By Patti Murphy
Battle lines are being drawn in Washington as President Trump and Republican lawmakers try to make good on campaign promises to roll back regulations, including those spawned by the Dodd-Frank Act.
Enacted at the height of the Great Recession, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was the most comprehensive financial legislation to come out of Washington in generations. It shook up the regulatory structure, creating new agencies like the Consumer Financial Protection Bureau, imposed new bank capital requirements, initiated new procedures for dealing with failing financial institutions, and even took a stab at regulating debit card interchange.
Seven years later, Republicans, who were largely opposed to Dodd-Frank, are pushing for repeal. They took a first step in that direction in early May 2017 with passage of the Financial CHOICE Act (H.R. 10) by the House Financial Services Committee. "Dodd-Frank failed, but we have a better way," said Rep. Jeb Hansarling, R-Texas, Chairman of the House Financial Services Committee and chief architect of the legislation. "It's called the Financial CHOICE Act because it stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs."
The legislation still must be voted on by the full House, similar legislation must pass muster in the Senate, and the two chambers will need to iron out any differences between their respective bills before final legislation gets sent to the White House for the President's signature. That will take time and plenty of heated exchanges. Democrats in both the House and Senate are vocal in their opposition, insisting Dodd-Frank works. And while the Democrats don't have enough votes in the Senate to shoot down a repeal bill, they could filibuster efforts to vote.
"The Wrong CHOICE Act is a deeply misguided measure that will bring harm to consumers, investors and our whole economy," said Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee.
Sen. Elizabeth Warren, D-Mass., added, "This bill doesn't solve a single real problem. It's not a wrong choice, it's an immoral choice."
Warren wants Congress to erect new regulatory barriers between traditional financial institutions (banks and credit unions offering checking accounts and loans) and institutions specializing in riskier activities, like investments. The Glass-Steagall Act of 1933 barred commercial banks from engaging in most investment banking activities and kept investment banks out of commercial banking, but those barriers were removed in 1999 with passage of the Gramm-Leach-Bliley Act.
Some scholars and politicians have suggested the deconstruction of Glass-Steagall contributed to risky behavior that led to the Great Recession. Warren has crafted a bipartisan plan to reinstate Glass-Steagall restrictions.
"Since the core provisions of the Glass-Steagall Act were repealed in 1999, a culture of excessive risk-taking has taken root in the banking world, placing the financial security of millions of hardworking American taxpayers at risk," said Sen. John McCain, R-Ariz. "Even with the thousands of pages of misguided and burdensome regulations imposed by Dodd-Frank in the wake of the 2008 financial crisis, there are indications that this culture of risky behavior continues today. That's why I believe it is critical for Congress to reinstate the protections that separated main street banks and investment banks."
McCain; Warren; Sen. Maria Cantwell, D-Wash.; and Sen. Angus King, Jr., I-Maine, have signed on to a package of reforms known as the 21st Century Glass-Steagall Act (S. 881). "Reinstating Glass-Steagall has broad bipartisan support, and it's time to get it done," said Sen. Warren in a statement about the bill.
Even President Trump suggested he would favor a Glass-Steagall-like wall between traditional and investment banking activities. "I'm looking at that right now," he told Bloomberg News in late April.
Meanwhile, Sen. Mike Crapo, R-Idaho, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, said he's working with Democrats on his committee to craft a comprehensive package of changes to financial regulations. Crapo, however, has conceded that he would be hard pressed to get Democrats on board with any legislation that scales back the CFPB's authority to issue and enforce pro-consumer regulations.
The CFPB has been a partisan battlefront since its inception. Republicans routinely blast the bureau for regulatory overreach. Several have introduced measures to gut CFPB actions such as a pending body of rules governing prepaid cards. Two Texas Republicans, Sen. Ted Cruz and Rep. John Ratcliffe, have introduced legislation (S. 370 and H.R. 1031, respectively) that would disband the bureau. Regarding H.R. 1031, Ratcliffe stated he was "optimistic at our renewed chances of advancing this effort with a willing partner in the White House."
The Financial CHOICE Act would radically alter the CFPB, changing its name, replacing its single director with a five-member commission subject to congressional oversight and appropriations, and repeal its authority to ban bank products or services it deems "abusive."
The American Bankers Association wants Congress to enact national data protection standards for all companies that handle sensitive consumer financial data.
"It's time to get serious about building a security infrastructure that brings banks, payment networks and retailers together to safeguard sensitive financial data," James Ballentine, ABA Executive Vice President of Congressional Relations and Political Affairs, wrote in a May 8, 2017, letter to members of the House and Senate. "It's time to pass a strong, consistent national standard for fighting data breaches and give consumers the protection they need."
In the United States today, no comprehensive federal law addresses the collection, use and protection of consumers' personal data. Instead, data security is covered by a patchwork of federal and state laws and regulations, as well as guidelines developed by regulators and industry groups (for example, the Payment Card Industry Data Security Standard).
