What Can We Learn From Banking Policy In Trump’s First Term?
Evolve Reveals Many Synapse End Users To Get Pennies On The Dollar — Or Nothing At All. What’s Next?
Hey all, Jason here.
Tomorrow, I’ll be hosting a live interview and Q&A with Synapse cofounder and former CEO Sankaet Pathak on X (formerly Twitter) Spaces. I believe to attend you do need to have an account on X, and, as best I can tell, the live audio Spaces functionality only works on the mobile app, not web.
The conversation will take place Monday, November 11th, beginning at 9am ET — you can join here or check my feed on X for the latest.
As I previously mentioned, I’m heading to Washington, DC, the week of November 17th to speak at the American Fintech Council Policy Summit. I’ll also be attending FinRegLab’s AI Symposium. If you’re attending either of the events, I hope to catch up with you there!
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Evolve Reveals Many Synapse End Users To Get Pennies On The Dollar — Or Nothing At All. What’s Next?
End users of fintech programs built on top of Synapse lost access to their funds on or around Saturday, May 11th — six months ago — for reasons that still aren’t entirely clear.
While most users whose funds were held at AMG National Trust or Lineage Bank received payouts some time ago, thousands of users owed tens of millions of dollars waited patiently for Evolve’s promised reconciliation efforts — only for many of them to find out last week that they would get back pennies on the dollar, if that.
Evolve has provided little meaningful explanation of the data it provided to its third-party consultant, Ankura, or the reconciliation methodology Ankura used to calculate users’ ecosystem balance and Evolve payment.
Users are able to appeal Evolve’s determination, though the bank has provided no detail about how it will adjudicate such disputes, beyond instructing users that they “will need to provide a description of why [they] believe [their] payout amount or program balance are incorrect.” Representatives for Evolve did not respond to questions about the dispute process.
Yet, users are poorly equipped to meaningfully dispute Evolve’s assertions, as Evolve has not explained the data or methodology used, nor do users have the benefit of granular transaction data, including money movement between Synapse’s partner banks, that Evolve purportedly used to do its reconciliation.
Evolve’s decision to inform users of their balances the day before the US presidential election may be purely coincidental, but, given the bank’s general lack of transparency and engagement with end users to date, even if it was a coincidence, the optics are poor and further cement end users’ perception of Evolve as a bad-faith actor.
With Evolve now disbursing the FBO funds it holds and the Chapter 11 trustee, former FDIC Chair Jelena McWilliams, moving to sell what limited assets the Synapse estate holds, the bankruptcy process appears to be progressing towards some kind of conclusion.
Evolve, which has seen several senior leaders resign in recent weeks, seems determined to pay out what it has decided is the right amount and deflect questions and responsibility for the shortfall onto others — particularly with the bank already facing multiple lawsuits stemming from the Synapse disaster.
Yet, there remain numerous unanswered questions.
What is the size of the shortfall, and what caused it?
The long-running elephant in the room has been the $65 million to $96 million shortfall in what Synapse’s partner banks, AMG, American, Evolve, and Lineage, collectively held vs. what end users were owed.
To date, neither the Chapter 11 trustee nor any of the banks have provided any meaningful additional context on the size or cause of the shortfall.
Synapse cofounder and former CEO Sankaet Pathak has publicly made allegations about the causes of the shortfall — and Fintech Business Weekly has independently reported that Evolve internally acknowledged the Mercury “over migration” situation — but the bankruptcy process hasn’t evaluated the veracity of these claims.
To be fair to the Chapter 11 trustee and Judge Martin Barash, the bankruptcy process is not well suited to investigate and adjudicate these claims.
What about the $35 million in reserve funds Evolve held?
Evolve has previously acknowledged holding approximately $35 million in reserve funds, which it has said it would distribute to end users if its reconciliation efforts determined it was “appropriate” to do so. What happened to this money?
Was there criminal wrongdoing?
Fintech Business Weekly has previously reported that Synapse knowingly used customer funds to meet reserve requirements at some of its bank partners — a potentially criminal action.
Trustee McWilliams and Judge Barash have repeatedly made clear that they cannot confirm nor deny if they have made any referral to law enforcement agencies.
With it becoming increasingly clear that the bankruptcy process is likely to leave many questions unanswered, including whether or not there was intentional or criminal wrongdoing, a criminal investigation, if one isn’t already underway, seems like a real possibility.
