2020 Election preview: Specialty finance
INSIGHT ARTICLE |
With the election approaching, RSM is looking at the economic stakes and the key issues for various industries and sectors. This is one in our series of election previews.
The top policy issue for consumer lending
The results of the election have the potential to alter the regulatory environment for middle market consumer loan companies and loan servicers. The monitoring and enforcement role of the Consumer Financial Protection Bureau (CFPB) is expected to be different if Joe Biden wins the presidency. In addition, the future of legislation that would impose a federal interest rate cap for certain consumer loans and the creation of a public credit reporting agency could be determined based on the election results.
If Trump wins
A reelection of Donald Trump would likely have no significant impact on the direction or focus of the CFPB. During the Trump administration, the CFPB has imposed significant penalties on the largest financial institutions, but the number of enforcement actions taken by the CFPB has decreased during the Trump administration compared to the Obama administration.
If Biden wins
As a result of a recent Supreme Court ruling, the president may replace the CFPB director upon taking office. It is expected that a change in administration would bring a change in leadership of the CFPB, and, with that, a change in focus. It is expected that the CFPB would be more aggressive in pursuing enforcement actions. The official Democratic Party platform states, “[We will] reinvigorate the Consumer Financial Protection Bureau (CFPB) to ensure that banks, financial institutions and lenders cannot prey on consumers.” As a result, existing regulations and disclosure requirements could be changed or enhanced and enforcement activities could increase to levels seen during the Obama administration.
Other consumer lending issues:
There is bipartisan legislation in the House of Representatives called the Veterans and Consumers Fair Credit Act that would impose a 36% federal interest rate cap on certain consumer loan products. While the odds of this legislation’s passing are low, elements of the legislation like enhanced disclosure requirements could be enacted in the future.
Biden has proposed the creation of a public credit reporting agency, which would provide an alternative to traditional private agencies. All federal lending programs, including federal mortgage and student loan programs, would be required to use this agency. Since 62% of all U.S. mortgages are backed by the federal government, the volume is significant.
While these proposals could significantly affect the industry, the odds of these being enacted are low because of the filibuster. Elements of these bills focusing on consumer protections may have enough bipartisan support to pass. It is not expected that these types of legislation are a high priority for Congress in 2021, but companies should continue to monitor developments.
The Trump administration’s effect on the industry:
Under the Trump administration, regulation of consumer lending has generally been less aggressive, with enforcement actions taken by the CFPB decreasing. Furthermore, the CFPB’s payday lending rule was revised in 2020. In its prior form, this rule was expected to significantly affect the viability and profitability of certain small-dollar consumer loan products. The Trump administration’s deregulation stance has had the effect of significantly lowering compliance and litigation costs.
By the numbers: $1.7 billion
During the first five years of the CFPB under President Obama, the agency’s actions resulted in more than $11 billion in relief for more than 25 million consumers, according to Bloomberg. CFPB enforcement from 2018-19 under President Trump totaled $1.7 billion in relief. Compliance and litigation costs for companies could be significantly higher in an environment where the CFPB is more aggressively pursuing monitoring and enforcement actions.
In preparation for the outcome, consumer lending companies should consider:
Consumer lending companies should be evaluating their compliance management systems and their ability to respond to a changing regulatory environment. Regulatory changes have the potential to alter the manner in which companies deliver financial products to customers and collect on debt, as well the structure of financial products offered. The companies that are better able to adapt existing procedures and innovatively design and deliver compliant products to consumers will be the most successful.
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