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Proposed Policy
Announced on June 8, 2017

Policy Summary

The House of Representatives voted on Thursday, June 8 to pass the Creating Opportunity for Investors, Consumers, and Entrepreneurs (CHOICE) Act, a bill that repeals many of the regulations imposed by the Dodd-Frank Bill of 2010. The Dodd-Frank bill was itself a response to the 2007-2008 financial crisis, which many believe to have occurred as a result of the deregulation legislation enacted by the Bush Administration.

The CHOICE Act also significantly weakens the Consumer Financial Protection Bureau, a federal agency whose creation was authorized by the Dodd-Frank bill. Under the CHOICE Act, the CFPB would no longer be an independent agency with independent funding; it would also be stripped of investigatory and regulatory functions.

The CHOICE Act also takes aim at the rights of small investors. The bill removes some rights of shareholders of public corporations. Currently, shareholders with an investment of at least $2,000 or 1 percent stake of a company can bring up proposals to the company’s board. The bill and its merits will now be debated in the Senate, where it would need 60 votes in order to pass; Republicans would need support from Democrats in order for passage.

Analysis

Deregulating Banks & Financial Institutions

Deregulation is treated by many in government—especially Republicans—as a magic pill that will automatically increase efficiency and cut costs and “red tape.” In the case of the financial and banking sectors, however, deregulation is often followed by increases in risky investments and spending as well as a lack of transparency and accountability to customers, shareholders, and taxpayers alike.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 in order to curb the risky investment behavior of some banks and financial institutions. Banking deregulation is believed by many critics to be one of the top contributing factors for the financial crisis of 2007-2008. For years, banking and financial regulations were relaxed (such as limits on deposits) or allowed to lapse (such as Glass-Steagall in 1999). This pattern of deregulation coincided with an evolution in creating new financial products and derivatives, which, along with lax rules for credit rating agencies, led to the financial crisis which hobbled the US and world economy for years after the crisis. Among the most important regulations imposed by Dodd-Frank were restrictions on what banks could do with their clients’ money. These regulations were meant to ensure that the country would not be faced with the tough choice of costly bank bailouts on the one hand and the catastrophic consequences of bank failures on the other.

Repealing the Dodd-Frank Act, the primary goal of the CHOICE Act, would allow banks to once again make risky investments with their clients’ money. It would also reduce the transparency and accountability of the banking and financial sector. It would give more choices to a small, select group of banks and investors, while reducing the choices for stability for the rest of the American public.

Although many of the laws, rules, and regulations imposed by Dodd-Frank have their fair share of critics, what is remarkable about the CHOICE act is its breadth in attacking the bill. By increasing regulations on mortgage lending, a consequence of Dodd-Frank was that mortgages became more difficult for many Americans to acquire. But the CHOICE Act not only weakens rules such as the Volcker rule, but also removes shareholder and investor protections, and guts the Consumer Financial Protection Bureau.

This has been somewhat of a pattern in the still-young Trump administration; in February of this year, the President signed an executive order to relax rules that financial advisors be required to work in the best interests of their clients, and he’s also been vocal in his opposition to the Consumer Financial Protection Bureau.

Removing Protections for the Little Guy

Although the Dodd-Frank bill was passed in response to the financial crisis, the bill itself contains many sections, which attempt to regulate a large number of financial products as well as increase protections for the general public–from investors to shareholders to consumers of more basic financial products such as checking and savings accounts. The CHOICE Act broadly attacks many of these protections, limiting the extent to which large companies and banks can be held accountable.

Muzzling the Watchdogs

One of the victories of the Dodd-Frank act was the creation of the Consumer Financial Protection Bureau (CFPB), a federal agency that has the power to investigate financial institutions and companies. Since its creation, the CFPB has led investigations of banks, predatory lenders, and credit card companies. The Bureau estimates that it has provided consumers with nearly $12 billion dollars in relief. The Trump administration has previously attempted to curb the power of the CFPB by limiting the amount that it can request in funding. The CHOICE Act goes even further, completely changing its funding structure and requiring that Congress approve Bureau investigations.

The CHOICE Act also limits the power of small investors to voice their opinions about how public companies are run. The provision, described above, has been used by investors to raise proposals to a company’s board of directors; this provision has been used to raise issues about human rights, climate change, and other practices by companies. But it is also a mechanism that protects all investors from unlimited power by these large companies.

Overall, the CHOICE Act significantly weakens many of the protections of the Dodd-Frank Act, reducing accountability for lenders large and small. Proponents of the act argue that loosening regulations will allow banks to save money, and that they will pass on those savings to consumers. However, the CHOICE act mostly represents a return to the status quo that culminated in the financial crisis.

Engagement Resources

This brief was compiled by Ivy Perez. If you have comments or want to add the name of your organization to this brief, please contact ivy@usresistnews.org.


 

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