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Revamping and Revitalizing Banking in the 21st Century

House Committee on Financial Services

Subcommittee on Financial Institutions and Monetary Policy

Revamping and Revitalizing Banking in the 21st Century

Wednesday, February 8, 2023

Topline

  • Members and witnesses discussed data privacy, including private right of action and preemption, FinCEN’s beneficial ownership database proposals, DOL’s ESG rule, and the impact of burdensome regulations.
  • The hearing also focused on de novo banks and fintech.

Witnesses

  • Jim Reuter, Chief Executive Officer, FirstBank, on behalf of the American Bankers Association
  • Penny Lee, Chief Executive Officer, Financial Technology Association
  • John Berlau, Senior Fellow and Director of Finance Policy, Competitive Enterprise Institute
  • Brian Knight, Senior Research Fellow, Director of Innovation and Governance, Mercatus Center at George Mason University
  • Renita Marcellin, Advocacy and Legislative Director, Americans for Financial Reform

Opening Statements

Chairman Andy Barr (R-Ky.)

Barr opened the hearing by stating his concern about the crisis of de novo banks. He noted that only 60 new banks have chartered in the past decade, highlighting the trend of community banks merging, being acquired, or closing their doors. Barr said that his Promoting Access to Capital in Underbanked Communities Act seeks to increase de novo bank formations through a reduction in initial capital requirements and restrictions and explained how Rep. Jake Auchincloss (D-Mass.) has legislation that directs federal banking agencies to report to Congress on ways to promote the establishment of new banks and credit unions. Next, Barr noted bills sponsored by Reps. Roger Williams (R-Texas) and Bill Foster (D-Ill.) that encourage coordination of state and federal banking agencies in regulating and examining the activities of bank service companies and prevent the Financial Stability Oversight Council (FSOC) from voting to determine that a non-bank financial company will be supervised by the Federal Reserve without considering alternatives. Barr argued that these bipartisan bills are an important first step towards demonstrating Congress’ intent on transparency and accountability in financial regulation and supervision. Finally, Barr said Congress needs to update the protections in the Gramm-Leach-Bliley Act (GLBA) to bring our regulations into better alignment with existing and emerging technologies. He said the discussion draft in today’s hearing attempts to modernize the GLBA using a technology-agnostic approach.

Ranking Member Bill Foster (D-Ill.)

Foster said when giant businesses fail, it is not just Wall Street that suffers but ordinary families as well. As it relates to pre-emption in data privacy, Foster proposed that any group representing 20% of the states should be able to adopt a common standard. As a result, he said new entries would only have a handful of different standards, instead of having 50 different laws or a one size fits all model.

Full Committee Ranking Member Maxine Waters (D-Calif.)

Waters said consumers are sick and tired of banks ripping them off, saddling them with junk fees, and otherwise engaging in abusive and illegal behavior. Waters said she is looking forward to reviewing Chairman Patrick McHenry’s (R-N.C.) bill on data privacy but noted that consumer advocates have already raised issues with it. She said Republicans should end their brinkmanship around whether the U.S. can pay its debts, as any reforms to the banking industry will be undone if our markets collapse.

Testimony

John Berlau, Senior Fellow and Director of Finance Policy, Competitive Enterprise Institute

In his testimony, Berlau noted his concern about the regulatory barriers that have been erected since the financial crisis and how they impact the formation of new or de novo banks. He said that unduly restricting the emergence of de novo banks may be justified by some as preventing risk but highlighted that it also poses its own risks. In particular, he said that a lack of new entrants in the banking sector increases the chances that a large bank failure could curtail the supply of credit and the availability of financial services. Berlau concluded by noting that a competitive market, free of heavy-handed regulation, enables a financial system and an economy that is simultaneously dynamic, inclusive, and resilient.

Brian Knight, Senior Research Fellow, Director of Innovation and Governance, Mercatus Center at George Mason University

In his testimony, Knight explained how technology can assist with customer acquisition, intake, and underwriting and noted that alternative data has been used to provide better pricing for borrowers with limited credit. Additionally, he said that fintech firms have increased the availability of credit to relatively underserved markets. He added that smaller banks, which would benefit from these advances, will be better able to compete if they can partner with other firms, but Knight noted that inapt regulation could peril the value of such partnerships. He stated that while most regulators are not inherently malicious, the nature of the regulatory system creates poor incentives for all involved.

