Financial CHOICE Act of 2017: What does the future hold for consumers and entrepreneurs?

rayburn hob

On Wednesday, the Financial Services Committee (FSC) held the “A Legislative Proposal to Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs” hearing on the Financial CHOICE Act of 2017. The bill’s objective is stated in its discussion draft as, “To create hope and opportunity for investors, consumers, and entrepreneurs by ending bailouts and Too Big to Fail, holding Washington and Wall Street accountable, eliminating red tape to increase access to capital and credit, and repealing the provisions of the Dodd-Frank Act that make America less prosperous, less stable, and less free, and for other purposes.”

Key Financial CHOICE Act Principles
1. Taxpayer bailouts of financial institutions must end and no company can remain too big to fail;
2. Both Wall Street and Washington must be held accountable;
3. Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful;
4. Economic growth must be revitalized through competitive, transparent, and innovative capital markets;
5. Every American, regardless of their circumstances, must have the opportunity to achieve financial independence;
6. Consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty; and
7. Systemic risk must be managed in a market with profit and loss.

Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the hearing, stating, “The bill [Financial CHOICE Act] will unleash opportunities for economic growth, foster capital formation, provide Main Street job creators with regulatory relief, so more Americans can go back to work in good careers and give their families a better life.”

Ranking Member Maxine Waters (D-CA) followed the Chairman, “The wrong CHOICE Act thoroughly dismantles Wall Street reform, guts the Consumer Financial Protection Bureau and takes us back to the system that allowed risky and predatory Wall Street practices and products to crash our economy. During the Great Recession, because of the actions of reckless financial institutions, Americans lost $13 trillion in household wealth, 11 million Americans lost their home, and their unemployment rate climbed to 10 percent. The impact was widespread and harmful to all.”

Vice Ranking Member, Daniel T. Kildee (D-MI) continued, “The wrong choice for hardworking Americans, it [Financial CHOICE Act] puts Wall Street back in charge and does away with those very protections that were enacted after the financial crisis, puts the economy back at risk … This takes us back to the days where Wall Street practices nearly crippled our economy, back to the days where millions of people lost their homes, lost their jobs, saw their retirement savings wipe out. The people that I represent have not forgotten these dark days, and the Committee should not forget them either.”

U.S. Representative Brad Sherman (D-CA) suggested that separating the bill could be a beneficial alternative. “Mr. Chairman, this CHOICE Act takes some good bills that pass this Committee with overwhelming and bipartisan majorities, puts them together a lot with bad bills that do not have bipartisan support, and gives members no choice. You’re ultimately going to have to vote up or down. Mr. Chairman, please break up this bill.”

Seven Hearing Witnesses

Mr. Peter J. Wallison, Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies, American Enterprise Institute

“Because Congress did not know what really caused the crisis, it was led to adopt a series of unnecessary restrictions in the Dodd-Frank Act, detailed in my prepared testimony. Among them are, first, costly regulations on community banks, which prevented the growth of small business and the employment small business produces, causing seven years of stunted economic and employment growth; second, the creation of the FSOC, with the power to designate firms as SIFIs; among other things, this caused GE to close down GE Capital, which had been a successful lender to small business and other growth companies; third, an unnecessary orderly liquidation authority that would make it likely to be difficult for very large financial firms to find financing in the future; fourth, authority for the Fed to finance failing clearing houses, which would pave the way for another financial crisis; and fifth, the Volcker Rule, which drastically reduced liquidity in the financial markets, creating the potential for another financial crisis. The CHOICE Act can’t be enacted too soon, Mr. Chairman.”

Dr. Norbert J. Michel, Senior Research Fellow, Financial Regulations and Monetary Policy, The Heritage Foundation

“My testimony argues that Dodd-Frank needlessly increased borrowing costs, and that removing this excess burden with markedly increase sustainable economic growth … The Financial CHOICE Act implements an improved bankruptcy process for large financial firms by adopting the Financial Institution Bankruptcy Act of 2016, legislation that subjects derivatives and repos to an automatic 48-hour stay. The temporary stay is a welcome improvement, and the elimination of this safe harbor and all other bankruptcy safe harbors for derivatives and repos would be optimal.”

