President Donald Trump on Friday signed an executive order directing the Treasury Department to study and develop recommendations on how to go about rolling back some or all of the Dodd-Frank Wall Street Reform Act.
Although the order asks the Treasury only to study the situation, the president has made it abundantly clear that he wants to significantly roll back, if not completely repeal, the act. Prior to signing the order, Trump held a meeting with small business owners during which he promised to do “a big number” on Dodd-Frank, adding that it had damaged the country’s “entrepreneurial spirit” and limited access to credit.
“Regulation has actually been horrible for big business, but it’s been worse for small business,” the president said during the meeting. “Dodd-Frank is a disaster.”
Although the Treasury has been ordered only to study the situation, it seems likely that the act will be replaced with another piece of legislation – most likely the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act, which was introduced last year by Rep. Jeb Hensarling, R-Texas, who is also chairman of the House Financial Services Committee.
Hensarling, who was by the president’s side on Friday when the executive order was signed, points out that much of the executive order “mirrors” the CHOICE Act, which, in his words, aims “to end Wall Street bailouts, end ‘too big to fail’ and end top-down regulations that make it harder for our economy to grow and for hardworking Americans to achieve financial independence.”
However, it is important to bear in mind that the executive order, in and of itself, is not a definitive plan for overhauling, replacing or eliminating Dodd-Frank.
In a related development, Hensarling on Tuesday said during an interview with Stuart Varney on Fox Business that President Trump should fire Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), which was borne out of the Dodd-Frank Act, “as soon as possible.”
“I think he has the legal authority to do that, and I would encourage our president to do that as soon as possible,” Hensarling said during the interview.
Meanwhile, Congress is mulling separate proposals to change the leadership structure of the CFPB from its current single-leader structure to a committee structure. Those proposals spring from a Washington, D.C., federal circuit judge’s recent ruling in the CFPB v. PHH Mortgage case that the leadership structure of the CFPB is unconstitutional and further that Cordray overstepped his bounds when he unilaterally and significantly increased the fines that PHH would be required to pay under the original case.
Most agree that it will be difficult for the president to fire Cordray, due mainly to strong pushback from Senate Democrats; however, according to a report in the Wall Street Journal (WSJ), there is a path for the president to accomplish that. According to the column published Tuesday by WSJ staffer Thomas M. Boyd, all Trump has to do is ask Cordray to drop the CFPB’s appeal of the circuit court’s decision, and, should Cordray refuse, Trump could fire him for insubordination.
The mortgage industry has mixed feelings about all of this. Some mortgage professionals don’t necessarily want to see all of the regulation that has been put in place during the past six years under Dodd-Frank eliminated, simply because lenders and servicers have gone through great effort and expense to comply with those new regulations – plus, in some ways, the rules have been good for business. Some lenders and servicers have leveraged these rules as a “competitive differentiator.”
At the same time, many mortgage professionals are in support of rolling back certain parts of Dodd-Frank – for example, the qualified mortgage rule that was put in place by the CFPB, which has restricted the types of mortgage products that can be offered to consumers, as well as other regulations that lenders feel are too restrictive, such as the recently enacted capital reserve requirements.
“Along with other regulatory reforms, such as more lenient Community Reinvestment Act and capital and asset requirements, rolling back and replacing Dodd-Frank is likely to inspire and encourage more mortgage banking start-ups,” says Rick Roque, president of MENLO, a consulting firm specializing in retail growth strategies, including mergers and acquisitions. “The cost of warehousing is likely to go down, while access to warehouse financing may broaden as the result of less onerous borrowing ratios.
“The impact of replacing Dodd-Frank is far-reaching, as many federal agencies have created hundreds of new rules that, taken together, have attempted to limit risks in the financial system,” Roque tells MortgageOrb. “Modifying Dodd-Frank, therefore, may encourage mortgage companies to take on more risks, which will enable them to create more flexible loan products for consumers and expand credit and product ‘boxes’ across all FICO and income bands. If that happens, more people will be able to get mortgages than can today.”
Still, there is a huge question as to how any regulatory rollback might impact lenders and servicers operationally. Roque says although “most of the proposed reforms look positive, there is a notable lack of clarity in what the new rules will actually look like. This could create confusion among regulators trying to regulate against the current rules, as well as for lenders who are attempting to run their businesses according to current regulations.”
In other words, the short-term impact of regulatory rollback could be massive confusion.
If the Republican leadership in Washington, D.C., gets its way, it seems very likely that Cordray will be fired – and soon. However, one could argue that such a measure really has nothing to do with the bureau’s role in protecting consumers – it has more to do with the perception that the bureau director simply has too much unchecked power due to the bureau’s leadership structure (which is the crux of what the recent federal circuit court ruling is all about). In an opinion piece in USA Today, Sen. Ben Sasse, R-Neb., who serves on the Senate Banking, Housing and Urban Affairs Committee, says under the current leadership structure, Cordray “has more power than just about anyone in Washington.”
“That’s not just a problem, it’s a threat to government of, by and for the people,” Sasse writes.
“The bureau’s mission to prohibit ‘abusive practices’ sounds great,” Sasse says in his opinion piece. “But all that power has little accountability. The bureau can unilaterally write rules for major sectors of our economy (that’s a legislative power) and unilaterally slap penalties on [whomever] it chooses (that’s executive power). Its budget is on autopilot, with funding from the Federal Reserve completely outside Congress’ budget process.
“In a country of 320 million Americans, we don’t have room for any kings,” Sasse concludes. “A federal court ruled this unique structure unconstitutional and said its director must be removable by the president. It’s time to fire Richard Cordray.”