The Issues at Stake
This election will determine the direction of every area of financial regulation. The starkest contrast between the parties will be in the area of consumer enforcement, mainly through the Consumer Financial Protection Bureau (CFPB). A Biden administration will likely put in place new protections and enforcement actions around small-dollar and "payday" lending, collections, arbitration, and practices with disparate impact. Another stark divide will be in how each party approaches the regulation of systemic risk, including through capital rules, activities-based supervision, and Volcker Rule implementation. The nature of banking and bank charters itself is at stake, with a Republican Office of the Comptroller of the Currency (OCC) pushing for new national bank charters for fintech and payments firms that do not take deposits, and Democrats looking to make banking services more utility-like through proposals such as postal banking and publicly run consumer credit agencies.
Climate Change and ESG
There is a growing consensus that the financial services industry will be indirectly impacted by the effects of climate change and is seen by some as a policy lever to reduce the economy's carbon footprint. Some banks and private equity funds have already begun shifting investments to less carbon-intensive companies, and financial firms of all types are grappling to price in climate risk to their offering.
Democratic: Biden's plan includes requiring public companies to disclose climate-related risks and issues, and it is likely a Biden administration would seek to include the effects of climate change as a factor in bank safety and soundness examinations and in stress tests. Biden's overall climate-change policy would likely hasten the flow of capital to green projects, opening opportunities for financial firms while simultaneously requiring them to reevaluate their existing investments.
Republican: Trump's administration is expected to continue opposing efforts that require climate-change disclosures, which the Securities and Exchange Commission (SEC) maintains are immaterial to investors. Regulators will also push the notion that climate expertise is out of their purview, and regulatory requirements on the issue will create more problems than fixes.
Community Reinvestment Act Reform
Both parties acknowledge that reforms are needed for the Community Reinvestment Act (CRA) to be effective, as both banking practices and technology have changed. These changes include broader use of internet-banking services, which has reduced the need for brick and mortar branches and thereby makes current CRA metrics and assessment areas somewhat obsolete. In May 2020, the OCC issued a final rule amending its CRA regulations to, among other things, broaden the definition for eligible investments, provide new metrics, and institute new assessment area (AA) standards. Although the OCC, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve (Fed) had for decades maintained identical joint CRA regulations, the OCC under the Trump administration acted alone. The Fed is working on a proposed rulemaking to amend its own CRA regulations, which is expected to differ significantly from the OCC's rule. Unless the OCC switches course or is overruled by Congress, the CRA framework is likely to differ across jurisdictional boundaries.
Democratic: A Biden administration could target portions of the new OCC regulations that Democrats across the board oppose, including the expansion of CRA-eligible activities to explicitly include certain commercial investments like community facilities and essential infrastructure. Further, Democrats will look to roll back contentious AA provisions such as the 5% deposit taking threshold and the ability to measure AA using the largest geographical area available. Under new leadership, the OCC would likely amend the Trump-era rule in coordination with the Fed and FDIC. Federal Reserve Board Governor Lael Brainard, a Democratic appointee, has led the Fed's efforts to reform its CRA rules, with the support of Chairman Jerome Powell, and has advocated for a more limited approach than that taken by the OCC.
Republican: The Trump administration, with Republican support in Congress, will continue to push for modernization of the CRA, but the outcomes remain up in the air, as even banks that would supposedly benefit from the OCC's efforts have expressed concerns with the agency's approach. Nonetheless, a Republican administration would be unlikely to amend the OCC rule before its 2023 and 2024 effective dates. The Federal Reserve will almost certainly still issue its own CRA rulemaking, forcing the FDIC to pick an approach, likely in line with the Fed.
Consumer Protections and Lending
The CFPB has been less active in recent years in bringing enforcement actions, resulting in several states proposing their own consumer protection agencies for financial products and services. These so-called mini-CFPBs do not yet have a record of enforcement, but it is likely that financial firms will face an even more difficult regulatory landscape with conflicting or overlapping regulatory expectations among the states. Either way, we believe the CFPB—regardless of its director in 2021—can be expected to thoroughly review the treatment of consumers during the course of the ongoing COVID-19 pandemic.
Democratic: A Biden administration would likely move quickly to appoint a new CFPB director (pursuant to the Seila Law decision striking down the "for cause" requirement for removal). Upon confirmation, the CFPB is expected to escalate enforcement actions and strengthen consumer protections as it targets interest rate caps, credit reporting, debt collection, and fair lending requirements, among other issues.
A Democratic Congress and administration could seek to test the limits of the "substantially similar" definition of the Congressional Review Act and seek to redo overturned rules on arbitration.
