Six Recommendations for the CHOICE Act 2.0


Six Recommendations for the CHOICE Act 2.0

December 19, 2016 6 min read Download Report
Norbert Michel
Norbert Michel
Former Director, Center for Data Analysis
Norbert Michel studied and wrote about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.

President-elect Donald Trump has promised to get rid of the Dodd–Frank Wall Street Reform and Consumer Protection Act.[1] Eliminating the law ultimately requires legislative action, so an obvious guide is the Financial CHOICE Act of 2016, a bill that replaces large parts of Dodd–Frank. The core elements of the CHOICE Act represent a major regulatory improvement because they help restore market discipline while reducing regulatory burdens. A key provision of the bill is the regulatory off-ramp, which provides regulatory relief to banks that choose to hold higher equity capital, thus improving their ability to absorb losses while reducing the likelihood of taxpayer bailouts.

The CHOICE Act would accomplish the following major regulatory improvements (among others):

  • Repeal most of Title I of Dodd–Frank;
  • Convert the Financial Stability Oversight Council (FSOC) into a regulatory council for sharing information;
  • Repeal Dodd–Frank’s orderly liquidation authority (OLA);
  • Amend the bankruptcy code so that large financial firms can credibly use the bankruptcy process;
  • Repeal Title VIII of Dodd–Frank;
  • Change the structure of the unaccountable Consumer Financial Protection Bureau (CFPB); and
  • Implement the Fed Oversight Reform and Modernization (FORM) Act of 2015.[2]

The passage of the 2016 CHOICE Act would be an overwhelmingly positive step for U.S. financial markets and the broader U.S. economy. Moreover, the 115th Congress, which convenes in January 2017, will have the opportunity to do even better by adding more reforms to the original CHOICE Act. This Issue Brief highlights several ways that a new version of the CHOICE Act—CHOICE 2.0—can help the Trump Administration get rid of the Dodd–Frank Act. Following such a plan would help to reduce the risk of future financial crises while freeing countless citizens from the burden of economy-stifling regulations.

Recommendations for CHOICE 2.0

The regulatory approach in Dodd–Frank relies on the federal government to plan, protect, and prop up the financial system, an approach based on a mistaken belief that the 2008 financial crisis stemmed from unregulated financial markets.

Quite to the contrary, the government’s extremely active role in directing the financial markets—and its promises to absorb the losses of private risk-takers—brought about the financial crisis. Repealing the Dodd–Frank Act and restoring market discipline would reduce the risk of future financial crises and bailouts, and would allow investors and consumers to prosper by freeing them from centralized regulation and micromanagement. To reach these goals more quickly, the following provisions should be included in CHOICE 2.0.[3]

  • Repeal Title X of Dodd–Frank. Title X created the Consumer Financial Protection Bureau (CFPB) despite Congress never establishing that such a government agency was necessary. Prior to Dodd–Frank, authority for approximately 50 rules and orders stemming from 18 consumer protection laws was divided among seven federal agencies (in addition to respective state laws).[4] At best, the pre-Dodd–Frank framework called for consolidation of authority in one existing agency. But Title X goes much further by:

    • Providing the CFPB with an independent budget not subject to congressional review;

    • Shielding the CFPB from meaningful oversight by Congress, the President, and the federal courts; and

    • Granting the CFPB unprecedented authority to prohibit any financial act or practice that its sole director deems “unfair, deceptive or abusive.”[5]

    The CFPB is based on the mistaken belief that consumers suffer from cognitive limitations that result in poor decision making, and that regulators should therefore design behavioral “interventions” to “nudge” consumers into making better decisions.[6] The 2016 CHOICE Act converts the CFPB to a commission structure, but the DC Circuit Court of Appeals has since ruled that the bureau’s single-director model is unconstitutional.[7] Thus, converting the CFPB to a commission structure simply addresses a legal defect even though the case for the CFPB’s existence has never been made. CHOICE 2.0 should eliminate the CFPB by repealing Title X of Dodd–Frank.

