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How the ‘Choice Act’ Could Affect You

Find out how the average American might be affected by a new bill that looks undo significant financial regulations.

Between 2007 and 2010, the United States experienced one of the worst financial situations since the Great Depression of the 1920’s. In response to the crisis, President Obama enacted legislation in an attempt to overhaul the American financial system and prevent future collapses.

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Following this financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became federal law on July 21, 2010, brought about significant alterations in financial regulations affecting both federal regulatory agencies and the American financial industry. The act represents the biggest changes to the American financial landscape since the Great Depression. In brief, the Dodd–Frank Act is:

An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail," to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

However, with the election of Donald Trump and a new administration, Republicans in Washington are attempting to make major changes to Dodd-Frank. Last week, the House Financial Services Committee approved an act which would move the President closer to a repeal of Dodd-Frank. Before becoming law, the Final Choice Act needs to pass the full House and Senate. This bill is an altered version of a failed 2016 bill.

Choice Repeals and Replacements

‘Choice,' which stands for Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs seems to be more about undoing than creating. The Atlantic calls the Choice Act, “a repeal-and-replace initiative for the financial sector,” that is “heavier on repeal than it is on replace.”

If passed, this legislation would do a number of things, the main function of which seems to be the reversal of the Dodd-Frank Act. Below are some of the more significant changes that the Choice Act would make:

  • The removal of Title II of Dodd-Frank - This section created the Orderly Liquidation provision which affects banks that are filing for bankruptcy. Title II created a ‘wind-down’ guide for these banks. Republicans, however, wish to replace this with a new section designed especially for large banks and financial institutions.
  • The removal of Title IV - The Private Fund Investment Advisers Registration Act of 2010 allows the Financial Stability Oversight Council (FSOC) to strictly regulate certain financial organizations, such as hedge fund managers and private equity fund managers. It also imposes more rules and regulations on them. 
  • The dissolution of the FSOC (Financial Stability Oversight Council) - This council monitors risks to the US financial system which are related to the distress and potential failure of financial institutions.
  • Repeal of the Volcker Rule - This rule keeps banks from making certain investments that will not directly benefit the bank’s customers.
  • Reduction of oversight - Banks who maintain large sums of money would be allowed to skip numerous regulations and avoid certain levels of oversight.

Removing the Guardrails

As the Atlantic states, the Choice Act would heavily alter Dodd-Frank, possibly placing consumers in a more vulnerable position. University of Michigan Law School professor Michael Barr, who helped draft the Dodd-Frank Act, believes that the Choice Act would endanger the financial interests of the middle class, retirees, and even investors. Barr says:

“It just seems like a recipe for a huge disaster. [Dodd-Frank] put in place real guardrails against re-creating the kind of financial crisis we saw in 2008. It is inexcusable that the administration has targeted the most vulnerable people in our society to be the ones that bear the brunt of their ideological push.”

The Choice Act and Consumers Like You

So how would the average American potentially be affected by the Choice Act? Under this act, the role of the Consumer Financial Protection Bureau (CFPB) would be fundamentally altered. Created by Dodd-Frank, this agency offers financial protection to consumers. The CFPB deals mostly with mortgages, credit cards, and student loans, although it also deals with issues related to payday lenders and debt collectors. The Choice Act could greatly affect the CFPB by:

  • Taking away most of the agency’s authority to question the practices of financial institutions that are abusive, unfair, or deceptive.
  • Placing the CFPB under Congressional oversight, making it more vulnerable to future defunding and effectively removing all of its power to safeguard consumers.

If the Choice Act were to pass, consumers could become more vulnerable to discriminatory financial policies, predatory lending, burdensome financial fees, and unfair debt collection practices. For example, if the Volcker rule and the associated Durbin amendment are repealed, consumers could see higher fees and charges on purchases using debit cards. Other practices such as the protection of retirement accounts and protections for those for who take out ‘short-term loans’ could fall by the wayside.

If the act passes and the CFPB is changed or loses funding, consumers might find it much more difficult to report unfair banking practices leaving them exposed to greater financial abuse.