Trump administration could upend post-crisis financial reforms, weaken CFPB

After years of fines, stress tests, settlements and tightening regulations, the biggest story in banking this year was more of the same: the unauthorized accounts scandal at Wells Fargo & Co. and the crackdown on banking industry sales practices expected to follow.

But the story changed Wednesday morning, when Donald Trump — a pro-business candidate who has vowed to scrap regulations spurred by the financial crisis — unexpectedly won his bid for the White House.

When markets opened, investors piled into financial stocks, expecting that Trump will make good on his pledge to dismantle much of 2010’s landmark Dodd-Frank Wall Street Reform Act — or at least have a lighter regulatory hand.

That could including pushing for an outright repeal of Dodd-Frank and the rules it spawned, supporting a weaker replacement version or dramatically reshaping the Consumer Financial Protection Bureau, an agency created by Dodd-Frank that has been a top target of Republican lawmakers.

Trump’s stunning victory is seen as a boon for financial firms and by consumer advocates as a threat to the new regulations, despite his lack of any specific proposals.

“There’s no question from the industry’s standpoint that a Trump victory is a huge win,” said Scott Pearson, a Los Angeles-based partner at law firm Ballard Spahr, which specializes in representing financial firms and often works with clients facing CFPB scrutiny. “But I think there is still some uncertainty. We’ll see what he follows through on.”

It’s not clear how Trump might change specific rules for big banks, small banks and other financial firms.

Still, the KBW-Nasdaq bank index, which tracks a basket of bank stocks, climbed 4.9% on Wednesday to its highest level in more than a year.

Analysts Brian Gardner and Michael Michaud at brokerage and investment bank Keefe Bruyette & Woods wrote in a research note that Trump probably will appoint financial regulators that are “more industry friendly than regulators appointed by President Obama.”

That could mean a more lax regulatory environment for money mangers, insurance companies, consumer lenders and other financial firms, though they suggested that an outright repeal of Dodd-Frank is unlikely.

Republicans now control the House and Senate, but Democrats hold enough seats in the upper chamber to block attempts to kill Dodd-Frank.

Dodd-Frank rules require big banks to hold on to more capital, undergo more intense regulatory scrutiny and limit their ability to return capital to shareholders in the form of dividends and stock buybacks.

Credit unions as well as small and mid-size banks have complained that stricter regulations have raised compliance costs, in many cases pushing institutions to merge.

Dennis Kelleher, chief executive of Better Markets, a group that advocates for stricter financial regulation, notes that when Trump has talked about Dodd-Frank, he has focused mostly on its effects on small banks, not on big Wall Street firms.

And he has even talked about bringing back some version of the Glass-Steagall Act, a Depression-era law that limited big banks’ ability to participate in the equity markets.

“I think he wants to provide regulatory relief for community banks,” Kelleher said. “People who think he’s going to start delivering for Wall Street are in for a rude awakening.”

Another prediction from KBW’s analysts is that Richard Cordray, the director of the Consumer Financial Protection Bureau, will be replaced — a move that could have a dramatic effect on the bureau’s operations.

A federal appeals court last month handed down a stunning ruling, saying that the president should be able to fire the CFPB’s director at any time, rather than for only for cause, as spelled out in Dodd-Frank.

That ruling, which the CFPB has said it may contest, coupled with Trump’s unexpected victory might mean Cordray could be replaced as soon as Trump takes office, Pearson said. Cordray, the agency’s first director, is not set to leave office until 2018.

“He’s one of the biggest problems in terms of individuals in the government that have strangled industry,” Pearson said of Cordray. “Trump thinks overregulation is a big problem, so firing Cordray is something I think he’d do the first week.”

Cordray, a former Ohio attorney general, is seen as an aggressive regulator willing to use novel approaches to take financial firms to task. A less aggressive replacement, perhaps from within the financial services industry, could set a dramatically different tone at the agency at a time when it is in the middle of finalizing rules that could reshape parts of the industry.

The bureau is nearing completion of a set of rules governing payday loans and other small-dollar, high-interest consumer loans. It is also working on proposals that would rein in debt collectors and bar financial firms from using arbitration clauses to block customers from bringing class-action cases.

Even if finalized soon, those rules, along with other CFPB regulations that have already taken effect, could be rewritten under a new leader.

However, Bryan Sullivan, chief financial officer of Orange County mortgage lender LoanDepot, now one of the nation’s biggest home lenders, said he believes that the Trump administration probably wouldn’t try to undo the bureau’s mortgage rules, which have been in effect for a few years already.

“They’re pretty well baked in,” he said. “I don’t think that’s the first thing they’d go after.”

And weakening the consumer-focused agency could be politically problematic for Trump, said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group.

While not loved by the financial services industry or congressional Republicans, the CFPB has made a name for itself by going after unpopular targets — most recently Wells Fargo, which agreed to pay the agency $100 million over the accounts scandal.

“The CFPB is very popular with the public,” Mierzwinksi said. “If Trump wants to pick that fight, I think that’s a mistake for him.”

Although interested in loosening financial regulations, the president-elect hasn’t talked about CFPB, payday lending rules or other specific issues, Kelleher noted.

Even investor and Trump supporter Carl Icanh said Wednesday during an interview on CNBC that he would not support repealing Dodd-Frank.

Instead of financial regulation, Kelleher said he expects Trump to focus on other priorities.

“This big infrastructure plan and probably tax relief — those are the two big pillars of his domestic policy,” he said. “He’s not going to want to get bogged down in trench warfare over Dodd-Frank.”

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