Post-Election Analysis 2020: Financial Services
While the financial services sector remains a frequent target of criticism from many progressive lawmakers, it remains unclear whether Democratic control of the House 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.
Additionally, Republicans' hold on the Senate will be a limiting factor on the ambitions of progressives in Congress and the Biden Administration. Senate Majority Leader Mitch McConnell (R-KY) has typically not been shy about utilizing Senate rules to his party's advantage, and Senate action is likely to remain a substantial obstacle for Democrats on many fronts. That being said, control of the White House and one chamber of Congress gives Democrats the ability to set the agenda, and progressives in Congress may use the next two years to lay the groundwork on their more ambitious agenda, in the hopes that they flip the Senate in 2022 (when Republicans will again be defending many more seats).
Much of the leadership over the various federal financial agencies have terms that extend beyond 2021. Therefore, the Biden-Harris Administration may have fewer vacancies to fill within the first 100 days of the presidential term, unless many of the current agency leaders decide to depart early from their positions (which is always a possibility, especially with a change in administration). In filling the agency leadership vacancies, the Biden-Harris Administration will consider those who previously served as leaders or advisors under the Obama-Biden Administration and current Democratic members of Congress who have indicated interest in leading certain causes. With certainty, it is expected that the Biden-Harris Administration will nominate a diverse slate of individuals to fill vacancies at the agencies.
Under any election scenario, Congress would be expected to oversee the pandemic response by financial regulators and financial institutions. With Democrats now controlling the House and the White House, we expect such oversight to be less adversarial vis-à-vis the Department of the Treasury and (to some extent) the Federal Reserve, but it is possible that oversight will include a renewed focus on the activities of lending institutions and what responsibility, if any, they bear for fraudulent borrowers in the various federal relief programs. Rep. Maxine Waters (D-CA), in particular, has been critical of the manner in which 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.
Notwithstanding those regulators on fixed terms, the Biden-Harris Administration will be able to fill numerous vacancies at the financial regulatory agencies, and such individuals will be more focused on rulemakings and enforcement activities aligned with Democratic priorities, such as emphasizing consumer protections and data privacy, improving the safety and soundness of financial institutions, and protecting the financial stability of the economy and banking system. New leadership at the agencies may result in additional rulemakings and oversight of large nonbank financial institutions, and greater investor protections as well. Nevertheless, a GOP-controlled Senate could complicate efforts to have certain nominees confirmed.
With a split Congress and divergent interests, it is unlikely that any major financial services related legislation will be passed, unless there is an urgent issue that requires an act of Congress. Legislation related to one-off issues, such as cannabis banking and data privacy, may be considered, but a large package similar in size to the Economic Growth, Regulatory Relief, and Consumer Protection Act is not expected.
There are certain issues that have been decided by Trump Administration appointees to the federal banking agencies that could see congressional action, such as the "Valid When Made" rule, adopted by the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), which reaffirm banks' ability to sell validly originated loans to third parties notwithstanding state usury laws. Other legal issues that could receive congressional attention include the OCC's recently finalized "True Lender" rule, assessments under the Community Reinvestment Act, and state challenges to the OCC's authority to issue special purpose national bank charters to financial technology, or "FinTech" companies. However, it remains to be seen whether a split Congress will be able to amass sufficient consensus to pass legislation addressing these issues absent an urgent need to prevent or minimize a threat to the financial stability of the economy or banking system.
Depending upon the extent to which the Republican Senate obstructs Biden Administration appointments and legislative initiatives, it may come to pass that President-elect Biden pursues more expansive use of executive orders and more centralized rulemaking, similar to the path taken by President Trump in recent years.
The Biden-Harris Administration should be able to fill vacancies at the banking agencies and install individuals that share Democrats' focus on consumer protection, which has not been a priority of the Trump Administration, although much will depend on the rate of turnover at the agencies. Nevertheless, we will see a refocusing of priorities under a Democratic White House, with possible new rulemakings and oversight initiatives targeting perceived weaknesses in the current consumer protection regime. With a split Congress, however, we do not expect to see significant federal legislation in this space.
