Leadership changes are underway at federal banking and finance agencies, as the new administration charts course toward deregulation.
Topics discussed:
- New leadership at the FDIC, OCC, and CFPB
- Early moves in easing bank and crypto rules
- Responding to the CFPB’s stop work order
- CFPB litigation dwindles in select areas
- Congress seeks to reform the CFPB and repeal some of the agency’s Biden-era regulations
Listen to audio here.
Transcript
The following transcript of this discussion was edited for clarity.
Samantha Kirby: Hi, thanks so much for joining us. I’m Samantha Kirby, chair of financial services here at Goodwin, and today, we’re going to talk to you about what we’re watching with respect to the bank regulatory agencies and the Consumer Financial Protection Bureau (CFPB).
First point: Personnel is policy. The new administration has already had a significant influence on banking agency policy through its ability to appoint banking agency leadership. For instance, we now have a Federal Deposit Insurance Corporation (FDIC) board of directors that’s in Republican hands, and Republicans are also in charge at the Office of the Comptroller of the Currency (OCC) and the CFPB.
At the Federal Reserve, the board makeup remains the same for now. Michael Barr stepped down as vice chair for supervision, and Michelle Bowman, who was herself a former community banker and is seen by the industry as banker friendly, has been nominated to replace him.
The FDIC has withdrawn various proposed rules, including ones relating to broker deposit classification, corporate governance, and the Change in Bank Control Act.
We can’t predict with certainty what the FDIC might do with a proposal relating to recordkeeping in connection with custodial deposit accounts with transactional features, but Acting Chair Travis Hill voted in favor of the proposal when it was released last fall at the same time that he noted he would support changes to ease the regulatory burden the rule would impose — which suggests to us that the FDIC may adopt a revised version of the rule.
Bill, let me turn it over to you.
Bill Stern: Thanks, Samantha. I’m Bill Stern. I’m also a partner in Goodwin’s Financial Services group, based in New York, with a focus on bank regulatory matters.
Regarding additional action by the FDIC, Acting Chair Hill has also stated that he intends for the FDIC to encourage more de novo activity so that there’s a healthy pipeline of new entrants in the banking sector.
By some accounts, between 2000 and 2008 (leading up to the financial crisis), there were more than 1,000 de novo banks formed. There’s been a relative drought of activity since then, so any increase in de novo bank formation would be considered significant in this space.
The federal banking agencies have also announced their intention to withdraw the Community Reinvestment Act rule that was issued in 2023. The banking industry as a whole was fairly critical of that rule because it evaluated bank performance in certain cases on a nationwide basis. It also took into account deposit-taking services, whereas the Community Reinvestment Act itself (the statute) is focused on meeting community credit needs. Any sort of reversion back to the old rules would likely be seen by the industry as a lowering of regulatory burden.
The FDIC and the OCC have also announced their intention to eliminate reputational risk as a standalone category of risk in connection with their examination of banks and savings associations. This is likely to provide some additional flexibility for banks to provide services to companies that present heightened risk — in particular, anti-money laundering risk related to businesses like money services businesses and crypto firms. Banks will need to consider the specific risks posed by these customers, and they will of course also need to comply with underlying statutes and regulations — in particular, the Bank Secrecy Act.
The FDIC and the OCC have also provided guidance clarifying that the institutions they supervise may engage in various crypto activities, such as acting as a custodian for digital assets and clarifying the process for doing so. That is, of course, significant because banking institutions have felt constrained in that space for the last few years.
Samantha Kirby: Thanks, Bill. Kim, tell us about the CFPB.
Kim Holzel: Hi, everyone. I’m Kim Holzel. I’m also a partner at Goodwin in our Financial Services group, and I’m a former staff member of the CFPB.
As Samantha and Bill elaborated on already, there’s been quite a bit of leadership change at the federal banking agencies, including the CFPB. In addition to that, there has been a stop work order for a majority of the Bureau staff. While that remains subject to ongoing litigation, we’ve felt the impacts of that across the industry, at least with respect to companies that are supervised by the CFPB or work with companies and banks that are supervised by the CFPB.
Most notably, when that change happened quite suddenly, it became apparent to us — and I think many players in the industry — that there is some need for the CFPB to come back to work and manage some ongoing issues.
Based on some of the leadership’s statements, it does seem like they’re in development of a plan to move forward with the new administration’s policy, but they’re doing so in a very conservative way right now where they’ve stopped work until those policies can be carried out and decided.
For example, we’ve been receiving questions about the status of examinations, enforcement actions, and investigations as well as the status of rulemakings. Many of these things were in progress at the time of the leadership change. The stop work order didn’t mean that matters requiring attention went away, or that investigations were going away, or that rules that were slated to go into effect would automatically be invalidated.
Something that we’ve been watching over the first 100 days and beyond is how the CFPB is going to come back and deal with those issues and what the industry should be doing in response to those ongoing issues. Our general feeling is that until we hear some official action, the industry needs to be prepared to comply with what’s already out there.
