Bates Research - 05-03-17

The CHOICE Act: Congress Introduces Bill to Reengineer the Regulatory Landscape

Last week, House Financial Services Committee Chairman Jeb Hensarling unveiled an updated version of the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act (a/k/a “the Financial CHOICE Act), a bill first introduced in 2016 as HR 5983. The new version of the Act includes a dedicated effort to roll back the purported regulatory overreach of Dodd-Frank combined with an ambitious grab-bag of financial services reforms. If enacted, the reforms would dramatically change the financial services landscape. (See here for a section-by-section Summary of the Act).

Changes proposed in the CHOICE Act

In broad strokes, the legislation would repeal, reengineer or abolish many of the regulatory structures developed in response to the financial crisis of 2007-2008 (FSOC, OLA, OFR, and CFPB, to name a few), and would give banking and large financial institutions an “off ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards. The legislation would subject agencies to greater Congressional oversight and place new limitations on the authority of the regulatory agencies to promulgate new rules. It would repeal the Volcker Rule, the Department of Labor’s fiduciary rule and the so-called “Durbin amendment,” which caps the fee banks charge retailers for processing debit-card transactions. In addition, the bill would impact civil enforcement by enhancing penalties for all kinds of financial fraud.

The CHOICE Act also incorporates many financial reform proposals that have been around for years, and which had been introduced and passed previously in the House of Representatives. These include almost two dozen Committee or House-passed capital formation bills, two dozen regulatory relief bills for community financial institutions, and a number of bills affecting specific authorities such as a proposed repeal of the SEC’s authority to eliminate or restrict securities arbitration and directing the remittances for fines collected by the MSRB and PCAOB.

Partisanship in the Name of the American People

At the April 26th hearing on the sweeping bill, partisan lines were drawn early and often. Supporters of the legislation focused on how it provides specific redress of longstanding complaints about government overreach. Peter Wallison of the American Enterprise Institute testified that “one way to understand the act and the need for the comprehensive reform that the CHOICE Act provides, is to recognize that the Dodd-Frank Act was completely unnecessary.” Director of the Financial Markets Working Group at the Mercatus Center, Hester Peirce, testified that “the bill’s provision requiring Congress to approve major agency rules builds accountability into the regulatory process. And Heritage Foundation researcher Norbert J. Michel testified against the CFPB stating: “the CHOICE Act greatly improves the status quo by… making the CFPB director removable at will, putting the agency through the regular appropriations process, eliminating the abusive behavior concept, and relegating the CFPB to an enforcement-only agency.” Chair Hensarling argued succinctly that "the Financial CHOICE Act ends bailouts for Wall Street and imposes the toughest penalties in history for those who commit financial fraud and insider trading.”

Calling the bill “the Wrong CHOICE Act,” Democratic critics were so vigorous in their opposition that they demanded a separate minority hearing on the legislation.  Railing against the entirety of the bill, Ranking Member of the Committee Maxine Waters (D-CA) argued that it is “a deeply misguided measure that would bring harm to consumers, investors and our whole economy. The bill is rotten to the core and incredibly divisive.” Similarly, Senator Elizabeth Warren, (D-MA) who testified at the minority hearing, stated that “access to credit is at a historic level, as are bank profits.” She called the GOP legislation a "589-page insult to working families" that would only make "’big-time’ lobbyists happy.” 

There were occasions for bipartisanship. Representative Brad Sherman (D-CA) suggested that the bill be split up into multiple pieces of legislation and he offered specific support for preserving access to manufactured housing and the Mortgage Choice Act. Representative John Delaney (D-MD) supported regulatory relief for community banks, and Representative Gwen Moore (D-WI), argued there was room for compromise on appropriate reform to the Volcker Rule. But on the whole, the opening hearings provided a platform for political confrontation. Mark-up sessions scheduled for this week will reflect whether there are any possibilities for bipartisan action.

Prospects for the CHOICE Act

Despite a heavy legislative agenda, the House of Representatives should pass the Hensarling bill in May, though it is likely to face a barrage of Democratic amendments attempting to slow it down. Speaker Paul Ryan reportedly announced that he will seek a vote on the CHOICE Act “as quickly as possible” once it gets through Chair Hensarling’s Committee.

On the campaign trail, the President called for repeal of the Dodd-Frank Act, however, the administration has yet to announce any policy positions on financial regulation or, specifically, the CHOICE Act provisions. Presumably, these positions will be articulated sometime in June as a result of the President’s Executive Order mandating such a review by the Treasury Department. For his part, Treasury Secretary Mnuchin offered this quasi-endorsement: “the existing regulatory system is limiting, not stimulating our economy…I applaud the steady commitment and leadership that Chairman Hensarling and his colleagues have provided on these issues, and welcome the reintroduction of the CHOICE Act.”

The true fate of the CHOICE Act will be determined by the Senate. Banking Committee Chairman Mike Crapo is on record as saying he wants to pass bipartisan legislation in the Senate, in recognition of political practicality. Partisan legislation would likely be blocked by a filibuster, which is why the CHOICE Act is largely viewed as a non-starter in the Senate. Still, the talk among the Congressional financial leadership is of support. Senator Crapo was quoted as "lauding" Chair Hensarling’s bill as a “positive move away from government micromanagement.” Chair Hensarling, for his part, stated that he expects Senator Crapo’s bill “to look much different.”

As the CHOICE Act, Treasury recommendations and Senate proposals work their way through the legislative process, Bates will keep you posted on the progress and potential impact of lawmaking in this area.


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