The latest effort to—depending on your viewpoint— either undermine or reform the Dodd-Frank Act has a unique twist when compared to the barrage of other efforts: This time there are Democrats on board.
Well, not all Democrats. There are currently about 20 Senators onboard, mostly those who hold office in “red” and “purple” (swing) states. Notable supporters of the Economic Growth, Regulatory Relief and Consumer Protection Act include Sens. Heidi Heitkamp (D-N.D.), Jon Tester D-Mont.), Claire McCaskill (D-Mo.), and Tim Kaine (D-Va.). Kaine, in fact, is a co-sponsor of the bill, originally sponsored by Sen. Mike Crapo (R-Idaho).
The big question: Is this newfound political consensus an omen of more attacks on the post-Financial Crisis legislation? The answer may not emerge immediately, especially while inter-party squabbles rage on.
Bipartisan support for the bill has created a rift among Democrats, one with a line of demarcation that can be bookended by liberal ideology.
Progressive diehards like Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) are the figureheads of dissent. Due in part to their efforts, a vote planned for last week is now bumped up to this week because nearly 100 amendments have been piled atop the original bill, many intended to dull its deregulatory efforts.
The bill, S. 2155, would change the regulatory framework for small depository institutions with assets under $10 billion (community banks) and for large banks with assets over $50 billion. It raises the asset threshold for heightened prudential supervision—a trigger for an expanded regulatory slate of liquidity standards, leverage ratios, stress testing, and resolution planning—from $50 to $250 billion.
While some quibble about the size of that asset jump, offering regulatory and compliance relief to smaller, local financial institutions has been met with little opposition. The bill, however, doesn’t stop there.
The proposed legislation also includes language saying that the Federal reserve “may” tailor regulation for the largest banks. Volcker rule requirements are scratched for smaller banks with less than $10 million in assets. Mortgage rules are also loosened. Approximately 85 percent of lenders will find relief from the reporting requirements of the Home Mortgage Disclosure Act, data that helps track discriminatory lending patterns. The bill similarly seeks to provide regulatory relief and safe harbor for certain mortgage loans that are made by certain credit unions and held in portfolio.
Consumer credit reporting agencies are directed to provide a security freeze on a consumer’s credit file when requested and to exclude information related to a veteran’s medical debt from their consumer credit report under certain circumstances. The bill allows banks to offer products and services entirely through online and mobile channels outside their geographic footprint.
The legislation, barring submitted amendments, would also offer deregulatory benefits to 25 holding companies of foreign banks, including Deutsche Bank, BNP Paribas, UBS, and Credit Suisse. The bill also lowers the ratio of loss-absorbing capital buffers/supplementary leverage ratio at two of the eight most systemically important banks in the United States, State Street Corp. and The Bank of New York Mellon Corp. Changes are also afoot for how regulators calculate large banks’ (SLR) for some large banks.
“The corporate tax cuts passed in December 2017 were a windfall for big banks-and big banks are again winners in this legislation. The bill would deregulate 25 of the largest 38 banks in the United States and would undermine some key protections for homeowners and homebuyers, while offering crumbs for consumers.”
Gregg Gelzinis, Researcher, Center for American Progress
“This piece of legislation has been touted as a community bank bill. Make no mistake, S. 2155 is the second part of a massive corporate giveaway,” says Gregg Gelzinis, a researcher at the liberal Center for American Progress. “The corporate tax cuts passed in December 2017 were a windfall for big banks—and big banks are again winners in this legislation. The bill would deregulate 25 of the largest 38 banks in the United States and would undermine some key protections for homeowners and homebuyers, while offering crumbs for consumers.”
Crapo defended his legislation from the Senate floor last week. “We are losing credit unions and, more specifically, community banks, across this nation at an alarming pace,” he said. “The primary reason is the phenomenally significant increased regulatory burden that they face.”
“Our bill simplifies the capital regime compared to the current Basel III requirements for larger financial institutions,” he added. “Under Basel III, community capital has become punitive and complex. Do we really need four definitions of regulatory capital, a capital conservation buffer, and impossibly complex rules?”
