Dodd-Frank: The surprising appeal of the reform everyone hated

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A belated happy birthday to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which turned two years old last week. Sweeping U.S. financial reform laws are so cute at that age, aren't they?

Okay, maybe "cute" is the wrong word for a 2,600-page legislative Frankenstein's monster that has faced criticism from all sides since its inception. Conservatives have grumbled that the law imposes onerous new costs on still-struggling financial institutions. Liberals have complained that Dodd-Frank is so watered down and toothless that the big banks are doing back-flips through its loopholes. Everyone is nervous that it discourages banks from lending.

But two years in, Americans of all political stripes are seeing a certain appeal in Dodd-Frank. In fact, they like it so much that they'd like to see more.

A survey published last week by several U.S. investor-advocacy groups led by the American Association of Retired Persons found that among Americans who are likely to vote in this year's U.S. election, 73 per cent support Dodd-Frank, versus only 20 per cent who oppose it, a 53-percentage-point spread. The support-versus-oppose spread is biggest with registered Democrats (83 points), but even among Republicans, the yeas outnumber nays by 20 points.

Two-thirds of voters favour the Consumer Financial Protection Bureau, a regulatory body established under Dodd-Frank to oversee consumer fairness and transparency of financial products and services. (The CFPB had its first birthday last week.)

What's more, two-thirds of voters – including 78 per cent of Republicans – favour allowing individual states to enact and enforce even tougher consumer protection laws than the ones contained in Dodd-Frank.

And that was before they had seen the new financial-consumer protections in action. The survey came out prior to the CFPB's announcement last week of its first enforcement action – slapping credit card company Capital One Financial Corp. with $210-million (U.S.) in penalties (including about $140-million in consumer refunds), to settle charges that it pressured or tricked customers into buying add-on products such as payment protection and credit monitoring.

"Bipartisan support among voters should be no surprise: Who hasn't been hurt by the economic downturn?" said Gary Kalman, director of federal policy at the Center for Responsible Lending, one of the co-sponsors of the survey. "People get that common-sense oversight could have prevented it."

Still, the banking community doesn't share consumers' enthusiasm. For banks, the new regulations are costly, cumbersome, and either restrict or discourage them from offering certain products to customers. That's bad for business – which hurts not only the banks but their investors, too.

"We anticipate reduced profitability for banks in this 'new normal,' with pretax return on revenue averaging approximately 24 [to] 26 per cent in the coming years – down from 33 [to] 36 per cent before the crisis," said Standard & Poor's credit analyst Rodrigo Quintanilla, in the debt-rating agency's recent report on Dodd-Frank's first two years.

And that may hurt smaller banks – and their customers – even more than the Wall Street giants that were at the heart of the financial crisis, and whose problems brought on Dodd-Frank in the first place.

"Big banks … can much more easily shoulder Dodd-Frank's compliance burdens," said Jim Purcell, chairman and CEO of the State National Bank of Big Spring, a small community bank in Texas. "Community banks, by contrast, lack those resources, and every extra dollar of compliance costs is one less dollar to spend on customer service, one more dollar of cost that ultimately must be passed through to customers."

S&P characterizes Dodd-Frank as a flawed work-in-progress; while some of its regulations are already in force, others have yet to be implemented or are being phased in over several years. We're not sure what the ultimate effect will be on the banking industry, investors and customers. Its financial-system safeguards have yet to be tested by another major risk event (thankfully – knock on wood).

But ultimately, it said, "We believe that, as a whole, [Dodd-Frank] is a positive step toward providing regulators with the tools and authority to identify serious problems early and to take action."

If it can protect consumers from predatory and potentially devastating banking practices, and help us avoid another financial meltdown, then I think we can overlook a few blemishes and growing pains.