President Donald Trump has spent much of his time in office acting on his 2016 campaign platform of rolling back provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that strengthened bank regulation and consumer financial protections in the aftermath of the 2008 financial crisis. Within the first two weeks of his presidency, Trump signed an executive order requiring regulators to revoke at least two regulations for each new regulation issued. In the following year, Trump made headway on his deregulatory efforts when he signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), which eased rules for all but the largest banks in the United States. If Trump is re-elected, most observers expect his administration to continue down a path of deregulation.
Although many within the banking industry celebrated the deregulatory efforts, consumer advocacy groups feared that a regulatory rollback would expose the U.S. financial system to the same risks and behaviors that led to the 2008 financial crisis. As details emerge regarding Former Vice President Joe Biden’s bank regulatory platform, recent statements, including recommendations issued through the Biden-Sanders unity task force, suggest his support for strengthening certain provisions of the Dodd-Frank Act to protect U.S. consumer financial health and prevent another financial crisis sparked by risky lending and investing activities. However, what form this “strengthening” takes, especially in light of the coronavirus (COVID-19) pandemic, remains a source of handwringing among industry observers and participants.
Regardless of the election’s outcome, banks and consumers alike need to be prepared to navigate the post-election landscape. Although a Trump victory likely keeps the needle on deregulation, increased costs are to be expected as banks continue changing internal processes and procedures to meet compliance requirements. Meanwhile, predicting where the regulatory pendulum swings is much more challenging under a Biden administration. A Biden victory could spell a return to pre-Trump financial regulation with the re-implementation of policies and procedures that were unwound during Trump’s presidency; alternatively, Biden could maintain the status quo established by Trump in light of the economic stress caused by COVID-19. In either case, regulatory costs likely will be passed on to consumers in the form of higher fees and borrowing costs.
Below are several issues for bankers to watch as the election approaches.
Deregulation of Dodd-Frank
EGRRCPA’s passage made significant changes to the Dodd-Frank Act’s banking reforms. The legislative changes could be grouped generally into four categories: (a) regulatory relief for community and regional banks, (b) regulatory relief for mortgage lending, (c) regulatory relief for capital formation, and (d) consumer protection. In practice, the changes took the form, among others, of (i) relaxing the applicability of certain prudential standards, including requirements to conduct company-run stress tests, for banks with less than $250 billion in assets; (ii) easing Volcker Rule restrictions; (iii) establishing a community bank leverage ratio as an alternative to meeting other leverage and risk-based capital requirements; (iv) tailoring regulations for domestic and foreign banks to more closely match a banks’ risk profile; and (v) providing relief, generally, to community banks that included reduced reporting requirements.
A Trump victory, coupled with ongoing economic stress caused by COVID-19, could lead to a stronger deregulatory push that continues what EGRRCPA started, such as further relaxing capital and liquidity requirements to promote lending, further reducing examination frequency and reporting requirements to reduce burden on banks, and, as advocated by the Federal Reserve’s Vice Chair for Supervision Randal Quarles, amending Section 171 of Dodd-Frank (known as the “Collins Amendment”) to permit regulators to provide flexibility under the leverage ratio.
Although bankers breathed a sigh of relief when Biden became the Democratic nominee, uncertainty remains regarding a Biden presidency’s impact on bank regulation. Most recently, the Biden-Sanders unity task force recommended strengthening Dodd-Frank-era financial reforms, in particular calling for safeguards to ensure separation of retail banking from riskier investment activities, creating a public credit reporting agency within the Consumer Financial Protection Bureau (CFPB), and reinforcing consumer financial protection rules. Much of the hand-wringing surrounding a potential Biden presidency, however, relates to how far left Biden will go on financial policy issues because of voters and whether Biden would appoint bank regulators that support stricter rules. For example, Biden already moved to the left on bankruptcy reform, supporting policies championed by Senator Elizabeth Warren that include a streamlined bankruptcy process for personal bankruptcy and other debtor-friendly changes.
