The U.S. House and Senate are back in session this week, but only until very early August when lawmakers will be off again for the month-long summer recess. There also are now just over five months left in the entire 118th Congress, assuming lawmakers come back after the election to finish up work in a lame-duck session, as expected.
While much of the attention in the media on Capitol Hill of late has been focused on Democrats’ positions related to whether President Joe Biden should stand for reelection, work will continue throughout the year, both by federal regulators and state and federal lawmakers, on several important financial services and fintech-related matters.
Let’s take a look at what those issues are.
“Woke” Banking: An Emerging Election Issue?
It’s no secret GOP lawmakers have made environmental, social, and governance (ESG) “activism” and its effect on household finances a key pillar of their policy and communications focus over the last two years. In a hearing last fall regarding pensions and retirement security, House Ways and Means Committee Chair Jason Smith (R-Mo.) said, for example, that lawmakers “have a responsibility to put the needs of seniors ahead of climate extremists and far-left activists who want to use retirement savings to finance a political agenda.”
Outside of the Beltway, Republican policymakers in several states also are raising this issue — and are getting legislation passed in the process.
As Politico reported last week, recently enacted laws in Florida and Tennessee “target big banks over what conservatives say is political and religious discrimination.” The Florida law prohibits all national banks, not just state-chartered ones, from canceling a customer’s financial services based on their political opinions or religious beliefs. The law also implements a customer complaint process that triggers an investigation into the bank by state regulators,” Politico reported.
Tennessee’s law is similar but applies only to banks with total assets exceeding $100 billion. Additionally, it requires banks to provide an explanation, with specific reasons, for closing or denying an account. That provision is important since the law also allows customers to sue banks for violating the statute.
“The laws are the latest front in a broader battle playing out in states over what Republicans deride as ‘woke’ banking,” Politico explained. “They echo related efforts in recent years by GOP officials to go after big banks and asset managers over how they approach climate and social concerns in investing.”
Lawmakers in Arizona, Georgia, Iowa, and Idaho also are considering similar legislation, and Republican activists have no plans to stop there.
“We’re hopeful more states will look at this issue,” Matt Sharp, senior counsel at the Alliance Defending Freedom, told Politico. He said the laws are aimed at addressing “the real harms that come when these banks — without any transparency, without any accountability — shut down an account and the damage it can do.”
Financial services trade associations are pushing back, arguing the state laws are preempted for national banks by federal law. Washington, D.C. policymakers, or federal courts, may have to settle this issue.
Congress’ Focus On Crypto Will Continue
The Treasury Department and Internal Revenue Service recently released a final rule that establishes reporting requirements for sales of digital assets that are similar to requirements for stocks, bonds, and other investments. Meanwhile, members of Congress continue to try to strike a balance when it comes to regulating digital assets and encouraging innovation.
Today, for example, pro-crypto House Democrats and Republicans are expected to unite to vote in favor of overriding President Joe Biden’s veto of a resolution that overturned U.S. Securities and Exchange Commission (SEC) guidance that directed financial institutions to mark digital assets as liabilities on their balance sheets.
While the House vote is likely to be successful, ultimately the effort is unlikely to garner the support of two-thirds of the U.S. Senate, which is the threshold needed for a veto override in that chamber. According to Politico, backers of the override effort “are already formulating a plan B.” Specifically, they want to advance legislation written by Rep. Mike Flood (R-Neb.) that would overrule the SEC guidelines and attach that bill “to a must-pass package — thus taking the pressure off Democrats to split with the president.”
Additionally, back in May, House lawmakers voted overwhelmingly to approve H.R. 4763, the Financial Innovation and Technology for the 21st Century (FIT21) Act, a bill that would divide regulatory oversight of digital assets between the Commodity Futures Trading Commission (CFTC) and the SEC. That bill contained H.R. 3572, which seeks to exclude assets sold as part of investment contracts from being classified as securities. The House also approved H.R. 5403, which would prohibit the Federal Reserve from issuing a central bank digital currency unless it preserves the privacy protections of cash.
