Why Dodd-Frank Is Vulnerable in 2015

WASHINGTON — From the moment it was signed into law in 2010, bankers have hoped, tried and mostly failed to make changes to the Dodd-Frank Act.

But that dynamic started to change in the waning days of last year, and this year is likely to go much further in that direction.

With Republicans now controlling both chambers of Congress and Democrats signaling that they are open to alterations, revisions to Dodd-Frank will top the agenda for banking issues this year, in addition to other subjects, like terrorism insurance and housing finance reform.

"They'll put a lot of priority initially on Dodd-Frank reforms," said Mark Calabria, director of financial regulation studies at the Cato Institute.

A Focus on Dodd-Frank

To be sure, the White House still has veto power, but more moderate changes to the financial reform law are likely to gain traction, depending on how they are packaged.

The new term comes on the heels of a divisive — at times heated — lame duck session, when Obama administration officials and the big banks helped to shepherd a major spending bill through Congress.

The legislation included a measure that rolled back a controversial Dodd-Frank provision requiring banks to push certain swaps out of depository institutions and into affiliates — the first substantial change to Dodd-Frank since the law's passage in July 2010.

Congress also approved a more modest tweak to Dodd-Frank last month, clarifying the Federal Reserve's ability to tailor capital standards for insurers.

Those votes could set the stage for further changes to the law, though it's unclear if bipartisan compromise can be struck. Whether any specific measure constitutes a minor tweak or a major rollback of the law remains in the eye of the beholder, as was definitely the case in the fight over the swaps pushout repeal.

Sen. Richard Shelby, R-Ala., is expected to take over the Banking Committee this year to serve out his final two years as chairman under caucus rules. And Rep. Jeb Hensarling, R-Texas, will return as head of the Financial Services Committee, despite early chatter last fall of a potential challenge from Sen. Frank Lucas, R-Okla., a senior lawmaker on the banking panel.

Shelby and Hensarling share a similar ideology — skepticism for big government and big business — but they'll both face hurdles to getting policy enacted, despite GOP control. Hensarling has had trouble uniting his own caucus around some of his most conservative plans, while Shelby will need to attract Democratic support if he wants avoid a filibuster on the Senate floor. Both lawmakers have been vocal critics of Dodd-Frank.

But some Democrats may be softening to the idea of taking another look at the financial reform law, depending on how far Republicans push the envelope on changes.

"There are many members desirous of perfecting of the legislation, but every time we want to perfect it, the other side wants to slay it, and that's just not going to happen," Sen. Menendez, D-N.J., told American Banker last month. "But if the Republican majority wants to slay the very essence" of the bill "then we'll have that debate. I hope that's not the way they're coming at it."

It's been more than four years since the law's passage, giving Congress, regulators and industry a chance to see what works and what could work better. Moreover, nearly half of the lawmakers — almost all Democrats — who voted for Dodd-Frank have since left office, and the fight over the law may be less visceral for those who were not in the trenches four and half years ago.

"There's been an almost generational shift in both House and Senate in terms of membership, and that brings with it less loyalty to previously passed legislation — and fewer battle scars over what was difficult to get enacted into law," said Edward Mills, an analyst at FBR Capital Markets.

Indeed, only 31 of the original 60 senators who voted in favor of Dodd-Frank four and a half years ago are returning this year, as are just 131 of the 237 House members who approved the law. (See graphic attached to this story.)

Of course, some newer members of Congress bring their own loyalty to parts of the law, such as Sen. Elizabeth Warren, D-Mass., who founded the Consumer Financial Protection Bureau. Still, overall, there will inevitably be less loyalty going forward.

"The attachment is lessened over time," said Calabria.

The parameters of the fight are likely to be familiar. Major changes to the structure of the CFPB — such as subjecting the agency to the appropriations process or establishing a commission to replace the director — will no doubt be debated again, though the odds of such controversial measures being passed or signed into law are slim.

Republicans will also renew their concerns about the Financial Stability Oversight Council's powers and structure. Critics argue that the council should include all of the top officials at agencies with bipartisan leadership structures — like the Securities and Exchange Commission — not just the chairs. They say it also fails to make its designation and policy decisions transparent to Congress or the public.

"Now that Republicans have the gavel in both chambers, there will be a concerted effort to focus on FSOC activities," said Dan Crowley, a partner at K&L Gates.

Still, the blowback last month to the swaps "pushout" repeal from progressive advocates and some Democrats could make more dramatic changes to the CFPB, the FSOC and other parts of Dodd-Frank unlikely. Even if they didn't succeed in stopping the swaps measure from going through, big bank critics managed to sour Wall Street's victory with a string of negative headlines.

"I lean toward this being the last gasp of the big bank lobby for some time," said Isaac Boltansky, an analyst at Compass Point Research & Trading.

As such, there's likely to be a focus on regulatory relief for smaller and mid-sized banks, which have tended to be a more politically palatable constituency.

"Given they gave Wall Street a little gift in the lame duck with the swaps pushout repeal, I think there's a very strong appetite in both banking committees and in Congress overall to do some meaningful bank regulatory relief" for smaller institutions, said Camden Fine, president and chief executive of the Independent Community Bankers of America.

That could include easing some of the burdens under the CFPB's ability-to-pay mortgage rule and potentially raising key Dodd-Frank regulatory thresholds.

Lawmakers in both the House and Senate discussed raising the $50 billion threshold for systemically important institutions last year, and the issue is expected to be raised again by Republicans and Democrats. Regulators, including Fed Gov. Daniel Tarullo, have also spoken out in favor of raising the cut-off, which subjects banks to a litany of additional regulatory requirements.

