Election 2020: Could Bernie be bad for credit unions?

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WASHINGTON — The rise of Sen. Bernie Sanders to front-runner status in the race for the Democratic presidential nomination is increasingly causing alarm among industry insiders, but there are widely differing opinions over whether the Vermont senator poses a direct threat to banks and credit unions.

Observers say a Sanders presidency could lead to a reversal of Trump regulatory relief initiatives, turnover at the top of the regulatory agencies, and a newfound focus on both enforcement actions and proposals that Sanders has supported in Congress to overhaul the banking industry's structure.

Jeffrey Naimon, a partner at Buckley LLP who defends financial services companies in enforcement matters, said that his clients have begun to consider the impact of a Sanders presidency.

“We are starting to see both banks and other financial services companies get interested because Sen. Sanders would represent a significant policy pivot, and obviously, federal policy has a great effect on the industry," Naimon said. "They are starting to consider what the possible ramifications might be, what initiatives they might take, and the kind of things they may not do.”

Sen. Bernie Sanders has long been one of the harshest critics of Wall Street in Congress, advocating for sweeping reforms such as breaking up the big banks and reinstating Glass-Steagall.
Sen. Bernie Sanders has long been one of the harshest critics of Wall Street in Congress, advocating for sweeping reforms such as breaking up the big banks and reinstating Glass-Steagall.

Others say there is no cause for panicking just yet. Sanders, a democratic socialist, has jumped out to a sizable lead in delegates after strong showings in early state contests. But it is still early in the Democrats' nominating process and Super Tuesday could offer more clarity.

Some analysts and bank representatives say they believe President Trump would have the advantage going into a general election against Sanders. And even if Sanders won, many said the GOP is still likely to hold the Senate and he would face other hurdles to enacting reforms detrimental to the industry.

Sanders, an independent who caucuses with the Democrats in the Senate, has long been one of the harshest critics of Wall Street in Congress, advocating for sweeping reforms such as breaking up the big banks and reinstating Glass-Steagall, among other things.

In May 2019, Sanders along with Rep. Alexandria Ocasio-Cortez, D-N.Y., introduced a bill to cap credit card interest rates at 15%, though it is viewed as dead on arrival in the current Republican-controlled Senate.

The previous October he introduced a bill that would cap a financial institution’s total exposure at 3% of the nation’s GDP, saying at the time that "the four largest financial institutions in this country are on average 80% larger than they were before we bailed them out” in the financial crisis.

Credit unions as an industry have donated more than $68,000 to Sanders’ current campaign, more than any other candidate, according to data from OpenSecrets. Only former South Bend, Ind. Mayor Pete Buttigieg – who ended his presidential campaign Sunday – is a distant second, bringing in nearly $30,000 less from the industry than Sanders.

But that doesn’t mean credit unions are enthusiastically backing the Vermont senator.

“One of the reasons we would be concerned about any change in the presidency would be the fact that it opens up the possibility for the regulatory pendulum to swing wildly,” Ryan Donovan, chief advocacy officer at the Credit Union National Association, said last week. “One of the reasons for that is the CFPB is a single director and not a multimember commission; it’s not Sanders or Warren or Biden or Buttigieg or Bloomberg, but when you have a change in party you’re going to see that pendulum swing and there would be different priorities.”

While CUNA doesn’t get involved in presidential races, Donovan said the industry “need[s] certainty in the regulatory process, and that certainty is a lot easier to achieve when the distance and speed that pendulum swings at is narrower. It’s not personality-driven, those are just dynamics in play whenever you have a change in administration.”

One factor from a Democratic administration that could have a big impact on credit unions is a new president’s approach to the National Credit Union Administration Board. Mark McWatters’ term on the board expired nearly six months ago, while Todd Harper and Chairman Rodney Hood’s terms run until August of 2021 and 2023, respectively. Given President Trump’s slow speed at filling those expired seats, the next president could reshape the entire board. And a Sanders administration would certainly change the panel’s balance to two Democrats – Harper and one other – and potentially increase the focus on consumer protections, as Harper has already attempted to do.

Bernie's race to lose?

Some commentators have declared that the Democratic race is Sanders' to lose. But several analysts still doubt his chances.

