10 Years Later, Congress Looks to Loosen Regs on Financial Institutions
In 2008, a massive housing bubble and subprime mortgage crisis contributed to the loss of nearly 9 million American jobs and pushed the unemployment rate into double digits for the first time in more than 40 years. The collective net worth of American households fell $12 trillion.
Despite mostly recovering from the effects of a recession that reduced U.S. gross domestic product by 5.1%, scholars and financial analysts continue to debate the causes of one of the worst market crashes in America since the Great Depression of the 1930s. Relaxed government standards in the new millennium led banks and mortgage brokers to offer home mortgages to subprime consumers with loose underwriting standards.
In the wake of the housing crash, a bipartisan Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new law imposed tighter regulatory and reporting requirements on lenders and established the Consumer Financial Protection Bureau (CFPB) to supervise, investigate and enforce federal consumer protection laws as well as promulgate rules in the finance industry.
Throughout the intervening years, banks have strengthened their operations in ways that should insulate them from future recessions. At the same time, consumer credit card debt is now back at pre-recession levels. However, nearly 4 in 5 Americans live paycheck-to-paycheck, and almost one quarter of American households have wealth levels at or below zero. A CFPB survey found that more than 40% of Americans struggle with financial well-being.
Although banks and other financial institutions appear to be on strong footing, consumer health remains tenuous. Congressional Democrats have long looked to bolster small community banks and credit unions. Many of those small bank provisions found their way into a recent bill to reform certain areas of the Dodd-Frank Act. The changes being put forth by the Democratic coalition mirror a previous bill brought before the Senate Banking Committee in 2015. The amendments to Dodd-Frank would focus on reducing the compliance burden for many smaller and fiscally-responsible financial institutions by limiting bank stress tests and exempting smaller banks from expensive and burdensome oversight requirements.
However, compromises made in the Dodd-Frank Act reform bill also lift significant oversight of America’s largest banks. Some, like the CFPB’s chief architect, Senator Elizabeth Warren (D- MA), have heavily criticized fellow Democrats for a bill that could push America toward another recession.
Warren’s frustration over consumer protection and banking regulation has steadily grown in the months since Richard Cordray resigned as CFPB Director. The announcement that Cordray was leaving the Bureau to run for governor of Ohio has only created more regulatory uncertainty as our two main political powers jockey for position at the agency.
Democrats that disagree with the Dodd-Frank reform bill may actually have House Republicans to thank if the legislation stalls in Congress. House Financial Services Committee Chairman Jeb Hensarling (R- TX) informed Senate leadership this week that the House would not entertain the bill unless it unwound banking and securities regulations even more.
It took nearly a decade for the nation to recover from the mortgage crisis of 2008. Large banks are more prepared now to weather another economic downturn, but many American households remain on the brink of financial peril. How Congress votes over the coming weeks on banking and consumer finance regulation could go far in deciding how millions of Americans maintain financial health for the next decade.
