For many of Mark D. Belongia’s clients, the reaction to President Donald Trump’s election is encapsulated in one word: relief.
Many of his clients, ranging from small community banks to large global banks, felt that the real estate developer-turned-politician would usher in broad regulatory relief, he said.
“The industry generally looks at the Obama administration as overreaching into the day-to-day operations of the financial system,” said Belongia, a partner at Duane Morris. “It was causing a significant stress on the financial institutions. The compliance costs were skyrocketing, it was creating liability where none should exist and it was very difficult time to do business.”
However, feelings of relief have been tempered by a second word: uncertainty.
“The president did promise to change a lot of the regulation and there is uncertainty about how important that is to him given the other matters which are pending in Washington these days,” said Bruce N. Menkes of Mandell Menkes. “It’s hard to give advice now because there is uncertainty about how Dodd-Frank should be interpreted and it’s not being resolved by congressional action.”
Consumer finance and banking attorneys in Chicago share different concerns about the uncertain fate of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was passed in the aftermath of 2008 housing crisis and subsequent recession to prevent a similar economic downturn from happening again.
Questions surrounding who Trump will appoint to fill upcoming vacancies on the Federal Reserve Board and other financial regulatory agencies confuses an already uncertain situation.
Despite Trump’s campaign promises to immediately reverse aspects of Dodd-Frank and make radical appointments to regulatory agencies, some Chicago banking and finance lawyers doubt large-scale reform can happen overnight as many changes would require approval from a gridlocked Congress.
“Yes, this is a state of uncertainty to be sure, but all laws and regulations are subject to change at some point in time,” said Michael G. Cortina of SmithAmundsen. “The only real advice we can give our clients is what the current state of the law is and that they should adhere to the current law unless the current laws change, which may or may not happen. Being agile and able to adapt is important since change may be around the corner, but adhering to the existing laws and regulations is simply a requirement.”
Mick O’Rourke, president of the Bankers Club of Chicago, said this uncertainty is not new. He said it existed in a different way before the election.
Once Dodd-Frank was implemented in 2010, O’Rourke said, the legislation was still evolving in murky waters and there was speculation about the Consumer Financial Protection Bureau — a watchdog agency created through Dodd-Frank.
“That is what I think was causing the frustration in our industry — the uncertainty on the path they were taking on the formation of the CFPB, pre-election,” said O’Rourke, who is also president and CEO of Signature Bank, which has locations in Chicago and Rosemont.
He said the election results created even greater uncertainty.
“But it flipped from one extreme to the next,” he said.
Now, instead of uncertainty about regulations, the political discourse became dominated by those saying they wanted to eliminate Dodd-Frank, O’Rourke said.
“And that’s uncertain because you don’t know how realistic that is,” he said. “It’s ironic. We are actually in the same position where it’s still uncertainty.”
Adding to the uncertainty in Washington is the consensus among some banking and finance insiders, such as O’Rourke and Illinois Bankers Association President and CEO Linda Koch, that the recommendations and proposed legislation have little chance of becoming law.
On Feb. 3, Trump signed an executive order calling for a U.S. Department of the Treasury report laying out recommendations for regulatory reform.
The Treasury report released in June, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” is the first in a series of four that are being issued pursuant to Trump’s executive order.
It lays out a blueprint for broad regulatory reform in the banking and finance sector but does not go as far as the Financial CHOICE Act which passed in the U.S. House in June and calls for a “repeal and replace” of Dodd-Frank.
“The odds of [the Treasury report recommendations] passing in the form presented are slim to none,” O’Rourke said.
Koch said she does not foresee the CHOICE Act, which cleared the U.S. House of Representatives by a 233-186 vote along party lines, having enough votes to pass out of the Senate.
“We are not going to see a major rollback of Dodd-Frank — we know that. We are not going to see the Financial CHOICE Act in any way shape or form,” she said. “What we expect will happen and what we hope will happen is that on a bipartisan level they come together and pass some meaningful regulatory relief that everyone can agree to.”
Koch said she and her fellow IBA members are well aware of the political nuances and gridlock right now in Congress.
“But we also know that the banking industry for nine years has been pushing for some regulatory relief and we have laid a lot of groundwork for our message and the importance of lifting some of the regulatory burden that banks are facing,” she said.
Keeping up with the news
Amid this time of uncertainty, finance attorneys try to stay abreast of any changes in regulation through financial newsletters as well as trade groups like the American Bar Association, Illinois State Bar Association, Illinois Bankers Association and Community Bankers Association of Illinois.
