Our take: The changing regulatory landscape

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Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Current topics - January 15, 2021

OCC Acting Comptroller finalizes fair access rule, steps down

Yesterday, Brian Brooks stepped down from his position as the Acting Comptroller at the OCC. In the eight-months he served as Acting Comptroller, Brooks has primarily focused on innovation and fintech, taking a number of actions including finalizing the “valid-when-made” rule which clarifies that lenders may transfer loans across states without running afoul of state interest caps. Bank-fintech partnerships have relied upon this rule to set up processes where nationally-chartered banks originate loans and then transfer them to fintechs that are subject to more stringent state caps. To further curtail regulatory uncertainty in these partnerships, he finalized a rule to clarify that the “true lender” is determined by the firm listed on the loan application. He also advocated for the OCC’s ability to offer special purpose charters to fintech companies, clarified that banks can provide certain cryptocurrency custody services and finalized modernization of the Community Reinvestment Act (CRA). Under his tenure, the agency granted the first national banking charter application to a mobile-only fintech, granted preliminary approval to a fintech personal finance company, approved a fintech lender’s acquisition of a national bank, and on Wednesday conditionally approved a cryptocurrency firm’s application to convert its state charter to a national trust charter.

On his last day, Brooks finalized the “fair access rule” requiring that banks with $100b or more in total assets make lending decisions based on “quantitative, impartial, risk-based standards” applied to individual applicants as opposed to avoiding or terminating services to entire categories of customers. The rule in effect restricts banks from broadly refusing service to “politically controversial but lawful” businesses that do not meet certain environmental, social or governance (ESG) standards. It has been met with vocal opposition from industry groups, which criticized the rule for “undermining safety and soundness” by constraining banks’ abilities to make judgments based on qualitative risk factors.

Upon Brooks’ resignation, OCC Chief Operating Officer Blake Paulson became the agency’s new Acting Comptroller. President-elect Joe Biden will be able to nominate a permanent Comptroller after taking office on January 20.

Our take

When Brooks became the Acting Comptroller last May, he recognized that his tenure could be short but pledged to “make a difference” and “move fast” to take actions to advance an ambitious innovation agenda. He made good on that promise, but it remains to be seen whether the ambitious steps taken under his tenure will last. With the special purchase charter, valid-when-made rule and true lender rule all facing lawsuits from state regulators alleging that these actions unconstitutionally override state consumer protection authority, the potential for courts to declare them invalid remains. Any upcoming legal decisions may be moot, however, as President-elect Biden’s new Comptroller could take steps to modify or reverse not only these actions but also the CRA reform and fair access rule, both of which faced disapproval from Democrats. Considering that consumer protection and promotion of ESG are likely to be key aspects of Biden’s financial services agenda, we see these two rules in particular as potential priorities for a new Comptroller to rescind or modify. Specifically, we could see the Biden OCC aligning the CRA rule to the proposal released by the Fed, which was led by Obama-appointee Lael Brainard and received praise from community groups  As for Brooks’ efforts to promote innovation, we do not expect the Biden Administration to pursue a full-scale reversal of them but instead focus on ensuring that they have the appropriate frameworks to ensure consumer protection.

CFPB releases consumer financial regulation report

Last Tuesday, the CFPB released a report from its Taskforce on Federal Consumer Financial Law providing an overview of the current legal and regulatory environment and offering 102 recommendations for improving it. The recommendations span a wide variety of categories including:

  • Fintech and innovation. The report recommends that Congress authorize the CFPB to charter non-depository institutions, remove competitive barriers for non-banks and work with other agencies to streamline and harmonize policies around innovation. Noting that technology has rapidly evolved since Congress passed the E-Sign Act in 2000, it calls for the law to be modernized to better reflect the use of mobile devices and other more recent developments.
  • Alternative data. The report recommends that policymakers and regulators should exercise caution in the restriction of the use of alternative data for credit decisions, clarify the application of the Fair Credit Reporting Act to data aggregators and allow a wider variety of companies, such as electronic communications services, to provide information to credit reporting agencies.
  •  Small-dollar credit. The report recommends that state interest rate caps should be eliminated entirely, and if they are imposed states should carefully consider the negative impact on credit availability. It also recommends that the CFPB promote disclosures that ensure consumers “know what they are signing up for.” Noting that consumer harm from small-dollar credit use often stems from delays in payment processing, the report supports regulatory efforts to adopt a faster payments system.
  •  Data privacy. The report recommends that the CFPB should seek regulatory solutions that control the possibility of harm to consumers rather than relying on disclosure. It also calls upon Congress to enact a law providing a standard for data breach notifications.
  • Rulemaking and regulatory approach. The report recommends that agencies review their regulations to streamline them and eliminate or modify those that pose unnecessary burdens. It also recommends that the CFPB apply a flexible principles-based approach when promulgating new regulations, and when issuing guidance it should ensure that it does not create new policy.
  •  Agency organization. The report recommends that the agency reorganize itself to have groups focused on markets (e.g., mortgages, credit cards, fintech) as opposed to “tools” (e.g., regulation, examination), explaining that this structure would better promote consistency in approach.
  • Enforcement. The report recommends that the agency provide transparent information on when activities will translate to enforcement as well as formulas on civil penalties and restitution. It also recommends that the CFPB release periodic enforcement highlights to the public.

