May 22, 2017 Walt Wojciechowski
On May 4, the House Financial Services Committee approved the Financial CHOICE Act, voting to send the bill to the House floor, according to The Hill. Developed by Chairman Jeb Hensarling, the proposed law would repeal many of the regulations instituted under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
If enacted into law, how would the Financial CHOICE Act impact commercial and consumer lending practices?
Overhauling the Consumer Financial Protection Bureau
The CHOICE Act proposes reforming the CFPB as a civil enforcement agency and rename the institution as the Consumer Law Enforcement Agency (CLEA). The Act would also reform CLEA's statutory mandate "to ensure that it takes into account, and seeks to promote, robust market competition," as well as enforce consumer protection laws.
Moving past the law's intentions, the CHOICE Act would enable courts to "correct any erroneous interpretation" the Agency makes within its legal powers. It also mandates that CLEA:
- Conduct thorough cost-benefit analyses of regulations it is considering adopting.
- Give up the authority to prevent consumers from using financial products and services it deems "unfair, deceptive, or abusive."
- Cannot unilaterally broaden its powers without authorization from Congress.
The CHOICE Act's authors maintained that the CFPB has neglected to clearly define what "unfair, deceptive, and abusive acts or practices" (UDAAP) really are. The argument stands that, as financial institutions (FIs) have no clear, accurate idea of what an UDAAP is, many refrain from offering services to lower-income individuals and developing innovative financial products.
If Congress passes the CHOICE Act and repeals the UDAAP authorities, FIs may feel confident enough to develop and integrate new types of lending products for low-income Americans. Some may completely reassess their consumer lending practices, and consider utilizing alternative credit data to assess applicants' ability to pay mortgages.
The hope among the CHOICE Act's proponents is that restructuring the CFPB will increase credit access among blacks and Hispanics. The bill's comprehensive summary noted that between 2007 and 2014, mortgage approval rates among blacks and Hispanics decreased 52 percent.
Community FIs May Be Exempt From Regulatory Burdens
While large FIs can handle the costs associated with lending regulations, their regional and community-based counterparts struggle with such expenses. One of the stipulations of the CHOICE Act seeks to resolve this issue by requiring regulatory agencies to adjust laws according to FIs' business models and risk profiles.
The CHOICE Act also seeks to decrease community FIs' reporting obligations by "eliminating redundancies in the data collection demands made by different regulators on the same institution." The Federal Reserve Bank of St. Louis surveyed 974 community banks across the U.S. in 2014 and found they collectively spent $4.5 billion on compliance efforts that year.
Reducing such costs could theoretically enable those institutions to invest in product development, providing consumers with greater access to credit. The capital available to an institution - a bank, credit union, or some other organization - partly determines whether or not it can sustain the risks of pursuing one endeavor or another.
If a community bank has to spend 22 percent of its net income to comply with federal and state regulations (as was the case with those which the St. Louis Federal Reserve surveyed), then it cannot allocate that portion of its net income to developing new credit products, updating their information technology, and other such endeavors.
The CHOICE Act's restructure of the CFPB and regulatory revisions regarding community banks are just two of many proposals outlined in the bill's framework. In addition, after the law is enacted, how institutions implement it may differ than what's on paper.