It is not often that written commentary praises the efforts of elected officials. When such praise is warranted, it should be given. The efforts of Rep. Jeb Hensarling (R-TX), Chairman of the House Financial Services Committee, deserve the highest praise. Outside of Obamacare, perhaps the most economically destructive major legislative act of the Barack Obama presidency was the passage of the Dodd-Frank Act. Rep. Hensarling is to be commended for getting the Financial Choice Act, which greatly reforms the legislation, passed through committee.
One key provision of the Financial Choice Act eliminates the worst part of Dodd-Frank, namely the unaccountable nature of the Consumer Financial Protection Bureau. This government agency with limitless regulatory authority over financial services industries, created that way by design, nearly eliminated from existence whole financial industries that provide much needed services to consumers. Ten of millions of under-banked consumers would have been denied access to credit services if the CFPB had succeeded in regulating out of existence small-dollar lenders that offer credit products like payday loans. The CFPB was also part of the effort that tried to deny banking services to firearms dealers. The Financial Choice Act reforms the CFPB by making it accountable to our elected officials.
Rep. Hensarling’s bill also repeals the Durbin Amendment, key provision of Dodd-Frank included as a crony reward for big box retailers who donated to politicians like Sen. Dick Durbin (D-IL), which created artificially low interchange fees on debit card transactions.
The CEO of Walgreens went to Sen. Dick Durbin about this issue and got more than a sympathetic ear — they got a champion for their cause. Mr. Durbin went to the Senate floor crying crocodile tears about the costs interchange fees were imposing on their businesses. “I had the CEO of Walgreens contact me last week,” Durbin said, “and he told me that when they look at the expenses of Walgreens…it turns out the fees that Walgreens pays to credit card companies is the fourth largest item of cost for their business.” It is no coincidence that Walgreens is based out of Durbin’s home state of Illinois and is a major donor to Durbin’s campaigns.
The interchange fees retailers complained about were on average 1.15 percent per transaction. Retailers have profited greatly from the widespread usage of debit cards by consumers . Supporters of the Durbin Amendment claimed this price control would lower retail prices, but a study from the George Mason University law school refutes this claim. A Federal Reserve study also echoed that, showing that few merchants reduced prices after the Durbin Amendment was passed into law.
Under the Durbin Amendment, the interchange fee is no longer proportional to the total of the purchase made by the consumer. The result of this is, to make up for banks’ revenue losses, the local bagel store owner is now forced to pay the same 22-cent fee on a 3.50 order that a jewelry store owner does on a $350 order. Before the Durbin Amendment, that fee on a $3.50 order would’ve been no more than 6 cents. This has also lead to some retailers to put a minimum purchase requirement on consumers using their debit cards, prohibiting the use of debit cards for smaller transactions.
The Durbin Amendment also lead to the sharp decline in free checking available to consumers. The American people have less access to much needed credit products while the availability of key banking services, such as free checking accounts, has severely declined. While 75 percent of banks offered free checking before Dodd-Frank, that has fallen to just 37 percent by 2015. To make up for the revenue shortfall, bank fees on American consumers have risen dramatically, more than $8 billion per year, while monthly bank service fees have grown by 111 percent since Dodd-Frank. During those years, one million Americans, mostly those of low-income, lost their bank accounts. The end result of the Durbin Amendment was the transfer of $1-3 billion in wealth from lower/middle income consumers to big box retailers.
Last week, Rep. Ted Budd (R-NC) spoke eloquently on the floor of the House about the problems of the Durbin Amendment’s imposition of price controls on banks and how it limits consumer choices in financial services. Clearly this part of Dodd-Frank, like many others, is an instance of government control of economic activity that has failed to benefit consumers. Budd, a former retailer himself, explained how it was a great benefit for his business to pay the interchange fees to accept debit cards from customers and that other retailers should not be complaining.
“A vote to keep the Durbin Amendment is a vote that rests on the idea that members are sure that there is price fixing in the debit card market,” Rep. Budd stated on the House floor, “There’s six to eight billion dollars per year at play here, and the violation of a core free-market principle: the notion that government should not be telling people what they can or can’t charge.”
The Financial Choice Act, passed by a nearly party line 34 to 26 vote in the House Financial Services Committee, is an excellent conservative bill that not only rips the teeth out of the CFPB and eliminates the Durbin Amendment, but also fulfills President Trump’s campaign promise to reform Dodd-Frank. The bill will create an alternative path for banks to bypass a number of tougher restrictions under the law if they meet a certain measure of bank capital.
Likewise, the Financial Choice Act will be a great win for the American people, repealing the worst provisions of Dodd-Frank and allowing innovation in financial services and more choices for consumers. Rep. Hensarling deserves the highest praise for standing up for the American people, against the special interests, and reforming the regulations on financial services.