NTF Issue Paper: cong97.doc. 6-16.

BACKGROUND. Conservative Cong. Jeb Hensarling (TX) is sponsoring his Financial Choice Act, HR 1266, to replace the liberal business-crippling Dodd-Frank Act. He is the chairman of the House Financial Services Committee. Tight regulatory restrictions on financial services blossomed each year between 1999 and 2008, making financial services one of the most regulated industries in our economy. The U.S. is mired in the slowest and weakest economic recovery in our history. The last quarter Gross Domestic Product (GDP) growth was less than 1%. Nebraskans cannot forge ahead, our paychecks stagnant and savings depleted. His bill would successfully protect consumers while enhancing our economy. This bill would allow Nebraskans to raise our standards of living and achieve financial independence. Without robust capital markets, economies cannot innovate rapidly or grow sufficiently to create new businesses and jobs. Without capital and confidence in the direction of our economy, many entrepreneurs have not executed their ideas, which has led to weak job creation.

THE PROBLEMS. Increased regulations have crushed small financial institutions in NE. Costs and time required to comply with heavy regulations outweigh the benefits to small, rural banks. A study from the Mercatus Center at George Mason University in 2015 estimated the U.S. lost 14% of its small banks between the second quarter of 2010, after Dodd-Frank (DF) took effect, and the third quarter, the most recent period for which data is available.  Dozens of witnesses representing small banks and credit unions have testified in D.C. about the harm caused to their customers by the avalanche of DF regulations. Progressives think that private businesses are predatory in nature, their customers hapless victims. The Consumer Financial Protection Bureau (CFPB) Director under DF has unprecedented power to unilaterally declare any mortgage, credit card, or bank account unfair or abusive and snatch them from those needing, wanting, and affording them. DF has stifled economic growth and protected huge banks. The weight, volume, complexity, and uncertainty of these regulations beg relief. Its 2,300+ pages, 400 new regulations, and mountains of red tape rest on the false premise that financial deregulation caused the last recession. New rules will require from the private sector over 24 million hours per year in compliance. Actually, years before the recession, stifling regulatory restrictions on the financial sector increased and led to recession. DF endorsers promised that it would promote financial stability, end too big to fail bailouts, and enhance the economy. Instead, our economy is unstable and less free. DF codified too big to fail and taxpayer-funded bailouts that will cost billions. It erodes market discipline and encourages further bailouts. When private investors expect a bailout, their incentives to closely monitor risk disappears. Since its inception, no year has seen even 3% economic growth. 72% of Americans still believe the nation in recession because of their financial predicaments. Before DF, about 75% of all banks offered free checking; now only 50%. DF regulations caused a 21% surge in checking fees and the mandatory minimum account balance necessary to qualify for free checking. As account fees rise, also rises the number of households that do no or little banking. About 20% of those who qualified for a mortgage in 2010 no longer qualify because of the rigid debt-to-income ratio. The Federal Reserve claims that 1/3 of black and Hispanic mortgage borrowers have suffered from DF. Rules based on a rigid debt to income ratio mean 1 of 5 who borrowed to purchase a house in 2010 now fail to meet underwriting requirements. There exist 15% fewer credit cards. The CFPB is an unaccountable administrative bureaucracy run amok. This entity abuses and exceeds its statutory authority, operating in secrecy, acting as judge, jury, and executioner, all without due process. It governs Americans less by the rule of law and more by whims of progressive regulators, sowing fear, doubt, and pessimism in its wake. These kinds of regulators were very negligent in preventing the 2008 financial collapse despite having the regulatory authority to prevent it and identify failing institutions. They could have broken up the Big Banks and restricted their activities. Because of DF, small businesses did not start, innovative products not produced, workers not hired, homes not bought, and dreams of financial independence and economic security quashed. The ultimate DF goal is to ensure federal control of our capital markets, to make large banks utilities for the government, so that the feds can grant credit to only their political favorites. Arbitration is a form of dispute resolution in which parties agree to settle a claim with the help of an independent mediator, rather than hiring a lawyer, joining a class action lawsuit, and waiting several years before our overcrowded court system can hear their case. But the CFPB prohibits this more cost- effective alternative and the many benefits it offers consumers. Class action lawsuits are much worse for consumers. A CFPB 2015 study shows that only 13% of class actions settle on a class-wide basis. Among the consumers eligible for relief in those cases, only 4% receive money from the settlement. This CFPB rule is a boon for trial lawyers, who reap the benefits of more litigation and exorbitant payoffs from class action lawsuits. The CFPB released rules that would almost eradicate an entire industry by rendering small dollar loans unprofitable, thereby denying poor Americans one of their only avenues for accessing credit.

