NAFSA’s 2017 Year in Policy Review
2017 proved to be a busy year for financial services, and as the only Native trade association fully dedicated to advocating for tribal lending, NAFSA looked to keep pace with the ever-changing regulatory and policy landscape around consumer finance.
Here is a quick review of the major news surrounding consumer finance policy from the past year:
Filling Out the Trump Financial Regulatory Team
A new president in the White House in 2017 meant new faces at the head of government agencies. President Trump moved quickly to install former Goldman Sachs partner Steve Mnuchin as the next Secretary of the Treasury. Mnuchin’s confirmation hearing set the tone for the administration’s approach to financial policy- limit regulation to spur economic growth.
Soon after Mnuchin’s confirmation, Trump signed an executive order with strategies to lower regulatory burdens across all agencies of government. Mnuchin following the President’s order with a report recommending major financial regulatory reforms. The report includes a number of proposals on changes that could be made to the Consumer Financial Protection Bureau (CFPB) through both agency and Congressional action.
After Mnuchin, the Administration’s second major confirmation victory came with the approval of Tenth Circuit judge Neil Gorsuch to the U.S. Supreme Court. Gorsuch’s experience with Indian law while serving at the Tenth Circuit was seen by many as a strength. Justice Gorsuch had a record of upholding tribal rights in a region home to significant native populations. The Tenth Circuit Court covers federal courts in Oklahoma, Kansas, Colorado, New Mexico, Wyoming, and Utah.
At his confirmation hearing, Gorsuch reiterated the importance of tribal sovereignty and the need for the federal government to uphold treaty promises. It is too early to tell where Gorsuch will stand on the high profile cases regarding Indian Country to be heard and decided by the U.S. Supreme Court in the future.
Trump nominated Montana representative Ryan Zinke to serve as Secretary of the Interior, a job that oversees a vast range of federal lands, mineral deposits, wildlife, and Indian affairs. As a member of the House of Representatives, Secretary Zinke was an ally for tribal interests in the financial services industry.
In 2016, he wrote a letter to his predecessor Sally Jewell in support of tribal online lending and counseled Secretary Jewell against federal regulation that might harm this burgeoning economic development opportunity for Native Americans. He asked that tribal impacts be considered in any potential rulemaking instigated by the CFPB and stressed that “[I] firmly believe it is the duty of both your agencies [Bureau of Indian Affairs and CFPB] to protect the interests and sovereignty of Tribes.” His previous support of tribal lending is a welcome ally at Interior.
The last major personnel change came late in 2017. After rumors swirls for months that CFPB Director Richard Cordray would leave his post to run for governor of Ohio, he finally announced his departure right after Thanksgiving. Cordray will leave a mixed legacy as the first leader of the federal consumer watchdog. He recently watched his agency’s rule limiting mandatory arbitration in disputes over credit products repealed by Congress and President Trump. His departure will also cast doubt on the future of the Bureau’s recently issued rule on small dollar loans, another key rule Cordray’s team spent years developing.
Although Cordray’s resignation could reverse problems with his agency’s attacks on tribal sovereignty, his departure has left more questions than answers. Moments before departing, Cordray promoted his old chief of staff, Leandra English, to deputy director and claimed that she would serve as interim director in his absence. President Trump then immediately moved to install current director of the Office of Management and Budget, Mick Mulvaney, as interim director at the CFPB.
When Mulvaney appeared at CFPB headquarters the following work day, English initiated a lawsuit to block his temporary appointment. The judge has initially sided with Mulvaney, but the uncertainty of who is actually in charge at the agency casts a shadow over consumer finance regulation entering 2018.
Need for Credit at All Levels Remains Strong
The use of credit has become a daily part of American life, and 2017 saw some important research and revelations on just how deep our reliance of credit products has become. American credit card debt alone was expected to top $1 trillion this past year. This meant that credit card usage had finally returned to pre-recession levels.
While much of the credit card use in America comes from consumers in strong financial positions, a growing percentage of subprime consumer more heavily relied on credit to remain afloat in 2017. Around 20% of American households have zero or negative wealth, signalled a struggle for many families to adequately save for emergencies. Another study found that nearly 4 in 5 Americans lives paycheck to paycheck. In a first-of-its-kind study, the CFPB found that 40% of Americans lack financial well-being. The lack of financial stability makes the services and products provided by tribal lenders critical to American households.
An increasing understanding of credit invisibility, when a consumer lacks the data needed to calculate a credit score or their credit data is so old that it is no longer a reliable indicator of creditworthiness, underscored a lack of access to mainstream credit services. The CFPB proposed a new rule in 2017 to allow alternative data sources to help the credit invisible demonstrate creditworthiness. The agency also worked to clean up credit reporting. Some simple changes made by credit reporting agencies were already showing modest dividends for credit scores.