Community Reinvestment Act
The Trump administration’s effort to reform the Community Reinvestment Act (CRA) has been controversial. In May 2020, the Office of the Comptroller of the Currency (OCC) finalized a rule to “strengthen and modernize” the CRA. The final rule marked the most significant change to the CRA in over 20 years by (i) expanding the banking activities that qualify for positive consideration under CRA; (ii) expanding assessment areas; (iii) revising the CRA evaluation criteria; and (iv) revising reporting requirements. The OCC, however, finalized the rule alone. The Federal Deposit Insurance Corporation (FDIC) declined to join the final rule (despite joining with the OCC during the proposal stage) citing timing concerns related to COVID-19, while the Federal Reserve declined to join the rulemaking altogether. By expanding the scope of activities positively treated under CRA, the OCC received significant criticism from consumer advocacy groups that accused the OCC of undercutting efforts to require banks to help low-to-moderate income neighborhoods. The OCC’s reform received a further blow when House Democrats passed a joint resolution on June 29, 2020, that explicitly disapproves the OCC final rule and states that the rule “shall have no force and effect.”
If Trump is reelected, the federal banking agencies may continue taking separate paths on reforming the CRA. The OCC, under Acting Comptroller Brian Brooks, likely will continue implementing its CRA rules despite the lack of interagency support. Meanwhile, the banking industry expects the FDIC and the Federal Reserve to move forward with some measure of CRA reform.
A Biden victory would enable him to appoint a new Comptroller, which could move the OCC’s CRA reform one step closer to being overturned, especially if Democrats win control of the Senate. As a policy matter, Biden has expressed support for strengthening and expanding the CRA to ensure banks and nonbank financial institutions, particularly mortgage and insurance companies, are providing credit access to all members of the community while filling in loopholes that enable institutions to circumvent investing in community development.
Consumer Protection and the CFPB
The CFPB under Trump’s first term has rolled back numerous consumer protections. Beginning with a marked reduction in enforcement actions, the CFPB has continued unraveling Dodd-Frank reforms by, most notably, weakening underwriting requirements for payday lenders. If Trump were re-elected, current CFPB Director Kathy Kraninger likely would remain in power, which would allow her to finalize key initiatives such as (a) easing the “Qualified Mortgage” rule to eliminate debt-to-income as a qualifying factor and (b) overhauling approaches to fair lending and implementation of the Equal Credit Opportunity Act.
A Biden presidency likely means the end of Kraninger’s CFPB leadership, with a Democratic-appointed CFPB director likely unwinding Kraninger’s deregulatory actions. Most likely, a Biden administration would strengthen CFPB oversight of consumer lending to curtail abusive or deceptive lending practices as well as promote greater lending cost transparency to borrowers.
The election could push the Federal Housing Finance Agency (FHFA) another step closer to ending Fannie Mae and Freddie Mac’s government conservatorship. The FHFA under Trump-appointee Mark Calabria has taken steps to recapitalize Fannie and Freddie and to propose a post-conservatorship capital framework. Although privatizing Fannie and Freddie would afford Fannie and Freddie added flexibility to engage in other activities (and to stop sending profits to the Treasury Department), privatization would eliminate significant benefits currently enjoyed by Fannie and Freddie, such as local and state tax exemptions and lower federal borrowing costs. More important, without government backing, Fannie and Freddie may be less likely to purchase longer-term mortgage loans from banks and lenders, which means financial institutions may be less likely to extend 30-year fixed rate mortgages to borrowers and, instead, opt for shorter mortgage terms or adjustable rate mortgage that protect lenders but generally are viewed as less predictable and, therefore, riskier for borrowers.
If Biden is elected president, his administration could attempt to replace Calabria (pending the outcome of a Supreme Court case to determine whether a President can remove the FHFA director without cause) and prolong the conservatorship. In addition, if Democrats win majority control of the Senate, a Biden administration could push forward legislative efforts to reform Fannie and Freddie as a public utility, which would place limits on their profitability and pricing.
What does this mean for Banks and their Customers?
Consistency and predictability, particularly in the legislative and regulatory space, are highly valued by banks. Regardless of the outcome of the 2020 presidential election, banks likely will face some degree of regulatory whiplash and the associated costs. And clarity likely will not come until months after the presidential election.
Kevin Tran is a partner at Waller and assists clients in matters related to bank regulatory compliance, capital-raising and corporate transactions. Banks, bank holding companies and other financial institutions benefit from the experience he gained