Post-Election Analysis 2020: Financial Services
*Updated January 6, 2021
While the financial services sector remains a frequent target of criticism from many progressive lawmakers, it remains unclear whether unified Democratic control of Congress and the White House portends much in the way of major regulatory reform measures. To be sure, action can be expected on a variety of financial services issues, including some that have stalled in recent years, but the clamor for major structural reforms to financial regulation has largely subsided since the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018.
Much of the leadership over the various federal financial agencies have terms that extend beyond 2021. The Biden-Harris Administration nevertheless has a number of senior positions to fill, led by the appointment of Janet Yellin to be Treasury Secretary. In filling agency leadership vacancies, the Biden-Harris Administration has considered previous leaders from the Obama-Biden Administration and current Democratic members of Congress who have indicated interest in leading certain causes. With the razor-thin Senate majority, nominees who can draw unanimous support from the Democratic caucus will be at a premium.
As for leadership over the banking committees, Rep. Maxine Waters (D-CA) will remain the chair of the House Financial Services Committee, and Sen. Sherrod Brown (D-OH) will likely be the chair of the Senate Banking Committee. Since the onset of the pandemic, both Rep. Waters and Sen. Brown have been vocal about the need for congressional action to secure the financial protections needed by the most vulnerable people in society, including those related to housing, rent and mortgage relief, and upholding of consumer financial protections. It is expected that with a Democratic sweep, these issues will be at the top of the list for the banking committees. Besides issues related to the COVID-19 pandemic, other items that may be high on the agenda for the Democratic Congress include data privacy, diversity and inclusion, fair lending and consumer lending protections generally, and oversight of federal financial regulators.
With unified Democratic control, albeit with slim majorities, we expect more aggressive oversight of financial regulators by Congress, particularly oversight related to the regulators' response to the COVID-19 pandemic. Rep. Waters, in particular, has been critical of the manner in which the Department of the Treasury and the Federal Reserve have implemented certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We do not believe the change in Administration will dampen her desire to keep the pressure on regulators, particularly since many key personnel appointed during the Trump Administration, including Federal Reserve Chairman Jerome Powell, Federal Deposit Insurance Corporation Chair Jelena McWilliams, and Federal Housing Finance Agency Director Mark Calabria, have terms that extend well into the next administration.
With Democrats setting the agenda in both chambers, we can expect that Congress will focus on legislation aimed at addressing urgent needs brought on, or worsened, by the COVID-19 pandemic, including housing, rent and mortgage relief, and consumer financial protection.
Assuming candidates with appeal across the Democratic spectrum can be identified, we expect that Congress will move swiftly in confirming Biden-Harris nominees for those agency leadership positions that are open, and then will rely heavily on these agency heads to expand consumer protection safeguards and to deter perceived abuse by Wall Street and corporate executives. In terms of legislation, we expect Congress to evaluate whether legislation is needed to address agency rulings and determinations by President Trump appointees, especially in instances where there are differences in opinion among the federal government and the individual states. Key issues include the "Valid When Made" doctrine (which has been adopted as a final rule of the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), and has been criticized as allowing nonbank lenders to circumvent state usury laws by purchasing loans from banks), as well as the "True Lender" rule issued by the OCC in late October. Another rulemaking that, if finalized, is likely to be attacked is the OCC's so-called "fair access" rule, which would require national banks to lend to energy and firearms companies, among others, and which has been heavily criticized by both Democrats and the banking industry.
The extent to which the new Congress may utilize the Congressional Review Act to overturn recent agency rulemakings will be an area to watch in the early months of 2021. Much like the Republican-controlled Congress in the first year of the Trump Administration, Democrats will have the ability to overturn recent rulemakings with simple majority votes in each chamber.
Another major area of interest is the OCC's national charter for special purpose banks, commonly referred to as the fintech charter, which has been opposed by state banking agencies such as New York, as intruding on the authority of states.
