BPInsights: Jan. 18, 2025

Chopra's Last Stand: Illegal Regulatory Blitz Creates 'Reputational Risk' for CFPB

As Director Chopra's tenure at the Consumer Financial Protection Bureau draws to a close, the agency has unleashed an unprecedented wave of unlawful rules and improper enforcement actions. This flurry of 11th-hour rulemaking creates a massive policy and procedural backlog that the incoming administration will have to wade through - miring businesses with months, if not years, of uncertainty and forcing the Bureau to divert resources to address illegal rules rather than protect consumers.

BPI published a new report today examining the Bureau's track record under the outgoing director and highlighting the numerous instances in which the Bureau has acted arbitrarily and exceeded its legal authority under his leadership.

By the Numbers

Over the last several weeks, the CFPB has issued:

• 34 press releases;
• 5 final rules (4 already facing legal challenges);
• 4 proposed rules, including a novel prohibition on certain contract clauses that represent a complete departure from the Bureau's core mission; and
• 5 policy statements and circulars, reshaping interpretations of long-standing consumer finance laws.

Case Study: Zelle

One notable case is the CFPB's enforcement action against Early Warning Services, the company behind Zelle. The Bureau accuses Zelle and several banks of inadequate fraud controls - despite 99.95% of Zelle transactions occurring without incident. The move highlights the Bureau's controversial reliance on improper enforcement actions as a tool to advance policy goals, a hallmark of the current director's tenure under which the CFPB has repeatedly sought to evade the proper rulemaking process to establish new requirements.

Is this the new normal for the CFPB?

The CFPB's legacy under Chopra will likely hinge on the sheer volume and scope of its final actions. Yet, the critical question remains: Is this legacy built to last? Or have these fast and furious actions built on dubious legal theories set a dangerous precedent that undermines trust in the CFPB?

Government, like banking, relies on trust and transparency. While bold rhetoric and aggressive tactics may serve a personal agenda and grab headlines, to be enduring, rules and policy must be established lawfully and backed by data. The outgoing director's parting blitz risks leaving the CFPB mired in legal uncertainty that will ultimately be bad for consumers, and bad for America.

Five Key Things

1. Cybersecurity Needs Common Sense, Not Bureaucratic Overload

Cybersecurity risk is a national security threat across U.S. critical infrastructure. A recent attack by China on the nation's telecom infrastructure demonstrates the urgency of protecting these sectors from infiltration. For communications, power and financial firms, the problem necessitates close collaboration with the law enforcement and intelligence communities, an army of trained specialists and significant investments in fortifying their systems. But it doesn't require the intrusive reach of an extra layer of government oversight - the banking examination regime. Banks are unique among critical infrastructure industries in this extra scrutiny, which risks undermining, rather than supporting, their ability to respond to cyber threats.

• Auditors, not practitioners: Banking agency examiners generally lack hands-on experience running a complex security program or practical expertise in cybersecurity or technology. These cyber auditors focus on forcing cyber teams to document everything they do, then ensuring that they comply 100 percent of the time, rather than focusing on outcomes and security improvements.

• More harm than good: Bank cybersecurity exams now risk degrading, rather than enhancing, the industry's ability to safeguard itself. The bank officers responsible for security report spending 30-50 percent of their time on compliance and examiner management; their teams spend 70 percent of their time on those functions. This causes burnout and staff turnover, and distracts from critical security duties.
• A better way: A better alternative to this regime is to empower a single agency to support banks' efforts, rather than continuously examining their processes, employing a permanent staff with sufficient expertise and connectivity to the intelligence and national security communities. The Treasury Department, which already houses such an office, could play a larger role alongside its intelligence function.

