Mnuchin takes aim at Dodd-Frank

In a re­port, Trea­sury sec­re­tary pro­poses sweep­ing changes to fi­nance re­form rules.

Los Angeles Times - - BUSINESS - By Jim Puz­zanghera and James Ru­fus Koren

WASH­ING­TON — Trea­sury Sec­re­tary Steven T. Mnuchin on Mon­day pro­posed sweep­ing changes to the tough Dodd-Frank reg­u­la­tions put in place af­ter the 2008 fi­nan­cial cri­sis, in­clud­ing a ma­jor re­duc­tion in the power of the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau and other roll­backs long de­sired by Wall Street.

In a 149-page re­port or­dered by Pres­i­dent Trump, Mnuchin also rec­om­mended re­duc­ing over­sight of large fi­nan­cial in­sti­tu­tions, pro­vid­ing even more reg­u­la­tory re­lief for smaller banks and loos­en­ing new mort­gage re­stric­tions de­signed to pre­vent a re­peat of the sub­prime melt­down.

The re­port was the Trump ad­min­is­tra­tion’s first for­mal salvo in what’s ex­pected to be a long and com­plex process in­volv­ing Congress and fed­eral agen­cies to try to scale back reg­u­la­tions that Repub­li­cans have com­plained are harm­ing banks and stif ling eco­nomic growth.

“A sen­si­ble re­bal­anc­ing of reg­u­la­tory prin­ci­ples is war­ranted in light of the sig­nif­i­cant im­prove­ment in the strength of the fi­nan­cial sys­tem and the econ­omy, as well as the ben­e­fit of per­spec­tive since the Great Re­ces­sion,” the re­port said.

Democrats and con­sumer ad­vo­cates said Dodd-Frank is the rea­son for that strength, af­ter the sys­tem nearly im­ploded in 2008. They’ve vowed to fight ma­jor changes in the law.

“We need more ef­fec­tive reg­u­la­tion and en­force­ment, not roll­backs driven by Wall Street and preda­tory lenders,” said Lisa Don­ner, ex­ec­u­tive di­rec­tor of Amer­i­cans for Fi­nan­cial Re­form, a group ad­vo­cat­ing tougher over­sight of the fi­nan­cial sys­tem.

The re­port, which in­cluded dozens of rec­om­men­da­tions, is the first of three or­dered by Trump as he looks to ful­fill a cam­paign prom­ise to dis­man­tle the Dodd-Frank Wall Street Re­form and Con­sumer Pro­tec­tion Act.

The leg­is­la­tion was ap--

proved by Congress with al­most no Repub­li­can sup­port in the wake of the 2008 fi­nan­cial cri­sis.

Dodd-Frank tough­ened bank reg­u­la­tions, sought to avoid fu­ture bailouts by cre­at­ing a process to shut down tee­ter­ing fi­nan­cial giants, pro­hib­ited fed­er­ally in­sured banks from en­gag­ing in risky trad­ing, es­tab­lished a pow­er­ful panel of reg­u­la­tors to watch for signs of in­sta­bil­ity and cre­ated the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau to over­see credit cards, mort­gages and other fi­nan­cial prod­ucts.

The House last week voted along party lines to ap­prove sweep­ing leg­is­la­tion — the Fi­nan­cial Choice Act — re­peal­ing key pro­vi­sions of Dodd-Frank.

The Trea­sury re­port calls for many of the same changes but in some ar­eas is more mod­er­ate than the House bill. For ex­am­ple, the Fi­nan­cial Choice Act would re­peal the trad­ing re­stric­tions known as the Vol­cker Rule. Mnuchin rec­om­mended sig­nif­i­cantly loos­en­ing the re­stric­tions, which reg­u­la­tors could do on their own, but did not call for a re­peal, which would re­quire con­gres­sional ap­proval.

The Trea­sury pro­pos­als re­flect the dif­fi­culty Repub­li­cans face in over­com­ing a likely Demo­cratic fil­i­buster on Dodd-Frank changes in the Se­nate.

But in a nod to the House bill, the re­port called for Trump to con­sider repli­cat­ing its cen­ter­piece — let­ting banks elude most reg­u­la­tory over­sight if they boost the amount of cap­i­tal they hold as a cush­ion against fu­ture losses.

The House bill, spon­sored by Rep. Jeb Hen­sar­ling (R-Texas), and the Trea­sury re­port would each gut the power of the in­de­pen­dent con­sumer bu­reau.

“The CFPB was cre­ated to pur­sue an im­por­tant mis­sion, but its un­ac­count­able struc­ture and un­duly broad reg­u­la­tory pow­ers have led to reg­u­la­tory abuses and ex­cesses,” the Trea­sury re­port said.

