On June 8th, the House of Representatives passed a bill to nullify significant parts of the Dodd-Frank Act. The Republican-backed bill, called the Financial Choice Act, won by a vote of 233-186 along party lines. Although the bill may have major effects on the economy, it still leaves many asking the question: How will this affect real estate?

Dodd-Frank vs. The Financial Choice Act: The Debate 

The Financial Choice bill is considered to be the “crown jewel” of the Republican regulatory reform effort meant to repeal the financial regulations of the Dodd-Frank Act. Conservatives have long been critical of Dodd-Frank which they argue is responsible for “anemic economic growth . . . and for enshrining too-big-to-fail, which . . . paves the way for future taxpayer bailouts of the country’s biggest banks” according to CNN. The Financial Choice Act, which significantly loosens much of Dodd-Frank’s financial regulations, is highly anticipated legislation for the GOP.

Democrats, on the other hand, object to the Financial Choice Act arguing that the bill would be a disaster for the economy. According to liberals, the bill would eviscerate Dodd-Frank’s regulations that helped the country recover from the Great Recession. Without regulations to prevent banks from lending to high-risk borrowers, Democrats fear that the passage of the Financial Choice Act would result in another market crash.

How the Financial Choice Act Will Dismantle Dodd-Frank 

Among the Choice Act’s various provisions, economists are most concerned about how the Act will take aim at Dodd-Frank. According to Forbes, the following is a list of how the Financial Choice Act will alter the financial landscape:

1) The Consumer Financial Protection Bureau (CFPB) Will Be Restructured

The Choice Act would allow for President Trump to fire the agency’s director at any time. Additionally, the CFPB’s oversight power would also be greatly reduced.

2) The Orderly Liquidation Authority Would Be Replaced­ 

­­­According to the N.Y. Times, The Orderly Liquidation Authority would be eliminated and replaced with a new bankruptcy code provision.

3) Fewer Stress Tests for Banks 

Forbes also reports that the Choice Act would greatly reduce the number of stress tests required and to possibly make them biannual. Although financial reformists laud stress tests for their ability to measure financial stability, CEOs are “caught off guard on how they are tested.”

4) Mortgage Requirements Will Be Loosened

The Choice Act would also minimize a Dodd-Frank rule on qualified mortgages. This rule increases the cost of lending to high-risk individuals and “often precludes banks from holding mortgages on their books,” says Forbes. Modifying these rules under the Choice Act would allow local banks to increase lendings for high-risk borrowers.

5) The Volcker Rule Would Be Repealed

The Volcker Rule, which prevents banks from engaging in proprietary trading, would also be repealed under the Choice Act. If repealed, banks would then be allowed to profit off of their own invested money instead of their clients’ money.

6) The Fiduciary Rule Would Also Be Rescinded 

Under the Choice Act, the Fiduciary Rule would also be nullified which would allow financial advisors to dispense advice with the institution’s best interests rather than those of clients’.

What’s Next for the Financial Choice Act? 

The Financial Choice Act will not go completely into effect until it is passed with a majority vote in the Senate and signed off by the President. The bill will also have to be approved by those in “top regulatory posts at three bank regulatory agencies,” says CNN.

In terms of the bill’s effect on Los Angeles luxury real estate, experts predict that either one of two scenarios will happen. If the Financial Choice Act is not passed, heavy financial regulation on banks will make obtaining a loan more difficult. However, when combined with rising interest rates, this could result in sellers reducing asking prices by thousands, or even millions, in an effort to entice buyers.

If the Financial Choice Act is passed (even with changes from the Senate), regulatory measures on banks will be greatly relaxed. Additionally, banks will be allowed to offer mortgage loans to a larger pool of buyers, even those considered high-risk borrowers. Although this may stimulate the economy in the short-term, economists worry that high-risk loans could result in another recession if the Dodd-Frank Act is completely reversed.

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