2. Notable Highlights: Scott Bessent Nomination Hearing

Treasury Secretary nominee Scott Bessent testified this week at a nomination hearing before the Senate Finance Committee. While much of the hearing centered on tariffs and taxes, here are some notable exchanges on bank regulation:

• Strength of the banking system: Responding to Senate Banking Chairman Tim Scott (R-SC), Bessent described the U.S. banking system as "well capitalized - perhaps overcapitalized," drawing on his background as a financial institutions analyst. He attributed the growth of the shadow banking system to "undue regulation" that has largely been to the detriment of regional and small banks. Bessent committed to reviewing regulatory and supervisory conditions and likened the current bank regulatory regime to a pendulum that has swung too far.
• SARs: In response to Sen. Ben Ray Luján's request to work with him on increasing transparency over Suspicious Activity Reports, Bessent said yes. He also mentioned digital assets: "I believe that we have to have a 2025 approach to … digital currencies and all branches of government."
• Federal Reserve independence: In response to Sen. Catherine Cortez Masto (D-NV) asking about how much influence the President should have over the Fed, American Banker highlights that "Bessent expressed support for the central bank's independence, specifically with regard to monetary policy, though he did not say the same for bank regulatory matters."
• Credit card rates: When questioned about a Trump campaign proposal to cap credit card rates at 10 percent, Bessent said he would defer to the President on the matter.
• Central bank digital currencies: Responding to a question from Sen. Marsha Blackburn (R-TN), Bessent largely dismissed the idea of a CBDC in the U.S. stating, "a central bank digital currency is for countries [that] have no other investment alternatives. I view that many of these countries are doing it out of necessity, whereas the U.S., if you hold U.S. dollars, could hold very secure U.S. assets."
• Community Development Financial Institutions: Bessent signaled ongoing support for CDFIs in response to a question from Sen. Mark Warner (D-VA) and acknowledged the important role that CDFIs play in underserved communities.
• Return to office: Bessent wants Treasury employees back in the office. "I support a return to the office, which is against the [current] policy. I intend to be in the building every day that I'm in Washington."

3. Bank of England Delays Basel Implementation to January 2027

The Bank of England's Prudential Regulation Authority has postponed the implementation of the new Basel capital rules by one year, pushing the start date to January 2027. The delay is attributed to ongoing uncertainty regarding the rule's adoption in the United States and considerations related to competitiveness and economic growth. Additionally, the PRA has paused data collection for Pillar 2 capital requirements and deferred deadlines for joining the Interim Capital Regime until further clarity is achieved. This marks the second delay announced by the PRA, following a six-month extension in September.

4. California Proposal Overreaches, Undermines Federal Framework

A proposed rulemaking by California's privacy agency imposing requirements on banks' cybersecurity programs, automated decision-making tools, and risk management is yet another overreaching state law that undercuts longstanding federal rules, BPI said in a comment letter submitted on Tuesday.

"A patchwork approach to bank regulation is bad policy and contrary to law. Banks are already subject to stringent federal rules on their cybersecurity, AI tools, and risk management, and invest billions of dollars into protecting their customers' data. What's more, the rule disregards the longstanding federal framework that enables national banks to serve customers efficiently and finance business growth across the country. Forcing banks to comply with different and conflicting requirements detracts from real risk management and innovation." - Greg Baer, BPI President and CEO.

Here's the background: The California proposal goes beyond the limited mandate the legislature granted to the state privacy agency and imposes far-reaching requirements that attempt to dictate banks' cybersecurity and risk management practices, as well as how they use AI technology. As a result, it would interfere with critical bank operations like underwriting small business loans and preventing fraud.

Bottom line: To avoid duplicative regulation and conflict with federal law, banks already subject to federal oversight should be exempt from California's proposed rules.

5. The New Normal for Bank of England Stress Tests: Less Frequent, More Efficient

Bank of England official Nathanael Benjamin outlined in a speech this week the Bank's new approach to stress testing. Benjamin, the BoE's executive director for financial stability strategy and risk, described the need to "join the dots" between stress tests, how the tests have evolved over time and the insights the Bank has gleaned from various exercises in stress testing recently. "Our updated approach combines the predictability of regular stress testing for cyclical risks with the adaptability the Bank has used in recent years to explore different risks," Benjamin said.