“Following news from these organizations, along with following the news in general, makes it so that no major changes occur or are suggested without us knowing about them,” said Cortina, who represents banking and financial institutions. “Add to that the fact that we all regularly attend conferences, seminars and Continuing Legal Education, and we have most everything covered. If a change is advocated or proposed, and if it is significant enough, we share it with the others at the firm and also our clients.”
Menkes said his role on the American Bar Association’s Consumer Financial Services Committee has been a beneficial way to stay informed.
“We often hear from people who are dealing directly with the government, not lobbyists so much as practitioners whose job it is to keep their clients advised,” he said.
He said he also tries to keep up to date on the news through financial blogs.
“I think the best blog is from a firm Ballard Spahr LLP [headquartered in Philadelphia] called the Consumer Finance Monitor,” he said. “It’s a really good way to keep up on the changes in Washington. It generally gives information on upcoming congressional hearings, decisions in important cases and what’s going on with the CFPB.”
Belongia said in addition to speaking with lobbyists, he also subscribes to e-mail services from the Office of Comptroller of Currency, Federal Deposit Insurance Corp. and Consumer Financial Protection Bureau, among other agencies.
“When you sign up for them, you get daily alerts and press releases,” he said. “They do a great job of pushing out information to keep you apprised of their activities.”
The looming vacancies on federal agencies, such as the Federal Reserve and the Consumer Financial Protection Bureau, exacerbate uncertainty as whoever fills these positions could change the course of direction for financial regulation in Washington.
The Federal Reserve System’s Board of Governors chair is one soon to be vacated. Speculation is rampant over who will fill the role once Janet Yellen’s four-year term expires on Feb. 3, 2018.
The Federal Reserve chair is considered one of the most powerful positions in the country, with the power to affect monetary policy and influence decisions that can move the economic markets. Of course, any appointment Trump makes is subject to Senate confirmation.
Trump’s inconsistent remarks about Yellen and interest rates make it even more challenging to decipher any future Fed appointments.
“I like her; I like her demeanor. I think she’s done a good job,” Trump told the Wall Street Journal in July 2017. “I’d like to see rates stay low. She’s historically been a low-interest-rate person.”
In September 2016, speaking by phone on CNBC, Trump said Yellen should be “ashamed” of what she’s doing to the country. By keeping interest rates low, the Fed has created a “false stock market,” he said during the interview.
Trump has also suggested he might nominate his National Economic Council Director Gary Cohn for Yellen’s post. His other vacancies to fill at the Fed include several governor seats and a recently opened vice chairman’s seat.
James I. Kaplan of Quarles & Brady said Trump’s appointments, rather than any policy change, could be his most enduring legacy.
“The fact is, maybe the most significant thing will be those individuals,” he said. “The Fed board also sets the tone with respect to supervision and enforcement so there is no question that those are all significant appointments.”
Kaplan, who mostly represents banks and large corporate borrowers, said the next leader of the CFPB is also crucial because Trump is almost certain to appoint someone different than the current director, Richard Cordray, whose term expires in July 2018.
Cordray has added another layer of speculation, hinting he may run for public office.
“It’s almost a parlor game now about whether he’s going to resign and run for Ohio governor,” said Menkes. “People are looking at every pronouncement he makes to try to determine what he is going to do.”
If he doesn’t run for Ohio governor, Menkes said there is a real question about whether Cordray is entitled to keep his job.
That question is the subject of a federal lawsuit, PHH Corporation, et al v. CFPB, and is tied up in the D.C. Circuit Court of Appeals.
PHH Corp. sued the bureau after the CFPB’s Office of Enforcement issued an administrative action in 2015 against the mortgage lender for violations under Section 8 of the Real Estate Settlement Procedures Act. In October 2016, the appeals panel ruled its single director structure is unconstitutional. Under Dodd-Frank, Cordray can only be fired with cause.
“The issue has been raised that he is a unitary head of an agency when most agencies have had multimember commissions running them,” he said. “The president may take the position that he has a right to fire director Cordray.”
This position — that the bureau director can be fired without cause — was offered as a remedy by the D.C. appeals panel.
Following the bureau’s appeal, the D.C. Circuit vacated the panel’s enforcement order pending a ruling on the case by the entire court of 10 judges. Oral arguments were heard by the D.C. Circuit in May.
Consumer finance concerns
Analyzing the moves of Cordray and trying to discern the future of the CFPB is now on the minds of many consumer finance lawyers who are advising their clients under the Trump administration.
