The inauguration of US President Joe Biden on January 20, 2021, marked the beginning of what will surely be a major transition across the US legislative and regulatory landscape—including the laws and regulations governing financial services firms in the United States. Some of those changes have already been felt, while others—including the appointment and Senate confirmation of key regulators—will unfold over the coming weeks, months, and years. In this piece, we identify several of the most pressing financial regulatory issues facing the new administration—from controversial rulemakings to new legislative priorities and policy initiatives to the management of the ongoing COVID-19 pandemic—and provide our thoughts on what financial services firms and other stakeholders might expect going forward.
Finalized on the last day in office for outgoing Acting Comptroller Brian Brooks, this regulation would require national banks, federal savings associations, and federal branches and agencies of foreign banking organizations with more than $100 billion in assets to provide “fair access to financial services” on proportionally equal terms to all customers engaged in lawful activities.
Backed by stakeholders such as the oil and gas industry and firearms manufacturers, which have at times been denied banking services by certain financial institutions for reputational risk or other reasons, the controversial rule would effectively prohibit covered banks from refusing services to entire categories of customers without conducting individual risk assessments. The banking industry has opposed—and continues to oppose—this rule on both substantive and procedural grounds.
The final rule was scheduled to become effective on April 1, 2021, but on January 28, 2021, the Office of the Comptroller of the Currency (OCC) delayed publication of the rule to “allow the next confirmed Comptroller of the Currency to review the final rule and the public comments the OCC received, as part of an orderly transition.” In connection with the delay, the OCC noted its “long-standing supervisory guidance stating that banks should avoid termination of broad categories of customers without assessing individual customer risk remains in effect.”
Potential Action by the Administration
In light of the OCC’s January 28 announcement, it is highly unlikely that the final rule will take effect on April 1 as initially proposed. Going forward, the Biden administration has several potential paths for taking action.
First, among the flurry of last-minute rulemakings by the OCC and other financial regulatory agencies, the Fair Access Rule is likely a leading candidate to be repealed by congressional Democrats under the Congressional Review Act. Alternatively, once President Biden’s selection for Comptroller of the Currency—not yet announced—is confirmed by the Senate, the Comptroller could delay the April 1 effective date and/or reopen the rulemaking with a view to discarding the initiative entirely or, potentially, reissuing the rule in a manner that applies the “fair access” concept in a way that addresses key progressive concerns regarding improved access to financial services for minority and other unbanked or underbanked communities.
Failing either of those options—or, perhaps, in concert with them—banking industry stakeholders could still challenge the rule in court. One way or another, the OCC’s Fair Access Rule as currently formulated appears to have little chance of surviving in its current form under the Biden administration and may well be among the key financial services rules to see action within the first 100 days of the administration.
In response to the uncertainty in credit markets as a result of the Madden[1] decision, the OCC adopted a final rule that clarifies that federal preemption of state usury laws with respect to loans originated by a national bank or federal savings association continues to apply, even after the originating bank sells, assigns, or transfers the loan to a nonbank assignee. The OCC’s rule applies to national banks and federal savings associations and became effective August 3, 2020. In June 2020, the FDIC adopted a substantially similar final rule that applies to loans originated by FDIC-insured state-chartered banks and became effective August 21, 2020.
These “valid when made” rules, in effect, mitigate the substantial uncertainty created by the Madden decision for lenders and others regarding the enforceability of certain loans after an originating bank transfers them to a nonbank entity. The rules do not eliminate all of the uncertainty in the market caused by the Madden decision, however, because the rules are not binding on the courts and may be challenged in court by consumers, state regulators, and/or consumer advocacy groups. On July 29, 2020, the attorneys general of California, Illinois, and New York filed an action against the OCC challenging the rule under the Administrative Procedure Act (APA) and seeking to have the rule declared unlawful and set aside. This case is in its early stages, and the plaintiffs recently moved for summary judgment. On August 20, 2020, attorneys general of several states filed a separate action against the FDIC challenging the rule under the APA and seeking to have the rule declared unlawful and set aside. The case also is in its early stages.
