BPInsights: October 30, 2021

Stories Driving the Week

Digital ID, CBDC, Invisible Primes: Key Themes from the BPI Financial Inclusion Symposium

The question of how to bring America’s unbanked and underbanked households into the mainstream banking system, the importance of which was underscored by challenges they faced during the pandemic, was addressed in a symposium hosted by BPI on Oct. 26, 2021.  The event, titled “Barriers to Deposit Accounts for the Unbanked and Underbanked and Going the Last Mile,” featured researchers and practitioners delving into this question from wide-ranging perspectives.  Here is a high-level summary of the symposium.

IRS Bank Reporting Provision in Flux

The proposal to require banks to report account inflow and outflow information to the IRS stands on uncertain ground after criticism this week from Sen. Joe Manchin (D-WV), whose support is critical for ultimate passage of the Democratic social spending bill. Manchin said in remarks at an event this week that he told President Biden the provision was “screwed up.” “I think that one’s going to be gone,” he said.

After Manchin’s comments, CNBC initially reported that the proposal had been removed from the bill, but some Democratic negotiators have tried to revise it with an exemption for people earning less than $400,000 a year, according to Bloomberg. Banks do not track account holders’ annual income, which would make that version of the proposal unworkable to implement.

The proposal is also divisive in the House – 21 House Democrats called in a letter this week for the IRS reporting provision to be removed from the spending package. The debate comes amid further negotiations on the broader Democratic reconciliation bill, which is a centerpiece of the Biden Administration agenda. The White House this week released its “Build Back Better” proposal, which includes increased IRS enforcement that would raise an estimated $400 billion; however, it does not appear to mention the reporting provision.

WSJ Editorial: A Banking Regulator Who Hates Banks

Opposition to OCC nominee Saule Omarova is based on her radical policy proposals, such as nationalizing the banking system and placing the Federal Reserve in charge of controlling wages and fuel, food and home prices, and concern that “she’d abuse her supervisory power as Comptroller to expand political control over the private economy,” the Wall Street Journal wrote this week in an editorial. “The Senate should defer to Presidents on most nominees, but not on one who loathes the institutions and system she’d regulate.”

FDIC Chief: Stablecoin Reserves Must Have Oversight 

Stablecoins issued outside of the regulated banking system should be subject to oversight, particularly focused on whether they are truly backed 1:1 with safe, liquid assets, FDIC Chair Jelena McWilliams said in remarks this week. “That oversight should rest on the foundation that stablecoins issued from outside the banking sector are truly backed 1:1 by safe, highly liquid assets,” she said. “If issuers purport to have reserves available on demand to satisfy withdrawal requests, regulators should have authority to ensure the funds are there, specifically if such issuers are large enough that a stablecoin ‘run’ could result in financial instability.” Regulators must also keep in mind money laundering and operational resilience threats.

The prospect of stablecoins becoming a dominant form of payment is risky, she said. “This could lead to substantial sums of money migrating out of insured banks with significant ramifications for credit creation, financial stability, and bank funding.”

McWilliams also said regulators are faced with a choice between prohibiting banks from engaging with digital assets, which would mean “it will inevitably develop in non-banks,” or regulating that activity appropriately and setting forth clear expectations for banks. She said the FDIC will issue a series of policy statements “in the coming months” on expectations for banks and crypto assets.

Serious Problems with Using the Military APR Calculation for a Broadly Applied Interest Rate Cap

Many payday lenders and some nonbank financial institutions routinely offer predatory products with annual percentage rates (APR) exceeding 300 percent. Rather than alleviating the financial difficulties of households relying on these products, these predatory products often exacerbate financial difficulties and leave borrowers worse off. Some in Congress have sought to eliminate these predatory lending practices by introducing legislation to expand the Military Lending Act (MLA), including its 36 percent APR cap on unsecured consumer credit, to all consumers, not just servicemembers and their families.

