Failures of the Financial CHOICE Act of 2016

Jee Young Kim 

Introduced in September 2016 by House Financial Services Committee Chair Rep. Jeb Hensarling (R-TX5), the Financial CHOICE Act, H.R. 5983 (FCA), seeks to deregulate the country’s financial sector. It is seen as the Republican response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Signed in 2010, Dodd-Frank introduced new regulations in order to prevent another financial crisis. Among other provisions, Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) as well as the Financial Stability Oversight Council (FSOC). The primary role of the CFPB is to create and enforce consumer financial regulations on both banks and non-bank institutions. It seeks to increase transparency and fairness for financial products and services, with emphasis on protecting consumers.[1] The FSOC identifies the economy’s level of financial risk and has the ability to oversee individual institutions that may be engaging in excessively risky behavior.[2] Through the establishment of such agencies, along with other regulations – such as increased required reserves for banks – Dodd-Frank has prevented financial institutions from enjoying the same level of freedom they had before the 2007/8 financial crisis.

The FCA – which currently remains as a bill – proposes to amend several provisions of Dodd-Frank. For example, it seeks to repeal the “Volcker Rule,” which prohibits banks from proprietary trading with risky assets and from sustaining certain relationships with investment funds, such as hedge funds or private equity funds.[3] In this way, the FCA aims to eliminate the safeguards against the risky behavior that contributed to the financial crisis. The Volcker Rule is only one of many Dodd-Frank regulations that the FCA is targeting.[4]

Many supporters of the bill argue that the FCA will correct Dodd-Frank, which they see as excessively restrictive on the financial sector. According to the House Financial Services Committee, Dodd-Frank “directs federal regulators to burden job creators and the economy with more than 400 new rules and mandates.”[5] Supporters also point out that the Congressional Budget Office estimates Dodd-Frank to take $27 million from the economy.[6]

The FCA, however, should not be passed. One major reason is that it helps to create a dangerously speculative financial environment. As mentioned above, Dodd-Frank created the CFPB, which is a necessary agency that protects the general public. Although it has been subject to some controversy because of its relative independence from the congressional appropriations process (it gets much of its funding from the Federal Reserve’s revenues), this financial autonomy most likely is helpful rather than harmful for consumers. Instead of worrying about politics in Congress and appeasing the lawmakers that could potentially control its budget, size and even its mission, the CFPB can more effectively focus on its main objective, which is to make sure U.S. consumers are not taken advantage of. Opponents argue that the transparency of the CPFB is an issue given the nature of its funding. It is important to note, however, that measures that ensure the agency’s transparency and accountability do exist. The CFPB director’s biannual testimony before Congress and the cap on the CFPB’s non-appropriated funding are some examples. The FCA nonetheless aims to restrict the authority of the CFPB. For one, it wants to subject the agency to the traditional appropriations process. It also seeks to repeal the agency’s power to declare certain abusive acts as unlawful and proposes to increase the threshold for depositories that come under the CFPB’s supervision from $10 billion to $50 billion.[7] Curtailing the influence of the CFPB could lead to dangerous outcomes. The general public will receive less protection, and financial institutions will have less resistance when engaging in the types of behavior that we all saw could lead to disastrous economic outcomes on a global scale. The agency has already returned almost $12 billion of relief to 29 million consumers.[8] It has also played an integral role in holding Wells Fargo accountable for its illegal practice of opening unauthorized accounts.[9] The CFPB is an important agency that has so far shown that it can do much good for consumers. Therefore, limiting its authority is not a wise move to make.

The House Financial Services Committee criticizes Dodd-Frank by saying that it “reaches far beyond Wall Street and does not address the real causes of the crisis [and] continues the bailouts by enshrining “too big to fail” into law, placing taxpayers at risk for trillions of dollars of future bailouts.”[10] The House Financial Services Committee argues the FCA is needed because Dodd-Frank does not resolve the real issues of the economy. However, what exactly does the FCA plan to do with these problems? Its solution to taxpayer-funded bailouts is to prevent the FSOC from designating certain institutions as “too big to fail.” This designation is what places such institutions under additional regulations. Simply prohibiting the designation does not automatically lead to the end of government bailouts. Such public expenditure may nonetheless be necessary if an institution’s bankruptcy puts the health of the economy at risk. By placing such institutions under more stringent regulations, however, FSOC acts preemptively to decrease the chances of those bankruptcies. But the FCA instead plans to remove such designations. Such a change will only allow these institutions to more easily engage in risky behavior, which makes bankruptcies and the consequent bailouts all the more likely. Supporters of the FCA base their arguments on the need to address the real issues. Yet, their proposed resolution is not the answer to those problems.

Dodd-Frank is not perfect, but the FCA is not the solution. Despite the bill’s shortcomings, Jeb Hensarling has announced that a new version is scheduled to be released soon.[11] Considering the Republican-led Congress as well as Trump’s presidency, the passage of some version of the bill seems highly likely.

 

[1] “Consumer Financial Protection Bureau” Federal Register. https://www.federalregister.gov/agencies/consumer-financial-protection-bureau.

[2] “H.R. 5983 (114th): Financial CHOICE Act of 2016” govtrack. https://www.govtrack.us/congress/bills/114/hr5983/summary#oursummary.

[3] “The Financial CHOICE Act: Policy Issues” Congressional Research Service. https://fas.org/sgp/crs/misc/R44631.pdf.

[4] “H.R.5983 – Financial CHOICE Act of 2016” Congress.gov. https://www.congress.gov/bill/114th-congress/house-bill/5983.

[5] “Oversight of Dodd-Frank Act Implementation” Financial Services Committee. http://financialservices.house.gov/dodd-frank/.

[6] “H.R. 5983 (114th): Financial CHOICE Act of 2016” govtrack. https://www.govtrack.us/congress/bills/114/hr5983/summary#oursummary.

[7] “The Financial CHOICE Act: Policy Issues” Congressional Research Service. https://fas.org/sgp/crs/misc/R44631.pdf.

[8] “Consumer Financial Protection Bureau: By the numbers” Consumer Financial Protection Bureau. https://files.consumerfinance.gov/f/documents/201701_cfpb_CFPB-By-the-Numbers-Factsheet.pdf.

[9] “Consumer Financial Protection Bureau Fines Wells Fargo $100 Million for Widespread Illegal Practice of Secretly Opening Unauthorized Accounts” Consumer Financial Protection Bureau. https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/.

[10] “Oversight of Dodd-Frank Act Implementation” Financial Services Committee. http://financialservices.house.gov/dodd-frank/.

[11] “Revised Financial CHOICE Act to Come Soon” DSnews. http://www.dsnews.com/daily-dose/03-23-2017/revised-financial-choice-act-come-soon.

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