Ten years since the Great Recession and U.S. lawmakers are ready to forget the mistakes that led to the financial crisis and housing crash — and make some more.
Their latest effort to loosen up rules designed to prevent another financial crash is the rollback of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
Dodd-Frank was passed in 2010 in answer to the financial crisis and 2008 Great Recession. Its main role has been to police Big Banks in an effort to prevent another financial crisis, and to protect consumers from being taken advantage of by financial institutions.
To that end, Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), which since 2011 has collected penalties from several banks and other institutions for fraudulent practices. It has also made financial products and choices more transparent by creating new forms and consumer guidance.
But that was all under the old administration. The Republican-controlled government (with some support from Democrats) has now passed legislation to defang Dodd-Frank and the CFPB.
In May 2018, the president signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act.
Some key features of the Act include:
- exempting certain “small” banks from the Volcker rule, which prohibits banks from making certain types of risky investments;
- exempting smaller banks and credit unions from providing mortgage applicant data to the government under the Home Mortgage Disclosure Act (HMDA) — a change which opens the door for these banks to discriminate against minority applicants;
- exempting several “small” banks (such as American Express, BB&T and SunTrust Banks) from the stress test required of Big Banks to ensure they have enough assets available to survive a financial crash;
- reinstituting the Protecting Tenants at Foreclosure Act, which protects certain residential tenants during foreclosure; and
- exempting certain smaller banks and credit unions (with less than $10 billion in assets) from the ability-to-repay and qualified mortgage (QM) rules when the bank or credit union keeps the mortgage loan in its portfolio.
The Act also allows mortgage loan originators (MLOs) who are licensed in one state who have submitted an application to be an approved MLO in a separate state to be granted the temporary ability to work as an MLO in that other state while they wait a decision on their submitted application.
History repeats itself
Does any of this sound familiar to you?
It probably should — the cycle of tightening regulation followed by deregulation regularly occurs within the circle of economic booms and busts. Efforts to deregulate the market and grow the economy, like the president’s Act to phase out Dodd-Frank, are common in the buildup to a recession.
The thing is — even while the president and other lawmakers are focusing on growing the economy, the Federal Reserve (the Fed) is working on pulling in the reigns. The Fed’s aim is to prevent the economy from becoming overheated and induce a normal business recession (unlike the huge crash that occurred in 2007-2008 — oversized due to the bubble heights the deregulated economy was allowed to reach before the inevitable crash).
The Fed will get its recession one way or another. The real question is: how well will consumers and banks be able to stand when the recession arrives?
The Act which defangs Dodd-Frank opens the door for more risk in the market and increases the potential for more bank failures down the road. All of this is concerning to hardworking consumers and taxpayers, who rely on the government to keep everyone financially sound during recessions.
The aim of the Act is to increase lending and grow the economy, and it certainly has the potential to do that. But at what future cost to consumers?