“I think everybody is in a kind of in a wait-and-see situation,” said John Ropiequet, of counsel in the litigation department at Saul Ewing Arnstein & Lehr. “The [CFPB] regulations that are there aren’t going anywhere until there is movement in Congress to change them or there is a new sheriff at the CFPB who starts changing regulations or making amendments to existing regulations, which is a whole administrative process that takes time.”
But a proposed arbitration rule issued by the bureau in May, with the public comment period ending in August, has drawn the attention of consumer finance insiders, including lawyers such as Ropiequet and Menkes, who represent consumer lenders and consumer finance companies.
Menkes said his clients are very concerned about the proposed rule, which has been in the works since 2012. The rule would prohibit companies from requiring mandatory arbitration to settle disputes and make it easier for consumers to bring class-action lawsuits against financial services companies.
“The rule has been proposed and published by the CFPB and Congress has to determine whether they want to repeal it,” Menkes said. “But if that goes into effect, it will be a big change for my clients.”
Under the Congressional Review Act, Congress has 60 legislative days from the date it was issued to overturn a proposed CFPB regulation by adopting a resolution of disapproval. The U.S. House of Representatives passed the resolution of disapproval July 25 to block the rule by a 231-190 vote. The Senate filed the disapproval resolution July 20 but has not yet voted on it. The 60-day period only includes days when the House or Senate are in session.
Ropiequet said if the gridlock in Congress is any indication of the future, then quick action from the Senate should not be expected.
“In terms of changing the CFPB into something else or doing away with it entirely, until Congress actually does something and both houses agree on it and give it to the president to sign, there is nothing that is going to happen,” he said.
Ropiequet acknowledged that the perspective of banking and finance lawyers depends largely on their vantage point.
“Of course what’s happening or might happen in Washington is going to vary depending on the type of client,” he said.
Degrees of regulation
For some lawyers like Belongia, the Treasury report and Financial CHOICE Act are both appropriate measures to roll back and repeal certain aspects of Dodd-Frank.
“I think that the recommendations made by the Treasury report are a very strong, measured approach to peeling back layers of regulation but still making sure that we are operating a safe and sound financial system,” Belongia said. “The CHOICE Act would be helpful because it serves to strip CFPB of a lot of its examination and supervisory authority over banks … I think they should focus on the original charge of the CFPB, which was abuse in the financial sector but not be an actual regulator of financial institutions.”
But some Chicago banking lawyers, like Kaplan, don’t view large-scale financial deregulation as positive for the industry or the economy.
Kaplan said many of the reforms outlined in the CHOICE Act and the Treasury report go too far.
“I think there is a general belief that lack of regulation in the sector contributed if not caused the financial crisis in 2008 and the subsequent severity of the recession of 2007 to 2009,” he said. “So Dodd-Frank in 2010 was designed to deal with some of the problems that had come up specifically with respect to the lack of regulations in certain areas. And while I do think Dodd-Frank is due for a refresher — it touched almost every sector of the banking business and there are some things you would want to adjust — both the Treasury proposal and the CHOICE Act, I think, those both go way too far in terms of deregulating the industry.”
For example, he said, both the Treasury report and House bill would essentially dismantle the CFPB.
“I think that’s a mistake because I think consumers need protection,” he said. “You can argue about whether their approach has been too adversarial, too enforcement-oriented as opposed to regulatory-oriented but these proposals to gut them go way too far.”
Still, Kaplan said, there is some agreement for reforms to Dodd-Frank where the regulatory burden outweighs the public benefit. In particular, he said, Dodd-Frank’s one-size-fits-all approach to regulation should be adjusted.
“In some ways, Dodd-Frank does not reflect a lighter regulatory touch for smaller banks,” he said. “I think the banking industry agrees that the smaller banks should get a lighter regulatory touch than the larger, more complex and more systemically critical banks who, if something were to happen to them, they could bring the system down.”
Koch is also advocating for an end to this approach, especially since 65 percent of the IBA’s members are banks with less than $200 million in assets. Only 4 percent of the association’s members have more than $10 billion in assets.
Of the 513 FDIC banks and thrift institutions that operate in Illinois, 457 are headquartered in Illinois, said Koch.
“What Dodd-Frank did was basically apply a one-size-fits-all model for regulation,” she said. “So one of our common sense reforms would be to require regulators to tailor their banking regulations based on a bank’s business model and risk profile.”
Koch views this reform as a modest change to Dodd-Frank that would not result in a massive unraveling of the legislation.
“We are simply optimistic and hopeful that Congress will act,” she said. “All we can do as an industry is keep advocating for change.”