• Giacomo Breda

President Trump signs Economic Growth, Regulation Relief and Consumer Protection Act

Past Thursday May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) into law. The Act was passed by the House on Tuesday by a vote of 258 to 159 and by the Senate on March 14 by a vote of 67 to 31. Although the Act does not make the sweeping changes to the Dodd-Frank Act contemplated by other proposals, it nevertheless provides welcome regulatory relief to both smaller and larger financial institutions. After President Trump signed the Act, Director Mick Mulvaney as Consumer Financial Protection Bureau Director (CFPB) acting issued a statement applauding Congress for passing the Act and indicating that he is “pleased to see the long-overdue reforms to the regulations governing mortgage lending.”

In addition to the changes regarding mortgage lending, the Act makes a number of changes to provisions of federal laws regarding credit reporting, and loans to veterans and students. It also reduces the regulatory burdens on financial institutions as particularly financial institutions with total assets of less than $10 billion. Bank holding companies with up to $3 billion in total assets would be permitted to comply with less restrictive debt to equity limitations instead of consolidated capital requirements. This change should promote growth by smaller bank holding companies. Larger institutions should benefit from the higher asset thresholds that would apply to systemically important banks subject to enhanced prudential standards. The higher thresholds may lead to increased merger activity between and among regional and super regional banks. Although the bill already has prompted both high praise and intense criticism, the actual changes reflect a moderate approach. The changes are only significant, especially in reducing regulations on small and medium-sized banks, but do not represent a real change for the banking. The House voted 258-159 to approve a regulatory rollback that passed before to the Senate, handing a significant victory to President Trump, who has promised to “do a big number on Dodd-Frank.” The bill stops far short of unwinding the toughened regulatory regime put in place to prevent the nation’s biggest banks from engaging in risky behavior, but it represents a substantial watering down of Obama-era rules governing a large swath of the banking system.

The legislation will leave fewer than 10 big banks in the United States subject to stricter federal oversight, freeing thousands of banks with less than $250 billion in assets from a post-crisis crackdown that they have long complained is too onerous. Nearly eight years after its original passage, Congress agreed to relax key elements of Dodd-Frank, the financial regulatory legislation crafted in the wake of the global financial crisis. Some Democratics were opposed, as unnecessary, while Republicans argued the bill will provide growth and necessary relief for smaller institutions. “It’s a bad bill under the guise of helping community banks,” Representative Nancy Pelosi of California, the Democratic minority leader, said during debate on the House floor on Tuesday. “The bill would take us back to the days when unchecked recklessness on Wall Street ignited an historic financial meltdown.”

The Dodd-Frank bill was a Democrat-led initiative that passed with the support of just three Republicans and it has been under constant attack from Republicans ever since. Left lawmakers like Senator Elizabeth Warren of Massachusetts and Senator Sherrod Brown of Ohio have blasted their more moderate colleagues, like Heidi Heitkamp of North Dakota, for supporting the legislation. Past days, Ms. Pelosi with Maxine Waters of California, wrote a letter to their House colleagues urging them not to support the bill. The overtures did not prevent several Democrats from crossing party lines in favor of the legislation. 33 Democrats voted for it, and one Republican, Walter B. Jones of North Carolina, voted against it. Republicans, and some Democrats, say that the Dodd-Frank law has unnecessarily hurt small and medium sized banks that did not play a role in the financial crisis and have been collateral damage in Washington’s campaign to corral their bigger brethren. They say the regulations have cut off the flow of credit to many Americans who depend on smaller banks for business and personal loans. Conservative groups that have been strong opponents of Dodd-Frank say more must be done to fix the regulatory overreach created by the crisis. The Act focuses on five key areas: mortgage lending, small and community banks, larger financial institutions, securities markets, and consumer protections. The most notable change for larger financial institutions is the alteration in the asset threshold for automatic “systemically important” designations which bring increased regulatory requirements. The legislation lifts the threshold from $50 billion in assets to $250 billion, a compromise from previous legislation that aimed to remove the minimum threshold altogether. The change will exempt more than half of the approximately 40 U.S. bank holding companies. Smaller bank holding companies, those with $10 billion or less in assets, will now be exempt from Dodd-Frank’s controversial Volcker Rule, as long as no more than five percent of the bank’s consolidated assets come from trading assets and liabilities. Also smaller institutions could receive relaxed capital and data sharing requirements, elements that supporters believe to be too strict for institutions of their size. The relaxed capital standards should allow institutions that benefit from them to increase lending, which may further aid economic growth.

Notably, the bill does not include alterations to the CFPB. So not taking any action against the CFPB and instituting several new consumer protections. Moreover, the protection of student borrowers or their cosigners from automatic default in the event of the bankruptcy or death of the borrower, and the release of the cosigner upon the death of the borrower, offer some welcome relief to under federal student loan program.

Giacomo Breda

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