Dodd-Frank Act: The Threat of Repeal

So, what's next for Dodd-Frank under Trump?

Commentary by NCS 

Although the 2010 induction of the Dodd-Frank Act was costly, it was an effective start for consumer protection and market reform in the mortgage industry. Under President-elect Donald Trump, there is an impending threat of a legislative repeal. What will this uncertainty cost the bank industry when the country is still recovering from the housing market crash?

Although the 2010 induction of the Dodd-Frank Act was costly and invasive, it was an effective start for better consumer protection and market reform in the mortgage industry. Under President Donald Trump, there is an impending threat of a legislative repeal. What will this uncertainty cost lenders & consumers especially as rates are scheduled to rise in 2017?

There’s industry consensus that several aspects of the Dodd-Frank Act should be adjusted to be more target-specific.  This November, former Massachusetts Representative and part namesake to the Act, Barney Frank recommended raising the asset level for banks that were subject to more stringent compliance levels.  Dodd-Frank currently places a higher compliance threshold on financial institutions with $50 billion+ in assets.  Community banks have lodged frequent concerns about their inability to effectively manage the compliance policies and practices to conform to Dodd-Frank rules.  The Minneapolis Fed has conducted extensive studies on community bank consolidation.  Their research suggests just adding 2 employees to a bank’s compliance department would make a third of the smallest banks unprofitable according to an April 2016 article from the New York Times.   Motives for consolidation among community banks site steep increases in compliance costs, and also technology costs to keep pace with consumer and regulatory desires for greater transparency into the origination process.

A complete repeal of Dodd-Frank as suggested by President-elect Trump would eliminate both good and bad portions of the law.  It would be an extreme lift for a Congress now known for its inability to pass legislation, to draft, agree and enact new finance law. For many companies, the original legislation called for new regulation, policy requirements, and system overhauls that cost millions to gain compliance. Not only would this type of repeal be expensive, but it would require new company policies and procedures, training of employees, technology upgrades, and the numerous legal aspects of any given item.

Most financial institutions have adapted to doing business in the era of Dodd-Frank. To consider a repeal now, would involve from the banks think tanks, lobbyists, regulatory teams, operational upheaval, and time away from other priorities.  While larger corporations such as JP Morgan Chase, Citigroup, Wells Fargo, and Bank of America may have the resources to finance these new regulatory changes, they look at the threat of repeal in terms of risk and cost. The smaller community and regional banks would suffer even more economical and logistical consequences from this looming uncertainty under President Trump’s administration.

On the other hand, select revisions and itemized repeal would be beneficial to the current market structure, community banks and corporations alike. Meghan Milloy, Director of Financial Service at American Action Forum, suggests some solutions on sections of the existing legislation that could benefit from replacing, repealing, modifying and tweaking in her article, “Repealing and Replacing Dodd-Frank”. Updating Dodd-Frank would require deliberation from regulatory teams and special interest groups to achieve a working knowledge of what is required for overall market stability.

What can be agreed is that the “repeal and replace” prospective strategy for Dodd-Frank would be a daunting task for the leaders of Congress and the unproven Trump administration.  There’s certainly a part of the electorate that wants to “drain the swamp” and do away with the CFPB and the standing law of Dodd-Frank, but is it truly feasible in the next three- four years?  It’s all about priorities and it will be very interesting to see what the new president presents as his plan for his first 100 days in office next year.  It will be a good bellwether of his direction for financial reform.