Consumer Finance Insights
June 26, 2017

Treasury Seeks to Reshape Financial Services Regulatory Regime

On June 12, 2017, the U.S. Department of the Treasury issued a 150-page report called for by President Trump’s Executive Order 13772 on Core Principles for Regulating the United States Financial System.  The Report, entitled “A Financial System that Creates Economic Opportunities: Banks and Credit Unions,” is the first in a series of four reports requested by President Trump that will be focused on potential changes to the existing regulatory environment governing the financial industry.  According to the Secretary of the Treasury, Steve Mnuchin, the Treasury focused its recommendation on ways to make changes to the federal regulatory system for depository institutions through executive financial agencies and executive orders; he estimated that only 20 percent of the report recommendations would require Congress to enact legislation.

The recommendations include changing the current regulatory system by streamlining the regulatory agencies, easing regulations on banks, and, perhaps most critically, suggesting structural changes to the Consumer Financial Protection Bureau (CFPB) that would sharply reduce its independence and power.

Streamlining the Existing Regulatory Regime

One of the recommendations the Report makes is that Congress appoint a board or commission that would direct and regulate the agencies charged with regulation of financial industries, including appointing a lead regulator in areas where there is overlapping regulatory jurisdiction by regulators.   Treasury is recommending that the CFTC, SEC, FDIC, Federal Reserve, OCC, and CFPB more fully apply Office of Management and Budget (OMB) guidance on cost-benefit analysis when they propose any economically significant regulations.

Further, Treasury recommends that the CFPB should promulgate a regulation committing it to regularly reviewing all regulations at least every 10 years for all regulations that the CFPB administers and should include solicitation of public comment on regulations that are outdated, unnecessary, or unduly burdensome.

Revisions to the Dodd-Frank Banking Regulations

The Report targeted the Dodd-Frank Act with especially strong criticism, with a good portion of the report attacking the Act for overreach and unaccountability.  Many of the recommendations of the Report were in line with the proposed Financial CHOICE Act, which passed the full House of Representatives on June 8, 2017.

In its Report, the Treasury Department suggested relaxing the requirements on stress testing for banks by changing the requirement that banks participate based on their asset holdings, eliminating the mid-year DFAST cycle, and recommending that the number of supervisory scenarios should be reduced from three to two.  It also suggested making the living will process be on a two-year cycle instead of an annual cycle, removing the FDIC from the process, and revising the threshold for participation to match the revised threshold for application of the enhanced prudential standards.

In addition, the Report tried to minimize the burdens imposed on banks by the Volcker Rule, suggesting a “regulatory off-ramp” from the capital and liquidity requirements currently in place.  The Report’s suggested course would limit the applicability of the Volcker Rule so that banking organizations with $10 billion or less in total consolidated assets would be entirely exempt.

Changes to the CFPB’s Structure

Finally, the Report made several suggestions that would scale back the influence of the CFPB.  It recommends making the Director removable at-will by the President or, alternatively, that the CFPB be run as an independent multi-member commission or board, in order to create an internal check on the exercise of agency power.  Treasury also recommended that the CFPB’s funding structure should change, and should come through the annual appropriations process and be subject to OMB apportionment.  It further recommended that the Consumer Financial Civil Penalty Fund should be reformed to permit the CFPB to retain and use only those funds necessary for payments to the bona fide victims of activities for which the CFPB has imposed civil money penalties and remit to the Treasury any additional funds.  It also suggested the repeal the CFPB’s supervisory authority altogether.

Treasury also had several proposals to change the CFPB’s enforcement powers.  Suggestions included requiring the CFPB to focus on pursuing enforcement actions in the federal courts, rather than through administrative proceedings, and barring enforcement actions in circumstances where the CFPB’s position is unclear or departs from historical legal interpretations, unless the CFPB has provided clear guidance before bringing the actions.  The Report also proposes to change the CFPB’s requirements for no-actions letters to make them more like the requirements applying to no-action letters from the SEC, CFTC, and the FTC.

The above is not an exhaustive review of the Treasury Department’s initial set of proposals for the banking industry, but it provides an idea of the ways in which the regulatory burden for financial service firms may be changed and lightened if the Trump administration’s proposals succeed.  Of particular relevance would be the politicization of the CFPB, making it more likely to shift priorities with changing administrations, as it becomes beholden to the Congress for its funding and the Director subject to ouster by the President for any—or no—reason.  Such changes may bring some regulatory relief under the current administration, but could also introduce more uncertainty into the long range priorities of the agency for the financial industry.