The business friendly Trump Administration has its sights set on easing the banking restrictions put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was established in 2010. The passage of the law came at a time when Congressional leaders called for greater regulation of banks and other lenders following after the subprime mortgage crisis rocked the U.S. economy.
When it went into effect, the country was in the midst of the Great Recession brought on by the real estate bubble bursting and its implication on banks that made ill advised mortgage loans. Although well intentioned, Dodd-Frank resulted in a slowdown in lending that hurt small businesses. Banks turned off the spigot for business owners looking to invest in their companies and grow their operations. Many believe the legislation hurt more than it helped.
Dodd-Frank resulted in costs of time and money for compliance with government regulations because of extra forms required and the time it takes to complete them. The last thing banks -- or any other lenders -- needed was more paperwork. It took longer for banks to make loans and the percentage of approved loans made by big banks dwindled. According to the Biz2Credit Small Business Lending Index, which tracks loan approvals and denials on a monthly basis, big banks granted less than 10 percent of applications for funding made by small business owners. Small banks also approved less than half (about 45 percent) of the financing requests.
"Americans are going to have better choices and Americans are going to have better products because we're not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year," White House National Economic Council Director Gary Cohn said in a front page Wall Street Journal article. "The banks are going to be able to price product more efficiently and more effectively to consumers."
On the campaign trail, then candidate Donald Trump repeatedly said that Dodd-Frank prevented banks from lending, which made it harder for small business owners, as well as consumers, to get access to credit. He was right; lending stalled and small businesses had to jump through many hoops to secure capital. Often they were relegated to approaching non-bank lenders, many of them cash advance companies that charged 20 percent interest or more. Many small business owners found themselves in a Catch 22 situation of not being able to pay off debt because they were strangled by their interest payments.
While big banks have slowly reopened their vaults to small business lending, it is still not easy to get loans from them. The free-flowing days are long gone, however the current approval percentage, nearly 24 percent for big banks and 48.9 percent for regional and community banks, according to the December 2016 Biz2Credit Small Business Lending Index, could be much better. Unshackling bank lending will help grow small companies, which create the lion's share of new jobs in the American economy.
President Trump plans to sign an executive order that instructs the Treasury Secretary (presumably Steve Munchin, if confirmed) and federal regulators to ease many of the rules that Dodd-Frank put into place. If this happens, it could spur the increased flow of capital from banks to aspiring entrepreneurs as well as established business owners looking to expand and grow. The result would be a positive impact on the U.S. economy overall.