Risk & Compliance

‘Financial CHOICE Act’ Would Be Big Boost for Banks

The proposed law would significantly amend the Dodd-Frank Act and restore flexibility to financial institutions.
Christopher WhalenMarch 22, 2017
‘Financial CHOICE Act’ Would Be Big Boost for Banks

This is the second article in a two-part series on potential regulatory changes for the financial services industry. Read Part 1 here.

OpinionThe issues that are politically attractive to President Trump — health-care reform, tax reform, and government spending — are also the most difficult, in terms of the heavy lifting needed to make actual legislation a reality.

For that reason, many veteran observers of Washington believe the president will be able to get only one major piece of legislation through Congress in the first year of this term. Thus, choosing proposals that are relatively less problematic in a practical sense will increase his chances of success.

Revising the financial services regulatory environment is a good candidate. Changing the narrative regarding Dodd-Frank and related regulations is not a simple task, but it’s a lot simpler than either tax reform or fixing the ACA.

Rep. Jeb Hansarling

Rep. Jeb Hansarling Financial CHOICE Act

One idea floated by sources close to the Trump inner circle is passing a modified version of the Financial CHOICE Act, a project of Rep. Jeb Hensarling, the Republican chairman of the House Financial Services Committee.

The proposed law has been subject to extensive hearings. Here is a summary of its more significant provisions:

Dodd-Frank Off-Ramp: This provision aims to enhance U.S. financial market resiliency and promote economic growth by offering well-managed, well-capitalized financial institutions — those with a simple leverage ratio of 10% — to opt out of many Dodd-Frank regulatory rules.

Bankruptcy, Not Bailouts: This would end the discretion given to the FDIC with respect to the resolution of large banks.

Dodd-Frank currently allows bailouts. The legislation would establish a new bankruptcy code chapter that enables large, complex financial institutions to fail safely without making taxpayers foot the bill. Instead of getting an FDIC bailout, a failed institution’s parent company would be forced to file for bankruptcy and restructure, albeit with the acquiescence of federal regulators.

Any depository that became insolvent would still be subject to seizure and resolution by the FDIC, however.

Repeal of the Financial Stability Oversight Council’s SIFI Designation Authority: Under Dodd-Frank, large banks are automatically considered to be “systemically important financial institutions.” However, the FSOC has the authority to designate non-bank financial institutions, such as insurance companies and funds, as SIFIs.

Repealing that authority would address one of Dodd-Frank’s greatest examples of regulatory overreach. Rather than mitigating risks to financial stability, it arguably undermines both financial stability and market discipline by signaling to market participants that the government considers the designated firm “too big to fail.”

Reform the Consumer Financial Protection Bureau: The CFPB’s rules and policies exemplify a punitive “Washington-knows-best” attitude that limits the availability of useful — and safe — consumer products and services. The CHOICE Act will increase accountability by changing the bureau’s governance and funding mechanism to a commission structure subject to congressional appropriations.

The CFPB has been especially harmful to the mortgage industry, causing the cost of servicing a mortgage to rise several-fold since 2008. But the bureau has suffered some significant legal setbacks in the past year.

PHH, a large nonblank mortgage lender, made national headlines when it challenged CFPB Director Richard Cordray’s $103 million increase to a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

The United States Court of Appeals for the District of Columbia Circuit ruled for PHH, declaring the CFPB’s unitary leadership structure unconstitutional and vacating the additional $103 million fine.

Relief from Regulatory Burden for Community Financial Institutions: Since the 2008 financial crisis, regulators have discouraged banks from making risky loans to either consumers or businesses. Approximately one-third of U.S. consumers, for example, are essentially unable to get a mortgage loan.

The CHOICE Act includes a host of reforms to address the plight of consumers finding it increasingly difficult to access affordable credit, as well as that of community financial institutions unable to offer the products and services that those consumers demand.

Among other reforms, the law would require financial regulatory agencies to appropriately tailor regulations to fit an institution’s business model and risk profile, thereby reducing dead-weight compliance costs and allowing banks to devote more of their operating budgets to meeting customer needs.

