Investments Lending Servicing

Inside the foundation-shattering Republican plan to abolish Dodd-Frank

Includes ending 'too big to fail', dramatic overhaul of CFPB

US Capitol

If House Financial Services Committee Chairman Rep. Jeb Hensarling, R-TX, has his way, Tuesday, June 7, 2016 will soon be remembered as the day that the death clock started on the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Just as he recently promised, Hensarling on Tuesday revealed the Republican-crafted plan to repeal Dodd-Frank and replace it with a “pro-growth, pro-consumer” alternative.

In a speech given at the Economic Club of New York, Hensarling revealed the Republican plan, entitled the Financial CHOICE Act. “CHOICE” in this instance stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.”

When Hensarling first spoke of the Republicans’ plan to overhaul Dodd-Frank, he laid out a series of principles that would fundamentally change the way that the country’s financial system operates, and the specifics of the plan don’t disappoint in that regard.

“We remain stuck in the slowest and weakest economic recovery in our history. Last quarter’s pathetic GDP growth of less than 1% merely punctuates the point,” Hensarling said in his speech Tuesday.

“The economy isn’t working for tens of millions of working Americans who cannot get ahead and fear for the future of their families. Their paychecks remain stagnant; their savings have declined,” he continued.

“Why is this happening? One of the principal reasons is the Dodd-Frank Act, a grave mistake Washington foisted upon the American people nearly 6 years ago,” Hensarling said.

“Simply put, Dodd-Frank has failed. It’s time for a new legislative paradigm in banking and capital markets,” he added. “It’s time to offer all Americans opportunities to raise their standards of living and achieve financial independence. In a phrase, we need economic growth for all and bank bailouts for none.”

Per an announcement from the Republican arm of the House Financial Services Committee, the Financial CHOICE Act will “end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from ‘growth-strangling regulation’ that slows the economy and harms consumers; and impose tougher penalties on those who commit fraud as well as greater accountability on Washington regulators.”

According to Hensarling, the Financial CHOICE Act and its “real reforms” would undo many of the rules that Dodd-Frank ushered in, as well as significantly change the financial regulatory environment that’s existed for the last several years.

Hensarling laid much of the blame for the weak economy on “the Left,” and the fact that Dodd-Frank and its reforms are built on “faulty principle, faulty premise and faulty policy,” which lead to increased regulation that’s “crushed” smaller financial institutions.

“Those on the Left who gave us Dodd-Frank believe in the principle that human nature is self-destructive and that people (except themselves, of course) are fundamentally ignorant,” Hensarling said.

“Therefore, when it comes to markets they believe private businesses are essentially predatory in nature and people are hapless victims,” Hensarling continued.

“Consequently, their solution to the financial crisis was to impose yet even more stifling government regulations, restrict economic liberty and give Washington the power to direct financial institutions,” Hensarling said.

“Dodd-Frank’s false premise is that an alchemy of Wall Street greed, outsized private risk and massive Washington de-regulation almost blew up the world economy,” Hensarling said.

“According to their narrative, this necessitated massive taxpayer bailouts and a functional occupation of our capital markets by federal regulators,” he said. “It wasn’t de-regulation that caused the financial crisis; it was dumb regulation.”

But, according to Hensarling, Dodd-Frank and its goals are far more nefarious than it appears.

“I fear Dodd-Frank’s ultimate purpose is to eventually render effective control of our capital markets to the state; to turn large money-center banks into functional utilities, so that the state can allocate credit within our economy to politically favored classes,” Hensarling said. “In other words, to take over the commanding heights of our economy. This must not be allowed to stand.”

And, if Hensarling and the Republicans have anything to do with it, Dodd-Frank and its ulterior motives will not persist for much longer.

According to Hensarling, the Financial CHOICE Act, which will be introduced in Congress later this month, features seven separate sections that each address areas of the country’s financial system that have been negatively impacted by Dodd-Frank

Per an executive summary of the Financial CHOICE Act provided by the House Financial Services Committee, those sections are:

1. Provide for election to be a strongly capitalized, well-managed financial institution

2. End “too big to fail” and bank bailouts

3. Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors

4. Demand accountability from financial regulators and devolve power away from Washington

5. Demand accountability from Wall Street through enhanced penalties for fraud and deception

6. Unleash opportunities for small businesses, innovators, and job creators by facilitating capital formation

7. Provide regulatory relief for Main Street and community financial institutions

The executive summary, which can be read in full here, provides more information about each of the sections in greater detail, but several tenets of the plan necessitate further mention due to their potential impact.

Notably, as Hensarling mentioned, the Financial CHOICE Act would overhaul not only the CFPB and its leadership structure, but other significant regulators as well – including the Federal Housing Finance Agency.

According to the executive summary, the Financial CHOICE Act would actually change the name of the CFPB to the “Consumer Financial Opportunity Commission,” and establish a new mission for the consumer watchdog of not only protecting consumers but also ensuring competitive markets.

Under the Republican plan, CFPB Director Richard Cordray would be replaced by a “bipartisan, five-member commission which is subject to congressional oversight and appropriations.”

Cordray’s position at the top of the CFPB and the CFPB’s actions under Cordray have long been a target of the Republican Party, and in his speech, Hensarling further illuminated why that is.

“The CFPB may arguably be the single most powerful and least accountable Federal agency in the history of our nation,” Hensarling said. “The CFPB Director – one man – has the unbridled and unprecedented power to unilaterally declare virtually any mortgage, credit card or bank account ‘unfair’ or ‘abusive’ at which point Americans can’t have it – even if they need it, want it, understand it and can afford it.”

