Mortgage market watchers should expect next year’s post-election policy mandate in Washington – including an anticipated correction of the most far-reaching financial services bill passed in recent memory – to be shaped in no small part by voters going to the polls on Nov. 8.
In the race for the White House, presumptive Republican nominee Donald Trump has called for the dismantling of the industry-dreaded Dodd-Frank Wall Street Reform and Consumer Protection Act.
It shouldn’t be a surprise that presumptive Democrat nominee Hillary Clinton is flatly opposed to Trump’s Dodd-Frank Act stance, as well as to a recently unveiled bill by a top House Republican that would reform (but not repeal) the DFA.
However, political insiders within the industry say that the party composition of the 115th Congress will matter every bit as much as who is elected the 45th President of the United States.
Republicans currently hold majorities in both chambers of Congress but Democrats, traditionally bolstered by election year voter turnout, are widely expected to gain seats – perhaps enough to take over the Senate and narrow the electoral margin in the House of Representatives.
“No matter who is president and whichever party has [the majority in] Congress next year, we’re going to see some updates to Dodd-Frank,” predicts a trade group official.
CHOICE of Tweaks
In principle, both Democrats and Republicans agree that “tweaks” to Dodd-Frank are necessary and even inevitable. But the much talked about proposal by House Financial Services Committee Chairman Jeb Hensarling (R-TX) – an election-year bill with near zero chance of passage – has polarized pols sharpening their knives on offense and defense alike.
“The governing sense in this town has always been that when you pass a huge bill, a bill that has far-reaching changes, there’s always been a corrections bill three-to-five years later because nobody gets everything right the first time,” said the trade group official who asked to remain anonymous so as to speak candidly. “What’s changed is that this town has become so partisan that even corrections bills can’t get off the ground.”
As we first told you in May, Hensarling has been positioning the Democrat-passed Dodd-Frank Act as a campaign issue for Republicans to run against. On the stump, Hensarling has been laying the blame for six-years of anemic economic growth and a paralytic business environment on the 2010 law.
The Texas Republican doubled down during a June 7 speech to the Economic Club of New York where he unveiled a wide-ranging alternative bill that he calls a “market-based, equity financed Dodd-Frank off-ramp.”
“The Republicans’ better approach will relieve financial institutions from regulations that create more burden than benefit in exchange for meeting higher, yet simple, capital requirements,” said Hensarling. “Our reform plan allows banks to opt-in to an alternative regime that replaces growth-strangling regulation with reliable accountability. It stops investors from betting with taxpayer money”
The Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs) Act addresses specific provisions of Dodd-Frank – many of the controversial parts which have bipartisan support for reform, according to an analysis by K&L Gates.
Among other things, Hensarling’s FCA would restructure the Consumer Financial Protection Bureau into the “Consumer Protection Opportunity Commission,” replacing the single-director with a bipartisan, five-member commission subject to congressional oversight and appropriations. It would also establish an independent, Senate-confirmed inspector general.
The FCA would also provide a qualified mortgage (QM) safe harbor from lawsuits for depository institutions and the banking regulators for any mortgage that has been held in portfolio since origination.
Among the specific provisions of Dodd-Frank left untouched by the FCA are: over-the counter derivatives, private fund adviser registration, credit-rating agencies, securitization requirements, interchange fees, executive compensation and corporate governance, according to K&L Gates.
“Despite the long-standing rhetoric about ‘repealing’ Dodd-Frank, the FCA is more appropriately characterized as ‘reforming’ Dodd-Frank,” noted K&L Gates. “Although [the FCA] is not expected to advance as stand-alone legislation this year, we anticipate that it is likely to inform Dodd-Frank Act efforts going forward.”
Bert Ely, a financial institutions consultant and adjunct scholar at the Cato Institute agrees. Ely says Hensarling’s effort is a “serious” proposal but a “cut and paste” of a lot of different reform ideas.
“It’s important not to look at Hensarling’s bill in some kind of coherent sense but as a collection of specific proposals. The question then becomes what would have a realistic chance of moving next year,” says Ely. “If there is a quote ‘Dodd-Frank Reform Bill,’ it will be a catch-all of tweaks to Dodd-Frank, with those tweaks that stay in the bill being those that have the broadest political support.”
The Trump Vacuum
Speaking of political support, Hensarling made a point of meeting with Trump following the roll out of his Financial CHOICE Act. The Texas Republican left the meeting without an explicit endorsement of his bill but the presumptive Republican nominee is on record in opposition to Dodd-Frank.
In a May interview with Reuters, Trump said he would seek changes “close to a dismantling” of the DFA.
“Dodd-Frank has made it impossible for bankers to function,” Reuters quoted Trump. “It makes it very hard for bankers to loan money to people to create jobs, for people with businesses to create jobs. And that has to stop.”
Although Trump hasn’t endorsed Hensarling’s proposal, the campaign could still absorb the content of the Financial CHOICE Act into its own platform. Trump’s lack of policy specifics at this stage is troubling some political observers.
“Trump is not putting together a robust policy team, which presidential nominees typically do. Science and Washington abhors a vacuum,” said the trade group official. “Hensarling is partly trying to set the agenda for the next Congress but he’s partly trying to set the agenda for the nominee who is not doing it himself. I’ve never seen anything like this.”
‘A Wet Kiss’
For her part, presumptive Democrat nominee Hilary Clinton has vowed to veto efforts to repeal or weaken Dodd-Frank should she be elected. However, during a meeting with the New York Daily News editorial board in April, Clinton said she “would certainly be open” to some tweaks to the DFA.
Despite concerns among Wall Street that nominee rival Vermont Sen. Bernie Sanders has pulled her too far left, Ely expects Clinton will “swing back to the moderate middle” on policy grounds.
Meanwhile, any calculus of Dodd-Frank legislative reform must factor Sen. Elizabeth Warren (D-MA) into the equation. Warren, the popular progressive architect of the CFPB, blasted Hensarling’s plan as a “wet kiss” for Wall Street banks
Reportedly on the Clinton vice-presidential short list, Warren will play a “key blocking role” to any Democrat support of reform legislation in whatever office she holds next year, says Ely. The trade group official agrees.
“Very few Dems want to cross Warren on CFPB,” said the official. “If she is opposed to a Dodd-Frank change – with the exception of the commission – then I think it makes it really difficult for any Democrat to cross the line to support a Republican proposal.”
The GOP currently holds majorities in the House and Senate but infighting and factional divisions among both political parties has made for much trickier political forecasting during an anything-but-typical presidential election cycle.
However, political observers believe that control of the Senate is “in play” with Democrats poised to pick up seats – the question is how many, according to Rob Zimmer, principal with the Washington, DC-based strategic consulting firm TVDC.
“If you cut away the presidential race and simply look at the number of seats contested and the states they are contested in, the easy answer is that the Democrats will take over the Senate,” said Zimmer. “If there’s a Trump surge, there’s decent odds the Republicans could hold on. But if there’s a Hillary surge, it’s just a matter of how much of a majority will the Democrats hold.”
This article was written exclusively for GoRion.