In October 2020, the OCC issued a final “true lender” rule, which establishes that a national bank is the “true lender” of a loan when, as of the date of origination, (1) the bank is named as the lender in the loan agreement or (2) the bank funds the loan. This rule, which applies only to national banks and federal savings association, went into effect on December 29, 2020. On January 5, 2021, attorneys general from seven states—New York, California, Colorado, Massachusetts, Minnesota, New Jersey, and North Carolina—and the District of Columbia sued the OCC, challenging this rule under the APA and seeking to have the rule declared unlawful and set aside.
Potential Action by the Administration
All of these rules have now gone into effect, and the Biden administration therefore may have somewhat more limited means to change or reverse course going forward. By most calculations, agency rules finalized after August 21, 2020, could be repealed under the Congressional Review Act (CRA). In turn, only the OCC’s “true lender” final rule would remain subject to CRA review (although all three rules have faced criticism and opposition from congressional Democrats). President Biden’s nominee for Comptroller of the Currency—as yet, unknown—could, once confirmed by the Senate, take action to reopen the OCC’s “valid when made” and “true lender” rulemakings, seeking to discard the initiatives entirely.
With respect to the FDIC’s “valid when made” final rule, the FDIC could reopen the rulemaking as the FDIC board of directors evolves to include Biden appointees. FDIC Chair Jelena McWilliams’s term does not end until 2023 (and she has indicated that she plans to remain in her position through the end of her term), but because the director of the CFPB and the Comptroller of the Currency are members of the FDIC board, once President Biden appoints new leadership to those agencies, a majority of the FDIC board will consist of Democratic appointees. Accordingly, confirmation of Biden nominees to the FDIC board will likely cause McWilliams to lose her majority, relegating her to minority chair, with uncertain policy implications at this time.
Failing any CRA repeal or agency reconsideration, the Biden administration will also have to weigh the potential impact of the lawsuits challenging these OCC and FDIC rulemakings. This could include, for example, the Biden administration reaching a settlement with the states to revise these rules, if the state attorneys general do not insist on complete withdrawals of them.
Soon after the inauguration of President Biden on January 20, former Consumer Financial Protection Bureau (CFPB or Bureau) Director Kathleen Kraninger submitted her resignation. Shortly thereafter, the president announced that he had appointed David Uejio, a veteran CFPB official who most recently served as the Bureau’s chief strategy officer, to serve as acting director until the Senate confirms Rohit Chopra, Biden’s nominee for director.
In the short time since the inauguration, the Bureau has released guidance to assist military families in managing their finances during and after the pandemic; to individuals choosing or being forced, due to the pandemic, to retire; and on current loan and housing protection measures. In addition, Acting Director Uejio has been meeting with the staff of the Bureau’s divisions and has both conveyed his broad vision for the Bureau in the coming months and directed key Bureau divisions to take some immediate actions. In keeping with the Biden administration’s broader priorities, one of the CFPB’s stated policy priorities is to provide relief for consumers facing hardship due to the COVID-19 pandemic and the related economic crisis.
Potential Action by the Administration
Acting Director Uejio stated that the Bureau will immediately focus its supervision and enforcement tools on overseeing the companies responsible for COVID-19 relief. He is “concerned” about the findings described in the Bureau’s recent Supervisory Highlights COVID-19 Prioritized Assessments Special Edition that companies are failing to properly administer relief through the pandemic. Uejio stated that, moving forward, the Bureau “will take aggressive action to ensure that regulated companies follow the law and meet their obligations to assist consumers during the COVID-19 pandemic.” He also has directed the Bureau’s Supervision, Enforcement and Fair Lending (SEFL) division to “always determine the full scope of issues found in its exams, systemically remediate all of those who are harmed, and change policies, procedures, and practices to address the root causes of harms.”
