Financial CHOICE Act to Reform Dodd-Frank

April 27, 2017

On April 19, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) released an updated version of the Financial CHOICE Act (2.0), a discussion draft that would reform the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The discussion draft builds on a previous version of the bill (H.R.5983 in the 114th Congress), which was introduced by Chairman Hensarling and passed by the committee last year. The FCA 2.0 discussion draft text can be found here.

Included in the FCA 2.0 is a provision to repeal the NSBA-supported Durbin Amendment, removing requirements that guided how much credit card networks could charge retailers for processing debit card transactions. The legislation claims that the Durbin Amendment resulted in the elimination of free checking accounts at banks and pushed consumers out of the mainstream banking system, while providing no discernible benefits to retail consumers.

The Durbin Amendment was part of the 2010 Dodd-Frank Act to lower costs to retailers and increase competition in the market–dominated by some credit card companies–for processing debit card transactions, and NSBA was an outspoken supporter of the language. Each time a shopper uses their debit card at a checkout, the merchant pays a fee to the bank that issued that card. Prior to the reform, if merchants wanted to accept debit or credit cards issued by the card networks they were required to pay the fee, which is set by the networks and non-negotiable. Under the Durbin Amendment, banks with over $10 billion in assets would have to charge debit card interchange fees that are “reasonable and proportional to the actual cost” of processing the transaction. After much wrangling, these swipe fees were ultimately capped at $.21, about half of the pre-reform average. Additionally, the measure included provisions which allow retailers to refuse to use credit cards for small purchases and offer incentives for using cash or another type of card.

Another revisions is the preservation of the single-director structure of the Consumer Financial Protection Bureau (CFPB). However, the director would be removable by the President at-will, and the CFPB would be restructured as a law enforcement agency—without rulemaking authority— similar to the Federal Trade Commission.

Chairman Hensarling has also revised the bill’s regulatory relief title which would exempt banking organizations from capital and liquidity requirements. Under the original proposal, the requirements for relief were an average leverage ratio of 10 percent and a CAMELS composite rating of 1 or 2. The FCA 2.0 reduces the requirements for regulatory relief by removing the need for a CAMELS rating of 1 or 2.  Also, the FCA 2.0 would expand the regulatory relief under the title to include an exemption from stress tests and Comprehensive Capital Analysis and Review.

Numerous provisions contained in the FCA 1.0 instituting Commodity Futures Trading Commission (CFTC) reforms have been removed. Specifically, the FCA 2.0 no longer requires the CFTC to harmonize rulemakings with the Securities and Exchange Commission (SEC) and promulgate a rule regarding the cross-border regulation of derivatives. Many of the CFTC reform provisions that have been removed have been included in the House-passed CFTC reauthorization bill (H.R. 238), such as the requirement for rulemaking on the cross-border regulation of derivatives.

The FCA 2.0 takes a different approach for the Department of Labor’s (DOL) Fiduciary Duty Rule. Under the previous proposal, the DOL was prohibited from issuing a Fiduciary Duty Rule until 60 days after the SEC issues a rule. The FCA 2.0 abandons the time limit for a requirement that the DOL only issue a Fiduciary Duty Rule that is “substantially similar” to the SEC’s rule. Since the SEC has not issued a Fiduciary Duty Rule, this provision would prohibit the DOL Fiduciary Duty Rule from becoming effective.

The discussion draft amends requirements for shareholder proposals and prohibits the SEC from requiring use of a universal proxy ballot. Shareholders would be required to have one percent ownership for three years to submit a proposal as opposed to the current requirement that allows shareholders to submit a proposal if they have one percent ownership or $2,000 worth of stock for one year.

The committee held a hearing to discuss the FCA 2.0 on April 26. The bill is expected to be marked-up in early-May. In contrast to the markup in the 114th Congress, where the only amendment was an amendment in the nature of a substitute offered by Chairman Hensarling, Democrats on the committee are expected to offer numerous amendments. The measure will likely be voted out of the committee—probably along party lines—which sets the stage for passage by the House. A House vote could occur before the August recess. Meanwhile, the Senate Banking Committee leadership has indicated an interest in pursuing some Dodd-Frank reforms, possibly including provisions of the FCA.

More information is also available on the committee website.