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The fifth anniversary of the financial crisis has come and gone. There was much discussion about safety and soundness of big banks and progress of new safeguards, such as the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB). There was shockingly little discussion about how consumers have fared.
In a speech earlier this week, the CFPB’s director, Richard Cordray, announced that the bureau’s policies were working: “We have already begun to see changes in the marketplace as a direct result of our efforts.” Perhaps he hasn’t fully considered exactly whom the changes are affecting.
Low-income people, young people, and minorities have seen a dramatic drop in the financial products and services available to them since the crisis. Nearly 1 million people were shut out of mainstream banking completely from 2009 to 2011, according to the Federal Deposit Insurance Corporation.
Why? Following the crisis, the Obama administration and Congress passed the largest financial reform bill in history — the Dodd-Frank Act. Dodd-Frank was intended to reform Wall Street and “protect consumers.” But Dodd-Frank is making the poor worse off.
Dodd-Frank compliance for the largest eight banks alone is estimated to cost up to $34 billion annually, according to Standard and Poors. This doesn’t include the $103 billion Bloomberg reports the big banks have racked up in legal fees since the crisis.
Many celebrate the burden on Wall Street. President Obama and his regulators certainly do. The problem is the industry doesn’t bear these costs alone. Dodd-Frank’s costs are passed to consumers.
Low-income consumers are being squeezed on all fronts. As banks boost capital ratios, tighten underwriting standards, and hunker down amid Dodd-Frank uncertainty, they have cut $70 billion in credit cards in three years. This has disproportionately impacted low-income families, 40 percent of which report having their credit cards canceled, limits reduced, or been denied a new card during this time period, according to a national survey by Demos.
Debit is no better. The Durbin Amendment of Dodd-Frank capped the interchange fees payment companies charge retailers to process debit cards, transferring $8 billion from giant payment companies, like Visa and MasterCard, to giant retailers, like Wal-Mart and CVS. For perspective, this is considerably more than the losses from JPMorgan’s London Whale, considered by Senator McCain to be “catastrophic.”
To make up for lost revenue from Durbin and other Dodd-Frank regulations, bank fees on a whole variety of products have skyrocketed — some by more than 25 percent year-over-year, according to Bankrate.
Even plain vanilla checking accounts have gotten more expensive. Free checking was long championed by the FDIC to bring the unbanked into mainstream banking, and it has all but disappeared as banks cut costs. In 2009, 76 percent of banks offered free checking accounts, according to Bankrate. In 2012, only 39 percent of banks do. To be fair, people can still get free checking if they hold enough money in their account. But the average minimum balance required to avoid fees is $723.02, a bridge too far for people living paycheck to paycheck.
Priced out of mainstream banking, low-income earners are turning to alternative finance measures, such as payday lending and check cashers, widely considered to be more risky and expensive. With payday lenders, it costs $15 to $100 on average to borrow $100 for two weeks. This equals a sky-high APR of 391 percent, and that’s if the money is paid back on time. The fees only go up from there.
This is a big deal. A whole segment of society is losing access to mainstream banking that allows them to safely save and invest for the future. They are being pushed into nontraditional financial arrangements, not by choice, but because of Dodd-Frank.
Hold on, some might say. There is a huge component of Dodd-Frank that is targeted on helping low-income consumers: the CFPB. Already, this agency has written new rules on remittances and is cracking down on overdraft fees.
However, many of the CFPB’s efforts underscore the problem. As happened with debit card interchange fees, if bank fees are capped in one place, they tend to increase in another place. What good are capped overdraft fees if low-income consumers no longer access a bank account?
The CFPB has also promised to clamp down on payday lenders. But clamping down on payday lenders will push financial activity even further out of the mainstream to pawn shops or loan sharks. The CFPB should aim to maximize the financial services options available to the poor, not limit them further.
Access to safe savings and investment is foundational to economic advancement, and these opportunities are rapidly decreasing for low-income families. Aside from perhaps the Durbin Amendment, there’s no single rule that could be eliminated to restore free checking, lower bank fees, and get credit flowing again. There must be broad reform to lift the costly regulatory apparatus that is stifling financial services for low-income consumers.
Regulators should apply cost-benefit analysis to each of the 238 Dodd-Frank rules that have yet to be finalized. If these rules are expensive and don’t make consumers safer, they should be eliminated or at least suspended.
Dodd-Frank punishes Wall Street at the poor’s expense, turning mainstream banking into a luxury available only for the middle class and rich. This is a far cry from consumer protection, especially for the least of these.
Abby McCloskey is program director of Economic Policy at the American Enterprise Institute. She was a staffer for Senator Richard Shelby during financial reform and director of research at the Financial Services Roundtable.
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