Who Loves Ya Baby? The Financial Choice Act vs. The Dodd Frank Act

How many of you out there remember Kojak’s famous line?  While I might be dating myself by admitting I remember the TV series (albeit very, very vaguely), I felt it an appropriate title for this month’s blog post for several reasons.  When I was doing my research on this topic, this line kept popping into my head.  Allow me to explain a little more fully…

I’m sure you all recall the national scare that happened in September when news broke about the Equifax data breach.  I mean really, how could you forget?  One of the little nuggets of information that would periodically surface during that scandal was news that the Financial Choice Act passed the House in June of this year.  Now, why is this little piece of information important in the tumult of the ginormous data breach?  I’ll tell you why, because this legislation, if it gets passed in its current state, will basically gut the Dodd Frank Act in general, including the Consumer Financial Protection Bureau (CFPB).

Again, you may be asking, why does this matter?  It matters because the CFPB is basically the only government agency allowed to supervise and regulate credit reporting agencies beyond the law enforcement level.  Check out this article from CFPB website which talks about credit reporting agencies.  If this doesn’t make you nervous, it should.  Dodd Frank is about the only thing standing between us and a return to the economic environment that led to the financial collapse in 2009.

Before we go any further, if you haven’t guessed already, I want to say that I am soundly against the Financial Choice Act.  I do want to take a minute to explain why I’m against it so you understand where I’m coming from.  If you are one of my tribe members, you already know that I started off on this trek as a bankruptcy attorney.  I chose that line of work because I saw too many people close to me suffering under the weight of poor financial decisions, not entirely of their own making.  Then ultimately, finding themselves in the unfortunate circumstance of having to file bankruptcy.

Remember, I said these decisions were “not entirely of their own making.”  You see, many times credit card companies and other lenders saw these hard working, decent people as cash cows.  These lenders preyed on them, encouraging them to “take the deal” even though the terms weren’t in their favor, or even their best interest.  These companies saw an opportunity and they took it with little to no regard of how it would impact the borrower.  I also believe that if these folks knew what they were getting into in the first place, they never would’ve signed on the bottom line, and therein lies the rub.

Let me be very clear, I am all about giving people a choice.  We 99%ers are generally not lazy, stupid or greedy.  However, most of us do not have MBAs or master’s degrees in finance, either.  I really believe that if the financial product or transaction is transparent enough, people should be trusted to make their own financial decisions (we’ll talk about the implication of behavioral finance studies later).  After all, isn’t that what life, liberty and the pursuit of happiness are all about?

The problem is when you have companies that create financial transactions and products that are extremely complicated and designed to hide the true predatory nature of the deal, an inequality occurs.  It’s not fair to let these gigantic banks, insurance companies and financial powerhouses control the economy with little to no restraint or regulation.  It’s also not fair to create all these super complex financial products and then tell the public, “it’s on you to make the best choice, and by the way, if you choose poorly, too bad, so sad.”  When things get to that point, it’s time for the government to step in and say enough.  You can no longer suck the life out of the hard working people who make up the 99% and are now, effectively, unrepresented on Wall Street.  That’s where Dodd Frank comes into play.

Recall why the Dodd Frank Act was passed so quickly back in 2010 in the first place.  Because we just suffered from the worst financial recession since the Great Depression.  It was brought on by a deregulated financial industry (that, incidentally, got off pretty much scott free, too!).  How does that make gutting Dodd Frank a good thing?  Unless the financial industry is willing to become transparent of its own accord (ha, don’t hold your breath), someone needs to force them to do it.

So, what is the Financial Choice Act and what does it do?  It is legislation that was proposed in, and passed, the House earlier this year.  It has not passed the Senate… yet.  This legislation does not come out and say “we’re gutting Dodd Frank because we want to keep bleeding the 99% dry.”  In fact, it starts off by saying pretty much that it will do what Dodd Frank was pretty much intended to do.  Here is the text of the first paragraph:

“To create hope and opportunity for investors, consumers, and entrepreneurs by ending bailouts and Too Big to Fail, holding Washington and Wall Street accountable, eliminating red tape to increase access to capital and credit, and repealing the provisions of the Dodd-Frank Act that make America less prosperous, less stable, and less free, and for other purposes.”