For the Prioritized Assessments that do not already take these steps, Uejio has requested that Bureau supervision staff follow up to ensure these steps are implemented and completed without conducting new follow-up exams. Uejio also noted that companies that have not already received instructions from Bureau examiners “should expect to receive letters in the mail soon.” In some cases, Uejio warns that penalties may be necessary. Uejio also has directed the SEFL division to expedite enforcement investigations relating to COVID-19 “so that [the Bureau] can take action now to ensure that industry gets the message that violations of law during this time of need will not be tolerated.”
Uejio also stated that he will rely on the Research, Markets, and Regulations (RMR) division’s “rigorous, routine internal reporting on key market metrics like foreclosures, charge offs, auto loans, checking account closures, and more. These metrics will help [the Bureau] gauge the health of consumer finance markets and guide [the Bureau’s] focus. [He] will look to the RMR division for a robust research agenda that examines the impact of specific industry practices on consumers’ daily budget and overall bottom line in order to target effective policy interventions.” He expects the RMR division to publish regular research reports addressing COVID-19 “so that the public has the benefit of [the Bureau’s] high-quality analysis.” In addition, Uejio expects the CFPB to make maximum use of the data available to it, and he will authorize use of the Bureau’s data collection authority to obtain relevant data to the extent the Bureau lacks access to data it needs. Among the immediate steps he is asking the RMR division to take include preparation of an analysis on housing insecurity, including mortgage foreclosures, mobile home repossessions, and landlord-tenant evictions.
In addition, Uejio has directed the RMR division to “focus rulemaking on the pandemic response and to preserve, where possible, maximum policy flexibility for the president’s nominee once confirmed.” To that end, he has asked the RMR division to focus the mortgage servicing rulemaking on pandemic response to avert, to the extent possible, a foreclosure crisis when the COVID-19 forbearances end in March and April. Last June, the Bureau issued an interim final rule to provide an exemption from certain Regulation X loss mitigation requirements in connection with offering certain permanent loss mitigation options to borrowers who are completing a COVID-19-related forbearance. The Bureau is currently engaged in further rulemaking that is likely to expand the scope of those exemptions.
Along with the sharpened COVID-19-related consumer focus, the Bureau seems primed to place a greater emphasis on assisting the small businesses across the country that are on the brink of extinction. The Bureau enforces critical laws that protect small business owners, including from harmful discrimination, in their access to and use of credit. To this end, Uejio has pledged the RMR division “the support it needs” to implement the Dodd-Frank Act–required small business lending data collection rulemaking “without delay.”
President Biden appointed a new acting director at the CFPB shortly after his inauguration. The US Supreme Court’s June 2020 decision in Seila Law v. Consumer Financial Protection Bureau, which allows the president to remove the CFPB director “at will,” should, to a large degree, align the director’s policy aims with those of the current presidential administration. The Seila Law decision means that the beginning of the Biden administration has significant new consequences for the direction of the CFPB. Previously, Director Kathleen Kraninger could have continued to serve in office until well into 2023. However, President Biden exercised his right to promptly replace her—and in so doing, dramatically alter the agency’s course.
The Biden-Harris transition team announced on January 18 that it had selected Rohit Chopra, a member of the Federal Trade Commission (FTC), to be the nominee to be the next director of the CFPB. Prior to his time at the FTC, Chopra served as a CFPB assistant director, where he focused on the Bureau’s student loan efforts and served as the student loan ombudsman. New senior leadership likely will replace the agency’s other existing management personnel, including at least some of the leadership ranks within the CFPB’s SEFL division.
Potential Action by the Administration
The Biden administration’s key issue likely will be enforcement. The CFPB’s anticipated approach to the exercise of its authorities will reflect criticism that the agency has been lax in its approach under Acting Director Mulvaney/Director Kraninger’s leadership during the Trump administration. More specifically, in contrast to the CFPB’s approach of handling more matters in supervision under the previous administration, there will likely be more enforcement cases involving larger dollar amounts and a more aggressive focus on the Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts and practices (UDAAPs).
