The High Cost of Reform to Private Businesses--HR 4173 and the CBO

This week we have been examining the Congressional Budget Office's score card for HR 4173--the Restoring American Financial Stability Act of 2010. Today, we will conclude our series on this by taking a look at the direct cost to private businesses. The CBO estimates that the bill will add $19.7 billion to the deficit between 2010 and 2020, and the first part of the report is aimed at detailing how those monies will be allocated.

However, the final part of the CBO's report is dedicated to the private sector impact of the implementation of this reform bill. The Unfunded Mandates Reform Act sets an annual threshold for private sector mandates which is currently $141 million for 2010. In their summary, the CBO concludes that the fees imposed on private businesses will "significantly exceed" that figure. The last 7 pages of the CBO's analysis are devoted to letting us know how significant these additional costs will be.

For some parts of the bill, the CBO cannot determine a cost because they do not have sufficient information. For example, the CBO is not able to adequately evaluate the impact of the Merkley amendment--which caps loan originator compensation at 3% and prohibits the financing of fees unless the Yield Spread Premium is the only mechanism for compensation, because they do not have enough information about the mortgage industry and how it currently utilizes yield spread premium as a form of compensation to realistically predict the potential impact on business. For the same reason, the CBO does not attempt to address the cost of risk retention or the Landrieu/Isakson amendment.

HR 4173 authorizes the SEC to prohibit predispute mandatory arbitration agreements. These are used by brokers, dealers, municipal financial advisors, investment advisors, mortgage lenders and car dealers as a cost saving mechanism for dealing with conflict without going to court. With mandatory arbitration agreements outlawed, businesses will face potentially much higher litigation costs, which the CBO acknowledges, but to which it does not attempt to assign a dollar figure. The report says simply, "Based on information from industry sources, CBO expects that if the SEC were to impose such mandate, the incremental cost to those entities of using the court system instead of arbitration could be significant."

So what is the CBO able to assign monetary cost to? First, the Orderly Liquidation Fund. The CBO estimates that this fund, which will be part of the Orderly Liquidation Authority, which has the power to seize and dissolve financial institutions which are endangering the economy, will cost the private sector approximately $1 billion in assessments during the first five years of its existence.

Next, the Securities and Exchange Commission fees. Fee increases levied by the SEC are estimated to total at least $650 million during the first five years.

The Financial Stability Oversight Council, which will have the authority to require large bank holding companies to comply with certain requirements and which will be able to issue cease and desist orders for certain activities, will cost the private sector about $75 million a year.

New fees imposed by the Federal Reserve to cover expenses in supervising certain firms will cost the private sector an additional $75 million a year.

New requirements on hedge fund advisers which require advisers managing funds with over $100 million in assets to register with the SEC will cost approximately $30,000 per firm.

Other costs cannot be measured because they involve legislation that has not yet been written. For instance, HR 4173 requires the SEC to establish new rules to address any deficiencies in the regulations of brokers, dealers and advisers, but the CBO cannot score this because the cost depends on whatever new rules are implemented.

And finally, perhaps the oddest note in the CBO's report: HR 4173 contains a section requiring that manufacturers using certain minerals disclose where they obtained the minerals and what measures were "taken to ensure that obtaining the minerals did not benefit any armed groups in the Democratic Republic of the Congo or an adjacent country." Why this is included in financial reform, I cannot even imagine; how much it will cost no one apparently knows. The CBO could not put a price tag on this because they would need to know what data the manufacturers would be required to collect regarding mineral origin.

In summary: The estimated cost of HR 4173 to the U.S. taxpayer: $19.7 billion in deficit spending between 2010 and 2020.

The cost to the private sector in fees and assessements plus additional court costs: well over $1 billion in five years.

Implementing a massive new bureaucracy with unprecedented powers over businesses and the financial lives of Americans: priceless