The Dodd-Frank act was meant to protect consumers and prevent the type of financial implosion of five years ago when the United States bailed out banks deemed too big to fail.
But there are some consequences that will be felt miles away from the big investment banks and insurance companies that brought the nation to the brink of economic disaster.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was approved by Congress and signed by President Barack Obama in July 2010. Its aim was to prevent another bank bailout, focusing on lending, investment and mortgage abuses.
These companies took on huge risks, which offer huge rewards but also huge consequences. The nation bailed out these companies, thus relieving them of the huge consequences. So to prevent another bankruptcy filing by an investment bank deemed too big to fail, Congress passed Dodd-Frank, though the bill didn't stop at regulating the big players.
The impact is being felt by small, community banks throughout Wisconsin. They are paying for the sins of the big banks with expanded financial regulations that take away their autonomy.
In trying to cover every single contingency and protect bankers and consumers from themselves, the federal government has overreached on aspects of this act.
"In our opinion, the pendulum has swung too far the other way," said Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association, at a recent editorial board meeting.
Take balloon loans. Banks and potential home owners, especially in rural areas, use these type of loans that require a smaller downpayment and lower interest payment. When the balloon is due, the loan is refinanced. For example, a homeowner who wouldn't qualify for a 30-year fixed-rate loan could get a three-year balloon loan and after those three years it would be refinanced and replaced by a more conventional loan.
There is some risk involved, but community banks know their clients. They are on the ground and better able to determine acceptable risk with loans. It doesn't serve them to loan money that will be defaulted on.
Changing the terms for what can be considered a qualified mortgage loan is understandable given the mortgage crisis five years ago. But community banks in Wisconsin will not be confused with Wall Street giants, and that's a good thing.
While the risky behavior of investment banks and insurance giants like Lehman Brothers and AIG led to the bank bailout and prompted the Dodd-Frank act, the smaller, community banks - many of which are found in Wisconsin - are also paying the price.
The WBA backs some of the aims of Dodd-Frank, such as improving some of the rules governing underwriting standards, and it's not asking that the entire Dodd-Frank act be thrown out, but under some of the provisions, "none of us would qualify" for a loan, Oswald Poels said.
Many of the provisions of Dodd-Frank act will go into effect Jan. 1, so there is time to make some changes.
If it isn't changed, the impact will be that some mortgages will cost more, more people will not qualify and it will take longer to get the loan. It takes away from the flexibility these banks need.
"It prevents banks from doing what they've always done and that's make good decisions about good people," said Paul Northway, regional president of Baylake Bank.
No lawmakers who voted for Dodd-Frank can say that was an intention of the measure, but it is a result. Those lawmakers have the power to fix it, and they should.