A Congressional inquiry, where participants could be compelled to testify under oath, is another avenue that could provide greater clarity on what happened — and what steps regulators can take to prevent it from happening again.
How did each bank approach reconciliation? Did they use consistent data and processes?
Very little has been shared publicly about exactly how Synapse’s partner banks went about their respective reconciliation efforts: did each bank use the same underlying data and similar processes? The answer to this appears to be no, based on Evolve’s public statements, but it’s hard to be certain.
In Evolve’s case specifically, as the only bank involved that is known to have used an external consultancy, what data and guidance did Evolve give to its third party, Ankura?
Was the Ankura effort the only reconciliation work Evolve undertook, or were there other workstreams, apart from Ankura’s, focused on reconciliation?
Evolve has represented that Ankura’s reconciliation efforts are “done” — did these efforts reveal anything about the cause or size of the shortfall or provide any context on former CEO Pathak’s allegations, including the Mercury “over migration” and Tabapay debit issues?
If Evolve did have other reconciliation efforts, did the data and methodology used and results differ from Ankura’s?
In its FAQs, Evolve has said that Synapse’s ledgers are not accurate and reliable, saying in part that (emphasis added) “[i]n multiple instances, the ledgers provided by Synapse showed significant differences in Synapse Brokerage End User balances from one day to the next, without corresponding movement of funds. Some of these irregularities impacted millions of dollars of End User funds, without explanation.”
Yet it is known and has been acknowledged by the Chapter 11 trustee that Synapse regularly made bulk movements of funds in between banks in order to maximize the interest it generated. It follows that, if funds moved between banks for this reason, Synapse would also need to change how it “assigned” corresponding user balances to specific banks, which would cause a user’s balance at a specific Synapse partner bank to fluctuate day to day, even in the absence of that user conducting any transactions.
It’s not clear to what extent, if at all, Evolve or the other banks acknowledged this and incorporated it into their reconciliation methodology.
Why did Evolve abandon its plan to determine users’ balances at each bank and then tell users it never planned to do this?
Evolve has been highly critical of the other banks involved in the situation, describing its own course of action as the “responsible” one, while criticizing the other banks’ approach to reconciling and returning users’ funds.
Evolve had previously represented that the reconciliation efforts it undertook would reveal the amount of users’ balances held at each Synapse partner bank.
During the August 15th bankruptcy hearing, Evolve’s external counsel, Orrick’s Caroline Stapleton, said in response to an end user question (emphasis added):
“[T]hat’s exactly what the reconciliation is aimed at doing is determining each end user’s balance at Evolve and across the ecosystem at the different banks…
And so the point of that exercise will be to determine what I think you are asking, which is to understand what the balance is at each institution assigned to you and to the other end users of Fintech that were migrated to Synapse [Brokerage].”
But by the October 23rd status conference, Evolve’s tune had changed, with its attorney responding to questions from end users by denying that the reconciliation efforts were ever intended to yield bank-specific balances or answer questions about the cause or size of any shortfall in end user funds.
Evolve’s attorney in that hearing said in response to an end user question that (emphasis added):
“The reconciliation process was to recalculate end user balances per the Synapse ledger, to correct what was on the Synapse ledger. That is complete. That doesn’t indicate which banks are holding what funds and how much funds that they own. That calculation would have to come from a combination of data sources that are held at all of the various ecosystem banks. That data we do not have. As a result, cannot calculate a shortfall or not.”
Why did Evolve “migrate” users to the Synapse Brokerage program when it knew there was a shortfall of actual vs. expected funds at the time?
During the same August 15th hearing, Evolve’s external counsel, Orrick’s Caroline Stapleton, confirmed the bank was aware of a shortfall prior to the brokerage “migration,” saying (emphasis added):
“Prior to the migration of end user accounts to Synapse Brokerage in October and November of 2023 the bank had to become aware actually through in part communications from Synapse of a deficit or a difference between the ledger balance and the amount of funds in the FBO account.”
If Evolve knew there was a shortfall in the amount of funds it held vs. what end users were owed, why did it proceed with the “migration” and bulk transfer funds to AMG, as custodian for the brokerage, rather than investigate and resolve the shortfall?
What happened to users’ demand deposit accounts (DDAs)?
