Directly or indirectly, the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted into law over two years ago under President Obama may have prevented, constrained, or discouraged fully qualified and prospective home and small business applicants from obtaining modest loans through financial institutions. Often, when an organizational or systemic problem is discovered, the first reactions are to overreact to the fundamental problem at hand. The Dodd-Frank Act may have created an over reactive and penalty system for prospective home and business loan applicants. Relating a recent story from a recent American home buyer illuminates why my contention above has important future implications for every U.S. citizen.
The Dodd-Frank Act incorporates some good aspects that curbed out-of-control Wall Street financial behavior; however, many other aspects are impacting prospective home and business owners in concerning ways. A case in point, our example American consumer sporting a superior credit rating including owning little to no debt recently had an extremely difficult time receiving approval for a modest home loan. Specifically, this consumer recently applied for a Bank of America home loan and related his loan experience to navigating through a military obstacle course or gauntlet of fire fraught with excessive processing bureaucracy as a result of the Dodd-Frank regulatory requirements. This loan processing environment was vastly different than what he experienced 15 years earlier with the same perfect credit rating. After nine grueling weeks of excessive processing requests, Bank of America approved his modest home loan. Over two years into implementation of the Dodd-Frank Act, it was obvious that many Bank of America home loan specialists were still trying to figure out the Dodd-Frank compliance requirements as they went through this member’s loan processing. Under the current financial system, if we put our consumers with superior credit (a credit score of over 800, little to no debt, over a year’s worth of savings in the bank, and stable monthly income for calculated debt-to-income ratio) through such a grueling process, what does this tell you about the overall financial system and for millions of Americans with less than perfect credit ratings? The financial gauntlet we are putting our loan applicants through strongly suggests systemic anti-innovative and anti-resilient financial reactions resulting from fast-track legislation like the Dodd-Frank Act. Looking at summary paragraph of this law derives several questions and one obvious conclusion:
The Dodd-Frank Act implements changes that, among other things, affect the oversight and supervision of financial institutions, provide for a new resolution procedure for large financial companies, create a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduce more stringent regulatory capital requirements, effect significant changes in the regulation of over the counter derivatives, reform the regulation of credit rating agencies, implement changes to corporate governance and executive compensation practices, incorporate the Volcker Rule, require registration of advisers to certain private funds, and effect significant changes in the securitization market. (http://www.mofo.com/files/Uploads/Images/SummaryDoddFrankAct.pdf)
Highlighting just one paragraph, you would think we are a third world country with no previous financial regulations on the books. Why does the government need new agencies adding to the financial burden of our national debt? Establishing any new large agency creates inherent new bureaucracy, startup problems, additional tax dollar expenditures, delays for public information dissemination resulting in financial chaos, and significant gaps in educating the professionals in these large financial institutions. Elected individuals seemed to forget that it is the people that make up established large financial institutions and if the financial specialists can’t figure out the complexities of the Dodd-Frank Act, how can they ever become innovative and resilient? Why does the government need new and significant changes to the existing regulations? Why not just fix or simplify what is on the legislative books? Why does the government need more stringent regulatory capital? There are so many stringent and complex regulations now that it is almost impossible for Americans with absolutely perfect credit to receive modest home or small business startup funds without going through an amazingly grueling financial profiling and inquiry process. Even more concerning, do we as Americans allow the political behavior exemplified in the following well known statement from the former Democrat Speaker of The House Nancy Pelosi to continue: “Let’s pass the legislation first [referring to the Obama Health Care Bill] and then we can find out what is in it.” Indicative of this type of behavior, one of the hidden secrets our loan applicant realized during his loan experience is that the IRS may get a retroactive or indirect shot at penalizing his income tax deductions for the previous two years and since he itemized his deductions appropriately and in detail, these deductions counted against his perfect credit under the Dodd-Frank mortgage compliance provisions. Our applicant discovered that several financial institutions would not approve his loan based on his previous two years worth of tax deductions. This hidden legislative provision, cloaked as a financial compliance requirement is, in effect, a hidden government tax penalty for being successful as an individual. It is absolutely clear that past IRS deductions do not indicate future income or the credit worthiness for obtaining a loan—the only purpose is that this legislative provision is a subtle tax penalty for an individual’s past success. For sure, our example applicant affirmed, “with my perfect credit situation, I will never apply for a FHA/VA loan again under the current regulatory environment; the financial inquisition I endured is not worth it.” I can go on analyzing the Dodd-Frank content above but based on the way the content is written, the overall tone of this narrative is very constraining, and the overreaction to comply with this legislation throughout the financial industry does not promise a future recipe for economic stimulation, innovation, or resilience. This piece of enacted legislation is merely one of many laws that will surprise the American public with detrimental or devastating regulatory requirements as more Americans take note of what their elected officials are doing in Washington and how these officials will affect their daily lives through fast-tracking legislation into law with the behavior of: “Let’s pass the legislation first and then we can find out what is in it.”
