Several weeks ago, Trump announced an intended rollback of Dodd-Frank financial regulations. Then the story vanished from the headlines as the administration turned its attention to healthcare reform.

But with Trumpcare dead on arrival, the focus will come back around to financial regulatory reform soon, and the recent executive order brings up a lot of good questions for both consumers and financial companies. Will the president try to repeal Dodd-Frank or simply reduce regulations under the law? Could a lower-regulation environment lead to another financial crisis? And what will happen to the surge of fintech companies that have benefited from a higher-regulation environment?

Of course, nothing material has happened yet. The executive order, which outlined “core principles for regulating the U.S. financial system,” was simply an indication of intent to make regulatory and/or legislative changes. Given how things work in Washington, it could take a while for anything significant to go down. We saw this with the failed healthcare bill, and financial regulatory reform could be even more difficult.

However, Trump has called Dodd-Frank a “disaster” and promises to “do a big number” on it soon—and many Republicans agree with his sentiments. It’s important to consider how reform might ultimately happen and what the implications could be, both for consumers and the broader financial industry. (For related reading, see: Trump Admin Begins Crackdown on H-1B Abuse.)

Dodd-Frank Repeal Vs. Rollback

Passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was designed to reduce risks taken by financial institutions and stop predatory lending practices that hurt consumers. Notably, it created numerous financial regulations and entities to oversee these regulations—for example, the Consumer Financial Protection Bureau (CFPB). In fact, the law is really just a legal framework, which requires most of the details to be determined by these regulatory agencies.

The big question is whether Trump’s administration will attempt to repeal Dodd-Frank or simply change or reduce regulations while keeping the law in place. If the former, is repeal even possible? If the latter, how quickly can we expect to see changes?

Here are three things that can help answer these questions:

  1. Regulatory changes are easier than legislative (i.e. law) changes. Since Dodd-Frank is a legal framework for creating regulations vs. a specific set of rules itself, there’s flexibility to dial up or down the regulations currently in place. The leaders President Trump appoints to the various agencies will be able to relax the rules under Dodd-Frank without changing the law—a much easier feat given the track record in Congress in recent years. They could also be more flexible in the enforcement of current laws or regulations, giving businesses more leeway to operate without fear of being excessively fined or prosecuted for infractions they think are inevitable as part of the ordinary course of business. 
  2. Major legislative changes may be unwanted by financial markets. Any legislative changes still need to be administered via regulatory agencies—the same ones that already have discretion under Dodd-Frank—and would take much longer than making regulatory changes under current law. Financial markets will likely prefer less stringent regulations over an entirely new legislative framework, which would increase uncertainty for a longer period.  
  3. Financial regulatory reform takes time. It took almost two years for Dodd-Frank to pass after the financial crisis, and even longer for the actual rules to be put into place (some of it is still ongoing). While some small things can be changed via executive order or supervisory guidance, material changes require regulators to propose new rules, put them out for comment and get agency buy-in—typically a multi-year process.

The Benefits and Costs of Lower Regulation

If regulations are relaxed, some believe it could increase lending, reduce costs for customers and increase the range of financial products available for consumers.  Others say it could mean a return to some of the fast and loose practices that led to the housing bubble and financial crisis in the first place. Like a typical policy wonk, my take is that the answer depends on the actual changes.

Each regulation has a cost associated with following it—and these costs are largely passed on to the consumer, whether directly or indirectly. In the mortgage space, for example, the cost of originating a loan has risen from roughly $3,000 per loan to nearly $8,000 per loan in the last six years.  This increase is primarily the result of regulations that dictate how mortgage lenders should market to customers, disclose rate information, report information to regulators and more. Reducing or relaxing these regulations could certainly result in increased lending and lower consumer costs.

But remember—the regulations in place under Dodd-Frank were instated as a direct response to the bad practices and abuses millions of borrowers experienced prior to the financial crisis. And the impact was tremendous: Over 8 million American families lost their home to foreclosure or short sale. Another 8 million had their loan refinanced or modified under a foreclosure prevention program. Cutting regulations, while making lending easier again, could cause some unintended consequences if it’s not done carefully.

Rather than eliminating regulations, I personally think financial companies should find more efficient and effective ways to follow them. That’s the approach you’ll see at many of the newer fintech companies. It’s not an easy path, which is why most banks would simply prefer to see the laws and regulations relaxed rather than innovate or compete with new fintech companies that have been built with Dodd-Frank in mind.

The Best Financial Companies Put Customers First

Whether the regulations and protections under Dodd-Frank are relaxed or go away, the market will still demand a higher level of accountability than in the past. Looser regulations may benefit bad actors in the short-term, but in the long run these companies will probably fall victim to their own misbehavior.

Ultimately, the more innovative, customer-centric companies—the ones that use technology to cut costs, create efficiencies and educate consumers—should triumph. (For related reading, see: Fed Could Promptly Begin Shedding Bonds This Year.)


Jeff Foster is the CEO and co-founder of Clara Lending.

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