The Future of Dodd-Frank: Where is it Going?

Seyfarth Synopsis: Just last week Steve Mnuchin, the Secretary of the Treasury, put forth the first of several Reports proposing financial reforms.  Much of the Report makes sweeping changes to Dodd- Frank, the legislation put in place after the 2008 financial crisis.  The Report comes on the heels of the Financial Choice Act, introduced by House Republicans, which also proposes repealing key provisions of Dodd-Frank.  These actions are the opening salvo in what is expected to be a protracted and complicated effort to curb the regulations that make up Dodd-Frank, which is considered by many Republicans  to be legislation which has stifled economic growth and hurt the banking industry.  This One Minute Memo will update you on both initiatives, including efforts to curb the power of the CFPB.

When Steve Mnuchin was selected as Treasury Secretary in November 2016 one of the big questions raised was what would happen to Dodd-Frank, the 2010 sweeping legislative initiative of the Obama administration intended to prevent the recurrence of events that caused the 2008 financial crisis.  Last week the Trump administration issued a 149 page Report outlining its goals for financial reform and discussing proposed changes to the legislation.  The Report, prepared  by Mnuchin, who had been tasked to provide these recommendations by the President, mostly calls for rolling back the new powers Congress gave to regulatory agencies as a result of Dodd-Frank. Ensuring his view was clear,  Mnuchin told a Senate panel after release of the Report that, if he “were King for a day,” he would repeal Dodd-Frank in its entirety.

The Report

The Report recommended reducing the powers of the Consumer Financial Protection Bureau. Since its inception the Bureau has recovered almost $12 billion dollars as a result of the aggressive stance it has taken with respect to enforcement actions it commenced on behalf of consumers.  Mnuchin recommended abolishing the agency’s independent funding stream and that it be replaced by a more traditional congressional appropriations process.  He also urged that the President expressly be given the authority to fire the Bureau’s director, where this authority is presently being questioned. Also, in keeping with his initial observations about Dodd-Frank in November, the Report also recommended reducing the oversight of large financial institutions, and providing more regulatory relief to smaller banks, so as to loosen restrictions with respect to mortgage lending.  Concerns about decreased lending as a result of Dodd-Frank were a large part of Mnuchin’ s platform when nominated.  It was recently reported in the Wall Street Journal that three million first-time home buyers were shut out of the market over the past decade due to credit tightening, which has created a major drag on the housing market.  The Report also urges other changes to regulations affecting lending, noting that many of the regulations are now too conservative, including a rule that requires companies that pool and securitize mortgages to retain a portion of these loans to protect against loan failure.  Many Republicans lauded these recommendations because they think the lifting of these regulations will significantly improve the housing market, reduce the cost of loans, and allow for improved economic growth.

Another significant recommendation concerns oversight of the Financial Stability Oversight Council, which was created by Dodd-Frank to ensure that risks that might be missed by individual regulatory agencies overseeing one industry are more quickly identified when there is shared oversight by the larger group.  The Treasury Secretary is the Chairman of the Council which includes the heads of the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, and five other regulators.  The group has the power to identify any entity as a potential risk to the financial system and subject that entity to the same level of regulation that is now imposed on our largest financial institutions.  The group's role, the Report suggested,  “should be broadened”  to allow it to pick one agency to lead in situations where several agencies may be involved, and to coordinate data sharing among them.  Not surprisingly Mnuchin’s Treasury Department seems to be the natural choice for that role, and Mnuchin has not suggested otherwise.

The Cabinet and the Congress

Interestingly, giving the Council more power is at odds with many Republicans in Congress who have attempted to limit the power of the Council since Dodd-Frank was enacted, calling it unaccountable, capricious and lacking in transparency.  Only days before the Report was issued House Republicans passed the Financial Choice Act (“the Act”) a bill that would largely replace Dodd-Frank, but which contains a provision to eliminate the Council's power to designate entities requiring  more regulation, and which subjects the Council to greater oversight and accountability. How the disagreement between the Treasury and Congress will play out on this issue  remains to be seen.

In some respects the Report calls for many of the same changes as the Act, but in some areas it is more moderate than the House’s proposal.  The Act, for example, would repeal the controversial Volcker Rule which restricts banks from certain speculative trading.  The Act seeks to repeal the trading restrictions in their entirety.  Mnuchin recommended loosening these restrictions,  which regulators could do on their own, but did not urge a full repeal, which would require Congressional approval.  This may suggest that Mnuchin is prepared to take a more measured approach in changing Dodd-Frank, but also one more likely to succeed in light of an expected filibuster by Democrats intent on protecting Dodd-Frank in the Senate. 

In what might show as an effort to homogenize the Report's recommendations with that of the pending Republican legislation, the Treasury Department recommended  replicating a key provision of the Act,  to allow for an amount of capital banks must hold as a cushion against future losses, which amounts, if met, would exempt banks from much  regulatory oversight.

And both the Act and the Report are lockstep in other areas, most notably the recommendation to significantly rein in the CFPB.  Such a move is strongly opposed by Congressional Democrats who say that the recommendations as to the CFPB would serve to weaken Dodd-Frank, and will, in the words of Sen. Elizabeth Warren, a huge proponent of the Bureau at its inception, “make it easier for big banks to cheat their customers and spark another financial meltdown.”

The take away from the Report, and also from the proposed legislation, is that many of the reforms that were a hallmark of the Obama administration are, slowly but surely, going to be stripped away.  First on the list is the CFPB, which was heralded as the new regulatory Sheriff in town only a few short years ago.  But whether it be President Trump or Treasury Secretary Mnuchin, or still unknown players in a reinvigorated Republican Congress, it is now clear that a new Sheriff has trumped the old one.