In its public statements, Evolve has gone to great lengths to argue that end users were not customers of the bank, but rather that Evolve provided some payment processing services to Synapse Brokerage.
However, prior to the “migration” to the brokerage, which Evolve facilitated, many end users held demand deposit accounts at Evolve, meaning end users had a direct legal agreement with the bank.
What happened to these accounts? Generally, only the bank that holds an account can close it — third parties, like Synapse or users’ fintech programs, typically cannot effectuate the closure of a DDA on a bank’s behalf.
Either way, users must receive official notice that their DDA is being closed — did that happen in this case? If so, when, and what party sent notices? If not, end users arguably continue to have a legal, contractual relationship with Evolve that is governed by the demand deposit agreement they entered into when they first opened their accounts.
What’s Next?
Tomorrow, Monday November 11th, I will be conducting a live interview and question and answer with former Synapse CEO Sankaet Pathak, addressing these questions and more (more info here.) However, despite his central role in this catastrophe, even his visibility into what happened and his capacity to answer these questions has its limits.
The next bankruptcy hearing is scheduled for this Wednesday, November 13th, at 10:00am PT — and, while the hearing seems likely to be contentious, given the understandable anger of end users, it doesn’t seem particularly likely to provide answers to the most pressing questions: what happened to the money, and when will end users get it back?
What Can We Learn From Banking Policy In Trump’s First Term?
When Trump unexpectedly won in 2016 and took office the following January, I was working at Goldman Sachs on building and scaling the bank’s Marcus consumer offering (how times have changed…)
And while Trump’s regulatory appointments in that first administration surely impacted the business, monitoring, analyzing, and opining on how what was happening in DC impacted banking and fintech was, at the time, well outside my day-to-day purview.
In an effort to better understand what a second Trump administration could mean for banking and fintech, I’ve taken a look at some of his key regulatory appointments and their tenures during Trump’s first administration — though, it’s worth caveating, there are ample reasons to believe appointments and policy in his next administration could look substantially different from the first time around, especially when it comes to crypto.
Trump, his coalition, and the advisors he surrounds himself with have changed significantly since 2016, and the people likely to staff a second administration will reflect that.
Further, there have been changes in the legal and judicial environment, including the end of the Chevron doctrine, which will have yet-unknown impacts on how the federal banking agencies under any administration go about their work of promulgating rules, supervising banks, and enforcing regulations and the law.
While banking policymakers in Trump’s first administration broadly pursued de-regulatory agendas and were “pro-innovation,” most of his appointments were, in hindsight, remarkable for their, well, normalcy, particularly in comparison to his staffing choices in other areas of government.
Key appointments in Trump’s first administration included Jospeh Otting and Brian Brooks at OCC; Jelena McWilliams at the FDIC; Mick Mulvaney and Kathy Kraninger at the CFPB; and Jerome Powell and Randal Quarles at the Federal Reserve.
Trump-Era OCC’s Aborted Attempt To Offer Fintech, Payments Charters
Trump appointed Jospeh Otting as his first Comptroller of the Currency to lead the OCC, which oversees nationally-chartered banks.
Otting came from a lengthy career in banking, including stints at Bank of America, Union Bank, and US Bank, ultimately serving as president, CEO, and board member at OneWest. At OneWest, which was created from the purchase of global financial crisis casualty IndyMac, Otting worked closely with Steve Mnuchin, who Trump would later name as Treasury Secretary.
Key initiatives during Otting’s stint at the OCC included updating the agency’s Community Reinvestment Act regulations, encouraging financial inclusion through the creation of Project REACh, working with other federal regulators to establish a framework to encourage banks to offer small-dollar loans, and the continued development of an ill-fated “fintech charter.”
The OCC, under Otting, introduced a final CRA rule in May 2020. According to the agency’s statement at the time, the rule would “increase bank CRA-related lending, investment, and services in low- and moderate-income communities where there is significant need for credit, more responsible lending, and greater access to banking services.”
The updated 2020 rule sought to:
clarify what qualified for CRA consideration
update how banks define CRA assessment areas
evaluate CRA performance more objectively through quantitative measures
make reporting more transparent and timely
provide greater support for small businesses, small and family-owned farms, and Indian Country
evaluate banks’ CRA performance in all of their assessment areas
However, the OCC, which oversees about 1,000 of the country’s approximately 4,500 banks, undertook its 2020 rule update without coordinating with the FDIC or the Federal Reserve.
