Banking’s Next Act: Regulatory Shifts Ahead

0:04 Hi everyone, and welcome to Leaders in Lending. This is Lynd Soderbiel. I'm happy to be joining you here today from CBA Live, and I have Dave Palmeran and Billy Riley joining me today, so thanks thanks for being here, gentlemen. I would appreciate it if both of you could just kind of introduce yourselves and what you do at CBA. Sure. Yeah, Hi everyone. David Palmer, I am a general counsel and head of Regulatory Affairs at CBA, so I deal a lot with the regulators in DC and of course with all the ongoing litigation around some of the former CFPB's rule bankings. And I'm Billy Riley, head of Public Affairs, so we handle messaging for the organization on behalf of our membership, work very closely with the regulatory and legislative teams in terms of policy communications, and also support broader corporate comms and executive comms, including helping to set up this conference and some of our other events like our Executive Banking School.

0:59 Well great, thank you again, appreciate you taking the time to join us today. So i'd really just ask each of you to kind of give a brief overview obviously there's a lot of things changing in the market right now with the current regulatory and political environment, but just kind of a lay of the land, like where do you see things stand right now with the current environment out there, and how it's really impacting CBA members. Sure, yeah, I mean it's a very unique environment and it's changing by the minute. So any predictions we could give you probably are going to be wrong because they're going to change very rapidly right now. I mean, we're in this kind of limbo right where the new administram administration has come in a lot of executive orders, a lot of internal kind of rearranging of some of the agencies, and we're not quite sure where it's going to end up at this point. So we're working very diligently with the administration. We have new we have nominations for new director, we have nominations for a new comptroll or that are working their way through the Senate now, and so hopefully well once we get people in place in a permanent basis, there will be some think stability though that we can go and start talking to the individual agencies. We need the agencies to function, We need to know who we're dealing with right and the banks need to have certainty within the markets and the rules that they have to abide buying compliance issues. So there's a lot of question marks right now. There's a lot on people's minds, and

2:30 so we're working through that and hopefully we'll again get to a better place in the near future. Yeah, I just add on that. I think the uncertainty is a big one, but it poses some we think positives, but also some potential headwinds. So obviously bankers know that the last four years in the prior administration in terms of some of the financial regulatory rules that came out, pos significant challenges for our members and kept us at CBA very busy. Obviously a lot of that is going away, or we think it is, and so in the sense and the positive sense, that may be a good thing. But we also have a political system right now with Republicans that may be a little bit more skeptical of large institutions, including large banks in particular with the rise of populism. So something else to keep an eye on, especially as it relates to Capitol Hill. But some of the proposals out there that maybe our banks won't be a supportive of.

3:28 Sure, and I definitely hear you on the uncertainty. You know, we deal with We have over one hundred lenders of both banks and credit unions on our platform, and my team is actually supporting them through their regulatory exams and so that is a that and we deal with all of the regulators too, So certainty certainly helps us do a better job for our clients and helps our clients have a better understanding of what to expect. So, you know, with kind of the status of the CFPB right now, ongoing legislative debates, and and certainly states getting more active in the regulatory space, and potentially even more so if if the federal credential regulators kind of back off. You know, I think, how do you you know, how are banks adapting to these uncertainties and and what kind of advice are you giving your members on ways to stay kind of proactive and to at least navigate as smoothly as they can through this uncertainty.

4:28 Yeah, I mean it's as Billy alluded to. I mean, a lot of the rules that they're currently gearing up for are you know, in limbo right now that could go away either through actions by Congress, actions by the agencies themselves or through litigation. Our banks are business as usual right now. I mean they're they're still beholden to the consumer protection laws and you know, and they're you know, complying with all of these things and regardless of whether or not the c FPB is and they're supervising them for any of these issues. Hopefully we'll get back to again a sense of stability on the supervisory side soon. The prudential banking regulators are supervisoring, supervising, holding, you know, examinations of those things, but a lot of the prep for things like ten seventy one small business data collection, this this is a huge poll for the industry, and they need to understand where that's going and what the bureau might do with it, what's going to be the outcome of the litigation, and so in large part, I think, you know, you have to plan for what we know now, and that's where they're going with this right now. But things could change on a dime and that cost compliance dollars obviously, which is not you know, ideal. But I mean, banks need to get back to what we're talking about, the certainty around some of the rule making, some of the compliance issues that they have right now in order to better function and quite honestly better serve the US public.