To end that concentration of power, the Republican plan would not only strip Cordray of his (and any other future single director) of his power, the Financial CHOICE Act would also establish an independent, Senate-confirmed Inspector General for the commission, require the Commission to obtain permission before collecting personally identifiable information on consumers, repeal the CFPB’s current authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration and repeal the CFPB’s indirect auto lending guidance.

But the CFPB and its leadership structure aren’t alone in the crosshairs of the Republicans.

The Republican plan would also supplant Mel Watt as the director of the FHFA, as well as Thomas Curry as the Comptroller of the Currency.

“Our plan also holds Washington accountable by converting financial regulatory agencies presently headed by single directors – the CFPB, the Office of Comptroller of the Currency, and the Federal Housing Finance Agency – into bipartisan commissions,” Hensarling said. “A bipartisan structure will compel these agencies to consider multiple viewpoints and perspectives in their rule-makings and protect them from partisanship.”

Another significant section of the Republican plan deals with Washington’s current “one-size-fits-all” regulatory approach that is “crushing” smaller financial institutions.

“To promote economic growth, we will need both Citibank with an ‘i’ located a few blocks from here and City Bank with a ‘y’ located in Forney, Texas in my district,” Hensarling said. “Both types of banks have a vital role to play in revitalizing economic growth.”

According to Hensarling, the country is losing, on average, one community financial institution every day due to the “the sheer weight, volume, complexity and expense of Washington’s rules.”

To counteract that trend, the Republican’s proposal would require financial regulators to “tailor regulations so they fit a bank or credit union’s business model and risk profile.”

Additionally, the Republican plan would provide “critically needed mortgage relief” for community banks, Hensarling said.

According to Hensarling, the plan would include an ability-to-repay safe harbor for loans held on portfolio, ensure the availability of mortgage credit for manufactured homes, fix the way points and fees are calculated, and exempt small servicers from escrow requirements.

The Republican plan would also impose the “toughest penalties in history for financial fraud, self-dealing and deception,” Hensarling said.

“We will double the cap for the most serious securities law violations and will allow for triple monetary fines when penalties are tied to illegal profits,” Hensarling said. “We will give the SEC new authority to impose sanctions more closely linked to investor losses – and increase punishments even more for repeat offenders,” Hensarling continued.

“We will increase the maximum criminal fines for both individuals and firms that engage in insider trading,” Hensarling added. “Our plan toughens penalties—not out of some ideological or poll-driven war against Wall Street, but simply to better protect consumers and strengthen their markets. This is key to economic growth.”

But those are just a few pieces of the Republican plan. Again, for the full executive summary of the Financial CHOICE Act, click here.

Hensarling closed his speech with a call to action.

“In conclusion, our circumstance is unprecedented in our history. Seven years after the Great Recession ended…and so few meaningful jobs, so little growth. The American people deserve something better than they’re getting now. They deserve an economy that’s more prosperous…a future that’s more secure…a nation that’s more free,” Hensarling said.

“This nation’s fiscal, monetary and regulatory policies all need fundamental reforms because all are dragging down job- and business-creation. After most other recessions, the engines of growth returned, fueled by capital flows from U.S. banks and financial institutions,” Hensarling said.

“The difference this time is clear: it’s the inefficiencies thrown by Dodd-Frank into the capital flow fuel line. This is why ending and replacing the mistake of Dodd-Frank is the necessary start if we ever hope to restore real economic growth in America,” Hensarling said.

“You cannot have capitalism without capital. Capitalism, or free enterprise, is the greatest, most effective economic system to raise prosperity for everyone from the bottom to the top, to create jobs, to give consumers more choices, and generate innovative technological improvements for a better life,” Hensarling continued.

“More importantly than anything else, free enterprise – resting on the rule of law – provides the moral basis of a fair and just distribution of goods and services, ordered to the good and the happiness of every human being,” Hensarling concluded. “We don’t need to envision new principles to restore economic growth, we need only to take back the Founders’ vision and take up a new policy direction for the financial sector of the 21st century.”

Unsurprisingly, Rep. Maxine Waters, D-CA, the ranking member of the House Financial Services Committee, denounced the Republican plan, saying that the plan will “weaken” the country’s financial system and consumer protections.

“Today, just steps from Wall Street, Chairman Hensarling unveiled a special interest wish list that would deregulate the financial sector to the detriment of consumers and investors,” Waters said in a statement.

“In the six years since Democrats saved our economy from the worst financial crisis since the Great Depression, Republicans have been clear about their intent to dismantle the historic protections we put in place under the Dodd-Frank Act,” Waters continued.

“They seem to forget about the trillions of dollars of wealth that were stripped from American families and they refuse to acknowledge that the crisis was caused by reckless behavior on Wall Street and a wholly inadequate regulatory regime,” Waters added. “That’s why most Americans favor robust financial regulation. They know that Wall Street Reform has made our financial system safer, fairer, and stronger.”

Waters closed her statement by lumping in the Republican plan with the presumptive Republican nominee for president, a comparison that’s not mean to flatter.

“The Chairman’s proposal takes a page from Donald Trump’s casino playbook by gambling with the American economy,” Waters concluded. “We cannot allow Republicans to take us back to the depths of the financial crisis by weakening regulatory oversight and giving banks the tools to game the system once again.”

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