Jan 09, 2019 Philip Burgess
In Part One of this series, we discussed a few executive orders the Trump administration issued over the past few months. Each of these orders detailed how executive branch plans to reform federal regulations.
Now, we'll attempt to determine how those executive orders will impact consumer lending.
Analyzing Impact on Economic Growth
The executive orders we cited in our previous article didn't call out any specific regulations the Trump administration plans to repeal. Rather, they set up a system in which every federal agency must appoint a Regulatory Reform Officer.
The RRO will be in charge of creating a Regulatory Reform Task Force charged with evaluating existing regulations for the purpose of recommending those which can be repealed, replaced or modified. The RRTF will make recommendations based on whether rules:
- Eliminate jobs or prevent job creation.
- Are ineffective, unnecessary or antiquated.
- Impose costs on businesses that exceed the rules' benefits.
- Are inconsistent with existing rules or interfere with the executive's reform agenda.
When conducting these assessments, RRTF's may consult small businesses, government officials, non-governmental organizations, consumers and trade associations.
None of the executive orders detailed exactly how the RRTFs will calculate how regulations affect business costs, job creation or other economic activity. So we can only rely on previous studies to guess as to what sort of consumer lending regulations may be repealed under these executive orders.
Regulations and Costs in Consumer Lending
In 2014, the Credit Union National Association (CUNA) commissioned Cornerstone Advisors, a banking consultancy, to conduct a two-phase study on how regulations impact credit unions and their members. The researchers gathered data on compliance costs, third party expenses and reduced revenue opportunities.
According to the study, regulatory costs for credit unions in 2014 "were $1.7 billion higher than they would have been" had the federal government not instituted the rules they implemented between 2010 and 2014. In addition, the regulations reduced revenues by $1.1 billion - adding up to a $2.8 billion financial impact.
In addition, the researchers found regulations had a greater economic impact on small credit unions than their larger counterparts. This was because larger organizations had a wider asset base across which to spread the fixed costs of regulatory compliance.
Digging Into Specifics
What were some of the pain points credit union leaders highlighted in the CUNA study? One of them had to do with inconsistent interpretation of regulations.
That complaint adds another level of complexity to Trump's executive orders. A regulation, by itself, may not impose exorbitant costs on a bank or credit union. However, if four regulators determine affected institutions should take different steps to comply with that law, it can disrupt day-to-day operations. Revealing those costs may be difficult.
However, the CUNA study provides just one perspective. Capgemini, for example, found that increased capital requirements would have a negative impact on lending in the short term. However, as banks accumulate capital reserves overtime and decrease high-risk assets, their cost of capital will decrease. The question is whether bank regulators will determine if banks are in the "short term" or "long term" phase, which will dictate the survival of capital requirements regulations.
Where Are We Headed?
It's really tough to say. While one study may assert regulations A, B, and C have a negative impact on the consumer lending industry, the RRTFs assigned to analyzing the impact of those regulations may not agree.
One thing is for sure: The changes are moving relatively fast. The president's first executive on reducing regulation states that each agency must produce a report detailing the total incremental costs associated with the rules it oversees. The major changes may not happen until 2018.