This week, the US House of Representatives intends a vote on the Financial CHOICE Act (hereinafter: the GOP’s Choice Act), which is intended to significantly overhaul the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  This is a bill that needs to be stopped, as it reforms Dodd-Frank (which isn’t perfect and needs some corrections) the wrong way, and in a manner that will hurt consumers and protect damaging lending practices.  The GOP is hoping to fly this under the radar with little constituency attention, as former FBI Director James Comey is set to testify this week, and Dodd-Frank is seen as very complex and intimidating.  Don’t be fooled!  It’s time to light up the phone lines of our federal legislators to prevent Dodd-Frank from being reformed in the manner set by the GOP’s Choice Act.
Let’s start by going through a few basics.
WHAT ARE THE IMPORTANT THINGS THAT DODD-FRANK DOES?
Dodd-Frank was passed in 2010, after the collapse of the financial market.  Dodd-Frank streamlines the regulatory oversight process, which allows the US Federal Government better supervision, especially for institutions that create a systemic risk.  Dodd-Frank also ends taxpayer bailouts of financial institutions, regulates (and in some cases, ends) certain risky maneuvers by financial institutions which lead to the need for bailouts, reigns in certain issues of governance within financial institutions and compensation, and helps provide a better early warning system of economic trouble.
To list every important item that Dodd-Frank does would be exceedingly long for this post.  Here are just a few of the major ways that Dodd-Frank seeks to achieve the above goals:
– Requires certain financial companies to compose a “living will” in the event of failure.
– Creates 2 sub-agencies within the Treasury Department specifically charged with identifying and responding to threats of financial stability and promotion of market discipline, and to research and collect data to back up these tasks (the Financial Stability Oversight Council and the Office of Financial Research).
– Expands the power of liquidation by the FDIC and the SIPC (Securities Investor Protection Corporation) to certain non-bank financial institution, which, in the event of failure by those companies, would ensure the removal of management responsible for that failure.
– Extends the Investment Advisor Act of 1940 to regulate private equity managers and hedge fund managers.  It should be noted that these 2 funds are empowered to make riskier transactions than most financial institutions.
– Creates the famed “Volcker Rule”, which bars banking entities from having more than 3% of its assets in a hedge fund or private equity fund, and bars banks from engaging in any transactions in with that private equity or hedge fund to which it is invested without then disclosing the transaction to a regulator.
– Provides for certain retention of credit risk by securitizers, to keep securitizers on the hook in the event of a pass off of a bad unqualified loan to an investor or servicer.
Listed last here but is certainly not least: Dodd-Frank provides for the creation of the Consumer Financial Protection Bureau, which acts independent from the Federal Reserve, provides supervision and enforcement of fair lending and banking standards, and provides for consumer education.
WHAT ARE THE PARTS OF DODD-FRANK THAT ACTUALLY NEED IMPROVEMENT?
There is a lot of noise on this one, as if you ask different legislators or regulators, you will receive different answers.  Let’s go to what is likely the most credible source for this, Representative Barney Frank (one of the Dodd-Frank’s namesakes and the Chair of the House Financial Services Committee at the time of Dodd-Frank’s passage).  Frank noted to NPR in a story run Friday June 2, 2017, that Dodd-Frank is too restrictive to community banks and has too low of a threshold for a label of “Too Big to Fail” (a label that subjects a bank to further stringent regulations).
Representative Frank is right on both counts.  Compliance costs with a lot of the Dodd-Frank regulations are simply too high for community banks to meet, which has an unintended backlash of risking a greater monopoly from the larger banks, as many community banks cannot afford to meet several of the regulations.  It is this writer’s opinion that an exemption for community banks should be created for many of the requirements of Dodd-Frank (not including the underwriting standards and credit-risk retainment).  Too low of a “Too Big To Fail” standard creates a similar problem, as compliance costs increase, some of the institutions on the low end of the threshold may not be able to afford being of that size, and have to reduce or fail, which further decreases competition among financial institutions.
The above is not intended to downplay the absolute importance of financial institutions investing in compliance and taking the time to create a culture of compliance within the executives and rank and file.  This investment can stop illegality before it starts, prevents costly fines to the institution, prevent a situation that leads to protracted litigation, and maintains trust between consumers and financial institutions.
WHAT DOES THE GOP’S CHOICE ACT DO?
Let’s start with the first 2 things: yes, it will reduce regulation to community banks, and significantly rolls back the “too big to fail” guideline.  This will reduce compliance costs.  However, this is not all that it does.  Some of the items that get changed are:
– Eliminates the Office of Financial Research;
– If a bank maintains a leverage ratio of 10%, it does not have to maintain a living will;
– Eliminates the orderly liquidation authority of regulators in case of a failure, the power that included the removal of management responsible for the failure;
– Repeals the Volcker Rule;
– Certain financial institutions can make loans without regard to the customer’s ability to repay, significantly reducing  protections against predatory lenders;
– Rolls back rulemaking and enforcement authority of the Federal Government to payday lenders and vehicle title lenders;
– Changes the Consumer Financial Protection Bureau (in addition to changing the name to the Consumer Law Enforcement Agency) and several other financial agencies into an agency with significantly reduced independence, by subjecting any rulemaking authority the agency may have to Congressional approval (despite the rule also already needing to be submitted for notice and public comment under our Constitutional concepts of procedural due process).
Any help to consumers and promotion of the health of the financial industry that could be achieved with the regulatory rollbacks to community banks and scaling back the “too big to fail” designation is more than undone with the above noted changes, which erode accountability within the financial industry.  Opposing the GOP’s Choice Act is not an act of “throwing away the good hoping for something perfect.”  Opposing the GOP’s Choice Act is standing against a bad bill.
Dodd-Frank is an imperfect, but decent banking reform package.  It can be made perfect if we fight for it.  That fight starts with calling Congressman Paulsen and telling him to oppose the GOP’s Choice Act.
Sincerely,
Michael Vogel
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