As the end of 2020 mercifully approaches and the presidential election is now in the rearview mirror, Waller’s Financial Services Industry Team is looking forward to 2021 to bring you its insight into what the future may hold for participants in the financial services industry. In this multi-part series, we will cover topics ranging from the forecasted impact of the presidential election on bank regulation to the trends bearing upon and the gradual thawing out of bank M&A activity to the continued appetite of the capital markets for additional debt and equity raises. Although our series will seek to provide a comprehensive look at banking in 2021, in the first two installments, we describe key bank regulatory issues to watch as President-elect Joe Biden transitions into office.
President-elect Joe Biden’s victory likely marks a pendulum swing back towards stricter banking regulation; however, predicting where the pendulum ultimately rests under a Biden administration is challenging.
During his campaign, Biden championed strengthening the Dodd-Frank era reforms that protect consumers from unfair, deceptive and predatory lending practices by financial institutions, provide greater access to credit and financial services to a broader cross-section of Americans, and prevent banks from engaging in risky lending and investment activities. However, few specific details on Biden’s financial regulatory platform emerged during the campaign trail. As a result, industry observers and participants alike are left wondering what form this “strengthening” may take, especially in light of the economic stress caused by the coronavirus (“COVID-19”) pandemic.
For bankers, obtaining insight into Biden’s financial regulatory platform and the appointees charged with carrying out his policies will be integral to post-election strategic planning. To that end, below is part one of a two-part series describing key bank regulatory issues to watch as Biden settles into his presidency.
Social and racial justice movements dominated discussion on the campaign trail. As part of those movements, the concept of financial inclusion, in particular access to credit and financial services for minorities and low-to-middle income (LMI) neighborhoods, has taken center stage. However, a fractured CRA regulatory framework, with the federal banking agencies going in separate directions, could derail consistent application of the Community Reinvestment Act (“CRA”).
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. To that end, Biden could revisit the OCC’s CRA reforms by appointing a new Comptroller to better align the federal banking agencies to act in concert with respect to implementing CRA.
The Consumer Financial Protection Bureau (“CFPB”) under Trump rolled back numerous consumer protections implemented under Dodd-Frank, beginning with a marked reduction in enforcement actions and continuing, more recently, with the weakening of underwriting standards for payday lenders and initiatives to ease the “Qualified Mortgage” rule that would eliminate debt-to-income as a qualifying factor.
Biden is expected to reinvigorate the CFPB with a renewed focus on curtailing abusive or deceptive lending practices and increasing lending cost transparency for borrowers. These policies likely will take the form of (i) undertaking more aggressive enforcement roles, (ii) strengthening underwriting requirements and borrower protections, (iii) monitoring student-loan servicers, and (iv) potentially establishing a public credit-reporting agency under the CFPB’s control as an alternative to Equifax, Transunion and Experian.
Biden’s support of ensuring greater access to financial services, creating a public credit-reporting agency alternative, and promoting fair lending practices could create a fertile environment for fintech growth.
Federal regulators have long recognized and discussed the tension of balancing the massive potential for financial technology innovation with the simultaneous need to develop adequate regulations without stifling innovation. To that end, a friendly regulatory environment for fintechs likely paves the way for more partnerships between fintechs and banks by facilitating partnerships between the two that would enable fintechs to leverage a bank’s capital reserves and existing customer base and banks to leverage a fintech’s innovative technology infrastructure (including artificial intelligence and machine learning) to provide more affordable financial services to a broader segment of the U.S. population.
Banks have long been accustomed to Fannie Mae (“Fannie”) and Freddie Mac (“Freddie”) as purchasers of residential mortgage loans while under government conservatorship. With the specter of privatizing Fannie and Freddie under Trump, fears arose regarding the lack of government financial support and what that would mean for banks’ willingness to issue longer-term mortgage loans. Specifically, a privatized Fannie and Freddie may be less willing to purchase longer-term mortgage loans from banks. As a result, financial institutions may be less likely to extend conforming 30-year, fixed-rate mortgage loans, which have become a staple in U.S. housing finance, to borrowers. Instead, banks may opt to issue loans with shorter terms or adjustable rates that protect lenders but generally are viewed as less predictable and, therefore, riskier and potentially more costly for borrowers.
As a policy matter, Biden likely will take a drastically different approach to Fannie and Freddie and revert to the Obama-era approach of empowering Fannie and Freddie to facilitate access to affordable housing. To that end, Biden likely would move to appoint leadership at the Federal Housing Finance Agency who would keep capital requirements for Fannie and Freddie low and, most likely, keep both entities under conservatorship. In addition, there has been speculation that Biden may treat Fannie and Freddie as public utilities, which would place limits on their profitability and lead to lower borrowing costs.
In a 2017 symposium speech, former Federal Reserve Chair Janet Yellen remarked, “the balance of research suggests that the core reforms [stemming from Dodd-Frank] we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth.” Critics of Dodd-Frank existed on both sides of the aisle, with some arguing the reforms failed to adequately regulate the financial industry while others claimed the reforms went too far and stymied economic growth. Regardless of where the pendulum swings and falls, bankers should be prepared to react to and address the changing regulatory landscape under Biden.
We hope that you enjoyed this first installment of our multi-part series. Next week, our Financial Services Industry Team will disseminate a continuation of this first installment which addresses additional bank regulatory policy issues that likely will come to the fore in 2021.
 The Federal Reserve Board (“Fed”), Office of the Comptroller of the Currency (“OCC”), and Federal Deposit Insurance Corporation (“FDIC”).
 See Community Reinvestment Act, Pub. Law 95-128.
 Between January 20, 2012 and November 30, 2017 (resignation date of Obama-appointed former CFPB Director Richard Cordray), the CFPB issued approximately 190 public enforcement actions versus approximately 65 between December 1, 2017 and the present.
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