The Trump Administration Should Not Rest While Waiting For Congress to Cut Dodd-Frank

By Norbert Michel, Heritage Foundation Financial Regulations Expert

Shortly after his inauguration, President Trump pledged that his Administration would “be cutting a lot out of Dodd-Frank.” He then signed an executive order making it the official policy of the Trump administration to regulate the United States financial system in a manner consistent with seven core principles.

Many of those principles closely track the ideas in the Financial CHOICE Act, the bill passed by the House in early June to replace large chunks of Dodd-Frank.  The White House has also released an official statement of administration policy noting that:

…the Financial CHOICE Act, reflects the Administration’s Core Principles in several key respects. It aims to eliminate taxpayer bailouts, simplify regulation, hold financial regulators accountable, and foster economic growth by facilitating capital formation.

So the Trump administration and the House are on the same page when it comes to financial regulatory reform. Where is the Senate? That remains to be seen.

Many people assume that President Trump will never get the chance to sign something like the CHOICE Act into law because no Senate Democrats will help their Republican colleagues surpass the 60-vote threshold.  Repealing parts of Dodd-Frank is, in fact, not on the Democrats’ to do list.  (Interestingly, it is not on the big banks’ list either.)

But Senate Republicans can still pass key sections of the CHOICE Act – perhaps even the entire bill – with only the 52-seat majority they currently hold.

They can do so through the budget reconciliation process.

Senate rules require that budget bill provisions be “germane” to budgeting and avoid increasing the deficit.The CHOICE Act meets those requirements.  The nonpartisan Congressional Budget Office (CBO) recently reported that “enacting the legislation would reduce federal deficits by $24.1 billion over the 2017-2027 period.

Despite this green light from the CBO, the Senate appears to be in no hurry to enact these reforms. That’s unfortunate. These types of reforms would prevent taxpayer-funded bailouts and empower Americans to make independent financial decisions.

Two key reforms in the CHOICE Act would: (1) drastically improve the mission and structure of the Consumer Financial Protection Bureau (CFPB); and, (2) replace Title II of Dodd-Frank, known as orderly liquidation authority (OLA), with a bankruptcy provision. The CBO reports that these two reforms provide most of the budgetary savings in CHOICE.

The good news: While the Senate dithers, the Trump administration can immediately take at least two policy actions consistent with these reforms.

First, the Treasury can announce that it will charge a high rate of interest – a penalty rate – on all obligations related to Dodd-Frank’s orderly liquidation authority.

While orderly liquidation may sound pleasant, Title II’s OLA allows federal regulators to close down troubled financial firms with minimal judicial review. It also authorizes the Federal Deposit Insurance Corporation (FDIC) to hold taxpayers responsible for the most worthless assets on a company’s books. There’s a word for this: “bailout.”

Specifically, Section 210(n) of Dodd-Frank, authorizes the FDIC to issue obligations to the U.S. Treasury to buy up assets that no one else wants to buy.

What can the administration do to protect taxpayers from being stuck with these duds? Well, Section 210(n)(5)(C) says Treasury can set an interest rate surcharge on these obligations that must be greater than the difference between:

(i) the current average rate on an index of corporate obligations of comparable maturity; and

(ii) the current average rate on outstanding marketable obligations of the United States of comparable maturity.

So, while waiting for Congress to repeal OLA, the Treasury could protect taxpayers by announcing that this surcharge will be, for example, 10 percentage points above the difference required by Dodd-Frank.  This would discourage failing firms from trying to dump their bad paper on the U.S. Treasury. Of course, the ultimate goal is protecting taxpayers by getting rid of OLA.

The second reform that the Trump administration can implement now involves using the Financial Stability Oversight Council (FSOC).

In particular, Treasury can use the FSOC to protect millions of Americans from two of the CFPB’s most controversial rules: the payday lending rule and the arbitration rule.

The CFPB is expected to finalize both rules in the coming months—even though the Bureau’s own research suggests these rules could have a broad negative impact with little benefit (even for those the rules are supposed to help).

Provided that it acts before the CFPB finalizes the rules, the Trump administration can, at the very least, delay these rules from being implemented—buying time from bad regulation until Congress acts.

Section 1023 of Dodd-Frank authorizes the FSOC to set aside any final rule issued by the CFPB if the FSOC decides the rule would endanger the stability of the U.S. financial system.  Section 1023 also authorizes the FSOC Chair (i.e., the Treasury Secretary) to impose a 90-day stay for any final regulation issued by the CFPB “for the purpose of allowing appropriate consideration of the petition by the Council.”

Treasury must, however, follow the specific conditions set forth in Section 1023 to obtain this stay and to set aside a final rule.

Specifically, Treasury can petition the FSOC for a 90-day stay of the arbitration and payday-lending rules provided it:

(A) has in good faith attempted to work with the Bureau to resolve concerns regarding the effect of the rule on the safety and soundness of the United States banking system or the stability of the financial system of the United States; and,

(B) files the petition with the Council not later than 10 days after the date on which the regulation has been published in the Federal Register.

Treasury must also publish the filed petition in the Federal Register and transmit the petition, contemporaneously with the filing, to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services.

To ensure that it can use this authority, Treasury should immediately inform the CFPB director, in writing, that it has concerns regarding the effect of the payday-lending rule and the arbitration rule on: (1) the safety and soundness of the United States banking system; and, (2) the stability of the financial system of the United States.

If the CFPB publishes either of these two final rules in the Federal Register, the administration should then, in no more than 10 days from the publication, file a written petition with the FSOC.

Neither of these two recommendations provides the permanent relief from Dodd-Frank that Americans need, but both would provide the temporary reprieve needed while Congress gets its financial-reform act together.

*Originally published in Forbes, click here.

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