Financial CHOICE Act: Ending “Too Big to Fail” Bailouts, Reforming Dodd-Frank and the CFPB (H.R. 10)

What is H.R. 10?

(Updated November 16, 2018)

This bill — known as the Financial CHOICE Act — would implement a number of reforms to the laws and regulations of the financial industry, including the Dodd-Frank Act. In general, it seeks to end “Too Big to Fail” bailouts of financial institutions, expand small businesses’ access to capital, enhance punishments for financial crimes, and reform the Consumer Financial Protection Bureau (CFPB).

The bill would reform the bankruptcy process for large financial institutions by repealing the FDIC’s Orderly Liquidation Authority under Dodd-Frank and replacing it with a new chapter of the Bankruptcy code that’s designed to accommodate the liquidation of complex financial firms. It would also retroactively eliminate the ability of the Financial Stability Oversight Council (FSOC) to designate firms as systemically important financial institutions, or payment and clearing organizations as systemically important “financial market utilities.”

The Treasury Dept.’s Exchange Stabilization Fund would be prohibited from being used to bailout financial firms or creditors. The Federal Reserve’s discount window lending would be restricted to when Bagehot’s dictum applies, which is that to avoid panic central banks (like the Fed) should lend without limit to solvent firms against good collateral at sufficient rates.

There would be an “off-ramp” from the post-Dodd-Frank supervisory regime and the Basel III capital and liquidity requirements for banks that maintain high levels of capital. Banks that choose to make a qualifying capital election, meaning they choose to pursue the off-ramp by keeping more cash on hand, but fail to maintain the proper non-risk weighted leverage ratio lose that regulatory relief. Exempted banks would be free from federal laws and regulations related to mergers or acquisitions, limitations on capital or liquidity standards, or federal regulators considering their risk to the financial system’s stability when reviewing their application to consummate a transaction or commence an activity.

The Securities and Exchange Commission (SEC) would be allowed to triple the monetary fines it seeks in administrative or civil actions where the penalties are tied to the defendant’s illegal profits. In circumstances involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” the SEC would be granted the new authority to impose penalties equal to investor losses where the loss or risk of loss is significant and punish repeat offenders more harshly.

The maximum criminal fines for individuals and firms engaging in insider trading and other corruption would be increased, and penalties for financial fraud and self-dealing would be enhanced. In general, the minimum and maximum penalties for these crimes are doubled by this legislation. All fines collected would be provided to the Treasury for deficit reduction.

All financial regulatory agencies would have their major regulations subject to Congress’s approval under the REINS Act, and their funding would be subject to appropriations. An across-the-board requirement would be put in place for financial regulators to conduct a detailed economic analysis of all proposed and final regulations to ensure the costs imposed are outweighed by the benefits.

The SEC would be reauthorized, along with funding, structural, due process, and entitlement reforms. Financial regulators and the Dept. of Justice (DOJ) would be prohibited from requiring that donations be made to non-victims in settlement agreements.

Some sections and titles of the Dodd-Frank Act, such as the Volcker Rule which prohibits banks from conducting certain investment activities with their own accounts or owning private equity funds or hedge funds, would be repealed by this bill. It also contains a number of provisions that have also been introduced as standalone bills in this Congress or the last, including bills aimed at the following:

• Making it easier for startups to pitch angel investors on their business plans.

• Creating a safe harbor for investment fund research by brokers and dealers.

• Increasing the number of investors in a venture capital firm before it becomes subject to SEC regulation.

• Requiring the SEC to consider the ease with which small businesses access capital in an annual review; and expand small businesses’ access to credit.

This section of the bill contains a number of individual pieces of legislation aimed at providing regulatory relief to community banks and credit unions, including:

• Requiring regulators to consider the risk profiles and business models of financial institutions when proposing regulations;

• Prohibiting federal banking agencies from terminating the accounts of customers or groups of customers unless there is a material reason to do so, rather than because of their reputation risk as occurred during Operation Choke Point which targeted gun shops, payday lenders, pawn stores, and cigar shops.

• Creating a safe harbor for mortgage lenders that keep mortgages on their balance sheets.

The name of the Consumer Financial Protection Bureau (CFPB) would be changed to the Consumer Law Enforcement Agency (CLEA), and it’d be tasked with the dual mission of consumer protection and competitive markets. Cost benefit analyses of rules would be performed by the newly-formed Office of Economic Analysis.

The CLEA would be structured as an agency of the executive branch, rather than an independent agency as the CFPB was, thereby subjecting it to Congressional oversight and the appropriations process. Its supervisory function would be eliminated, and it’d be required to enforce enumerated consumer protection laws. The CFPB’s market-monitoring function would be eliminated, and CLEA would have to obtain permission before collecting consumers’ personally identifiable information. The CFPB’s “unfair, deceptive, or abusive acts and practices” authority would be removed, and the Dept. of Labor’s fiduciary rule would be repealed.

Argument in favor

This bill would end “Too Big to Fail” bailouts of financial institutions and undo the excesses of the Dodd-Frank Act’s regulations to help banks facilitate economic growth. It also reforms and refocuses the Consumer Financial Protection Bureau on protecting consumers and ensuring competitive markets rather than overseeing banks.

Argument opposed

This bill would end too many vital consumer protections that were created by the Dodd-Frank Act after the financial industry meltdown of 2008 triggered the Great Recession, leaving Americans open to fraudulent financial advice. It would let Wall Street firms engage in more of the risky behavior that caused the financial crisis in the first place.

Impact

Consumers of financial services; banks, credit unions, venture capital firms, and investment firms; financial regulators such as the SEC and CFPB; and the Treasury Dept.

Cost of H.R. 10

The CBO estimates that enacting this bill would reduce federal spending by $30.1 billion and revenues by $5.9 billion over the 2017-2027 period, thereby reducing federal deficits by $24.1 billion.

Additional Info

In-Depth: Sponsoring Rep. Jeb Hensarling (R-TX) introduced this bill to end bank bailouts, promote economic growth, and provide regulatory relief for community banks and credit unions:

“The Financial CHOICE Act offers economic opportunity for all and bank bailouts for none.  The era of ‘too big to fail’ will end and we will replace Dodd-Frank’s growth-strangling regulations on community banks and credit unions with reforms that expand access to capital so small businesses can create jobs and consumers have more choices and options when it comes to credit. With the Financial CHOICE Act, we will unleash America’s economic potential and give Main Street job creators desperately needed help so more Americans can find work, have good careers and give their families a better life.”

Democrats have expressed opposition to bill, which they’ve taken to calling the “Wrong Choice Act” for a number of reasons. In the bill’s committee report, Democrats said it would eliminate the most important aspects of the Dodd-Frank Act’s Wall Street Reforms. They say it “effectively guts” the CFPB and exposes consumers to “unfair, deceptive, or abusive acts” perpetrated by “shoddy financial actors.” Democratic members of the committee also feel that it “would encourage large banks to take the same kinds of risks that crashed the economy in 2008.”

This legislation passed the House Financial Services Committee on a 34-26 vote and has the support of 40 cosponsors in the House, all of whom are Republicans.

Media:

• House Financial Services Committee Press Release
  
• House Financial Services Committee Resources
  
• Section-by-Section
  
• CBO Cost Estimate
  
• The Hill
  
• Reuters
  
• U.S. News and World Report
  
• Forbes (In Favor)