Policy

Hensarling’s Offensive on Dodd-Frank Seen as Negotiating Move

Texas Republican’s new bill strips much more of CFPB’s authority

Texas Rep. Jeb Hensarling was considered by President Donald Trump for the Treasury secretary position. (Bill Clark/CQ Roll Call)

House Financial Services Chairman Jeb Hensarling appears to be doubling down on his Dodd-Frank repeal legislation, adding more features objectionable to Democrats in the wake of a White House announcement of a four-month review of the nation’s financial laws and regulations. 

In a staff memo circulated last week, Hensarling filled five single-spaced pages with changes to a bill approved by his committee in September 2016 over the opposition of every Democrat and one Republican. Among other things, the Texas Republican’s new bill would strip much more of the Consumer Financial Protection Bureau’s authority than last year’s version.

Other features include making it easier for some banks to opt out of the Federal Reserve’s enhanced regulation, easing compliance and frequency requirements for big banks to submit liquidation plans, otherwise known as living wills, and loosening thresholds that would relieve some small companies from Securities and Exchange Commission requirements.

Hensarling hasn’t released a draft of the new bill.

The congressman has been on the offensive in the last 10 days. He urged President Donald Trump to fire CFPB Director Richard Cordray. He wrote an op-ed piece for The Wall Street Journal suggesting that the CFPB’s $600 million budget could be defunded through one of this year’s reconciliation bills, and he stood behind the president on Feb. 3 when Trump signed an executive order calling for the review of financial laws and regulations.

Hensarling’s activity suggests a deeper game to Ed Groshans, managing director for the financial securities group at Height Securities, which analyzes the impact of federal policies on stocks.

“It sounds like a lot of saber rattling to get the Democrats to come to the table,” he said. Last year’s version of Hensarling’s bill would have replaced the CFPB’s director with a five-member commission and put the bureau under congressional appropriations. There appeared to be at least some Democratic support for that change, and Hensarling’s new proposal to take away much of the bureau’s power may be a negotiating ploy, Groshans said.

“Don’t get me wrong, I think Hensarling would love to restructure it to [a Federal Trade Commission-like] organization and eventually terminate it,” he said, calling that “not a realistic outcome.”

Hensarling’s office didn’t comment. 

Rep. Maxine Waters of California, the ranking Democrat on the Financial Services Committee, sees a link between the chairman and the White House’s activity. She noted that Trump said he would do a “big number” on the Obama-era financial regulatory law.

“This new version of the chairman’s Wrong Choice Act is even worse than the original,” Waters said in a statement, repeating what has become her catchphrase for Hensarling’s bill.

“What that really means is that he’s going to destroy the protections Congress created to stop Wall Street from ripping off hardworking Americans and putting our economy at risk,” she said. “It’s clear that Chairman Hensarling has plotted out a disastrous blueprint that will do exactly that.”

Groshans noted that the eight-term congressman had been on Trump’s short list to be Treasury secretary. Hensarling has had multiple meetings with Trump and is considered a close friend of Vice President Mike Pence. The nomination for Treasury secretary eventually went to Steven Mnuchin, a former Goldman Sachs partner and hedge fund manager. 

“I don’t think that the characteristics that made him eligible for a Cabinet position disappeared,” Groshans said of Hensarling. “I think there was a decision back at the time that the utility of Hensarling is better utilized as chairman of House Financial Services rather than at the Cabinet level.”

Trump has not commented publicly on his thinking about the CFPB. Mnuchin has said its budget should come through an appropriation, rather than through the Federal Reserve as the Dodd Frank law set it up.

Bartlett Naylor, financial policy advocate at the liberal Public Citizen, said he expects any bargaining in Congress to be led by the consensus-oriented Senate Banking Chairman Michael D. Crapo of Idaho rather than Hensarling. 

“It’s possible we’re bargaining by going big,” Naylor said. “He’s piling on more odious stuff.”

That includes “reducing the protection of investors” with proposed securities registration changes, he said.

CFPB is main target

The biggest of Hensarling’s changes appear to be at the CFPB, said Marcus Stanley, policy director at Americans for Financial Reform, which supports keeping Dodd-Frank in place.

The memo says the new bill would eliminate the bureau’s broad mission to police fraud, limiting it instead to specific statutes; it would eliminate the bureau’s consumer complaint database, which has, to date, received more than 1 million complaints, and eliminate the bureau’s jurisdiction to supervise and demand information from banks.

“This is like the playbook of how the FTC’s powers were demolished in the 1970s,” Stanley said

Besides the changes aimed at the CFPB, much of the memo appears to be aimed at the SEC, said Paul Merski, group executive vice president for government relations at the Independent Community Bankers of America.

Among them, according to the memo, are changes that would allow some securities issuers to avoid the expense and effort of registering their securities with the SEC. That includes eliminating the requirement that investors qualified to buy securities not registered with the SEC be accredited annually; and increasing the number of shareholders who can participate in some small-company issues and the size threshold for companies participating in securities offerings.

“It’s being more aggressive,” Merski said of the bill.

Stanley said big banks will like a lot of things in the memo.

Hensarling’s memo says the new bill would remove the Federal Deposit Insurance Corporation from the review of whether a big bank’s so-called living will is adequate. Currently, it takes both the FDIC and the Federal Reserve to reject a bank’s plan.

“The FDIC was always the toughest in that living will process,” Stanley said, adding that “only seven or eight major banks really care about” that process.

The new bill would turn the annual requirement for stress testing into a two-year cycle. These are expensive, time-consuming requirements, so cutting the requirement in half would immediately save banks money, Groshans said.

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