Observers suggested that Congress could similarly take another look at the $10 billion threshold in the law that determines, for example, which banks are supervised directly by the CFPB.

In addition, the fight over "too big to fail" is likely to remain on the table as well. Both Shelby and Hensarling have argued that Dodd-Frank didn't end the problem or do enough to protect taxpayers, and they could even support alternatives to the law's "orderly liquidation authority," such as through the bankruptcy code.

Shelby has also championed higher capital standards for big banks in the past, an issue that could even win the support of some liberal Democrats on the committee, including Sens. Sherrod Brown, D-Ohio, who will be the panel's ranking member, and Elizabeth Warren, D-Mass.

Getting TRIA Done

Beyond changes to the financial reform law, one of the biggest and most immediate challenges facing Congress will be the reauthorization of the Terrorism Risk Insurance Act. The terrorism insurance program, which provides a government backstop in the case of a catastrophic attack, expired at the end of 2014 — to the surprise of many.

Sen. Tom Coburn, R-Okla., who retired at the end of the year, blocked the measure over an unrelated provision that would have created a national organization for state insurance agents and brokers.

House and Senate lawmakers negotiated for weeks before Coburn torpedoed the legislation, raising questions about how quickly the program can be renewed this year.

Last year's legislation would have extended the program for six years and made several changes to its structure, including doubling the trigger for when it goes into effect from $100 million to $200 million. The bill also included unrelated measures, including one that requires that someone with community banking experience sit on the Federal Reserve Board.

Shelby indicated last month that he'd like to see the issue dispensed with quickly, saying in a statement that it requires "immediate attention" when Congress resumes. Sources have warned in recent weeks that Hensarling, who's been critical of TRIA, could try to rework the deal, but House leaders added the bill from last year to this week's floor schedule on Monday night.

Housing Finance Still on the Agenda

Housing, meanwhile, is also expected to remain on the radar this year, though whether lawmakers again attempt to tackle large-scale reform of Fannie Mae and Freddie Mac remains to be seen, after efforts last year failed to gain serious traction.

Some observers remain hopeful that the banking panels will focus on reforming the housing market, building on earlier work.

"Much bipartisan effort has been put forth and a base of knowledge developed to deal with housing finance reform and the winding down of Fannie Mae and Freddie Mac," Sen. Bob Corker, R-Tenn., told American Banker in a statement. "For Republicans to have a majority in Congress and not take action to wind them down would be malpractice, especially when the White House agrees it should be done."

Sens. Tim Johnson, D-S.D., who chaired the banking panel over the past four years, and Mike Crapo, R-Idaho, who was the top Republican, attracted significant industry attention when they built on a partisan plan to unwind the government-sponsored enterprises put forward by Corker and Sen. Mark Warner, D-Va., last term.

The bill passed out of committee, but failed to gain enough support from more progressive members of the panel for consideration on the Senate floor. Hensarling also introduced his own plan to all but privatize the housing finance market, which was not taken up by the House, though it cleared the banking panel.

"It will be pretty high priority. As to whether efforts are successful or not, that's very much unclear, because I don't think there's consensus for a definite path forward yet. But they'll put plenty of time and energy into it," said Fine.

Shelby has been a vocal advocate in the past for changes to the GSEs and would likely support a conservative approach to removing them from the market. But it's not clear that he'll risk diving into the legislative process given his short remaining tenure as chairman and other potential priorities.

"It's going to be more of an oversight area than the committee has seen for some time," said Brandon Barford, a partner at Beacon Policy Advisors. "I think Chairman Shelby will focus on things like vigorously overseeing the Federal Housing Administration and the Federal Housing Finance Agency and the GSE conservatorship — trying to rein in taxpayer risk."

At the same time, Democrats are likely to focus on loosening credit for potential homebuyers and ensuring that FHFA Director Mel Watt, a former North Carolina congressman, continues to prioritize the needs of low-income buyers and renters.

The Banking Committee should continue to look at ways "to strengthen homeownership for families across American," Sen. Jeff Merkley, D-Ore., told American Banker last month.

President Obama is due to give an address on the subject later this week during a speech in Arizona.

Still, Republicans have already pushed back on some of Watt's efforts, including his decision to fund two low-income housing trust funds that had been suspended since the financial crisis. Hensarling said last month that he will call on Watt to testify in early January to discuss the move.

Other Items to Watch

A host of additional issues crucial for the broader business community are expected to remain on the agenda — including cybersecurity legislation, patent reform and changes to the tax code.

Both chambers took up legislation to improve information sharing around data breaches in the wake of continued attacks on banks and retailers last year, but the Senate did not ultimately take up the Intelligence Committee's bill, which passed over the summer. Lawmakers are expected to renew efforts on the issue next year.

"The hard work is done, in that the base text is already there. That's going to be an issue that moves this year," said Francis Creighton, executive vice president of government affairs at the Financial Services Roundtable.

The banking panels will also have to tackle funding for the Export-Import Bank after a protracted fight last year, which resulted in a short-term extension. And the Senate Banking Committee may have to devote some time to transit issues that fall under its jurisdiction, when reauthorization of the transportation bill comes up for debate this spring.

It remains to be seen how lawmakers will balance a host of competing legislative priorities this term, particularly with the presidential elections already looming on the horizon. By the middle of 2016, attention will have turned almost completely to that fight, as well as to control of the Senate. Democrats remain favored to take back the chamber in the next elections, but the strong GOP wave this past November means that another flip is far from a sure thing at this point. All of that will factor into whether Republican leadership takes a hardline messaging approach to legislation, or tries to work across the aisle on bipartisan packages.

"It's a tough environment, and we've got a presidential election around the corner," said Calabria.