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Law360 (December 21, 2020, 5:49 PM EST) --
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| Aaron Cutler |
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| Ashley Hutto-Schultz |
The latest sign of a changing tide came on Dec. 4 when Rep. Maxine Waters, D-Calif., chairwoman of the U.S. House of Representatives Financial Services Committee, sent President-elect Joe Biden a letter with a sizeable list of recommendations on areas where she thinks the Biden administration should take immediate action upon entering office.[1]
Among these recommendations are executive orders, rule reversals, policy amendments and enforcement priorities seeking to reverse Trump administration actions, coordinate the federal response to COVID-19, protect consumers and small businesses, and support an economic recovery.
The list is quite extensive. While we do not expect the Biden administration to accomplish every item, at least in the short term, several will likely come to fruition. Additionally, this letter clearly telegraphs the focus of the House Financial Services Committee for the 117th Congress.
Implementation
Two major factors may affect how these recommendations are prioritized and accomplished.
1. Whether Republicans Maintain Control of the Senate
The two U.S. Senate seats in Georgia are headed to a runoff on Jan. 5. Democrats would need to win both seats to attain a 50-50 majority in the U.S. Senate with Vice President-elect Kamala Harris casting the tiebreaking vote.
Likely ramifications of a split Congress would include a limited ability to get far-left-leaning legislative actions passed and more moderate Cabinet choices and agency appointments. If Republicans maintain their majority by winning one or both Georgia Senate seats, then only bipartisan legislation would be able to make its way to the president's desk. In this scenario, we would expect a few confirmations to be blocked and fewer judges getting confirmed.
2. Whether Biden Removes and Replaces Heads of Federal Financial Services Regulators
His selections for such positions could be impacted by who controls the Senate. For example, Waters expressly calls for Biden to fire the directors of the Consumer Financial Protection Bureau and the Federal Housing Finance Agency. We also expect potential changes to the Office of the Comptroller of the Currency leadership.
Further, since executive orders don't require congressional approval, the Biden administration may accomplish those recommendations quickly. For more cumbersome and time-consuming actions, such as rulemaking and anything requiring congressional approval, the factors listed above will have a bigger impact on the outcome.
Key Takeaways From the Letter
Financial institutions with Coronavirus Aid, Relief and Economic Security Act compliance responsibilities (e.g., certain loan servicers and furnishers under the Fair Credit Reporting Act) should continue monitoring and confirming compliance with those protections.
The letter focuses on pandemic-related consumer protection issues and denounces agency policy statements that promise to account for good faith compliance or eased regulatory obligations during the pandemic. Following the spirit of the letter, fair lending and the prohibition on unfair, deceptive, or abusive acts or practices also appear to be ripe for post-pandemic enforcement.
The letter recommends the Biden administration undo several fintech and innovation-friendly developments that have occurred during the Trump administration. For example, it recommends rescinding sandbox and sandbox-like efforts such as the CFPB's compliance assistance program, no-action letter policy and trial disclosure program.
It also urges the Biden administration to rescind the OCC and Federal Deposit Insurance Corp.'s final rules reversing the Madden v. Midland decision, related to the valid-when-made doctrine, and to withdraw the OCC's proposed rule defining who is a true lender in certain loan origination scenarios.
Regarding digital banking and crypto assets, the letter recommends the OCC rescind its policy statements: (1) regarding the ability of national banks to hold stablecoin reserves; and (2) clarifying the authority of federally chartered banks and federal savings associations to provide cryptocurrency custody services for customers.
Companies regulated by the U.S. Securities and Exchange Commission will likely see efforts to undo what Waters considers Trump-era "decreased oversight" and "lax enforcement." The letter makes several policy recommendations, including for the Biden administration to rescind the August 2020 rule expanding the definition of "accredited investor," and the June 2019 final rule establishing the broker-dealer standard of conduct.
The letter indicates increased scrutiny of hedge funds during the Biden administration. Drawing from issues outlined by the Financial Stability Oversight Council Hedge Fund Working Group in 2016, the letter calls for a revival of the Hedge Fund Working Group to better understand associated risks.
More broadly speaking, Waters appeals to Biden to "rein in private equity, hedge funds, and investment funds that engage in predatory practices," such as "siphoning profits and assets from their portfolio companies and, then charging exorbitant management fees and forcing debt-financed dividend payments."
Other priorities emphasized in the letter that we expect to shape Biden administration policies are diversity and inclusion and climate change initiatives. The letter recommends certain disclosures be required for companies with respect to each category. Since each of these issues has received a considerable amount of attention from regulators and were prominent during Biden's campaign, it would not be surprising if some of these are pushed forward.
Waters will likely conduct vigorous oversight to justify the recommendations made in the letter – these include current efforts that are already underway and possibly pursuing new targets.
Waters is very focused on leveling the financial playing field and consumer protection. Even if these recommendations are not fully implemented by the Biden administration, this letter encapsulates areas where we expect Waters and her committee to focus. Financial institutions can expect to hear more from her on these topics, including in congressional hearings and investigations.
Impact on Consumer Financial Services Providers
Below, we provide a nonexhaustive list of key recommendations from the letter that, if implemented, would impact consumer financial services providers.
Federal Response to COVID-19
Issue an executive order on evictions.
The CARES Act temporary eviction moratorium expired earlier this year. The Trump administration later issued a Centers for Disease Control and Prevention public health order to prevent most evictions from proceeding, which expires at the end of the year.