The OCC’s 2020 CRA rule was officially rescinded in December 2021, shortly after Biden took office.
Ultimately, the OCC, together with the FDIC and the Federal Reserve, jointly issued a rule to update and modernize aspects of the Community Reinvestment Act in late 2023.
Comptroller Otting also supported the idea of a so-called “fintech charter,” technically known as a special-purpose bank charter — though, it’s worth pointing out, his predecessor, Obama-era Comptroller Thomas J. Curry, said that the OCC would consider applications for fintech charters as far back as late 2016.
At the time, Comptroller Curry described offering such special-purpose charters as being “in the public interest,” as, he said, (emphasis added throughout) “It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters.”
Otting worked towards the goal of the OCC offering such charters, announcing in July 2018 that the agency would begin accepting fintech charter applications.
In a policy statement released at the time, the OCC argued that it has authority to grant charters for national banks engaged in the “business of banking” and that an entity engaged in any of the three core banking functions — receiving deposits, paying checks, or lending money — could be eligible for a special-purpose charter.
Otting envisioned fintech charter holders as being eligible to be members of the Federal Reserve and Federal Home Loan Bank systems, meaning they could gain direct access to Fed payment systems, like FedWire and FedACH, and liquidity facilities.
However, the OCC’s effort to offer a fintech charter was subject to multiple challenges over several years by the New York Department of Financial Services and the Conference of State Bank Supervisors.
The challenges broadly argued that the OCC’s effort to grant non-depository charters exceeded its authority under the National Bank Act by improperly defining the “business of banking” to include non-depository institutions and sought to enjoin the OCC from implementing its plan to offer such charters.
Given the legal uncertainty around the fintech charter, no company ever applied for one.
Figure, a lender and blockchain company started by SoFi cofounder Mike Cagney, attempted to pursue a similar structure as that envisioned by the fintech charter by applying for a national bank charter without seeking FDIC deposit insurance.
The CSBS sued to block the application, but dropped the suit in 2021, after the company amended its application to indicate it would seek deposit insurance from the FDIC. Figure ultimately abandon its quest for a charter, withdrawing its application in 2023.
Current Acting Comptroller Michael Hsu and the Treasury Department have made calls for the creation of a federal licensing framework for payments firms, but few concrete steps have been taken, as, in Hsu’s estimation, such an initiative would require an act of Congress.
Otting also oversaw the OCC’s participation, alongside the FDIC, the Federal Reserve, and the National Credit Union Administration, in developing interagency guidance encouraging banks and credit unions to offer small-dollar loans.
The agencies’ principles offered guidance on the structure, pricing, underwriting, marketing, and serciving of small-dollar loans.
But both the go-it-alone approach on updates to the Community Reinvestment Act and the prospect of offering fintech charters were controversial at the time and may have contributed to Otting’s decision to step down in May 2020.
Brooks’ Brief, Crypto-Friendly Tenure Atop the OCC
Brian Brooks took the helm as Acting Comptroller after Otting’s departure in May 2020 and led the agency until just before the end of Trump’s administration, in January 2021.
Shortly after Brooks took the reins at OCC, the agency announced Project REACh, or the Roundtable for Economic Access and Change, with the explicit goal of promoting “financial inclusion through greater access to credit and capital.”
The effort, which debuted in the wake of the death of George Floyd and subsequent racial unrest, was specifically positioned as addressing inequities in the financial system.
Then-Acting Comptroller Brian Brooks commented at the time, “The recent civil unrest across our country emphasizes that too many people have been left out of our nation’s economy,” and continued to say, “A good example of the structural barriers we can tackle involves the fact that almost 50 million Americans have no credit score. That does not mean those individuals are uncreditworthy, but it likely means they cannot get a traditional loan. We can fix that and similar problems that will make access to credit easier and more affordable for millions of people.”
Brooks sought to build on Otting’s efforts to offer a fintech charter, even announcing a “payments charter” in late 2020, shortly before the end of his tenure. Brooks described the offering as a “national version of a state money transmitter license.”
The proposal met immediate opposition from banking groups, including the CSBS, and no firm ever applied for such a payments charter.
Brooks’ tenure at OCC did coincide with a more relax approach to traditional charters, with Varo becoming the first fintech to be granted a de novo national charter and Jiko winning approval of its proposed acquisition of Minnesota-based Mid-Central National Bank during his time at the agency.