“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. These changes would provide an enormous benefit to U.S. citizens, but Congress can do even better by eliminating the CFPB and consolidating its enforcement authority at the Federal Trade Commission.”

The Honorable Michael S. Barr, Professor of Law, University of Michigan Law School

“While American families have not forgotten the pain of the financial crisis, a kind of collective amnesia appears to be now descending on Washington. Many seem to have forgotten the causes of the crisis and the brutal consequences for American families … While the drafted legislation has many serious flaws; I want to focus here on three key problems. First, weakening oversight of the financial system; second, eliminating orderly liquidation; and third, undermining consumer and investor protection.”

“The proposed legislation would weaken oversight of the financial system by eliminating the ability of the Federal Reserve to supervise systemically-important nonbank financial companies, undermining the Financial Stability Oversight Council, abolishing the Office of Financial Research and fundamentally weakening oversight of banks … None of these changes will help hometown banks. Instead, small banks could benefit from safe harbor rules and plain language versions of regulations that do apply to them.”

Mr. Alex J. Pollock, Distinguished Senior Fellow, The R Street Institute

“To whom are financial regulatory agencies accountable? Who is their boss? The answer to both these questions is, of course, the Congress. All of these agencies of the government, populated by unelected employees with their own ideologies, agendas and ambitions, and the CFPB is the best example of that, must be accountable to the elected representatives of the people who created them, can dissolve them and have to govern them in the meantime.”

“I believe the CHOICE Act is an excellent example of Congress asserting itself, at last, to clarify that regulatory agencies are derivative bodies accountable to the Congress, they cannot be sovereign fiefdoms, not even the dictatorship of the CFPB and not even the money printing activities of the Federal Reserve.”

Dr. Lisa D. Cook, Associate Professor, Economics and International Relations, Michigan State University

“Among those irresponsible financial practices was that banks were placing bets with public money. If they won, banks’ profits would soar and bank managers and owners would be paid. If they lost, American taxpayers would pay through deposit insurance or direct government bailouts … If higher capital requirements constrained lending, and therefore economic growth, we should see a fall in both since the passage of Dodd-Frank in 2010. Instead, we see both increasing. According to the latest data available, commercial and consumer loans grew between 0.5 percent and 12 percent annually since 2012. Household debt at the end of 2016 stood at $12.6 trillion, which is only 0.8 percent shy of its $12.6 trillion peak in the third quarter of 2008. The economy has expanded 0.2 percent and 6.7 percent each quarter since the first quarter of 2011.”

Ms. Hester Peirce, Director, Financial Markets Working Group and Senior Research Fellow, Mercatus Center, George Mason University

“Another important part of financial regulation, which the CHOICE Act recognizes, is the need to allow the capital markets to work, we need to allow investors and companies to meet in the capital markets in ways that are mutually beneficial, and the CHOICE act opens up new avenues for investors and companies to come together. It also addresses another important problem, which is that many companies don’t go public anymore, which means that investors can’t participate in the growth unless they’re accredited … the bottom line is that regulatory reform needs to work for consumers, investors and Main Street companies. That’s the objective of financial regulatory reform, and I believe the CHOICE Act has many elements that further these objectives.”

Mr. John Allison, Former President and Chief Executive Officer, Cato Institute

“For those of you that are concerned about safety and soundness, why would you believe regulators know how much risk we ought to take? They just caused the last crisis. In my career, they always overreact. They encourage too much risk in good times, too little risk in bad times, which is what they’re doing today. They don’t have any magic wand. Markets do a much better job of that.”

Among its changes, the Financial CHOICE Act proposes changing the name of the Consumer Financial Protection Bureau (CFPB) to the Consumer Law Enforcement Agency (CLEA), restructuring the agency with a single director removable at will by the President and submitting the agency to Congressional oversight and the Congressional appropriations process.

The Financial CHOICE Act was originally introduced in the summer of 2016, revised leading up to the April 26 hearing, and a markup for the bill is expected shortly. The FSC could vote on the act as early as next week.

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