The Treasury Department, in the first of four reports to President Trump detailing its review of financial regulations and its recommendations about potential changes to the depository system, proposed major changes in the Consumer Financial Protection Bureau (CFPB) structure as well as a “regulatory off-ramp” from capital and liquidity requirements, the Volcker Rule, and Dodd-Frank’s enhanced prudential standards, among other important changes.
What happened
Executive Order 13772 required the Treasury to detail laws, regulations and other government policies with regard to federal financial regulators. The 149-page “A Financial System That Creates Economic Opportunities” focuses on the depository system, including supervision and enforcement by federal regulators.
The report includes a background of the U.S. banking system and an overview of financial regulation, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Noting the goals of the current administration, the report identified several “Core Principles” that form the basis of President Trump’s policy with regard to the financial system (such as preventing taxpayer-funded bailouts and making regulation “efficient, effective, and appropriately tailored”).
With this in mind, the Treasury proposed several changes to federal financial regulatory oversight. To begin with, federal agencies need to increase their coordination and reduce overlap and duplication, the report stated. “This could include consolidating regulators with similar missions and more clearly defining regulatory mandates,” the agency suggested.
An interagency reassessment of Matters Requiring Attention, Matters Requiring Immediate Attention and Consent Orders should occur, and an improved approach for clearing regulatory entities of resolved supervisory findings should be developed. Federal financial regulators should be subject to cost-benefit analysis requirements like the executive agencies, the Treasury said, and a comprehensive review of the Community Reinvestment Act is needed to enhance the existing framework.
As part of the push to reduce the regulatory burden for banks and appropriately tailor applicable rules, the report proposed establishing a “regulatory off-ramp” from all capital and liquidity requirements, and enforcing the Volcker Rule (which prohibits banks from conducting certain investment activities using their own accounts) and nearly all aspects of Dodd-Frank’s enhanced prudential standards that apply to banks with assets of $50 billion or more. In order to take advantage of this option, such depository institutions would elect to maintain a sufficiently high level of capital, such as a 10 percent non-risk-weighted leverage ratio.
Specific to community financial institutions, the Treasury advised that modifications should be made to further streamline the process of forming de novo banks, the eligibility threshold for the 18-month examination cycle should be raised, and special consideration and tailoring should be applied by regulators to agricultural and rural banks.
High on the list of supposedly “necessary” changes, says the Treasury: reformation of the CFPB. “A significant restricting in the authority and execution of regulatory responsibilities by the CFPB is necessary,” according to the report. “The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to predictable regulatory abuses and excesses.”
Similar to the proposed changes found in the Financial CHOICE Act, and consistent with court challenges on the same issue, the report recommends switching the CFPB’s director position to one that can be removed at will by the president or restructuring the agency as an independent multimember commission, subjecting the CFPB to the congressional appropriations process, repealing the authority to conduct examinations, requiring the CFPB to adopt regulations delineating unfair or deceptive acts and practices standards, and limiting the availability of detailed data in the CFPB’s complaint database to federal and state agencies rather than making it available to the general public—among many other suggestions.
The report also considered changes to mortgage lending requirements, advocating for tweaks to the Qualified Mortgage/Ability to Repay requirements (such as permitting a loan to attain Qualified Mortgage status if one underwriting criterion is met but compensating factors exist) and the TRID Rule (including additional rulemaking to reduce compliance uncertainty and permitting creditors to cure errors in the loan file within a reasonable period post-closing).
On a slightly different topic, the Treasury also recommends a specific review of regulatory expectations for board of director performance, expressing concern that the current burdens are excessive and could be better tailored to alleviate risk. Taking care of regulatory matters is taking up too much time for boards, the report said, leaving directors with less time to spend on core corporate governance issues and thereby increasing business risk.
To read the Treasury report, click here.
For the next three installments, the Treasury Department intends to focus on capital markets; asset management, insurance industries, and retail and institutional investment products; and nonbank financial institutions, financial technology and financial innovation. Importantly, many of the recommendations presented in the report could be achieved through regulatory agencies and do not require congressional action, improving the odds of change.
Why it matters
This report is part of a full frontal attack on Obama-era structural changes as a result of the recent economic recession that began in 2007–08. This report and the possibility of significant changes under the House-passed Financial CHOICE Act suggest an administration aligned with the House of Representatives on core structural changes that would have a dramatic impact on financial regulation and supervision. Whether or not these changes have the support of the Senate is an entirely different question.