In his letter, Ballentine said banks are being held to higher data security standards than other businesses. "The financial services sector is highly motivated to protect sensitive consumer data and spends literally hundreds of millions of dollars a year protecting it," he wrote. "Sadly for American consumers, others are not required to protect consumer data under federal law." Some have even lobbied against past legislative efforts to create a national data protection standard, he added.
The ABA letter pointed to an impact study by the Identity Theft Resource Center, a nonprofit organization that helps victims of identity theft, to illustrate how superior banks are at protecting consumer data. According to that study, just 0.2 percent of data breaches in which customer records were exposed so far this year occurred in the financial sector, while 81.3 percent involved breaches at retailers and other businesses.
The ITRC has been collecting information on breaches involving Social Security numbers and credit and debit card numbers since 2010. In 2016, Social Security numbers were exposed in 52 percent of breaches, an 8.2 percent increase over 2015; just 13.1 percent of 2016 breaches exposed credit and debit card numbers, down 7.4 percent from 2015, the ITRC reported.
When Congress created the CFPB, its principal concern was the regulation of nonbank providers of financial services, such as mortgage servicers, payday lenders and debt collectors. It also shifted to the bureau enforcement authority for consumer-protection laws that previously had been the responsibility of the Federal Reserve.
Pending new rules governing prepaid debit cards are a direct result of that shift. Those rules extend many of the disclosure requirements and other consumer protections applied to credit and traditional debit cards under Regulations E (EFT) and Z (truth in lending) to prepaid debit card products. The rules would limit cardholder liability when prepaid cards are reported lost or stolen, for example, and require card issuers to assess cardholder creditworthiness when providing overdraft protection options. And they include detailed requirements for pre- and post-card purchase disclosure forms.
The CFPB's prepaid rules were slated to take effect in October 2017, but the bureau recently delayed implementation by six months. It said the extension would give prepaid card companies more time to prepare, as well as provide more time to review controversial provisions. Some of the most vocal opponents of the rules are TSYS and its NetSpend prepaid card unit and the Electronic Transactions Association, which has accused the CFPB of "regulatory overreach that harms innovation."
In addition to writing new rules, the CFPB has used its enforcement authority to come down on card and payment processing companies. In February 2017, the consumer watchdog agency ordered Mastercard and the prepaid card company UniRush LLC to pay $10 million in restitution and $3 million in civil penalties because of service glitches that blocked thousands of cardholders from accessing funds for several days in 2015.
In 2016, the bureau went after Fargo, N.D.-based payment processor Intercept Corp. for facilitating fraud against consumer checking accounts. According to a complaint filed in federal court, "perfunctory due diligence" on the part of Intercept allowed fraudsters to withdraw millions of dollars from the accounts of unwitting consumers.
"Companies cannot turn a blind eye to wrongdoing when they process payments from consumer banking accounts on behalf of clients who break the law," CFPB Director Richard Cordray said at the time.
The previous year the CFPB named Global Payments Inc. and three ISOs as co-defendants in what it alleged in federal court documents was a bogus debt collection scheme. The four companies processed card transactions submitted by fraudsters despite numerous red flags including an onslaught of consumers disputing transactions, according to the CFPB's complaint.
Another controversial provision of the Financial CHOICE Act seeks to repeal the Dodd-Frank Act's Durbin Amendment, which caps allowable interchange for debit card payments. Washington insiders say the chances of that provision making it through to any final legislative package are slim, as lawmakers risk constituent blowback. In an April interview with Bloomberg News, Rep. Jim Himes, D-Conn., said, "I'm being forced to choose between the competing interests of two big industries."
The Durbin Amendment itself was the result of a compromise between the same two competing interests: merchants wanted interchange caps on credit and debit cards; banks wanted none. Lobbyists representing merchants coined the phrase "swipe fees" to describe interchange and rallied public support around the notion that lower interchange would result in lower costs to consumers.
The National Retail Federation recently claimed retailers saved $8.5 billion in the first year under debit interchange caps and that close to $6 billion of the savings was passed along to consumers. But a 2015 study by the Federal Reserve Bank of Richmond suggested otherwise. That survey collected information on interchange and pricing from 420 merchants spanning 26 sectors and revealed there were no discernable price changes at the vast majority (77.2 percent), very few merchants (1.2 percent) reduced prices and 21.6 percent actually raised prices after debit caps were imposed. The Richmond Fed also uncovered an "unintended consequence of the Durbin Amendment" was that interchange on small-dollar debit card transactions rose as networks eliminated discounts intended to encourage card acceptance for small-dollar card payments.
Using the Richmond Fed's data, lobbyists representing banks and credit unions complain the caps so far have siphoned $42 billion in revenues from their members and driven up compliance costs even at small financial institutions, which are supposed to be exempt from the caps. In a May 1, 2017, op-ed piece published by Morning Consult, leaders of trade groups representing banks, credit unions and card companies urged lawmakers to support repeal of the Durbin Amendment.
"In the six years since Congress passed the Durbin Amendment, we have gathered ample evidence to prove the law did not meet its stated goal of lowering prices," the group stated. "Instead, it has needlessly imposed added costs on lenders, borrowers and consumers alike."