What's the Cost Versus Benefit of Financial Reform?

The 2010 Dodd-Frank Act, written in response to the economic meltdown of the two preceding years, was intended to safeguard the financial markets—and the American taxpayer—against a future "repeat performance." CRE Finance Council supports the overall objective of Dodd-Frank: the creation of a stronger, more resilient and, ultimately, more liquid US capital market. However, the regulations implementing the Dodd-Frank mandates must be written in a way that is workable for our industry and makes sense in total.

We are concerned that regulations proposed, in some cases, go beyond ensuring the security of the commercial real estate finance industry and would instead restructure it. Is this the "benefit" intended by Dodd-Frank? And at what cost?

Since 1993 a total of three Presidential Executive Orders have been signed—most recently by President Obama in January 2011—mandating improved regulation and regulatory review processes. Included in each of these was the requirement to conduct a cost-benefit analysis for new regulations. As of today, no such analysis has been conducted to determine the overall financial impact, for example, of the securitization rules mandated by Dodd-Frank. We think such an analysis is critical to the rulemaking process and the outcome of the final regulations.

As a result of the uncertain and precarious regulatory environment—the stability of which is critical to the commercial real estate finance marketplace—lenders are justifiably hesitant to take bold steps toward increasing market activity without knowing exactly how their businesses will be impacted. Uncertainty about the timing of the final rules is also causing nervousness within our industry. As of May 1, just 55% of Dodd-Frank rulemakings have passed, and only 33% as final rules, well behind the timetable established for issuing the regulations.

We applaud those taking on the tough task of implementing Dodd-Frank reforms. However, the commercial real estate finance markets, particularly CMBS, are in a fragile state of recovery. Regulations that would implement a government-directed restructuring of parts of the industry could prove so disruptive that participants pull back or leave the market entirely. This could end the recovery before it really begins.

CREFC is working hard to ensure that our nation's lawmakers and regulators understand both our industry and the potential consequences of the proposed rules. We recognize the fine line that regulators must walk—that of balancing the need to safeguard the markets without restructuring them. In working to pass rules that ultimately ensure the safety and viability of the commercial real estate finance industry, we hope that this is a line not crossed.