President Donald Trump is just completing his first month in office and has flicked his pen many times on several executive orders — one of those relating to financial regulations or the Dodd-Frank Wall Street Reform and Consumer Protection Act, which he called a “disaster” and vowed to do a “big number” on.
The Dodd-Frank Act has been a hot topic among many in lending, and those who operate businesses across the U.S. since it passed in 2010.
Some aspects of the legislation also have been said to limit the amount of capital available for commercial real estate and consumer mortgage lending. On the consumer side, standards for borrowers has gone up, with some arguing too much.
At one time, lenders were doing NINJA loans (no income, no job, no assets). And allowing debt-to-income ratios of more than 70 percent, with today’s standards moving down below 50 percent for debt-to-income.
Put in place during President Barack Obama’s presidency, opponents argue new regulations make it more difficult to obtain funding and are a barrier to growth, though some stop short of a full repeal, as that also could be disastrous. Still, others fear for consumers caught in between.
On the side of proponents is the argument that the U.S. could experience another Great Recession if Dodd-Frank were to be overturned because it would loosen rules put in place on predatory lending on consumer mortgages.
Whichever side of this we fall on, the executive order signed by Trump will certainly make waves by destabilizing the legislation as it is now written. Under the order, the secretary of treasury has 120 days to report what parts of Dodd-Frank are effective and which aren’t. The order also requires the labor secretary to delay the fiduciary rule, scheduled to come into effect in April.
Trump can get most of what he wants by maneuvering around an all-out repeal. Getting his appointees into the right positions, which he’ll likely be able to do, will help with this.
Trump’s appointees will hold seven of the 10 seats on the Financial Stabilization Oversight Council (FSOC), a panel that is charged with identifying threats to the financial system. The full force of the council’s powers may not be exerted the way some intended when the panel was formed.
The new regulators on the FSOC panel could change how Dodd-Frank is enforced, leaving much of the body’s power unused.
Some of the deregulation the U.S. could see includes raising the $50 billion asset threshold, which critics say have bogged down smaller lenders from obtaining the capital they need.
For reference, the $50 billion threshold in assets identified these institutions as “systematically important” under Dodd-Frank, which requires financial institutions meet the threshold under exams by the Federal Reserve, including stress tests.
By removing this requirement, some argue that small to midsized lenders could see a reduction in overhead costs, which would, in turn, allow for those lenders to offer small business and consumer loans more easily.
The question then would be: Should we expect a return of smaller community banks under the guise of these deregulation efforts? That’s something that might be answered over time. But one thing’s for sure, the U.S. is likely heading down that road to find out.
In the commercial real estate market, Dodd-Frank’s risk-retention rules, which require lenders to retain 5 percent of each commercial mortgage-backed securities deal, were especially scrutinized by some for potentially limiting access to capital to that market. That part of Dodd-Frank came online at the end of 2016.
Another major change on our journey could bring about the FSOC’s new appointees stopping or delaying of the Volcker Rule, which was named after former Federal Reserve Chairman Paul Volcker. This stipulation restricts banks from making hedge fund and private equity investments.
Trump’s treasury secretary, Steven Mnuchin, has said publicly that he would look to amend the rule, but not kill it completely.
Another set of forces looking to take down Dodd-Frank’s abilities is Congress, at least on the GOP side. But despite full control of the Republican Party in Washington, the Democrats could still obstruct efforts to gut the bill completely on the Senate or House of Representative’s floor.
But it could be argued that deregulation is going to happen anyway, whether both sides argue about it or not.