Should banks fear a blue wave in November?
WASHINGTON — The 2020 presidential and Senate elections could bring a sea change in the financial services industry's policy agenda, as analysts and pollsters raise the odds of a Democratic Senate takeover coinciding with a White House party switch.
While banks have played offense after the GOP swept Congress and the White House in 2016, observers said the outcomes of a Democratic sweep in November could include overturning some of the Trump administration's deregulation, as well as heightened scrutiny of banks and more attention on affordable housing and consumer issues.
“A blue wave would lead to changes at the top of the financial regulators, which would alter the trajectory of policymaking that we’ve seen over the past three and a half years and lead to a number of regulatory reversals,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.
Republicans currently hold a 53-47 advantage in the Senate. If former Vice President Joe Biden wins the presidency, that means Democrats would need to flip a net total of three seats to control the Senate (with a Democratic vice president breaking the tie).
With at least four Republican-held seats either leaning Democratic or considered tossups, analysts say the Democrats' chances of controlling Congress are improving. In a note earlier this month, Capital Alpha Partners projected a 55% chance that Democrats take the White House and Senate.
Still, observers say Democrats would only hold a slim majority in the Senate, which means sweeping legislative changes are unlikely. A 60-vote threshold is required to overcome a filibuster of legislation. The regulatory relief package Republicans passed in 2018, with support from several moderate Democrats, is likely safe.
“It’s unlikely to change the dynamic significantly regarding legislation,” said Brian Gardner, a policy analyst at KBW. “If it’s a 51-49 Democratic Senate, then you need 60 votes to pass legislation. They’re still going to be short of getting kind of very aggressive, pro-left-wing type of legislation. If it’s a breakup of banks, if it’s a rollback of [2018 reg relief], those kind of initiatives would be unlikely to pass.”
But Democrats’ influence would likely come from being able to set the Banking Committee hearing agenda, and, if they control both the Senate and the White House, confirming leaders to run the regulatory agencies.
There could be an immediate opening at the top of the Office of the Comptroller of the Currency; it's not clear if the Trump administration has immediate plans to nominate a successor to outgoing Comptroller Joseph Otting after Brian Brooks was announced as the agency's acting chief. Within the next presidential term, there could be new nominees to run the Federal Reserve and Federal Deposit Insurance Corp. as well.
“Certainly, the individuals that head up the key financial services regulators, the FDIC, OCC, Fed positions, those positions should not be political but often are,” said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America. “But it will be a different regulatory environment depending on which party is in control.”
Gregg Gelzinis, senior policy analyst for economic policy at the Center for American Progress, said that a Democratic Senate improves the chances for more progressive appointees to get confirmed, which could lead to dramatic change in the agencies' focus.
“The Senate obviously plays a critical role in the nominations process,” Gelzinis said. “I think obviously with financial regulatory issues, there is incredible authority vested in the financial regulators under existing statute. So there is a lot that they can do under their own discretion that makes the old adage that ‘personnel is policy’ really true for financial regulation. The more favorable the Senate to progressive nominees, the more likely that we will get progressive nominees confirmed for various financial regulators.”
Not only would Sen. Sherrod Brown, D-Ohio, become the likely chairman of the Banking Committee if his party wins, but there could be some new faces on the committee as well.
A number of incumbents on the panel, both Democrats and Republicans, face tough reelection battles. Sens. Doug Jones, D-Ala., Martha McSally, R-Ariz., and Thom Tillis, D-N.C., are at risk of losing their seats. Sens. David Perdue, R-Ga., and Tina Smith, D-Minn., are in competitive races.
Messaging risk for banks
A party switch in the Senate would come as the economy will likely still be battling the coronavirus pandemic. Banks have played a key role delivering loans to struggling businesses through the congressionally mandated Paycheck Protection Program, but that role has drawn heavy scrutiny, particularly after it was revealed that some borrowers received funds they didn't need.
Boltansky said Senate hearings under Democratic control would likely shine an even brighter spotlight on banks' handling of PPP loans.
