Arkansas Congressman’s Proposal To “Make Community Banking Great Again”
CFPB Finalizes Digital Wallet "Larger Participant" Rule, Congress Grills Prudential Regulators
Hey all, Jason here.
After and informative and interesting week in Washington, DC, I’m wrapping up this newsletter from Chicago, where I’ll be staying through the Thanksgiving holiday. I want to extend a big thank you to Phil Goldfeder and the entire American Fintech Council team as well as Melissa Koide and the FinRegLab team for putting on amazing events.
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However, not all tradeline data is created or treated equally, so to speak. In this session, I’ll be joined by industry experts Jason Capehart (Mission Lane), Chris LaConte (Self Financial), Alex Johnson (Fintech Takes), and Jesse Silverman (Troutman Pepper), in what promises to be an enlightening and entertaining conversation on Assessing the Signal vs. Noise of New Kinds of Tradeline Data.
Join us on Tuesday, December 3rd, at 12:00pm Eastern / 9:00am Pacific for this can’t-miss session.
Arkansas Congressman’s Proposal To “Make Community Banking Great Again”
US Congressman French Hill, who represents Arkansas’s Second Congressional District, has a plan to “Make Community Banking Great Again.”
Hill, who’s served in Congress since January 2015, currently sits on the House Financial Services Committee, where he holds the title of vice chair. With the Republicans maintaining control of the House and current HFSC chairman Patrick McHenry (R-NC) set to retire, Hill has set his sights on the committee chairman role, though Andy Barr (R-KY) has the backing of House Majority Leader Steve Scalise (R-LA) and is a favorite to win the gavel.
Perhaps in an effort to telegraph his MAGA bona fides, earlier this month, Hill released his plan to Make Community Banking Great Again. In a statement announcing the plan, Hill said (spacing adjusted):
“The House Financial Services Committee has not had a former banker hold the gavel in over a century. As a former Founder, Chair and CEO of a community bank, I have a plan to make community banking great again in this country.
I welcome feedback on these principles and look forward to advancing President Trump’s economic growth agenda and bringing fresh ideas to support banks of all sizes, which serve communities nationwide and are a source of strength for our economy.”
Hill’s plan offers a variety of suggestions that, he says, would promote regulatory “fairness, transparency, and right-sizing,” promote a healthy banking industry for institutions of all sizes, and improve access to funding and capital, including by:
Reversing the “weaponization of government” by prohibiting federal prudential regulators from ordering institutions to close customer accounts without a material reason.
Investigating the conduct of banking agency personnel to assess if staffers have engaged in “political targeting” of industries like fire arms or digital assets.
Making climate stress testing optional.
Re-establishing the concept of regulatory “tailoring” by “by requiring federal prudential regulators to (1) tailor their actions based on the capital structure, risk profile, complexity, financial activities, business model, and size of the institution; and (2) conduct a comprehensive review of their compliance with the statutory mandate for regulatory tailoring under S. 2155.”
Being more open to innovation “in a way that is consistent with safety and soundness and provide clear supervisory expectations to financial institutions about their third-party relationships including with financial technology companies.”
Increasing the fairness, accountability, and transparency of bank examinations by adopting legislation similar to the Fair Audits and Inspections for Regulators’ Exams Act.
Better coordinating the timing of state, federal, and CFPB examinations to reduce the compliance burden on smaller institutions.
Increasing the $10 billion threshold at which institution are subject to CFPB supervision and indexing the threshold to inflation.
Increasing the threshold at which well-managed well-capitalized institutions qualify for an 18-month instead of 12-month examination cycle.
Amending the CAMELS rating system, including by adjusting the relative category weights and establishing “objective measures” to assess each CAMLES component.
Modernizing call report data for banks based on deposit type, size, mean, median, and duration, and the inclusion of disaggregated fraud losses.
Having federal regulators develop a plan to address surging check and debit card fraud.
Automatically deeming bank merger or acquisition applications approved unless expressly denied by regulators within 120 days of filing.
Addressing the lack of de novo bank charters, especially in underserved areas.
