Senate votes to relax banking rules as battleground Democrats reject liberal warnings

The Senate voted Wednesday to unravel some of the bank restrictions imposed after the 2008 financial crisis, with several politically vulnerable Democrats joining with the Republican majority to reject liberal colleagues' warnings about future bailouts.

Supporters said the bill, which must pass the House before it could become law, would ease burdens on credit unions and community and mid-sized banks that were not responsible for the economic collapse. Regulations and capital reserve requirements, they say, are making it harder for them to provide credit, especially in rural communities.

The bill would also let consumers freeze and unfreeze their credit reports without paying a fee; make active-duty members of the military eligible for free credit monitoring; and prohibit student loan lenders from declaring a loan in default because a co-signer dies or declares bankruptcy.

Critics said the bill would make future bailouts more likely by reducing government oversight, including "stress tests" by the Federal Reserve to identify risky practices that could threaten the overall economy.

The Congressional Budget Office said the probability of such bank failures, which is "small" under current the law known as Dodd-Frank, "would be slightly greater under the legislation."

Dodd-Frank classified all banks with assets worth more than $50 billion as "systemically important financial institutions" subject to special tests by the Federal Reserve. They also must maintain the financial capacity to absorb losses and develop plans to deal with the potential failure of the bank.

Under the Senate bill, those restrictions would only be mandatory for institutions with assets worth more than $250 billion. The change would ease regulations on more than two dozen financial companies, including BB&T Corp., Sun Trust Banks Inc. and American Express, according to The Associated Press.

Those with assets worth $100 billion to $250 billion could still be subject to stricter Fed controls, but only if regulators chose to impose them.

The vote was 67 to 31 and highlighted a rift on the issue between the Senate’s liberal and moderate Democrats.

Critics said lax oversight by regulators led to the 2008 financial collapse, and the bill would open the door for it to happen again.

One of the most outspoken critics was Sen. Elizabeth Warren, the Massachusetts Democrat whose commentary about Wall Street failures propelled her from academia into politics. Warren gave a half-dozen speeches against the bill during the past two weeks on the Senate floor, and even sent out a fund-raising email telling supporters the some Democrats were working with Republicans to undo Dodd Frank.

"Since I called out some of my Democratic colleagues for their support, I've been taking heat from fellow Democrats," Warren wrote Monday in a post on Medium.

"But there's a long history in Washington of members of both parties teaming up to deregulate banks - followed soon after by a financial crisis ... Saying that doesn't make me the most popular kid on the team," Warren wrote.

Sen. Sherrod Brown of Ohio, the top Democrat on the banking committee, said Congress is “suffering from collective amnesia."

“We know what happens next,” Brown said. “It is hubris to think we can gut the rules on these banks again, but avoid the next crisis.”

But several of the Democratic supporters of the bill are up for re-election in states that Trump won, and they said they were proposing common sense reforms to address a decline in what they called "relationship lenders" who know their communities.

"What I have said consistently is that Dodd-Frank was supposed to have stopped too big to fail, but the net result has been too small to succeed," said Sen. Heidi Heitkamp, D-N.D.

"This is not a giveaway to Wall Street. It is not a giveaway to the largest institutions. Our bipartisan bill makes targeted, common sense fixes so as to provide tangible relief to community banks and credit unions so that they can lend to borrowers in rural America and support rural communities," Heitkamp said.