  • Restore Fed District Bank President Voting. Prior to Dodd–Frank, all members of each Federal Reserve District Bank’s Board of Directors voted to select their new bank president. Section 1107 of Dodd–Frank amended the Federal Reserve Act so that Class A directors—those selected by member banks to represent the stockholding banks—can no longer vote in the election of a new District Bank president.[8] Now, only Class B directors, who are elected by member banks to represent the public rather than the stockholding banks, and Class C directors, who are selected by the Board of Governors to represent the public, can vote in the election.[9] This Dodd–Frank provision does not solve any existing problem or serve any material purpose other than to increase the Board’s political influence over the District Banks. CHOICE 2.0 should repeal section 1107 of Dodd–Frank.

  • Repeal Title VII of Dodd–Frank. Title VII completely restructured the regulatory framework of the over-the-counter (OTC) derivatives market based on the false notion that a lack of regulation caused the financial crisis. The bulk of the pre-crisis OTC derivatives market was deeply concentrated among heavily regulated commercial banks. Title VII represents a gift to these banks. In particular, its core elements:

    • Implement a clearing mandate for OTC derivatives, a change which transfers banks’ counterparty risks to specialty clearing firms;
    • Leave financial markets with a higher concentration of financial risks;[10] and
    • Burden markets with a complex set of rules filled with special exemptions, more moral hazard, and a greater likelihood of a future financial crisis.

    Dodd–Frank’s Title VIII provides bank-like access to the Federal Reserve for these specialty clearing firms, a clear admission that Title VII undermines financial stability. The 2016 CHOICE Act appropriately repeals Title VIII; CHOICE 2.0 should repeal Title VII.

  • Repeal the Community Reinvestment Act. The 1977 Community Reinvestment Act (CRA) was supposed to address banks’ provisioning of credit in the communities in which they operate, with a particular focus on how banks provide credit to low-income and moderate-income (LMI) neighborhoods.[11] The basic concept of the CRA is flawed because it assumes that banks neglect profitable loan opportunities, and that regulation must force them to make such loans.[12] Regulators currently take CRA ratings into account when considering, among other things, applications to open new branches, move existing branches, and merge with other banking organizations.[13] Simply put, sound underwriting—not social policies—should guide lending decisions. Streamlining the bank chartering process[14] and relieving banks of CRA obligations would increase competition to provide profitable loans, even in LMI areas.

  • Relieve Banks of Liability Under Disparate Impact. Several consumer protection laws, such as the 1974 Equal Credit Opportunity Act (ECOA), were intended to promote adequate disclosure of information and also to shield protected classes of consumers from discrimination when applying for credit.[15] Over time, these laws have been used more broadly, and regulators now prohibit discriminatory practices where discrimination is defined as disparate impact rather than disparate treatment. In other words, regulators can prohibit a creditor practice deemed discriminatory because it has a disproportionately negative impact even though the creditor had no intent to discriminate.[16] Congress should clarify that, in the act of providing credit, firms cannot lawfully discriminate based on race, color, religion, national origin, sex, marital status, or age, where discrimination is defined as disparate treatment rather than disparate impact.

  • Roll Back FDIC Deposit Insurance. Government-backed deposit insurance weakens market discipline, increases moral hazard, and leads to higher financial risk than the economy would otherwise have, thus weakening the banking system as a whole. Contrary to popular belief, FDIC deposit insurance does not primarily benefit low-income and middle-income families. The current coverage limit is $250,000 while the average account balance is less than $5,000.[17] Worse still, the FDIC bank resolution process, brokered deposit coverage, and emergency loan guarantee programs have rendered the coverage limit all but meaningless.[18] An actual per person cap of $40,000 (the pre–Savings & Loan crisis limit) would more than adequately cover the vast majority of U.S. households and also greatly improve the market discipline faced by U.S. banks and their creditors.


Rather than dealing with the causes of the 2008 crisis, the Dodd–Frank Act has exacerbated and compounded the economy’s existing ills. The resulting financial regulatory framework has restrained the economy’s recovery, introduced more moral hazard, and expanded the number of firms viewed as too big to fail.

