Given the complexity of many banking industry issues, federal legislation and regulation often represent more of a continuum than an episodic affair, except when a major crisis results in landmark laws. But things in Washington often proceed at two levels. One consists of the ongoing matters relating to financial services that often move at a glacial pace. The other concerns the agendas of whichever party holds the White House and Congress.
The 2022 national elections didn’t produce the red wave many predicted, though the Republicans did pick up a narrow margin to gain leadership of the House of Representatives in the next Congress. With the White House and Senate firmly in Democrats’ hands, that seems like a recipe for a stalemate.
That would be just fine with many in the financial services industry. But hold off on making any bets.
Much is brewing that has implications for bankers. Here’s a preview of what to expect, with an emphasis on competitiveness issues rather than safety and soundness matters like capital levels.
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‘Banking’ Isn’t Just About Banking Anymore
The phrase “banking issues” has come to refer to a lot more than just traditional banking in recent years. In the wake of the financial crisis of 2007-2008, fintech companies began to proliferate, and while they may have set out to make banks irrelevant, they’ve become inexorably entwined frenemies since then.
No longer are the banking and credit union trade associations the only voices on legislative and regulatory issues. Fintechs in all their variety have banded together into various groups representing a mix of nonbank digital lenders; buy now, pay later companies; blockchain and cryptocurrency operations; and more. The increasing influence of big tech firms like Apple and Amazon and payment giants like PayPal can’t be ignored either.
The involvement of these comparatively new “banking” players will increase.
Rapid Evolution Continues:
As veteran Washington banking lawyer Thomas Vartanian points out in an interview, only about 25% of U.S. consumer lending occurs through federally chartered banks these days. That's just one measure of the ongoing change in what ‘banking’ means.
The Consumer Financial Protection Bureau, under Director Rohit Chopra, has been paying close attention to the new players, with probes into buy now, pay later companies and big tech payment activities. Because of these moves, it’s generally accepted that the CFPB intends to regulate the buy now, pay later sector, though the bureau is also facing its own major challenges, which we’ll get to.
The influence of nontraditional players surfaced in a big way when the Treasury Department issued a November 2022 report, titled “Assessing the Impact of Non-bank Firms on Competition in Consumer Financial Markets.” This massive paper is one of the many outcomes of a Biden executive order on promoting competition in multiple industries and, specifically, determining how various influences like fintech and big tech are affecting financial services.
“While these new entrant non-bank firms appear to be contributing to competitive pressures, they are generally not subject to the same oversight for safety and soundness or consumer protection as [insured depository institutions], which raises various public policy considerations,” the report said.
Among those considerations is the difficulty of even measuring the impact these companies might be having, as there are no fintech and big tech equivalents of the extensive regulatory database that documents bank activities. Ironically, some of the report’s suggestions for tracking the unregulated nonbanks came down to further scrutinizing how regulated banks interact with the newcomers, as well as fleshing out the supervisory framework for bank-fintech partnerships.
But legislators are looking at some ideas of their own.
Gridlock May Not Be the Whole Story in Congress
There’s a strong case to be made that not much will be coming out of Congress in 2023 and 2024, or not much affecting banks in any case. The ongoing controversy around the FTX crypto implosion could become the centerpiece of a legislative package, but it’s too early to tell.
In some quarters, the possibility of banking legislation being on hold is considered a positive.
“Most of my clients are pleased that there will be a stalemate in Congress and that nothing of significance is going to happen for the next couple of years,” says Alan Kaplinsky, senior counsel at Ballard Spahr. “Everything will require bipartisan support and very few things will be enacted.”
“With a split Congress, the likelihood is that legislation will drag even more,” says Thomas Vartanian, who has served with federal financial regulators, on Capitol Hill and in private law practice.
Even so, legislators are keen to add some regulatory oversight for the new entrants.
The basic outline of “modern” U.S. bank regulation goes back to the 1930s, Vartanian points out. While there has been some evolution — a separate federal regulator for thrifts no longer exists — the overall regulatory approach is still close to a century old. In the 1930s, there was no “tech” to go with “fin.”
Big Change Afoot for Future ILCs:
The Senate Banking Committee is expected to tackle legislation to put corporate owners of industrial loan companies under Federal Reserve supervision.
All the iffiness about the intent of the incoming Congress aside, one certainty is: the Senate Banking Committee remains under the chairmanship of Sen. Sherrod Brown, D-Ohio, who reliably takes a pro-consumer stance on banking issues and in oversight hearings.
Senate Banking Committee hearings involving the heads of the nation’s major banks have generally been hours-long grilling sessions. In laying out Brown’s plans for the next Congress in a December paper, committee majority staff made it clear that he will continue to push a pro-consumer, progressive viewpoint. He intends to work on a framework to regulate crypto.
