President Trump and Proposed Repeal of Dodd-Frank

On February 3, 2017, President Trump signed an executive order asking the US Treasury Department to revise Dodd-Frank regulations. The order signals agencies to ease up on enforcing those regulations. Republicans plan to introduce a bill by the end of April to repeal Dodd Frank completely. This simply must not be done and would be extremely bad for consumers for the reasons stated below.

Trump’s administration claims these regulations prevent banks from lending more to small businesses. But the rules target large banks, which have consolidated and grown greatly since the 2008 Financial crisis.  Small businesses are more likely to borrow from small banks, not big banks so this argument is not factual. The biggest impediment to small banks is the low interest rate climate that has prevailed since the financial crisis.

Trump’s cabinet members say that banks no longer need the additional rules and supervision. They note the banks have enough capital to withstand any crisis. But banks are only so well-capitalized because of Dodd-Frank and without proper regulation would likely return to their profit at all costs actions of the past with no regard of how it effect the consumer.

Anyone needing evidence of why these regulations are so necessary may recall the recent incident where employees of Wells Fargo boosted sales figures by covertly opening new   accounts and funding them by transferring money from other customer accounts without their knowledge or permission. They also opened credit card and checking accounts to pad their sales, costing customers money from additional banking fees and interest.

What is Dodd-Frank

The term Dodd-Frank refers to a comprehensive financial regulation born out of the Great Recession of 2008 with the intention of preventing another collapse of a major financial institution like Lehman Brothers.

Dodd-Frank is also geared toward protecting consumers with rules like keeping borrowers from abusive lending and mortgage practices by banks.The Dodd-Frank Wall Street Act is a law that regulates the financial markets and protects consumers. Its eight components make it less likely the financial crisis could recur.

It is the most comprehensive financial reform since Glass-Steagall Act which regulated banks after the 1929 stock market crash.  The Gramm-Leach-Bliley Act repealed it in 1999 allowing banks to once again invest depositors’ funds in unregulated derivatives.  This lack of regulation helped cause the 2008 financial crisis.

The Dodd-Frank Act is named after the two Congressmen who created it. Senator Chris Dodd introduced it March 15, 2010. On May 20, it passed the Senate. U.S. Representative Barney Frank revised it in the House, where it was approved June 30. On July 21, 2010 President Obama signed the Act into law.

Eight Ways Dodd-Frank Makes Your World Safer

  1. Oversees Wall Street. The Financial Stability Oversight Council identifies risks that affect the entire financial industry. It also oversees financial firms other than banks, like hedge funds. It recommends that the Federal Reserve supervise any that gets too big. The Fed will ask the company to increase its reserve requirement. That prevents a firm from becoming to big to fail, like the American International Group Inc. The Chair of the FSOC is the Treasury Secretary.  It has nine members. They included the Securities Exchange Commission, the Fed, the Consumer Financial Protection Bureau, OCC, the Federal Deposit Insurance Corporation, FHFA and the CFPA.

The Trump administration wants to prevent the Fed from supervising large firms. It wants the FSOC to stop designating companies like AIG as too big to fail. It claims the additional regulations make large companies non-competitive.

  1. Stops Banks from Gambling with Depositors’ Money. The Volcker Rule bans banks from using or owning hedge funds for their own profit. It prohibits them from using their depositors’ funds to trade on their own accounts. Banks can use hedge funds on behalf of their customers only. Dodd-Frank gave banks seven years to get out of the hedge fund business. They could keep any funds that are less than 3 percent of revenue. Banks lobbied hard against the rule, delaying its approval until December 2013. It went into effect in April 2014.  Banks had until July 21, 2015, to implement their compliance mechanisms.

The Trump executive order can’t end the Volcker Rule but regulators could ease up its enforcement. If banks return to gambling with depositors’ money, depositors will have increased risk.

