Congress should act quickly to fix Dodd-Frank's 'overcorrections'

• Congress should reconcile House and Senate bills correcting some of the unintended consequences of the 2010 Dodd-Frank Act.

Adam Jeffery | CNBC

The U.S. Capitol Building in Washington, D.C.

With all of Washington's chaos and partisanship, it's easy to miss some bipartisan developments on the Hill that could make life much easier for consumers. A number of bills moving through Congress have the potential to ease barriers to credit that have been in place for the past decade.

In the wake of the 2008 financial crisis, Congress sought to reform Wall Street by passing the Dodd-Frank regulatory overhaul, which had sweeping effects on the financial services industry and its regulators.

However, the good intentions behind Dodd-Frank's attempt to usher in a new era of accountability and enforcement came with a price. The new regulatory environment has left some consumers unable to find credit. Community banks have also struggled under the weight of regulations tailored to larger financial institutions.

There are promising signs that Congress is finally waking up to these realities. On April 13, for example, it took the first step in repealing a regulation known as the Volcker Rule, which places heavy restrictions on the types of investing banks can engage in, and is overseen by five regulatory agencies.

H.R. 4790, or the Volcker Rule Harmonization Act, places the rule's regulatory authority under the Federal Reserve, lowering the overall administrative costs of compliance and freeing capital to better serve consumers. Passage was a bipartisan effort: 78 Democrats joined Republicans.

Meanwhile, Senate Banking Committee Chairman Mike Crapo (R-ID) and Senator Mark Warner (D-VA) have worked together to craft S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. The Senate has taken its first meaningful bipartisan steps toward correcting some of the unintended consequences of the 2010 Dodd-Frank Act.

S.2155 would help consumers by requiring the government mortgage corporations Fannie Mae and Freddie Mac to consider alternative credit-scoring models instead of relying solely on the three traditional credit bureaus: Equifax, Experian, and Transunion. Mortgages, credit cards, auto loans, apartment leases, and more all rely on some form of credit report.

Once in the credit-reporting system, it is almost impossible for Americans to opt out. In the wake of the 2017 Equifax data breach, it is encouraging to see policy makers bringing innovation to the credit-rating market. In recent years, financial technology (FinTech) companies have begun deploying alternative data models to provide a more accurate and comprehensive assessment of borrowers.

The Philadelphia Federal Reserve has observed that FinTech credit scoring models are performing well and afford some borrowers access to credit that they might not otherwise have. Bringing such models to the mortgage market could allow mortgage seekers prevented from qualifying for a mortgage through traditional credit-scoring methods to achieve access.

The bill could also spur innovation at the local level by expanding mortgage lending at small banks to a wider array of borrowers.

The bill would allow banks and credit unions with less than $10 billion in assets to retain federal mortgage protections on loans that do not meet the definition of a "qualified mortgage," provided that the financial institution does not sell the mortgage to a third party.

This could bring back face-to-face banking, allowing community banks to directly serve local consumers as individuals rather than a credit score.

However, the primary change S. 2155 would make to the banking system is in how Washington categorizes and regulates small and midsize banks.

Under existing Dodd-Frank requirements, regulators classify any bank with $50 billion in assets as a "Systemically Important Financial Institution" (SIFI) and the Federal Reserve imposes additional regulatory standards, scrutiny, and compliance costs on those banks.

The Crapo bill would increase the SIFI threshold from $50 billion to $250 billion, allowing some of the larger community and regional banks flexibility to innovate and grow.

In its attempt to end "Too-big-to-fail" banks, Dodd-Frank unintentionally created an environment where smaller banks could be too small to succeed. Currently, these banks do not have the flexibility to take long-term customer relationships and individual circumstances into account.

This bill could move the country away from one-size-fits-all banking regulation, allowing small banks to once again operate as such, able to address the unique needs of the individuals and communities they serve.

There are some much-needed reforms that neither the House nor Senate have addressed yet. For example, the Durbin Amendment, which caps the fees banks can charge retailers for the use of debit cards, has caused a contraction in free checking, making traditional financial services more expensive for low- and middle-income consumers. Congress needs to fix that.

Nonetheless, the recent bipartisan flurry of bills passing in the House and Senate represent a reasonable step toward rolling back some of the severe post-financial crisis overcorrections.

By quickly reconciling the Crapo bill with the House passed Volcker Rule Harmonization Act and other bipartisan House bills, Congress could provide consumers relief from the harmful unintended consequences of Dodd-Frank.

Commentary by Beau Brunson, a senior policy advisor at Consumers' Research, the nation's oldest consumer interest organization.

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