The American Dream has always been an important part of my life.   In this video I discuss what motivated me to write Saving the American Dream.

The following was originally published in the Raddon Report, which can be found here.

Some bankers and economists will argue that there is no need for banking regulation, and we should just allow the private sector to create the appropriate incentives to protect against the inherent risks to both the system and consumers. While fodder for an interesting philosophical debate, don’t expect this free market utopia to make an appearance anytime soon. Regulation is here to stay.

Blame it on the Great Depression (one little Great Depression and everyone gets all scared for the next century). Blame it on the S&L crisis. Blame it on the subprime mortgage meltdown. Monday morning quarterbacking is an American pastime, and the all-star team resides in Washington. Right or wrong, the knee-jerk reaction to past financial crisis has always been to double down on regulation. But regulation by itself is not the problem. The danger lies in the difficulty of balancing between over and under-regulating. Safety and soundness may be compromised without the proper rules in place; but too many rules, or not the right rules, can ultimately end up hurting the consumers they are intended to protect.

My daughter’s kindergarten class has a jar of warm fuzzies. When the entire class behaves well, a warm fuzzy (cotton ball) is put into the jar. When the class misbehaves, a fuzzy might be taken out of the jar. When the jar is filled to the brim, the class is rewarded with a prize such as extra recess time or a special snack. The challenge of course is that one bad seed can ruin it for everyone. If everyone is quiet during story time except for little Johnny, it means no new warm fuzzies for the class. In the banking industry, a few little Johnny’s have ruined your chance of getting any warm fuzzies.

A tangible example of this is found in an analysis of the Consumer Financial Protection Bureau’s consumer complaint database. The database displays consumer credit card complaints received to date, starting in December 2011. (The CFPB is also collecting complaints for other products, but credit card complaints are the only ones currently available in the published database; CFPB started collecting credit card complaints on July 21, 2011, but database only goes back to December 1st). The CFPB currently only publishes the complaints against financial institutions with more than $10 billion in assets, with the others forwarded to the appropriate regulator (FDIC, OCC, Federal Reserve, or NCUA). Based on some additional information provided in the CFPB’s most recent quarterly report, it appears that approximately 91% of the 23,400 total credit card complaints received are for larger institutions, with the remaining 9% under their $10 billion purview (after adjusting for the 6% incomplete and 4% pending that are noted in the report).

As one would expect, the complaint database is dominated by the largest card issuers, with five banks accounting for 75% of all complaints in the database (Capital One, Citi, Chase, BoA, and GE). While 64 different financial institutions have at least one complaint in the database, the top ten institutions cover 94% of the complaints, with the top twenty accounting for 98% of the complaints (leaving just 44 institutions for the remaining 2% of complaints).

Again, this shouldn’t be a complete surprise given the larger number of cardholders for the institutions at the top of the list. However, when appending credit card balance data, we do see that these institutions control a disproportionate share of the complaints relative to their share of total credit card balances. For example, the top ten institutions in the complaint database have 72% of all outstanding credit card balances, but account for 85% of all complaints received (94% of the complaints in the database, but 85% after adjusting for the 9% of complaints for smaller institutions not published).

This data will not give you a lot of warm fuzzies, because we know that laws are typically written for the worst offenders. While the complaints are just that, complaints, and don’t necessarily mean any wrong-doing by the financial institution (which is one of the biggest critiques of the CFPB database, as the CFPB even states on their website, “we do not verify the accuracy of all facts alleged in these complaints,” although they do take steps to confirm that a legitimate relationship exists between the consumer and company targeted in the complaint), it does indicate that the wrong-doings of a few could impact the whole group. To be more precise, the 14,360 banks and credit unions are all being painted with the same regulatory brush as the handful that knowingly might take advantage of consumers.

And this is where the unintended consequences start to appear, the first of which is that smaller institutions bear the largest expense burden from regulations. A 2010 report from the Small Business Administration noted that the regulatory costs to small businesses (fewer than 20 employees) are 36 percent higher than the regulatory costs facing large firms (those with at least 500 employees). Banking is no different than most other industries, where compliance costs are largely fixed expenses, which allows for economies of scale to take over as the institution size grows. As shown in this previous Raddon Report article, the chart below illustrates the disparity in compliance personnel costs for small financial institutions compared to their larger brethren.

This regulatory cost imbalance makes it even more difficult for the smaller community-based organizations to compete against the mega-banks, which will ultimately leave consumers with fewer choices. On a larger scale, the current trend towards over-regulating also tends to stifle and slow innovation. Besides the obvious reasons having to do with resource allocation, the slow-down occurs when regulators attempt to solve problems that are better left to be solved by innovation in the free market.

