Biden’s Banking Watchdogs Could Create Real Headaches for the Industry

A major reversal of Trump-era policies and practices will affect financial institutions on multiple fronts, from regulation and consumer protection to the 'greening' of credit. Renewed attention to racial disparities will come on top of a reboot of efforts to bring the Community Reinvestment Act into line with modern banking trends. Fintechs will be scrutinized harder.

Any new administration is closely watched by financial institution executives. But the arrival of the Biden administration during an ongoing pandemic and following the contentious exit of the Trump administration heightens the attention level by an order of magnitude.

“There are a lot of moving parts in the U.S. regulatory world and a lot of uncertainty of how it will play out over the next couple of years,” says Alan McIntyre, Senior Managing Director-Banking at Accenture. “As always, the regulatory environment will shape how the U.S. industry evolves. My hope is that we don’t go back to bank bashing, but instead create an environment that encourages the right type of innovation, that encourages new capital formation in the industry, while including some elements of consumer protection.”

There is hope and there is political reality. The Biden administration’s story promises to be a tug of war between moderate and progressive Democrat voices. (Not to mention Republican minorities in both the House and Senate.)

Treasury’s Going Green — And It Isn’t About Currency

“Credit allocation” is something the banking industry has resisted for decades. The idea of the government pushing private lenders towards particular types of lending has always led to a war of words. Whether that will continue in the new regime remains to be seen.

“I think we need to seriously look at assessing the risk to the financial system from climate change.”
— Janet Yellen, Treasury Secretary

Right now the Biden administration’s anticipated movement to push lenders to adopt more “green” lending policies has become centered in the Treasury Department, under new Secretary of the Treasury Janet Yellen.

Yellen hopes to appoint a former Obama regulator, Sarah Bloom Raskin, to a new post as a sort of federal green financing czar. “I think we need to seriously look at assessing the risk to the financial system from climate change,” Yellen said during her own Senate confirmation hearing. Support and prodding are expected from key members of Congress — both House Financial Services Committee Chairman Maxine Waters (D.-Calif.) and Senate Banking Committee Chairman Sherrod Brown (D.-Ohio) favor further action on climate risk. An analysis by Fitch Ratings points out that the Federal Reserve began encroaching into green policy before President Biden came in. For example, the Fed joined the Network of Central Banks and Supervisors for Greening the Financial System.

How far new rules will go is a long way from being known. Fossil fuels still underpin a huge portion of the American economy. But pressure is growing. “The U.S. been a notable laggard among developed market governments…,” states the Fitch report. “Under the new administration, U.S. policy trajectory may more closely follow that of global regulatory leaders in this area, such as the Bank of England and the European Central Bank.”

What to Watch:

There are many levers in the U.S. financial system that can be pulled by pro-green forces beyond regulations and reporting.

( Read More: Banks Can’t Keep Dodging Those Tough Social Issues (Like Guns) )

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CFPB: New Policies On The Move Even Before Nomination Hearings

Officially, Rohit Chopra, formerly head of student loan oversight at the Consumer Financial Protection Bureau during the Obama years, is President Biden’s choice to be the next director of the often-controversial young agency. While confirmation hearings had not been held or scheduled by mid-February, Senate Banking Committee Chairman Sherrod Brown (D.-Ohio) already expressed his strong approval of Chopra after a personal meeting. He believes that Chopra would help root out illegal discrimination and racial inequities and ensure fair and equitable access to consumer financial services.

What to Watch:

Some commentators suggest it will take years to put teeth back into the CFPB. However, the remaking of the bureau in the Biden administration image has already begun, with the appointment in January 2021 of Acting Director Dave Uejio.

Since its creation in the wake of the financial crisis, CFPB has tended to draw staffers who believe strongly in its goals and Uejio, an eight-year veteran of the bureau, appears to be of that mold. In a matter of days Uejio began clearing the way for Chopra and implementing shifts to return the bureau to its pre-Trump days.

“Over the coming weeks,” Uejio announced, “we will be reversing policies of the last administration that weakened enforcement and supervision.” He added that “we are planning to rescind public statements conveying a relaxed approach to enforcement of the laws in our care.”

In staff memos, Uejio said that his policy priorities for the bureau would be relief for consumers facing financial hardship due to the pandemic and the recession, and racial equity. He has directed bureau staff to examine foreclosures, auto lending, checking account closures and more. Enforcement of anti-discrimination laws in relations to small-business banking is another priority. Staff has also been directed to expedite enforcement investigations involving COVID-19 issues.

“The country is in the middle of a long overdue conversation about race, and as we all know, practices and policies of the financial services industry have both caused and exacerbated racial inequality.”
— Dave Uejio, Acting Director, CFPB

More specifically on race, Uejio told staff that: “It’s also time for CFPB to take bold and swift action on racial equity. I know this is close to the hearts of many of you. The country is in the middle of a long overdue conversation about race, and as we all know, practices and policies of the financial services industry have both caused and exacerbated racial inequality.”

Clearly fair-lending will be a bureau priority. Uejio said he would “elevate and expand” existing race-related investigations and exams and add new ones “to ensure we have a healthy docket intended to address racial equity.”

