Congress Acts to Give Small Businesses More Access to Capital

Congress has approved sweeping reforms to the Dodd-Frank Act of 2010, which enacted sweeping new regulations on banks of all sizes.

Last year, we worked with Senator Graham’s office to convene more than a dozen Upstate banks to discuss the changes to Dodd-Frank. The room was almost unanimous in articulating that smaller banks were hamstrung by regulations that really should only apply to the biggest banks. Because of that, it was getting harder and harder for small businesses to access the capital they may need to thrive. Dodd-Frank was a misguided, one-size-fits-all approach to banking regulation.

As we wrote last year:

On the consumer side, banks at the meeting this week said the cost of originating a home mortgage has more than doubled since 2009, which is passed directly on to consumers. Statistics from the Greenville Homebuilders show that for every $1,000 in increased costs when buying a home, 520 families are priced out of the market in the Greenville-Spartanburg metro area. That doesn’t take into account the impact of changes to mortgage disclosure rules, which many bankers and realtors say sink numerous deals because of minor changes that don’t substantively change the loan agreement.

The Federal Reserve’s April Small Business Credit Survey showed that 45 percent of businesses applied for credit in 2016, with 76 percent of those receiving “some” funding and only 40 percent receiving the full amount sought. Even sorted by credit risk, businesses with less than $1 million in revenue had trouble receiving funding. The banks blamed that, in part, on the new Dodd-Frank regulations. Community bankers said it is getting more difficult for them to issue loans or lines of credit to smaller businesses, which has historically been the main access point for small businesses to access capital.

The changes approved by the House of Representatives last night will go a long way toward relieving the pressure on small community banks and some of the larger regional banks. Of note in the bill (via the Wall Street Journal and the S.C. Bankers Association):

• Dodd-Frank said larger banks must follow stricter rules than smaller ones. It drew the line at $50 billion in assets, leaving about 40 of the roughly 5,670 U.S. banks above it. The bill would effectively raise that threshold to $250 billion in assets, leaving 12 banks facing mandatory annual “stress tests” and other hurdles. The Federal Reserve could still decide to impose strict rules on banks below $250 billion in assets. See how changing the threshold affects banks.
• Lenders with less than $10 billion in assets would be exempt from Dodd-Frank’s mortgage-underwriting standard, so long as they hold the loans rather than sell them to Wall Street.
• Simplifies capital calculations for community banks with less than $10 billion in assets;
• Provides relief from certain appraisal requirements for rural real estate transactions under $400,000;
• Provides relief from the Volcker Rule for banks with $10 billion or less in assets and trading assets and liabilities comprising not more than 5% of total assets;
• Housing-finance giants Fannie Mae and Freddie Mac would have to consider alternative credit-scoring methods besides FICO.
• The smallest banks, those with less than $10 billion in assets, would be exempt from the Volcker rule, which bans banks from making speculative bets.
• Small banks would file shorter financial reports with regulators, be examined less often and be released from some capital rules as long as they maintain a relatively high ratio of equity to assets.
• The bill limits bank regulators’ ability to restrict banks’ commercial-real-estate lending.

Access to capital for small businesses in smaller metro or rural areas is a major problem, and the Dodd-Frank legislation caused much of that capital to dry up. The UCC hopes that with these changes, small businesses in their most formative stages will be able to access the capital they need to grow.

We thank Senators Graham and Scott for working on this legislation in the Senate, and we thank Representatives Duncan, Gowdy, Norman, Rice, Sanford, and Wilson for supporting this legislation in the House yesterday.