One area of law that many Democrats consider overdue for a legislative update is the Community Reinvestment Act (CRA). Leading Democratic members of Congress, including Rep. Waters, have been in support of modernizing the CRA to address banking in the 21st century, however, members of Congress have taken issue with certain proposed amendments by the federal banking agencies, asserting that the proposals do not go far enough in encouraging financial institutions to provide critical banking services to the unbanked and underbanked in low- and moderate-income communities. Notwithstanding opposition, the prior Comptroller of the Currency approved a new CRA rule for national banks prior to his resignation, while the Federal Reserve and FDIC are still exploring potential amendments. With Democrats in control of the executive and legislative branches of government, there is a greater likelihood that legislation to amend the CRA can be enacted, depending on legislative priorities.
In all cases, however, the Democrats' legislative priorities and ambitions will be tempered by the fact that they hold only slim majorities in both chambers. Particularly in the Senate, garnering at least some level of bipartisan support for legislative priorities will be critical.
Aside from legislative changes, greater oversight of the federal financial regulators, more investigations of corporate executives deemed to be at fault for corporate abuses, and continued focus on diversity and inclusion in financial services in both the public and private sectors will occur.
The Biden transition has already indicated that the new administration will be pushing back on last-minute Trump Administration rulemakings, and there may well be a temporary freeze on rules not yet effective as of late January. In addition to the OCC's forced-lending rule mentioned above, the Biden Administration may prioritize review of the DOL fiduciary duty rule, and FinTech related rules (discussed further below). In early December, in fact, Rep. Waters sent a letter to the Biden transition outlining a host of executive actions taken by the Trump Administration that Biden should look to reverse. Though it is safe to say not all actions identified by Rep. Waters will be reversed by the new administration, we expect a concerted effort to address several such items.
There may also be a push to expand the separation of retail banking from investment banking, and to prevent institutions that have access to federal deposit insurance (and the federal safety net generally) from engaging in riskier investments and activities. Additional safeguards may come from reinvigorating laws under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and retooling key regulatory bodies, such as the Financial Stability Oversight Council, to tamp down on nonbank financial institutions that pose systemic risks. Consumer protections and the Consumer Financial Protection Bureau (CFPB) will remain on the hot seat in terms of enforcing consumer protection rights and will be expected to ensure that consumer protection laws are upheld to the highest degree. Furthermore, with the U.S. Supreme Court's 2020 decision overruling the for-cause restriction on the President's authority to remove the CFPB director, we expect the CFPB to remain a highly politicized agency, even with unified Democratic control.
The unified Democratic control will usher in a renewed focus on consumer financial protection in the wake of what Democrats, in both chambers of Congress, have viewed as lax oversight of the financial services sector over the past four years. Sen. Elizabeth Warren (D-MA) and Rep. Waters have been particularly vocal in their criticism of the Trump Administration's approach to enforcement in this space, and in a Democratic-controlled Congress and White House we can expect them to push more forcefully and successfully for change. Whether through legislation or, more likely, key agency appointments, the administration and Congress will seek to focus on consumer protection issues such as fair-lending enforcement and ensuring equal access to financial services for minorities and traditionally underserved communities. To that end, we may expect to see a return to the more aggressive interpretations of consumer protection laws that we witnessed under the Obama Administration, as well as more frequent use of the Dodd-Frank Act's authority to stop "unfair, deceptive, and abusive" activities. While there have been several high-profile actions against large financial institutions and their senior executives recently for consumer protection violations, we expect to see additional focus on individual accountability for corporate missteps. It may take time for these efforts to yield visible results and the industry should prepare for heightened scrutiny of its consumer-facing operations.
Cannabis Banking Legislation
The 116th Congress spent considerable attention on the issue of financial services for legitimate cannabis businesses, and legislation addressing the issue attracted substantial bipartisan support despite it ultimately stalling in the Senate. The Secure and Fair Enforcement (SAFE) Banking Act of 2019 (H.R. 1595/S. 1200), would have created a safe harbor for providing financial services to cannabis businesses in states where such businesses have been legalized. With near unanimous support among Democrats, the bill also garnered substantial support among Republicans, with 91 Republicans voting in favor of the measure as it passed the House of Representatives in September 2019. Republican support in the Senate was less pronounced, and the measure stalled in that chamber due in no small part to concerns raised by Senate Banking Committee Chairman Mike Crapo (R-ID).
