President Trump’s budget would enact broad changes to financial regulation, including reducing resources to the Consumer Financial Protection Bureau, cutting a fund designed to help regulators unwind a failing megabank, and eliminating housing programs for low-income consumers.
Although the budget, released Tuesday, is more of a wish list than a concrete legislative proposal, it provides a useful insight into the administration’s priorities. Overall, it is aimed at reducing spending and cutting regulations in an effort to deliver 3% economic growth, a target that many analysts consider overly optimistic.
“This budget is a part of is an effort to get to sustained 3% economic growth in this country again,” Mick Mulvaney, director of the Office of Management and Budget, said in a press briefing with reporters.
Though both chambers of Congress are controlled by Republicans, the budget faces an uphill battle. Speaker Paul Ryan signaled Tuesday that while they share “common goals,” Congress is working on its own budget.
To help cut spending, the administration targets several programs related to financial regulation and housing. Following are the key parts of the proposal.
Under the budget proposal, the CFPB would be effectively defunded. Yet the administration stopped short of calling to eliminate the agency altogether.
Instead, the budget proposal said it seeks to “restructure” a “reformed agency” that receives funding through congressional appropriations. Currently, the CFPB receives its funding directly from the Federal Reserve, which is considered “off-budget,” but Republicans have sought for years to have its budget set by Congress.
The Office of Management and Budget said its plan would reduce the federal deficit by $145 million in fiscal 2018, and save billions of dollars over the next 10 years, by reducing CFPB’s overall budget. (The argument is that after accounting for operating expenses, assessments and funding the CFPB, the Fed sends extra funds generated by its interest income to the Treasury. By reducing the CFPB’s budget, more money could be sent to Treasury. The Fed remitted $91.5 billion to the Treasury last year, after providing $600 million in funding to the CFPB.)
To be sure, the CFPB would continue to exist, but it would be provided “discretionary appropriations” starting in 2019.
The switch in funding was framed almost as a disciplinary action designed to scale back consumer activism and "harmful" regulations.
“Subjecting the reformed agency to the appropriations process would provide the oversight necessary to impose financial discipline and prevent future overreach of the agency into consumer advocacy and activism," the document stated. "Restructuring the CFPB to refocus its efforts on enforcing enacted consumer protection laws is a necessary first step to scale back harmful regulatory impositions and prevent future regulatory hurdles that stunt economic growth and ultimately hurt the consumers that CFPB was originally created to protect."
Orderly liquidation authority
The Trump budget plan also calls for eliminating the fund that would allow the Federal Deposit Insurance Corp. to use its orderly liquidation authority to unwind a failing large banking company. The budget proposal estimates it would save $13 billion over four years and $35 billion over the next 10 years.
To be sure, those savings are largely theoretical. Any output by the Treasury to implement OLA would be paid back by the banking industry through a special assessment. But the budget proposal does not account for those payments.
Republicans are keen to repeal OLA in part because the accounting for the fund would give them leeway to boost spending in areas like defense or to enact tax cuts.
The proposal comes as little surprise as Trump signed an executive order in April calling for a review of orderly liquidation authority. Still, Treasury Secretary Steven Mnuchin said last week that he was not necessarily committed to eliminating OLA, but was still assessing the situation.
The OMB’s projections are larger than those of the Congressional Budget Office, which estimated that cutting orderly liquidation authority as part of House Financial Services Committee Chairman Jeb Hensarling’s bill would reduce the deficit by $14.5 billion over 10 years. (Overall, the Texas Republican’s bill would reduce the deficit by a little more than $24 billion over 10 years, the Congressional Budget Office said.)
Housing, CDFI programs get the ax
The budget also significantly cuts spending for several programs aimed at providing financial services and resources in underserved communities, such as the Housing Trust Fund and the Capital Magnet Fund.
The budget estimates that the combined savings of those two programs over 10 years is roughly $2.85 billion.
The Housing Trust Fund program was authorized in 2008, to be paid into by Fannie Mae and Freddie Mac on each loan they purchase. But when the government-sponsored enterprises went into conservatorship, the program couldn’t get off the ground.
Federal Housing Finance Agency Director Mel Watt ordered the GSEs to pay into the program for the first time in 2016, resulting in an allocation of $627 million, according to the budget document.
The White House said that those programs should be eliminated because they cause a “fragmented system with varying rules and regulations that create overlap and inefficiencies, as well as challenges to measuring collective performance.”
Instead, the administration will “devolve some affordable housing activities to state and local governments, who are better positioned to comprehensively address the array of unique market challenges, local policies, and impediments that lead to housing affordability problems.”
Jaret Seiberg, managing partner of Cowen Washington Research Group, said that the administration appeared to be tapping the funds in order to offset spending increases elsewhere, namely in defense. But the administration has also said it wants to recapitalize the GSEs, meaning the funds can’t be relied upon as a long-term revenue generator.
“In other words, this administration wants as much revenue as possible from Fannie and Freddie to help reduce the deficit,” Seiberg said in a research note. “This again is not a position set in stone, but it is interesting given the view that the White House wants the enterprises to recapitalize.”
The budget also would cut $220 million from the Treasury’s CDFI program, which, in addition to the Capital Magnet Program, administers the Bank Enterprise Award Program and CDFI Bond guarantee program. Administrative functions of the CDFI office would be funded at $14 million in fiscal 2018 under the proposed budget.
The administration targeted the CDFI program in March when it issued its “skinny budget” but was met with hardened opposition from not only Democrats but many in the banking industry. Funding was restored — and even increased — in the omnibus spending bill passed in April, but whether those programs fare as well in the next budget process is less clear.
Mnuchin said during his testimony in the Senate Banking Committee last week that the president’s priorities in the budget were to ramp up defense spending and cut domestic programs to offset that increase.
“While I share some of your concerns about the CDFIs, we had to look at this across a lot of different priorities,” Mnuchin said. “It is an area where this market is mature and there is private capital that will come in and banks do lend.”
Tax reform not included
Mnuchin also said during a panel Tuesday morning that the budget does not account for changes in the tax code in fiscal year 2018, since the administration has not advanced far enough in its negotiations with Congress to hammer out a tax reform bill acceptable to the House, Senate and White House leadership.
“We felt it was premature to put in any changes in the budget as a result of taxes, because we’re not far enough along to estimate what that impact will be,” Mnuchin said.