Why the Senate’s Move to Deregulate Banks Does More Harm Than Good

On March 14, 2018, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), a lengthy bill that weakens Dodd-Frank, legislation enacted in response to the 2008 housing collapse to regulate the banking sector and prevent another financial crisis (read this summary to learn more about S. 2155’s effects). S. 2155 passed the Senate 67-31, with all Republicans voting for the bill and 17 Democrats breaking rank with their party and supporting it as well. The bill will now be considered by the House.

Touted by supporters as a way to provide needed regulatory relief to community banks, credit unions, and other small financial institutions, the bill actually makes consumers and the financial market less safe by prematurely rolling back legislation that has helped mend and grow the economy since Dodd-Frank was passed eight years ago.

Watered-down regulations that existed before the housing collapse made room for a number of harmful products and practices to flourish with little oversight, including the growth of predatory loan products that were disproportionately marketed to communities of color (as was discussed in Prosperity Now’s Downpayment on the Divide report). Not surprisingly, these communities experienced the brunt of the fall out when the bubble burst.   

Harmful Provisions

Prosperity Now has actively pushed back on language contained in the bill that would increase lending discrimination and boost sales of predatory loan products. Here are the details:

Lending Discrimination (Section 104): As mentioned earlier, households of color were particularly hurt by the financial crisis because they were actively targeted by the subprime lending market. To address this problem, Dodd-Frank expanded the types of data that financial institutions needed to report to make it easier for regulators to identify lending discrimination. Section 104 of S. 2155 would exempt approximately 85% of banks from having to comply with these additional reporting requirements. Those exempted are smaller banks—making 500 or fewer mortgages annually—that tend to serve lower-income families and households of color. The exemption makes it harder to detect lending discrimination, which in turn, makes it more difficult to call out bad actors marketing predatory products in these communities.

Predatory Loan Steering in Manufactured Housing (Section 107): This allows sellers of manufactured homes to market predatory loan products to potential customers. It is not unusual for sellers and lenders that offer financing products for manufactured homes to be owned by the same parent company. This creates an incentive for sellers to recommend loans offered by lenders they have a relationship with to finance the purchase, rather than marketing more affordable (less costly) competitor products. 

Some Good News

While much of this bill is harmful, there are a few bright lights. One is Section 310, which increases competition in the credit market by encouraging the Government Sponsored Enterprises (GSEs)—Fannie Mae and Freddie Mac—to adopt a process to update the credit scores they use for their loan underwriting. Fannie Mae and Freddie Mac guarantee more than half the mortgages originated in this country, but only use one outdated score to help them decide whether to purchase a loan, which decreases competition and discourages innovation. This section encourages the GSEs to re-examine and replace this score, creating the opportunity for more inclusive scores that are better for low-income families and households of color to be adopted by them. 

Stay tuned for details next week about a comment letter Prosperity Now submitted to the Federal Housing Finance Agency (FHFA) about the GSEs scoring model.

Conclusion

Overall, the benefits of Section 310 do not make up for the harmful sections of this bill. As S. 2155 is considered in the House, we will continue advocating for a version of the bill that is non-discriminatory, safe for consumers and beneficial for the financial security of households across the country.

For those of you who responded to our alerts about opposing the bill’s harmful provisions over the past few months, many thanks for your advocacy! 

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