With unified Democratic control, there is a decent chance that this legislation—which remains a priority of the banking industry—will become law in 2021. Perhaps the bigger question is whether supporters of the bill will set their sights higher (such as on full legalization of marijuana at the federal level), causing the SAFE Banking Act to stall as part of a heavier lift. Indeed, some House Democrats, while voting in favor of the SAFE Banking Act of 2019, indicated concern that advancing the bill separately could undermine momentum from broader reform of marijuana laws. The extent to which this sentiment gains traction among congressional Democrats bears watching, since the slim margins in both chambers continue to be a limiting factor on Democratic ambitions. In all there is a decent chance that the legislation will be enacted in the 117th Congress.
With Democrats setting the agenda, we expect a rollback of recent efforts, championed by the OCC and the FDIC, to promote access to bank charters and bank partnerships for financial technology, or "FinTech," companies. Billed by supporters as a mechanism to streamline the otherwise burdensome state regulatory framework and enhance access to innovative financial services and products, Democrats and numerous states have criticized the efforts as undermining consumer protections and the states' ability to protect their citizens from high-cost loans and other potentially predatory activities. With Democrats in control, several recent rulemakings and regulatory initiatives, including the OCC and FDIC "Valid When Made" rules and the OCC "True Lender" rule, will be revisited and potentially altered or rescinded. We also anticipate a reassessment of the availability of "special purpose" bank charters, such as the OCC's "FinTech charter," and industrial loan company charters to FinTech companies and similar entities that do not fit the traditional bank holding company model. With control of Congress, we may see Democrats introduce legislation aimed at clarifying and restricting the regulators' authority to engage in such rulemakings or to approve these controversial charters.
Diversity & Inclusion
The Biden-Harris Administration has focused on nominating a slate of diverse individuals to fill vacancies at the federal financial agencies and will encourage the leadership at the agencies to ensure that staff is adequately diversified.
The House Financial Services Committee, led by the Chairwoman Waters, along with chair of the Subcommittee for Diversity and Inclusion, Rep. Joyce Beatty (D-OH), will continue to be the crusaders for diversity and inclusion in financial services in the public and private sectors. Sen. Brown of the Senate Banking Committee has also acknowledged the need for diversity in financial services.
As part of the Dodd-Frank Act, Congress required the federal financial agencies to establish "Office of Minority Women and Inclusion" (OMWI) offices, which are responsible for monitoring diversity among staff and suppliers of the agencies and seeking information on diversity from regulated financial institutions. With the other priorities of Congress, it is unlikely that legislation focused on diversity and inclusion will be enacted with a mandate beyond that which is currently undertaken by OMWIs under the Dodd-Frank Act.
In addition to diverse leadership, there will be continued interest in funding and supporting Community Development Financial Institutions and minority-owned financial institutions, as demonstrated by the inclusion of funding for such institutions in the recent stimulus package.
Financial Transaction Tax
With a Biden-Harris Administration, and Democrats controlling both the House and the Senate, there is a remote possibility that Congress may consider implementing a financial transaction tax, which has been a frequent suggestion of the progressive left. While there is currently a small fee imposed by the Securities and Exchange Commission (SEC) on stock trades, referred to as Section 31 Transaction Fees (currently set at 0.0021% or approximately two cents per $1,000 traded), the suggested transaction tax would be intended to raise substantially more revenue than the current fees, which are aimed at funding SEC operations. State-level financial transaction taxes have also received consideration recently, including in New Jersey and New York.
The size of a federal financial transaction tax would be up for debate. The tax was one of the leading talking points for the Vice-President elect, Sen. Kamala Harris (D-CA), as well as Sen. Bernie Sanders (D-VT) and Sen. Warren during their presidential campaigns. Sen. Sanders proposed a tax of 0.5% on stocks, 0.1% on bonds, and 0.05% on derivatives, while Sen. Warren proposed a 0.1% tax on most stocks, bonds, and debt obligations, and on derivative contracts. Vice-President elect Harris proposed a 0.2% tax on stock trades, 0.1% on bond trades, and 0.002 percent tax on derivative trades during her presidential campaign.
