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How Congress might gut Dodd-Frank

Consumers would lose; big banks would win.

President-Elect Donald Trump Holds Meetings At His Trump Tower Residence In New York
Rep. Jeb Hensarling gets photobombed by Superman at Trump Tower
Photo by Drew Angerer/Getty Images

Running alongside the Trump administration’s efforts to reduce financial regulation is House Financial Services Committee Chair Jeb Hensarling (R-TX), who is reportedly proposing to dramatically reconfigure the structure and powers of the Consumer Financial Protection Bureau (CFPB).

The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010 following the 2007-’09 financial crisis. The primary goal of the CFPB is to regulate the design and marketing of consumer financial instruments such as mortgages, credit cards, and student loans.

At least as it has been reported, Hensarling’s proposal encompasses several important changes.

Putting it under presidential control. The first proposed change is structural: The CFPB is headed by a single individual (currently Obama appointee Richard Cordray), who is removable only for cause, meaning he or she cannot be fired by the president for policy or political reasons. Hensarling’s proposal would remove the “for cause” requirement, meaning that the CFPB would be just like any other executive agency (and hence, not like an independent regulatory commission such as the Securities and Exchange Commission).

This aspect of the proposal is starker in appearance than in reality, as the DC Circuit Court ruled in October that the “for cause” requirement was unconstitutional, so Trump arguably has the power to fire Cordray, though trying to do so would presumably result in litigation without this proposed statutory change. Intriguingly, this change is also at odds with some of Hensarling’s co-partisans’ calls for the CFPB to be headed by a five-member, bipartisan commission.

Cutting its jurisdiction. The proposal would repeal the CFPB’s “direct supervisory authority.” In conjunction with other agencies such as the Office of the Comptroller of the Currency (OCC), the Federal Reserve (the Fed), and the Federal Depository Insurance Corporation (FDIC), the CFPB currently supervises 113 financial institutions. Specifically, Dodd-Frank gave CFPB the authority to supervise:

1. All banks, thrifts, and credit unions with assets over $10 billion

2. All nonbank mortgage originators and servicers, payday lenders, and private student lenders, regardless of their assets

Furthermore, Hensarling’s proposal would eliminate both the CFPB’s ability to levy fines on violators and its authority to sue firms for “unfair, deceptive, and abusive acts or practices.” In sum, the proposal would essentially eliminate the CFPB’s power to monitor and regulate deceptive financial products and marketing practices.

Eliminate the consumer complaint database. The CFPB maintains a searchable database of consumer complaints, and Hensarling’s proposal would eliminate it.

Widen the “off ramp.” The proposal would expand upon a provision, referred to as the “off ramp,” which was featured in a bill introduced last year by Hensarling. To take the off ramp, a bank must keep a higher proportion of its money (capital) on hand. Under Hensarling’s proposal, a bank that takes the off ramp essentially allows large banks to:

1. Avoid the Fed’s “stress tests” — which calculate the bank’s financial viability in periods of economic stress, such as a severe recession

2. Eliminate the requirement to file a “living will,” which is a detailed document describing how the bank would be broken apart and/or shut down if it were on the verge of collapsing

Limit the Fed’s ability to enforce the stress tests. The proposal would require the Fed use the notice-and-comment rulemaking process to impose new requirements on a bank that fails the stress test. This would slow down the process in many ways, limiting the Fed’s ability to be proactive in controlling systemic financial risk.

Limit the Fed’s ability to grade the stress tests. Currently, the Fed can reject a bank’s stress test results due to what are referred to as “qualitative objections” to how the banks calculated the tests. This essentially allows the Fed to question the assumptions of the tests, which are drawn up by the banks themselves. The proposal would eliminate the Fed’s ability to reject a plan on these grounds. In other words, it would hamper the ability of the Fed to reject a stress test in which the bank in question made overly convenient and/or unrealistically optimistic assumptions.

What does it all mean?

If adopted, Hensarling’s proposal would both gut consumer protections in the financial marketplace and limit the ability of financial regulators to limit systemic financial risk. Yes, the existing rules and powers are imperfect, and reforms could help (as noted recently by the nonpartisan Government Accountability Office), but with reform, it is always important to remember “how we got here.” Dodd-Frank was a response to the financial crisis of 2007-’09 and, more proximately, both the ensuing $426 billion “TARP” program and the more than $2 trillion of “quantitative easing” (i.e., asset purchases/money injected into the economy) by the Fed. It’s been seven years since Dodd-Frank was enacted, and Hensarling’s proposal would essentially gut it.

Now, to be clear, Hensarling’s proposal is currently just a memo, so there’s no guarantee that it will actually end up being proposed (and definitely not necessarily with all of these features). In addition, any legislative reform of Dodd-Frank would require some Democratic support, because the GOP does not control 60 seats in the Senate. Nonetheless, the fact that Hensarling — whose committee sits at the center of this policy area — is publicly circulating such a strong proposal (much stronger than his own from last year) is telling about the current direction of financial regulation policy.