“I think banks should be concerned regarding the potential for the goodwill they have earned in serving such an essential role in fostering some of the economic support efforts reversing very quickly,” Boltansky said. “From an optical perspective, anything that can be framed as banks not playing a sufficient role in the recovery could lead to considerable political risk.”
Aside from banks’ handling of the PPP program, a number of congressional Democrats have continued to express frustration with Wells Fargo over its various consumer banking scandals. After Democrats took over the House in 2019, the House Financial Services Committee held hearings centered on Wells Fargo, in addition to calling CEOs of the other U.S. megabanks to testify.
If Democrats win back the Senate, "I suspect that you’ll see more hearings focusing on the universal and Wall Street banks than what we’ve seen before,” said Gardner.
Gelzinis said that in the aftermath of the coronavirus pandemic, shadow banks could also see more scrutiny under a Democratic Senate. Many of the Federal Reserve's early moves during the pandemic involved announcing liquidity backstops for financial sectors from money market mutual funds to commercial paper.
“Whether we’re talking about money market mutual funds or leveraged hedge funds and their role in the Treasury market, nonbank mortgage servicers, which are begging for a taxpayer lifeline right now, I think there are clear fragilities that a Democratic-controlled Congress and a Democratic president could work to mitigate going forward,” Gelzinis said.
Gelzinis added that lenders and servicers could attract more scrutiny after forbearance plans — a temporary reprieve allowing borrowers struggling economically in the pandemic to skip mortgage payments — come to an end. At that point, mortgage delinquencies could spike.
"Those potential losses could be of such a scale that it actually swamps ... capital and we actually face a banking crisis by the end of the year, which would then inform potential future actions to raise bank capital, toughen the stress tests, have more stringent liquidity requirements," he said.
Focus on affordable housing
A financial services lobbyist said the Senate Banking Committee’s agenda would likely involve a heavy emphasis on affordable housing under Brown.
“If Sen. Brown becomes chair of Senate Banking, I think the biggest change would be a focus on housing,” the lobbyist said. “I think the housing issues, particularly affordable housing, homelessness, multifamily housing would definitely all receive significantly more attention under a Chairman Brown.”
Ashley Harrington, federal policy advocate at the Center for Responsible Lending, said she would hope to see lawmakers advance measures to provide down payment assistance for homebuyers.
“We also want to see fair homeownership opportunities that address structural inequities and provide support for affordable housing including providing down payment assistance for low wealth families,” Harrington said. “We in general are encouraged when we see any lawmakers supporting affordable homeownership for communities.”
A new CFPB
The Supreme Court is currently weighing whether a president can fire the director of the Consumer Financial Protection Bureau without cause. While Republicans originally launched the legal challenge of the agency's leadership structure, the case could enable Biden, if he wins, to remove CFPB Director Kathy Kraninger.
“If you end up with a new CFPB director, appointed by Biden and confirmed by a Democratic Senate, then you will have Brown working very closely with a new CFPB director on a range of issues and that would be important,” the financial services lobbyist said.
Under Kraninger, the bureau has rolled back several Obama-era rules, and it is poised to rescind underwriting requirements in the agency's payday lending rule.
“Candidly, I think there is a lot of pent-up anger around these issues,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition. “I think you have a lot of Democrats quite angry that the CFPB is revisiting the [payday] rule.
"I think there will be a debate, do we revert to the old rule or do we go even further on something that might be even stronger?”
Community Reinvestment Act
At top of mind for congressional Democrats is the final rule issued by the Office of the Comptroller of the Currency modernizing the Community Reinvestment Act.
The CRA rule, which will only apply to OCC-regulated banks, has drawn harsh criticism from community reinvestment groups and others.
“At a time when prudence and care is required, Comptroller Otting has ignored thousands of thoughtful comments from civil rights leaders, community development advocates, and local leaders and rammed through an overhaul to this key civil rights era law while he is reportedly on his way out the door,” Brown said in a press release after the rule was announced.
But the FDIC and Fed both declined to support the rule. With Otting planning to step down this week, sources say a Democratic president could remove his successor more easily than the heads of the other agencies, and a new comptroller confirmed by a Democratic Senate could seek to unwind the CRA rule.