During Brooks’ brief time at OCC, he oversaw aspects of a number of rulemakings, including the “valid-when-made” and “true lender” doctrines and the fair access rule.
Valid-when-made and true lender sought to provide greater clarity for marketplace lending arrangements, in which non-bank lenders partner with banks to originate loans.
The valid-when-made doctrine codified that idea that, if a loan’s interest rate was valid and permissible at the time it was originated by a bank, it remains valid, even if the loan is sold or transferred to another entity. The true lender rule sought to codify that a bank should be considered the “true lender” of a given loan, even if later sold or transferred, so long as the bank is named as the lender in the loan agreement or if the bank funded the loan.
The fair access rule sought to require banks with more than $100 billion in assets to provide quantitative justifications when declining to lend to legal but sometimes disfavored industries, such as weapons manufacturers, tobacco, and oil and gas.
However, the Biden administration paused the fair access rule, which ultimately never took effect, and the newly-sat Congress leveraged the Congressional Review Act to reverse the the true lender rule in early 2021. The valid-when-made rule has faced legal challenges, but remains in effect.
Brooks, who served as Coinbase’s chief legal officer prior to joining the OCC and had a four month stint at Binance.US’s CEO after leaving the OCC, pursued a number of crypto-friendly measures during his time as acting Comptroller.
During his tenure, the OCC published an interpretive letter clarifying that national banks could custody cryptoassets and clarified that national banks could hold “reserves” on behalf of stablecoin issuers.
However, in November 2021, shortly after taking office, current Acting Comptroller Hsu clarified that banks “must demonstrate that they have adequate controls in place” before seeking to engage in certain crypto, distributed ledger, or stablecoin activities and that banks must receive supervisory non-objection before engaging in such activities.
Brooks even used his position to advocate for decentralized finance, or DeFi, arguing that it could “eliminate error, stop discrimination, and achieve universal access for all” in financial services.
FDIC Under McWilliams Had Largely “Pro-Innovation,” Deregulatory Agenda
To lead the FDIC, Trump nominated Jelena McWilliams, a lawyer who had previously worked at the Federal Reserve, on the Senate Banking Committee under Republican members Richard Shelby and Mike Crapo, and as chief legal officer at Fifth Third Bank.
Key regulatory initiatives during McWilliams’ tenure at FDIC included the 2020 brokered deposit rule, which narrowed the definition of brokered deposits and provided more expansive exceptions. The rule was positively received by fintechs and the banks with which they partner, as it provided greater flexibility in how these arrangements could be structured, without triggering the brokered deposit classification.
Current FDIC Chair Martin Gruenberg has proposed a rule that would functionally roll back the changes made by the 2020 rule.
McWilliams oversaw the FDIC as it undertook rulemaking to implement aspects of 2018’s Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), including regulations that:
exempted certain real property mortgage transactions from appraisal requirements
allowed institutions with less than $10 billion in assets that meet certain criteria to report a Community Bank Leverage Ratio and exempted them from existing risk-based capital ratio and leverage ratio requirements
amended the FDI Act to exempt a capped amount of reciprocal deposits from being deemed to be brokered for qualifying institutions
exempted banks with less than $10 billion in assets and trading assets and liabilities of no more than 5% of assets from the Volcker Rule
allowed simplified call reporting for institutions with less than $5 billion in assets for filings in the first and third quarters
increased the size threshold for well-capitalized institutions to be eligible for an 18-month exam cycle from $1 billion to $3 billion in total assets
raised the threshold for the application of enhanced prudential standards to bank holding companies, including capital and liquidity rules, from $50 billion to $250 billion, and allowed the Federal Reserve to apply enhanced prudential standards to any bank holding company with between $100 billion and $250 billion in total consolidated assets under certain circumstances, often referred to as “regulatory tailoring”
simplified and reduced requirements for stress tests and resolution planning
McWilliams was supportive of the Bank On initiative, spearheaded by the Cities for Financial Empowerment Fund, which advocates for safe and affordable access to banking services. The FDIC under McWilliams collaborated with local coalitions, supported national standards for account structures that aligned with the goals of the program, and participated in outreach and education efforts.
The FDIC leaned in to innovation efforts during McWilliams’ tenure, including by launching its FDITECH office. FDITECH facilitated “tech sprints,” which brought together regulators, advocates, and private sector actors to ideate on possible solutions to vexing problems, including barriers to economic inclusion.
