As the Biden administration takes shape, many are foreseeing changes to the regulation and conduct of the financial services industry in keeping with themes of the Biden/Harris campaign. Expectations include a renewed emphasis on consumer protection; changes to monetary policy; and, the pursuit of political goals, such as racial equality and amelioration of climate concerns. If Republicans retain control of the Senate, the president is likely to act through regulation rather than legislation, and to advance his agenda with appointments to key positions in the numerous federal agencies that affect financial services.
The Biden administration can appoint its own director of the Consumer Financial Protection Bureau (CFPB) thanks to a recent U.S. Supreme Court ruling that allows the president to fire the director before the end of a specific term. This matters because the Trump administration’s effort to restructure divisions within the CFPB to ensure a more industry-friendly approach to the bureau’s regulatory efforts were largely slow-walked once the presidential election results were learned and will almost certainly not go forward under Biden. The Biden administration’s transition team for CFPB includes people who worked for prior CFPB Director Richard Cordray. The CFPB under Cordray collected billions of dollars in fines from financial services companies. Such fines slowed almost to non-existence after the Trump administration installed its own director but would presumably ramp back up upon reinstallation of the Cordray team.
In addition, numerous provisions of the just-passed, second CARES Act (COVID-19 “stimulus” legislation) will fall to the CFPB to administer. Examples include monitoring of mortgage lenders’ compliance with rules allowing certain borrowers to skip payments, and enforcing foreclosure bans on certain properties financed by federally insured loans, such as apartment buildings. Beyond provisions in stimulus legislation, the CFPB can reinstate restrictions on payday lending and the Biden/Harris campaign has talked of creating via CFPB regulation a federal credit reporting agency that all lenders who participate in federally insured lending would be required to use.
Beyond the CFPB, the Biden administration’s transition team for the Federal Communications Commission (FCC) includes its former Commissioner Mignon Clyburn, who while in office supported a broad interpretation of the FCC’s “auto-dialer” rules that made it more difficult to use automation for credit collection calls. Recent federal court rulings that exempted many such calls from the auto-dialer rules could be effectively overturned by new interpretations of the rules.
Also being discussed is regulatory change through the Federal Reserve known as “real time payment systems” to give consumers quicker access to deposited funds that currently require time to “clear.” Consumer advocates claim that delays in the posting of deposited checks result in accidental overdrafts, which create fees and impact credit ratings. Instant posting, however, could make it difficult or impossible to reverse fraudulent transactions.
President Joe Biden will appoint his own secretary of the treasury, Janet Yellen, former Federal Reserve Board chair. The Fed is the country’s “national bank” and, among other things, sets the basic interest rate of funds that are loaned to banks, injecting new dollars into the money supply and influencing the interest rates on business and consumer loans. The Treasury Department, in turn, has great power over financial regulation, taxes and money supply. Yellen is expected to push the Fed toward actions believed to stimulate distressed areas of the economy, which usually translates to keeping interest rates lower than they would otherwise be.
This is sometimes referred to as a “loose” monetary policy. The intent is to make it easier for businesses and consumers to borrow money to start new projects, buy homes, buy cars, etc.; in turn, stimulating demand for numerous goods and services. Critics of loose money, conversely, argue that artificially low borrowing rates encourage people to take unrealistic risks, which can result in failures that chain-react and lead to sudden contractions of the economy such as occurred in 2008. For now, Biden’s pick of Yellen signals that loose monetary policy will remain in place as it has been throughout the Trump years.
Running somewhat counter to a policy of encouraging credit, however, is that the second stimulus bill or “CARES Act 2” appears to contain restrictions on certain lending programs that were established in the original CARES Act, indicating at least some Congressional restraint on federal credit policy that a Biden administration could only undo with additional legislation, which would be difficult if Republicans retain control of the Senate.
Political Policy Initiatives Affecting Financial Industries
Many commenters and observers have identified a Biden administration focus on economic inequality, racial justice and climate change. Politically inspired regulations addressing these types of concerns are referred to as “environmental, social and governance” or “ESG.” The Trump administration tended to minimize ESG in evaluating financial regulation and disclosure, while a Biden administration is widely expected to emphasize ESG at all levels. Some specific examples being discussed include: (1) Securities and Exchange Commission requirements that public companies disclose their stance on climate change, effectively requiring such companies to adopt climate change strategies that comport with the regulators’ views (this is already being done by New York’s Department of Financial Services via an “Industry Letter” outlining how companies should address the effects of climate change on their own financial risks and outlooks); (2) Federal Reserve requirements that entities under its regulatory control address the effect on racial equality of proposed mergers and acquisitions; and, (3) Labor Department requirements that pension funds invest their assets only in companies that meet regulator-approved ESG criteria.
In addition, presumptive Treasury Secretary Yellen has supported a carbon tax and was recently quoted in a Reuters article as saying, “What I see is a growing recognition on both sides of the aisle that climate change is a very serious concern and that action needs to occur” and “[t]here really is a new kind of recognition that you’ve got a society where capitalism is beginning to run amok and needs to be readjusted in order to make sure that what we’re doing is sustainable and the benefits of growth are widely shared in ways they haven’t been.” This is one indication that Biden’s administration will be focusing heavily on regulation of the financial industry to implement its social and political goals.
Only time will tell, but initial indications are that financial services regulation will be returning to an environment very like the one that prevailed during the Obama administration, which will include tighter regulation of consumer issues and politically driven regulation of the financial services industry in a general and pervasive way.
Bert Spence is a commercial attorney in the Birmingham office of RumbergerKirk. He has a broad background in banking financial services and commercial litigation. He has also represented numerous commercial real estate lenders regarding problem loans including foreclosures, deed-in-lieu transactions, receiverships, loan modifications, guaranty claims and general issues concerning realization on collateral.