President-elect Trump made plain his dislike for the Dodd-Frank Wall Street Reform and Consumer Protection Act financial regulatory law during the campaign and now it appears his administration will move quickly toward making changes.
Dodd-Frank was enacted in the aftermath of the 2008-09 financial crisis amid concern the nation’s largest banks and investment houses had engaged in risky investment practices that helped cause the recession. The law’s purpose was to guard against banks that were supposedly “too big to fail” and whose collapse could threaten the nation’s financial system.
Critics contend, though, that the law has imposed huge costs on the banking industry and served to short-circuit both business and consumer lending. While the biggest banks have been able to absorb the costs of these new regulations, the impact has been particularly harsh for smaller lending institutions, they say.
“The big banks got bigger while community financial institutions have disappeared at a rate of one per day,” says a statement on the Trump transition website. “The Dodd-Frank economy does not work for working people.”
Big banks have long complained about the regulatory costs imposed by Dodd-Frank and contend that the benefits have been minimal.
“For the banks that I represent, the main concern is that Dodd-Frank was an overreaction to a very difficult situation [and] the cost of regulation is not matched by the benefits,” said Tom Vartanian, a financial services and regulatory lawyer at Dechert LLP, a University City-based law firm. “They are spending an enormous amount of money for compliance and that comes from one of two places, either shareholders or consumers who use financial services.”
Dodd-Frank, a sprawling 2,300-page law that touches nearly every corner of the financial services industry, created new agencies to oversee the health of banks and other financial companies; sharply restricted the ability of banks to engage in speculative investments with their own funds, so-called proprietary trading; and created a new agency to protect consumers called the Consumer Financial Protection Bureau, among other initiatives.
While conservatives have sharply criticized the law, there are signs that a full repeal, though promised on the transition website, likely won’t take place.
Members of the Trump transition team have been quoted saying that they plan to take a targeted approach, removing some elements and changing others while leaving aspects of the law intact.
One potential model for revamping the law is a bill introduced this summer by Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee. The bill would make various changes to the law but not scrap it entirely.
Alan Kaplinsky, a financial services lawyer at Ballard Spahr LLP, said he expects that even the CFPB, much disliked by Republicans, probably will survive, although in an altered fashion.
“Let’s not forget how he got elected,” Kaplinsky said of Trump. “He is a populist and I would think that a lot of his constituents want to have a federal agency devoted to consumer protection. I think it would be almost unfathomable for them to get rid of it.”
Kaplinsky is head of Ballard Spahr’s consumer financial services practice and came up with the credit-card industry practice of requiring consumers to waive the right to file class-action lawsuits and agree instead to go to arbitration when there is a dispute. The CFPB has looked askance at the practice.
Rather than get rid of the CFPB, Kaplinsky said he expects that the Trump administration will look to convert it to a commission, governed by a majority of like-thinking Republicans. Although the bureau now is funded by the Federal Reserve, and thus fiscally out of reach from Congress, Kaplinsky said he expects Republicans will try to impose congressional budget authority over the bureau.
Whatever happens, the Trump administration’s goal of remaking the law, as well as many other policies instituted by President Obama, will likely keep lawyers busy for a while.
“We think they are going to be very busy across a number of practice areas,” said Jeffrey Lowe, managing partner of the Washington office of Major, Lindsey & Africa, a national legal consulting and employment firm with an office in Philadelphia. “There is going to be a lot of regulatory advice that will be needed.”
