Banks are feeling the pressure of the Financial Reform Act — and to keep revenue stable, they are passing off this pressure to consumers. Regulators are striving to bring more consumer protection with their changes, but it looks like the consumer may actually become the victim.

Banks are losing money left and right due to the tighter restrictions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A recent blow to the banks was when their interchange fees were cut by nearly 90% due to regulations enforced by the fed. This step, and entire act in general, led many experts to wonder how the banks would retaliate.

Customers Suffer due to Policy Changes

The first apparent move by banks to protect themselves was the slow elimination of free checking accounts, but now banks are going after a different target: big borrowers. The Wall Street Journal reported recently that banks have begun rewriting loan documents to increase the amount they will be charging large borrowers.

The borrowing increase will be directly linked to cost-triggering changes of the financial reform act. Large lenders are looking for borrows to take a financial hit in order to offset some of the costs. According to analysts at Goldman borrowing costs for corporations have gone up 2 percentage points compared to averages in 2007. These changes will affect both big and small companies taking out loans and paying off loans. Some think that the language change will be most common among companies that have a non-lucrative loan with big banks, no matter the date of the borrowing.

Banks Must Use Strategy

Lenders are in a tricky spot when it comes to document changes. Their number one goal is to continue making the same earnings while keeping customers. The difficulty is in rewriting lending language to increase costs while maintaining customer satisfaction. The recent difficulty in receiving bank loans has turned many companies to the bond market, which has depleted the income for many banks.

Another problem highlighted by The Journal is that banks could see from loan language changes is “many credit agreements allow borrowers to switch to another lender if the provision is used.” Banks such as JPMorgan Chase and Bank of America® Corp. have already begun including these loan provisions in their document language.

Did you enjoy this article? Yes No
Oops! What was wrong? Please let us know.

Ask a Question