Critics include Sen. Bernie Sanders (D-Vt.). “I have not heard one person say, ‘Bernie, we have got to deregulate 25 of the largest banks in this country with cumulative assets of $3.5 trillion.’ ”
And, of course, Sen. Warren was lead soprano in the chorus of critics. Speaking from the Senate floor, she said that easing mortgage requirements and raising the enhanced regulation threshold to $250 billion “puts the entire economy at risk.”
“The banks don’t want you to know what’s in this bill because, if you did know, you’d fight back,” she said. “It was written by senators in back rooms and jammed through the Senate Banking Committee where its authors voted down every single amendment, every single idea to make the bill even one smidge better or to protect consumers just one tiny bit more. They voted against every amendment even if they agreed with it, because Republicans and Democrats have locked arms to do the bidding of the big banks.”
At an earlier press conference, Warren underscored her point, explaining that Countrywide, a bank whose mortgage malpractice and malfeasance helped spark the Financial Crisis, only had cumulative assets of only about $200 billion at the time. Under the current bill, “it would be regulated as if it were some tiny, little community bank.”
Sen. Thom Tillis (R-N.C) rejected the notion that amendments were shunned or that the bill is a gift to big banks. “What this bill is trying to do is recognize that, of course, after the Financial Crisis there was a regulatory exposure that we needed to address,” he said. “The problem is we simply went too far. With the passing of time, we now know that we can claw back those regulations on certain banks, particularly community banks and regional banks.”
“There are discussions here where it sounds like we are doing some big bank relief. Not at all,” he added. “I have a couple of large banking institutions in North Carolina. they are going to have to continue to submit 60,000-page, 100,000-page stress tests and CCAR [Comprehensive Capital Analysis and Review] reports to make sure they don't create a systemic threat. This bill doesn’t touch that. What it touches is a part of the ecosystem that is suffering.”
Sen. Bob Menendez (D-N.J.) spoke out on the Senate floor about the inclusion of mortgage rule changes.
“The bill we have before us brings back risky mortgage lending practices that increase the likelihood of foreclosures,” he said. “It undermines our efforts to police discriminatory lending practices. Under this bill, some banks will once again be able to offer mortgages with teaser rates of 4 percent that more than double in just two years without ever verifying if a borrower could afford a 9 percent interest rate.”
As for the prospect of regulators stepping in to fill any regulatory void, Menendez was not impressed. “Supporters of the bill are quick to point out that it preserves the Federal Reserve’s authority to take action if they become concerned about a bank with less than $250 billion in assets,” he said. “Forgive me for not having confidence in regulators with a long history of doing too little too late.”
Providing additional fuel for critics is the Congressional Budget Office. It estimates that enacting the bill would increase federal deficits by $671 million over the 2018-2027 period.
“CBO’s estimate of the bill’s budgetary effect is subject to considerable uncertainty, in part because it depends on the probability in any year that a systemically important financial institution (SIFI) will fail or that there will be a Financial Crisis,” the analysis said. It estimates “that the probability is small under current law and would be slightly greater under the legislation.”
While the Senate hashes out its differences, another complication may be on the horizon. Seeing their chance to strike, the House Financial Services Committee is already floating trial balloons about nearly 30 reform bills it may want to tag on when it is their turn. Lurking in the background is Rep. Jeb. Hensarling’s (R-Texas) massive Financial CHOICE Act, a full-throated attack on Dodd-Frank from nearly every angle.
And so, for now, despite bipartisan momentum, Dodd-Frank Act reforms remain a work in progress, says Cliff Stanford, a partner in Alston & Bird’s Financial Services & Products Group and leader of the firm’s Bank Regulatory Team.
“There seems to be this wall up around changing Dodd-Frank for, depending on your point of view, good reasons or bad reasons,” Stanford says. “This wall around it has been hard to crack open. The political winds have not been blowing in the banking industry’s favor for some time, on either side of the aisle,” he says. If you look at the Financial CHOICE Act it is a smorgasbord of reform ideas, but because it is so far-reaching and such a hodge-podge of ideas, it was likely more of a menu or picklist and not likely to be passed in that form.”
“What you may see is that the House may just pick this [the Senate bill] up and move forward with it, because it is the best they are going to get. There are some good ideas there, such as the simplified capital ratios for community banks and relief from the Volcker rule, that just make good sense and there seems to be bipartisan momentum to move ahead with those pieces,” he adds.