This real case above indicates a larger systemic problem facing our country as we turn briefly to scanning the national and global financial landscape. There are many looming global financial crises that will have serious implications for the U.S. economy if policy leaders don’t take immediate intentional innovative and resilient actions. Currently, the federal government is missing the boat on getting our U.S. fiscal house in order. Make no mistake; all the political narratives threaten to divert the average voter’s attention off the most pressing and obvious issue in the upcoming U.S. presidential election—revitalizing our economy and reversing our federal deficit. Political narratives aside, the time to fix our economy was two to three years ago through innovative and resilient economic policies, global trade leadership, and small business growth programs. Had innovative and resilient policies and programs been put in place to get Americans back to work and fix existing near-bankrupt, highly inefficient, or broken federal government programs, we would be reaping the financial benefits now as individuals and small businesses. Instead political narratives threaten to lead Americans to a class warfare narrative quagmire. For small business owners, let’s acknowledge now the fact that the king is wearing no clothes with regard to our economic environment—no near-term individual or small business benefits are visible on the horizon. We are traveling down the proverbial “Road to Abilene” and what we will find when we get there is a scenario that is untenable and that threatens our American way of life as we know it. To be sure, with the European Union (EU) unraveling at the seams, we do not want to transform our way of life in the mold of Europe, China, Russia, or any other foreign country.
Our country was founded on sound legislative and economic principles that have truly been resilient to the changing world environment over the past several hundred years. The further we get from these founding principles, the more chaos and turbulence we will likely see in the future. The chaos and turbulence in the past few years are reaching an impending tipping point. For example, between 2008 and 2010 more than 200,000 small businesses disappeared and over 3 million associated jobs and over 23 million unemployed or underemployed according to recent Census figures or Bureau of Labor statistics. Even more troubling is the fact that millions more have just given up the job hunt under a cloud of stagnated GDP and severely anemic recent job growth. Applying innovation and resilience principles to the U.S. economic environment reveals that our national leaders have reacted toward the global turbulence in an anti-innovative and anti-resilient manner.
For a meaningful and positive impact on American consumers, our national leaders should take a lesson from history and lead this country according to our founding principles and relook the federal policies and political behaviors that are financially detrimental, devastating, anti-innovative, and anti-resilient. Financial bureaucracy, a grueling financial background inquisition, and hidden success penalties—this is not economic stimulation, promise, or a forward-looking economic perspective; this scenario leads us to the pond of a financial quagmire. Of concern, the effect that the Dodd-Frank Act has had on Americans is that it may have prevented, constrained, or discouraged fully qualified and prospective home and small business applicants from obtaining modest loans through reputable financial institutions. Furthermore, the Dodd-Frank Act aftershocks and current political Washington narratives may also indicate the subtle and leading wave of an era I call the Success Prohibition Era.
Never letting the world forget that the Civil War involved a larger issue; in his dedication of the military cemetery at Gettysburg, President Lincoln asserts: “that we here highly resolve that these dead shall not have died in vain–that this nation, under God, shall have a new birth of freedom–and that government of the people, by the people, for the people, shall not perish from the earth.” Freidel (2001, p. 38).
E.C.
Staff Writer
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References:
Freidel, F. (2001). The Presidents of the United States of America. Washington: White House Historical Association.
NOTE: This blog site provides general information and discussion topics. Innovation and resilience information is not provided as advice for a specific matter. For advice on a specific matter, consult your business advisor and/or attorney. Opinions and content in this blog site does not necessarily reflect the position of Wings of Innovation & Resilience Organizational Consulting (WIROC), LLC.