In the current administration, the FDIC has dismantled the public-facing efforts of the FDITECH office, earning rebukes from Republican lawmakers.
The FDIC under McWilliams was also more receptive to deposit insurance applications from industrial loan companies, with Square and Nelnet winning approval of their deposit insurance applications, thereby allowing them to receive ILC charters during her time at the helm of the FDIC.
McWilliams was appointed to a five-year term as FDIC Chair, which would have run through spring 2023. McWilliams stepped down in early 2022 following a power struggle with Democratic FDIC board members Martin Gruenberg (who is currently FDIC chair), Acting Comptroller Michael Hsu, and CFPB Director Chopra.
Chair Powell Likely to Remain At Fed Through 2026
Trump nominated Jerome Powell to a four-year term as the Chair of the Federal Reserve in November 2017. Notably, Biden renominated Powell to a second stint as Fed Chair, with his current term set to run through 2026.
The Fed Chair can only be removed “for cause” and, despite Trump’s threats, for now, it seems likely Powell will remain through 2026.
The Fed is best known for its role setting interest rate policy. During the early phase of the COVID-19 pandemic, the Fed played a key role supporting financial markets and the wider economy through interest rate policy, quantitative easing, and emergency liquidity facilities, among other measures and programs.
In his first term, Trump also appointed former Treasury official Randal Quarles as a Fed board member and vice chair for supervision. Though the position was created as part of 2010’s Dodd-Frank, Quarles, appointed in July 2017, was the first to hold the role.
The Fed, under Powell’s leadership during the Trump administration, pursued a broadly deregulatory agenda. Key initiatives during Powell’s and Quarles’ tenures included implementing regulation called for by 2018’s EGRRCPA, including “tailoring” requirements based on banks’ asset size, revisions to the Volcker Rule, and revisions to the bank stress-testing regime analogous to implementation efforts at the FDIC and OCC.
CFPB Likely to See Most Significant Policy Shifts
Perhaps Trump’s most controversial first-term appointment was nominating Mick Mulvaney as his first pick to lead the Consumer Financial Protection Bureau.
Mulvaney memorably described the consumer protection agency as a “sick, sad joke,” submitted a budget request for $0, and quipped about not being able to burn down the bureau’s headquarters if he tried, owing to its brutalist architecture.
Mulvaney served at the CFPB for about a year, from November 2017 until December 2018, while simultaneously serving as the Director of the Office of Management and Budget.
During Mulvaney’s stint leading the CFPB, the bureau pivoted to a substantially more industry-friendly outlook. The bureau under Mulvaney undertook substantially fewer enforcement actions, dismissed multiple advisory boards, including its consumer advisory board, and emphasized a cost-benefit lens for proposed new regulations and enforcement actions.
Mulvaney delayed the implementation of the bureau’s payday lending rule in order to undertake a review of the rule and proposed revisions that would rollback or water down provisions of the regulation, including a key ability to pay requirement.
Mulvaney stepped down from leading the CFPB when he became Trump’s third chief of staff in late 2018.
Mulvaney was succeeded by Kathy Kraninger, who ultimately did rescind the payday rule’s ability to pay requirement.
Kraninger largely continued Mulvaney’s deregulatory agenda. During Kraninger’s tenure, the bureau formulated new rules clarifying regulations governing debt collection practices, amending the remittance rule, updating the qualified mortgage definition under Regulation Z, narrowing the institutions required to comply with Home Mortgage Disclosure Act (HMDA) rules, and governing property-assessed clean energy (PACE) financing.
Kraninger also spearheaded the bureau’s “Start Small, Save Up” initiative, which encourages consumers to improve their financial health by building up emergency savings, and placed a stronger emphasis on consumer financial education with programs like “Your Money, Your Goals.”
Project 2025 Argues For Combining OCC, FDIC, and Fed’s Supervisory and Regulatory Functions, Eliminating Fed’s Dual Mandate, Abolishing the CFPB
While President-elect Trump has sought to distance himself from the Heritage Foundation’s controversial Project 2025 plan, which purports to provide a policy blueprint for Trump’s second term in office, the 922-page document provides insight into what some of his stakeholders hope to achieve this time around.