Biden's plan for community investment calls for the creation of a public credit reporting agency. Viewed as part of an overall effort to increase access to credit and capital for underserved communities and individuals, the Democrats could also move to establish universal access to bank accounts through either the Federal Reserve or postal banking.
Republican: President Trump will likely continue to be selective in how his administration approaches what it views as onerous regulations on businesses in an attempt to free up access to capital while maintaining consumer protections through enforcement penalties.
Republicans would strongly oppose the creation of new government sponsored banking services like postal banking.
Diversity and Inclusion
Democratic: Biden would build upon Democrat-led efforts in the House of Representatives to push more policies to promote diversity and inclusion within the federal government and in the private sector. This is likely to include—but is not limited to—mandates for reporting on pay equity, vendor spending, training, and performance measures.
Republican: Republicans support efforts to increase diversity and inclusion in federal agencies and the private sector but are not likely to push for reporting mandates. They will also oppose efforts that place increased governance requirements on company boards.
Bank Partnerships and Fintech
The OCC and FDIC continue to encourage appropriate partnerships between banks and payments and fintech companies. In 2019, the FDIC issued a proposed rule to modernize the brokered deposit rule which aims to improve the ability of banks to accept deposits originating from a payments or fintech program. Earlier this year, the OCC and FDIC issued rules clarifying that nonbanks that purchase or take assignment of loans originated by banks are permitted to charge the same interest rate as the banks that made the loan (the "valid when made" doctrine). In addition, the OCC has proposed a rule to address the related "true lender" issue, which creates a framework to determine the circumstances under which an entity is considered to be the actual lender behind a loan. However, some states see these efforts as intruding on their regulation of nonbank lenders, and several have filed suit to block the OCC's rulemaking.
Finally, Acting Comptroller of Currency Brian Brooks continues to push ahead with a proposed payments charter, which would provide payments companies the benefits of federal preemption of state laws governing money transmission without the need to establish a full-service national bank. States, however, have pushed back against the proposed payments charter, and will surely challenge the OCC's authority to establish such a charter in court.
Democratic: Some of the reforms, especially Valid When Made and True Lender, will continue to be scrutinized by Democrats, as evidenced by a recent letter sent by Senate Democrats to the OCC on the True Lender proposed rule. However, that does not necessarily mean a Biden administration would significantly change the OCC's approach to fintech and payment charters. The OCC's effort to establish a regulatory regime for fintechs started under former Comptroller Thomas Curry, an Obama appointee. It is possible that a Biden-appointed comptroller would seek a negotiated resolution with the states rather than a protracted court battle. The OCC and FDIC could continue making it easier for banks to partner with fintech and payments companies, but under a Biden administration the framework would likely incorporate greater regulatory requirements for nonbanks.
Republican: The federal banking regulators under President Trump would continue advancing rulemakings that make it easier for fintech and payment companies to partner with banks, become banks themselves, or otherwise access the payments system. The OCC likely would vigorously defend against the state challenges in court. The FDIC will likely finalize the brokered deposit rule with little modification and may look to approve applications from payments and fintech companies to obtain industrial loan charters.
The promise of "faster payments" is becoming a reality, with the launch of various services, including the Clearing House's Real-Time Payments Network (RTP Network), "push to card" services, Nacha's same-day settlement, and the Federal Reserve's in-development FedNow service. At this time, however, only banks have direct access to these networks, and fintech companies are seeking to capitalize on these payments systems.
Democratic: Biden's Unity Plan includes a proposal to ramp up the Federal Reserve's FedNow service to facilitate greater access to real-time payments and allow consumers to have more immediate access to their funds. Under a Biden administration, the Federal Reserve would likely focus on deploying FedNow to rival the private RTP Network, which Democrats say will be costly and non-accessible to Americans who don't have bank accounts. The Biden administration would likely treat access to faster payments as part of a larger effort to the underbanked.
Republican: Under a second Trump term, the Federal Reserve may focus less energy on FedNow, instead allowing the RTP Network to take the lead on developing the real-time payments infrastructure. The Federal Reserve and OCC would likely continue to push for bank partnerships as the means to more widely disseminate access to financial services and payment systems, with less emphasis on the government's role in ensuring equity in financial services.
The OCC, FDIC, and Fed have been actively updating, amending, and, in some cases, rolling back financial regulations under the Trump administration. In the two-year period from January 2017 through December 2018, the agencies issued a combined 81 final rules. Since January 2019, however, they have issued a dizzying 130 final rules, and will likely issue at least 10 more before the end of Trump's current term. The regulatory reforms have covered everything from capital rules to counterparty credit limits, and the liquidity coverage ratio to narrowing the Volcker Rule. Because of the Administrative Procedure Act, these types of formal rulemakings are difficult to unwind, assuming the agencies are even inclined to make such changes.