Adopting the ideas in the 2016 CHOICE Act would be an overwhelmingly positive step for U.S. financial markets because doing so would replace large parts of Dodd–Frank and help to restore market discipline. The 115th Congress, which convenes in January 2017, can include even more beneficial reforms in a new version of the CHOICE Act—CHOICE 2.0. Improving the CHOICE Act in this manner can greatly assist the Trump Administration in ridding U.S. financial markets of the Dodd–Frank Act and helping Americans more easily achieve financial security.

—Norbert J. Michel, PhD, is a Research Fellow in Financial Regulations, in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.

[1] Marilyn Geewax, “Trump Team Promises To ‘Dismantle’ Dodd–Frank Bank Regulations,” NPR, November 10, 2016, (accessed December 11, 2016).

[2] See Norbert J. Michel, “Money and Banking Provisions in the Financial CHOICE Act: A Major Step in the Right Direction,” Heritage Foundation Backgrounder No. 3152, August 31, 2016,  

[3] For a list of nine other provisions that could be added to the CHOICE Act 2.0, such as changes to the Fed’s regulatory and emergency lending authority, see Norbert J. Michel, “Money and Banking Provisions in the Financial CHOICE Act: A Major Step in the Right Direction.”

[4] Alden F. Abbott, “Time to Eliminate the Consumer Financial Protection Bureau,” Heritage Foundation Legal Memorandum No. 172, February 8, 2016,  

[5] Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111–203, §§ 1017, 1022, and 1031.

[6] See, for instance, Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (New Haven, CT: Yale University Press, 2008).

[7] Diane Katz, “Court Ruling Reins in Unaccountable Financial Regulation Agency,” Daily Signal, October 11, 2016,  

[8] 12 U.S. Code § 341.

[9] 12 U.S. Code § 302.

[10] Early evidence suggests that the Title VII clearing mandate is concentrating financial risk. See Jerome H. Powell, “A Financial System Perspective on Central Clearing of Derivatives,” remarks at 17th Annual International Banking Conference, November 6, 2014, (accessed December 13, 2016), and Bank for International Settlements, “Statistical Release: OTC Derivatives Statistics at end-June 2016,” November 2016, (accessed December 13, 2016).

[11] See 12 U.S. Code § 2901. The CRA is implemented by 12 Code of Federal Regulations § 25, 195, 228, and 345.

[12] Lawrence J. White, “A Flawed Regulatory Concept: The Community Reinvestment Act,” Mercatus Center, Mercatus On Policy No. 54, July 2009, (accessed December 14, 2016).

[13] 12 Code of Federal Regulations § 25.29.

[14] New charter applications currently must be approved by the Office of the Comptroller of the Currency (OCC) or the state banking regulator in which the headquarters will be located, and the Federal Deposit Insurance Corporation (FDIC) must also approve a deposit-insurance application. The OCC’s authority to charter national banks is under the National Bank Act of 1864, as amended, 12 U.S. Code ch. 1 et seq.

[15] The ECOA is implemented by the CFPB’s Regulation B. (See 12 C.F.R., part 1002.) For an overview of policy concerns, see John Matheson, “The Equal Credit Opportunity Act: A Functional Failure,” Harvard Journal on Legislation, Vol. 21 (1982), p. 371, (accessed December 16, 2016).

[16] See 12 Code of Federal Regulations § 1002 (Regulation B), Supplement I to §1002.1(a), Section 1002.6—“Rules Concerning Evaluation of Applications,” December 30, 2011, (accessed December 16, 2016). Also see Hans A. von Spakovsky, “‘Disparate Impact’ Isn’t Enough,” Heritage Foundation Commentary, March 22, 2014,  

[17] David R. Burton and Norbert J. Michel, “Financial Institutions: Necessary for Prosperity,” Heritage Foundation Backgrounder No. 3108, April 14, 2016,  

[18] Norbert J. Michel, “FDIC Insurance and the Brokered Deposit Market: Not a Recipe for Market Discipline,” testimony before Financial Institutions and Consumer Credit Subcommittee, Committee on Financial Services, U.S. House of Representatives, September 27, 2016, (accessed December 16, 2016).


Norbert Michel
Norbert Michel

Former Director, Center for Data Analysis