Fair-lending examination and enforcement takes multiple forms. Individual federal financial institution regulators, including CFPB, examine for compliance, taking in everything from marketing communications and targeting to the results of lending efforts. Exams compare approval and disapproval rates by racial groups and also compare pricing of credit, just to name a couple of factors. Findings may be addressed administratively or through a referral to the fair-lending arm of the Justice Department’s Civil Rights Division.

Uejio promised that bureau scrutiny would go beyond fair lending to dig out unlawful conduct by financial institutions disproportionately affecting “communities of color” and other “vulnerable populations.” And he’s instigating a major study of the bureau’s controversial system for tracking complaints against covered financial institutions and other providers. In part this is because of “unacceptable” disparate responses to complaints by black, brown and Native American minorities.

Other issues for a Biden appointee at CFPB include payday lending and similar short-term credit mechanisms such as overdrafts. Credit reporting and information sharing, such as in open-banking types of arrangements, will also be in the mix.

Justice Department Nominations Tie Into Fair-Lending
The renewed focus of CFBP on racial disparities coincides with two Justice Department appointments of special note.

When President Biden nominated federal judge Merrick Garland to be Attorney General in January 2020, he made two more appointments, all subject to Senate approval.

One was the nomination of Vanita Gupta to be Associate Attorney General. Gupta served as Assistant Attorney General for Civil Rights during the Obama administration during a time when fair-lending enforcement cases were ramped up tremendously. Before and after that service she has worked for major civil rights organizations, including the NAACP. During her earlier federal service, she said in a speech that underlying much of the unrest seen in the U.S. at that time “lies a foundation of systemic inequalities and discriminatory biases, built up over decades, not days.”

The head of the Civil Rights Division would report to Gupta. Nominated to that role is Kristen Clark. She is head of the Lawyers’ Committee for Civil Rights Under Law and began her career as a trial attorney in the DOJ’s Civil Rights Division.

OCC Top Post Is Looks to be a Two-Person Horse Race

As of mid-February, President Biden had not announced an appointment for Comptroller of the Currency, regulator of federally chartered banks and savings institutions. But an interesting competition had shaped up.

The morning line tip sheet indicated that the nominee would be Michael Barr, a veteran of both the Obama and Clinton administrations and currently a public policy professor at the University of Michigan. Among past posts, Barr served as Assistant Secretary of the Treasury for Financial Institutions in 2009-2010. Barr was intimately involved in development of the Dodd-Frank Act. Among his many publications is the book No Slack: The Financial Lives of Low-Income Americans.

“One of the great ironies in modern America is that the less money you have, the more you pay to use it.”
— Mehrsa Baradara, contender for Comptroller

The book could be significant because Barr’s rival for this appointment as regulator of national banks, Mehrsa Baradaran, Associate Professor of Law at the University of Georgia School of Law, is clamored for by progressives in part because of books that she has written. One of them How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy. Another is The Color of Money: Black Banks and the Racial Wealth Gap. Baradaran was born in Iran.

Baradaran’s supporters include a key one: Senate Banking Committee Chairman Sherrod Brown.

Baradaran backs the idea of postal banking, which the mainstream banking lobby has fought since the days of President Franklin Roosevelt. She has written much about how mainstream banks don’t want to do business with the poor.

Her 2015 “other half” book begins bluntly: “One of the great ironies in modern America is that the less money you have, the more you pay to use it.” On the other hand, backers of Barr — including Sen. Elizabeth Warren (D.-Mass.) say he understands the plight of the consumer.

Why It Matters:

Whichever professor eventually wins the OCC post, they will inherit a government agency that has been an activist, since the Obama administration, for financial innovation.

Why Fintechs Could be a Key Factor Politically

It was in the Obama administration that the idea of fintech charters first surfaced. Acting Comptroller Brian Brooks expanded on the idea of specialized charters during his short time heading OCC.

Fintech could be a turning point for the nomination process. One pro-Baradaran writer, the Washington Post’s Helaine Olen, wrote: “Given that, after he left the Obama administration, Barr worked for several fintech companies and associated venture capital firms, his appointment to regulate this industry would be a classic example of the Washington ‘revolving door’.”

She continues: “Baradaran, on the other hand, is skeptical of the fintech sector’s claim that its mere existence broadens financial access, and concerned that regulations issued by the OCC are permitting fintech actors to masquerade as banks without the strictures, rules and consumer protections banks need to observe.”

Says Politico: “Fintech is just a fancy word for everything they [progressives] already hate about finance.” Adds the publication: “As the Biden administration begins to take control of the government’s regulatory machine, that souring view suggests financial technology firms will have a lot harder time than they did in the Trump era casting themselves as the good guys who need special treatment so they can grow to compete with their giant, established competitors.”

Rethinking CRA Reform

Whoever is the new Comptroller will inherit the revision of Community Reinvestment Act regulations. The OCC under Comptroller Joseph Otting, a former banker who served ahead of Brooks, went its own way with a major CRA rule revamp. No other regulator got on board with it, in spite of Otting’s observation that the existing regulations failed to address massive changes in the industry, such as the advent of mobile banking. CRA classically is heavily focused on physical offices.

Now the Federal Reserve has announced plans to revise CRA and early comment letters have supported the Fed’s stated aim that the agencies revert to the cooperative interagency model. A key point for any revision, as expressed in an American Bankers Association comment: “CRA cannot be truly modernized without addressing the digital revolution and reframing how and where banks are evaluated for CRA compliance.”

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