Allowing the FDIC to waive its Least Cost Resolution (LCR) requirement in cases where a proposed transaction would increase competition and facilitate economics growth.
Revisiting the methodology for evaluating bank mergers and competition for proposed transactions.
Upholding the FDIC’s 2020 brokered deposit rule, which outgoing FDIC Chair Martin Gruenberg has proposed functionally rolling back.
While Hill’s proposal reads more like a wish list than a roadmap for concrete, passable legislation, it does give at least some indication of the likely directional of travel when the 119th Congress is sworn in early next year.
With Republican control of the Presidency, House, and Senate, Trump moving quickly to staff senior roles in his administration, and the end of Chevron deference, the pendulum is set to swing back towards deregulation.
Still, those hoping for a rapid easing of regulatory scrutiny of fintech and banking may be left waiting, as it typically takes time for changes in regulatory leadership to filter through to boots-on-the-ground supervisory staff.
CFPB Finalizes Larger Participant Rule For Payment Apps
Last week, the CFPB issued a final rule defining “larger participants” in the market for general-use consumer payment applications, making firms that meet the criteria subject to the CFPB’s supervisory authority under the Consumer Financial Protection Act.
In the Bureau’s initial proposal, digital payment apps and wallets that process more than 5 million transactions per year would have been deemed to be “larger participants.” This was raised to 50 million transactions per year in the final rule. The final rule also limits the scope to transactions conducted in US dollars, excluding other currencies, including cryptocurrencies and digital assets.
The CFPB estimates that the most widely used apps and services covered by the rule, which presumably will include household names like Venmo, Cash App, Apple Pay, and Google Pay, in aggregate process more than 13 billion transactions per year.
Director Chopra said of the final rule that “[d]igital payments have gone from novelty to necessity and our oversight must reflect this reality” and that “[t]he rule will help to protect consumer privacy, guard against fraud, and prevent illegal account closures.”
The CFPB’s supervision authority allows it to examine entities to assess their compliance with relevant consumer financial laws; to gather information on their activities, compliance systems, and policies and procedures, including prior to or without conducting an examination; to detect and assess risks to consumers and consumer financial markets; and to require reports.
According to the CFPB, its supervision powers will enable it to:
better assess payment apps’ privacy and surveillance practices, including how they collect and use “vast quantities of data” about consumers’ transactions.
monitor how firms handle errors and fraud, include rights consumers have under federal law to dispute transactions that are fraudulent or incorrect; the Bureau specifically flagged that it is “concerned about how digital payment apps can be used to defraud older adults and active duty servicemembers.”
protect consumers from being “debanked”
While some have described the measure as making big tech firms like Apple and Google subject to regulatory exams “just like banks are,” that framing ignores that, depending on the business model and app, many hold state-issued money transmission license or partner with already-regulated banks.
And even without the supervision authority the newly finalized rule will give the CFPB, there’s no question the Bureau previously had and continues to have enforcement authority over digital payment apps like Venmo and Apple Pay.
Industry actors are, understandably, not thrilled with the prospect of additional supervisory oversight.
The same day the final rule was released, the Financial Technology Association called on the CFPB to withdraw what the trade group described as “deeply flawed.” FTA President and CEO Penny Lee said in part (spacing adjusted):
“It’s not clear what problem this rule is solving. Payment companies are well-regulated at the state and federal levels, and consumers are having positive experiences with them…
The final rule is deeply flawed, failing to define a market or identify specific risks to consumers and conflating diverse uses and products into a one-size-fits-all approach. It will lead to less competition, fewer services, and higher prices.
Instead of layering regulation simply for the sake of regulation, we should follow the lead of other major economies and work to integrate leading payment companies into the national payment infrastructure.”
The final rule goes into effect 30 days after it is officially published in the Federal Register, though there are low probability but possible avenues to reversing it.
Congress has 60 legislative days to attempt to use the Congressional Review Act, which can be used to invalidate federal agency rules through a simple majority vote in both the House and Senate and Presidential approval. When a rule is overturned via the CRA, the agency that promulgated it is prohibited from introducing a substantially similar rule unless specifically authorized by legislation.
