How Overregulation Restricts Innovation

Blog posted On December 14, 2017

Since the Financial Crisis, the financial services industry has adapted to a regulatory environment.  Numerous regulations were imposed to protect the consumer and protect consumers from predatory activity and strengthen the national economy.  While many of the regulations imposed have served the purposes of improving accountability and encouraging responsible business practices, overregulation can have a tendency to restrict innovation.

Legislation like the ability to repay (ATR) and Qualified Mortgage (QM) standard were put in place to ensure responsible lending, and remain largely unchanged almost a decade later, despite changes in the market and the greater economy.  Legislation like the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) only require financial legislation to be reviewed at least once every ten years. 

Chris George on Regulation and Innovation:

A lot can change in ten years.  Since 2007, we saw the release of the iPhone on June 29, 2007, we saw the emergence of social media platforms, like Instagram in 2010, we now use daily (2010), and we saw the launch of numerous digital services, like GoFundMe in 2010, that have changed the way we help each other.  When regulation remains unchanged for decades at a time, financial institutions lack the ability to innovate at the pace of the rest of society and remain stifled.

The Comprehensive Growth of Regulatory Review Act of 2017 (CRAA) would increase the frequency of regulatory review alleviate burdensome legislation that may no longer be necessary.  Much of the brunt of over-legislation is borne by small lenders and brokers.  Large financial firms can more easily afford the cost of regulatory change, while smaller institutions

In order to foster an environment of product innovation and an adaptable lending landscape, outdated legislation should be reviewed more frequently, and if necessary replaced.  In his testimony before the US House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit, Chris George expresses his support of the Mortgage Fairness Act of 2017 and the Comprehensive Regulatory Review Act of 2017 to encourage responsible lending and make it possible for institutions to innovate. 

Sources: Congress.gov, Congress.gov, YouTube