The far-reaching policy framework makes several notable recommendations regarding federal banking law and regulation, including:
combining the OCC, the FDIC, the NCUA, and the Federal Reserve’s non-monetary supervisory and regulatory functions
eliminating restrictions on banks engaging in non-banking activities, including by “creat[ing] new charters for financial firms that eliminate activity restrictions and reduce regulations in return for straightforward higher equity or risk-retention standards”
repealing Title I and Title VIII of Dodd-Frank, which created the Financial Oversight Stability Council (FSOC) and give the council broad powers to regulate financial market utilities
repealing Title II of Dodd-Frank, which granted regulators orderly liquidation authority as an alternative to the traditional bankruptcy process for large financial firms
ending the government conservatorship of Fannie Mae and Freddie Mac
requiring FinCEN to publish the number of SARs, CTRs, AML-related prosecutions and convictions, aggregate amount of AML/CFT-related fines, and annual estimates of the costs imposed on private entities by AML/CFT regulations
identifying every Treasury official who has participated in diversity, equity, and inclusion initiatives and interview them to determine the purpose, scope, and nature of these initiatives
eliminating the Treasury’s Climate Hub Office
eliminating the Federal Reserve’s “dual mandate,” instead focusing only on “protecting the dollar and restraining inflation”
limiting the Fed’s role as lender of last resort
reducing the size of the Fed’s balance sheet
limiting future Fed balance sheet expansion to US Treasuries
considering replacing the current monetary regime with “free banking,” commodity-backed money, or implementing “K-Percent” or inflation-targeting rules
prohibiting the Fed from issuing a central bank digital currency (CBDC)
abolishing the Consumer Financial Protection Bureau
It’s Hard to Make Predictions, Especially About the Future
I generally try to avoid making predictions, because I’m usually wrong.
It seems safe enough to conclude that a second Trump administration will herald a return to a more industry-friendly, deregulatory posture among federal banking regulators, though the specific policy agendas the Fed, OCC, FDIC, and CFPB pursue will be shaped by whom Trump appoints to lead them.
There are also important differences to note vs. Trump’s first term.
The composition of the House and Senate has changed — including leadership on the Senate Banking Committee, which will be led in the next Congress by Republican Senator Tim Scott. With Democratic Senator Sherrod Brown’s loss in Ohio, Elizabeth Warren, an original architect of the CFPB, seems poised to become the committee’s ranking Democrat.
Who will control of the House of Representatives remains uncertain, though Republicans are favored to prevail. With North Carolina Congressman Patrick McHenry’s retirement, assuming Republicans retain control of the chamber, the House Financial Services Committee will have a new chairperson.
The Supreme Court’s decision in Loper Bright eliminating the Chevron doctrine may be another key difference vs. Trump’s first term. The end of Chevron functionally shifts power from executive branch agencies to the courts, potentially opening avenues for progressives or advocacy groups to challenge business-friendly regulations. Though with the inroads conservatives have made in capturing the judiciary, this may make little difference in the end.
Perhaps the most important area to watch will be how “blue state” regulators and legislators react to the shift in power and sentiment at the federal level.
Jurisdictions like California, New York, Colorado, Connecticut, and Maryland, which tend to be more actively “pro-consumer” regardless of who is in charge in DC, may feel compelled to “protect” their constituents if they perceive the Trump administration’s agenda to be favoring business at consumers’ expense.
Examples of actions state regulators and attorneys general have taken include California’s efforts to block higher-rate loans originated by out-of-state banks and to define earned wage access products as “loans” under state law, Colorado’s decision to opt out of DIDMCA, and numerous state actions against peer-to-peer payday lender SoLo Funds.
A more permissive federal banking regulatory posture combined with diverging “blue state” vs. “red state” financial services policy agendas risk exacerbating the already challenging state-by-state patchwork that banks and especially fintechs must navigate.
Other Good Reads
Five Thoughts About Bank Regulation in the Second Trump Administration (Bank Reg Blog)
CFPB Orders Navy Federal Credit Union to Pay More Than $95 Million for Illegal Surprise Overdraft Fees (CFPB)
The Fights Over Bank-Fintech Arrangements (Fintech Takes)
FTC Takes Action Against Online Cash Advance App Dave for Deceiving Consumers, Charging Undisclosed Fees (FTC)
Extend-and-Pretend in the U.S. CRE Market (Federal Reserve Bank of New York)
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