Three Areas of Financial Regulatory Reform in the New Congress

The U.S. House of Representatives is returning to Democratic control for the first time since 2011. While a divided Congress often yields legislative gridlock, it’s probable that bipartisan support may produce targeted legislation addressing:  

(1)   Data privacy and management. There is an ongoing debate (spanning beyond financial services) regarding ownership and third-party use of consumer data. Data aggregators and fintech firms contend that they need fewer operational restrictions to mine data in ways that benefit consumers and fosters innovation. In response, consumer-privacy advocates have countered that current data-mining practices violate consumer privacy. Given the global focus on general data protection regulation (GDPR) and consumer privacy, it’s likely that the new Congress may pass measured reforms that enhance consumer protection and ensure that consumers have access to information in making financial decisions. 

(2)   Madden and true-lender fixes. Democrats and Republicans have long sought legislative clarity regarding uncertainty caused by the 2015 Second Circuit decision in Madden v. Midland Funding. This decision complicates bank-fintech partnerships by casting doubt on the validity of interest rates for bank-originated loans transferred to nonbank purchasers. Similarly, both political parties have expressed support for resolving the true-lender dilemma that subjects bank-funded loans to state licensing and usury laws. The true-lender issue involves claims that the “true lender” of a bank-funded loan is a nonbank partner, rather than the bank itself. Legislation remedying both issues may garner bipartisan support by broadening financial inclusion and making it easier for bank-fintech partnerships to expand services for low-income communities.

(3)   Cryptocurrency and Blockchain. Legislators have invested significant resources in better understanding cryptocurrency and its underlying blockchain technology. Moreover, major players such as Coinbase and Circle have expressed a desire for legislative and regulatory clarity to prevent financial crimes and prosecute bad actors. In this connection, legislators on both sides of the aisle may unify to work toward clarifying anti-money laundering requirements applicable to banks, financial institutions and other entities operating in crypto. Key members of each party, however, will be reluctant to commit to legislative proposals perceived favoring the industry.

Although the new Congress is unlikely to pass major financial reform legislation, it may exercise its oversight and investigative authority to block agencies’ deregulatory initiatives and motivate private-sector changes. Consequently, banks, financial services firms, and their service providers should expect more subpoenas, document requests, and investigations in the new Congress.