Our take

By releasing this nearly-900 page report, the Taskforce is providing the incoming Administration with a lot of early reading material. The headlines are focused on the more controversial aspects of the report along with the make-up of the Taskforce itself, which was sued last year by consumer groups for lacking consumer advocate representation. Most of these more headline-grabbing recommendations do not have much of a chance of becoming reality any time soon. For example, Congress is unlikely to grant the CFPB new chartering authority for nonbanks and states are unlikely to eliminate their interest caps. However, beneath the headlines, the report contains a number of proposals designed to be common-sense approaches to increase efficiency, transparency and consumer protection that could be adopted by the incoming Administration. For example, the recommendation to pursue data privacy regulation could receive bipartisan support, but Democrats in Congress would likely oppose any national law that weakens state standards. In terms of recommendations that the CFPB can implement itself, we expect the new Director to focus on recommendations that would benefit and protect consumers such as more financial literacy programs and stronger data privacy protections.

On our radar

These notable developments hit our radar over the past week: 

  • Crisis update. Regulators continued to take action in response to the crisis yesterday, including:

    ○      President-elect Joe Biden unveiled proposed details of the first pandemic relief package he hopes will be passed after his inauguration. The $1.9 trillion plan includes an additional $1400 direct payment for those who received $600 under the last relief bill, funding for vaccinations, testing, and tracing as well as state and local governments. The proposal received positive feedback from a variety of Democratic legislators and organizations such as the Chamber of Commerce.

    ○      The FHFA announced that it is extending crisis-related loan flexibilities from January 31, 2021 to February 28, 2021.

    ○      Treasury announced the launch of a $25b emergency rental assistance program. States and local governments will be able to enroll in the program and grant assistance to households a) with income at or below 80% of the area median and b) that have experienced financial hardship or housing instability due to the crisis.

    ○      The SBA released an interim final rule on second draw PPP loans.
  • LIBOR transition: On Monday, both Refinitiv and ICE Benchmark Administration (IBA) began the publication of forward-looking term versions of SONIA, the recommended alternative rate to replace GBP LIBOR. Since SONIA is an in arrears overnight rate, forward-looking term rates are implied from pricing of derivatives transactions based on SONIA. In the U.S., many market participants remain hopeful that rising liquidity in derivatives based on SOFR, the recommended alternative rate to replace USD LIBOR, will eventually allow for the construction of robust forward-looking SOFR term reference rates as well. The Alternative Reference Rates Committee (ARRC), a Fed sponsored industry working group charged with facilitating the transition away from USD LIBOR, has set a target of Q2 2021 for the publication of SOFR term reference rates, conditional on there being sufficient depth in the SOFR indexed derivatives markets.
  • Treasury and FHFA amend GSE agreements. Yesterday, the Treasury Department and Federal Housing Finance Agency announced that they would amend the Preferred Stock Purchase Agreements (PSPAs) between Treasury and the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. The amendments will extend the period that the GSEs are able to retain capital and stipulate that they will not be able to exit conservatorship until they have common equity tier 1 capital of at least 3% of their assets.
  • AI risk interagency request coming. On Tuesday, Fed Governor Lael Brainard gave a speech providing an overview of the use of artificial intelligence (AI) and machine learning in financial services and explaining that the Fed has been working with other regulators to request information on AI risk management practices. This information will be used to determine whether additional clarity is needed to facilitate adoption of AI.

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Julien Courbe

Financial Services Leader, PwC US

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