What's new: The Bank will shift from annual stress tests to biennial, calling the exercise the "Bank Capital Stress Test."

• The BoE will supplement its assessment of the banking system's resilience "using stress testing when appropriate, but in a way that is much less burdensome" than the full Bank Capital Stress Test.
• The Bank will assess structural, emerging and other risks through exploratory exercises, but not strictly every other year.
• Reasoning: "Reducing the frequency of big firm submission tests represents a considerable efficiency gain, without compromising our assessment of financial stability," Benjamin said. "It ensures the burden placed on participating banks is proportionate, and supports the UK banking sector's competitiveness and growth. This change creates space for banks, and for us, to assess and address a wider set of risks facing the banking sector and will provide better insights in an evolving risk environment."
• Reducing opportunity cost could pay off: The shift will "give participating banks greater capacity to invest in improvements in data (particularly crucial if they want to make the most of artificial intelligence, by the way), modelling, and risk management. In turn that will further enhance the ability of stress tests to deliver insights over the medium- to long-term." A key reason for the BoE reducing the frequency of the full tests is because banks are now much better capitalized than in previous years.
• 'Joining the dots': Benjamin emphasized the need for regulators to see the big picture of risk across different financial sectors, including nonbanks, by linking the findings of separate sector-specific stress tests. He noted that lending and market-making is increasingly migrating away from banks to nonbank firms.

In Case You Missed It

BPI Sets the Record Straight on 'Bank Wins' and Regulatory Checks in Response to NYT Article

A recent article in The New York Times titled "Banks Are Racking Up Wins Even Before Trump Is Back in White House" examines key developments affecting the banking industry. Unfortunately, the article fails to acknowledge the strength of the banking system and misrepresents the industry's motives, instead mischaracterizing major policy discussions as an effort to "avoid regulatory checks." In response, BPI President and CEO Greg Baer sets the record straight that banks aren't chasing regulatory shortcuts - they're speaking out against them.

Federal Reserve Withdraws from NGFS

The Federal Reserve Board withdrew from the Network of Central Banks and Supervisors for Greening the Financial System. In an announcement published on Friday, the Federal Reserve stated, "While the Board has appreciated the engagement with the NGFS and its members, the work of the NGFS has increasingly broadened in scope, covering a wider range of issues that are outside of the Board's statutory mandate."

Fed Paper Examines Volcker Rule's Impact on Trading Revenue During COVID

A recent Federal Reserve staff paper examines the potential causes of banks' profitable trading desks during the COVID pandemic. It offers various explanations for why banks did well in trading during this period of acute stress - one, that the Fed's actions to stabilize markets helped soothe investor confidence despite economic turmoil. The other - perhaps more compelling - explanation cited in the paper is robust trading books "driven by the realized fees and commissions associated with the increased trading volume facilitating customer transactions and market making activities."

• Regulatory context: The paper explores the influence of the Volcker rule, a post-Global Financial Crisis regulation designed to restrict banks' proprietary trading (trading as a principal with the institution's own funds) but allow them to engage in market-making (buying and selling large volumes of securities to provide continuous liquidity in the markets, but as an intermediary rather than a principal). The paper suggests that during COVID, banks "continued to facilitate markets but did not suffer large losses due to positioning or trading as principals while exposed to large market shocks. That is, the Volcker rule may have had a positive impact on the relatively risk-neutral positions taken by firms in order to avoid the appearance of proprietary trading." In other words, banks facilitated trading for their clients, including through market-making, but didn't take large one-sided positions as principals. Their trading facilitation activities made them profitable at a time of economic turmoil. This suggests that trading can serve as a source of diversification during market stress.

Policy implications: The effect of market and economic stress on banks' trading revenue is a key part of the Fed's stress tests. The paper's findings suggest that the stress tests - particularly their Global Market Shock component - should be reformed to reflect the diversification benefits of trading revenue during volatile times. (BPI has published research demonstrating that the stress tests understate banks' noninterest income, such as the fees and commissions they earn on trades, and overstate the capital banks need to account for market stress considering trading's diversification benefits.)

