HFSC Hearing on Dodd -Frank: Are We More Free?

House Financial Services Committee

“The Dodd-Frank Act Five Years Later: Are We More Free?”

Thursday, September 17, 2015 

Key Topics & Takeaways

  • Stress Tests and Living Wills: Professor Skeel from the University of Pennsylvania Law School stated that stress tests required by banks and living wills are “highly secretive,” arbitrary, and do not put restraints on regulator discretion.
  • Too Big To Fail: Professor Zywicki from George Mason University School of Law insisted that Dodd-Frank built a “bigger moat” around too big to fail (TBTF) institutions.
  • Impact on Small Businesses: Rep. Pittenger (R-N.C.) asked how barriers to entry are harming small businesses. Ambassador Gray from Boyden Gray & Associates explained that “big government” likes big businesses and that there is harm to community banks due to their inability to cope with larger competitors.
  • CFPB Data Mining: Rep. Love (R-Utah) asked why the CFPB is collecting personal financial data from consumers and noted her disapproval of the data collection. Zywicki stated that the Bureau has not explained why, while Gupta Wessler PLLC’s Gupta stressed that it is to get an aggregate picture of the market, not to spy on consumers. 


Opening Statements

In his opening statement, Chairman Jeb Hensarling (R-Texas) said that Dodd-Frank has made Americans “less free” and has still not achieved economic recovery for families. He questioned why consumers trust one person in the Consumer Financial Protection Bureau (CFPB) to decide which products Americans can have. Hensarling stated that the Financial Stability Oversight Council (FSOC) defines “vague” terms however they wish, and that Dodd-Frank laws “squeeze” small businesses and dollars that could help create job paths for Americans. He concluded that it “time to move beyond Dodd-Frank and create a nation of boundless opportunity for all.”

In her opening statement, Rep. Carolyn Maloney (D-N.Y.) stressed that four federal district courts have rejected challenges against the CFPB, FSOC, and Orderly Liquidation Authority (OLA), and that instead of arguing if the CFPB undermines the rule of law, the Committee should work to improve Dodd-Frank.

Rep. Randy Neugebauer (R-Texas) agreed with Hensarling that “we are not more free” with Dodd-Frank and noted the need to restore the rule of law for financial markets.

Witness Testimony

Dr. Matthew Spalding, Associate Vice President and Dean of Educational Programs, Hillsdale College

In his testimony, Dr. Matthew Spalding described four components that are associated with the rule of law: (1) The rule of law is a formal, regular process of law enforcement and adjudication; (2) The rules are “binding on rulers and the ruled alike”; (3) There are unwritten rules or “generally understood” standards that laws and lawmaking must conform; and (4) It is based on the centrality of lawmaking. He continued that Dodd-Frank’s rulemakings reached not only every financial institution, but “every corner of the American economy.” Spalding stressed that the CFPB and FSOC operate “outside of the public eye” and are not subject to traditional checks, with the CFPB “literally outside the rule of law.”

The Honorable C. Boyden Gray, Founding Partner, Boyden Gray & Associates

In histestimony, Ambassador Boyden Gray stated that while “structural” difficulties with Dodd-Frank have not been “cured,” they are well known. He continued that community banks have been “hit hard” by the unchecked powers of the CFPB, as smaller banks cannot afford lawyers and lobbyists like larger banks. He spoke of the problems within three titles: Title I created the FSOC and therefore the designation of systemically important financial institutions (SIFIs), limiting court jurisdiction to review SIFI designations; Title II created the OLA that replaced traditional court-managed bankruptcy; and Title X created the CFPB with independence from the Executive and Legislative Branches. Gray stressed the fact that Dodd-Frank allows the FSOC to designate a company as a SIFI based on “sheer speculation” rather than actual likelihood of systemic harm.     

Professor David A. Skeel, S. Samuel Arsht Professor of Corporate Law, University of Pennsylvania Law School

In his testimony, Dr. David Skeel stated that the most “worrisome” feature of Dodd-Frank is the framework for regulating SIFIs, as it does not follow the traditional rule of law principles. He continued that Dodd-Frank set up a “corporatist” partnership between the government and the largest financial institutions rather than restoring the rule of law. Skeel touched on two issues he has with Dodd-Frank: (1) Stress tests required by banks and living wills are “highly secretive,” arbitrary, and do not put restraints on regulator discretion; and (2) Title II rules have no due process. He noted that the costs of the two examples are “enormous” and will fall on small and medium sized banks, and stated his support for Congress to re-work the features of Dodd-Frank and reestablish the law of principles.

Mr. Deepak Gupta, Founding Principal, Gupta Wessler PLLC

In his testimony, Mr. Deepak Gupta stated that the CFPB is Dodd-Frank’s “crown jewel” and has proven that it protects consumers, stressing that Congress should “resist efforts to gut the agency.” He continued that accountability and rule of law objections are “misplaced,” as the CFPB is “as least as accountable” as previous prudential regulators. Gupta explained that the CFPB’s budget is capped, has rules that can be vetoed by a committee of other regulators, and is subject to small business reviews. The challenges that the opposition continues to press on the CFPB and Dodd-Frank is “meritless,” he stressed. Gupta concluded that innovation designed to make the government more responsive and effective should be celebrated, not criticized.