Brown and his colleagues are also pursuing proposed legislation called the “Close the Shadow Banking Loophole Act.” This bill focuses on nonbank companies’ becoming state-chartered industrial banks — also called industrial loan companies, or ILCs — in order to conduct financial services activities without certain regulatory constraints. These entities typically also apply for deposit insurance with the Federal Deposit Insurance Corp.
Several new players, including Square, have gained entrée to the banking business by getting an ILC charter. Some have speculated that Elon Musk could attempt to do the same as a means to thrust Twitter into the banking and payments business.
The Loophole bill would pull ILCs further under the federal regulatory umbrella, subjecting their holding companies to supervision by the Federal Reserve. That kind of oversight is something multiple banking associations have favored for a long time. However, this bill would apply only to ILC applications received after late fall 2021.
Among the Republicans, with the upcoming retirement of Sen. Pat Toomey of Pennsylvania, the ranking member of the committee’s minority side, that role will be taken by Sen. Tim Scott of South Carolina.
New Leader for House Financial Services Committee
On the House side, more change is coming. With the Republicans taking over chairmanships as the majority party, North Carolina’s Patrick McHenry will become head of the House Financial Services Committee.
McHenry represents an interesting mix for the banking business, along the lines of the fintech-banking split discussed earlier. A veteran banking industry source notes that members of Congress increasingly tend to be pro-bank or pro-fintech in their viewpoint, the implication being that they are not friendly to the other side.
“Regarding incoming chairman McHenry, I don’t want to say that he doesn’t like the banks at all. I think he’s very supportive of the traditional banking sector. But his policy interests revolve around emerging entrants like fintechs and to some extent cryptos,” this source said.
Legislators & Fintech/Banking Rivalry:
Members of Congress increasingly tend to be pro-bank or pro-fintech in their viewpoint, and incoming House Financial Services Committee Chair McHenry’s interests lean towards fintechs.
Members of Congress increasingly tend to be pro-bank or pro-fintech in their viewpoint, and McHenry’s interests lean towards fintechs.
One of McHenry’s initiatives for the next Congress is legislation to create a level playing field for bank-affiliated and nonbank-affiliated issuers of “stablecoins.”
McHenry’s interest in new forms of finance arose years ago when his father had difficulty raising capital for a small business, according to his official biography. This led to his instrumental role in Obama-era legislation favoring the crowdfunding movement. From there, he developed an affinity for fintechs.
An example of the potential for bipartisanship lies in data issues. There has been talk about moving a privacy and data security bill in the Senate, coming out of the Senate Commerce Committee. The initial thrust would be more towards social media and other tech companies, sources say. But McHenry has said if that legislation were to move, he would like to use the opportunity to update Title V of the Gramm-Leach-Bliley Act.
Title V, implemented through federal regulators’ rules, concerns the right of financial institutions to share customer financial information and consumers’ own corresponding right to protect the confidentiality of their data. Gramm-Leach-Bliley is about a quarter century old and many uses of data that are commonplace today weren’t even dreamed of when the act was written.
But legislation is just one way that McHenry’s influence will be felt
Having a Republican chairman at the House Financial Services Committee is significant because this committee has oversight of the federal banking agencies. Through hearings, letters and other queries, incoming Chairman McHenry and fellow Republicans can “shine a light on some areas where there’s perhaps some regulatory overreach,” a source says. The activities of the CFPB would be a prime target here.
Overall, Republicans object to “woke” policymaking and they wish to “de-politicize banking,” according to Rep. Andy Barr, R.-Ky. Barr, who will be a senior member of the Financial Services Committee’s new majority, was speaking during a Consumer Bankers Association virtual event.
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CFPB’s Chopra in the Hot Seat
All oversight by McHenry’s House Financial Services Committee will be a Republican-led review of policies and actions of top regulators appointed by a Democratic president. But Republicans have long been out to curb the CFPB. During the Trump presidency, the initial head of the bureau was a former member of Congress, Mick Mulvaney, who had tried to kill it.
Meanwhile, Brown sees his leadership on the Senate Banking Committee as a continuous effort to “defend the CFPB against repeated and coordinated Wall Street attacks.”
Kaplinsky believes Chopra, as CFPB’s director, is in for tougher oversight hearings on the House side and predicts some dramatic legislative theater. “They will rake him over the coals pretty well,” Kaplinsky says.
But in terms of having any actual influence over Chopra’s actions, not so much. “I don’t think Rohit Chopra is that thin-skinned,” he says.
Indeed, Kaplinsky expects CFPB will be operating full speed ahead over the next couple of years on the Biden/Chopra agenda.
Now we come to two factors that are speedbumps in the race to advance this agenda. The first is clear, the second is just a possibility.
The Question of CFBP Funding
The first factor concerns the CFPB’s legal status. In late October 2022, the U.S. Court of Appeals for the Fifth Circuit ruled that the bureau’s funding method is unconstitutional. The CFPB appealed the ruling directly to the U.S. Supreme Court. That appeal is itself being opposed by one of the parties in the underlying case. If the high court takes on the appeal, the bureau’s hope is to have a decision by mid-2023.