Further, the leadership structures of the federal banking agencies create policies that are sticky across administrations, particularly the Fed with its seven staggered 14-year governorships. Even if a Biden administration immediately filled the two empty Federal Reserve Board seats, it is unlikely the Fed would radically shift its supervisory focus. Meanwhile, the acting comptroller would likely be replaced in a Biden administration, but Jelena McWilliams, the FDIC chair, would still have two years remaining in her term.
A new administration could, however, push the regulators to change the effectiveness of rules through examinations and enforcement actions. In addition, the relationship between federal and state regulators will be significantly different, depending on the administration. Several states, all with Democratic governors, are currently suing the OCC over its various rulemakings and, under a Trump administration, the agency would likely aggressively defend its position.
Democratic: A Biden administration may look to reverse the deregulatory policies of the Trump administration but that would require longer-term rulemaking. The agencies' significant efforts at increasing transparency for both the enforcement of regulations and the deliberative processes of the agencies themselves are unlikely to change. Instead, a Biden administration would more likely focus on systemic issues. Although Biden's official plans do not address the issue, the Biden-Sanders Unity Task Force and influential supporters, such as Elizabeth Warren (D-MA), assert that the largest financial institutions still pose unacceptable risk to the financial system. We expect a revived Financial Stability Oversight Council (FSOC) under a Democratic secretary of the treasury and a revamped Office of Financial Research (OFR), which will increasingly look at specific activities that could cause systemic risk. A Biden administration will also focus on how financial institutions participated in COVID-19 recovery efforts and will scrutinize whether the ongoing economic fallout is impacting bank safety and soundness.
Republican: The federal banking agencies will continue their rulemaking efforts, though the pace may slow. The OCC will continue its push to revolutionize the national bank charter to include fintech and payments companies and will aggressively defend against the state-level challenges to its authority. The FDIC and the Fed will likely follow the OCC's lead in modernizing its regulations to account for bank partnerships and changes in technology. Depending on the duration of the COVID-19-induced economic shock, a Trump administration FSOC will likely continue to be less active as concerns about systemic issues fade. With a likely divided Congress and administrative processes ticking along, Trump could even seek to advance his priorities by reevaluating the regulators' relationships with international financial supervisory regimes, such as the Bank of International Settlements. Current Federal Reserve Board Vice Chairman for Supervision Randal Quarles is also the chair of the Financial Stability Board. In the year he would have left on his term, Quarles could continue efforts to build an international supervisory framework that gives greater leeway for individual countries to tailor their prudential regulations.
Other Issues to Watch (less dependent on the outcome of the election):
- Cannabis Banking: Bipartisan support in the House and Senate, resolution between Republican and Democratic leaders in the Senate necessary. Democratic control may push that issue to a resolution.
- BSA/AML: Like cannabis banking, there is broad support in the House and Senate for reform. Republicans are looking to resolve issues and concerns around its effect on small businesses.
The Key Players
Those to watch in a possible Biden administration include Jared Bernstein, former economic policy advisor to Biden and key campaign advisor, and Ben Harris, who has taken a lead on financial services policy for the campaign. Lael Brainard, Federal Reserve board governor, has helped lead a progressive agenda at the Federal Reserve, including the Fed's Community Reinvestment Act reform efforts. Others to watch include key players from the Obama administration, including current FDIC board member and former chair Marty Gruenberg, former CFTC chair Gary Gensler, and key former Treasury senior staff, including Amias Gerety, Jonah Crane, and Katheryn Rosen. Look for former Warren allies FTC Commissioner Rohit Chopra and current member of the Congressional Oversight Commission Bharat Ramamurti to play continuing roles in the consumer protection space.
Biden will have an opportunity to reshape the bureaucracy fairly quickly. Jelena McWilliams has two more years in her term as FDIC chair, and Vice Chair Randal Quarles' term (as vice chair only) expires in October of 2021. OCC head Brian Brooks is currently in an acting position. Mike Crapo (R-ID) could continue to lead the Republicans as chair or ranking member of the Senate Banking Committee, and Pat Toomey (R-PA) is a potential chair of the Senate Banking Committee.
Sherrod Brown (D-OH) could become chairman of the Senate Banking Committee if Democrats take control of the Senate; Elizabeth Warren (D-MA) will not only play a role as a key advisor to Biden, being a major voice for progressives in the financial services space, but she could be on the short list for a cabinet-level position. Maxine Waters (D-CA) is likely to continue as chairwoman of the House Financial Services Committee and as a leading voice for increased consumer protections and diversity and inclusion requirements. Patrick McHenry (R-NC) is likely to continue as ranking member of the House Financial Services Committee.