Prospects for enactment of such a tax remain remote, as such a proposal has not achieved widespread enough support within the Democratic party to overcome what would likely be close to unanimous Republican opposition. Should Congress address the issue at all, it may be more of a messaging exercise, but any signal on the issue from the Biden-Harris Administration will be closely watched.
Housing Finance Reform
With a Biden-Harris Administration, and Democrats controlling the House and Senate, there is a possibility of progress toward housing finance reform and releasing Fannie Mae and Freddie Mac from conservatorship, but not as envisioned by the Trump-Pence Administration.
Rep. Waters, as chair of the House Financial Services Committee, has stated that housing finance reform must include objectives of (1) maintaining access to the 30-year fixed rate mortgage, (2) ensuring sufficient private capital is in the system to minimize reliance on federal (taxpayer) funding, (3) ensuring that the government-sponsored enterprises (GSEs) are adequately capitalized and have sufficient liquidity, and (4) ensuring access to mortgages for qualified borrowers while also ensuring access to affordable rental housing.
Still, while there is general agreement within Congress that housing finance reform remains the "unfinished business" of the financial crisis, it is unclear whether there will be any catalyst for the movement of reform legislation that would break the current stalemate on the issue.
While insurance matters rarely dominate the financial services agenda, two items are likely to see some level of congressional action in the 117th Congress: a pandemic insurance program and flood insurance reauthorization.
The first is the possible establishment of a federal program to insure against pandemic-related business losses. While insurers, as a general matter, did not cover pandemic-related losses in commercial business interruption policies, policymakers are exploring avenues to encourage the insurance sector to offer a greater level of coverage for future pandemics. Rep. Carolyn Maloney (D-NY) introduced the Pandemic Risk Insurance Act of 2019 (H.R. 7011), in May, which would create a federal backstop for insurers offering pandemic coverage, modeled off of the Terrorism Risk Insurance Act enacted in the wake of 9/11. The bill has yet to garner any Republican cosponsors, functioning more as an opening position to bring stakeholders to the negotiating table.
The insurance industry remains wary of becoming too exposed to pandemic risk, as potential losses can be catastrophic and difficult to diversify where a pandemic is on a global scale. Several stakeholder groups have offered alternative proposals, including programs whereby the government would sell an insurance-like product to businesses whose payouts would be triggered automatically upon defined criteria, obviating the need for claims adjusting capacity.
There appears to be bipartisan support for moving legislation in this area in the new Congress. A key determining factor will be whether a consensus can emerge from the business community and the insurance industry on the parameters of a program, including on sensitive issues such as whether insurers should be required to offer pandemic coverage. There is no clear partisan division on the parameters of a pandemic insurance program at this time, so the election's outcome does not move the needle much; certainly the unified Democratic control makes legislative action potentially smoother, but movement remains mostly contingent upon greater stakeholder consensus on the path forward.
The 117th Congress may also consider legislation to reauthorize the National Flood Insurance Program (NFIP). The last full reauthorization of NFIP was the Biggert-Waters Flood Insurance Reform Act of 2012, and since 2017, the program has survived through a series of short-term extensions as debate over a broader reform package has stalled. There is broad consensus that NFIP ̶ which has remained heavily in debt since the 2005 hurricane season ̶ needs further reforms, but agreement on what those reforms should be remains elusive. While some of the divisions are along party lines, others are more geographical, with members from coastal and flood-prone districts often more focused on preserving existing subsidies where others look to ensure that premium rates are actuarily sound.
Since a divided Congress has found only stalemate, unified Democratic control increases the chances that broader NFIP reform can move in the 117th Congress, and if it does move the legislation will focus primarily on claims-handling and other consumer-facing reforms. The path to enactment of such legislation will certainly be impacted by the razor-thin margin in the Senate, as the Senate has thus far been the chamber most responsible for the current stalemate.
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