In keeping with the Biden administration’s announced focus on the COVID-19 pandemic, the economy, and racial justice, we expect that the CFPB will focus on softening the economic impact of the pandemic on households and more aggressively police Wall Street. The federal CARES Act relief law extended certain protections to homeowners and renters, and the CFPB will probably step in more closely to monitor businesses and make sure consumers are not pushed further into distress (e.g., avoid evictions and vehicle repossessions, reduce loan delinquencies and defaults, and monitor debt collectors and credit reporting agencies).
Any additional stimulus efforts that Congress passes and President Biden signs into law will likely provide additional consumer protections (e.g., further extensions of the eviction and foreclosure moratoriums) that will warrant careful CFPB scrutiny and consideration. The CFPB’s mortgage-related investigations are likely to be laser focused on COVID-19-related issues and what servicers are doing to help and not harm consumers during this time.
The administration’s focus on promoting racial equity through financial policies and programs also portends the CFPB’s greater supervisory and enforcement focus on fair lending matters. Should Chopra be confirmed as the next CFPB director, we anticipate a strong push for individual liability for company directors and officers (in addition to corporate liability) in agency enforcement actions. Even without federal privacy legislation, we also expect the CFPB to increase its involvement in privacy oversight, as Chopra has been an advocate of the use of “unfairness” in these cases during his time at the FTC.
Financial services firms subject to the CFPB’s jurisdiction should expect possibly abrupt change in the agency's supervisory and enforcement activities, and be mindful of the three-year statute of limitations on the agency’s civil enforcement authority when gauging prospective risks.
The cryptocurrency space was active during 2020 and continues to be an area of interest to investors and regulators. In the last year, two cryptocurrency bills were introduced in the House of Representatives, one of which would have required stablecoin issues to be subject to bank regulation. During 2020, the OCC issued interpretive letters to provide guidance to banks that wish to hold cryptocurrency and stablecoin reserves.
In addition, the OCC provisionally approved a national trust bank charter for a digital bank, Anchorage Digital Bank, National Association (Anchorage Digital Bank) in January. Anchorage Digital Bank had sought conversion to a national bank from a South Dakota–chartered nondepository public trust company and was already permitted to offer custody services to investors that transact in digital assets and cryptocurrencies, such as tokenized securities and cryptocurrencies like Bitcoin and Ethereum, among others.[2] In announcing this development, the OCC’s press release noted that the conversion from a nondepository public trust company to a national bank was “not in contravention of applicable law.” Less than a month after the Anchorage approval, the OCC conditionally approved an application to become a federally chartered trust bank, permitting Protego, a Seattle-based provider of cryptocurrency custody and trading services, to operate nationwide. The landmark Anchorage Digital Bank and Protego charters demonstrate the OCC’s comfort in permitting national banks to engage in certain cryptocurrency activities and paves the way for other banks to become chartered to engage in cryptocurrency activities.
Potential Action by the Administration
In light of the Democrat-controlled Congress, cryptocurrency legislation and legislation that requires stablecoin issuers to be banks could gain momentum. With Gary Gensler poised to take the helm of the US Securities and Exchange Commission (SEC), the SEC almost certainly will become more active in its oversight of initial coin offerings and cryptocurrency in general. At the same time, the Biden administration’s stance on cryptocurrency activities expansion is unclear, although Treasury Secretary Janet Yellen recently has voiced concerns over the illicit uses of cryptocurrencies. That said, the OCC, which historically has operated with a considerable level of autonomy notwithstanding its status as a Treasury bureau, may continue its efforts to facilitate cryptocurrency in the mainstream banking space. A decision by the OCC to move forward with a special purpose national bank charter (a “payments charter”) for fintech firms, which would provide federal preemption of state money transmitter licensing requirements, would be a significant win for cryptocurrency and stablecoin companies. This would be especially true if legislation were adopted that forces stablecoin issuers to be banks.
