In the wake of the financial crisis that began in fall of 2008, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to curb some of the banking practices that were blamed for the recession.
Now, in 2017, the Dodd-Frank Act is back in the limelight—and in the hot seat—as President Donald Trump recently signed two executive orders to roll back financial industry regulation.
There’s no doubt that Trump’s actions will have implications for the financial industry as a whole—but what about your small business? Do you stand to gain or lose without Dodd-Frank in the picture?
Here’s what you need to know.
Let’s take a step back and cover the basics of the Dodd-Frank Act.
Dodd-Frank, named after its sponsors Senator Christopher J. Dodd and U.S. Representative Barney Frank, emerged in the aftermath of the global financial crisis.
The 2,300 page law was put in place by the Obama administration, and its 225 regulations were generally set to eliminate the different risks across the United States’ financial system as a whole.
For one thing, Dodd-Frank established the Financial Stability Oversight Council—to monitor the financial stability and practices of firms considered “too big to fail”—and created the Consumer Financial Protection Bureau—to prevent the predatory mortgage lending blamed for the financial crisis and make it easier for consumers to understand the terms of their mortgage before signing the dotted line.
Among many other restrictions, Dodd-Frank also put more stringent regulatory capital requirements on large and small banks.
And that’s where your small business comes into play.
As a consumer, Dodd-Frank’s consumer protection laws directly impact you and how you access personal credit.
But let’s focus in on Dodd-Frank’s restrictions on banks—that’s the regulation that is assumed to affect small businesses the most.
Dodd-Frank put higher reserve requirements in place, meaning that banks need to hold a much bigger percentage of their assets in cash than they used to hold before the financial downfall in 2008.
Dodd-Frank’s higher reserve requirement has implications on many different aspects of the financial industry and took a lot of criticism from its opponents.
One big piece of the criticism came from the thought that with banks both holding more assets in cash and paying more to comply with regulations, they’d have a lot less to lend to small businesses and entrepreneurs—the lifeblood of our economy.
And with less capital going to support small business, entrepreneurs can’t create new jobs, slowing economic growth as a whole.
Among other Dodd-Frank criticisms, the “credit crunch” for small businesses is one of the main reasons behind Trump’s review and possible repeal of the Dodd-Frank Act.
Hedge fund manager Anthony Scaramucci told NPR, “One of the biggest problems that Dodd-Frank has caused is it has restricted the lending to small businesses.”
Trump echoed this sentiment earlier this month when he said that his number-one reason for delivering on his campaign promise of slashing Dodd-Frank was informed by the fact that his friends and business owners of solid companies can’t get loans.
As a small business owner yourself, you might have felt the effects of the supposed credit crunch of Dodd-Frank if you applied for a bank loan and were denied.
But is Dodd-Frank really to blame?
While many of the criticisms of Dodd-Frank are founded and widely supported, it’s unclear if the problem is really as big as Trump and his economic advisors claim it is.
It’s true that small business owners have a hard time securing small business loans from banks both big and small.
But Dodd-Frank wasn’t the primary cause of the choking off of small business credit access—you can blame the 2008 financial crisis for that. Small businesses failed across the country during the recession, and banks have been hesitant ever since to make business loans that are generally riskier.
Also, government data shows that small business loans fell dramatically during the recession and right after—before Dodd-Frank even existed. Banks made more than $336 billion in smaller loans in 2008, but by mid-2010—right before Dodd-Frank became law—bank lending to small businesses dropped to $310 million.
Now as we stand in 2017, the economy has gradually improved, with bank lending to small businesses growing with it. In June of 2016—six years after Dodd-Frank—bank loans of less than $1 million were at $328 billion.
Federal Reserve chief Janet Yellen said yesterday that the numbers showing that bank lending is back up even under Dodd-Frank are supported by the fact that an “extremely low number” of small businesses complained that access to credit was their main problem.
Based on a recent National Federation of Independent Business survey, just about 4% of respondents said they were unable to access the credit they needed to support their businesses.
The bottom line on Dodd-Frank and small business lending is this:
Dodd-Frank likely compounded the problem that was almost entirely caused by the 2008 financial crisis. But with bank lending back up to the level it stood before the 2008 crisis, it’s unclear that repealing Dodd-Frank solely on the fact that some small businesses can’t get business loans is the right move.
With Dodd-Frank still in place but under review, there’s a lot of speculation over what will happen to small business lending if it’s repealed.
The question on many people’s mind is with pre-2008 financial regulations back in place, will small businesses all of a sudden have an easy time scoring a bank loan?
If Dodd-Frank wasn’t the primary cause of the credit crunch for small businesses, it’s unclear if anything will change at the small business or community banking level when Dodd-Frank is repealed.
It isn’t so easy to place blame on one financial factor—whether that’s the recession or the many regulations put in place after it—from the past decade. Karen Mills, former head of the Small Business Administration and now senior fellow at Harvard Business School, says, “Increasing access to capital for small businesses and getting rid of Dodd-Frank—it’s not a one-to-one.”
Plus, sweeping financial reform doesn’t happen overnight. Reviewing and repealing Dodd-Frank will take time.
So stay alert, small business owner, and stay on top of how the coming policy changes affect your small business and your ability to access capital!
There's only ONE reason Trump is wrecking out Dodd-Frank.
It was a success and credited to Obama.
End of story.
When Trump gets done wrecking out and rebuilding Obamacare
My bet is that it'll look a lot like Obamacare, but with a BIG sign saying TRUMPCARE.
The goal is not parity with lending scores prior to Dodd-Frank, the objective is to make America Great Again. To do that, we need a robust economy. That requires making more capital available to small businesses. In addition, banks have a hard time discerning good business plans from industry averages. Hence, even if a business owner is proven capable, he is not measured on his own merits but rather forced into a group of mediocrity. Loan denied. Economy stalled.
Also, consider the SBA. This agency purports to be a friend of small business. Actually, it is a friend of the banks. The bank is required to analyze the credit worthiness of an applicant consistent with the bank's normal practice. Nothing new there. Thus, the SBA participation is not for the applicant but the bank; its guarantee (in effect a reserve) allows the bank to make more loans. The small business winds up paying higher interest, higher loan costs, more paperwork, and absolutely no up side.
At Scott...I'm not sure that you can call Trump a Republican so you're not alone.
I know a lot of people don't like Trump but my Startup couldn't get a loan because the banks all want personal guarantees and dollar for dollar collateral. If I had that, why do I need a loan? Trump has nothing to do with that. And maybe Dodd-Frank doesn't either, but I'm willing to see what happens with the change of POTUS and lending as right now it's not getting any better for most of us entrepreneurs out here trying to chase our dreams and help turn the economy around. (And PS., I'm not a Republican...)