Richard W. Shepherd
Loyola University Chicago School of Law, JD 2019
The Trump administration is delivering on its promise to deregulate America. Since taking office, numerous regulations spanning everything from energy to health care have been repealed or weakened. The financial services industry is not immune to the deregulation movement. The Trump administration is acting through appointments, executive agencies, and legislation to deregulate the financial services industry. Proponents of deregulation claim the movement is needed after Dodd-Frank and strict post-financial crisis regulation. However, in deregulating financial services, the Trump Administration—and compliance professionals—should proceed cautiously.
Deregulation Through Legislation
Since its passing in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) has seen more than its fair share of controversy. The legislation created the Consumer Financial Protection Bureau (CFPB), numerous new regulations, and overall was the most significant overhaul of the industry since the Great Depression. Reaction to the legislation has been mixed, with proponents claiming the new rules and consumer protections are vital to economic stability, while opponents claim the legislation is an overreaction to the financial crisis.
In June 2017, Republicans in the House of Representatives passed the Financial CHOICE Act, which would allow banks to escape heightened scrutiny, cut back on stress testing, and significantly limit the authority of the CFPB. The Senate is currently working on a bipartisan Dodd Frank reform bill, which will likely be less extreme than the House bill. President Trump supports the effort.
Any effort to deregulate financial services must be cautious when dealing with subprime lending, collateralized debt obligations, capital levels, and liquidity controls. The goal of any reform to Dodd Frank should seek to balance the needs of economic growth with stabilizing controls and regulation.
Deregulation Through Appointments
Perhaps the easiest way for President Trump to significantly change financial regulation is through executive appointments. Directors of executive agencies have significant influence over the policy, enforcement, and culture of federal regulators. Trump has already made several appointments which could drastically change the landscape of financial regulation.
President Trump appointed Jerome Powell as the Chairman of the Federal Reserve, replacing Janet Yellen. President Trump declined to reappoint Ms. Yellen, an Obama appointee, when her term expired. Chairman Powell inherits an economy with low unemployment and inflation. It’s expected Chairman Powell will continue to gradually raise interest rates. Although the Fed maintains independence, presidents have often tried to influence the Fed’s policies. Whether President Trump will be able to influence Chairman Powell or Federal Reserve policy remains to be seen.
President Trump also appointed Joseph Otting as Comptroller of the Currency, replacing interim Comptroller Keith Noreika and Obama appointee Thomas Curry. The OCC is responsible for chartering, regulating, and supervising national banks and thrifts. Otting is a former banker with close ties to Treasury Secretary Steven Mnuchin. Otting was CEO of OneWest Bank, an institution co-founded by Mnuchin. During Otting’s tenure, OneWest was criticized by their primary regulator, The Office of Thrift Supervision (OTS), for unsafe and unsound mortgage foreclosure practices. In 2011, the OTS was merged with the OCC, meaning Comptroller Otting is now leading a federal agency which held his bank under a consent order. The Comptroller is expected to be a key figure in the Trump deregulation effort. Comptroller Otting has already received criticism for the OCC’s lack of enforcement in the wake of the Wells Fargo scandal. Senate democrats claim the OCC has failed to make progress on any of the regulatory recommendations made to Wells Fargo in April 2017.
Along with Otting and Powell, President Trump appointed Mick Mulvaney as the Acting Director of the Consumer Financial Protection Bureau (CFPB). Acting Director Mulvaney replaced Richard Cordray, an Obama appointee, who resigned to run for Governor of Ohio. There was significant controversy following Mr. Cordray’s resignation and Trump’s appointment; a controversy that is still ongoing. However, that has not stopped Director Mulvaney from implementing President Trump’s plan to weaken the CFPB. The CFPB has been stripped of the power to pursue discrimination cases related to fair lending laws, has been limited on the ability to collect mortgage data, has ended multiple investigations into payday lenders, has begun to delay and revisit new regulations, and has decided to stop enforcing some regulations all together.
When he was a congressman, Director Mulvaney co-sponsored a bill to eliminate the CFPB. As Director, he lacks the power to kill the agency, but the Trump Administration is clearly seeking to make the CFPB irrelevant. Recently, The U.S. Court of Appeals for the District of Columbia Circuit upheld the structure of the CFPB as constitutional, in a blow to the Trump Administration. The decision sets up a likely Supreme Court review of the constitutionality of the CFPB.
The Trump Administration would be wise to proceed cautiously in deregulating financial services. While deregulating financial institutions may promote economic growth, it may also create the right environment for another financial crisis. For compliance professionals, the environment creates significant uncertainty. With an administration and regulators implementing looser requirements, or simply not enforcing regulations all together, institutions need to be cautious moving forward. Compliance professionals should consider the risk tolerance of their institution, while balancing what new opportunities may be available in a deregulated environment, as well as maintaining a reasonable system of controls.