House Financial Services Committee Chairman Patrick McHenry (R-N.C.) said the votes represent a high-water mark for digital asset policy, resulting from extensive bipartisan efforts and stakeholder input.
The path forward for these pieces of legislation is still difficult, however. Though 71 House Democrats voted for H.R. 4763, the Biden administration opposes the bill due to concerns about a lack of sufficient consumer and investor protections. Senate leaders also have been reluctant to schedule a vote or hearings on companion legislation. The bipartisan support in the House puts some pressure on Senate Democratic leadership to act on the bill, but progressive members of the party will pressure Senate Majority Leader Chuck Schumer (D-N.Y.) to delay or altogether avoid consideration of the legislation.
Will Congress Finally Approve The Safer Banking Act?
House lawmakers have approved the SAFE Banking Act seven times since it was first introduced 11 years ago. As sponsor Sen. Jeff Merkley (D-Ore.) explained, the legislation would ensure legal cannabis businesses have access to banking and financial services by preventing federal banking regulators from:
- Prohibiting, penalizing or discouraging a bank from providing financial services to a legitimate state-sanctioned and regulated cannabis business, or an associated business (such as a lawyer or landlord providing services to a legal cannabis business);
- Terminating or limiting a bank’s federal deposit insurance primarily because the bank is providing services to a state-sanctioned cannabis business or associated business;
- Recommending or incentivizing a bank to halt or downgrade providing any kind of banking services to these businesses; or
- Taking any action on a loan to an owner or operator of a cannabis-related business.
Last year, Sen. Merkley changed the name of the bill(it’s now the SAFER Banking Act) and the contents of the legislation.
One of the most significant changes was that The SAFER Banking Act expanded the list of institutions that would qualify as a “covered financial institution.” The SAFE Banking Act only included forfeiture protections for depository institutions, federal reserve banks, and federal home loan banks. The SAFER Banking Act also includes the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, and Federal Agencies Making, Insuring, or Guaranteeing Mortgage Loans or Securities, and a host of “other parties to mortgage loans.”
The Senate Banking Committee approved the SAFER Banking Act on a 14-9 vote last fall, but the legislation has been stalled since then. In May, Banking Dive concluded, “The likelihood of further action on that legislation this year, though, is uncertain. Advocates say they’re hoping the bill can be attached to a larger legislative vehicle, as stand-alone passage seems increasingly unlikely.”
Continued Attention On Fintech Lending
“The financial technology advances of the past decade brought to prominence a new group of lenders active within the personal loan space — financial technology (fintech) lenders,” observed an August 2023 Federal Reserve FEDS Note. “Although traditional lenders such as banks, thrifts, credit unions, and finance companies continue to play an important role in providing personal loans to consumers, fintech lenders gained a notable market share.”
Many of these fintech lenders are backed by one of just a few traditional banks
While lawmakers generally agree fintech tools can help consumers budget more wisely, save more, and diversify their investments, there is increased scrutiny by regulators and some on Capitol Hill regarding fintech lending, payments, and deposit-taking given the relatively small size of the banks with whom many fintechs partner and whether they are able to sustain the compliance expectations of the fintechs’ activities.
As legal experts at Pillsbury noted, last year, the Federal Deposit Insurance Corporation (FDIC) issued a consent order against Cross River Bank that cited “noncompliance and weaknesses in its oversight of fintech lending partners.” The Office of the Comptroller of the Currency (OCC) issued an order against another lender, Blue Ridge Bank, in 2022 citing allegations that the bank “engaged in unsafe and unsound practices related to its partnerships with fintechs.”
Additionally, as a blog post from the Duke University Financial Economics Center explained in 2020, “By originating loans on behalf of fintech lenders … these banks allow their fintech partners to bypass state licensing requirements and interest rate restrictions.” That blog post concluded, that, “in so doing, [these banks] are creating new risks that are little understood.”
Regulators and members of Congress are beginning to explore those risks and while we do not expect lawmakers to approve any legislation regarding this matter over the rest of the 118th Congress, oversight will continue.