New presidential administrations bring about change. However, the implications for bank regulatory compliance depend on the president-elect’s agenda and the current economic environment.
All evidence suggests that the incoming Biden administration will reinstate or refocus on some of the regulations eliminated or eased over the last four years, in particular those related to fair lending. The Georgia runoff races solidified a Democratic majority in the U.S. Senate, which could accelerate legislative change.
But the president-elect’s agenda also faces headwinds. Regulatory change requires broader support. And despite rapid progress on vaccines, the pandemic is far from over. Its economic fallout could last, especially for hard-hit industries and demographics.
Financial institutions can best prepare for this new administration by keeping close tabs on its expected regulatory priorities.
Plan for Slow-Moving, Broad Regulatory Change
Many institutions have concerns regarding parts of Dodd-Frank that were peeled away by the Trump administration. However, major regulatory legislation faces several hurdles that would likely delay changes to 2022 or beyond.
The new administration will first focus on the pandemic and its economic consequences. In addition, Biden has several other agenda items planned for his first 100 days in office that include action on immigration, healthcare, education, climate change and voting rights. It’s an ambitious plan that leaves little oxygen for major regulatory change.
Once the administration does have time to address financial regulation, it will still need bipartisan support to overcome the 60-vote Senate filibuster rule. This could force the administration to focus on legislation with more widespread interest.
It’s also important to remember that signed regulatory legislation requires the prudential regulator to write a proposed rule, review comments, finalize the rule and set an implementation deadline. Typically, the process takes at least two years before the rule goes into full effect.
The administration could counteract that slow pace of legislative change by moving quickly to replace the current directors of the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB). New leaders selected by President-elect Biden may take a more aggressive approach to enforcing existing regulations.
The Biden-Sanders Unity Task Force Recommendation outlined the agenda for the next four years in broad strokes. One of its key tenets is a fairer economy. This will likely inform much of the new administration’s regulatory priorities.
Here are six areas to watch for regarding regulatory change or increased levels of enforcement:
1. Community Reinvestment Act (CRA) and Fair Lending
To achieve a fairer economy, the task force proposed a new economic pact to address “decades of red-lining, rising income inequality, and predatory lending practices targeting low-income families and people of color.” The Biden campaign provided the following specifics on this:
- CRA: Expanding it to include fintechs and non-banks along with mortgage and insurance companies, making covered institutions publicly commit to the public interest and closing loopholes for avoiding lending and investing in certain communities
- Fair Lending Laws: Reinstating the Affirmatively Furthering Fair Housing Rule, rigorously enforcing the Fair Housing Act and the Home Mortgage Disclosure Act and restoring the federal government’s ability to enforce settlements against discriminatory lenders
Given the events of 2020 and campaign promises, this area may receive the most immediate focus from the Biden administration.
2. Small Business Lending Data Collection Rulemaking
In recent months, the CFPB has been working on an outstanding piece of the Dodd-Frank Act: Section 1071, which requires financial institutions to compile, maintain and submit data on credit applications from women and minority-owned small businesses. According to the CFPB’s High-Level Summary, it is considering the following provisions for an eventual Small Business Lending Data Collection rule:
- Small Business Definition: Using the Small Business Administration’s (SBA) “small business concern” definition along with a Section 1071 size standard
- Covered Institutions: Encompassing banks, credit unions, online lenders and others, with possible exemptions based on size, activity or a combination of the two
- Covered Products: Applying to term loans, lines of credit and business credit cards
- Data Points: Covering the mandatory data points outlined in Section 1071, which include:
- Type of business (women or minority-owned or small business)
- Application/loan number
- Application date
- Loan/credit type and purpose
- Credit amount/limit applied for and approved
- Type of action taken and the date
- Principal place of business
- Gross annual revenue
- Race, sex and ethnicity of the applicant’s principal owners
If the president-elect installs new leadership at the CFPB, that director will likely further champion this effort given the administration’s calls to boost lending initiatives for women and minority-owned small businesses. However, the new director will probably want to review the current provisions and apply their own stamp on the eventual rule. This could delay the proposed rule and therefore its eventual implementation date. It could also mean stricter requirements incorporated into it.
3. Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
The CFPB brought fewer enforcement actions and less monetary relief under the Trump administration than it did under the Obama administration, including for UDAAP violations. The CFPB continued this more lenient posture toward UDAAP with its September 15, 2020 Statement of Policy Regarding Prohibition on Abusive Acts or Practices, which indicated how it would apply the abusiveness standard:
- Focusing on abusive conduct that causes more consumer harm than benefit
- Not adding abusiveness to unfair and deceptive violations for the same circumstances
- Only seeking monetary relief when a good faith UDAAP compliance effort was not made
Based on the commitment to a fairer economy and a focus on consumer protections, it is safe to assume that the CFPB under a Biden-appointed director will place greater scrutiny on potential UDAAP conduct, including abusiveness, and mete out harsher penalties for violations.
4. Bank Secrecy Act and Anti-Money Laundering (BSA/AML)
BSA/AML compliance is a perennial issue whose ultimate aim—protecting the financial system from financing illicit actors or activities—enjoys mutual support from both the regulatory and industry side. The key sticking point between the two has been the law’s failure to keep pace with ongoing changes in the industry, global economy and technology.
There have been several recent steps to tackle this issue and modernize the BSA/AML framework. The Financial Crimes Enforcement Network (FinCEN) issued a proposed rule on Anti-Money Laundering Program Effectiveness, which asked for feedback on three key questions for AML programs:
- Should they have to pass an “effective and reasonably designed” standard?
- Should FinCEN issue national AML priorities to inform them?
- Should a risk assessment process be explicitly required?
In addition, with veto-proof majorities, both the U.S. House of Representatives (335-78) and Senate (84-13) recently passed the 2021 National Defense Authorization Act (NDAA), which included several provisions for updating the BSA. Some are more favorable to industry members, such as the creation of a beneficial ownership national registry and a review of the thresholds for suspicious activity and currency transaction reports. However, it also calls for stiffer penalties for BSA/AML violations, especially for repeat offenders.
There is no reason to expect that a Biden administration focused on protecting consumers and the U.S. financial system would object to or try to stop these BSA/AML modernization efforts.
5. Marijuana Banking
There have also been recent developments in the context of BSA/AML that suggest that marijuana is inching closer to national legalization. This could pave the eventual way for more financial institutions to bank with members of the cannabis industry.
As of the 2020 election, 36 states and the District of Columbia have legalized marijuana in some form. And on December 4, 2020, the U.S. House of Representatives passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, which seeks to remove marijuana from the Controlled Substances Act.
6. Data Privacy
COVID-19 pushed more work and overall activity into the digital realm, which could have major data privacy implications. At the moment, financial institutions are dealing with the European Union’s General Data Protection Regulation (GDPR) and various state privacy laws—most notably the California Consumer Privacy Act (CCPA).
An administration focused on consumer protection could push harder for a national data privacy law, which could eliminate some of the current confusion. But it could also lead to stricter enforcement and harsher penalties for alleged data privacy violations.
The Main Takeaway? Stay the Course
Although regulatory agendas change with almost all presidential transitions, there is no need for panic in 2021. Financial institutions with a culture of compliance and a solid change management framework should be prepared. With that foundation, they can avoid consequences from a spike in enforcement actions in the near-term and navigate significant regulatory change in the long-term.
Keith Monson serves as CSI’s chief risk officer. In this role, Monson maintains an enterprise-wide compliance framework for risk assessment and reporting, as well as other key components of CSI’s corporate compliance program. With over 30 years of experience, he has a wide range of expertise in the compliance arena, having served as chief compliance officer for both large and small financial institutions.