The future of Dodd-Frank and the CFPB for community banks

With the new presidential administration and Republican majorities in both houses of Congress, major changes to the Dodd-Frank Act are widely expected. There has been extensive coverage of what these impending changes mean for consumers and for the banking industry in general. This post examines potential changes from the perspective of community banks.

The Dodd-Frank Act and the CFPB face challenges from multiple angles. The primary challenge comes from forthcoming legislation from Congressman Jeb Hensarling designed to completely overhaul Dodd-Frank. This legislation, dubbed the CHOICE Act 2.0, is an updated version of legislation proposed last year by Congressman Hensarling. Some of the key points of the forthcoming Act include the following:

  • Banks would be allowed to elect for a simple leverage ratio of 10% in lieu of the Basel III capital requirements. Unlike the original CHOICE Act, the 2.0 version eliminates the CAMELS requirement from the capital election.
  • Qualifying banks that meet capital requirements would be entitled to relief from many existing regulations. The 2.0 version adds that qualifying banks would be exempt from stress testing.
  • The CFPB would be overhauled to make it more like the FTC, including (1) making the director removable by the President at-will; (2) repealing UDAAP power; (3) eliminating supervision authority; and (4) limiting rule-making authority to enumerated statutes.
  • Additional legislation would accompany the CHOICE Act to provide even more regulatory relief directed specifically to community banks. One proposal is the recently re-introduced TAILOR Act, which would require agencies to tailor regulatory activity to the business model and risk profile of a financial institution.

Although this forthcoming legislation is the main threat to the CFPB, there are other legislative and judicial actions that could substantially curb the CFPB’s power. For example, proposed legislation introduced by Senator Ted Cruz proposes a repeal of the portion of Dodd-Frank that created the CFPB. Other proposed legislation seeks to take control of the CFPB’s funding from the Federal Reserve and give Congress appropriations authority over the CFPB. This approach is consistent with Congressman Hensarling’s recent op-ed in the Wall Street Journal suggesting that in the absence of legislative reform, Congress could effectively shut down the CFPB by eliminating its $600 million budget through a “reconciliation vote.” In addition, the PHH Corp. case continues to make its way through the court system. Last week, the full D.C. Circuit court agreed to review the decision made by a three-judge panel last year determining that the single-director structure was unconstitutional. The outcome of the full court’s review will determine whether the President can terminate the CFPB director without cause.

Any reform to Dodd-Frank and the CFPB has the potential to significantly reduce compliance costs for community banks. I will continue to monitor legislative and judicial activity in this area and provide updates as new activity occurs.