U.S. Senate Advances Banking Bill To Ease Dodd-Frank

Phil Hall at National Mortgage Professional Magazine penned this piece on the Banking bill to reduce some of the damaging effects of the Dodd-Frank legislation from The Great Recession.

Seventeen Senate Democrats joined with Republicans Tuesday to advance a bipartisan regulatory relief bill for the banking industry, an early sign that the bill can clear the Senate in the coming days.

The U.S. Senate voted 67-32 to end debate on a motion to proceed with S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is widely seen as the first significant legislative effort to roll back portions of the 2010 Dodd-Frank Act.

The bill, introduced by Sen. Mike Crapo (R-ID), would amend the Truth-in-Lending Act (TILA) to allow institutions with less than $10 billion in assets to waive ability-to-repay requirements for certain residential-mortgage loans. It would also amend the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the Volcker Rule, and it would also amend the U.S. Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.

The bill has been the rare piece of legislation to have some Democrats crossing the aisle in support, with 17 members of the party joining their GOP colleagues in voting affirmatively. Several Democrats who have been touted as 2020 presidential candidates—including Massachusetts’ Elizabeth Warren, New York’s Kirsten Gillibrand and California’s Kamala Harris—voted against it. Senate Majority Leader Mitch McConnell (R-KY) welcomed the vote, stating, “By streamlining regulations, it will bring relief to the small financial institutions who have been hurt by Dodd-Frank’s one-size-fits-all approach.”

Dodd-Frank and the resistance to a repeal or defanging of it can be explained by Nobel Laureate economist George Stigler’s Regulatory Capture argument. Regulatory capture is a form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. When regulatory capture occurs, the interests of firms or political groups are prioritized over the interests of the public, leading to a net loss for society. Government agencies suffering regulatory capture are called “captured agencies”.

Who are the capture government agencies? Try The Federal Reserve, Federal Deposit Insurance Corporation and other regulators. The same regulators that permitted the merger and growth of large banks into Too-Big-To-Fail (TBTF) institutions.

Who did the capturing? The largest TBTF banks. Who was suffering? Institutions with less than $10 billion in assets.

Senate Bank bill S.2155 attempts to encourage mid-size and smaller-size banks to get back into the lending game.  Institutions with less than $10 billion in assets to waive “ability-to-repay requirements” for certain residential-mortgage loans.

What are the ability-to-repay requirements? The Consumer Financial Protection Bureau amended Regulation Z, which implements the Truth in Lending Act (TILA). Regulation Z prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.”

Bear in mind, Dodd-Frank and its creation, the Consumer Financial Protection Bureau, has played a role in denying lower credit score households a mortgage. (Chart courtesy of GMU finance major Belle Matthews). Rules such as the ability-to-repay requirements actually hurt marginal households trying to shift from renting to owning, keeping them locked into renting.

Senate Bank bill S.2155 would also amend the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the Volcker Rule. The Volcker Rule is overly complex and smaller banks are less able to cope with its complexity. Even larger banks have problems with the complexity of the Volcker Rule.

S.2155 does not eliminate Dodd-Frank or the Consumer Financial Protection Bureau. It simply attempts to level the playing field that has been stacked in favor of the largest, Too-Big-To-Fail banks.

The so-called “subprime crisis” which spawned the Dodd-Frank legislation was far more complicated than portrayed by the Financial Crisis Inquiry Commission (that interviewed me over the causes of the crisis) or the book/film “The Big Short” or “Margin Call.”  It was not solely caused by lenders originating no-doc loans or subprime loans. It was also caused by an enormous housing bubble caused in part by a construction boom fueled by The Fed lowering its target rate to near zero around the 2001 recession.

So, there were lots of parties responsible for the financial crisis and in the attempt to prevent another one, Congress looked almost solely at ALT-A and subprime lending as the root cause.

Please see my paper with Gerald Hanweck and FDIC economist Gary Fissel on bank failures surrounding the financial crisis.

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