Making the Most of Dodd-Frank
After more than 20 years in Hackensack, N.J., Financial Service Centers of America (FiSCA), a trade association representing check-cashing stores and payday lenders, packed up its headquarters in December and moved to a more strategic location: Washington, D.C.
The group's offices are now just two blocks from the Consumer Financial Protection Bureau, the nascent federal regulator created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to oversee a broad array of financial firms, including those such as Dollar Financial (DLLR) and ACE Cash Express that offer quick cash at annual interest rates as high as 400 percent.
FiSCA's members, largely regulated at the state level until now, handle about $106 billion a year in transactions for more than 30 million customers and are hoping to take even more market share from traditional banks. The new consumer agency, which has the power to write rules that would mandate repayment terms and force disclosures of loan costs, may determine whether they succeed or fail. Ed D'Alessio, general counsel for FiSCA, says the move to Washington was "necessary to meet the increased level of regulation that's coming down the pike."
While the Dodd-Frank law established the broad outlines of a new regulatory landscape, federal agencies are now writing at least 330 new rules governing everything from derivatives trading to the mortgage industry. Decisions being made at the Securities and Exchange Commission, the Federal Reserve, and other agencies will not just ordain how companies must act. They'll also determine which ones are dealt into moneymaking opportunities created by Dodd-Frank—and which are shut out. The actions of regulators such as the consumer bureau will "create key precedents for decades to come," says Douglas J. Elliott, an expert on financial regulation at the Brookings Institution and a former JPMorgan Chase (JPM) investment banker. "Bankers could be hurt badly or could come away without too much damage, and the economy could be helped or hurt, depending on those choices."
Financial firms such as Wells Fargo (WFC), one of the nation's largest mortgage lenders, are already attempting to use the new regulatory system to gain a competitive advantage. The bank, which originated more than $100 billion in residential mortgages in the third quarter of 2010, broke with its rivals last month in lobbying for a rule that will require banks to keep a stake in home loans they sell or package into mortgage-backed securities.
While competitors such as U.S. Bancorp (USB) and SunTrust Banks (STI) want regulators to exempt a broad array of mortgages from that requirement, Wells Fargo is urging the federal government to exempt only loans with at least a 30 percent down payment. Smaller banks complain that this would give Wells Fargo a competitive advantage because it's big enough to more easily keep riskier loans on its books.
In some cases, Dodd-Frank is creating new markets for financial services. The law requires that most transactions in the $615 trillion over-the-counter derivatives market now be processed through clearinghouses, allowing regulators and buyers and sellers to see who holds the complex financial instruments and what they cost. Companies such as Nasdaq Omx Group (NDAQ) and Goldman Sachs (GS), which own stakes in clearinghouses, could share in the increased revenue from clearing fees. Analysts at Keefe, Bruyette & Woods estimated last month that revenue could grow by $410 million by 2012, thanks to the new Dodd-Frank requirements.
Making the price of derivatives more transparent is among many rules mandated by Dodd-Frank that are aimed at managing speculation by big financial interests at the expense of smaller users. Companies ranging from Delta Air Lines (DAL) to small heating-oil suppliers have been urging regulators to limit speculation.
In addition to writing the Dodd-Frank rules this year, regulators will launch 122 oversight panels and offices required by the law, according to a BGov analysis. They range from a federal insurance office at the Treasury Dept. to an office overseeing credit ratings at the SEC. As these entities are formed and staffed, they will provide businesses with opportunities to influence the rules controlling their industries.
Regulators face a July deadline for writing many of these rules. They're getting some political pressure to slow down. Republicans, who regained a majority in the House of Representatives this year, have vowed to repeal some Dodd-Frank provisions or cut funding for regulators such as the SEC. Their power to do that will be limited because Democrats still control the White House and the Senate. Also, officials in charge of the regulatory agencies favor the changes in the Dodd-Frank law, in most cases, and will be pushing to move ahead quickly, according to Barney Frank (D-Mass.), one of the authors of the Dodd-Frank law. Says Frank: "I think there will be full implementation. In every case the regulators were active participants in writing this law."
The analyst's take: A Bloomberg Government study found there are more than 122 points of entry for financial-services lobbyists hoping to influence rulemaking under Dodd-Frank. Large banks are pitted against smaller lenders with each side seeking a competitive advantage.
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