ISSUE BRIEF
No. 4642 | December 19, 2016
Six Recommendations for the CHOICE Act 2.0
Norbert J. Michel, PhD
P
resident-elect Donald Trump has promised to
get rid of the Dodd–Frank Wall Street Reform
and Consumer Protection Act.1 Eliminating the law
ultimately requires legislative action, so an obvious guide is the Financial CHOICE Act of 2016, a
bill that replaces large parts of Dodd–Frank. The
core elements of the CHOICE Act represent a major
regulatory improvement because they help restore
market discipline while reducing regulatory burdens. A key provision of the bill is the regulatory offramp, which provides regulatory relief to banks that
choose to hold higher equity capital, thus improving
their ability to absorb losses while reducing the likelihood of taxpayer bailouts.
The CHOICE Act would accomplish the following
major regulatory improvements (among others):
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Repeal most of Title I of Dodd–Frank;
Convert the Financial Stability Oversight Council (FSOC) into a regulatory council for sharing
information;
Repeal Dodd–Frank’s
authority (OLA);
orderly
liquidation
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Amend the bankruptcy code so that large financial firms can credibly use the bankruptcy
process;
Repeal Title VIII of Dodd–Frank;
Change the structure of the unaccountable Consumer Financial Protection Bureau (CFPB); and
Implement the Fed Oversight Reform and Modernization (FORM) Act of 2015.2
The passage of the 2016 CHOICE Act would be
an overwhelmingly positive step for U.S. financial
markets and the broader U.S. economy. Moreover,
the 115th Congress, which convenes in January 2017,
will have the opportunity to do even better by adding more reforms to the original CHOICE Act. This
Issue Brief highlights several ways that a new version of the CHOICE Act—CHOICE 2.0—can help the
Trump Administration get rid of the Dodd–Frank
Act. Following such a plan would help to reduce the
risk of future financial crises while freeing countless citizens from the burden of economy-stifling
regulations.
Recommendations for CHOICE 2.0
This paper, in its entirety, can be found at
http://report.heritage.org/ib4642
The Heritage Foundation
214 Massachusetts Avenue, NE
Washington, DC 20002
(202) 546-4400 | heritage.org
Nothing written here is to be construed as necessarily reflecting the views
of The Heritage Foundation or as an attempt to aid or hinder the passage
of any bill before Congress.
The regulatory approach in Dodd–Frank relies
on the federal government to plan, protect, and prop
up the financial system, an approach based on a mistaken belief that the 2008 financial crisis stemmed
from unregulated financial markets.
Quite to the contrary, the government’s extremely active role in directing the financial markets—and
its promises to absorb the losses of private risk-tak-

ISSUE BRIEF | NO. 4642
December 19, 2016
ers—brought about the financial crisis. Repealing
the Dodd–Frank Act and restoring market discipline would reduce the risk of future financial crises and bailouts, and would allow investors and consumers to prosper by freeing them from centralized
regulation and micromanagement. To reach these
goals more quickly, the following provisions should
be included in CHOICE 2.0.3
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Repeal Title X of Dodd–Frank. Title X created the Consumer Financial Protection Bureau
(CFPB) despite Congress never establishing that
such a government agency was necessary. Prior
to Dodd–Frank, authority for approximately 50
rules and orders stemming from 18 consumer
protection laws was divided among seven federal
agencies (in addition to respective state laws).4 At
best, the pre-Dodd–Frank framework called for
consolidation of authority in one existing agency.
But Title X goes much further by:
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Providing the CFPB with an independent
budget not subject to congressional review;
Shielding the CFPB from meaningful oversight by Congress, the President, and the federal courts; and
Granting the CFPB unprecedented authority
to prohibit any financial act or practice that
its sole director deems “unfair, deceptive or
abusive.”5
The CFPB is based on the mistaken belief that
consumers suffer from cognitive limitations
that result in poor decision making, and that
regulators should therefore design behavioral
“interventions” to “nudge” consumers into making better decisions.6 The 2016 CHOICE Act
converts the CFPB to a commission structure,
but the DC Circuit Court of Appeals has since
ruled that the bureau’s single-director model is
unconstitutional.7 Thus, converting the CFPB
to a commission structure simply addresses a
legal defect even though the case for the CFPB’s
existence has never been made. CHOICE 2.0
should eliminate the CFPB by repealing Title X
of Dodd–Frank.
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Restore Fed District Bank President Voting. Prior to Dodd–Frank, all members of each
Federal Reserve District Bank’s Board of Directors voted to select their new bank president.
