With so many stories in the news right now, it’s easy for some to fall through the cracks—even one with potentially wide-ranging effects. Last week, the House of Representatives passed a bill approving the Financial CHOICE Act, which in many ways negates 2010’s Dodd-Frank Act.
For a very cursory look at both acts, how they compare, and the US Treasury’s separate plan announced last night, keep reading.
What is Dodd-Frank?
For more than a century, policymakers have responded to major financial crises by passing sweeping overhauls to the way big banks do business. Stock markets collapsed and global markets crashed in 2008 with the failure of Lehman Brothers, America’s fourth-biggest investment bank at the time. In response, a highly partisan Congress passed the Dodd-Frank Act in 2010 as a long-term solution designed to prevent “too big to fail” banks from failing again in the future.
In short, the Dodd-Frank Act enacted a series of critical reforms:
- Capital banks were required to increase the amounts they held in reserves, giving them an added cushion should they see significant loan losses in future downturns.
- Banks were also required to keep a larger portion of their assets in investments that could be easily liquidated if need be (e.g., cash and government securities instead of term loans).
- Banks with more than $50 billion in assets were subjected to heightened regulatory requirements not faced by regional and community banks, including an annual “stress test” administered by the Federal Reserve.
- Central tenants of the Glass-Steagall Act of 1933 were reintroduced in the form of the Volcker Rule, which outlaws proprietary trading at universal banks, limiting their trading operations to serving as market makers for institutional clients.
- The Consumer Financial Protection Bureau (CFPB) was founded as a watchdog agency with the authority to protect consumers from unfair, deceptive, or abusive financial products and services.
What is the Financial CHOICE Act?
The Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act was introduced to the House on April 26. On June 8, the House passed the bill 233-186, along opposite party lines from Dodd-Frank, with all Democrats and a single Republican voting against.
The 600-page Financial CHOICE Act scales back or eliminates many of the post-crisis banking rules established by Dodd-Frank. Among its stipulations:
- It would repeal the Volcker Rule preventing government-insured banks from making risky bets with investments. Some provisions are targeted at small financial institutions or issuers, whereas others provisions are applied across the board.
- It would remove the fiduciary requirements that retirement advisors put client interests ahead of profits.
- The CFPB’s examination or supervisory powers would be be scaled back considerably, though it would have many of the same enforcement powers. Congress would also gain control of the CFPB’s budget.
- The Orderly Liquidation Authority, created as a bankruptcy alternative involving multiple financial regulators, would be rolled back in favor of an enhancement to the bankruptcy code.
- The president would have the authority to fire the heads of the CFPB and the Federal Housing Finance Agency with or without cause.
GOP supporters in the House say that the bill will encourage economic growth at a local level and prevent any future massive government bailouts. However, opponents say it is focused on boosting Wall Street interests, not Main Street, and will in fact encourage banks to engage in risky behavior, leaving Americans more vulnerable to another financial crisis. Most news sources expect the bill to struggle in the Senate, which has been working on its own bipartisan bill focused on loosening regulations on community banks.
How does Monday’s Treasury Plan Differ?
On June 12, the US Treasury also unveiled a 147-page plan for sweeping financial reforms, though one that takes a more moderate approach than the Financial CHOICE Act. Unlike congressional plans, the Treasury proposes to enact these changes largely through regulators and executive action rather than Congress.
Among the 100 changes proposed, the Treasury plan would:
- Significantly restructure the CFPB to weaken the bureau, though the plan avoids many specifics.
- Preserve the Volcker Rule, but scale it back to exempt institutions with less than $10 billion in assets. Banks that maintain a sufficiently high level of capital would also be exempt from some Dodd-Frank regulatory burdens.
- Expand the Financial Stability Oversight Council, a super-committee of regulators created by Dodd-Frank.
- Pare back the annual stress test to a bi-annual schedule.
- “Modernize” the Community Reinvestment Act of 1977, which requires banks to loan in neighborhoods in which they operate.
The report comes after months of consultations with industry stakeholders and has already generated unsurprisingly partisan reactions. The goal of the plan is to encourage more lending, which the president believes was hobbled by Dodd-Frank. Critics of the plan cite federal data that shows that the banking sector is healthy as it is, with a near-record number of outstanding loans extended to borrowers this year.
How will All of This Affect Your Home Purchase and Mortgage?
The Financial CHOICE Act as it is currently written exempts securities only from risk retention rules that are not residential mortgages. However, it also modifies some mortgage rules, including those related to manufactured housing, points and fees, and portfolio lending.
Unless and until this act passes the Senate, wide changes will not go into effect. But if you’re planning to purchase a home soon, you may want to meet with a mortgage professional now to get preapproved and discuss any expected changes at the local level.
Beverly-Hanks Mortgage Services’ mission is to make the process of financing real estate easy and enjoyable. That is why we are staffed with financing professionals dedicated to providing prompt, personal service. Find out how together we can make your dream home a reality. Contact a Beverly-Hanks Mortgage Professional today.
Image Copyright: kmiragaya / 123RF Stock Photo
— Beverly-Hanks WNC (@beverlyhanks) June 13, 2017