Dodd-Frank overhaul won't be quick

The Scotsman Guide - Victor Whitman - 03 February 2017

A major overhaul of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) won’t be a fast or easy process, according to Fitch Ratings.

In a recent analysis, the rating agency said the Trump administration and the Republican Congress are unlikely to scrap Dodd-Frank entirely, but some reforms to the Obama-era signature 2010 law regulating the financial services industries are likely to be enacted.

“That is something that is high on the priority list of the Trump administration,” said Joo-Yung Lee, a managing director and head of Fitch’s North American Financial Institutions during a telephone interview on Friday.

“It is something that he has been quite outspoken about in terms of his platform,” she told Scotsman Guide News. “We do think that some change in regulation is likely. How quickly it happens is hard for us to say.”  

Notably, Fitch also believes that reforms to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac could be pushed far off as Congress tackles other regulatory reform.

“We saw that even in [Treasury Secretary-designate Steven] Mnuchin’s testimony, he has sort of retreated from his original comments that reform is needed, but they need to do some analysis,” Lee said. “The GSEs right now are still a very important part of the housing market in terms of the role they play, in terms of buying mortgages from the banks and securitizing them. We haven’t seen any real proposals in some time.”

Speculation has been running high that the Trump administration will attempt drastic changes to Dodd-Frank, which created, among other things, the Consumer Financial Protection Bureau (CFPB) and changed how the mortgage market functions. President Donald Trump ordered on Friday a review of Dodd-Frank. Earlier in the week, he called the law “a disaster” and pledged to do “a big number” on Dodd-Frank.

Fitch believes that the Financial Choice Act, a bill proposed last year by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, provides a potential blueprint. That is a sweeping bill, which proposes a mechanism for banks to opt out of most regulatory oversight by maintaining much higher capital levels. That rule would also change the leadership structure of the CFBP, which would be renamed the Consumer Financial Opportunity Commission.   

Fitch said there wasn’t enough information about Trump’s position or the future course of regulatory reform to determine the overall effect on its securities ratings.  

Trump, in essence, ordered his Treasury secretary and other members of the financial team to review Dodd-Frank and develop a plan to overhaul the law. 

In its analysis, Fitch noted that the process could be long and drawn out because of the complexity and far-reaching implications of financial regulations. Trump can't scale back regulations through executive orders, and the federal agencies tend to take many months, and sometimes years, to develop major rule changes. In most cases, Congress will need to change the law.

“Dodd-Frank is a pretty big law,” Lee said. “It would require a decent amount of time to review. You would also want, I would think, to understand the implications of your changes to ensure there are not unintended consequences.”