The Dodd-Frank financial-reform law’s hundreds of new rules will force small banks and credit unions to burn up "an estimated 2,260,631 labor hours just for compliance."
Sean Duffy on Wednesday, July 20th, 2011 in an op-ed piece in the Washington Times
Rep. Sean Duffy says small banks will have to spend 2.2 million labor hours to comply with Dodd-Frank financial reform law
In 2010, Republicans denounced the sweeping financial-reform law that Democrats pushed after a financial crisis that has fueled America’s stubborn economic downturn.
Job-killer, they called it. Failure. Budget buster. Regulatory overkill.
Now, more than a year after President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the GOP is pushing for changes -- and trotting out some eye-popping numbers to back its claim that the measure is anti-business.
Republican U.S. Rep. Sean Duffy, a freshman from northern Wisconsin, is among the naysayers -- though not to the point of signing on to the repeal bill offered by U.S. Rep. Michele Bachmann, a GOP presidential candidate.
Duffy is claiming the creation of the Consumer Financial Protection Bureau actually could hurt consumers and slow economic recovery by piling new regulations on local financial institutions.
"For small community banks and credit unions, like those in Central and Northern Wisconsin, the hundreds of new rules will require an estimated 2,260,631 labor hours just for compliance," Duffy wrote in an op-ed piece published by The Washington Times on July 20, 2011. "Those are hours that your local bank or credit union will spend dealing with some Washington bureaucrat instead of focusing on the needs of customers like you."
He added: "Just because Wall Street is in New York and has a bad reputation doesn’t mean it’s right or fair to lump the ‘little guys’ in Wausau, Hayward and Superior in with them."
More than 2.2 million hours?
That figure has become a talking point for various Republicans. The original source was apparently the House Financial Services Committee, of which Duffy is a member.
"Banks tell us they are adding compliance people to their staffs," said Daryll Lund, president and CEO of the Community Bankers of Wisconsin, a nonprofit trade group. "The vast majority of them are talking about adding staff."
But does anybody really estimate the time needed to do all the paperwork behind the new safeguards?
The answer is yes.
Under the federal Paperwork Reduction Act of 1995, that figure is estimated by each federal agency that puts rules into effect -- and that’s where Duffy’s office pointed us when we asked for evidence to back the claim.
The first batch of about 30-plus rules contains hundreds of pages of detailed estimates of the "burden hours" for each. The House Financial Services Committee totalled up the hours just for those rules, and came up with the 2.2 million hours referenced by Duffy, said Bryan Blom, Duffy’s legislative director.
We sampled the calculations, and consulted several academics and lawyers involved in studying Dodd-Frank. The consensus is that the 2.2 million number is reasonable, if not low. Indeed, just one part of one rule had an estimate of 604,800 hours.
But Duffy uses the number in a particular way, stretching its meaning in his claim.
We noticed a couple of big discrepancies.
First, Duffy’s claim attributed the 2.2 million hours to "hundreds" of new rules. The first batch of about 30 rule produced that many, so the real number will certainly be higher.
More importantly, Duffy attributes the fallout from all that paperwork to small banks and credit unions. But some of the rules appear to have little to do with Main Street lenders.
For example, several rules in the first batch -- including the one with the 600,000 hour paperwork burden -- regulate the transparency of activities by so-called "swap dealers."
Swaps transactions became famous -- or infamous -- in the financial crisis. Dodd-Frank tightened reporting of swaps "because of concerns that unregulated, poorly regulated and poorly managed swaps operations had contributed to the credit market freeze that started in 2007 and the ensuing financial crisis," Life and Health National Underwriter reported in May 2011.
Most small banks don’t get involved in swaps and would not be directly affected by the rules on that, said Richard McGuigan, executive vice president of the Community Bankers of Wisconsin. A few might be indirectly affected.
That makes Duffy’s use of the estimate problematic.
A more cautious approach was taken in the House committee report that Duffy cited. It said Dodd-Frank will require small community
and mid-sized regional banks to spend "thousands of man-hours" on regulatory compliance. It referenced the 2.2 million hours, but without so closely linking that number to small institutions.
When we talked to experts, we heard over and over that nobody knows the impact yet of the law, which has been called one of the most complex bills ever.
Small banks know they can’t afford to pay someone $100,000 to make sure they comply with everything, said Milwaukee attorney James Friedman, who heads the financial institutions practice group at the Quarles & Brady, which has a large national practice.
And they know that Internet banking, the economy, new regulations could spell an end to many smaller institutions, said Friedman.
But it’s just too early in the life of the law to know the ultimate effect on banks, credit unions or consumers, according to both Friedman and the Community Bankers of Wisconsin.
Let’s cash this one in.
Duffy used the sympathetic "Main Street" bankers to illustrate his concerns about the regulatory impact of the Dodd-Frank law. There’s no doubt it will create more work, and Duffy turns to an estimate from a credible source.
But in dramatizing the burden, he misapplies a very precise number to one subset of the many institutions that will be affected by the law. No one knows how many of those hours will land on the small players.
At the same time, he potentially underestimates the burden, attributing the paperwork load of the first batch of rules to the as-yet-uncalculated burden from the hundreds of rules to come.
So there’s an element of truth in the estimates and it’s possible Duffy’s number could turn out to be low.
This reminds us of the joke about two statisticians out hunting who spy a duck. The first fires a bullet -- six inches too high. The second statistician takes aim and fires -- six inches too low. The two statisticians celebrate and say, "Got him!", figuring that "on average" the two shots hit the duck.
Duffy’s found the trail and is tracking his prey, but this is a blind shot at this point.
We rate Duffy’s claim Mostly False.
Published: Monday, August 22nd, 2011 at 9:00 a.m.
Rep. Sean Duffy, op-ed piece on official website, July 21, 2011
The House Financial Services Committee, "One Year Later: The Consequences of the Dodd-Frank Act," undated
Interviews with Bryan Blom, Legislative Director, Office of Congressman Sean Duffy, Aug. 16-18, 2011
Interview with Richard McGuigan, executive vice president, Community Bankers of Wisconsin, Aug. 18, 2011
Interview with James Friedman, head of the financial institutions practice group, Quarles & Brady law firm, Aug. 18, 2011
Email exchange with Mark A. Calabria, director of financial regulation studies, Cato Institute, Aug. 16, 2011
Congressional Research Service, "Upcoming Rules Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Jan. 25, 2011
Times Topics, "Financial Regulatory Reform," July 19, 2011
Interview with Christine Henzig, director of communications, Wisconsin Credit Union League, Aug. 17, 2011
Congressional Research Service, Paperwork Reduction Act: OMB and Agency Responsibilities and Burden Estimates, June 15, 2009
Life and Health National Underwriter, "Dodd-Frank: Pension Plans Face Swap Snarls," May 20, 2011
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