In the wake of substantial social and political unrest that reached new heights in 2020 following the killing of George Floyd and the surge of the Black Lives Matter movement, the Biden administration has made clear that racial justice will be a key pillar of its agenda for the country. Senator Sherrod Brown, chair of the Senate Committee on Banking, Housing, and Urban Affairs, and Representative Maxine Waters, chair of the House Financial Services Committee, have both emphasized throughout their tenures in Congress the need for a greater focus on diversity and inclusion issues in the financial services sector as well as expanded access to financial services for women and people of color.
As a result, we expect that racial equity and diversity and inclusion initiatives in the US financial sector will be a hallmark of the new administration—with impacts ranging from changes in composition of the leadership of financial regulatory agencies, to legislative and policy initiatives aimed at expanding access to banking and other financial services to minority communities, to regulatory and supervisory initiatives focused on improving diversity within the country’s financial institutions.
Potential Action by the Administration
The strong mandate for action in this area, coupled with a Democratic party–controlled Congress that is broadly aligned with the administration on diversity and inclusion and racial justice issues, creates a strong possibility of sweeping racial equity and diversity–related reforms across the financial sector.
Both Senator Brown and Representative Waters previously sponsored legislation intended to promote and, in certain respects, mandate a heightened level of diversity and inclusion within America’s financial services firms. These initiatives are likely to receive renewed attention in Congress. Both Brown and Waters have also pushed for a range of legislative and policy initiatives focused on ensuring that the US financial system better serves the interests of the unbanked and underbanked, which disproportionally consist of people of color. Such initiatives likely will lead to renewed focus on the Community Reinvestment Act, expansion of community development lending and investment including through Community Development Financial Institutions, and potentially more sweeping measures focused on universal banking access, such as reliance on the US Postal Service to offer bank or bank-like products to all.
We also expect that the financial regulatory agencies and financial firms alike will be encouraged—through congressional hearings and otherwise—to focus on reducing racial and ethnic disparities across the financial landscape (from hiring to lending to investment). These efforts suggest the potential for a substantial increase in supervisory focus and enforcement action related to diversity and inclusion and racial equity issues, including an increased focus on compliance with federal antidiscrimination laws, such as the Equal Credit Opportunity Act and the Fair Housing Act.
Climate change has taken on heightened prominence in recent discussions of US financial regulatory policy. With the Biden administration and a Democratic party–controlled Congress aligned on, and strongly supportive of, this key initiative, we expect that this trend will accelerate and is likely to be reflected in US financial regulatory and supervisory policy initiatives, potentially beginning in the early days of the Biden administration.
Potential Action by the Administration
From a legislative perspective, Democrats in Congress may well reintroduce the Climate Change Financial Risk Act, which, in part, would require the Federal Reserve Board to introduce stress testing for large financial institutions to measure their resilience to climate-related financial risks. Other legislative and regulatory policy initiatives likely will include an increased focus on research (and funding) to study the links between climate change and the economy, and the potential risks that climate change presents for US financial stability.
Over a longer time horizon, US financial regulators could incorporate specific climate change–related considerations into a range of bank regulatory and supervisory frameworks, including the evaluation of an institution’s risk management practices (i.e., to ensure adequate management of climate risk), underwriting criteria (e.g., to favor or disfavor certain industries and borrowers based on climate considerations), and regulatory capital requirements (e.g., to impose higher capital charges for investments and assets based on their climate-related risks).
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[1] Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
[2] In addition, the bank may provide on-chain governance services that allow its clients to participate in the governance of the protocols on which their assets operate, operate validator nodes, provide staking as a service, perform settlement services with third-party brokers and with clients themselves, and custody fiat currency using a sub-custodian.