5:59 Then sure, and I think you know we we certainly the clients that we work with are are many of them are not CB members. There are more, you know, regional community banks, and and the potential costs of uncertainty I think is hitting everyone hard, but certainly hitting them them hard as well. So I think one thing that that does stay in the spotlight, as you mentioned consumer protection and and how the you know, the banks are doing the things that they need to do to protect the consumer regardless of the rules, and the regulators are still doing their their regular exams, but late fees, overdraft fees certainly remain in the spotlight as well as SERIA modernization efforts and UH and lately some some UH I think, proposals to to get rid of CDFI as an organization.

6:46 But you know, kind of with all of the different things happening, you know, what are some of the areas you think that that banks and financial institutions should really be paying special attentions to as it relates to some of those I think, particularly the consumer focus items like late FEZ rate caps, overdraft. I mean, these are all important issues. Clearly, this was part of the previous administration's junk fee campaign quote unquote junk fee campaign. I think it's been painted in a large, large part as a populist issue, and actually the cost benefit analysis wasn't really completed when it's when they were looking about how these rules actually could impact the US consumer.

7:29 You know, what should our banks be looking for. I mean, as you know, with late fees and with overdraft fees, there's litigation in both those fronts. The overdraft fee rule is subject to a Congressional Review Act resolution currently in front of Congress, so you know how they are navigating again, it's you know, hope we have answers soon. I hope that we get back to a place where we have a durable, credible agency within the cfp B that's going to do cost benefit analysis rule making where there is a market failure. Right now, we're really just kind of combating all these rules that were more political in nature than really addressing a market failure. Some of our member institutions, for instance, an overdraft, they're the leaders and putting together mitigating ways for consumers to actually avoid overdraft fees. With buffer amounts, twenty four hour grace periods, things of that nature.

8:29 Where was the market failure that you know, precipitated this this need for this kind of outlandish rule and so you know, that's what we're dealing with now. I am very hopeful that over the next year or so, we can see a lot of this litigation go away, get back to really appropriate rule making that's done within the confines of authority and not for political reasons. And just to add to that, so obviously David mentioned the Lafey and overdraft fees driven largely by the prior administration, and you also mentioned ratecaps, And we recently saw a proposal introduced in the House as a companion to a previous legislative proposal in the Senate, both of which had bipartisan support, seeking to limit bank in credit card issuer's ability to charge interest rates above ten percent, which is concerning for a lot of different reasons. And so that's something we're keeping our eye on because of the bipartisan nature of it, and one of the many ways that we're trying to push back on that here at CBA, whether in the media or through some of our blogs and op eds, is trying to show through data and research the impact that that would have on consumers and especially consumers at the margin and their access to credit, because a lot of times these legislative proposals make for good political headlines, but they have real world implications on the people we're working to serve.

9:54 Yeah. Absolutely, and I think you both called it out that you know, doing a true data driven cost benefit analysis, what really will happen if you impact if you make changes like that, And the answer is that a lot of lenders simply won't be able to lend to, especially UH consumers. That I think when when we originally started our company, we're looking to expand access to credit and maybe identify what we saw as those hidden primes or near primes that the banks weren't reaching. And those folks are are easy to get kind of put out on the edges of the banking industry. Again, So what do you you know as you as you think about maybe the federal regulators being weakened a little bit, or being defunded or having less staff. Potentially, do you see a potential for individual states to create more kind of a patchwork of regulation that it makes it even harder for the Bank.

10:50 It's a great point. Yeah, and we need a strong federal regulator to set you know, the kind of the path here. It's it's difficult for our member institutions to kind of piecemeal regulation and enforcement through different state actions. We're seeing a little bit of that now. I would imagine that you'll see more ramp up with the AGS, especially in blue states where if we don't have you know, proper supervision from the Bureau or from from the Prudentials. Again, we're really hopeful that the Bureau will start that process again and that we'll get back to a good place. There's also the private right of action for a lot of the enumerated statutes within Dodd Frank. So we are somewhat concerned that you could see an uptaken you know, lawsuits from the plane offs bar. But you know, that wouldn't be anything new. The planet bar is going to take advantage when it can take advantage of something. But I do think that we'll we'll probably get more action from the states as we move, you know, into the near future. But again, I don't think that was anything particularly new. We saw that ramp up even with the Biden administration. Yeah, so I think that we'll see a little bit more of it down.

