Barney Frank worries weakening Dodd-Frank may lead to another crash
Barney Frank, 76, is retired and hopscotching around the world for speeches and conferences.
But the former Democratic congressman from Massachusetts is speaking out, worried that President Trump’s assault on one of Frank's signature legislative achievements could trigger another financial crash.
In 2010, Frank, who was then the House Financial Services Committee chairman, joined with Sen. Chris Dodd (D-Conn.) to co-sponsor and spearhead passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act.
The comprehensive law introduced sweeping changes in the financial industry, ranging from limits on risky loans and predatory lending to establishing a powerful watchdog agency, the Consumer Financial Protection Bureau.
Last week, President Trump signed executive orders to roll back key financial regulations of the Obama era, including restrictions in Dodd-Frank.
Learn more: Best current CD rates
In an interview with USA TODAY, Frank said he’d welcome a few changes, particularly for small banks. But he warned that significant changes could again encourage banks’ risky behavior and unleash a severe recession. His comments have been edited for clarity and length.
Q: Should consumers be concerned about the Trump administration’s efforts to roll back Dodd-Frank? If so, why?
Consumers who have dealings with banks and other financial institutions should be very worried about (Dodd-Frank) being abolished. If you don’t keep the rules we have in place to restrain irresponsible risk-taking, you’ll have, at some point, another crash.
Q: Trump and Republican lawmakers are intent on weakening the CFPB, saying its rules inhibit lending. Any validity to their argument?
The CFPB’s sole purpose is to protect consumers. And the uncontroversial figure is that, in the years it’s been in place, it saved consumers $12 billion.
(Before 2008), banks lent money to people who couldn’t pay them back to make money short-term. The banks that made the loans sold them. Those people who bought the loans then bought credit default swaps, a form of insurance. You’ve got this whole chain of financial derivatives. And it all came crashing down.
We outlawed bad loans. Banks are still free to lend as long as they can show that the people they’re lending to can pay it back.
Q: What are some vital components of the law and why?
There is a set of rules that say financial institutions can’t take action that will leave them with so much risk that they won’t be able pay it off. So there’s restriction on these irresponsible subprime loans.
We also said if you get involved in these financial derivatives transactions…you have to do it a responsible way. If you promise to pay off someone if a security goes bad, you have to have money to do that.
Q: Speculation is that the administration will also roll back rules that more directly impact consumers, such as payday lending limits and banning financial companies from imposing mandatory arbitration. Your thoughts?
I’m very worried about those, particularly about arbitration. Compulsory arbitration is very unfair to consumers. I'm afraid that it’s going to be weakened.
Q: What are some changes you’d welcome?
Smaller banks – banks under $10 billion in assets – are spending more money than they should to comply with parts of the law that don’t really affect them. Four years ago, one of the federal regulators said 'let’s exempt them from some of these,' and I’d agree with that.
Q: Any other changes you’d support?
I was never in favor of the amendment that had the Federal Reserve regulate the amount banks charge retailers (for credit card swipe fees). That was supposed to be consumer protection. I don't think that is.
Q: Large banks with total assets of $50 billion or more must maintain certain capital levels and maintain credit quality, and are given “stress tests.” Some banks have lobbied for the $50 billion threshold to be raised. You agree?
I think $50 billion is too low. I’d go $125 billion with a proviso that fed regulators can reach down if a particular bank seems to be a problem.
I have to add here that I’m now a member of the board of (Signature Bank), which would benefit from that. But I decided that it was a good idea four years ago, long before I’d heard of the bank I’m with.
Q: Small banks want to get rid of some “qualified mortgage” rules, such as the ban on excessive upfront points and fees, the “interest-only” period and loan terms longer than 30 years. Your thoughts on relaxing these rules?
That’s the rule that says you can’t lend to people who can’t pay it back. I’m really astonished that there is not acceptance and understanding of that. That was a major problem.
I would say this. For small banks, if you’re going to keep the loans in your portfolio and not sell them, then I would agree that these small banks should not be subject to the (qualified mortgage restrictions). That would only be relaxation for banks under $10 billion in assets.
Q: The Volcker Rule, which prohibits banks from using customer deposits to engage in “proprietary" trading of speculative securities, is also being targeted by the industry. Critics say it’s too complicated. Your thoughts?
I would exempt banks under $10 billion (in assets) from it. There’s some hypocrisy here. One of the things they’re trying to argue is that it hurts lending. The Volcker Rule tells banks to stop derivatives trading and lend.
Q: How effective do you think Trump will be in rolling back Dodd-Frank rules?
I don't think Trump is going to succeed in getting any of the laws weakened substantially in most cases because I don’t think you’re going to get 60 senators. (Legislative changes need 60 votes in the Senate.)
But some of these things can be weakened by the person in charge. I am afraid that he will appoint someone (as head of the CFPB) who ultimately will weaken some of the things you just talked about.
Q: You’ve said you’re worried the CFPB’s financial autonomy will be gone? What did you mean by that?
I believe it would be subject to (budget) reconciliation (in Congress), which would subject (the CFPB) to appropriations. All other bank regulators are free of appropriation -- the Federal Deposit Insurance Corp. and the Federal Reserve.
One way to substantially reduce consumer protection, even if you don’t have the vote to abolish the agency, is to starve it of its funds.