  1. Regulates Risky Derivatives. Dodd-Frank requires that the most dangerous derivatives, like credit default swaps, be regulated. This task fall to either the Securities and Exchange Commission or the Commodity Futures Trading Commission, depending on the type of derivative. They will identify excessive risk-taking. That will bring it to policy-makers’ attention before a major crisis occurs. Then they bring any violations to policy-makers’ attention before a major crisis occurs. A clearinghouse, similar to the stock exchange, must be set up. That ensures the derivative trades are transacted in public. Dodd-Frank left it up to the regulators to determine the best way to create the clearinghouse. That led to a series of studies and international negotiations.
  1. Brings Hedge Funds Trades Into the Light. When hedge funds and other financial advisors aren’t regulated, the underlying assets of derivatives are hidden. One of the causes of the 2008 financial crisis was that no one knew what was in the derivatives. This meant no one knew how to price them. That’s why the Fed thought the subprime mortgage crisis would remain within the housing industry but did not.

To correct that, Dodd-Frank requires all hedge funds to register with the SEC. Hedge funds must provide data about their trades and portfolios so the SEC can assess overall market risk. This gives states more power to regulate investment advisers. That’s because Dodd-Frank raised the asset threshold limit from $30 million to $100 million.

  1. Oversees Credit Rating Agencies. Dodd-Frank created an Office of Credit Ratings at the SEC. It regulates credit-rating agencies like Moody’s and Standard and Poor’s. Many blame the agencies for overrating some bundles of derivatives and mortgaged backed securities. That misleads investors who didn’t realize the debt was in danger of not being repaid. The SEC can require agencies to submit their methodologies for review. It can deregister an agency that gives faulty ratings.
  2. Regulates Credit Cards, Loans and Mortgages. The Consumer Financial Protection Bureau consolidated the functions of many different agencies. It oversees credit reporting agencies, credit and debit cards and payday and consumer loans. The CFPB regulates credit fees, including credit, debit, mortgage underwriting and banking. It protects homeowners by requiring they understand risky mortgage loans. It also requires banks to verify borrower’s income, credit history and job status. The CFPB is under the U.S. Treasury Department.  Massive changes to the CFPB could hurt mortgage borrowers who use the agency as an intermediary to fight erroneous charges and foreclosures.

H.R. bill 1031-To eliminate the Bureau of Consumer Financial Protection was sponsored by Rep. John Ratcliffe and introduced on 2/14/17 and referred to the House Committee on Financial Services on 2/14/17.

S.370 bill to repeal CFPB was introduced by Senator Ted Cruz on 2/14/17 and referred to  the Senate Banking, Housing and Urban Affairs Committee.

Trump could easily weaken the CFPB by replacing its director with someone less enthusiastic about enforcing consumer protection. Congress also has enough Republican votes to cut off funding for the CFPB.

  1. Increases Supervision of Insurance Companies. Dodd-Frank created a new Federal Insurance Office under the Treasury Department.  It identifies insurance companies that create a risk for the entire system. It also gathers information about the insurance industry. It makes sure affordable insurance is available to minorities and other underserved communities. It represents the United States on insurance policies in international affairs. Trump’s executive order may relax oversight on big insurance companies.
  2. Reforms the Federal Reserve. Dodd-Frank gave the Government Accountability Office new powers. It audited the Fed’s emergency loans made during the financial crisis. It can review future emergency loans when needed. The Treasury Department must approve any emergency loans given by the Fed.

Summary

It would be extremely detrimental if even parts of an important and necessary law such as Dodd-Frank were repealed. This would once again prioritize corporations and wall street over the American people and place consumers at risk from abusive practices by banks and other financial institutions.  History has shown that without appropriate regulations, the chase for corporate profits nearly always outweighs the best interest of consumers.

As you can see, Republicans are attempting to repeal the CFPB immediately (S.370 and H.R. 1031) while the President campaigned on a complete repeal of the law.  We must fight them to help protect the American people!