Explainer: Congress rolls back regulations on banks and financial institutions
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Explainer: Congress rolls back regulations on banks and financial institutions

What just happened?

On Tuesday, the House voted 258-159 (including 33 Democrats) in favor of the Economic Growth, Regulatory Relief and Consumer Protection Act. The legislation rolls back some of the Dodd-Frank banking and financial regulations that were implemented after the financial crisis a decade ago.

The Senate has already approved a similar version and President Trump said he will sign the bill.

What is Dodd-Frank?

The Dodd-Frank Wall Street Reform and Consumer Protection Act (better known as Dodd-Frank) is a federal law signed in 2010 as a response to the financial crisis of 2007-2008. The stated purpose of the Act was to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

What are the major changes in the bill?

The rollback mostly affects small and midsize banks and financial institutions, exempting them from some of the more onerous regulations that were imposed under Dodd-Frank.

“The Main Street banks and credit unions that people depend on, they’ve been suffering,” said Rep. Jeb Hensarling (R-TX), chair of the House Financial Services Committee. “They’ve been suffering for years under the weight, the load, the volume, the complexity, the cost of heavy Washington bureaucratic red tape. They haven’t been able to serve these people to get them into homes and get them into cars.”

What are the specifics changes made in the bill?

The bill makes numerous changes in six key areas. Here are some highlights from each of the sections of the legislation:

Improving Consumer Access to Mortgage Credit

• Allows small banks and credit unions to forgo certain ability-to-pay requirements regarding residential mortgage loans.

Regulatory Relief and Protecting Consumer Access to Credit

• Requires federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank’s equity capital to its consolidated assets) for banks with assets of less than $10 billion. Such banks that exceed this ratio will be deemed to be in compliance with all other capital and leverage requirements.

• Excludes reciprocal deposits (i.e., deposits that banks make with each other in equal amounts) of an insured depository institution from certain limitations on prohibited broker deposits if the total reciprocal deposits of the institution do not exceed the lesser of $5 billion or 20 percent of its total liabilities.

• Exempts from the “Volcker Rule” banks with total assets valued at less than $10 billion, and trading assets and liabilities comprising not more than 5 percent of total assets. (The Volcker Rule prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds.)

• Authorizes financial institutions to record personal information from a scan, copy, or image of an individual’s driver’s license or personal identification card and store the information electronically when an individual initiates an online request to open an account or obtain a financial product. The financial institution may use the information for verification purposes but then must delete any copy or image of an individual’s driver’s license or personal identification card after use.

• Lowers the maximum allowable amount of surplus funds of the Federal Reserve banks.

Protections for Veterans, Consumers, and Homeowners

• Increases the length of time a consumer reporting agency must include a fraud alert in a consumer’s file.

• Requires a consumer reporting agency to provide a consumer with free credit freezes and to notify a consumer of their availability and establishes provisions related to the placement and removal of these freezes.

• Creates requirements related to the protection of the credit records of minors.

• Establishes and limits a dispute process and verification procedures with respect to the inclusion of a veteran’s medical debt in a consumer credit report.

• Extends immunity from liability to certain individuals employed at financial institutions who, in good faith and with reasonable care, disclose the suspected exploitation of a senior citizen to a regulatory or law-enforcement agency.

• Allows financial institutions and third-party entities to offer training related to the suspected financial exploitation of a senior citizen to specified employees

• Restores notification requirements and other protections related to the eviction of renters in foreclosed properties.

• Clarifies that a refinanced home loan may not be guaranteed by the Department of Veterans Affairs (VA), unless a specified minimum time period has passed between the original loan and the refinancing and the lender complies with provisions related to fee recoupment, mortgage interest rates, and net tangible benefit tests.

• Allows the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), when determining whether to purchase a residential mortgage, to consider a borrower’s credit score only if certain procedural requirements are met with respect to the validation and approval of credit-scoring models.

• Makes permanent the one-year grace period during which a servicemember is protected from foreclosure after leaving military service.

Tailoring Regulations for Certain Bank Holding Companies

• Reduces the regulations on nonbank financial companies and certain bank holding companies with less than $250 billion in assets.

Encouraging Capital Formation

• Exempts from state registration securities qualified for national trading by the Securities and Exchange Commission (SEC) and authorized to be listed on a national securities exchange. (Currently, securities listed on exchanges specified by statute or SEC rule are exempt.)

• Exempts from the definition of an “investment company” a qualifying venture capital fund that has no more than 250 investors. Specifically, applies to a venture capital fund that has less than $10 million in aggregate capital contributions and uncalled committed capital. (Under current law, a venture capital fund is considered to be an investment company if it has more than 100 investors.)

• Expands the applicability to issuers of “Regulation A+” (which exempts certain smaller offerings from securities registration requirements).

• Directs the SEC to revise registration rules to allow a closed-end company to use offering and proxy rules currently available to other issuers of securities, thereby reducing filing requirements and restrictions on communications with investors in certain circumstances. (A closed-end company is a publicly traded investment management company that sells a limited number of shares to investors in an initial public offering.)

Protections for Student Borrowers

• Prohibits a creditor from declaring a default or accelerating the debt of a private student loan because of the death or bankruptcy of a cosigner to such a loan.

• Directs loan holders to release cosigners from any obligation upon the death of the student borrower.

Joe Carter

Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).