Federal Reserve Reform: The law would scale back the Fed’s regulatory and supervisory powers and subject them to greater congressional oversight and accountability. By promoting a more predictable, rules-based monetary policy, the law would provide a stronger foundation for economic growth than the Fed’s improvisational approach of recent years under Chair Janet Yellen.

The legislation also calls for an audit of the Fed by the General Accountability Office and makes major changes to the Dodd-Frank provisions calling for “living wills” and annual bank stress tests.

Reining in the Administrative State: The CHOICE Act would impose a statutory cost-benefit analysis requirement on financial regulators. The legislation includes the REINS Act, which would require Congress to pass, and the president to sign, a joint resolution of approval for all major regulations before they are effective.

In addition, within five years of a new rule’s implementation, the regulator would have to complete an analysis of its economic impact, including both direct and indirect costs.

The legislation would also convert agencies with single directors, such as the CFPB, to a commission structure and subject all agencies to the congressional appropriations process. That would eviscerate one of the key aspects of the Dodd-Frank law that Democrats use to insulate these agencies from public accountability.

Amend Title IV of Dodd-Frank: Title IV requires the SEC to expend scarce resources on the protection of sophisticated institutional investors and wealthy individual investors. These resources would be better used to protect the millions of retail investors of more modest means who have a far greater need for the SEC’s assistance.

Under the CHOICE Act, Title IV would be amended to enhance funding opportunities for start-up companies and other job creators and to focus government resources on protecting mom-and-pop investors instead of the wealthiest Americans.

Repeal the Volcker Rule: The nickname for Section 619 of Dodd-Frank, the Volcker rule prohibits U.S. bank holding companies and their affiliates from engaging in “proprietary trading” and from sponsoring hedge funds and private equity funds.

The real purposes of the Volcker Rule, however, is to address self dealing and conflicts of interests between banks and their customers. As such, the rule should be left in place. One proposal would allow banks’ broker-dealer to trade for their own account while the depository remains under the restrictions of the existing Volcker Rule.

Repeal the Durbin Amendment: During the Senate’s consideration of financial regulatory reform legislation, Illinois Democratic Senator Richard Durbin offered an amendment to cap interchange fees on debit card transactions. The amendment ultimately became Section 1075 of Dodd-Frank Act.

The amendment was not even considered by the House prior to final passage of Dodd-Frank and was never the subject of a hearing in the House Financial Services Committee.

Eliminate the Office of Financial Research: Title I of Dodd-Frank Act created the OFR within the Treasury Department to support the work of the FSOC, by collecting and analyzing data on systemic risk in financial markets.

The OFR is headed by an independent director that the president appoints to a six-year term, subject to the advice and consent of the Senate. Dodd-Frank gives the director “sole discretion” for determining how to carry out Dodd-Frank authorities. To date, the OFR has produced little public research of value to either the regulatory community or the public.

Address SEC Enforcement Issues: Because both Wall Street and Washington must be held accountable if future financial melt-downs are to be averted, the CHOICE Act would significantly increase penalties for securities law violations by both individuals and entities.

Further, it would couple those increases with important reforms to the SEC’s enforcement program designed to promote the rule of law and ensure due process.


Some or all of the provisions of the Financial CHOICE Act could eventually become law. A modified version of legislation could be made palatable to both parties in the Senate and, despite Democratic opposition, it would far easier to pass this law than either a tax-reform bill or ACA reform.

Rep. Hensarling is close to Vice President Mike Pence from the latter’s days in Congress. Hensarling even traveled with the Trump campaign, and thus the provisions of the proposed law are familiar to the new administration.

Any number of other issues may catch the president’s attention in the coming year, but an amended version of the Financial CHOICE Act has the highest probability of success in 2017. Needless to say, the financial services industry will strongly support the effort.

Christopher Whalen is chairman of Whalen Global Advisors and a former senior managing director for Kroll Bond Rating Agency.

Photo: Gage Skidmore, CC BY-SA 2.0. No changes were made to the original image.

This article is a shortened version of a policy brief originally published by the Networks Financial Institute at Indiana State University.