Professor Todd J. Zywicki, Foundation Professor of Law and Executive Director of the Law and Economics Center, George Mason University School of Law

In his testimony, Dr. Todd Zywicki stated that the economy is “learning the hard way” lessons that were learned in the past, and that giving more money and power to the government does not improve prosperity for American families. He criticized Dodd-Frank for “driving” community banks out of business twice as fast as they were prior to the law, and insisted that Dodd-Frank built a “bigger moat” around too big to fail (TBTF) institutions. Zywicki explained that small businesses are unable to secure loans to start and build their business because those failed small community banks provided the majority of the lending. Consumers are unable to obtain mortgages, he continued, due to the one-size fits-all regulatory burden that has been imposed onto banks. Regarding CFPB data mining, Zywicki stated that credit card accounts, mortgages, and bank account data has been retrieved without any regulatory purpose.

Questions and Answer

Rule of Law

Hensarling asked if the loss of the rule of law lays the foundation for the next financial crisis. Zywicki stated that the “lack of respect” for the rule of law creates a moral hazard. He continued that low and moderate income Americans cannot afford to hire lobbyists to “weave” through the law, and will therefore have to comply to the rules as written, giving them the “short end of the stick.” Skeel agreed and explained that an outcome of the Volcker Rule is that basic banking activities, such as market making and trading, are now being conducted outside of banks.

Small Banks and Businesses

Both Maloney and Rep. Nydia Velazquez (D-N.Y.) asked how the implementation of Dodd-Frank and the CFPB has been tailored to fit the needs of small banks and credit unions. Zywicki stressed that community banks are shrinking and disappearing due to Dodd-Frank, while Gupta disagreed, explaining that there is “no correlation” between the existence of the CFPB and problems facing community banks.

He continued that small banks were “hurting” prior to the creation of the CFPB, but with the $10 million threshold, these small banks and credit unions are not subject to CFPB enforcement.

Rep. Robert Pittenger (R-N.C.) asked how barriers to entry are harming small businesses. Gray explained that “big government” likes big businesses and that there is harm to community banks due to their inability to cope with larger competitors. 

Consolidating Oversight

Neugebauer asked about consolidating power from multiple regulators. Skeel stated that the “danger” with multiple regulators protecting consumers is that they were competing with each other, and noted that the idea of a consumer bureau is “good.”

Rep. Scott Garrett (R-N.J.) stated that OLA removes judicial review except for arbitration, and asked if Dodd-Frank takes away the rule of law and due process rights for Americans. Spalding replied, “Absolutely,” and said it is like “being ruled by someone who is not responsible to us.”

Operation Choke Point

Rep. Blaine Leutkemeyer (R-Mo.) stated that the lack of the rule of law creates moral hazard, such as Operation Choke Point, and asked if the panelists have seen this “choking” before. Zywicki stated that he “has not seen anything like it,” and said the CFPB is targeting legal industries to “choke out” if the Bureau does not “like” the industry.

Rep. David Scott (D-Ga.) asked if Dodd-Frank can be a positive role for Operation Choke Point. Zywicki stated that it is hard to find out who the CFPB is targeting with Operation Choke Point and why, and that the “tragedy” of Dodd-Frank is that consumers are being driven out of the system by removing their credit cards, payday loans, and other options available to them. He continued that the operation is driving consumers online, which raises “real concerns.” 

Rep. Roger Williams (R-Texas) asked if Operation Choke Point underlies the rule of law. Zywicki stressed that it is the “most frightening government decision” he has ever seen, with Dodd-Frank choosing winners and losers among banks. 

SIFI Designation

Rep. Bill Huizenga (R-Mich.) asked if the SIFI designation is “constitutionally appropriate.” Gray explained that there is no way to review the designation because courts prohibit questioning whether the designation endangers risk to the financial industry. He continued that the designation will fail due to the lack of accountability and appeal.

Rep. Bruce Poliquin (R-Maine) asked how an investment firm or pension fund management firm deals with a SIFI designation. Gary explained that these types of firms are included because the terms within Dodd-Frank are “so vague,” and that there is “no way” the companies pose a systemic risk to anyone other than themselves. 

Cost of Implementation

Rep. Michael Fitzpatrick (R-Pa.) asked who “bears the brunt” of the new wave of regulations that came from Dodd-Frank. Zywicki stressed that the cost of Dodd-Frank falls on the people with the “fewest options” and the least flexibility in their budgets.

Prudential Regulators

Rep. Edward Royce (R-Calif.) stated that prudential regulators are responsible for safety and soundness, and that taking them “out of the equation” and not allowing them to have input has long term risks, stressing that he would put this function under prudential regulators.

Consequences of Dodd-Frank

Rep. Robert Hurt (R-Va.) asked what threat there is to taxpayers when there is an accumulation of backstop by the federal government. Gray explained that the threat is not to the taxpayer or the Fed first, that it will be inflationary and degrade the quality of savings, with banks no longer lending. Spalding agreed with Gray and added that the average person will suffer.

Data Mining

Rep. Mia Love (R-Utah) asked the panelists why the CFPB is collecting personal financial data from consumers and noted her disapproval of the data collection. Zywicki stated that the Bureau has not explained why, while Gupta stressed that it is to get an aggregate picture of the market, not to spy on consumers.

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