In part because of credit invisibility and part due to past experiences watching their parents struggle with debt during the Great Recession, millennials were slow to adopt credit cards in 2017. For many of these reasons, alternative financial services, like the small dollar installment loans provided by NAFSA members, showed strong interest in 2017, and America’s growing credit appetite predicts additional need in 2018.
A Path to Federal Charters
The Office of the Comptroller of the Currency (OCC) issued its draft licensing manual for special purpose bank charters for financial technology (FinTech) companies this past year, sparking a tug-o-war between state and federal regulators over the future of the finance industry. The proposed charter system would allow FinTech companies to seek a federal bank charter, bringing them under the federal regulatory umbrella and outside the purview of state bank regulators. As expected, many states, led by the financial hub of New York, instantly criticized this grab for regulatory power by the OCC.
The collective voice for state financial regulators, the Conference of State Bank Supervisors (CSBS), offered their own alternative to the OCC’s charter system, dubbed Vision 2020. Both New York and CSBS sued the OCC over the implementation of the charter proposal. The New York lawsuit was recently dismissed as speculative, and the OCC has yet to definitively announce whether it will actually issue any FinTech charters or not. Regardless, the charter system has the potential to shape regulation of the fledgling FinTech industry.
The Unpredictable Fate of the CFPB
The future of the leadership structure at the CFPB, and even the agency itself, was a constant discussion in the news. After previously ruling in 2016 that the single director structure of the CFPB was unconstitutional, the DC Circuit Court agreed to rehear arguments en banc in PHH Corp. v. CFPB this past May. The U.S. Department of Justice reversed its previous position and ultimately sided with the original DC Circuit panel decision to bring more accountability to the CFPB’s structure.
The CFPB made more headlines in 2017 for its handling of the fake account scandal at Wells Fargo from the previous year. CFPB Director Richard Cordray was threatened with possible contempt charges for refusing to turn over certain documents related to the investigation into a Wells Fargo scheme to create millions of fake bank accounts for members to charge fees. House Republicans never formally charged the embattled former CFPB director, and he was also later cleared of violating the Hatch Act for alleged campaign inquiries while still serving the agency. Wells Fargo ultimately became a proxy for the partisan battle over the future of the CFPB, and its operations remain a point of contention between Republicans and Democrats in Congress.
Reshaping Federal Regulation
The courts were not the only location where the CFPB’s fate and structure were argued; the Republican majority in Congress worked tirelessly in 2017 to find ways to chip away at Cordray’s authority over the CFPB and its activities. After a previous iteration never made it out of the legislature, House Financial Services Committee Chairman Jeb Hensarling (R- TX) revamped and proposed sweeping changes to the CFPB and Dodd-Frank, the act that bore the agency. The legislation was named the Financial CHOICE Act 2.0 and would remove much of the agency’s rulemaking authority and limit it to an enforcement role.
CHOICE Act 2.0 easily passed the Republican-controlled House along party lines, but the Senate has yet to consider the legislation. Rep. Hensarling’s chief legislative effort is now in limbo after he announced that he would not seek reelection in 2018, opening the leadership position and future direction of the powerful committee to new visionaries in the House.
Instead of working from the more radical proposals of the CHOICE Act, the Senate chose to forge its own path to more modest Dodd-Frank reform. Unlike the CHOICE Act which received exclusively Republican support, the Senate effort earned bipartisan consideration.
Outside the CHOICE Act, Congressional Republicans found other ways to attemept to bring more accountability to the CFPB while awaiting a decision in the PHH case from the DC Circuit. One bill sought to create an inspector general’s office for the agency, while another sought to make changes through the budget process. Each of these proposals have stalled.
Despite both Congress and the courts trying to dismantle and reorganize the agency, the CFPB still found time in 2017 to have a profound impact on the industry through its rulemaking authority. This past summer, the Bureau banned the use of mandatory arbitration clauses in financial services contracts. An exemption in the arbitration rule for tribes demonstrated a disconnect between the rulemaking and enforcement divisions at the agency.
As rumors grew that Congressional Republicans might repeal the rule through the Congressional Review Act, the State of California wrote its own arbitration rule. Fears that the CFPB’s effectiveness might diminish under the current presidential administration encouraged blue states to enhance consumer finance enforcement efforts and embolden their attacks on tribal sovereignty.
Congress ultimately repealed the arbitration rule, but not before Cordray published his final overture as CFPB director with the small dollar rule. While much of the small dollar rule is inapplicable to NAFSA’s tribal lenders, its commentary on tribal sovereignty is troubling. With new leadership now at the CFPB, there is hope the agency will embrace a renewed respect for tribal sovereignty and our efforts at self-determination and economic development in 2018.
