The House recently approved the new Financial Choice Act. How will it impact the real estate market and investors?
The Financial Choice Act which aims to shake up banking industry regulations cleared the House in early June 2017. It still may not make it through the Senate and become law exactly in its current form. Either way, some of these changes are likely to hit markets soon.
The overarching theme of this new act is to undue the restrictions of the Dodd-Frank Act. Dodd-Frank has become one of the most controversial and disliked sets of regulations since it became law in the wake of the 2008 crises. Most notably it has limited mortgage lending, and has caused even more fear and confusion among lenders and investors wishing to offer seller financing. Those in favor of killing off Dodd-Frank expect the move to spur more mortgage lending and economic growth. The opposition fears it will simply give big financial a free pass to push markets to bursting point again, at the expense of American tax payers and property owners.
Options and Reserves
As the name suggests, the Financial Choice Act gives big banks the option as to how they will be regulated and supervised based. They can remove some of the toughest requirements by choosing to increase their reserves. This could be an increase of as much as $100B in reserves for the largest banks like Chase. Larger reserves could theoretically help protect taxpayers from having to bail out these institutions if they fail again. Or at least may lessen the blow. At the same time, it could take more capital out of action, limit the ability to lend, and dull overall bank performance.
Bank stress test thresholds will be moved from $10B to $50B. Annual stress tests will be changed to assessments being made every two years.
Remaking the CFPB
The CFPB has been as controversial as the Dodd-Frank Act in recent years. It has been both credited withholding banks like Wells Fargo accountable for fraud, as well as leveling unfounded charges at companies to the point where many are afraid to do business. The Financial Choice Act will give the president the ability to fire and appoint heads of the CFPB and FHFA, and to replace CFPB leadership with a panel committee, versus one person.
The act also calls for the name of the Consumer Financial Protection Bureau to be changed to the Consumer Financial Opportunity Commission (CFOC). This new agency will be equally tasked with protecting consumers and ensuring markets remain open and competitive. It will have to obtain permission before collecting personally identifiable data on consumers.
Facilitating Capital Formation Opportunities
One thing the media really hasn’t covered up to this point is the focus of the Financial Choice Act on unleashing opportunities for small business, innovators, and job creators. This includes bringing in over 24 new bills including the Retail Investor Protection Act, Small Business Capital Formation Enhancement Act, Help Angels Lead Our Startups Act, and the Fair Access to Investment Research Act. This is all in addition to more than 20 other bills aimed at relieving the ability to lend and access mortgages, including the Portfolio Lending and Mortgage Access Act.
Eliminating the Fiduciary Rule
The elimination of the Fiduciary Rule which has been on hold since early 2017, maintains the status quo for bank investment advisors. That means that advisors won’t be obligated to act in clients’ best interests when it comes to their brokerage and retirement investment accounts.
The new Financial Choice Act has many potentially broad and deep implications for the mortgage and real estate market. While all of these provisions may not make it into law, many could help relax lending requirements, make it easier to raise capital, and to access money. At the same time there would be fewer regulations and checks in place to protect tax payers and consumers. There would likely be a faster surge in the economy and housing market. How much of a bubble risk that may be would depend on how much loan programs expand, and how disciplined individuals are in using them.