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Next steps for bank regulation in the US

Chris Hamblin, Editor, London, 6 February 2021


With the Biden administration coming in in the United States, American financiers are expecting plenty of regulatory changes, especially at the Consumer Financial Protection Bureau. This article looks at future supervisory and enforcement efforts and appointments at various bureaux.

At a recent webinar on the subject of the future of regulation at big US banks, Ben Saul, the financial services partner at the US law firm of Bryan Cave Leighton Paisner, told Compliance Matters and other attendees that Rohit Chopra (nominated to become the director of the CFPB) will undoubtedly return the regulator to its Obama-era role as a really aggressive consumer protection regulator. Acting CFPB director Dave Uejio has already begun to point the CFPB in this direction. As Saul saw it, one key CFPB priority at the outset of Chopra's directorship is likely to be the supervision and enforcement of companies responsible for Covid-relief. In this regard, Uejio has already cited concerns about mortgage and loan servicers giving incorrect information about Cares Act forbearances, forbearance requests, collecting or setting rate fees and providing inaccurate information to credit bureaux.

Beyond that, the CFPB is also going to make some structural changes. For example, according to Saul, it is going to eliminate the "big use" of political appointees to co-head its divisions, opting instead to return more control to career people. Saul thought that it was also likely that the CFPB was going to restore the Office of Fair Lending and Equal Opportunity as a stand-alone unit with its own power to initiate investigations and take enforcement action.

Racial equity

He went on: "I think we're going to see a marked increase in supervisory and enforcement efforts to do with racial equity generally but fair lending specifically. This is an overarching priority of the Biden administration in all areas but has through the CFPB a very clear and direct role for Biden to make change with respect to access and the equitable pricing of financial services products.

"This morning it was reported that Uejio said that red-lining enforcement, a subset of fair-lending enforcement, is a key priority right now for the bureau. It intends to crack down on bad practices fairly immediately. With respect to fair lending enforcement, the Trump administration used to be very reluctant to deploy disparate impact theory, which is a form of discrimination that focuses on the effects of racially-neutral practices and policies. It seems clear that this theory will be pushed more aggressively on the part of the bureau as part of its renewed commitment to racial equity and fair lending."

The disparate impact theory of discrimination allows the government or a private plaintiff to establish the fact that discrimination has taken place solely by reference to the outcome of a neutral policy, without having to prove any actual intent to discriminate.

Algorithmic bias in the use of AI

Another racial equity issue is the probability that the bureau will probably write rules or issue some guidelines regarding controls to mitigate algorithmic bias in the use of artificial intelligence and machine learning. Saul said: "Another racial equity issue that I think might be taken up is the establishment of a federal standard for appraisals and appraiser training in order to eradicate racial biases that contribute to the undervaluation of the properties in communities of colour."

In terms of new priorities, Saul expected to see the CFPB focusing on consumers owning data as well as third-party access to bank information when cleared by consumers.

Other issues for the CFPB

With respect to FinTech innovation and industry engagement, Saul very much expected the CFPB to continue its Project Catalyst, which is meant to encourage consumer-friendly innovation by providing no-action letters and 'sandboxes' with 'safe harbours' for a period of time while products are tested. However, he thought that the success of people who participate in Project Catalyst was going to turn much more heavily than during the days of Mick Mulvaney or Kathy Kraninger - a former director and a former acting director - on the net benefit to consumers. Given the product or service than they had in different years.

Saul said: "I also expect the recently-announced CFPB advisory opinion programme to continue under Chopra but it will be interesting to see whether those opinions remain very tailored, as we've seen in the first few, or whether Chopra takes a more expansive approach to this method of providing guidance to the industry. That's what I see on the horizon for the CFPB in the near-term."

Fresh appointees

President Biden is likely to nominate Michael Barr, a former Treasury official under Obama and Clinton who used to be an advisor to Ripple and is the Dean of the University of Michigan's Public Policy School, as the next Comptroller of the Currency. Barr is seen as a pretty industry-friendly centrist, as evidenced by his position on the advisory board. People perceive that he is likely to be FinTech-friendly, not a lot like outgoing comptroller Brian Brooks.

At the Federal Reserve, Chairman Jay Powell's term expires in 2022 and it seems clear that he is going to serve it out. At the Federal Depository Insurance Corporation or FDIC, Jelena McWilliams has indicated that she is going to serve out her term (which runs until 2023) as chairman as well.

The 'true lender' rule

Another rule that might be rowed back through a notice of rulemaking or, more likely, a Congressional Review Act, is the OCC's True Lender Rule of October 2020. This resolves the question of which entity makes the loans in a lending partnership between a bank and a third party and it increases protection for marketplace lending platforms from lawsuits that claim that the marketplace lender and not its bank partner is the lender and that bank pre-emption of state law does not apply.

Democrats dislike the rule because they think that it promotes rent-a-charter arrangements that allow market-based lenders to avoid state usury caps and state consumer protection laws. To this end, some state attorneys-general are suing the OCC, challenging its authority to issue the rule in the first place.

Saul said: "For those reasons, I think there's a decent chance that that rule may be walked back and notwithstanding Barr's FinTech friendliness, which goes back to a point that I made at the top of the discussion, which is that Congress can take this action on its own and I wouldn't be surprised if that's the way it plays out."

De novo chartering

"Beyond rulemaking, it will be interesting to see how the OCC and the FDIC approach de novo bank chartering. First, there is the OCC's special-purpose FinTech chartering. Unfortunately, that type of charter has gone nowhere as the OCC has been caught up in litigation with New York State over its authority to provide the special-purpose FinTech charter. I fully expect the ligitation to go on for a fair bit, although there is a slight chance that a Biden-appointed comptroller could send a contact to Congress as a means to short-circuit the ongoing court [action], so that may be something to take a close look at."

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