You might have missed it amidst the flurry of other headlines, but President Donald Trump—and Republican lawmakers—want to change the rules that govern the way banks can do business.
At issue is the Dodd-Frank Wall Street Reform and Consumer Protection Act, a 2,300-page law signed by President Obama in 2010.
What does Dodd-Frank do?
Named for two former Democratic lawmakers, the bill aims to prevent banks from making the same mistakes that led to the Great Recession and to help us be more informed when making important financial decisions. How?
- It set up new agencies and merged others to supervise financial institutions including banks, brokerages, and mortgage lenders.
- It created the Consumer Financial Protection Bureau (or CFPB), which aims to “protect consumers from unfair, deceptive and abusive practices” by financial firms.
- It established the “Volcker Rule,” which prevents banks from making high-risk investments with your deposits.
- It ordered “stress tests” on banks to make sure they have enough money in case of another economic crisis.
So, what’s the problem?
Many banks don’t like Dodd-Frank. They argue the rules are too strict and the red tape alone costs them billions of dollars—money they say could be used instead to invest in the economy by providing more loans to homebuyers and business owners.
Supporters dispute that notion and say such regulations are necessary—otherwise banks could make risky bets with customers’ money and trigger another financial crisis. And they argue that consumers will pay the price if the CFPB is stripped of its funding or regulatory powers.
The CFPB’s fielded more than a million consumer complaints and provided nearly $12 billion to 29 million Americans through its enforcement work since it was formed in 2011. (Last year it found Wells Fargo had opened two million unauthorized customer accounts to boost sales quotas, fining the bank $100 million and ordering full restitution to affected customers.) But critics complain the agency has too much power and has overreached with regulations.
The debate still rages, but the new president said he does expect “to be cutting a lot out of Dodd-Frank.”
Can he do that?
Only Congress can rewrite the Dodd-Frank law. But Trump set the course when he made two key moves:
He signed an executive order to review existing rules to see if they follow his administration’s “core principles.” The Treasury Department must report back on ways to cut the red tape, which could eventually involve naming more administration-friendly officials to lead regulatory agencies.
Trump also signed a memo requiring a review of the implementation of the “fiduciary rule,” which would require brokers to put customers’ best interests first, not their financial institution’s, when offering retirement advice. (Critics have argued the rule would be costly to implement and limit consumer choice.) In early March, the Labor Department released an updated proposal for a 60-day hold on the original April 10 effective date. It’s not clear whether it will be implemented after the review.
How could all this affect us?
If Dodd-Frank is rolled back, financial institutions may be more willing to offer loans to customers with weaker credit (but watch the rates, which are often higher). Banks, which are already doing very well, could improve profitability by cutting staff hired to supervise compliance. Implementation of the fiduciary rule may now be postponed indefinitely. (Registered Investment Advisors are already held to that standard under SEC guidelines, but brokers and other financial advisors aren’t, so it’s wise to ask.)
That’s still an if though. The only thing you can be certain of is a lively debate in Congress in the coming weeks between Democrats who have vocally opposed calls to “dismantle” Dodd-Frank and high-ranking GOP lawmakers who have vowed to do just that.
This story was updated on March 1 with new information on the fiduciary rule.
February 9, 2017