“Sanders has a strong base, but one that is hard to expand,” Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a note Thursday. “It is why we still see a moderate winning the nomination, though it is becoming a closer call.”

Even if Sanders is the nominee, Isaac Boltansky, director of policy research at Compass Point Research & Trading, suggested that the market doesn’t think he could win the general election.

“Whether correct or incorrect, the market believes that Trump is the clear favorite in a matchup against Sanders,” Boltansky said.

Even so, should Sanders win the White House, financial services policy could undergo a sea change.

Sanders’ anti-Wall Street rhetoric gained notice in the congressional debate of financial reforms that became the 2010 Dodd-Frank Act. After the financial crisis, Sanders proposed several failed pieces of legislation that he is still endorsing to this day.

“I hope that my Republican colleagues who have come to the floor expressing concern about Wall Street, I hope that what they are saying is more than just rhetoric, that they really want to do something,” Sanders said on the floor of the Senate in April 2010. “And if they want to do something, I hope very much that they will join me when I offer an amendment as part of financial reform to cap credit card interest rates at 15%.”

After the crisis, Sanders was also was one of the loudest voices calling to break up the largest U.S. banks, which would go several steps further than Dodd-Frank.

His campaign website again calls for breaking up the big banks, as well as reinstating Glass-Steagall, the Depression-era framework dividing commercial and investment banking that was repealed by Congress in 1999.

Sanders also calls for an audit of the Federal Reserve, banking services being offered at every U.S. post office, and a financial transaction tax.

But as drastic as those changes sound to the financial services industry, observers question whether Sanders would be able to turn them into reality.

“The odds still favor the Senate still being under Republican control,” Boltansky said. “And even if it isn’t, there will still be a contingent of centrist red-state Democrats in the Senate that will slow or stop many of the progressive proposals. … That means what matters most for bankers is what can be changed administratively.”

While Sanders would struggle to impose tougher regulations on the banking industry through legislation, his power would likely come through the regulators he appoints.

For example, Boltansky said he expects the Supreme Court will knock down a controversial provision in Dodd-Frank that restricts a president's ability to fire a sitting director of the Consumer Financial Protection Bureau. That would allow Sanders immediately to name a new CFPB director if elected president, and make an imprint on several rulemakings at the bureau.

“As we’ve seen, a single agency director wields considerable power,” Boltansky said. “To me, I think that matters for small-dollar lending. I think it matters for debt collection, which is an ongoing rulemaking. And I think it matters for mortgages given the uncertainty around the [qualified mortgage] patch. … You will see a more aggressive supervisory and enforcement posture.”

One bank lobbyist added that a Sanders administration “probably could be heavily populated with academics and activists.”

But Naimon said that Sanders would likely need to wait to replace several other Trump-appointed regulators beyond just the NCUA.

"A new president won’t have the immediate opportunity to change the chair of the FDIC, the Comptroller of the Currency, or the chairman of the Fed, but would have to wait until their terms expired," Naimon said.

To be clear, Sanders isn’t the only progressive Wall Street critic in the Democratic primary. Sen. Elizabeth Warren of Massachusetts has heavily criticized the Trump administration's financial regulators, Wells Fargo and other large banks, and was the architect of the CFPB.

"From my perspective, I think that a lot of the proposals that [Sanders] has put forward … are not entirely dissimilar from the proposals that Sen. Warren has put forward," Naimon said.

Some have suggested Warren’s rhetoric on the presidential campaign has been viewed as less worrisome for financial institutions, though a 2019 proposal to revamp the Community Reinvestment Act and apply it to credit unions earned her few friends in the industry.

The Sanders campaign did not respond to a request for comment.

However, there is one policy that could help Sanders score points with the industry.

Banks and credit unions have long wanted to serve the cannabis industry in states that have legalized the substance, but a federal ban on pot has prevented them from doing so. Sanders has said he would legalize marijuana within his first 100 days in office.

"We don't believe that is possible, though he could direct the Justice Department not to pursue cannabis-related activity," Seiberg said in his note. "More broadly, he would sign whatever cannabis bill can emerge from Congress."

Aaron Passman contributed to this report.

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Policymaking Regulatory reform Election 2020 Community banks Bernie Sanders Elizabeth Warren Dodd-Frank