By Ellen R. Marshall, Partner, Financial Services
In a vote along party lines, the House of Representatives passed the Financial CHOICE Act of 2017, which would eliminate or scale back many of the provisions found in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
What happened
Republicans have repeatedly promised to repeal the Dodd-Frank Act and made several attempts over the past few years. In the latest effort, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) moved forward with H.R. 10, dubbed the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs) Act, originally introduced last July.
The nearly 600-page piece of legislation would repeal some parts of Dodd-Frank, modify other parts of that act and make changes to various other statutes affecting the way the financial industry is regulated and supervised, including:
- Repeal Title II of Dodd-Frank and its Orderly Liquidation Authority, replacing it with a new chapter of the Bankruptcy Code designed to accommodate the failure of a large, complex financial institution.
- End the Financial Stability Oversight Council’s (FSOC) broad power to designate firms as systemically important financial institutions with retroactive effect. Several firms have challenged their designation as a SIFI in the past, most notably General Electric.
- Repeal Title VIII of Dodd-Frank, which gives the FSOC the authority to designate certain payments and clearing organizations as systemically important “financial market utilities,” as well as retroactively repeal all such designations.
- Permit the Securities and Exchange Commission to triple monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant’s illegal profits and grant the agency new authority to impose sanctions equal to investor losses in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” where the loss or risk of loss is significant, increasing the stakes for repeat offenders.
- Increase the maximum criminal fines for individuals and firms that engage in insider trading and other corrupt practices, impose enhanced penalties for financial fraud and self-dealing, and promote greater transparency and accountability in the civil enforcement process.
- Repeal Section 619 of Dodd-Frank, known as the Volcker Rule.
- Eliminate the doctrine of judicial deference (known as Chevron deference), under which courts defer to an agency’s reasonable interpretation of its statutory authority.
- Codify the “valid when made” doctrine, providing that a loan that is valid when it is made (with regard to its interest rate) remains valid regardless of a subsequent sale, assignment or transfer of the loan. This provision was inserted in response to the U.S. Court of Appeals for the Second Circuit decision in Madden v. Midland Funding LLC, in which the court apparently did not consider this principal doctrine to hold that the National Bank Act does not provide a shield against state usury claims even though the loan, when originated by a national bank, was not usurious.
- Create a regulatory “off-ramp” that would permit banks and other financial institutions to opt out of many of the regulatory requirements (such as stress testing) if they maintain a 10 percent leverage capital ratio, among other conditions.
- Substantially roll back the powers of the Consumer Financial Protection Bureau, beginning with a name change to the “Consumer Law Enforcement Agency” and a switch to an executive branch agency with a single director removable by the President at will. The legislation would also subject the agency to congressional oversight and the normal congressional appropriations process, eliminate the bureau’s supervisory function, and remove the CFPB’s “unfair, deceptive, or abusive acts and practices” authority.
- Subject the federal banking regulators to greater congressional oversight and tighter budgetary control, with new requirements that agencies conduct a cost-benefit analysis for new proposed rulemakings and notify Congress and the public before participating in an international standard-setting process.
However, in a significant victory for the retail industry, House Republicans at the last minute eliminated from the bill a provision that would have repealed the Durbin Amendment, which capped interchange fees that banks can receive on electronic debit transactions. The Durbin Amendment pits retailers against financial institutions, and there had been massive lobbying efforts by both groups related to the amendment. Ultimately, the repeal was dropped because House leadership feared that the issue is so contentious it would derail passage of the Financial CHOICE Act.
To read H.R. 10, click here.
Why it matters
The bill passed the House by a vote of 233 to 186, with no Democrats voting in favor of the measure and just one Republican voting against. The White House released a statement in support of the Financial CHOICE Act. The Treasury Department, though, is working on its own alternative approach to Dodd-Frank amending legislation. H.R. 10 now moves to the Senate, where it faces an unsure timetable and an uphill battle to passage.