On January 20, 2017, Donald J. Trump was sworn in as the forty-fifth President of the United States. Regardless of how one feels about Mr. Trump’s election, one thing seems clear—relief is coming to financial institutions from the increased regulatory burdens imposed on them at the federal level during the Obama Administration. On January 23, 2017, President Trump told business leaders he hoped to cut federal regulations by 75% or “maybe more.” However, many state regulatory agencies have vowed to step up their own enforcement in order to fill the “gap” they perceive may be coming at the federal level. While the decreased regulation at the federal level will no doubt be welcome for financial institutions, they will need to be careful to comply with what may become a patchwork of regulation at the state level.
During the campaign, President Trump stated that his Administration would “dismantle” the regulatory framework put in place by the Obama Administration under the Dodd-Frank Act. As then-Candidate Trump stated, “Dodd-Frank has made it impossible for bankers to function. It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop.” When asked what changes he would make if he became President, Mr. Trump stated that “it will be close to dismantling of Dodd-Frank.” While it is far from clear, with the Republicans only controlling 52 seats in the Senate, that President Trump could succeed in repealing the Dodd-Frank Act in its entirety, as the chief of the executive branch, the President will have vast influence over the Consumer Financial Protection Bureau (“CFPB”), created by the Dodd-Frank Act, and could cause it to drastically change direction.
On the day of his inaugaration, the President issued an executive order prohibiting federal agencies from issuing any new regulations unless approved by a Trump-appointed agency head.
The current director of the CFPB—Richard Cordray—has been aggressively using the power given to him through that agency to regulate financial institutions and other businesses. And while under the statute Mr. Cordray can only be removed for cause until his current term expires in 2018 (12 U.S.C. § 5491(c)(3)), at least one federal appellate court has ruled that these removal provisions in the Dodd-Frank Act are unconstitutional, and that the President can remove the Director at any time for any reason or no reason. See PHH Corp. v. CFPB, 839 F.3d 1, 39 (D.C. Cir. 2016) (finding that the CFPB is “unconstitutionally structured because it is an independent agency headed by a single Director,” but finding that the appropriate remedy is to “sever the for-cause removal provision from the statute” and holding that “[t]he President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time”). While the CFPB has sought en banc review of that decision and could appeal any further unfavorable ruling to the United States Supreme Court, there is no guarantee that the High Court will grant certiorari, and even if it does, with President Trump appointing the replacement for deceased Justice Antonin Scalia, the Court very well may uphold the D.C. Circuit’s ruling. Further, some commentators have opined that President Trump’s Justice Department may be able to control whether the CFPB continues to seek review of the panel decision. And even if the PHH ruling is overturned by the en banc panel or the Supreme Court, President Trump will have the opportunity to replace Mr. Cordray in just two years.
However, some state regulators have vowed to step up regulation in the event that President Trump eases the regulatory burden at the federal level. William Galvin, the Secretary of the Commonwealth of Massachusetts, stated that under the Trump Administration, “[i]t sounds like we’re going to be under the same type of problems there were prior to the Great Recession, with securities and financial services being ‘lightly regulated . . .’ I think that’s a problem.” Secretary Galvin stated that “[w]e may be back to” the time when state regulators were aggressively going after perceived violations by financial institutions instead of the federal government. The Dodd-Frank Act gives state attorneys general the power to enforce the statute’s prohibitions against unfair, deceptive or abusive acts and practices against non-banks (such as mortgage lenders) and state-chartered financial institutions, as well as CFPB regulations that affect these entities. And while state attorneys general lack the authority to enforce the prohibition against unfair, deceptive or abusive acts by nationally chartered banks and federal thrifts, they can enforce CFPB regulations affecting these institutions, as well as other federal consumer protection laws like the Truth in Lending Act and the Fair Credit Reporting Act. Accordingly, state regulators will likely have a number of tools at their disposal to regulate financial institutions, mortgage lenders and similar institutions in the event of a regulatory easing at the federal level.
Further, the Dodd-Frank Act generally did not preempt state consumer protection laws. So, state laws such as California’s Unfair Competition Law (the “UCL”) (Cal. Bus. & Prof. Code § 17200, et seq.) remain at state regulators’ disposal. It is reasonable to expect that California will be a hotbed of regulation during the Trump Administration. While former California Attorney General Kamala Harris is now in the United States Senate, Governor Jerry Brown has appointed Xavier Becerra, a pro-consumer, pro-regulation attorney, as her successor. Accordingly, financial institutions doing business in California will likely see an increase in regulation from the state, even as regulation from the CFPB and other federal agencies may ease. We expect the UCL will provide fertile ground for California’s stepped-up regulation of financial institutions.
This, of course, is not an ideal situation for financial institutions. While an easing of the up-to-now overbearing CFPB will no doubt be welcome, complying with a patchwork of state regulation—including aggressive enforcement in some states like New York, Massachusetts and California—may prove costly for businesses. Financial institutions would be wise to closely watch not only how the Trump Administration handles regulation in the coming months, but also how state regulators respond.
For more information regarding the effect of the election on state and federal financial regulation, contact Joseph W. Guzzetta at email@example.com.