Changes In Attitude, Changes In FinServ Regulatory Latitude

Last week was not a good week to be the CFPB or Dodd-Frank financial reforms. The House Financial Services Committee voted 34 to 26 to repeal and replace it with the Financial Choice Act and sent it to the House floor for an up or down vote.

The vote was taken along party lines and has been something of a rather contentious topic — even in terms of how various media outlets are describing the changes as approved by the House committee.

The New York Times described the passage of the Financial Choice Act as “gutting” Dodd-Frank, while CNN chose the more neutral “reform” and Fox Business went with “repeal.”

And while it is perhaps easy to take shots at histrionic headline writers (looking at you, New York Times) — it should be noted that for drama, the reactions on the House floor did just fine on their own without help from journalists.

Jeb Hensarling, chairman of the committee and author of the bill, broke out of his usual taciturn demeanor to express his enthusiasm for the speed at which the bill moved through the committee.

“I can’t do a good James Brown, but I feel good,” Rep. Hensarling stated. “When Dodd-Frank was passed nearly seven years ago, Americans were promised it would lift the economy. Instead, we’ve had the slowest and weakest recovery of our lifetime.”

California Democrat Maxine Waters, on the other hand, felt just about as bad as Rep. Hensarling felt good.

“The bill is rotten to the core and incredibly divisive,” said Waters. “It’s also dead on arrival in the Senate and has no chance of becoming law.”

And that was just a short sample of the 23-hour debate between Democrats and Republicans on the Financial Services Committee that ended with a total party line vote on the subject.

Other highlights included Democrats accusing Republicans of passing a bill that is “immoral,” “poisonous,” “deeply misguided” and bound to “impoverish American families to enrich Wall Street”; while Republicans responded by accusing Democrats of mindlessly supporting Dodd-Frank despite the fact that it is “poorly conceived,” “economy killing,” “too-big-to-fail fueling” and a “real middle finger to the American people.”

Democrats attempted to add a reported 18 amendments to the bill —but Republicans beat back all 18, and the bill was passed through committee unamended.

It was the level of civil and rational discourse that one normally gets from Congress these days.

So what does the bill actually do? Is it DOA should it get to the Senate? And does that even matter in light of current events?

The Changes

As we noted, the CFPB is among the biggest losers in the Financial Choice Act — if not the biggest loser entirely. Under the new rules as proposed, the CFPB would lose a good deal of its enforcement and rule-making authority in its dealings with banks, lenders, credit card companies and financial services providers.

Its independent director structure would also become a thing of the past — as the head of the CFPB would become like the head of most executive agencies and serve at the will of the President.

And, in a sense, at the will of the Congress, because the Financial Choice Act would also restructure the CFPB’s funding source such that it did not draw its appropriation directly from the budget of the Federal Reserve. Instead, Congress will have control over the CFPB’s budget, again in line with their power of the purse for other federal agencies.

The Consumers Union advocacy group criticized the legislation.

“This bill strips the CFPB of most of its power and would leave consumers vulnerable to fraud, hidden fees and costly ‘gotchas’ by banks and unscrupulous financial firms,” said Pamela Banks, senior policy counsel for Consumers Union.

The bill would also unwind much of the increased capital reserves U.S. banks are required to hold, the annual stress testing to indicate they could continue to function in the event of severe financial shock. The Financial Choice Act largely replaces those requirements with an alternative path for banks to bypass a number of tougher restrictions under the law, if they meet a certain measure of bank capital.

The new regulations also remove the Federal Deposit Insurance Corp. from overseeing the so-called living will process, which requires banks to write up plans on how they would safely be unwound in the event of a collapse.

Will these regulations ever make it to President Trump’s desk — as his previous statements on Dodd-Frank strongly indicate that he would very much like to sign legislation that will reign in the 2010 set of financial regulations?

Probably not. Though the bill is widely expected to pass the House in another partisan vote, the bar to cross in the Senate is higher — 60 votes — which means Democratic support is necessary for passage. It is unlikely enough Democrats — or even any Democrats — could be pushed to support the bill as written, meaning Rep. Waters is likely right: This bill is DOA in the Senate.

What’s Next  

It is at least interesting to note that banks — that is until very recently — were usually content to put up and shut up when it came to the CFPB. But they’re getting a bit more recalcitrant and are now pushing back.

The CFPB has announced some 21 enforcement actions in 2017, one-third of which have been challenged already. That is already more challenges than what was seen in the entirety of 2016.

“We are seeing more resistance to CFPB actions,” Joseph Rubin, a senior counsel at Arnall Golden Gregory, who advises clients on regulatory matters, told The Wall Street Journal. “We anticipate that as it gets closer to the end of Corday’s term, the CFPB may find it more difficult to obtain quick consent orders from financial institutions.”

Corday’s term reportedly ends in July of 2018.

Despite the multiple moves against it, the CFPB doesn’t look to change the way it works while it can help it.

“We remain focused on carrying out our mission, and we will take action where necessary to enforce the law and achieve relief for harmed consumers,” Samuel Gilford, a CFPB spokesman, was quoted as saying.

For as long as they can anyway. The CFPB is still awaiting the outcome to a court challenge to the constitutionality of its legal structure, and President Trump has been quite clear that it is his intention to rollback Dodd-Frank and severely limit the CFPB.

It may not be the end of the world as the CFPB knows it just yet — but it is looking increasingly like the end might just be near.