The Trump administration and Republican-controlled Congress are considering a major overhaul of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that would dramatically change or roll back many financial regulations.
On April 19, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) introduced the latest iteration of the Financial CHOICE Act of 2017, dubbed “CHOICE Act 2.0” after an earlier version of the legislation failed in the previous Congress.
The Financial CHOICE Act seeks to amend or repeal many of the banking reforms enacted following the financial crisis of 2008-2010. Those regulations included rigorous capital requirements, stress testing, and the establishment of the powerful Consumer Financial Protection Bureau.
Since its adoption in 2010, the Dodd-Frank Act has led to the creation 400 separate regulations. Many studies claim Dodd-Frank and its related regulatory actions have resulted in increased costs for financial institutions of all sizes.
A 2013 study by the Federal Reserve Bank of Minneapolis estimates Dodd-Frank caused a decline in commercial banks’ return on assets of 12 to 14 basis points. According to another survey of 200 community banks conducted by George Mason University’s Mercatus Center, 83% of banks reported an increase in compliance costs of greater than 5%, and the median bank surveyed hired one to two additional employees to help manage the increased compliance burden.
Credit unions also have confronted the impacts of a growing compliance burden in recent years.
“In 2016 we lost 5.6% of credit unions,” said Alexander Monterrubio , director of regulatory affairs for the National Association of Federally-Insured Credit Unions. “That’s the most significant rate of decline since World War II. There are many reasons for that, but it’s increasingly difficult for small financial institutions like credit unions to compete in the broader market when they’re being regulated in the same fashion as a very large international bank.”
Still, some experts say on balance the benefits of Dodd-Frank and the CFPB have outweighed the increased costs of compliance.
“From my academic perspective, I think it was a good idea to create the CFPB because it was clear that the federal regulators of banks were focused on keeping banks afloat and safe,” said James Fanto, the Gerald Baylin Professor of Law and co-director of the Center for the Study of Business Law & Regulation, Brooklyn Law School in New York City. “They’re really prudential regulators. Their focus is on making sure the banks engage in safe practices and have adequate capital.
“Historically, they also did consumer financial protection. But they gave it short-shrift; over time, it ended up not being their main focus. And I think that came to light in the financial crisis, that the financial regulators were not adequately focused on consumer protection issues, and what was happening in the mortgage world.”
To address what they see as overreach by the CFPB and other regulatory agencies, banking advocates are seeking congressional action.
The Independent Community Bankers of America wants to see regulatory relief in several areas.
“The first area is in mortgage finance and lending,” said Paul Merski, group executive vice president, Congressional Relations and Strategy for the ICBA. “A specialty of community banks is in tailoring loans to individual customers and communities. We are looking for Congress to address mortgage lending rules, including the ability to repay. There is bipartisan support in Congress to ensure all qualified borrowers get a loan without getting tripped up by the rules.”
The ICBA also is seeking changes to make it easier for banks to raise capital. “Dodd-Frank inhibits banks from attracting and raising capital, through very complex treatment under the act,” he said. “We are looking for relief so banks have the capital they need to leverage lending activities.”
Other areas the ICBA would like to see changes to the act include examinations, stress testing and reporting.
“Compliance costs the banking sector time and money, and diverts resources away from helping communities and customers,” Merski said. “Banks operate on very thin margins, and every additional penny of regulatory burden and cost really hurts the bank’s ability to be viable.”
The Financial CHOICE Act of 2017 seeks to limit the CFPB director’s powers by creating a five-person bipartisan commission, a governance model more in line with most other regulatory agencies. The bill also seeks to reposition the CFPB under the auspices of the executive branch rather than the Federal Reserve, a move designed to limit the agency’s ability to take unchecked regulatory actions.
“NAFCU has always been very supportive of a five-member, bipartisan commission,” Monterrubio said. “We really think that that is the way the CFPB should be going forward.”
Industry advocates are optimistic financial reform will get done, but expect it will take time with other legislative priorities currently before Congress such as a proposed healthcare overhaul and tax reform.
“Obviously, Congress has a lot on their plate right now,” Monterrubio said. “So it’s about getting floor time and actually getting the bill voted on eventually. When it comes to implementation, Congress would want to provide some time for a transition period between what the CFPB is now and ultimately how the CFPB is going to change.”
“There are a number of bills in play right now, including the Financial CHOICE Act with its very comprehensive reworking of many Dodd-Frank provisions,” Merski added. “The Senate’s bills from the last Congress will likely be reintroduced in this Congress, including those impacting mortgage lending and Dodd-Frank.”
The fly in the ointment is financial institutions already have implemented numerous changes to comply with the Dodd-Frank Act, and its associated regulatory burden.
“You can’t change this overnight,” Fanto said. “A lot of financial firms, particularly the big financial firms, have already made the investment in compliance, and the systems have all been changed. But for smaller firms, there you get more bipartisan political support, and maybe we can give them a break on some of these requirements because it is very costly for them and they’re smaller players.”
Freelance writer Ted Goldwyn contributed to the writing and research of this article.
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