Section 1107 of Dodd–Frank amended the Federal Reserve Act so that Class A directors—those
selected by member banks to represent the stockholding banks—can no longer vote in the election
of a new District Bank president.8 Now, only Class
B directors, who are elected by member banks to
represent the public rather than the stockholding
banks, and Class C directors, who are selected by
the Board of Governors to represent the public,
can vote in the election.9 This Dodd–Frank provision does not solve any existing problem or serve
any material purpose other than to increase
1.
Marilyn Geewax, “Trump Team Promises To ‘Dismantle’ Dodd–Frank Bank Regulations,” NPR, November 10, 2016,
http://www.npr.org/sections/thetwo-way/2016/11/10/501610842/trump-team-promises-to-dismantle-dodd-frank-bank-regulations
(accessed December 11, 2016).
2.
See Norbert J. Michel, “Money and Banking Provisions in the Financial CHOICE Act: A Major Step in the Right Direction,” Heritage Foundation
Backgrounder No. 3152, August 31, 2016, http://www.heritage.org/research/reports/2016/08/money-and-banking-provisions-in-thefinancial-choice-act-a-major-step-in-the-right-direction#_ftn20.
3.
For a list of nine other provisions that could be added to the CHOICE Act 2.0, such as changes to the Fed’s regulatory and emergency lending
authority, see Norbert J. Michel, “Money and Banking Provisions in the Financial CHOICE Act: A Major Step in the Right Direction.”
4.
Alden F. Abbott, “Time to Eliminate the Consumer Financial Protection Bureau,” Heritage Foundation Legal Memorandum No. 172,
February 8, 2016, http://thf-reports.s3.amazonaws.com/2016/LM172.pdf.
5.
Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111–203, §§ 1017, 1022, and 1031.
6.
See, for instance, Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (New Haven, CT: Yale
University Press, 2008).
7.
Diane Katz, “Court Ruling Reins in Unaccountable Financial Regulation Agency,” Daily Signal, October 11, 2016,
http://dailysignal.com/2016/10/11/court-ruling-reins-in-unaccountable-financial-regulation-agency/?_ga=1.129240399.234929671.1471295889.
8.
12 U.S. Code § 341.
9.
12 U.S. Code § 302.
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December 19, 2016
the Board’s political influence over the District
Banks. CHOICE 2.0 should repeal section 1107 of
Dodd–Frank.
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Repeal Title VII of Dodd–Frank. Title VII completely restructured the regulatory framework of
the over-the-counter (OTC) derivatives market
based on the false notion that a lack of regulation
caused the financial crisis. The bulk of the precrisis OTC derivatives market was deeply concentrated among heavily regulated commercial
banks. Title VII represents a gift to these banks.
In particular, its core elements:
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Implement a clearing mandate for OTC derivatives, a change which transfers banks’ counterparty risks to specialty clearing firms;
Leave financial markets with a higher concentration of financial risks;10 and
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Burden markets with a complex set of rules
filled with special exemptions, more moral
hazard, and a greater likelihood of a future
financial crisis.
Dodd–Frank’s Title VIII provides bank-like
access to the Federal Reserve for these specialty
clearing firms, a clear admission that Title VII
undermines financial stability. The 2016 CHOICE
Act appropriately repeals Title VIII; CHOICE 2.0
should repeal Title VII.
Repeal the Community Reinvestment Act.
The 1977 Community Reinvestment Act (CRA)
was supposed to address banks’ provisioning of
credit in the communities in which they operate, with a particular focus on how banks provide
credit to low-income and moderate-income (LMI)
neighborhoods.11 The basic concept of the CRA
is flawed because it assumes that banks neglect
profitable loan opportunities, and that regulation
must force them to make such loans.12 Regulators
currently take CRA ratings into account when
considering, among other things, applications to
open new branches, move existing branches, and
merge with other banking organizations.13 Simply put, sound underwriting—not social policies—
should guide lending decisions. Streamlining the
bank chartering process14 and relieving banks of
CRA obligations would increase competition to
provide profitable loans, even in LMI areas.
Relieve Banks of Liability Under Disparate
Impact. Several consumer protection laws, such
as the 1974 Equal Credit Opportunity Act (ECOA),
were intended to promote adequate disclosure of
information and also to shield protected classes
of consumers from discrimination when applying for credit.15 Over time, these laws have been
used more broadly, and regulators now prohibit
discriminatory practices where discrimination
is defined as disparate impact rather than disparate treatment. In other words, regulators can
prohibit a creditor practice deemed discriminatory because it has a disproportionately negative
impact even though the creditor had no intent
10. Early evidence suggests that the Title VII clearing mandate is concentrating financial risk. See Jerome H. Powell, “A Financial System
Perspective on Central Clearing of Derivatives,” remarks at 17th Annual International Banking Conference, November 6, 2014,
https://www.federalreserve.gov/newsevents/speech/powell20141106a.pdf (accessed December 13, 2016), and Bank for International
Settlements, “Statistical Release: OTC Derivatives Statistics at end-June 2016,” November 2016, http://www.bis.org/publ/otc_hy1611.pdf
(accessed December 13, 2016).
