Dodd-Frank Will Be Paid for by the Poor
October 8, 2013
The five year anniversary of the financial crisis has come and gone. In that time, there has been much discussion about the 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 has been shockingly little discussion about how consumers have fared, says Abby McCloskey, the program director of economic policy at the American Enterprise Institute.
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.
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.
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.
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.
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.
Source: Abby McCloskey, "Dodd-Frank's Costs Will Be Paid For By Low-Income Bank Customers," Forbes, September 26, 2013.
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