If you want to read it (and I’m sure you do in your spare time, right?  Tee hee!), here’s a link to both a summary and the full text.   If you don’t want to read it, here’s a summary just a few of the changes it makes to Dodd Frank:

1. It basically gets rid of the Orderly Liquidation Authority of financial institutions that are about to default. This rule basically says that the government can put financial institutions of a certain size into receivership (a type of bankruptcy), if they look like they are about to go belly up.  This rule lets someone else take the company over (an appointed receiver), and is designed to stop the bleeding and minimize damage to the economy.
2. It gets rid of the Financial Stability Oversight Council. The FSOC is designed to assess economic threats to the U.S.  Its goal is to promote market discipline and to identify Systemically Important Financial Institutions (read “banks that are too big to fail”), and impose supervision of those banks.  (You can see why banks wouldn’t want forced government supervision, right?)
3. Severely reduce stress tests on big banks so they don’t have to file reports as often showing their true size and economic health.
4. It limits the authority of financial regulators and imposes a strict set of standards on them.
5. It also eases restrictions on mortgage lenders allowing them to increase lending and keeping them from qualifying as Systemically Important Financial Institutions (again, too big to fail).

Now, ask yourself.  Where do you, the consumer, fit in this Financial Choice Act?  Or, as Kojak would say, who really does love ya, baby?  Who is looking out for you?  First and foremost, it should be you, yourself.  In fact, in this current economic climate, it HAS to be you.

Some of you may be saying, “hey the current economy is doing great, what are you talking about?  Stocks are up, homes are selling and banks are lending.”  Well, hold your horses there, partner.  Yes, stocks are up, but so is student loan debt, credit card debt and secured debt (mortgages and car loans).  We also potentially have a huge tax change coming, as well as another interest rate hike looming on the horizon.  There’s also the little matter of the unresolved ACA threat that lingers like a dark cloud, too.  Finally, household savings rates are not growing at all.  Things are not necessarily as good as they may seem.  One thing that concerns me is the student loan debt pyramid.  If it crashes (meaning widespread default on student loans), it could be quite a 2008 style mess all over again, though hopefully not as big and far reaching.

So again, what does this mean for you?  It means we 99%ers have to be proactive.  We should all be checking our accounts and credit reports for accuracy.  If you are lucky enough to have them, you should be watching your retirement accounts closely and making your plan administrator or financial advisors explain to you how they get paid and how much it’s costing you.  You should also make them explain the products you are investing in.  Ask them if you have other options and have them explain them to you.

You should be paying your bills on time and working hard to get out of debt and stay there.  You should be voting with your wallet and only doing business with financial institutions who protect their customer’s best interests.  You know why?  Because Wall Street is not going to do it for you and the CFPB may not be there to help either, if the naysayers have their way.

There is one bright spot in this crazy economic environment where stocks are up and data breaches occur simultaneously.  That bright spot is the fact that my point about financial awareness and mindfulness is being made for me.  The first, last and best line of defense against those who would take financial advantage of you is… well, you!  Each of us needs to be mindful and aware of how we are spending our money and who has access to it.  This, in turn, is empowerment.  I’ve said it before and I’ll say it again.  (See my book Money Basics, Keeping It and Growing It, for more on that).  When you have your personal finances under control, you are empowered and you’re voice can be heard.

I’m going to end by making one last observation.  If nothing else I’ve said makes sense, just think about the following statement.  Right now, who is most likely able to stop another huge data breach?  The answer to that question is the Consumer Financial Protection Bureau.  Let’s hope that in the years to come they are around to do the job should we ever need it.

Sincerely,

The Dollar Lama

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