12:02 Yeah, and that's definitely something you know, we certainly track a lot with like the legislation in Colorado and different and did MACA opt outs as are of challenging to manage when you're a company that works across the across the country. So you know, as you think though about protecting consumers insurance competition, do you see any tension between kind of those two things, like how are your banks on bank members staying competitive and with each other when there's certainly a lot of I think in a regulator d certainty and they also have to think about consumer protection. I can start with them, and I mean we always talk about how the banking industry in America is among the most highly regulated, most competitive in the world. Right, and so that really does benefit consumers in the sense that because of the regulatory apparatus, they can have confidence that they are being protected, that their money is safe and secure. But also with that many banks and credit unions and also with the rise of fintech and tech companies that are increasingly offering financial services, consumers have amazing ability to choose financial products and tools that meet their unique needs, right and so I feel pretty confident, Dave.

13:17 I think you would agree as well that this system really does provide so much flexibility and choice and access, and I think nowhere has that been more evident over the last decade than in overdraft. And you've seen so many of our members innovate on that product, offering financial flexibility and next day grace periods because you know, banks really want to meet consumers where they're at number one, but number two. The market is getting more competitive with other FinTechs and such that are offering are offering low or no cost overdraft services, and so that competition, I think is benefiting consumers, and consumers can have that comp finance when they meet their needs within the well regulated banking system, that they're also being protected.

14:04 Yeah, I agree with all that, and I would add though that, you know, with the fintech industry or banking as a service as a model now becoming more and more popular, it's it's vital that our our member institutions, large regionals or national banks have the ability to innovate, aren't confined by the rules that are being written solely for them, right without having an equal playing you know, or a level playing field, for those those fintech companies and for you know innovators in that space. I mean, we're all for the innovation on either side, but we have to we have to be able to have the flexibility to do that as well. And I'll i add too though, this is another reason the CPP is very important because they have a supervisory theory over the non banks and that is going to be vitally important going into the next few years where we're having I think a larger up uptick in you know, banking as a service and FinTechs entering that space and partnerships.

15:04 Sure, there's a there's a great story from the early days of Upstart, where you know, I was founded by ex Google executives primarily and people who had not worked in banking, and in their exuberants to be part of the industry and to be you know, friendly to regulators and to get in front of them, showed up at the OCC Office of Information in San Francisco and said, hey, we want to tell you about what we're doing, very excited, which was maybe the first time that that had happened at an OCC office. And so we do work very closely with the regulators, like we why we don't get examined, our clients do, uh, And so we spend a lot of time with the OCC and helping them understand and and the FDAC and helping them understand how we use AI and how we think about AI and how we work with our bank partners. You know, I think is that a space that you're particularly seeing probably more uncertainty and maybe less of an even playing field where the banks may be getting challenged harder on use of AI versus FinTechs and banking as as service providers can can move a little bit faster.

16:08 Well, it definite can move faster. I mean there's a lot about it. Banks have to be very measured in their approach to any new technology, especially AI. I mean, it's it's highly scrutinized, right, I mean, it's a little scary, I mean to be honest with you, right, you know, and we do good regulation and sound law around the use of AI, or it could go it could run amok, right, And so but you have the FinTechs that are able to move a little faster, and that's not bad for the banking industry as a whole, you know, as long as we can partner and work with these these organizations. There's also third party risk management issues that you know are abundantly you know, our banks are abundantly you know, supervised and examined for and we encourage that innovation and we but we have to be able to implement and you know, partner or build that to be able to do that ourselves as well. In order to make sure that we're able to do that, we need to be very very measured in our approach to regulation. That only affects you know, the banking industry and depository industries federally ensured you know, FDIC positive industries, but the fintech industry plays a very important role in getting us to the next level. And so we not saying that they shouldn't be able to do that. We just need to have far absolutely.

17:24 Yeah, and I think fair lending particularly is an area that comes up frequently that in a traditional underwriting model is logistic regression whatever your you know, even table driven models, or it is easier to explain or at least it's already documented with the regulators. How do you examine a bank that is using a model like this? How do you examine a bank that is partnering with the fintech that uses AI and their underwriting much less clear and kind of gets back to your certainty, like the rules of the road aren't as clear. I think there's certainly a challenge with individual examiners not necessarily having the know how to do it, and I think there's an education challenge there that we're trying to This is a.

18:04 Challenge in the current environment now too. I mean, you're seeing a lot of the regulators leave the agencies. A lot of the folks that were embedded within some of these financial institutions knew them how to historical context of the of the institution, and now we're seeing fewer and fewer, you know, team staff at the regulatory agencies. The examiner, the examiners are half of what they used to be. They have to be brought up to speed, and so it's important to have a really well educated, very informed regulatory exam staff in order to make sure that banks and FinTechs can get to these places and that they're not being halted on something that's misunderstood just because the regulator might not understand the process or the institution that's implementing.

