President Trump has increased his criticism of the Dodd-Frank banking overhaul, because he thinks that the law has made it harder for companies to get financing, which leads to slower economic growth. Since enacted, mortgage lenders and banks have complained that the excessive regulations stemming from this law have increased the cost of home loans and made it more difficult for first time buyers to buy a house.
He was quoted this week as saying that he and his staff plan to do ‘a big number’ on Dodd-Frank, which means that he intends to do a major overhaul. Trump is on record at an event with small business leaders calling the law a disaster; he also noted that it is very difficult to start a small business or to expand a current business due to difficulty in getting loans.
It is believed that major changes to Dodd Frank will occur this year. The president just signed an executive order that requires agencies to revoke two current regulations for every new one they put out. It is likely that some of the regulations that will be revoked include parts of Dodd Frank.
It is unknown exactly what Trump is proposing to do with the law, but we can get some hints by looking at a recent bill that was assembled by the Republican congress called the Financial CHOICE Act, which proposes a number of changes in the Dodd Frank law:
#1 Provide an Off Ramp
Many experts in the Republican party argue that the law needs to have an ‘off ramp’ from being governed by Dodd Frank rules, including Basel III capital and liquidity standards, if a bank has high enough levels of capital.
The proposal also states that banking agencies should be able to do stress states of a banking organization that has made a qualifying capital election. It also states that banking organizations should be exempt from any federal rules that put limits on mergers, acquisitions or consolidations.
#2 End Too Big to Fail
The CHOICE Act states that the authority of the Financial Stability Oversight Council or FSOC should be repealed, which involves being able to label financial institutions as ‘too big to fail.’
It also states that Title II of Dodd Frank should be repealed and replaced with a new part of the bankruptcy code that is made to accommodate the failure of a large financial institution.
#3 Reform the CFPB
The bill says the CFPB should be changed to mean the Consumer Financial Opportunity Commission, and it should be designed to both protect consumers and competitive markets. Critically, the bill says that a cost benefit analysis must be performed of proposed rules, which should be done by the Office of Economic Analysis.
Also, many argue that the single director of the CFPB should be replaced by a five member commission, which is subject to congressional oversight and appropriations. Trump and the GOP have largely argued that the current CFPB commissioner wields far too much power and Congress has no oversight.
#4 More Accountability from Financial Regulators
Trump and the GOP want to make all financial regulatory agencies forced to obey the REINS Act, which would require them to be subject to congressional oversight and appropriations.
Further, Trump wants all financial regulators be required to do detailed cost benefit analyses of all regulations that are being proposed.
#5 More Accountability from Wall Street
There should be tougher penalties for financial fraud and self-dealing. There also should be more transparency and accountability in the civil enforcement regime.
The SEC should be able to triple fines that are sought in civil and administrative actions in some cases, where penalties are tied to illegal profits.
#6 More Opportunity for Businesses
The biggest argument that Trump is making about Dodd Frank is that it makes it too difficult for small businesses to access capital. He wants to see certain sections of Dodd Frank totally repealed, such as the Volcker Rule, which limits capital formation.
Also, the SEC’s authority to eliminate or restrict securities arbitration should be repealed.
The Federal Reserve met today and committed that the Federal Funds Rate will remain low. The Fed said the rates will be holding steady between 0.50% and 0.75%.
#7 Regulatory Relief
Trump also wants to make it easier for community financial banks and institutions to do business and to lend money. The bill thereby proposes that more than two dozen regulatory relief bills be passed to make it easier for Main Street to do business.
#8 Strengthen FHA
With delinquencies and defaults rising on FHA mortgages in recent months, Trump put suspended the insurance premium rate cut for future FHA financing. When the risks plateau, it makes sense to revisit reducing insurance costs for consumers on FHA home loans because first time home buyers will help increase that rate of home-ownership. FHA interest rates have competitively priced in the marketplace for the last several decades.
The Bottom Line
There are few in the financial industry that want to see the entire Dodd-Frank law repealed. But there are very strong arguments that the entire law was an overreaction by progressive forces in the Obama administration to the financial meltdown.
While Trump will certainly want to keep rules in place that would prevent another financial calamity, the fact is that economic growth in the last eight years has never gone higher than 3%. Given that the recession ended in 2010, it seems likely that oppressive financial regulations are causing economic growth to slow.
Hopefully, reforming Dodd-Frank under the Trump administration will improve economic growth to 3% or higher.