At long last I am now a Dodd-Frank survivor. No longer do I need to fear foreclosure on a property or non-renewal of a loan if the economy changes and income drops. To have a loan declared nonperforming and hence not renewed even though all payments have been made on time is an investor’s nightmare. No more! Why might the Dodd-Frank Act be important to anyone else? It is important because it still relates directly to jobs and economic recovery. The Dodd-Frank Act remains in full force and is avidly supported by the legislators of one party, mostly multimillionaires for whom the Act has had no direct impact and who present themselves as being champions of the little guy. These are legislators without a clue who somehow seemed stunned by the evaporation of the middle class fostered by their own legislation. For most of us who are operating the truly small businesses that are the backbone of our economy, the only way out from under the Dodd-Frank yoke is to completely pay off renewable business loans. I am a Dodd-Frank survivor because we have been able to survive until we could do just that.
The cost to our economy of an eight-year old political absurdity is difficult to fully assess. Eight years ago our legislators saw fit to “help” this country by passing legislation with which most people do not have to deal directly. If you buy a car, for instance, your financing protects you from repossession as long as you make the payments on time and maintain the vehicle. Making timely payments, which would include insurance to also protect the note holder, seems logical. If you buy a house, the same rules apply. Make the payments, protect the value of the house, pay the taxes and insurance, and you have no other worries. Those rules are simple, easy to understand, and arguably reasonable. The Dodd-Frank Wall Street Reform and Consumer Protection Act did not change them. It did impact the cost of purchasing a house due to additional regulations and it did drive many banks out of the mortgage business, but once you got your mortgage you did not have a problem as long as you held up your end of the deal and made the payments. If you already had a mortgage, the rules could not change. Those are the types of loans with which most people are familiar.
Small businesses rely heavily on another type of loan. Most small business loans, including critical lines of credit and mortgages, are periodically renewable. The Dodd-Frank Act changed the rules for such loans, changed them dramatically. They changed retroactively. They changed overnight. They changed for loans you already had. The new rules changed by adding an additional criterion—if an investor took total business expenses for a given business, multiplied those expenses by 1.25, and did not have income from the business of at least that level, the underlying loan was now in default. The loan was in default even though all of the payments, including every other payment in the investor’s entire repertoire, was on time! So the new rules covered not just the specific investment property on which the loan was made, but also the “global” financial picture. For me and thousands and thousands of other small businesses and investors, making all of the payments on time was no longer enough—my income to expense ratio, like that of many other small businesses, now had to be greater than that at which I had ever operated. The fact that I had just started a new business–ranching–made no difference. These rules changed overnight. They changed for the loans I already had. They put me in serious financial jeopardy. But the rule change was the tip of the iceberg.
The body of the iceberg was less visible. The new rules made it virtually impossible to sell investment property other than single family homes. Because most small businesses could no longer qualify for the abundance of cash that banks were accumulating, the Dodd-Frank Act made it nearly impossible to sell small business property. Our sales of property necessary to obtain capital simply ceased. This year we were finally able to sell a four-unit building to a cash buyer–no bank financing involved, so no Dodd-Frank investor constraints. With that sale we began shedding loans that were renewable. The previous sale was eight years earlier to a buyer who could not obtain bank financing. He could not obtain financing even though as a machinist he had a sterling reputation and numerous contracts with the government. The Realtor involved happened to be the trustee for a large private trust. Upon seeing the financials of the interested buyer, the trust loaned him the money. The buyer paid off the entire mortgage in five years from positive cash flow from the business. Non-regulated private money, in extremely short supply, helped keep the economy on life support as banks continued to accumulate cash that the new regulations would put them at risk for loaning.
Admittedly, by the new income to expense standards imposed overnight by the Dodd-Frank Act, my business model simply sucked. That business model had allowed me to have twelve employees and to put a lot of money into the local economy while continuing to improve property and to develop equity. But equity was no longer important when the legions of regulators began visiting banks. They began wreaking their havoc on the east coast and worked their way to the Midwest, so my banking contacts in the east gave me a foreboding of what was to come. At a time when our country desperately needed employment and spending, my only route for survival was to cut expenses in every way possible, go from twelve to three employees, go back to work full time + without pay, and stop every expense that was not critical. Releasing great employees who you have spent years finding is painful beyond words, but we simply could not sell property into a nonexistent market. Many small businesses were crushed. Many others, even when they met the new criteria, could not borrow money and were unable or unwilling to expand. Welcome to the Dodd-Frank Act.
*** Gary A. Howie MSc, PhD *** is business owner/rancher and a Life & Liberty News contributor