In some quarters, the thinking is that Congress should amend the Dodd-Frank Act, which created the CFPB, to change the funding mechanism. As it stands, the CFPB draws funding by request from the Federal Reserve, an independent agency. This puts it outside the congressional appropriations process.
But if Congress did pursue an amendment, a price the Republicans could very well demand would be to change the leadership structure of the CFPB. They have long opposed the current setup, which is to have a single director, currently Chopra, who must be appointed by the president and approved by the Senate. They favor giving oversight of the CFPB to a board consisting of bipartisan membership, similar to the FDIC board.
Congressman Barr said that the ruling will give Republicans more opportunity to press for a governance change at the CFPB.
Barr also said that hearings in the new Congress could help Republicans push for changes to the CFPB policy on the “abusive” facet of its UDAAP standards. (UDAAP stands for Unfair, Deceptive, or Abusive Acts or Practices.) Republicans are developing legislation on this, but Barr indicated that simply holding hearings on the matter could jawbone some changes. (The CFPB broadly defines “abusive” as an action that materially interferes with a consumer’s ability to understand a term or condition of a financial product or service. In addition, the term can also mean taking unreasonable advantage of factors such as a consumer’s lack of understanding about a product’s costs or risks.)
Why Hearings Matter:
A longtime Washington insider says simply holding hearings on a controversial issue can promote what he calls “oversight by annoyance.” He suspects Biden regulators will be hauled before the House Financial Services Committee frequently.
If a compromise on the CFPB funding is worked out in Congress, and it becomes law, that would make the need for a Supreme Court ruling moot. This would be better for all, Kaplinsky says, versus the chaos that could otherwise result. He suggests that the Supreme Court might even hold off on its verdict to give legislators enough time to amend the law to avoid such turmoil.
“The banking industry doesn’t want the apple cart to be flipped over,” says Kaplinsky.
He says the court case and its aftermath could be a game-changer. If Chopra has to play ball with Congress more to get the law amended, there would be more compromising “and the CFPB isn’t used to that.”
Institutions in the midst of investigations or settlement discussions with the bureau may be able to take a harder line in the limbo created by the appeals court ruling, he adds. “CFPB is on their heels a bit.”
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CFPB’s Challenge: Beating Congress to the Punch
Here’s the second factor influencing the speed of the CFPB agenda: the Congressional Review Act.
A wrinkle that may prompt some regulators to push more-ambitious changes between now and the aftermath of the 2024 elections is the possibility that the Republicans could regain both the White House and the Senate in 2025. A Washington source says this could result in Biden appointees fast-tracking controversial rules to put them in place beforehand.
Too close to a turnover and their plans could be upset by use of the Congressional Review Act, which gives Congress 60 legislative days to disapprove regulations put in place via resolutions passed by a simple majority.
On the other hand, new regulators appointed by a Republican president also could pause rules put into effect or those still making their way through an agency’s rulemaking process when the turnover took place. A major revamp of Community Reinvestment Act regulations orchestrated and finalized under former Trump-era Comptroller of the Currency Joseph Otting got shelved once the Biden administration came in. Otting’s successor, Acting Comptroller Brian Brooks, also a Trump pick, had pushed a proposal called “the fair access rule” to ensure access to banking services from very large national banks for industries that many financial institutions had looked askew at, Examples included firearms manufacturers, fracking companies and family planning organizations. It, too, was withdrawn once the Biden administration came in.
Regulatory Agency Heads Still Just ‘Acting’
While Chopra has been leading the CFPB for a while, other banking posts haven’t been filled as quickly under the Biden administration.
As of mid-December 2022, Michael Hsu remains in the role of acting comptroller, with no official appointee on the horizon.
The administration’s nomination of law professor Saule Omarova for Comptroller of the Currency collapsed almost before it started due to views she expressed about private banks in the past. In the wake of a disastrous Senate Banking Committee confirmation hearing, she withdrew her name.
Hsu is respected in Washington, where insiders describe him as knowledgeable. He behaves much as an appointed comptroller would, not one who is just temporary. Some speculate he could get the nod — eventually.
Only recently did the administration nominate Martin Gruenberg, the acting FDIC chairman, to that post. If this appointment and the nomination of two Republicans to the FDIC board goes through, the board would be up to its full strength for the first time since 2015. The board has five members in all. Three of them are agency heads, and two of those are currently “acting” officials — Hsu and Gruenberg. (The other is Chopra.)
“There’s a long history of acting officials in the financial services agencies,” says Vartanian. “But we’re going into the third act of a four-act play and we’ve still got acting people at both OCC and FDIC.”
(Subsequent to original publication of this article the Senate on Dec. 19, 2022, confirmed Martin Gruenberg as FDIC Chairman. He had been acting chairman. The Senate also confirmed Jonathan McKernan and Travis Hill to the FDIC board and designated Hill as vice chairman.)