The partial rollback of the Dodd-Frank regulations should stimulate economic growth in New Jersey by loosening rules on lending, according to banking industry officials.
The U.S. House of Representatives voted to roll back some of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in a 258 to 159 vote featuring bipartisan support on May 22. President Trump is expected to sign the reform regulation, dubbed the Economic Growth, Regulatory Relief and Consumer Protection Act.
Critics warn that the loosening of regulations could allow financial institutions to act recklessly as they did in the days prior to the banking crisis that led to passage of Dodd-Frank. But John McWeeney, CEO of the New Jersey Bankers Association, said loosening up bank controls will stimulate economic growth in the state by removing stifling lending requirements for community banks.
“What we think the new law will do is help community banks in the area of capital rules,” said McWeeney. “Smaller community banks were held to the same Basel III standards as larger institutions under Dodd-Frank. This new law creates a new framework for smaller banks with under $10 billion and resizes that a bit.”
Basel III is an international banking accord that essentially set liquidity requirements for banks when they make risky investments.
“In some areas of residential mortgage lending, the new law will incur more lending,” he added.
The Qualified Mortgage Safe Harbor Rule requires mortgage borrowers to meet with certain Ability to Repay requirements. The CFPB's rule creates two different kinds of legal presumption: a safe harbor and a rebuttable presumption, meaning banks can be sued if they failed to ensure that borrowers met those requirements.
“In the past, any mortgage that didn’t meet strict guidelines was not considered a qualified mortgage under the Safe Harbor rule,” said McWeeney. “So if a bank made a loan that didn’t meet those requirements, they could be sued. Since Dodd-Frank, banks were making those loans and putting them on their own books. Under the new law, if that mortgage is held by a bank, it will automatically be considered a qualified mortgage.”
In general, the new law should help increase the number of community banks in the state and make them more efficient, the NJBA chief said.
“This regulatory burden has been tremendous on community banks,” McWeeney said. “It has also helped lead to the accelerated consolidation of banks in New Jersey. We’re down to 81 New Jersey-headquartered banks. If you go back to the end of the crisis in March, 2008, we had 125 New Jersey-headquartered banks. I’m not saying it’s the only reason for the consolidation, but it’s a big factor.”
One of the critics of the new law, the Consumer Federation of America, said it could prompt a rise in foreclosure rates by exempting manufactured-home retailers from a mortgage-originator compensation rule, which prevents borrowers from being steered toward floating-rate loans.
“This bill makes a future banking crisis more likely” said Christopher Peterson, financial services director at the Consumer Federation. “The Act’s elimination of protections for manufactured-home mortgage borrowers is particularly mean spirited. This change will make it more difficult for families in states like New Jersey that are struggling to find basic shelter where opportunities can be scarce.
State consumer advocacy group New Jersey Citizen Action criticized New Jersey lawmakers who voted in favor of the roll back. Those politicians are U.S. Reps. Josh Gottheimer, D-5th District; Frank LoBiondo, R-2nd District; Tom MacArthur, R-3rd District; Chris Smith, R-4th District; and Leonard Lance, R-7th District.
The group claims the act “effectively guts the Dodd-Frank Wall Street Reform and Consumer Protection Act, endangering the country's financial system and stripping consumers of vital protections. The bill also exempts large banks from the Home Mortgage Disclosure Act’s data reporting requirements, making it more difficult to spot high-risk lending patterns.
“Even though the facts indicate very clearly that consumer protections in Dodd Frank are not hurting the banking industry’s ability to thrive and increase their profits, Congressman Gotthheimer and four other New Jersey congressmen voted to undermine those protections from the same deceptive, abusive and discriminatory practices that led to the financial crash just a few short years ago,” said Beverly Brown Ruggia, financial justice organizer of the group.