In their drive to revamp the Dodd-Frank Act, Republicans have repeatedly asserted that the 2010 financial reform law has increased the cost of consumer lending and cut off access to credit.
“Thanks to Dodd-Frank’s red tape, consumers pay more for mortgages, credit cards and auto loans — that is if consumers can even get access to them,” House Financial Services Committee Chairman Jeb Hensarling said in a typical recent speech.
Yet the available data indicates otherwise. Consumer credit has roared back in the six years since Dodd-Frank, with a 46% jump in outstanding consumer credit to $3.8 trillion, according to recent Federal Reserve data.
“The best available data just don’t support their claims,” said Marc Jarsulic, vice president of economic policy at the Center for American Progress and a former chief economist for the Senate Banking Committee.
It is plausible that lending in recent years was weaker than it would otherwise have been without the sundry regulatory costs imposed by Dodd-Frank, which have likely been a contributing factor in bank consolidation since the law’s passage.
But the lawmakers have been making claims about facts, not counterfactuals. And the fact remains that mortgage, auto and credit card lending have all gone up since 2010.
Following is a guide to some of the claims made, and what the data says about them.
Myth No. 1: Mortgage costs have gone up because of Dodd-Frank
Interest rates for the 30-year fixed mortgage spiked to a three-year high this week, jumping to 4.21%.
But that increase appears related to the Federal Reserve’s expected hike in the federal funds rate next week, not the passage of Dodd-Frank. Indeed, interest rates have been at record lows since 2010 and still have not reached their level prior to the law’s enactment.
Rates on 30-year conventional, conforming mortgages fell to 3.65% in the fourth quarter of 2016, from 4.69% in the fourth quarter of 2010, just after Dodd-Frank was signed into law, according to Freddie Mac, which has compiled the data since 1971. The cost of points and fees also dropped in the same period to 0.5%, from 0.7%, Freddie found.
“I’m not sure Dodd-Frank can be said to have had an impact,” said Daren Blomquist, a senior vice president at Attom Data Solutions, formerly known as RealtyTrac. “Interest rates are near long-term lows, so it would be hard to say the cost of borrowing money is at or near a high point from that perspective.”
Looked at another way, a homeowner would have paid $1,021 a month for a $250,000 home loan with a 20% down payment in July 2010, compared with $892 a month in July 2016.
Myth No. 2: Dodd-Frank is keeping consumers from obtaining a mortgage
The availability of mortgage credit has been a hot topic since the housing downturn.
Laurie Goodman, co-director of the Urban Institute’s Housing Finance Policy Center, argues that tight credit has kept as many as 5 million borrowers from obtaining home loans between 2009 and 2014. She has estimated that roughly 1 million loans could have been made in 2015 if “reasonable” lending standards had been in place.
But it is difficult to blame the pullback in mortgage lending specifically on Dodd-Frank. Lenders began imposing higher minimum credit scores, known as credit overlays, long before the Consumer Financial Protection Bureau enacted new mortgage regulations in 2014.
“Yes, the mortgage market is tighter than it has been, but that’s not a consequence of regulation but of changes in lender behavior that began well before the changes in mortgage rules, and continue to affect mortgage availability,” Jarsulic said.
Last month, Jamie Dimon, the chairman and CEO of JPMorgan Chase, blamed “structural flaws” in the mortgage market and specifically higher liability, for fewer loans having been made to consumers. He pointed to concerns over buybacks by Fannie, Freddie and specifically the Federal Housing Administration, an issue that, while significant, is not related to Dodd-Frank.
“We don’t have safe harbors for FHA, we don’t have securitization laws in place even seven years later. We don’t have safe harbors, which is why banks are putting overlays on top of GSE underwriting,” Dimon said, referring to loans backed by the government-sponsored enterprises Fannie Mae and Freddie. “So [without] that alone, just that, probably there would have been another $0.5 trillion of mortgages done. That’s counterfactual, I can’t prove that, but that’s one example.”
This is not to say that Dodd-Frank didn’t have any impact on mortgage costs or availability. The law required the CFPB to create mortgage standards, including having lenders assess a borrower’s ability to repay a loan. The bureau’s qualified mortgage rule created a category of stable loans that gave lenders greater protection against litigation while also prohibiting risky features such as balloon payments, negative amortization, and interest-only periods.
“I think it did raise costs,” said Daniella Casseres, a principal at the law firm Offit Kurman. “Rates would have gone down more” absent regulatory pressures, she said.
But the data does not support the idea that most borrowers are having trouble getting loans. The Mortgage Bankers Association’s index of mortgage credit availability has risen steadily since 2012 and recently hit a new high, an indication that lending standards are as loose as they’ve been since the downturn. The index calculates borrower eligibility using credit scores and loans types based on criteria from 95 investors and aggregators.
Myth No. 3: Dodd-Frank made auto loans more expensive and less available
Auto lending has been on a tear since the financial crisis, with total lending hitting a peak of more than $1 trillion in the fourth quarter of 2016, up from $634 million in the fourth quarter of 2010, according to Experian.
Brian Foran, an analyst at Autonomous Research, said auto lending is “the only consumer product well above pre-crisis peaks.”
Moreover, average interest rates on both new and used car loans were slightly lower in the fourth quarter of 2016, to 4.7% and 8.5%, respectively, than they were in the same period in 2010, Experian found.
Myth No. 4: Dodd-Frank hurt credit card availability and raised costs
Credit card lending has returned to pre-crisis levels with total lending hitting an all-time high of $996 billion at end of 2016, up from $839 billion in 2010.
“There is certainly no roadblock on availability to credit right now,” Foran said.
That said, the pricing on credit cards may be higher. But that doesn’t appear to be a result of Dodd-Frank so much as the CARD Act of 2009, which got rid of credit card companies’ ability to reprice existing debt (typically by increasing the annual percentage rate after a consumer missed a payment). The switch makes it harder to determine if consumers are paying more on credit card rates because now there are fewer penalty APRs.