by Bryan Dornan
One of the biggest targets for President-Elect Donald Trump and a Republican Congress will surely be the 2010 Dodd-Frank financial overhaul low that, critics argue, has led to less economic activity and consumer lending since its passage.
It is hard to say with certainty which parts of the law may change the most, but experts say there are a few areas that a Trump Administration may target that we outline here.
We do know that since Trump won the election, his financial policy team has been working on designing new measures that could gut the Dodd-Frank law and replace it with policies that would encourage more economic growth and creation of jobs.
Yes,presently interest rates on mortgages is nearly at record lows, but is it too difficult for credit-worthy borrowers to qualify for a home loan? Hopefully the new President will find a way to reduce “red-tape” without increasing the risk to a volatile mortgage industry that is still recovering from record-high default rates and plummeting homeownership rates.
While clearly, the Dodd-Frank original intent was good in an effort to protect consumers, while holding financial institutions accountable, we have to ask ourselves these questions:
- Is it working properly?
- Is it blocking too many good borrowers from getting refinancing?
- Is it causing the cost to do a mortgage to rise?
- Is there anything our government can do to improve this law?
#1 Volcker Rule
A Trump Administration could repeal the Volcker Rule, which is designed to stop banks from making risky bets with some of their own funds. It makes sense to review the rules in question, but this one may offer worthy protections that mitigate banks mismanaging their money with high-risk investments.
#2 Financial Stability Oversight Council Overhaul
This body would be prevented from designating a non-bank as systemically important. The proposal also would allow the largest banks in the US to be able to exempt themselves from liquidity and capital requirements and many other regulatory rules if they have sufficient capital to keep a leverage ratio of a minimum of 10%.
#3 Restructure the Consumer Finance Protection Bureau
The CFPB has long been a target of the Republicans and is a very likely target for a President Trump. One possibility would be to replace the CFPB’s one director with a bipartisan panel, which would be known as the Consumer Financial Opportunity Commission.
All financial regulatory bureaus would be required to abide by greater cost benefit analysis that many critics say are designed to greatly slow the rule making process.
Other financial agencies in the US government also would be remade with bipartisan commissions. All would be subject to the congressional appropriations process, except for the monetary policy of the Federal Reserve. Is there a way to cut the red-tape in way that appeases mortgage lenders while still protecting consumers, the housing industry and the U.S. economy?
#4 More Penalties for Financial Fraud
This is one area of possible bipartisan agreement where there will be harsher financial penalties for fraud and for more transparency in the financial law enforcement process.
#5 Improve Community Bank Lending
A Trump Administration would probably want to loosen up regulations so that more community banks can more easily lend money again. One of the arguments against the Dodd-Frank law is that it condenses more lending into the largest banks in the country and world.
#6 No Longer Allow the Government to Use ‘Systematically Important’
Dodd Frank currently allows the government to label a company as so ‘systemically important’ that it can constrain such companies from engaging in certain types of financial activity.
#7 Repeal the Durbin Amendment
Places a limit on the fees that are charged to retailers for all debit card transactions. Opponents of this law have argued that retailers usually keep the savings and are not passing the money back to the consumer.
#8 Repeal Bankruptcy Provision
Another controversial rule that could see the axe in a Trump Administration is the provision of the D0dd-Frank law that gives regulators a major role in steering financial organizations through bankruptcy if they hit severe financial problems.
Institutions would simply be required to follow the standard bankruptcy code. Other recent commentary in the media about Trump’s plans for Dodd Frank include:
- Financial deregulation will be a top priority in his first month in office to encourage banks to lend. Trump is on record calling DF a major burden to small banks. He believes it is very important to downsize much of the law because it is preventing banks from lending money, which affects growth.
- He noted that people who have capital have not been affected by the increased regulations. Trump said that people like him can borrow money, but there are many small companies and business owners that cannot borrow from banks.
- Trump has said that there are some parts of the law that he will embrace. One of them is to increase the transparency of the credit rating companies and to better regulate derivative products. These issues were at the center of the entire financial crisis. Whether we are talking about bad credit or home loans with zero down-payment, expect to see expanded guidelines in 2017.
- Trump also has noted that he may want to prevent the CFPB from issuing final rules that outlaw mandatory arbitration agreements in many types of financial services.
- Banks that are too big to fail have a competitive advantage over smaller banks. One idea that both Obama and Hillary Clinton championed is to have a levy on big banks so that their size is reduced in time and they are no longer too big to fail. This would then allow other smaller banks to grow in size so that the entire lending industry is more diversified.
- Trump argues that many of the regulators who designed DF did not understand the markets they wanted to control. Also, some of his staff further argues that DF ended up being jammed with many bad ideas that many people who wrote the law did not understand.
We cannot know for sure which parts of DF that Donald Trump will definitely gut and change. But we know that it is very likely that Dodd Frank as it is today will cease to exist very quickly in the first part of 2017. The ultimate goal of Dodd Frank should be to protect consumers without inhibiting mortgage companies’ ability to operate cost-effectively in manners that would hinder affordable housing for Americans.
It is the hope of many people in the financial and bank sectors, not to mention many consumers, that fewer regulations will increase lending and speed economic growth.
Trust is paramount to the financial sector and the U.S. economy hopefully the Trump Administration will keep this in mind when making changes to a fragile economy.
The CFPB does provide a wealth of resources for consumers. They have created a great website for people to educate themselves on financial terms in an effort to develop prudent strategies to potentially save money when considering borrowing money and various financing committments.