House lawmakers were able to successfully pass legislation Tuesday aimed at loosening financial sector regulations implemented after the last crash.
The Dodd-Frank Act became one of the most excessive laws governing the financial sector when it was implemented in 2010. The law was a direct response to the financial crisis that led to the Great Recession. But critics have argued the law has been doing more harm than good as some lawmakers look to rein it in.
The Regulatory Relief and Consumer Protection Act is intended to ease constraints on regional and community banks put in place by Dodd-Frank. Republican Sen. Mike Crapo, who serves as chairman of the banking committee, first proposed the legislation with the intent of freeing smaller lenders from cumbersome requirements under the law. The final vote was 258 to 159. The bill received 33 votes from Democrats.
“The Obama administration and his allies in Congress put forth a flawed proposal,” Republican Rep. Bill Huizenga said in the lead up to the vote. “Economic growth stalled as access to financial services became limited.”
The bill makes several changes to the law with one of the more significant being how it defines systemically important financial institutions. That status subjects them to stricter supervision under federal law. The bill would raise the threshold from $50 billion to $250 billion in assets for banks to be designated as systemically important.
President Donald Trump has already praised the bill for providing needed relief for the thousands of community banks and credit unions across the country. He added that it would spur lending and economic growth in the process. The Senate has already passed its version of the bill which means it can now go onto the president for consideration.
The bill does have critics who warn the reforms it is rolling back were needed to prevent another financial sector crash. They have pointed to risky lending by major financial institutions as leading to the crash from a decade ago. Democratic Rep. Maxine Waters argued that the bill will increase the likelihood of another crash.
“The financial crisis resulted in nine million people losing their jobs,” Waters said on the floor prior to the vote. “It was an economic tragedy that should never be repeated.”
The bill does have bipartisan support among its roughly two dozen cosponsors. The Freedom Partners, a free market advocate, urged lawmakers to pass the bill to alleviate the burdens that were placed on smaller lenders. Dodd-Frank, the group argues, has failed to take into account real-life consequences for consumers.
“We applaud Chairman Crapo and the House members who supported this transformative legislation,” Freedom Partners said in a statement provided to InsideSources. “We will continue working with Congress to remove roadblocks to the financial industry that place undue costs on ordinary Americans. Specifically, we encourage the Senate to pursue additional reforms to eliminate the barriers created by Dodd-Frank.”
The Center for American Progress (CAP), a progressive public policy research group, counters that the bill removes an essential borrower protection by eliminating escrow requirements for banks under $10 billion. Escrow requirements protect borrowers by identifying the full cost of a mortgage loan to prevent them from losing their home.
“If enacted, the bill would make the U.S. financial system—and key regional economies—more vulnerable to another financial crisis, potentially putting taxpayers back on the hook to bail out the same banks once again,” CAP argued in a recent report. “The failure of several of these banks during a period of significant stress in the financial sector could threaten financial stability and starve the economy of the credit and financial intermediation it needs to thrive.”
The CAP also warned that many other provisions in the bill ignore the causes of the financial crisis while not addressing real problems. It points to a rollback of appraisal requirements for higher-risk mortgages in rural areas, which could further risk dangerous mortgage practices – like the ones that led to the crash.
Former President Barack Obama responded to the financial crisis by imposing new rules and restrictions on the financial sector. Dodd-Frank became the centerpiece of those reforms – and was intended to rein in the big banks, which many feared had grown out of control.
The financial crisis started in the subprime mortgage market before becoming a global economic disaster. It turned into an international crisis with the collapse of the investment bank Lehman Brothers in September 2008. The resulting recovery was sluggish, but the economy has improved significantly since the collapse.
House Speaker Paul Ryan has previously made the point that the Dodd-Frank reforms have actually helped the big banks grow. He has stated that the regulations have stifled small businesses by making it harder to get loans. Ryan has reiterated the point a few times over the last couple of years.
Republicans have introduced other pieces of legislation written to chip away at Dodd-Frank. The Financial CHOICE Act is intended to end bailouts, reduce financial restrictions, and restructure certain federal agencies. The House passed it last year, but it has since stalled.