customers, fostering greater stability of financial institutions and the market and protecting consumers from predatory practices.

Here’s a summary of some of the more significant changes being implemented and their existing and likely future effects on financial institutions and their customers:

Bureau of Consumer Financial Protection. Dodd-Frank established the first federal agency devoted to protection of consumers in financial transactions. While it only recently opened for business, the bureau has already signaled a more aggressive approach to enforcing federal consumer financial laws than its predecessors, the federal banking regulators, and has indicated that it will be a “cop on the beat.” The bureau will have rulemaking authority over anyone who offers or provides a financial product or service, and the bureau’s staff has cited mortgage lending and credit card regulation as top priorities for rulemaking and enforcement. The bureau currently has authority to examine only the largest banks and has barely commenced rulemaking, yet many in the financial industry fear that a future deluge of new rulemaking and enforcement actions by the bureau will make consumer lending much riskier and less profitable, reducing the availability of consumer credit in the years to come.

Residential mortgage lending. In response to the subprime lending crisis, which continues to plague many banks and the housing market, Dodd-Frank requires lenders to verify and document that borrowers have the capacity and ability to repay home mortgage loans, and prohibits practices that are unfair, deceptive, or abusive. Mortgage loan originators are now prohibited from “steering” customers to a loan product that they cannot repay or that has “predatory characteristics or effects.” The emergence of new “qualified mortgage” products (which will be defined by future regulations) may reduce availability of other types of mortgage loans. To date, however, the primary effect of Dodd-Frank has generally been to reduce the number of consumers who can obtain or refinance mortgage loans.

New capital requirements. When implemented, the Collins Amendment provisions in Dodd-Frank will impose new minimum risk-based capital and leverage requirements on financial institution holding companies, and will phase out the ability to include trust preferred securities in so-called Tier 1 capital. Many institutions may find that they will be below required capital levels, placing them under greater regulatory scrutiny and reducing their ability to make loans.

States’ rights. While Dodd-Frank is a federal law, it granted state attorneys general and regulators greater enforcement rights and subjected national banks and their subsidiaries to greater regulation by states. As a result, banks will have to comply with more laws in each state in which they do business and may not be able to rely on federal preemption to the extent they had previously enjoyed.

Deposit insurance. When Dodd-Frank was enacted, the deposit insurance limit for most accounts increased from $100,000 to $250,000. Also, non-interest-bearing demand deposit accounts now have unlimited deposit insurance coverage, and banks may now pay interest on all demand deposit accounts. The premiums that banks pay to the FDIC for deposit insurance will be assessed differently, which may significantly increase costs for larger banks.

Debit card interchange fees. As a result of rulemaking required by Dodd-Frank, the country’s largest banks, which dominate the interchange market, will face new limits on the amount of interchange fees they can charge to merchants on debit card transactions. This will limit a growing source of banks’ revenue, and may result in banks increasing fees payable by consumers for debit cards.

While Dodd-Frank will continue to evolve in the coming years through agency rulemaking, court decisions, and possibly future congressional action, it’s clear that the banking and consumer credit markets and products are changing, and that those changes are affecting financial institutions and their business and consumer customers in profound ways.

Timothy S. Crisp is a partner with Foley & Lardner LLP and a member of the Finance & Financial Institutions; Consumer Financial Services; Health Care Finance & Restructuring; Information Technology & Outsourcing; and Privacy, Security & Information Management Practices.

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