Donald Trump
When Donald Trump takes office for the second time on Jan. 20, he will be entering the White House having won one of the most significant, decisive, albeit narrow, victories in American history. Not only did he win every contested state, Republicans took control of the Senate and, remarkably, held on to the House of Representatives. Regardless of who you voted for, as a former president once said, “elections have consequences,” and this one might be one of the most consequential.
If you work with or volunteer at a credit union, you have an obligation to understand how this may impact the credit union industry as a whole and your credit union in particular. Even if you disdain politics, credit unions are the most heavily regulated financial industries in the country and an appreciation for the ebb and flow of the regulatory and legal environment as they operate is an important component of credit union leadership. If you haven’t started ruminating already, here are some thoughts about the changes we will see in the coming months. Here goes:
There Will Be a New Chairman, but Will There Be a New Direction?
A president gets to choose a member of his own party as Chairman of NCUA’s Board, but he does not get to replace sitting Board members. As a result, even though a Republican, presumably current Vice Chairman Kyle Hauptman, will become Chairman, there will still be two Democrats on the three-member board. Chairman Harper made that point abundantly clear when he told the House Financial Services Committee at a recent hearing that he intended to stay for the remainder of his term, which doesn’t end until 2027. Hauptman's term is set to expire in August 2025.
Still, doesn’t the Chairman get to set the agenda? Yes, and no. 12 CFR 791.6 stipulates that “the Chairman is responsible for the final order of each meeting agenda. Items shall be placed on the agenda by determination of the Chairman.” So far so good, if you’re the Chairman. But, with amendments made in the early nineties, the regulation goes on to explain that, at the request of any Board member, an item will be placed on the agenda of the next regularly scheduled meeting. In December 2021, using this authority when there were two Republican members and a Democratic Chair, Rodney Hood teamed up with then-new board member Kyle Hauptman to get several measures on the NCUA’s agenda that Chairman Harper thought were bad ideas. In other words, no matter who the Chairman is, the regulatory agenda will still be heavily influenced by the Democratic side of the aisle.
Where Will Interest Rates Be Four Years From Now?
I had an interesting discussion with a credit union CEO the other day, who was trying to decide how aggressively to move his credit union into mortgage lending. Of course, the trick is not to buy a bunch of mortgage loans with interest rates close to 7% if you think interest rates are going to tumble in the next couple of years. In deciding on the best course of action, a well-reasoned economic analysis doesn’t go far enough. First, Republicans will pass a budget package that extends the Trump tax cuts that are otherwise due to expire. Then, we already have all that debt piled on during the Biden Administration. The bottom line is, at some point, you would expect investors to demand a higher premium for investing in U.S. bonds. Then again, people have been making this prediction for the past 40 years, culminating with the lowest interest rates in history.
Now, however, we have an incoming president who has made it abundantly clear that he wants control of the Fed. In fact, a few weeks ago, he stated that a crisis with the Fed may be inevitable. This unprecedented uncertainty about who ultimately controls monetary policy doesn’t lend itself to a stable bond market, but the situation could be even more unstable if a more politically sensitive Fed lowers interest rates, irrespective of the economic environment. The bottom line is this: In the pre-COVID world, life was fairly simple. The Fed controlled interest rates and kept inflation at bay. Washington’s policies had little impact. Then came an enormous amount of government stimulus. Now, we are in an era where fiscal policy will continue to impact interest rates and inflation independent of what the Fed does. This will make it much more difficult to guess right on the kind of investments to make and anticipate consumer demand. Don’t take my word for it; the chart below shows how volatile the market yield for 10-year U.S. Treasury securities has been since the election.
Less Regulation, But With A Populist Twist?
CFPB Director Rohit Chopra has been ruthlessly effective in demonstrating what an incredibly powerful institution the CFPB is. By “aggressively” interpreting both the Dodd-Frank Act and the Bureau’s UDAAP powers, he has made overdrafts an honorary four-letter word and given a roadmap to plaintiff’s lawyers who are bringing an ever-increasing number of class-action lawsuits against credit unions of all sizes. With a Republican in charge of the Bureau, we can rest assured that any attempts to gut federal arbitration law or the use of opinion letters with the force and effect of regulations will go into hibernation.
But there should be a limit to your glee. Republicans are getting almost as lathered up about fees as their Democratic counterparts. President Trump suggested in the election campaign's closing weeks that he would temporarily move to cap credit card interest rates at 10%. Campaign bluster? Maybe, maybe not.
And don’t forget about the Republican-controlled Senate. At a Senate Judiciary Committee hearing on Nov. 19, Republican Josh Hawley sounded like a stand-in for Senator Elizabeth Warren (D-Mass.) when he admonished top executives from Visa and Mastercard about credit card debt that’s crushing Americans and accused them of overseeing a “collusive monopoly.” He also introduced a measure that would cap interest rates at 18%.
To be clear, I’m not going to guess what, if any, of these measures may or may not become law. What I am saying is that it cannot be assumed that, simply because the parties in control have changed, the focus on fees will fade away.
States to the 'Rescue'
During the first Trump Administration, purple and blue states created state-level consumer protection bureaus designed to protect consumers because the Republican-controlled Bureau, they argued, would not. As David Elliot and Charles Davis of Burr & Forman pointed out in a 2019 opinion piece for Bloomberg, Maryland, New Jersey and Pennsylvania were among the states that responded to the change in Bureau leadership by strengthening state consumer laws. In Pennsylvania, for example, future governor Josh Shapiro, who was serving as the state’s AG in 2017, announced the creation of a consumer protection unit. The bottom line is that, in some states, regulatory relief at the federal level may be more than offset by increasing regulatory enforcement on the state level, particularly for state-chartered credit unions.
Against this backdrop, expect preemption to become an intensely debated legal and political issue. One of the issues where a Republican-controlled Congress could act decisively is to create national data protection and privacy standards. A Republican-controlled House is more likely to go along with legislation that preempts similar state laws so that there are uniform standards.
Puff Goes the Magic Dragon?
For years, yours truly has been predicting that it was only a matter of time before Congress legalized marijuana possession and banking of marijuana businesses as a matter of federal law. This window may have closed. We had a moment where there was bipartisan support for legislation like the Safe Act. Unfortunately, I am concerned that the issue has been sucked into the ideological vortex, and the result is that neither Democrats nor Republicans will be willing to pass common-sense measures.
If I am right, this means continued uncertainty for those credit unions in states like New York that are being approached to provide marijuana banking services and increasing risks for those credit unions for whom marijuana banking has become a component of their business model. Could we see a backlash against marijuana legalization? And if so, where would that leave banks and credit unions that engage the business?
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