WASHINGTON — Congress is likely to pass significant changes to the Dodd-Frank Act early next year and then attempt to overhaul roughly a third of the U.S. economy by restructuring the housing finance system.
The House and Senate is working on passing a regulatory relief package that would increase the "systemically important financial institution" threshold and make a number of other legislative changes that will benefit community banks.
The Senate is expected to approve in January or February the carefully negotiated package between Senate Banking Committee Chairman Mike Crapo and moderate Democrats on the panel. The House will then either adopt the Senate deal or use it as a framework for a slightly different legislative proposal. However, the Senate deal is delicate so the House is limited in how far it might go to change the deal.
“It might be the lowest common denominator we can get to,” said Rep. Steve Stivers, R-Ohio, of the Senate deal. “Everything in that bill is easy, the question is can we get anything done that is a little harder and I would like to get things down that are a little more ambitious.”
Rep. Emanuel Cleaver, D-Mo., added that the bill is bipartisan “so that gives me cause that it is going to be a reasonably good piece of legislation but I think we ought to not blindly follow in behind the Senate.”
The most contentious reforms in the bipartisan bill that Crapo negotiated with four moderate Democrats include raising the Dodd-Frank systemic threshold to $250 billion and relaxing stress testing requirements for banks that are below that threshold.
Crapo's bill is expected to split the Democratic caucus between those willing to accept adjustments to Dodd-Frank and harder-line Democrats who oppose regulatory easing. Crapo began negotiating with the moderate Democrats after his talks broke down with Sen. Sherrod Brown, D-Ohio, the committee's ranking member.
“Weakening these stress tests when we are going to [$250 billion] is a real problem,” Brown said during the committee's debate of the bill before he voted against it.
Still, bipartisan support for the Crapo bill increases its chances to pass the full Senate. The focus would then shift to the House.
Lawmakers have essentially moved on from House Financial Services Committee Chairman Jeb Hensarling's regulatory relief package, the Financial Choice Act, a bill that more dramatically would roll back Dodd-Frank and is seen as too extreme in the Senate.
Instead, the House has focused more on passing discrete bills, some that are consistent with provisions of the Crapo bill and others that go further.
For example, the House on Dec. 19 approved a bill to get rid of a SIFI asset threshold altogether, and instead use an indicator test to determine whether a bank is systemically risky.
That bill, sponsored by Rep. Blaine Luetkemeyer, R-Mo., passed the House with support from 59 Democrats. However, it is unlikely to find its way in a final package that becomes law.
Sen. Pat Toomey, R-Pa., said an indicator test could "theoretically" find its way into a regulatory relief package, but he said he was "not optimistic" that lawmakers would support removing the SIFI label for banks with assets of more than $250 billion. "That is going to be difficult,” he said.
Community bank relief
Besides the SIFI threshold for large banks, other parts of the Crapo bill are targeted towards community banks and are likely to garner more support on both sides of the aisle.
Both the House and Senate have versions of the Clear Relief Act, intended to make changes to benefit smaller institutions. The Senate version, which was made part of the Crapo bill, would allow banks with less than $10 billion in assets that have minimal trading assets to be exempt from the Volcker Rule, which bans banks from proprietary trading with customer deposits.
The bill also allows mortgages originated and held in portfolio by banks with less than $10 billion in assets to be deemed a “Qualified Mortgage.”
“The most important thing is this is Crapo’s first test case of what can be done on a bipartisan basis,” said Paul Merski, executive vice president of congressional relations and strategy for the Independent Community Bankers of America. “That is going to set the tone of what can be done going forward.”
Housing finance reform
The House and Senate banking committees have held a number of hearings throughout 2017 on housing finance reform and are expected to introduce legislation early next year.
The main players in the Senate in efforts to reform the government-sponsored enterprises will be Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., as well as Crapo.
Corker and Warner are said to have already written draft legislation that builds on a 2014 deal between the two lawmakers. Crapo also introduced legislation during the same Congress with then-Banking Committee Chairman Tim Johnson, D-S.D.
Members of the House Financial Services Committee have also been exploring housing finance reform. Reps. Jeb Hensarling, R-Texas, and Sean Duffy, R-Wis., have met with stakeholders to plot their own path forward.
Hensarling, who in the past has staunchly opposed government backing for the housing finance system, has already made concessions to develop a consensus plan. His previous GSE bill that he shepherded through the House in 2013 would have eliminated Fannie and Freddie and completely privatized the housing finance market. But without enough Senate support for such a plan, Hensarling has appeared to soften his position.
Cleaver, who is the top Democrat on housing and insurance subcommittee, said he recently sat down with Duffy, who chairs the subcommittee, and nailed down three or four major points of agreement.
“I have not heard one single Democrat or Republican say that we do not need reform,” said Cleaver. “If Mr. Duffy and I are given the leeway I actually believe we can come up with something” to reform Fannie and Freddie.
Some observers still think that housing finance reform may be an unsolvable problem. But the imminent departures of key figures in the debate could motivate them to try to reach a deal. Hensarling and Corker have both announced they will not run again in 2018, and the term of Federal Housing Finance Agency Director Mel Watt will expire in 2019.
Midterm elections, changing leadership
Despite a favorable Senate electoral map, Republicans have a precarious hold on the upper chamber with a single-vote majority in 2018. Analysts are also warning of a potential wave election for Democrats in the House during the 2018 midterm elections.
A power swing in either of the chambers, or both, resulting from the November midterm elections would create a significant shift in focus for the banking committees.
Rep. Maxine Waters is one of the most progressive members of Congress and would likely hold the gavel for the Financial Services Committee if Democrats win the House.
The California Democrat has called for breaking up Wells Fargo and introduced legislation that would allow regulators to pull banking charters from megabanks that have a pattern of running afoul of regulations and consumer protections.
On the Senate side, Brown would be the Banking Committee chairman in a Democrat-controlled Senate. He opposed the regulatory relief deal made by Crapo and the moderate Democrats despite the sizable banking presence in his home state of Ohio.
Brown has shown openness to revisiting parts of Dodd-Frank, but if he controlled the committee. major reforms efforts would likely ground to a halt.
If the GOP holds the House, Republicans on the Financial Services Committee will also be campaigning for chairmanship as Hensarling will be stepping away.
Early contenders for the job appear to be Luetkemeyer, who has been a leader on a number of financial services bills that have passed out of committee; Rep. Patrick McHenry, R-N.C., who has been one of the biggest supporters of fintech; and Rep. Ed Royce, R-Calif., who is a champion for credit unions and has worked closely on housing finance and credit scoring issues.