A clear example of this is the battle over interchange rates, coupled with the transformation in the payments space. Rather than attempting to resolve the interchange dispute between merchants and banks with regulation such as the Durbin Amendment, wouldn’t it be in the best interest of consumers to allow the free market to run its course? Innovation and competition, not over-regulation, should ultimately decide what the best payment vehicle is. The PayPals, Squares, and Googles of the world are all attempting to provide better, cheaper, and more convenient payment options, forcing banks to look for ways to keep up. Isn’t that how it’s supposed to work? Competition driving innovation.

President Obama issued an Executive Order back in January of 2011 reinforcing the notion that “Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation.” In short, strike the right balance between over and under-regulating. The E.O. also addresses taking “into account benefits and costs, both quantitative and qualitative.” In other words, keep an eye out for the unintended consequences. Unfortunately, many of the recent banking regulations seemingly run directly counter to this edict. We have a ways to go before Goldilocks gets her warm fuzzies back and finds the level of regulation that is just right.

Marcus Rothaar

Collaboration is the key to strengthening community based institutions. By working as one, community banks and credit unions can gain the scale of the largest institutions in the world. Find out what I mean in this video:

At BAI’s Retail Delivery Conference, Redstone Federal Credit Union’s SVP of Technology Harry Gunsallus joined Louis Hernandez, Jr. for a presentation on how community-based financial institutions can collaborate to strengthen relationships and advance industry interests. Please see below for an excerpt from American Banker’s coverage of the presentation, and the full story can be found here.

Community banks and credit unions are well behind the innovation curve, enough to draw alarms from one of the segment’s most ardent advocates.

“What is amazing about our industry is your customers and members use Amazon and Hulu and Square and we think it’s OK that when those customers and members walk into our branches they are going back 30 years,” said Louis Hernandez, chairman and CEO of Open Solutions. Open Solutions operates the DNAappstore in which smaller banks and credit unions can be certified to develop and share tech products, which are called DNAapps.

Hernandez frequently advocates for community banks and credit unions, and has written books about financial services and small businesses such as “Too Small to Fail” and “Saving the American Dream: Main Street’s Last Street’s Last Stand.” At this week’s BAI Retail Delivery Conference, Hernandez challenged community-based institutions to get more creative about mixing internal and shared development to reach consumers with innovation that’s on par with popular digital payments startups such as Square. There’s some incentive for Hernandez here, since Open Solutions gets a cut of DNAapps that are sold.

While not knocking Square, which allows mobile phones to be used to accept card payments, Hernandez bemoaned the fact that a startup beat traditional financial institutions to the punch. “Square is a great company, but [community banks and credit unions] must get in position to do this sort of thing,” Hernandez said.

He also said the task isn’t easy, since community banks and credit unions must keep up with not only larger banks and startups, but also arduous regulatory environment. While the Dodd-Frank law is generally aimed at larger banks, the law is still evolving and smaller institutions are also planning to comply-which requires major IT changes to risk and reporting systems. This compliance burden has left fewer resources available for product development for institutions that traditionally don’t carry large tech budgets. “For community-based institutions, the regulatory framework has made it hard to capitalize on what should be a good time for us. Surveys say people would rather do business with [community-based institutions] but it’s tough today to keep up. As consumers see our products as a commodity, we have to work harder price and package our products in a way that demonstrates value,” Hernandez said.

Hernandez suggests community banks and credit unions take a close look individually at how to best compete against other financial institutions and non-bank startups and focus on developing tech for that differentiating factor, then be willing to cooperate with other institutions and share tech expenses for development that drives non-proprietary activities. “You want to spend less on the things that don’t make you different… There’s a moment of clarity [that's necessary], you need to be able to answer ‘why am I here?’” Hernandez said.

Community-based institutions and big banks serve different purposes, and should therefore be treated differently in terms of regulations.

Louis Hernandez, Jr. provided a guest blog post on Credit Union Executive Society’s SKYBOX. Please take some time to read the piece below, and you can read more SKYBOX here.

Credit unions have a long and rich heritage of serving as trusted financial intermediaries for Main Street America. They also have exceptional member satisfaction rates and membership growth. Yet, despite such enviable qualities, America’s policy-makers seem determined to destroy the credit union industry in the United States and, in the process, dismantle the very engines of the American dream.

Ever since the financial crisis, we have witnessed a series of broad-stroke financial regulations with compliance requirements and costs that have severely threatened credit unions’ ability to do what they do best, which is to drive economic growth and stability in local communities, and to support the fundamental tenets of the American Dream–home ownership, getting an education, starting a business and achieving financial security.