Scott Unveils Banking Committee Agenda

Senate Banking Committee Chair Tim Scott (R-SC) this week released his policy agenda for the panel. Scott highlighted eliminating excessive regulations as a key priority, along with legislation to enshrine regulatory cost-benefit analysis into law. He called for providing "clear rules of the road" on financial technology, developing a regulatory framework for digital assets and promoting U.S. national security, among other priorities. "Excess regulation limits access to credit, capital, and financial offerings that advance financial success and growth for individuals and businesses of all sizes," Scott said in the agenda. In a recent Q&A, Scott elaborated on some of his near-term priorities, including Congressional Review Act measures to invalidate CFPB rules. "With [Director] Chopra, it's just a target-rich environment," Scott said, referring to the CFPB Director's flurry of eleventh-hour rulemakings. On possible changes to the bank regulatory agency structure under the next Administration, including whether the President would consolidate banking agencies, Scott said "I do think it's serious" as a consideration.

Trump Announces Senior Staff Appointments to White House National Economic Council

President-elect Trump announced key appointments to the White House National Economic Council on Friday. Leading the NEC under Dr. Kevin Hassett include:

• Robin Colwell, Deputy Assistant to the President for Economic Policy and Deputy Director of the NEC;
• Nels Nordquist, Deputy Assistant to the President for Economic Policy and Deputy Director of the NEC;
• Paige Willey, Deputy Assistant to the President for Economic Policy and Deputy Director of the NEC;
• Ryan Baasch, Special Assistant to the President for Economic Policy, primarily focusing on technology, telecom, and cybersecurity;
• Emory Cox, Special Assistant to the President for International Economic Relations;
• Cale Clingenpeel, Special Assistant to the President for Economic Policy, focusing primarily on trade, immigration, and labor;
• Andrew Lyon, Special Assistant to the President for Economic Policy, focusing primarily on tax policy;
• Jeff Wrase, Special Assistant to the President for Economic Policy, focusing primarily on financial regulation and banking; and
• Joel Zinberg, Special Assistant to the President for Economic Policy, focusing primarily on healthcare and deregulation.

Quick Cash, False Advertising: New Paper Examines Fintech Lenders' Interest Claims and Practices

A recent paper by researchers from the University of Rochester, University of California at Berkeley and University of Houston finds that the typical fintech cash advance app offers APRs over 200 percent, yet many apps falsely advertise "no interest" despite charging high implied interest rates. Ads claiming "no interest" attract strong consumer uptake, according to the paper. The paper highlights the need for stronger regulation of the cash advance lending market, including more rigorous enforcement of Truth in Lending Act regulations and measures to increase fee transparency. Such regulation could have saved consumers tens of millions of dollars every year in borrowing costs that they might not be aware of, the paper said.

• Disproportionate complaints: The paper reaches a conclusion similar to a BPI research note demonstrating that fintechs generate a disproportionate number of consumer complaints to the CFPB in the area of deceptive practices.

Treasury's Wally Adeyemo: 'How to Stop Cyberattacks on the US Financial System'

In a recent Bloomberg op-ed, Deputy Secretary of the Treasury Wally Adeyemo outlined critical steps the U.S. government is taking to safeguard the financial system from rising cyber threats. He highlighted existing measures such as "Project Fortress," a public-private partnership aimed at strengthening cybersecurity across the sector. Adeyemo also emphasized the need for Congress to grant expanded authorities to oversee third-party service providers, improve intelligence sharing between the public and private sectors and better coordinate cyber exams across regulators to reduce redundancies and strengthen the overall defense of the financial sector.

FASB Rejects Additional Disclosures for Credit Risk Transfer Transactions

The Financial Accounting Standards Board rejected a call this week to add specific financial statement disclosure items for CRTs - also referred to as synthetic risk transfers. The minutes from FASB's board meeting state that current GAAP and SEC regulations already mandate various disclosures related to CRTs, including terms, an entity's risk management practices and analyses of financial factors.

