On February 3, President Trump took the first step towards Dodd-Frank reform in an Executive Order asking for a comprehensive Treasury Department review of the financial regulatory framework.  

By Sue Johnson, strategic alliance consultant

The Executive Order instructed the Treasury (in consultation with several other agencies) to produce a report within 120 days that will identify (and recommend changes to) any laws, treaties, regulations, guidance, reporting requirements and other government policies that inhibit Federal financial regulation in a manner consistent with “Core Principles,” which include:

  • Empowering Americans to make independent financial decisions and informed choices.
  • Preventing taxpayer-funded bailouts.
  • Fostering economic growth through more rigorous regulatory impact analysis.
  • Enabling American companies to be competitive in domestic and foreign markets.
  • Making regulation efficient, effective and appropriately tailored.
  • Restoring public accountability within Federal financial regulatory agencies.

No one knows exactly which parts of Dodd-Frank will be on the chopping block once Treasury presents its report on June 2. The list of potential issues is long and sweeping in its potential impact on the financial regulatory system.

One of the issues to be addressed is how to revamp the Consumer Financial Protection Bureau (CFPB), the Dodd-Frank–created agency with unprecedented regulatory authority over the housing industry.
Here’s what to watch for in the coming months:

CFPB Regulations: A Long Road Ahead

We can expect the Treasury report to nibble at the edges of Dodd-Frank reform by identifying regulations that should be revised or eliminated. This process was already set into motion by Trump’s January 30 Executive Order requiring that two existing regulations be stricken for every new rule put in place.

But, the White House only can direct agencies under its authority to target over-reaching or unnecessary regulations. While Richard Cordray remains as an independent director of the CFPB, he is not subject to either Executive Order. This could change if the appeals court in PHH vs. the CFPB upholds a 2016 three-judge panel decision that the CFPB director should be under the authority of the President. At a minimum, the President would be able to nominate a more business-friendly CFPB director when Cordray’s term expires in July 2018.

It’s important to keep in mind that a CFPB director who is subject to the President’s authority—or is more pro-business—must follow the same process when amending or eliminating a regulation that he does when issuing a new rule. This means publishing a proposal and providing for a public comment period, which would require months even under the most expedited schedule. The CFPB director’ however, would have more flexibility regarding regulatory guidance (as opposed to rules), such as the 2016 RESPA bulletin on Marketing Services Agreements (MSAs).

CFPB Legislative Reform: New Life for the Financial Choice Act

In the long term, the White House will need Congress to pass legislation to achieve significant CFPB reform.

Dodd-Frank pundits in Washington, D.C. expect the Treasury’s legislative recommendations to mirror provisions in the Financial Choice Act, Dodd-Frank reform legislation long advocated by House Financial Services Committee Chairman Jeb Hensarling (R-TX).

Hensarling is expected to introduce this year’s version of the Financial Choice Act at any time. The original version would:

  • Rename the CFPB as the “Consumer Financial Opportunity Commission” (CFOC).
  • Require that it ensures competitive markets in addition to providing consumer protection.
  • Replace the CFPB’s single director with a bi-partisan five-member commission.
  • Subject it to the Congressional appropriations process, which would give a Republican Congress the ability to reduce its funds.
  • Eliminate its authority to enforce against abusive practices.
  • Require a cost-benefit analysis of CFPB rules.

According to a recent CNBC article, an energized Hensarling is circulating an internal memo that outlines a more aggressive version of the Financial Choice Act. This memo reportedly turns the CFPB director into a political appointee subject to the authority of the President (the outcome of the PHH decision that is being appealed) and takes away the CFPB’s UDAAP authority to pursue enforcement actions against unfair, deceptive and abusive practices.

But the Financial Choice Act faces tough obstacles even in a Republican Congress. Senator Elizabeth Warren (D-MA) has made it clear that she will aggressively defend the agency, and she is backed by most Democrats. A Warren-led Senate filibuster would require 60 votes to overcome.

So, unless Republicans find an alternative legislative process to rein in the CFPB, compromise will be necessary. This begs the question: Are Democrats willing to suffer through a five-year term of a Trump-appointed CFPB director to preserve the long-term independence of the CFPB, or can they be persuaded to negotiate?

Only one thing is certain for now—Trump’s Executive Order was the first official step towards a long, grueling battle over CFPB reform that could ultimately change the consumer financial services regulatory landscape.