Banking regulations under Mnuchin

Everyone knows that the Trump administration has been aggressively pushing policy changes in virtually every government agency. Most notably and probably one of the more controversial efforts is being led by Treasury Secretary Steve Mnuchin to roll back many of the regulatory provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Republican legislators for some time have been debating that laws passed during the Obama administration had served their purpose and are no longer necessary. In fact, arguments are going forth that they are harming banks and hampering our economic recovery. LA Times

If you recall, the 2008 recession was the result of large swaths of collapsing portfolios of subprime mortgages. During years prior, mortgage lenders were able to approve loans left-and-right because lax terms allowed buyers to easily get qualified. Interest rates were low and products for all credit levels were available, including adjustable rate mortgages (ARMs). It is common practice for lenders to pool and sell their loans soon after homebuyers close on their mortgages. That wasn’t the problem. The problem arose when increasing numbers of worthless assets became securitized and traded. The Consumer Finance Protection Bureau (CFPB) is a powerful government agency created by Dodd-Frank. Its officers have enforcement powers and an independent source of funding not subject to House appropriations. If a bank becomes subject to audit, an officer from the CFPB has the authority to travel to the bank in question and assess whether the institution is meeting regulations. There are many other rules for businesses, such as: (1) payday lending, (2) credit cards, and (3) auto loans, and other consumer financial products.

Steve Mnuchin even believes that Fannie Mae and Freddie Mac should be returned to the private sector. He even backs reducing regulatory oversight for banks that create new markets if they increase capital reserves. Basically, it means lowering the amount of allowable leveraging against available liquid assets in the event of future losses. Seven-to-one leveraging was commonplace before the Great Recession. The Volcker Rule was established to prevent banks from engaging in speculative investments, and certain types of high-risk trading activities that do not benefit their customers. They must also submit financial reports to demonstrate they are complying with the rule and that training programs for employees are in place that can be independently audited… These requirements are now deemed as unnecessarily excessive and cumbersome while not all banks have yet entirely implemented the changes. These make up a short- list of examples, so please do more digging on your own… Europe began developing similar legislation, but ultimately scrapped the plan since a better solution has not yet been found. The process for removing or revising these laws are not simple and could take years or, at a minimum, months to change and will certainly be watched as we near mid-term elections.  Investopedia

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