It’s a simple equation: 70 percent of the U.S. economy is consumer spending, which is strongly correlated with jobs and employment; 65 percent of new jobs are created by entrepreneurs and small business; and 60 percent of the loans to small businesses come from Main Street banks and credit unions. Main Street institutions also disproportionately provide loans for houses, autos, education and the basic credit that supports the national economy.

But recent polices, which were supposed to de-risk the banking industry, stabilize the economy, create jobs and protect the consumer, have instead undermined all these areas while creating a growing disconnect between the needs of our Wall Street and Main Street financial institutions. Instead of doing more to support our credit unions and rebuild the American Dream, these policies are crippling them.

Part of the reason is that policy-makers are oblivious to the disadvantages credit unions face in complying with the demanding regulations introduced since the financial crisis. Historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small financial institutions than for large ones. Additionally, while large banks have extensive access to capital and numerous sources of income to cover increased compliance costs, credit unions have limited access to capital and considerably fewer sources of income, as they focus on the basic needs of their communities.

Along with this, every dollar spent on regulatory compliance at a credit union means one dollar less is channeled back to member-owners or used to provide loans that help consumers and small businesses. And every minute spent on compliance means one minute less is devoted to serving members, which is what credit unions are supposed to be doing. It’s no wonder that we have seen record mergers in the credit union industry in recent years, and a dwindling number of new credit unions being started.

The unfairness of recent policies seems hard to miss. What isn’t hard to miss is the fact that credit unions and other community-based financial institutions entered the financial crisis better off, with higher capital, lower charge-offs and lower default rates than Wall Street banks, and exited worse off because of reactionary policies that reduced their income and raised their costs–placing the viability of many credit unions in jeopardy.

It is time to take our cause to America’s leaders in a single voice that Washington cannot fail to hear, which is why I started a movement and petition to build awareness and strengthen support for our Main Street institutions at SavingTheAmericanDream.org. I ask everyone to take part in this movement and to sign our petition, so that we can press Congress and the President to end the legislative threats to our Main Street businesses and community financial institutions, and work to rebuild their strengths in the interests of preserving the American Dream.

We can no longer ignore the significant differences between Main Street credit unions and Too Big to Fail megabanks and need polices that address these differences. To preserve the unique role credit unions play in supporting the financial needs of individuals and small businesses in their communities – in short, in supporting the American Dream – policy makers must be mindful of the unintended consequences of our current regulatory requirements and the harm they are inflicting on the national economy.

Innovation is a hallmark of the American Dream and I take great pride playing a small, but important role in helping drive that creativity. To deliver the next big idea, companies in our home market of Silicon Valley must continue attracting creative genius to their organizations, and the next great engineer or scientist that calls our community home could come from anywhere in the world.

Silicon Valley is America’s high-tech hub for innovation, research and development. Global firms like Google, Genentech, Facebook and others are constantly recruiting talent from abroad. All too often, however, these highly sought out inventors can’t say yes to the job because a big bank has said no to their home mortgage application.

A local biotech firm was courting an eminent scientist from Switzerland who wanted to join the company and move his entire family to California. Since he wasn’t a U.S. citizen, he didn’t have a social security number, a record of earning a living in America, or a credit score. The big banks looked no further and denied his mortgage application. That’s bad for the company, our marketplace and hurts America’s ability to be an innovative leader in the global economy.

Our credit union approved the loan to the scientist because sometimes you need to ignore rigid mortgage formulas and create different, yet conservative ways for great thinkers to make their home in America. We’re playing a special part in helping America grow its knowledge-based economy by lending to a segment of the population that is overlooked by large banks.

People come from all over the world to experience the American Dream. It may be to develop that next great idea, own a home with a white picket fence – or both, if we have anything to do with it.

Joan Opp, President and CEO
Stanford Federal Credit Union

On Thursday, September 27, Louis Hernandez, Jr. appeared on the Fox Business program “Markets Now,” to discuss how the heavy cost of financial regulations is undermining the tenets of the American Dream, and why we need to create policies recognizing the difference between community-based financial institutions and their larger counterparts to grow the economy.

The following column from Louis Hernandez, Jr. originally appeared in Credit Union Times, and can be found here.

Credit unions have a long and rich heritage of serving as trusted financial intermediaries for Main Street America. But the overwhelming burden of broad-stroke financial regulations and their attendant compliance costs have severely threatened credit unions’ ability to do what they do best, driving economic growth and stability in their local communities.

