What You Need to Know About the Dodd-Frank Overhaul

Pundits in the real estate market have been observing things carefully over the past year. First, there were the questions about what a real estate mogul in the White House might do for the housing market. Now, after six months in the Oval Office, people are anxiously awaiting one of President Trump’s top campaign promises–dismantling Dodd-Frank financial regulations put in place during the Obama Administration. Just where is that bill now and what can we expect in the near future?

What Is Dodd-Frank?

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by the Obama Administration in 2010. The Act created several new government agencies in charge of overseeing the banking system. One of the key components in Dodd-Frank is the Volcker Rule, which restricts the ways banks can invest. It separates the investment and commercial functions of a bank and disallows involvement in hedge funds, among other things.

President Trump’s campaign promise is now one step closer to becoming a reality. On June 8th, the House of Representatives voted to replace Dodd-Frank with the Financial CHOICE Act, which would roll back many parts of Dodd-Frank. The CHOICE Act, however, is not expected to pass the Senate as it stands now.

There has been some concern that the CHOICE Act looks to remove small banks from the mortgage market. The legislation was presented with the intention of holding Wall Street accountable, but some in the financial markets are worried about Title V, “Safe Harbor for Certain Loans Held on Portfolio.” This section would eliminate the regulatory requirement that lenders evaluate and document borrowers’ “ability to repay” in cases where a bank holds the loan on its books.

One of the big differences between Dodd-Frank and the CHOICE Act is, under Dodd-Frank U.S. banks have to:

• hold much higher capital,
• design a plan to “unwind safely” in the event of failure, and
• undergo an annual ‘stress test’ to ensure they could continue to lend even in the face of a financial difficulty

CHOICE gives them an alternate option to bypass some of these restrictions.

The Future of CHOICE

As expected, support adheres largely to party lines. House Republicans tend to believe CHOICE offers more regulation for the banking industry without strangling it, while House Democrats show concern. Representative Maxine Waters said,

“It’s an invitation for another Great Recession or worse.”

As with most legislation, there is a long path between the introduction of a bill and the signing of a law. The bill has passed the House, but passage in the Senate is not expected as it stands now. Still, with it being a top priority for the President, it’s difficult to assume that it won’t make it’s way through in some form.

This legislation may have a big effect on the lending and financial industries, so it’s something we’ll be keeping an eye on here at Bay National Title. Continue to check back in this space for the latest news affecting the real estate market.