Finally, Knight provided four recommendations for Congress: (1) Congress should engage in vigorous oversight with the regulators and regulated entities to get more insight into how regulators use their power; (2) Congress should ensure that regulators’ decisions can be appealed to a truly neutral third party; (3) Congress should provide clarity as the scope of a regulator’s authority; (4) Congress should consider eliminating things like reputational risk from the regulators’ purview.

Penny Lee, Chief Executive Officer, Financial Technology Association

In her testimony, Lee emphasized the need for statutory and regulatory frameworks to keep pace and modernize accordingly. Next, Lee noted her organization’s support for efforts to modernize financial data privacy expectations and create a clear, consistent, and uniform federal privacy standard that pre-empts the patchwork of state privacy laws. She said that modernizing laws like GLBA will help ensure a level playing field for all financial services participants, enhance consumer rights, and ensure that privacy standards fit the digital age. Finally, Lee argued that proper use of consumer financial data will underpin a more fair, accessible, and inclusive financial system capable of better serving all American consumers and small businesses.

Jim Reuter, Chief Executive Officer, FirstBank, on behalf of the American Bankers Association

In his testimony, Reuter said that the proposals by Barr and Auchincloss would help promote de novo charters, increasing the availability of banking and financial services. He said the ABA supports several aspects of Chair McHenry’s draft legislation to modernize financial data privacy laws. Specifically, he noted that they support the addition of meaningful pre-emption and additional clarity about the application of the GLBA to data aggregators. Finally, he recommended that any legislation include comprehensive pre-emption of state laws, not add a private right of action or enforcement by state attorneys general, preserve the GLBA’s administrative enforcement structure by the prudential regulatory agencies, and ensure that any new privacy right not interrupt the operation of the financial system.

Renita Marcellin, Advocacy and Legislative Director, Americans for Financial Reform

In her testimony, Marcellin argued that a fairer financial system must have strong safeguards for consumer financial data, stop excessive corporate power, promote competition, and apply the same rules to activities that bear similar risk, regardless of the technology used. She said that financial data laws should not be allowed to pre-empt state laws, must include a strong private right of action for consumers to seek recourse, and must affirm the role of the Consumer Financial Protection Bureau (CFPB). She said that the proposed financial data privacy bill does none of these things.

Marcellin argued that Congress should not roll back protections for consumers that safeguard their data during a new age of banking that blends Wall Street and Silicon Valley. She noted that large tech companies can offer a full suite of banking services while avoiding the necessary banking rules through industrial loan company charters and highlighted buy now pay later (BNPL) products as an example of tech and financial services blurring their services.

Finally, she proposed three recommendations for the subcommittee: (1) Congress should work to make our traditional banking system more resilient; (2) Congress should resist the urge to roll back capital requirements for new banks; (3) Congress should amplify calls to bolster our bank merger review guidelines so new banks do not have to compete with larger and larger banks.

Question & Answer

Data Privacy

Barr asked about the best enforcement mechanism, specifically whether a private right of action would open the door to “frivolous” lawsuits by trail lawyers. Reuter said it would open up for frivolous lawsuits, that banks have been in the data industry for a long time, and GLBA has been around for 20 years. He also expressed support for pre-emption and having prudential regulators oversee enforcement.

Rep. Waters noted her concern that McHenry’s discussion draft on data privacy would pre-empt state laws and prevent states from adopting new protections in response to new technology.

Rep. Barry Loudermilk (R-Ga.) asked Lee if it is imperative that Congress update laws like the GLBA. Lee said absolutely. She noted that there is a distinction between data and financial data but said updates to give consumers the right to delete data, provide increased transparency, and give users the ability to share their own data are needed.

De Novo Banks, Community Banks, and Consolidation

Barr highlighted his Promoting Access to Capital in Underbanked Communities Act, which allows for a phase-in of capital for de novo institutions. Berlau commented that consolidation itself is not necessarily a bad thing but noted his concern about consolidation driven by the cost of regulation. He said it is vital to have de novo banks in communities that were never adequately served and supported McHenry’s bill.

Rep. Young Kim (R-Calif.) asked Reuter about the decline in de novo formation within the financial system. Reuter noted three causes: compliance regulatory cost, the cost for technology, and the capital needed to start the bank.