America’s policy makers seem unaware of the adverse relationship between the policies they have created and the economic vitality that credit unions bring to their communities. In an attempt to de-risk the banking industry, stabilize the economy, create jobs and protect the consumer, our post-crisis policies have undermined all of these areas while creating a growing disconnect between Wall Street excess and Main Street responsibility.

It’s a simple equation: 70% of U.S. economy is consumer spending, which is strongly correlated with jobs and employment; 65% of new jobs are created by entrepreneurs and small business; and 60% of the loans to small businesses come from Main Street banks and credit unions. Main Street institutions also disproportionately provide loans for houses, autos, education and basic credit that support the national economy.

But today, the community-based financial institutions that had little to do with the subprime crisis–who entered the crisis better off, with higher capital, lower charge-offs and lower default rates than Wall Street banks–exited worse off because of sweeping policies that reduced their income and raised their costs, placing the viability of many credit unions in jeopardy.

Policy makers seem oblivious to the disadvantages credit unions face in complying with the demanding regulations introduced since the financial crisis. Historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small financial institutions than for large ones. Additionally, while large banks have extensive access to capital and numerous sources of income to cover increased compliance costs, credit unions have limited access to capital and considerably fewer sources of income, as they focus on the basic needs of their communities.

It is no surprise that credit unions are under enormous pressure despite exceptional satisfaction rates and membership growth. For credit unions, spending on regulatory compliance comes at the expense of channeling savings back to member-owners and providing loans to help create and grow small businesses. It also diverts time and attention from serving members, which is what credit unions are designed to do. By raising the cost of compliance for credit unions, policy makers are destroying one of our communities’ greatest assets and stifling economic growth.

Entrepreneurs, small businesses, and the community-based financial institutions that support them are the foundation of the shared economic and social ambitions we call the American Dream. But recent policies–and their costs–are rapidly eroding this dream. It’s isn’t just affecting credit unions, either. Consider that it costs small businesses with 20 or fewer employees $2,830 more on a per employee basis than firms with 500 or more employees to comply with today’s business regulations.

To preserve the unique role that credit unions play in supporting the individuals and small businesses in their communities, policy makers must be made aware of the unintended consequences of their regulations and the harm they are inflicting on the national economy. We must take our cause to America’s leaders, speaking in a single voice that Washington cannot ignore. To this end, I have started a movement and petition to build awareness and strengthen support for our Main Street institutions at SavingTheAmericanDream.org. I ask everyone to join the movement and sign the petition, so we can show Congress and the president we are aware of the legislative threats to our Main Street businesses and community financial institutions and will work to prevent further economic derailment.

In the meantime, credit unions must do more to help themselves and reduce costs in other areas to offset the costs of aggressive regulation. One way to reduce costs is by collaborating with other credit unions in areas that don’t differentiate you. Collaboration is a proven strategy for creating efficiencies through shared resources and increased purchasing power. What’s more, it gives community-based financial intuitions the advantages of scale and flexibility that larger banks enjoy. By collaborating in areas that are non-differentiating, credit unions can redirect resources to areas where they are unique, including supporting the credit needs of their communities with quality member service.

Another way to become more effective at serving members while driving down operational costs is by upgrading technology. Newer technology is essential to meet the needs of consumers and small businesses who expect more varied services and delivery channels. Technology has become ubiquitous for most people today, yet many in the credit union industry are trying to meet digital-age needs using technology platforms that were developed 30 or 40 years ago. These systems are not only ill-equipped to deliver the services members demand, but are costly and difficult to maintain.

Taking these steps will allow credit unions to remain focused on serving their members through the undeniable traits credit unions are known for: service, trust and community affinity. A less punitive regulatory environment, a greater commitment to collaboration, and the technology to support more powerful member relationships are what our industry needs to overcome regulatory compliance burdens and continue fulfilling our role as trusted financial intermediaries to Main Street America.

This column from Louis Hernandez, Jr., originally appeared in The Ohio Community Banker, which can be found here.

To some, the American Dream may seem like a quaint idea from a bygone era. But as a self-made entrepreneur, and the son of parents who came to America searching for and finding opportunity and success, I can attest to the truth and power of the American Dream. The opportunity to pursue advanced education, career growth, entrepreneurial passions and material comfort based on ambition and hard work rather than race, class, or background have not only made the United States a preeminent world power, but a model for the nations everywhere and a beacon of hope for generations of people like me.

Our political leaders have long championed the American Dream. Yet right now, it is our own policy makers who are slowly killing it. The American Dream is being buried under the cumulative weight of regulations that are making it harder than ever for individuals to start and run the small businesses that provide jobs and impeding the ability of community banks to support these businesses.