18:49 Absolutely, So, how do you know, as you think about your member banks, how do you advise kind of the business teams, the lending teams, the heads of innovation, the different different functional areas to work closely with their kind of legal and public affairs team to navigate what's happening right now in the market. We provide no advice to anyone. No, I mean, I mean quite clearly, I mean we're not. We're you know, we try to shape the policy that best suits our industry right and so, and we work very closely with the policy folks within our member institutions, the legal teams. You know, as a lawyer, I can say the lawyers probably you know, hold up most of these things for very when they shouldn't be. But you know that's what lawyers do, and that's what we pay them to be careful.

19:31 But we you know, obviously it takes it takes a village, you know, to kind of push you know, an organization forward. And I think that you know, working closely with the policy especially the folks in d C and now more importantly you know, the state you know, policy folks and the legal teams is vital to the survival of some of these institutions and. Just to add to that, I think over the last four years, as difficult as some of the rules and regulartions coming out of the prior administration were for the industry, for especially the largest institutions, when the business lines really got a sense of the financial impact that one specific regulation among many would have on their ability to provide that product and innovate on that product at the level that their consumers expect, I think really heightened the pressure that corporate executives across the industry put on DC. And so you saw that Obviously government affairs and traditional lobbying was always a priority, but that really expanded to the public affairs ecosystem, and so you saw really historic levels of investment with digital advertising, grassroots coalitions, grasstops, which really means more paid stakeholder engagement. So identifying those small business owners or some of those think tanks that can speak on behalf of the industry. That really all revved up over the last four year years, and I think there's

21:01 a perception that in many cases it was at least somewhat successful. And so I think that kind of atmosphere of the intersection between the business priorities outside of Washington, and the teams on the ground in terms of public affairs and government relations will continue regardless of who's in the White House. Great. Yeah, And I think we've certainly seen it on the fintech side of the world too. The American Fintech Council, which we're a founding member of we used to be the Marketplace Lenders Association, were actively engaged there. I know We've got a lot of some similar organizations that are doing similar work and partnering up on various initiatives. So I think it's it's definitely been a very very active few years and doesn't look like things are slowing down at all. So kind of last last thoughts are last question for the both of you. You know, any kind of bold or bold predictions, emerging issues, things that might surprise us for the year ahead, that that banks should be really preparing for, could both political and regulatory standpoint, like, is there you know, with the uncertainty, what could they prepare for to be ready for twenty twenty five?

22:08 You want to start to sure, I'll take you. I'll take the Obviously, banks need to be able to our member institutions need to be able to pivot quickly, and I think us providing them with a little bit of the kind of signals of where things are going with some of the rulemakings and other things will be helpful for them. But it's going it's it's just kind of a new era. We're very dedicated to stopping that pendulum swing between administrations. I think that we're going to see a pretty big pendulum swing for the next two years at least because Congress. They have majorities in Congress and that might change in two years, and so they're going to have a pretty healthy agenda going forward. So it will be an interesting couple of years. I think banks will enjoy some deregulation of in some wind back, wind down of some of these more egregious rules that we're quite honestly outside the authority of the regulators to even promagate. But it's going to be We're going to have to be very nimble right and be flexible about our approach to how we're working with our regulars. But I think we also need to advocate for what we need the regulators for, and that is for to make sure that the system is working, that we have level playing fields, and that you know, quite honestly that you know, we're proud of being the most regulated, are heavily regulated, heavily supervised industry because you know, we were there for the American public. It needs to be well regulated, well supervised, and so hopefully we'll get back to some of that.

23:38 Yeah, just to add to what Dave said, I think a lot of institutions right now in the financial services space are, especially for reputational risks, trying to stay a little bit more in the background, which is obviously an intentional choice. We'll see if they're able to continue to do that, and a lot of that depends on the political environment. From a policy perspective, I think banks and credit unions and FinTechs need to be prepared for what seems to be more likely instance or a more likely instance of legal framework being put around crypto and stable coins. Peers. There's bipartisan consensus in the House and Senate to advance that, and obviously you saw in the President's campaign huge coalition of crypto and stable coin influencers and leaders, and that seems to be something that is going to make progress in the months to come.

24:31 Awesome. Well, thank you, thanks Dave, Thanks Billy, appreciate you being on the podcast Today US