The letter criticizes the CDC order for imposing "needless hurdles on renters" and exposing them to criminal liability and urges the Biden administration to revise and extend the CDC order and to pass a broader eviction moratorium. This may be extended via end of year legislation the current Congress is considering.
Fix policies that unfairly penalize FHFA, Fannie Mae and Freddie Mac lenders.
The letter calls for an amendment to recent U.S. Department of Housing and Urban Development and FHFA policies that impose restrictions and increased costs for certain loans that go into forbearance prior to FHA endorsement or purchase by Fannie Mae or Freddie Mac. It urges the Biden administration to ensure these loans are still eligible for FHA insurance and purchase by Fannie and Freddie.
Fully utilize CARES Act lending authorities.
The letter highlights that the CARES Act lending facilities were not fully utilized and suggests tailoring them to be more impactful for certain businesses and populations. Waters also criticizes reported plans by U.S. Treasury Secretary Steven Mnuchin to close some of the lending facilities by the end of the year.
COVID-19 Consumer Protection
Fire the current CFPB director and focus on enforcement.
Under the consumer protection recommendations related to COVID-19, Waters calls for Biden to fire CFPB Director Kathy Kraninger, and to direct the CFPB to aggressively enforce consumer protection laws, such as the CARES Act protections and the unfair, deceptive, or abusive acts or practices prohibition.
Rescind agency policy statements that promised lenient pandemic-related supervision and enforcement.
Numerous policy statements were issued during the pandemic that suggest regulators will take a lenient approach, and will account for good faith compliance efforts, when enforcing certain compliance obligations. The letter recommends rescinding those and ensuring strong enforcement of consumer protection laws.
Strengthen debt collection and payday lending rules.
The letter recommends rescinding and strengthening the debt collection practices final rule and the 2020 Payday, Vehicle Title and Certain High-Cost Installment Loans Rule. Related to debt collection, Waters takes issue with the lack of protections regarding emails and texts. For the payday rule, the letter recommends that the CFPB reinstate the 2017 version of the rule which would include mandatory ability to repay underwriting requirements.
Financial Stability and Consumer Protection
Ax certain actions taken under the guise of innovation.
The recommendations target the rulemakings on the valid-when-made and true lender doctrines, as well as OCC policy statements about a national bank's ability to hold stablecoin reserves as a service to bank customers, among others. They also speak to the highly controversial special purpose national bank charter efforts — suggesting that Biden's appointed officials at the OCC should "not assume, as their predecessors have, that a" 150-year-old law gives the OCC the authority to offer such charters.
Financial Stability and Prudential Regulation
Rescind FSOC's December 2019 interpretive guidance regarding the process for designating a nonbank financial company as a systemically important financial institution.
Waters considers this guidance a "substantial weakening of post-crisis reforms," and recommends replacing it with the previous version of the designation process.
Strengthen FSOC.
The letter recommends increasing FSOC staffing and taking a number of other measures to rein in certain markets, including the revival of FSOC's Hedge Fund Working Group and the publication by FSOC of digital asset and distributed ledger-related developments.
Affordable Housing
Halt efforts to remove Fannie Mae and Freddie Mac from conservatorship.
Waters strongly discourages removing Fannie Mae and Freddie Mac from conservatorship in the near term. She asks the Biden administration to fire FHFA Director Mark Calabria and take "whatever steps necessary" to halt his efforts to accomplish Fannie and Freddie's removal before his tenure ends. This recommendation includes rolling back capital rules for the government-sponsored enterprises.
Preserve and extend the GSE patch.
The GSE patch is a temporary compliance safe harbor that provides qualified mortgage status to mortgages eligible for purchase by Fannie Mae or Freddie Mac. It is set to expire on the mandatory compliance date of the General QM Final Rule — July 1, 2021 — or the date the GSEs exit conservatorship, whichever comes first. The letter recommends an extension of this expiration date to provide a longer transition period.
Diversity and Inclusion Board Disclosures
The letter recommends requiring annual reporting of diversity data by regulated entities; disclosures of regulated entities and public companies regarding their boards' diversity levels; minimum board diversity levels; and approval of proposals by national exchanges to change their listing standards to require such disclosure.
Climate Change
The letter urges Biden to issue an executive order for financial regulatory agencies to prioritize climate change in their oversight of U.S. financial institutions, recommending, among others, that new leadership at the OCC promptly rescind its proposed rule to "ensure fair access to bank services, capital and credit." Waters criticizes this proposed rule for forcing banks to serve oil and gas companies despite the risks presented to the financial system.
Investor Protection and Capital Markets
Waters' recommendation that the Biden administration rescind the final rule that expands the "accredited investor" definition is geared toward rolling back Trump-era efforts to provide retail customers with more access to private equity.
Rescind Regulation BI
This rule establishes the broker-dealer standard of conduct, an active topic for Waters and other Democratic leaders during the rulemaking.
The letter's recommendation to "rein in" private equity, hedge fund and other investment funds engaging in predatory practices calls for Biden-appointed officials to:
Establish maximum debt limits and initial and ongoing debt-to-equity ratio requirements for acquired portfolio companies; Prohibit dividend recapitalizations or other investment payback methods for, at least, the first two years; Create standardized investment performance metrics; and, Ensure that private equity firms are forced to take responsibility for the targeted company's worker pensions.
Conclusion
All in all, this letter has no completely unexpected items but it may serve as a useful planning tool to understand where these policy issues could land under the Biden administration.
Aaron Cutler is a partner and Ashley Hutto-Schultz is a senior associate at Hogan Lovells.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://financialservices.house.gov/uploadedfiles/120420_cmw_ltr_to_biden.pdf.
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