The OCC's examination standards established under Otting won’t be in place until 2022.
“I would anticipate at sort of a minimum, the OCC’s changes are reversed and we revert back to the status quo,” Van Tol said. “But I also think there will be a push to expand CRA.”
Harrington said the Center for Responsible Lending would push for regulators to consider a proposal that would include increased data collection.
“We do think that there needs to be heightened data collection and more transparency on CRA activities and CRA lending,” Harrington said.
Good news for pot banking, beneficial ownership
When Democrats flipped the House after the 2018 midterm elections, two industry-backed legislative measures that were viewed to have bipartisan support were a bill to enable banks to service state-legal cannabis businesses, and a bill to revamp money laundering requirements.
The House in September 2019 passed the Secure and Fair Enforcement Banking Act, or SAFE Banking Act, in a 321-103 vote, with 91 Republicans joining nearly all of the chamber’s Democrats. That bill would bar federal regulators from penalizing financial institutions serving marijuana businesses that are compliant with state laws.
But as a number of Republicans have supported a Senate version of the SAFE Banking Act, Banking Committee Chairman Mike Crapo, R-Idaho, has raised objections to it. A Democratic Senate would likely advance that measure.
“Cannabis banking, it would probably be easier to get the bill through the Senate, assuming Brown supports it,” said Gardner. “I think that bill has stalled because of Sen. Crapo’s opposition. I would suspect that Democrats could probably get 60 votes for it on the floor, if it came up.”
In October 2019, the House passed the Corporate Transparency Act 49-17, with 25 Republicans joining nearly all of the chamber’s Democrats. That bill would require companies to report their true owners at incorporation to the Financial Crimes Enforcement Network, removing the burden of banks to report beneficial ownership information about their commercial clients.
That legislation has also stalled in the Senate, as Republicans are not united in support of it. Brown told American Banker in February that most Democrats supported the legislation.
“The problem is one of the right-wing groups, the [National Federation of Independent Business], is scaring the hell out of the Republicans," Brown said in the February interview. "Democrats are mostly on board and the Republicans are jittery because one of their rating special interest groups is saying that they are against. So until Republicans get some backbone, we are not going to get it.”
The Warren factor
With her national profile expanding after a failed president bid, Sen. Elizabeth Warren, D-Mass., could put pressure on Brown to advance her progressive legislative proposals.
But Boltansky noted that Brown likely has his own policy priorities.
“Sherrod Brown is his own politician, with his own agenda and his own worldviews,” Boltansky said. “And I think he will run the committee with an ideologically progressive bent.”
Yet a number of moderate Democrats will still sit on the committee in the new Congress, including Sens. Jon Tester, D-Mont., Mark Warner, D-Va., and Kyrsten Sinema, D-Ariz.
“Having the gavel forces you to do one simple thing: count votes,” the lobbyist said. “Counting votes becomes very important and finding ways to get Warren to agree with a Tester, Warner or a Sinema becomes a balancing act for a chairman.”
Is the industry worried?
While a blue wave in the November elections likely means a less industry-friendly environment for banks, industry representatives don’t appear to be in panic mode yet.
One industry source, who spoke on the condition of anonymity, said banks are more concerned dealing with the coronavirus pandemic than potential consequences of the election.
“I don’t feel preoccupied by it as an industry representative,” the source said. “I think we are all pretty preoccupied with what’s staring at us in the face right now.”
Richard Hunt, CEO of the Consumer Bankers Association, said in an email that banks are in a good position to extend credit to consumers and businesses, regardless of who controls the White House and Congress.
“The banking system is well capitalized and sound financial policies allow banks to extend safe, well-regulated financial products and credit to more people and small businesses,” Hunt said. “Nothing about that should be partisan.”
Still, Merski noted that some Democratic proposals, such as caps on consumer loan interest rates and legislation to offer financial services through the U.S. Postal Service will have the industry on the defense.
“We are always concerned about certain issues,” Merski said. “The push for postal banking — the postal service should not be in financial services. They have little to no experience in that. That would be a disaster. Congress enacting interest rate caps is really interfering in the marketplace and will do more harm than good.”