Still, with the US Supreme Court's 2020 decision overruling the for-cause restriction on the president's authority to remove the Consumer Financial Protection Bureau (CFPB) director, we expect the CFPB to remain a highly politicized agency.
Financial Transaction Tax
With a Biden-Harris Administration, and Democrats controlling the House, there is a possibility 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 Vice President-elect Sen. Kamala Harris (D-CA), as well as Sens. Bernie Sanders (D-VT) and Elizabeth Warren (D-MA) 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 percent tax on stock trades, 0.1 percent on bond trades, and 0.002 percent tax on derivative trades during her presidential campaign.
Regardless, as has been the case with numerous Democratic initiatives in the previous two years, the Republican Senate will remain a check on Democratic ambitions in this space. The likelihood of legislation in this area actually getting enacted remains small as long as Republicans hold the Senate, but there may be action on the issue intended to lay the groundwork for future enactment should Democrats flip the Senate in two years.
Many congressional Democrats have been vocal critics 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 of the executive branch, 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 by the bank regulatory agencies. We also anticipate a reassessment of "special purpose" bank charters, such as the OCC's "FinTech" charter and industrial loan company charters, as well as an assessment of the availability of such charters to FinTech companies and similar entities that do not fit the traditional bank holding company model. While legislative change is not feasible under a GOP-controlled Senate, the banking agencies can do much to reverse or slow down the FinTech initiatives advanced under the Trump Administration.
Cannabis Banking Legislation
The 116th Congress gave considerable attention to the issue of financial services for legitimate cannabis businesses, and legislation addressing the issue attracted substantial bipartisan support despite ultimately stalling in the Senate. The Secure and Fair Enforcement (SAFE) Banking Act of 2019 (H.R. 1595/S. 1200), for example, 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).
There is a greater chance that this legislation—which remains a priority of the banking industry—will become law in the 117th Congress. Outgoing Senate Banking Chairman Crapo represents one of the few states in the nation (Idaho) that has not enacted any marijuana legalization measures; consequently, it is possible that the new chairman, Sen. Patrick Toomey (R-PA), will feel additional constituent pressure to move the bill where Sen. Crapo felt none.
An additional question is whether supporters of the bill in the House 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 2019, indicated concern that advancing the bill separately could undermine momentum for broader reform of marijuana laws. The extent to which this sentiment gains traction among congressional Democrats bears watching. We expect early action on this measure in the House, but as with the 116th Congress, the bill's chances will hinge upon the Senate.
Diversity & Inclusion
The Biden-Harris Administration will focus 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 Chairwoman Waters, along with chair of the Subcommittee for Diversity and Inclusion, Rep. Joyce Beatty (D-OH), will continue their efforts to promote diversity and inclusion in financial services in the public and private sectors. Sen. Toomey, slated to be the next chairman of the Senate Banking Committee, and other Senate Republican leaders have not identified diversity and inclusion as a top legislative priority. Therefore, it is unlikely that such issues will gain much traction on the other side of the Capitol.
Housing Finance Reform
The Biden-Harris Administration may be interested in reform structures aligned with Democratic principles of safeguarding access to affordable mortgages. However, with a split Congress, it is unlikely that housing finance reform will see increased prospects of passage given the difference in views in Congress on how government-sponsored enterprises (GSEs) should operate after leaving conservatorship. 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.
The status quo in Congress does not immediately suggest that any such catalyst for movement is likely. However, the incoming chairman of the Senate Banking Committee, Sen. Toomey, announced he will be retiring in 2022 and in doing so indicated his desire to work on such legislation during his remaining time in office. Whether his particular interest will be enough to move the needle, however, remains to be seen.
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; 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, the election does not do much to increase the chances of enacting NFIP reform, however, both parties agree that it remains a matter of unfinished business, and external events, such as a particularly damaging flood, may force the issue to the forefront in the coming years.
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© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.