Something’s got to give, or does it?
“Regulation has actually been horrible for big business, but it’s been worse for small business,” President Donald Trump said. “Dodd-Frank is a disaster.”
Regardless of their political views, most community bankers I know would not disagree with President Trump’s assessment of The Dodd-Frank Act. For more than six years, bankers, board members, auditors – and, even worse, consumers – have dealt with the fallout from the overhaul created by Dodd-Frank. Community bankers and their customers have dealt with the heavy burden that many call the overly regulated regulatory environment. A lot of people would argue that all the Dodd-Frank Act accomplished was limiting and restricting access to much needed credit for the consumer. For this reason, President Trump has promised to do “a big number” on the Dodd-Frank Act.1
On the other side of the coin, while President Trump has promised to make big changes and tone down regulation, Richard Cordray, the director of the Consumer Financial Protection Bureau (CFPB), appears to be operating under a “business-as-usual” approach. In a recently recorded interview with the Wall Street Journal, Cordray said that the new administration, “shouldn’t change the job,” and that the CFPB is focused on “their main unfinished agenda.” Cordray also talked about how important it is to have a law enforcement agency that keeps large companies in check. He cited the recent Wells Fargo incident as proof that the Bureau’s work is important and beneficial to the consumer. In the short interview he also reiterated at least four separate times that the CFPB is an “independent” agency. The CFPB’s director also talked about the dysfunction consumers face when dealing with the financial industry as a whole.
There’s little disagreement in most circles that financial mismanagement by some large institutions and consumers led to the financial crisis of 2008. Given the magnitude of that crisis and its far reaching impact, financial reform was inevitable and probably warranted. The gist of Director Cordray’s message is that his job is to enforce the laws passed down by Dodd-Frank. While Cordray’s intentions may be noble, change in the agency’s structure also seems inevitable.2
So what will happen?
While it’s not clear if the new president wants to (or even has the authority to) fire the CFPB director, many senators have asked President Trump to dismiss Richard Cordray and instead to appoint a bipartisan commission to oversee the CFPB.3 Cordray’s appointment was confirmed by the Senate, and he argues that the current structure keeps banks and others from bringing partisan politics into protecting consumers.
Director Cordray has also emphasized how he wants to increase cooperation between the CFPB and other regulatory enforcement agencies – which is probably keeping most community bankers up at night. Change is coming, but a complete repeal of Dodd-Frank would be unprecedented and is highly unlikely.
I think consumers and community bankers could agree that we need an environment that’s a happy medium. Rulemaking by enforcement is probably not the most effective way of regulating a financial institution’s activities. Finding balance between regulation that is too stringent or too lenient is the challenge that faces the current administration.
The proposed CHOICE Act that went through the House Financial Services Committee and was amended on Dec. 20, 2016, offers an interesting alternative to the current format. Highlights of the act include raising the CFPB’s supervisory limit from $10 billion to $50 billion and appointing a five-person bipartisan commission to oversee the CFPB’s previously unchecked enforcement. Perhaps most importantly, the proposed act would repeal CFPB’s authority to regulate consumer arbitration and to determine what constitutes abusive conduct.4
What should the bank do?
No matter how regulations and enforcement may change, ultimate responsibility for compliance will, no doubt, rest with management and the board. Each bank should have a top-down approach to compliance to ensure that employees understand the importance of regulatory compliance and their role in the process. Ongoing training is imperative, not just for employees, but for management and board members as well.
Banks should proactively implement Interagency guidance to administer an effective, risk-based approach to compliance management.5 Each institution’s compliance management system should focus on the products they offer to their customers and the way they identify, manage, and even prevent potential compliance problems. If the compliance management system is sound and operating effectively, the bank should be well positioned to identify potential issues and handle them internally, prior to regulatory oversight. Come what may, a well-oiled system and culture of accountability will help prepare the Bank for regulatory change.
As always, the KraftCPAs banking team is available to help if you have questions or concerns about the process. You may reach a member of our banking team at (615) 242-7351.