Following the Great Recession, it was clear that something needed to change to protect consumers and their finances. The result was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010.
Dodd-Frank did many things to protect consumers, CNBC explained. Some of its most impactful moves included:
- Creating the Consumer Finance Protection Bureau.
- Preventing banks from engaging in trading operations for their own profit through the Volcker Rule.
- Passing the regulation of risky derivatives over to the Securities and Exchange Commission or the Commodity Futures Trading Commission.
Many people touted the act as one that would protect consumers from predatory lenders, check big banks' power and help avoid another recession.
But others believe Dodd-Frank holds financial institutions back too much. Over the past seven years, many people have spoken out against the act. Under President Obama's administration, there was little chance that the rule would be repealed. But now, with a new Republican president, Dodd-Frank reform is more likely than ever.
Having risen from the ruin of the recession, Dodd-Frank's purpose was to target the institutions that led to the economic downfall - namely, big banks. The act even gives the Consumer Financial Protection Bureau the ability to lift certain regulations for institutions deemed nonthreatening to consumers, Dan Berger, president and CEO of the National Association of Federal Credit Unions, pointed out in an article for American Banker.
However, the CFPB has yet to make use of this ability, therefore imposing Dodd-Frank in its entirety on credit unions and regional banks as well as big banks.
Now, some financial institutions are arguing that, since they don't pose the same threats to American consumers as those that are "too big to fail," they shouldn't be treated the same way.
In a recent letter to Congressional lawmakers, CEOs of several regional banks requested that Dodd-Frank be reviewed so that appropriate regulations are applied to the respective institutions, PaymentsSource reported. They also ask for a cost-benefit analysis to provide greater insight into the effects of all new rules.
Some financial industry experts have noted that Dodd-Frank has already hurt smaller institutions. Berger reported that 1,250 credit unions - equal to about 17 percent of the industry - have shut down since the rule went into effect. He admitted that consolidation and downsizing are normal, but not at this rate. He believes that, without Dodd-Frank, 30 to 40 of those closed credit unions could have been saved every year.
Evaluations in order
Possessing a background in real estate and business, President Donald Trump entered the Oval Office with his own opinions about Dodd-Frank. He has said the regulations have hindered Americans' access to credit and dampened the "entrepreneurial spirit" of the nation, Bloomberg reported.
Trump swiftly ordered a review of Dodd-Frank, with particular attention to the Volcker Rule. While nothing has been decided as of yet, those in favor of rewriting or replacing Dodd-Frank predict a positive year ahead. In an interview with CNBC, House Financial Services Committee Chairman Rep. Jeb Hensarling (R-Texas) called reforming the rule a "this-year priority."
Hensarling has been particularly active in the effort to change up Dodd-Frank. Last year, he introduced his own rewrite of the rule, called the Financial CHOICE Act, and he plans to reintroduce it soon, Credit Union Times reported.
"House Republicans are listening and help is on the way," Hensarling said, according to Credit Union Times. "It's a new day in Washington."
Though Hensarling and others in favor of the report are optimistic, there will undoubtedly be obstacles that could slow the reform process down. Ryan Donovan, chief advocacy officer for the Credit Union National Association, pointed out that Trump didn't broach the topic in his first address to Congress on Feb. 28. Some people interpreted this as a sign that Dodd-Frank isn't a top priority for Trump.
Additionally, there will inevitably be politicians who oppose any reform. Barney Frank, the former Massachusetts lawmaker who played an integral role in creating Dodd-Frank, told U.S. News & World Report that he doesn't believe the struggles of small businesses and financial institutions are a result of lending restrictions at all.
" ... The only restriction on lending in that law is the provision that says you cannot make the kind of subprime loans to low-income people who don't have any assets," he explained. "That was the single greatest cause of the problem. Maybe they intend to loosen those restrictions. I would hope not. I don't think that would be very popular."
However, Frank did go on to say that he could be in favor of some changes that would benefit smaller financial institutions. And, it's possible that the CFPB could make alterations on its own that could benefit financial institutions. Rep. Brad Sherman (D-California) stated that he believes CFPB Director Richard Cordray will begin to tailor regulations to individual institutions appropriately.
As it stands, Dodd-Frank is intact, and financial institutions must abide by its rules. But between Trump's opinions of the rules, Hensarling's determination to rewrite the act, and credit unions and regional banks alike speaking out about their struggles as a result of the bill, there's a good chance the industry will see a shift toward fewer regulations.