Rep. Monica De La Cruz (R-Texas) asked about the needs that local community banks serve that their larger, national counterparts do not. Berlau said that a new bank can fill a void, which is why it is so important to lift barriers for de novo banks.

Rep. William Timmons (R-S.C.) asked about the impact of the steep decline in formation of new, local financial institutions. Reuter said that the lack of de novo charters hurts communities. He added that when primary shareholders and local investors are in the community, it impacts what that bank can do. Timmons then asked about the impact of consolidation on depositors and borrowers, and Reuter said that consolidation is needed for banks to handle IT costs and increased compliance costs.

Regulation/Rulemaking

Waters asked if fines have become the cost of doing business for many financial institutions, and Marcellin agreed. Waters highlighted Acting Comptroller Michael Hsu’s draft escalation plan, where regulators would impose tougher penalties including breaking up a bank that repeatedly breaks the law. Marcellin agreed hat it was a good idea.

Rep. Blaine Luetkemeyer (R-Mo.) asked if Reuter is troubled by the beneficial ownership rule currently being promulgated by FinCEN. He replied that the original intent of having a database that the banking industry could use to identify customers and beneficial owners was a great idea, but the revised versions show access to the database will be limited. Luetkemeyer also asked if the ability of a bank to provide credit would be impacted by significantly increased capital requirements. Reuter said that increased capital requirements reduces the ability to lend.

Williams asked if overregulating smaller entities will affect their ability to operate. Knight noted that regulatory barriers have to be paid for and warned against imposing greater cost by regulating on the basis of speculative hypotheticals. Williams said that banks should be hiring more loan officers, not more compliance officers.

Rep. John Rose (R-Tenn.) asked Reuter if the increased cost associated with the 1071 Rule will reduce competition in small business lending. Reuter said yes.

Rep. Sean Casten (D-Il.) noted that Barr has been leading an effort to overturn a Department of Labor (DOL) rulemaking to allow fiduciaries to consider climate risk and ESG factors when selecting investments. He asked if retirement savings would be at risk if that DOL rulemaking is overturned. Marcellin said yes, climate change is a risk for retirement savings. Rep. Juan Vargas (D-Calif.) agreed that allowing states and localities to prevent investing in ESG funds does a great disservice to the communities there.

Kim asked about what Congress can do to curb regulations. Knight advocated for vigorous oversight as the first step. He said financial regulators believe they are empowered to engage in micromanagement to prevent risk and prevent banks from engaging in unsafe or unsound behavior.

Rep. Scott Fitzgerald (R-Wis.) asked about undefined markets and whether defining them would provide regulatory relief to banks seeking a merger or acquisition. Reuter said that the definition of competition in general needs to be reassessed. He also said that what defines a competitive market today is different than when the merger and acquisition manual was drafted, so it should be updated.

Fitzgerald also asked about Section 1033 of Dodd Frank. He said that it grants consumers a right to access a portion of the data held by a covered firm in a usable, electronic format, but noted that it is not clear whether this section extends to the agents of customers or data aggregators. Lee said that in their recent comments on the 1033 rulemaking, her organization called for supervision of data aggregators to allow for CFPB to oversee and understand. On data breaches, she said it depends on where it occurs.

Rep. Byron Donalds (R-Fla.) asked about the impact that Dodd Frank has had on small community banks. Reuter said that medium and small banks have exited the mortgage business due to regulatory requirements and also said that some of the regulations make it hard to lend to self-employed borrowers.

Bank Secrecy Act

Loudermilk said that Congress should update the Bank Secrecy Act to reduce the amount of data that small financial institutions report to the federal government.

Rose said he is also concerned about the current Bank Secrecy Act process, and asked Reuter how much he spends on BSA filings and related compliance. Reuter responded that they have a 30-person team that focuses on it.

Fair Lending

Rep. Al Green (D-Texas) asked about what Congress can do to address discrimination in mortgage lending. Marcellin recommended shoring up the CFPB’s authority in this space. Reuter said that the industry is heavily regulated and tested for fair lending. He also noted that Intuit was the number one originator of mortgages in the U.S. last year, but they do not have the same robust supervision and regulation as the banking industry.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.