Treasury Secretary Steven T. Mnuchin on Monday proposed sweeping changes to the tough Dodd-Frank regulations put in place after the 2008 financial crisis, including a major reduction in the power of the Consumer Financial Protection Bureau and other rollbacks long desired by Wall Street.
In a 149-page report ordered by President Trump, Mnuchin also recommended reducing oversight of large financial institutions, providing even more regulatory relief for smaller banks and loosening new mortgage restrictions designed to prevent a repeat of the subprime meltdown.
The report was the Trump administration’s first formal salvo in what’s expected to be a long and complex process involving Congress and federal agencies to try to scale back regulations that Republicans have complained are harming banks and stifling economic growth.
“A sensible rebalancing of regulatory principles is warranted in light of the significant improvement in the strength of the financial system and the economy, as well as the benefit of perspective since the Great Recession,” the report said.
Democrats and consumer advocates said Dodd-Frank is the reason for that strength, after the system nearly imploded in 2008. They’ve vowed to fight major changes in the law.
“We need more effective regulation and enforcement, not rollbacks driven by Wall Street and predatory lenders,” said Lisa Donner, executive director of Americans for Financial Reform, a group advocating tougher oversight of the financial system.
The report, which included dozens of recommendations, is the first of three ordered by Trump as he looks to fulfill a campaign promise to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The legislation was approved by Congress with almost no Republican support in the wake of the 2008 financial crisis.
Dodd-Frank toughened bank regulations, sought to avoid future bailouts by creating a process to shut down teetering financial giants, prohibited federally insured banks from engaging in risky trading, established a powerful panel of regulators to watch for signs of instability and created the Consumer Financial Protection Bureau to oversee credit cards, mortgages and other financial products.
The House last week voted along party lines to approve sweeping legislation — the Financial Choice Act — repealing key provisions of Dodd-Frank.
The Treasury report calls for many of the same changes but in some areas is more moderate than the House bill.
For example, the Financial Choice Act would repeal the trading restrictions known as the Volcker Rule. Mnuchin recommended significantly loosening the restrictions, which regulators could do on their own, but did not call for a repeal, which would require congressional approval.
The Treasury proposals reflect the difficulty Republicans face in overcoming a likely Democratic filibuster on Dodd-Frank changes in the Senate.
But in a nod to the House bill, the Treasury Department called for Trump to consider replicating its centerpiece — allowing banks to elude most regulatory oversight if they increase the amount of capital they hold as a cushion against future losses.
The House bill, sponsored by Rep. Jeb Hensarling (R-Texas), and the Treasury report would each gut the power of the independent consumer bureau.
“The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to regulatory abuses and excesses,” the Treasury report said.
Mnuchin recommended that the agency’s independent funding stream be eliminated and that it be placed under the congressional appropriations process. He also wants the president to be able to remove the bureau’s director for any reason.
The bureau also would lose its ability to send supervisors into banks to make sure they are complying with consumer protection laws.
And the department recommended that the public no longer have access to the agency’s online database of consumer complaints against financial firms. The data would be available to only federal and state agencies.
The report also calls for a handful of changes in the regulations governing mortgage lending, saying many of the safety measures that aimed to correct weaknesses exposed by the housing crash and recession were no longer needed and have made it more difficult and expensive to get home loans.
It cites a report from the trade group Mortgage Bankers Assn., suggesting the cost to originate a mortgage rose to $7,500 last year from $4,400 in 2009, and says those costs have been passed along to consumers in the form of higher rates. However, rates remain near record lows; the average 30-year fixed mortgage rate was 3.89% last week, its lowest level this year, according to Freddie Mac.
The report suggests scrapping a rule that requires companies that pool and sell off, or “securitize,” mortgage loans to hold on to some of those loans. That rule was a response to lenders who wrote and securitized mortgages without keeping any, meaning they had little concern if the loans failed.
Eliminating the rule, the report suggests, is one of a few steps that should be taken to boost the number of loans that are underwritten by private lenders rather than by government-backed mortgage buyers Fannie Mae and Freddie Mac.
To that same end, the report calls on changing the CFPB’s definition of a safe mortgage to more closely match the definitions used by Fannie Mae and Freddie Mac.
Now, the government-backed mortgage buyers accept loans that are somewhat riskier than those that get legal protection by a CFPB rule. That disparity, the report says, “creates an unfair advantage for government-supported mortgages without providing additional consumer protection.”
The report also suggests changes that would make it easier for lenders to underwrite mortgages for borrowers who are self-employed or otherwise have a harder time documenting their income. It would exempt mid-size banks from some mortgage requirements that small banks do not have to follow.
The report calls for a Treasury Department review of the Community Reinvestment Act, or CRA, a federal antiredlining law that predates Dodd-Frank by more than 30 years. The law, which requires banks to lend in low-income and minority communities, has long been criticized by some conservative lawmakers but has not been a focus of deregulation efforts.
Mnuchin ran into CRA problems when he was selling Pasadena’s OneWest Bank to New Jersey lender CIT Group. Complaints from community groups that said OneWest did not do enough in the way of CRA compliance helped delay the deal and led to a federal hearing on whether the combination of the two banks would benefit California neighborhoods.
The report suggests that the Home Mortgage Disclosure Act, an antiredlining measure that requires lenders to collect and report data about borrowers and race, should not be expanded to require lenders to report more information, something Dodd-Frank required. It also suggests “discontinuing public use” of HMDA data, a move that probably would draw ire from housing and lending advocacy groups.
Trump has ordered separate reviews of two pillars of Dodd-Frank — regulators’ authority to designate large firms as a risk to the financial system and a new process to try to shut them down with minimal collateral damage if they’re on the verge of failing. So neither were addressed in Monday’s report.