Trump’s eventual CFPB nominee could also undertake a new rulemaking process under the APA to modify or revoke the rule.
Companies impacted by the rule or industry trade groups can also attempt to block or modify the rule by suing the CFPB, though long-running challenges to the Bureau’s funding mechanism have delayed, but not reversed, other regulations disfavored by industry.
20 Key Takeaways from Last Week’s Hearing On Oversight of Prudential Regulators
Last Wednesday, FDIC Chair Martin Gruenberg, Fed Vice Chair for Supervision Michael Barr, NCUA Chair Todd Harper, and Acting Comptroller of the Currency Michael Hsu testified in front of the House Financial Services Committee in a hearing focusing on oversight of the prudential regulators.
Embattled FDIC Chair Gruenberg, who announced he would step down from his role effective January 19th, 2025, had a lengthy, 32-page prepared statement for the committee. In his testimony, Gruenberg:
emphasized the importance of and need for the FDIC’s recently proposed rule to strengthen recordkeeping and reconciliation requirements, better known as the “Synapse Rule.”
noted that aggregate domestic deposits decreased by nearly $200 billion, or about 1.1%
warned that the FDIC has observed a “dramatic” increase in false advertising and misrepresentations about FDIC insurance coverage
described some of the actions, including enforcement actions, the FDIC has taken related to consumer protection
highlighted a quarter over quarter increase in net income and decrease in unrealized losses on available-for-sale and held-to-maturity securities portfolios
flagged increasing weakness in banks’ commercial real estate and credit card loan portfolios
touched on some of the “cultural issues” at the FDIC, including ongoing anti-harassment and discrimination efforts
In his prepared written and oral statements, Acting Comptroller Hsu:
warned about the need to guard against complacency and emphasized the need to prioritize strong risk management
reiterated that elevating fairness, through initiatives like modernizing the Community Reinvestment Act, reforming overdraft practices, and initiatives like Project REACh, remains a top priority
emphasized the need to adapt to digitalization while also protecting consumers, including through “responsible innovation”
advocated for a deliberative, common-sense approach to climate-related financial risks
In his brief prepared remarks, Fed Vice Chair for Supervision Barr:
noted that the overall banking system remains “sound and resilient,” with banks continuing to report capital and liquidity ratios above minimum regulatory levels
described the progress the Fed has made on “improving the speed, force, and agility” of supervision to better manage the “ risks, size, and complexity of supervised banks, as appropriate”
updated the committee on various rulemaking initiatives, including regarding Basel III endgame and long-term debt requirements
And finally, National Credit Union Administration Chair Todd Harper:
warned of potential weaknesses that NCUA is monitoring, including “growing signs of weak loan performance, declining capital levels, rising delinquency rates, and lower earnings across the system and at specific institutions”
noted that year over year share growth remains positive, even with negative quarter over quarter share growth in June 2024
mentioned slowing returns on assets, with an industry-wide aggregate ROA of 0.69%
warned of increasing consumer financial stress, with credit unions’ delinquency rate for total loans and leases increasing to 0.84% in the second quarter
flagged the increasing number of complex credit unions with more than $500 million in assets that are considered “troubled,” as, at the end of the second quarter, credit unions with CAMELS ratings of 3, 4, or 5 accounted for just over 10% of the industry’s assets
explained the NCUA’s efforts to promote financial technology, including public-facing documentation, establishing “office hours,” and data collection efforts on credit unions’ use of fintech
Other Good Reads
Andreessen Investor Fought to Keep Synapse CEO Before Fintech Collapsed (The Information)
Authorization or Annoyance: Will 1033 Reauthorization Requirements Create a Ticking Time Bomb? (Jane Barratt/Open Banker)
Should We Eliminate Deposit Insurance Limits? (Fintech Takes)
Defining Households That Are Underserved in Digital Payment Services (Kansas City Fed)
Why Do Banks Fail? Three Facts About Failing Banks (Liberty Street Economics)
When Siri Becomes a Deposit Broker (Todd Phillips)
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