House passes bill to dismantle Dodd-Frank

Roger Yu | USA TODAY

The House of Representatives voted Thursday for a bill that would dismantle many of the laws that regulate Wall Street, a major legislative step in the Republicans’ deregulation efforts that worry consumer advocates.

The Financial CHOICE Act proposes to scrap much of the landmark Dodd-Frank Act, which was enacted in 2010 in the wake of the financial crisis and outlawed some of the riskiest behaviors of banks and financial service companies. The bill passed 233-186, with all Democrats voting against it.

The bill proposes to defang a consumer financial protection agency created by Dodd-Frank, eliminate liquidity requirements for large banks and remove a rule that prohibits banks from investing in risky securities using clients' money.

Sponsored by Rep. Jeb Hensarling (R-Texas), the bill is likely dead on arrival in the Senate, where a smaller-scale bill is being considered and at least 60 votes are required to avoid a Democratic filibuster.

Still, the bill’s passage in the House, widely expected, represents a symbolically significant step in the Republicans' years-long quest to undo Dodd-Frank. Critics of Dodd-Frank, including President Trump, argue that it is too broad in scope, contains too many cumbersome rules that hinder new loans and that it costs banks too much money.

In a statement, Sen. Mike Crapo (R-Idaho), chairman of the Senate Committee on Banking, Housing and Urban Affairs, said Hensarling's bill is a "thoughtful effort to improve our financial regulatory system."

The bill "makes a positive move away from government micromanagement, and returns to basic principles of safety and soundness and market-driven principles," he said.

Dodd-Frank proponents say the legislation helps to maintain banks' financial health and empowers regulators to robustly crack down on scams. Without it, the financial sector could revert to risky lending and investing practices that could trigger a recession, they say.

"It's shameful that Republicans have voted to do the bidding of Wall Street at the expense of Main Street and our economy," said Rep. Maxine Waters (D-Calif.), Ranking Member of the House Committee on Financial Services, in a statement. "They are setting the stage for Wall Street to run amok and cause another financial crisis."

Here are some of the new bill's key proposals:

* Repeal the Volcker Rule. The bill seeks to eliminate the so-called Volcker Rule, which prevents banks from using customer deposits to conduct “proprietary" trading, or trading of speculative securities for banks' benefit. The rule was included in Dodd-Frank as a direct response to the rampant trading of derivatives that contributed to the financial crisis.

* Exempt banks from some rules. Under the bill's proposals, some large banks with high levels of capital would be exempted from Dodd-Frank's liquidity rules. The act requires that banks with assets of $50 billion or more undergo "stress tests" each year. The bill proposes to conduct the test every two years rather than annually. These tests — run by bank management and separately by the Federal Reserve — were put into place because regulators were afraid banks might lose their ability to provide loans to households and businesses during a severe recession.

* Weaken the Consumer Financial Protection Bureau. The bill also proposes to have the CFPB, an influential enforcement agency established by Dodd-Frank, to get its funding from congressional appropriations. It also proposes to give the president authority to fire the CFPB director at will. The CFPB, which has aggressively cracked down on fraudulent financial products, is independently funded by the Federal Reserve. The director serves a five-year term and can be removed only for cause.

* Eliminate ways to shut down struggling banks. The bill seeks to eliminate the Federal Deposit Insurance Corporation's authority to quickly dismantle insolvent banks and financial companies. In April, Trump ordered a review to see whether court-supervised bankruptcy may be a better way to wind them down. But Dodd-Frank proponents argue that bankruptcy procedures can't effectively assess the broader effects of a company's failure on the financial system.

* Remove "too big to fail" designation. The bill would remove the authority of the Financial Stability Oversight Council, a Treasury Department organization, to designate non-bank financial institutions, such as insurance companies, as "systemically important." These "too-big-to-fail" companies are now subject to additional regulatory restrictions.

* Eliminate fiduciary rule. The bill proposes to erase the Labor Department’s fiduciary rule, which requires financial advisers working with retirement account holders to act in the best interest of their clients. The rule, which was drafted by the Obama administration, partly goes into effect Friday.

Contributing: Eliza Collins

Follow USA TODAY reporter Roger Yu on Twitter @ByRogerYu.