Prior to the enactment of Dodd-Frank, the World Bank advised that if you want to start a business, you’d do better to move to Canada than to set up shop in the U.S., where “mind-numbing government regulations smother entrepreneurs.”[1] Now with the Trump administration’s broad moves to deregulate industries, including the financial services industry, there’s plenty of talk centered on this controversial piece of legislation.

The “Why” of Dodd-Frank

Two years after the 2008 economic collapse, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was intended to keep lending under control, protect consumers and (hopefully) prevent another financial crisis. Built into Dodd-Frank are some wide-ranging restrictions on banks, including significant reporting requirements and oversight of their financial health (lending to asset ratio).

Dodd-Frank represents the government’s effort to avert any repeat of the “too-big-to-fail” bank bailout. It also represents the most comprehensive banking reform the U.S. had seen in eight decades. While the bill is widely criticized for adding extra costs to bank processes, and for limiting borrowers’ access to capital, the impact of Dodd-Frank wasn’t really felt by banks until the end of 2016 when the new risk retention rules of the act kicked in.[2]

Risk Retention Rules

Under Dodd-Frank’s risk regulations, lenders are required to reserve five percent of the value of each loan on their balance sheets.[3] In some cases, certain loans became less profitable for banks to issue, including loans to SMEs, and banks began “hoarding” money as part of their risk aversion. (see last month’s newsletter).[4] Industry analyst David Tobin notes that the unintended consequences of these strict risk requirements hit smaller banks hardest. And small businesses too.[5]

Since 2008, banks have been reluctant to lend to small businesses, and to date, these banks haven’t come back into the small business lending market at the pace that was expected, according to Small Business Trends, an online publication targeting the SME community.[6]

The pullback in bank lending created a vacuum in the marketplace that alternative lenders such as ExpoCredit stepped in to fill. While industry analysts do not foresee a full dismantling of Dodd-Frank, there are indications that select portions of the bill will be revised.

Whether Dodd-Frank remains intact or is partially (or even totally) dismantled, alternative lenders such as ExpoCredit will remain a strong, compelling choice for business loans. As a specialty financial services firm, ExpoCredit provides easy, fast access to working capital, free of the financial covenants and personal guarantees imposed by banks. Our portfolio of financial products and services includes: Accounts Receivables (A/R) Financing, Purchase Order (P.O.) Financing, Inventory Buyback, and Supply Chain Financing. Additional services include credit analysis, collections, accounting and other related services customized to meet the specific needs of each client.

For more details or to apply online, contact www.expocredit.com

[1] https://www.gaffneyledger.com/news/2017-03-10/columns
[2] https://www.bisnow.com/national/news/economy/the-unintended-consequence-of-dodd-frank-and-the-impact-of-trumps-deregulation-plans-on-cre-lending-70768
[3] https://media.mofo.com/files/uploads/Images/SummaryDoddFrankAct.pdf
[4] https://expocredit.com/lending-boom-ahead-will-trumps-easing-of-regulations-unleash-funds/
[5] https://www.bisnow.com/national/news/economy/the-unintended-consequence-of-dodd-frank-and-the-impact-of-trumps-deregulation-plans-on-cre-lending-70768?utm_source=CopyShare&utm_medium=Browser
[6] https://smallbiztrends.com/2016/12/impact-the-fed-rate-hike-will-have-on-small-businesses.html