11. See 12 U.S. Code § 2901. The CRA is implemented by 12 Code of Federal Regulations § 25, 195, 228, and 345.
12. Lawrence J. White, “A Flawed Regulatory Concept: The Community Reinvestment Act,” Mercatus Center, Mercatus On Policy No. 54,
July 2009, https://www.mercatus.org/system/files/A_Flawed_Regulatory_Concept_pdf.pdf (accessed December 14, 2016).
13. 12 Code of Federal Regulations § 25.29.
14. New charter applications currently must be approved by the Office of the Comptroller of the Currency (OCC) or the state banking regulator
in which the headquarters will be located, and the Federal Deposit Insurance Corporation (FDIC) must also approve a deposit-insurance
application. The OCC’s authority to charter national banks is under the National Bank Act of 1864, as amended, 12 U.S. Code ch. 1 et seq.
15. The ECOA is implemented by the CFPB’s Regulation B. (See 12 C.F.R., part 1002.) For an overview of policy concerns, see John Matheson, “The
Equal Credit Opportunity Act: A Functional Failure,” Harvard Journal on Legislation, Vol. 21 (1982), p. 371,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1874297 (accessed December 16, 2016).
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December 19, 2016
to discriminate.16 Congress should clarify that,
in the act of providing credit, firms cannot lawfully discriminate based on race, color, religion,
national origin, sex, marital status, or age, where
discrimination is defined as disparate treatment
rather than disparate impact.
nn
Roll Back FDIC Deposit Insurance. Government-backed deposit insurance weakens market
discipline, increases moral hazard, and leads to
higher financial risk than the economy would
otherwise have, thus weakening the banking system as a whole. Contrary to popular belief, FDIC
deposit insurance does not primarily benefit lowincome and middle-income families. The current coverage limit is $250,000 while the average account balance is less than $5,000.17 Worse
still, the FDIC bank resolution process, brokered
deposit coverage, and emergency loan guarantee programs have rendered the coverage limit
all but meaningless.18 An actual per person cap
of $40,000 (the pre–Savings & Loan crisis limit)
would more than adequately cover the vast majority of U.S. households and also greatly improve
the market discipline faced by U.S. banks and
their creditors.
Conclusion
Rather than dealing with the causes of the 2008
crisis, the Dodd–Frank Act has exacerbated and
compounded the economy’s existing ills. The resulting financial regulatory framework has restrained
the economy’s recovery, introduced more moral
hazard, and expanded the number of firms viewed
as too big to fail.
Adopting the ideas in the 2016 CHOICE Act would
be an overwhelmingly positive step for U.S. financial
markets because doing so would replace large parts
of Dodd–Frank and help to restore market discipline.
The 115th Congress, which convenes in January 2017,
can include even more beneficial reforms in a new
version of the CHOICE Act—CHOICE 2.0. Improving the CHOICE Act in this manner can greatly assist
the Trump Administration in ridding U.S. financial
markets of the Dodd–Frank Act and helping Americans more easily achieve financial security.
—Norbert J. Michel, PhD, is a Research Fellow in
Financial Regulations, in the Thomas A. Roe Institute
for Economic Policy Studies, of the Institute for
Economic Freedom and Opportunity, at The Heritage
Foundation.
16. See 12 Code of Federal Regulations § 1002 (Regulation B), Supplement I to §1002.1(a), Section 1002.6—“Rules Concerning Evaluation of
Applications,” December 30, 2011, http://www.consumerfinance.gov/eregulations/1002-Subpart-Interp/2011-31714#1002-1-a-Interp-1
(accessed December 16, 2016). Also see Hans A. von Spakovsky, “‘Disparate Impact’ Isn’t Enough,” Heritage Foundation Commentary,
March 22, 2014, http://www.heritage.org/research/commentary/2014/3/disparate-impact-isnt-enough.
17. David R. Burton and Norbert J. Michel, “Financial Institutions: Necessary for Prosperity,” Heritage Foundation Backgrounder No. 3108,
April 14, 2016, http://www.heritage.org/research/reports/2016/04/financial-institutions-necessary-for-prosperity?ac=1.
18. Norbert J. Michel, “FDIC Insurance and the Brokered Deposit Market: Not a Recipe for Market Discipline,” testimony before Financial
Institutions and Consumer Credit Subcommittee, Committee on Financial Services, U.S. House of Representatives, September 27, 2016,
http://www.heritage.org/research/reports/2016/09/fdic-insurance-and-the-brokered-deposit-market-not-a-recipe-for-market-discipline
(accessed December 16, 2016).
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