While an unchecked pandemic rages and precarious economic conditions loom, major changes to financial regulation may not be a day one priority for the next administration. But make no mistake: the presidential and congressional elections will have profound strategic, economic and policy implications for financial services firms operating in the United States.
Under President-elect Biden, greater scrutiny of financial services at the federal level is without question on the horizon. Democrats generally take a more robust approach to regulation – especially consumer protection – and a Biden administration will be no exception.
Biden’s victory has particular implications for the Consumer Financial Protection Bureau (CFPB), which was created following the financial crisis of 2008 with a mission to provide accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace. Critics of the Trump administration contend that the CFPB has become toothless in the last four years. Indeed, the CFPB has initiated only 77 enforcement actions under Trump, compared to 235 during Obama’s first term as President.
Biden will likely replace the CFPB Director immediately following inauguration with someone who has a demonstrated track record of advocating for strong consumer protections. A Biden administration will also likely undo some of the Trump administration’s reversals of Obama-era policies. For example, the Trump administration relaxed restrictions on payday and other short-term loans, as well as on debt collectors. Biden’s CFPB Director will almost certainly revisit those rules. Under Biden, bank regulators are also quite likely to revisit Trump administration rules that eased requirements for banks to invest in communities where they collect deposits, under the Community Reinvestment Act.
But the Biden administration will go beyond score-settling. The cornerstone of Biden’s vision for a stronger, resilient, and more inclusive economy is grounded in racial justice and economic equality. The pandemic exposed just how fragile many Americans’ finances are, and just how unequally economic security is distributed. Biden’s administration will seek to use the levers at its disposal, including regulation, to rebalance some of these disparities.
Those levers include fair lending laws, which require lenders to avoid practices that directly or indirectly treat borrowers unequally based on race, gender, age or other protected characteristics. The new administration will likely also embrace the concept of “fair and responsible banking,” which essentially expands the traditional fair lending concepts to include Unfair and Deceptive Acts and Practices (UDAAP). Other areas of focus may include credit reporting reform, as well as loan servicing practices, with a particular focus on default management and loss mitigation activities, which have increased significantly during Covid.
Another key area of focus will be the fees banks charge their customers, such as overdraft fees. Overdraft fees are a significant source of non-interest income for the country’s largest banks – in fact banks charge over $11 billion per year in overdraft fees. According to the CFPB, 9% of consumer accounts – typically the most vulnerable Americans – pay approximately 79% of those fees. Overdraft fees are among the most complained about banking practices and, accordingly, the CFPB may well place restrictions on the amount, frequency and circumstances under which such fees can be charged.
The ultimate outcome of the Senate elections will significantly affect the level of fiscal support provided to the economy, as well as the ideological disposition of regulatory appointments in a Biden administration, both of which will materially impact the policy outlook. If the GOP retains its majority in the Senate, successful execution of the administration’s objectives will depend even more on robust engagement of the administrative agencies, as the likelihood of passing meaningful legislative reforms will be significantly diminished under a divided Congress. We expect heightened scrutiny on firms’ pandemic response efforts, often with a 20/20 hindsight lens.
This crisis is not like the one that greeted Vice President Biden in 2009 — the financial sector is not the source of the crisis and has, to date, been a source of relative strength. But if we learned anything from the financial crisis, it’s that oversight of financial services must evolve with the industry, and must provide a framework of regulation that protects not only the banking system itself, but also the consumers who use it. The financial fragility exposed by the pandemic buttresses this need, and ensures that the banking industry will not be bored under President Biden.
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This column does not necessarily reflect the opinion of FinLedger’s editorial department and its owners.
To contact the authors of this story:
Catherine Brown at [email protected] &
Jonah Crane at [email protected]
To contact the editor responsible for this story:
Mary Ann Azevedo at [email protected]