The House passed the Financial CHOICE Act (H.R. 10) in June 2017. The CHOICE Act is a comprehensive financial regulatory reform bill that would replace large parts of the 2010 Dodd–Frank Act. The Senate has not yet passed its own reform bill, but the Senate Banking Committee recently passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) with votes from four Democratic members of the committee. S. 2155 is a more targeted financial-reform bill than the CHOICE Act, but it includes similar versions of approximately 15 CHOICE Act provisions.
A cornerstone of the CHOICE Act is a regulatory off-ramp, a provision that provides regulatory relief to all banks that choose to maintain a higher equity–capital ratio than currently required. Although S. 2155 does not include as broad a regulatory off-ramp as the CHOICE Act, it does include a limited off-ramp for some smaller banks. If Congress can enact a properly designed off-ramp, it will provide significant regulatory relief for financial institutions, help restore market discipline, and move U.S. financial markets in the right direction. This Issue Brief provides an overview of the major features of the CHOICE Act and S. 2155.
Main CHOICE Act Provisions
The core elements of the CHOICE Act represent a major regulatory improvement because they help restore market discipline while reducing regulatory burdens. The bill replaces harmful portions of the Dodd–Frank Act, implements many capital market improvements, and makes several positive changes to the Federal Reserve. The major money and banking components of the CHOICE Act are as follows.
Providing a Regulatory Off-Ramp. The regulatory off-ramp (capital election) in Title VI of the CHOICE Act provides regulatory relief to all banks that choose to maintain a higher equity–capital ratio, thus improving their ability to absorb losses, and reducing the likelihood of taxpayer bailouts. Qualifying banks would be exempt from, among other regulations, any federal law, rule, or regulation addressing capital or liquidity requirements, and any of the “heightened prudential standards” implemented by section 165 of Dodd–Frank.
Repurposing the Financial Stability Oversight Council (FSOC). Title II of the CHOICE Act takes a major step toward fixing the damage caused by Title I of Dodd–Frank, the section that created the FSOC, a sort of super-regulator tasked with singling out firms for especially stringent regulation. The CHOICE Act effectively transforms the FSOC into a regulatory council for sharing information.
Replacing Orderly Liquidation with Bankruptcy. Title II of the CHOICE Act repeals Dodd–Frank’s orderly liquidation authority (OLA) and amends the bankruptcy code so that large financial firms can credibly use the bankruptcy process.
Repealing the Volcker Rule. Title IX of the CHOICE Act repeals Section 619 of Dodd–Frank, otherwise known as the Volcker rule. The Volcker rule supposedly protects taxpayers by heavily regulating banks’ proprietary trading. Long before the 2008 crisis, federal regulators had—and used—the authority to regulate these types of investments.
Protecting Financial Consumers. Title VII of the CHOICE Act converts the Consumer Financial Protection Bureau (CFPB) into an enforcement-only agency, and ensures that its director would be removable by the President at will. The CHOICE Act places the new agency under congressional appropriations, and also repeals Dodd–Frank’s overly vague “unfair, deceptive, or abusive” consumer protection construct.
Main Features of the Economic Growth, Regulatory Relief, and Consumer Protection Act
The Economic Growth, Regulatory Relief, and Consumer Protection Act is designed to provide targeted relief in the banking industry. The Senate bill includes several features that would provide significant regulatory relief, and it includes several provisions that are very similar to sections of the CHOICE Act. Two of the main components of S. 2155 are as follows.
Regulatory Off-Ramp for Risk-Weighted Capital Rules. S. 2155 includes a trimmed-down version of the off-ramp in the CHOICE Act. The S. 2155 off-ramp only provides relief from risk-weighted capital requirements (as defined in 12 U.S. Code § 5371) for some small banks that meet a new leverage-ratio requirement. In general, this regulatory off-ramp applies to banks with total assets of less than $10 billion. However, the bill authorizes federal regulators to disqualify banks—even those that meet the new leverage ratio—for capital regulation relief based on their risk profile.
Relief from Heightened Standards. S. 2155 amends the asset threshold for the Federal Reserve to impose more stringent regulations on non-bank financial companies and bank holding companies. The Senate bill raises the threshold from $50 billion to $250 billion, but with major conditions. S. 2155 would still authorize the Fed to “apply any prudential standard” to “any bank holding company or bank holding companies” with total assets of at least $100 billion. The bill also authorizes the Fed “to tailor or differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including financial activities of their subsidiaries), size, and any other risk-related factors that the Board of Governors deems appropriate.” In other words, the Senate bill lifts the threshold to $250 billion in name only.
Common Provisions in CHOICE and the Economic Growth, Regulatory Relief, and Consumer Protection Act
Aside from different versions of the regulatory off-ramp, the two bills share nearly 15 similar provisions. A brief description of some of these features follows, and Table 1 provides a summary-level overview of many of the respective features in the two bills.
Relief from Ability-to-Repay/QM Rules. Both bills provide relief to banks that hold residential mortgages on their books instead of selling them into the securitization market. S. 2155 provides a qualified mortgage (QM) safe harbor for such banks with less than $10 billion in total assets, but the CHOICE Act provides a QM safe harbor for all banks that hold mortgages instead of selling them.
Relief from Home Mortgage Disclosure Act (HMDA) Requirements. The CHOICE Act provides an exemption from most HMDA requirements to depository institutions that originate less than 100 closed-end mortgages and less than 200 open lines of credit in each of the two preceding years. S. 2155 creates a more limited HMDA exemption for institutions that originate less than 500 closed-end mortgages, and fewer than 500 open lines of credit in each of the two preceding years.
Relief from Mortgage Licensing Impediments. Both the Senate and House bills amend the Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act of 2008 so that individuals employed as loan originators can continue working without having to go through a special licensing process when they switch jobs from depository institutions to non-depository institutions. There are no material differences in these sections of the two bills.
Volcker Rule Relief. The CHOICE Act entirely repeals the Volcker rule, but the Senate bill creates an exemption from Volcker for banks with assets not exceeding $10 billion and with total trading assets and liabilities not exceeding more than 5 percent of their total assets.
Reduced Reporting Burden. The Senate bill authorizes a shortened call report in the first and third quarters, subject to newly issued regulations, for banks with less than $5 billion in assets. The CHOICE Act provides the same relief to any size bank provided that it is well capitalized.
Common Ground for Regulatory Off-Ramp
The S. 2155 regulatory off-ramp is much more limited than the CHOICE Act off-ramp, but the House and the Senate versions are not irreconcilable. For instance, rather than giving the Fed discretion to disqualify banks based on a risk profile, Congress could simply adopt a leverage ratio that accounts for off-balance-sheet exposures, proprietary trading, and derivatives exposures.
Banks that do not undertake such activities would remain unaffected by using such a metric, while banks that do engage in large amounts of such activities will have a more difficult time meeting the off-ramp requirement. Ultimately, the off-ramp approach should be expanded to provide additional regulatory relief to banks that choose to meet even higher equity–ratio requirements.
In June, the House passed the Financial CHOICE Act, a comprehensive financial regulatory reform bill that would replace large parts of the 2010 Dodd–Frank Act. The Republicans hold a very slim Senate majority, so enacting such a comprehensive reform package is difficult. Nonetheless, the Senate Banking Committee recently passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, a more targeted financial reform bill that has bipartisan support. There is sufficient overlap between the policies in the Senate and House bills that Congress can enact important financial regulatory reforms.
—Norbert J. Michel, PhD, is the Director of the Center for Data Analysis, of the Institute for Economic Freedom, at The Heritage Foundation.