The winner of this November’s presidential race could affect consumer protection and banking laws
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As the presidential campaign heads into the final stretch, the rhetoric swirls and pie-in-the-sky economic promises fly. Though the candidates provide few specifics when it comes to the issue of credit cards, the Democratic and Republican platforms – and history – hint at what to expect.
“Historically, Democrats have taken a tougher regulatory line on credit card companies than Republicans, who have traditionally been more willing to trust the market,” says Robert Litan, adjunct senior fellow at the Council on Foreign Relations at the Brookings Institution. But this year, he says, all bets are off.
“Given the unconventional candidacy of Donald Trump, however, there is no reliable way to project whether he would follow traditional Republican thinking. It is a much safer bet to predict that a Clinton administration would continue Obama’s policies of insisting on fuller and simpler disclosures by credit card issuers,” says Litan.
The battle for Dodd-Frank
A major battleground between the parties is the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act, which President Obama signed into law in July 2010, was drafted in the wake of the 2008 financial crisis, and placed restrictions on the banking industry designed to lower the risk of another crash. Trump has said he wants to roll back or even do away with the law, while Hillary Clinton and the Democrats favor strengthening Dodd-Frank’s regulations on big banks.
During the first presidential debate on Sept. 26, both candidates reaffirmed their general stance on regulation, without mentioning banking and consumer financial protection in particular. Trump reiterated his pledge to cut regulations, without going into specifics. Clinton, discussing the Great Recession, said “the last thing we need is to go back to the policies that
The banking industry needs to have more oversight and transparency, but consumers also need to take more personal responsibility, and that’s good for everyone.
|\u2014 Neale Godfrey|
CEO, Children’s Financial Network
Former banking executive
Republicans believe Dodd-Frank puts an undue burden on the financial industry. As the 2016 Republican platform states, “From startups foregone to home loans not made, Dodd-Frank’s excessive regulation and burdensome requirements have helped contribute to the slow economy we all endure today under President Obama and the Democrats.” This results in less choice and higher prices for consumers, the thinking goes.
Democrats, however, pledge to strengthen Dodd-Frank, believing that consumers need protection from predatory financial practices. “We will vigorously implement, enforce, and build on President Obama’s landmark Dodd-Frank financial reform law, and we will stop dead in its tracks every Republican effort to weaken it,” affirms the 2016 Democratic Party platform.
The Dodd-Frank law also created the Consumer Financial Protection Bureau, an agency charged with writing and enforcing pro-consumer rules for banking, credit cards and other financial activities. The CFPB also serves as a clearinghouse where consumers can file complaints and educates consumers about sound financial practices. Under the broad powers given to it by Dodd-Frank, the CFPB can fine financial companies including card issuers, for practices that it deems unfair, deceptive or abusive.
Doing away with Dodd-Frank would mean that the CFPB would cease to exist. Given the broad protections it provides to consumers, if the CFPB is shut down, some financial experts believe that the stage would be set for a repeat of the 2008 financial crisis.
“Without the protection of the CFPB, we’re only positioning people to spin out of control with excessive debt again,” says Neale Godfrey, chairman and president at Children’s Financial Network, and a former bank president and CEO. “This isn’t just bad for consumers, it’s bad for the country since we’d all be picking up the bill.”
If the agency is not shut down, the GOP platform calls for subjecting the CFPB to the congressional appropriations process, which is considered a more realistic goal. In fact, a Republican bill before Congress, House Financial Services Committee Chairman Jeb Hensarling’s Financial CHOICE Act, seeks to implement this idea. The CFPB is currently funded through the Federal Reserve, to insulate it from political pressures.
Putting its funding under congressional control will undercut the agency’s ability to act contrary to powerful banking and business lobbies in Washington, consumer advocates say. The CFPB is developing consumer protection rules regarding debt collection, prepaid cards, payday loans, and pre-dispute arbitration clauses. These rules could be blocked or watered down if lobbyists exert enough political pressure, opponents of the bill say.
“Financial regulators have been independently funded since they were created, in some cases as far back as the Civil War,” Sen. Elizabeth Warren (D-Massachusetts) said in response to the funding proposal in June. “Congressman Hensarling wants to get rid of that protection so the bank regulatory process will be subject to more political meddling.”
Reinstituting Glass-Steagall Act
Another battleground in the parties’ war of ideas is the Glass-Steagall Act. Partially repealed in 1999, the law blocked deposit-taking commercial banks from engaging in the riskier activities of investment banks. Investment banks can trade in stocks and bonds, and are more exposed to the ups and downs of financial markets.
With that partial repeal, commercial banks were allowed to act like an investment bank – and take more risks with depositors’ money – which bank industry critics say contributed to the financial crash of 2008.
Trump and the GOP support reinstating Glass-Steagall’s separation of commercial and investment banking, which would mean breaking up the biggest U.S. banks. Clinton would rather rein in Wall Street by beefing up Dodd-Frank and the CFPB. To protect taxpayers from a bailout of too-big-to-fail banks, Dodd-Frank requires big banks to submit resolution plans, so called “living wills,” that insulate the financial system from shock in case they fail.
“You’re not going to see [Clinton propose reinstating] Glass-Steagall,” said economist Alan Blinder, an adviser to the campaign on economic policy, in an interview with Reuters. Indeed, in a Democratic primary debate last fall, she said that her plan for overhauling the financial industry goes beyond what Glass-Steagall would accomplish.
“The big banks are not the only thing we have to worry about,” Clinton said in an interview with CNN. “I have what I consider to be a more comprehensive approach to what we need to do to rein in these institutions, including the big banks.”
Political considerations have helped shape the two parties’ positions on financial industry reform, according to Brian Gardner, managing director at Keefe Bruyette & Woods, an investment bank specializing in the financial services sector. “The Warren-Sanders wing of the Democratic Party has wanted to break up banks for a long time,” he said, referring to Sen. Warren and Sen. Bernie Sanders of Vermont, Clinton’s opponent in the Democratic primaries.
“The Trump camp wants to peel off disgruntled Sanders voters who run to Clinton’s left on this part of economic policy.”
Bringing back Glass-Steagall would break up the biggest banks in the U.S., including the four largest – Bank of America, JPMorgan Chase, Wells Fargo and Citigroup, which collectively claim about 90 percent of bank deposits held by Americans. That could affect both credit card users and the banks that issue them.
“Breaking up the banks would be disruptive to the financial sector in the short term, and there may be a negative impact on credit availability,” says Gardner. However, he added, this could encourage smaller players to expand their offerings. “As big banks downsize, some small banks will step into the breach.”
In any case, some experts believe that breaking up these too-big-to-fail banks is necessary. “Having monstrously big, essentially unmanageable and reckless institutions that are effectively above the laws is bad for society,” says Anat Admati, professor of finance and economics at the Stanford Graduate School of Business.
Reading the tea leaves
In this wholly unpredictable election season, it’s difficult to say what will happen once the dust settles and a new president is inaugurated, not to mention the outcomes of Senate and House races that could tip the balance in Congress. Gardner suggests that people take a deep breath. “You start by recognizing that whatever the candidates propose has to go through Congress, so I don’t think either will get close to what they want,” he says.
“There’s a big difference between what’s proposed and what’s possible.”
And if new regulations pass or old ones are reinstated, Godfrey believes that both consumers and credit card companies will benefit. “The banking industry needs to have more oversight and transparency,” she says, “but consumers also need to take more personal responsibility, and that’s good for everyone.”
Hopefully, whoever moves into the Oval Office next January will agree.
Contributing: CreditCards.com senior reporter Fred O. Williams