Mnuchin rec­om­mended that the agency’s in­de­pen­dent fund­ing stream be elim­i­nated and that it be placed un­der the con­gres­sional ap­pro­pri­a­tions process. He also wants the pres­i­dent to be able to re­move the bu­reau’s di­rec­tor for any rea­son. The bu­reau also would lose its abil­ity to send su­per­vi­sors into banks to make sure they are com­ply­ing with con­sumer pro­tec­tion laws.

And the de­part­ment rec­om­mended the pub­lic no longer have ac­cess to the CFPB’s on­line data­base of con­sumer com­plaints against fi­nan­cial firms. The data would be avail­able to only fed­eral and state agen­cies.

The re­port also calls for a hand­ful of changes in the reg­u­la­tions gov­ern­ing mort­gage lend­ing, say­ing many of the safety mea­sures that aimed to cor­rect weak­nesses ex­posed by the hous­ing crash and re­ces­sion were no longer needed and have made it more dif­fi­cult and ex­pen­sive to get home loans.

It cites a re­port from the trade group Mort­gage Bankers Assn. sug­gest­ing the cost to orig­i­nate a mort­gage rose to $7,500 last year from $4,400 in 2009, and says those costs have been passed along to con­sumers in the form of higher rates. How­ever, rates re­main near record lows; the av­er­age 30year fixed mort­gage rate was 3.89% last week, its low­est level this year, ac­cord­ing to Fred­die Mac.

The re­port sug­gests scrap­ping a rule that re­quires com­pa­nies that pool and sell off, or “se­cu­ri­tize,” mort­gage loans to hold on to some of those loans. That rule was a re­sponse to lenders who wrote and se­cu­ri­tized mort­gages with­out keep­ing any, mean­ing they had lit­tle con­cern if the loans failed. Elim­i­nat­ing the rule, the re­port sug­gests, would help boost the num­ber of loans that are un­der­writ­ten by pri­vate lenders rather than by gov­ern­ment-backed mort­gage buy­ers Fan­nie Mae and Fred­die Mac.

To that same end, the re­port calls on chang­ing the CFPB’s def­i­ni­tion of a safe mort­gage to more closely match the def­i­ni­tions used by Fan­nie Mae and Fred­die Mac. Now, the gov­ern­ment­backed mort­gage buy­ers ac­cept loans that are some­what riskier than those that get le­gal pro­tec­tion by a CFPB rule. That dis­par­ity, the re­port says, “cre­ates an un­fair ad­van­tage for gov­ern­ment-sup­ported mort­gages with­out pro­vid­ing ad­di­tional con­sumer pro­tec­tion.”

The re­port also sug­gests changes that would make it eas­ier for lenders to un­der­write mort­gages for bor­row­ers who are self-em­ployed or oth­er­wise have a harder time doc­u­ment­ing their in­come.

The re­port calls for a Trea­sury De­part­ment re­view of the Com­mu­nity Rein­vest­ment Act, or CRA, a fed­eral anti-redlin­ing law that pre­dates Dodd-Frank by more than 30 years. The law, which re­quires banks to lend in low-in­come and mi­nor­ity com­mu­ni­ties, has long been crit­i­cized by some con­ser­va­tive law­mak­ers but has not been a fo­cus of dereg­u­la­tion ef­forts.

Mnuchin ran into CRA prob­lems when he was sell­ing Pasadena’s OneWest Bank to New Jersey lender CIT Group. Com­plaints from com­mu­nity groups that said OneWest did not do enough in the way of CRA com­pli­ance helped de­lay the deal and led to a fed­eral hearing on whether the com­bi­na­tion of the two banks would ben­e­fit Cal­i­for­nia neigh­bor­hoods.

The re­port sug­gests that the Home Mort­gage Dis­clo­sure Act, an anti-redlin­ing mea­sure that re­quires lenders to col­lect and re­port data about bor­row­ers and race, should not be ex­panded to re­quire lenders to re­port more in­for­ma­tion, some­thing Dodd-Frank re­quired. It also sug­gests “dis­con­tin­u­ing pub­lic use” of HMDA data, a move that prob­a­bly would draw ire from hous­ing and lend­ing ad­vo­cacy groups.

Trump has or­dered sep­a­rate re­views of two pil­lars of Dodd-Frank — reg­u­la­tors’ au­thor­ity to des­ig­nate large firms as a risk to the fi­nan­cial sys­tem and a new process to try to shut them down with min­i­mal col­lat­eral dam­age if they’re on the verge of fail­ing. So nei­ther were ad­dressed in Mon­day’s re­port.

Drew An­gerer Getty Images

PRO­POS­ALS from Trea­sury Sec­re­tary Steven T. Mnuchin in­clude gut­ting the con­sumer bu­reau.

Shawn Thew Euro­pean Pressphoto Agency

MANY PRO­POS­ALS in the re­port echo a bill passed by the House last week, but in some ar­eas are more mod­er­ate. Above, Pres­i­dent Trump and Trea­sury Sec­re­tary Steven T. Mnuchin at an April sign­ing cer­e­mony.

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