This week’s Closer Looks will dive into one of the most popular bills last week on our site and in the news, US S2155, or the Economic Growth, Regulatory Relief, and Consumer Protection Act. (Click on the bill number to see how your representatives voted on the bill.)
This Act was passed and signed on May 24th, 2018 and works to roll back some of the rules put in place after the Great Recession in 2010 with Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank worked to improve financial stability and consumer protection after the Great Recession. The stated aim for Dodd-Frank is as follows:
“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”
Many politicians believed the financial institutions were primarily responsible for the crash. The bill changed the American financial environment for all financial regulatory agencies – affecting almost every sector in the industry. Dodd-Frank brought the most consequential regulatory changes to financial regulation since the Great Depression. Many people believe that though well-intentioned, the new regulations in the Act had some flaws. For example, many people in the financial industry take issue with the lack of distinction between the huge institutions (Citigroup, Bear Stearns, ect.) which contributed to the crash and smaller/community-based banks and lenders, which were not major players in the financial crisis.
The Economic Growth, Regulatory Relief, and Consumer Protection Act is broken into six sections covering access to mortgage credit, access to consumer credit, veterans/consumer/homeowner protections, holding companies, capital formation, and student borrowers. The most publicized provisions are ones that reduce some of the regulatory requirements on banks put in place since the credit crisis:
1. Requires the Federal Reserve to take size of banks into account when crafting regulations, rather than “one size fits all” regulations as critics contend the Fed has been doing for the past decade.
2. Exempts banks with total assets of less than $10 billion (provided trading assets and liabilities comprise not more than 5 percent of total assets) from the Volcker Rule (prohibiting banks from using customer deposits for their own profit or speculative trades) and eases Volcker Rule name sharing restrictions
3. Permits banks with between $50-$250 billion in assets to run with less regulatory oversight from the Financial Stability Oversight Council (FSOC).
4. Increases the asset threshold at which company-run stress tests are required from $10 billion to $250 billion
5. Directs the Securities and Exchange Commission to deliver a report to Congress on the risks and benefits of algorithmic trading in capital markets.
We interviewed Lori Pollack, the Executive Director of the Financial Counseling Association of America about the possible impact of this bill and here are some of her thoughts, briefly:
My sense of this bill is that everyone has forgotten 2008 and 2010 and we’ll have another case of, “why didn’t we learn the first time.”
There are some good consumer protections that have been put in here (although nothing that would mitigate another wave of mortgage foreclosures or help the overextended consumer). One that I like the most is regarding private student loans. Up until now, if a cosigner died or declared bankruptcy, the loan went into automatic default. That will be prohibited. The cosigner will also be released of his/her obligation in the event the borrower should pass away.
It’s also great that credit reporting agencies now have to provide fraud alerts to consumers who are victims of identity theft or fraud for a year(up from 90 days) and provide credit freezes free of charge. [Hallelujah — Karen]
There are protections for renters living in foreclosed properties; Veterans now have a year before medical debt appears on their credit reports; and when a Veteran applies for a mortgage refinancing, there needs to be tangible benefits for him/her.
So it’s not all bad, but I am personally concerned about what may happen down the road.
Personally, although I can understand the arguments against over-regulating small community banks, I’m concerned that the definition of small in the bill does not match up with my conception of an actual community bank. According to this well-footnoted letter from CAP, “If enacted, 25 of the 38 largest banks in the U.S. that currently face heightened prudential standards would escape important regulatory improvements established since the financial crisis.” So, like Lori, I fear we may be setting ourselves up to learn the hard way, again.
What do you think?
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