Lawmakers Targeting Medical Debt, Overdraft Measures for CRA

Republicans in Congress are eyeing the CFPB's rules on medical debt in credit reports and overdraft fees as initial targets for the Congressional Review Act, which allows lawmakers to repeal federal regulations within a certain timeframe, POLITICO reported this week. The CFPB has been prolific in the days following the presidential election, issuing a flurry of new rules and breaking from the practices followed by other financial regulatory agencies that generally paused their rulemaking. Lawmakers may therefore try to eliminate additional CFPB "midnight rules" through the CRA.

FSB: Usefulness of Banks' Climate Transition Plans as Stability Bolster Limited by Data Gaps, Key Differences

The Financial Stability Board published a report this week titled "The Relevance of Transition Plans for Financial Stability" that examines the role of banks' climate transition planning in financial system stability. The report provides an early analysis of how transition plans and the process that underpins them can influence financial stability. It does not provide recommendations but offers some insights into the implications of such plans.

• Usefulness: Climate transition plans can be useful for measuring and monitoring climate-related risks to financial stability, but their overall usefulness is limited by data availability, as well as differences in scope, coverage and quality of key metrics, according to the report.
• Looking forward: The report suggests that continued efforts to standardize and to broaden adoption of transition plans can enhance their effectiveness.
• Practical uses: The report describes how transition plans can affect climate-related financial risk management, such as facilitating banks' strategy-setting, informing investment decisions and supporting financial authorities' risk monitoring.
• 'Important caveats': The report identifies important caveats to using transition plans to assess financial stability: Transition plans are not inherently designed for that purpose, but for business strategy and target setting; they have wide differences in format, content and methodology; mechanisms to ensure the reliability of the information in transition plans are still emerging; and analytical thinking on these plans' specific use in financial stability analysis is still at an early stage.
• More on climate: The FSB this week also published a report on the assessment of climate-related vulnerabilities, which contains an analytical framework and toolkit to evaluate such risks. The toolkit features three categories of metrics to monitor climate vulnerabilities: proxies that provide early signals on potential risk drivers; exposure metrics; and risk metrics to quantify impacts for banks and the financial system. "While these metrics are already used by some FSB members domestically, various methodological and data challenges need to be overcome for them to be used for global monitoring," the FSB said in a release. U.S. Treasury Under Secretary for Domestic Finance Nellie Liang said in a statement: "The framework is a welcome addition to the FSB's financial stability surveillance. The case study in the report examining the potential consequences of the crystallisation of climate physical risks via real estate markets and changes in insurance coverage illustrates how the framework can be applied in practice."

The Crypto Ledger

Here's the latest in crypto.

• Crypto money-laundering lawsuit: A proposed class action lawsuit in California federal court accused crypto exchange OKX of enabling criminals to launder stolen funds. The suit was brought by a crypto investor accusing the platform of failing to apply anti-money laundering procedures that would have detected the laundering of $725,000 in stolen crypto through the exchange.
• 'C' for corruption?: A recent report by the Human Rights Foundation draws a link between central bank digital currency backers and corruption. The organization names central bankers from China, Nigeria and Lebanon as cautionary examples of global CBDC supporters that ended up tied to alleged corruption, embezzlement and other crimes. "Despite being such a new phenomenon, CBDCs are increasingly associated with significant human rights and civil liberties concerns," the report says.

BofA's Moynihan: Banks Want Regs 'Fair to Everybody'

Bank of America CEO Brian Moynihan discussed regulation, the bank's strategy and a range of other topics in a recent Financial Times interview. On Basel Endgame and regulation, he said: "We want a good set of rules that are fair to everybody, help us support growth, but also help keep the industry what it is, the best capitalized and best run industry in the world." He noted the global phenomenon of "pushback" against unjustified regulations. Read more here.

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