The Republican-controlled House, on June 8, voted in favor of legislation to scale back major parts of the Obama-era financial rules devised in response to the 2008 economic crisis. Its approval signals the continuation of a drawn-out battle over the banking industry’s deregulation.
The bill would dismantle much of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act. The banking law was enacted in 2010 to prevent future financial meltdowns following the Great Recession that resulted in millions of people losing their homes and jobs.
The House voted 233 to 186 on the bill called the Financial Choice Act, which the Democrats overwhelmingly opposed. Republicans have long been pushing to wipe away many of the Dodd-Frank’s stricter regulations that they claim are hurting banks, restricting consumer credit, making mortgages hard to obtain and stagnating economic growth. They argue that big banks are getting bigger while community banks are dwindling.
The bill was introduced by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, who claims consumers have suffered due to Dodd-Frank. “They promised us it would lift the economy . . . but instead we are still stymied in the weakest, slowest recovery in the postwar era,” he said. “Have you tried to get a mortgage recently? They are hard to come by and cost hundreds of dollars more to close.”
President Donald Trump, who has been highly critical of Dodd-Frank, directed the Treasury to review post-crisis banking laws in April. Treasury Secretary Steven Mnuchin on June 12, released the first of what will be several reports on Dodd-Frank. He recommended reduced oversight of financial institutions and more regulatory relief. The Trump administration is supporting the Financial Choice Act with the aim of boosting economic growth by loosening banking regulations.
Democrats, on the other hand are defending Dodd-Frank, saying the law has provided financial security to millions of Americans. They argue that rolling back oversight and repealing important consumer protections would give rise to risky lending practices that could make the nation vulnerable to another financial disaster.
Michael G. Barone, managing partner of the Mortgage Compliance Practice at Abrams Garfinkel Margolis Bergson, LLP in New York, commented, “While most banks and mortgage lenders would love to be freed from some of their regulatory oversight, such oversight is necessary, given the financial crisis the entire country felt less than ten years ago as a result of abusive lending practices.”
A key point of contention among Democrats and consumer advocates is that the new legislation would strip the Consumer Financial Protection Bureau (CFPB) of its power to ensure financial institutions are complying with consumer protection laws. The CFPB was created in 2011 as an independent entity to oversee financial products such as mortgages and credit cards. The bureau has tightened mortgage rules and put fines on large banks for allegedly taking advantage of consumers with deceptive practices.
The Financial Choice Act would dramatically reduce the bureau’s autonomy by requiring its director to report to the president. Since being established, the CFPB has returned $29 billion to 12 million people who lost money due to dishonest marketing and other forms of financial wrongdoing. The CFPB also penalized Wells Fargo with a $100 million fine last year after the bank opened over two million fake accounts.
Another major part of Dodd-Frank that the Financial Choice Act would undo is the Volcker Rule, which restricts federally insured banks from engaging in risky financial trading for their own profit. Its repeal would effectively enable large banks to avoid regulatory oversight if they can show they have a certain amount of base capital.
Under the new overhaul legislation, big banks such as Bank of America and Goldman Sachs would face less scrutiny, while financial giants such as MetLife could bypass stricter regulations altogether. The Financial Choice Act would offer the nation’s 6,000 banks a choice. Banks can qualify for regulatory relief if they meet a strict requirement to build extra base capital to cover unexpected big losses. The bill’s supporters say that would allow banks to have a higher likelihood of surviving without taxpayer help in case of an economic shock.
However, many of the nation’s largest banks are unlikely to take advantage of that option as building the bigger financial cushion for regulatory relief would be costly, amounting to possibly billions for some institutions. Instead, they could get relief in the form of having to undergo fewer stress tests to demonstrate their stability in case of a financial crisis.
One of the biggest issues concerning the Financial Choice Act is how it would deal with financial institutions that are too big to fail. A liquidation authority was created under Dodd-Frank following the 2008 financial crisis to safely close down at-risk entities in order to avoid bailouts. Under the new bill, the authority would be scrapped in favor of enhanced bankruptcy provisions. Critics say the provisions would be inadequate in the face of another economic meltdown.
Barone commented, “The move to repeal this entire consumer protection statute, especially when most political insiders say the proposed legislation has a slim chance of getting through the Senate and becoming law, is wasting time, which would be better spent making subtle changes to the existing regulations to directly benefit consumers without limiting the necessary regulatory oversight.”
The bill now goes to the Senate, where it faces major obstacles. It is likely to require significant changes in order to gain Democratic support. Senators have said they will spend the next few months trying to find common ground on the legislation.
Democratic Rep. Maxine Waters of California, who has led the opposition to the House bill, urged senators not to take it up. “Donald Trump and [the] Republicans want to open the door to another economic catastrophe like the Great Recession and return us to a financial system where reckless and predatory practices harm our communities and families,” she said on the House floor.