March 7, 2018 may have come and gone as just a regular day for many of us, but for those on Wall Street, it marked the beginning of a major victory. On March 7the Senate passed a bipartisan bill known as the Economic Growth, Regulatory Relief, and Consumer Protection Act, which effectively rolls back parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the most comprehensive and complex financial reform since the Great Depression. Since its enactment in 2010, Dodd-Frank has been a source of great contention among politicians, financial experts, and American citizens alike and as expected, this proposed rollback has reignited the longstanding debate.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (“Dodd-Frank Rollback Bill” or “Bill”) would alter certain aspects of the regulation for banks, mortgage lending, and credit reporting agencies. The Bill is expected to trim down costly and burdensome regulation, increase consumer protections and encourage mid-size banks to make more loans; in return boosting economic growth. Among the beneficiaries of the overhaul are thousands of community banks, dozens of regional lenders, and several custody banks. While the bill does not contemplate significant relief for major Wall Street banks, such as Bank of America and JPMorgan, the Congressional Budget Office recently estimated there’s a substantial chance that the Federal Reserve will relax the rules for bigger banks after lawmakers pass the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Among the most significant provisions of the proposed Bill is Title IV, which provides regulatory relief to large banks, specifically those that were designated as “too big to fail” or “systemically important financial institutions” under Dodd-Frank. Supporters and opponents of the proposed bill generally agree that systemically important banks should be subject to greater regulation; however, there is disagreement on how to identify such banks. Pursuant to Title I of the Dodd-Frank Act, all banks with more than $50 billion in assets were subject to a comprehensive regulatory regime. The regime includes strict liquidity requirements, stress/crisis tests and capital planning, risk management standards, financial stability and other requirements. The Economic Growth, Regulatory Relief, and Consumer Protection Act effectively increases the threshold from $50 to $250 billion in assets. Banks between $50 to $250 billion in assets would be subject to discretionary and varying degrees of regulation, but ultimately less regulation than in the past. The increased threshold would leave only a dozen US banks facing the strictest regulations by the Federal Reserve. In addition to decreasing the threshold, the proposed bill also makes changes to specific regulatory regime requirements, mostly providing regulators with greater discretionary authority.
Other significant changes contemplated in the Bill include a limited scope for the application of the Volcker Rule. The Volcker Rule generally prohibits banks from engaging in proprietary trading (investing with depository funds) and limits their dealings with hedge funds and private equity funds. The Volcker Rule aims to protect bank customers by preventing banks from making risky investments with money that is insured by the government (and its taxpayers). There is broad debate over the necessity and efficacy of the Volcker Rule, but the proposed Bill only addresses its application to small banks. Per the proposed Bill, community banks with less than $10 billion in assets would no longer have to comply with the Volcker Rule.
The proposed amendments to mortgage rules intend to reduce the regulatory burden involved in mortgage lending and to expand credit availability, especially in certain market segments. The proposal provides regulatory relief for banks with $10 billion or less in assets, eliminating the requirement to abide by strict mortgage underwriting standards prescribed by Dodd-Frank. Additionally, banks that originate 500 or fewer mortgages each year would no longer have to comply with certain Home Mortgage and Disclosure Act reporting requirements, such as reporting the race of the mortgagor.
The Bill also contains some consumer protection provisions, but they are minimal in comparison to other contemplated changes. Section 301 of the proposed bill contemplates recent cybersecurity scandals and intends to help protect consumer credit reports from being used fraudulently. The provision amends the Fair Credit Reporting Act by requiring credit bureaus to provide fraud alerts for consumer files to individuals who are victim of fraud or identity theft for at least one year after the individual receives notice. This is an increase from a current 90-day requirement. It also provides consumers the right to freeze and unfreeze credit reports free of charge. Other consumer protection provisions exclude certain types of information about student loan and medical debt from being included in credit reports.
Proponents of the Economic Growth, Regulatory Relief, and Consumer Protection Act claim the current regulations are too stringent and detrimental to overall economic growth. They assert that the proposed Bill would foster economic growth, strengthen consumer protections and eliminate a number of unduly burdensome regulations. Contrastingly, opponents of the bill argue it needlessly pares back important Dodd- Frank protections without offering any additional protections for working families. Critics contend the purpose of the Bill is to benefit large and profitable banks, the very banks that were taking advantage of the American people for too long without being held accountable before Dodd-Frank. Both the proponents and opponents of the Economic Growth, Regulatory Relief, and Consumer Protection Act raise legitimate interests in defending their positions. While the final version of the proposed reform is uncertain, due to possible revisions by the House of Representatives, the rollback of Dodd-Frank is imminent.