DETAILS. This bill would change the name of the Consumer Financial Protection Bureau to the Consumer Financial Opportunity Commission (CFOC), replacing a director with a bipartisan 5-member commission subject to congressional oversight and appropriations. His plan also would convert other financial regulatory agencies currently manned by single directors, the Office of Comptroller of the Currency and the Federal Housing Finance Agency, into bipartisan commissions. It would terminate the Consumer Protection Bureau. It would repeal indirect auto lending guidance. HR 1266 would place all financial regulatory agencies subject to a bipartisan commission and place them in an appropriations process, so that Congress could exercise regulatory oversight. Congress would explicitly approve all new major rules, ensuring that regulatory burdens are not yoked on Americans without the approval of their elected representatives. It would reauthorize the Securities and Exchange Commission (SEC) for a period of 5 years with funding, structural, and enforcement reforms. This restructure would force this agency to consider many viewpoints and perspectives in rulemaking. Hensarling would double the cap for the most serious securities law violations and allow triple monetary fines when penalties tied to illegal profits. The SEC will gain new authority to calculate and impose sanctions more closely linked to investor losses as a result of misconduct and increase punishments even more for repeat offenders. Currently, the SEC sits constrained by statute from seeking penalties that match investor losses. The Hensarling bill would boost fines for violating insider trading laws and the Foreign Corrupt Practices Act. The SEC policy that now allows companies and individuals to settle most charges without admitting or denying liability would end. He would increase the maximum criminal fines for both individuals and firms that engage in insider trading. An independent Senate-confirmed Inspector-Gen. The new commission must obtain permission before collecting personal ID information on consumers. The bill would impose a requirement for all financial regulators like the Office of Economic Development to conduct a detailed cost-benefit analysis of every proposed regulation for the financial services industry, increase penalties for financial crimes like fraud, and extend regulation relief to local banks. The Volcker Rule, which the bill would end, limits the ability of financial institutions to grow their non-deposit liabilities and places restrictions on investment-trading activities. Banks now could speculate with their own accounts. Banks could hold high levels of capital instead of complying with harsh rules embodied in DF. Great regulatory relief from centralized micromanagement in exchange for banks that choose to meet high but simple capital requirements. If a bank has a strong balance sheet that protects clients and minimizes systemic risk, then it can win permission to act independently. If they matched capital to at least 10% of their assets, they could avoid regulatory oversight. The plan requires financial regulators to tweak regulations, so that they fit a bank or credit business model and risk profile.  Of the 450 financial institutions that failed during or as a result of the recession, not one failed because of proprietary trading. Financial institutions that varied their revenue stream continued lending and supported jobs. The banking system would have a federal safety net with much more capital but less federal control. Banks will opt in to this plan, only if it makes them more competitive, serving customers at a lower cost. Clauses would end the current rule that prevents consumers from banding together to hold banks and lending companies accountable in court, that limits capital formation, and repeals the SEC authority to retroactively eliminate or restrict securities arbitration. It permits small institutions to more easily finance acquisitions and allows well-capitalized community institutions to file short-form call reports in the first and third quarters of each year. Federal Reserve stress tests on institutions must have adequate public notice and comment, required to disclose a summary of all stress test results submitted by financial institutions. More difficult for the Fed to conduct bailout-style loans to insolvent banks. Hensarling would take away the power of the Financial Stability Oversight Council to decide which banks are too large and should suffer dismantling. To end taxpayer-funded bailouts for huge banks, HR 1266 will create a new subchapter of the Bankruptcy Code tailored to specifically address the failure of large, complex institutions. The plan would require financial regulators to tweak regulations to fit a bank or credit union business model and risk profile and provide needed mortgage relief for community banks. It would ensure the availability of mortgage credit for manufactured homes, revise the collection of fees, and exempt small institutions from escrow requirements. Small NE hometown banks and credit unions can focus their time and resources on their customers rather than on the dictates of Washington bureaucrats. Some large firms will shrink, because the credit they now obtain will price according to their inherent risk of failure without implicit government guarantees backing firms that are too big to fail. The bill would end the Chevron doctrine that requires the judiciary to give deference to regulatory agency interpretation of the law. The legislation will improve due process rights, because too many citizens suffer from uncaring government.

CREDIT UNION HELP. No price caps on federal credit unions, which could more easily appeal federal exam findings The bill would return healthy credit unions to a longer exam cycle, both to save their resources and to relieve them of the burden of more frequent exams. Credit unions are the only federally- regulated depository institutions currently without an extended cycle for examinations. Since the start of DF, we have lost 1,280 federally-insured credit unions, over 17% of the industry.  Their numbers declined by 252 during the past 12 months. 

PRINCIPLES. HR 1266 bases on several principles. Competitive, transparent, and innovative capital markets will restore economic growth. Streamlined and efficient capital markets will provide opportunity for Americans. Every American should have an opportunity to achieve financial achievement. Many opportunities for small businesses, innovators, and job creators by enhancing capital formation. Consumers must have protection from fraud and deception but also from loss of economic liberty. No taxpayer bailouts for financial institutions. Risk reduced by free market discipline. Systemic risk managed in a market with profit and loss. Accountability from Washington, D.C. and Wall Street and power whisked away from D.C.

SUPPORT & OPPOSITION. Presidential candidate Donald Trump supports scaling back regulation and terminating Dodd-Frank. The American Bankers Association and Consumer Bankers Association support the bill. The Independent Community Bankers of America, Credit Union National Association, and National Assoc. of Federal Credit Unions endorse the plan. Opponents include radical Rep. Maxine Waters and Massachusetts Sen. Elizabeth Warren, who continually blasts Wall Street and capitalism. Big Banks are the only entities with sufficient employees and resources to navigate the DF regulatory maze. Big Banks like Goldman Sachs are among the largest beneficiaries of DF and oppose Hensarling. The CEO of JP Morgan Chase agreed that DF benefits his conglomerate by creating deterrents for small financial institutions to enter new business lines and accrue market share and customers. These banks under the Obama Regime are too big to jail.

TAKE ACTION NOW. Help restart our Founding Fathers vision for Americans and support this new policy direction for the financial sector. Contact your representative and 2 senators today to co-sponsor and support HR 1266. Email netaxpayers@gmail.com for Capitol Hill contact information.

Research, analysis and documentation for this issue paper done by Nebraska Taxpayers for Freedom, with express prior permission for its use by other groups in the NE Conservative Coalition Network. 6-16 C

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