While the intent of this legislation is well-meaning, its passage could harm consumers, largely due to the adverse consequences that arise from how the APR is calculated under the MLA, BPI economist Paul Calem highlights in a new blog post. Banks must comply with both the Truth-in-Lending Act (TILA) and MLA; however, the definition for determining the APR is very different and much less transparent under the MLA. The MLA requires banks to account for additional fees in the APR, including participation or member fees (except for “bona fide and reasonable” credit card fees) and fees for optional ancillary products and services (e.g., credit monitoring), among others. While banks currently comply with the MLA by adapting their product offerings, waiving fees or subsidizing costs for service members, mandating that the MLA be applied to all consumers would quickly become economically infeasible, due to the combination of the 36 percent cap with these aspects of the APR calculation. Consequences likely would include discontinuation of credit card products that offer unique menus of benefits, stifling of innovation in the credit card market and reduced availability of beneficial ancillary services. Furthermore, publication of two separate APRs, as required by both TILA and the MLA and compliance with other legal mandates, would likely very much confuse consumers.

Justice Department Probes Visa’s Relationships With FinTech Firms

The Department of Justice is scrutinizing Visa’s relationships with Square, Stripe and PayPal as part of an antitrust investigation, the Wall Street Journal reported this week. DOJ is examining the financial incentives Visa gave those FinTech firms and whether the incentives kept them from using other card networks or technologies.

In Case You Missed It

Chopra’s Hill Debut as Confirmed CFPB Chief – Top Takeaways

Newly confirmed CFPB Director Rohit Chopra testified in his first appearance before Congress since taking over the agency. Here are takeaways from his testimony.

  • Big Tech: Chopra said in House Financial Services Committee testimony that he is “very, very worried” about the grip of Big Tech on the U.S. dollar and global payments. The CFPB recently requested information from several Big Tech firms on how they use and share consumer data. He plans to focus enforcement efforts on the biggest fish: “I believe that we should focus most of our resources on the largest firms that are engaged in nationwide harm, that are really you know, totally beyond the pale,” he said. “Focusing on larger participants in the market I think is one of the best ways we can accomplish our mission.” At a Senate Banking Committee hearing the following day, Chopra said he would keep Congress updated on the matter with public summaries. He also said the CFPB’s inquiry will study Chinese tech giants’ practices and that there are “open questions” about how tech companies are harvesting data in line with the privacy sections of the Gramm-Leach-Bliley Act.
  • Stablecoin and crypto: Chopra said there is a great deal of discussion between financial regulators about how to oversee crypto and stablecoins. Facebook’s Libra proposal in 2019 was a “wakeup call to all of us about really what could be the damage that is done to our dollar and to really our economy and our households,” he said.
  • Consumer financial data sharing: The upcoming rule on Dodd-Frank Section 1033, which covers consumer financial data sharing, could “unlock more competition,” Chopra said, “but at the same time, we also need to make sure that banks and non-banks are operating under the same set of rules that there’s not regulatory arbitrage.” He said data aggregators are a key part of what the agency will consider.
  • Small business data: Chopra said the public was disadvantaged during the pandemic by a lack of reliable small-business data. The CFPB is currently preparing a rule on Dodd-Frank Section 1071, which requires the government to gather data, such as demographic information, on small businesses. “There are many reasons to have that small business data, including to understand the complete picture of how our small businesses are accessing financing,” he said. “But also how we can determine trends, spot risks, and avoid discrimination.”
  • Government-run credit bureau: Chopra expressed skepticism about the prospect of a government-run credit bureau, saying it would be a “big mountain to move” to create such a database. He said he was more concerned in the near term about Fair Credit Reporting Act violations, how credit reporting agencies investigate disputes and ensuring that new types of credit reporting entities adhere to the law amid privacy implications.

U.S. Treasury Taps Bowdler for Racial Equity Position

The Treasury Department this week named Janis Bowdler, a former JPMorgan Chase executive, as its first counselor for racial equity. Bowdler will be in charge of Treasury’s efforts to engage with diverse communities throughout the U.S. and identify and mitigate barriers to accessing benefits and opportunities with Treasury.

JPMC Releases Progress Report on Racial Equity Pledge

JPMorgan Chase this week released a one-year progress report on its $30 billion commitment to help close the racial wealth gap. The bank has deployed or committed more than $13 billion so far. The efforts include mortgage refinancing, improved access to homeownership and support of affordable rental housing preservation.

M&T Unveils $43B Plan to Support LMI, Minority Communities

M&T Bank this week announced its plan to provide $43 billion in loans, investments and other support to enhance economic opportunity for low- to moderate-income and minority communities. The plan was developed alongside the National Community Reinvestment Coalition in conjunction with M&T’s planned acquisition of People’s United Financial.

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Disclaimer:

The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.