This has rippled through the industry in terms of preparing for compliance with rules that are slated to come out and preparing for examinations that have been scheduled (some of which have been canceled — but maybe not all of them, especially those slated for later in the spring or summer).
It’s been a day-by-day trickle to see which of those things are going to move forward and which aren’t and also what the status of the staff is going to be as this litigation continues.
I’m going to hand it over to Christina, who’s going to talk a bit more about enforcement and litigation in terms of the CFPB and other agencies.
Christina Hennecken: Thanks, Kim. Hi, everyone. My name is Christina Hennecken. I am a partner in Goodwin’s Consumer Financial Services Enforcement and Government Investigations group. Part of my practice focuses on the CFPB.
Similar to what Kim has been tracking with CFPB supervision, we've also been tracking the CFPB's activity with respect to enforcement, whether it be litigations or investigations. On the litigation front, we've seen a mix of stays and voluntary dismissals, and there has been some dwindling activity with the CFPB moving forward in a handful of cases.
Just to put some numbers on it, at the beginning of the Trump administration, there were about three dozen CFPB litigations active. And within the first month of Russell Vought being in charge, about 10 matters were voluntarily dismissed. Some were stayed, but then some started moving forward again slowly.
As an example, there are a couple matters that are active involving the Military Lending Act. These cases involved alleged excessive interest rates charged against members of the military. In one of them, the Bureau filed a status report saying, “We’re moving forward with this one. We’re going to prosecute the case.”
Just recently, the parties filed a joint motion to temporarily stay the case based on settlement discussions, which was granted. Based on what we've seen, there could be some limited activity with respect to narrow areas like protection for service members or the elderly — areas that have strong bipartisan or populist support.
There are also a handful of matters that are moving forward where the CFPB was already very far along in the enforcement litigation. There was one matter against a debt relief company, for example, where the court had already made a finding of liability, and recently, the Bureau filed a brief seeking civil money penalties (CMPs). What makes this case somewhat interesting is that the CMPs the Bureau was seeking were very aggressive, which is somewhat surprising coming from the new CFPB.
Another litigation update: There was a redlining enforcement action where the CFPB had alleged a mortgage lender violated the Equal Credit Opportunity Act. The parties had already reached a settlement, but the new CFPB is trying to have that settlement vacated, saying the lawsuit should have never been brought in the first place. That’s something we’ve never seen before.
On the investigations front, many companies that were in the midst of CFPB investigations in February received letters saying all their deadlines are being held in abeyance. Since then, for the majority of these investigations, it’s been radio silence. It could be that, like with the litigations, the Bureau is going to slowly lurch back to life with some of these if they fit the narrow subject area that this administration cares about. But for now, it’s mostly a large-scale pause on CFPB investigations.
Congress has also been very active with respect to the CFPB. At the end of March, there was a House Subcommittee on Financial Institutions hearing called, “A New Era for the CFPB.”
We’ve been tracking that because the legislature has lots of ideas on reforming the agency. There were several legislative proposals from that hearing that show signs that Congress at least wants the agency to exist; they might just want it to be more tailored and to avoid mission creep.
One of the proposals is for the agency to be a five-member bipartisan commission with at least two members with private sector experience within consumer financial services and products. Another proposal that I think will be supported by the industry is called the Civil Investigative Demand Reform Act, with the intention of reforming CID authority and ensuring targets receive due process and that they’re not subject to undue burden from CFPB investigations. During the hearing itself, Congressman Andy Barr actually referred to CIDs as extortionary and had very strong language to describe the process. I could see this proposal gaining some momentum.
Separately, Congress has also been seeking to repeal regulations that were finalized right at the end of the Biden administration using the Congressional Review Act (CRA). We’re tracking a number of rules that had been finalized in the last 60 or so working days of the prior Congress.
Just this week, the House and Senate successfully passed resolutions to revoke the CFPB's overdraft lending rule, which would have limited bank overdraft fees to $5. Congress also successfully passed resolutions to revoke the rule giving the CFPB supervisory authority over non-banks involved in digital payment transactions. Those resolutions are going to the president for final sign-off.
Another rule on the chopping block is the medical debt rule, which prohibits creditors from using medical debt information to make credit eligibility determinations and prohibits credit reporting agencies from furnishing consumer credit reports with medical debt. We'll see in the coming weeks whether Congress makes progress on that rule as well.
What's interesting about the Congressional Review Act is if Congress succeeds and actually revokes a rule, the agency cannot issue a new rule that is substantially the same unless Congress authorizes it in a subsequently enacted law. So it could be very challenging to revive these regulations in the future.
And beyond the CRA, Congress is also sending letters. We know they’ve sent letters to multiple financial agencies, including the CFPB, asking that the agencies themselves undo or change Biden-era regulations. They’re trying to deregulate from a couple of different fronts.
That’s all we have for today. Thanks so much for joining.
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