The U.S. economy is tracking $2 trillion below where it should be, even after 11 consecutive quarters of positive GDP growth. In addition to the regulatory environment, community banks are challenged by low loan demand from over-leveraged consumers who are unwilling to borrow. But we cannot pin our economic struggles on consumers, whose fears are warranted with the current unemployment situation.

Excessive regulations consume valuable business resources and increase costs, making a robust job market impossible. At the same time, toughened lending standards and capital constraints put in place since the financial crisis are preventing community banks from providing small businesses with the credit they need to grow and hire employees. Let’s be honest: the American Dream needs jobs. When jobs are abundant in America, opportunity exists and consumer confidence is high, creating strong economic growth and long term stability.

It is a simple equation:

• 70 percent of U.S. economy is consumer spending
• Consumer spending is directly correlated with jobs and employment
• More than 65 percent of new jobs created by entrepreneurs and small business
• Main Street community banks provide almost 60 percent of loans to these small businesses

It is not just regulations affecting small businesses and community banks that are killing the American Dream. Key government policies that over-facilitated the attainment of the American Dream and weakened the ambition of the American people are also to blame. Housing policies, interest rate policies and easy credit made the American Dream almost too easy to achieve and drove us inexorably toward the 2007 financial crisis. Sadly, the policies put in place since the financial crisis not only failed to address these core problems, they also created a disconnect between Wall Street and Main Street that is now making things much worse.

The Wall Street recovery isn’t being felt on Main Street. In fact, when it comes to the economy or personal financial security, small businesses and American consumers are not feeling positive at all. They believe they have been left out in the cold. While earnings for large corporations surge, the unemployment rate remains at a 70-year high. Household income, when adjusted for inflation, has been basically flat for 35 years. And the five biggest U.S. banks emerged 20 percent larger after the financial crisis than they were before, while the number of smaller financial institutions has dwindled.

Policy makers seem oblivious to the disadvantages community banks face in complying with the demanding regulations introduced since the financial crisis. Historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for community banks than for large ones. Additionally, while large banks have extensive access to capital and numerous sources of income to cover increased compliance costs, community banks have limited access to capital and considerably fewer sources of income, as they focus on the basic needs of their communities.

This is not the economic environment needed to sustain the American Dream. What is needed is an environment where rewards come from hard work rather than financial legerdemain, where those who want jobs can find them, where people feel secure about the jobs they have, and where the small businesses that employ more than 70 percent of the workforce can access the credit needed to grow and expand.

The road to economic recovery begins and ends with Main Street America, and the backbone of Main Street is community banks. Community banks disproportionately loan to small businesses, providing a foundation for the creation of new enterprises, new jobs, new opportunities and, most important, strong economic growth and long-term stability.

Policy makers need to stimulate economic growth by supporting community banks, not stifling them with burdensome regulations. The financial services industry needs to comply with nearly 400 new rules mandated by Dodd-Frank, which it is estimated will result in 2,260,631 labor hours and approximately $866 million in direct costs for the industry.

Small businesses face similar compliance hurdles. Today, there are 845 federal regulations directly affecting small businesses, an increase of 22 percent since 2009, and the highest number ever recorded. As the Small Business Administration notes, complying with these regulations costs firms with 20 or fewer employees $2,830 more on a per employee basis than it costs firms with 500 or more employees.  Again, not fair…and killing the American Dream.

To save the American Dream, we first and foremost must relieve the disproportionate regulatory burden that has been placed on our Main Street businesses and banks. These regulations are preventing us from creating new opportunities and fulfilling our economic and social potential.  We must also create new policies that reconnect with the core tenets of the American Dream: where hard work, responsibility and ambition – and not entitlements – enable anyone to pursue the opportunities they seek for education, enterprise, home ownership and financial self-sufficiency.

Finally, we must strengthen our individual resolve as citizens, recognizing that the American Dream has been co-opted by other nations that have used its principles to become strong competitors economically, educationally and entrepreneurially. We are at a crucial juncture in America’s history and we must do more to prevent further legislative threats to our existence. For example, I have started a movement to Save the American Dream that challenges our policy makers to repeal or revise regulations that have undermined our Main Street businesses and community banks, stifling economic growth. I ask everyone to join this movement and sign the petition at www.SavingTheAmericanDream.org so that we can deliver this important message to The President and Congress after the November elections.

There are obstacles in the road ahead, but also opportunities that offer great promise for the future. We cannot afford to be outdone when it comes to the American Dream. We must continually fulfill its promise or risk a legacy as the land of lost opportunity.