Dodd-Frank, In Place After Finanical Crisis, Targeted By Trump and Mnuchin

Steven Mnuchin, Donald Trump's Treasury Secretary designee, made much of his banking fortune amid the fallout of the 2008 financial crisis, buying and reselling a distressed bank in California.

Now, the 53-year old former Goldman Sachs banker will have the President-elect's ear in an effort to roll back the Dodd-Frank Act, legislation put in place with the goal of preventing such a crisis.

Revising Dodd-Frank is “the number one priority on the regulatory side,” Mnuchin told CNBC Wednesday.

Few expect Trump to follow through on his populist campaign to scrap the legislation. The law, which was passed to lower excessive risk-taking by banks, has fans even on Wall Street. But Trump is expected to target requirements on lending, disclosure and liquidity that he considers stringent.

“Repealing any legislation is difficult,” says James Ballentine, executive vice president of Congressional Relations and Political Affairs for the American Bankers Association. “Seeing what’s working and not working in Dodd-Frank will likely be the approach taken.”

Trump's changes could be similar to a revision of the rules drafted by Congressman Jeb Hensarling, chairman of the House Financial Services Committee. Earlier this year, Hensarling, one of the most vocal critics of Dodd-Frank, introduced the Financial Choice Act. Its proposals include removing smaller banks from many of Dodd Frank’s requirements and easing capital requirements on large banks. It also would scrap the so-called Volcker Rule, which limits banks’ speculative trading using customer deposits, and restructure the Consumer Financial Protection Bureau.

Mnuchin’s primary concern, he told CNBC, will be to "strip back" parts of Dodd-Frank that he believes inhibit banks from lending.

Banks complain that Dodd-Frank rules for a "qualified mortgage" are too restrictive. The CFPB removed what it called some “harmful” features in mortgage loans, including an “interest-only” period, "balloon payments” required at the end of the loan period, and loan terms longer than 30 years. The agency also prohibits excessive upfront points and fees and how much of applicants' income can be applied to debt.

These rules have been burdensome for smaller, community banks, says Paul Merski, group executive vice president of Congressional Relations & Strategy at Independent Community Bankers of America. His group has lobbied to exempt the banks that hold mortgages — rather than selling them to third-parties — from the qualified mortgage rules.

“We’ve been pressing lawmakers and policymakers ever since Dodd-Frank was crafted to make sure it doesn’t impact all banks in the same fashion,” Merski says. "A lot of the problem with Dodd-Frank was it was a one-size-fits-all legislation."

Dodd-Frank's proponents have argued that the mortgage and housing markets have thrived with the new rules. “I’m aware of little or any evidence that (Dodd-Frank) has hindered banking,” says Nick Ziegler, research professor at Brown University who's studied Dodd-Frank.

Banks will also press Trump to reconsider a Dodd-Frank rule designed to curb excessive credit exposures of large banks by subjecting them to "enhanced supervision." The rule caps credit exposures to a single party for banks with assets of more than $50 billion at 25% of the bank’s total capital.

“I imagine Mnuchin would want to dilute those controls for certain kinds of banks,” Ziegler said. “Relaxing capital controls for small and medium banks, if done properly, may be helpful.” But loosening the capital control rules for large banks would be “a bad idea,” he said.

The Volcker Rule also will come under scrutiny. Named after the former Federal Reserve Chairman Paul Volcker, the provision limits banks from using customer deposits to engage in “proprietary" trading — trading for banks' benefit and not customers — of speculative securities. It was a direct response to the rampant trading of derivatives that contributed to the financial crisis.

Changes to the rule could possibly result in banks being examined less frequently for derivatives trading or an expansion of the types of derivatives allowed, Ziegler says.

“It’s unlikely the Volcker Rule is completely eliminated,” he says. “But certain provisions may be reversed that gives banks more discretion. It could inject a great deal more risk.”

Mnuchin didn’t provide details on the Volcker Rule when pressed by CNBC. But he said “the number one problem” with it is that “it’s too complicated.”

Critics of the CFPB have also pressed to undermine its oversight structure. The agency, funded by the Federal Reserve, remains independent of Congressional oversight. But the banking industry would like to see it funded by Congress and for its director to be replaced by a five-member commission, a scenario that some say would threaten its independence.

The agency “has been a very welcome addition to the regulatory landscape,” he says. “It’d be a shame to make consumers more vulnerable to predatory lenders and retail financial firms,” Ziegler said.

By Roger Yu