Amid pandemic, state elected officials become de facto bank regulators

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Until last month, state elected officials typically had little involvement in financial regulation, instead leaving it in the hands of appointees at the state and federal levels.

But amid the coronavirus crisis, governors and state attorneys general, particularly in blue states, have become de facto banking regulators. California Gov. Gavin Newsom, Massachusetts Attorney General Maura Healey and Pennsylvania Attorney General Josh Shapiro, all Democrats, are among the state officials who have pushed for temporary protections for consumers impacted by the pandemic.

Some of these officials are working collaboratively with banks, while others have taken a more top-down approach. They have instituted moratoriums on foreclosures and vehicle repossessions, encouraged the establishment of grace periods for borrowers and sought to prevent damage to consumers’ credit scores.

“Long before the coronavirus pandemic broke out, there was a complete abrogation of responsibility at the federal level when it comes to consumer protection,” said Pennsylvania Attorney General Josh Shapiro.
“Long before the coronavirus pandemic broke out, there was a complete abrogation of responsibility at the federal level when it comes to consumer protection,” said Pennsylvania Attorney General Josh Shapiro.

The state elected officials are adding a a new layer of oversight to an existing patchwork of state and federal bank regulation. They are asserting authority in a realm where many Democrats believe that officials in the Trump administration have left a void.

Shapiro, who was elected on the same day that Pennsylvania voters unexpectedly helped propel Donald Trump to the presidency, has focused on consumer financial protection throughout his three-year tenure as AG.

In 2017, he hired Nicholas Smyth, a former enforcement lawyer at the Richard Cordray-era Consumer Financial Protection Bureau, to lead his office’s push to combat financial fraud.

“Long before the coronavirus pandemic broke out, there was a complete abrogation of responsibility at the federal level when it comes to consumer protection,” Shapiro said in a recent interview. “So we’ve been stepping up and filling that void for more than three years. But now more than ever, consumers need to be protected.”

Shapiro’s response to the current economic crisis was to craft a voluntary package of short-term consumer protections, and to encourage financial institutions to implement them throughout Pennsylvania. First onboard was PNC Financial Services Group, the Pittsburgh-based super-regional bank, and over the past two weeks seven smaller financial institutions have also joined.

Shapiro said that the industry’s response has been very positive, and that he expects many more banks to join in the coming days.

The $22 billion-asset Fulton Financial in Lancaster, Pa., is also participating in the Pennsylvania AG’s program. That is largely consistent with the steps the company had already been taking across its five-state footprint, according to CEO Curt Myers.

“We had to make one small modification on our fee waiver guidance,” Myers said, “but all of the rest of our program complied with theirs.”

Under the Pennsylvania AG’s program, participating banks pledge to expand the availability of loans to small and medium-sized businesses. They agree to provide a 90-day grace period on consumer loans, and to offer 90 days of relief from charges such as overdraft fees. The banks also commit to a 60-day pause on foreclosures and vehicle repossessions. And they promise not to make adverse reports to credit reporting companies when borrowers take advantage of the relief that is available.

The $2.3 trillion federal stimulus law enacted last month provided a couple of notable protections to cash-strapped consumers, including a 60-day moratorium on most foreclosures. But the federal legislation fell short in the eyes of consumer advocates.

It did not provide relief, for example, to borrowers who are unable to make their monthly auto loan payments. Nor did it include a moratorium on reporting missed payments to the credit bureaus.

Democrats in Washington have also blasted the CFPB over its response to the coronavirus crisis. Last week, a group of five Senate Democrats, led by Sen. Sherrod Brown of Ohio, called on the bureau to take steps to protect consumers’ credit scores.

Shapiro argued that it was necessary to go beyond the provisions of the federal stimulus law to protect Pennsylvanians. “I firmly believe that we will beat this crisis,” he said, “but consumers and small businesses need more resources and more help right now to stave off this economic fallout. And this is one critical way to do that.”

Other states in which elected officials have recently asserted their authority include Illinois, where Democratic Gov. J.B. Pritzker issued an executive order suspending auto repossessions, and Maryland, where Republican Gov. Larry Hogan acted unilaterally to prevent lenders from initiating the mortgage foreclosure process.

Late last month in Massachusetts, Healey filed an emergency regulation that prevents creditors from filing debt collection lawsuits, garnishing wages, and visiting the household or workplace of a debtor.

“The COVID-19 crisis has caused substantial medical and financial hardship for families in Massachusetts, and we want to do everything we can to protect them from further harm,” the attorney general said in a March 27 press release.

In California, Newsom has made aggressive use of his bully pulpit during the public health emergency.

On March 25, the Democratic governor praised JPMorgan Chase, Wells Fargo, Citigroup and U.S. Bancorp for agreeing to let state residents who are struggling financially to skip their mortgage payments for 90 days, and he criticized Bank of America for declining to match that commitment.

In response, a BofA spokesman said that the Charlotte, N.C.-based company is allowing customers nationwide to defer payments on a monthly basis until the crisis is over, which could be 90 days or even longer.

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Law and regulation Consumer lending Loan modifications Coronavirus Pennsylvania Massachusetts California