Empirical Evidence Suggests Dodd-Frank Has Led to 14.5 Percent Drop in Consumer Credit

Many industry groups have sounded the cry that increased financial services regulation would have the unintended consequence of shrinking the credit available to the same consumers it was intended to protect. But most of these cries have been mere hypothesis.

According to new research from the American Action Forum (AAF), Dodd-Frank financial reform has led to a 14.5 percent drop in consumer revolving credit since 2010.

AAF explains its methodology, which attempted to control for factors such as the Great Recession, demand for credit in the U.S., and international trends in credit availability.

The researchers suggest that the $30 billion in regulatory costs and 72 million hours of paperwork associated with Dodd-Frank have indeed begun to take their economic toll, especially in the form of credit issued by smaller banks. Their data shows that the rise in average revolving credit after 2013 is explained by a modest 3.3 percent increase in available credit, but is also accompanied by an 11.6 percent drop in small banks.

Among the conclusions, “Dodd-Frank’s regulatory burden must be borne by someone: financial institutions and their employees, shareholders, or consumers in the form of higher prices or less access to credit. It appears the law has affected all three entities. We know Dodd-Frank imposes a regressive impact on smaller financial institutions, has driven up the price of obtaining a mortgage, and now has decreased revolving credit by approximately 14.5 percent.”

insideARM Perspective

This is very interesting data, coming amidst other information that seems to suggest that, in fact, credit is on the upswing.

Released yesterday, TransUnion’s first-ever personal loan forecast predicts that both secured and unsecured loans will be on the rise through 2016. The forecast claims that strong performance of personal loans is expected as the popularity for these products continues to rise among prime consumers.

Well, this makes sense, as personal loans are a relatively new concept — so they really can only go up from here.

This fairly in-depth article on PYMNTS.com (and referencing this article in The Atlantic)  details the nuances of different categories that tend to be lumped together (but shouldn’t be) such as unbanked (11 million people) vs. underbanked (25 million people) vs. subprime borrowers (somewhere between 101-138 million people). The authors explore whether rising credit for these categories of consumer is a good thing. Clearly the CFPB thinks the answer is no. Boston-based consumer advocate Claire Miller suggests that this is not such a clear cut arena, “I can’t move consumers into mainstream products if there aren’t sort of borderline mainstream products to act as a bridge.”

One can make statistics support whatever argument one would like, especially when trying to be predictive. Only time will tell whether heavy-handed regulation will have had the intended result.