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Are the Dodd Frank Laws Making the Mortgage Industries Better or Worse for Consumers?


For a few years now, we have heard countless stories about how the Dodd-Frank legislation is making the home loan process worse for consumers and home finance processors. What’s worse is that most surveys reveal that lending costs have risen since these laws were enacted. Sure the Federal Government passed these bills to help better educate consumers in hopes that the costs for a mortgage would be reduced at the same time. Unfortunately the reality is that when you add more paperwork to the private sector it typically raises the costs of a product rather than lowering it. The so-called “Wall-Street Reform” is supposed to keep house lenders in check, but so many mortgages are exempt. (ie. FHA, Fannie Mae, Freddie Mac, etc.)

According to Forbes, in June, State National Bank of Big Spring, Texas, along with the Competitive Enterprise Institute and the 60 Plus Association, filed a lawsuit challenging the constitutionality of Dodd-Frank. The suit asserts that the Financial Stability Oversight Council and the Consumer Financial Protection Bureau are inconsistent with the constitution’s separation of powers.

Last month, three states joined the case, alleging that Dodd-Frank’s Orderly Liquidation Authority effectively setting up corporate death panels is also unconstitutional. The Obama Administration’s response has been that the lawsuit ”just rehashes old arguments of those who oppose Wall Street reform.” Contrary to this simplistic characterization, this lawsuit raises issues that go beyond current legal precedent. And it will test the extent to which our Constitution’s limitations on government power can be used to protect community banks from overreaching and unaccountable bureaucrats and the big banks with which they collude.

A premise of the constitutional challenge is that an unchecked and uncertain regulatory structure violates the constitution; agencies can’t regulate without meaningful oversight. The left naively thinks that unchecked bureaucratic experts can free agencies from the influence of special interest groups, including big banks. Under this theory, Dodd-Frank cut the CFPB off from meaningful legislative, judicial, or executive oversight, while granting it broad discretion to regulate “abusive practices.” Through the newly established “Orderly Liquidation Authority,” it also allowed for the liquidation of financial companies, “with little or no advance warning, under cover of mandatory secrecy, and without either useful statutory guidance or meaningful legislative, executive, or judicial oversight.”

This creates economic uncertainty, hurting our economy in the process. Why would companies expand or invest without knowing their regulatory burden? And how can they predict what Dodd-Frank’s unchecked bureaucrats will do? Alan Greenspan quantified this kind of destructive force two years ago, when he evaluated why the economy was experiencing significantly reduced long-term investment. He inferred that ”a minimum of half and possibly as much as three-fourths of the effect can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory, and financial environments faced by businesses.”

This uncertain regulatory regime also hurts community banks, which are an essential element of our economy; the GAO explains that about 20% of community bank loans go to small businesses, and their loans– based on a relationship model of banking– disproportionately help farmers and rural customers. Read the original Forbes article on Dodd-Frank.